TALEGEN ACQUISITION CORP, S-1, 1996-06-07

TALEGEN ACQUISITION CORP
S-1, 1996-06-07

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 7, 1996

REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TALEGEN ACQUISITION CORPORATION
(Exact name of Registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 6331 94-3236449
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>

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1011 WESTERN AVENUE
SUITE 1000
SEATTLE, WASHINGTON 98104
(206) 654-2600
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
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JOSEPH W. BROWN, JR.
1011 WESTERN AVENUE
SUITE 1000
SEATTLE, WASHINGTON 98104
(206) 654-2600
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPIES TO:

<TABLE>
<S> <C>
JOHN B. TEHAN ROHAN S. WEERASINGHE
GARY I. HOROWITZ ROBERT EVANS III
SIMPSON THACHER & BARTLETT SHEARMAN & STERLING
425 LEXINGTON AVENUE 599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10022
(212) 455-2000 (212) 848-4000
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As promptly
as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
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CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER SECURITY(*) OFFERING PRICE(*) FEE
<S> <C> <C> <C> <C>
% Senior Subordinated Debentures
due 2008......................... $350,000,000 100% $350,000,000 $120,689.66
</TABLE>

(*) Estimated solely for the purpose of calculating the registration fee.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
TALEGEN ACQUISITION CORPORATION

Cross Reference Sheet pursuant to Rule 404(a) of the Securities Act of 1933
and Item 501(b) of Regulation S-K showing the location or heading in the
Prospectus of the Information required by Part I of Form S-1.

S-1 ITEM NUMBER AND CAPTION LOCATION OR HEADING IN PROSPECTUS
--------------------------- ---------------------------------

1. Forepart of Registration and
Outside Front Cover Page of
Prospectus . . . . . . . . . . . Outside Front Cover Page

2. Inside Front and Outside Back
Cover Pages of Prospectus. . . . Available Information; Inside Front
Cover Page; Outside Back Cover Page

3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges . . . . . . . . . . . . Prospectus Summary; Risk Factors;
The Company

4. Use of Proceeds . . . . . . . . Prospectus Summary; Use of Proceeds

5. Determination of Offering Price. *

6. Dilution . . . . . . . . . . . *

7. Selling Security Holders. . . . *

8. Plan of Distribution. . . . . . Outside Front Cover Page;
Underwriting

9. Description of Securities
to be Registered. . . . . . . . Description of Debentures

10. Interests of Named Experts and
Counsel . . . . . . . . . . . . *

11. Information with Respect to the
Registrant:
(a) Item 101 of Regulation S-K. Prospectus Summary; Business;
Reserves and Risk Management;
Glossary of Selected Insurance
Terms

(b) Item 102 of Regulation S-K. Business
(c) Item 103 of Regulation S-K. Business
(d) Item 201 of Regulation S-K. *
(e) Financial Statements. . . . Selected Financial Information; Pro
Forma Consolidated Financial
Information
(f) Item 301 of Regulation S-K. Selected Financial Information
(g) Item 302 of Regulation S-K. *
(h) Item 303 of Regulation S-K. Management's Discussion and
Analysis of Talegen's Financial
Condition and Results of Operations
(i) Item 304 of Regulation S-K. *
(j) Item 401 of Regulation S-K. Management
(k) Item 402 of Regulation S-K. Management
(l) Item 403 of Regulation S-K. Ownership of Capital Stock
(m) Item 404 of Regulation S-K. Certain Interests in the
Acquisition and Related
Transactions

12. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities. . . . . . . . *

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* Item is omitted because answer is negative or Item is inapplicable.

<PAGE>
SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED JUNE 7, 1996

PROSPECTUS
$350,000,000
TALEGEN ACQUISITION CORPORATION
% SENIOR SUBORDINATED DEBENTURES DUE 2008
-------------------

Talegen Acquisition Corporation, a Delaware corporation (the "Company"), was
organized at the direction of Kohlberg Kravis Roberts & Co., L.P. ("KKR") and
certain members of management of Talegen Holdings, Inc. ("Talegen Holdings") and
its subsidiaries to effect the acquisition (the "Acquisition") of Talegen
Holdings from Xerox Financial Services, Inc. ("XFSI"), a wholly-owned subsidiary
of Xerox Corporation ("Xerox"). Upon consummation of the Acquisition, Talegen
Holdings will be a wholly-owned subsidiary of the Company. The net proceeds of
the offering (the "Offering") of the % Senior Subordinated Debentures due 2008
(the "Debentures") will provide a portion of the financing for the Acquisition.
The Offering is conditioned upon the consummation of the Acquisition, which in
turn is subject to certain conditions.

Interest on the Debentures will be payable semiannually on and of
each year, commencing , 1996. The Debentures will mature on
, 2008. The Debentures will be redeemable at the option of the
Company, in whole or in part, at any time or from time to time on or after
, 2001, at the redemption prices set forth herein, together with
accrued and unpaid interest, if any, to the date of redemption. In addition, at
any time on or prior to , 1999, the Company may redeem up to 40% of
the aggregate principal amount of the Debentures originally issued with the net
proceeds of (i) one or more Equity Offerings (as defined) by the Company or (ii)
one or more capital contributions to the Company by its parent, New Talegen
Holdings Corporation ("Holdings"), with the net proceeds of one or more Equity
Offerings by Holdings, at % of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of redemption; provided, that at least $210
million aggregate principal amount of the Debentures remains outstanding after
such redemption. Upon a Change of Control (as defined) of the Company or of
Holdings, each holder of the Debentures will be able to require the Company to
purchase such holder's Debentures at 101% of the principal amount thereof,
together with accrued and unpaid interest, if any, to the date of purchase.

The Debentures will be unsecured senior subordinated obligations of the
Company and will be subordinated in right of payment to all existing and future
Senior Indebtedness (as defined) of the Company, including indebtedness under
its Credit Facilities (as defined). At March 31, 1996, on a pro forma basis
giving effect to the closing of the Acquisition and the Financings (as defined)
(including the sale of the Debentures) (the "Closing"), the Senior Indebtedness
of the Company would have been approximately $796 million and the Company would
have had additional availability of $179 million for borrowings under the Credit
Facilities, all of which would be Senior Indebtedness, if borrowed. The Company
will be a holding company and, accordingly, the Debentures also will be
effectively subordinated to all existing and future liabilities of the Company's
subsidiaries. As of March 31, 1996, after giving pro forma effect to the
Acquisition and the Financings, the Company's subsidiaries would have had total
liabilities (including loss reserves and unearned premium reserves) of $8,667
million.

The Company does not intend to list the Debentures on any national securities
exchange or include the Debentures for quotation through an inter-dealer
quotation system.
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE DEBENTURES.
-------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(1)(3)
<S> <C> <C> <C>
Per Debenture............................... % % %
Total....................................... $ $ $
</TABLE>

(1) Plus accrued interest, if any, from , 1996.

(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(3) Before deducting expenses payable by the Company estimated at $ .
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The Debentures are offered by the Underwriters, subject to prior sale, when,
as and if issued to and accepted by the Underwriters, subject to approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Debentures will be made in New York, New York on or about
, 1996 against payment therefor in same day funds.
-------------------

MERRILL LYNCH & CO.
BA SECURITIES, INC.
BT SECURITIES CORPORATION
CHASE SECURITIES INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES
CORPORATION
LEHMAN BROTHERS
MORGAN STANLEY & CO.
INCORPORATED
SMITH BARNEY INC.
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THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
The following table outlines the proposed ownership structure of the Company
and its insurance operations and summarizes certain financial and business
information as of and for the year ended December 31, 1995.

[GRAPH OF FLOW CHART]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DEBENTURES AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

FOR NORTH CAROLINA INVESTORS: THE COMMISSIONER OF INSURANCE FOR THE STATE OF
NORTH CAROLINA HAS NOT APPROVED OR DISAPPROVED THIS OFFERING, NOR HAS THE
COMMISSIONER PASSED UPON THE ACCURACY OF THIS PROSPECTUS.
<PAGE>
PROSPECTUS SUMMARY

The following information is qualified in its entirety by the detailed
information and financial statements found elsewhere in this Prospectus. See
"Glossary of Selected Insurance Terms" for definitions of certain insurance
terms used herein. Unless otherwise indicated, all financial data have been
prepared using generally accepted accounting principles ("GAAP"). References to
"Talegen" in this Prospectus include Talegen Holdings, its insurance
subsidiaries (the "Insurance Companies") and its non-insurance subsidiaries.
Unless otherwise indicated, references to "Coregis," "Crum & Forster,"
"Industrial Indemnity" and "Westchester Specialty" are references to Operating
Groups, which include, respectively, Coregis Group, Inc., Crum & Forster
Holdings, Inc., Industrial Indemnity Holdings, Inc., and Westchester Specialty
Group, Inc. (individually, an "Intermediate Holding Company"; collectively, the
"Intermediate Holding Companies") and each such Intermediate Holding Company's
respective subsidiaries. The Company was organized at the direction of KKR and
certain members of management of Talegen Holdings and the Insurance Companies to
acquire Talegen Holdings from XFSI, a subsidiary of Xerox. The narrative and
tabular presentations included in this Prospectus relating to sources and uses
of funds to finance the Acquisition assume the Acquisition had closed on March
31, 1996. Upon completion of the Acquisition, Talegen Holdings will be a wholly
owned subsidiary of the Company.

GENERAL

Talegen, with net premiums written of $1.7 billion in 1995, is a leading
writer of commercial property and casualty insurance that operates through four
dedicated business units (the "Operating Groups"), each of which is focused on a
different, well-defined segment of the commercial property and casualty
insurance market. This operating structure allows each Operating Group to focus
on a specific operating strategy and to respond rapidly to changing market
conditions, and provides Talegen with diversified sources of cash flow and
opportunities for premium growth. As of March 31, 1996, Talegen's combined
statutory surplus was $1.7 billion and total assets were $11.0 billion,
including $6.3 billion of investment assets comprised principally of cash and
short-term investments. Talegen is the seventeenth largest writer of commercial
property and casualty insurance in the United States based on 1994 net premiums
written, according to A.M. Best Company, Inc. ("A.M. Best").

The Operating Groups are:

Coregis. Coregis, with net premiums written of $355 million in 1995, is a
leading writer throughout the United States of commercial property and casualty
insurance programs for public entities, lawyers, nonprofit organizations, and
other selected market niches in which insureds' needs are generally underserved
by most major insurers. Coregis distinguishes itself by developing in-depth
knowledge of well-defined customer groups, by designing customized products for
such groups, and by distributing such products through specialized distribution
channels on a program-by-program basis.

Crum & Forster. Crum & Forster, with net premiums written of $960 million in
1995, is a national writer of a broad array of property and casualty products
for mid-sized commercial accounts distributed through a select network of
independent agents and brokers. Crum & Forster has differentiated itself by
developing long-term relationships with a select group of 589 agents and brokers
("custom agents") that accounted for 81% of Crum & Forster's gross premiums
written in 1995. In order to maintain its responsive service and thorough
knowledge of the local insurance market, Crum & Forster operates on a highly
decentralized and regionalized basis through 20 regional offices.

3
<PAGE>
of a workers' compensation claim, including prevention, medical management,
legal and financial. This innovative claims process allows Industrial Indemnity
to manage more effectively the medical care and disability components of its
business and to reduce overall workers' compensation costs for its customers.

Westchester Specialty. Westchester Specialty, with net premiums written of
$152 million in 1995, specializes in umbrella, excess casualty and specialty
property coverages. Westchester Specialty principally focuses on excess and
surplus lines of business which are difficult to place and/or complex, and which
require a greater underwriting and claims expertise than that typically found in
the standard commercial property and casualty insurance market.

CORE STRENGTHS

In 1992, a new management team began to implement a series of initiatives
designed to strengthen Talegen's competitive position in the property and
casualty insurance industry. The most significant of these initiatives was a
comprehensive legal and capital restructuring (the "Talegen Restructuring") that
terminated Talegen's intercompany pooling arrangement and realigned 18 of
Talegen's insurance companies into the four highly focused Operating Groups. A
fifth group, composed of The Resolution Group, Inc. and its subsidiaries
("TRG"), which is being sold by XFSI in a separate transaction to an entity
organized at the direction of KKR and certain management members of TRG, was
established at the same time to manage claims run-off obligations and
reinsurance collections associated with its own and several Talegen discontinued
books of business. In addition to the Talegen Restructuring, which required the
approval of 15 state insurance departments, management's initiatives also
included: (i) the strengthening of the balance sheet through capital infusions,
significant additions to reserves and a repositioning of the investment
portfolio primarily to cash and short-term investments, (ii) the implementation
of more disciplined planning, reserving, reinsurance and catastrophe management
practices, and (iii) various initiatives to improve productivity, including the
more effective use of technology and other process enhancements. Talegen
believes that these initiatives, as well as additional management actions, have
resulted in the following core strengths:

Focused Operating Groups. Although Talegen is a leading writer of commercial
property and casualty insurance, each of the Operating Groups is a dedicated
business unit with a specific market focus, operating strategy, and business and
financial objectives. This structure permits each Operating Group to (i)
identify customer needs, (ii) develop tailored products for its targeted
customer groups, (iii) respond rapidly to new opportunities and changing market
conditions, and (iv) maintain its own balance sheet to improve internal
financial accountability. Although the Operating Groups are managed as separate
businesses, Talegen Holdings establishes corporate strategies and objectives and
implements disciplined planning and audit review processes for each of the
Operating Groups.

Well Capitalized Balance Sheet. Talegen believes that the Insurance
Companies are well capitalized with $1.7 billion of combined statutory surplus
to support $1.7 billion of net premiums written in 1995. This conservative
premium-to-surplus ratio of 1.0 to 1.0 provides the opportunity for profitable
business expansion consistent with Talegen's philosophy of disciplined
underwriting and managed premium growth. In addition, Talegen's $6.3 billion
investment portfolio is currently invested principally in cash and short-term
investments. As part of the Acquisition and prior to the Closing, XFSI will
replace certain promissory notes and certain real estate assets of the Insurance
Companies with $468 million of cash that Talegen will use to increase the
investment portfolio of the Insurance Companies.

4
<PAGE>
comprehensive methodologies to evaluate its environmental and asbestos
exposures, which Talegen believes are among the most sophisticated in the
property and casualty insurance industry. Since 1992, Talegen has strengthened
its gross loss and loss expense and uncollectible reinsurance reserves,
including reserves relating to environmental, asbestos and other latent
exposures, by $1.3 billion. Furthermore, as of March 31, 1996, gross reinsurance
coverage remains available from a subsidiary of Xerox for accident years 1992
and prior of $140 million and $100 million for Coregis and Industrial Indemnity,
respectively, exclusive of 15% coinsurance. Talegen has also significantly
improved the quality of its reinsurance program by reducing the number of its
reinsurers from approximately 175 in 1992 to approximately 35 high quality
reinsurers in 1995 with whom Talegen placed over 80% of its 1995 ceded premiums.
Talegen's management believes that its actions to strengthen reserves coupled
with its focus on claims and reinsurance management will mitigate future adverse
reserve development and believes its current reserves are adequate. See
"Reserves and Risk Management."

Disciplined Pricing and Underwriting. The Operating Groups underwrite
insurance products for well-defined, and often underserved, customer groups
through a profit-oriented rather than a premium volume strategy. This
profit-oriented strategy has led to a strict focus on pricing adequacy within
Talegen. For example, Westchester Specialty has decreased its book of umbrella
and excess casualty business due to significant price competition and has
simultaneously increased its book of specialty property business where
conditions have been favorable due to capacity shortages. By operating in well-
defined market segments, the Operating Groups obtain significant data and
experience within each customer group, enabling them to identify acceptable
risks and appropriately price coverages.

Claims Management Expertise. Talegen believes that the Operating Groups'
claims management practices provide a significant competitive advantage in the
marketplace. Each of the Operating Groups strongly emphasizes the timeliness and
quality of its claims handling practices, resulting in high quality service to
customers. In addition, appropriate disbursement of claim payments and claim
expenses is critical to Talegen's financial success. To differentiate its claim
management practices and to enhance the effectiveness of its knowledgeable
claims staff, Talegen has invested significantly in technology over the last
three years.

Talegen's management has devoted the past four years to developing its core
strengths, completing the Talegen Restructuring, and resolving Talegen's
ownership situation following Xerox's January 1993 announcement of its intention
to divest itself of its financial services operations, including Talegen. With
the Talegen Restructuring and the other management actions now complete and the
ownership question resolved by the Acquisition, management can direct its full
attention to profitably growing the Operating Groups by building on these core
strengths.

STRATEGY

Talegen believes that the most effective strategy for competing in the
commercial property and casualty insurance industry is to operate as dedicated,
flexible business units that are focused on well-defined markets. While
continuing to focus on its core strengths, Talegen plans to implement the
following strategies:

Disciplined Premium Growth. Talegen believes premium growth opportunities
that offer adequate returns exist in each of its markets through geographic
expansion, development of new products and increased penetration of its existing
customer groups and distribution channels. For example, Coregis is developing
new products for its existing customer groups, identifying new customer groups,
and expanding each of its divisions geographically. Through its differentiated
distribution strategy, Crum & Forster believes that it can continue to grow the
volume of business obtained from its custom agents. Industrial Indemnity is
focused on increasing its penetration of its existing markets as well as
extending its workers' compensation expertise beyond the western states. In the
absence of profitable opportunities

5
<PAGE>
to expand its casualty coverages, Westchester Specialty has been increasing its
book of specialty property business.

Low-Cost Provider. Talegen's objective is to become a low-cost provider in
each of its markets. The Operating Groups have been increasing their efficiency
by implementing technological improvements to increase productivity, reducing
staff, and enhancing management controls and financial oversight. As a result of
these efforts, gross premiums written per employee have increased from
approximately $426,000 in 1993 to $533,000 in 1995, or 25%. In addition,
Talegen's internal operating expenses (see "Glossary of Selected Insurance
Terms") have decreased from $463 million in 1992 to $391 million in 1995.
Talegen believes that additional opportunities exist for expense and
productivity improvements by optimizing its significant investments in
technology to date and by continuing management's focus on internal expense
improvements.

Reposition Investment Portfolio. The Operating Groups liquidated their
investment portfolios in 1992 to assist in obtaining regulatory approval for the
Talegen Restructuring. After the Talegen Restructuring, Talegen engaged in
limited reinvestment activities and, to assist in the sale of Talegen, again
liquidated its investment portfolio in 1995. As of March 31, 1996, Talegen had
total investment assets of $6.3 billion, which were comprised principally of
cash and short-term investments. With its ownership situation resolved, Talegen
will implement an investment strategy consistent with the duration of its
liabilities and designed to maximize after-tax investment income within
acceptable risk and volatility criteria. Talegen's strategy will be to invest
principally in a portfolio of high-quality marketable fixed income securities
with an average rating for the portfolio of "A" or better, while maintaining
sufficient investments in highly liquid, short-term securities to provide for
immediate cash requirements.

THE ACQUISITION

Pursuant to the Stock Purchase Agreement dated as of January 17, 1996 among
XFSI, Xerox, Holdings, and the Company (the "Purchase Agreement"), the Company
will acquire all of the issued and outstanding capital stock of Talegen Holdings
in consideration of $1.75 billion, including the sale by a trust formed by
Holdings (the "Trust") of $450 million of preferred securities (the "Preferred
Securities") to XFSI (subject to certain adjustments). See "Description of
Preferred Securities." In addition, in conjunction with the Acquisition, Talegen
Holdings will (i) repay existing indebtedness of its Intermediate Holding
Companies, which amounted to $351 million at March 31, 1996, and (ii) apply an
estimated $100 million to a combination of the payment of transaction fees and
expenses and balances for working capital. To finance the Acquisition, in
addition to the Offering and the utilization of $72 million of cash and
investment balances of Talegen Holdings, the Company will enter into a $775
million term loan facility (the "Term Loan Facility") and a $200 million
revolving credit facility (the "Revolving Credit Facility"; collectively, the
"Credit Facilities"). Of the $200 million commitment under the Revolving Credit
Facility, $21 million will be used to finance the Acquisition with the remainder
available to fund future liquidity needs of the Company, if any. Entities
organized at the direction of KKR and approximately 85 members of Talegen's
management (the "Management Investors") will fund a portion of the Acquisition
cash purchase price through a $513 million common equity investment
(approximately $53 million from the Management Investors) in Holdings, which
will be contributed by Holdings, along with $450 million in proceeds from the
sale of the Preferred Securities, to the Company as common equity (the "Equity
Investment"). The Offering, the Credit Facilities, and the Equity Investment
(including the contribution to the Company of the proceeds of the Preferred
Securities) are collectively referred to in this Prospectus as the "Financings."

6
<PAGE>
The sources and uses of the funds for the Acquisition and the related
transactions are as follows (dollars in millions):

<TABLE>
<CAPTION>
SOURCES OF FUNDS
<S> <C>
Cash and investment balances of Talegen Holdings......................... $ 72.0(1)
Cash contribution by XFSI................................................ 20.0(2)
Term Loan Facility....................................................... 775.0
Revolving Credit Facility................................................ 21.0(3)
Debentures offered hereby................................................ 350.0
Equity Investment........................................................ 963.0(4)
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Total sources of funds................................................. $2,201.0
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--------
USES OF FUNDS
Purchase of Talegen Holdings equity...................................... $1,750.0(5)
Refinancing of existing debt............................................. 351.0
Estimated transaction fees and expenses and balances for working
capital................................................................ 100.0
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Total uses of funds.................................................... $2,201.0
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--------
</TABLE>

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

(1) As of March 31, 1996, on a pro forma basis to give effect to certain
dividends from the Intermediate Holding Companies and the Insurance
Companies and the release of funds from a security arrangement upon the
repayment of debt of the Intermediate Holding Companies, Talegen Holdings
would have had cash and investment balances of $195 million. From its pro
forma cash balances, Talegen Holdings intends to: (i) contribute a total of
$85 million to Crum & Forster and Westchester Specialty, (ii) apply $72
million to fund the Acquisition and the related transactions, and (iii)
retain $38 million as excess cash and investment balances. Pursuant to the
Purchase Agreement, substantially all cash dividends of the Insurance
Companies from and after July 1, 1995, with the exception of the proceeds of
certain sales of assets, will be retained by Talegen Holdings and not paid
to XFSI.

(2) Primarily represents a contribution by XFSI of dividends to be paid by TRG
subsequent to March 31, 1996 and prior to Closing.

(3) $179 million of commitments under the Revolving Credit Facility will be
available to the Company after the Closing to fund future liquidity needs,
if any.

(4) The Equity Investment is comprised of capital contributions from the
following sources:

Preferred Securities of Holdings.................................. $450.0
KKR-organized entities............................................ 460.0
Management Investors.............................................. 53.0
------
Total Equity Investment....................................... $963.0
------
------

The Trust will sell $450 million of Preferred Securities to XFSI and then loan
the proceeds to Holdings. Holdings will contribute the proceeds of the Preferred
Securities as common equity to the Company. One of Industrial Indemnity's
Insurance Company subsidiaries has applied to California regulators for
permission to pay an extraordinary dividend of $50 million in connection with
the Acquisition. In the event that such approval is not obtained or is
obtained for only a portion of the requested $50 million, the total purchase
price of the Acquisition will remain the same, but an additional amount of
Preferred Securities equal to the difference between $50 million and the
permitted dividend, if any, will be issued to XFSI in lieu of a like amount
of cash. See "Description of Preferred Securities." Included in the $53
million investment by the Management Investors is a $13 million restricted
investment in Holdings stock, the proceeds of which will be invested as
common equity by Holdings in the Company.

(5) If the Closing has not occurred prior to July 1, 1996, the purchase price
will be increased by $10 million each month (or the pro rata portion of each
month), payable in additional Preferred Securities.

7
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Debentures Offered........... $350,000,000 principal amount of % Senior Subordinated
Debentures due 2008.

Maturity Date................ , 2008.

Interest Payment Dates....... and of each year, commencing , 1996.

Optional Redemption.......... The Debentures will be redeemable at the option of the
Company, in whole or in part, at any time or from time to
time, on or after , 2001, at the redemption prices set forth
herein, together with accrued and unpaid interest, if any,
to the date of redemption. In addition, at any time on or
prior to , 1999, the Company may redeem up to 40%
of the aggregate principal amount of the Debentures
originally issued with the net proceeds of (i) one or more
Equity Offerings (as defined) by the Company or (ii) one or
more capital contributions to the Company by Holdings with
the net proceeds of one or more Equity Offerings by
Holdings, at a redemption price equal to % of the
principal amount thereof, plus accrued and unpaid interest,
if any, to the date of redemption; provided that at least
$210 million aggregate principal amount of the Debentures
remains outstanding after such redemption. See "Description
of the Debentures--Optional Redemption."

Change of Control............ Upon the occurrence of a Change of Control of the Company or
Holdings, each holder of the Debentures may require the
Company to purchase all or any portion of such holder's
Debentures at a purchase price equal to 101% of the
principal amount thereof, together with accrued and unpaid
interest, if any, to the date of purchase. See "Description
of the Debentures--Repurchase at the Option of
Holders--Change of Control."

Ranking...................... The Debentures will be unsecured senior subordinated
obligations of the Company and, as such, will be
subordinated to all existing and future Senior Indebtedness
(as defined) of the Company, including indebtedness under
the Credit Facilities, with respect to principal, premium,
if any, and interest. By reason of such subordination,
holders of Senior Indebtedness must be paid in full before
holders of the Debentures may be paid in the event of a
liquidation, dissolution or other winding up of the Company,
whether voluntary or involuntary and whether or not
involving insolvency or bankruptcy. At March 31, 1996, on a
pro forma basis after giving effect to the Acquisition and
the Financings and the application of the net proceeds
therefrom, the Company would have had approximately $796
million of Senior Indebtedness outstanding and the Company
would have had additional availability of $179 million for
borrowings under the Credit Facilities, all of which would
be Senior Indebtedness, if borrowed.

The Company will be a holding company and, accordingly, the
Debentures also will be effectively subordinated to all
existing and future liabilities of the Company's
subsidiaries. At March 31, 1996,
</TABLE>

8
<PAGE>

<TABLE>
<S> <C>
on a pro forma basis after giving effect to the Acquisition
and the Financings and the application of the net proceeds
therefrom, the Company's subsidiaries would have had total
liabilities (including loss reserves and unearned premium
reserves) of $8,667 million. Additional Senior Indebtedness
may be incurred by the Company from time to time, subject to
certain restrictions. See "Description of the
Debentures--Subordination."

Certain Covenants............ The indenture under which the Debentures will be offered
(the "Indenture") will contain covenants, including, but not
limited to, covenants with respect to the following matters:
(i) restricted payments; (ii) limitation on incurrence of
indebtedness and issuance of disqualified stock; (iii)
liens; (iv) merger, consolidation, or sale of all or
substantially all assets; (v) limitation on transactions
with affiliates; (vi) dividends and other payment
restrictions affecting subsidiaries; (vii) limitations on
other senior subordinated indebtedness and (viii) asset
sales. See "Description of the Debentures."

Use of Proceeds.............. The gross proceeds from the Debentures offered hereby will
be used to provide a portion of the Financings that will be
used to acquire Talegen Holdings, repay indebtedness of the
Intermediate Holdings Companies, pay certain related fees
and expenses and fund balances for working capital. See "Use
of Proceeds."

Absence of Public Market for
the Debentures.............. There is no public market for the Debentures and the Company
does not intend to apply for listing of the Debentures on
any securities exchange or for quotation on any inter-dealer
quotation system. The Company has been advised by the
Underwriters that, following completion of the initial
offering of the Debentures, the Underwriters presently
intend to make a market in the Debentures; however, they are
not obligated to do so and any such market making may be
discontinued at any time without notice. Accordingly, there
can be no assurance as to whether an active public market
for the Debentures will develop or, if a public market does
develop, as to the liquidity of the trading market for the
Debentures. If an active public market does not develop, the
market price and liquidity of the Debentures may be
adversely affected. See "Underwriting."
</TABLE>

RISK FACTORS

See "Risk Factors" for a discussion of certain factors which should be
considered by prospective investors in evaluating an investment in the
Debentures.

9
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF TALEGEN

Summary historical consolidated financial information for Talegen for the
three years ended December 31, 1995 and for the three months ended March 31,
1995 and 1996 is as follows. The consolidated information as of December 31,
1994 and 1995 and for each of the years in the three-year period ended December
31, 1995 has been derived from the audited consolidated financial statements of
Talegen for such periods. The consolidated information for the three months
ended March 31, 1995 and 1996 and as of December 31, 1993 and March 31, 1996 are
unaudited, but in the opinion of management reflect all adjustments (which
include only normal, recurring adjustments) necessary for a fair presentation of
such data.

The combined statutory data of Talegen as of and for the years ended December
31, 1993 through 1995 and as of and for the three months ended March 31, 1995
and 1996 have been derived from annual combined and quarterly statutory
financial statements filed with the domiciliary states of the Insurance
Companies and prepared in accordance with statutory accounting practices
("SAP"), which differ from GAAP. Although the annual statutory financial
statements of the individual Insurance Companies are audited, the annual and
quarterly combined statutory data presented herein are unaudited, but in the
opinion of management reflect the adjustments necessary for a fair presentation
of such data.

The operating data for the three months ended March 31, 1996 are not
necessarily indicative of results of operations for the entire year. For
additional information, see "Selected Financial Information" and the
consolidated financial statements of Talegen and the related notes thereto
included elsewhere in this Prospectus.

10
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE
THREE MONTHS
AS OF AND FOR THE YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------------- -----------------
1993 1994 1995 1995 1996
------- ------- ------- ------ -------
(DOLLARS IN MILLIONS)
CONSOLIDATED OPERATING DATA:
<S> <C> <C> <C> <C> <C>
Gross premiums written.......................... $ 2,132 $ 2,097 $ 2,107 $ 507 $ 496
------- ------- ------- ------ -------
------- ------- ------- ------ -------
Net premiums written............................ $ 1,811 $ 1,716 $ 1,694 $ 410 $ 404
------- ------- ------- ------ -------
------- ------- ------- ------ -------
Net premiums earned............................. $ 1,765 $ 1,687 $ 1,659 $ 407 $ 419
Losses and loss expenses........................ 1,327 1,240 1,406 339 327
Underwriting, acquisition and other insurance
expenses...................................... 532 530 534 132 138
Dividends to policyholders...................... 36 32 21 3 3
------- ------- ------- ------ -------
Underwriting results.......................... (130) (115) (302) (67) (49)
Net investment income........................... 261 297 343 83 89
Net realized investment gains................... 65 13 70 3 1
Interest expense................................ -- (7) (35) (8) (6)
Other income (expense), net..................... (43) 21 18 3 1
------- ------- ------- ------ -------
Earnings from operations before income
taxes....................................... 153 209 94 14 36
Provision for income tax expense................ (35) (72) (15) (3) (13)
------- ------- ------- ------ -------
Net earnings.................................. $ 118 $ 137 $ 79 $ 11 $ 23
------- ------- ------- ------ -------
------- ------- ------- ------ -------
Ratio of earnings to fixed charges (1).......... 9.1x 9.4x 2.8x 2.2x 4.6x
CONSOLIDATED OTHER OPERATING DATA:
EBITDA (2) (3).................................. $ 225 $ 304 $ 211 $ 45 $ 55
Depreciation and amortization................... 72 88 82 23 13
Cash available from the Insurance
Companies (4) (5)............................. n/a 252 166 44 48
GAAP loss and loss expense ratio (6)............ 75.2% 73.5% 84.8% 83.3% 78.0%
GAAP underwriting expense ratio (6)............. 30.1% 31.4% 32.2% 32.4% 32.9%
GAAP combined ratio including policyholder
dividends (6)................................. 107.3% 106.8% 118.2% 116.4% 111.6%
CONSOLIDATED BALANCE SHEET DATA:
Total investments and cash...................... $ 5,845 $ 5,964 $ 6,450 $ 6,327
Total assets.................................... 10,297 10,207 11,116 11,026
Unpaid losses and loss expenses................. 6,779 6,527 6,923 6,904
Debt............................................ -- 425 372 351
Shareholder's equity............................ 2,318 1,950 2,353 2,363
COMBINED STATUTORY DATA:
Statutory net income............................ $ 182 $ 166 $ 120 $ 47 $ 35
Policyholders' surplus.......................... 1,641 1,682 1,721 1,713 1,727
Ratio of net premiums written to surplus (7).... 1.1x 1.0x 1.0x 1.0x 1.0x
Available dividends from the Insurance Companies
(8)............................................ n/a $ 224 $ 175 $ 57 $ 48
</TABLE>

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

<TABLE>
<C> <S>
n/a Certain 1993 amounts have been marked as not available ("n/a") because they would be
based on 1992 statutory financial information that was prepared in accordance with an
intercompany pooling arrangement in effect at that time. Such 1992 statutory financial
information would not be comparable to the data available as of and for the years ended
December 31, 1993 through 1995 and, accordingly, has not been provided.

(1) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of
earnings from operations before income taxes, plus fixed charges. "Fixed charges"
consist of interest expense, amortization of deferred financing costs and one-third of
rental expense (the portion deemed representative of the interest factor).

(2) EBITDA represents net earnings plus interest expense, income tax expense, depreciation,
amortization of intangible assets, and amortization of premium or discount on
investments in bonds. EBITDA is presented as a measure of the Company's consolidated
cash flow and its ability to generate cash flow to service its debt obligations.
However, EBITDA should not be construed as an alternative to Talegen's net earnings or
cash flow from operating activities (as determined in accordance with GAAP) and should
not be construed as an indicator of Talegen's operating performance or as a measure of
Talegen's liquidity.
</TABLE>

(Footnotes continued on following page)

11
<PAGE>
(Footnotes continued from preceding page)

<TABLE>
<C> <S>
(3) Includes net realized investment gains of $65 million, $13 million and $70 million for
the years ended December 31, 1993, 1994 and 1995, respectively, and $3 million and $1
million for the three months ended March 31, 1995 and 1996, respectively. EBITDA also
includes the effect of loss and loss expense reserve actions pertaining to prior
accident years which increase (decrease) EBITDA by ($4) million, $43 million and ($102)
million for the years ended December 31, 1993, 1994 and 1995, respectively, and ($19)
million and $1 million for the three months ended March 31, 1995 and 1996, respectively.
See "Management's Discussion and Analysis of Talegen's Financial Condition and Results
of Operations."

(4) Cash available from the Insurance Companies represents the sum of tax allocation
payments, management and other fees (net of operating expenses of Talegen Holdings),
and available dividends from the Insurance Companies during such periods. These amounts
are not necessarily representative of the amounts of cash available from the Insurance
Companies after the Acquisition. See "--Summary Pro Forma Consolidated Financial Information
of the Company" and "Pro Forma Consolidated Financial Information." See footnote 8 for a
discussion of the calculation of available dividends from the Insurance Companies and
certain reserving actions taken on December 31, 1995 that affect the amount of available
dividends from the Insurance Companies. See "Management's Discussion and Analysis of
Talegen's Financial Condition and Results of Operations--Liquidity and Capital Resources."

(5) Cash available from the Insurance Companies includes the effect of (i) a $21 million
litigation settlement that was included in the 1995 operating expenses of Talegen
Holdings (with the effect of reducing cash available from the Insurance Companies for
1995 and the three months ended March 31, 1995 by such amount) which the Company
believes is a nonrecurring item at the Talegen Holdings level, and (ii) a $9 million
reduction in tax allocation payments (as calculated under the existing tax allocation
agreements) from the Insurance Companies (with the effect of reducing cash available
from the Insurance Companies for 1995 by such amount) resulting from certain net loss
and loss expense reserve actions pertaining to prior accident years taken at the
Insurance Companies on December 31, 1995 in the amount of $102 million. The Company
believes that the magnitude of such loss and loss expense reserve actions,
together with any loss and loss expense reserve actions taken prior to the Closing (see
"The Acquisition and the Financings--Certain Actions Before Closing--Reserves"), are not
representative of future operations. However, the Company closely monitors reserve
requirements and, accordingly, there can be no assurance as to the level of adjustments
for prior accident years that may be recorded in future periods.

(6) GAAP loss and loss expense ratio represents the sum of losses and loss expenses as a
percentage of net premiums earned. GAAP underwriting expense ratio represents
underwriting expenses as a percentage of net premiums earned. GAAP combined ratio
represents the sum of GAAP loss and loss expense ratio, GAAP underwriting expense ratio,
and GAAP policyholder dividends as a percentage of net premiums earned.

(7) Represents the ratio of statutory net premiums written for the period to statutory
policyholders' surplus at the end of such period. The ratios as of March 31, 1995 and
1996 are calculated using statutory net premiums written from the four quarters which
precede the interim date.

(8) Without regulatory approval, in the absence of contractual or regulatory restrictions,
including regulatory restrictions that are imposed as a matter of administrative policy,
domestic insurers are permitted to pay "ordinary dividends" from earned surplus up to an
amount defined by the insurance statutes of each state. Ordinary dividends are defined
in Indiana, New Jersey and California as dividends which, together with dividends paid
in the previous 12 months, do not exceed the greater of (i) 10% of policyholders'
surplus at the preceding December 31 or (ii) statutory net income, for the 12-month
period ending the preceding December 31. In New York, "ordinary dividends" are defined
as dividends which, together with dividends declared or paid in the preceding 12 months,
do not exceed the lesser of (i) 10% of policyholders' surplus as shown by its last
statement on file with the New York Insurance Department (the "NYID") or (ii) adjusted
net investment income for the preceding 12-month period.

As of December 31, 1995, after giving effect to certain reserving actions taken on
December 31, 1995, available dividends for all of 1996 from the Insurance Companies is
$96 million, of which $16 million has been paid through March 31, 1996. Unlike the $175
million of available dividends for 1995 from the Insurance Companies derived under
statutory definitions, the $96 million excludes dividends from two New York-domiciled
Insurance Companies, United States Fire Insurance Company ("U.S. Fire") and Westchester
Fire Insurance Company ("Westchester Fire"), due to their negative earned surplus
positions as of December 31, 1995. Both U.S. Fire and Westchester Fire have applied to
reset their earned surplus to $0 as of the first day following the end of the quarter in
which the Closing occurs. In addition, New York-domiciled insurance companies which
undergo a change of control, such as U.S. Fire, Westchester Fire and Crum & Forster
Indemnity Company ("Crum & Forster Indemnity"), are prevented, as a matter of general
administrative policy, from paying ordinary shareholder dividends for two years
following such change of control without the NYID's prior approval. Of the $175 million
of available dividends in 1995, $93 million represents available dividends from the New
York-domiciled Insurance Companies. See "Regulatory Matters."
</TABLE>

12
<PAGE>
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY

Summary pro forma consolidated financial information for the Company for the
year ended December 31, 1995 and for the three months ended March 31, 1996 is as
follows. The pro forma amounts reflect the estimated effects of the Acquisition
and the related transactions, including the Financings, as described under "Pro
Forma Consolidated Financial Information." The pro forma income statement data
for the periods presented give effect to the Acquisition, the Financings and
related transactions as if they had occurred on January 1, 1995. The pro forma
balance sheet data give effect to the Acquisition, the Financings and related
transactions as if such events had occurred as of March 31, 1996. The pro forma
financial data do not purport to represent what the Company's results of
operations actually would have been if the Acquisition had been consummated on
the date or for the periods indicated or what such results will be for any
future date or for any future period. The pro forma adjustments are based on
available information and certain assumptions that Talegen believes are
reasonable under the circumstances. The pro forma financial data should be read
in conjunction with the historical financial statements and the notes thereto
included elsewhere in this Prospectus and with "Management's Discussion and
Analysis of Talegen's Financial Condition and Results of Operations." See "Pro
Forma Consolidated Financial Information" and "Selected Financial Information."
<TABLE>
<CAPTION>
FOR THE YEAR AS OF AND FOR THE
ENDED THREE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996
----------------- ------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
PRO FORMA CONSOLIDATED OPERATING DATA:
Gross premiums written................................... $ 2,107 $ 496
-------- --------
-------- --------
Net premiums written..................................... $ 1,694 $ 404
-------- --------
-------- --------
Net premiums earned...................................... $ 1,659 $ 419
Losses and loss expenses................................. 1,399 325
Underwriting, acquisition and other insurance expenses... 520 133
Dividends to policyholders............................... 21 3
-------- --------
Underwriting results................................... (281) (42)
Net investment income.................................... 355 90
Net realized investment gains............................ 70 1
Interest expense......................................... (108) (26)
Other income, net........................................ 27 6
-------- --------
Earnings from operations before income taxes........... 63 29
Provision for income tax benefit (expense)............... 7 (8)
-------- --------
Net earnings........................................... $ 70 $ 21
-------- --------
-------- --------
Ratio of earnings to fixed charges (1)................... 1.5x 2.0x

PRO FORMA CONSOLIDATED OTHER OPERATING DATA:
EBITDA (2) (3)........................................... $ 195 $ 53
Ratio of EBITDA to cash interest expense (4)............. 2.0x 2.2x
Depreciation and amortization............................ $ 24 $ (2)
Cash available from the Insurance Companies (5).......... $ 101 $ 56
Ratio of cash available from the Insurance Companies to
cash interest expense (4) (5)........................... 1.0x 2.3x
Adjusted cash available from the Insurance Companies
(6)..................................................... $ 134 n/a
Ratio of adjusted cash available from the Insurance
Companies to cash interest expense (4) (6).............. 1.3x n/a
GAAP loss and loss expense ratio (7)..................... 84.3% 77.6%
GAAP underwriting expense ratio (7)...................... 31.3% 31.7%
GAAP combined ratio including policyholder dividends
(7)..................................................... 116.9% 110.0%
</TABLE>

13
<PAGE>

<TABLE>
<CAPTION>
FOR THE YEAR AS OF AND FOR THE
ENDED THREE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996
----------------- ------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
PRO FORMA CONSOLIDATED BALANCE SHEET DATA:
Total investments and cash............................... $ 6,723
Total assets............................................. $ 10,776
Unpaid losses and loss expenses.......................... $ 6,904
Debt..................................................... $ 1,146
Shareholder's equity..................................... $ 963
Ratio of shareholder's equity to total capitalization.... 45.7%
Ratio of debt to statutory surplus....................... 64.8%

PRO FORMA COMBINED STATUTORY DATA:
Statutory net income..................................... $ 87 $ 24
Policyholders' surplus................................... $ 1,768
Ratio of net premiums written to surplus (8)............. 1.0x
Available dividends from the Insurance Companies (9)
(10)....................................................... $ 83 $ 48
</TABLE>

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

(1) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of earnings from operations before income taxes, plus
fixed charges. "Fixed charges" consist of interest expense, amortization of
deferred financing costs and one-third of rental expense (the portion
deemed representative of the interest factor).

(2) EBITDA represents net earnings plus interest expense, income tax expense,
depreciation, amortization of intangible assets, and amortization of
premium or discount on investments in bonds. EBITDA is presented as a
measure of the Company's consolidated cash flow and its ability to generate
cash flow to service its debt obligations. However, EBITDA should not be
construed as an alternative to Talegen's net earnings or cash flow from
operating activities (as determined in accordance with GAAP) and should not
be construed as an indicator of Talegen's operating performance or as a
measure of Talegen's liquidity. On a pro forma basis, as calculated under
the Indenture, EBITDA would be $ million and $ million for the year
ended December 31, 1995 and the three months ended March 31, 1996,
respectively.

(3) Includes $70 million and $1 million of net realized investment gains for
the year ended December 31, 1995 and the three months ended March 31, 1996,
respectively. EBITDA also includes the effect of loss and loss expense
reserve actions pertaining to prior accident years which increase
(decrease) EBITDA by ($102) million for the year ended December 31, 1995
and $1 million for the three months ended March 31, 1996. See "Management's
Discussion and Analysis of Talegen's Financial Condition and Results of
Operations."

(4) Cash interest expense represents interest expense excluding amortization of
deferred financing costs.

(5) Pro forma cash available from the Insurance Companies represents the sum of
pro forma tax allocation payments, pro forma management and other fees (net
of operating expenses of Talegen Holdings) and pro forma available
dividends from the Insurance Companies during such periods. See footnotes
9 and 10 for a discussion of the calculation of available dividends from
the Insurance Companies and certain reserving actions taken on December 31,
1995 that affect the amount of available dividends from the Insurance
Companies. See "Management's Discussion and Analysis of Talegen's Financial
Condition and Results of Operations--Liquidity and Capital Resources." The
pro forma tax allocation payments represent amounts that would be paid
under the tax allocation agreements to be entered into in connection with
the Acquisition.

(6) Pro forma adjusted cash available from the Insurance Companies represents
pro forma cash available from the Insurance Companies adjusted to exclude
(i) a $21 million litigation settlement that was included in the 1995
operating expenses of Talegen Holdings (which had the effect of reducing
pro forma cash available from the Insurance Companies for 1995 by such
amount) which the Company believes is a nonrecurring item at the Talegen
Holdings level, and (ii) a $12 million reduction in

(Footnotes continued on following page)

14
<PAGE>
(Footnotes continued from preceding page)
pro forma tax allocation payments (as calculated under the post-Acquisition
tax allocation agreements) from the Insurance Companies (which had the
effect of reducing pro forma cash available from the Insurance Companies
for 1995 by such amount) resulting from certain net loss and loss expense
reserve actions pertaining to prior accident years taken at the Insurance
Companies on December 31, 1995 in the amount of $102 million. The Company
believes that the magnitude of such loss and loss expense reserve actions,
together with any loss and loss expense reserve actions taken prior to the
Closing (see "The Acquisition and the Financings--Certain Actions Before
Closing--Reserves"), are not representative of future operations. However,
the Company closely monitors reserve requirements and, accordingly, there
can be no assurance as to the level of adjustments for prior accident years
that may be recorded in future periods.

(7) GAAP loss and loss expense ratio represents the sum of losses and loss
expenses as a percentage of net premiums earned. GAAP underwriting expense
ratio represents underwriting expenses as a percentage of net premiums
earned. GAAP combined ratio represents the sum of GAAP loss and loss
expense ratio, GAAP underwriting expense ratio, and GAAP policyholder
dividends as a percentage of net premiums earned.

(8) Represents the ratio of statutory net premiums written for the period to
statutory policyholders' surplus at the end of such period. The ratio as of
March 31, 1996 is calculated using statutory net premiums written from the
four quarters which precede the interim date.

(9) Without regulatory approval, in the absence of contractual or regulatory
restrictions, including regulatory restrictions that are imposed as a
matter of administrative policy, domestic insurers are permitted to pay
"ordinary dividends" from earned surplus up to an amount defined by the
insurance statutes of each state. Ordinary dividends are defined in
Indiana, New Jersey and California as dividends which, together with
dividends paid in the previous 12 months, do not exceed the greater of (i)
10% of policyholders' surplus at the preceding December 31 or (ii)
statutory net income, for the 12-month period ending the preceding December
31. In New York, "ordinary dividends" are defined as dividends which,
together with dividends declared or paid in the preceding 12 months, do not
exceed the lesser of (i) 10% of policyholders' surplus as shown by its last
statement on file with the NYID or (ii) adjusted net investment income for
the preceding 12-month period.

(10) Due to a general administrative policy in the state of New York that
prevents New York-domiciled insurance companies which undergo a change of
control from paying ordinary shareholder dividends for two years following
such change of control without the NYID's prior approval, pro forma
available dividends from the Insurance Companies reflects the exclusion of
$93 million of available dividends during 1995 from U.S. Fire, Westchester
Fire and Crum & Forster Indemnity.

In addition, regardless of such policy, the 1995 year-end reserve strengthening
caused U.S. Fire and Westchester Fire to report negative earned surplus
positions, and, accordingly, they have no ordinary dividend capacity in
1996. Both U.S. Fire and Westchester Fire, as a matter of statutory
accounting, have requested the NYID to allow them to reset their negative
earned surplus accounts to $0 as of the first day following the end of the
quarter in which the Closing occurs. If the NYID grants these requests, and
absent any other statutory, regulatory or administrative restrictions
(including those relating to change of control situations as discussed
previously in this footnote), both U.S. Fire and Westchester Fire would be
able to pay shareholder and policyholder dividends from earnings recognized
in the fiscal quarters after the Closing.

15
<PAGE>
RISK FACTORS

Prospective investors should consider carefully, in addition to the other
information contained in this Prospectus, the following factors before
purchasing the Debentures offered hereby.

ADEQUACY OF LOSS RESERVES

Talegen maintains reserves to cover its estimated ultimate liability for
losses and loss expenses. These reserves do not represent an exact measurement
of liability but are Talegen's estimates based upon: (i) actuarial projections
of what Talegen at a given time expects to be the cost of the ultimate
settlement and administration of claims reflecting facts and circumstances then
known, (ii) estimates of future trends in claims severity and frequency, (iii)
judicial theories of liability, and (iv) other factors, such as variables in
claims handling procedures, economic factors, and judicial and legislative
trends and actions. Most or all of these factors are not directly quantifiable,
particularly on a prospective basis. In addition, there may be significant
reporting lags between the occurrence of the insured event and the time it is
actually reported to the insurer. The inherent uncertainties of estimating
insurance reserves are generally greater for casualty coverages than for
property coverages primarily due to the longer period of time that typically
elapses before a definitive determination of ultimate loss can be made, changing
theories of legal liability and changing political climates.

There are significant additional uncertainties in estimating the amount of
reserves required for environmental, asbestos-related and other latent exposure
claims. Among these uncertainties are a lack of historical data, long reporting
delays, and complex, unresolved legal issues regarding policy coverage and the
extent and timing of any such contractual liability. Courts have reached
different and frequently inconsistent conclusions as to when the loss occurred,
what claims are covered, under what circumstances the insurer has an obligation
to defend, how policy limits are determined and how policy exclusions are
applied and interpreted.

Talegen Holdings and the Insurance Companies regularly review and adjust the
Insurance Companies' estimated loss and loss expense and uncollectible
reinsurance reserves. Talegen Holdings and the Insurance Companies, as
appropriate, review: (i) claim information, (ii) the historical loss experience
of each Insurance Company and of the property and casualty insurance industry as
a whole, (iii) legislative enactments, judicial decisions, legal developments in
the assessment and imposition of damages and changes in political attitudes, and
(iv) trends in general economic conditions, including the effects of inflation.
However, because of the uncertainties discussed above, actual losses may
deviate, perhaps substantially, from the reserves reflected in Talegen's
financial statements. Any material deficiency in reserve estimates, as compared
to actual losses, could result in a charge to earnings which could have a
material adverse effect on the Company. See "--Ability to Service Debt; Reliance
on Dividends from Insurance Companies" and "Reserves and Risk Management."

SIGNIFICANT LEVERAGE

As of March 31, 1996, after giving pro forma effect to the Acquisition and
the Financings, the Company will have $1,146 million of consolidated
indebtedness and $963 million of consolidated shareholder's equity resulting in
a debt to equity ratio of 1.2 to 1.0. The Company's pro forma ratio of earnings
to fixed charges for the fiscal year ended December 31, 1995 and for the three
months ended March 31, 1996 would have been 1.5 to 1.0 and 2.0 to 1.0,
respectively, after giving effect to the Acquisition, the Financings and the
application of the proceeds therefrom. See "Pro Forma Capitalization" and "Pro
Forma Consolidated Financial Information." The Company and its subsidiaries may
incur additional indebtedness in the future, subject to certain limitations
contained in the instruments governing its indebtedness. Accordingly, the
Company will have significant debt service obligations.

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<PAGE>
The Company's debt service obligations could have important consequences to
holders of the Debentures, including the following: (i) a substantial portion of
the dividends and other payments to the Company from the Insurance Companies
(through Talegen Holdings) will be dedicated to the payment of principal and
interest on its indebtedness (for a discussion of the Company's debt service
obligations, see "The Acquisition and the Financings--Financing of the
Acquisition"), thereby reducing the funds available to the Company for its
Insurance Company operations; (ii) the Company's ability to obtain additional
financing in the future may be limited; (iii) certain of the Company's
borrowings (specifically, $796 million under the Credit Facilities at the
Closing) will be at variable rates of interest, which could cause the Company to
be vulnerable to increases in interest rates; (iv) all of the indebtedness
incurred in connection with the Credit Facilities will become due prior to the
time the principal payments on the Debentures will become due; and (v) the
Company's indebtedness imposes numerous financial and other restrictive
covenants, the failure to comply with which may result in an event of default
which, if not cured or waived, could have a material adverse effect on the
Company. There can be no assurance that the Company's or the Insurance
Companies' operating results will be sufficient for payment of the Company's
indebtedness.

ABILITY TO SERVICE DEBT; RELIANCE ON DIVIDENDS FROM INSURANCE COMPANIES

On a pro forma basis for the Acquisition and the Financings, the Insurance
Companies will have no outstanding long-term indebtedness and no material
interest expense. However, because the Company will incur significant
indebtedness as discussed above and because the Company will have no significant
operations independent of the Insurance Companies and certain service companies
described in "Business," the Company will be primarily dependent on dividends,
tax allocation payments, and management and other fees from the Insurance
Companies, paid through Talegen Holdings, to meet its debt obligations,
including its obligations under the Debentures. All of the jurisdictions in
which the Insurance Companies are domiciled, principally New York, Indiana, New
Jersey and California, regulate the payment of dividends. Dividends are
generally payable only from earned surplus.

Without regulatory approval, in the absence of contractual or regulatory
restrictions or other agreements with regulatory authorities restricting
dividends, including regulatory restrictions that are imposed as a matter of
administrative policy, domestic insurers are permitted to pay ordinary dividends
from earned surplus up to an amount defined by the insurance statutes of each
state. "Ordinary dividends" are defined in Indiana, New Jersey and California as
dividends which, together with dividends paid in the previous 12 months, do not
exceed the greater of (i) 10% of policyholders' surplus at the preceding
December 31 or (ii) statutory net income, for the 12-month period ending the
preceding December 31. "Ordinary dividends" are defined in New York as dividends
which, together with dividends declared or paid in the preceding 12 months, do
not exceed the lesser of (i) 10% of policyholders' surplus as shown by its last
statement on file with the New York Insurance Department or (ii) adjusted net
investment income for the preceding 12-month period. Adjusted net investment
income includes a carry forward of undistributed net investment income for two
years. In Indiana, New Jersey and California, ordinary dividends may not be paid
unless prior notice has been given to the respective insurance commissioner. In
Indiana and California, notice of ordinary dividends must be given within five
business days after the dividend is declared and at least ten days before it is
to be paid. New Jersey similarly requires that notice be given within five
business days after the dividend is declared, but requires notice 30 days prior
to payment, unless the commissioner approves a shorter period. Any dividends in
excess of ordinary dividends are defined as "extraordinary dividends" and
require the approval of the insurance commissioner of the relevant state.

Due to 1995 year-end reserve strengthening that caused the reporting of
negative earned surplus positions at December 31, 1995, two New York-domiciled
Insurance Companies, U.S. Fire and Westchester Fire, have no ordinary dividend
capacity in 1996. However, both U.S. Fire and Westchester Fire have, as a matter
of statutory accounting, requested the NYID to allow them to reset their
respective earned surplus accounts to $0 as of the first day following the end
of the quarter in which the

17
<PAGE>
Closing occurs. If the NYID grants these requests, and absent any other
statutory, regulatory or administrative restrictions (see below), both U.S. Fire
and Westchester Fire would be able to pay shareholder and policyholder dividends
from earnings recognized in fiscal quarters after the Closing. New
York-domiciled insurance companies subject to a change of control, such as U.S.
Fire, Westchester Fire and Crum & Forster Indemnity, however, are prevented, as
a matter of general administrative policy, from paying ordinary shareholder
dividends for two years following such change of control without the NYID's
prior approval. There can be no assurance that the NYID will approve (i) U.S.
Fire's and Westchester Fire's requests to reset their earned surplus accounts to
$0 or (ii) any request made by U.S. Fire, Westchester Fire or Crum & Forster
Indemnity to pay dividends during the two-year period following the Closing.

The aggregate amount available for the payment of ordinary dividends by the
Insurance Companies during 1996 is $96 million, of which $16 million has been
paid through March 31, 1996. Such amounts do not include dividends from U.S.
Fire and Westchester Fire due to their negative earned surplus positions at
December 31, 1995. On a pro forma basis, cash available from the Insurance
Companies, which includes tax allocation payments, management and other fees
(net of operating expenses of Talegen Holdings) and available dividends from the
Insurance Companies, would have been $101 million in 1995 and $56 million for
the three months ended March 31,1996. This compares to pro forma interest
expense (excluding amortization of deferred financing costs) and principal
payments related to the Offering and the Credit Facilities of $95 million for
the year ended December 31, 1995 and $24 million for the three months ended
March 31, 1996. There can be no assurance that the Insurance Companies will be
able to pay dividends in the future in an amount sufficient to enable the
Company to meet its liquidity requirements.

The Credit Facilities contain covenants that require the Insurance Companies
to maintain certain risk-based capital levels, minimum statutory surplus levels,
and combined statutory net premiums-to-surplus ratios, each of which indirectly
imposes limitations on the ability of the Insurance Companies to pay dividends
to the Company. The Credit Facilities, however, do not contain restrictive
covenants that expressly limit the payment of dividends by the Insurance
Companies.

No prediction can be made as to whether any legislative proposals relating
to dividend rules in New York, Indiana, New Jersey and California will be made,
whether any such legislative proposal will be adopted in the future, or the
effect, if any, any such proposal would have on the Company, Talegen Holdings or
the Insurance Companies. No assurance can be given that some or all of the
Insurance Companies' domiciliary states will not adopt regulatory provisions
more restrictive than those currently in effect. In addition, the insurance
commissioner of every state has broad authority to limit payments (dividends or
otherwise) by domestic insurance companies if such insurance commissioner
believes such payments would leave the insurer in a hazardous financial
condition. See "Regulatory Matters-- Regulation of Dividends and Other Payments
from Insurance Companies" and "Management's Discussion and Analysis of Talegen's
Financial Condition and Results of Operations--Liquidity and Capital Resources."

SUBORDINATION OF DEBENTURES; HOLDING COMPANY STRUCTURE; ASSET ENCUMBRANCES

The Company's obligations under the Debentures are subordinate and junior in
right of payment to all existing and future Senior Indebtedness of the Company.
As of March 31, 1996, on a pro forma basis after giving effect to the
Acquisition and the Financings and the application of the net proceeds
therefrom, the Company would have had (i) approximately $796 million of Senior
Indebtedness, all of it under the Credit Facilities, and (ii) approximately $179
million of commitment availability under the Revolving Credit Facility to fund
future liquidity needs of the Company, if any, all of which would be Senior
Indebtedness, if borrowed. Additional Senior Indebtedness may be incurred by the
Company from time to time, subject to certain restrictions. By reason of such
subordination, in the event of an insolvency, liquidation, or other
reorganization of the Company, the lenders under the Credit Facilities

18
<PAGE>
and other creditors who are holders of Senior Indebtedness must be paid in full
before the holders of the Debentures may be paid; accordingly, there may be
insufficient assets remaining after payment of prior claims to pay amounts due
on the Debentures. In addition, under certain circumstances, no payments may be
made with respect to the principal of or interest on the Debentures if a default
exists with respect to certain Senior Indebtedness. See "Description of
Debentures--Subordination."

The Debentures are effectively subordinated to the obligations of the
Company's subsidiaries (including the Insurance Companies) because the Company
is a holding company. In the event of an insolvency, liquidation or other
reorganization of any of the Insurance Companies, the creditors of the Company
(including the holders of the Debentures), as well as shareholders of the
Company, will have no right to proceed against the assets of such Insurance
Companies or to cause the liquidation or bankruptcy of such Insurance Companies
under Federal bankruptcy laws. The respective insurance laws of the domiciliary
states of each of the Insurance Companies would govern such proceedings and the
relevant state insurance authority would act as liquidator or rehabilitator for
such Insurance Companies. Creditors and policyholders of such Insurance
Companies would be entitled to payment in full from such assets before the
Company, as a shareholder, would be entitled to receive any distribution
therefrom, and, to the extent that state law allows, policyholders of such
Insurance Companies would be entitled to payment in full from such assets before
any creditors of such Insurance Companies would be entitled to receive any
distribution therefrom. Except to the extent that the Company may itself be a
creditor with recognized claims against such Insurance Companies, claims of
creditors of such Insurance Companies, including insureds under policies, will
have priority with respect to the assets and earnings of such Insurance
Companies over the claims of creditors of the Company, including claims under
the Debentures. At March 31, 1996, combined statutory liabilities of the
Insurance Companies, including reserves for outstanding losses and unearned
premiums, aggregated $6,016 million and combined statutory assets of the
Insurance Companies totaled $7,743 million. As of March 31, 1996, after giving
pro forma effect to the Acquisition and the Financings, the Company's
subsidiaries would have had outstanding liabilities (including loss reserves and
unearned premium reserves) of $8,667 million.

The Company's obligations under the Credit Facilities will be secured by a
first priority pledge of and security interest in (i) all of the common stock
owned by the Company in Talegen Holdings and certain subsequently acquired
direct domestic subsidiaries of the Company, (ii) all of the common stock of the
Intermediate Holding Companies owned by Talegen Holdings, (iii) any surplus
debentures existing and certain subsequently acquired (debentures repayable from
excess cash flow) created in connection with any acquisition of a direct
domestic subsidiary of the Company or Talegen Holdings, and (iv) certain noncash
proceeds of asset dispositions (collectively, the "Collateral"). Accordingly, if
an event of default occurs with respect to the Credit Facilities, the banks will
have a claim prior to the holders of the Debentures on substantially all of the
assets of the Company. See "The Acquisition and the Financings--Bank Financing."

COLLECTIBILITY OF REINSURANCE

To moderate the potential impact of unusually severe or frequent losses, the
Insurance Companies may cede (i.e., transfer) a portion of their gross policy
premiums to reinsurers in exchange for the reinsurers' agreements to share
covered losses with the Insurance Companies. Although reinsurance makes the
assuming reinsurer liable to such ceding Insurance Company to the extent of the
risk ceded, such Insurance Company is not relieved of its primary liability to
its insureds and therefore bears a credit risk with respect to its reinsurers.
Most of the Insurance Companies made significant use of reinsurance during the
1970s and early 1980s. Since that time, the Insurance Companies have generally
increased the portion of the business they retain while reducing the number and
improving the overall credit quality of reinsurers used for their reinsurance
contracts. During 1995 and 1994, excluding reinsurance ceded to pools and
associations, 85% and 63%, respectively, of the Insurance Companies' total
written premiums ceded to reinsurers were placed with approximately 35 high
quality reinsurers.

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<PAGE>
Although the Insurance Companies only place reinsurance with reinsurers that
they believe to be financially sound, there can be no assurance that the
Insurance Companies' reinsurers will pay all reinsurance claims on a timely
basis, if at all. At December 31, 1995, the Insurance Companies had current and
future reinsurance recoverables, net of uncollectible reinsurance, of $2,210
million due from several hundred reinsurers, including $404 million from Ridge
Reinsurance Limited ("Ridge Re"), a special purpose Bermuda reinsurer and a
wholly-owned subsidiary of XFSI, and $207 million from International Insurance
Company ("IIC"), a subsidiary of TRG, which represented the two largest
reinsurance recoverables. See "Reserves and Risk Management--Use of Reinsurance"
and "--Uncollectable Reinsurance."

In connection with the Talegen Restructuring, the Insurance Companies
entered into reinsurance agreements with IIC to transfer discontinued books of
business from certain of the Insurance Companies to IIC. Certain of the policies
initially reinsured by IIC during the Talegen Restructuring have been novated to
IIC and additional subject policies continue to be novated to IIC as claims are
reported. Under this novation process, IIC is substituted for the ceding
Insurance Company and becomes directly liable to the primary insured. As of
December 31, 1995, IIC had gross carried reserves related to the novated
policies totalling approximately $172 million. There can be no assurance that
these policy novations will not be subject to challenge in the future by
affected policyholders, which could result in the Insurance Companies retaining
primary liability for some or all of such policies. See "Reserves and Risk
Management--Use of Reinsurance."

FLUCTUATIONS OF INSURANCE INDUSTRY RESULTS; CATASTROPHE LOSSES

The results of the property and casualty insurance industry have
historically been subject to significant fluctuations. The industry's
profitability can be affected significantly by volatile and unpredictable
developments (including catastrophes), changes in loss reserves resulting from
changing legal environments as different types of claims arise and judicial
interpretations relating to the scope of insurers' liability develop,
fluctuations in interest rates and other changes in the investment environment
which affect returns on invested capital, and inflationary pressures that affect
the size of losses. The property and casualty insurance industry as a whole has
historically experienced pricing and profitability cycles. The principal factors
contributing to the profitability cycles are price competition and aggressive
marketing. Periods characterized by higher combined ratios have typically been
followed by withdrawal of capacity and a firming of prices, resulting in lower
combined ratios. In contrast to broad industry-based profitability cycles,
profitability in the commercial property and casualty insurance industry in
recent years has varied significantly by product line. Because of the nature of
the property and casualty insurance profitability cycle, it is very difficult to
predict future trends in the industry's overall combined ratios, however,
management believes that these factors have in the past and may in the future
produce profitability cycles for the industry and the Company.

Property and casualty insurers are subject to claims arising from
catastrophes, which may have a significant effect on their results of operations
and financial condition. The property and casualty insurance industry has
experienced, and can be expected to experience in the future, catastrophe losses
which may, from time to time, have a material adverse effect on many property
and casualty insurance companies' results of operations and financial
conditions. Catastrophes can be caused by various events including hurricanes,
windstorms, earthquakes, hail, explosions, severe winter weather, and fires. The
incidence and severity of catastrophes are inherently unpredictable. The extent
of losses from a catastrophe is a function of both the total amount of limits
exposed in the area affected by the event and the severity of the event. Most
catastrophes are restricted to small geographic areas, however, hurricanes and
earthquakes may produce significant damage in large, heavily populated areas.
Although catastrophes can cause losses in a variety of Talegen's property and
casualty lines, most of Talegen's catastrophe-related claims in the past have
related to commercial property coverages. Talegen generally seeks to reduce its
exposure to catastrophe losses through its selective underwriting practices and
the purchase of catastrophe reinsurance. There can be no assurance that the
reinsurance purchased

20
<PAGE>
by Talegen will be adequate to protect Talegen against material catastrophe
losses or that such reinsurance will continue to be available to Talegen in the
future at commercially reasonable rates. See "Reserves and Risk Management--Use
of Reinsurance." Although Talegen attempts to limit its exposure to acceptable
levels, it is possible that a catastrophic event or multiple catastrophic events
could have a material adverse effect on Talegen.

REGULATION

The Insurance Companies are subject to extensive regulation and supervision
in the states in which they do business. Regulators oversee matters relating to
rate setting in respect of certain lines of insurance, trade practices, policy
forms, claims practices, mandated participation in shared markets, types and
amounts of investments, reserve adequacy, insurer solvency, minimum amounts of
capital and surplus, transactions with related parties, and the payment of
dividends. The rates that the Insurance Companies can charge for certain lines
of business are subject to regulation, and, therefore, premium rates may not
keep pace with inflation. State insurance laws and regulations are administered
by agencies that have broad powers and are concerned primarily with the
protection of policyholders rather than securityholders. It is possible that
future regulatory changes or developments may impede rate increases or other
actions that the Insurance Companies propose to take to enhance their operating
results or fundamentally change the business environment in which they operate.
Future regulatory changes or developments, depending on their nature and
magnitude, could have a material adverse effect on the Company. See "Regulatory
Matters."

The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA" or "Superfund"), passed in 1980, is the principal federal statute
requiring cleanup of environmental damage. Congress has considered and continues
to consider several proposals to amend the Superfund legislation. The Company
cannot predict whether such proposed legislation will be enacted, what form such
legislation might take, or the potential effects such legislation may have on
Talegen and its competitors.

In addition, several committees of Congress have made inquiries and
conducted hearings as part of a broad study of the regulation of insurance
companies, and legislation has been introduced in several of the past sessions
of Congress which, if enacted, could result in the federal government assuming
some role in the regulation of the insurance industry.

COMPETITION

Talegen operates in a highly competitive industry and faces competition from
domestic and foreign insurers, many of which are larger and have greater
financial, marketing and management resources than Talegen. Although competition
is significant for all of the Operating Groups, certain of the Operating Groups,
particularly Industrial Indemnity and Westchester Specialty, have experienced
especially significant price competition in recent years. Competition in the
property and casualty insurance industry is based on many factors, including
overall financial strength of the insurer, ratings by rating agencies, premiums
charged, policy terms and conditions, services offered, reputation, broker
compensation and experience. There can be no assurance that Talegen will not
face increased competition in the future from other insurance companies. See
"Business."

Several commercial property and casualty insurers currently offer
alternative forms of risk protection in addition to traditional insurance
products. These products, including large deductible programs and various forms
of self-insurance that utilize captive insurance companies and risk retention
groups, have been instituted in reaction to the escalating cost of insurance
caused in part by increased jury awards in third-party liability and workers'
compensation cases. It is not possible to predict how continued growth in
alternative forms of risk protection will affect Talegen's future operations.

21
<PAGE>
DEPENDENCE ON INVESTMENT INCOME

Talegen, like other property and casualty insurance companies, depends on
income from its investment portfolio for a significant portion of its earnings.
Property and casualty insurers (including Talegen) typically experience a
combined ratio in excess of 100%. However, because premiums are received in
advance of the payment of claims, insurers are able to earn substantial income
from the investment of these premiums. Although Talegen currently invests
primarily in fixed income securities issued by the U.S. government or its
agencies with maturities of one year or less, no assurance can be given that
Talegen will not suffer a significant decline in investment yields in future
periods as it expands the diversity of its investment portfolio. A significant
decline in investment yields could have a material adverse effect on Talegen's
results. See "Business--Investments and Investment Policy."

RATINGS

Increased public and regulatory concerns regarding the financial stability
of participants in the insurance industry have resulted in greater emphasis
being placed by policyholders upon insurance company ratings and has created
some measure of competitive advantage for insurance carriers with higher
ratings. The Insurance Companies are currently rated "A (Excellent)" by A.M.
Best. As a result of the Acquisition and the Financings, A.M. Best has indicated
that the Best Rating of the Insurance Companies will be lowered one level to "A-
(Excellent)" after the Closing. In January 1996, following the announcement of
the Acquisition, Standard & Poor's Corporation ("Standard & Poor's") placed the
claims-paying ability ratings of the Insurance Companies, which currently range
from A+ to A-, on creditwatch with negative implications. There can be no
assurance that the Insurance Companies will be able to maintain the ratings
described in this Prospectus. Any further downgrade in ratings could materially
adversely affect the business of the Insurance Companies. The ratings are not in
any way a measure of protection offered to investors in the Debentures and
should not be relied upon with respect to making an investment in the
Debentures. See "Business--Ratings."

IMPORTANCE OF MANAGEMENT AND KEY EMPLOYEES

The Company and its subsidiaries will depend on the services of the
post-Acquisition executive officers, particularly Joseph W. Brown, Jr., the
chairman of the board of Talegen Holdings and a significant equity investor in
Holdings. Mr. Brown is also the chairman of the board of TRG. Talegen does not
have and does not intend to enter into employment agreements with its key
executive officers. In addition, the ability to write profitable insurance
business is dependent on the ability to maintain a staff of qualified
underwriters and service personnel. See "Management--Executive Compensation" and
"--Stock Purchase and Option Plan."

CONTROL BY NEW TALEGEN, LLC

At the Closing, approximately 90% of the outstanding shares of common stock
(the "Common Stock") of the Company will be held beneficially by New Talegen,
LLC ("New Talegen"), a Delaware limited liability company, the members of which
are the members of the limited liability company which is the general partner of
KKR. Following the Acquisition, assuming the exercise of all options granted to
management and the lapsing of restrictions on all restricted stock, New Talegen
will continue to hold beneficially at least 78% (on a fully diluted basis) of
the outstanding Common Stock of the Company. New Talegen will have sole voting
power and investment power with respect to such shares. Consequently, New
Talegen will control the Company and have the power to elect all of its
directors and to approve any action requiring stockholder approval. Two members
of New Talegen will also be directors of the Company. See "Ownership of Capital
Stock."

For a description of the terms of an arrangement pursuant to which KKR will
render management, consulting and financial services to the Company and Talegen
Holdings, see "Certain Interests in the

22
<PAGE>
Acquisition and Related Transactions." Under the Credit Facilities, a change in
the control of the Company may constitute an event of default under the Credit
Facilities. See "The Acquisition and the Financings--Bank Financing" and
"Description of Credit Facilities."

LACK OF PRIOR PUBLIC MARKET

There is currently no public market for the Debentures offered hereby and
the Company does not plan to apply for listing of the Debentures on any
securities exchange. The Company has been advised by the Underwriters that,
following completion of the initial offering of the Debentures, the Underwriters
presently intend to make a market in the Debentures; however, they are not
obligated to do so, and any market making may be discontinued at any time
without notice. Therefore, there can be no assurance as to the liquidity of the
trading market for the Debentures or that an active public market for the
Debentures will develop. If an active public market does not develop, the market
price and liquidity of the Debentures may be adversely affected. See
"Underwriting."

FORWARD-LOOKING STATEMENTS

This Prospectus contains certain forward-looking statements concerning the
Company's operations, economic performances and financial condition, including,
in particular, the likelihood of the Company's success in developing and
expanding its business. These statements are based upon a number of assumptions
and estimates which are inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company, and reflect
future business decisions which are subject to change. Some of these assumptions
inevitably will not materialize, and unanticipated events will occur which will
affect the Company's results.

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<PAGE>
THE COMPANY

The Company was organized at the direction of KKR and certain members of
management of Talegen Holdings and the Insurance Companies to acquire Talegen
Holdings from XFSI, a subsidiary of Xerox. Following the Acquisition, the
Company will act as the holding company for Talegen and its only material asset
will be the capital stock of Talegen Holdings. Talegen, with net premiums
written of $1.7 billion in 1995 and $404 million for the three months ended
March 31, 1996, is a leading writer of commercial property and casualty
insurance that operates through its four Operating Groups, each of which is
focused on a different, well-defined segment of the commercial property and
casualty insurance market. This operating structure allows each Operating Group
to focus on a specific operating strategy and to respond rapidly to changing
market conditions, and provides Talegen with diversified sources of cash flow
and opportunities for premium growth. As of March 31, 1996, Talegen's combined
statutory surplus was $1.7 billion and total assets were $11.0 billion,
including $6.3 billion of investment assets comprised principally of cash and
short-term investments. Talegen is the seventeenth largest writer of commercial
property and casualty insurance in the United States based on 1994 net premiums
written, according to A.M Best.

In 1992, a new management team began to implement a series of initiatives
designed to strengthen Talegen's competitive position in the property and
casualty insurance industry. The most significant of these initiatives was the
Talegen Restructuring, which terminated Talegen's intercompany pooling
arrangement and realigned 18 of Talegen's insurance companies into the four
highly focused Operating Groups. A fifth group, TRG, which is being sold in a
separate transaction to an entity organized at the direction of KKR and certain
management members of TRG, was established at the same time to manage claims
run-off obligations and reinsurance collections associated with its own and
several Talegen discontinued books of business. In addition, in 1992 Talegen
included two other insurance groups that were outside the intercompany pooling
arrangement, Constitution Re Corporation and Viking Insurance Holdings, Inc. On
January 18, 1993, Xerox announced its intention to disengage from its insurance
and other financial services businesses, which included Talegen. In 1995,
Talegen completed the divestiture of Constitution Re Corporation and Viking
Insurance Holdings, Inc.

24
<PAGE>
The following chart provides certain information concerning the Company,
Talegen Holdings, the Intermediate Holding Companies, the Insurance Companies by
Operating Group, and Talegen Holdings's other direct subsidiaries:

<TABLE>
<CAPTION>
NAME (1) STATE OF DOMICILE
- ---------------------------------------------------------------------------- ------------------
<S> <C>
The Company................................................................. Delaware
Talegen Holdings.......................................................... Delaware
Coregis Group, Inc...................................................... Delaware
Coregis Insurance Company............................................. Indiana
Coregis Indemnity Company............................................. Illinois
California Insurance Company.......................................... California
Crum & Forster Holdings, Inc............................................ Delaware
United States Fire Insurance Company.................................. New York
The North River Insurance Company..................................... New Jersey
Crum and Forster Insurance Company.................................... New Jersey
Crum & Forster Indemnity Company...................................... New York
Crum & Forster Underwriters Co. of Ohio............................... Ohio
Industrial Indemnity Holdings, Inc...................................... Delaware
Industrial Indemnity Company.......................................... California
Industrial Indemnity Company of Alaska................................ Alaska
Industrial Indemnity Company of Idaho................................. Idaho
Industrial Indemnity Company of the Northwest......................... Washington
Industrial Insurance Company.......................................... California
Employers First Insurance Company..................................... California
Westchester Specialty Group, Inc........................................ Delaware
Westchester Fire Insurance Company.................................... New York
Westchester Surplus Lines Insurance Company........................... Georgia
Industrial Underwriters Insurance Company............................. Texas
Apprise Corp............................................................ New Jersey
Infocus Employee Services, Inc. (2)..................................... Delaware
Talegen Properties, Inc................................................. Delaware
Filoli Information Systems Company (3).................................. Delaware
</TABLE>

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

(1) Indentations indicate subsidiary relationships. Except as indicated, all
ownership is 100%.

(2) Ownership of Infocus Employee Services, Inc. by Talegen Holdings was 92.5%
on a fully diluted basis at March 31, 1996.

(3) Ownership of Filoli Information Systems Company by Talegen Holdings was 78%
on a fully diluted basis at March 31, 1996.

The Company is incorporated in Delaware and the address of its executive
offices is 1011 Western Avenue, Suite 1000, Seattle, Washington 98104. The
Company's telephone number is (206) 654-2600.

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<PAGE>
THE ACQUISITION AND THE FINANCINGS

GENERAL

Pursuant to the Purchase Agreement, the Company will acquire all of the
issued and outstanding capital stock of Talegen Holdings in consideration of
$1.75 billion, including the sale by the Trust of $450 million of Preferred
Securities to XFSI. The Purchase Agreement provides that from and after July 1,
1995, substantially all cash dividends of the Insurance Companies, with the
exception of proceeds from sales of certain assets entered into prior to the
Purchase Agreement, will be retained by Talegen and not paid to XFSI. If the
Closing has not occurred prior to July 1, 1996, the purchase price will increase
by $10 million each month (or by the pro rated amount for the portion of each
month) payable in additional Preferred Securities. In addition, XFSI will make a
$20 million cash contribution to Holdings which primarily represents the
dividends to be paid by TRG after March 31, 1996 and prior to the Closing. One
of Industrial Indemnity's Insurance Company subsidiaries has applied to
California regulators for permission to pay an extraordinary dividend of $50
million in connection with the Acquisition. In the event that such approval is
not obtained or is obtained for only a portion of the requested $50 million, the
total purchase price of the Acquisition will remain the same, but an additional
amount of Preferred Securities equal to the difference between $50 million and
the permitted dividend, if any, will be issued to XFSI in lieu of a like amount
of cash. See "--Financing of the Acquisition," "--Bank Financing" and "--Equity
Investments," and "Description of Preferred Securities."

CERTAIN ACTIONS BEFORE CLOSING

Certain actions have been or will be taken prior to Closing to enhance
Talegen's financial condition.

Asset Substitutions. As part of the Acquisition and prior to the Closing,
XFSI will replace certain promissory notes and certain real estate assets of the
Insurance Companies with $468 million of after-tax cash that Talegen will use to
increase the investment portfolio of the Insurance Companies.

Reinsurance Arrangements. Since 1992, the Insurance Companies, on an
Operating Group basis, have been parties to aggregate excess of loss reinsurance
agreements (the "Ridge Re Treaties") with Ridge Re. Pursuant to the Ridge Re
Treaties, Ridge Re has agreed to reinsure 85% of all the Insurance Companies'
net losses (which include losses and allocated loss expenses and losses from
uncollectible reinsurance, net of salvage, subrogation and other recoverables),
as aggregated on an Operating Group basis, up to the limits of the Ridge Re
Treaties, for claims made or losses occurring during the 1992 accident year and
all accident years prior thereto in excess of the Insurance Companies' net
reserves, as aggregated on an Operating Group basis, as of December 31, 1992
(the "Retention Amounts"). As the Insurance Companies within an Operating Group
establish reserves that, in the aggregate, increase their net losses in excess
of the Retention Amounts, 85% of the amount of net losses corresponding to such
reserves is ceded to Ridge Re. When such Insurance Companies' paid losses and
allocated loss expenses (including paid losses from uncollectible reinsurance)
exceed the Retention Amounts under the Ridge Re Treaties, Ridge Re is required
to reimburse the Insurance Companies for 85% of such paid losses. As of March
31, 1996, Crum & Forster and Westchester Specialty had ceded to Ridge Re 100% of
their respective limits under the Ridge Re Treaties, while gross reinsurance
cover (exclusive of the 15% coinsurance) of $140 million and $100 million
remains available to Coregis and Industrial Indemnity, respectively. Talegen has
a reinsurance recoverable balance from Ridge Re of $404 million as of March 31,
1996, with respect to which the relevant Insurance Companies have received
irrevocable letters of credit.

As part of the Acquisition, XFSI and Xerox will enter into a guarantee at
the Closing in favor of the Insurance Companies with respect to Ridge Re's
payment obligations under the Ridge Re Treaties. As of December 31, 1995, Xerox
had total assets and common shareholders' equity of $26 billion and $3.9
billion, respectively.

26
<PAGE>
Reserves. The Purchase Agreement permits Talegen to increase the net loss
and loss expense reserves of the Insurance Companies within the Crum & Forster
and Westchester Specialty Operating Groups in 1996 prior to the Closing by up to
$215 million if any such increase is supported by actuarial analysis.

Capital Contributions. In 1996 and prior to the Closing, Talegen Holdings
intends to contribute up to $85 million of its cash balances to the contributed
surplus of certain Insurance Companies of the Crum & Forster and Westchester
Specialty Operating Groups.

Other Transactions. In a separate transaction, XFSI agreed in January 1996
to sell TRG to TRG Acquisition Corporation ("New TRG"), an entity formed at the
direction of KKR and certain management of TRG, for total consideration of $612
million. In addition to KKR-organized entities, ownership of New TRG will
include certain senior management members of TRG and its affiliates, including
Mr. Brown, the Chairman of the Board, President and Chief Executive Officer of
Talegen Holdings (and the Chairman of the Board, President and Chief Executive
Officer of the Company at Closing). Mr. Brown is also the Chairman of the Board
of TRG. TRG was spun-off by Talegen Holdings to XFSI on December 31, 1995.

FINANCING OF THE ACQUISITION

The Company expects that an aggregate of approximately $2.2 billion will be
needed to pay the Acquisition consideration, refinance certain indebtedness of
the Intermediate Holding Companies, pay fees and expenses in connection with the
Acquisition and the Financings, and establish working capital balances.

The sources and uses of the funds for the Acquisition and the related
transactions are as follows (dollars in millions):

<TABLE>
<S> <C>
SOURCES OF FUNDS
Cash and investment balances of Talegen Holdings........................... $ 72.0(1)
Cash contribution by XFSI.................................................. 20.0(2)
Term Loan Facility......................................................... 775.0
Revolving Credit Facility.................................................. 21.0(3)
Debentures offered hereby.................................................. 350.0
Equity Investment.......................................................... 963.0(4)
--------
Total sources of funds................................................. $2,201.0
--------
--------
USES OF FUNDS
Purchase of Talegen Holdings equity........................................ $1,750.0(5)
Refinancing of existing debt............................................... 351.0
Estimated transaction fees and expenses and balances for working capital... 100.0
--------
Total uses of funds.................................................... $2,201.0
--------
--------
</TABLE>

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

(1) As of March 31, 1996, on a pro forma basis to give effect to certain
dividends from the Intermediate Holding Companies and the Insurance
Companies and the release of funds from a security arrangement upon the
repayment of debt of the Intermediate Holding Companies, Talegen Holdings
would have had cash and investment balances of $195 million. From its pro
forma cash balances, Talegen Holdings intends to (i) contribute a total of
$85 million to Crum & Forster and Westchester Specialty, (ii) apply $72
million to fund the Acquisition and the related transactions, and (iii)
retain $38 million as excess cash and investment balances. Pursuant to the
Purchase Agreement, substantially all cash dividends of the Insurance
Companies from and after July 1, 1995, with the exception of the proceeds of
certain sales of assets, will be retained by Talegen Holdings and not paid
to XFSI.

(Footnotes continued on following page)

27
<PAGE>
(Footnotes continued from preceding page)
(2) Primarily represents a contribution by XFSI of dividends to be paid by TRG
subsequent to March 31, 1996 and prior to Closing.

(3) $179 million of commitments under the Revolving Credit Facility will be
available to the Company after the Closing to fund future liquidity needs,
if any.

(4) The Equity Investment is comprised of capital contributions from the
following sources:

BANK FINANCING

The Credit Facilities will consist of a $525 million senior secured term
loan facility due 7 years from the date of the Closing (the "Closing Date") (the
"Tranche A Loans"), a $100 million senior secured term loan facility due 8 years
from the Closing Date (the "Tranche B Loans"), a $100 million senior secured
term loan facility due 8 1/2 years from the Closing Date (the "Tranche C
Loans"), a $50 million senior secured term loan facility due 9 1/4 years from
the Closing Date (the "Tranche D Loans"), and the $200 million Revolving Credit
Facility. The Company expects to borrow $21 million under the Revolving Credit
Facility to finance the Acquisition and the related transactions, leaving $179
million of available unused commitments under the Revolving Credit Facility to
fund future liquidity requirements, if any. Prior to maturity, the Term Loan
Facility will be subject to scheduled amortization and mandatory prepayment in
connection with certain events, including certain asset sales not in the
ordinary course of business (subject to reinvestment exceptions), certain
issuances of debt by the Company, and the generation of Excess Cash Flow (50% of
which will be required to be used for mandatory prepayments as defined in the
documents governing the Credit Facilities, subject to certain exceptions).
Scheduled amortization under the Term Loan Facility will equal $3.75 million
prior to the thirtieth month after Closing. The Revolving Credit Facility is
subject to certain scheduled mandatory commitment reductions prior to final
termination of the commitment 7 years from the Closing Date.

The Company's obligations under the Credit Facilities will be secured by a
first priority pledge of and security interest in (i) all of the common stock
owned by the Company in Talegen Holdings and certain subsequently acquired
direct domestic subsidiaries of the Company, (ii) all of the common stock of the
existing and certain subsequently acquired Intermediate Holding Companies owned
by Talegen Holdings, (iii) any surplus debentures created in connection with any
acquisition of a direct domestic subsidiary of the Company and Talegen Holdings,
and (iv) certain noncash proceeds of asset dispositions. The banks that are
parties to the Credit Facilities will agree not to exercise certain remedies
with

28
<PAGE>
respect to such pledged stock prior to obtaining any required regulatory
approvals. For a period of five years after the Closing, the Credit Facilities
will not permit the Company to pay cash dividends to Holdings for the purpose of
paying cash dividends on the Preferred Securities. See "Description of Credit
Facilities."

EQUITY INVESTMENTS

The capitalization of the Company will include the $963 million Equity
Investment, which will be funded by (i) a $460 million common equity investment
in Holdings by Talegen Associates, L.P., a Delaware limited partnership
("Talegen Associates") and the majority shareholder of Holdings, (ii) a $53
million common equity investment in Holdings by the Management Investors, and
(iii) $450 million from the proceeds of the Preferred Securities. Of the $53
million equity investment by the Management Investors, $13 million represents a
restricted investment in Holdings stock. At Closing, the Management Investors
will beneficially own approximately 10% of the Common Stock of the Company, and,
on a fully diluted basis, the Management Investors could beneficially own up to
22% of the Common Stock of the Company. Indirectly, Talegen Associates is
controlled by New Talegen.

The Trust will sell $450 million of Preferred Securities to XFSI and then
loan the proceeds to Holdings. Holdings will contribute the $450 million of
proceeds to the Company as a common equity investment. The Preferred Securities
are mandatorily redeemable on the twentieth anniversary of issuance (the
"Preferred Redemption Date"), and permit the Trust to defer dividends for the
first seven years after issuance. In addition, deferred dividends are generally
not payable until the Preferred Redemption Date. The Preferred Securities are
similar in structure to a variety of trust originated preferred securities and
similar instruments that have been publicly issued in recent years. See
"Description of Preferred Securities."

29
<PAGE>
USE OF PROCEEDS

The gross proceeds to the Company from the Offering are estimated to be $350
million. Such proceeds, together with (i) borrowings of $796 million under the
Credit Facilities, (ii) $963 million from the Equity Investment, (iii) $72
million of existing cash and investment balances of Talegen Holdings, and (iv) a
$20 million cash contribution by XFSI will be used by the Company (i) to pay
$1.75 billion to XFSI to acquire Talegen Holdings, (ii) to repay indebtedness of
the Intermediate Holding Companies, which amounted to $351 million at March 31,
1996, and (iii) to pay $100 million of fees and expenses incurred in connection
with the Acquisition and the Financings and to fund working capital balances.
The indebtedness of the Intermediate Holdings Companies to be repaid in
connection with the Acquisition and the Financings, as of March 31, 1996,
consisted of (i) $90 million principal amount, at an interest rate of 6.31%,
owed by Coregis Group, Inc. to a syndicate of banks led by The First National
Bank of Chicago, (ii) $119 million principal amount, at an interest rate of
5.94%, owed by Crum & Forster Holdings, Inc. to a syndicate of banks led by
Citibank, N.A., (iii) $86 million principal amount, at an interest rate of
6.31%, owed by Industrial Indemnity Holdings, Inc. to a syndicate of banks led
by Bank of America National Trust and Savings Association, and (iv) $56 million
principal amount, at an interest rate of 6.06%, owed by Westchester Specialty
Group, Inc. to a syndicate of banks led by Bank of America National Trust and
Savings Association. See "The Acquisition and the Financings."

30
<PAGE>
PRO FORMA CAPITALIZATION

The following table sets forth the unaudited consolidated pro forma
capitalization of the Company as of March 31, 1996, as adjusted to give effect
to the Acquisition and the related transactions, including the Financings and
the application of the proceeds therefrom. This table should be read in
conjunction with the "Pro Forma Consolidated Financial Information" and the
notes thereto, the consolidated financial statements of Talegen Holdings and
related notes thereto, and the financial statements of the Company and related
notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AS ADJUSTED AS OF
MARCH 31, 1996
---------------------
(DOLLARS IN MILLIONS)
<S> <C>
Retained excess cash....................................................... $ 38.0(1)
--------
--------

Long-term debt:
Revolving Credit Facility................................................ $ 21.0(2)
Term Loan Facility....................................................... 775.0(3)
Debentures offered hereby................................................ 350.0
--------
Total long-term debt................................................. 1,146.0
--------
Shareholder's equity:
Common Stock (1,000 shares authorized, $.01 par value, 100 shares
outstanding, historical basis; 1,000 shares authorized, $.01 par value,
100 shares outstanding on a pro forma basis)........................... --
Additional paid-in capital............................................... 963.0
--------
Total shareholder's equity........................................... 963.0(4)
--------
Total capitalization....................................................... $ 2,109.0
--------
--------
</TABLE>

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

(1) Represents cash and investment balances of Talegen Holdings and the
Intermediate Holding Companies.

(2) Approximately $21 million of the commitments under the Revolving Credit
Facility will be drawn on the Closing Date, leaving $179 million of
commitments under the Revolving Credit Facility available to the Company
after the Closing to fund future liquidity needs, if any.

(3) The Company will incur $775 million of indebtedness under the Term Loan
Facility in connection with the Acquisition. The term loan tranches under
the Term Loan Facility consist of the $525 million 7 year amortizing Tranche
A Loans, the $100 million 8 year amortizing Tranche B Loans, the $100
million 8 1/2 year amortizing Tranche C Loans, and the $50 million 9 1/4
year amortizing Tranche D loans. See "Description of Credit Facilities."

(4) At the Closing, the Trust will sell $450 million of Preferred Securities to
XFSI and then loan the proceeds to Holdings. Holdings will contribute the
$450 million of proceeds as common equity to the Company. See "Description
of Preferred Securities." The remainder of the total shareholder's
investment will consist of an equity investment of $460 million by entities
organized at the direction of KKR and $53 million by the Management
Investors. Included in the $53 million investment by the Management
Investors is a $13 million restricted investment in Holdings stock, the
proceeds of which will be invested as common equity by Holdings in the
Company.

31
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following pro forma financial data (the "Pro Forma Financial Data") have
been derived by the application of pro forma adjustments to the historical
financial statements included elsewhere in this Prospectus. The pro forma income
statement data for the periods presented give effect to the Acquisition, the
Financings and related transactions as if they had occurred on January 1, 1995.
The pro forma balance sheet data give effect to the Acquisition, the Financings
and related transactions as if they had occurred as of March 31, 1996. The
adjustments are described in the accompanying notes. The Pro Forma Financial
Data do not purport to represent what the Company's financial position and
results of operations actually would have been if the Acquisition had been
consummated on the date or for the periods indicated, or what such results will
be for any future date or for any future period. The pro forma adjustments are
based on available information and certain assumptions that Talegen believes are
reasonable under the circumstances. The Pro Forma Financial Data should be read
in conjunction with the historical financial statements and the notes thereto
included elsewhere in this Prospectus and "Management's Discussion and Analysis
of Talegen's Financial Condition and Results of Operations."

The pro forma adjustments were applied to the respective historical
financial statements to reflect and account for the Acquisition as a purchase.
Under purchase accounting, the respective purchase cost will be allocated to
acquired assets and liabilities based on their relative fair values as of the
Closing based on valuations and other studies which are not yet complete. The
fair value of the net assets acquired as of the Closing is expected to exceed
the purchase cost. This difference has been allocated to reduce the values
assigned to noncurrent assets, other than long-term marketable securities and
deferred income taxes, with the remaining balance classified as negative
goodwill. Such allocations are subject to final determination based on
valuations and other studies which may be completed after the Closing.
Accordingly, the final allocations will be different from the amounts reflected
herein. However, management does not expect that the effect of any differences
will be material.

32
<PAGE>
TALEGEN ACQUISITION CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
FINANCING/
PURCHASE
TALEGEN PRE-CLOSING ACCOUNTING
HISTORICAL TRANSACTIONS(1) ADJUSTMENTS PRO FORMA
---------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Investments and cash..................... $ 6,327 $ 488 $ (92)(2) $ 6,723(3)
Reinsurance recoverables................. 2,193 2,193
Receivables, due from affiliates and
other assets........................... 1,524 (350) (3)(2) 1,171
Deferred policy acquisition costs........ 144 144
Deferred financing costs................. 60(2) 60
Land, buildings, and equipment........... 132 (34) (98)(2)
Deferred income taxes.................... 463 (28) 50(2) 485
Cost of acquired businesses in excess of
net assets............................. 243 (243)(2)
---------- ----- ----------- ---------
TOTAL ASSETS......................... $ 11,026 $ 76 $ (326) $10,776
---------- ----- ----------- ---------
---------- ----- ----------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY
Unearned premiums........................ $ 794 $ 794
Unpaid losses and loss expenses.......... 6,904 6,904
Current income taxes..................... 69 $ (69)
Debt..................................... 351 $ 795(4) 1,146
Accounts payable and accrued
liabilities............................. 545 (5) 44(2) 584
Negative goodwill--successor............. 385(2) 385
---------- ----- ----------- ---------
Total liabilities...................... 8,663 (74) 1,224 9,813
---------- ----- ----------- ---------
Shareholder's equity--predecessor........ 2,363 150 (2,513)(2)
Shareholder's equity--successor.......... 963(4) 963
---------- ----- ----------- ---------
Total shareholder's equity............. 2,363 150 (1,550) 963
---------- ----- ----------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY............................. $ 11,026 $ 76 $ (326) $10,776
---------- ----- ----------- ---------
---------- ----- ----------- ---------
</TABLE>

See accompanying notes.

33
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)

(1) Prior to the Acquisition, the Company, Talegen and XFSI are required to
enter into the following transactions:

<TABLE>
<CAPTION>
ACCOUNTS
LAND, DEFERRED CURRENT PAYABLE AND SHAREHOLDER'S
INVESTMENTS DUE FROM BUILDINGS AND INCOME INCOME ACCRUED EQUITY--
AND CASH AFFILIATES EQUIPMENT TAXES TAXES LIABILITIES PREDECESSOR
----------- ---------- ------------- -------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEBIT (CREDIT)
a) $ 118 $ (34) $ 6 $ (90)
b) (34) $69 $ 5 (40)
c) 20 (20)
d) 350 $ (350)
--
----- ---------- ----- -------- ------- ------
$ 488 $ (350) $ (34) $(28) $69 $ 5 $(150)
--
--
----- ---------- ----- -------- ------- ------
----- ---------- ----- -------- ------- ------
</TABLE>

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

<TABLE>
<C> <S>
a) Represents after-tax cash received from the replacement of a training facility in
Virginia with cash by XFSI and the related elimination of property and deferred
taxes.
b) Represents the adjustments to eliminate deferred tax assets and current income tax
and other payables not assumed by the Company.
c) Primarily represents a contribution by XFSI of dividends to be paid by TRG
subsequent to March 31, 1996 and prior to Closing.
d) Represents repayment and reinvestment of notes due from affiliates.
</TABLE>

The pre-closing transactions do not include a nonrecurring expense and deemed
capital contribution to be recognized at or immediately prior to Closing,
relating to payments to be made by Xerox to certain Talegen management
employees under the terms of a preexisting Long-Term Incentive Plan. The
charge will have a material effect on results of operations in the period in
which the Closing occurs. The funds for such payment will be provided solely
by Xerox.

(2) The Acquisition will be accounted for as a purchase, applying the provisions
of Accounting Principles Board Opinion No. 16. The purchase cost will be
allocated to the acquired assets and liabilities based on their estimated
relative fair values as of the Closing. The fair value of the net assets
acquired, as of the Closing, is expected to exceed the purchase cost. This
difference has been allocated to reduce the values assigned to noncurrent
assets, other than long-term marketable securities and deferred income
taxes, with the remaining balance classified as negative goodwill. Such
allocations are subject to final determination based on valuations and other
studies which may be completed after the Closing. The pro forma adjustments
to reflect the Acquisition are summarized as follows:

Net funds from financing activities.................................. $1,758
Use of available funds on hand....................................... 92
------
Total funds.................................................... $1,850
------
------
Purchase cost:
Cash consideration for Talegen..................................... $1,750
Estimated fees and expenses and balances for working capital....... 100
------
Total purchase cost............................................ 1,850

Elimination of shareholder's equity--predecessor..................... 2,513
------
Excess of net assets acquired over cost of Acquisition............... $ (663)
------
------
(Footnotes continued on following page)

34
<PAGE>
(Footnotes continued from preceding page)

Allocation to assets and liabilities of Talegen:
Deferred financing costs........................................... $ 60
Deferred income taxes.............................................. 50
Accounts payable and accrued liabilities adjustments, net.......... (44)
Elimination of:
Existing cost of acquired businesses in excess of net assets..... (243)
Remainder of land, buildings and equipment....................... (98)
Other assets..................................................... (3)
Negative goodwill--successor....................................... (385)
------
Total.......................................................... $ (663)
------
------

(3) Includes $38 million of cash and investment balances at Talegen Holdings and
Intermediate Holding Companies.

(4) The pro forma adjustments to reflect the issuance of new debt and equity and
repayment of existing debt are as follows:

<TABLE>
<CAPTION>
SHAREHOLDER'S
EQUITY--
DEBT SUCCESSOR
----- -------------
DEBIT (CREDIT)
<S> <C> <C>
Borrowings under Credit Facilities.................................. $(796)
Issuance of Debentures.............................................. (350)
Refinancing of debt of Intermediate Holding Companies............... 351
Equity Investment................................................... $(963)
----- ------
Total capitalization............................................ $(795) $(963)
----- ------
----- ------
</TABLE>

35
<PAGE>
TALEGEN ACQUISITION CORPORATION
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN MILLIONS)

OTHER OPERATING DATA:
EBITDA (7)(8)....................................... $ 211 $ 195
Ratio of EBITDA to cash interest expense(9)......... 6.2x 2.0x
Depreciation and amortization....................... $ 82 $ 24
Cash available from the Insurance Companies
(10)(11).......................................... $ 166 $ 101
Ratio of cash available from the Insurance Companies
to cash interest expense (9)(10)(11)............... 4.9x 1.0x
Adjusted cash available from the Insurance
Companies (11).................................... n/a 134
Ratio of adjusted cash available from the Insurance
Companies to cash interest expense (9)(11)......... n/a 1.3x
Amortization of financing costs..................... $ 1 $ 8
Amortization of difference between fair value of net
assets acquired and purchase cost.................. $ 8 $ (24)

COMBINED STATUTORY DATA:
Statutory net income................................ $ 120 $ 87
Available dividends from the Insurance Companies
(12)(13)........................................... $ 175 $ 83
</TABLE>

See accompanying notes.

36
<PAGE>
TALEGEN ACQUISITION CORPORATION
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
THREE MONTHS ENDED MARCH 31, 1996
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
TALEGEN PRO FORMA
HISTORICAL ADJUSTMENTS (1) PRO FORMA
---------------- --------------- ---------
<S> <C> <C> <C>
REVENUES:
Gross premiums written.............................. $ 496 $ 496
------- ---------
------- ---------
Net premiums written................................ $ 404 $ 404
------- ---------
------- ---------
Net premiums earned................................. $ 419 $ 419
Net investment income............................... 89 $ 1(2) 90
Net realized investment gains....................... 1 1
Other income, net................................... 3 (4)(2) 6
7(3)
------- ------- ---------
Total revenues.................................. 512 4 516
------- ------- ---------
LOSSES AND EXPENSES:
Losses and loss expenses............................ 327 (2)(3) 325
Underwriting, acquisition and other insurance
expenses........................................... 138 (5)(3) 133
Dividends to policyholders.......................... 3 3
Interest expense.................................... 6 20(4) 26
Amortization of goodwill............................ 2 (2)(3) --
------- ------- ---------
Total losses and expenses....................... 476 11 487
------- ------- ---------
Earnings from operations before income taxes........ 36 (7) 29
Provision for income taxes (expense) benefit........ (13) 5(5) (8)
------- ------- ---------
Net earnings.................................... $ 23 $ (2) $ 21
------- ------- ---------
------- ------- ---------
Ratio of earnings to fixed charges (6).............. 4.6x 2.0x
OTHER OPERATING DATA:
EBITDA (7)(8)....................................... $ 55 $ 53
Ratio of EBITDA to cash interest expense (9)........ 9.2x 2.2x
Depreciation and amortization....................... $ 13 $ (2)
Cash available from the Insurance Companies
(10)............................................... $ 48 $ 56
Ratio of cash available from the Insurance Companies
to cash interest expense (9)(10)................... 8.0x 2.3x
Amortization of financing costs..................... $ -- $ 2
Amortization of difference between fair value of net
assets acquired and purchase cost.................. $ 2 $ (6)
COMBINED STATUTORY DATA:
Statutory net income................................ $ 35 $ 24
Policyholders' surplus.............................. $1,727 $ 1,768
Ratio of net premiums written to surplus (14)....... 1.0x 1.0x
Available dividends from the Insurance Companies
(12)(13)........................................... $ 48 $ 48
</TABLE>

See accompanying notes.

37
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
(DOLLARS IN MILLIONS)

(1) Does not include a nonrecurring expense and deemed capital contribution by
Xerox to be recognized at or immediately prior to Closing, relating to
payments to be made to certain Talegen management employees under the terms
of a preexisting Long-Term Incentive Plan. The charge will have a material
effect on results of operations in the period in which the Closing occurs.
The funds for such payments will be provided solely by Xerox.

(2) Reflects adjustments from the replacement of a training facility in Virginia
with cash by XFSI and the related net reduction in rental income of $10
million and $3 million, offset by a $22 million and $4 million
reclassification from other income related to the repayment of the notes due
from affiliates and the reinvestment of the net proceeds therefrom for the
year ended December 31, 1995 and the three months ended March 31, 1996,
respectively.

(3) Adjustments resulting from the allocation of the purchase cost are as
follows:

<TABLE>
<CAPTION>
UNDERWRITING,
ACQUISITION
LOSSES AND AND OTHER
OTHER AMORTIZATION LOSS INSURANCE
INCOME OF GOODWILL EXPENSES EXPENSES
------ ------------ ---------- -------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Amortization of negative goodwill,
over 15 years (a)......................... $ 24
Adjustment for unfavorable leases (b)....... 2 $ (1) $ (3)
Elimination of depreciation and amortization
on buildings and equipment................. (7) (16)
Elimination of the amortization of
goodwill................................... $ (8)
Other--principally elimination of deferred
gain amortization......................... (3) 1 5
------ --- --- -----
$ 23 $ (8) $ (7) $ (14)
------ --- --- -----
------ --- --- -----
THREE MONTHS ENDED MARCH 31, 1996:
Amortization of negative goodwill,
over 15 years (a)......................... $ 6
Adjustment for unfavorable leases (b)....... 1 $ (1)
Elimination of depreciation and amortization
on buildings and equipment................. $ (2) (5)
Elimination of the amortization of
goodwill................................... $ (2)
Other--principally elimination of deferred
gain amortization......................... 1
------ --- --- -----
$ 7 $ (2) $ (2) $ (5)
------ --- --- -----
------ --- --- -----
</TABLE>

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

<TABLE>
<C> <S>
(a) Differences in the final allocation of purchase price from those described in the
Pro Forma Condensed Consolidated Balance Sheet, including any change in the reserve
for unpaid losses and loss expenses (see "The Acquisition and the
Financings--Certain Actions Before Closing"), will affect the balance of negative
goodwill and annual income from its amortization.
(b) Represents the annual reversal for the liability of unfavorable leases established
in the allocation of the purchase price.
</TABLE>

(4) Increased interest expense is based upon the pro forma capitalization of the
Company following consummation of the Acquisition and the Financings,
including the elimination of interest on

(Footnotes continued on following page)

38
<PAGE>
(Footnotes continued from preceding page)
existing debt refinanced in connection with the Financings. Interest expense
is reflected at the assumed rates shown below:

<TABLE>
<CAPTION>
YEAR THREE MONTHS
ENDED ENDED
ASSUMED DECEMBER 31, MARCH 31,
INTEREST RATES BALANCE 1995 1996
-------------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Term Loan Facility:
Tranche A Loans............................. 7.59% $ 525 $ 39 $ 10
Tranche B Loans............................. 8.09% 100 8 2
Tranche C Loans............................. 8.34% 100 8 2
Tranche D Loans............................. 8.59% 50 4 1
Revolving credit facility..................... 7.59% 21 2 1
Debentures.................................... 9.75% 350 34 8
Amortization of financing costs on above...... 8 2
Elimination of interest expense for refinanced
debt........................................ (29) (6)
Elimination of amortization of financing costs
for refinanced debt......................... (1) --
----- -----
Net adjustment................................ $ 73 $ 20
----- -----
----- -----
</TABLE>

A 1/2% change in the blended interest rates would change pro forma interest
expense by $6 million and $1 million in the year ended December 31, 1995 and
the three months ended March 31, 1996, respectively. In addition, an increase
(decrease) in interest rates would increase (decrease) interest income.

(5) Reflects the effect of provision for income taxes at a 35% effective tax
rate on the pro forma adjustments (excluding amortization of goodwill or
negative goodwill).

(6) For purposes of these computations, earnings consist of income before
income taxes plus fixed charges. Fixed charges consist of interest expense,
amortization of deferred financing costs and one-third of rental expenses
(the portion deemed representative of the interest factor).

(7) EBITDA represents net earnings plus interest expense, income tax expense,
depreciation, amortization of intangible assets, and amortization of
premium or discount on investments in bonds. EBITDA is presented as a
measure of the Company's consolidated cash flow and its ability to generate
cash flow to service its debt obligations. However, EBITDA should not be
construed as an alternative to Talegen's net earnings or cash flow from
operating activities (as determined in accordance with GAAP) and should not
be construed as an indicator of Talegen's operating performance or as a
measure of Talegen's liquidity. On a pro forma basis, as calculated under
the Indenture, EBITDA would be $ million and $ million for the year
ended 1995 and the three months ended March 31, 1996, respectively.

(8) Includes $70 million and $1 million of net realized investment gains for
the year ended December 31, 1995 and the three months ended March 31, 1996,
respectively. EBITDA also includes the effect of loss and loss expense
reserve actions pertaining to prior accident years which increase
(decrease) EBITDA by ($102) million for the year ended December 31, 1995
and $1 million for the three months ended March 31, 1996. See "Management's
Discussion and Analysis of Talegen's Financial Condition and Results of
Operations."

(9) Cash interest expense represents interest expense excluding amortization of
deferred financing costs.

(10) Pro forma cash available from the Insurance Companies represents the sum of
pro forma tax allocation payments, pro forma management and other fees (net
of operating expenses of Talegen Holdings) and pro forma available
dividends from the Insurance Companies during such periods. See footnotes
12 and 13 for a discussion of the calculation of available dividends from
the Insurance Companies and certain reserving actions taken on December 31,
1995 that affect the amount of available dividends from the Insurance
Companies. See "Management's Discussion and Analysis of Talegen's Financial
Condition and Results of Operations--Liquidity and Capital Resources." The
pro forma tax allocation payments represent amounts that would be paid
under the tax allocation agreements to be entered into in connection with
the Acquisition.

(Footnotes continued on following page)

39
<PAGE>
(Footnotes continued from preceding page)
(11) Talegen historical cash available from the Insurance Companies includes the
effect of (i) a $21 million litigation settlement that was included in the
1995 operating expenses of Talegen Holdings (with the effect of reducing
cash available from the Insurance Companies for 1995 by such amount) which
the Company believes is a nonrecurring item at the Talegen Holdings level,
and (ii) a $9 million reduction in tax allocation payments (as calculated
under the existing tax allocation agreements) from the Insurance Companies
(with the effect of reducing cash available from the Insurance Companies
for 1995 by such amount) resulting from certain net loss and loss expense
reserve actions pertaining to prior accident years taken at the Insurance
Companies on December 31, 1995 in the amount of $102 million.

Pro forma adjusted cash available from the Insurance Companies represents pro
forma cash available from the Insurance Companies adjusted to exclude (i) the
$21 million litigation settlement described above (which had the effect of
reducing pro forma cash available from the Insurance Companies for 1995
by such amount) which the Company believes is a nonrecurring item at the
Talegen Holdings level, and (ii) a $12 million reduction in pro forma tax
allocation payments (as calculated under the post-Acquisition tax allocation
agreements) from the Insurance Companies (which had the effect of reducing
pro forma cash available from the Insurance Companies for 1995 by such
amount) resulting from certain net loss and loss expense reserve actions
pertaining to prior accident years taken at the Insurance Companies on
December 31, 1995 in the amount of $102 million.

The Company believes that the magnitude of the loss and loss expense reserve
actions described above, together with any loss and loss expense reserve actions
taken prior to the Closing (see "The Acquisition and the Financings--Certain
Actions Before Closing--Reserves"), are not representative of future
operations. However, the Company closely monitors reserve requirements and,
accordingly, there can be no assurance as to the level of adjustments for
prior accident years that may be recorded in future periods.

(12) Without regulatory approval, in the absence of contractual or regulatory
restrictions, including regulatory restrictions that are imposed as a
matter of administrative policy, domestic insurers are permitted to pay
"ordinary dividends" from earned surplus up to an amount defined by the
insurance statutes of each state. Ordinary dividends are defined in
Indiana, New Jersey and California as dividends which, together with
dividends paid in the previous 12 months, do not exceed the greater of (i)
10% of policyholders' surplus at the preceding December 31 or (ii)
statutory net income, for the 12-month period ending the preceding December
31. In New York, "ordinary dividends" are defined as dividends which,
together with dividends declared or paid in the preceding 12 months, do not
exceed the lesser of (i) 10% of policyholders' surplus as shown by its last
statement on file with the NYID or (ii) adjusted net investment income for
the preceding 12-month period.

(13) Due to a general administrative policy in the state of New York that
prevents New York-domiciled insurance companies which undergo a change of
control from paying ordinary shareholder dividends for two years following
such change of control without the NYID's prior approval, pro forma
available dividends from the Insurance Companies reflects the exclusion of
$93 million of available dividends during 1995 from U.S. Fire, Westchester
Fire and Crum & Forster Indemnity.

(14) Represents the ratio of statutory net premiums written for the period to
statutory policyholders' surplus at the end of such period. The ratio as of
March 31, 1996 is calculated using statutory net premiums written from the
four quarters which precede the interim date.

40
<PAGE>
SELECTED FINANCIAL INFORMATION

Selected historical consolidated financial data of Talegen for the five
years ended December 31, 1995 and the three months ended March 31, 1995 and 1996
is as follows. The information as of December 31, 1994 and 1995, and for each of
the years in the three-year period ended December 31, 1995, has been derived
from the audited consolidated financial statements of Talegen for such periods.
The consolidated information as of December 31, 1991, 1992, 1993 and March 31,
1996 and for each of the years in the two-year period ended December 31, 1992
and the three month periods ended March 31, 1995 and 1996, is unaudited, but in
the opinion of management reflects all adjustments (which include only normal,
recurring adjustments) necessary for a fair presentation of such data.

The combined statutory data as of and for the years ending December 31, 1993
through 1995 and as of and for the three months ended March 31, 1995 and 1996
have been derived from annual combined and quarterly statutory financial
statements filed with the domiciliary states of the Insurance Companies and
prepared in accordance with SAP, which differs from GAAP. Although the annual
statutory financial statements of the individual Insurance Companies are
audited, the annual and quarterly combined statutory data presented herein are
unaudited, but in the opinion of management reflect the adjustments necessary
for a fair presentation of such data.

The operating data for the three months ended March 31, 1996 are not
necessarily indicative of results of operations for the entire year. The
selected financial information presented below should be read in conjunction
with the consolidated financial statements of Talegen and the related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF AND FOR THE
THREE MONTHS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------- ------- ------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATING DATA:
Gross premiums written............... n/a n/a $ 2,132 $ 2,097 $ 2,107 $ 507 $ 496
------ ------ ------- ------- ------- ------- -------
------ ------ ------- ------- ------- ------- -------
Net premiums written................. $1,884 $1,450 $ 1,811 $ 1,716 $ 1,694 $ 410 $ 404
------ ------ ------- ------- ------- ------- -------
------ ------ ------- ------- ------- ------- -------
Net premiums earned.................. $2,049 $1,472 $ 1,765 $ 1,687 $ 1,659 $ 407 $ 419
Losses and loss expenses............. 1,628 1,867 1,327 1,240 1,406 339 327
Underwriting, acquisition and other
insurance expenses.................. 645 563 532 530 534 132 138
Dividends to policyholders........... (22) (20) 36 32 21 3 3
------ ------ ------- ------- ------- ------- -------
Underwriting results............... (202) (938) (130) (115) (302) (67) (49)
Net investment income................ 452 357 261 297 343 83 89
Net realized investment gains........ 91 355 65 13 70 3 1
Interest expense..................... -- -- -- (7) (35) (8) (6)
Other income (expense), net.......... (117) (244) (43) 21 18 3 1
------ ------ ------- ------- ------- ------- -------
Earnings (loss) from operations
before income taxes.............. 224 (470) 153 209 94 14 36
Provision for income tax (expense)
benefit............................. (21) 110 (35) (72) (15) (3) (13)
Cumulative effect of accounting
change.............................. -- 56 -- -- -- -- --
------ ------ ------- ------- ------- ------- -------
Net earnings (loss)................ $ 203 $ (304) $ 118 $ 137 $ 79 $ 11 $ 23
------ ------ ------- ------- ------- ------- -------
------ ------ ------- ------- ------- ------- -------
Ratio of earnings to fixed charges
(1)................................. 9.6x -- (2) 9.1x 9.4x 2.8x 2.2x 4.6x
CONSOLIDATED OTHER OPERATING DATA:
EBITDA (3) (4)....................... $ 256 $ (194) $ 225 $ 304 $ 211 $ 45 $ 55
Depreciation and amortization........ 32 276 72 88 82 23 13
Cash available from the Insurance
Companies (5)(6).................... n/a n/a n/a 252 166 44 48
GAAP loss and loss expense ratio
(7)................................. 79.4% 126.8% 75.2% 73.5% 84.8% 83.3% 78.0%
GAAP underwriting expense ratio
(7)................................. 31.5% 38.2% 30.1% 31.4% 32.2% 32.4% 32.9%
GAAP combined ratio including
policyholder dividends (7)......... 109.9% 163.7% 107.3% 106.8% 118.2% 116.4% 111.6%
</TABLE>

41
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE
THREE MONTHS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------- ------- ------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Total investments and cash........... $5,334 $5,503 $ 5,845 $ 5,964 $ 6,450 $ 6,327
Total assets......................... $7,737 $8,066 $10,297 $10,207 $11,116 $11,026
Unpaid losses and loss expenses...... $4,926 $5,198 $ 6,779 $ 6,527 $ 6,923 $ 6,904
Debt................................. -- -- -- $ 425 $ 372 $ 351
Shareholder's equity................. $1,695 $1,745 $ 2,318 $ 1,950 $ 2,353 $ 2,363
COMBINED STATUTORY DATA:
Statutory net income................. n/a n/a $ 182 $ 166 $ 120 $ 47 $ 35
Policyholders' surplus............... n/a n/a $ 1,641 $ 1,682 $ 1,721 $ 1,713 $ 1,727
Ratio of net premiums written to
surplus (8)......................... n/a n/a 1.1x 1.0x 1.0x 1.0x 1.0x
Available dividends from the
Insurance Companies (9)............ n/a n/a n/a $ 224 $ 175 $ 57 $ 48
</TABLE>

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

n/a Certain 1991, 1992 and 1993 amounts have been marked as not available
("n/a") because they would be based on financial information that was
prepared in accordance with an intercompany pooling arrangement in effect
during 1992 and prior years. Such information would not be comparable to the
data available as of and for the years ended December 31, 1993 through 1995
and, accordingly, has not been provided.

(1) For purposes of computing the ratio of earnings to fixed charges, "earnings"
consist of earnings from operations before income taxes, plus fixed charges.
"Fixed charges" consist of interest expense, amortization of deferred
financing costs and one-third of rental expense (the portion deemed
representative of the interest factor).

(2) Earnings were insufficient to cover fixed charges by $470 million in 1992.

(3) EBITDA represents net earnings plus interest expense, income tax expense,
depreciation, amortization of intangible assets, and amortization of premium
or discount on investments in bonds. EBITDA is presented as a measure of the
Company's consolidated cash flow and its ability to generate cash flow to
service its debt obligations. However, EBITDA should not be construed as an
alternative to Talegen's net earnings or cash flow from operating activities
(as determined in accordance with GAAP) and should not be construed as an
indicator of Talegen's operating performance or as a measure of Talegen's
liquidity.

(4) Includes net realized investment gains of $91 million, $355 million, $65
million, $13 million and $70 million for the years ended December 31, 1991,
1992, 1993, 1994 and 1995, respectively, and $3 million and $1 million for
the three months ended March 31, 1995 and 1996, respectively. EBITDA also
includes the effect of loss and loss expense reserve actions pertaining to
prior accident years which increase (decrease) EBITDA by $24 million, ($614)
million, ($4) million, $43 million and ($102) million for the years ended
December 31, 1991, 1992, 1993, 1994 and 1995, respectively, and ($19)
million and $1 million for the three months ended March 31, 1995 and 1996,
respectively. See "Management's Discussion and Analysis of Talegen's
Financial Condition and Results of Operations."

(5) Cash available from the Insurance Companies represents the sum of tax
allocation payments and management and other fees (net of operating expenses
of Talegen Holdings), and available dividends from the Insurance Companies
during such periods. These amounts are not necessarily representative of the
amounts of cash available from the Insurance Companies after the
Acquisition. See "Prospectus Summary--Summary of Pro Forma Consolidated
Financial Information of the Company" and "Pro Forma Consolidated Financial
Information."

See footnote 9 for a discussion of the calculation of available dividends from
the Insurance Companies and certain reserving actions taken on December 31, 1995
that affect the amount of available dividends from the Insurance Companies.

(6) Cash available from the Insurance Companies includes the effect of (i) a $21
million litigation settlement that was included in the 1995 operating
expenses of Talegen Holdings (with the effect of reducing cash available
from the Insurance Companies for 1995 and the three months ended March 31,
1995 by such amount) which the Company believes is a nonrecurring item at
the Talegen Holdings level, and (ii) a $9 million reduction in tax
allocation payments (as calculated under the existing tax allocation
agreements)

(Footnotes continued on following page)

42
<PAGE>
(Footnotes continued from preceding page)
from the Insurance Companies (with the effect of reducing cash available
from the Insurance Companies for 1995 by such amount) resulting from certain
net loss and loss expense reserve actions pertaining to prior accident years
taken at the Insurance Companies on December 31, 1995 in the amount of $102
million. The Company believes that the magnitude of such loss and loss
expense reserve actions, together with any loss and loss expense reserve
actions taken prior to the Closing (see "The Acquisition and the
Financings--Certain Actions Before Closing--Reserves"), are not
representative of future operations. However, the Company closely monitors
reserve requirements and, accordingly, there can be no assurance as to the
level of adjustments for prior accident years that may be recorded in future
periods.

(7) GAAP loss and loss expense ratio represents the sum of losses and loss
expenses as a percentage of net premiums earned. GAAP underwriting expense
ratio represents underwriting expenses as a percentage of net premiums
earned. GAAP combined ratio represents the sum of GAAP loss and loss expense
ratio, GAAP underwriting expense ratio, and GAAP policyholder dividends as a
percentage of net premiums earned.

(8) Represents the ratio of statutory net premiums written for the period to
statutory policyholders' surplus at the end of such period. The ratios as of
March 31, 1995 and 1996 are calculated using statutory net premiums written
from the four quarters which precede the interim date.

(9) Without regulatory approval, in the absence of contractual or regulatory
restrictions, including regulatory restrictions that are imposed as a matter
of administrative policy, domestic insurers are permitted to pay "ordinary
dividends" from earned surplus up to an amount defined by the insurance
statutes of each state. Ordinary dividends are defined in Indiana, New
Jersey and California as dividends which, together with dividends paid in
the previous 12 months, do not exceed the greater of (i) 10% of
policyholders' surplus at the preceding December 31 or (ii) statutory net
income, for the 12-month period ending the preceding December 31. In New
York, "ordinary dividends" are defined as dividends which, together with
dividends declared or paid in the preceding 12 months, do not exceed the
lesser of (i) 10% of policyholders' surplus as shown by its last statement
on file with the NYID or (ii) adjusted net investment income for the
preceding 12-month period.

As of December 31, 1995, after giving effect to certain reserving actions taken
on December 31, 1995, available dividends from the Insurance Companies during
1996 is $96 million, of which $16 million has been paid through March 31,
1996. Unlike the $175 million of available dividends for 1995 from the
Insurance Companies derived under statutory definitions, the $96 million
excludes dividends from U.S. Fire and Westchester Fire due to their negative
earned surplus positions as of December 31, 1995. Both U.S. Fire and
Westchester Fire have applied to reset their earned surplus to $0 as of the
first day following the end of the quarter in which the Closing occurs. In
addition, New York-domiciled insurance companies which undergo a change of
control, such as U.S. Fire, Westchester Fire and Crum & Forster Indemnity,
are prevented, as a matter of general administrative policy, from paying
ordinary shareholder dividends for two years following such change of control
without the NYID's prior approval. Of the $175 million of available dividends
in 1995, $93 million represents available dividends from the New York-
domiciled Insurance Companies. See "Regulatory Matters."

43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF TALEGEN'S
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Results for property and casualty insurance companies are influenced by many
factors including pricing, risk selection, operating and loss costs, and
investment returns. The level of pricing is influenced primarily by the supply
and demand dynamics of the marketplace, as well as by regulatory constraints. In
general, the demand for property and casualty insurance can be characterized as
fairly stable over extended periods of time and is influenced primarily by
general economic conditions. By contrast, the supply of property and casualty
insurance is related to available capacity in the marketplace, as measured by
the level of capital invested in the industry and the willingness of insurance
company management to risk that capital.

Surplus adequacy has historically been measured by the amount of net
premiums written relative to the level of aggregate surplus. More recently, the
introduction of risk-based capital models has shifted the basis for determining
surplus adequacy from measuring premiums only to measuring all forms of risk
including premium levels, investments, reinsurance and loss reserves. Based on
these measures, the insurance industry has experienced increasing capacity in
recent years that has led to increasing price competition. This trend, combined
with an increase in the number and size of catastrophic property losses, has led
to a reduction in underwriting profitability. Historically, the industry has
been characterized by broad profitability cycles in which periods of excess
capacity and decreasing profitability have been followed by withdrawal of
capacity from the industry and a general firming of pricing. More recently, this
broad profitability cycle has been replaced in the commercial property and
casualty insurance industry by more discrete fluctuations in capacity and
pricing levels within selective market segments, demanding a more refined
allocation of available capital.

Within the market driven pricing environment, property and casualty
insurance companies must determine the adequacy of premium rates through their
actuarial and underwriting processes. Pricing adequacy is affected mainly by the
severity and frequency of claims which, in turn, are influenced by many factors
including natural disasters, court decisions that define the extent of coverage,
and the effects of inflation on the amount of compensation due for injuries or
losses. Also influencing pricing adequacy are the level of costs associated with
underwriting, claims management and the general administration of the
organization, as well as expected investment portfolio returns and available
rates of return for new investments.

Talegen has responded to this industry environment by creating an
organizational structure based on smaller, more flexible Operating Groups each
with accountability for its own balance sheet, by instilling a disciplined
pricing and underwriting culture throughout the organization, and by seeking to
become the low-cost provider in all of its markets. By operating in well-defined
market segments, the Operating Groups can more rapidly respond to changing
market conditions and are better able to identify acceptable risks and
appropriately price coverages. Talegen has instilled a profit oriented strategy
rather than a premium volume strategy throughout the organization, resulting in
a strict focus on pricing discipline. By implementing technological
improvements, reducing staffing levels and enhancing management controls and
financial oversight, Talegen has increased the efficiency and productivity of
its Operating Groups. In addition, Talegen's investment portfolio is currently
invested principally in cash and short-term investments, creating the
opportunity to enhance investment returns as the portfolio is repositioned.

Premiums

Talegen's gross premiums written have remained constant at approximately
$2.1 billion from 1993 through 1995. Underlying this level overall trend in
gross premiums written has been a shift between

44
<PAGE>
and within Operating Groups in terms of the sources of premium writings. These
shifts have been the result of both competitive market conditions and the
decision by Talegen to focus on those targeted customers where it believes it
has a competitive advantage, while de-emphasizing underperforming and
non-strategic books of business. Talegen's net premiums written over the same
period decreased by $117 million, or 6%, due to a restructuring of Westchester
Specialty's reinsurance program in 1994 to reduce the net retained risk in its
umbrella and excess casualty business. In addition, net premiums written
decreased compared to gross premiums written because Industrial Indemnity
experienced an increase in its policy servicing business for assigned risk
pools. Premiums associated with its policy servicing business are included in
gross premiums written, but are not included in net premiums written because
they are completely reinsured to the assigned risk pool. The following
discussion summarizes the net premiums written trends for each of the Operating
Groups during the 1993-1995 period.

Coregis. Net premiums written at Coregis increased from $275 million in
1993 to $355 million in 1995, or 29%, as a result of strong growth in its
core property and casualty customer groups, as well as growth in
professional liability programs and a geographic expansion of its public
entity programs. This growth was achieved in spite of Coregis's strategic
withdrawal during 1993 through 1995 from property and casualty customer
groups that did not meet its program and profitability criteria, which
reduced Coregis's property and casualty customer groups from 33 to seven.
Coregis added its first new property and casualty customer group in early
1996, bringing the total number of customer groups to eight.

Crum & Forster. Net premiums written at Crum & Forster increased from
$835 million in 1993 to $960 million in 1995, or 15%, due to strong
production from its custom agents. The number of custom agents increased
from 494 at year end 1993 to 589 at year end 1995, and gross premiums
written per custom agent increased from $1.2 million in 1993 to $1.5 million
in 1995, leading to gross premiums written growth in Crum & Forster's custom
agent segment of over 20% annually from 1993 to 1995. This growth was offset
by a planned decline in premiums written by non-custom agents. As a result,
custom agents accounted for 81% of total gross premiums written in 1995
compared to 58% in 1993.

Industrial Indemnity. Net premiums written at Industrial Indemnity
decreased from $460 million in 1993 to $227 million in 1995, or 51%. In the
National Programs unit, net premiums written decreased from $152 million in
1993 to $15 million in 1995 and, in the California Franchise unit, net
premiums written decreased from $192 million in 1993 to $96 million in 1995.
The decline in National Programs was caused, in part, by improving loss
experience which led to a reduction in premium surcharges on retrospectively
rated policies of $48 million between 1993 and 1995 and a corresponding $48
million reduction in loss and loss expenses. Additionally, the largest
National Program account elected in 1994 to increase the deductible portion
of its policy in California, leading to a net premium written decline for
this account of $42 million in 1995.

The decline in the California Franchise unit was primarily caused by a
reduction in premium rates charged to existing customers due to: (i)
improved loss and loss expense experience in California; (ii) a shift from
retrospectively rated policies (involving policyholder dividends or premium
adjustment mechanisms) to guaranteed cost policies; and, (iii) increased
price competition resulting from open rating. In July 1993, the California
Legislature enacted reforms affecting the workers' compensation system that
were designed to address fraud and other issues that had been troubling the
industry. In part due to these reforms, loss and loss expense experience in
California significantly improved between 1993 and 1995 and allowed for
price declines in Industrial Indemnity's policies without impacting price
adequacy. As an indication of the improving loss environment, California's
"minimum rates" (rates established by regulatory authorities prior to the
advent of open rating) for the period January 1993 through December 1994
were reduced by approximately 32%. As part of the 1993 reforms, California's
minimum rating system was abandoned for an open rating system effective
January 1, 1995 whereby insurers did not need

45
<PAGE>
regulatory approval to set prices below the minimum rate. Because the
mandated minimum rates were believed in most cases to be more than adequate
prior to 1995, insurers often competed through the use of policyholder
dividends and retrospectively rated plans whereby dividends and return
premium payments, which are based on loss experience, were made to
policyholders after the policies expired. In 1995, with the adoption of open
rating firmly in place, policyholders migrated from dividends and
retrospectively rated plans to guaranteed cost contracts with lower initial
premiums, which reduced 1995 net premiums written. Lastly, contributing to
the decline was the intense competition resulting from the open rating
environment where premiums were lowered to maintain long-term account
relationships. Because of Industrial Indemnity's desire to maintain pricing
discipline and risk selection standards, this price competition also
resulted in a modest net loss of business, primarily in the first half of
1995. By the fourth quarter of 1995, however, renewal ratios for the
California Franchise unit had improved and returned to levels achieved prior
to open rating.

Net premiums written at Industrial Indemnity's Western States unit
stayed relatively flat at $116 million in 1993 and $115 million in 1995
despite a modest decline in premium rates due to improved loss experience in
certain non-California states.

Westchester Specialty. As a result of Westchester Specialty's decision
to maintain underwriting and pricing discipline in the extremely competitive
umbrella and excess casualty markets, and its strategic decision to reinsure
a higher portion of its umbrella and excess casualty business, net premiums
written at Westchester Specialty decreased from $241 million in 1993 to $152
million in 1995, or 37%. Reflective of the soft market, Westchester
Specialty's umbrella and excess casualty gross premiums written declined
from $288 million in 1993 to $152 million in 1995, or 47%. However, due to
the change in reinsurance strategy, net premiums written for umbrella and
excess casualty decreased at a faster rate than gross premiums, from $188
million in 1993 to $77 million in 1995, or 59%. Partially offsetting the
decline in gross and net premiums written in umbrella and excess casualty
business, Westchester Specialty experienced strong growth in its specialty
property business which benefited from capacity shortages in the market
resulting from several years of high catastrophe losses. In its specialty
property segment, Westchester Specialty's gross premiums written increased
from $102 million in 1993 to $137 million in 1995, or 34%, and net premiums
written increased from $53 million in 1993 to $75 million in 1995, or 42%.

Although Talegen's net premiums written decreased slightly, from $410
million in the three months ended March 31, 1995 to $404 million in the three
months ended March 31, 1996, trends associated with Talegen's net premiums
written during 1993 to 1995 continued through the first quarter of 1996.
Coregis, primarily through the strength of its professional liability division,
increased its net premiums written to $84 million in the first quarter of 1996
compared to $76 million in the first quarter of 1995. Crum & Forster continued
to grow both the number of custom agents and the percentage of gross premiums
written by custom agents in the first quarter of 1996 compared to 1995 levels.
However, Crum & Forster's net premiums written in the first quarter of 1996 were
relatively flat compared to the first quarter of 1995 because of price decreases
in the workers' compensation line of business where rates could be decreased due
to improved loss experience without sacrificing price adequacy.

Industrial Indemnity's renewal ratios in the first quarter of 1996 for the
California Franchise unit were consistent with those achieved in the fourth
quarter of 1995 and, accordingly, reflected levels achieved prior to the advent
of open rating on January 1, 1995. Despite this positive trend, Industrial
Indemnity's net premiums written decreased to $60 million in the first quarter
of 1996 compared to $69 million in the first quarter of 1995 because of the
effect of installment premiums, which are not recognized as premiums written
until billed. Due to installment billing, the first quarter of 1995 net premiums
written included premiums from contracts entered into during 1994 and as a
result were not reflective of the 1995 price declines previously described. In
contrast, net premiums written in the first quarter of 1996, which included
premiums from contracts entered into during 1995, were fully reflective

46
<PAGE>
of the 1995 rate reductions and competitive conditions in the California market.
Industrial Indemnity's net premiums written also decreased in the first quarter
of 1996 due to the January 1, 1996 non-renewal of one of the largest customers
in the National Programs unit. In addition, the remaining large customer of the
National Programs unit did not renew in the second quarter of 1996. At
Westchester Specialty, the umbrella and excess casualty market continued to be
extremely competitive which resulted in lower net premiums written for this
business in the first quarter of 1996 compared to the first quarter of 1995.
However, due to the continued strength of Westchester Specialty's property
business, overall net premiums written for Westchester Specialty only decreased
modestly in the first quarter of 1996 compared to the first quarter of 1995.

Losses and Loss Expenses

As premiums are earned, loss and loss expense reserves are established by
the Insurance Companies to provide for the estimated level of claim payments
which will ultimately be made under the policies written. Incurred losses and
loss expenses are tracked on both an accident year and a calendar year basis.
Accident year incurred losses and loss expenses reflect the cumulative losses
and loss expenses attributable to the year the losses were incurred, and are not
necessarily related to when they were actually reported, recorded or paid.
Calendar year losses and loss expenses reflect the total incurred losses and
loss expenses recorded during a calendar year, regardless of when they were
actually reported or paid. Calendar year losses and loss expenses are the total
of the current accident year loss and loss expenses plus any strengthening or
reduction of prior accident year loss and loss expense reserves. Funding levels
for accident year incurred losses are established by Operating Group management
based upon the analysis and recommendations of its actuaries and senior
management and are reviewed and approved by Talegen Holdings.

Since 1992, one of Talegen's key management priorities has been the
monitoring and evaluation of its loss and loss expense and uncollectible
reinsurance reserve adequacy. Talegen has continually upgraded and expanded the
methodologies it uses to analyze its reserves, added newly available sources of
data, and utilized a variety of outside consultants to supplement its
comprehensive internal management review process. This ongoing emphasis and
scrutiny of the adequacy of its reserves led Talegen to perform a complete
review of its balance sheet as part of the Talegen Restructuring, to establish
more conservative initial reserve levels at the end of each accident year since
1992, and to initiate significant additional reserve testing in anticipation of
the Acquisition. As a result, reserve levels were significantly increased in
1992 and again in 1995. In 1992, Talegen strengthened gross loss and loss
expense reserves by $555 million and uncollectible reinsurance reserves by $59
million. At year-end 1995, Talegen strengthened gross loss and loss expense
reserves by $475 million and uncollectible reinsurance reserves by $50 million.
After consideration of all reserve actions taken throughout 1995, including
prior accident year reserve increases recorded by Westchester Specialty and Crum
& Forster which were only partially offset by reserve reductions recorded by
Industrial Indemnity and Coregis, total prior accident year gross loss and loss
expense reserves were strengthened by $584 million and the reserve for
uncollectible reinsurance was increased by $56 million. On a net basis, prior
accident year reserves were strengthened by $102 million in 1995, which
increased the 1995 calendar year loss and loss expense reserves by 6.1 points.

The majority of the year-end 1995 gross reserve strengthening was
attributable to asbestos bodily injury and environmental exposures. One of the
challenges for Talegen and the property and casualty insurance industry in
general is to improve the understanding, recognition and management of asbestos-
related, environmental and other latent exposures. As part of its overall effort
to understand and adequately reserve for these exposures that the Insurance
Companies had written in the past, Talegen has undertaken extensive work in
recent years and plans to continue to refine its understanding and response
capabilities with regard to latent exposures. Building on methodologies first
published in the third quarter of 1994 by the Casualty Actuarial Society, and
utilizing data from policyholders and third parties, in 1995 Talegen was able to
create and implement comprehensive reserving methodologies to

47
<PAGE>
provide estimates of ultimate losses for asbestos bodily injury and
environmental exposures. The data included information from newly available
databases from the Environmental Protection Agency. Talegen believes its
methodologies for assessing such exposures are among the most sophisticated in
the industry. The results of this effort supported a strengthening of asbestos
bodily injury and environmental gross reserves by $350 million at year-end 1995.
See additional information on asbestos-related, environmental and other latent
exposures in "Reserves and Risk Management."

Talegen believes that accident year loss and loss expense ratios provide
more insight into incurred loss trends than calendar year loss and loss expense
ratios. After consideration of the prior accident year reserve strengthening
actions recorded in 1995, the consolidated accident year loss and loss expense
ratios, as of December 31, 1995, for 1993, 1994 and 1995 remained within a
relatively narrow range at 79.9%, 77.1% and 76.9%, respectively. The decrease in
the accident year loss and loss expense ratio between 1993 and 1995 is primarily
attributable to an increase in the proportion of specialty property insurance
written at Westchester Specialty, which has lower accident year loss ratios than
its umbrella and excess casualty business, and improving loss experience at
Industrial Indemnity.

There were no significant adjustments related to prior accident year loss
and loss expense reserves recorded during the first quarter of 1996 and, as of
March 31, 1996, Talegen's 1996 accident year loss ratio was 77.4%. The increase
of 0.5 points in the accident year loss and loss expense ratio in the first
quarter of 1996 compared to the 1995 accident year was primarily due to higher
loss and loss expense ratios associated with nonvoluntary business at Crum &
Forster and Industrial Indemnity.

Underwriting Expenses

Another key priority of Talegen is to become a low-cost provider in each of
its markets. The Operating Groups have been increasing efficiency and
productivity by implementing technology improvements, reducing staff and
enhancing management controls and financial oversight. For example, from 1993 to
1995, total staffing declined 21% from 5,001 to 3,952, primarily through
turnover management as opposed to forced reduction actions. This staffing
decline helped Talegen achieve a 25% improvement in productivity as measured by
gross premiums written per employee, which increased from approximately $426,000
in 1993 to $533,000 in 1995. As a foundation for these productivity
improvements, Talegen has increased its technology initiatives, which resulted
in a $32 million increase in technology expenses from $52 million in 1993 to $84
million in 1995. Talegen expects to recognize the full benefits of implementing
these technology initiatives through further productivity gains and expense
improvements over the next few years. Because of the productivity improvements
achieved to date, and in particular the reduced staffing levels, non-technology
internal operating expenses (including expense related to claims handling
activities as well as underwriting activities) declined $49 million, or 14% from
1993 to 1995 more than offsetting the increase in technology costs.

Overall underwriting expenses remained relatively constant, at $532 million,
$530 million and $534 million in 1993, 1994 and 1995, respectively, which
reflected a decrease in internal underwriting expenses offset by an increase in
external underwriting expenses (commissions and premium taxes). Internal
underwriting expenses decreased from $247 million in 1993 to $237 million in
1995 due to the productivity improvements mentioned above partially offset by an
increase in technology costs. External underwriting expenses increased from $285
million in 1993 to $297 million in 1995, reflecting a shift in business mix
toward higher commission programs at Coregis, increased commission expense
associated with nonvoluntary business at Industrial Indemnity and certain
premium tax assessments at Westchester Specialty.

The property and casualty insurance industry commonly uses the total
underwriting expense ratio as an indicator of expense efficiency. This ratio
measures total underwriting expenses as a percentage of net premiums earned.
Accordingly, even though internal underwriting expenses decreased and total

48
<PAGE>
underwriting expenses were flat, due to the decline in net premiums earned
between 1993 and 1995, Talegen's overall underwriting expense ratio increased
2.1 points from 30.1% in 1993 to 32.2% in 1995.

During the first quarter of 1996, the 1993 to 1995 staffing trend continued
and resulted in a 2% decrease in staffing from 3,952 at year end 1995, to 3,866
as of March 31, 1996. Despite reductions in staffing, Talegen's underwriting
expenses increased from $132 million for the three months ended March 31, 1995
to $138 million for the three months ended March 31, 1996, and reflected modest
increases in both external and internal underwriting expenses. The increase in
external underwriting expenses was primarily due to a shift in business mix
toward higher commission programs at Coregis, partially offset by the reduction
of accruals for certain premium tax assessments at Westchester Specialty and
Crum & Forster. The higher internal underwriting expenses primarily represented
slight increases in non-technology internal operating expenses at Crum & Forster
and Industrial Indemnity. These increases caused a modest rise in Talegen's
overall underwriting expense ratio for the three months ended March 31, 1996 to
32.9% compared to 32.4% for the three months ended March 31, 1995.

Other

General changes in the interest rate environment affect the prospective
return on newly invested and reinvested funds. Although rising interest rates
enhance returns available, they reduce the market value of existing fixed
maturity investments and the availability of gains on the disposition thereof.
The Insurance Companies liquidated their investment portfolios in 1992 to assist
in obtaining approval for the Talegen Restructuring. After the Talegen
Restructuring, Talegen engaged in limited reinvestment activities and, to assist
in the sale of Talegen, again liquidated its investment portfolio in 1995. As of
December 31, 1995, Talegen had investment assets of $6.4 billion, which were
principally invested in cash and short-term investments. As a result of these
liquidations, Talegen had realized investment gains of $355 million in 1992 and
$70 million in 1995. With its ownership situation resolved, Talegen can now
implement an investment strategy that is consistent with the duration of its
liabilities and that is designed to maximize after-tax investment income, within
acceptable risk and volatility criteria. Talegen's strategy will be to invest
principally in a portfolio of high-quality marketable fixed income securities
with an average rating for the portfolio of "A" or better, while maintaining
sufficient investments in highly liquid, short-term securities to provide for
immediate cash requirements.

Consistent with the investment strategy discussed above, Talegen increased
the proportion of fixed maturities in its investment portfolio from 10% as of
December 31, 1995 to 18% as of March 31, 1996. The amount of realized gains in
the first quarter of 1996 was not significant.

49
<PAGE>
RESULTS OF OPERATIONS

SELECTED FINANCIAL INFORMATION
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
-------------------------- --------------
1993 1994 1995 1995 1996
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED FINANCIAL INFORMATION
Gross premiums written................................. $2,132 $2,097 $2,107 $ 507 $ 496
------ ------ ------ ----- -----
------ ------ ------ ----- -----
Net premiums written................................... $1,811 $1,716 $1,694 $ 410 $ 404
------ ------ ------ ----- -----
------ ------ ------ ----- -----
Net premiums earned.................................... $1,765 $1,687 $1,659 $ 407 $ 419
Losses and loss expenses............................... 1,327 1,240 1,406 339 327
Underwriting, acquisition and other insurance
expenses.............................................. 532 530 534 132 138
Dividends to policyholders............................. 36 32 21 3 3
------ ------ ------ ----- -----
Underwriting results.................................. (130) (115) (302) (67) (49)
Net investment income.................................. 261 297 343 83 89
Net realized investment gains.......................... 65 13 70 3 1
Interest expense....................................... -- (7) (35) (8) (6)
Other income (expense), net............................ (43) 21 18 3 1
------ ------ ------ ----- -----
Earnings from operations before income taxes.......... 153 209 94 14 36
Provision for income tax expense....................... (35) (72) (15) (3) (13)
------ ------ ------ ----- -----
Net earnings.......................................... $ 118 $ 137 $ 79 $ 11 $ 23
------ ------ ------ ----- -----
------ ------ ------ ----- -----
EBIT (1)............................................... $ 153 $ 216 $ 129 $ 22 $ 42
------ ------ ------ ----- -----
------ ------ ------ ----- -----
SELECTED OPERATING GROUP FINANCIAL INFORMATION

NET PREMIUMS WRITTEN
Coregis................................................ $ 275 $ 320 $ 355 $ 76 $ 84
Crum & Forster......................................... 835 886 960 233 230
Industrial Indemnity................................... 460 323 227 69 60
Westchester Specialty.................................. 241 187 152 32 30
------ ------ ------ ----- -----
Total................................................. $1,811 $1,716 $1,694 $ 410 $ 404
------ ------ ------ ----- -----
------ ------ ------ ----- -----
LOSS AND LOSS EXPENSE RATIOS
Coregis................................................ 74.3% 74.1% 70.1% 77.8% 75.6%
Crum & Forster......................................... 71.0 70.8 82.5 73.6 76.9
Industrial Indemnity................................... 85.9 74.7 77.0 89.1 82.1
Westchester Specialty.................................. 72.7 86.5 122.7 89.1 81.6
Consolidated........................................... 75.2 73.5 84.8 83.3 78.0

UNDERWRITING EXPENSE RATIOS
Coregis................................................ 30.6% 29.6% 32.0% 30.9% 31.1%
Crum & Forster......................................... 37.2 36.5 33.0 36.1 34.6
Industrial Indemnity................................... 18.9 19.6 28.3 25.0 28.6
Westchester Specialty.................................. 27.8 29.0 30.0 28.3 26.3
Consolidated........................................... 30.1 31.4 32.2 32.4 32.9

DIVIDEND RATIOS
Crum & Forster......................................... 0.6% (0.4)% 0.7% 0.4% 0.8%
Industrial Indemnity................................... 7.1 10.8 6.1 3.1 1.8
Consolidated........................................... 2.0 1.9 1.2 0.7 0.7

]COMBINED RATIOS
Coregis................................................ 104.9% 103.7% 102.1% 108.7% 106.7%
Crum & Forster......................................... 108.8 106.9 116.2 110.1 112.3
Industrial Indemnity................................... 111.9 105.1 111.4 117.2 112.5
Westchester Specialty.................................. 100.5 115.5 152.7 117.4 107.9
Consolidated........................................... 107.3 106.8 118.2 116.4 111.6
</TABLE>

- ------------
(1) EBIT represents net earnings plus interest expense and income tax expense.
EBIT should not be construed as an indication of Talegen's net earnings or
cash flow from operating activities (as determined in accordance with GAAP)
and should not be construed as an indicator of Talegen's operating
performance or as a measure of Talegen's liquidity.

50
<PAGE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995

Premiums

Talegen's gross premiums written decreased from $507 million for the three
months ended March 31, 1995 (the "1995 period"), to $496 million for the three
months ended March 31, 1996 (the "1996 period"), or 2%. Net premiums written
decreased by 1%, from $410 million in the 1995 period to $404 million for the
1996 period. On an Operating Group basis, net premiums written increased at
Coregis, but were offset by decreases at Crum & Forster, Industrial Indemnity
and Westchester Specialty. Talegen's net premiums earned, however, increased
from $407 million in the 1995 period to $419 million in the 1996 period
primarily due to higher net premiums written by Crum & Forster in the third and
fourth quarters of 1995 compared to the same periods in 1994.

Coregis's net premiums written increased from $76 million in the 1995 period
to $84 million in the 1996 period, or 11%. The increase is attributable to
growth in Coregis's Professional Liability Division through planned expansion of
its lawyers programs into additional targeted states, as well as a greater
percentage of professional liability business retained by Coregis. The increase
in professional liability volume was partially offset by decreases in net
premiums written by its Public Entity and Property and Casualty Divisions due to
the strategic discontinuance in 1995 of certain programs that did not meet
program and profitability criteria.

Crum & Forster's net premiums written decreased slightly from $233 million
in the 1995 period to $230 million in the 1996 period, or 1%. Continued growth
occurred in both the number of custom agents and the percentage of gross
premiums written by custom agents in the first quarter of 1996. Despite this
growth, Crum & Forster's net premiums written were relatively flat due to price
decreases in the workers' compensation line of business where rates were reduced
to reflect improving loss experience without sacrificing price adequacy.

Industrial Indemnity's net premiums written decreased from $69 million in
the 1995 period to $60 million in the 1996 period, or 13%. Approximately $6
million of this reduction was experienced by the California Franchise unit where
its first quarter 1995 net premiums written included installment premiums for
contracts entered into during 1994. Accordingly, its net premiums written in the
1995 period did not fully reflect the 1995 period price reductions in the
California market, which resulted from: (i) improved loss experience (whereby
premiums could be reduced without sacrificing price adequacy), (ii) the
migration of customers from retrospectively rated to guaranteed cost policies
that typically have lower initial premiums, and (iii) the intense competition
resulting from open rating that was effective on January 1, 1995. By comparison,
net premiums written for the 1996 period fully reflected the 1995 price
reductions. The remaining reduction in net premiums written was experienced by
the National Programs unit due to the January 1, 1996 non-renewal of one of its
largest customers. The remaining large customer of the National Programs unit
did not renew in the second quarter of 1996.

Westchester Specialty's net premiums written decreased from $32 million in
the 1995 period to $30 million in the 1996 period. Westchester Specialty's
umbrella and excess casualty net premiums written decreased by $4 million due to
its strict underwriting and pricing discipline in an extremely competitive
market. Partially offsetting this decrease was a $2 million increase in
specialty property net premiums written in the 1996 periods compared to the 1995
period.

Losses and Loss Expenses

Talegen's losses and loss expenses decreased by $12 million from $339
million for the three months ended March 31, 1995 to $327 million for the three
months ended March 31, 1996. On a calendar year basis, Talegen's loss and loss
expense ratio decreased 5.3 points, from 83.3% for the 1995 period to 78.0% for
the 1996 period. This decrease was caused by changes in business mix at Coregis
and

51
<PAGE>
Industrial Indemnity, as well as certain loss and loss expense reserve
strengthening actions recorded in the 1995 period that did not occur in the 1996
period.

On an Operating Group basis, Coregis's loss and loss expense ratio decreased
from 77.8% in the 1995 period to 75.6% in the 1996 period due to the
discontinuance of certain programs that had higher loss ratios. Crum & Forster's
loss and loss expense ratio increased from 73.6% in the 1995 period to 76.9% in
the 1996 period due to increases in current accident year loss ratios following
the reserve study that was undertaken at year-end 1995, offset by the effect of
certain reserve strengthening actions in the 1995 period. Industrial Indemnity's
loss and loss expense ratio decreased from 89.1% in the 1995 period to 82.1% in
the 1996 period primarily due to improved loss experience in its Western States
Unit and the reduction in business in its National Programs unit, which had a
higher loss ratio in the 1995 period. Westchester Specialty's loss and loss
expense ratio decreased from 89.1% in the 1995 period to 81.6% in the 1996
period, primarily due to strengthening of prior accident year loss and loss
expense reserves in the first quarter of 1995 which did not occur in the first
quarter of 1996, offset by an increase in current accident year loss ratios in
its umbrella and excess casualty business subsequent to the reserve study that
was undertaken at year-end 1995.

Through March 31, 1996, Talegen's 1996 accident year loss and loss expense
ratio was 77.4%, which was 0.6 points higher than the 1995 full-year accident
year loss and loss expense ratio of 76.8%. The increase in the accident year
loss and loss expense ratio between 1995 and 1996 was primarily attributable to
higher loss and loss expense ratios on nonvoluntary business at Crum & Forster
and Industrial Indemnity.

Underwriting Expenses

Talegen's total underwriting expenses increased from $132 million for the
three months ended March 31, 1995 to $138 million for the three months ended
March 31, 1996, or 5%. Within total underwriting expenses, external underwriting
expenses increased slightly from $72 million in the 1995 period to $74 million
in the 1996 period. Internal underwriting expenses also increased, from $60
million in the 1995 period to $64 million in the 1996 period. Internal
underwriting expenses are a component of total internal operating expenses,
which increased $9 million from the 1995 period to the 1996 period, primarily
reflecting increases in non-technology expenses at Crum & Forster and Industrial
Indemnity. The increased level of internal operating expenses at Crum & Forster
was due to the reduction of certain premium deficiency and other accruals in the
1995 period that did not occur in the 1996 period, while the increase at
Industrial Indemnity related to the discontinuance of a policy servicing
contract in the 1996 period which had previously benefited internal operating
expenses. The increase in underwriting expenses led to a modest 0.5 point
increase in the underwriting expense ratio from 32.4% in the 1995 period to
32.9% in the 1996 period.

On an Operating Group basis, Coregis's underwriting expense ratio in the
1995 period was relatively unchanged compared to the 1996 period as increases to
the external underwriting expense ratio, due to higher commission programs, were
offset by the effect of a lower internal underwriting expense ratio which
resulted from higher net premiums earned. Crum & Forster's underwriting expense
ratio decreased from 36.1% in the 1995 period to 34.6% in the 1996 period,
primarily reflecting decreased commissions and premium taxes. Although
underwriting expenses were flat for Industrial Indemnity in the 1995 period
compared to the 1996 period, the underwriting expense ratio increased from 25.0%
in the 1995 period to 28.6% in the 1996 period, due to a decrease in net
premiums earned. At Westchester Specialty, the underwriting expense ratio
decreased from 28.3% in the 1995 period to 26.3% in the 1996 period reflecting a
reduction of accruals for certain premium tax assessments during the 1996
period.

52
<PAGE>
Other

Talegen's net investment income increased $6 million from $83 million in the
three months ended March 31, 1995 to $89 million in the same period in 1996. The
increase was due to a higher level of average investments in the 1996 period
compared to the 1995 period. On an annualized basis, the average investment
yield was unchanged at 5.1% in both the 1995 and 1996 periods.

Talegen's net realized investment gains of $3 million for the 1995 period
and $1 million for the 1996 period were not significant. Interest expense
decreased from $8 million in the 1995 period to $6 million in the 1996 period
which is primarily reflective of principal payments on term debt made during the
intervening quarters. The provision for income taxes increased from $3 million
for the 1995 period to $13 million for the 1996 period, primarily due to higher
earnings before income tax and a reduction in investment income attributable to
non-taxable securities. Accordingly, Talegen's effective tax rate was 21% in the
1995 period and 36% in the 1996 period.

1995 COMPARED TO 1994

Premiums

Talegen's gross premiums written remained level between 1994 and 1995,
changing only slightly from $2,097 million to $2,107 million. Net premiums
written decreased slightly from $1,716 million in 1994 to $1,694 million in
1995. On an Operating Group basis, net premiums written increased at Coregis and
Crum & Forster but were offset by lower net premiums written at Industrial
Indemnity and Westchester Specialty.

Coregis's net premiums written increased from $320 million in 1994 to $355
million in 1995, or 11%. The increase occurred principally in Coregis's
Professional Liability Division, which grew by 40% through planned expansion
into additional targeted states. The increase in professional liability net
premiums written was partially offset by the strategic discontinuance of several
property and casualty programs that no longer met program and profitability
criteria. Overall, new and renewal business levels improved across most
programs.

Crum & Forster's net premiums written increased from $886 million in 1994 to
$960 million in 1995, or 8%. Consistent with Crum & Forster's long-term
strategy, the growth continues to come from its custom agents, whose number
increased from 516 at year-end 1994 to 589 at year-end 1995. In addition, the
gross premiums written per custom agent continued to increase, rising from $1.4
million to $1.5 million. As a result, Crum & Forster received 81% of its gross
premiums written in 1995 compared to 71% in 1994 from its custom agents.

Industrial Indemnity's net premiums written decreased from $323 million in
1994 to $227 million in 1995, or 30%. Of the $96 million reduction, $42 million
pertained to the largest customer in the National Programs unit who, in 1994,
elected to increase the deductible portion of its policy. The remaining
reduction in net premiums written was experienced primarily by the California
Franchise unit and was caused both by rate reductions with existing customers
and a higher volume of business not renewed compared to new business obtained.
The reduced rates with existing customers resulted, in part, from improved loss
experience whereby premiums could be reduced without sacrificing price adequacy.
Also, a shift began occurring from retrospectively rated policies, whereby
favorable experience is returned to the customer after policy expiration, to
guaranteed cost policies which had lower initial premiums. The loss of business
was primarily attributable to the intense competition resulting from open
rating, which was effective January 1, 1995, and Industrial Indemnity's
maintenance of price discipline and risk selection standards during this period.

Westchester Specialty's net premiums written decreased from $187 million in
1994 to $152 million in 1995, or 19%. Westchester Specialty's casualty business
has been decreasing due to Westchester Specialty's strict underwriting and
pricing discipline in an extremely competitive casualty market. In

53
<PAGE>
contrast, attractively priced specialty property business has been growing where
conditions have been favorable due to capacity shortages, partially offsetting
the casualty business decline.

Losses and Loss Expenses

Talegen's losses and loss expenses increased by $166 million from $1,240
million in 1994 to $1,406 million in 1995. On a calendar year basis, Talegen's
loss and loss expense ratio increased 11.3 points from 73.5% in 1994 to 84.8% in
1995. During 1995, prior accident year gross loss and loss expense reserves were
strengthened by $584 million and uncollectible reinsurance reserves were
strengthened by $56 million. The increase in the loss and loss expense ratio and
the absolute increase in the amount of incurred losses and loss expenses were
caused by net prior accident year reserve strengthening of $102 million in 1995
as compared to $43 million in net reserve reductions in 1994. On an Operating
Group basis, Crum & Forster and Westchester Specialty increased their 1994 and
prior accident year net loss and loss expense reserves by $97 million and $62
million, respectively. However, due to favorable 1994 and prior accident year
loss trends, this impact was partially offset by reductions to 1994 and prior
accident year net loss and loss expense reserves totaling $20 million at Coregis
and $37 million at Industrial Indemnity. The effect of the 1994 and 1995 reserve
actions accounted for 8.6 points of the increase in the calendar year loss and
loss expense ratio over this period.

After adjusting for all prior accident year reserve actions through December
31, 1995, Talegen's accident year loss and loss expense ratio for 1994 was
77.1%, or 0.2 points higher than 1995's accident year loss and loss expense
ratio of 76.9%. On a Operating Group basis the accident year loss and loss
expense ratios were relatively constant.

Underwriting Expenses

Talegen's total underwriting expenses were $530 million in 1994 and $534
million in 1995, an increase of $4 million, or less than 1%. Within total
underwriting expenses, external underwriting expenses were flat at $295 million
in 1994 and $297 million in 1995, and internal underwriting expenses were also
flat at $235 million in 1994 and $237 million in 1995. Internal underwriting
expenses are a component of total internal operating expenses, which were also
flat from year to year, reflecting a $20 million, or 6% decrease in
non-technology expenses due to headcount reductions and other productivity
improvements, offset by a $23 million or 38% increase in technology expenses.
These results are consistent with Talegen's strategy of leveraging technology to
support productivity improvements. Although total underwriting expenses were
relatively flat in 1995 compared to 1994, a decline in net premiums earned at
Industrial Indemnity and Westchester Specialty resulted in a 0.8 point increase
in the total underwriting expense ratio from 31.4% to 32.2%.

On an Operating Group basis, Coregis's underwriting expense ratio increased
2.4 points, from 29.6% in 1994 to 32.0% in 1995, primarily due to higher
commission costs and investments in new systems technology. Crum & Forster's
underwriting expense ratio decreased 3.5 points, from 36.5% in 1994 to 33.0% in
1995, primarily due to tighter control over internal operating expenses and
decreased commissions. At Industrial Indemnity, the underwriting expense ratio
increased 8.7 points, from 19.6% in 1994 to 28.3% in 1995, due to the combined
effects of declining premiums, greater commission expense on nonvoluntary
business, and the cost of implementing its new claims management process.
Westchester Specialty's underwriting expense ratio increased only 1.0 point from
29.0% in 1994 to 30.0% in 1995, despite the 19% reduction in net premiums
written, reflecting its flexible internal expense structure that is responsive
to changes in premium production.

Other

Talegen's net investment income increased $46 million from $297 million in
1994 to $343 million in 1995. This increase was caused by a higher average
investment yield of 5.2% in 1995 compared to 4.7%

54
<PAGE>
in 1994, partially due to a shift from non-taxable to taxable investments, as
well as by a higher level of average investments in 1995.

Talegen's net realized investment gains increased from $13 million in 1994
to $70 million in 1995, which was primarily due to net gains realized during the
1995 liquidation of the investment portfolio. Interest expense increased from $7
million in 1994 to $35 million in 1995 primarily due to the full year of
interest incurred on the term debt which was issued in the fourth quarter of
1994. The 1995 provision for income taxes decreased $57 million from 1994 to
1995, primarily due to lower earnings before income taxes and a $10 million tax
adjustment. Accordingly, Talegen's effective tax rate was 16.0% in 1995,
compared to 34.4% in 1994.

1994 COMPARED TO 1993

Premiums

Talegen's gross premiums written decreased less than 2% from 1993 to 1994,
declining from $2,132 million to $2,097 million. Net premiums written decreased
by 5% from $1,811 million in 1993 to $1,716 million in 1994. On an Operating
Group basis, net premiums written increased at Coregis and Crum & Forster while
decreases were reported by Industrial Indemnity and Westchester Specialty.

Coregis's net premiums written increased from $275 million in 1993 to $320
million in 1994, or 16%. During 1994, Coregis's significant growth was the
result of an expansion of selected programs, primarily in the Professional
Liability Division, and a greater penetration of core property and casualty
customer groups, partially offset by the loss of the endorsement of a major
customer group and the strategic discontinuance of certain property and casualty
customer groups that no longer met program and profitability criteria.

Crum & Forster's net premiums written increased from $835 million in 1993 to
$886 million in 1994, or 6%. Growth was driven by an increase in the number of
custom agents from 494 at year-end 1993 to 516 at year-end 1994, as well as an
increase in the average gross premiums written from $1.2 million to $1.4 million
per custom agent.

Industrial Indemnity's net premiums written decreased from $460 million in
1993 to $323 million in 1994, or 30%. The decline was primarily due to improving
loss experience in the National Programs and the California Franchise units
which resulted in lower premium surcharges or greater return premiums to
policyholders on retrospectively rated policies and lower premium rates on
California Franchise business. Additionally, competitive pressures began to
increase in anticipation of the elimination of state mandated minimum rates in
California which became effective on January 1, 1995.

Westchester Specialty's net premiums written decreased from $241 million in
1993 to $187 million in 1994, or 22%. This decrease was the result of strict
adherence to underwriting and pricing discipline as extremely competitive
conditions continued in the umbrella and excess casualty market. These decreases
were partially offset by growth in net premiums relating to attractively priced
specialty property business that began to emerge as a result of capacity
shortages in 1993.

Losses and Loss Expenses

Talegen's losses and loss expenses decreased by $87 million from $1,327
million in 1993 to $1,240 million in 1994. On a calendar year basis, Talegen's
loss and loss expense ratio decreased 1.7 points from 75.2% in 1993 to 73.5% in
1994, primarily due to prior accident year net reserve reductions of $43
million. On an Operating Group basis, Industrial Indemnity's loss and loss
expense ratio decreased 11.2 points from 85.9% in 1993 to 74.7% in 1994 as a
result of a $65 million reduction to 1993 and prior accident year net loss and
loss expense reserves. In contrast, Westchester Specialty's calendar year loss
and loss expense ratio increased 13.8 points from 72.7% in 1993 to 86.5% in 1994
due to a $21 million strengthening of 1993 and prior accident year net loss and
loss expense reserves. Both Coregis and Crum & Forster had relatively unchanged
calendar year loss and loss expense ratios.

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<PAGE>
Through December 31, 1994, Talegen's accident year loss and loss expense
ratio for 1994 was 76.1%, which was 1.6 points lower than 1993's accident year
loss and loss expense ratio of 77.7%. The decrease in the accident year loss and
loss expense ratio between 1993 and 1994 was primarily attributable to reduced
premium writings of certain less profitable programs at Coregis in 1994, an
increase in the proportion of specialty property insurance underwritten at
Westchester Specialty, which had lower accident year loss ratios than umbrella
and excess casualty lines, and improving loss experience at Industrial
Indemnity.

Underwriting Expenses

Talegen's total underwriting expenses were $532 million in 1993 and $530
million in 1994, a decrease of $2 million, or less than 1%. Within total
underwriting expenses, external underwriting expenses increased from $285
million in 1993 to $295 million in 1994, whereas internal underwriting expenses
decreased from $247 million in 1993 to $235 million in 1994. The increase in
external underwriting expenses was primarily attributable to a shift in business
mix towards higher commission programs at Coregis. Internal underwriting
expenses are a component of total internal operating expenses, which decreased
$20 million or 5%, reflecting a $29 million, or 8% decrease in non-technology
expenses due to headcount reductions and other productivity improvements,
partially offset by a $9 million or 17% increase in technology expenses. These
results are consistent with Talegen's strategy of leveraging technology to
increase productivity. Although total underwriting expenses were flat in 1994
compared to 1993, a decline in net premiums earned at Industrial Indemnity and
Westchester Specialty, resulted in a 1.3 point increase in the total
underwriting expense ratio from 30.1% in 1993 to 31.4% in 1994.

On an Operating Group basis, Coregis's underwriting expense ratio decreased
1.0 point, from 30.6% in 1993 to 29.6% in 1994, as a result of implementing
various efficiency initiatives. Similarly, Crum & Forster's underwriting expense
ratio decreased by 0.7 points, from 37.2% in 1993 to 36.5% in 1994, reflecting
lower staffing levels and tighter control over other internal expenses.
Industrial Indemnity's underwriting expense ratio increased 0.7 points, from
18.9% in 1993 to 19.6% in 1994 due to declining premium volume partially offset
by reduced staffing levels and other internal expense measures. Westchester
Specialty's underwriting expense ratio increased 1.2 points, from 27.8% in 1993
to 29.0% in 1994, primarily due to investments in infrastructure to handle
growth in the property business.

Other

Talegen's net investment income increased $36 million from $261 million in
1993 to $297 million in 1994. This increase was caused in part by a higher
average investment yield of 4.7% in 1994 compared to 4.3% in 1993, as well as by
a higher level of average investments in 1994.

Talegen's net realized investment gains decreased from $65 million in 1993
to $13 million in 1994. The net realized investment gains in 1993 primarily
resulted from the liquidation of the investment portfolio in connection with the
Talegen Restructuring. Net realized investment gains in 1994 were minimal due to
the resumption of Talegen's normal investment activities. Interest expense
recorded in 1994 related to the term debt which was issued by the Intermediate
Holding Companies during the fourth quarter of 1994. In 1994, other income
totaling $21 million was recorded compared to other expenses totaling $43
million recorded in 1993. In 1993, other expenses were higher than usual due to
$58 million of nonrecurring expenses relating to the Talegen Restructuring. The
1994 provision for income taxes increased $37 million from 1993 to 1994,
primarily due to higher earnings before income taxes and a nonrecurring benefit
of $16 million in 1993 related to a change in the federal income tax rate.
Principally due to the non-recurring $16 million tax benefit in 1993, Talegen's
effective tax rate increased from 22.9% in 1993 to 34.4% in 1994.

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LIQUIDITY AND CAPITAL RESOURCES

Talegen--Historical

The liquidity requirements of the Insurance Companies have historically been
met by funds provided by operations and from the maturity and sale of
investments. The liquidity requirements of the Intermediate Holding Companies
have been met through the payment of dividends from the Insurance Companies. The
liquidity requirements of Talegen Holdings have been met through: (i) the
payment of dividends from the Intermediate Holding Companies, (ii) management
and other fees charged by Talegen Holdings to the Insurance Companies, and (iii)
the receipt of payments made pursuant to the Talegen Holdings tax allocation
agreement in effect prior to the Acquisition. See "Certain Interests in the
Acquisition and Related Transactions."

On a consolidated basis, cash provided by operating activities primarily
consists of premium collections, reinsurance collections and investment income,
less loss and loss expense payments, acquisition costs, operating expenses, the
purchase of reinsurance coverage and tax-sharing payments, if any. Cash provided
by operating activities was $203 million, $136 million and $262 million for the
years ended December 31, 1993, 1994 and 1995, respectively. Cash provided by
operating activities increased in 1995, primarily as a result of lower payments
for claims, net of reinsurance and salvage recoveries, lower payments for
acquisition and operating costs, and higher investment income partially offset
by an increase in tax payments. Crum & Forster, Coregis, Westchester Specialty,
and Talegen Holdings and the other service companies had positive cash flow from
operations during 1995 of $138 million, $129 million, $21 million and $32
million, respectively, which contributed to the increase, while Industrial
Indemnity had negative cash flow from operations of $58 million.

Cash used by operating activities was $23 million for the three months ended
March 31, 1995 and $36 million for the three months ended March 31, 1996. Cash
used in these quarters exceeded cash provided primarily due to payments made
which pertained to various accruals established during the prior year. This
included payments to agents for incentive commission plans and to employees for
incentive compensation and other benefits, as well as payments for premium taxes
and deposits on reinsurance treaties.

Total cash used in investing activities during 1995 was $206 million and is
mostly the result of the positive cash flow from operations discussed above,
which was used primarily to purchase short-term investments. Total cash used in
investing activities was $307 million in 1994 as compared to $408 million in
1993. During 1994, the Intermediate Holding Companies issued term debt of $425
million, the proceeds of which were used to pay stockholder dividends to XFSI
and to repay indebtedness at Talegen Holdings. Also in 1994, certain of the
Insurance Companies received $142 million of proceeds from the maturity of
certain XFSI notes. During 1993, in connection with the Talegen Restructuring,
Talegen Holdings received a cash capital contribution from XFSI of $235 million,
which, in turn, was contributed to Industrial Indemnity.

Total cash provided by investing activities during the three months ended
March 31, 1995 and 1996 was $7 million and $56 million, respectively. The cash
from investing activities combined with existing cash balances was primarily
used to fund the operating activities discussed above, and make principal
payments on term debt of $6 million during the first quarter of 1995 and $21
million during the first quarter of 1996.

The aggregate carrying value of invested assets, including cash and
short-term investments, was $5,845 million, $5,964 million and $6,450 million as
of December 31, 1993, 1994 and 1995, respectively. The increase in invested
assets in 1995 over 1994 resulted from positive cash flow from operations
generated during 1995 and lower unrealized losses due to a general decline in
interest rates. The increase in invested assets in 1994 over 1993 resulted
primarily from $136 million of positive cash flow

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<PAGE>
from operations in 1994, $142 million in proceeds from the 1994 maturity of
certain XFSI notes held by certain of the Insurance Companies, and investments
purchased with proceeds from the issuance of the 1994 term debt at the
Intermediate Holding Companies, partially offset by higher unrealized losses due
to an increase in interest rates.

The aggregate carrying value of invested assets, including cash and
short-term investments decreased from $6,450 at year-end 1995 to $6,327 million
as of March 31, 1996. The decrease in invested assets during the three months
ended March 31, 1996 was due to the negative cash flow from operations discussed
above, as well as an increase in receivables from unsettled securities
transactions due to the portfolio reinvestment activity.

Beginning in the third quarter of 1995, the Operating Groups liquidated
their investment portfolios to assist in the sale of Talegen. As a result of the
liquidation, the fixed income portfolio, including fixed income securities
classified as short-term investments, decreased from an average maturity of more
than four years at the end of 1994 to an average maturity of less than one year
at the end of 1995. Of the total invested assets at December 31, 1995,
approximately 92% were comprised of U.S. Treasury securities and other fixed
income securities issued by U.S. Government agencies and authorities. Following
the Acquisition, Talegen plans to implement an investment strategy that is
consistent with the duration of its liabilities and designed to maximize
after-tax investment income within acceptable risk and volatility criteria.

Consistent with Talegen's investment strategy, the proportion of fixed
maturities in its investment portfolio was increased from 10% as of December 31,
1995 to 18% as of March 31, 1996. Of the total invested assets at March 31,
1996, approximately 79% were comprised of U.S. Treasury securities and other
fixed income securities issued by U.S. Government agencies and authorities.

Talegen's shareholder's equity, as determined under GAAP, was $2,318
million, $1,950 million, and $2,353 million as of December 31, 1993, 1994 and
1995, respectively. Cash dividends of $45 million, $232 million and $9 million
were paid to XFSI during 1993, 1994 and 1995, respectively. Unrealized losses on
investment securities, which are recorded as a direct reduction to equity, were
approximately $286 million as of December 31, 1994, which improved to
approximately $3 million as of December 31, 1995 due to the general decline in
interest rates. Due to the 1995 repositioning of the investment portfolio in
favor of short-term securities, the investment portfolio is currently less
subject to valuation fluctuations resulting from changes in interest rates.
During 1993, XFSI made net capital contributions to Talegen of $229 million in
cash, $75 million in XFSI promissory notes, and other noncash contributions of
$118 million.

Shareholder's equity, as determined under GAAP, increased slightly during
the first quarter of 1996 and was $2,363 million at March 31, 1996. Net income
for the three months ended March 31, 1996 totaled $23 million, but was partially
offset by a small increase in unrealized losses on investment securities.

Combined statutory net income of the Insurance Companies amounted to $182
million, $166 million and $120 million for the years ended December 31, 1993,
1994 and 1995, respectively. Combined statutory net income for the three months
ended March 31, 1995 and 1996 amounted to $47 million and $35 million,
respectively. Combined statutory surplus of the Insurance Companies increased
from $1,641 million at December 31, 1993 to $1,727 million at March 31, 1996 and
the ratio of statutory net premiums written to surplus improved from 1.06 to
1.00 over the same period. Statutory surplus is an important measure utilized by
Talegen, regulators and rating agencies to assess the Insurance Companies'
ability to support business operations as well as provide dividend capacity. The
Insurance Companies are limited by insurance laws as to the amount of dividends
they may pay without prior approval from regulatory authorities. These
restrictions differ by state, but generally pertain to

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calculations based on statutory surplus, statutory net income, and/or investment
income. See "Regulatory Matters--Regulation of Dividends and Other Payments from
Insurance Companies." Maximum allowable dividends from the Insurance Companies,
not including tax-sharing payments and fees paid to Talegen, were $224 million
in 1994 and $175 million in 1995. The following table identifies combined
statutory surplus and operating leverage by Operating Group.

SELECTED OPERATING GROUP FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT OPERATING LEVERAGE)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------- ----------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
COMBINED STATUTORY SURPLUS
Coregis......................................... $ 252 $ 232 $ 244 $ 230 $ 249
Crum & Forster.................................. 767 809 851 828 853
Industrial Indemnity............................ 323 338 329 341 319
Westchester Specialty........................... 299 303 297 314 306
------ ------ ------ ------ ------
Total........................................... $1,641 $1,682 $1,721 $1,713 $1,727
------ ------ ------ ------ ------
------ ------ ------ ------ ------
OPERATING LEVERAGE (STATUTORY NET PREMIUMS WRITTEN
TO SURPLUS) (1)
Coregis......................................... 1.6x 1.4x 1.5x 1.5x 1.5x
Crum & Forster.................................. 1.0x 1.1x 1.2x 1.1x 1.2x
Industrial Indemnity............................ 1.0x 1.0x 0.7x 0.9x 0.7x
Westchester Specialty........................... 0.8x 0.6x 0.5x 0.6x 0.5x
Consolidated leverage........................... 1.1x 1.0x 1.0x 1.0x 1.0x
</TABLE>

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

(1) The ratios as of March 31, 1995 and 1996 were calculated using net premiums
written from the four quarters which precede the interim date.

As of December 31, 1995, the Company had a net deferred tax asset of
approximately $477 million, which primarily relates to temporary differences
that are expected to reverse over 10 to 15 years as net ordinary deductions for
tax purposes. Realization of this net deferred tax asset will require the
Company to generate approximately $1.4 billion of taxable income over the next
10 to 15 years, before reversal of these temporary differences. The Company
expects to be able to realize the deferred tax asset based upon generation of
such future taxable income.

The Company--Pro Forma

Following the Acquisition, the Company will be an insurance holding company
whose only material asset will be the capital stock of Talegen Holdings. The
Company will be dependent primarily on dividends, tax-allocation payments and
management and other fees paid by the Insurance Companies to meet its liquidity
requirements, including its debt service obligations.

After consummation of the Acquisition and related transactions, including
the Financings, the Company will have outstanding indebtedness of $1,146
million, of which $775 million will be pursuant to the Term Loan Facility, $21
million will be pursuant to the Revolving Credit Facility, and $350 million will
be pursuant to the Offering. In addition, $179 million of unused commitments
under the Revolving Credit Facility and approximately $38 million of excess cash
will be available after the Acquisition to fund future liquidity needs of the
Company, if any. Assuming a Closing of June 30, 1996, the Company must make
principal payments under the Term Loan Facility of $0 in 1996, $2.5 million in
1997, $37.5 million in 1998, $77.5 million in 1999, $82.5 million in 2000,
$127.5 million in 2001, $107.5 million in each of 2002 and 2003, $186.5 million
in 2004, and $46.0 million in 2005. Prior to the thirtieth month after Closing,
total scheduled amortization under the Term Loan Facility will be equal

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<PAGE>
to $3.75 million. The availability under the Revolving Credit Facility will be
reduced from $200 million at the Closing to $150 million in 2001, to $100
million in 2002, and will be eliminated in 2003. The $350 million aggregate
balance due under the Debentures mature in 2008. See "Description of Credit
Facilities."

The payment of dividends from the Operating Groups to Talegen Holdings,
along with certain fees paid by the Insurance Companies to Talegen Holdings,
will fund substantially all of the dividends from Talegen Holdings to the
Company. The payment of such dividends is indirectly subject to limitations
imposed by the respective domiciliary states of the Insurance Companies,
including the requirement of the NYID, consistent with its general
administrative policy, that the New York-domiciled Insurance Companies not pay
dividends for a two-year period following the Acquisition without prior
regulatory approval. The maximum allowable dividends payable in 1995 from the
Insurance Companies would have been $83 million if the two year dividend
moratorium for the New York-domiciled Insurance Companies had been in place. See
"Risk Factors--Ability to Service Debt," and "Regulatory Matters--Regulation of
Dividends and Other Payments from Insurance Companies." Based upon these
restrictions and 1995 operating results, the maximum amount available for
payment of dividends in 1996, as of December 31, 1995, from the Operating Groups
to Talegen Holdings (which is funded solely by the Insurance Companies) without
prior approval of regulatory authorities is $96 million, of which $16 million
has been paid through March 31, 1996. Such amounts do not include dividends from
U.S. Fire and Westchester Fire due to their negative earned surplus at December
31, 1995. Additional liquidity is provided by the management and other fees paid
by the Insurance Companies to cover the cost of management services provided to
them by Talegen Holdings and tax allocation payments as described below. On a
pro forma basis, cash available from the Insurance Companies in 1995, which
represents pro forma tax allocation payments, management and other fees net of
Talegen Holdings' operating expenses, and dividends that the Insurance Companies
could have paid during such period without the prior approval of relevant state
insurance commissioners, was $101 million. This compares with pro forma interest
expense related to the Offering and the Credit Facilities (excluding
amortization of deferred financing costs) and principal payments for the year
ended December 31, 1995 of $95 million.

For periods after the Closing, Holdings will file consolidated federal
income tax returns which will include the Company and all of its direct or
indirect domestic subsidiaries that satisfy the stock ownership requirements for
consolidation under federal income tax law. Effective at the Closing, the
Company will enter into tax allocation agreements with Holdings and each of the
Insurance Companies. The Insurance Companies will pay their allocated tax
liabilities to the Company throughout the year. The Company will pay to Holdings
the annual consolidated income tax liability attributable to Holdings and all of
its subsidiaries, including the Company, and Holdings will pay the tax liability
for the entire group to the government. As a result of this tax allocation
arrangement, the Company will receive the annual cash flow benefit associated
with the reduction in income taxes related to the interest payable on the
debentures issued by Holdings to the Trust, which is estimated to be $19 million
in 1997. Such amounts will be recognized by the Company as contributed capital.

ACCOUNTING STANDARDS NOT YET ADOPTED

Statement of Financial Accounting Standards No. 121, "Accounting for
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related both to assets to be held and
used and assets to be disposed. This Statement requires a write down to fair
value when long-lived assets to be held and used are impaired. It also requires
long-lived assets that are to be disposed to be carried at the lower of cost or
fair value, less their cost to sell, and does not allow such assets to be
depreciated. The adoption of this statement, effective January 1, 1996, will not
have a material adverse effect on the Company's results of operations, financial
condition or liquidity.

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EFFECTS OF INFLATION

The ultimate losses and loss expenses for claims not yet settled are
affected by inflation, which is, therefore, a significant factor in determining
appropriate loss reserves as well as insurance rates. Talegen's methods used
both to estimate loss reserves for claims incurred but not yet reported ("IBNR")
and to calculate insurance rates reflect the effects of inflation when
estimating ultimate loss costs. Talegen uses internal and industry insurance
data as well as government economic indices in estimating the effects of
inflation on insurance premium rates and loss reserves. However, until claims
are ultimately settled, the full effect of inflation on Talegen's results cannot
be known.

Due to changing inflationary pressures, Talegen believes that premium rates
and loss reserves, including IBNR loss reserves, must be re-evaluated
continually to incorporate the effects of inflation. Accordingly, Talegen
regularly evaluates such premium rates and loss reserves for inflation effects.

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<PAGE>
BUSINESS

GENERAL

Talegen, with 1995 net premiums written of $1.7 billion, is a leading writer
of commercial property and casualty insurance that operates through its four
Operating Groups, each of which is focused on a different, well-defined segment
of the commercial property and casualty insurance market. This operating
structure allows each Operating Group to focus on a specific operating strategy
and to respond rapidly to changing market conditions, and provides Talegen with
diversified sources of cash flow and opportunities for premium growth. As of
December 31, 1995, Talegen's combined statutory surplus was $1.7 billion and
total assets were $11.1 billion, including $6.4 billion of investment assets
comprised principally of cash and short-term investments. Talegen is the
seventeenth largest writer of commercial property and casualty insurance in the
United States based on 1994 net premiums written, according to A.M Best. The
Operating Groups are:

Crum & Forster. Crum & Forster, with net premiums written of $960 million in
1995, is a national writer of a broad array of property and casualty products
for mid-sized commercial accounts distributed through a select network of
independent agents and brokers. Crum & Forster has differentiated itself by
developing long-term relationships with its select group of 589 custom agents
that accounted for 81% of Crum & Forster's gross premiums written in 1995. In
order to maintain its responsive service and thorough knowledge of the local
insurance market, Crum & Forster operates on a highly decentralized and
regionalized basis through 20 regional offices.

Industrial Indemnity. Industrial Indemnity, with net premiums written of
$227 million in 1995, specializes in providing workers' compensation insurance
and risk management services on a nationwide basis with an emphasis on the
western United States. Industrial Indemnity has differentiated itself by its
recent implementation of a new comprehensive claims management process that
integrates all facets of a workers' compensation claim, including prevention,
medical management, legal and financial. This innovative claims process allows
Industrial Indemnity to manage more effectively the medical care and disability
components of its business and to reduce overall workers' compensation costs for
its customers.

CORE STRENGTHS

In 1992, a new management team began to implement a series of initiatives
designed to strengthen Talegen's competitive position in the property and
casualty insurance industry. The most significant of these initiatives was the
Talegen Restructuring that terminated Talegen's intercompany pooling arrangement
and realigned 18 of Talegen's insurance companies into the four highly focused
Operating Groups. A fifth group, TRG, which is being sold by XFSI in a separate
transaction to an entity organized at the direction of KKR and certain
management members of TRG, was established at the same time to manage claims
run-off obligations and reinsurance collections associated with its own and

62
<PAGE>
several Talegen discontinued books of business. In addition to the Talegen
Restructuring, which required the approval of 15 state insurance departments,
management's initiatives also included: (i) the strengthening of the balance
sheet through capital infusions, significant additions to reserves and a
repositioning of the investment portfolio primarily to cash and short-term
investments, (ii) the implementation of more disciplined planning, reserving,
reinsurance and catastrophe management practices, and (iii) various initiatives
to improve productivity, including the more effective use of technology and
other process enhancements. Talegen believes that these initiatives, as well as
additional management actions have resulted in the following core strengths:

Focused Operating Groups. Although Talegen is a leading writer of commercial
property and casualty insurance, each of the Operating Groups is a dedicated
business unit with a specific market focus, operating strategy, and business and
financial objectives. This structure permits each Operating Group to (i)
identify customer needs, (ii) develop tailored products for its targeted
customer groups, (iii) respond rapidly to new opportunities and changing market
conditions, and (iv) maintain its own balance sheet to improve internal
financial accountability. Although the Operating Groups are managed as separate
businesses, Talegen Holdings establishes Talegen's corporate strategies and
objectives and implements disciplined planning and audit review processes for
each of the Operating Groups.

Well Capitalized Balance Sheet. Talegen believes that the Insurance
Companies are well capitalized with $1.7 billion of combined statutory surplus
to support $1.7 billion of net premiums written in 1995. This conservative
premium-to-surplus ratio of 1.0 to 1.0 provides the opportunity for profitable
business expansion consistent with Talegen's philosophy of disciplined
underwriting and managed premium growth. In addition, Talegen's $6.4 billion
investment portfolio was invested principally in cash and short-term investments
as of December 31, 1995. As part of the Acquisition and prior to the Closing,
XFSI will replace certain promissory notes and certain real estate assets of the
Insurance Companies with $468 million of cash that Talegen will use to increase
the investment portfolio of the Insurance Companies.

Conservative Reserving and Reinsurance Practices. Since 1992, Talegen has
developed a comprehensive loss reserving process that will continue to be
enhanced after the Acquisition. This process includes in-depth analyses of
reserves at least semi-annually by each Operating Group and a review of such
analyses by Talegen Holdings's actuaries and senior management. In addition,
Talegen periodically retains independent actuaries to review and confirm its
reserve levels. Talegen has developed comprehensive methodologies to evaluate
its environmental and asbestos exposures, which Talegen believes are among the
most sophisticated in the property and casualty insurance industry. Since 1992,
Talegen has strengthened its gross loss and loss expense and uncollectible
reinsurance reserves, including reserves relating to environmental, asbestos and
other latent exposures, by $1.3 billion. Furthermore, as of March 31, 1996,
through Ridge Re, gross reinsurance coverage remains available for accident
years 1992 and prior of $140 million and $100 million for Coregis and Industrial
Indemnity, respectively, exclusive of 15% coinsurance. Talegen has also
significantly improved the quality of its reinsurance program by reducing the
number of its reinsurers from approximately 175 in 1992 to approximately 35 high
quality reinsurers in 1995 with whom Talegen placed over 80% of its 1995 ceded
premiums. Talegen's management believes that its actions to strengthen reserves
coupled with its focus on claims and reinsurance management will mitigate future
adverse reserve development and believes its current reserves are adequate. See
"Reserves and Risk Management."

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<PAGE>
defined market segments, the Operating Groups obtain significant data and
experience within each customer group, enabling them to identify acceptable
risks and appropriately price coverages.

STRATEGY

Reposition Investment Portfolio. The Operating Groups liquidated their
investment portfolios in 1992 to assist in obtaining regulatory approval for the
Talegen Restructuring. After the Talegen Restructuring, Talegen engaged in
limited reinvestment activities and, to assist in the sale of Talegen, again
liquidated its investment portfolio in 1995. As of December 31, 1995, Talegen
had total investment assets of $6.4 billion, which were principally comprised of
cash and short-term investments. With its ownership situation resolved, Talegen
will implement an investment strategy consistent with the duration of its
liabilities and designed to maximize after-tax investment income within
acceptable risk and volatility criteria. Talegen's strategy will be to invest
principally in a portfolio of high-quality

64
<PAGE>
marketable fixed income securities with an average rating for the portfolio of
"A" or better, while maintaining sufficient investments in highly liquid,
short-term securities to provide for immediate cash requirements.

TALEGEN HOLDINGS

Although the Operating Groups are managed as separate businesses, Talegen
Holdings establishes overall corporate strategies and objectives and has
implemented a disciplined planning and audit process for each of the Operating
Groups to monitor financial and risk management. Talegen Holdings is comprised
of a group of general management and functional professionals with significant
experience in a full range of insurance, financial and business operations
activities. Talegen Holdings's management team is principally involved in
strategy development, financial management, actuarial and risk management
practices, organizational design and technology solutions for Talegen as a
whole. Strategy development includes market definition, selection, and
segmentation for each of the Operating Groups, as well as the allocation of
resources to each of the Insurance Companies. Financial management of the
Operating Groups includes the deployment of capital, the determination of
appropriate capital structure, the approval of annual operating plans, and
advice with respect to the establishment of accounting and investment policies.
Actuarial and risk management practices include the monitoring of reserves and
loss development in critical areas of potential exposure, the review of reserve
analyses developed by the Operating Groups, and the identification of reinsurers
to be included in the Operating Group's reinsurance programs. Talegen Holdings
also designs the legal and reporting structures of the Operating Groups, manages
overall relationships with rating agencies and state insurance departments,
establishes compensation and benefits policies for Talegen, and confers with the
Operating Groups on key hiring decisions. Talegen Holdings assists each of the
Operating Groups in their development and implementation of technology plans and
solutions.

Talegen Holdings has established a disciplined planning and review process
for the Operating Groups and service companies. In addition to continual
refinements of business strategies, each Operating Group and service company
annually develops specific operating and financial objectives that are reviewed
and approved by Talegen Holdings. Each quarter, the Operating Groups and service
companies provide extensive management reports that analyze operating results
and measure financial performance compared to (i) plan objectives, (ii) prior
actual results, and (iii) performance of competitors in each respective market
segment. The quarterly operations review process also involves the updating of
the financial forecasts which, along with the evaluation of progress to date,
are reviewed in detail with senior management of Talegen Holdings. The
operations review process is supplemented by an extensive internal audit process
managed by Talegen Holdings.

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The following table outlines the proposed ownership structure of Talegen's
insurance operations and summarizes certain financial and business information
for Talegen Holdings and each Operating Group as of and for the year ended
December 31, 1995.

[GRAPH OF FLOW CHART]

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COREGIS

General

Coregis, with 1995 net premiums written of $355 million, is a leading writer
of commercial property and casualty insurance programs for public entities,
professionals and other selected market niches in which insureds' needs are
generally underserved by most major insurers. To capitalize on opportunities in
the program market, Coregis was created in 1992 as part of the Talegen
Restructuring by combining three business units of Talegen that were each
involved in different aspects of association and program businesses. Coregis and
its predecessors have provided public entity, professional liability and
specialized property and casualty coverages for over 20 years. Coregis is
focused on providing a comprehensive package of tailored coverages for each of
its customer groups while developing new programs designed to address the
insurance needs of additional targeted customer groups. Coregis distinguishes
itself through market segmentation, customized products, specialized
distribution on a program-by-program basis and claims management expertise.

Coregis considers its greatest competitive advantage to be its "program
management discipline" approach to the business. Coregis defines this approach
as an integrated process of market segmentation based upon detailed customer
knowledge, excellence in underwriting and claims management, customized
distributor relationships, and efficient product delivery. The advantages of
this approach include reduced concentration of risk as a result of greater
diversification among distributors and customers, more narrowly defined
programs, and minimal reliance upon national endorsements. The insureds and
distributors recognize the value-added services that Coregis provides as a
result of in-depth knowledge of each customer group's risk management needs.
This approach allows Coregis to sustain higher renewal retentions and market
share, and achieve more consistent and predictable loss experience resulting
from accumulated customer knowledge and claims management expertise.

Since 1993, Coregis has been focused on integrating its previously separate
units by establishing effective operating processes and refining its books of
business and distribution channels, resulting in a significant decrease in
customer groups from 39 to 13. During this period, Coregis reduced staff by 12%
but increased net premiums written by 29%. With its formative steps as a new
Operating Group completed, Coregis has begun to expand its marketing efforts to
more aggressively penetrate current customer groups and to develop new customer
groups.

Coregis's objective is to continue to enhance and expand its position as a
provider of insurance programs to its targeted customer groups, employing the
following strategies: (i) increasing penetration of existing customer groups
through geographic expansion and developing relationships with a larger group of
select distributors; (ii) identifying new customer groups with significant
market potential; (iii) executing strict program management discipline to
control risk selection, pricing, and distribution management; (iv) enhancing
technology and information resources to support Coregis's extensive market and
customer knowledge; and (v) optimizing its cost structure by capitalizing on the
benefits of technology and distribution synergies to minimize both acquisition
and internal costs.

As part of this strategy, Coregis is using its CorePRO+TM software system, a
proprietary software designed to support business and distribution processing
functions, as the foundation for other systems currently under development by
Coregis. Coregis believes that the CorePRO+TM system, which is currently being
used by the Professional Liability Division, reduces operating expenses by
providing fast and accurate quoting, decentralized processing to distributors,
lower product delivery costs and improved information for managers.

Public Entity Division ("PE Division")

The PE Division, with 1995 net premiums written of $156 million
(representing 44% of the Coregis total), is a leading insurer of public entities
such as municipalities, schools and special districts that offer governmental,
community or educational services to the public. The PE Division's expertise in
its target

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markets is the result of over 20 years of designing programs for schools and 12
years of designing programs for municipalities. Coregis is one of the few
national insurers with a separate division dedicated solely to serving public
entity customers. The PE Division, which currently provides coverage to 130
public entity programs in 30 states, insures more than half of the school
districts in Idaho, Louisiana and Mississippi, and approximately a quarter or
more of the school districts in Arizona and California, and is seeking to expand
to new markets in the midwest. The PE Division's primary focus is to provide a
broad package of products to its customers, including property, liability and
automobile.

The PE Division markets its insurance products through wholesalers,
retailers and program administrators who have direct relationships with insureds
and are dedicated to the PE Division's type of insurance product. Of the $156
million of net premiums written in 1995 by the PE Division, $64 million was
written for municipalities (cities, towns, villages and counties), $80 million
for schools (public and private elementary and high schools, junior colleges,
colleges and universities), and $12 million for utility and special districts
(fire, water, sewer, housing authorities and similar governmental functions).

Professional Liability Division ("PL Division")

The PL Division, with 1995 net premiums written of $110 million
(representing 31% of the Coregis total), specializes in providing professional
liability programs for lawyers, accountants and other select professional
classes. Currently, the PL Division's largest concentration of business is in
its lawyers programs (representing 88% of the PL Division's net premiums written
in 1995). Coregis has been able to capitalize on significant growth
opportunities in lawyers programs in recent years due to its 20 years of
experience insuring lawyers, its comprehensive data pool, and its in-depth
knowledge of relevant changes in the legal insurance marketplace. Programs in
the PL Division are written on an exclusive basis through approximately 27
regional agents or brokers and are marketed primarily as endorsed programs
through professional associations. By establishing exclusive relationships with
productive agents, the PL Division can increase its access to potential insureds
and accelerate response time.

The PL Division provides professional liability insurance exclusively on a
claims-made basis. In addition, such products are offered only on a primary
basis, which increases the PL Division's control of risk selection, pricing,
coverage, retention levels, and claims handling. The PL Division's lawyers book
net premiums written have increased from $35 million in 1993 to $98 million in
1995 due to the division's ability to capitalize on significant market
opportunities in 1994 and 1995. The growth in the lawyers book has offset the
decline in the accountants book, which resulted from the loss in 1993 of the
endorsement of the American Institute of Certified Public Accountants ("AICPA")
due to intense price competition. The AICPA account represented $30 million of
net premiums written in 1992 and $22 million in 1993. The PL Division plans to
increase its penetration of the accountants market through a state-focused, as
opposed to a nationally-focused, strategy similar to the approach successfully
executed in the lawyers market.

The PL Division focuses on the following critical factors when reviewing
potential opportunities: (i) targeting states where it can develop sufficient
knowledge about product need, rates, claims experience and competitor weakness
to achieve targeted pricing and selection criteria; (ii) identifying program
administrators who control business and/or association endorsements committed to
long-term exclusive relationships with the PL Division; (iii) leveraging its
claims management expertise; and (iv) tailoring products to obtain business or
reduce exposures.

Property and Casualty Division ("PC Division")

The PC Division, with 1995 net premiums written of $89 million (representing
25% of the Coregis total), designs specialized insurance programs for targeted
customer groups that meet specific underwriting criteria and that are generally
underserved by the insurance industry due to the complexity of

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the customer's insurance needs or the industry's general lack of understanding
of the inherent exposures.

The PC Division has undergone significant change during the past three
years. In 1992, the PC Division served 33 property and casualty customer groups.
After a thorough review, the PC Division concluded that many of these customer
groups did not meet its program and profitability criteria and began to withdraw
from such groups, a process that was completed in 1995 and which reduced the
number of such groups to seven. In late 1995, the PC Division added its first
new customer group, amusement parks. Currently, programs are in effect for the
following customer groups (with the percentage of 1995 net premiums written of
the PC Division indicated in parentheses): nonprofit directors and officers
(26%), Anheuser-Busch beer distributors (21%), forest products operators (15%),
moving and storage operators (12%), refuse haulers (9%), pest control operators
(8%), YMCAs (4%), and amusement parks (1%).

The PC Division has an established expertise in each of its current programs
and has been insuring non-profit organizations for over 20 years, moving and
storage operators for 13 years, Anheuser-Busch distributors for ten years, and
refuse haulers and pest control operators for six years. In each of these
customer groups, the PC Division has worked with the same distributor for each
program, developing long-standing, mutually beneficial relationships. The PC
Division believes that profitable underwriting opportunities exist to increase
market share in its existing customer groups and to develop new target customer
groups, similar to its success in adding amusement parks in 1995.

The PC Division predominantly writes commercial automobile, commercial
packages comprised of property and liability, and directors and officers'
liability. The PC Division has minimal exposure to pollution and catastrophe
claims. Recognizing the need to offer workers' compensation business on a cost
effective basis, the PC Division has recently partnered with Industrial
Indemnity to provide workers' compensation coverages for new and existing
customer groups.

Underwriting

Underwriting criteria are established based on a thorough understanding of
each customer group's classes of risks, from which selections are made to write
attractive business. Reserving and pricing policies and procedures are
consistent across the Coregis divisions. Specifically, Coregis's actuaries are
responsible for supporting underwriting selection, ensuring pricing integrity
and maintaining appropriate reserve levels. Actuaries report to the individual
divisions and are directly responsible for pricing, using guidelines established
by a chief actuary. Pricing actuaries work with reserving actuaries and claims
technicians on multi-functional teams. The pricing process begins with the
requirement that each program achieve a targeted long-term return on equity.
Each multi-functional customer group team makes its underwriting selections
based upon well-established criteria for the respective programs. Once a rate
level is set for a program and as policies are written, each customer group team
is held accountable for pricing all policies.

Claims

Coregis's claims administration capabilities are a key element of its
business strategy and Coregis believes its specialized claims management
expertise is a competitive advantage. Working within multi-functional customer
group teams, Coregis's claims technicians have a detailed understanding of their
insureds' exposures, coverage issues and claim resolution approaches. The
effectiveness of the claims process is continually monitored through a program
of internal and external reviews and audits to ensure that quality standards are
met and claim payments are appropriate. As of December 31, 1995 Coregis had 154
claims professionals and staff and an internal legal staff of 20 associates to
handle a portion of the claims litigation caseload, supplemented by the use of
outside legal counsel.

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Competition

Coregis's principal national competitors are CNA Financial Corporation,
American International Group, ITT Hartford Insurance Group, Zurich Insurance
Group and Fireman's Fund Insurance Companies. The competitive environment for
the public entity business is heavily influenced by non-traditional and
alternative market approaches, including pools, offshore arrangements,
reinsurers acting as direct writers, as well as national and regional companies.

CRUM & FORSTER

General

Crum & Forster, with 1995 net premiums written of $960 million, is a
national writer of a broad array of commercial property and casualty insurance
coverages, including commercial automobile, workers' compensation, general
liability and commercial multi-peril products. Crum & Forster targets mid-sized
commercial accounts whose insurance needs are well-served by its generalist
approach to total account underwriting. In order to maintain its responsive
service and thorough understanding of the local insurance market, Crum & Forster
operates on a highly decentralized and regionalized basis, servicing its
customers through 20 regional offices throughout the country. Crum & Forster
believes that its flat, decentralized structure improves underwriting results
and service by placing decisionmaking authority with underwriting and claims
professionals who understand the local insurance marketplace and have ongoing
contact with customers. Crum & Forster's strategy is to selectively expand the
number of its custom agents and to increase its penetration of the property and
casualty book of business produced by these agents by continuing to provide its
agents (i) a stable, consistent market for Crum & Forster's commercial products,
(ii) competitive agency profit sharing plans, (iii) high quality claims
management and loss control services, and (iv) participation in underwriting
results through "captives," as described below.

Crum & Forster differentiates itself by focusing on the agent and broker as
the customer. More specifically, Crum & Forster develops value added
relationships with its custom agents that allow it to compete on a basis other
than price alone. For 1995, Crum & Forster's 589 custom agents generated 81% of
Crum & Forster's gross premium volume. In addition, Crum & Forster has
established 18 offshore reinsurers, or "captives," that are owned by
approximately 245 of the custom agents in partnership with Crum & Forster. The
captives structure encourages custom agents to place profitable business with
Crum & Forster because the custom agent shares in the captive's profitability.

In order to continually provide quality service and maintain strong
underwriting discipline, Crum & Forster places significant emphasis on ongoing
development of the core insurance skills of underwriting and claims management.
Crum & Forster is also focused on achieving internal expense reductions and
productivity improvements that are necessary to make Crum & Forster a low-cost
provider within its market. During 1994 and 1995, Crum & Forster significantly
reduced staff count and non-technology administrative expenses while increasing
gross premiums written by approximately 9% during that period. As a result,
gross premiums written per employee increased from approximately $440,000 in
1993 to $603,000 in 1995. Substantial expense ratio improvement has been
achieved in recent years (from 37.2% in 1993 to 33.0% in 1995) and Crum &
Forster expects this trend to continue as a result of management discipline,
technology enhancements and greater administrative cost controls.

Distribution

Crum & Forster's client base consists of custom agents and select agents.
The custom agents are carefully identified and developed based on their
professionalism, business production skills, reputation, and ability to
contribute to a mutually profitable association with Crum & Forster. The custom
agents are expected to service the needs of policyholders and participate with
Crum & Forster in developing annual business plans which establish objectives
for business retention, volume, mix of business, pricing

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and profitability. Custom agents wrote 81% of Crum & Forster's gross premiums
written in 1995, up from 58% in 1993. Over this period, the number of custom
agents has increased from 494 to 589 and gross premiums written per custom agent
have increased from $1.2 million to $1.5 million.

Select agents currently generate 11% of Crum & Forster's gross premiums.
Select agents are those agents who have a profitable book of business with Crum
& Forster, but who do not meet the long-term business characteristic profile of
a custom agent. The select agent segment is a relatively small and diminishing
segment for Crum & Forster.

Underwriting

Crum & Forster has maintained a focus on product expertise and underwriting
discipline within its regional underwriting teams. Underwriting authority is
delegated to the regional manager on the basis of underwriting authority levels,
which are established by class of business, risk grade, limits of policy
coverage, premium amount and individual underwriter expertise. Crum & Forster
invests substantial resources in monitoring pricing activity and maintaining
actuarially calculated benchmark premiums. These benchmark pricing levels
provide consistent information to Crum & Forster's underwriters and regional
management regarding the adequacy of pricing levels.

The underwriting process for Crum & Forster's property book includes an
ongoing analysis of catastrophe exposure. As part of catastrophe exposure
management, sophisticated property catastrophe models are used to evaluate
probable maximum loss estimates. The results track gross loss exposure and
available capacity for underwriting catastrophe policies. Catastrophe exposure
is monitored and evaluated on the property book on a continual basis. See
"Reserves and Risk Management."

Claims

Crum & Forster strives to achieve a competitive advantage in the marketplace
through its claims management expertise. Since 1992, Crum & Forster has
developed Claims Cost Management ("CCM") methodologies which enable Crum &
Forster to monitor and control all aspects of the claims resolution process.
Through its disciplined claims management practices, Crum & Forster has been
able to achieve significant improvements in the quality of service, efficiencies
in handling cases and reduced claims payments. As of December 31, 1995, Crum &
Forster had 535 claims professionals and staff operating out of 20 regional
offices. Crum & Forster also had an internal legal staff of 119 associates,
supplemented by outside counsel, to handle a portion of the claims litigation
caseload.

The environmental, asbestos and other latent exposure claims arising from
policies issued by Crum & Forster are subcontracted to Envision Claims
Management Corporation ("Envision"), an affiliate of TRG. Envision is staffed by
claim handlers trained to manage specialized coverage and coordination issues
that arise in asbestos, environmental and other latent exposure claims. Because
of the special nature of environmental and other latent exposure claims,
Envision has developed an "account" management approach by which a particular
"account" includes all latent exposure claims made against a particular insured,
without regard to policy period or type of claim made. Crum & Forster has
approximately 1,075 accounts under management by Envision.

Competition

Crum & Forster's competition includes primarily national insurers such as
Travelers/Aetna Property Casualty Corp., American International Group, Chubb
Group, Royal Insurance Group and CNA Financial Corporation, as well as regional
insurers such as Cincinnati Financial Corporation and Ohio Casualty Group.
Although the national insurers tend to have significant resources with broad
market coverage, Crum & Forster views regional companies to be significant
competitors due to their in-depth local knowledge of the insurance marketplace
and level of responsiveness to the insured. Crum & Forster believes it is able
to compete successfully against both national and regional companies due to its
strong relationships with its custom agents and its local market presence and
responsiveness.

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INDUSTRIAL INDEMNITY

General

Industrial Indemnity, with 1995 net premiums written of $227 million, has
been a leading provider of workers' compensation insurance in the western United
States for the past 50 years. Industrial Indemnity specializes in providing its
clients with nationwide injury protection, medical and disability management,
and employers' liability products ranging from risk-sharing to fixed-cost
programs tailored to the insureds' needs and risk tolerance. According to
American Insurance Association data, in 1995, Industrial Indemnity was the tenth
largest private writer of workers' compensation in California and was ranked
among the top three private writers in Alaska, Hawaii, Idaho, Utah and
Washington. California, which represented Industrial Indemnity's largest market
in 1995, is the largest single market for workers' compensation insurance in the
United States.

Nationally, workers' compensation policies have experienced significant
improvement in profitability in recent years, in part due to benefit reforms. As
recently reported in Business Insurance, this improvement is demonstrated by a
decline in the industry-wide combined ratio from 109.1% in 1993 to an estimated
103.0% in 1995. In California and other western states, the workers'
compensation market has experienced a similar improvement in loss experience and
an attendant reduction in prices resulting in a significant decline in premium
levels, but not necessarily a decrease in price adequacy.

Workers' compensation insurance companies in California have experienced
competitive pressure on premium volume for two additional reasons. First, the
new "open rating" regulations that became effective in January 1995 in
California permit the adoption of price levels without prior regulatory approval
(before the adoption of an open rating system, minimum price levels were
established by regulatory authority). The advent of open rating has resulted in
significant price competition, particularly during the first half of 1995,
reducing premium levels and, to a lesser extent, overall price adequacy. Second,
the adoption of an open rating system has deemphasized the traditional practice
of competing on the basis of payments of policyholder dividends after a policy
expires, to a focus on lowering the upfront premium charged for insurance
products. Furthermore, the entrance of managed care providers into the workers'
compensation market has exacerbated this significant price competition in
California. Industrial Indemnity believes that the pricing disruptions in
California experienced in early 1995 have stabilized. With a substantial market
position in California and six offices within the state to service its client
base, Industrial Indemnity believes that attractive opportunities for growth
currently exist despite the competitive environment.

With a view to rapidly changing workers' compensation market conditions and
changes in the healthcare industry that affect its core markets, Industrial
Indemnity has responded by developing an innovative managed care capability and
investing in strategic initiatives to develop new proprietary systems utilizing
technology designed to assist it in reducing costs and improving customer
service. Industrial Indemnity's strategy is to leverage its market position, its
use of new technology, and its improved claims management capabilities to
penetrate further its current geographic base and selectively enter new markets
across the country.

To achieve these goals, Industrial Indemnity has differentiated itself by
its recent implementation of a new comprehensive claims management process
entitled Integrated Case Management ("ICM") that integrates all facets of a
workers' compensation claim, including prevention, medical management, legal and
financial. This innovative claims process allows Industrial Indemnity to more
effectively manage the medical care and disability components of its business
and to reduce overall workers' compensation costs for its insureds. The
effectiveness of ICM stems from an interdisciplinary approach, which teams
nurses, safety, health and legal professionals together with proven managed care
techniques and other "best practices" to manage occupational exposures and
workers' compensation claims, and to reduce overall costs to the insured.
Industrial Indemnity is also implementing a series of initiatives involving new
systems and related technology designed to support and enhance the ICM

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process. Industrial Indemnity believes these initiatives, in addition to
improving customer satisfaction, will achieve improvements in productivity,
ultimate loss costs and operating expenses.

Products and Markets

Industrial Indemnity conducts its business through five separate business
units, each focused on a different customer group or market segment. This
operating unit strategy provides Industrial Indemnity with a wide coverage of
the workers' compensation market, from small employers to large self-insureds.
The business units are described below.

California Franchise and Western States: The California Franchise and
Western States units of Industrial Indemnity (representing 42% and 51%,
respectively, of the 1995 net premium written by Industrial Indemnity) focus on
"franchise" employers with 100 to 10,000 workers which generate annual premium
of $100,000 or more. These customers recognize workers' compensation as a
manageable and controllable cost of doing business and desire a choice of
risk-sharing alternatives backed by strong loss prevention and claims management
services. Industrial Indemnity provides these customers with a wide array of
risk sharing programs and outcomes based on safety, claims, and managed care
services.

The California Franchise unit initially experienced premium declines in 1995
due to continued improvement in loss experience combined with an attendant
reduction in prices, significant competition associated with the introduction of
an open rating system, and Industrial Indemnity's strict focus on maintaining
pricing discipline and risk selection. After an initial deterioration, renewal
retentions have recently improved and, since the third quarter of 1995, have
returned to levels achieved prior to the introduction of the open rating system.
In addition, new business production improved after an initial decline in the
first half of 1995.

Industrial Indemnity's Western States unit is currently one of the top three
private providers in Alaska, Idaho, Utah and Washington, and also has a presence
in Arizona, Colorado, Hawaii, Montana, Oregon and Texas. Industrial Indemnity
believes that it can further capitalize on market opportunities in the Western
States by leveraging its long-standing reputation, strong producer ties, and
ability to offer tailored risk management services with the requisite "local"
knowledge of the insured. Industrial Indemnity's goal is to be one of the top
three private providers in the states in which it chooses to actively build its
presence. Industrial Indemnity plans to pursue additional growth opportunities
in its existing markets, while seeking to expand geographically into the
remaining states in the western United States.

National Programs: The National Programs unit of Industrial Indemnity
(representing 7% of the 1995 net premiums written by Industrial Indemnity)
historically focused on large, nationally oriented customers. Due to competitive
market conditions and Industrial Indemnity's focus on maintaining pricing
adequacy, effective in 1996, Industrial Indemnity's two largest customers, which
together accounted for substantially all of the National Programs unit's net
premiums written in 1994 and 1995, did not renew. As a result, Industrial
Indemnity has reorganized the National Programs unit to focus not only on
national accounts, but on nationwide group and association business, as well as
franchise customers in the midwest. As part of this effort, the National
Programs unit is partnering with Coregis to provide workers' compensation
coverages to certain of Coregis's customer groups.

Employers First Insurance Company ("EFI"): EFI, which commenced operations
in April 1995 (representing less than 1% of the 1995 net premiums written by
Industrial Indemnity), was established to provide a low-cost workers'
compensation product for the underserved market segment of smaller employers
(those with two to 50 employees) that generate annual premiums below $50,000.
These policies are underwritten with standardized payment plans and less
intensive policyholder services tailored for this market segment. Industrial
Indemnity has selected California as the initial marketplace for this business
unit due to the large number of small employers, which represent an estimated
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the state's total number of businesses. Distribution is conducted on an
exclusive basis through a small number of carefully selected independent agents
located in strategic areas throughout California.

American All Risk Group ("AARG"): AARG provides third-party claims
administration on a nationwide basis. AARG is 40% owned by Industrial Indemnity.
AARG was established to address the potential merging of the workers'
compensation and healthcare industries (often referred to as "24-hour care") in
addition to traditional third-party administration services. Its primary
operating entity is American All Risk Loss Administrators ("AARLA"), a
third-party administrator. AARLA's customized claims system allows for
integrated workers' compensation, group health and disability claims, and
administration of 24-hour care. Industrial Indemnity's investment in AARG
addresses the need to offer its customers the option of unbundled claims
services, and helps Industrial Indemnity compete with group healthcare
providers.

Distribution

Industrial Indemnity distributes its products through independent agents as
well as regional and national brokers. Through its long history in the western
United States, Industrial Indemnity has identified outstanding producers and
distributes its products and services in close association with these select
producers. Sixty percent of Industrial Indemnity's business in 1995 was
generated through its top ten brokers. In 1995, approximately 90% of Industrial
Indemnity's gross premium volume was generated by producers who have worked with
Industrial Indemnity for more than 10 years.

Underwriting

Industrial Indemnity has developed a distinctive three-tier approach to
underwriting which includes: (i) determining the overall rate adequacy for each
state; (ii) formulating the relative adequacy of each job classification for
territories within each state; and (iii) reviewing each individual account using
"COMPASS." COMPASS is an on-line interactive proprietary system that creates a
structured decision framework for account review, ensures consistent application
of underwriting and pricing criteria, and maintains a growing database of
customer information. Using the COMPASS technology tools, each account is
reviewed by a production team, which establishes underwriting criteria based on
an account pricing floor and an overall "book-of-business" profit target.

Industrial Indemnity reviews both its own loss experience and insurance
bureau filings to determine loss trends. Based on the anticipated loss trend and
certain other assumptions such as overhead costs and investment yield,
Industrial Indemnity can quickly estimate an overall return on individual
accounts. Production teams are afforded considerable pricing flexibility subject
to underwriting standards and overall return objectives for specific risk
categories.

Claims

In 1994, Industrial Indemnity began its implementation of ICM, which
integrates all potential facets of a workers' compensation claim from first
report to closure, including aggressive prevention of work related illness and
injuries; medical and temporary disability management and reserving;
investigation, rehabilitation, evaluation, and negotiation; and litigation
management and subrogation. ICM is designed to drive down insureds' work related
illness and injury-related costs and effectively and efficiently manage medical
care and disability for their injured employees.

Complementing the ICM management process, Industrial Indemnity has
reorganized its claims staff into teams of claims specialists to more
effectively address changes in the medical and disability cost management
environment. Each claims team includes a team leader, medical-specialty
technicians, dispute-specialty technicians, paratechnicians, and
nurse-clinicians. As part of ICM, nurses direct temporary disability and medical
management of the majority of Industrial Indemnity's lost-time cases. When
formal rehabilitation plans are required, Industrial Indemnity's medical and
disability nurses reach agreement with injured workers and employers on cost
effective plans for job accommodation, skill training and placement.

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As part of ICM, Industrial Indemnity is making a major investment in
technology to provide a competitive advantage by increasing the effectiveness
and efficiency of ICM. The technology project is driven by Industrial
Indemnity's need for improved information, as well as on-line access for
real-time management of risk and losses. As a result, Industrial Indemnity is in
the process of automating and integrating injury prevention and post-loss
medical, disability and litigation management into one seamless system. These
new risk management software applications are (i) the Claims Management System
("CMS") to be used by all Industrial Indemnity employees involved in servicing
claims, and (ii) the Customer Information Sharing ("CIS") to be used by
customers of Industrial Indemnity. These are flexible systems for directly
accessing and managing workers' compensation claims, including financial, legal
and rehabilitation information.

During 1994, Industrial Indemnity contracted for the purchase and
implementation of ICM software from Filoli Information Systems Company, an
insurance software development company in which Talegen Holdings owned a 78%
interest as of March 31, 1996 on a fully diluted basis. Industrial Indemnity
expects the software applications to be used in conjunction with the ICM process
to be completely implemented in early 1997. However, there can be no assurance
that the implementation of such software will be successfully completed or that
significant cost overruns and/or delays will not occur.

Competition

Industrial Indemnity's competition includes specialty workers' compensation
insurers such as Zenith National Insurance Corporation and California
Compensation Insurance Group and some national insurers including American
International Group, Liberty Mutual Insurance Companies, CNA Financial
Corporation and Fireman's Fund Insurance Companies. Competitors also include
state workers' compensation funds.

WESTCHESTER SPECIALTY

General

Westchester Specialty, with 1995 net premiums written of $152 million,
underwrites umbrella, excess casualty and specialty property business coverages.
Westchester Specialty principally focuses on excess and surplus lines business
which are either difficult to place or which have complex risk profiles
requiring greater underwriting and claims expertise than that generally found in
the standard market. The markets in which Westchester Specialty competes are
subject to significant cycles of fluctuating capacity and related wide
disparities in price adequacy. Consequently, Westchester Specialty's strategy is
to grow when conditions are favorable for a particular product line and to
reduce its writings and preserve capital when competitive pricing prevents
adequate returns on the risks insured.

To maintain the quality of its insured profile, Westchester Specialty sets
strict underwriting and pricing guidelines and has established a structure which
allows for successful controls of risk quality, underwriting documentation and
use of policy limits, terms, and conditions. Adherence to this underwriting
philosophy has led to a declining book of casualty business as the number of
profitable underwriting opportunities for such policies have decreased in a
prolonged soft market. Conversely, the specialty property market has offered
opportunities for profitable growth in recent years, and Westchester Specialty
has significantly increased its writing of property business. While the
specialty property book of Westchester Specialty has historically been smaller
than the casualty book, this mix is expected to reverse in 1996 following a
number of years of declining casualty business and a growing property book.
Westchester Specialty's market is highly cyclical and as a result, management
emphasizes the continual review of its market conditions to identify trends and
opportunities to underwrite attractive coverages, as well as to locate
additional distribution channels.

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Due to the cyclical nature of its business, Westchester Specialty maintains
a flexible expense structure with a low fixed-cost element to enable Westchester
Specialty to be responsive to changes in market conditions. An integral part of
Westchester Specialty's operating strategy is to maximize the efficiency and
effectiveness of its operations and achieve an overall reduction in operating
costs. This strategy led to the initiation of an underwriting project aimed at
streamlining underwriting activities throughout Westchester Specialty and a
review of all expenditure categories to achieve cost savings. In addition,
investments in technology will focus on enhancing and integrating various
existing systems to allow greater access to information and increased
effectiveness in its underwriting and processing operations.

Products and Markets

Within its casualty business, which accounted for 51% of Westchester
Specialty's 1995 net premiums written, Westchester Specialty specializes in
writing umbrella and excess liability products. These products provide coverage
over an underlying insurance program of at least $1 million. The majority of
Westchester Specialty's casualty business is written to provide coverage in
excess of underlying limits of between $1 million and $2 million. Within the
casualty segment, Westchester Specialty provides products that are within the
first $25 million of coverage. Westchester Specialty believes this approach
affords greater control over the terms, conditions and pricing of a total excess
liability program. The average annual premium for Westchester Specialty's
casualty book is approximately $65,000 per policy.

Westchester Specialty focuses on medium-sized to large accounts with a
moderate risk profile, primarily in manufacturing, construction and
service/retail businesses. Westchester Specialty's casualty business has been
negatively impacted by the continuing soft casualty market due to a large amount
of capacity entering the market. Westchester Specialty's disciplined
underwriting focus has led it to significantly reduce its casualty business over
the past few years in the face of these conditions. Because Westchester
Specialty writes coverage exclusively for commercial accounts, it is not subject
to state regulations requiring the continuation of coverage once it decides to
withdraw from a particular market.

Within its property business, which accounted for 49% of Westchester
Specialty's 1995 net premiums written, Westchester Specialty's coverages include
fire, allied lines, inland marine, and commercial multi-peril, primarily to
manufacturing entities, state and municipal governments and the hotel industry.
The average annual premium for Westchester Specialty's property book is
approximately $30,000 per policy.

Westchester Specialty's property emphasis is on larger or more complex
accounts, however, it also participates in a large number of national accounts,
state and municipal properties, as well as accounts with high deductibles.
During the last three years, Westchester Specialty has taken advantage of market
restrictions for catastrophe coverages to profitably grow its property book.
Following Hurricane Andrew in 1992, some insurance companies exited the
catastrophe market and others reduced their exposures, a trend that was
furthered by the 1994 Northridge earthquake.

Distribution

Westchester Specialty distributes its insurance products through a limited
group of wholesale brokers with whom it has developed long-term relationships.
Westchester Specialty believes that the match between its expertise and that of
its wholesalers is one of the key reasons wholesalers place business with
Westchester Specialty. In addition, because most wholesalers deal with a large
number of retailers, Westchester Specialty believes that wholesalers provide
access to more business than it could otherwise attract. Westchester Specialty
also believes that focusing its marketing efforts on wholesalers results in a
lower fixed-cost structure. Westchester Specialty is focused on developing new
strategies with its existing wholesaler base because the umbrella market share
of wholesalers is declining.

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<PAGE>
Westchester Specialty currently utilizes a total of approximately 75
wholesale brokers across the United States. It writes most of its premiums,
however, with a limited number of wholesalers with which it seeks to establish
mutually significant relationships. Westchester Specialty's top ten producers
accounted for 63% and 74% of Westchester Specialty's property and casualty
direct premium volumes in 1995, respectively.

Underwriting

Operating in a market in which capacity and price adequacy for its products
can change dramatically, Westchester Specialty's underwriting strategy is to
employ consistent, disciplined pricing and risk selection in order to maintain
an attractive book of business. Management's priority is to ensure that criteria
for risk selection are closely adhered to by its underwriting professionals and
to maintain sufficient experience and expertise in its underwriting staff.
Westchester Specialty's underwriting professionals average 14 years of
professional experience for the casualty line of business and 16 years for the
property line.

Westchester Specialty has the ability to write business on an admitted basis
(filed forms and rates with state insurance regulators) and on a non-admitted,
or surplus lines basis (flexible forms and rates not filed with state insurance
regulators). Having access to a non-admitted carrier allows quicker access to
markets and provides the flexibility to write non-standard coverages.

Westchester Specialty's catastrophe management strategy is to maximize
attractive premium writings in designated windstorm paths and earthquake zones.
Through its use of sophisticated exposure modeling tools, Westchester Specialty
analyzes potential exposure scenarios and then selects risks that offer strong
returns based on such models and individual risk characteristics. For a
discussion on catastrophe exposure management, see "Reserves and Risk
Management--Current Reinsurance Programs."

Claims

The claims-handling process is critical to Westchester Specialty given that
its umbrella and specialty property coverages are written on an excess basis. As
a result, losses arise from significant events that tend to present complex
claim issues. Although the claims volume at Westchester Specialty is
historically low, casualty claims may involve injuries or damages that amount to
more than $1 million.

Westchester Specialty's claims professionals average over 15 years of claims
handling experience. Westchester Specialty believes that this level of
experience provides it with stability and consistency in its claims handling
process. As of December 31, 1995, Westchester Specialty employed 23 casualty
claims handlers and 6 property claims handlers. At year-end 1995 there were
3,728 open non-environmental casualty claims being handled by Westchester
Specialty's casualty claims professionals. In contrast, Westchester Specialty's
property claims professionals have a total of 618 open claims.

Like Crum & Forster, the asbestos, environmental and other latent exposure
claims arising from policies issued by Westchester Specialty are subcontracted
to Envision. Envision is staffed by claim handlers trained to manage specialized
coverage and coordination issues that arise in environmental and other latent
exposure claims. Because of the special nature of environmental and other latent
exposure claims, Envision has developed an "account" management approach by
which a particular "account" will have included in it all the environmental and
latent exposure claims made against a particular insured, without regard to
policy period or type of claim made. Westchester Specialty has approximately 535
accounts under management by Envision.

77
<PAGE>
Competition

Westchester Specialty's main competitors in the casualty business include
American International Group, Chubb Group, Royal Insurance Group and
Travelers/Aetna Property Casualty Corp. Westchester Specialty's main competitors
in the property business include Royal Insurance Group, American International
Group, Commonwealth General Insurance Group, St. Paul Companies and ITT Hartford
Insurance Group.

SERVICE COMPANIES

The following subsidiaries and significant investments of Talegen Holdings
provide important services to Talegen.

Apprise Corp.

Apprise Corp. ("Apprise") specializes in supplying information technology
services to property and casualty insurers. Apprise's customers include
affiliated and nonaffiliated insurance companies as well as insurance-related
service companies. Apprise offers a full range of information technology
services including consulting, software development and maintenance, data center
processing and the management of complex data networks. Apprise is applying its
experience in insurance applications and process reengineering to the growing
field of professional consulting, primarily focusing on client-server platforms
and the integration of third-party products and services.

Infocus Employee Services, Inc.

Infocus Employee Services, Inc. ("Infocus") provides human resource support
services to Talegen Holdings and the Operating Groups through the application of
information technology tools, including payroll and benefits administration,
data management, and human resources consulting. Infocus was established as a
separate company effective January 1, 1996, utilizing operations and personnel
formerly part of Apprise and Talegen Holdings. Infocus was created to provide
its services to Talegen, and to address what is believed to be an underserved
market for its tailored services. Through its integrated payroll and human
resource administration system, Infocus has the ability to interface with
multiple third-party vendors and is implementing a marketing effort to attract
unaffiliated customers.

Talegen Properties, Inc.

Talegen Properties, Inc. ("Talegen Properties") holds two real estate
properties for sale that previously were held jointly among certain of the
Insurance Companies. The combined book value of these two properties was less
than $3 million at December 31, 1995. Talegen Properties also holds assigned
leases on two New Jersey properties, one of which is being leased to an
unaffiliated company.

Filoli Information Systems Company

Filoli Information Systems Company ("Filoli") develops integrated claims,
underwriting, and customer services software for the property and casualty
insurance industry. During 1994, Industrial Indemnity contracted with Filoli for
the purchase and implementation of software in conjunction with Industrial
Indemnity's new comprehensive claims management process. Through a combination
of insurance and information systems expertise, management believes Filoli is
one of the few information companies in the industry that designs client
server-based software that provides a single, fully integrated database for all
insurance activities. Talegen owned 78% of the capital stock of Filoli as of
March 31, 1996 on a fully diluted basis.

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<PAGE>
INVESTMENTS AND INVESTMENT POLICY

The Insurance Companies liquidated their investment portfolios in 1992 to
assist in obtaining regulatory approval for the Talegen Restructuring. After the
Talegen Restructuring, Talegen engaged in limited reinvestment activities and,
to assist in the sale of Talegen, again liquidated its investment portfolio in
1995. As of March 31, 1996, Talegen had total investments and cash of $6,327
million which were principally invested in cash and short-term investments. As
part of the Acquisition and prior to the Closing, XFSI will replace certain
promissory notes and real estate assets of the Insurance Companies with $468
million of cash that Talegen will use to increase the investment portfolio of
the Insurance Companies. With its ownership situation resolved, Talegen will
implement an investment strategy consistent with the duration of its liabilities
and designed to maximize after-tax investment income within acceptable risk and
volatility criteria. Talegen's strategy will be to invest principally in a
portfolio of high-quality marketable fixed income securities with an average
rating for the portfolio of "A" or better, while maintaining sufficient
investments in highly liquid, short-term securities to provide for immediate
cash requirements. Talegen, like other insurance companies, must comply with
applicable laws and regulations that prescribe the type, quality and
concentration of investments. In general, these laws and regulations permit
investments, subject to certain limits and qualifications, in federal, state,
and municipal obligations, corporate bonds, preferred and common equity
securities, real estate mortgages and real estate.

The finance committees of the Intermediate Holding Companies oversee
investments and establish investment policies and guidelines on behalf of the
Insurance Companies. At March 31, 1996, the combined carrying value of Talegen's
investment portfolio was $6,312 million. Fixed income investments accounted for
$1,147 million or 18.2% of the portfolio, while short-term investments accounted
for $5,157 million or 81.7% of the portfolio. The remaining $8 million, or 0.1%,
was invested in common stocks. Of the fixed income investments, 95.6% were
invested in bonds rated "A" or higher and approximately 75.2% were invested in
bonds rated "Aaa." The average duration of the combined fixed income and
short-term investment portfolios was 0.92 years. The combination of
non-investment grade and non-rated securities totaled $50 million, representing
4.4% of Talegen's investment portfolio as of March 31, 1996. The high percentage
of short-term investments in Talegen's investment portfolio reflects the
liquidation of the portfolio to assist in the sale of Talegen. The following
tables set forth information regarding the investments of Talegen.

The table below reflects the average amount of combined investments, net
investment income earned and the yield thereon for the Operating Groups for the
years ended December 31, 1993, 1994 and 1995 and the three months ended March
31, 1996.

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- ---------------
1993 1994 1995 1996
------ ------ ------ ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Average investments (at fair value)................. $5,881 $5,968 $6,137 $ 6,300
Net investment income(1)............................ $ 250 $ 282 $ 321 $ 81
Average yield(1).................................... 4.25% 4.73% 5.23% 5.14%(2)
Average tax equivalent yield(1)..................... 4.32% 5.07% 5.25% 5.16%(2)
</TABLE>

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

(1) Excluding realized and unrealized investment gains and losses, and rental
income.

(2) Annualized.

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<PAGE>
The following table summarizes, by type, the combined investments of Talegen
at December 31, 1995 and March 31, 1996 (on the basis of estimated fair value).
See Note 3 of Notes to the Consolidated Financial Statements of Talegen for
additional information regarding the investments by type.

<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT MARCH 31, 1996
----------------------------- ------------------------
ESTIMATED PERCENT OF ESTIMATED PERCENT OF
FAIR VALUE PORTFOLIO FAIR VALUE PORTFOLIO
--------------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Fixed Maturities:
U.S. government and government agency bonds...... $ 590 9.2% $ 604 9.6%
State, municipalities and political
subdivisions.................................... 53 0.8 37 0.6
Mortgage-backed securities....................... -- -- 259 4.1
Corporate debt securities........................ 5 0.1 247 3.9
Common stocks...................................... 7 0.1 8 0.1
Short-term investments............................. 5,779 89.8 5,157 81.7
------- ----- ---------- -----
Total investments............................ $ 6,434 100.0% $6,312 100.0%
------- ----- ---------- -----
------- ----- ---------- -----
</TABLE>

The following table sets forth the contractual maturity distribution of
Talegen's fixed maturity investment portfolio at December 31, 1995 and March 31,
1996.

<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT MARCH 31, 1996
------------------------ ------------------------
ESTIMATED PERCENT OF ESTIMATED PERCENT OF
FAIR VALUE PORTFOLIO FAIR VALUE PORTFOLIO
---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Contractual Maturity:
Within one year................................... $ 575 88.7% $ 450 39.2%
After one year but within five years.............. 26 4.0 102 8.9
After five years but within ten years............. 13 2.0 301 26.2
After ten years................................... 34 5.3 294 25.7
---------- ----- ---------- -----
Total fixed maturity investments.............. $ 648 100.0% $1,147 100.0%
---------- ----- ---------- -----
---------- ----- ---------- -----
</TABLE>

The following table indicates the composition of Talegen's fixed maturity
investment portfolio by Moody's ratings as of December 31, 1995 and March 31,
1996:

<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT MARCH 31, 1996
------------------------ ------------------------
ESTIMATED PERCENT OF ESTIMATED PERCENT OF
FAIR VALUE PORTFOLIO FAIR VALUE PORTFOLIO
---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Moody's Rating:
Aaa............................................... $ 603 93.0% $ 863 75.2%
Aa................................................ 14 2.2 45 3.9
A................................................. 1 0.2 189 16.5
---------- ----- ---------- -----
Total investment grade........................ 618 95.4 1,097 95.6
Non-investment grade (1).......................... 30 4.6 50 4.4
---------- ----- ---------- -----
Total fixed maturity investments.............. $ 648 100.0% $1,147 100.0%
---------- ----- ---------- -----
---------- ----- ---------- -----
</TABLE>

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

(1) Includes investments not rated by Moody's.

The National Association of Insurance Commissioners ("NAIC") also has a bond
rating system. The NAIC assigns securities to classes called NAIC "designations"
that are used by insurers when preparing their annual statements. The NAIC
assigns designations to publicly traded as well as privately placed securities.
The designations assigned by the NAIC range from class 1 to class 6, with a
rating in class 1 being the highest quality. The following table indicates the
composition of the fixed

80
<PAGE>
maturity investment portfolio of Talegen by NAIC designations as of December 31,
1995 and March 31, 1996.

<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT MARCH 31, 1996
------------------------ ------------------------
ESTIMATED PERCENT OF ESTIMATED PERCENT OF
FAIR VALUE PORTFOLIO FAIR VALUE PORTFOLIO
---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
NAIC Rating:
Class 1........................................... $ 620 95.7% $1,127 98.2%
Class 2........................................... 0 0.0 8 0.7
Class 3........................................... 3 0.5 3 0.3
Class 4........................................... 15 2.3 0 0.0
Class 5........................................... 0 0.0 0 0.0
Class 6........................................... 10 1.5 9 0.8
---------- ----- ---------- -----
Total fixed maturity investments.............. $ 648 100.0% $1,147 100.0%
---------- ----- ---------- -----
---------- ----- ---------- -----
</TABLE>

Talegen utilizes the investment management services of American Re Asset
Management, Inc. ("ARAM") pursuant to investment management agreements between
ARAM and each of the Insurance Companies. ARAM is an investment advisor
registered under the Investment Advisers Act of 1940 and is also a registered
broker-dealer. Pursuant to these agreements, ARAM invests new funds and
reinvests income from the Insurance Companies' investment portfolios in
investments in accordance with investment guidelines established by the
Insurance Companies, and provides administrative and reporting services
incidental to such investments. The investment management agreements are
terminable by the Insurance Companies with 30 days prior notice. ARAM receives
fees for its investment management services based on the market value of the
managed assets. See "Certain Interests in the Acquisition and Related
Transactions."

RATINGS

Insurance companies are rated by rating agencies to provide both industry
participants and insurance consumers with meaningful information on specific
insurance companies. Higher ratings generally indicate financial stability and a
strong ability to pay claims. These ratings are based upon factors relevant to
policyholders and are not directed toward protection of investors. Such ratings
are neither a rating of securities nor a recommendation to buy, hold or sell any
security. Ratings focus on the following factors: capital resources, financial
strength, demonstrated management expertise in the insurance business, credit
analysis, systems development, marketing, investment operations, minimum
policyholders' surplus requirements and capital sufficiency to meet projected
growth, as well as access to such traditional capital as may be necessary to
continue to meet standards for capital adequacy.

The following table summarizes the current Best Rating by A.M. Best and
claims-paying ability rating by Standard & Poor's for the Insurance Companies in
each Operating Group, as well as the expected rating after the consummation of
the Acquisition and the Financings. In January 1996, following the announcement
of the Acquisition, A.M. Best and Standard & Poor's placed the ratings of the
Insurance Companies on creditwatch with negative implications. As a result of
the Acquisition and the Financings, A.M. Best has indicated that the Best Rating
of the Insurance Companies will be lowered one level after the Closing from "A
(Excellent)," the third highest out of fifteen rating levels established by A.M.
Best, to "A- (Excellent)" which is A.M. Best's fourth highest rating. The
Company does not believe that such downgrade by A.M. Best will have a material
adverse effect on its business.

<TABLE>
<CAPTION>
BEST
DATE EXPECTED S&P DATE
OPERATING GROUP BEST RATING RATED COMMENT RATING RATING RATED COMMENT
- -------------------- -------------- -------- ----------- --------------- ------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
rating rating
Coregis............. A (Excellent) 5/22/95 reaffirmed A- (Excellent) A 9/15/95 affirmed
rating rating
Crum & Forster...... A (Excellent) 4/3/95 upgraded A- (Excellent) A 11/10/95 affirmed
Industrial rating rating
Indemnity........... A (Excellent) 5/22/95 reaffirmed A- (Excellent) A+ 9/15/95 affirmed
Westchester rating rating
Specialty........... A (Excellent) 5/22/95 reaffirmed A- (Excellent) A- 10/18/95 downgraded

</TABLE>

81
<PAGE>
EMPLOYEES

As of March 31, 1996, Talegen employed 3,866 persons. None of these
employees is represented by a labor union and Talegen and its subsidiaries
consider their employee relations to be good.

PROPERTIES

Talegen Holdings leases approximately 20,630 square feet of space in
Seattle, Washington for its operations.

Coregis leases approximately 65,651 square feet of space in Chicago,
Illinois for its principal office operations. Coregis also leases office space
in five other states for its branch office operations.

Crum & Forster leases approximately 124,525 square feet of space in
Morristown, New Jersey for its principal office operations. Crum & Forster also
leases office space in twenty other states for its regional office operations.

Industrial Indemnity leases approximately 93,216 square feet of space in San
Francisco, California for its principal office operations. Industrial Indemnity
also leases additional office space in California and in eleven other states in
connection with its operations.

Westchester Specialty leases approximately 96,340 square feet of space in
Atlanta, Georgia for its principal office operations. Westchester Specialty also
leases office space in California in connection with its field operations.

Apprise leases approximately 70,930 square feet of space in Parsippany, New
Jersey and 45,240 square feet of space in Morristown, New Jersey for its
operations.

Infocus leases approximately 7,867 square feet of space in Parsippany, New
Jersey for its operations.

Talegen believes that its office space is adequate for its current needs.
Talegen will enter into new leases to meet future needs as such needs arise and
general market conditions permit.

LITIGATION

In the ordinary course of business, the Insurance Companies receive claims
asserting alleged injuries and damages from asbestos-related, environmental and
other latent exposures. As a result of these claims, Talegen Holdings and the
Insurance Companies review reserve positions, reserving techniques and
reinsurance recoverables. In each of these areas of exposure, the Insurance
Companies litigate individual cases when appropriate and endeavor to settle
other claims on favorable terms.

As shown in "Reserves and Risk Management--Asbestos-Related, Environmental
and Other Latent Exposures," a significant amount of paid claims relate to
claims associated with Farm & Home Savings Association ("Farm & Home"), the
developer of a subdivision in Friendswood, Texas that is located close to the
Brio Superfund site. See the discussion of litigation associated with these
claims in Note 18 to Talegen's Consolidated Financial Statements included
elsewhere in this Prospectus.

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<PAGE>
RESERVES AND RISK MANAGEMENT

OVERVIEW

This ongoing emphasis and scrutiny of the adequacy of its reserves led
Talegen to perform a complete review of its balance sheet as part of the Talegen
Restructuring, establish more conservative initial reserve levels at the end of
each accident year since 1992, and to initiate significant additional reserve
testing in anticipation of the Acquisition. As a result, reserve levels were
significantly increased in 1992 and again in 1995. In 1992, Talegen strengthened
its gross and net loss and loss expense and uncollectible reinsurance reserves
by approximately $614 million. At year-end 1995, Talegen strengthened its gross
and net loss and loss expense reserves by a total of $475 million and $129
million, respectively, including an addition to the net reserve for
uncollectible reinsurance of $50 million. After consideration of reserve actions
taken throughout the year, including certain prior accident year reserve
reductions recorded by Industrial Indemnity and Coregis, total net reserve
strengthening recorded in 1995 pertaining to prior accident years amounted to
$102 million, which increased the 1995 calendar year loss and loss expense ratio
by 6.1 points.

A high management priority of Talegen is to establish adequate initial
accident year loss and loss expense reserves and to continually reevaluate loss
and loss expense reserve adequacy from prior periods. Talegen's management
believes that its actions to strengthen reserve adequacy coupled with its focus
on claims and reinsurance management will mitigate future adverse reserve
development and believes its current reserves are adequate. Given the
significant changes in Talegen's business since the mid-1980s and the
substantial changes since new management joined Talegen in 1992, the historical
patterns of internal loss reserve development may not be indicative of future
experience.

BACKGROUND

Losses from claims and related claims handling and legal expense comprise
the majority of costs from providing insurance products. Therefore, unpaid
losses and loss expenses are generally the largest liabilities on a property and
casualty insurer's balance sheet. However, because insurance coverage is
provided for situations in which the certainty of loss cannot be predicted,
ultimate losses which will be incurred on policies issued are difficult to
estimate and are subject to reevaluation as new information becomes available
and as new techniques are developed to analyze available data. Talegen, like
most insurance companies, utilizes a variety of loss trending and analysis
techniques to estimate anticipated ultimate losses and the time frames in which
claims are likely to be reported and paid. Loss development patterns vary
significantly by type of insurance coverage and are affected by the economic,
social, judicial, weather-related and geological conditions in different
geographic areas.

In order to moderate the potential impact of unusually severe or frequent
losses, the Insurance Companies cede (i.e., transfer) through reinsurance
mechanisms a portion of their gross policy premiums to reinsurers in exchange
for the reinsurer's agreement to share a portion of the covered losses. Although
the ceding of insurance does not discharge the Insurance Company from its
primary liability to its policyholder, the reinsurer that accepts the risk
assumes an obligation to the Insurance Company. The Insurance Company retains a
contingent liability with respect to reinsurance ceded to the extent that the
reinsurer might not be able to meet its obligations. The net liability retained
by the Insurance Companies on individual risks varies by product and by the
nature of the risk. Insured liabilities can be reinsured either by treaty,
wherein reinsurers agree in advance to provide coverage above retained limits or
for a specified percentage of losses attributable to specific products, or by

83
<PAGE>
facultative arrangements, wherein reinsurance is provided for individual risks
based on individual negotiations. See "--Use of Reinsurance."

Reserves are established by Talegen to provide for the estimated level of
claim payments which will be made under the policies it writes. Over the policy
period, as premiums are earned, a portion of the premiums is set aside as gross
loss and loss expense reserves for IBNR losses in anticipation of claims which
will be incurred, net of anticipated salvage and subrogation. IBNR reserves also
include amounts to supplement case reserves, when established, to provide for
potential further loss development. In addition, gross reserves are established
for internal and external loss expenses associated with handling the claims
inventory. These expenses are characterized as allocated loss expenses when they
are attributable to a specific claim or series of claims and unallocated loss
expenses when not similarly attributable. When a claim is reported, case
reserves are established on the basis of all pertinent information available at
the time. Legal defense costs that can be assigned to a related claim file and
can be included as part of the loss under the contract are generally established
as part of the gross case reserve. Reinsurance recoverables on gross reserves
are recorded for amounts that are anticipated to be recovered from reinsurers
and are determined in a manner consistent with the liabilities associated with
the reinsured policies. Net reserves are gross reserves less anticipated
reinsurance recoverables (net of uncollectible reinsurance) and salvage and
subrogation on those reserves.

The effect of inflation on gross reserves is implicitly considered when
estimating the liability for unpaid losses and loss expenses. The effect of
inflation on individual case basis reserves reflects the direction of economic
price levels as they affect the individual claims being reserved. Estimates of
the ultimate value of unpaid claims are based in part on historical data that
reflect past inflation, as well as Talegen management's assessment of severity
and frequency, industry trends and related costs.

Gross and net reserves for Talegen as of December 31, 1994 and 1995 are
summarized in the following table:

GROSS AND NET RESERVES BY OPERATING GROUP
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
---------------- ----------------
<S> <C> <C> <C> <C>
GROSS NET GROSS NET
------ ------ ------ ------
Coregis................................................... $ 995 $ 724 $1,013 $ 775
Crum & Forster............................................ 2,954 2,186 3,255 2,198
Industrial Indemnity...................................... 1,446 1,258 1,309 1,096
Westchester Specialty..................................... 1,247 762 1,423 787
Ceded balances to affiliates.............................. (115) -- (77) --
------ ------ ------ ------
Total................................................... $6,527 $4,930 $6,923 $4,856
------ ------ ------ ------
------ ------ ------ ------
</TABLE>

As of March 31, 1996, Talegen's gross and net reserves were $6,904 million
and $4,848 million, respectively.

MONITORING OF INSURANCE RESERVES

Talegen closely monitors reserve requirements arising from business written
to date and adjusts carried reserves as conditions change and new information
emerges. Each of the Insurance Companies employs experienced actuarial staff
who, as Fellows of the Casualty Actuarial Society ("Fellows") and Members of the
American Academy of Actuaries, are qualified loss reserve specialists and who
perform regular actuarial reviews of claim developments and resulting reserve
requirements. In total, Talegen currently employs twelve Fellows. On a
semi-annual or more frequent basis, detailed analyses of gross reserves, ceded
reserves and reserves net of reinsurance are conducted by line of business and
accident year. Actual claims activity is monitored quarterly and compared to
expected levels to detect variances or trends indicating changes in reserve
requirements.

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<PAGE>
Talegen actuaries and senior management have monthly meetings to consider
the actuarial studies and recommendations and implement appropriate reserve
funding actions. When unique or special reserve issues are identified, Talegen
routinely seeks additional outside expertise from a variety of consulting
actuaries. In addition, at each year end, the reserves for each Insurance
Company are independently analyzed and certified to the Insurance Commissioner
of the Insurance Company's state of domicile by an outside actuary appointed by
the Insurance Company's Board of Directors.

Overall reserve levels are affected primarily by the types and amounts of
insurance coverage currently being written and the trends developing from newly
reported claims and claims which have been paid and closed. Adjustments are made
to reserves in the period they can be reasonably estimated to reflect evolving
changes in loss development patterns and various other factors. Such factors
include increased damage awards by the courts, known changes in judicial
interpretations of legal liability for asbestos-related, environmental and other
latent exposure claims, changes in judicial interpretation of the scope of
coverage provided by general liability and umbrella policies. Many of these
judicial interpretations are still evolving. Generally, the greater the
projected time to settlement, the greater the complexity of estimating ultimate
claim costs and the more likely that such estimates will change as new
information becomes available.

STATUTORY AND GAAP REPORTING OF NET UNPAID LOSSES AND LOSS EXPENSES

The liability for unpaid losses and loss expenses required by GAAP includes
various adjustments from the liability reported in accordance with SAP. Because
not all GAAP adjustments can be associated with subsequent developments of the
liabilities on other than an arbitrary basis, developments on the loss and loss
expense reserve development table are prepared in accordance with SAP.

RECONCILIATION OF GAAP AND SAP LIABILITY
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
GAAP net liability for unpaid loss and loss expenses............... $5,136 $4,930 $4,856
Reserve for uncollectible reinsurance.............................. (73) (55) (62)
Other.............................................................. (25) (19) 41
------ ------ ------
SAP liability for unpaid loss and loss expenses................ $5,038 $4,856 $4,835
------ ------ ------
------ ------ ------
</TABLE>

85
<PAGE>

LOSS DEVELOPMENT DATA

The table below presents a reconciliation of the net liability for unpaid
loss and loss expenses for each of the years in the three-year period ended
December 31, 1995.

<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net unpaid losses and loss expenses, January 1.................... $5,198 $5,136 $4,930
------ ------ ------
Incurred losses and loss expenses related to:
Current year accident losses.................................... 1,323 1,283 1,304
Prior year accident losses...................................... 4 (43) 102
------ ------ ------
Total incurred losses and loss expenses....................... 1,327 1,240 1,406
------ ------ ------
Paid losses and loss expenses related to:
Current year accident losses.................................... 269 269 343
Prior year accident losses...................................... 1,067 1,163 1,087
------ ------ ------
Total paid losses and loss expenses........................... 1,336 1,432 1,430
Other............................................................. (53) (14) (50)
------ ------ ------
Net unpaid losses and loss expenses, December 31.............. 5,136 4,930 4,856
Reinsurance recoverable........................................... 1,643 1,597 2,067
------ ------ ------
Gross unpaid losses and loss expenses, December 31............ $6,779 $6,527 $6,923
------ ------ ------
------ ------ ------
Ceded incurred losses and loss expenses........................... $ 89 $ 210 $ 731
------ ------ ------
------ ------ ------
</TABLE>

During 1995, the provision for incurred losses was increased through
strengthening of prior accident year gross unpaid loss and loss expense reserves
by $584 million, of which $382 million pertained to latent exposure reserves,
and through strengthening of uncollectible reinsurance reserves by $56 million.
After giving effect to a cession of $378 million to Ridge Re and $160 million to
other reinsurers, net unpaid losses and loss expenses were strengthened by a
total of $102 million. On an Operating Group basis, Crum & Forster and
Westchester Specialty increased their 1994 and prior accident year net loss and
loss expense reserves by $97 million and $62 million, respectively. However, due
to favorable 1994 and prior accident year loss trends, this impact was partially
offset by reductions to 1994 and prior accident year net loss and loss expense
reserves totaling $20 million at Coregis and $37 million at Industrial
Indemnity.

During 1994, the provision for incurred losses was decreased due to
reductions to 1993 and prior accident year net loss and loss expense reserves by
Industrial Indemnity resulting from improving loss experience in its principal
markets.

Talegen's GAAP reserve for unpaid loss and loss expenses, including the
reserves attributable to long-term disability payments under workers'
compensation insurance policies, have been recorded on a full value basis
without the benefit of discounting. However, long term disability claims
included in the statutory loss and loss expense reserves have been discounted
using SAP procedures and rates. The effects of such discounting are not
material.

The loss and loss expense reserve development table illustrates the
development of statutory balance sheet liabilities for 1985 through 1995. The
first line of the table is the estimated GAAP liability for unpaid losses and
loss expenses, net of reinsurance recoverable, recorded at the balance sheet
date for each year. The second line on the table reconciles the estimated GAAP
liability for unpaid losses and loss expenses to the estimated SAP liability for
unpaid losses and loss expenses. The lower section of the table shows the
updated amount of the previously recorded SAP liability based on experience as
of the close of each succeeding year.

86
<PAGE>

The estimate for unpaid losses and loss expenses is increased or decreased
as more information becomes known about the claims until all claims are settled.
Deficiencies or redundancies represent aggregate changes in estimates as
calculated on a statutory basis for all prior calendar years. These changes in
estimates have been reflected in Talegen's calendar year operating results.
Because the Insurance Companies recognize adjustments to reserves for changes in
loss development patterns and various other factors, such as social and economic
trends, known changes in judicial interpretation of legal liability and
legislative changes affecting insurance companies, in the period in which they
become known, it is not appropriate to extrapolate future redundancies or
deficiencies based solely on this table.

TALEGEN LOSS AND LOSS EXPENSE RESERVE DEVELOPMENT
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1985(1) 1986(1) 1987(1) 1988(1) 1989(1) 1990(1) 1991(1) 1992(1) 1993 1994 1995
------- ------- ------- ------- ------- ------- ------- ------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses and loss
expenses--GAAP........................ 2,684 3,156 3,697 4,089 4,581 4,910 4,926 5,198 5,136 4,930 4,856
Increase (decrease) for GAAP
adjustments........................... (112) (220) (177) (130) (116) (137) (174) (180) (98) (74) (21)
------- ------- ------- ------- ------- ------- ------- ------- ----- ----- -----
Liability for unpaid losses and loss
expenses--Statutory.................... 2,572 2,936 3,520 3,959 4,465 4,773 4,752 5,018 5,038 4,856 4,835
Paid (cumulative) as of:
One year later........................ 953 924 998 828 1,179 1,268 1,289 1,005 1,161 1,078
Two years later....................... 1,583 1,583 1,551 1,608 2,053 2,206 2,024 1,943 1,961
Three years later..................... 2,020 1,938 2,093 2,230 2,737 2,692 2,760 2,569
Four years later...................... 2,251 2,291 2,508 2,702 3,046 3,228 3,232
Five years later...................... 2,506 2,579 2,870 2,904 3,443 3,575
Six years later....................... 2,715 2,850 3,056 3,199 3,694
Seven years later..................... 2,928 2,997 3,232 3,397
Eight years later..................... 3,052 3,122 3,403
Nine years later...................... 3,153 3,261
Ten years later....................... 3,278
Liability re-estimated as of:
One year later........................ 2,585 2,841 3,652 3,996 4,607 4,775 5,233 4,987 5,030 4,976
Two years later....................... 2,893 3,316 3,754 4,097 4,476 5,192 5,129 5,038 5,114
Three years later..................... 3,135 3,405 3,900 3,906 4,922 5,043 5,206 5,071
Four years later...................... 3,272 3,641 3,716 4,338 4,800 5,119 5,224
Five years later...................... 3,493 3,461 4,143 4,238 4,905 5,113
Six years later....................... 3,390 3,850 4,107 4,363 4,900
Seven years later..................... 3,743 3,835 4,204 4,379
Eight years later..................... 3,756 3,936 4,235
Nine years later...................... 3,862 3,983
Ten years later....................... 3,911
Net (deficiency) redundancy............ (1,339) (1,047) (715) (420) (435) (340) (472) (53) (76) (120) --
End of year:
Gross liability....................... 6,471 6,391 6,753
Reinsurance recoverable............... 1,433 1,535 1,918
Net liability......................... 5,038 4,856 4,835
One year later:
Gross re-estimated liability.......... 6,735 7,022
Re-estimated reinsurance
recoverable.......................... 1,705 2,046
Net re-estimated liability............ 5,030 4,976
Two years later:
Gross re-estimated liability.......... 7,326
Re-estimated reinsurance
recoverable.......................... 2,212
Net re-estimated liability............ 5,114
Gross (deficiency) redundancy.......... (855) (631) --
</TABLE>

- ------------
(1) Gross liability information is not available for periods prior to 1993.

87
<PAGE>
ASBESTOS-RELATED, ENVIRONMENTAL AND OTHER LATENT EXPOSURES

Overview

Claims resulting from asbestos-related, environmental and other latent
exposures have provided unique and difficult challenges to the insurance
industry. Talegen, through its historical writings at Crum & Forster and
Westchester Specialty, has not been immune from the challenge of establishing
adequate loss and loss expense reserves for these difficult to quantify
exposures. The possibility that these claims would emerge was often not
contemplated at the time the policies were written, and traditional actuarial
reserving methodologies have not been useful in accurately estimating ultimate
losses.

In addition to improving its ability to analyze and record its reserve
liability in this area, Talegen has changed its claim handling approach.
Beginning in 1992, Talegen shifted from a reactive to a proactive claim
management philosophy to identify potential exposures, analyze possible
outcomes, and aggressively seek to resolve disputes with its policyholders. The
results of these efforts have been a faster disposition of claims and, in many
cases, an acceleration of claim payments compared to periods prior to 1992.
Talegen believes this change in claim handling methodology will allow it to
ultimately pay less in claims handling expenses, resolve disputes with
policyholders sooner, and ultimately result in lower loss costs.

Asbestos-related claims, which began to emerge in the 1970s, were the first
type of latent exposure to cause significant losses to the insurance industry.
Historically, the largest asbestos bodily injury claims have come from
manufacturers of asbestos because their claims have typically involved many
injured parties. Over time, many such claims have settled and the remaining
exposure has decreased. Recently, however, the frequency of asbestos claims from
non-asbestos manufacturers (i.e., suppliers and distributors of asbestos, as
well as users of asbestos products) has been increasing. Because the number of
injured parties and the severity of the injuries under these claims have been
less than with the asbestos manufacturers, the per-claim exposures have also
been less. In addition, case law has become reasonably well developed in the
asbestos bodily injury claim area.

Environmental claims were the second major type of latent exposure claims to
emerge and significantly impact the insurance industry. Environmental claims
have generally been defined by the insurance industry as loss or potential loss
related to the alleged contamination of a site from operations on the site,
waste disposal or other causes. Examples of environmental exposure include
possible damages resulting from chemical waste, hazardous waste, industrial
waste disposal facilities, landfills, toxic waste pits and underground storage
tanks. Inconsistent federal and state case law and uncertainty with respect to
Superfund reform have compounded the industry's difficulties in adequately
assessing these complex exposures, although case law continues to develop on a
state-by-state basis and may reduce uncertainty in this area.

Prior to 1995, the Insurance Companies established case and IBNR reserves
for asbestos bodily injury and environmental claims that had been reported. The
IBNR reserves were established primarily to cover adverse development on known
claims. Case reserves have been and continue to be determined by a specialized
claim and legal staff. Building on methodologies first published in the third
quarter of 1994 by the Casualty Actuarial Society and utilizing data from
policyholders and third parties, such as the Environmental Protection Agency,
Talegen was able to create and implement comprehensive reserving methodologies
in 1995 to provide estimates of ultimate losses for asbestos bodily injury and
environmental exposures. These reserving methodologies, Talegen believes, are
among the most sophisticated in the property and casualty industry and during
1995 were evaluated by internal and external actuarial and claims professionals
knowledgeable in the latent exposure field. The results of this effort supported
a strengthening of asbestos bodily injury gross reserves of $190 million and
strengthening of environmental gross reserves of $160 million at year end 1995.

88
<PAGE>
Other latent exposures include claims related to asbestos-in-building,
repetitive stress, chemical exposure and surgical breast implants, as well as
other exposures where the possibility of such claims arising was not
contemplated when the policies were written. Reserves are established for other
latent exposures as they become known to the Insurance Companies and as
information becomes known to estimate reserve needs adequately.

In 1985, Talegen established a stand-alone unit to handle asbestos-related,
environmental and other latent exposure claims centrally. This unit has evolved
into Envision, a separate service company that is now a part of TRG. The
objectives of Envision are to bring expertise to this highly specialized area,
promote consistency in claim administration and reserving practices, and to
judiciously work through and close such claims on behalf of TRG and the
Insurance Companies. Envision has made a significant investment in technology
and has upgraded its staff to provide its customers with what Talegen believes
to be among the most sophisticated tools to analyze and resolve these difficult
and volatile claims.

As judicial patterns emerge through the appellate process and remove
uncertainties related to asbestos-related, environmental and other latent
exposures, additional liabilities and reinsurance recoverables could arise.
Total reserves for asbestos bodily injury, environmental and other latent
exposures as of December 31, 1995 are as follows:

RESERVES BY LATENT EXPOSURE
CATEGORY (1)

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
--------------------------------------------------------
ASBESTOS OTHER
BODILY LATENT
INJURY ENVIRONMENTAL EXPOSURES TOTAL
------------ ------------ ----------- ------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- --- ----- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Coregis (2)..................................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Crum & Forster.................................. 201 123 177 126 60 40 438 289
Industrial Indemnity (2)........................ 0 0 0 0 0 0 0 0
Westchester Specialty........................... 87 50 59 48 56 2 202 100
----- ---- ----- ---- ----- --- ----- ----
Total..................................... $ 288 $173 $ 236 $174 $ 116 $42 $ 640 $389
----- ---- ----- ---- ----- --- ----- ----
----- ---- ----- ---- ----- --- ----- ----
</TABLE>

- ------------
(1) Included are case, IBNR and allocated loss expense reserves. Net latent
exposure reserves have not been reduced for recoverables from Ridge Re
because the Ridge Re reinsurance contracts are aggregate excess of loss
contracts covering all lines of business for the Insurance Companies. See
"--Use of Reinsurance" and Note 6 to Talegen's 1995 Consolidated Financial
Statements.

(2) Asbestos and environmental exposures for Coregis are not significant
primarily because 1987 was the first year substantial business volume was
written by the Coregis Insurance Companies and because liability policies
since that period have generally excluded coverage for asbestos and
environmental claims. In addition, the Industrial Indemnity Insurance
Companies have received few latent exposure liability claims because they
primarily underwrite workers' compensation coverages. Although occupational
injuries, in certain instances, have been associated with asbestos and other
latent exposures, Talegen does not classify related workers' compensation
reserves as latent exposure reserves.

Talegen does not believe that liabilities associated with incurred asbestos
bodily injury and environmental claims will have a material adverse effect on
its future liquidity or financial position. With respect to other latent
exposures, because of the relatively low amount of cumulative net loss and
allocated loss expense payments, the reserves established for identified claims,
and the relatively low number of open claims, Talegen also does not expect that
liabilities associated with incurred claims in these latent exposure areas will
have a material adverse effect on its future liquidity or financial position.
However, given the complexity of coverage and other legal issues, and the
significant assumptions used in estimating such exposures, actual results could
significantly differ from Talegen's current estimates.

89
<PAGE>
The following is a discussion of the historical claim development and other
pertinent information for each latent exposure area. It is Talegen's policy not
to disclose established case reserves on specific claims.

Asbestos Bodily Injury Exposures

The following table sets forth gross and net unpaid loss and loss expense
reserve information related to asbestos bodily injury claims of the Insurance
Companies:

ASBESTOS BODILY INJURY
RESERVE INFORMATION

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1992 AND ----------------------------------------
PRIOR
PERIODS 1993 1994 1995
----------- ----------- ----------- ------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ----- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
In total:
Beginning case reserves....................... $ 0 $ 0 $ 89 $ 4 $61 $24 $ 58 $ 27
Claim payments (recoveries)................... 86 29 47 9 14 (4) 16 11
Case incurred losses.......................... 175 33 19 29 11 (1) 34 11
----- --- ----- --- ----- --- ----- ----
Ending case reserves.......................... $ 89 $ 4 $ 61 $24 58 27 76 27
IBNR/Allocated loss expense reserves (1)...... n/a n/a n/a n/a 38 24 212 146
----- --- ----- --- ----- --- ----- ----
Total reserves (1)............................ n/a n/a n/a n/a $96 $51 $ 288 $173
Allocated loss expenses payments
(recoveries)................................. $ 48 $33 $ 1 $(12) $10 $18 $ 10 $ 9
</TABLE>

- ------------
(1) Beginning in 1994, IBNR/Allocated loss expense reserves have been allocated
to certain claim categories; prior to 1994, similar allocations were not
made, thus the data for 1993 and prior years has been marked as not
available (n/a) in the table.

The following claim count table reflects the progress made in reducing the
overall number of asbestos bodily injury claims. Although it is difficult to
estimate when the pending asbestos bodily injury claims will be closed, the
overall inventory of such claims has been declining. From a historical
perspective, of the total open claims at the end of 1991, approximately 64% had
been closed as of December 31, 1995.

ASBESTOS BODILY INJURY
CLAIM COUNT INFORMATION

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1993 1994 1995
---- ---- ----
(IN UNITS)
<S> <C> <C> <C>
Beginning of period number of open claims (1).............................. 563 524 459
Number of claims opened.................................................... 142 172 204
Number of claims closed.................................................... 181 237 278
---- ---- ----
End of period number of open claims (1).................................... 524 459 385
</TABLE>

- ------------
(1) An open claim is counted for each insured, claim type and Operating Group
where the insurer has been notified of a potential loss. Thus, if an insurer
had a policyholder with environmental claims covering two policy years and
asbestos claims covering two policy years, there would be a claim count of
two associated with the policyholder's insurance contract (one environmental
and one asbestos claim).

90
<PAGE>
The following table displays the distribution of opened, closed, and end of
period asbestos bodily injury claims as of and for the year ended December 31,
1995 by type of insured.

ASBESTOS BODILY INJURY
ANALYSIS OF 1995 CLAIMS BY INSURED CATEGORY

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------
INSUREDS
WITHOUT
SUPPLIERS AND PRODUCTS
MANUFACTURERS (1) DISTRIBUTORS EXPOSURE (2) TOTAL
----------------- ------------- ------------ -----
(IN UNITS)
<S> <C> <C> <C> <C>
Number of claims opened.......................... 47 87 70 204
Number of claims closed.......................... 79 108 91 278
Distribution of ending opened claims............. 132 155 98 385
</TABLE>

- ------------
(1) This category includes manufacturers of asbestos as well as manufacturers of
products containing asbestos. As of December 31, 1995, there were 5 open
claims associated with manufacturers of asbestos.

(2) This category includes insureds who never manufactured or distributed
asbestos or asbestos products but rather owned or operated property where
asbestos products were used.

Environmental Exposures

The following table sets forth gross and net unpaid loss and allocated loss
expense reserve information related to environmental claims of the Insurance
Companies.

ENVIRONMENTAL RESERVE INFORMATION

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1992 AND ---------------------------------
PRIOR
PERIODS 1993 1994 1995
----------- ----------- ----------- ------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ----- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
In total:
Beginning case reserves....................... $ 0 $ 0 $ 7 $ 7 $ 15 $13 $ 20 $ 14
Claim payments................................ 31 20 16 11 19 14 29 20
Case incurred losses.......................... 38 27 24 17 24 15 19 14
----- --- ----- --- ----- --- ----- ----
Ending case reserves.......................... $ 7 $ 7 $ 15 $13 20 14 10 8
IBNR/Allocated loss expense reserve (1)....... n/a n/a n/a n/a 93 68 226 166
----- --- ----- --- ----- --- ----- ----
Total reserves (1)............................ n/a n/a n/a n/a $ 113 $82 $ 236 $174
Allocated loss expense payments (2)........... $ 36 $31 $ 12 $12 $ 11 $10 $ 9 $ 8
</TABLE>

(2) Of the gross cumulative allocated loss expense payments, approximately 51%
pertained to litigation expenses associated with declaratory judgment
actions.

91
<PAGE>
The following claim count table reflects the progress made in reducing the
overall number of environmental claims. Although it is difficult to estimate
when existing environmental claims will close, from a historical perspective, of
the total open claims at the end of 1991, approximately 78% had been closed as
of December 31, 1995.

ENVIRONMENTAL CLAIM COUNT INFORMATION

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1993 1994 1995
----- ----- -----
(IN UNITS)
<S> <C> <C> <C>
Beginning of period number of open claims (1)......................... 2,005 1,710 1,296
Number of claims opened............................................... 537 552 648
Number of claims closed............................................... 832 966 925
----- ----- -----
End of period number of open claims (1)............................... 1,710 1,296 1,019
</TABLE>

The principal federal statute that requires cleanup of environmental damage
is CERCLA, passed in 1980. It imposes liability on "potentially responsible
parties", subjecting them to liability for cleanup costs on National Priority
List sites regardless of fault, time period and relative contribution of
pollutants. The funding authorization for Superfund expired in December 1995 and
the future of Superfund is uncertain. There are many different reform proposals
that have been put forth, most of which generally have been supported by the
insurance industry, and it is not possible to predict what effect legislative
changes or the reauthorization of Superfund will have on Talegen's future
results.

Other Latent Exposure

A diversity of claims have been filed that assert injury or loss due to
exposure to a substance or device from a prolonged period. Open claims for other
latent exposures consist of the following as of December 31, 1995:

OTHER LATENT EXPOSURES
OPEN CLAIM COUNTS (1)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------------------
ASBESTOS REPETITIVE LEAD BREAST CHEMICAL
IN-BUILDING STRESS EXPOSURE IMPLANT EXPOSURE OTHER TOTAL
----------- ---------- -------- ------- -------- ----- -----
(IN UNITS)
<S> <C> <C> <C> <C> <C> <C> <C>
50 26 55 16 179 90 416
</TABLE>

- ------------
(1) An open claim is counted for each insured, claim type and Operating Group
where the insurer has been notified of a potential loss. Thus, if an insurer
has a policyholder with a repetitive stress claim covering two policy years
and a lead exposure claim covering two policy years, there would be a claim
count of two associated with the policyholders' insurance contracts (one
repetitive stress and one lead exposure claim).

92
<PAGE>
The following table sets forth gross and net unpaid loss and allocated loss
expense reserve information related to other latent exposure claims of the
Insurance Companies, as well as additional claim count information:

OTHER LATENT EXPOSURES
RESERVE INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1992 AND ------------------------------------------
PRIOR
PERIODS 1993 1994 1995
------------ ------------- ------------ -----------
GROSS NET GROSS NET GROSS NET GROSS NET
----- ---- ------ ---- ----- ---- ----- ---
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning case reserves........................ $ 0 $ 0 $ 211 $ 97 $ 165 $104 $ 137 $39
Claim payments--Farm and Home (2).............. 223 140 54 0 19 62 44 11
Other claim payments........................... 22 13 3 3 6 3 4 2
Case incurred losses........................... 456 250 11 10 (3) 0 6 1
----- ---- ------ ---- ----- ---- ----- ---
Ending case reserves........................... $ 211 $ 97 $ 165 $104 137 39 95 27
IBNR/Allocated loss expense reserves (1)....... n/a n/a n/a n/a 27 20 21 15
----- ---- ------ ---- ----- ---- ----- ---
Total reserves (1)............................. n/a n/a n/a n/a $ 164 $ 59 $ 116 $42
Allocated loss expense payments (recoveries)... $ 10 $ 7 $ (2) $ (2) $ 2 $ 2 $ 3 $ 3
</TABLE>

- ------------
(1) Beginning in 1994, IBNR/Allocated loss expense reserves have been allocated
to certain claim categories, prior to 1994, similar allocation were not
made, thus the data for 1993 and prior years has been marked as not
available (n/a) on the table.

(2) Because the case reserves established for Farm & Home include consideration
for allocated loss expenses, the claim payments include allocated loss
expense cost for this exposure. In 1994, a portion of the net payments was
attributable to a write-off of paid loss receivables.

As shown in the preceding reserve information table, a significant amount of
paid claims relates to claims associated with Farm & Home, the developer of a
subdivision in Friendswood, Texas that is located close to the Brio Superfund
site. (See discussion of litigation associated with these claims in Note 18 to
Talegen's 1995 Consolidated Financial Statements included elsewhere in this
Prospectus.)

Exclusive of Farm & Home, other latent exposure claim payments and case
incurred losses after 1992 have not been material. In addition, as presented
below, despite an increase in the number of claims opened since 1993, an even
greater number of claims during this period have been closed, thereby reducing
the pending claims count in 1994 and 1995.

OTHER LATENT EXPOSURES
CLAIM COUNT INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1993 1994 1995
---- ---- ----
<CAPTION>
<S> <C> <C> <C>
Beginning of period number of open claims (1)............................. 660 560 495
Number of claims opened................................................... 181 241 311
Number of claims closed................................................... 281 306 390
---- ---- ----
End of period number of open claims (1)................................... 560 495 416
</TABLE>

- ------------
(1) An open claim is counted for each insured, claim type and Operating Group
where the insurer has been notified of a potential loss. Thus, if an insurer
had a policyholder with a repetitive stress claim covering two policy years
and a lead exposure claim covering two policy years, there would be a claim
count of two associated with the policyholder's insurance contract (one
repetitive stress and one lead exposure claim).

93
<PAGE>
USE OF REINSURANCE

Most of the Insurance Companies made significant use of reinsurance during
the 1970s and early 1980s. Since that time, the Insurance Companies generally
have increased the portion of business they retain while reducing the number of
reinsurers used for their reinsurance contracts. During 1994 and 1995, excluding
reinsurance ceded to pools and associations, 63% and 85%, respectively, of total
written premiums ceded to reinsurers were placed with approximately 35
high-quality reinsurers. Reinsurance recoverables, net of uncollectible
reinsurance, as of December 31, 1995, were $2.2 billion. Set forth below is a
table of the Insurance Companies' ten largest reinsurers, as ranked by net
reinsurance recoverables as of December 31, 1995. Net reinsurance recoverables
from these reinsurers totaled approximately $1.2 billion as of December 31,
1995.

TEN LARGEST REINSURERS BY NET RECOVERABLES

<TABLE>
<CAPTION>
BEST
REINSURER RATING
--------- ------
<S> <C>
Ridge Reinsurance Limited........................................................... NR (1)
International Insurance Company..................................................... B++ (2)
General Reinsurance Corporation..................................................... A++
Kemper Reinsurance Company.......................................................... A
American Re-Insurance Company....................................................... A+
St. Paul Fire & Marine Insurance Company............................................ A+
Texas Workers' Compensation Assigned Risk Pool...................................... NR
Transatlantic Reinsurance Company................................................... A+
Virginia Surety Company............................................................. A+
Everest Reinsurance Company (formerly Prudential Reinsurance Company)............... A
</TABLE>

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

NR--not rated

(1) Although Ridge Re is not rated by A.M. Best, XFSI and Xerox will enter into
a guarantee at the Closing in favor of the Insurance Companies with respect
to Ridge Re's payment obligations under the Ridge Re Treaties. All payment
obligations, including those currently in effect, are and will be secured by
irrevocable letters of credit. As of December 31, 1995, Xerox had total
assets and common shareholders' equity of $26 billion and $3.9 billion,
respectively.

(2) Represents the highest rating given by A.M. Best for an insurance company in
run-off.

Since 1992, the Insurance Companies, on an Operating Group basis, have been
parties to the Ridge Re Treaties. Pursuant to the Ridge Re Treaties, Ridge Re
has agreed to reinsure 85% of all the Insurance Companies' net losses (which
include losses and allocated loss expenses and losses from uncollectible
reinsurance, net of salvage, subrogation and other recoverables), as aggregated
on an Operating Group basis, up to the limits of the Ridge Re Treaties, for
claims made or losses occurring during the 1992 accident year and all accident
years prior thereto in excess of the Insurance Companies' Retention Amounts, as
aggregated on an Operating Group basis. As the Insurance Companies within an
Operating Group establish reserves that, in the aggregate, increase their net
losses in excess of the Retention Amounts, 85% of the amount of net losses
corresponding to such reserves is ceded to Ridge Re. When such Insurance
Companies' paid losses and allocated loss expenses (including paid losses from
uncollectible reinsurance) exceed the Retention Amounts under the Ridge Re
Treaties, Ridge Re is required to reimburse the Insurance Companies for 85% of
such net losses. As of December 31, 1995, Crum & Forster and Westchester
Specialty had ceded to Ridge Re 100% of their respective limits under the Ridge
Re Treaties, while gross reinsurance cover (exclusive of the 15% coinsurance)
totalling $100 million and $140 million remains available to Industrial
Indemnity and to Coregis, respectively. Talegen has a reinsurance recoverable
balance from Ridge Re of $404 million as of December 31, 1995, with respect to
which the relevant Insurance Companies have received irrevocable letters of
credit. In addition, XFSI and Xerox will enter into a guarantee at the Closing
in favor of the Insurance Companies with respect to Ridge Re's payment
obligations under the Ridge Re Treaties. As of December 31, 1995, Xerox had
total assets and common shareholders' equity of $26 billion and $3.9 billion,
respectively.

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<PAGE>
The following table identifies the aggregate developed losses (i.e., the
Retention Amounts plus the amount of incurred loss or benefit that has developed
on 1992 and prior accident years since January 1, 1993), the Retention Amount,
the cumulative ceded losses through December 31, 1995 and the contractual
coverage under the Ridge Re Treaties for each Operating Group.

<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------
AGGREGATE CUMULATIVE
DEVELOPED RETENTION CEDED CONTRACTUAL
LOSSES AMOUNT (1) LOSSES (2) COVERAGE (2)
--------- ---------- ---------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Coregis........................................... $ 532 $ 585 $ 0 $140
Crum & Forster.................................... $ 2,538 $2,263 $275 $275
Industrial Indemnity.............................. $ 1,207 $1,157 $ 50 $150
Westchester Specialty Group....................... $ 910 $ 755 $150 $150
</TABLE>

- ------------
(1) Retention Amounts equal the carried net unpaid losses and allocated loss
expenses and uncollectible reinsurance reserves, net of salvage, subrogation
and other recoverables, as of December 31, 1992.

(2) Cumulative ceded losses and contractual coverage amounts do not reflect the
15% coinsurance amounts (i.e., for every dollar of ceded losses the affected
Insurance Company will be able to recover eighty-five cents from Ridge Re).

TRG, which includes IIC, was established as part of the Talegen
Restructuring as a separate operating group to manage claims run-off obligations
and reinsurance collections associated with IIC's and several Talegen
discontinued books of business. The IIC reinsurance, entered into as part of the
Talegen Restructuring, was put in place to transfer discontinued books of
business from certain of the Insurance Companies to IIC. Certain of the policies
initially reinsured by IIC during the Talegen Restructuring have been novated to
IIC and additional subject policies continue to be novated to IIC as claims are
reported. Under this novation process, IIC is substituted for the ceding
Insurance Company and becomes directly liable to the primary insured. As of
December 31, 1995, IIC had gross carried reserves related to the novated
policies totalling approximately $172 million. To the extent reserves have not
yet been transferred on a direct basis, ceded unpaid loss and loss expense
reserves remain with the Insurance Companies. At December 31, 1995, the
Insurance Companies' reinsurance recoverable from IIC was $207 million. See
"Risk Factors--Collectibility of Reinsurance."

Other than the reinsurance recoverables from Ridge Re and IIC, no other
reinsurance recoverable represents more than 10% of Talegen's reinsurance
recoverables.

95
<PAGE>
CURRENT REINSURANCE PROGRAMS

Talegen has a reinsurance security committee composed of members of Talegen
Holdings's senior management who approve the reinsurers with whom the Insurance
Companies do business. The criteria under which such approvals are granted have
become increasingly restrictive over the past several years.

A comprehensive financial analysis is completed at least annually on each
approved reinsurer to assess credit quality. Additionally, the aggregate
exposure to each reinsurer is monitored quarterly. As a result of the more
restrictive guidelines, the number of approved reinsurers has been reduced from
approximately 175 in 1992 to approximately 35 high quality reinsurers in 1995.

Talegen views catastrophe and insurance risk management as an integral and
proactive segment of its overall property business strategy. Each Operating
Group is responsible for managing the exposure to adverse underwriting
developments on its own balance sheet. Talegen Holdings requires that each
Operating Group identify and define the exposures assumed through the use of
technology and external software, tabulate aggregate exposures, calculate
probable maximum loss ("PML") estimates, and develop a risk management strategy
which includes exposure caps, retention guidelines and the analytically based
purchase of catastrophe reinsurance. Talegen believes that catastrophe and risk
management enables each of the Operating Groups to identify geographic areas for
potential premium growth as well as providing a benchmark for adequate pricing
of property exposures.

The Insurance Companies purchase both treaty and facultative reinsurance to
limit the amount of risk retained. Limits and retentions on reinsurance
contracts are based on a number of factors, including the loss history of the
line of business, policy limits and exposure data, potential severity of losses,
market terms and conditions, and capacity.

The Insurance Companies limit their exposure to individual risks by
purchasing excess of loss reinsurance. The reinsurance program structure and net
retentions vary depending on the specific requirements of the line of business
or products being reinsured. In some cases, the Insurance Companies purchase
additional facultative reinsurance to increase capacity or to further reduce
their retentions.

As of March 31, 1996, subject to contractual limits, the net retention per
occurrence for a casualty risk is $1 million for Coregis, $6 million for Crum &
Forster, $2 million for Industrial Indemnity and $2 million for Westchester
Specialty. In addition, Coregis, Crum & Forster and Westchester Specialty
purchase a contingency cover to provide protection from multiple claims from a
single event.

As of March 31, 1996, subject to contractual limits, the net retention per
occurrence for a property risk is $1 million for Coregis, $5 million for Crum &
Forster and $1 million for Westchester Specialty. Industrial Indemnity does not
write property business. Coregis, Crum & Forster and Westchester Specialty also
purchase excess of loss reinsurance for property catastrophe losses.

In addition to property catastrophe reinsurance protection acquired by the
Insurance Companies, Talegen maintains a blanket catastrophe reinsurance treaty
with a per occurrence limit of $80 million that acts as umbrella coverage for
Coregis, Crum & Forster and Westchester Specialty.

In the United States, four of the five costliest insured catastrophes have
occurred during the past four-year period. The table below provides a comparison
of the industry losses for the three most severe of these disasters and the
losses incurred by the individual Operating Groups. None of the Insurance

96
<PAGE>
Companies write personal lines and, as a result, have escaped the most severe
losses incurred by the industry.

<TABLE>
<CAPTION>
ESTIMATED
CRUM & INDUSTRIAL WESTCHESTER TOTAL TOTAL
CATASTROPHE COREGIS FORSTER INDEMNITY SPECIALTY TALEGEN INDUSTRY (1)
----------- ------- ------ ---------- ----------- ------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
HURRICANE ANDREW
(AUGUST 1992)
Gross Losses....................... $ 0.7 $89.0 $0.0 $ 9.7 $99.4 $ 16,500
Net Losses......................... $ 0.1 $10.5 $0.0 $ 4.7 $15.3 N/A
NORTHRIDGE EARTHQUAKE
(JANUARY 1994)
Gross Losses....................... $ 0.5 $ 1.1 $0.0 $35.7 $37.3 $ 12,500
Net Losses......................... $ 0.5 $ 1.1 $0.0 $ 2.9 $ 4.5 N/A
HURRICANE OPAL
(OCTOBER 1995)
Gross Losses....................... $ 0.0 $ 2.4 $0.0 $20.0 $22.4 $ 2,100
Net Losses......................... $ 0.0 $ 2.3 $0.0 $ 2.1 $ 4.4 N/A
</TABLE>

- ------------
(1) As estimated by A. M. Best.

UNCOLLECTIBLE REINSURANCE

The potential uncollectibility of ceded reinsurance is an industry-wide
issue. With respect to the management of recoveries due from reinsurers, the
Insurance Companies operate under common guidelines for the early identification
of potential collection problems and utilize the services of Resolution
Reinsurance Service Company, a specialized group of work-out experts and a
subsidiary of TRG, to aid in the management of the more complicated cases. This
unit aggressively pursues collection of reinsurance recoverables through
mediation, arbitration and, where necessary, litigation to enforce the Insurance
Companies contractual rights against reinsurers. Nevertheless, periodically, it
becomes necessary for management to adjust reserves for potential losses to
reflect their ongoing evaluation of developments which affect recoverability,
including the financial difficulties that some reinsurers can experience. Based
upon the review of financial condition and assessment of other available
information, the Insurance Companies maintain a provision for uncollectible
amounts due from reinsurers, as reported in Note 6 to Talegen's 1995
Consolidated Financial Statements.

97
<PAGE>
REGULATORY MATTERS

GENERAL

The Insurance Companies are subject to comprehensive, detailed regulation
throughout the United States. Although there is limited federal regulation of
the insurance business, each state has a comprehensive system of regulation of
insurers operating in that state. The laws of the various states establish
supervisory agencies with broad authority to regulate, among other things,
licenses to transact business, premium rates for certain coverages, trade
practices, agent licensing, policy forms, underwriting and claims practices,
reserve adequacy, transactions with affiliates, and insurer solvency. Many
states also regulate investment activities on the basis of quality, distribution
and other quantitative criteria. Further, most states compel participation in
and regulate composition of various shared market mechanisms. The Insurance
Companies' operations and accounts are subject to examination at regular
intervals by insurance regulators. States have also enacted legislation which
regulates insurance holding company systems, including acquisitions, dividends,
the terms of affiliate transactions, and other related matters. The Insurance
Companies are domiciled in Alaska, California, Georgia, Idaho, Illinois,
Indiana, New Jersey, New York, Ohio, Texas and Washington state.

Insurance companies are also affected by a variety of state and federal
legislative and regulatory measures and judicial decisions that define and
qualify the risks and benefits for which insurance is sought and provided. These
include redefinitions of risk exposure in such areas as product liability,
environmental damage and workers' compensation. In addition, individual state
insurance departments may prevent premium rates for some classes of insureds
from reflecting the level of risk assumed by the insurer for those classes. Such
developments may result in adverse effects on the profitability of various lines
of insurance. In some cases, these adverse effects on profitability can be
minimized, when possible, through the repricing of coverages if permitted by
applicable regulations, or the limitation or cessation of the affected business.

Most states have insurance laws requiring that property and casualty rate
schedules, policy or coverage forms, and other information be filed with the
state's regulatory authority. In many cases, such rates and/or policy forms must
be approved prior to use. A few states have recently considered or enacted
limitations on the ability of insurers to share data used to compile rates. Such
restrictions have had no significant impact on Talegen.

Insurance companies are required to file detailed annual reports with the
state insurance regulators in each of the states in which they do business, and
their business and accounts are subject to examination by such agencies at any
time. In addition, these insurance regulators periodically examine the insurer's
financial condition, adherence to statutory accounting practices, and compliance
with insurance department rules and regulations. The respective reports made
relating to the most recent periodic examinations of the Insurance Companies
contained no material adverse findings.

Applicable state insurance laws, rather than federal bankruptcy laws, apply
to the liquidation or reorganization of insurance companies.

INSURANCE REGULATION CONCERNING CHANGE OR ACQUISITION OF CONTROL

The insurance regulatory codes in the Insurance Companies' respective
domiciliary states each contain similar provisions (subject to certain
variations) to the effect that the acquisition of "control" of a domestic
insurer or of any person that directly or indirectly controls a domestic insurer
cannot be consummated without the prior approval of the domiciliary insurance
regulator. In general, a presumption of "control" arises from the ownership,
direct or indirect, control, possession with the power to vote or possession of
proxies with respect to 10% or more of the voting securities of a domestic
insurer or of a person that controls a domestic insurer. A person seeking to
acquire control, directly or indirectly, of a domestic insurance company or of
any person controlling a domestic insurance company must generally

98
<PAGE>
file with the relevant insurance regulatory authority a statement relating to
the acquisition of control containing certain information required by statute
and published regulations and provide a copy of such statement to the domestic
insurer. In connection with the Acquisition, requests for approval of the sale
of Talegen Holdings, as the controlling entity of each of the Insurance
Companies, have been filed with the domiciliary states of each of the Insurance
Companies, specifically Alaska, California, Georgia, Idaho, Illinois, Indiana,
New Jersey, New York, Ohio, Texas and Washington, as required by the insurance
laws in each of these states.

In addition, certain state insurance laws contain provisions that require
pre-acquisition notification to state agencies of a change in control of a
non-domestic insurance company admitted in that state. While such
pre-acquisition notification statutes do not authorize the state agency to
disapprove the change of control, such statutes do authorize certain remedies,
including the issuance of a cease and desist order with respect to the
non-domestic admitted insurer's doing business in the state if certain
conditions exist, such as undue market concentration.

REGULATION OF DIVIDENDS AND OTHER PAYMENTS FROM INSURANCE COMPANIES

The Company is a legal entity separate and distinct from its subsidiaries.
As a holding company with no other business operations, its primary sources of
cash to meet its obligations, including principal and interest payments with
respect to indebtedness, are available dividends and other statutorily permitted
payments, such as tax allocation payments and management and other fees, from
the Insurance Companies.

The Insurance Companies are subject to various state statutory and
regulatory restrictions, including regulatory restrictions that are imposed as a
matter of administrative policy, applicable generally to any insurance company
in its state of domicile, which limit the amount of dividends or distributions
an insurance company may pay to its shareholders without prior regulatory
approval. The restrictions are generally based on certain levels or percentages
of surplus, investment income and operating income, as determined in accordance
with SAP, which differs from GAAP. Generally, dividends may be paid only out of
earned surplus. In every case, surplus subsequent to the payment of any
dividends must be reasonable in relation to an insurance company's outstanding
liabilities and must be adequate to meet its financial needs.

Due to 1995 year-end reserve strengthening that caused them to report
negative earned surplus positions at December 31, 1995, two New York-domiciled
Insurance Companies, U.S. Fire and Westchester Fire, have no ordinary dividend
capacity in 1996. However, both U.S. Fire and Westchester Fire have, as a matter
of statutory accounting, requested the NYID to allow them to reset their
respective earned surplus accounts to $0 as of the first day following the end
of the quarter in which the Closing occurs. If the NYID grants these requests,
and absent any other statutory restrictions (see below), both U.S. Fire and
Westchester Fire would be able to pay shareholder and policyholder dividends
from earnings recognized in fiscal quarters after the Closing.

New York-domiciled insurance companies which undergo a change of control,
such as U.S. Fire, Westchester Fire and Crum & Forster Indemnity, are prevented,
as a matter of general administrative policy, from paying ordinary dividends for
two years following such change of control without the NYID's prior approval.

There can be no assurance that the NYID will approve (i) U.S. Fire's and
Westchester Fire's requests to reset their earned surplus accounts to $0 or (ii)
any request made by U.S. Fire, Westchester Fire or Crum & Forster Indemnity to
pay dividends during the two-year period following the Closing. No assurance can
be given that some or all of the Insurance Companies' domiciliary states will
not adopt statutory provisions more restrictive than those currently in effect.

99
<PAGE>
The aggregate amount available for the payment of ordinary dividends by the
Insurance Companies during 1996, assuming no dividends are paid from the New
York-domiciled Insurance Companies, is $96 million, of which $16 million has
been paid through March 31, 1996.

If insurance regulators determine that payment of a dividend or any other
payments to an affiliate (such as payments under a tax-sharing agreement or
payments for employee or other services) would, because of the financial
condition of the paying insurance company or otherwise, be hazardous to such
insurance company's policyholders, the regulators may block such payments that
would otherwise be permitted without prior approval.

STATUTORY SURPLUS AND CAPITAL

In connection with the licensing of insurance companies, insurance
regulators may limit or prohibit the writing of new business by an insurance
company within its jurisdiction when, in the regulator's judgment, the insurance
company is not maintaining adequate statutory surplus or capital. The Company
does not currently anticipate that any regulator would limit the amount of new
business that the Insurance Companies may write given their current levels of
statutory surplus and capital.

RISK-BASED CAPITAL

In order to enhance the regulation of insurer solvency, the National
Association of Insurance Commissioners (the "NAIC") adopted risk-based capital
("RBC") requirements for property and casualty insurance companies commencing
with filings made in 1995 covering the 1994 calendar 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. The RBC formula provides a
mechanism for the calculation of an insurance company's Authorized Control Level
(the "ACL") RBC amount.

The NAIC RBC model law stipulates four levels of regulatory action with the
degree of regulatory intervention increasing as the level of surplus to RBC
decreases. The initial level, the Company Action Level, requires the insurance
company to submit a plan of corrective action to the relevant insurance
commissioner if surplus falls below 200% of the ACL amount. The next level is
the Regulatory Action Level which requires the company to submit a plan of
corrective action and also allows the regulator to perform an examination of the
company's business and operations and issue a corrective order if surplus falls
below 150% of the ACL amount. The third level is the ACL, which permits the
regulator to place the company under regulatory control entailing rehabilitation
or liquidation if surplus falls below 100% of that amount. The final action
level is the Mandatory Control Level which requires the insurance commissioner
to place the company under regulatory control if surplus falls below 70% of the
ACL amount.

Based on the foregoing formula, at December 31, 1995, the capital of each
Insurance Company was higher than the Company Action Level, and, as a result, no
regulatory response or action is required.

NAIC IRIS RATIOS

In the 1970s, the NAIC developed a set of financial relationships or "tests"
called the Insurance Regulatory Information System ("IRIS") that were designed
to facilitate early identification of

100
<PAGE>
companies which may require special attention by insurance regulatory
authorities. Insurance companies submit data on an annual basis to the NAIC,
which in turn analyzes the data utilizing ratios covering 12 categories of
financial data with defined "usual ranges" for each category. An insurance
company may fall out of the usual range for one or more ratios because of
specific transactions that are in themselves immaterial or eliminated at the
consolidated level. Generally, an insurance company may become subject to
increased scrutiny if it falls outside the usual ranges on four or more of the
ratios. There have been instances where certain IRIS ratios of one or more of
the Insurance Companies have fallen outside of the usual ranges. In all such
instances, the regulators have been satisfied, after analysis, that the
particular Insurance Company did not warrant special attention.

INVESTMENT REGULATION

The Insurance Companies are subject to state laws and regulations that
require diversification of investment portfolios and limit the amount of
investments in certain investment categories. Failure to comply with these laws
and regulations would cause non-conforming investments to be treated as non-
admitted assets for purposes of measuring statutory surplus and, in some
instances, would require divestiture. As of December 31, 1995, the Insurance
Companies' investments complied with such laws and regulations in all material
respects.

GUARANTY FUNDS

All fifty states have separate insurance guaranty fund laws requiring
property and casualty insurance companies doing business within their respective
jurisdictions to be members of their guaranty associations. These associations
are organized to pay covered claims (as defined and limited by the various
guaranty association statutes) under insurance policies issued by insolvent
insurance companies. Such guaranty association laws, except in New York, create
post-assessment associations which make assessments against member insurers to
obtain funds to pay association covered claims after an insurer insolvency
occurs. These associations levy assessments (up to prescribed limits) on all
member insurers in a particular state on the basis of the proportionate share of
the premiums written by member insurers in the covered lines of business in that
state. Maximum assessments required by law in any one year generally vary
between 1% and 2% of annual premiums written by a member in that state. New York
has a pre-assessment guaranty fund which makes assessments prior to an
insolvency occurring. New Jersey, North Carolina and Pennsylvania have created,
by statute, a separate guaranty association for workers' compensation business
lines. Some states permit member insurers to recover assessments paid through
surcharges on policyholders or through full or partial premium tax offsets,
while other states permit recovery of assessments through the rate filing
process.

The property and casualty guaranty association assessments paid by the
Insurance Companies during the last three years totaled $7.6 million in 1993,
$7.1 million in 1994 and $3.7 million in 1995.

The Insurance Companies record guaranty assessments when such assessments
are billed by the respective guaranty funds. In addition, each Insurance
Company's policy is to accrue for any significant insolvencies when the loss is
probable and the assessment amount can be reasonably estimated. In the case of
most insurance insolvencies, the ability of each Insurance Company to reasonably
estimate the insolvent insurer's liabilities or develop a meaningful range of
the insolvent's liabilities is significantly impaired by inadequate financial
data with respect to the estate of the insolvent company as supplied by the
guaranty funds.

Although the amount of any assessments applicable to guaranty funds cannot
be predicted with certainty, the Insurance Companies believe that future
guaranty association assessments for insurer insolvencies will not have a
material adverse effect on their liquidity or capital resources.

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<PAGE>
SHARED MARKETS

As a condition of its license to do business, each Insurance Company, as
applicable, is required to participate in mandatory property and casualty shared
market mechanisms or pooling arrangements which provide various insurance
coverages to individuals or other entities that are otherwise unable to purchase
such coverage in the commercial insurance marketplace. Each Insurance Company's
participation in such shared markets or pooling mechanisms is generally
proportionate to the amount of that Insurance Company's direct writings for the
type of coverage written by the specific pooling mechanism in the applicable
state.

Commercial automobile insurance and workers' compensation lines have
mandatory pooling arrangements on a state-by-state basis for segments of the
market that have difficulty finding coverage from insurers. The shared market
mechanisms for providing commercial automobile coverages are generally assigned
risk plans, reinsurance facilities and joint underwriting facilities.
Additionally, another pooling mechanism, a Commercial Auto Insurance Plan
("CAIP"), uses a limited number of servicing carriers to handle assignments from
other insurers. The CAIP servicing carrier is paid a fee by the insurer who
otherwise would be assigned the responsibility of handling the commercial
automobile policy and paying claims. For workers' compensation, the pooling in
each state is generally in the form of a reinsurance type arrangement with
servicing carriers providing the policy services and claims handling services.
The National Council of Compensation Insurance provides services for calculating
member pooling of losses and expenses in 32 states, with the remainder of the
states having their own independent servicing plans. Certain of the Insurance
Companies participate in the Florida Hurricane Catastrophe Fund, a
state-mandated catastrophe reinsurance fund. Business insurance is also subject
to pooled insurance on a small scale for commercial properties insured through
the various Fair Access to Insurance Requirements ("FAIR") Plans which exist in
most states. The Insurance Companies incurred an underwriting loss from
participation in such mandatory pools and underwriting associations of $24.2
million, $5.1 million and $9.2 million in 1993, 1994 and 1995, respectively.

The amount of future losses or assessments from the shared market mechanisms
and pooling arrangements described above cannot be predicted with certainty.
Although it is possible that future losses or assessments from such mechanisms
and pooling arrangements could have a material adverse effect on results of
operations, the Insurance Companies do not expect future losses or assessments
to have a material adverse effect on liquidity or capital resources.

POSSIBLE LEGISLATIVE AND REGULATORY CHANGES

In recent years, the insurance industry has been subject to increased
scrutiny. The NAIC and a number of state legislatures have considered or adopted
legislative proposals that alter and, in many cases, increase the authority of
state agencies to regulate insurance companies and holding company systems. In
addition, several committees of Congress have made inquiries and conducted
hearings as part of a broad study of the regulation of insurance companies, and
legislation has been introduced in several of the past sessions of Congress
which, if enacted, could result in the federal government assuming some role in
the regulation of the insurance industry.

Although the federal government does not regulate the business of insurance
directly, federal initiatives often affect the insurance business in a variety
of ways. Current and proposed federal measures which may significantly affect
the insurance business include changes in environmental laws and tort reform.

It is not possible to predict the outcome of any of the foregoing
legislative, administrative or congressional activities or the potential effects
thereof on the Company, Talegen Holdings or the Insurance Companies. See "Risk
Factors--Regulation."

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<PAGE>
MANAGEMENT

DIRECTORS AND OFFICERS OF THE COMPANY

The current directors and officers of the Company are as follows:

NAME AGE POSITION
---- --- --------
<S> <C> <C>

Joseph W. Brown, Jr. 47 Chairman of the Board, President, Chief
Executive Officer, Assistant Treasurer,
Assistant Secretary and Director

Gary C. Tolman 45 Executive Vice President, Chief Financial
Officer, Treasurer and Secretary

Douglas C. Hamilton 47 Vice President and Controller

Todd A. Fisher 30 Director

Saul A. Fox 42 Director

George R. Roberts 52 Director
</TABLE>

Joseph W. Brown, Jr. became a director in January 1996. He is Chairman of
the Board, President and Chief Executive Officer of Talegen Holdings. He has
served in such positions with Talegen and its predecessors since January 1992.
Prior to joining Talegen, Mr. Brown was President and Chief Executive Officer of
Fireman's Fund Insurance Company from 1989 to December 1991. Mr. Brown is also a
director of MBIA, Inc., Constitution Re Corp., the American Institute for
Chartered Property Casualty Underwriters and the Insurance Institute of America.

Gary C. Tolman became an officer of the Company in June 1996 and serves as
Managing Director and Treasurer of Talegen Holdings. He has served in such
positions with Talegen Holdings and its predecessors since May 1992. Prior to
joining Talegen Holdings, Mr. Tolman was a Senior Vice President at Fireman's
Fund Insurance Company from 1990 to April 1992. Mr. Tolman has indicated that,
following the Closing, he will be resigning his position at the Company.

Douglas C. Hamilton became an officer of the Company in June 1996 and serves
as controller of Talegen Holdings. Since 1978, Mr. Hamilton has held various
management positions with Talegen including Regional Controller, Vice
President-Corporate Accounting, and Senior Vice President and Chief Financial
Officer of different Operating Groups. Prior to joining Talegen, Mr. Hamilton,
who holds an M.B.A., had been with Coopers & Lybrand in New York.

Todd A. Fisher became a director of the Company in January 1996. Mr. Fisher
is a limited partner in New Associates (Talegen), L.P. and has been an executive
of KKR since June 1993. Mr. Fisher is also a director of Red Lion Hotels, Inc.
and Merit Behavioral Care Corporation. From 1992 to June 1993, Mr. Fisher was an
associate at Goldman, Sachs & Co. Prior to 1992, Mr. Fisher attended the Wharton
School of Business at the University of Pennsylvania.

Saul A. Fox became a director of the Company in January 1996. Mr. Fox has
been a general partner of KKR since January 1, 1991 and, effective January 1,
1996, became a member of the limited liability holding company which serves as
the general partner of KKR. He is a member of New Talegen. Mr. Fox is also a
director of American Re Corporation, Canadian General Insurance Group Limited,
Fred Meyer, Inc., Layne, Inc. and Union Texas Petroleum Holdings, Inc.

George R. Roberts became a director of the Company in January 1996. Mr.
Roberts is a founding partner of KKR and, effective January 1, 1996, became a
member of the limited liability company which serves as the general partner of
KKR. He is a member of New Talegen. He is also a director of AutoZone, Inc.,
Borden, Inc., Bruno's, Inc., Canadian General Insurance Group Limited, Duracell

103
<PAGE>
International, Inc., Flagstar Companies, Inc., Flagstar Corporation, IDEX
Corporation, K-III Communications Corporation, Merit Behavioral Care
Corporation, Newsquest Capital plc, Owens-Illinois, Inc., Owens-Illinois Group,
Inc., Safeway Inc., The Stop & Shop Companies, Inc., Union Texas Petroleum
Holdings, Inc. and World Color Press, Inc.

DIRECTORS AND EXECUTIVE OFFICERS OF TALEGEN HOLDINGS

The following table sets forth certain information regarding certain of the
directors and executive officers of Talegen Holdings and, as indicated, certain
of its direct subsidiaries.

NAME AGE POSITION
---- --- --------
<S> <C> <C>

Joseph W. Brown, Jr. 47 Chairman of the Board, President and Chief
Executive Officer

Michael A. Coutu 47 Managing Director, President and Chief
Executive Officer of TRG

Richard N. Frasch 44 Managing Director, General Counsel,
Secretary

Robert L. Gossett 45 Managing Director

Gary C. Tolman 45 Managing Director, Treasurer

Kathleen M. Wilson 46 Managing Director

Jack D. Miller 50 President and Chief Executive Officer of
Industrial Indemnity Holdings, Inc.
("IIHI")

Dennis B. Reding 47 President and Chief Executive Officer of
Westchester Specialty Group, Inc. ("WSGI")

Courtney C. Smith 48 President and Chief Executive Officer of
Coregis Group, Inc. ("CGI")

James A. Stark 53 President and Chief Executive Officer of
Crum & Forster Holdings, Inc. ("CFHI")
</TABLE>

Effective upon the Closing, Talegen Holdings anticipates that Mr. Fox and
Mr. Fisher will become directors of Talegen Holdings. Following the Closing, Mr.
Frasch, Mr. Tolman and Ms. Wilson have indicated that they will be resigning
their positions at Talegen Holdings and its subsidiaries. Effective upon the
Closing, Mr. Coutu will be resigning his positions at Talegen Holdings to spend
all of his time as President and Chief Executive Officer of TRG.

Joseph W. Brown, Jr. (See "--Directors and Officers of the Company").

Michael A. Coutu is a Managing Director of Talegen Holdings. He has served
in such positions with Talegen Holdings and its predecessors since May 1992.
Prior to joining Talegen Holdings, Mr. Coutu was President of Oak Hill Financial
Group, Inc. from 1989 until May 1992. Mr. Coutu also serves as the President and
Chief Executive Officer of TRG.

Richard N. Frasch is a Managing Director, General Counsel and Secretary of
Talegen Holdings. He has served in such positions with Talegen Holdings and its
predecessors since May 1993. Prior to joining Talegen Holdings, Mr. Frasch was a
partner in the law firm of Pettit & Martin from 1984 until May 1993.

Robert L. Gossett is a Managing Director of Talegen Holdings. He has served
in such position with Talegen Holdings and its predecessors since March 1994.
From January 1992, until March 1994, Mr. Gossett was a Senior Vice President
with an affiliated company of Talegen Holdings. From 1987 until 1992, Mr.
Gossett was a Senior Vice President at Fireman's Fund Insurance Company.

104
<PAGE>
Gary C. Tolman (See "--Directors and Officers of the Company").

Kathleen M. Wilson is a Managing Director of Talegen Holdings. She has
served in such position with Talegen Holdings and its predecessors since May
1992. Prior to joining Talegen Holdings, Ms. Wilson was Vice-President at
International Business Machines Corporation from January 1989 until March 1992.

Jack D. Miller is President, Chief Executive Officer and a Director of IIHI.
He assumed his current positions in May 1995. Prior to serving in his current
positions, he was Executive Vice President of Industrial Indemnity Company from
August 1989.

Dennis B. Reding is President, Chief Executive Officer and a Director of
WSGI. He assumed his current positions in July 1993. Prior to serving his
current positions, he was president and chief executive officer of The London
Agency from May 1992 and senior vice president of Fireman's Fund Insurance
Company from October 1986 to May 1992.

Courtney C. Smith is President, Chief Executive Officer and a Director of
CGI. He assumed his current positions in July 1993. Prior to serving in his
current positions, he was Senior Vice President of Industrial Indemnity and
President of the Property and Casualty Division of Industrial Indemnity from
December 1989.

James A. Stark is President, Chief Executive Officer and a Director of CFHI.
He assumed his current positions in July 1993. Prior to serving in his current
positions, he held a number of senior officer positions with Talegen and TRG
subsidiaries from March 1989.

Approximately 85 members of Talegen's management will fund a portion of the
Acquisition cash purchase price through a $53 million common equity investment
in Holdings.

COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS

Directors of the Company who are not officers or employees of the Company or
Talegen will receive an aggregate annual fee of $55,000. The Company does not
intend to pay any compensation to its officers, who will all be officers of
Holdings. Talegen compensates its officers as set forth below.

EXECUTIVE COMPENSATION

Talegen's compensation program for its executive officers for the fiscal
year ended December 31, 1995 consisted primarily of salaries, cash bonuses, and
other forms of compensation pursuant to certain qualified and nonqualified
plans.

The following table sets forth in summary form all compensation from Talegen
for all services rendered in all capacities to Talegen paid or accrued during
the fiscal year ended December 31, 1995 to the Chief Executive Officer of
Talegen and the four other most highly compensated executive offices of Talegen
(collectively, with the Chief Executive Officer, the "Named Executive
Officers"). Such table represents historical compensation and is not indicative
of future compensation to be received by the Named Executive Officers. Talegen
intends to introduce a new annual performance based bonus plan for its executive
officers following the Closing and, additionally, intends to encourage
additional ownership in the Company by its executives through the introduction
of a new long term stock ownership plan (see "Stock Purchase and Option Plan").

105
<PAGE>
SUMMARY COMPENSATION TABLE FOR 1995

SALARY AND INCENTIVE COMPENSATION

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------- -----------------------------------
OTHER RESTRICTED SECURITIES
NAME AND PRINCIPAL ANNUAL STOCK UNDERLYING LTIP ALL OTHER
POSITION SALARY BONUSES COMPENSATION AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
- ---------------------------- -------- -------- ------------ ---------- ------------ ------- ------------
(1) (2) (UNITS) (2)
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph W. Brown, Jr......... $500,006 $ 0 $ 30,000 $0 0 $ 0 $139,555
Chairman of the Board,
President and Chief
Executive Officer of
Talegen Holdings.
James A. Stark.............. 300,014 291,245 19,501 0 0 0 0
President and Chief
Executive Officer of CFHI.
Dennis B. Reding............ 250,003 241,163 12,000 0 0 0 0
President and Chief
Executive Officer of WSGI.
Jack D. Miller.............. 266,827 160,000 16,010 0 0 0 2,247
President and Chief
Executive Officer of IIH.
Courtney C. Smith........... 250,016 142,696 30,002 0 0 0 0
President and Chief
Executive Officer of CGI.
</TABLE>

- ------------
(1) These amounts include employer contributions under the Talegen Individual
Retirement Plan (as defined below), and are prior to reduction for employee
contributions under the Talegen Individual Retirement Plan pursuant to
Section 401(k) of the Internal Revenue Code and under Talegen's cafeteria
plan pursuant to section 125 of the Internal Revenue Code.

(2) The following table details other annual compensation and all other
compensation.

<TABLE>
<CAPTION>
QUALIFIED NON- NON- NON-
PLAN QUALIFIED QUALIFIED QUALIFIED QUALIFIED QUALIFIED MOVING CLUB
NAMED EXECUTIVE OFFICER MATCH PLAN MATCH BASIC BASIC PERFORMANCE PERFORMANCE EXPENSES MEMBERSHIPS
- ----------------------------- --------- ---------- --------- --------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph W. Brown, Jr.......... $ 2,310 $ 12,690 $ 4,500 $10,500 $ 0 $ 0 $139,555 $ 0
James A. Stark............... 2,310 6,691 4,500 4,500 750 750 0 0
Dennis B. Reding............. 4,500 0 4,500 3,000 0 0 0 0
Jack D. Miller............... 4,500 3,505 4,500 3,505 0 0 0 2,247
Courtney C. Smith............ 2,310 5,190 4,500 3,001 6,810 8,191 0 0
</TABLE>

STOCK PURCHASE AND OPTION PLAN

Concurrently with the Acquisition, certain officers and key employees of the
Company, Holdings and Talegen (including those named under "--Summary
Compensation Table for 1995") will participate in the Stock Purchase and Option
Plan (the "Plan") for key employees of Holdings and its subsidiaries. Pursuant
to the Plan, eligible persons are offered the opportunity to purchase
shares of Holdings common stock, par value $.01 ("Holdings Stock") and
options to purchase shares of Holdings Stock (the "Options"), of which
approximately shares of Holdings Stock and Options will be issued
pursuant to the Plan shortly after the completion of the Acquisition.

The Options will have an exercise price of $10.00 and will consist of
600,000 Series A Reinvestment Options (the "Series A Options"), Series B
Options (the "Series B Options"), Series C Performance Options (the
"Series C Options") and Series J Options (the "Series J Options"). All of
the options will be non-qualified stock options. The Holdings Stock issued
pursuant to

106
<PAGE>
the Plan will consist of 1,800,000 shares of restricted stock (the "Restricted
Stock") and shares of unrestricted stock (the "Purchased Stock").

In general, the Series A Options, the Series B Options and the Series J
Options vest and become exercisable at a rate of 33 1/3% per year beginning on
the second anniversary of the Acquisition. The Series C Options generally vest
and become exercisable on the tenth anniversary of the Acquisition provided
certain performance targets are met, but may vest earlier at the discretion of
the Committee. The Restricted Stock vests on the fifth anniversary of the
Acquisition. Notwithstanding the foregoing, upon a Change of Control, the
Restricted Stock and the Options will vest automatically, provided that in the
case of the Series C Options performance targets are met.

Prior to the fifth anniversary of the Acquisition, Options, Holdings Stock
acquired upon exercise of the Series A Options, the Series B Options and the
Series J Options ("Option Stock"), Restricted Stock and Purchased Stock
generally are not transferable except, among other things, (i) by will, (ii)
pursuant to applicable laws of descent and distribution or (iii) upon the
exercise of pro-rata drag along and tag along rights following certain
dispositions by Talegen Associates, L.P. (the owner of % of Holdings Stock
upon the closing of the Acquisition). However, Restricted Stock, Purchased Stock
and Option Stock acquired upon the exercise of Series A Options become
transferable at a rate of 33 1/3% per year at the end of the fifth anniversary
of the Acquisition. Option Stock acquired upon the exercise of Series A Options
becomes transferable at a rate 20% per year at the end of the fifth anniversary
of the Acquisition.

All Options granted under the Plan will expire ten years and one day from
the date of grant except for Series J Options, which will expire 12 years from
the date of grant. In addition, all unvested Options will be subject to
cancellation upon or following specified periods of time after the first to
occur of (i) the termination of the optionee's employment, (ii) the effective
date of a Change of Control (as defined) of Holdings, or (iii) other events not
related to the optionee's employment.

Prior to the tenth anniversary (or the twelfth anniversary in the case of
Series J Options or related Option Shares) of the Acquisition, Holdings will
have the right to purchase, at the Repurchase Price (as described below), Option
Shares, Restricted Shares and Purchased Shares (and to cancel exercisable
Options upon payment of the Repurchase Price less the exercise price of such
Options) upon certain circumstances including the termination of an optionee's
employment with Holdings or its subsidiaries. The Repurchase Price, except for
Option Shares, is defined as (i) with respect to repurchases after termination
for cause, the lower of $10 per share and market price, (ii) with respect to
repurchases after death or disability, an amount equal to the greater of $10 per
share and market price and (iii) with respect to all other trigger events,
market price, and the Repurchase Price for Option Shares is the market price.
Notwithstanding the foregoing, the Repurchase Price for Restricted Shares will
be $0 until after the fifth anniversary of the Acquisition.

The terms of the Options will be set forth in separate option agreements
with each optionee. In addition, individuals who purchase Holdings Stock will
execute a Stockholders Agreement that sets forth certain terms with respect to
such stock. The summary of the Plan in the foregoing paragraphs does not purport
to be complete and is qualified in its entirety by the Plan, the individual
Option agreements and the Stockholders Agreement which have been filed as
exhibits hereto.

TALEGEN RETIREMENT PLANS

Through May 31, 1985, employees of Talegen working in the United States were
covered under the Employees Retirement Plan of Crum & Forster, a noncontributory
qualified defined benefit plan (the "Original Retirement Plan"). The Original
Retirement Plan provided a retirement benefit at age 65. The annual retirement
benefit for a participant was equal to 2% of Average Final Compensation (as
defined below) multiplied by years of credited service as a participant up to 25
years, plus 0.75% of Average Final Compensation multiplied by years of credited
service as a participant in excess of 25

107
<PAGE>
years, less a reduction for Social Security payments. Average Final Compensation
was defined as the participant's average annual compensation during the 60
highest consecutive calendar months in the last 120 months of service.
Compensation used to determine benefits did not include overtime earnings,
commissions, bonuses or special pay.

As a result of the termination of the Original Retirement Plan, all benefits
accruing to the termination date became vested regardless of an employee's years
of service, and annuities were purchased for benefits payable under the plan.

On January 1, 1986, the Crum and Forster, Inc. Retirement Plan, a new
noncontributory qualified defined benefit plan (the "Terminated Retirement
Plan"), was established, with provisions substantially the same as the Original
Retirement Plan. However, the annual retirement benefit under the Terminated
Retirement Plan equals 1.2% of Average Final Compensation, less a reduction for
Social Security payments. Effective July 1, 1993, accruals under this 1.2%
benefit formula were discontinued. Participants also receive recognition of
their future salary increases through December 31, 1995 (or the date their
service terminated) for their credited service prior to January 1, 1986. Prior
to July 1, 1993, all employees became participants in the Terminated Retirement
Plan following the later of completion of one year's service or attainment of
age 21. Subject to certain conditions, a participant becomes 100% vested in his
retirement benefit after completion of five years of service. The Terminated
Retirement Plan provides for reduced benefits paid in a form other than a
straight life annuity (e.g., a qualified joint and 50% survivor annuity) or upon
early retirement. Early retirement is available to participants age 55 to 64
with at least 10 years of credited service. Under certain circumstances, upon
the death of a vested participant, the Terminated Retirement Plan provides a
survivor annuity benefit to the participant's spouse or other beneficiary. A
participant who was totally disabled on June 30, 1993 and who had completed 10
years of credited service will accrue additional credited service until the
earlier of his attainment of age 65, cessation of disability status, return to
employment or death.

Talegen Holdings's subsidiaries have reimbursed and will reimburse Talegen
Holdings for that portion of the annual funding cost of the Terminated
Retirement Plan applicable to employees of each subsidiary through at least the
consummation of the transaction. The required contribution by all subsidiaries
for the plan year ended December 31, 1995, was $4,836,687. The table set forth
below illustrates the approximate Terminated Retirement Plan annual retirement
benefit, after applicable reduction for Social Security which would be payable
at age 65 as a straight life annuity, based on the Average Final Compensation
and years of credited service through June 30, 1993. The amounts set forth below
do not reflect limits on benefits and includable compensation imposed by the
Internal Revenue Code.

60 MONTH
AVERAGE YEARS OF CREDITED SERVICE THROUGH JUNE 30, 1993
FINAL -------------------------------------------------------------------
COMPENSATION 5 10 15 20 25 30
- ------------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
20$0,000... $10,860 $21,140 $30,850 $40,680 $51,000 $61,300
225,000... 12,360 24,030 35,030 46,160 57,770 69,380
250,000... 13,860 26,930 39,220 51,630 64,540 77,440
300,000... 16,360 32,720 47,590 62,580 78,070 93,550
350,000... 19,860 38,510 55,960 73,540 91,600 109,660
400,000... 22,860 44,300 64,300 84,490 105,130 125,780
550,000... 28,860 55,880 81,070 106,390 132,200 158,000
</TABLE>

Compensation covered by the Terminated Retirement Plan excludes overtime
earnings, commissions, bonuses or special pay. With respect to the following
individuals, the current annual compensation covered under the Terminated
Retirement Plan, and the estimated current credited years of service, are as
follows: Mr. Brown--$500,000 (1 year), Mr. Stark--$300,000 (29 years), Mr.
Miller-- $300,000 (6 years), Mr. Smith--$250,000 (13 years) and Mr.
Reding--$250,000 (1 year).

108
<PAGE>
TALEGEN INDIVIDUAL RETIREMENT PLAN

All subsidiaries of Talegen Holdings are participating employers in The
Individual Retirement Plan of Talegen Holdings, Inc. (the "IRP"). Employees of
subsidiaries of Talegen Holdings with at least one year of service (including
those individuals in the Cash Compensation Table) are eligible to participate.
The employer makes a basic contribution to a trust fund (the "Trust Fund") equal
to 3% of salary for each participant employed at year-end. An eligible employee
may elect to contribute to the Trust Fund not less than 1% and not more than 12%
of his salary, in 1% increments, on a before-tax or after-tax basis. The
employer makes regular matching contributions to the Trust Fund equal to 50% of
the participant's contributions (participant's contributions in excess of 6% of
base salary are not matched). The plan provides that employers may make
additional performance related matching and/or basic contributions to
participants employed at year end. Employee contributions made on a before-tax
or after-tax basis are 100% vested at all times. Except as noted in the
following sentence, a participant is always 100% vested in employer
contributions. In the case of employees hired after July 1, 1993, such
participants will become 100% vested in employer regular matching contributions
after completion of five years of service. The maximum amount of employee
contributions that may be contributed annually on a before-tax basis equals
$7,000, as adjusted annually by the Commissioner of Internal Revenue to reflect
cost of living increases ($9,500 in 1996).

The Talegen subsidiaries have reimbursed and will reimburse Talegen for that
portion of the employer contributions to the IRP applicable to employees of each
subsidiary at least through the consummation of the transaction and the
subsidiaries will thereafter establish or maintain a similar plan. The required
contribution by the subsidiaries for the year ended December 31, 1995 was
$13,148,032. Talegen Holding's contribution was $300,608.

SUPPLEMENTAL PLANS

Effective January 1, 1994, certain employees participating in the IRP are
also eligible to participate in the Supplemental Individual Retirement Plan of
Talegen Holdings (the "Supplemental IRP"), which provides the benefits which
would have been payable under the IRP but for limitations imposed by the
Internal Revenue Code or otherwise restricted by includable compensation limits.

Selected executives of the subsidiaries of Talegen Holdings who were
participants in previous defined benefit retirement plans sponsored by Talegen
(the "Previous Retirement Plans") prior to July 1, 1993, were also eligible to
participate in the Talegen Holdings, Inc. Supplemental Executive Retirement Plan
(the "SERP"). The SERP provides a benefit payable at age 65 equal to 2.2% of the
participant's Average Final Compensation (as defined above) multiplied by his
years of service up to a maximum of 25 years, less the sum of (i) the
participant's primary Social Security benefit, (ii) the participant's annual
retirement benefit under the Original Retirement Plan and the Terminated
Retirement Plan, and (iii) the participant's annual supplemental retirement
benefit provided by any written agreement. Effective July 1, 1993, accruals
under the SERP were discontinued. A participant in the SERP may also receive a
reduced early retirement benefit after attainment of age 55 with at least 15
years of service. Upon becoming totally disabled, a participant who has
completed at least 10 years of service will continue to accrue service under the
SERP up to the earlier of his attainment of age 65 or 25 years of service and
will receive a benefit at age 65. Mr. Brown and Mr. Reding were credited with 17
years and 10 years, respectively, at date of hire for purposes of calculating
this benefit.

The table set forth below illustrates the approximate SERP annual retirement
benefits, after reduction for Social Security, payable from the Retirement Plan
of Talegen Holdings Inc. (after reflecting compensation limits in effect as of
12/31/93) and benefits payable from Met Life. These benefits would be payable at
age 65 as a straight life annuity, based on the Average Final Compensation

109
<PAGE>
and years of credited service through June 30, 1993 indicated. Note that the
right to a nonforfeitable benefit under the SERP requires the attainment of age
55 and completion of 15 years of vesting service.

60 MONTH
AVERAGE YEARS OF CREDITED SERVICE THROUGH JUNE 30, 1993
FINAL ----------------------------------------------------------------------
COMPENSATION 5 10 15 20 25 30
- ----------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 200,000 $ 0 $ 4,550 $ 7,640 $ 10,520 $ 12,520 $ 0
225,000 0 6,500 9,890 13,020 15,270 0
250,000 0 10,530 15,540 20,330 24,250 665
300,000 2,430 21,530 32,040 42,330 51,750 28,165
350,000 4,930 32,530 48,540 64,330 79,250 55,665
400,000 7,430 43,530 65,040 86,330 106,750 83,165
500,000 12,430 65,530 98,040 130,330 161,750 138,165
</TABLE>

Compensation covered by the SERP excludes overtime earnings, commissions,
bonuses or special pay. With respect to the following individuals, the current
annual compensation covered under the SERP, and the estimated current credited
years of service, are as follows: Mr. Brown, Jr.--$500,000 (1 year), Mr.
Stark--$300,000 (29 years), Mr. Miller--$300,000 (6 years), Mr. Smith $250,000
(13 years), and Mr. Reding--$250,000 (1 year).

Prior to July 1, 1993 all employees of Talegen Holdings and its subsidiaries
who were participants in the Previous Retirement Plans and the IRP were eligible
to participate in the Benefits Equalization Plan (the "BEP"), which provided the
benefits which would have been payable under the Terminated Retirement Plan and
the IRP but for the limits under Section 415 of the Internal Revenue Code.
Effective July 1, 1993, accruals under the BEP were discontinued. Effective
January 1, 1994, the BEP was terminated, and benefits previously accrued were
transferred to the SERP or to the Supplemental IRP.

Prior to July 1, 1993, select management employees who were participants in
the Previous Retirement Plans and the IRP were eligible to participate in the
Executive Supplemental Retirement and Savings Plan (the "Executive Supplemental
Plan") which provided the benefit which would have been payable under the
Terminated Retirement Plan and the IRP but for the limitations on benefits and
contributions imposed by the Internal Revenue Code (except Section 415) or
otherwise restricted by includable compensation limits. Effective July 1, 1993
accruals under the Executive Supplemental Plan were terminated and benefits
previously accrued were transferred to the SERP or Supplemental IRP.

The SERP and the Supplemental IRP are non-qualified plans and benefits under
these plans are payable solely from general corporate assets. Reserves of
$3,099,831 and $2,467,405 have been accrued with respect to the SERP and the
Supplemental IRP respectively, as of December 31, 1995.

110
<PAGE>
CERTAIN INTERESTS IN THE ACQUISITION
AND RELATED TRANSACTIONS

New Talegen will beneficially own approximately 90% of the Company's
outstanding Common Stock at Closing. The members of New Talegen are Messrs. Saul
A. Fox, Edward A. Gilhuly, Perry Golkin, James H. Greene, Jr., Henry R. Kravis,
Robert I. MacDonnell, Michael W. Michelson, Paul E. Raether, Clifton S. Robbins,
George R. Roberts, Scott M. Stuart and Michael T. Tokarz. Upon the consummation
of the Acquisition, KKR will receive from the Company a fee of $30 million for
its services in negotiating the Acquisition and arranging the Financings and,
from time to time in the future, it may receive customary investment banking
fees for services rendered to the Company. In addition, KKR has agreed to render
consulting and financial services to the Company for an initial annual fee of
$1.25 million. Such services would include, but are not necessarily limited to,
advice and assistance concerning any and all aspects of the operations, planning
and financing of the Company and its subsidiaries, as needed from time to time.
See "Management" and "Ownership of Capital Stock."

New Talegen is the general partner of New Associates (Talegen), L.P., a
Delaware limited partnership ("New Associates"), of which certain past and
present employees of KKR and partnerships and trusts for the benefit of the
families of such past and present employees and a former partner of KKR are the
limited partners. New Associates is the general partner of Talegen Associates,
which will own at Closing approximately 90% of the outstanding Holdings Stock.

In connection with the Acquisition, the Trust will sell $450 million of
Preferred Securities to XFSI. The proceeds from the sale of the Preferred
Securities will then be loaned by the Trust to Holdings. Holdings will
contribute the $450 million of proceeds from the sale of the Preferred
Securities to the Company as a common equity investment. The Preferred
Securities allow for the deferral of cash dividends for the first seven years
after issuance. Any such deferred dividends are generally not payable until
after mandatory redemption at the end of twenty years from issuance (or upon
earlier redemption). XFSI will be granted certain demand registration rights
with respect to the Preferred Securities. See "Description of Preferred
Securities."

Upon the Closing it is anticipated that up to shares of Holdings Stock
will be made the subject of purchase rights and options to be granted to certain
members of senior management of Talegen Holdings and the Insurance Companies.
See "Management."

In connection with the Acquisition, the Company, Holdings, Xerox and XFSI
entered into a Tax Allocation and Indemnification Agreement (the "Tax
Agreement") that sets forth each party's rights and obligations with respect to
certain tax matters. The Tax Agreement provides for tax settlement payments
between Talegen Holdings and Xerox for 1995 and that portion of 1996 ending on
the Closing Date. The Tax Agreement also provides that Xerox and XFSI will
indemnify Holdings and its subsidiaries (including Talegen Holdings and the
Company) against all tax assessments attributable to Xerox and its subsidiaries
(including Talegen Holdings and its subsidiaries) for taxable periods ending on
or prior to the Closing Date. Finally, the Tax Agreement provides for payments
between Xerox and Talegen Holdings relating to the utilization of certain tax
benefits and certain adjustments to the tax position of one party that affect
the tax position of another party.

Under the Purchase Agreement, XFSI is required to contribute capital to
Talegen Holdings immediately prior to the Closing in an amount equal to the
lesser of (i) cash dividends received by XFSI from TRG between January 1, 1996
and the Closing Date (the "TRG Contributed Amount") and (ii) $15 million plus
$7.5 million for each calendar quarter from July 1, 1996 to the Closing (on a
pro rated basis for the elapsed portion of such calendar quarter) (the "TRG
Dividend Amount"). To the extent the TRG Dividend Amount exceeds the TRG
Contributed Amount, TRG will also issue a promissory note to XFSI for such
difference and XFSI, in turn, will contribute such promissory note to

111
<PAGE>
Talegen Holdings. The note will be payable at such times as TRG has available
cash (after the payment of its indebtedness and other corporate expenses).

In addition to the transactions described above, Talegen Holdings (or its
affiliates) will provide a preferred stock facility (the "Preferred Facility")
to TRG that will allow TRG to access additional funds for future liquidity
needs, if any, in connection with debt service requirements under the bank debt
incurred in connection with the TRG acquisition (the "TRG Bank Debt"). The
Preferred Facility will provide availability of up to $30 million (plus accreted
but unpaid dividends). There will be no drawings under the Preferred Facility as
of the Closing. Pursuant to the Preferred Facility, TRG will issue non-voting
preferred stock to Talegen Holdings. The terms of the preferred stock would
require mandatory redemption 18 years from the closing of the TRG acquisition.
Upon repayment in full of the TRG Bank Debt, the preferred stock would be
convertible, at the option of Talegen Holdings, into senior secured debt of TRG
under the same terms as the TRG Bank Debt. Dividends on the preferred stock
would accrue at a rate to compensate Talegen Holdings for its lending costs and
its long-term subordinated equity position under the Preferred Facility, but
would only be payable out of excess cash flow after meeting debt service
requirements for the TRG Bank Debt. The ability to draw down funds under the
Preferred Facility would continue (absent earlier repayment of the TRG Bank
Debt) for a 10 year period commencing with the closing of the TRG acquisition.

TRG was established as part of the Talegen Restructuring as a distinct
operating group, including IIC and other companies, to manage claims run-off
obligations and reinsurance collections associated with its own and several
Talegen discontinued books of business. In January 1996, XFSI agreed to sell TRG
to New TRG, an entity formed at the direction of KKR and certain management of
TRG, for total consideration of $612 million in a separate transaction. In
addition to KKR-organized entities, ownership of New TRG will include certain
senior management members of TRG and Talegen, including Mr. Brown, Chairman of
the Board, President and Chief Executive Officer of Talegen Holdings and
Chairman of the Board, President and Chief Executive Officer of the Company. Mr.
Brown is also the Chairman of the Board of TRG. Management of Crum & Forster's
and Westchester Specialty's environmental, asbestos and other latent exposure
claims is currently subcontracted to Envision, an affiliate of TRG. Resolution
Reinsurance, a subsidiary of TRG, currently provides the Insurance Companies
with assistance in the management of recoveries due from reinsurers. In
addition, Talegen Holdings will provide TRG with certain management services and
Talegen may receive, in addition to services provided by Envision and Resolution
Reinsurance, other claims management services from time to time.

American Re Corporation, a company organized at the direction of KKR and
certain members of management of American Re-Insurance Company ("American Re"),
is the parent of American Re, one of Talegen's principal reinsurers. In
addition, in August 1995 (prior to the negotiation of the Purchase Agreement),
First Quadrant Corp., which at that time was a wholly-owned subsidiary of
Talegen Holdings, sold the assets of one of its investment management segments
to ARAM, a subsidiary of American Re. The sales price approximated the value of
the net assets sold. The business segment sold provides, pursuant to existing
agreements between the Insurance Companies and ARAM, investment management
services primarily to Talegen's property and casualty insurance businesses. ARAM
receives fees for its investment management services based on the market value
of the managed assets.

112
<PAGE>
OWNERSHIP OF CAPITAL STOCK

Upon the Acquisition, the Common Stock of the Company will be beneficially
owned, assuming full dilution, as follows:

<TABLE>
<CAPTION>
NUMBER OF
SHARES
NAME OWNED (1) PERCENTAGE
---- --------- ----------
<S> <C> <C>
New Talegen (1)........................................................ [xx] [xx]
2800 Sand Hill Road, Suite 200
Menlo Park, California 94025
Joseph W. Brown, Jr. (2)............................................... [xx] [xx]
Todd A. Fisher......................................................... -- --
Saul A. Fox (1)........................................................ -- --
George R. Roberts (1).................................................. -- --
All officers and directors as a group (4 persons)...................... -- --
Management Investors (3)............................................... [xx] [xx]
</TABLE>

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

(1) Shares of Common Stock of the Company shown as beneficially owned by New
Talegen are owned of record by Holdings, approximately 90% of which is held
by Talegen Associates. Talegen Associates is a limited partnership organized
under the laws of Delaware for the sole purpose of acquiring and holding the
capital stock of Holdings. Talegen Associates is controlled by its general
partner, New Associates, which is, in turn, controlled by its general
partner, New Talegen. New Talegen is a limited liability company, the
members of which are Messrs. Saul A. Fox, Edward A. Gilhuly, Perry Golkin,
James H. Greene, Jr., Henry R. Kravis, Robert I. MacDonnell, Michael W.
Michelson, Paul E. Raether, Clifton S. Robbins, George R. Roberts, Scott M.
Stuart and Michael T. Tokarz. Messrs. Fox and Roberts are also directors of
the Company. Such individuals may be deemed to share beneficial ownership of
the shares shown as beneficially owned by New Talegen. Such individuals
disclaim beneficial ownership of such shares.

(2) Including the deemed exercise of all options and other rights to acquire
stock, Mr. Brown's ownership interest in Holdings is expected to be more
than 10%, but not more than 11%, on a fully diluted basis.

(3) It is expected that the Management Investors (including Mr. Brown) will
initially acquire approximately 10% of the voting securities of Holdings,
exclusive of options and restricted stock. Including the deemed exercise of
all options and other rights to acquire stock and all restricted stock, the
Management Investors could eventually hold up to 22% of the voting
securities of Holdings. Each Management Investor will invest individually,
and the Management Investors will not have any agreement, written or
unwritten, as to the voting of such securities.

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DESCRIPTION OF THE DEBENTURES

The Debentures offered hereby will be issued under an indenture to be dated
as of , 1996 (the "Indenture") between the Company, as issuer, and
Marine Midland Bank, as trustee (the "Trustee"), a copy of the form of which is
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. The Indenture is subject to and governed by the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). The following summary of the
material provisions of the Indenture does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the provisions of the
Indenture, including the definitions of certain terms contained therein and
those terms made part of the Indenture by reference to the Trust Indenture Act.
For definitions of certain capitalized terms used in the following summary, see
"--Certain Definitions."

GENERAL

The Debentures will mature on , 2008, will be limited to
$350,000,000 aggregate principal amount and will be unsecured senior
subordinated obligations of the Company. Each Debenture will bear interest at
the rate set forth on the cover page hereof from , 1996 or from the
most recent interest payment date to which interest has been paid or duly
provided for, payable on and semiannually thereafter on and
in each year until the principal thereof is paid or duly provided for to
the Person in whose name the Debenture (or any predecessor Debenture) is
registered at the close of business on the or next preceding such
interest payment date. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.

Principal of, premium, if any, and interest on the Debentures will be
payable, and the Debentures will be exchangeable and transferable, at the office
or agency of the Company in the City of New York maintained for such purposes
(which initially will be the Trustee); provided, however, that, at the option of
the Company, interest may be paid by check mailed to the address of the Person
entitled thereto as such address appears on the security register. The
Debentures will be issued only in fully registered form without coupons and only
in denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any registration of transfer or exchange or redemption of
Debentures, but the Company may require payment in certain circumstances of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection therewith.

SUBORDINATION

The payment of principal of, premium, if any, and interest on the Debentures
will be subordinated in right of payment, as set forth in the Indenture, to the
prior payment in full of all Senior Indebtedness, whether outstanding on the
date of the Indenture or thereafter incurred. Upon any distribution to creditors
of the Company in a liquidation or dissolution of the Company or in a
bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to the Company or its property, an assignment for the benefit of
creditors or any marshalling of the Company's assets and liabilities, the
holders of Senior Indebtedness will be entitled to receive payment in full of
all Obligations due in respect of such Senior Indebtedness (including interest
after the commencement of any such proceeding at the rate specified in the
documents relating to the applicable Senior Indebtedness) before the Holders of
Debentures will be entitled to receive any payment with respect to the
Debentures, and until all Obligations with respect to Senior Indebtedness are
paid in full, any distribution to which the Holders of Debentures would be
entitled shall be made to the holders of Senior Indebtedness (except that
Holders of Debentures may receive (i) shares of stock and any debt securities
that are subordinated at least to the same extent as the Debentures to Senior
Indebtedness and any securities issued in exchange for Senior Indebtedness and
(ii) payments made from the trusts described under "--Legal Defeasance and
Covenant Defeasance").

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The Company also may not make any payment upon or in respect of the
Debentures (except in such subordinated securities or from the trust described
under "--Legal Defeasance and Covenant Defeasance") if (i) a default in the
payment of the principal of, premium, if any, or interest on Designated Senior
Indebtedness occurs and is continuing beyond any applicable period of grace or
(ii) any other default occurs and is continuing with respect to Designated
Senior Indebtedness that permits holders of the Designated Senior Indebtedness
as to which such default relates to accelerate its maturity and the Trustee
receives a notice of such default (a "Payment Blockage Notice") from the Company
or the holders of any Designated Senior Indebtedness. Payments on the
Debentures, including any missed payments, may and shall be resumed (a) in the
case of a payment default, upon the date on which such default is cured or
waived or shall have ceased to exist or all Obligations in respect of such
Designated Senior Indebtedness shall have been discharged or paid in full and
(b) in case of a nonpayment default, the earlier of (x) the date on which such
nonpayment default is cured or waived, (y) 179 days after the date on which the
applicable Payment Blockage Notice is received (each such period, the "Payment
Blockage Period") or (z) such Payment Blockage Period shall be terminated by
written notice to the Trustee from the holders of a majority of the outstanding
principal amount of such Designated Senior Indebtedness or their representative
who delivered such notice. No new period of payment blockage may be commenced
unless and until 365 days have elapsed since the effectiveness of the
immediately preceding Payment Blockage Notice. However, if any Payment Blockage
Notice within such 365-day period is given by or on behalf of any holders of
Designated Senior Indebtedness (other than the agent under the Senior Credit
Facility), the agent under the Senior Credit Facility may give another Payment
Blockage Notice within such period. In no event, however, may the total number
of days during which any Payment Blockage Period or Periods is in effect exceed
179 days in the aggregate during any 365 consecutive day period. No nonpayment
default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent
Payment Blockage Notice unless such default shall have been cured or waived for
a period of not less than 180 days.

If the Company fails to make any payment on the Debentures when due or
within any applicable grace period, whether or not on account of the payment
blockage provision referred to above, such failure would constitute an Event of
Default under the Indenture and would enable the Holders of the Debentures to
accelerate the maturity thereof.

The Indenture will further require that the Company promptly notify holders
of Senior Indebtedness if payment of the Debentures is accelerated because of an
Event of Default.

As a result of the subordination provisions described above, in the event of
insolvency, bankruptcy, administration, reorganization, receivership or similar
proceedings relating to the Company, Holders of Debentures may recover less
ratably than creditors of the Company who are holders of Senior Indebtedness. At
March 31, 1996, on a pro forma basis after giving effect to the Acquisition and
the Financings and the application of the net proceeds therefrom, the Company
would have had approximately $796 million of Senior Indebtedness outstanding.
Although the Indenture contains limitations on the amount of additional
Indebtedness that the Company may incur, under certain circumstances the amount
of such Indebtedness could be substantial and, in any case, such Indebtedness
may be Senior Indebtedness. See "--Certain Covenants--Limitations on Incurrence
of Indebtedness and Issuance of Disqualified Stock."

The Company is a holding company that derives substantially all of its
operating income and cash flow from its subsidiaries. Generally, claims of
creditors of a subsidiary, including policyholders, trade creditors, secured
creditors and creditors holding indebtedness and guarantees issued by such
subsidiary, and claims of preferred stockholders (if any) of such subsidiary
will have priority with respect to the assets and earnings of such subsidiary
over the claims of creditors of its parent company, except to the extent the
claims of creditors of the parent company are guaranteed by such subsidiary. The
Debentures, therefore, will be effectively subordinated to creditors (including
trade creditors) and

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preferred stockholders (if any) of the direct and indirect subsidiaries of the
Company. At March 31, 1996, on a pro forma basis after giving effect to the
Acquisition and the Financings and the application of the net proceeds
therefrom, the Company's Subsidiaries would have had total liabilities
(including loss reserves and unearned premium reserves) of $8,667 million.
Although the Indenture limits the incurrence of Indebtedness and Disqualified
Stock of the Company's Restricted Subsidiaries, such limitation is subject to a
number of significant qualifications. Moreover, the Indenture does not impose
any limitation on the incurrence by such subsidiaries of liabilities that are
not considered Indebtedness under the Indenture. See "--Certain
Covenants--Limitation on Incurrence of Indebtedness and Issuance of Disqualified
Stock."

"Designated Senior Indebtedness" means (i) Indebtedness under the Senior
Credit Facility so long as any Obligations under the Senior Credit Facility are
outstanding and (ii) any other Senior Indebtedness permitted under the Indenture
the principal amount of which is $25 million or more and that has been
designated by the Company as Designated Senior Indebtedness.

"Senior Indebtedness" means (i) the Indebtedness under the Senior Credit
Facility and (ii) any other Indebtedness permitted to be incurred by the Company
under the terms of the Indenture, unless the instrument under which such
Indebtedness is incurred expressly provides that it is on a parity with or
subordinated in right of payment to the Debentures. Notwithstanding anything to
the contrary in the foregoing, Senior Indebtedness will not include (1) any
liability for federal, state, local or other taxes owed or owing by the Company,
(2) any obligation of the Company to any of its Subsidiaries, (3) any accounts
payable, trade liabilities or claims with respect to insurance, in each case,
arising in the ordinary course of business (including instruments evidencing
such liabilities), (4) any Indebtedness that is incurred in violation of the
Indenture, (5) Indebtedness which, when incurred and without respect to any
election under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company, (6) any Indebtedness, guarantee or obligation of the
Company which is subordinate or junior to any other Indebtedness, guarantee or
obligation of the Company, (7) Indebtedness evidenced by the Debentures and (8)
Capital Stock.

The Debentures will rank senior in right of payment to all Subordinated
Indebtedness of the Company.

MANDATORY REDEMPTION

The Company will not be required to make mandatory redemptions or sinking
fund payments prior to maturity of the Debentures.

OPTIONAL REDEMPTION

Except as described below, the Debentures will not be redeemable at the
Company's option prior to , 2001. From and after , 2001, the
Debentures will be subject to redemption at the option of the Company, in whole
or in part, upon not less than 30 nor more than 60 days' written notice, at the
redemption prices (expressed as a percentage of principal amount) set forth
below, plus accrued and unpaid interest thereon, if any, to the applicable
redemption date, if redeemed during the twelve-month period beginning on
of each of the years indicated below:

REDEMPTION
YEAR PRICE
---- ----------
2001............................................................... %
2002............................................................... %
2003............................................................... %
2004............................................................... %
2005 and thereafter................................................ 100%

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In addition, at any time or from time to time, on or prior to , 1999,
the Company may, at its option, redeem up to 40% of the aggregate principal
amount of Debentures originally issued under the Indenture on the Issuance Date
at a redemption price equal to % of the aggregate principal amount thereof,
plus accrued and unpaid interest thereon, if any, to the redemption date, with
the net proceeds of (i) one or more Equity Offerings by the Company or (ii) one
or more capital contributions to the Company by Holdings with the net proceeds
of one or more Equity Offerings by Holdings; provided that at least $210 million
aggregate principal amount of Debentures remains outstanding immediately after
the occurrence of such redemption; and provided, further, that such redemption
shall occur within 60 days of the date of the closing of any such Equity
Offering.

REPURCHASE AT THE OPTION OF HOLDERS

Change of Control. The Indenture will provide that, upon the occurrence of a
Change of Control, the Company will make an offer to purchase all or any part
(equal to $1,000 or an integral multiple thereof) of the Debentures pursuant to
the offer described below (the "Change of Control Offer") at a price in cash
(the "Change of Control Payment") equal to 101% of the aggregate principal
amount thereof plus accrued and unpaid interest to the date of purchase. The
Indenture will provide that within 30 days following any Change of Control, the
Company will mail a notice to each Holder of Debentures issued under the
Indenture, with a copy to the Trustee, with the following information: (i) a
Change of Control Offer is being made pursuant to the covenant entitled "Change
of Control," and that all Debentures properly tendered pursuant to such Change
of Control Offer will be accepted for payment; (ii) the purchase price and the
purchase date, which will be no earlier than 30 days nor later than 60 days from
the date such notice is mailed, except as may be otherwise required by
applicable law (the "Change of Control Payment Date"); (iii) any Debenture not
properly tendered will remain outstanding and continue to accrue interest; (iv)
unless the Company defaults in the payment of the Change of Control Payment, all
Debentures accepted for payment pursuant to the Change of Control Offer will
cease to accrue interest on the Change of Control Payment Date; (v) Holders
electing to have any Debentures purchased pursuant to a Change of Control Offer
will be required to surrender the Debentures, with the form entitled "Option of
Holder to Elect Purchase" on the reverse of the Debentures completed, to the
paying agent and at the address specified in the notice prior to the close of
business on the third Business Day preceding the Change of Control Payment Date;
(vi) Holders will be entitled to withdraw their tendered Debentures and their
election to require the Company to purchase such Debentures, provided, that the
paying agent receives, not later than the close of business on the last day of
the offer period, a telegram, telex, facsimile transmission or letter setting
forth the name of the Holder, the principal amount of Debentures tendered for
purchase, and a statement that such Holder is withdrawing such Holder's tendered
Debentures and his election to have such Debentures purchased; and (vii) that
Holders whose Debentures are being purchased only in part will be issued new
Debentures equal in principal amount to the unpurchased portion of the
Debentures surrendered, which unpurchased portion must be equal to $1,000 in
principal amount or an integral multiple thereof.

The Indenture will provide that, prior to complying with the provisions of
this covenant, but in any event within 30 days following a Change of Control,
the Company will either repay all outstanding amounts under the Senior Credit
Facility or offer to repay in full all outstanding amounts under the Senior
Credit Facility and repay the Obligations held by each lender who has accepted
such offer or obtain the requisite consents, if any, under the Senior Credit
Facility to permit the repurchase of the Debentures required by this covenant.

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Company will comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations described in the Indenture
by virtue thereof.

The Indenture will provide that on the Change of Control Payment Date, the
Company will, to the extent permitted by law, (i) accept for payment all
Debentures or portions thereof properly tendered pursuant to the Change of
Control Offer, (ii) deposit with the paying agent an amount equal to the
aggregate Change of Control Payment in respect of all Debentures or portions
thereof so tendered and (iii) deliver, or cause to be delivered, to the Trustee
for cancellation the Debentures so accepted together with an Officers'
Certificate stating that such Debentures or portions thereof have been tendered
to and purchased by the Company. The Indenture will provide that the paying
agent will promptly mail to each Holder of Debentures the Change of Control
Payment for such Debentures, and the Trustee will promptly authenticate and mail
to each Holder a new Debenture equal in principal amount to any unpurchased
portion of the Debentures surrendered, if any, provided, that each such new
Debenture will be in a principal amount of $1,000 or an integral multiple
thereof. The Company will publicly announce the results of the Change of Control
Offer on or as soon as practicable after the Change of Control Payment Date.

The Senior Credit Facility currently prohibits the Company from purchasing
any Debentures, and also provides that certain change of control events with
respect to the Company would constitute a default thereunder. Any future credit
agreements or other agreements relating to Senior Indebtedness to which the
Company becomes a party may contain similar restrictions and provisions. In the
event a Change in Control occurs at a time when the Company is prohibited from
purchasing the Debentures, the Company could seek the consent of its lenders to
the purchase of the Debentures or could attempt to refinance the borrowings that
contain such prohibition. If the Company does not obtain such a consent or repay
such borrowings, the Company will remain prohibited from purchasing the
Debentures. In such case, the Company's failure to purchase tendered Notes would
constitute an Event of Default under the Indenture. If, as a result thereof, a
default occurs with respect to any Senior Indebtedness, the subordination
provisions in the Indenture would likely restrict payments to the Holders of the
Debentures.

The existence of a Holder's right to require the Company to repurchase such
Holder's Debentures upon the occurrence of a Change of Control may deter a third
party from seeking to acquire the Company in a transaction that would constitute
a Change of Control.

Asset Sales. The Indenture will provide that the Company will not, and will
not permit any of its Restricted Subsidiaries to, cause, make or suffer to exist
an Asset Sale, unless (x) the Company, or its Restricted Subsidiaries, as the
case may be, receives consideration at the time of such Asset Sale at least
equal to the fair market value (as determined in good faith by the Company) of
the assets sold or otherwise disposed of and (y) except in the case of a
Permitted Asset Swap, at least 75% of the proceeds from such Asset Sale when
received consists of cash or Cash Equivalents; provided that, the amount of (a)
any liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet) of the Company or any Restricted Subsidiary (other than
liabilities that are by their terms subordinated to the Debentures) that are
assumed by the transferee of any such assets, (b) any notes or other obligations
received by the Company or any such Restricted Subsidiary from such transferee
that are immediately converted by the Company or such Restricted Subsidiary into
cash (to the extent of the cash received) and (c) any Designated Noncash
Consideration received by the Company or any of its Restricted Subsidiaries in
such Asset Sale having an aggregate fair market value, taken together with all
other Designated Noncash Consideration received pursuant to this clause (c) that
is at that time outstanding, not to exceed 12 1/2% of Total Adjusted Assets at
the time of the receipt of such Designated Noncash Consideration (with the fair
market value of each item of Designated Noncash Consideration being measured at
the time received and without giving effect to subsequent changes in value),
shall be deemed to be cash for the purposes of this provision; and provided
further that any Asset Sale with

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respect to an asset which constitutes a Permitted Investment that is described
under clause (g) or (h) of the definition of Permitted Investment shall not be
subject to clause (y) of this sentence.

Within 365 days after the Company's or any Restricted Subsidiary's receipt
of the Net Proceeds of any Asset Sale, the Company or such Restricted Subsidiary
may apply the Net Proceeds from such Asset Sale, at its option, (i) to
permanently reduce Obligations under the Senior Credit Facility (and to
correspondingly reduce commitments with respect thereto) or other Senior
Indebtedness or Pari Passu Indebtedness, (ii) to secure Letter of Credit
Obligations to the extent related letters of credit have not been drawn upon or
returned undrawn, (iii) to an investment in any one or more businesses, capital
expenditures or acquisitions of other assets, in each case, used or useful in an
Insurance Business (including, without limitation, Invested Assets of an
Insurance Subsidiary) and (iv) to an investment in properties or assets that
replace the properties and assets that are the subject of such Asset Sale.
Pending the final application of any such Net Proceeds, the Company or such
Restricted Subsidiary may temporarily reduce Indebtedness under a revolving
credit facility, if any, or otherwise invest such Net Proceeds in Cash
Equivalents or Investment Grade Securities. The Indenture will provide that any
Net Proceeds from the Asset Sale that are not invested as provided and within
the time period set forth in the first sentence of this paragraph will be deemed
to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $30 million, the Company shall make an offer to all Holders of
Debentures (an "Asset Sale Offer") to purchase the maximum principal amount of
Debentures, that is an integral multiple of $1,000, that may be purchased out of
the Excess Proceeds at an offer price in cash in an amount equal to 100% of the
principal amount thereof, plus accrued and unpaid interest to the date fixed for
the closing of such offer, in accordance with the procedures set forth in the
Indenture. The Company will commence an Asset Sale Offer with respect to Excess
Proceeds within ten Business Days after the date that Excess Proceeds exceeds
$30 million by mailing the notice required pursuant to the terms of the
Indenture, with a copy to the Trustee. To the extent that the aggregate amount
of Debentures tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of Debentures surrendered
by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall
select the Debentures to be purchased in the manner described under the caption
"Selection and Notice" below. Upon completion of any such Asset Sale Offer, the
amount of Excess Proceeds shall be reset at zero.

The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws or regulations are applicable in connection with the repurchase
of the Debentures pursuant to an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with the provisions of
the Indenture, the Company will comply with the applicable securities laws and
regulations and shall not be deemed to have breached its obligations described
in the Indenture by virtue thereof.

Selection and Notice. If less than all of the Debentures are to be redeemed
at any time or if more Debentures are tendered pursuant to an Asset Sale Offer
than the Company is required to purchase, selection of such Debentures for
redemption or purchase, as the case may be, will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which such Debentures are listed, or, if such Debentures are not so
listed, on a pro rata basis, by lot or by such other method as the Trustee shall
deem fair and appropriate (and in such manner as complies with applicable legal
requirements); provided that no Debentures of $1,000 or less shall be purchased
or redeemed in part.

Notices of purchase or redemption shall be mailed by first class mail,
postage prepaid, at least 30 but not more than 60 days before the purchase or
redemption date to each Holder of Debentures to be purchased or redeemed at such
Holder's registered address. If any Debenture is to be purchased or redeemed in
part only, any notice of purchase or redemption that relates to such Debenture
shall state the portion of the principal amount thereof that has been or is to
be purchased or redeemed.

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A new Debenture in principal amount equal to the unpurchased or unredeemed
portion of any Debenture purchased or redeemed in part will be issued in the
name of the Holder thereof upon cancellation of the original Debenture. On and
after the purchase or redemption date, unless the Company defaults in payment of
the purchase or redemption price, interest shall cease to accrue on Debentures
or portions thereof purchased or called for redemption.

CERTAIN COVENANTS

Restricted Payments. The Indenture will provide that the Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly: (i) declare or pay any dividend or make any distribution on account
of the Company's or any of its Restricted Subsidiaries' Equity Interests,
including any dividend or distribution payable in connection with any merger or
consolidation (other than (A) dividends or distributions by the Company payable
in Equity Interests (other than Disqualified Stock) of the Company or (B)
dividends or distributions by a Restricted Subsidiary of the Company so long as,
in the case of any dividend or distribution payable on or in respect of any
class or series of securities issued by a Subsidiary other than a Wholly Owned
Subsidiary, the Company or a Restricted Subsidiary of the Company receives at
least its pro rata share of such dividend or distribution in accordance with its
Equity Interests in such class or series of securities); (ii) purchase, redeem,
defease or otherwise acquire or retire for value any Equity Interests of the
Company; (iii) make any principal payment on, or redeem, repurchase, defease or
otherwise acquire or retire for value in each case, prior to any scheduled
repayment, or maturity, any Subordinated Indebtedness; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of such Restricted Payment:

(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;

(b) immediately before and immediately after giving effect to such
transaction on a pro forma basis, the Company could incur $1.00 of
additional Indebtedness under the provisions of the first paragraph of
"--Limitations on Incurrence of Indebtedness and Issuance of Disqualified
Stock"; and

(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the Issuance Date (including Restricted Payments permitted by clauses
(i), (v), (vi) and (viii) of the next succeeding paragraph, but excluding
all other Restricted Payments permitted by the next succeeding paragraph),
is less than the sum of (i) 50% of the Consolidated Net Income of the
Company for the period (taken as one accounting period) from the Issuance
Date to the end of the Company's most recently ended fiscal quarter for
which internal financial statements are available at the time of such
Restricted Payment (or, in the case such Consolidated Net Income for such
period is a deficit, minus 100% of such deficit), plus (ii) 100% of the
aggregate net cash proceeds and the fair market value, as determined in good
faith by the Board of Directors, of marketable securities received by the
Company since the Issuance Date from the issue or sale of Equity Interests
of the Company (including Retired Capital Stock (as defined below), but
excluding cash proceeds and any marketable securities received from (A) the
sale of Equity Interests of the Company to members of management, directors
or consultants of the Company and its Subsidiaries after the Issuance Date
to the extent such amounts have been applied to Restricted Payments in
accordance with clause (iv) of the next succeeding paragraph, (B) the sale
of Equity Interests of the Company to Holdings where such proceeds are from
the sale of Equity Interests of Holdings to members of management, directors
or consultants of the Company and its Subsidiaries after the Issuance Date
to the extent such amounts have been applied to Restricted Payments in
accordance with clause (iv) of the next succeeding paragraph, (C) the sale
of Designated Preferred Stock and (D) the sale of Equity Interests of the
Company to Holdings where such proceeds are from the sale of Contributed

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Preferred Stock) or debt securities of the Company that have been converted
into such Equity Interests of the Company (other than Refunding Capital
Stock (as defined below) or Equity Interests or convertible debt securities
of the Company sold to a Restricted Subsidiary of the Company and other than
Disqualified Stock or debt securities that have been converted into
Disqualified Stock), plus (iii) 100% of the aggregate amounts contributed to
the capital of the Company (including amounts recorded by the Company as
capital contributions in accordance with GAAP that result from the
allocation to the Company of the tax benefits to the consolidated group, of
which Holdings is a part, of the Preferred Securities, but excluding capital
contributions by Holdings to the Company (x) with the proceeds from the sale
of Equity Interests of Holdings to members of management, directors or
consultants of the Company after the Issuance Date to the extent such
amounts have been applied to Restricted Payments in accordance with clause
(iv) of the next succeeding paragraph, (y) from the proceeds of Contributed
Preferred Stock and (z) that are permitted to be included in the calculation
of Consolidated Net Income pursuant to clause (v) of the definition
thereof), plus (iv) 100% of the aggregate amounts received in cash and the
fair market value of marketable securities (other than Restricted
Investments) received from (A) the sale or other disposition of Restricted
Investments made by the Company and its Restricted Subsidiaries or (B) a
dividend from, or the sale of the stock of, an Unrestricted Subsidiary, plus
(v) other Restricted Payments in an aggregate amount not to exceed $25
million.

The foregoing provisions will not prohibit:

(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at the date of declaration such payment would have
complied with the provisions of the Indenture;

(ii) (a) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company (the "Retired Capital Stock"), Equity
Interests of Holdings (the "Retired Holdings Capital Stock"), Subordinated
Indebtedness of the Company or Indebtedness of Holdings (in the case of
Equity Interests or Indebtedness of Holdings, either directly or indirectly
by means of a dividend or loan or advance to Holdings or any distribution on
account of the Company's Equity Interests), in each case, in exchange for,
or out of the proceeds of, the substantially concurrent sale (other than to
a Restricted Subsidiary of the Company) of Equity Interests of the Company
(other than any Disqualified Stock) (the "Refunding Capital Stock"), and (b)
if immediately prior to the retirement of Retired Capital Stock or Retired
Holdings Capital Stock, as the case may be, the declaration and payment of
dividends thereon was permitted under clause (v) of this paragraph, the
declaration and payment of dividends on the Refunding Capital Stock in an
aggregate amount per year no greater than the aggregate amount of dividends
per annum that was declarable and payable on such Retired Capital Stock
immediately prior to such retirement; provided, however, that at the time of
the declaration of any such dividends, no Default or Event of Default shall
have occurred and be continuing or would occur as a consequence thereof;

(iii) the redemption, repurchase or other acquisition or retirement of
Subordinated Indebtedness of the Company made by exchange for, or out of the
proceeds of the substantially concurrent sale of, new Indebtedness of the
Company so long as (A) the principal amount of such new Indebtedness does
not exceed the principal amount of the Subordinated Indebtedness being so
redeemed, repurchased, acquired or retired for value (plus the amount of any
premium required to be paid under the terms of the instrument governing the
Subordinated Indebtedness being so redeemed, repurchased, acquired or
retired), (B) such Indebtedness is subordinated to Senior Indebtedness and
the Debentures at least to the same extent as such Subordinated Indebtedness
so purchased, exchanged, redeemed, repurchased, acquired or retired for
value, (C) such Indebtedness has a final scheduled maturity date later than
the final scheduled maturity date of the Debentures and (D) such
Indebtedness has a Weighted Average Life to Maturity equal to or greater
than the remaining Weighted Average Life to Maturity of the Debentures;

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(iv) a Restricted Payment to pay for the repurchase, retirement or other
acquisition or retirement for value of any Equity Interests of the Company
or Holdings held by any future, present or former employee, director or
consultant of the Company or any Subsidiary pursuant to any management
equity plan or stock option plan or any other agreement; provided, however,
that the aggregate Restricted Payments made under this clause (iv) does not
exceed in any fiscal year $7.5 million (with unused amounts in any year
being carried over to the next two immediately succeeding fiscal years
subject to a maximum (without giving effect to the following proviso) of $15
million in any fiscal year); provided, further, that such amount in any
calendar year may also be increased by an amount not to exceed (i) the cash
proceeds from the sale of Equity Interests of the Company (or capital
contributions, or purchase of Equity Interests of the Company, by Holdings
with the proceeds from the sale of Equity Interests of Holdings) to members
of management, directors or consultants of the Company and its Subsidiaries
that occurs after the Issuance Date (to the extent the cash proceeds from
the sale of such Equity Interests or capital contributions have not
otherwise been applied to the payment of Restricted Payments by virtue of
the preceding paragraph (c)) plus (ii) the cash proceeds of key man life
insurance policies received by the Company and its Restricted Subsidiaries
after the Issuance Date less (iii) the amount of any Restricted Payments
previously made pursuant to clauses (i) and (ii); and provided further, that
cancellation of Indebtedness owing to the Company from members of management
of the Company or any of its Restricted Subsidiaries in connection with a
repurchase of Equity Interests of the Company will not be deemed to
constitute a Restricted Payment for purposes of this covenant or any other
provision of the Indenture;

(v) the declaration and payment of dividends to holders of any class or
series of Designated Preferred Stock (other than Disqualified Stock) issued
after the Issuance Date (including, without limitation, the declaration and
payment of dividends on Refunding Capital Stock in excess of the dividends
declarable and payable thereon pursuant to clause (ii)); provided, however,
that for the most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date
of issuance of such Designated Preferred Stock, after giving effect to such
issuance on a pro forma basis (including the payment of dividends to
Holdings for the purpose of declaring and paying dividends on Contributed
Preferred Stock), the Company and its Restricted Subsidiaries would have had
a Fixed Charge Coverage Ratio of at least (x) 1.50 to 1.00 if such date is
prior to June 30, 1999 and (y) 2.00 to 1.00 if such date is on or after June
30, 1999;

(vi) the declaration and payment of dividends to Holdings for the
purpose of declaring and paying dividends on Contributed Preferred Stock
issued after the Issuance Date; provided, however, that the aggregate amount
of such dividends permitted to be paid pursuant to this clause (vi) does not
exceed the capital contributions by Holdings to the Company from the
proceeds of the issuance of such Contributed Preferred Stock; provided
further that for the most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date
of issuance of such Contributed Preferred Stock, after giving effect to such
issuance on a pro forma basis (including the payment of dividends to
Holdings for the purpose of declaring and paying dividends on Contributed
Preferred Stock), the Company and its Restricted Subsidiaries would have had
a Fixed Charge Coverage Ratio of at least (x) 1.50 to 1.00 if such date is
prior to June 30, 1999 and (y) 2.00 to 1.00 if such date is on or after June
30, 1999;

(vii) Investments in Unrestricted Subsidiaries having an aggregate fair
market value, taken together with all other Investments made pursuant to
this clause (vii) that are at that time outstanding, not to exceed $20.0
million at the time of such Investment (with the fair market value of each
Investment being measured at the time made and without giving effect to
subsequent changes in value);

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(viii) (a) the payment of dividends on the Company's Common Stock,
following the first public offering of the Company's Common Stock after the
Issuance Date, of up to 6% per annum of the net proceeds received by the
Company in such public offering, other than public offerings with respect to
the Company's Common Stock registered on Form S-8 and (b) the payment of
dividends to Holdings for the payment of dividends on Holdings common stock,
following the first public offering of Holdings common stock after the
Issuance Date, of up to 6% per annum of the net proceeds thereof contributed
to the capital of the Company by Holdings after such public offering, other
than public offerings with respect to Holdings common stock registered on
Form S-8;

(ix) payments to Holdings for the payment of taxes pursuant to the Tax
Allocation Agreement (as defined in the Indenture) as the same may be
amended from time to time in a manner that is not disadvantageous to the
Holders in any material respect;

(x) payments to Holdings (other than those covered in clause (ix) above)
used to pay ordinary operating expenses (other than taxes) of Holdings
incurred in the normal course of business so long as Holdings is a holding
company with substantially no assets (other than investments in
Subsidiaries, other Investments, Cash Equivalents and assets related to the
performance of management functions with respect to all such assets) or
operations (other than the performance of management functions with respect
to its investments in Subsidiaries, other Investments and Cash Equivalents);
and

(xi) repurchases of Equity Interests deemed to occur upon exercise of
stock options if such Equity Interests represent a portion of the exercise
price of such options;

provided, however, that at the time of, and after giving effect to, any
Restricted Payment permitted under clauses (iii), (iv), (v), (vi), (vii), (viii)
and (xi), no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof and, so long as any Event of Default
shall have occurred and be continuing and payments to Holdings under the Tax
Allocation Agreement are permitted to be made on a gross basis (without
reduction for any tax benefits to the consolidated group, of which Holdings is a
part, of the Preferred Securities or other similar securities), the amount of
Restricted Payments permitted under clause (ix) will be reduced (such reduced
amount shall in no event be less than zero) by the aggregate amount of such tax
benefits (such limitation will not affect the amount of capital contributions
recognized pursuant to clause (iii) of paragraph (c)); and provided further that
for purposes of determining the aggregate amount expended for Restricted
Payments in accordance with clause (c) of the immediately preceding paragraph,
only the amounts expended under clauses (i), (v), (vi) and (viii) shall be
included.

As of the Issuance Date, all of the Company's Subsidiaries will be
Restricted Subsidiaries. The Company will not permit any Unrestricted Subsidiary
to become a Restricted Subsidiary except pursuant to the second to last sentence
of the definition of "Unrestricted Subsidiary." For purposes of designating any
Restricted Subsidiary as an Unrestricted Subsidiary, all outstanding Investments
by the Company and its Restricted Subsidiaries (except to the extent repaid) in
the Subsidiary so designated will be deemed to be Restricted Payments in an
amount determined as set forth in the last sentence of the definition of
"Investments." Such designation will only be permitted if a Restricted Payment
in such amount would be permitted at such time and if such Subsidiary otherwise
meets the definition of an Unrestricted Subsidiary. Unrestricted Subsidiaries
will not be subject to any of the restrictive covenants set forth in the
Indenture.

Limitations on Incurrence of Indebtedness and Issuance of Disqualified
Stock. The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable with
respect to (collectively, "incur" and correlatively, an "incurrence" of) any
Indebtedness (including Acquired Indebtedness) or any shares of Disqualified
Stock; provided, however, that the Company may incur Indebtedness or issue
shares of Preferred Stock that is Disqualified Stock if the Fixed Charge

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Coverage Ratio for the Company and its Restricted Subsidiaries for the most
recently ended four full fiscal quarters for which internal financial statements
are available immediately preceding the date of such incurrence would have been
(x) at least 2.00 to 1.00 if such date is prior to June 30, 1999 and (y) 2.50 to
1.00 if such date is on or after June 30, 1999 determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Indebtedness had been incurred or such Preferred Stock had been
issued, as the case may be, and the application of proceeds had occurred at the
beginning of such four-quarter period.

The foregoing limitations will not apply to:

(a) the incurrence by the Company of Indebtedness under the Senior
Credit Facility and the issuance of letters of credit thereunder (with
letters of credit being deemed to have a principal amount equal to the face
amount thereof) up to an aggregate principal amount of $975 million
outstanding at any one time, less principal repayments of term loans and
permanent commitment reductions with respect to revolving loans and letters
of credit under the Senior Credit Facility made after the Issuance Date in
each case with the Net Proceeds of Asset Sales, if any;

(b) the incurrence by the Company of Indebtedness represented by the
Debentures;

(d) Indebtedness (including Capitalized Lease Obligations) incurred by
the Company or any of its Restricted Subsidiaries to finance the purchase,
lease or improvement of property (real or personal) or equipment (whether
through the direct purchase of assets or the Capital Stock of any Person
owning such assets) in an aggregate principal amount which, when aggregated
with the principal amount of all other Indebtedness then outstanding and
incurred pursuant to this clause (d), does not exceed $25 million (including
any Refinancing Indebtedness with respect thereto);

(e) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including without
limitation letters of credit issued in respect of its insurance or
reinsurance business (including letters of credit issued to satisfy
insurance regulatory requirements) or in respect of workers' compensation
claims or self-insurance, or other Indebtedness with respect to
reimbursement type obligations regarding workers' compensation claims;
provided, however, that upon the drawing of such letters of credit or the
incurrence of such Indebtedness, such obligations are reimbursed or repaid
within 30 days following such incurrence;

(f) obligations (to the extent such obligations are considered
Indebtedness under the Indenture) arising from agreements of the Company or
a Restricted Subsidiary providing for indemnification (including loss
reserve guarantees), adjustment of purchase price or similar obligations, in
each case, incurred or assumed in connection with the disposition of any
business, assets or a Subsidiary, other than guarantees of Indebtedness
incurred by any Person acquiring all or any portion of such business, assets
or a Subsidiary for the purpose of financing such acquisition; provided,
however, that (i) such Indebtedness is not reflected on the balance sheet of
the Company or any Restricted Subsidiary (contingent obligations referred to
in a footnote to financial statements and not otherwise reflected on the
balance sheet will not be deemed to be reflected on such balance sheet for
purposes of this clause (i)) and (ii) the maximum assumable liability in
respect of all such Indebtedness shall at no time exceed the gross proceeds
including noncash proceeds (the fair market value of such noncash proceeds
being measured at the time received and without giving effect to any
subsequent changes in value), actually received by the Company and its
Restricted Subsidiaries in connection with such disposition;

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(g) Indebtedness of the Company to a Restricted Subsidiary and
Indebtedness of a Restricted Subsidiary to the Company or another Restricted
Subsidiary; provided, however, that any subsequent issuance or transfer of
any Capital Stock or any other event which results in any such Restricted
Subsidiary ceasing to be a Restricted Subsidiary or any other subsequent
transfer of any such Indebtedness (except to the Company or a Restricted
Subsidiary) shall be deemed, in each case to be an incurrence of such
Indebtedness;

(h) Hedging Obligations that are incurred (1) for the purpose of fixing
or hedging interest rate risk with respect to any Indebtedness that is
permitted by the terms of the Indenture to be outstanding or (2) for the
purpose of fixing or hedging currency exchange rate risk with respect to any
currency exchanges;

(i) obligations in respect of performance, surety and appeal bonds and
completion guarantees provided by the Company or any Restricted Subsidiary
in the ordinary course of business;

(j) Indebtedness not otherwise permitted hereunder in an amount under
this clause (j) not to exceed $150 million at any one time, provided that up
to $50 million of such Indebtedness outstanding at any time may be
Indebtedness of Restricted Subsidiaries;

(k) Indebtedness or Preferred Stock that is Disqualified Stock of a
Person existing at the time such Person is acquired by the Company or any of
its Restricted Subsidiaries, including through a consolidation or merger of
such Person with or into the Company or a Restricted Subsidiary in
accordance with the terms of the Indenture; provided, however, that such
Indebtedness or such Disqualified Stock is not incurred or issued, as the
case may be, in connection with, or to provide all or any portion of the
funds or credit support utilized to consummate such acquisition,
consolidation or merger; and provided further that the Fixed Charge Coverage
Ratio (determined, with respect to Indebtedness or Preferred Stock incurred
or issued (and only with respect to such Indebtedness or Preferred Stock
incurred or issued), as the case may be, pursuant to this clause (k) prior
to the second anniversary of the Issuance Date, without regard to clause
(iii) of the definition of Consolidated Net Income to the extent that the
application of such clause in determining Consolidated Net Income causes a
Net Income Deduction as a result of regulatory restrictions imposed by NYID,
as a result of administrative policy, relating to the change of control
resulting from the Acquisition) for the Company and its Restricted
Subsidiaries for the most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date
of such transaction would have been at least (x) 2.00 to 1.00 if such date
is prior to June 30, 1999 and (y) 2.50 to 1.00 if such date is on or after
June 30, 1999 determined on a pro forma basis, as if such transaction had
occurred at the beginning of such four-quarter period and such Indebtedness
or such Disqualified Stock and the EBITDA of such acquired, consolidated or
merged Person had been included for all purposes in such pro forma
calculation;

(l) Indebtedness incurred by a Restricted Subsidiary; provided, however,
that the Fixed Charge Coverage Ratio for the Company and its Restricted
Subsidiaries for the most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date
of incurrence of such Indebtedness would have been at least 3.00 to 1.00
determined on a pro forma basis, as if such Indebtedness had been incurred
at the beginning of such four-quarter period; and provided, further, that if
such Restricted Subsidiary guarantees Indebtedness of the Company, such
Restricted Subsidiary will comply with the provisions of clause (m) below;

(m) any guarantee by a Restricted Subsidiary of Indebtedness of the
Company; provided that if such Indebtedness is Senior Indebtedness, the
Debentures will be guaranteed by such Restricted Subsidiary, which guarantee
will be subordinated to such Subsidiary's guarantee of the Senior
Indebtedness to the same extent as the Debentures are subordinated to Senior
Indebtedness of the

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Company under the Indenture, and if such Indebtedness is not Senior
Indebtedness, the Debentures will be guaranteed by such Restricted
Subsidiary on a pari passu basis (if such Indebtedness is pari passu in
right of payment to the Debentures) or on a senior basis (if such
Indebtedness is subordinated in right of payment to the Debentures;

(n) any guarantee by the Company of Indebtedness or other obligations of
any of its Restricted Subsidiaries so long as the incurrence of such
Indebtedness incurred by such Restricted Subsidiary is permitted under the
terms of the Indenture; and

(o) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness which serves to refund, refinance or restructure any
Indebtedness incurred as permitted under the first paragraph of this
covenant and clauses (b), (c), (d), (k) and (l) above, or any Indebtedness
issued to so refund, refinance or restructure such Indebtedness including
additional Indebtedness incurred to pay premiums and fees in connection
therewith (the "Refinancing Indebtedness") prior to its respective maturity;
provided however that such Refinancing Indebtedness (i) has a Weighted
Average Life to Maturity at the time such Refinancing Indebtedness is
incurred which is not less than the remaining Weighted Average Life to
Maturity of Indebtedness being refunded or refinanced, (ii) to the extent
such Refinancing Indebtedness refinances Indebtedness subordinated or pari
passu to the Debentures, such Refinancing Indebtedness is subordinated or
pari passu to the Debentures at least to the same extent as the Indebtedness
being refinanced or refunded and (iii) shall not include (x) Indebtedness of
a Subsidiary that refinances Indebtedness of the Company or (y) Indebtedness
of the Company or a Restricted Subsidiary that refinances Indebtedness of an
Unrestricted Subsidiary; and provided further that subclauses (i) and (ii)
of this clause (o) will not apply to any refunding or refinancing of any
Senior Indebtedness.

Liens. The Indenture will provide that the Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly create,
incur, assume or suffer to exist any Lien that secures obligations under any
Pari Passu Indebtedness or Subordinated Indebtedness on any asset or property of
the Company or such Restricted Subsidiary, or any income or profits therefrom,
or assign or convey any right to receive income therefrom, unless the Debentures
are equally and ratably secured with the obligations so secured or until such
time as such obligations are no longer secured by a Lien.

Merger, Consolidation, or Sale of All or Substantially All Assets. The
Indenture will provide that the Company may not consolidate or merge with or
into or wind up into (whether or not the Company is the surviving corporation),
or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions to, any Person unless (i) the Company is the surviving corporation
or the Person formed by or surviving any such consolidation or merger (if other
than the Company) or to which such sale, assignment, transfer, lease, conveyance
or other disposition will have been made is a corporation organized or existing
under the laws of the United States, any state thereof, the District of
Columbia, or any territory thereof (the Company or such Person, as the case may
be, being herein called the "Successor Company"); (ii) the Successor Company (if
other than the Company) expressly assumes all the obligations of the Company
under the Indenture and the Debentures pursuant to a supplemental indenture or
other documents or instruments in form reasonably satisfactory to the Trustee;
(iii) immediately after such transaction no Default or Event of Default exists;
(iv) the Successor Company, at the time of such transaction and after giving pro
forma effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test
(determined, with respect to any such merger, sale, assignment, transfer, lease,
conveyance or other disposition occurring on or before the second anniversary of
the Issuance Date and so long as no Indebtedness is incurred by the Company or
such other Person in connection with, or to provide all or any portion of the
funds or credit support utilized to consummate such, merger, sale, assignment,
transfer, lease, conveyance or other disposition, without regard to clause (iii)
of the definition of Consolidated Net Income to the extent that the application
of such clause in determining Consolidated

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Net Income causes a Net Income Deduction as a result of regulatory restrictions
imposed by NYID, as a result of administrative policy, relating to the change of
control resulting from the Acquisition) set forth in the first paragraph of the
covenant described under "--Limitations on Incurrence of Indebtedness and
Issuance of Disqualified Stock"; provided that the determination of the Fixed
Charge Coverage Ratio as set forth in the parenthetical included in this clause
(iv) will not prohibit the Company or any Restricted Subsidiary from otherwise
incurring Indebtedness permitted by and in accordance with the terms (including
the determination of the Fixed Charge Coverage Ratio where required without
regard to the parenthetical in this clause (iv)) of the Indenture; and (v) the
Company shall have delivered to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that such consolidation, merger or transfer and
such supplemental indenture (if any) comply with the Indenture. The Successor
Company will succeed to, and be substituted for, the Company under the Indenture
and the Debentures. Notwithstanding the foregoing clauses (iii) and (iv), (a)
any Restricted Subsidiary may consolidate with, merge into or transfer all or
part of its properties and assets to the Company and (b) the Company may merge
with an Affiliate incorporated solely for the purpose of reincorporating the
Company in another jurisdiction.

Transactions with Affiliates. The Indenture will provide that the Company
will not, and will not permit any of its Restricted Subsidiaries to, sell,
lease, transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction") involving
aggregate consideration or payments in excess of $5.0 million, unless:

(a) such Affiliate Transaction is on terms that are not materially less
favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by the Company or
such Restricted Subsidiary with an unrelated Person; and

(b) the Company delivers to the Trustee with respect to any Affiliate
Transaction involving aggregate consideration or payments in excess of $15.0
million, a resolution adopted by a majority of the Disinterested Directors
of the Board of Directors approving such Affiliate Transaction and set forth
in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (a) above.

The foregoing provisions will not apply to the following: (i) transactions
between or among the Company and/or any of its Restricted Subsidiaries; (ii)
Restricted Payments permitted by the provisions of the Indenture described above
under the covenant "--Restricted Payments"; (iii) the payment of customary
annual consulting and advisory fees and related expenses to KKR and its
Affiliates; (iv) the payment of reasonable and customary regular fees paid to,
and indemnity provided on behalf of, officers, directors, employees or
consultants of the Company or any Restricted Subsidiary; (v) payments by the
Company or any of its Restricted Subsidiaries to KKR and its Affiliates made
pursuant to any financial advisory, financing, underwriting or placement
agreement or in respect of other investment banking activities, including,
without limitation, in connection with acquisitions or divestitures which are
approved by the Board of Directors of the Company in good faith; (vi)
transactions in which the Company or any of its Restricted Subsidiaries, as the
case may be, delivers to the Trustee a letter from an Independent Financial
Advisor stating that such transaction is fair to the Company or such Restricted
Subsidiary from a financial point of view or meets the requirements of clause
(a) of the preceding paragraph; (vii) payments or loans to employees or
consultants which are approved by the Board of Directors of the Company in good
faith; (viii) any agreement as in effect as of the Issuance Date or any
amendment thereto or any transaction contemplated thereby (including pursuant to
any amendment thereto so long as any such amendment is not disadvantageous to
the Holders of the Debentures in any material respect); (ix) the existence of,
or the performance by the Company or any of its Restricted Subsidiaries of its
obligations under the terms of, any stockholders

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agreement (including any registration rights agreement or purchase agreement
related thereto) to which it is a party as of the Issuance Date and any similar
agreements which it may enter into thereafter; provided, however, that the
existence of, or the performance by the Company or any of its Restricted
Subsidiaries of obligations under any future amendment to any such existing
agreement or under any similar agreement entered into after the Issuance Date
shall only be permitted by this clause (ix) to the extent that the terms of any
such amendment or new agreement are not otherwise disadvantageous to the Holders
of the Debentures in any material respect; (x) transactions permitted by, and
complying with, the provisions of the covenant described under "--Merger,
Consolidation, or Sale of All or Substantially All Assets"; (xi) the payment of
all fees and expenses related to the Acquisition and Financings; (xii) the
Preferred Facility as in effect as of the Issuance Date, and as may be amended,
supplemented or modified from time to time, provided that such terms as so
amended, supplemented or modified are no less favorable to the Holders in any
material respect; (xiii) payments pursuant to the Tax Allocation Agreement as in
effect as of the Issuance Date or any amendment thereto so long as such
amendment is not disadvantageous to the Holders in any material respect; (xiv)
transactions with Holdings for services of the type provided by Talegen Holdings
as of the Issuance Date to the Subsidiaries; and (xv) transactions with
customers or insureds, suppliers, consultants, investment advisors, joint
venture partners or purchasers or sellers of goods or services (including,
without limitation, each of TRG, IIC and Envision and their respective
subsidiaries, other insurers, reinsurers and claims managers), in each case in
the ordinary course of business (including, without limitation, pursuant to
joint venture agreements) and otherwise in compliance with the terms of the
Indenture which are fair to the Company or its Restricted Subsidiaries, in the
reasonable determination of the Board of Directors of the Company or the senior
management thereof, or are on terms at least as favorable as might reasonably
have been obtained at such time from an unaffiliated party.

Dividend and Other Payment Restrictions Affecting Subsidiaries. The
Indenture will provide that the Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause to
become effective any consensual encumbrance or consensual restriction on the
ability of any such Restricted Subsidiary to:

(a) (i) pay dividends or make any other distributions to the Company or
any of its Restricted Subsidiaries on its Capital Stock or any other
interest or participation in, or measured by, its profits or (ii) pay any
Indebtedness owed to the Company or any of its Restricted Subsidiaries;

(b) make loans or advances to the Company or any of its Restricted
Subsidiaries; or

except (in each case) for such encumbrances or restrictions existing
under or by reason of:

(1) contractual encumbrances or restrictions in effect on the Issuance
Date, including pursuant to the Senior Credit Facility and its related
documentation;

(2) the Indenture and the Debentures;

(3) customary non-assignment or subletting provisions in leases entered
into in the ordinary course of business and consistent with past practices;

(4) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature discussed in
clause (c) above on the property so acquired;

(5) applicable insurance or other laws, rules, regulations or orders or
agreements with any governmental authority that regulates the insurance
industry;

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(6) Indebtedness or Capital Stock of Restricted Subsidiaries that are
acquired by or merged with or into the Company or any of its Restricted
Subsidiaries after the Issuance Date; provided that such Indebtedness or
Capital Stock is in existence at the time of such acquisition and was not
incurred, assumed or issued in contemplation of such acquisition or merger;

(7) contracts for the sale of assets, including, without limitation,
customary restrictions with respect to a Subsidiary pursuant to an agreement
that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Subsidiary;

(8) secured Indebtedness otherwise permitted to be incurred pursuant to
the covenants described under "Limitations on Incurrence of Indebtedness and
Issuance of Disqualified Stock" and "Liens" that limit the right of the
debtor to dispose of the assets securing such Indebtedness;

(9) customary provisions contained in leases and other agreements
entered into in the ordinary course of business;

(10) provisions in joint venture agreements and other similar agreements
that are materially similar to ordinary provisions entered into by parties
to joint ventures in the Insurance Business at the time of such joint
venture or similar agreement;

(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business;

(12) Indebtedness permitted to be incurred subsequent to the Issuance
Date pursuant to the "Limitations on Incurrence of Indebtedness and Issuance
of Disqualified Stock" covenant; provided that any such restrictions are
customary and ordinary with respect to the type of Indebtedness being
incurred (under relevant circumstances); and

(13) any encumbrances or restrictions of the type referred to in clauses
(a), (b) and (c) above imposed by any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings of the contracts, instruments or obligations referred to in
clauses (c)(1) through (c)(12) above, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are, in the good faith judgment of the
Company's Board of Directors, no more restrictive with respect to such
dividend and other payment restrictions than those contained in the dividend
or other payment restrictions prior to such amendment, modification,
restatement, renewal, increase, supplement, refunding, placement or
refinancing.

Limitation on Other Senior Subordinated Indebtedness. The Indenture will
provide that the Company will not, directly or indirectly, incur any
Indebtedness (including Acquired Indebtedness) that is subordinate in right of
payment to any Indebtedness of the Company unless such Indebtedness is either
(a) pari passu in right of payment with the Debentures or (b) subordinate in
right of payment to the Debentures, in the same manner and at least to the same
extent as the Debentures are subordinate to Senior Indebtedness.

Reports and Other Information. Under the terms of the Indenture, the Company
will file with the Trustee and provide Holders, within 15 days after it files
them with the Commission, copies of its annual reports and of the information,
documents and other reports (or copies of such portions of any of the foregoing
as the Commission may by rule or regulation prescribe) which the Company is
required to file with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act
or otherwise report on an annual and quarterly basis on forms provided for such
annual and quarterly reporting pursuant to rules and regulations promulgated by
the Commission, the Indenture will require the Company to continue to file with
the Commission and provide the Trustee and Holders with, without cost to each
Holder, (a) within 90 days after the end of each fiscal year,

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annual reports on Form 10-K (or any successor or comparable form) containing the
information required to be contained therein (or required in such successor or
comparable form); (b) within 45 days after the end of each of the first three
fiscal quarters of each fiscal year, reports on Form 10-Q (or any successor or
comparable form); and (c) promptly from time to time after the occurrence of an
event required to be therein reported, such other reports on Form 8-K (or any
successor or comparable form); provided however the Company shall not be so
obligated to file such reports with the Commission if the Commission does not
permit such filings. The Company will in all cases, without cost to each
recipient, provide copies of such information to the holders of the Debentures
and, if they are not permitted to file such reports with the Commission, shall
make available such information to prospective purchasers and to securities
analysts and broker-dealers upon their request.

EVENTS OF DEFAULT AND REMEDIES

The following events constitute Events of Default under the Indenture:

(i) default in payment when due and payable, upon redemption,
acceleration or otherwise, of principal or premium, if any, on the
Debentures whether or not such payment shall be prohibited by the
subordination provisions relating to the Debentures;

(ii) default for 30 days or more in the payment when due of interest
with respect to the Debentures whether or not such payment shall be
prohibited by the subordination provisions relating to the Debentures;

(iii) failure by the Company for 30 days after receipt of written notice
given by the Trustee or the Holders of at least 30% in principal amount of
the Debentures then outstanding to comply with any of its other agreements
in the Indenture or the Debentures;

(iv) default under any mortgage, indenture or instrument under which
there is issued or by which there is secured or evidenced any Indebtedness
for money borrowed by the Company or any of its Restricted Subsidiaries or
the payment of which is guaranteed by the Company or any of its Restricted
Subsidiaries (other than Indebtedness owed to the Company or a Restricted
Subsidiary), whether such Indebtedness or guarantee now exists or is created
after the Issuance Date, if both (A) such default either (1) results from
the failure to pay any such Indebtedness at its stated final maturity (after
giving effect to any applicable grace periods) or (2) relates to an
obligation other than the obligation to pay principal of any such
Indebtedness at its stated final maturity and results in the holder or
holders of such Indebtedness causing such Indebtedness to become due prior
to its stated maturity and (B) the principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in default
for failure to pay principal at stated final maturity (after giving effect
to any applicable grace periods), or the maturity of which has been so
accelerated, aggregate $30 million or more at any one time outstanding;

(v) failure by the Company or any of its Significant Subsidiaries to pay
final judgments aggregating in excess of $30 million, which final judgments
remain unpaid, undischarged and unstayed for a period of more than 60 days
after such judgment becomes final, and in the event such judgment is covered
by insurance, an enforcement proceeding has been commenced by any creditor
upon such judgment or decree which is not promptly stayed; or

(vi) certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries.

If any Event of Default (other than by reason of bankruptcy or insolvency)
occurs and is continuing under the Indenture, the Trustee or the Holders of at
least 30% in principal amount of the then outstanding Debentures may declare the
principal, premium, if any, interest and any other monetary obligations on all
the then outstanding Debentures to be due and payable immediately; provided,

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however, that, so long as any Indebtedness permitted to be incurred pursuant to
the Senior Credit Facility shall be outstanding, no such acceleration with
respect to an Event of Default described in clause (ii) of the first paragraph
of this section shall be effective until the earlier of (i) acceleration of any
such Indebtedness under the Senior Credit Facility or (ii) five business days
after the giving of written notice to the Company of such acceleration. Upon
such declaration, such principal and interest will be due and payable
immediately. Notwithstanding the foregoing, in the case of an Event of Default
arising under clause (vi) of the first paragraph of this section, all
outstanding Debentures will become due and payable without further action or
notice. Holders of Debentures may not enforce the Indenture or the Debentures
except as provided in the Indenture. Subject to certain limitations, Holders of
a majority in principal amount of the then outstanding Debentures may direct the
Trustee in its exercise of any trust or power. The Indenture provides that the
Trustee may withhold from Holders of Debentures notice of any continuing Default
or Event of Default (except a Default or Event of Default relating to the
payment of principal, premium, if any, or interest) if it determines that
withholding notice is in their interest. In addition, the Trustee shall have no
obligation to accelerate the Debentures if in the best judgment of the Trustee
acceleration is not in the best interest of the Holders of such Debentures.

The Indenture provides that the Holders of a majority in aggregate principal
amount of the then outstanding Debentures issued thereunder by notice to the
Trustee may on behalf of the Holders of all of such Debentures waive any
existing Default or Event of Default and its consequences under the Indenture
except a continuing Default or Event of Default in the payment of interest on,
premium, if any, or the principal of, any such Debenture held by a
non-consenting Holder. In the event of any Event of Default specified in clause
(iv) above, such Event of Default and all consequences thereof (including
without limitation any acceleration or resulting payment default) shall be
annulled, waived and rescinded, automatically and without any action by the
Trustee or the Holders of the Debentures, if within 20 days after such Event of
Default arose (x) the Indebtedness or guarantee that is the basis for such Event
of Default has been discharged, or (y) the holders thereof have rescinded or
waived the acceleration, notice or action (as the case may be) giving rise to
such Event of Default, or (z) if the default that is the basis for such Event of
Default has been cured.

The Indenture provides that the Company is required to deliver to the
Trustee annually a statement regarding compliance with the Indenture, and the
Company is required, within five Business Days, upon becoming aware of any
Default or Event of Default or any default under any document, instrument or
agreement representing Indebtedness of the Company, to deliver to the Trustee a
statement specifying such Default or Event of Default.

NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS

No director, officer, employee, incorporator or stockholder of the Company
shall have any liability for any obligations of the Company under the Debentures
or the Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of the Debentures by accepting a
Debenture waives and releases all such liability. The waiver and release are
part of the consideration for issuance of the Debentures. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.

LEGAL DEFEASANCE AND COVENANT DEFEASANCE

The obligations of the Company under the Indenture will terminate (other
than certain obligations) and will be released upon payment in full of all of
the Debentures. The Company may, at its option and at any time, elect to have
all of its obligations discharged with respect to the outstanding Debentures
("Legal Defeasance") and cure all then existing Events of Default except for (i)
the rights of holders of outstanding Debentures to receive payments in respect
of the principal of, premium, if any,

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and interest on such Debentures when such payments are due solely out of the
trust created pursuant to the Indenture, (ii) the Company's obligations with
respect to Debentures concerning issuing temporary Debentures, registration of
such Debentures, mutilated, destroyed, lost or stolen Debentures and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Debentures. In the event Covenant Defeasance occurs, certain events (not
including non-payment on other indebtedness, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Debentures.

In order to exercise either Legal Defeasance or Covenant Defeasance with
respect to the Debentures,

(i) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders of the Debentures, cash in U.S. dollars,
non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium, if
any, and interest due on the outstanding Debentures on the stated maturity
date or on the applicable redemption date, as the case may be, of such
principal, premium, if any, or interest on the outstanding Debentures;

(ii) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that, subject to customary assumptions
and exclusions, (A) the Company has received from, or there has been
published by, the United States Internal Revenue Service a ruling or (B)
since the Issuance Date, there has been a change in the applicable U.S.
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel in the United States shall confirm that, subject to
customary assumptions and exclusions, the Holders of the outstanding
Debentures will not recognize income, gain or loss for U.S. federal income
tax purposes as a result of such Legal Defeasance and will be subject to
U.S. federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred;

(iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that, subject to customary
assumptions and exclusions, the Holders of the outstanding Debentures will
not recognize income, gain or loss for U.S. federal income tax purposes as a
result of such Covenant Defeasance and will be subject to such tax on the
same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred;

(iv) no Default or Event of Default shall have occurred and be
continuing with respect to certain Events of Default on the date of such
deposit;

(v) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, any material
agreement or instrument (other than the Indenture) to which the Company is a
party or by which the Company is bound;

(vi) the Company shall have delivered to the Trustee an opinion of
counsel to the effect that, as of the date of such opinion and subject to
customary assumptions and exclusions following the deposit, the trust funds
will not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally under
any applicable U.S. federal or state law, and that the Trustee has a
perfected security interest in such trust funds for the ratable benefit of
the Holders;

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(vii) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of defeating, hindering, delaying or defrauding any creditors of the
Company or others; and

(viii) the Company shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel in the United States (which opinion of
counsel may be subject to customary assumptions and exclusions) each stating
that all conditions precedent provided for or relating to the Legal
Defeasance or the Covenant Defeasance, as the case may be, have been
complied with.

SATISFACTION AND DISCHARGE

The Indenture will be discharged and will cease to be of further effect as
to all Debentures issued thereunder, when either (a) all such Debentures
theretofore authenticated and delivered (except lost, stolen or destroyed
Debentures which have been replaced or paid and Debentures for whose payment
money has theretofore been deposited in trust and thereafter repaid to the
Company) have been delivered to the Trustee for cancellation; or (b) (i) all
such Debentures not theretofore delivered to such Trustee for cancellation have
become due and payable by reason of the making of a notice of redemption or
otherwise or will become due and payable within one year and the Company has
irrevocably deposited or caused to be deposited with such Trustee as trust funds
in trust an amount of money sufficient to pay and discharge the entire
indebtedness on such Debentures not theretofore delivered to the Trustee for
cancellation for principal, premium, if any, and accrued interest to the date of
maturity or redemption; (ii) no Default or Event of Default with respect to the
Indenture or the Debentures shall have occurred and be continuing on the date of
such deposit or shall occur as a result of such deposit and such deposit will
not result in a breach or violation of, or constitute a default under, any other
instrument to which the Company is a party or by which it is bound; (iii) the
Company has paid all sums payable by it under such Indenture; and (iv) the
Company has delivered irrevocable instructions to the Trustee under such
Indenture to apply the deposited money toward the payment of such Debentures at
maturity or the redemption date, as the case may be. In addition, the Company
must deliver an Officers' Certificate and an Opinion of Counsel to the Trustee
stating that all conditions precedent to satisfaction and discharge have been
satisfied.

AMENDMENT, SUPPLEMENT AND WAIVER

Except as provided in the next two succeeding paragraphs, the Indenture and
the Debentures issued thereunder may be amended or supplemented with the consent
of the Holders of at least a majority in principal amount of the Debentures then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for the Debentures), and any existing default or compliance with
any provision of the Indenture or the Debentures may be waived with the consent
of the Holders of a majority in principal amount of the outstanding Debentures
(including consents obtained in connection with a tender offer or exchange offer
for the Debentures).

The Indenture will provide that without the consent of each Holder affected,
an amendment or waiver may not (with respect to any Debentures held by a
nonconsenting Holder of the Debentures): (i) reduce the principal amount of the
Debentures whose Holders must consent to an amendment, supplement or waiver,
(ii) reduce the principal of or change the fixed maturity of any such Debenture
or alter or waive the provisions with respect to the redemption of the
Debentures (other than provisions relating to the covenants described under
"--Repurchase at the Option of Holders"), (iii) reduce the rate of or change the
time for payment of interest on any Debenture, (iv) waive a Default or Event of
Default in the payment of principal of, premium, if any, or interest with
respect to the Debentures (except a rescission of acceleration of the Debentures
by the Holders of at least a majority in aggregate principal amount of such
Debentures and a waiver of the payment default that resulted from such
acceleration), or in respect of a covenant or provision contained in the
Indenture which cannot be amended or modified without the consent of all
Holders, (v) make any Debenture payable in money other than that stated in such
Debentures, (vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of Holders of such Debentures to receive
payments of

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principal of or premium, if any, or interest with respect to such Debentures,
(vii) make any change in the foregoing amendment and waiver provisions, (viii)
impair the right of any Holder of the Debentures to receive payment of principal
of, or interest on such Holder's Debentures on or after the due dates therefore
or to institute suit for the enforcement of any payment on or with respect to
such Holder's Debentures, or (ix) make any change in the subordination
provisions of the Indenture that would adversely affect the Holders of the
Debentures.

The Indenture will provide that, notwithstanding the foregoing, without the
consent of any Holder of Debentures, the Company and the Trustee together may
amend or supplement the Indenture or the Debentures (i) to cure any ambiguity,
defect or inconsistency, (ii) to provide for uncertificated Debentures in
addition to or in place of certificated Debentures, (iii) to comply with the
covenant relating to mergers, consolidations and sales of assets, (iv) to
provide for the assumption of the Company's obligations to Holders of such
Debentures, (v) to make any change that would provide any additional rights or
benefits to the Holders of the Debentures or that does not adversely affect the
legal rights under the Indenture of any such Holder, (vi) to add covenants for
the benefit of the Holders or to surrender any right or power conferred upon the
Company, or (vii) to comply with requirements of the Commission in order to
effect or maintain the qualification of the Indenture under the Trust Indenture
Act.

The consent of the Holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.

CONCERNING THE TRUSTEE

The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.

The Indenture will provide that the Holders of a majority in principal
amount of the outstanding Debentures issued thereunder will have the right to
direct the time, method and place of conducting any proceeding for exercising
any remedy available to the Trustee, subject to certain exceptions. The
Indenture will provide that in case an Event of Default shall occur (which shall
not be cured), the Trustee will be required, in the exercise of its power, to
use the degree of care of a prudent person in the conduct of his own affairs.
Subject to such provisions, the Trustee will be under no obligation to exercise
any of its rights or powers under the Indenture at the request of any Holder of
such Debentures, unless such Holder shall have offered to the Trustee security
and indemnity satisfactory to it against any loss, liability or expense.

GOVERNING LAW

The Indenture and the Debentures will be, subject to certain exceptions,
governed by and construed in accordance with the internal laws of the State of
New York, without regard to the choice of law rules thereof.

CERTAIN DEFINITIONS

Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided. For
purposes of the Indenture, unless otherwise specifically indicated, the term
"consolidated" with respect to any Person refers to such Person consolidated
with its Restricted Subsidiaries, and excludes from such consolidation any
Unrestricted Subsidiary as if such Unrestricted Subsidiary were not an Affiliate
of such Person.

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"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Restricted Subsidiary of such specified Person,
including Indebtedness incurred in connection with, or in contemplation of, such
other Person merging with or into or becoming a Restricted Subsidiary of such
specified Person and (ii) Indebtedness encumbering any asset acquired by such
specified Person.

"Acquisition" means the acquisition of Talegen Holdings, Inc. by the
Company, pursuant to the Stock Purchase Agreement dated as of January 17, 1996
among the Company, Xerox Corporation, XFSI and New Talegen Holdings.

"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise, provided, however,
that beneficial ownership of 10% or more of the voting securities of a Person
shall be deemed to be control.

"Asset Sale" means:

(i) the sale, conveyance, transfer or other disposition (whether in a
single transaction or a series of related transactions) of property or
assets (including by way of a sale and leaseback) of the Company or any
Restricted Subsidiary (each referred to in this definition as a
"disposition") or

(ii) the issuance or sale of Equity Interests of any Restricted
Subsidiary (whether in a single transaction or a series of related
transactions), in each case, other than:

(a) the sale of all or any portion of the Invested Assets of an
Insurance Subsidiary;

(b) a disposition of Cash Equivalents or Investment Grade Securities
or obsolete equipment in the ordinary course of business;

(c) the disposition of all or substantially all of the assets of the
Company in a manner permitted pursuant to the provisions described above
under "Merger, Consolidation or Sale of All or Substantially All Assets"
or any disposition that constitutes a Change of Control pursuant to the
Indenture;

(d) any disposition that is a Restricted Payment or that is a
dividend or distribution permitted under the covenant described above
under "Restricted Payments" or any Investment that is not prohibited
thereunder or any disposition of Cash Equivalents;

(e) any disposition, or related series of dispositions, of assets
with an aggregate fair market value of less than $2.5 million;

(f) any sale of Equity Interests in, or Indebtedness or other
securities of, an Unrestricted Subsidiary; and

(g) foreclosures on assets.

"Capitalized Lease Obligation" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized and reflected as a liability on
a balance sheet in accordance with GAAP.

"Capital Stock" means with respect to any Person, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock of such Person, including, without limitation, if such Person is
a partnership, partnership interests (whether general or limited) and any other
interest or participation that confers on a Person the right to receive a share
of the profits and losses of, or distributions of assets of, such partnership.

"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof, (iii) certificates of deposit, time
deposits and eurodollar time deposits with maturities of one year or less from

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the date of acquisition, bankers' acceptances with maturities not exceeding one
year and overnight bank deposits, in each case with any commercial bank having
capital and surplus in excess of $500 million, (iv) repurchase obligations for
underlying securities of the types described in clauses (ii) and (iii) entered
into with any financial institution meeting the qualifications specified in
clause (iii) above, (v) commercial paper rated A-1 or the equivalent thereof by
Moody's or S&P and in each case maturing within one year after the date of
acquisition, (vi) investment funds investing 95% of their assets in securities
of the types described in clauses (i)-(v) above, (vii) readily marketable direct
obligations issued by any state of the United States of America or any political
subdivision thereof having one of the two highest rating categories obtainable
from either Moody's or S&P and (viii) Indebtedness or Preferred Stock issued by
Persons with a rating of "A" or higher from S&P or "A2" or higher from Moody's.

"Change of Control" means the occurrence of any of the following:

(i) the sale, lease or transfer, in one or a series of related
transactions, of all or substantially all of the assets of the Company and
its Subsidiaries, taken as a whole;

(ii) Holdings or the Company becomes aware of (by way of a report or any
other filing pursuant to Section 13(d) of the Exchange Act, proxy, vote,
written notice or otherwise) the acquisition by any Person or group (within
the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or
any successor provision), including any group acting for the purpose of
acquiring, holding or disposing of securities (within the meaning of Rule
13d-5(b)(1) under the Exchange Act), other than the Permitted Holder and its
Related Parties, in a single transaction or in a related series of
transactions, by way of merger, consolidation or other business combination
or purchase of beneficial ownership (within the meaning of Rule 13d-3 under
the Exchange Act, or any successor provision) of 50% or more of the total
voting power of the Voting Stock of the Company or Holdings, as the case may
be, and such Person or group beneficially owns more of the total voting
power of the Voting Stock of Holdings or the Company, as the case may be,
than the Permitted Holder and its Related Parties;

(iii) the first day within any two-year period on which a majority of
the members of the Board of Directors of Holdings or the Company are not
Continuing Directors; or

(iv) Holdings or the Company consolidates with, or merges with or into,
another Person or sells, assigns, conveys, transfers, leases or otherwise
disposes of all or substantially all of its assets to any Person, or any
Person consolidates with, or merges with or into, Holdings or the Company,
in any such event pursuant to a transaction in which the outstanding Voting
Stock of Holdings or the Company, as the case may be, is converted into or
exchanged for cash, securities or other property, other than (A) any such
transaction where (1) the outstanding Voting Stock of Holdings or the
Company is converted into or exchanged for (I) Voting Stock (other than
Disqualified Stock) of the surviving or transferee corporation and/or (II)
cash, securities and other property in an amount which could be paid by the
Company as a Restricted Payment under the Indenture and (2) the "beneficial
owners" of the Voting Stock of Holdings or the Company immediately prior to
such transaction own, directly or indirectly, not less than a majority of
the Voting Stock of the surviving or transferee corporation immediately
after such transaction or (B) any such transaction as a result of which the
Permitted Holder or its Affiliates own a majority of the total Voting Stock
and Capital Stock of the surviving or transferee corporation immediately
after the transaction.

"Consolidated Depreciation and Amortization Expense" means with respect to
any Person for any period, the total amount of depreciation and amortization
expense and other noncash charges (excluding any noncash item that represents an
accrual, reserve or amortization of a cash expenditure for a future period) of
such Person and its Restricted Subsidiaries for such period on a consolidated
basis and otherwise determined in accordance with GAAP.

"Consolidated Interest Expense" means, with respect to any period, the sum
of: (a) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, to the extent such

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expense was deducted in computing Consolidated Net Income (including
amortization of original issue discount, non-cash interest payments, the
interest component of Capitalized Lease Obligations, and net payments (if any)
pursuant to Hedging Obligations with respect to Indebtedness, excluding
amortization of deferred financing fees) and (b) consolidated capitalized
interest of such Person and its Restricted Subsidiaries for such period, whether
paid or accrued, to the extent such expense was deducted in computing
Consolidated Net Income.

"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, and otherwise determined in accordance
with GAAP; provided, however, that (i) the Net Income for such period of any
Person that is not a Subsidiary, or is an Unrestricted Subsidiary, or that is
accounted for by the equity method of accounting, shall be included only to the
extent of the amount of dividends or distributions or other payments paid in
cash (or to the extent converted into cash) to the referent Person or a Wholly
Owned Restricted Subsidiary thereof in respect of such period, (ii) the Net
Income of any Person acquired in a pooling of interests transaction shall not be
included for any period prior to the date of such acquisition, (iii) the Net
Income of any Operating Group for such period, on a consolidated basis (without
giving effect to any push down of the accounting for the Acquisition by the
Company to the financial statements of any member of such Operating Group and to
the extent such Net Income is not a loss), shall be excluded to the extent that
such Net Income exceeds the sum of, without duplication, (a) the maximum
aggregate amount of cash that such Operating Group's Insurance Subsidiaries are
able to pay to the Company through such Operating Group's Insurance Holding
Company as a dividend, distribution, repayment of intercompany indebtedness or
interest thereon at the date of determination without prior governmental
approval (which has not been obtained) (excluding any required passage of time
in nondisapproval states) and which is not prohibited, directly or indirectly,
by the terms of any charter or any agreement, instrument, judgment, decree,
order, writ, injunction, certificate, statute, rule, law, code, ordinance or
government regulation applicable to such Operating Group's Insurance Holding
Company or any of its Insurance Subsidiaries unless any such restriction has
been legally waived, (b) the amount of any dividend, distribution, repayment of
intercompany indebtedness or interest thereon paid during such period by such
Operating Group's Insurance Subsidiaries, through such Operating Group's
Insurance Holding Company, to the Company to the extent that such dividend,
distribution, repayment of intercompany indebtedness or interest thereon reduces
the amount described in clause (a) that could be distributed at the date of
determination, (c) the amount of cash payments made or accrued (with respect to
such accrual, to the extent that payment of such accrued amount is not
prohibited, directly or indirectly, by the terms of any charter or any
agreement, instrument, judgment, decree, order, writ, injunction, certificate,
statute, rule, law, code, ordinance or government regulation) by such Operating
Group's Insurance Subsidiaries, directly or indirectly, to or for payment to, as
the case may be, the Company or a Restricted Subsidiary that is not an Insurance
Holding Company or that is not an Insurance Subsidiary under any management,
referral or similar agreement (including, but not limited to, any fees paid to
the Company or a Restricted Subsidiary that is not an Insurance Holding Company
or that is not an Insurance Subsidiary in respect of the management of the
Operating Group's Insurance Subsidiaries' investment portfolios); provided that
if any such accrual is subsequently reversed the amount so reversed will be
deducted from the calculation of the amounts under clauses (a) through (d) of
this clause (iii) in the period of such reversal, and (d) the amount of cash
payments made or accrued (with respect to such accrual, to the extent that
payment of such accrued amount is not prohibited, directly or indirectly, by the
terms of any charter or any agreement, instrument, judgment, decree, order,
writ, injunction, certificate, statute, rule, law, code, ordinance or government
regulation) by such Operating Group's Insurance Subsidiaries, directly or
indirectly, to or for payment to, as the case may be, the Company or a
Restricted Subsidiary that is not an Insurance Holding Company or that is not an
Insurance Subsidiary (which payments take into consideration any adjustments in
clauses (i) through (vi) of the definition of Net Income and without giving
effect to any tax loss carryforward) under the Tax Allocation Agreement with
respect to such period and allocated to such period based upon the taxable
income of such Subsidiary for such

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period and, for periods prior to the Issuance Date, as if such Tax Allocation
Agreement had been in effect for such period; provided that if any such accrual
is subsequently reversed the amount so reversed will be deducted from the
calculation of the amounts available under clauses (a) through (d) of this
clause (iii) in the period of such reversal, (iv) the Net Income for such period
of any Restricted Subsidiary, other than any Insurance Holding Company or any
Insurance Subsidiary included in an Operating Group, shall be excluded to the
extent that such Net Income exceeds the maximum aggregate amount of cash that
such Restricted Subsidiary is permitted to pay as a dividend or other
distribution to the Company at the date of determination without any prior
government approval (which has not been obtained) and which is not prohibited,
directly or indirectly, by the terms of such Restricted Subsidiary's charter or
any agreement, instrument, judgment, decree, order, writ, injunction,
certificate, statute, rule, law, code, ordinance or governmental regulation
applicable to such Restricted Subsidiary, unless any such restriction has been
legally waived, (v) without duplication, cash payments received by Holdings from
the Company or any of its Restricted Subsidiaries in payment for services which
are expensed and which payments are subsequently contributed to the Company by
Holdings shall be added to the Net Income of the Company or such Restricted
Subsidiary and (vi) unrealized gains and losses with respect to investment
portfolios to the extent such gains and losses affect Net Income shall be
excluded for such period. For purposes of applying clause (iii) of the preceding
sentence, Net Income will be determined without regard to interest expense or
interest income relating to intercompany indebtedness which is incurred by
Insurance Holding Companies.

"Contingent Obligations" means, with respect to any Person, any obligation
of such Person guaranteeing any leases, dividends or other obligations that do
not constitute Indebtedness ("primary obligations") of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, including,
without limitation, any obligation of such Person, whether or not contingent,
(i) to purchase any such primary obligation or any property constituting direct
or indirect security therefor, (ii) to advance or supply funds (A) for the
purchase or payment of any such primary obligation or (B) to maintain working
capital or equity capital of the primary obligor or otherwise to maintain the
net worth or solvency of the primary obligor, or (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation against loss in respect thereof.

"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors who (i) was a member of such Board of Directors on the
Issuance Date or (ii) was nominated for election or elected to such Board of
Directors with, or whose election to such Board of Directors was approved by,
the affirmative vote of a majority of the Continuing Directors who were members
of such Board of Directors at the time of such nomination or election or (iii)
is any designee of the Permitted Holder or its Affiliates or was nominated by
the Permitted Holder or its Affiliates or any designees of the Permitted Holder
or its Affiliates on the Board of Directors.

"Contributed Preferred Stock" means Preferred Stock of Holdings (other than
Disqualified Stock) that is issued for cash (other than to the Company or any
Restricted Subsidiary) and is so designated as Contributed Preferred Stock,
pursuant to an Officer's Certificate of Holdings, on the issuance date thereof,
the proceeds of which are contributed as capital to the Company and excluded
from the calculation set forth in paragraph (c) of the "Restricted Payments"
covenant.

"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.

"Designated Noncash Consideration" means the fair market value of noncash
consideration received by the Company or one of its Restricted Subsidiaries in
connection with an Asset Sale that is so designated as Designated Noncash
Consideration pursuant to an Officers' Certificate, setting forth the basis of
such valuation, executed by the principal executive officer and the principal
financial officer of the Company, less the amount of cash or Cash Equivalents
received in connection with a sale of such Designated Noncash Consideration.

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"Designated Preferred Stock" means Preferred Stock of the Company (other
than Disqualified Stock) that is issued for cash (other than to a Restricted
Subsidiary) and is so designated as Designated Preferred Stock, pursuant to an
Officers' Certificate executed by the principal executive officer and the
principal financial officer of the Company, on the issuance date thereof, the
cash proceeds of which are excluded from the calculation set forth in paragraph
(c) of the "Restricted Payments" covenant.

"Disinterested Director" means, with respect to any transaction or series of
transactions in respect of which the Board of Directors is required to deliver a
resolution of the Board of Directors under the Indenture, a member of the Board
of Directors who does not have any material direct or indirect financial
interest in or with respect to such transaction or series of transactions
(except arising exclusively as a consequence of such member's relationship to
the Company).

"Disqualified Stock" means, with respect to any Person, any Capital Stock of
such Person which, by its terms (or by the terms of any security into which it
is convertible or for which it is puttable or exchangeable), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the holder
thereof, in whole or in part, in each case prior to the date 91 days after the
maturity date of the Debentures; provided, however, that if such Capital Stock
is either (i) redeemable or repurchaseable solely at the option of such Person
or (ii) issued to employees of the Company or its Subsidiaries or to any plan
for the benefit of such employees, such Capital Stock shall not constitute
Disqualified Stock unless so designated.

"EBITDA" means, with respect to any Person for any period, the Consolidated
Net Income of such Person for such period plus (i) provision for taxes based on
income or profits for such period (taking into consideration the adjustments
referred to in clauses (i) through (vi) of the definition of Net Income and
clauses (i), (ii), (v) and (vi) of the definition of Consolidated Net Income)
deducted in computing Consolidated Net Income (or minus in the case of a tax
benefit), and which provision shall be reduced (or increased in the case of a
tax benefit) by a fraction the numerator of which is (A) the aggregate Net
Income Deduction times (B) the Effective Tax Rate, the denominator of which is
one minus the Effective Tax Rate, plus (ii) Consolidated Interest Expense of
such Person for such period, plus (iii) Consolidated Depreciation and
Amortization Expense of such Person for such period to the extent such
depreciation and amortization were deducted in computing Consolidated Net
Income, in each case, on a consolidated basis for such Person and its Restricted
Subsidiaries, plus (iv) without duplication and to the extent such amounts were
deducted in computing Consolidated Net Income, the amount of any restructuring
charge or reserve recorded during such period (excluding insurance loss and
insurance loss expense reserves), plus (v) without duplication and to the extent
such amounts were deducted in computing Consolidated Net Income, any expense,
reserve or charge (excluding insurance loss and insurance loss expense reserves)
related to the Acquisition and the Financings, plus (vi) without duplication and
to the extent such amounts were deducted in computing Consolidated Net Income,
any other non-cash charges reducing Consolidated Net Income for such period
(excluding (a) any such charge which requires an accrual of a cash reserve for
anticipated cash charges for any future period and (b) charges for insurance
loss reserves and loss reserve expenses), less, without duplication,
(vii) non-cash items increasing Consolidated Net Income of such Person for such
period (excluding any items which represent the reversal of any accrual of, or
cash reserve for, anticipated cash charges under clause (vi) above in any prior
period).

"Effective Tax Rate" means, for any period, the actual income tax expense
for the Company and its Restricted Subsidiaries divided by the actual pretax
income (adjusted for the items referred to in clauses (i) through (vi) of the
definition of Net Income and clauses (i), (ii), (v) and (vi) of the definition
of Consolidated Net Income) for the Company and its Restricted Subsidiaries.

"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).

"Equity Offering" means any public or private sale of common stock or
Preferred Stock (excluding Disqualified Stock).

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"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Existing Indebtedness" means Indebtedness of the Company or its Restricted
Subsidiaries in existence on the Issuance Date, plus interest accruing thereon,
after application of the net proceeds of the sale of the Debentures as described
in this Prospectus.

"Fixed Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of EBITDA of such Person for such period to the Fixed Charges
of such Person for such period. In the event that the Company or any of its
Restricted Subsidiaries incurs, assumes, guarantees or redeems any Indebtedness
(other than repayments of revolving credit borrowings with respect to which the
related commitment remains outstanding) or issues or redeems Preferred Stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the event for which the calculation of
the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed
Charge Coverage Ratio shall be calculated giving pro forma effect to such
incurrence, assumption, guarantee or redemption of Indebtedness, or such
issuance or redemption of Preferred Stock, as if the same had occurred at the
beginning of the applicable four-quarter period. For purposes of making the
computation referred to above, Investments, acquisitions, dispositions which
constitute all or substantially all of an operating unit of a business and
discontinued operations (as determined in accordance with GAAP) that have been
made by the Company or any of its Restricted Subsidiaries, including all
mergers, consolidations and dispositions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the Calculation
Date shall be calculated on a pro forma basis assuming that all such
Investments, acquisitions, dispositions, discontinued operations, mergers,
consolidations (and the reduction of any associated fixed charge obligations and
the change in EBITDA resulting therefrom) had occurred on the first day of the
four-quarter reference period and without regard to clause (ii) of the
definition of Consolidated Net Income. If since the beginning of such period any
Person (that subsequently became a Restricted Subsidiary or was merged with or
into the Company or any Restricted Subsidiary since the beginning of such
period) shall have made any Investment, acquisition, disposition which
constitutes all or substantially all of an operating unit of a business,
discontinued operation, merger or consolidation that would have required
adjustment pursuant to this definition, then the Fixed Charge Coverage Ratio
shall be calculated giving pro forma effect thereto for such period as if such
Investment, acquisition, disposition, discontinued operation, merger or
consolidation had occurred at the beginning of the applicable four-quarter
period and without regard to clause (ii) of the definition of Consolidated Net
Income. For purposes of this definition, whenever pro forma effect is to be
given to a transaction, the pro forma calculations shall be made in good faith
by a responsible financial or accounting officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest of such Indebtedness shall be calculated as if the rate in
effect on the Calculation Date had been the applicable rate for the entire
period (taking into account any Hedging Obligations applicable to such
Indebtedness). Interest on a Capitalized Lease Obligation shall be deemed to
accrue at an interest rate reasonably determined by a responsible financial or
accounting officer of the Company to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP. For purposes of making the
computation referred to above, interest on any Indebtedness under a revolving
credit facility computed on a pro forma basis shall be computed based upon the
average daily balance of such Indebtedness during the applicable period.
Interest on Indebtedness that may optionally be determined at an interest rate
based upon a factor of a prime or similar rate, a eurocurrency interbank offered
rate, or other rate, shall be deemed to have been based upon the rate actually
chosen, or, if none, then based upon such optional rate chosen as the Company
may designate.

"Fixed Charges" means, with respect to any Person for any period, the sum of
(a) Consolidated Interest Expense of such Person for such period and (b) all
cash dividend payments (excluding items eliminated in consolidation) on any
series of Preferred Stock of such Person.

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"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issuance Date. For the purposes of the
Indenture, the term "consolidated" with respect to any Person shall mean such
Person consolidated with its Restricted Subsidiaries, and shall not include any
Unrestricted Subsidiary.

"Government Securities" means securities that are (a) direct obligations of
the United States of America for the timely payment of which its full faith and
credit is pledged or (b) obligations of a Person controlled or supervised by and
acting as an agency or instrumentality of the United States of America the
timely payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act), as custodian with respect to any such Government Securities
or a specific payment of principal of or interest on any such Government
Securities held by such custodian for the account of the holder of such
depository receipt; provided, that (except as required by law) such custodian is
not authorized to make any deduction from the amount payable to the holder of
such depository receipt from any amount received by the custodian in respect of
the Government Securities or the specific payment of principal of or interest on
the Government Securities evidenced by such depository receipt.

"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness or other obligations.

"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) currency exchange or interest rate swap agreements,
currency exchange or interest rate cap agreements and currency exchange or
interest rate collar agreements and (ii) other agreements or arrangements
designed to protect such Person against fluctuations in currency exchange or
interest rates.

"Holder" means a holder of the Debentures.

"Indebtedness" means, with respect to any Person, (a) any indebtedness of
such Person, whether or not contingent (i) in respect of borrowed money, (ii)
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof), (iii) representing the
balance deferred and unpaid of the purchase price of any property (including
Capitalized Lease Obligations), except any such balance that constitutes an
accrued expense or trade payable or any other monetary obligation of a trade
creditor (whether or not an Affiliate), or (iv) representing any Hedging
Obligations, if and to the extent of any of the foregoing Indebtedness (other
than letters of credit and Hedging Obligations) that would appear as a liability
upon a balance sheet of such Person prepared in accordance with GAAP, (b) to the
extent not otherwise included, any obligation by such Person to be liable for,
or to pay, as obligor, guarantor or otherwise, on the Indebtedness of another
Person (other than by endorsement of negotiable instruments for collection in
the ordinary course of business) and (c) to the extent not otherwise included,
Indebtedness of another Person secured by a Lien on any asset owned by such
Person (whether or not such Indebtedness is assumed by such Person); provided,
however, that the following shall be deemed not to constitute Indebtedness (1)
obligations with respect to products underwritten by the Insurance Subsidiaries
in the ordinary course of business including insurance policies, guaranteed
investment contracts, performance and surety bonds and annuities, (2)
reinsurance agreements entered into by any Insurance Subsidiary in the ordinary
course of business, (3) Contingent Obligations incurred in the ordinary course
of business and (4) Hedging Obligations entered into in connection with the
Invested Assets of the Insurance Companies.

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"Independent Financial Advisor" means an accounting, appraisal, investment
banking firm or consultant to Persons engaged in Insurance Businesses of
nationally recognized standing that is, in the judgment of the Company's Board
of Directors, qualified to perform the task for which it has been engaged.

"Insurance Business" means a business, the majority of whose revenues are
derived from lines of business carried on by the Company and its Restricted
Subsidiaries on the Issuance Date, other insurance or insurance-related
businesses and businesses or activities in each case representing a reasonable
extension, development or expansion thereof or ancillary thereto.

"Insurance Holding Company" means a Restricted Subsidiary that is a holding
company with substantially no assets (other than investments in Insurance
Subsidiaries, other Investments and Cash Equivalents) or operations (other than
the performance of management functions with respect to its Insurance
Subsidiaries, other Investments and Cash Equivalents).

"Insurance Subsidiary" means any Restricted Subsidiary engaged in the
Insurance Business.

"Invested Assets" means with respect to any Person which is an insurance
company that files statutory financial statements with a governmental authority,
the amount be shown on the line item "Cash and Invested Assets" (or any
equivalent line item(s) setting forth the type of assets which would be
reflected in the line item "Cash and Invested Assets" on the Issue Date) on such
insurance company's balance sheet included in its most recent statutory
financial statements filed with such governmental authority.

"Investment Grade Securities" means (i) securities issued or directly and
fully guaranteed or insured by the United States government or any agency or
instrumentality thereof (other than Cash Equivalents), (ii) debt securities or
debt instruments with a rating of BBB-or higher by S&P, Baa3 or higher by
Moody's or Class (2) or higher by NAIC or the equivalent of such rating by such
rating organization, or, if no rating of S&P, Moody's or NAIC then exists, the
equivalent of such rating by any other nationally recognized securities rating
agency, but excluding any debt securities or instruments constituting loans or
advances among the Company and its Subsidiaries, and (iii) investments in any
fund that invests exclusively in investments of the type described in clauses
(i) and (ii) which fund may also hold immaterial amounts of cash pending
investment and/or distribution.

"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of loans (including
guarantees), advances or capital contributions (excluding advances to customers,
commission, travel and similar advances to officers and employees made in the
ordinary course of business), purchases or other acquisitions for consideration
of Indebtedness, Equity Interests or other securities issued by any other Person
and investments that are required by GAAP to be classified on the balance sheet
of the Company in the same manner as the other investments included in this
definition to the extent such transactions involve the transfer of cash or other
property. For purposes of the definition of "Unrestricted Subsidiary" and the
covenant described under "--Certain Covenants--Restricted Payments", (i)
"Investments" shall include the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of a
Subsidiary of the Company at the time that such Subsidiary is designated an
Unrestricted Subsidiary; provided, however, that upon a redesignation of such
Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue
to have a permanent "Investment" in an Unrestricted Subsidiary equal to an
amount (if positive) equal to (x) the Company's "Investment" in such Subsidiary
at the time of such redesignation less (y) the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of such Subsidiary at the time of such redesignation; and (ii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer, in each case as determined
in good faith by the Board of Directors.

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"Issuance Date" means the closing date for the sale and original issuance of
the Debentures under the Indenture.

"Letter of Credit Obligations" means Indebtedness of the Company or any of
its Restricted Subsidiaries with respect to letters of credit constituting
Senior Indebtedness or Pari Passu Indebtedness which shall be deemed to consist
of (a) the aggregate maximum amount then available to be drawn under all such
letters of credit (the determination of such maximum amount to assume compliance
with all conditions for drawing), and (b) the aggregate amount that has then
been paid by, and not reimbursed to, the issuers under such letters of credit.

"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction); provided that in
no event shall an operating lease be deemed to constitute a Lien.

"Moody's" means Moody's Investors Service, Inc.

"NAIC" means National Association of Insurance Commissioners.

"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of Preferred Stock dividends, but excluding, net of any related
provision or benefit for taxes on such gain, loss or expense, (i) any gain or
loss realized in connection with any Asset Sale (including, without limitation,
dispositions pursuant to sale and leaseback transactions), (ii) any charge or
expense with respect to the $102 million of reserves for insurance losses,
insurance loss expenses and uncollectible reinsurance (but excluding any charge
or expense for any other reserves for insurance losses, insurance loss expenses
and uncollectible reinsurance) recorded by the Company on December 31, 1995,
(iii) any charge or expense with respect to reserves for insurance losses,
insurance loss expenses and uncollectible reinsurance for prior accident years
permitted to be taken by the Company prior to Closing pursuant to the Purchase
Agreement and recorded by the Company during the quarter ended June 30, 1996
and/or the period subsequent thereto and prior to the Issuance Date, (iv) any
expense, reserve or charge related to the Acquisition and the Financings
(including, but not limited to, any nonrecurring noncash expense recognized at
or prior to the Closing relating to payments to be made by Xerox under the terms
of an incentive plan adopted in , 19 ), but excluding any
insurance loss reserve or insurance loss expense reserve, (v) the expense
recorded with respect to any increase in reserves for insurance losses,
insurance loss expenses and uncollectible reinsurance, for which any associated
increase in reinsurance recoverables relating to any related party reinsurance
contract existing at the Issuance Date that must be recognized as a deferred
gain pursuant to SFAS 113 and (vi) any income resulting from the amortization of
any amounts excluded from Net Income pursuant to clause (v) above.

"Net Income Deduction" means, for any period, the amounts excluded from the
calculation of Consolidated Net Income for such period pursuant to clauses (iii)
and (iv) thereof.

"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale, net of the
direct costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and brokerage and sales commissions),
and any relocation expenses incurred as a result thereof, taxes paid or payable
as a result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of principal, premium (if any) and interest on Indebtedness
required (other than required by clause (i) of the second paragraph of
"--Repurchase at the Option of Holders--Asset Sales") to be paid as a result of
such transaction and

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any deduction of appropriate amounts to be provided by the Company as a reserve
in accordance with GAAP against any liabilities associated with the asset
disposed of in such transaction and retained by the Company after such sale or
other disposition thereof, including, without limitation, pension and other
post-employment benefit liabilities and liabilities related to environmental
matters or against any indemnification obligations associated with such
transaction.

"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.

"Officers' Certificate" means a certificate signed on behalf of the Company
by two officers of the Company, one of whom must be the principal executive
officer, the principal financial officer, the treasurer or the principal
accounting officer of the Company that meets the requirements set forth in the
Indenture.

"Operating Group" means each Restricted Subsidiary that is an Insurance
Holding Company together with the Insurance Subsidiaries that are owned,
directly or indirectly, by such Insurance Holding Company.

"Pari Passu Indebtedness" means Indebtedness which ranks pari passu in right
of payment to the Debentures.

"Permitted Asset Swap" means any one or more transactions in which the
Company or any of its Restricted Subsidiaries exchanges assets for consideration
consisting of cash and/or Equity Interests in or assets of a Person engaged in
an Insurance Business.

"Permitted Holder" means any one or more Affiliates of Holdings, Talegen
Associates, New Associates, New Talegen, Mr. Joseph W. Brown, Jr. or any group
(within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act,
or any successor provision) of Persons the majority of the voting Equity
Interests in which are beneficially owned by Mr. Brown.

"Permitted Investments" means (a) Investments by Insurance Subsidiaries that
comply with all applicable insurance laws, rules and regulation and are
considered as Invested Assets, including Investments determined subsequent to
acquisition to not comply with applicable laws, statutes and regulations so long
as such noncompliance is cured within 30 days of the chief investment officer of
an Insurance Subsidiary becoming aware of such noncompliance; (b) any Investment
in the Company or any Restricted Subsidiary or Permitted Joint Venture of the
Company that in each case is an Insurance Business; (c) any Investment in Cash
Equivalents or Investment Grade Securities; (d) any Investment by the Company or
any Restricted Subsidiary of the Company in a Person that is an Insurance
Business if as a result of such Investment (i) such Person becomes a Restricted
Subsidiary or a Permitted Joint Venture of the Company or (ii) such Person, in
one transaction or a series of related transactions, is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Restricted Subsidiary or a
Permitted Joint Venture of the Company; (e) any Investment in securities or
other assets not constituting Cash Equivalents and received in connection with
an Asset Sale made pursuant to the provisions of "--Repurchase at the Option of
Holders--Asset Sales" or any other disposition of assets not constituting an
Asset Sale; (f) any Investment existing on the Issuance Date; (g) any
transaction to the extent it constitutes an Investment that is permitted by and
made in accordance with the provisions of the second paragraph of the covenant
described under "--Certain Covenants--Transactions with Affiliates" (except
transactions described in clauses (ii) and (vi) of such paragraph); (h) any
Investment in Insurance Businesses (other than an Investment in an Unrestricted
Subsidiary) having an aggregate fair market value, taken together with all other
Investments made pursuant to this clause (h) that are at that time outstanding,
not to exceed 3% of Total Adjusted Assets at the date of such Investment (with
the fair market value of each Investment being measured at the time made and
without giving effect to subsequent changes in value); (i) any Investment in any
Insurance Business (other than an Investment in an Unrestricted

144
<PAGE>
Subsidiary); provided that at the date of such Investment the Company and its
Restricted Subsidiaries, after giving effect to such Investment on a pro forma
basis, would have a Fixed Charge Coverage Ratio for the most recently ended four
fiscal quarters for which internal financial statements are available
immediately preceding the date of such Investment of at least (x) 2.00 to 1.00
if such date is prior to June 30, 1999 and (y) 2.50 to 1.00 if such date is on
or after June 30, 1999; (j) any Investment by Restricted Subsidiaries in other
Restricted Subsidiaries and Investments by Subsidiaries that are not Restricted
Subsidiaries in other Subsidiaries that are not Restricted Subsidiaries; (k)
loans or advances to employees not in excess of $5.0 million outstanding at any
one time; (l) any Investment acquired by the Company or any of its Restricted
Subsidiaries (i) in exchange for any other Investment or accounts receivable
held by the Company or any such Restricted Subsidiary in connection with or as a
result of a bankruptcy, workout, reorganization or recapitalization of the
issuer of such other Investment or accounts receivable or (ii) as a result of a
foreclosure by the Company or any of its Restricted Subsidiaries with respect to
any secured Investment or other transfer of title with respect to any secured
Investment in default; (m) Hedging Obligations; (n) loans and advances to
officers, directors and employees for business-related travel expenses, moving
expenses and other similar expenses, in each case incurred in the ordinary
course of business; (o) Permitted Asset Swaps; (p) Investments in the Preferred
Facility plus accrued and unpaid dividends thereon; (q) Investments the payment
for which consists exclusively of Equity Interests of the Company (exclusive of
Disqualified Stock); provided, however, that such Equity Interests will not
increase the amount available for Restricted Payments under clause (c) of the
"Restricted Payments" covenant; and (r) additional Investments having an
aggregate fair market value, taken together with all other Investments made
pursuant to this clause (r) that are at that time outstanding, not to exceed $50
million at the time of such Investment (with the fair market value of each
Investment being measured at the time made and without giving effect to
subsequent changes in value).

"Permitted Joint Venture" means, with respect to any Person, (i) any
corporation, association, or other business entity (other than a partnership) of
which 50% of the total voting power of shares of Capital Stock entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time of determination owned or
controlled, directly or indirectly, by such Person or one or more of the
Restricted Subsidiaries of that Person or a combination thereof and (ii) any
partnership, joint venture, limited liability company or similar entity of which
(x) 50% of the capital accounts, distribution rights, total equity and voting
interests or general or limited partnership interests, as applicable, are owned
or controlled, directly or indirectly, by such Person or one or more of the
other Restricted Subsidiaries of that Person or a combination thereof whether in
the form of membership, general, special or limited partnership interests or
otherwise and (y) such person or any Restricted Subsidiary of such person is a
controlling general partner or otherwise controls such entity, which in the case
of each clauses (i) and (ii) is engaged in an Insurance Business.

"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.

"Preferred Facility" means the preferred stock of TRG owned, from time to
time, by the Company or its Affiliates pursuant to the agreement dated
, 1996, as such agreement may be modified from time to time in a
manner not adverse to the Holders.

"Preferred Stock" means any Equity Interest with preferential right of
payment of dividends or upon liquidation, dissolution, or winding up.

"Related Parties" means any Person controlled by the Permitted Holder,
including any partnership of which the Permitted Holder or its Affiliates is the
general partner.

"Repurchase Offer" means an offer made by the Company to purchase all or any
portion of a Holder's Debentures pursuant to the provisions described under the
covenants entitled "--Repurchase

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<PAGE>
at the Option of Holders--Change of Control" or "--Repurchase at the Option of
Holders--Asset Sales."

"Restricted Investment" means an Investment other than a Permitted
Investment.

"Restricted Subsidiary" means, at any time, any direct or indirect
Subsidiary of the Company that is not then an Unrestricted Subsidiary; provided,
however, that upon the occurrence of any Unrestricted Subsidiary ceasing to be
an Unrestricted Subsidiary, such Subsidiary shall be included in the definition
of "Restricted Subsidiary."

"S&P" means Standard and Poor's Ratings Group.

"Securities Act" means the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.

"Senior Credit Facility" means, that certain credit facility described in
this Prospectus among the Company and the lenders thereto, including any
collateral documents, instruments and agreements executed in connection
therewith, and the term Senior Credit Facility shall also include any
amendments, extensions, renewals, restatements or refundings thereof and any
credit facilities that replace, refund or refinance any part of the loans or
commitments thereunder, including any such replacement, refunding or refinancing
facility that increases the amount borrowable thereunder, provided, however,
that no credit facility with a principal amount of less than $25 million will be
a Senior Credit Facility and, provided, further, that, for purposes of clause
(i) of the definition of Designated Senior Indebtedness there shall not be more
than one Senior Credit Facility and, if at any time there is more than one
facility which would constitute the Senior Credit Facility, the Company will
designate to the Trustee which one of such facilities will be the Senior Credit
Facility for purposes of the definition of Designated Senior Indentures.

"Significant Subsidiary" means any Subsidiary which would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the Issuance
Date.

"Subordinated Indebtedness" means any Indebtedness of the Company which is
by its terms subordinated in right of payment to the Debentures.

"Subsidiary" means, with respect to any Person, (i) any corporation,
association, or other business entity (other than a partnership) of which more
than 50% of the total voting power of shares of Capital Stock entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time of determination owned or
controlled, directly or indirectly, by such Person or one or more of the other
Subsidiaries of that Person or a combination thereof and (ii) any partnership,
joint venture, limited liability company or similar entity of which (x) more
than 50% of the capital accounts, distribution rights, total equity and voting
interests or general or limited partnership interests, as applicable, are owned
or controlled, directly or indirectly, by such Person or one or more of the
other Subsidiaries of that Person or a combination thereof whether in the form
of membership, general, special or limited partnership or otherwise and (y) such
person or any Wholly Owned Restricted Subsidiary of such person is a controlling
general partner or otherwise controls such entity.

"Total Adjusted Assets" means, with respect to any Person, the total
consolidated assets of such Person and its Restricted Subsidiaries less the sum
of (i) reinsurance receivables, (ii) investments of any Insurance Subsidiary and
(iii) cash of any Insurance Subsidiary, as shown on the most recent balance
sheet of such Person prepared in accordance with GAAP.

"Unrestricted Subsidiary" means (i) any Subsidiary of the Company which at
the time of determination is an Unrestricted Subsidiary (as designated by the
Board of Directors of the Company,

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<PAGE>
as provided below) and (ii) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors of the Company may designate any Subsidiary of the Company
(including any existing Subsidiary and any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of
its Subsidiaries owns any Equity Interests of, or owns, or holds any Lien on,
any property of, the Company or any Subsidiary of the Company (other than any
Subsidiary of the Subsidiary to be so designated), provided that (a) any
Unrestricted Subsidiary must be an entity of which shares of the capital stock
or other equity interests (including partnership interests) entitled to cast at
least a majority of the votes that may be cast by all shares or equity interests
having ordinary voting power for the election of directors or other governing
body are owned, directly or indirectly, by the Company, (b) the Company
certifies that such designation complies with the covenants described under
"--Certain Covenants--Restricted Payments" and (c) each of (I) the Subsidiary to
be so designated and (II) its Subsidiaries has not at the time of designation,
and does not thereafter, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable with respect to any Indebtedness pursuant
to which the lender has recourse to any of the assets of the Company or any of
its Restricted Subsidiaries. The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that,
immediately after giving effect to such designation, the Company could incur at
least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test described under "--Certain Covenants--Limitations on Incurrence of
Indebtedness and Disqualified Stock" on a pro forma basis taking into account
such designation. Any such designation by the Board of Directors shall be
notified by the Company to the Trustee by promptly filing with the Trustee a
copy of the board resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.

"Voting Stock" means, with respect to any Person, any class or series of
capital stock of such Person that is ordinarily entitled to vote in the election
of directors thereof at a meeting of stockholders called for such purpose,
without the occurrence of any additional event or contingency.

"Weighted Average Life to Maturity" means, when applied to any Indebtedness
or Disqualified Stock, as the case may be, at any date, the quotient obtained by
dividing (i) the sum of the products of the number of years from the date of
determination to the date of each successive scheduled principal payment of such
Indebtedness or redemption or similar payment with respect to such Disqualified
Stock multiplied by the amount of such payment, by (ii) the sum of all such
payments.

"Wholly Owned Restricted Subsidiary" is any Wholly Owned Subsidiary that is
a Restricted Subsidiary.

"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
95% of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.

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<PAGE>

DESCRIPTION OF CAPITAL STOCK

GENERAL

The certificate of incorporation of the Company authorizes 1000 shares of
Common Stock, par value $0.01 per share, of which 100 shares will be outstanding
after the Acquisition. See "Ownership of Capital Stock."

COMMON STOCK

The holders of the Common Stock are entitled to one vote per share for each
share held of record on all matters submitted to a vote of the stockholders.
Holders of the Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors of the Company on the Common Stock out
of funds legally available therefor. The declaration and payment of dividends
may be restricted by the provisions of the Credit Agreement, as well as by the
Indenture. In the event of a liquidation, dissolution or winding up of the
affairs of the Company, the holders of the Common Stock are entitled to share
equally and ratably in the assets of the Company available for distribution
after any payments to creditors. The holders of the Common Stock have no
preemptive rights, cumulative voting rights or rights to convert shares of
Common Stock into any other securities and are not subject to future calls or
assessments by the Company. All outstanding shares of Common Stock of the
Company are fully paid and nonassessable.

148

<PAGE>
DESCRIPTION OF PREFERRED SECURITIES

The Preferred Securities to be sold by the Trust to XFSI in connection with
the Acquisition are mandatorily redeemable on the Preferred Redemption Date and
permit the deferral of dividends for the first seven years after issuance. In
addition, deferred dividends generally are not payable until the Preferred
Redemption Date. The proceeds from the sale of the Preferred Securities will be
loaned to Holdings and then contributed by Holdings as an investment of common
equity in the Company. The Preferred Securities are similar in structure to a
variety of trust originated preferred securities and similar instruments that
have been publicly issued in recent years.

Prior to the Closing, Holdings will establish the Trust, which will be
capitalized with approximately $13.9 million. In exchange for such
capitalization, Holdings will receive common securities issued by the Trust. At
the Closing, the Trust will sell $450 million of Preferred Securities to XFSI.
The Trust will use the cash proceeds from the issuance of the common securities
and the Preferred Securities (collectively, "Trust Securities") to purchase
approximately $463.9 million of debentures issued by Holdings (the "Holdings
Securities"). The principal amount of the Holdings Securities will equal the
liquidation amount of the Trust Securities and the interest rate on the Holdings
Securities will equal the dividend rate on the Preferred Securities. The
dividend rate on the Preferred Securities will equal the Applicable Federal Rate
as published on a monthly basis, plus 499 basis points. Dividends will be paid
on the Preferred Securities (or the Preferred Securities will be redeemed) only
to the extent that interest is paid (or principal is repaid) on the Holdings
Securities. Holdings has the right to cause distributions on the Preferred
Securities to be deferred for the first seven years after issuance with any such
deferred distributions not being payable until (i) , 2016, the
stated maturity of the Holdings Securities, or (ii) a redemption of the Holdings
Securities. In any event, the Credit Facilities require that distributions on
the Holdings Securities or the Preferred Securities not occur prior to the
expiration of the fifth anniversary of their issuance.

The Holdings Securities may be redeemed prior to their maturity by Holdings
under certain limited circumstances, although the Credit Facilities will contain
certain restrictions with respect to such redemptions. If Holdings redeems
Holdings Securities, the Trust must redeem Trust Securities having an aggregate
liquidation amount equal to the amount of the Holdings Securities so redeemed.
The Preferred Securities must be redeemed upon maturity of the Holdings
Securities, which will not occur until , 2016. Upon the occurrence
of certain events, the Trust may be dissolved, causing a distribution of the
Holdings Securities to XFSI and Holdings as the holders of the Trust Securities.
Upon certain changes of control relating to Holdings, specified repurchase
requirements would apply to the Holdings Securities and the Trust Securities.

The Preferred Securities contain certain limitations on the right of Talegen
Associates and its affiliates to sell or otherwise dispose of Holdings Common
Stock. So long as Xerox or any of its affiliates owns any Preferred Securities,
Talegen Associates and its affiliates may not sell or otherwise dispose of more
than 25% of the original shares of Holdings Common Stock owned by Talegen
Associates and its affiliates, provided that if Xerox sells $50 million or more
of the Preferred Securities, Talegen Associates and its affiliates can sell an
additional shares of Holdings Common Stock. Xerox and its affiliates may
not transfer the Preferred Securities for one year. Talegen Associates and its
affiliates, including Talegen, can buy the Preferred Securities back at par at
any time from Xerox and its affiliates.

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<PAGE>
DESCRIPTION OF CREDIT FACILITIES

In connection with the Acquisition, the Company will enter into the Bank
Credit Agreement under which the Credit Facilities will be funded. The following
summary of certain provisions of the Credit Facilities is generalized, does not
purport to be complete, and is subject to and is qualified in its entirety by
reference to the provisions of the Bank Credit Agreement, a copy of which will
be filed as an exhibit to the Registration Statement of which this prospectus is
a part. Capitalized terms that are used but not otherwise defined herein shall
have the meanings assigned to them in the Bank Credit Agreement and those
definitions are incorporated by reference. See "Prospectus Summary--The
Acquisition" and "The Acquisition and the Financing--Bank Financing."

General. The Company has accepted a commitment letter from Bank of America,
as agent (in such capacity, the "Agent"), pursuant to which Bank of America has
committed, subject to certain conditions, to provide the Credit Facilities to
the Company in an aggregate principal amount of $975 million. Proceeds from the
Credit Facilities will be used to finance a portion of the Acquisition and
related closing costs.

The Credit Facilities will consist of the $525 million Tranche A Loans due 7
years from the Closing Date, the $100 million Tranche B Loans due 8 years from
the Closing Date, the $100 million Tranche C Loans due 8 1/2 years from the
Closing Date, the $50 million Tranche D Loans due 9 1/4 years from the Closing
Date and the $200 million Revolving Credit Facility. Prior to maturity, each of
the term loan facilities will be subject to scheduled amortization and mandatory
repayment in connection with certain events, including certain asset sales
(subject to reinvestment exceptions), certain issuances of debt by the Company,
and the generation of excess cash flow (as defined). The Revolving Credit
Facility is subject to certain scheduled mandatory commitment reductions prior
to final termination of the commitment 7 years from the Closing Date.

Interest Rate; Fees. Outstanding amounts under the Term Loan Facility shall
bear interest, at the election of the Company, at (a) Bank of America's Base
Rate (which is the fluctuating rate equal to the greater of (i) the rate as
publicly announced from time to time by Bank of America as its "Base Rate" or
(ii) the Federal Funds Rate plus 0.5%) plus: (1) for the Tranche A Loans, 1.00%
initially, after which as set forth in Pricing Grids A and B below, (2) for the
Tranche B Loans, 1.50%, (3) for the Tranche C Loans, 1.75%, (4) for the Tranche
D Loans, 2.00% or (5) for the Revolving Credit Facility, the same as for the
Tranche A Loans; or at (b) the reserve-adjusted London interbank offered rate
for periods of one, two, three, six or, if available, nine or twelve months, as
selected by the Company, plus: (1) for the Tranche A Loans, 2.25% initially,
after which as set forth in Pricing Grids A and B below, (2) for the Tranche B
Loans, 2.75%, (3) for the Tranche C Loans, 3.00%, (4) for the Tranche D Loans,
3.25%, or (5) for the Revolving Credit Facility, the same as for the Tranche A
Loans.

From the initial funding date until the six month anniversary thereof, the
applicable margins with respect to the Tranche A Loans and the Revolving Credit
Facility shall be those indicated above. Subsequently, the applicable margins
will be determined from Pricing Grids A and B below, providing for the lower
rate from time to time.

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<PAGE>
PRICING GRID A:
SENIOR BANK DEBT RATING*

<TABLE>
<CAPTION>
PRICING LEVEL
I: PRICING LEVEL PRICING LEVEL PRICING LEVEL PRICING LEVEL
BBB-BAA3 AND II: III: IV: V:
(IN BASIS POINTS) ABOVE BB+/BA1 BB/BA2 BB-/BA3 BELOW BB-/BA3
<S> <C> <C> <C> <C> <C>
Commitment Fee:........... 25.0 37.5 37.5 37.5 50.0
LIBOR Margin:............. 125.0 175.0 200.0 225.0 250.0
Base Rate Margin:......... 0.0 50.0 75.0 100.0 125.0
</TABLE>

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

* The Senior Bank Debt Rating shall be one rating higher than the Company's
subordinated debt rating. In the event the Company's Senior Bank Debt Ratings
are split, the higher rating shall apply. If the Senior Bank Debt Ratings
differ by two or more levels, the rating shall be one level below the higher
rating except that if the lower rating is below BB-/Ba3, the rating which is
one level above the lower shall apply. If the Company is not rated by Moody's
Investors Service, Inc. and Standard & Poor's Rating Group, Pricing Grid B
shall be applicable.

PRICING GRID B:
TOTAL DEBT TO TOTAL CAPITALIZATION RATIO

<TABLE>
<CAPTION>
PRICING LEVEL PRICING LEVEL PRICING LEVEL PRICING LEVEL PRICING LEVEL PRICING LEVEL
I: II: III: IV: V: VI:
(IN BASIS POINTS) X < 40% 40% < X < 45% 45% < X < 50% 50% < X < 55% 55% < X < 60% X > 60%
<S> <C> <C> <C> <C> <C> <C>
Commitment Fee:....... 25.0 25.0 37.5 37.5 50.0 50.0
LIBOR Margin:......... 125.0 150.0 200.0 225.0 237.0 250.0
Base Rate Margin:..... 0.0 25.0 75.0 100.0 112.5 125.0
</TABLE>

The Company will pay a commitment fee on the unutilized portion of the total
commitment, payable quarterly in arrears from the date of the execution of the
credit agreement, at a rate of 0.375% per annum for the first six months
following the Closing and thereafter based upon the lower of the two amounts set
forth in Pricing Grids A and B above.

Amortization. The Tranche A Loans are subject to the following amortization
schedule:

NUMBER OF MONTHS
FROM CLOSING DATE AMOUNT
----------------- ------------
30................................................... $ 35,000,000
36................................................... 35,000,000
42................................................... 40,000,000
48................................................... 40,000,000
54................................................... 40,000,000
60................................................... 62,500,000
66................................................... 62,500,000
72................................................... 52,500,000
78................................................... 52,500,000
84 (7 years)......................................... 105,000,000
------------
Total: .............................................. $525,000,000

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<PAGE>
The Tranche B Loans are subject to the following amortization schedule:

NUMBER OF MONTHS
FROM CLOSING DATE AMOUNT
----------------- --------------
12.................................................. $ 500,000
18.................................................. 500,000
24.................................................. 500,000
30.................................................. 500,000
36.................................................. 500,000
42.................................................. 500,000
48.................................................. 500,000
54.................................................. 500,000
60.................................................. 500,000
66.................................................. 500,000
72.................................................. 500,000
78.................................................. 500,000
84.................................................. 500,000
90.................................................. 500,000
96 (8 years)........................................ 93,000,000
--------------
Total: ............................................. $ 100,000,000

The Tranche C Loans are subject to the following amortization schedule:

NUMBER OF MONTHS
FROM CLOSING DATE AMOUNT
----------------- --------------
12.................................................. $ 500,000
18.................................................. 500,000
24.................................................. 500,000
30.................................................. 500,000
36.................................................. 500,000
42.................................................. 500,000
48.................................................. 500,000
54.................................................. 500,000
60.................................................. 500,000
66.................................................. 500,000
72.................................................. 500,000
78.................................................. 500,000
84.................................................. 500,000
90.................................................. 500,000
96.................................................. 500,000
102 (8 1/2 years) .................................. 92,500,000
--------------
Total:.............................................. $ 100,000,000

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<PAGE>

The Tranche D Loans are subject to the following amortization schedule:

NUMBER OF MONTHS
FROM CLOSING DATE AMOUNT
----------------- -----------
12.................................................... $ 250,000
18.................................................... 250,000
24.................................................... 250,000
30.................................................... 250,000
36.................................................... 250,000
42.................................................... 250,000
48.................................................... 250,000
54.................................................... 250,000
60.................................................... 250,000
66.................................................... 250,000
72.................................................... 250,000
78.................................................... 250,000
84.................................................... 250,000
90.................................................... 250,000
96.................................................... 250,000
102................................................... 250,000
108................................................... 250,000
111 (9 1/4 years)..................................... 45,750,000
-----------
Total:................................................ $50,000,000

Availability under the Revolving Credit Facility shall reduce from $200
million according to the following schedule:

NUMBER OF MONTHS
FROM CLOSING DATE AMOUNT AVAILABLE
- ---------------------------------------------------- ----------------
60............................................ $150,000,000
72............................................ $100,000,000
84............................................ $ 0

Security. The Credit Facilities will be secured by a perfected first
priority pledge of and security interest in (i) all of the common stock owned by
the Company in Talegen Holdings and certain subsequently acquired direct
domestic subsidiaries of the Company, (ii) all of the common stock of existing
and certain subsequently acquired Intermediate Holding Companies owned by
Talegen Holdings, (iii) any surplus debentures created in connection with any
acquisition of a direct domestic subsidiary of the Company and Talegen Holdings
and (iv) certain non-cash proceeds of asset dispositions. The agreement
documenting the pledge will contain language affirming the Lenders' agreement
that they may not exercise certain remedies in respect of the pledged stock of
the Insurance Companies without first obtaining any regulatory approvals.

Certain Covenants. The Credit Facilities contain numerous operating and
financial covenants, including, without limitation, requirements to maintain
ratios of cash flow to debt service and fixed charges, maximum levels of
indebtedness in relation to total capitalization, minimum levels of statutory
surplus and risk-based capital, and maximum levels of net premiums written to
surplus. In addition, the Credit Facilities include customary covenants,
including covenants relating to the delivery of financial statements, reports,
notices and other information, access to information and properties, maintenance
of insurance, payment of taxes, maintenance of assets, nature of business,
corporate existence and rights,

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<PAGE>
compliance with applicable laws, ERISA matters, transactions with affiliates,
use of proceeds, limitations on indebtedness, limitations on liens, limitations
on amendments, limitations on certain acquisitions, mergers and sales of assets,
limitations on investments, limitations on dividends and other distributions,
and limitations on debt payments, including prepayments and redemptions on
securities.

Events of Default. The Credit Facilities contain certain other events of
default after expiration of applicable grace periods, including, without
limitation, failure to make payments under the Credit Facilities, breach of
representations and warranties, breach of covenants, default under other
agreements or conditions relating to indebtedness, certain events of insolvency
or bankruptcy with respect to the Company or any Specified Subsidiary, certain
ERISA violations, invalidity or disaffirmance of any Pledge Agreement, certain
judgments and certain events relating to changes in control of the Company.

Upon the occurrence of an Event of Default, the Agent or the Lenders may
terminate the Commitments, declare all amounts under the Credit Facilities to be
due and payable and take certain other actions.

154
<PAGE>
UNDERWRITING

Each of the underwriters named below, (the "Underwriters") has agreed,
subject to the terms and conditions set forth in a purchase agreement (the
"Underwriting Agreement") between the Company and the Underwriters, to purchase
the Debentures offered hereby from the Company. The Underwriting Agreement
provides, subject to the terms and conditions set forth therein, that the
Underwriters will be obligated to purchase the entire principal amount of the
Debentures offered hereby if any are purchased.

PRINCIPAL AMOUNT
UNDERWRITER OF DEBENTURES
----------- ----------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................... $
BA Securities, Inc..........................................
BT Securities Corporation...................................
Chase Securities Inc........................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Lehman Brothers Inc.........................................
Morgan Stanley & Co. Incorporated...........................
Smith Barney Inc............................................
----------------
Total....................................................... $350,000,000
----------------
----------------

The Underwriters propose initially to offer the Debentures to the public at
the public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of % of the
principal amount thereof. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of % of the principal amount of the
Debentures to certain other dealers. After the initial public offering, the
public offering price, concession and discount may be changed.

There is no public market for the Debentures and the Company does not intend
to apply for listing of the Debentures on any securities exchange or for
quotation on any inter-dealer quotation system. The Company has been advised by
the Underwriters that, following completion of the initial offering of the
Debentures, the Underwriters presently intend to make a market in the
Debentures; however, they are not obligated to do so and any such market making
activities may be discontinued at any time without notice. Accordingly, there
can be no assurance as to whether an active trading market for the Debentures
will develop or, if a trading market does develop, as to the liquidity of the
trading market for the Debentures. If an active public market does not develop,
the market price and liquidity of the Debentures may be adversely affected.

The Company has agreed to indemnify each Underwriter against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that any Underwriter may be required to make in respect thereof.

The Company has agreed that it will not and will not permit any of its
subsidiaries, for a period of 180 days from the date of the Prospectus, without
the prior consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), directly or indirectly, issue, offer, sell, grant any option
to purchase or otherwise dispose of, any debt securities of the Company or its
subsidiaries.

Certain of the Underwriters and their respective affiliates, from time to
time, perform investment banking and other financial services for KKR and
various of its associated entities. Merrill Lynch has acted as financial advisor
to the Company in connection with the Acquisition.

An affiliate of BA Securities, Inc. is the agent and a lender under certain
existing indebtedness of the Intermediate Holding Companies that will be repaid
with the proceeds of the Financings, including

155
<PAGE>
those of the Offering. It is possible that more than 10% of the proceeds of the
Offering, not including underwriting compensation, will be received by such
affiliate of BA Securities, Inc. Therefore, the Offering is being conducted
pursuant to Article III, Section 44(c)(8) of the NASD Rules of Fair Practice. In
accordance with these provisions, Merrill Lynch is acting as qualified
independent underwriter ("QIU"), and the yield on the Debentures will be no
lower than that recommended by the QIU. The QIU has participated in the
preparation of the Registration Statement of which this Prospectus is a part and
has performed due diligence with respect thereto.

An affiliate of BA Securities, Inc. will act as agent and a lender under the
Bank Credit Agreement and affiliates of BT Securities Corporation and Chase
Securities Inc. will also be lenders thereunder, for which they will receive
customary fees.

156
<PAGE>
LEGAL MATTERS

Certain legal matters relating to the Offering will be passed upon for the
Company by Simpson Thacher & Bartlett, New York, New York (a partnership which
includes professional corporations). Certain legal matters with respect to the
Debentures offered hereby will be passed upon for the Underwriters by Shearman &
Sterling, New York, New York.

EXPERTS

The consolidated financial statements and schedules of Talegen as of
December 31, 1994 and December 31, 1995, and for each of the years in the
three-year period ended December 31, 1995, have been included herein and in this
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.

The balance sheet of the Company as of March 15, 1996 included in this
Prospectus has been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein and is included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
and the rules and regulations promulgated thereunder relating to the Debentures
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and the
Debentures offered hereby, reference is made to such Registration Statement and
exhibits and schedules filed as a part thereof. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete, but such statements are complete in
all material respects for the purposes herein made. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.

Upon effectiveness of the Registration Statement, the Company will become
subject to the information and reporting requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith will
file periodic reports and other information with the Commission. The
Registration Statement, as well as such reports and other information filed by
the Company with the Commission, may be inspected by anyone without charge at
the Public Reference Section of the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of all or any portion of the Registration Statement may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates.

157

<PAGE>
GLOSSARY OF SELECTED INSURANCE TERMS

<TABLE>
<S> <C>
Accident year.................. The annual accounting period in which loss events
occurred, regardless of when the losses are actually
reported, booked or paid.

Admitted insurer............... A company licensed to transact insurance business within a
state.

Agent.......................... A person or organization engaged in the activity of
soliciting insurance coverages for one or more insurance
companies.

Allied lines................... Coverages that are generally written with fire insurance,
including tornado, windstorm and hail, sprinkler and water
damage, explosion, riot and civil commotion, growing
crops, flood, rain, and damage from aircraft and vehicles.

Alternative market............. The segment of the insurance market that has developed in
response to volatility in cost and availability of
traditional commercial insurance coverage and consists of
various risk financing mechanisms, including
self-insurance, captive insurance companies, risk
retention groups and residual market business.

Best Rating.................... An independent opinion of a company's financial strength
and ability to meet its obligations to policyholders.
These ratings are developed and published annually by A.M.
Best & Company.

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

Capacity....................... The percentage of surplus, or the dollar amount of
exposure, that an insurer or reinsurer is willing to place
at risk. Capacity may apply to a single risk, a program, a
line of business or an entire book of business. Capacity
may be constrained by legal restrictions, corporate
restrictions or indirect restrictions.

Captive company................ An insurance company formed to insure or reinsure the
risks of its parent entity or entities.

Case reserves.................. Loss reserves established with respect to specific,
individual reported claims.

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

Catastrophe.................... A severe loss, usually involving risks such as fire,
earthquake, windstorm, explosion and other similar events.

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

Cede; ceding company........... When an insurer reinsures its liability with another
insurer (a "cession"), it "cedes" business and is referred
to as the "ceding company."
</TABLE>

G-1
<PAGE>
<TABLE>
<S> <C>
Claim.......................... Request by an insured for indemnification by an insurance
company for loss incurred from an insured peril.

Claims-made basis.............. A form of insurance that provides coverage for claims made
(reported or filed) during the year the policy is in force
for any incidents which occur during that year or during
any previous period the policyholder was insured under the
"claims-made" contract. This form of coverage is in
contrast to the occurrence policy which covers losses from
claims which occurred during the policy period, regardless
of when the claims are asserted.

Combined ratio................. The sum of the loss and loss expense ratio, the
underwriting expense ratio and, where applicable, the
ratio of policyholder dividends to net premiums earned. A
combined ratio under 100% generally indicates an
underwriting profit. A combined ratio over 100% generally
indicates an underwriting loss.

Commercial automobile.......... Coverage for businesses against losses incurred from
personal bodily injury, bodily injury to third parties,
property damage to an insured's vehicle, and property
damage to other vehicles and other property resulting from
the ownership, maintenance or use of automobiles and
trucks in a business.

Commercial multi-peril......... A contract for a commercial enterprise that packages two
or more insurance coverages protecting an enterprise from
various property and casualty risk exposures. Frequently
includes fire, allied lines, extended coverage and
liability (such coverages would be included in other
annual statement lines, if written individually).

Contingency cover.............. A casualty excess of loss agreement with a retention
higher than the limits on any one reinsured policy. The
agreement is generally exposed to loss when two or more
casualty policies (perhaps from different lines of
business) are involved in a common occurrence in an amount
greater than the contingency cover retention. Also known
as clash cover, or casualty catastrophe cover.

Deductible..................... The amount of loss that an insured retains.

Earned Surplus................. Under New York law, the "portion of the surplus that
represents the net earnings, gains or profits, after
deduction of all losses, that have not been distributed to
the shareholders as dividends or transferred to stated
capital or capital surplus or applied to other purposes
permitted by law but does not include unrealized
appreciation of assets." Although the laws of Indiana, New
Jersey and California contain varied definitions of
"earned surplus," in each state earned surplus is to be
distinguished from contributed surplus and is to exclude
unrealized capital gains.

Earthquake..................... Property coverages for losses resulting from a sudden
trembling or shaking of the earth, including that caused
by volcanic eruption. Excluded are losses resulting from
fire, explosion or tidal wave.

Excess liability............... Additional casualty coverage above the first layer.

Excess of loss reinsurance..... Reinsurance that indemnifies the reinsured against all or
a specified portion of losses under reinsured policies in
excess of a specified dollar amount or "retention."

Expense ratio.................. See "Underwriting expense ratio."

Facultative reinsurance........ The reinsurance of all or a portion of the insurance
provided by a single policy. Each policy reinsured is
separately negotiated.
</TABLE>

G-2
<PAGE>
<TABLE>
<S> <C>
Fire........................... Coverage protecting the insured against the loss to real
or personal property from damage caused by fire, including
business interruption, loss of rents, etc.

Gross premiums written......... Total premiums for insurance written and reinsurance
assumed during a given period.

Guaranty fund.................. State-regulated mechanism which is financed by assessing
insurers doing business in those states. Should
insolvencies occur, these funds are available to meet some
or all of the insolvent insurer's obligations to
policyholders.

Incurred but not reported
("IBNR") reserves.............. Reserves for estimated losses and loss expenses which have
been incurred but not yet reported to the insurer.

Inland marine.................. A broad type of insurance generally covering articles that
may be transported from one place to another, as well as
bridges, tunnels and other instrumentalities of
transportation. It includes goods in transit (generally
other than transoceanic) and may include policies for
movable objects such as personal effects, personal
property, jewelry, furs, fine arts and others.

Internal operating expenses.... All internal costs associated with acquiring and writing a
policy plus all internal claim servicing costs which are
not assigned to a specific policy.

IRIS ratios.................... Financial ratios calculated by the NAIC to assist state
insurance departments in monitoring the financial
condition of insurance companies.

Loss........................... An occurrence that is the basis for submission and/or
payment of a claim and the costs of indemnification of
such a claim. Losses may be covered, limited or excluded
from coverage, depending on the terms of the policy.

Loss and loss expense ratio.... The ratio of incurred losses and loss expenses to net
premiums earned.

Loss expenses.................. The expenses of settling claims, including legal and other
fees and the portion of general expenses allocated to
claim settlement costs.

Loss reserves.................. The liability established by insurers and reinsurers to
reflect the estimated cost of claims incurred that the
insurer or reinsurer will ultimately be required to pay in
respect of insurance or reinsurance it has written.
Reserves are established for losses and for loss expenses,
and include case reserves and IBNR reserves.

Losses and loss expenses....... The sum of losses incurred and loss expenses.

Losses incurred................ The total losses sustained by an insurance company under a
policy or policies, whether paid or unpaid. Losses
incurred includes a provision for IBNR.

Multiple peril policies........ Refers to policies which cover both property and third
party liability exposures.

National Association of
Insurance Commissioners
("NAIC")..................... An organization of the insurance commissioners or
directors of all 50 states organized to promote
consistency of regulatory practice and statutory
accounting standards throughout the United States.
</TABLE>

G-3
<PAGE>
<TABLE>
<S> <C>
Net premiums earned............ The portion of premiums written that is allocable to the
expired portion of the policy term.

Net premiums written........... Gross premiums written less premiums ceded to reinsurers.

Non-admitted coverage.......... Insurance coverage written in a state by an insurer not
licensed in that state.

Personal lines................. Types of insurance written for individuals or families,
rather than for businesses.

Pool........................... An organization of insurers or reinsurers through which
particular types of risks are underwritten with premiums,
losses and expenses being shared in agreed percentages.

Primary insurer................ An insurer who provides the first layer of insurance. The
excess insurer provides limits of liability over those
provided by the primary insurer.

Product liability.............. Insurance coverage protecting the manufacturer, seller or
lessor of a product against legal liability resulting from
a defective condition that causes personal injury or
damage to any individual or entity associated with the use
of the product. Coverage may also include liability
incurred by a contractor as the result of improperly
performed work (construction or installation) after a job
has been completed.

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

Quota share reinsurance........ Reinsurance wherein the insurer cedes an agreed fixed
percentage of liabilities, premiums and losses for each
policy covered on a pro rata basis.

Rates.......................... Amounts charged per unit of insurance.

Reinsurance.................... The practice whereby one insurer, called the reinsurer, in
consideration of a premium paid to such insurer, agrees to
indemnify another insurer, called the ceding company, for
part or all of the liability assumed by the ceding company
under one or more policies or contracts of insurance which
it has issued.

Reinsurance agreement.......... A contract specifying the terms of a reinsurance
transaction.

Residual market (nonvoluntary
business)..................... Insurance market that provides coverage for risks that are
unable to be placed in the voluntary market either because
the risk is too great or rate inadequacy has reduced the
supply of insurance. Residual markets are frequently
created by state legislation either because of lack of
available coverage such as property coverage in a
windstorm prone area or protection of the accident victim
as in the case of workers' compensation. The costs of the
residual market are usually charged back to the direct
insurance carriers in proportion to the carriers'
voluntary market shares for the type of coverage involved.

Retention...................... The amount of exposure an insurance company retains on any
one risk or group of risks.

Retrospective premiums......... Premiums related to retrospectively rated policies.

Retrospective rating........... A plan or method which permits adjustment of the final
premium or commission on the basis of actual loss
experience, subject to certain minimum and maximum limits.
</TABLE>

G-4
<PAGE>
<TABLE>
<S> <C>
Salvage........................ The amount of money an insurer recovers through the sale
of property transferred to the insurer as a result of a
loss payment.

Servicing carrier.............. An insurance company that provides, for a fee, various
services including policy issuance, claims adjusting and
customer service for insureds in a reinsurance pool.

Statutory accounting practices
("SAP")....................... The rules and procedures prescribed or permitted by United
States state insurance regulatory authorities for
recording transactions and preparing financial statements.
Statutory accounting practices generally reflect a
modified going concern basis of accounting.

Statutory surplus.............. As determined under SAP, the amount remaining after all
liabilities, including loss reserves, are subtracted from
all admitted assets. Admitted assets are assets of an
insurer prescribed or permitted by a state to be taken
into account in determining the insurer's financial
condition for statutory purposes. Statutory surplus is
also referred to as "surplus" or "surplus as regards
policyholders" for statutory accounting purposes.

Subrogation.................... A principle of law incorporated in insurance policies that
enables an insurance company, after paying a loss to its
insured, to recover the amount of the loss from another
who is legally liable.

Tail........................... The period of time that elapses between the writing of the
applicable insurance policy or the loss event (or the
insurer's knowledge of the loss event) and the payment in
respect thereof.

Third party liability.......... A liability owed to a claimant (or "third party") who is
not one of the two parties to the insurance contract.
Insured liability claims are referred to as third party
claims.

Treaty reinsurance............. The reinsurance of all or a portion of some class or
classes of policies, in contrast to facultative
reinsurance, which involves reinsurance of all or a
portion of a single policy.

Umbrella coverage.............. A form of insurance protection against losses in excess of
amounts covered by other liability insurance policies or
amounts not covered by the usual liability policies.

Underwriting................... The insurer's or reinsurer's process of reviewing
applications for insurance coverage, and the decision
whether to accept all or part of the coverage and
determination of the applicable premiums; also refers to
the acceptance of such coverage.

Underwriting expense ratio..... The ratio of underwriting expenses incurred to net
premiums earned. (For statutory purposes, the ratio of
underwriting expenses incurred to net premiums written.)

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

Underwriting profit or
underwriting loss............. The pre-tax profit or loss experienced by a property and
casualty insurance company after deducting losses and loss
expenses and underwriting, acquisition and other insurance
expenses from net earned premiums. This profit or loss
calculation includes reinsurance assumed and ceded but
excludes investment income.
</TABLE>

G-5
<PAGE>
<TABLE>
<S> <C>
Unearned premium............... The portion of premiums written that is allocable to the
unexpired portion of the policy term.

Wholesale broker............... An independent agent that represents both admitted and
non-admitted insurers in market areas which include
standard, non-standard, specialty and excess and surplus
lines of insurance. The wholesaler does not deal directly
with the insurance consumer. The wholesaler deals with the
retail agent or broker.

Workers' compensation.......... A system (established under state laws) under which
employers provide insurance for benefit payments to their
employees for work-related injuries, deaths and diseases,
regardless of fault.
</TABLE>

G-6
<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Auditors for Talegen Acquisition Corporation ................. F-2

Balance Sheet as of March 15, 1996.................................................. F-3

Note to Balance Sheet............................................................... F-4

Report of Independent Auditors for Talegen Holdings, Inc............................ F-5

Consolidated Balance Sheets of Talegen Holdings, Inc. as of December 31, 1994 and
December 31, 1995................................................................. F-6

Consolidated Statements of Earnings of Talegen Holdings, Inc. for the years ended
December 31, 1993, December 31, 1994, and December 31, 1995....................... F-7

Consolidated Statements of Shareholder's Equity of Talegen Holdings, Inc. for the
years ended December 31, 1993, December 31, 1994, and December 31, 1995........... F-8

Consolidated Statements of Cash Flows of Talegen Holdings, Inc. for the years ended
December 31, 1993, December 31, 1994, and December 31, 1995....................... F-9

Notes to Consolidated Financial Statements.......................................... F-10

Consolidated Balance Sheet of Talegen Holdings, Inc. as of March 31, 1996
(unaudited)....................................................................... F-31

Consolidated Statements of Earnings of Talegen Holdings, Inc. for the three month
periods ended March 31, 1995 and March 31, 1996 (unaudited)....................... F-32

Consolidated Statement of Shareholder's Equity of Talegen Holdings, Inc. for the
three month period ended March 31, 1996 (unaudited)............................... F-33

Consolidated Statements of Cash Flows of Talegen Holdings, Inc. for the three month
periods ended March 31, 1995 and March 31, 1996 (unaudited)....................... F-34

Notes to Interim Financial Statements (unaudited)................................... F-35
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Board of Directors
of Talegen Acquisition Corporation:

We have audited the accompanying balance sheet of Talegen Acquisition
Corporation as of March 15, 1996. This financial statement is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.

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

In our opinion, such balance sheet presents fairly, in all material aspects,
the financial position of the Company as of March 15, 1996 in conformity with
generally accepted accounting principles.

Deloitte & Touche LLP
New York, New York
March 15, 1996

F-2
<PAGE>
TALEGEN ACQUISITION CORPORATION
BALANCE SHEET
MARCH 15, 1996

<TABLE>

<S> <C>
ASSETS

Cash............................................................................. $1,000
------
Total.............................................................................. $1,000
------
------

STOCKHOLDER'S EQUITY

Common stock, par value $.01 per share;
authorized 1,000 shares; 100 shares outstanding................................ $ 1
Additional paid-in capital....................................................... 999
------
Total.............................................................................. $1,000
------
------
</TABLE>

See note to Balance Sheet.

F-3
<PAGE>
TALEGEN ACQUISITION CORPORATION
NOTE TO BALANCE SHEET
MARCH 15, 1996

1. GENERAL

The accompanying balance sheet reflects the accounts of Talegen Acquisition
Corporation (the "Company"), a Delaware Corporation. The Company will be used to
effect the acquisition of Talegen Holdings, Inc. ("Talegen"). Upon the
completion of the acquisition, the principal shareholder of the Company will be
a Delaware corporation, New Talegen Holdings Corporation. The acquisition of
Talegen is subject to conditions set forth in the Stock Purchase Agreement dated
as of January 17, 1996.

The Company has not engaged in any activities other than those incident to
its formation and to the acquisition of Talegen and the related financing.

F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholder
Talegen Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of Talegen
Holdings, Inc. (Talegen Holdings) and subsidiaries as of December 31, 1994 and
1995, and the related consolidated statements of earnings, shareholder's equity,
and cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of Talegen
Holdings' management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Talegen
Holdings, Inc. and subsidiaries as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP

Short Hills, New Jersey
January 17, 1996

F-5
<PAGE>
TALEGEN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(IN MILLIONS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at fair value (cost: 1994--$5,425; 1995--$650)....... $ 5,137 $ 648
Equity securities--common stocks, at fair value (cost: 1994--$126;
1995--$8)............................................................ 128 7
Short-term investments, at amortized cost which approximates fair
value................................................................ 677 5,779
------- -------
Total investments.................................................... 5,942 6,434
Cash..................................................................... 22 16
Accrued investment income................................................ 95 72
Receivables:
Premiums (net of reserve for uncollectible receivables: 1994--$15;
1995--$15)........................................................... 572 588
Other.................................................................. 190 202
Reinsurance recoverables................................................. 1,834 2,210
Prepaid reinsurance premiums............................................. 132 132
Deferred policy acquisition costs........................................ 129 150
Deferred income taxes.................................................... 466 477
Land, buildings and equipment............................................ 130 132
Cost of acquired businesses in excess of net assets...................... 255 245
Due from affiliates...................................................... 370 368
Other assets............................................................. 70 90
------- -------
Total assets......................................................... $10,207 $11,116
------- -------
------- -------
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Unearned premiums...................................................... $ 783 $ 818
Unpaid losses and loss expenses........................................ 6,527 6,923
Debt................................................................... 425 372
Current income taxes................................................... 67 64
Dividends to policyholders............................................. 52 35
Accounts payable and accrued liabilities............................... 403 551
------- -------
Total liabilities.................................................... 8,257 8,763
------- -------
Commitments and contingencies
Shareholder's equity:
Common stock and additional paid-in capital (includes $1 par value
common stock, 1,000 shares authorized, issued and outstanding)....... 1,781 1,781
Retained earnings...................................................... 459 576
Net unrealized loss on investment securities........................... (286) (3)
Cumulative translation adjustments..................................... (4) (1)
------- -------
Total shareholder's equity........................................... 1,950 2,353
------- -------
Total liabilities and shareholder's equity........................... $10,207 $11,116
------- -------
------- -------
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>
TALEGEN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN MILLIONS)

<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Revenues:
Net premiums earned............................................. $1,765 $1,687 $1,659
Net investment income........................................... 261 297 343
Net realized investment gains................................... 65 13 70
Other income.................................................... 23 30 26
------ ------ ------
Total revenues............................................ 2,114 2,027 2,098
------ ------ ------

Losses and expenses:
Losses and loss expenses........................................ 1,327 1,240 1,406
Underwriting, acquisition and other insurance expenses.......... 532 530 534
Dividends to policyholders...................................... 36 32 21
Interest expense................................................ -- 7 35
Amortization of goodwill........................................ 9 9 8
Other expenses.................................................. 57 -- --
------ ------ ------
Total losses and expenses................................. 1,961 1,818 2,004
------ ------ ------
Earnings from operations before income taxes.............. 153 209 94
Provision for income taxes........................................ 35 72 15
------ ------ ------
Net earnings.............................................. $ 118 $ 137 $ 79
------ ------ ------
------ ------ ------
</TABLE>

See accompanying notes to consolidated financial statements.

F-7
<PAGE>
TALEGEN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN MILLIONS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Common stock and additional paid-in capital:
Balance at beginning of year.................................... $1,366 $1,787 $1,781
Capital adjustments............................................. (1) (6) --
Capital contributions........................................... 422 -- --
------ ------ ------
Balance at end of year...................................... 1,787 1,781 1,781
------ ------ ------
Retained earnings:
Balance at beginning of year.................................... 442 524 459
Net earnings.................................................... 118 137 79
Dividends to shareholder........................................ (45) (232) (16)
Dividends from disengaged subsidiaries.......................... 9 33 56
Minimum pension liability adjustment............................ -- (3) (2)
------ ------ ------
Balance at end of year...................................... 524 459 576
------ ------ ------
Net unrealized gain (loss) on investment securities:
Balance at beginning of year.................................... (59) 9 (286)
Change in unrealized gains (losses)............................. 70 (293) 283
Increase in deferred income taxes............................... (2) (2) --
------ ------ ------
Balance at end of year...................................... 9 (286) (3)
------ ------ ------
Cumulative translation adjustments:
Balance at beginning of year.................................... (4) (2) (4)
Increase (decrease) in translation adjustments, net............. 2 (2) 3
------ ------ ------
Balance at end of year...................................... (2) (4) (1)
------ ------ ------
Total shareholder's equity.................................. $2,318 $1,950 $2,353
------ ------ ------
------ ------ ------
</TABLE>

See accompanying notes to consolidated financial statements.

F-8
<PAGE>
TALEGEN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN MILLIONS)

<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings..................................................... $ 118 $ 137 $ 79
------ ------ ------
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Net realized investment gains................................ (65) (13) (70)
Depreciation and amortization................................ 72 88 82
Changes in certain assets and liabilities:
Unpaid losses and loss expenses.......................... (140) (233) 423
Unearned premiums........................................ 47 55 35
Other liabilities........................................ 63 (22) 131
Underwriting assets...................................... (110) (23) (398)
Deferred policy acquisition costs........................ (7) 1 (21)
Income taxes................................................... 35 72 15
Receipts (payments) for income taxes........................... 189 82 (14)
Other.......................................................... 1 (8) --
------ ------ ------
Total adjustments.................................... 85 (1) 183
------ ------ ------
Net cash provided by operating activities............ 203 136 262
------ ------ ------
Cash flows from investing activities:
Cash used for the purchase of fixed maturities and equity
securities...................................................... (3,503) (1,729) (956)
Proceeds from the sale or maturity of fixed maturities and equity
securities...................................................... 4,385 335 5,872
Decrease (increase) in short-term investments.................... (1,279) 953 (5,102)
Purchase of fixed assets......................................... (3) (22) (28)
Payments for discontinued operations............................. (17) (19) (27)
Dividends from disengaged subsidiaries........................... 9 33 35
Proceeds from note receivable.................................... -- 142 --
------ ------ ------
Net cash used in investing activities.................... (408) (307) (206)
------ ------ ------
Cash flows from financing activities:
Dividends to shareholder......................................... (45) (232) (9)
Cash used for repayment of debt.................................. -- -- (53)
Proceeds from issuance of debt................................... -- 425 --
Proceeds from issuance of notes payable.......................... -- 210 --
Repayment of notes payable....................................... -- (210) --
Capital contributions............................................ 229 -- --
------ ------ ------
Net cash provided by (used in) financing
activities......................................... 184 193 (62)
------ ------ ------
Net (decrease) increase in cash...................... (21) 22 (6)
Cash at beginning of year.......................................... 21 -- 22
------ ------ ------
Cash at end of year................................................ $ -- $ 22 $ 16
------ ------ ------
------ ------ ------
</TABLE>

See accompanying notes to consolidated financial statements.

F-9
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995

(1) BASIS OF CONSOLIDATION AND SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Consolidation

Talegen Holdings, Inc. (Talegen Holdings) is a wholly-owned subsidiary of
Xerox Financial Services, Inc. (XFSI), which is a wholly-owned subsidiary of
Xerox Corporation (Xerox). In January 1993, Xerox announced its intention to
disengage from its insurance and other financial services businesses. During
1992 and 1993, Talegen Holdings and its consolidated insurance subsidiaries
(Talegen) completed a recapitalization and restructuring of its business
operations into seven stand-alone insurance operating groups each with an
independent holding company (the Intermediate Holding Company or, collectively,
the Intermediate Holding Companies) that, in turn, owns one or more insurance
companies (the Insurance Companies). Talegen's investment in Xerox Financial
Services Life Insurance Company and Xerox Financial Life Insurance Company (both
collectively known as Xerox Life), which had been accounted for on an equity
basis, was transferred to XFSI as a dividend in 1993.

In line with Xerox's disengagement process, during 1995, Talegen Holdings
completed sales of two of its insurance operating groups, Constitution Re
Corporation (Constitution), a writer of treaty and facultative reinsurance, and
Viking Insurance Holdings, Inc. (Viking), a writer of non-standard personal
automobile insurance, as well as the sale of the insurance investment services
business of First Quadrant Corp., a wholly-owned subsidiary of Talegen Holdings.
In January 1996, Talegen Holdings entered into an agreement to sell the
remainder of First Quadrant Corp. On December 31, 1995, direct ownership of The
Resolution Group, Inc. (TRG), an insurance group that manages run-off insurance
obligations and provides reinsurance collection services as well as claims
management services for latent exposures, was transferred through a distribution
of its common stock to XFSI. The majority of TRG's obligations have been in
run-off since the mid-1980's, and the remainder principally relate to books of
business that are no longer being written by the remaining four insurance groups
(the Operating Groups). On January 17, 1996, XFSI entered into an agreement to
sell the Operating Groups and service companies of Talegen Holdings to an
investment group led by Kohlberg Kravis Roberts & Co. (KKR) and certain members
of management of Talegen for $1.75 billion including $450 million to $500
million in preferred securities (the Acquisition). The Acquisition, which is
expected to close mid-1996, is subject to customary closing conditions,
including buyer financing and regulatory approval.

In order to present financial statements which are consistent with the
operations, financial position and cash flows of Talegen on a going forward
basis, assuming the Acquisition is consummated, the consolidated financial
statements included herein exclude the accounts of the insurance operating
groups and service companies sold or otherwise disengaged (i.e., Xerox Life,
Constitution, Viking, TRG and First Quadrant Corp.). Management believes this
presentation provides the most meaningful information to interested parties
since those businesses are dissimilar from the commercial property and casualty
focus of the Operating Groups, and in light of the increased autonomy of the
groups during the last several years due to the 1992 and 1993 restructuring. All
significant intercompany transactions have been eliminated. Other than the
exclusion of the accounts of the insurance operating groups and service
companies, as indicated above, the accounts of Talegen as of December 31, 1995
have been prepared on a historical cost basis and have not been adjusted to
reflect the Acquisition.

The Operating Groups included in these financial statements with their
respective areas of specialization are the following Intermediate Holding
Companies and their subsidiaries:

COREGIS GROUP, INC. Coregis is a writer of commercial property and casualty
insurance programs for public entities, professionals, and other selected market
niches.

F-10
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(1) BASIS OF CONSOLIDATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
CRUM & FORSTER HOLDINGS, INC. Crum & Forster is a national writer of a broad
array of commercial property and casualty products distributed through a select
network of independent agents and brokers. Crum & Forster's focus and operations
are highly regionalized and decentralized through 20 regional offices located
throughout the United States.

INDUSTRIAL INDEMNITY HOLDINGS, INC. Industrial Indemnity specializes in
providing workers' compensation insurance and risk management services on a
nationwide basis with an emphasis on the western United States.

WESTCHESTER SPECIALTY GROUP, INC. Westchester Specialty specializes in
umbrella, excess casualty and specialty property coverages. Westchester
Specialty principally focuses on excess and surplus lines of business which are
difficult to place and/or complex, requiring greater expertise than that found
in the standard commercial insurance market.

Talegen Holdings' wholly-owned ongoing service companies are much smaller in
size than the Operating Groups and consist of Apprise Corp., a provider of
technology services to property and casualty insurance customers and Infocus
Employee Services, Inc., a provider of human resource administrative and
consulting services, including payroll and benefits administration (formed on
January 1, 1996). In addition, at December 31, 1995, Talegen owned a 37%
interest in Filoli Information Systems Company (Filoli), a provider of software
to the insurance industry.

(b) Investments

Effective January 1, 1994, Talegen adopted Statement of Financial Accounting
Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and
Equity Securities." Under SFAS 115, debt securities for which a company has the
intent and ability to hold to maturity are classified as "held-to-maturity"
securities and are reported at amortized cost. Debt and equity securities that
are bought and held principally for the purpose of selling them in the near term
are classified as "trading" securities and are reported at fair value, with
unrealized investment gains and losses included in earnings. Debt and equity
securities not classified as either held-to-maturity securities or trading
securities are classified as "available-for-sale" securities and reported at
fair value, with unrealized investment gains and losses credited or charged as a
separate component of shareholder's equity. All debt and equity securities held
by Talegen are classified as available-for-sale securities. The initial adoption
of SFAS No. 115 had no effect on shareholder's equity on January 1, 1994.

Short-term investments are carried at amortized cost which approximates fair
value due to the short-term maturity of these investments.

Realized investment gains and losses on the sale of investments are
determined on a specific identification basis. A provision in the consolidated
statements of earnings is made only when the decline in the fair value of debt
and equity securities is other than temporary. Investment income is recorded
when earned.

Premiums are generally earned pro rata over the period in which the
coverages are provided. Premiums earned include estimates of certain premiums
due, including adjustments on retrospectively rated policies, net of the cost of
reinsurance. Unearned premiums represent the portion of premiums written that
are applicable to the unexpired terms of policies in force. Prepaid reinsurance
premiums represent the unexpired portion of premiums ceded to reinsurers.

F-11
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(1) BASIS OF CONSOLIDATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(d) Policy Acquisition Costs

Policy acquisition costs, primarily commissions, brokerage expenses,
salaries and premium taxes, represent those costs which vary with and are
primarily related to the acquisition of new and renewal insurance policies.
These costs are deferred by major product groups and are amortized over the life
of the policy in proportion to premium revenue recognized. Policy acquisition
costs in excess of recoverable amounts, including investment income, are charged
to expense. Acquisition expenses include $372 million, $384 million and $382
million of policy acquisition costs which were amortized during 1993, 1994 and
1995, respectively.

(e) Losses and Loss Expenses

Losses and loss expenses are charged to expense as incurred. The reserve for
unpaid losses and loss expenses is determined on the basis of claim adjusters'
evaluations and other estimates, including those for incurred but not reported
(IBNR) losses and for future salvage and subrogation recoveries. Overall reserve
levels are impacted primarily by the types and amounts of insurance coverage
written, trends developing from newly reported claims and claims which have been
paid and closed. The Operating Groups continually monitor gross and net loss and
loss expense reserves of the Insurance Companies for business written in both
the current and prior years, and Talegen senior management reviews these
reserves on a periodic basis. Adjustments are made to reserves in the period
they can be reasonably estimated to reflect evolving changes in loss development
patterns and various other factors, such as social and economic trends and
judicial interpretation of legal liability.

(f) Reinsurance

Reinsurance recoverables include the balances due from insurance and
reinsurance companies for paid losses and loss expenses and estimates of the
portion of unpaid losses and loss expenses that will be recovered from insurers
and reinsurers, determined in a manner consistent with the liabilities
associated with the reinsured policies. The reserve for uncollectible
reinsurance is determined based upon the review of the financial condition of
the insurers and reinsurers and an assessment of other available information, as
further discussed in Note 6.

(g) Postretirement Benefits Other Than Pensions and Postemployment Benefits

The cost of postretirement benefits other than pensions and postemployment
benefits is recognized in the consolidated financial statements during the
active working careers of employees.

(h) Income Taxes

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts and the tax bases of Talegen's assets and
liabilities. Such differences are primarily due to tax basis discount on unpaid
losses, ceded premiums, adjustment for unearned premiums, uncollectible
reinsurance and policy acquisition costs applicable to unearned premiums.
Additionally, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date. A valuation allowance against deferred tax assets is recorded if it is
more likely than not that all or some portion of the benefits related to
deferred tax assets will not be realized.

(i) Land, Buildings and Equipment

Land, buildings and equipment are carried at cost and are shown net of
depreciation. Buildings, equipment and capitalized software are depreciated on a
straight-line basis over 40 years, 5 years and 3

F-12
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(1) BASIS OF CONSOLIDATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
years, respectively. Capital improvements to leased property are amortized over
the life of the improvement or the life of the lease, whichever is shorter. As
of December 31, 1994 and 1995, accumulated depreciation on buildings and
equipment was $115 million and $127 million, respectively.

(j) Dividends to Policyholders

Dividends to policyholders are charged to earnings as the related premiums
are earned and include a provision for undeclared dividends.

(k) Cost of Acquired Businesses in Excess of Net Assets (Goodwill)

The cost of acquired businesses in excess of net assets purchased is
amortized on a straight-line basis, generally over forty years. The carrying
amount of goodwill is reported net of accumulated amortization and is regularly
reviewed by Talegen Holdings management for indications of impairment in value
based on undiscounted Operating Group cash flow analyses.

(l) Use of Estimates

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported financial statement balances as well as
the disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.

Similar to most companies with property and casualty insurance operations,
the reserve for unpaid losses and loss expenses, the reserve for uncollectible
reinsurance and deferred policy acquisition costs, although supported by
actuarial science and other supportive data, are ultimately based on
management's reasoned expectations of future events. In addition, Talegen's
realization of deferred income tax assets is dependent on generating sufficient
future taxable income. It is reasonably possible that expectations associated
with these accounts can change in the near term (i.e., one year) and that the
effect of those changes could be material to the consolidated financial
statements.

(2) ACCOUNTING CHANGES

Effective January 1, 1994, Talegen adopted SFAS No. 115, "Accounting for
Certain Investment in Debt and Equity Securities" which is more fully discussed
in Note 1. The adoption of SFAS No. 115 had no effect on January 1, 1994
shareholder's equity.

Effective January 1, 1994, Talegen adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits" which is more fully discussed in Note
10. The adoption of SFAS No. 112 did not have a significant impact on earnings.

F-13
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(3) INVESTMENTS AND INVESTMENT INCOME

The components of the investment portfolio at December 31, 1994 and 1995
follow (in millions):

<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED INVESTMENT INVESTMENT FAIR
1994 COST GAINS LOSSES VALUE
---- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government and agencies and authorities....... $ 4,424 $ 3 $ (262) $4,165
States, municipalities and political
subdivisions..................................... 686 3 (21) 668
All other corporate fixed maturities............... 60 -- (3) 57
Mortgage-backed securities......................... 255 -- (8) 247
--------- ---------- ---------- ----------
Total fixed maturities........................... 5,425 6 (294) 5,137
--------- ---------- ---------- ----------
Equity securities--common stocks:
Public utilities................................... 19 -- (1) 18
Banks, trusts and insurance companies.............. 14 1 (1) 14
Industrial and miscellaneous....................... 93 8 (5) 96
--------- ---------- ---------- ----------
Total equity securities.......................... 126 9 (7) 128
--------- ---------- ---------- ----------
Short-term investments............................. 677 -- -- 677
--------- ---------- ---------- ----------
Total investments available-for-sale............. $ 6,228 $ 15 $ (301) $5,942
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
</TABLE>

<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED INVESTMENT INVESTMENT FAIR
1995 COST GAINS LOSSES VALUE
---- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government and agencies and authorities....... $ 591 $ 1 $ (2) $ 590
States, municipalities and political
subdivisions......................................... 53 1 (1) 53
All other corporate fixed maturities............... 6 -- (1) 5
--------- ---------- ---------- ---------
Total fixed maturities........................... 650 2 (4) 648
--------- ---------- ---------- ---------
Equity securities--common stocks (industrial and
miscellaneous)...................................... 8 -- (1) 7
Short-term investments............................. 5,779 -- -- 5,779
--------- ---------- ---------- ---------
Total investments available-for-sale............. $ 6,437 $ 2 $ (5) $ 6,434
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
</TABLE>

The pre-tax change in unrealized investment gains (losses) for fixed
maturity investments and equity securities for each of the three years ended
December 31 follow (in millions):

<TABLE>
<CAPTION>
1993 1994 1995
---- ----- ----
<S> <C> <C> <C>
Fixed maturities....................................................... $66 $(283) $286
Equity securities--common stocks....................................... 4 (10) (3)
---- ----- ----
Total pre-tax change in unrealized investment gains (losses)....... $70 $(293) $283
---- ----- ----
---- ----- ----
</TABLE>

At December 31, 1995, approximately 92% of Talegen's total investments
available-for-sale were comprised of U.S. Treasury securities and other fixed
maturity securities issued by U.S. Government agencies and authorities.

F-14
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(3) INVESTMENTS AND INVESTMENT INCOME--(CONTINUED)
Securities carried at $1,102 million and $1,174 million at December 31, 1994
and 1995, respectively, were deposited by Talegen with governmental authorities
or designated custodian banks as required by laws affecting insurers.

Pursuant to the terms of the Westchester Specialty debt agreement (see Note
11), short-term investments carried at $10 million at December 31, 1995 were
deposited in an account as collateral for the associated debt.

The amortized cost and estimated fair value of Talegen's fixed maturities at
December 31, 1995 by contractual maturity follow (in millions):

<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
<S> <C> <C>
Contractual maturity:
Within one year...................................... $ 578 $ 575
After one year but within five....................... 27 26
After five years but within ten...................... 12 13
After ten years...................................... 33 34
--------- ---------
Total fixed maturities............................. $ 650 $ 648
--------- ---------
--------- ---------
</TABLE>

Actual maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties, and changing interest rates, tax considerations and other
factors result in portfolio sales prior to maturity.

The components of net investment income for each of the three years ended
December 31 follow (in millions):

<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Interest on fixed maturities........................................... $243 $245 $261
Dividends on equity securities--common stocks.......................... 4 4 4
Interest on short-term investments and other........................... 34 64 102
---- ---- ----
Total investment income............................................ 281 313 367
Investment expenses.................................................... (20) (16) (24)
---- ---- ----
Net investment income.............................................. $261 $297 $343
---- ---- ----
---- ---- ----
</TABLE>

The components of net pre-tax realized investment gains for each of the
three years ended December 31 follow (in millions):

<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Fixed maturities:
Gross gains........................................................... $104 $ 7 $103
Gross losses.......................................................... (45) (4 ) (60)
Equity securities--common stocks........................................ 10 9 30
Other................................................................... (4) 1 (3)
---- ---- ----
Net realized investment gains....................................... $ 65 $13 $ 70
---- ---- ----
---- ---- ----
</TABLE>

F-15
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(3) INVESTMENTS AND INVESTMENT INCOME--(CONTINUED)
For the year ended December 31, 1994, gross realized investment gains and
losses on equity securities amounted to $20 million and $11 million,
respectively. For the year ended December 31, 1995, gross realized investment
gains and losses on equity securities amounted to $38 million and $8 million,
respectively.

(4) INCOME TAXES

Talegen is included in the consolidated Federal income tax return filed by
Xerox, and, as such, entered into a tax allocation agreement which was effective
in 1983 and provides that Talegen will pay or be reimbursed by Xerox for tax
liabilities or benefits generated. The right to reimbursement from Xerox for
these tax benefits does not expire due to any statutory period of limitation
under the Internal Revenue Code. Income taxes reflected in the Consolidated
Statements of Earnings are Talegen's share of the Xerox consolidated tax
provision.

The components of the Federal income tax provision for each of the three
years ended December 31 follow (in millions):

<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Current expense (benefit)................................................ $-- $65 $(19)
Deferred expense......................................................... 35 7 34
---- ---- ----
$35 $72 15
---- ---- ----
---- ---- ----
</TABLE>

A reconciliation from the U.S. Federal statutory income tax rate to the
effective income tax rate for each of the three years ended December 31 follows:

<TABLE>
<CAPTION>
1993 1994 1995
----- ---- -----
<S> <C> <C> <C>
U.S. Federal statutory income tax rate.............................. 35.0% 35.0% 35.0%
Tax exempt income................................................... (0.8) (3.2) (10.2)
Dividends received deduction........................................ (0.4) (0.4) (0.9)
Amortization of intangibles......................................... 1.4 1.5 3.3
SFAS No. 109 rate change benefit.................................... (10.4) -- --
Change in estimate of tax liability................................. -- -- (10.7)
Other, net.......................................................... (1.9) 1.5 (0.5)
----- ---- -----
Effective income tax rate....................................... 22.9% 34.4% 16.0%
----- ---- -----
----- ---- -----
</TABLE>

Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in earnings in the period
that includes the enactment date. Accordingly, in the third quarter of 1993,
Talegen recorded a $16 million benefit to recognize the effect on deferred tax
assets and liabilities for the change in the Federal income tax rate which
became effective retroactive to January 1, 1993. In 1995, resolution of
significant tax issues resulted in a credit to earnings of $10 million.

F-16
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(4) INCOME TAXES--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31
follow (in millions):

1994 1995
---- ----
Deferred tax assets:
Tax basis discount on unpaid losses........................ $395 $369
Ceded premiums............................................. 50 9
Adjustment for unearned premiums........................... 39 41
Uncollectible reinsurance.................................. 45 60
Severance and leasehold provisions......................... 16 11
Gain on sale/leaseback..................................... 13 11
Discontinued operations.................................... 2 2
Unrealized investment losses............................... 100 1
Net operating loss carryforward............................ -- 63
Other...................................................... 68 79
---- ----
Total gross deferred tax assets.......................... 728 646
Less valuation allowance..................................... 187 88
---- ----
Deferred tax assets...................................... 541 558
---- ----
Deferred tax liabilities:
Deferred policy acquisition costs.......................... (54) (52)
Other...................................................... (21) (29)
---- ----
Total gross deferred tax liabilities..................... (75) (81)
---- ----
Net deferred tax assets.................................. $466 $477
---- ----
---- ----

The decrease in the valuation allowance in 1995 is caused by the reduction
of $99 million of valuation allowance which, in 1994, was established to offset
deferred tax assets recorded for unrealized investment losses. Because the
consolidated net unrealized investment loss for Talegen at December 31, 1995 is
$3 million, this portion of the valuation allowance is $1 million. The reduction
in the valuation allowance was recorded directly to shareholder's equity.

F-17
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(5) UNPAID LOSSES AND LOSS EXPENSES

Activity related to unpaid losses and loss expenses for each of the three
years ended December 31 follows (in millions):

<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Net unpaid losses and loss expenses, January 1.................... $5,198 5,136 4,930
------ ------ ------
Incurred losses and loss expenses related to:
Current year accident losses.................................... 1,323 1,283 1,304
Prior year accident losses...................................... 4 (43) 102
------ ------ ------
Total incurred losses and loss expenses....................... 1,327 1,240 1,406
------ ------ ------
Paid losses and loss expenses related to:
Current year accident losses.................................... 269 269 343
Prior year accident losses...................................... 1,067 1,163 1,087
------ ------ ------
Total paid losses and loss expenses........................... 1,336 1,432 1,430
Other............................................................. (53) (14) (50)
------ ------ ------
Net unpaid losses and loss expenses, December 31.............. 5,136 4,930 4,856
Reinsurance recoverable........................................... 1,643 1,597 2,067
------ ------ ------
Gross unpaid losses and loss expenses, December 31............ $6,779 $6,527 $6,923
------ ------ ------
------ ------ ------
Ceded incurred losses and loss expenses........................... $ 89 $ 210 $ 731
------ ------ ------
------ ------ ------
</TABLE>

During 1995, the provision for incurred losses was increased through
strengthening of prior accident year gross unpaid loss and loss expense reserves
by $584 million, of which $382 million pertained to latent exposure reserves,
and through strengthening of uncollectible reinsurance reserves by $56 million.
After consideration of $378 million ceded to Ridge Reinsurance Limited (Ridge
Re) (see Note 6) and $160 million ceded to other reinsurers, net unpaid losses
and loss expenses were strengthened by a total of $102 million. On an Operating
Group basis, Crum & Forster and Westchester Specialty increased their 1994 and
prior accident year net loss and loss expense reserves by $97 million and $62
million, respectively. However, due to favorable 1994 and prior accident year
loss trends, this impact was partially offset by reductions to 1994 and prior
accident year net loss and loss expense reserves totaling $20 million at Coregis
and $37 million at Industrial Indemnity.

During 1994, the provision for incurred losses was decreased through
reductions to 1993 and prior accident year net loss and loss expense reserves by
Industrial Indemnity resulting from improving loss experience in its principal
markets.

LATENT EXPOSURES

Claims resulting from asbestos-related, environmental and other latent
exposures have provided unique and difficult challenges to the insurance
industry. Talegen, through its historical writings at Crum & Forster and
Westchester Specialty, has not been immune from the challenge to establish
adequate loss and loss expense reserves for these difficult to quantify
exposures. The possibility that these claims would emerge was often not
contemplated at the time the policies were written, and traditional actuarial
reserving methodologies have not been useful in accurately estimating ultimate
losses.

F-18
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(5) UNPAID LOSSES AND LOSS EXPENSES--(CONTINUED)
Asbestos-related claims, which began to emerge in the 1970s, were the first
type of latent exposure to cause significant losses to the insurance industry.
At this point, sufficient time has elapsed for case law to become reasonably
well developed in the asbestos bodily injury claims area. Historically, the
largest asbestos bodily injury claims have come from manufacturers of asbestos
since their claims have typically involved many injured parties. Over time, many
such claims have settled and the remaining exposure has been decreasing. More
recently, however, the frequency of asbestos claims from non-asbestos
manufacturers (i.e., suppliers and distributors of asbestos, as well as users of
asbestos products) has been increasing. Because the number of injured parties
and the severity of the injuries under these claims has been less than with the
asbestos manufacturers, the per-claim exposures have also been less.

Environmental claims were the second major type of latent claims to emerge
and significantly impact the insurance industry. Environmental claims have
generally been defined by the insurance industry as loss or potential loss
related to the alleged contamination of a site either from operations on the
site, from waste disposal or from other causes. Examples of environmental
exposure include possible damages resulting from chemical waste, hazardous
waste, industrial waste disposal facilities, landfills, toxic waste pits and
underground storage tanks. Inconsistent federal and state case law and
uncertainty with respect to Superfund reform have compounded the industry's
difficulties in adequately assessing these complex exposures. However, case law
with respect to environmental exposures is continuing to develop on a
state-by-state basis and will eventually reduce uncertainty in this claim area.

Other latent exposures include claims related to asbestos-in-building,
repetitive stress, chemical exposure and surgical breast implants, as well as
other exposures where the possibility of such claims arising was not
contemplated when the policies were written.

As judicial patterns emerge through the appellate process and remove
uncertainties surrounding asbestos-related, environmental and other latent
exposures, additional liabilities and reinsurance recoverables could arise.

Gross and net unpaid losses and loss expenses for each latent exposure area
at December 31 are as follows (in millions):

<TABLE>
<CAPTION>
1994 1995
-------------------- ----------------
GROSS NET GROSS NET
RESERVES RESERVES RESERVES RESERVES
-------- -------- -------- ----
<S> <C> <C> <C> <C>
Latent exposure area reserves(1):
Asbestos bodily injury..................................... $ 96 $ 51 $288 $173
Environmental.............................................. 113 82 236 174
Other latent exposures..................................... 164 59 116 42
-------- -------- -------- ----
Total.................................................... $373 $192 $640 $389
-------- -------- -------- ----
-------- -------- -------- ----
</TABLE>

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

(1) Included are case, IBNR and allocated loss expenses reserves. Net reserves
have not been reduced for recoverables from Ridge Re because the Ridge Re
reinsurance contracts are aggregate excess of loss contracts, covering all
lines of business for the Insurance Companies. See Note 6 for further
explanation of the Ridge Re contracts. Although occupational injuries, in
certain instances, have been associated with asbestos and other latent
exposures, Talegen does not classify related workers' compensation reserves
as latent exposure reserves.

F-19
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(5) UNPAID LOSSES AND LOSS EXPENSES--(CONTINUED)

Prior to 1995, the Insurance Companies established case and IBNR reserves
for asbestos bodily injury and environmental claims that had been reported. The
IBNR reserves were established primarily to cover adverse development on known
claims. Case reserves have been and continue to be determined by a specialized
claim and legal staff. Building on methodologies first published in the third
quarter of 1994 by the Casualty Actuarial Society, and utilizing data from
policyholders and third parties, Talegen was able to create and implement
specific reserving methodologies in 1995 to support IBNR reserve estimates for
unreported claims as well as for adverse development on aggregate known asbestos
bodily injury and environmental exposures. The data included information from
newly available databases from the Environmental Protection Agency. During 1995,
the methods of analysis were evaluated by internal and external actuarial and
claims professionals knowledgeable in the latent exposure field. The results of
this effort supported a strengthening by the Insurance Companies of asbestos
bodily injury gross reserves by $190 million and strengthening of environmental
gross reserves by $160 million in the fourth quarter of 1995. Of the $350
million gross strengthening, $311 million was ceded to reinsurers resulting in a
net pre-tax charge to Talegen of $39 million.

At December 31, 1995, Talegen does not expect that liabilities associated
with incurred asbestos bodily injury and environmental claims will have a
material adverse effect on its future liquidity or financial position. With
respect to other latent exposures, because of the relatively low amount of
cumulative net loss and allocated loss expense payments, the reserves
established for identified claims, and the relatively low number of open claims,
Talegen also does not expect that liabilities associated with incurred claims in
these latent exposure areas will have a material adverse effect on its future
liquidity or financial position. However, given the complexity of coverage and
other legal issues, and the significant assumptions used in estimating such
exposures, actual results could significantly differ from Talegen's current
estimates.

(6) REINSURANCE

Talegen reinsures, in the ordinary course of business, certain risks with
other insurance companies. These arrangements provide the means for greater
diversification of business and serve to limit the net loss potential on
unusually severe or frequent losses. With respect to potential property,
business interruption and nonvoluntary assessment losses arising out of
catastrophes, Coregis, Crum & Forster and Westchester Specialty each purchase
individual catastrophe reinsurance. Talegen supplements this coverage through
the purchase of excess of loss reinsurance which provides $80 million of
additional protection to the Insurance Companies in these three Operating
Groups. Industrial Indemnity, which has exposure to workers' injuries caused by
a catastrophe, primarily earthquake, purchases its own catastrophe reinsurance
limits in an amount which exceeds estimated maximum losses from such an event.
As of January 1, 1996, this coverage was $98 million in excess of a net
retention of $2 million.

The ceding of insurance does not discharge the original insurer from its
primary liability to the policyholder; however, the reinsurance company that
accepted the risk assumes an obligation to the original insurer. The ceding
insurer retains a contingent liability with respect to reinsurance ceded to the
extent that any reinsuring company might not be able to meet its obligations.

F-20
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(6) REINSURANCE--(CONTINUED)
The components of Talegen's net premiums written and net premiums earned for
each of the three years ended December 31 follow (in millions):

<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Net premiums written:
Direct.......................................................... $2,032 $2,032 $2,006
Assumed from other companies, pools or associations............. 100 65 101
Ceded to other companies, pools or associations................. (321) (381) (413)
------ ------ ------
Net premiums written.......................................... $1,811 $1,716 $1,694
------ ------ ------
------ ------ ------
Net premiums earned:
Direct.......................................................... $1,959 $1,994 $1,974
Assumed from other companies, pools or associations............. 100 72 92
Ceded to other companies, pools or associations................. (294) (379) (407)
------ ------ ------
Net premiums earned........................................... $1,765 $1,687 $1,659
------ ------ ------
------ ------ ------
</TABLE>

The components of Talegen's reinsurance recoverable at December 31, 1994 and
1995 follow (in millions):

<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Reinsurance receivable on paid losses..................... $ 237 $ 143
Reinsurance recoverable on unpaid loss and loss
expenses................................................. 1,597 2,067
------ ------
Total reinsurance recoverable........................... $1,834 $2,210
------ ------
------ ------
</TABLE>

Reinsurance recoverable on unpaid loss and loss expenses reflected above is
net of a reserve for uncollectible reinsurance on unpaid losses and loss
expenses of $55 million and $62 million at December 31, 1994 and 1995,
respectively.

The Insurance Companies made significant use of reinsurance during the 1970s
and the early 1980s and, accordingly, have current and/or future net reinsurance
recoverables from several hundred reinsurers. Since that time, the Insurance
Companies have generally increased the portion of business retained while
reducing the number of reinsurers used. During 1994 and 1995, excluding
reinsurance ceded to pools and associations, Talegen ceded 63% and 85%,
respectively, of total premiums written ceded to approximately 35 reinsurers. As
of December 31, 1994 and 1995, reinsurance recoverables from TRG were $205
million and $207 million, respectively. Reinsurance recoverables from Ridge Re
were $26 million and $404 million as of December 31, 1994 and 1995,
respectively. As of December 31, 1995, the individual reinsurers with the next
highest share of the net recoverable balance accounted for 6% and 5%,
respectively.

Talegen actively monitors and evaluates the financial condition of its
reinsurers and prepares estimates of the uncollectible amounts due from troubled
reinsurers. The evaluation focuses on financial and other available data such as
whether or not the reinsurer is in rehabilitation or in liquidation proceedings
and produces an estimate of the amount that will be ultimately collected from
these

F-21
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(6) REINSURANCE--(CONTINUED)
troubled reinsurers. In addition to the reinsurers' ability to pay claims, from
time to time disputes arise over claim amounts and reinsurance coverage. Talegen
pursues its remedies in these cases and recognizes the impact of developments in
these situations as the disputes are resolved. Management believes the
reinsurance recoverable, net of the established reserve for uncollectible
reinsurance, to be valid and collectible.

Effective December 31, 1992, Ridge Re, a special purpose Bermuda reinsurer,
which is a wholly-owned subsidiary of XFSI, provided aggregate excess of loss
reinsurance to the Insurance Companies aggregated on an Operating Group basis.
Under the terms of the reinsurance coverage, which is guaranteed by XFSI and
subject to stated limits, Ridge Re will reimburse the Insurance Companies for
85% of any and all ultimate net losses, if any, in excess of the retention
amount. Coverage is provided for unfavorable development on all losses and
allocated loss expenses incurred and uncollectible reinsurance charged by the
Insurance Companies for accident years 1992 and prior, net of development on all
salvage, subrogation, and other recoverables. The contract coverage for the
Operating Groups at December 31, 1995 totals $607 million, which is net of 15%
coinsurance. The corresponding premium amount of $223 million, all of which is
being provided by XFSI and is guaranteed by Xerox, was ceded in 1992 to Ridge Re
as consideration for the risk assumed by Ridge Re.

The following table identifies the retention amount (i.e., the amount of
carried net unpaid loss and loss expenses and uncollectible reinsurance reserves
as of December 31, 1992 retained by the Insurance Companies within the Operating
Groups) and the remaining reinsurance coverage as of December 31, 1995 under the
respective Ridge Re contracts (in millions):

<TABLE>
<CAPTION>
RETENTION CONTRACTUAL CUMULATIVE CEDED REMAINING
AMOUNT COVERAGE(1) LOSSES(1)(2) COVERAGE(1)
--------- ----------- ---------------- -----------
<S> <C> <C> <C> <C>
Coregis........................................ $ 585 $ 119 --$ $ 119
Crum & Forster................................. $ 2,263 $ 234 $234 $--
Industrial Indemnity........................... $ 1,157 $ 127 $ 43 $ 84
Westchester Specialty.......................... $ 755 $ 127 $127 $--
</TABLE>

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

(1) Coverage and ceded amounts are net of 15% insurance company coinsurance
amounts (i.e., for every dollar of covered loss in excess of the retention
amount, the affected insurance company will be able to cede or recover
eighty-five cents from Ridge Re).

(2) The Insurance Companies have obtained letters of credit from Ridge Re for
these cumulative ceded balances.

(7) SALVAGE AND SUBROGATION

Estimates of salvage and subrogation recoveries on unpaid losses have been
recorded as a reduction of unpaid losses and amounted to $54 million at both
December 31, 1994 and 1995.

F-22
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(8) PENSIONS

Talegen has one principal noncontributory defined benefit pension plan
(Plan) that covers employees of Talegen and TRG who meet eligibility
requirements. Additionally, the Plan covers the active participants of
Constitution and Viking who, as of the effective date of the sale of those
companies, became fully vested in their accrued benefits and were accorded
distribution rights as provided by the Plan. Talegen makes contributions to the
Plan in an amount deductible and in accordance with funding standards
established under the Internal Revenue Code as amended by the Employee
Retirement Income Security Act of 1974. Prior to July 1, 1993 the Plan provided
benefits that were based on total years of service and compensation during an
employee's last five years of employment. Effective July 1, 1993, Talegen
amended the Plan with the effect of limiting the accrual of further benefits to
its participants under the terms of the Plan.

The following table sets forth the Plan's funded status and the amounts
recognized in Talegen's consolidated financial statements at December 31 (in
millions):

<TABLE>
<CAPTION>
1993 1994 1995
---- ----- -----
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested.............................................. $ 68 $ 64 $ 76
Nonvested........................................... 3 5 7
---- ----- -----
Accumulated benefit obligation(1)................... 71 69 83
Effect of projected future compensation levels........ 6 2 --
---- ----- -----
Projected benefit obligation........................ 77 71 83
Fair value of plan assets, primarily listed stocks and
government securities................................ 61 56 69
---- ----- -----
Projected benefit obligation in excess of plan
assets............................................. 16 15 14
Unrecognized net loss................................. (3) (7) (9)
---- ----- -----
Accrued pension expense(2).......................... 13 8 5
Adjustment required to recognize minimum pension
liability............................................ -- 5 7
---- ----- -----
Net liability recognized in consolidated balance
sheets(3).......................................... $ 13 $ 13 $ 12
---- ----- -----
---- ----- -----
Assumptions used in the accounting were:
Discount rates...................................... 7.5% 8.5% 7.25%
Rates of increase in compensation levels............ 5.5% 5.5% 5.5%
Expected long-term rate of return on plan assets.... 8.5% 8.5% 8.5%
Net periodic pension cost included the following
components:
Service cost-benefits earned during the period...... $ 3 $-- $--
Interest cost on projected benefit obligation....... 6 6 6
Actual return on plan assets........................ (8) (5) (5)
Net amortization and deferrals...................... 4 -- --
SFAS No. 88 curtailment gain........................ (3) --
---- ----- -----
Net periodic defined benefit pension cost(4)........ $ 2 $ 1 $ 1
---- ----- -----
---- ----- -----
</TABLE>

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

(1) The accumulated benefit obligation of Talegen as of December 31, 1993, 1994
and 1995 was $67 million, $66 million and $79 million, respectively.

F-23
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(8) PENSIONS--(CONTINUED)
(2) The accrued pension expense of Talegen as of December 31, 1993, 1994 and
1995 was $12 million, $8 million and $5 million, respectively.

(3) The net liability recognized in Talegen's consolidated balance sheets as of
December 31, 1993, 1994 and 1995 was $12 million, $13 million and $12
million, respectively.

(4) Talegen's share of this expense for the years ended December 31, 1993, 1994
and 1995 was $2 million, $1 million and $1 million, respectively.

Talegen also sponsors a defined contribution pension plan (Savings Plan)
covering substantially all of its employees. Effective July 1, 1993, Talegen
amended the Savings Plan to provide for a basic contribution equal to 3% of an
employee's compensation, a matching contribution based on participants'
contributions, and a discretionary performance-related basic and/or matching
contribution made at the discretion of Talegen or its designee for any operating
group. Certain employees also have the opportunity to participate in a
non-qualified arrangement that permits contributions that would otherwise be
limited under the qualified plan by IRS regulations. Prior to July 1, 1993,
Talegen contributions were 50% of employee contributions up to 3% of an
employee's base salary for those employees with less than ten years of service
and 100% of employee contributions up to 6% of an employee's base salary for
those employees with more than ten years of service. Total savings plan expense
incurred by Talegen for the years ended December 31, 1993, 1994 and 1995, was $7
million, $12 million and $13 million, respectively.

(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

Talegen provides certain medical and life insurance benefits for retirees.
Prior to 1993, substantially all employees may have become eligible for these
benefits if they reached normal retirement age (or age fifty-five under certain
circumstances) with a defined minimum period of service, while still working for
Talegen. In 1993, Talegen announced its intention to limit retiree medical
benefits to those employees who had reached age 50 on January 1, 1994 and who
ultimately retired with at least 15 years of service. Certain Operating Groups
have instituted stand-alone plans which further limit retiree medical benefits.

A reconciliation of the funded status of all of the postretirement medical
and life plans as of December 31, 1994 and 1995 follows (in millions):

<TABLE>
<CAPTION>
1994 1995
--------------- ---------------
MEDICAL LIFE MEDICAL LIFE
------- ---- ------- ----
<S> <C> <C> <C> <C>
Accumulated postretirement benefit obligation
Retirees..................................... $18 $ 10 $18 $ 12
Fully eligible active participants........... 4 -- 4 --
Other active participants.................... 5 2 4 1
------- ---- ------- ----
Total...................................... 27 12 26 13
Deferred actuarial gain........................ 19 -- 15 --
Initial liability.............................. (23) (6) (21) (6)
------- ---- ------- ----
Accrued cost recognized in consolidated
balance sheet............................. $23 $ 6 $20 $ 7
------- ---- ------- ----
------- ---- ------- ----
</TABLE>

F-24
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS--(CONTINUED)
The medical inflation assumptions are 10.8% and 9.7% for participants under
age 65 and over age 65, respectively, and both decline to 5.0% in the year 2008
and thereafter. A one percentage point increase in the medical inflation
assumptions would increase the accumulated postretirement benefit obligation by
$1 million and the increase to the service and interest cost would be
immaterial.

The discount rate used to determine the funded status as of December 31,
1994 and 1995 was 8.5% and 7.25%, respectively.

The components of postretirement medical and life benefit cost for the three
years ended December 31, 1995 follow (in millions):

<TABLE>
<CAPTION>
1993 1994 1995
-------------- -------------- --------------
MEDICAL LIFE MEDICAL LIFE MEDICAL LIFE
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost.............................. $ 3 $-- $ 1 $-- $-- $--
Interest cost............................. 5 1 3 1 2 1
Amortization of initial liability......... 3 -- 1 -- -- --
Other..................................... -- -- -- -- (1) --
------- ---- ------- ---- ------- ----
Total..................................... $11 $ 1 $ 5 $ 1 $ 1 $ 1
------- ---- ------- ---- ------- ----
------- ---- ------- ---- ------- ----
</TABLE>

(10) POSTEMPLOYMENT BENEFITS

Effective January 1, 1994, Talegen adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." This Statement requires accrual
accounting for employee benefits that are paid after the termination of active
employment but prior to retirement. Benefits subject to SFAS No. 112 include
severance pay, accumulated vacation pay, disability benefits, salary
continuation programs, etc. Talegen's previous practice was to expense
postemployment benefit costs when paid.

The accrued postemployment benefit cost recorded by Talegen as of December
31, 1994 and 1995 was $1 million and $2 million, respectively.

(11) DEBT

Debt consisted of the following at December 31, 1994 and 1995 (in millions):

<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Debt incurred under credit agreements:
Coregis, remaining principal payable over five years....... $100 $ 90
Crum & Forster, remaining principal payable over four
years..................................................... 150 132
Industrial Indemnity, remaining principal payable over five
years..................................................... 100 90
Westchester Specialty, remaining principal payable over
four years............................................... 75 60
---- ----
Total.................................................... $425 $372
---- ----
---- ----
</TABLE>

The unsecured loans are held with several banks with terms which are
substantially similar in content. The interest rates on the loans are LIBOR plus
a margin which is dependent upon certain

F-25
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(11) DEBT--(CONTINUED)
financial ratios or ratings from specific agencies. As of December 31, 1995, the
interest rates in effect for Crum & Forster, Coregis, Industrial Indemnity and
Westchester Specialty were 6.44%, 7.13%, 6.63% and 6.31%, respectively. Subject
to notification of the lenders, each Intermediate Holding Company has the option
to change the method of interest calculation to one which utilizes other
financial market rates.

The loans are callable upon a change in control of the Intermediate Holding
Company or other dilutive events as defined in the credit agreements. These
credit agreements include restrictive covenants which require maintenance of net
worth and adherence to other specific financial ratios and requirements.

Future principal payments required under the loan agreements are summarized
below (in millions):

1996................................................................ $ 72
1997................................................................ 75
1998................................................................ 91
1999................................................................ 94
2000................................................................ 40
----
$372
----
----

The Westchester Specialty credit agreement prohibits the payment of
dividends by Westchester Specialty Group, Inc. (an Intermediate Holding Company)
to Talegen Holdings. The credit agreements for the other Intermediate Holding
Companies generally restrict the payment of dividends by the Intermediate
Holding Companies to Talegen Holdings to the lesser of statutory income in
excess of debt service requirements or a fixed percentage of statutory surplus.

Cash payments made by the Intermediate Holding Companies during 1994 and
1995 for interest were $5 million and $27 million, respectively.

(12) RELATED PARTY TRANSACTIONS AND BALANCES

Included in due from affiliates are promissory notes held by Talegen in the
amount of $275 million issued by XFSI and guaranteed by Xerox. Notes amounting
to $200 million were issued on December 31, 1992, mature on December 31, 1997,
and bear a variable rate of interest which is subject to change annually on the
anniversary of the issue date. These notes at December 31, 1995 carried an
interest rate of 5.84%. Notes amounting to $75 million were issued on September
1, 1993, mature on August 31, 1998, and bear a variable rate of interest which
is subject to change annually on the anniversary of the issue date. As of
December 31, 1995, these notes bear an interest rate of 6.69%. Interest earned
on the above notes included in other income was $22 million, $23 million and $23
million for the years ended December 31, 1993, 1994 and 1995, respectively.
Interest accrued on the above notes was $5 million as of December 31, 1995.

Also included in due from affiliates is a promissory note held by Talegen in
the amount of $75 million issued by Xerox Credit Corporation (XCC), a
wholly-owned subsidiary of XFSI, in connection with the sale of a portion of
Talegen's investment in the Xerox Life Companies to XCC in September 1993. The
note was issued on September 3, 1993, matures on September 3, 1998, and bears a

F-26
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(12) RELATED PARTY TRANSACTIONS AND BALANCES--(CONTINUED)
variable rate of interest which is subject to change annually on the anniversary
of the issue date. As of December 31, 1995, the note bears an interest rate of
6.58%. Interest earned on the note included in net investment income was $1
million, $5 million and $5 million for the years ended December 31, 1993, 1994
and 1995, respectively.

The remaining balances included in due from affiliates as of December 31,
1994 and 1995 represent miscellaneous receivables from TRG.

Talegen receives claims settlement and asbestos-related, environmental and
other latent exposure claims management services from TRG. Fees incurred for
these services for each of the years ended December 31, 1994 and 1995 were
approximately $6 million and $9 million, respectively. These fees were not
significant during 1993.

Talegen received investment services from First Quadrant Corp. Net fees
incurred for these services for each of the years ended December 31, 1993, 1994
and 1995 were $6 million, $6 million and $4 million, respectively.

During 1994, Industrial Indemnity contracted for the purchase and
implementation of software from Filoli. Included in equipment is capitalized
purchased software from Filoli of $4 million and $21 million as of December 31,
1994 and 1995, respectively.

During 1993, XFSI contributed to Talegen a training facility located in
Loudoun County in the state of Virginia. Talegen leased the facility to XFSI for
a primary term which expires on November 30, 2010 and is renewable at XFSI's
option. Rental income recorded by Talegen under the terms of the lease amounted
to $17 million in each of the years ended December 31, 1993, 1994 and 1995.

(13) STATUTORY INFORMATION

The Insurance Companies are restricted by insurance laws as to the amount of
dividends they may pay without the approval of regulatory authorities. The
amount of restricted shareholder's equity of the Insurance Companies plus the
amount of shareholder's equity for Talegen's non-insurance companies (which is
not restricted by insurance laws) at December 31, 1995 approximates $2,257
million. There are additional restrictions regarding the amount of loans and
advances that these subsidiaries may make to Talegen Holdings. These
restrictions indirectly limit the payment of dividends and the making of loans
and advances by Talegen Holdings to XFSI.

Generally accepted accounting principles differ in certain respects from the
statutory accounting practices prescribed or permitted by insurance regulatory
authorities for the Insurance Companies. "Prescribed" statutory accounting
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 enterprises use to prepare their statutory financial statements. The
effect on statutory policyholders' surplus of permitted practices is not
significant.

F-27
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(13) STATUTORY INFORMATION--(CONTINUED)
Combined statutory net income of the Insurance Companies amounted to $182
million, $166 million and $120 million, for the years ended December 31, 1993,
1994 and 1995, respectively. Combined statutory policyholders' surplus of the
Insurance Companies amounted to $1,641 million, $1,682 million and $1,721
million at December 31, 1993, 1994 and 1995, respectively. The principal
differences between statutory policyholders' surplus and shareholder's equity,
determined in accordance with generally accepted accounting principles, are
deferred Federal income taxes, certain reinsurance recoverables, the cost of
acquired businesses in excess of net assets and deferred policy acquisition
costs, which generally are not considered assets for statutory purposes, as well
as the shareholder's equity of Talegen's non-insurance entities.

(14) SHAREHOLDER'S EQUITY

In connection with the restructuring and the regulatory approvals (see Note
1) in 1993, XFSI agreed to provide to Talegen various forms of capital support
to ensure that statutory capital requirements of the newly dedicated legal
entities were met. These 1993 capital contributions consisted of $235 million in
cash, which was used to purchase portfolio investments, and $75 million of XFSI
promissory notes (see Note 12). Other net capital contributions and adjustments
in 1993 amounted to $112 million, with noncash contributions totaling $118
million and net return of capital adjustments amounting to $6 million.

In 1994, Talegen made a $6 million noncash return of capital distribution to
XFSI. The distribution was related to deferred taxes associated with a noncash
contribution received by Talegen in 1993, and resulted in the transfer of $6
million in deferred tax liability from XFSI to Talegen.

Dividends received from the insurance operating groups and service companies
sold or otherwise disengaged which in turn were not distributed to XFSI of $9
million, $33 million and $56 million during 1993, 1994 and 1995, respectively,
have been presented herein as a direct increase to retained earnings and,
accordingly, are not included within the consolidated statements of earnings.
Also included in the 1995 balance of dividends from disengaged subsidiaries is a
$21 million noncash disengagement adjustment related to deferred taxes.

(15) FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK

SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The following table presents the carrying amounts and estimated fair values of
Talegen's financial instruments at December 31, 1994 and 1995 (in millions):

<TABLE>
<CAPTION>
1994 1995
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Investments.............................. $5,942 $5,942 $6,434 $6,434
Debt..................................... $ 425 $ 425 $ 372 $ 372
</TABLE>

The fair values of investments are based on quoted market prices or dealer
quotes at the reporting date for those or similar investments.

F-28
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(15) FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT
RISK--(CONTINUED)
The fair value of the debt approximates carrying value as the interest rates
are calculated using current market rates.

Included in receivables are amounts due from McDonnell Douglas Corporation
totaling $163 million ($62 million in premiums receivable and $101 million in
other receivables) as of December 31, 1994 and $158 million ($63 million in
premiums receivable and $95 million in other receivables) as of December 31,
1995. The receivable is partially collateralized by a trust fund which amounted
to $84 million and $82 million at December 31, 1994 and 1995, respectively.

See Notes 3 and 6 regarding concentrations of investments and reinsurance
recoverable balances, respectively.

(16) LEASES

Talegen leases certain land, buildings and equipment under operating leases
which expire through 2009. The total rent expense under operating leases
amounted to $56 million, $54 million and $55 million for each of the years ended
December 31, 1993, 1994 and 1995, respectively. Future unaccrued minimum lease
payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year at December 31, 1995 are
summarized below (in millions):

1996................................................................ $ 45
1997................................................................ 41
1998................................................................ 34
1999................................................................ 30
2000................................................................ 29
Thereafter.......................................................... 58
----
Total minimum lease payments.................................... $237
----
----

Approximately $85 million of the above total lease payments results from
leases that were entered into in 1984 by Talegen Holdings and certain of the
Insurance Companies in conjunction with sale-leaseback transactions. The leases
terminate in 2009 although extensions are available under each lease agreement.
The Insurance Companies' performance under these leases has been guaranteed by
Talegen Holdings. The property sales were financed in part by purchase money
notes held by certain of the Insurance Companies that have an aggregate carrying
value of $35 million at December 31, 1995.

(17) CONTINGENT LIABILITIES

In 1985, Talegen Holdings discontinued the operations of its indirect
subsidiary, Resolution Credit Services Corporation (RCSC). RCSC placed financial
guarantee insurance and contract surety business with an insurance company
within the Industrial Indemnity Operating Group. The phase-out period will be
lengthy due to the long-term nature of the outstanding financial guarantees. At
December 31, 1995, the Insurance Company remained contingently liable for
approximately $67 million, which represents the aggregate par value, net of
reinsurance of $196 million, of the guarantee contracts in force, but before
consideration of approximately $4 million of collateral which was pledged under
these contracts. At December 31, 1994, the aggregate net par value was $381
million and the

F-29
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(17) CONTINGENT LIABILITIES--(CONTINUED)
collateral was $247 million. The aggregate par value, net of reinsurance, of
these contingent liabilities expires as follows (in millions):

1996-2000............................................................ $ 9
2001-2005............................................................ $12
Thereafter........................................................... $46

Reserves for the anticipated future losses, loss expenses and other costs of
disposition are approximately $26 million at December 31, 1995, and are included
in the balance of unpaid losses and loss expenses.

(18) LITIGATION

Farm & Home Savings Association (Farm & Home) filed a lawsuit in the United
States District Court for the Western District of Missouri, Southwest Division
alleging that under an agreement previously entered into by certain Insurance
Companies with Farm & Home (Indemnification Agreement), the Insurance Companies
are required to defend and indemnify Farm & Home from certain actual and
punitive damage claims being made against Farm & Home relating to the Brio
superfund site (Brio). The Insurance Companies believe their obligations are
more limited than asserted by Farm & Home. The parties have reached agreement on
a stand-still whereby the litigation was dismissed with all parties reserving
their rights.

In a number of lawsuits pending against Farm & Home in the District Courts
of Harris County, Texas, several hundred plaintiffs seek both actual and
punitive damages allegedly relating to injuries arising out of the hazardous
substances at Brio. The Insurance Companies have been defending these cases
under a reservation of rights because it is unclear whether certain of the
claims fall under the coverage of either the policies or the Indemnification
Agreement. The Insurance Companies have been successful in having some claims
dismissed which were brought by plaintiffs who were unable to demonstrate a
pertinent nexus to the Southbend subdivision. However, there are numerous
plaintiffs who do have a nexus to the Southbend subdivision. The Insurance
Companies have been in settlement discussions with respect to claims brought by
plaintiffs who have or had a pertinent nexus to the Southbend subdivision. If
not settled, one or more of these cases can be expected to be tried in 1996.
Management believes that resolution of the Southbend subdivision claims will not
have a material adverse effect on the liquidity or financial position of
Talegen.

F-30
<PAGE>
TALEGEN HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(IN MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)

<TABLE>
<S> <C>
ASSETS
Investments:
Fixed maturities, at fair value (cost: $1,159).................................. $ 1,147
Equity securities--common stocks, at fair value (cost: $8)...................... 8
Short-term investments, at amortized cost which approximates fair value......... 5,157
-------
Total investments............................................................. 6,312
Cash.............................................................................. 15
Accrued investment income......................................................... 80
Receivables:
Premiums (net of reserve for uncollectible receivables: $15).................... 580
Other........................................................................... 281
Reinsurance recoverables.......................................................... 2,193
Prepaid reinsurance premiums...................................................... 123
Deferred policy acquisition costs................................................. 144
Deferred income taxes............................................................. 463
Land, buildings and equipment..................................................... 132
Cost of acquired businesses in excess of net assets............................... 243
Due from affiliates............................................................... 363
Other assets...................................................................... 97
-------
Total assets.................................................................. $11,026
-------
-------
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Unearned premiums............................................................... $ 794
Unpaid losses and loss expenses................................................. 6,904
Debt............................................................................ 351
Current income taxes............................................................ 69
Dividends to policyholders...................................................... 38
Accounts payable and accrued liabilities........................................ 507
-------
Total liabilities............................................................. 8,663
-------
Commitments and contingencies
Shareholder's equity:
Common stock and additional paid-in capital (includes $1 par value
common stock, 1,000 shares authorized, issued and outstanding)................ 1,781
Retained earnings............................................................... 595
Net unrealized loss on investment securities.................................... (12)
Cumulative translation adjustments.............................................. (1)
-------
Total shareholder's equity.................................................... 2,363
-------
Total liabilities and shareholder's equity.................................... $11,026
-------
-------
</TABLE>

See accompanying notes to interim financial statements.

F-31
<PAGE>
TALEGEN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996
(IN MILLIONS)
(UNAUDITED)

<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Revenues:
Net premiums earned...................................................... $ 407 $ 419
Net investment income.................................................... 83 89
Net realized investment gains............................................ 3 1
Other income............................................................. 5 3
------ ------
Total revenues..................................................... 498 512
------ ------

Losses and expenses:
Losses and loss expenses................................................. 339 327
Underwriting, acquisition and other insurance expenses................... 132 138
Dividends to policyholders............................................... 3 3
Interest expense......................................................... 8 6
Amortization of goodwill................................................. 2 2
------ ------
Total losses and expenses.......................................... 484 476
------ ------
Earnings from operations before income taxes....................... 14 36
Provision for income taxes................................................. 3 13
------ ------
Net earnings....................................................... $ 11 $ 23
------ ------
------ ------
</TABLE>

See accompanying notes to interim financial statements.

F-32
<PAGE>
TALEGEN HOLDINGS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996
(IN MILLIONS)
(UNAUDITED)

<TABLE>
<S> <C>
Common stock and additional paid-in capital:
Balance, beginning and end of period............................................. $1,781
------
Retained earnings:
Balance at beginning of period................................................... 576
Net earnings..................................................................... 23
Disengagement adjustments, net................................................... (4)
------
Balance at end of period..................................................... 595
------
Net unrealized loss on investment securities:
Balance at beginning of period................................................... (3)
Increase in unrealized losses, net of taxes...................................... (9)
------
Balance at end of period..................................................... (12)
------
Cumulative translation adjustments:
Balance, beginning and end of period............................................. (1)
------
Total shareholder's equity................................................... $2,363
------
------
</TABLE>

See accompanying notes to interim financial statements.

F-33
<PAGE>
TALEGEN HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996
(IN MILLIONS)
(UNAUDITED)

<TABLE>
<CAPTION>
1995 1996
----- -----
<S> <C> <C>
Cash flows from operating activities:
Net earnings.............................................................. $ 11 $ 23
----- -----
Adjustments to reconcile net earnings to net cash used in operating
activities:
Net realized investment gains......................................... (3) (1)
Depreciation and amortization......................................... 23 13
Changes in certain assets and liabilities:
Unpaid losses and loss expenses................................... 5 (17)
Unearned premiums................................................. (13) (24)
Other liabilities................................................. (75) (59)
Underwriting assets............................................... 30 10
Deferred policy acquisition costs................................. (1) 6
Income taxes.......................................................... 3 13
Payments for income taxes............................................. (3) --
----- -----
Total adjustments............................................. (34) (59)
----- -----
Net cash used in operating activities......................... (23) (36)
----- -----
Cash flows from investing activities:
Cash used for the purchase of fixed maturity and equity securities........ (342) (637)
Proceeds from the sale or maturity of fixed maturity and equity
securities............................................................... 98 78
Decrease in short-term investments........................................ 251 622
Purchase of fixed assets.................................................. (10) (7)
Payments for discontinued operations...................................... (4) (2)
Dividends from disengaged subsidiaries.................................... 14 2
----- -----
Net cash provided by investing activities..................... 7 56
----- -----
Cash flows from financing activities:
Cash used for the repayment of debt....................................... (6) (21)
----- -----
Net cash used in financing activities......................... (6) (21)
----- -----
Net decrease in cash.......................................... (22) (1)
Cash at the beginning of the period......................................... 22 16
----- -----
Cash at the end of the period............................................... $-- $ 15
----- -----
----- -----

Cash paid for interest...................................................... $ 7 $ 7
----- -----
----- -----
</TABLE>

See accompanying notes to interim financial statements.

F-34
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)

(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated balance sheet of Talegen Holdings, Inc. and
its consolidated subsidiaries (Talegen) as of March 31, 1996 and the related
consolidated statements of earnings, shareholder's equity and cash flows for the
three month period ended March 31, 1996 and the consolidated statements of
earnings and cash flows for the three month period ended March 31, 1995, have
been prepared in accordance with generally accepted accounting principles for
interim periods and include the appropriate intercompany eliminations.

In the opinion of management, these unaudited interim financial statements
reflect all adjustments, including all normal recurring accruals, necessary for
a fair presentation of the financial position, results of operations and cash
flows of Talegen. The operating results for interim periods are not necessarily
indicative of the results for the full year. The unaudited interim financial
statements presented herein should be read in conjunction with the consolidated
audited balance sheets of Talegen as of December 31, 1994 and 1995 and the
related consolidated statements of earnings, shareholder's equity and cash flows
for each of the years in the three year period ended December 31, 1995.

In line with Xerox's disengagement process, during 1995, Talegen Holdings
completed sales of two of its insurance operating groups, Constitution Re
Corporation (Constitution), a writer of treaty and facultative reinsurance, and
Viking Insurance Holdings, Inc. (Viking), a writer of non-standard personal
automobile insurance, as well as the sale of the insurance investment services
business of First Quadrant Corp., a wholly-owned subsidiary of Talegen Holdings.
In March 1996, Talegen Holdings completed the sale of the remainder of First
Quadrant Corp. On December 31, 1995, direct ownership of The Resolution Group,
Inc. (TRG), an insurance group that manages run-off insurance obligations and
provides reinsurance collection services as well as claims management services
for latent exposures, was transferred through a distribution of its common stock
to XFSI. The majority of TRG's obligations have been in run-off since the
mid-1980's, and the remainder principally relate to books of business that are
no longer being written by the remaining four insurance groups (the Operating
Groups). On January 17, 1996, XFSI entered into an agreement to sell the
Operating Groups and service companies of Talegen Holdings to an investment
group led by Kohlberg Kravis Roberts & Co. (KKR) and certain members of
management of Talegen for $1.75 billion including $450 million to $500 million
in preferred securities (the Acquisition). The Acquisition, which is expected to
close mid-1996, is subject to customary closing conditions, including buyer
financing and regulatory approval.

F-35
<PAGE>
TALEGEN HOLDINGS, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES--(CONTINUED)
last several years due to the 1992 and 1993 restructuring. Other than the
exclusion of the accounts of the insurance operating groups and service
companies, as indicated above, the accounts of Talegen as of March 31, 1996 have
been prepared on a historical cost basis and have not been adjusted to reflect
the Acquisition.

(2) CONTINGENCIES

Talegen is a party to various lawsuits primarily incidental to the ordinary
course of its business, which management believes will not have a material
adverse effect on its liquidity or financial position.

F-36
<PAGE>
- ------------------------------------------- --------------------------------
- ------------------------------------------- --------------------------------

NO DEALER, SALESPERSON OR OTHER
INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY $350,000,000
INFORMATION OR MAKE ANY REPRESENTATION
OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING
COVERED BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN TALEGEN
AUTHORIZED BY THE COMPANY OR THE ACQUISITION
UNDERWRITERS. THIS PROSPECTUS DOES NOT CORPORATION
CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE [TALEGEN LOGO]
DEBENTURES IN ANY JURISDICTION WHERE, OR
TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO % SENIOR SUBORDINATED
MAKE SUCH OFFER OR SOLICITATION. DEBENTURES DUE 2008
NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.

-------------------
TABLE OF CONTENTS

PAGE
----
Prospectus Summary................... 3
Risk Factors......................... 16
The Company.......................... 24
The Acquisition and the Financings... 26
Use of Proceeds...................... 30
Pro Forma Capitalization............. 31
Pro Forma Consolidated Financial
Information........................ 32 -------------------
Selected Financial Information....... 41
Management's Discussion and Analysis PROSPECTUS
of Talegen's Financial Condition
and Results of Operations.......... 44 -------------------
Business............................. 62
Reserves and Risk Management......... 83
Regulatory Matters................... 98
Management........................... 103
Certain Interests in the Acquisition
and Related Transactions........... 111 MERRILL LYNCH & CO.
Ownership of Capital Stock........... 113
Description of the Debentures........ 114 BA SECURITIES, INC.
Description of Capital Stock......... 148
Description of Preferred BT SECURITIES CORPORATION
Securities.......................... 149
Description of Credit Facilities..... 150 CHASE SECURITIES INC.
Underwriting......................... 155
Legal Matters........................ 157 DONALDSON, LUFKIN & JENRETTE
Experts.............................. 157
Available Information................ 157 SECURITIES CORPORATION
Glossary of Selected Insurance
Terms............................... G-1 LEHMAN BROTHERS
Index to Financial Statements........ F-1
MORGAN STANLEY & CO.
------------- INCORPORATED
UNTIL , 1996 (90 DAYS AFTER THE
DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE DEBENTURES, SMITH BARNEY INC.
WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE , 1996
OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------ ---------------------------------
- ------------------------------------------ ---------------------------------

<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered which, except as
otherwise indicated, will be paid solely by Talegen Acquisition Corporation (the
"Registrant"). All the amounts shown are estimates, except the Securities and
Exchange Commission registration fee and the NASD filing fee:

Securities and Exchange Commission registration fee............. $120,690
NASD filing fee................................................. 30,500
Printing and engraving expenses................................. *
Legal fees and expenses......................................... *
Accounting fees and expenses.................................... *
Blue Sky fees and expenses...................................... *
Miscellaneous fees and expenses................................. *
--------
Total..................................................... $ *
--------
--------

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

* To be completed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law (the "DGCL") provides
that a corporation may indemnify directors and officers as well as other
employees and individuals against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement in connection with specified
actions, suits or proceedings, whether civil, criminal, administrative, or
investigative (other than action by or in the right of the corporation a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceedings, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such actions, and the statute requires court approval
before there can be any indemnification where the person seeking indemnification
has been found liable to the corporation. The statute provides that it is not
exclusive of other indemnification that may be granted by a corporation's
charter, by-laws, disinterested director vote, stockholder vote, agreement or
otherwise. Article IV of the Registrant's By-laws requires indemnification to
the fullest extent permitted by Delaware law. In addition, the Registrant will
enter into indemnity agreements with its directors (a form of which is filed as
Exhibit 10.2 to this Registration Statement), which obligate the Registrant to
indemnify such directors to the fullest extent permitted by the DGCL. The
Registrant also intends to obtain, prior to the effective date of this
Registration Statement, officers' and directors' liability insurance which
insures against liabilities that officers and directors of the Registrant, in
such capacities, may incur.

Such 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duties as a director, except for liability (i) for any
transaction from which the director derives an improper personal benefit, (ii)
for acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (iii) for improper payment of dividends or
redemptions of shares, or (iv) for any breach of a director's duty of loyalty to
the company or its stockholders. Article VII of the Registrant's Certificate of
Incorporation includes such a provision.

II-1
<PAGE>
Reference is made to the form of Underwriting Agreement filed as Exhibit 1.1
to this Registration Statement which provides for the indemnification of the
directors and officers of the Registrant signing this Registration Statement and
certain controlling persons of the Registrant against certain liabilities,
including those arising under the Securities Act of 1933, as amended (the
"Securities Act"), in certain instances by the Underwriters.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

On January 15, 1996 the Registrant issued 100 shares of Common Stock to
Holdings for $1000 in cash. This sale is exempt from registration under Section
4(2) of the Securities Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement, dated as of , 1996 between Merrill Lynch
and the Registrant with respect to the Debentures.
2.1 Stock Purchase Agreement, dated as of January 17, 1996 among Xerox, XFSI, Holdings
and the Registrant.
3.1 Certificate of Incorporation of the Registrant.
3.2 Certificate of Amendment of the Certificate of Incorporation of the Registrant.
3.3 By-laws of the Registrant.
*4.1 Form of Indenture between the Registrant and Marine Midland Bank, as Trustee,
relating to the Debentures.
*4.2 Form of % Senior Subordinated Debentures due 2008.
*5 Opinion of Simpson Thacher & Bartlett regarding the legality of the Debentures being
registered.
*10.1 Form of Credit Agreement, dated as of , 1996 among the Registrant, Bank
of America and .
*10.2 Form of Indemnity Agreement.
*10.3 Form of Tax Allocation Agreement.
*10.4 Form of Option Agreement.
*10.5 Form of Stockholders Agreement.
*12 Statements of computations of certain ratios.
*21 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Simpson Thacher & Bartlett (included in Exhibit 5).
24 Powers of Attorney (included on signature page).
25 Statement of eligibility of Marine Midland Bank, as Trustee under the Indenture
relating to the Debentures.
*28 Certain information from reports furnished to state regulatory authorities.
</TABLE>

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

* To be filed by amendment

II-2
<PAGE>
(b) Financial Statement Schedules

<TABLE>
<S> <C>
Schedule I --Summary of Investments--Other than Investments in Related Parties
Schedule II --Condensed Financial Information of Talegen Holdings
Schedule III --Supplementary Insurance Information
Schedule IV --Reinsurance
Schedule V --Valuation and Qualifying Accounts
Schedule VI --Supplemental Information Concerning Property and Casualty Insurance Operations
</TABLE>

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

The Registrant hereby undertakes:

(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-3
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Seattle, State of
Washington, on June 7, 1996.

TALEGEN ACQUISITION CORPORATION
(Registrant)

By /s/ JOSEPH W. BROWN, JR.
...................................

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Joseph W. Brown, Jr. and Gary C. Tolman and any
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities to sign any and all amendments (including post-effective
amendments) to this registration statement and any other documents and
instruments incidental thereto, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents and/or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on June 7, 1996.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ---------------------------------------------

<S> <C>
/s/ JOSEPH W. BROWN, JR. Chairman of the Board, President, Chief
............................................. Executive Officer, Assistant Treasurer,
Joseph W. Brown, Jr. Assistant Secretary and Director

/s/ GARY C. TOLMAN Executive Vice President, Chief Financial
............................................. Officer, Treasurer and Secretary
Gary C. Tolman

/s/ TODD A. FISHER Director
.............................................
Todd A. Fisher

/s/ SAUL A. FOX Director
.............................................
Saul A. Fox

/s/ GEORGE R. ROBERTS Director
.............................................
George R. Roberts

/s/ DOUGLAS C. HAMILTON Vice President and Controller
.............................................
Douglas C. Hamilton
</TABLE>

II-4
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholder
Talegen Holdings, Inc.:

Under date of January 17, 1996, we reported on the consolidated balance
sheets of Talegen Holdings, Inc. and subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of earnings, shareholder's equity,
and cash flows for each of the years in the three-year period ended December 31,
1995, which are included in the prospectus. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedules in the registration statement. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits.

In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.

KPMG Peat Marwick LLP

Short Hills, New Jersey
January 17, 1996

S-1
<PAGE>
SCHEDULE I

TALEGEN HOLDINGS, INC.
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
(IN MILLIONS)

<TABLE>
<CAPTION>
ESTIMATED AMOUNT AT
AMORTIZED FAIR WHICH SHOWN IN
TYPE OF INVESTMENT COST VALUE THE BALANCE SHEET
- --------------------------------------------------------- --------- --------- -----------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States Government and government
agencies and authorities........................... $ 591 $ 590 $ 590
States, municipalities and political subdivisions.... 53 53 53
All other corporate bonds............................ 6 5 5
--------- --------- -------
Total fixed maturities............................. 650 648 648
--------- --------- -------
Equity securities:
Common stocks:
Industrial, miscellaneous and all other.............. 8 7 7
--------- --------- -------
Total equity securities............................ 8 7 7
--------- --------- -------
Short-term investments................................... 5,779 5,779 5,779
--------- --------- -------
Total investments.................................. $ 6,437 $ 6,434 $ 6,434
--------- --------- -------
--------- --------- -------
</TABLE>

S-2
<PAGE>
SCHEDULE II

TALEGEN HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF TALEGEN HOLDINGS
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(IN MILLIONS)

<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
ASSETS
Investments:
Short-term investments, at amortized cost which approximates fair
value................................................................... $ 26 $ 70
Investment in consolidated subsidiaries.................................. 1,676 1,992
------ ------
Total investments.................................................... 1,702 2,062
Cost of acquired businesses in excess of net assets...................... 252 243
Other assets............................................................. 38 75
------ ------
Total assets......................................................... $1,992 $2,380
------ ------
------ ------
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Accounts payable and accrued liabilities................................. $ 42 $ 27
------ ------
Shareholder's equity:
Common stock and additional paid-in capital (includes $1 par value common
stock, 1,000 shares authorized, issued and outstanding)................. 1,781 1,781
Retained earnings........................................................ 459 576
Net unrealized loss on investment securities............................. (286) (3)
Cumulative translation adjustments....................................... (4) (1)
------ ------
Total shareholder's equity........................................... 1,950 2,353
------ ------
Total liabilities and shareholder's equity........................... $1,992 $2,380
------ ------
------ ------
</TABLE>

The condensed financial statements of Talegen Holdings should be read in
conjunction with the consolidated financial statements and accompanying notes of
Talegen Holdings included elsewhere herein.

S-3
<PAGE>
SCHEDULE II

TALEGEN HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF TALEGEN HOLDINGS
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN MILLIONS)

<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Equity in the net earnings of subsidiaries........................... $157 $152 $ 75
Management and other fee income...................................... 63 33 33
Net investment and other income...................................... 7 2 2
---- ---- ----
Total revenues................................................... 227 187 110
---- ---- ----
Expenses:
General operating expenses........................................... 40 28 22
Amortization of goodwill............................................. 9 9 8
Interest expense..................................................... 10 9 --
Other expenses....................................................... 47 (1) 24
---- ---- ----
Total expenses................................................... 106 45 54
---- ---- ----
Earnings from operations before income taxes..................... 121 142 56
Provision for income taxes (benefits).................................. 3 5 (23)
---- ---- ----
Net earnings..................................................... $118 $137 $ 79
---- ---- ----
---- ---- ----
</TABLE>

The condensed financial statements of Talegen Holdings should be read in
conjunction with the consolidated financial statements and accompanying notes of
Talegen Holdings included elsewhere herein.

Talegen Holdings and its domestic subsidiaries file a consolidated federal
income tax return. The provision for income tax represents Talegen Holdings'
share of the consolidated federal income tax under its tax allocation agreement
with Xerox and its tax allocation agreement with its subsidiaries.

S-4
<PAGE>
SCHEDULE II

TALEGEN HOLDINGS, INC.
CONDENSED FINANCIAL INFORMATION OF TALEGEN HOLDINGS
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN MILLIONS)

<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings...................................................... $118 $137 $ 79
---- ---- ----
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Equity in the net earnings of subsidiaries...................... (157) (152) (75)
Dividends from subsidiaries(a)(c)............................... 5 468 31
Amortization of goodwill........................................ 9 9 8
Other, net...................................................... 83 (18) (7)
---- ---- ----
Total adjustments........................................... (60) 307 (43)
---- ---- ----
Net cash provided by operations............................. 58 444 36
---- ---- ----
Cash flows from investing activities:
Increase in short-term investments................................ (2) (26) (44)
Contributions to subsidiaries..................................... (237) (7) (25)
Dividends from disengaged subsidiaries............................ 9 33 35
Other, net........................................................ -- (10) 7
---- ---- ----
Net cash used in investment activities...................... (230) (10) (27)
---- ---- ----
Cash flows from financing activities:
Dividends to shareholder.......................................... (45) (232) (9)
Repayment on credit facility(b)................................... (8) (205) --
Proceeds from issuance of notes payable(b)........................ -- 210 --
Repayment of notes payable(c)..................................... -- (210) --
Capital contributions............................................. 229 -- --
Other, net........................................................ (1) -- --
---- ---- ----
Net cash provided by (used in) financing activities......... 175 (437) (9)
---- ---- ----
Net increase (decrease) in cash............................. 3 (3) 0
Cash at beginning of year........................................... -- 3 --
---- ---- ----
Cash at end of year................................................. $ 3 $ 0 $ 0
---- ---- ----
---- ---- ----
Other cash flows information:
Income taxes receipts (payments).................................. $ 46 $ 9 $ (3)
Interest paid..................................................... $ 10 $ 7 --
</TABLE>

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

<TABLE>
<C> <S>
(a) Dividends in 1994 were, in part, funded through $425 million of proceeds from term debt
issued by the Intermediate Holding Companies in 1994.
(b) The proceeds from the issuance of notes payable were primarily used for the repayment
on the credit facility.
(c) The source of funds for the repayment of the notes payable were dividends from the
Intermediate Holding Companies.
</TABLE>

The condensed financial statements of Talegen Holdings should be read in
conjunction with the consolidated financial statements and accompanying notes of
Talegen Holdings included elsewhere herein.

S-5
<PAGE>
SCHEDULE III

TALEGEN HOLDINGS, INC.
SUPPLEMENTARY INSURANCE INFORMATION
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN MILLIONS)

<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Deferred policy acquisition costs................................. $ 130 $ 129 $ 150
Unpaid losses and loss expenses................................... $6,779 $6,527 $6,923
Unearned premiums................................................. $ 728 $ 783 $ 818
Net premiums earned............................................... $1,765 $1,687 $1,659
Net investment income............................................. $ 261 $ 297 $ 343
Losses and loss expenses.......................................... $1,327 $1,240 $1,406
Amortization of deferred policy acquisition costs................. $ 372 $ 384 $ 382
Other operating expenses.......................................... $ 160 $ 146 $ 152
Net premiums written.............................................. $1,811 $1,716 $1,694
</TABLE>

S-6
<PAGE>
SCHEDULE IV

TALEGEN HOLDINGS, INC.
REINSURANCE
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN MILLIONS)

<TABLE>
<CAPTION>
CEDED TO ASSUMED
OTHER FROM OTHER
COMPANIES, COMPANIES, PERCENTAGE OF
DIRECT POOLS OR POOLS OR NET AMOUNT ASSUMED
AMOUNT ASSOCIATIONS ASSOCIATIONS AMOUNT TO NET
------ ------------ ------------- ------ --------------
<S> <C> <C> <C> <C> <C>
1993................................... $1,959 (294) 100 $1,765 5.67%
1994................................... $1,994 (379) 72 $1,687 4.27%
1995................................... $1,974 (407) 92 $1,659 5.55%
</TABLE>

S-7
<PAGE>
SCHEDULE V

TALEGEN HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN MILLIONS)

<TABLE>
<CAPTION>
CHARGES
BALANCE TO OTHER
AT CHARGES TO OTHER ADDITIONS BALANCE AT
BEGINNING COSTS AND ACCOUNTS-- (DEDUCTIONS)-- END OF
PERIOD DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ------ ---------------------------------------- --------- ---------- --------- ------------- ----------
<C> <S> <C> <C> <C> <C> <C>
1993.. Reserve for uncollectible premiums...... $19 $ 1 -- $ (5)(a) $ 15
1994 Reserve for uncollectible premiums...... $15 -- -- -- $ 15
1995 Reserve for uncollectible premiums...... $15 -- -- -- $ 15

1993 Reserve for uncollectible reinsurance... $53 -- -- 20(b) $ 73
1994 Reserve for uncollectible reinsurance... $73 -- -- (18)(c) $ 55
1995 Reserve for uncollectible reinsurance... $55 56 -- (49)(c) $ 62
</TABLE>

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

<TABLE>
<C> <S>
(a) Primarily represents premium receivable balances written off to the reserve.
(b) Primarily represents an increase to the reserve associated with the re-establishment of
reinsurance recoverables which had been previously written off.
(c) Primarily represents uncollectible reinsurance recoverable balances written off to the
reserve.
</TABLE>

S-8
<PAGE>
SCHEDULE VI

TALEGEN HOLDINGS, INC.
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN MILLIONS)

<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Deferred policy acquisition costs................................. $ 130 $ 129 $ 150
Unpaid losses and loss expenses................................... $6,779 $6,527 $6,923
Unearned premiums................................................. $ 728 $ 783 $ 818
Net premiums earned............................................... $1,765 $1,687 $1,659
Net investment income............................................. $ 261 $ 297 $ 343
Losses and loss expenses incurred:
Current year.................................................... $1,323 $1,283 $1,304
Prior year...................................................... $ 4 $ (43) $ 102
Amortization of deferred policy acquisition costs................. $ 372 $ 384 $ 382
Paid losses and loss expenses..................................... $1,336 $1,432 $1,430
Net premiums written.............................................. $1,811 $1,716 $1,694
</TABLE>

S-9

<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement, dated as of [ ], 1996 between Merrill Lynch
and the Registrant with respect to the Debentures.
2.1 Stock Purchase Agreement, dated as of January 17, 1996 among Xerox, XFSI, Holdings
and the Registrant.
3.1 Certificate of Incorporation of the Registrant.
3.2 Certificate of Amendment of the Certificate of Incorporation of the Registrant.
3.3 By-laws of the Registrant.
*4.1 Form of Indenture between the Registrant and Marine Midland Bank, as Trustee,
relating to the Debentures.
*4.2 Form of % Senior Subordinated Debentures due 2008.
*5 Opinion of Simpson Thacher & Bartlett regarding the legality of the Debentures being
registered.
*10.1 Form of Credit Agreement, dated as of [ ], 1996 among the Registrant, Bank
of America and [ ].
*10.2 Form of Indemnity Agreement.
*10.3 Form of Tax Allocation Agreement.
*10.4 Form of Option Agreement.
*10.5 Form of Stockholders Agreement.
*12 Statements of computations of certain ratios.
*21 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Simpson Thacher & Bartlett (included in Exhibit 5).
24 Powers of Attorney (included on signature page).
25 Statement of eligibility of Marine Midland Bank, as Trustee under the Indenture
relating to the Debentures.
*28 Certain information from reports furnished to state regulatory authorities.
</TABLE>

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

* To be filed by amendment

EXHIBIT 2.1

STOCK PURCHASE AGREEMENT

dated as of January 17, 1996

among

XEROX CORPORATION

XEROX FINANCIAL SERVICES, INC.

and

NEW TALEGEN HOLDINGS CORPORATION

and

TALEGEN ACQUISITION CORPORATION

<PAGE>

TABLE OF CONTENTS

Page
----

ARTICLE I

DEFINITIONS

1.1 Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Other Defined Terms . . . . . . . . . . . . . . . . . . . . . 10
1.3 Other Definitional Provisions . . . . . . . . . . . . . . . . 10

ARTICLE II

PURCHASE AND SALE OF STOCK AND PREFERRED SECURITIES

2.1 Transfer of Stock . . . . . . . . . . . . . . . . . . . . . . 11
2.2 Consideration for Stock . . . . . . . . . . . . . . . . . . . 11
2.3 Transfer of Debentures . . . . . . . . . . . . . . . . . . . 11
2.4 Consideration for Debentures . . . . . . . . . . . . . . . . 11
2.5 Transfer of Preferred Securities. . . . . . . . . . . . . . 11
2.6 Consideration for Preferred Securities . . . . . . . . . . . 11
2.7 Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . 12

ARTICLE III

CLOSING

3.1 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3.2 Documents to be Delivered . . . . . . . . . . . . . . . . . . 13

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF PARENT AND SELLER

4.1 Organization of Seller and Parent . . . . . . . . . . . . . . 14
4.2 Organization of the Company . . . . . . . . . . . . . . . . . 14
4.3 Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . 14
4.4 Authorization . . . . . . . . . . . . . . . . . . . . . . . . 15
4.5 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . 15
4.6 Ridge Re . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.7 Absence of Certain Changes or Events . . . . . . . . . . . . 18
4.8 Title to Assets, Etc. . . . . . . . . . . . . . . . . . . . . 21
4.9 Contracts and Commitments . . . . . . . . . . . . . . . . . . 22
4.10 No Conflict or Violation . . . . . . . . . . . . . . . . . . 23
4.11 Consents and Approvals . . . . . . . . . . . . . . . . . . . 24
4.12 Financial Statements . . . . . . . . . . . . . . . . . . . . 25
4.13 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.14 Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.15 Investments . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.16 Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.17 Compliance with Law; Permits; Regulatory Matters . . . . . . 28
4.18 No Brokers . . . . . . . . . . . . . . . . . . . . . . . . . 29

-i-

<PAGE>

Page
----

4.19 No Other Agreements to Sell the Assets or the Company . . . . 29
4.20 Proprietary Rights . . . . . . . . . . . . . . . . . . . . . 30
4.21 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . 30
4.22 Employment-Related Matters . . . . . . . . . . . . . . . . . 34
4.23 Transactions with Certain Persons . . . . . . . . . . . . . . 34
4.24 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.25 Reinsurance and Retrocessions . . . . . . . . . . . . . . . . 36
4.26 1992/93 Restructuring . . . . . . . . . . . . . . . . . . . . 36
4.27 Capital Commitments . . . . . . . . . . . . . . . . . . . . . 36
4.28 Environmental Laws . . . . . . . . . . . . . . . . . . . . . 36
4.29 Acquisition for Investment . . . . . . . . . . . . . . . . . 37

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF BUYER AND HOLDINGS

5.1 Organization of Buyer and Holdings . . . . . . . . . . . . . 37
5.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . 37
5.3 No Conflict or Violation . . . . . . . . . . . . . . . . . . 38
5.4 No Brokers . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.5 Acquisition for Investment . . . . . . . . . . . . . . . . . 39
5.6 Organizational Documents . . . . . . . . . . . . . . . . . . 39
5.7 Capitalization of Buyer . . . . . . . . . . . . . . . . . . . 39
5.8 Consents and Approvals . . . . . . . . . . . . . . . . . . . 40
5.9 Financial Obligations . . . . . . . . . . . . . . . . . . . . 40
5.10 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5.11 Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

ARTICLE VI

ACTIONS BY PARENT, SELLER, HOLDINGS AND BUYER
PRIOR TO THE CLOSING

6.1 Maintenance of Business and Preservation of Permits and
Services . . . . . . . . . . . . . . . . . . . . . . . . . . 42
6.2 Additional Financial Statements . . . . . . . . . . . . . . . 42
6.3 Certain Prohibited Transactions . . . . . . . . . . . . . . . 43
6.4 Investigation by Buyer . . . . . . . . . . . . . . . . . . . 43
6.5 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . 44
6.6 Notification of Certain Matters . . . . . . . . . . . . . . . 45
6.7 No Solicitations . . . . . . . . . . . . . . . . . . . . . . 45
6.8 Cooperation; Accounting and Other Matters . . . . . . . . . . 46
6.9 Investment Portfolio . . . . . . . . . . . . . . . . . . . . 46
6.10 Reinsurance Agreements . . . . . . . . . . . . . . . . . . . 47
6.11 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6.12 Seller Notes . . . . . . . . . . . . . . . . . . . . . . . . 48
6.13 Leesburg Training Facility . . . . . . . . . . . . . . . . . 48
6.14 Reserves and Book-Up . . . . . . . . . . . . . . . . . . . . 49
6.15 Rating Agency Presentations . . . . . . . . . . . . . . . . . 49
6.16 Certain Admitted Assets . . . . . . . . . . . . . . . . . . . 49
6.17 Intercompany Accounts . . . . . . . . . . . . . . . . . . . . 49
6.18 Certain Required Transfer . . . . . . . . . . . . . . . . . . 50
6.19 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . 50

-ii-

<PAGE>

Page
----

6.20 Dividends Received by TRG . . . . . . . . . . . . . . . . . . 50
6.21 Capital Contribution by Seller . . . . . . . . . . . . . . . 51
6.22 TOPrS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
6.23 Subsidiary Credit Agreements . . . . . . . . . . . . . . . . 51

ARTICLE VII

CONDITIONS TO OBLIGATIONS OF PARENT AND SELLER

7.1 Representations, Warranties and Covenants . . . . . . . . . . 51
7.2 HSR Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
7.3 No Governmental or Other Proceeding; Illegality . . . . . . . 52
7.4 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . 52
7.5 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . 52
7.6 Certificates . . . . . . . . . . . . . . . . . . . . . . . . 52
7.7 Corporate Documents . . . . . . . . . . . . . . . . . . . . . 52
7.8 TRG Closing . . . . . . . . . . . . . . . . . . . . . . . . . 53
7.9 Registration Rights Agreement . . . . . . . . . . . . . . . . 53
7.10 Solvency Matters . . . . . . . . . . . . . . . . . . . . . . 53
7.11 Capitalization . . . . . . . . . . . . . . . . . . . . . . . 53
7.12 Company Certificates . . . . . . . . . . . . . . . . . . . . 53
7.13 Subsidiary Releases . . . . . . . . . . . . . . . . . . . . . 53

ARTICLE VIII

CONDITIONS TO OBLIGATIONS OF HOLDINGS AND BUYER

8.1 Representations, Warranties and Covenants . . . . . . . . . . 53
8.2 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . 54
8.3 HSR Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
8.4 No Governmental or Other Proceeding; Illegality . . . . . . . 55
8.5 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . 55
8.6 Certificates . . . . . . . . . . . . . . . . . . . . . . . . 55
8.7 Corporate Documents . . . . . . . . . . . . . . . . . . . . . 56
8.8 TRG Closing . . . . . . . . . . . . . . . . . . . . . . . . . 56
8.9 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . 56
8.10 No Material Adverse Effect. . . . . . . . . . . . . . . . . 56
8.11 No Change in Rating . . . . . . . . . . . . . . . . . . . . . 56
8.12 Resignation of Officers and Directors . . . . . . . . . . . . 56
8.13 Transfer Taxes . . . . . . . . . . . . . . . . . . . . . . . 56
8.14 Seller Notes . . . . . . . . . . . . . . . . . . . . . . . . 56
8.15 Leesburg Training Facility Amount . . . . . . . . . . . . . . 56
8.16 Reserves and Book-Up . . . . . . . . . . . . . . . . . . . . 57
8.17 Ridge Re Endorsements. . . . . . . . . . . . . . . . . . . 57
8.18 Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . 57

-iii-

<PAGE>

Page
----

ARTICLE IX

ACTIONS BY PARENT, SELLER,
AND BUYER AFTER THE CLOSING

9.1 Books and Records . . . . . . . . . . . . . . . . . . . . . . 57
9.2 First Quadrant Final Sale, Viking Sale and Constitution Re
Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
9.3 Covenants Regarding the Securities . . . . . . . . . . . . . 58
9.4 Crostex/Camfex Purchase Money Notes . . . . . . . . . . . . . 58
9.5 Certain Employee Benefit Matters . . . . . . . . . . . . . . 58
9.6 Transfer Taxes . . . . . . . . . . . . . . . . . . . . . . . 59
9.7 Dividends Received by TRG . . . . . . . . . . . . . . . . . . 59
9.8 Ridge Re . . . . . . . . . . . . . . . . . . . . . . . . . . 59
9.9 Further Assurances . . . . . . . . . . . . . . . . . . . . . 59

ARTICLE X

INDEMNIFICATION

10.1 Survival of Representations and Warranties . . . . . . . . . 59
10.2 Indemnification . . . . . . . . . . . . . . . . . . . . . . . 60
10.3 Indemnification Procedures . . . . . . . . . . . . . . . . . 63
10.4 Insurance Proceeds and Tax Limitations . . . . . . . . . . . 64
10.5 Tax Indemnification . . . . . . . . . . . . . . . . . . . . . 65

ARTICLE XI

MISCELLANEOUS
11.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . 65
11.2 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . 67
11.3 Parent Option . . . . . . . . . . . . . . . . . . . . . . . . 67
11.4 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . 68
11.5 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
11.6 Choice of Law . . . . . . . . . . . . . . . . . . . . . . . . 69
11.7 Entire Agreement; Amendments and Waivers . . . . . . . . . . 69
11.8 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . 70
11.9 Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . 70
11.10 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . 70
11.11 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 70
11.12 [Intentionally Omitted] . . . . . . . . . . . . . . . . . . . 70
11.13 Joint and Several . . . . . . . . . . . . . . . . . . . . . . 70
11.14 No Third Party Beneficiaries. . . . . . . . . . . . . . . . . 70

-iv-

<PAGE>

Exhibits

Exhibit A Form of Indenture
Exhibit B Investment Policy
Exhibit C Form of TOPrS Side Letter
Exhibit D Form of Trust Agreement
Exhibit E-1 Form of Opinion of Simpson Thacher & Bartlett
Exhibit E-2 Form of Opinion of King & Spalding
Exhibit E-3 Form of Opinion of Richards, Layton & Finger
Exhibit F Form of Registration Rights Agreement
Exhibit G Form of Company Certificates
Exhibit H Form of Insurance Subsidiary Releases
Exhibit I-1 Form of Opinion of Skadden, Arps, Slate, Meagher & Flom
Exhibit I-2 Form of Opinion of Richard S. Paul
Exhibit I-3 Form of Opinion of Richard N. Frasch
Exhibit I-4 Form of Opinion of Cox & Wilkinson
Exhibit I-5 Form of Opinion of LeBoeuf, Lamb, Greene & MacRae
Exhibit I-6 Form of Opinion of Indiana counsel
Exhibit I-7 Form of Opinion of New Jersey counsel
Exhibit J Form of Ridge Re Endorsements
Exhibit K Form of Parent Guarantees
Exhibit L Form of Parent and Seller Guarantees
Exhibit M Term Sheet for Holdings Common Stock

-v-

<PAGE>

STOCK PURCHASE AGREEMENT
------------------------

STOCK PURCHASE AGREEMENT dated as of January 17, 1996 among Xerox
Corporation, a New York corporation ("Parent"), Xerox Financial Services, Inc.,
------
a Delaware corporation and a wholly-owned subsidiary of Parent ("Seller"), New
------
Talegen Holdings Corporation, a Delaware corporation ("Holdings"), and Talegen
--------
Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of
Holdings ("Buyer").
-----

RECITALS
--------

Seller is the beneficial and record owner of 1,000 shares of common
stock, par value $1.00 per share, of Talegen Holdings, Inc., a Delaware
corporation (the "Company"), constituting all of the issued and outstanding
-------
capital stock (the "Stock") of the Company.
-----

Buyer desires to purchase from Seller, and Seller desires to sell to
Buyer, all of the Stock subject to the terms and conditions of this Agreement.

Parent is the sole stockholder of Seller and desires that Seller sell
to Buyer all of the Stock, subject to the terms and conditions of this
Agreement.

NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein and for other good and valuable consideration the
receipt and adequacy of which are hereby acknowledged, the parties hereto agree
as follows:

ARTICLE I

DEFINITIONS
-----------

1.1 Defined Terms. As used herein, the terms below shall have the
-------------
following meanings:

"Affiliate" shall mean a Person that directly or indirectly through
---------
one or more intermediaries controls, is controlled by or is under common control
with the Person specified. For purposes of this definition and the definition
of "Subsidiary" set forth below, the term "control" (including the terms
"controlling," "controlled by" and "under common control with") of a Person
means the possession, direct or indirect, of the power to (i) vote 50% or more
of the voting securities of such Person or (ii) direct or cause the direction of
the management and policies of such Person, whether by contract or otherwise.

<PAGE>

"Agreement" shall mean this Stock Purchase Agreement (together with
---------
all schedules and exhibits referenced herein), as amended, modified or
supplemented from time to time.

"Ancillary Agreements" shall mean, collectively, the Ridge Re
--------------------
Endorsements, the Guarantees, the Tax Agreement and the TOPrS Side Letter.

"Apprise" shall mean Apprise Corp., a New Jersey corporation and a
-------
direct wholly-owned subsidiary of the Company.

"Balance Sheet Date" shall mean June 30, 1995.
------------------

"Cash Equivalents" shall mean (a) securities with maturities of one
----------------
year or less from the date of acquisition issued or fully guaranteed or insured
by the United States Government or any agency thereof, (b) certificates of
deposit and eurodollar time deposits with maturities of one year or less from
the date of acquisition and overnight bank deposits of any commercial bank
having capital and surplus in excess of $500,000,000, (c) repurchase obligations
of any commercial bank satisfying the requirements of clause (b) of this
definition, having a term of not more than 30 days with respect to securities
issued or fully guaranteed or insured by the United States government, (d)
commercial paper of a domestic issuer rated at least A-2 by S&P or P-2 by
Moody's, (e) securities with maturities of one year or less from the date of
acquisition issued or fully guaranteed by any state, commonwealth or territory
of the United States, by any political subdivision or taxing authority of any
such state, commonwealth or territory or by any foreign government, the
securities of which state, commonwealth, territory, political subdivision,
taxing authority or foreign government (as the case may be) are rated at least A
by S&P or A by Moody's, (f) securities with maturities of one year or less from
the date of acquisition backed by standby letters of credit issued by any
commercial bank satisfying the requirements of clause (b) of this definition or
(g) shares of money market mutual or similar funds which invest exclusively in
assets satisfying the requirements of clauses (a) through (f) of this
definition.

"CFI" shall mean Crum & Forster Holdings, Inc., a Delaware corporation
---
and a direct wholly-owned subsidiary of the Company.

"CGI" shall mean Coregis Group, Inc., a Delaware corporation and a
---
direct wholly-owned subsidiary of the Company.

"Closing Date" shall mean the date on which the Closing occurs.
------------

"Code" shall have the meaning ascribed in the Tax Agreement.
----

<PAGE>

"Company GAAP Financial Statements" shall mean the audited
---------------------------------
Consolidated Balance Sheets of the Company (or its predecessors) as of
December 31, 1994 and 1993 and the Consolidated Statements of Operations,
Consolidated Statements of Shareholder's Equity and Consolidated Statements of
Cash Flows of the Company (or its predecessors) for each of the three fiscal
years included in the three-year period ended December 31, 1994, prepared in
accordance with GAAP, together with the notes thereon and the related reports of
KPMG Peat Marwick LLP.

"Company Interim Financial Statements" shall mean the unaudited
------------------------------------
Consolidated Balance Sheets and the unaudited Consolidated Statements of
Operations, Consolidated Statements of Shareholder's Equity and Consolidated
Statements of Cash Flows of the Company for the nine-month periods ended
September 30, 1994 and 1995, together with the notes thereon.

"Constitution Re" shall mean Constitution Re Corporation, a Delaware
---------------
corporation.

"Constitution Re Sale" shall mean the sale of the capital stock of
--------------------
Constitution Re pursuant to the Stock Purchase Agreement dated December 16, 1994
between the Company and EXOR America Inc., as amended by an amendment dated
December 22, 1994.

"Contracts" shall mean all agreements, contracts, commitments and
---------
undertakings (other than contracts of insurance or reinsurance or retrocession
agreements) to which the Company or any of the Subsidiaries is a party, an
obligor or a beneficiary and (i) the performance or non-performance of which is
individually or, with respect to any related series of agreements, in the
aggregate, material to the Company and the Subsidiaries, taken as a whole, or
(ii) which provide for an aggregate purchase price or payments of more than
$1,000,000 under any agreement during any two-year period (or $1,000,000 in the
aggregate, during any two-year period, in the case of any related series of
agreements).

"Convention Statements" shall mean (i) the annual convention
---------------------
statements and the quarterly statement of each Insurance Subsidiary as filed
with the insurance regulatory authorities in its jurisdiction of domicile for
the years ended December 31, 1992, 1993 and 1994 and for the quarterly period
ended September 30, 1995, and (ii) the annual convention statements of Ridge Re
as filed with the insurance regulatory authorities in Bermuda for the period
from December 14, 1992 to December 31, 1993 and for the year ended December 31,
1994.

"Credit Corp." shall mean Xerox Credit Corporation, a Delaware
-----------
corporation and a wholly-owned subsidiary of Seller.

"Crostex/Camfex Contracts" shall mean all contracts, agreements or
------------------------
arrangements of the Company or any Subsidiary relating to the real property and
improvements located at (i) 255

<PAGE>

California Street, San Francisco, California, (ii) 5724 W. Los Positos Blvd.,
Pleasonton, California, (iii) 299 Madison Avenue, Morris Township, New Jersey,
(iv) 305 Madison Avenue, Morris Township, New Jersey and (v) 4040 North Central
Expressway, Dallas, Texas, including, without limitation, any notes held by the
Company or any Subsidiary (the "Crostex/Camfex Purchase Money Notes").
-----------------------------------

"Debentures" shall mean the debentures to be issued pursuant to the
----------
Indenture.

"Encumbrances" shall mean any claim, lien (statutory or other),
------------
pledge, option, charge, easement, security interest, right-of-way, encroachment,
encumbrance, mortgage, or other rights of third parties.

"Environmental Laws" shall mean any and all applicable Federal, state
------------------
or local laws or regulations relating to the protection of the environment or of
human health as it may be affected by the environment.

"Environmental Permit" shall mean any license, permit, order, consent,
--------------------
approval, registration, authorization, qualification or filing required under
any Environmental Law.

"Environmental Report" shall mean any report, study, assessment,
--------------------
audit, or other similar document that addresses any issue of actual or potential
noncompliance with, or actual or potential liability under, any Environmental
Law that may in any way affect the Company or any Subsidiary other than to the
extent such document addresses any issue of actual or potential noncompliance
with, or actual or potential liability under, any Environmental Law by reason of
any policy of insurance, reinsurance, indemnity, guaranty or assumption of
liability of any party entered into by the Company or any Insurance Subsidiary.

"Envision" shall mean Envision Claims Management Corporation, a New
--------
Jersey corporation and a direct wholly-owned subsidiary of TRG.

"Excluded Activities" shall mean, with respect to the Company and the
-------------------
Subsidiaries, activities relating to insurance reserves, claims under, related
to or in respect of insurance policies or any disputes related thereto, loss
adjustments and loss adjustment expenses and reinsurance receivables, provided,
--------
however, that "Excluded Activities" shall not be deemed to include any (i) of
- -------
the matters covered by the representations contained in Section 4.6, 4.9(c),
4.12 (to the extent it applies to Ridge Re) or 4.26 or other representations
regarding Ridge Re or the Ridge Re Treaties or Ridge Re Endorsements or (ii)
actions, suits, proceedings or claims pending by any governmental or regulatory
authority to the extent based upon a violation of any law, statute, ordinance,
rule or regulation.

<PAGE>

"Filoli" shall mean Filoli Information Systems Company, a Delaware
------
corporation.

"First Quadrant" shall mean First Quadrant Corp., a New Jersey
--------------
corporation.

"First Quadrant Asset Sale" shall mean the sale of certain assets of
-------------------------
First Quadrant pursuant to an Asset Purchase Agreement dated as of August 11,
1995 between First Quadrant and American Re Asset Management, Inc.

"First Quadrant Final Sale" shall mean the sale of the capital stock
-------------------------
of First Quadrant by the Company.

"GAAP" shall mean generally accepted accounting principles in the
----
United States of America in effect from time to time.

"GAAP Subsidiaries" shall mean Apprise, CFI, CGI, Envision, II and
-----------------
WSG.

"Guarantees" shall mean the guarantees referred to in Section 8.18.
----------

"Holdings Common Stock" shall mean common stock, par value $.01 per
---------------------
share, of Holdings.

"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
-------
of 1976, as amended.

"II" shall mean Industrial Indemnity Holdings, Inc., a Delaware
--
corporation and a direct wholly-owned subsidiary of the Company.

"IIC" shall mean Industrial Indemnity Company, a California
---
corporation and direct wholly-owned subsidiary of II.

"Indenture" shall mean the Indenture to be dated as of the Closing
---------
Date between Holdings and the trustee named therein, (i) with the terms of the
Debentures, the covenants and events of default set forth in Exhibit A and (ii)
otherwise substantially in the form of Exhibit A, except, in the case of clause
(ii), for such changes required by the trustee thereunder which do not have an
adverse effect on the holders of the Debentures or the Preferred Securities.

"Information Returns" shall have the meaning ascribed in the Tax
-------------------
Agreement.

"Insurance Subsidiaries" shall mean the Subsidiaries listed on
----------------------
Schedule 1.1A.

<PAGE>

"Investment Policy" shall mean, with respect to certain Subsidiaries,
-----------------
the policy for each such Subsidiary set forth on Exhibit B.

"KKR" shall mean Kohlberg Kravis Roberts & Co.
---

"Knowledge of Seller" shall mean (i) with respect to matters relating
-------------------
to Parent or Seller, actual knowledge of any officer of Parent, Seller or Ridge
Re set forth in Schedule 1.1B, and (ii) with respect to any matters relating to
the Company or any Subsidiary, actual knowledge of any such officer of Parent or
Seller, or the actual knowledge of the persons set forth in Schedule 1.1C.

"Material Adverse Effect" with respect to any Person shall mean a
-----------------------
material adverse effect on the business, financial condition, assets or
operations of such Person, but shall exclude any effect resulting from general
economic conditions.

"Materials of Environmental Concern" shall mean any waste, pollutant,
----------------------------------
or contaminant or substance (including, without limitation, petroleum or
petroleum products, asbestos or asbestos-containing materials, urea-formaldehyde
insulation, polychlorinated biphenyls, odors, radioactivity, and electro-
magnetic fields) regulated by or under, or which may otherwise give rise to
liability under, any Environmental Law.

"Moody's" shall mean Moody's Investors Service, Inc.
-------

"1992/93 Restructuring" shall mean the restructuring of the Company
---------------------
and its subsidiaries pursuant to the Restructuring Agreement dated as of
September 3, 1993 among Seller, Ridge Re, the Company and certain of the
Subsidiaries.

"Permits" shall mean all licenses, permits, orders, consents,
-------
approvals, registrations, authorizations, qualifications and filings with and
under all Federal, state, local or foreign laws and governmental or regulatory
bodies and all industry or other non-governmental self-regulatory organizations
(including, without limitation, Environmental Permits).

"Person" shall mean an individual, a partnership, a joint venture, a
------
corporation, a business trust, a limited liability company, a trust, an
unincorporated organization, a government or any department or agency thereof or
any other entity.

"Preferred Securities" shall mean the Trust Originated Preferred
--------------------
Securities to be issued pursuant to the Trust Agreement.

"Qualified Transferee" shall mean a corporation (or the wholly-owned
--------------------
direct or indirect subsidiary thereof) which, as of

<PAGE>

the date of the consummation of a sale pursuant to Section 9.8, is an insurance
company engaged in the business of reinsurance and has at least $2 billion in
assets and a rating of "A+" or better by A.M. Best.

"Ridge Re" shall mean Ridge Reinsurance Limited, a Bermuda corporation
--------
and a wholly-owned subsidiary of Seller.

"Ridge Re Endorsements" shall mean the endorsements to the Ridge Re
---------------------
Treaties referred to in Section 8.17.

"Ridge Re GAAP Financial Statements" shall mean the audited
----------------------------------
Consolidated Balance Sheets of Ridge Re as of December 31, 1994 and 1993 and the
related Statements of Operations and Retained Earnings and Cash Flows for the
year ended December 31, 1994 and the period from December 14, 1992 to December
31, 1993, prepared in accordance with GAAP, together with the notes thereon and
the related reports of KPMG Peat Marwick LLP.

"Ridge Re Interim Financial Statements" shall mean the unaudited
-------------------------------------
Consolidated Balance Sheet of Ridge Re as of September 30, 1995, and the related
Statements of Operations and Retained Earnings for the nine-month periods ended
September 30, 1994 and September 30, 1995.

"Ridge Re Treaties" shall mean the agreements, as amended by the
-----------------
applicable Endorsement No. 1 thereto, contained in Schedule 1.1D.

"S&P" shall mean Standard and Poor's Rating Group.
---

"Securities" shall mean (a) the Preferred Securities and (b) any
----------
shares of Holdings Common Stock purchased by Seller in accordance with Section
11.3.

"Statutory Accounting Principles" shall mean, as applied to any
-------------------------------
Subsidiary, the statutory accounting practices prescribed or permitted by the
jurisdiction of domicile of such Subsidiary.

"Subsidiaries" shall mean all corporations, partnerships, joint
------------
ventures or other entities which the Company controls, directly or indirectly
through one or more intermediaries. See definition of "Affiliate" in this
Section 1.1 for the meaning of "control."

"Subsidiary GAAP Financial Statements" shall mean the audited
------------------------------------
Consolidated Balance Sheets of each of the GAAP Subsidiaries as of December 31,
1994 and December 31, 1993 and the Consolidated Statements of Operations,
Consolidated Statements of Shareholder's Equity and Consolidated Statements of
Cash Flows of each such Subsidiary for each of the three fiscal years included
in the three-year period ended December 31, 1994 (except 1992 financial
statements for Apprise and Envision),

<PAGE>

prepared in accordance with GAAP together with the notes thereon and the related
reports of KPMG Peat Marwick LLP.

"Subsidiary Interim Financial Statements" shall mean the unaudited
---------------------------------------
Consolidated Balance Sheets of each of the GAAP Subsidiaries as of September 30,
1995, and the unaudited Consolidated Statements of Shareholder's Equity and
Consolidated Statements of Cash Flows of each such Subsidiary for the nine-month
periods ended September 30, 1994 and 1995, together with the notes thereon.

"Tax Agreement" shall mean the Tax Allocation and Indemnification
-------------
Agreement dated as of the date hereof among Parent, Seller, the Company,
Holdings and Buyer.

"Tax Returns" shall have the meaning ascribed in the Tax Agreement.
-----------

"Taxes" shall have the meaning ascribed in the Tax Agreement.
-----

"Third Party Amount" shall mean any amount paid by the transferee
------------------
(which may be Seller or any of its Affiliates (other than the Company or any
Subsidiary)) to the Company or the Subsidiaries of all or a portion of the
Seller Notes or Leesburg Training Facility, as the case may be, pursuant to
Sections 6.12 or 6.13.

"Third Party Expenses" shall mean all expenses paid or payable by
--------------------
Buyer or Holdings to other Persons in connection with the transactions
contemplated by this Agreement, the Ancillary Agreements and the Financing
Documents other than expenses contingent upon a payment to Buyer or Holdings or
which are not payable unless there has been a breach of this Agreement by
Parent, Seller, the Company or any Subsidiary, but shall in no event include any
amount payable to KKR or its Affiliates (other than to Am-Re Consultants, Inc.
in connection with reserve analyses) or any officer, director or employee of the
Company or the Subsidiaries.

"TOPrS Side Letter" shall mean the letter among an investment
-----------------
partnership affiliated with Holdings, Holdings and Seller to be dated the
Closing Date, substantially in the form of Exhibit C.

"TRG" shall mean The Resolution Group, Inc., a Delaware corporation
---
and a direct wholly-owned subsidiary of Seller.

"TRG Acquisition" shall mean TRG Acquisition Corporation, a Delaware
---------------
corporation.

"TRG Agreement" shall mean the Stock Purchase Agreement dated as of
-------------
the date hereof among Parent, Seller and TRG Acquisition, as amended, modified
or supplemented from time to

<PAGE>

time, which contemplates that TRG Acquisition will purchase all of the
outstanding capital stock of TRG from Seller, subject to the terms and
conditions thereof.

"TRG Dividend Replacement Amount" shall mean an amount equal to (i)
-------------------------------
$15,000,000 plus (ii) $7,500,000 for each calendar quarter from July 1, 1996 to
the Closing Date, provided that if the Closing Date is in the middle of a
--------
calendar quarter the amount for such calendar quarter shall be pro rated from
the first day of such calendar quarter to the Closing Date based on actual
number of days elapsed.

"Trust" shall mean the Delaware business trust referred to in the
-----
Trust Agreement.

"Trust Agreement" shall mean the Amended and Restated Trust Agreement
---------------
to be dated the Closing Date between Holdings and the trustees named therein
(the "Trustees"), (i) with the terms of Preferred Securities set forth in
--------
Exhibit D and (ii) otherwise substantially in the form of Exhibit D, except, in
the case of clause (ii), for such changes required by the Property Trustee (as
defined in the Trust Agreement) which do not have an adverse effect on the
holders of the Debentures or the Preferred Securities.

"Underwriter Letter" shall mean that certain letter dated January 17,
------------------
1996 between a nationally recognized underwriter and Buyer stating that such
underwriter is highly confident that Buyer will be able to obtain funds
referenced therein, before underwriting discounts and commissions, from the sale
of subordinated debt of Buyer.

"Underwritten Notes" shall mean the subordinated debt securities of
------------------
Buyer issued by Buyer in an offering underwritten by a nationally recognized
underwriter pursuant to the Underwriter Letter.

"Viking" shall mean Viking Insurance Holdings, Inc., a Delaware
------
corporation.

"Viking Sale" shall mean the sale of the capital stock of Viking
-----------
pursuant to a Stock Purchase Agreement dated as of April 26, 1995 between the
Company and Guaranty National Corporation.

"WSG" shall mean Westchester Specialty Group, Inc., a Delaware
---
corporation and a direct wholly-owned subsidiary of the Company.

<PAGE>

1.2 Other Defined Terms. The following terms shall have the meanings
-------------------
defined for such terms in the Sections set forth below:

Term Section
---- -------

"AARG" 4.7
"Actions" 4.13
"A.M. Best" 6.15
"Assets" 4.8
"Closing" 3.1
"Common Securities" 2.4
"Company Plans" 4.21
"Confidentiality Agreement" 6.4
"Crostex/Camfex Purchase Money Notes" 1.1
"Damages" 10.2
"ERISA" 4.21
"ESOP" 9.5
"Excluded Business" 10.2
"Exchange Act" 4.11
"Financing" 5.3
"Financing Documents" 5.3
"Indemnitee" 10.3
"Indemnitor" 10.3
"Indenture" 6.19
"Intellectual Property" 4.20
"Leesburg Training Facility 6.13
Amount"
"Leesburg Training Facility" 6.13
"Liabilities" 4.14
"Long Term Incentive Program" 4.7
"Notice" 10.3
"Personnel" 4.13
"Section 4.5 Subsidiaries" 4.5
"Securities Act" 4.3
"Seller Notes" 4.23
"Subsidiary Credit Agreements" 4.14
"TRG Contributed Dividends" 6.20
"Trustees" 1.1

1.3 Other Definitional Provisions. (a) The words "hereof", "herein"
-----------------------------
and "hereunder" and words of similar import when used in this Agreement shall
refer to this Agreement as a whole and not to any particular provision of this
Agreement, and Section, Schedule and Exhibit references are to this Agreement
unless otherwise specified.

(b) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.

<PAGE>

ARTICLE II

PURCHASE AND SALE OF STOCK AND PREFERRED SECURITIES
---------------------------------------------------

2.1 Transfer of Stock. Upon the terms and subject to the conditions
-----------------
contained herein, Seller will sell, convey, transfer, assign and deliver to
Buyer, and Buyer will acquire from Seller on the Closing Date, all of the Stock
for the consideration set forth in Section 2.2.

2.2 Consideration for Stock. Upon the terms and subject to the
-----------------------
conditions contained herein, as consideration for the purchase of the Stock, on
the Closing Date Buyer will pay to Seller cash in an amount equal to
$1,750,000,000, payable by wire transfer in immediately available funds to an
account which Seller will designate in writing to Buyer no less than two
business days prior to the Closing Date, subject to adjustment as described in
Section 2.7(a).

2.3 Transfer of Debentures. Simultaneously
----------------------
with Buyer making the payment provided for in Section 2.2, (i) Holdings will
issue Debentures to Trust in the aggregate principal amount of $450,000,000,
subject to adjustment as described in Sections 2.7(a) and 2.7(b), and (ii)
Holdings will issue additional Debentures to Trust in an aggregate principal
amount equal to the aggregate liquidation amount of the common securities
referred to in clause (ii) of Section 2.4.

2.4 Consideration for Debentures. As consideration for the purchase
----------------------------
of the Debentures, on the Closing Date, Holdings and Buyer will cause Trust (i)
to pay to Holdings cash in an amount equal to $450,000,000, payable by intrabank
transfer (at a bank to be mutually agreed) in immediately available funds to an
account which Holdings will designate in writing to Trust no less than two
business days prior to the Closing Date, subject to adjustment as described in
Sections 2.7(a) and 2.7(b), and (ii) to issue and deliver to Holdings common
securities of Trust ("Common Securities") with a liquidation amount of 3% of the
-----------------
aggregate liquidation amount of securities of Trust which will be outstanding at
Closing (after giving effect to the issuance of Preferred Securities provided
for in Section 2.5).

2.5 Transfer of Preferred Securities. Simultaneously with the
--------------------------------
payments provided for in Sections 2.2 and 2.4, Holdings and Buyer will cause
Trust to issue and deliver to Seller, and Seller will acquire from Trust,
Preferred Securities with an aggregate liquidation amount of $450,000,000,
subject to adjustment as described in Sections 2.7(a) and 2.7(b).

2.6 Consideration for Preferred Securities. As consideration for the
--------------------------------------
purchase of the Preferred Securities, on the Closing Date Seller will pay to
Trust cash in an amount equal to $450,000,000, payable by intrabank transfer (at
a bank to be mutually agreed) in immediately available funds to an account

<PAGE>

which Buyer will designate in writing to Seller no less than two business days
prior to the Closing Date, subject to adjustment as described in Sections 2.7(a)
and 2.7(b).

2.7 Adjustments. (a) If the Closing shall not have occurred on or
-----------
prior to July 1, 1996, the amount of cash payable by Buyer to Seller pursuant to
Section 2.2, the principal amount of Debentures to be issued by Holdings
pursuant to Section 2.3, the amount of cash payable by Trust pursuant to Section
2.4, the aggregate liquidation amount of Preferred Securities to be issued by
the Trust pursuant to Section 2.5 and the amount of cash payable by Seller
pursuant to Section 2.6 shall each be increased by $10,000,000 for each full
calendar month until the Closing Date, and with respect to any partial calendar
month commencing with July 1, 1996 until the Closing Date, by an amount equal to
the product obtained by multiplying $10,000,000 by a fraction the numerator of
which is equal to the number of days in such partial month which have elapsed
prior to the Closing Date and the denominator of which is equal to the number of
calendar days in such month.

(b) To the extent that IIC shall not have paid an extraordinary
dividend to II after the date hereof but prior to the Closing Date, the
principal amount of Debentures to be issued by Holdings pursuant to Section 2.3,
the amount of cash payable by Trust pursuant to Section 2.4, the aggregate
liquidation amount of Preferred Securities to be issued by Trust pursuant to
Section 2.5 and the amount of cash payable by Seller pursuant to Section 2.6
shall each be increased by $50,000,000, and to the extent that IIC shall have
paid an extraordinary cash dividend of less than $50,000,000 to II after the
date hereof but prior to the Closing Date, the principal amount of Debentures to
be issued by Holdings pursuant to Section 2.3, the amount of cash payable by
Trust pursuant to Section 2.4, the aggregate liquidation amount of Preferred
Securities to be issued by Trust pursuant to Section 2.5 and the amount of cash
payable by Seller pursuant to Section 2.6 shall each be increased to the extent
any such dividend is less than $50,000,000.

ARTICLE III

CLOSING
-------

3.1 Closing. The closing of the transactions contemplated herein
-------
(the "Closing") shall take place as soon as practicable but in no event later
-------
than five business days after satisfaction or waiver of the conditions set forth
in Articles VII and VIII, and shall be held at 9:00 a.m. local time on the
Closing Date at the offices of Simpson Thacher & Bartlett, 425 Lexington Avenue,
New York, New York 10017, unless the parties hereto otherwise agree. The
parties agree that the effective time of the Closing for Federal income tax
purposes shall be at the close of business on the Closing Date.

<PAGE>

3.2 Documents to be Delivered. To effect the transfers referred to
-------------------------
in Sections 2.1, 2.3 and 2.5 and the delivery of the consideration described in
Sections 2.2, 2.4 and 2.6 hereof, Seller and Buyer shall, and Holdings and Buyer
shall cause Trust to, on the Closing Date, deliver the following:

(a) Seller shall deliver to Buyer certificate(s) evidencing the
Stock, free and clear of any Encumbrances of any nature whatsoever (except
Encumbrances arising as a result of any action taken by Buyer or any of its
Affiliates), duly endorsed in blank for transfer or accompanied by stock powers
duly executed in blank.

(b) Buyer shall deliver to Seller immediately available funds as
provided in Section 2.2.

(d) Trust shall deliver to Holdings immediately available funds as
provided in clause (i) of Section 2.4.

(e) Trust shall deliver to Holdings certificate(s) evidencing Common
Securities as provided in clause (ii) of Section 2.4.

(f) Trust shall deliver to Seller certificate(s) evidencing the
Preferred Securities as provided in Section 2.5, free and clear of any
Encumbrances of any nature whatsoever (except Encumbrances arising as a result
of any action taken by Seller or any of its Affiliates) in the form of one or
more certificates in the name of Seller.

(g) Seller shall deliver to Trust immediately available funds as
provided in Section 2.6.

(h) Seller and Buyer shall each deliver all documents required to be
delivered pursuant to Articles VII and VIII.

(i) All instruments and documents executed and delivered to Buyer
pursuant hereto shall be in form and substance, and shall be executed in a
manner, reasonably satisfactory to Buyer. All instruments and documents
executed and delivered to Seller pursuant hereto shall be in form and substance,
and shall be executed in a manner, reasonably satisfactory to Seller.

<PAGE>

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF PARENT AND SELLER
---------------------------------------------------

Parent and Seller hereby represent and warrant to Buyer and Holdings
as follows:

4.1 Organization of Seller and Parent. Seller is duly organized,
---------------------------------
validly existing and in good standing under the laws of the State of Delaware
and has full corporate power and authority to conduct its business as it is
presently being conducted and to own the Stock. Parent is duly organized,
validly existing and in good standing under the laws of the State of New York
and has full corporate power and authority to conduct its business as it is
presently being conducted.

4.2 Organization of the Company. The Company is duly organized,
---------------------------
validly existing and in good standing under the laws of the State of Delaware
and has full corporate power and authority to conduct its business as it is
presently being conducted and to own, lease and operate its properties and
assets. The Company is duly qualified or otherwise authorized as a foreign
corporation to conduct the business conducted by it and is in good standing in
each jurisdiction in which such qualification or authorization is necessary
under the applicable law and where the failure to be so qualified or otherwise
authorized, individually or in the aggregate, would have a Material Adverse
Effect on the Company and the Subsidiaries, taken as a whole. Seller has
provided to Buyer a complete and correct copy of the certificate of
incorporation, bylaws and other organizational documents of the Company and the
minute books of the Company. The Company's minute books include copies of
minutes of all meetings of the directors or shareholders of the Company held on
or after January 1, 1993 and complete and accurate copies of all resolutions
passed by the directors or actions by written consent of the shareholders on or
after January 1, 1993.

4.3 Capital Stock. The Company has authorized 1,000 shares of common
-------------
stock, $1.00 par value, 1,000 shares of which are issued and outstanding, and no
shares of any other class or series of capital stock are authorized, issued or
outstanding. All of the shares of the Stock have been duly and validly
authorized and issued, and are fully paid and nonassessable. Seller owns of
record and beneficially all of the Stock free and clear of all Encumbrances,
including without limitation, any agreement, understanding or restriction
affecting the voting rights or other incidents of record or beneficial ownership
pertaining to the Stock; provided that Parent and Seller make no representation
--------
in this sentence regarding the ability of Seller to transfer or otherwise
dispose of such Stock without registration or qualification under, or in
compliance with, applicable Federal or state securities laws to a Person who is
not an "accredited investor" (as defined in Rule 501 of

<PAGE>

Regulation D under the Securities Act of 1933, as amended (the "Securities
----------
Act")) or without compliance with applicable insurance laws. There are no
- ---
subscriptions, options, warrants, calls, commitments, preemptive rights or other
rights of any kind outstanding for the purchase of, nor any securities
convertible or exchangeable for, any equity interests of the Company. There are
no restrictions upon the voting or transfer of any shares of the Stock pursuant
to the Company's Certificate of Incorporation or Bylaws or any agreement or
other instrument to which the Company or Seller is a party or by which the
Company or Seller is bound. Upon consummation of the transactions contemplated
by this Agreement, Buyer will acquire from Seller good and marketable title to
such Stock, free and clear of all Encumbrances, except Encumbrances arising as a
result of any action taken by Buyer or any of its Affiliates; provided that
--------
Parent and Seller make no representation regarding the ability of any Person
other than Seller to transfer or otherwise dispose of such Stock without
registration or qualification under, or in compliance with, applicable Federal
securities or state securities or insurance laws.

4.4 Authorization. Each of Parent and Seller has all necessary
-------------
corporate power and authority to enter into this Agreement and the Ancillary
Agreements to which it is or will be a party, and has taken all corporate action
necessary to consummate the transactions contemplated hereby and thereby and to
perform its obligations hereunder and thereunder. This Agreement and the Tax
Agreement have each been duly executed and delivered by each of Seller and
Parent. Assuming the due execution of this Agreement and the Tax Agreement by
Holdings and Buyer, each of this Agreement and the Tax Agreement is a legal,
valid and binding obligation of each of Seller and Parent enforceable in
accordance with its terms, subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at law) and an
implied covenant of good faith and fair dealing. Subject to the occurrence of
the Closing, the Guarantees and the TOPrS Side Letter will be duly executed and
delivered by Parent and Seller, as applicable, on the Closing Date. Upon
execution and delivery by Parent or Seller, as the case may be, each Guarantee
and the TOPrS Side Letter will be a legal, valid and binding obligation of such
Person enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing, assuming, in the case of
the TOPrS Side Letter, the due execution of such letter by Holdings and the
partnership party thereto.

4.5 Subsidiaries. Schedule 4.5 sets forth a complete and accurate
------------
list of all of the Subsidiaries, other than

<PAGE>

Subsidiaries which are not Insurance Subsidiaries and which do not hold any
assets (including capital stock) with a fair market value in excess of $1,000 or
insurance licenses (the "Section 4.5 Subsidiaries"). Schedule 4.5 also contains
------------------------
the jurisdiction of incorporation or formation of each of the Section 4.5
Subsidiaries, each jurisdiction in which such Subsidiary is licensed, qualified
or otherwise authorized to conduct insurance business, the number of shares of
capital stock of any Section 4.5 Subsidiary which is a corporation issued and
outstanding and the percentage ownership interest of the Company in each such
Subsidiary. All outstanding shares of capital stock of such Subsidiaries have
been duly and validly authorized and are fully paid and nonassessable. Except
as set forth on Schedule 4.5, all such outstanding shares are owned by the
Company and/or one or more of its Subsidiaries free and clear of any
Encumbrances, including, without limitation, any agreement, understanding or
restriction affecting the voting rights or other incidents of record or
beneficial ownership pertaining to such shares; provided that Parent and Seller
--------
make no representation in this sentence regarding the ability of Seller to
transfer or otherwise dispose of such shares without registration or qualifica-
tion under, or in compliance with, applicable Federal securities or state
securities laws to a Person who is not an "accredited investor" (as defined in
Rule 501 under the Securities Act) or without compliance with applicable
insurance laws. Except as set forth on Schedule 4.5, there are no
subscriptions, options, warrants, calls, commitments, preemptive rights or other
rights of any kind outstanding for the purchase of, nor any securities
convertible or exchangeable for, any equity interests of any of the Section 4.5
Subsidiaries. Schedule 4.5 contains true and complete copies of all agreements
and other instruments pursuant to which the Company or any Section 4.5
Subsidiary is obligated or required, under any circumstance, to make
contributions to the capital of any Subsidiary. Each of the Insurance
Subsidiaries is a corporation duly licensed, organized, validly existing and in
good standing under the jurisdiction of its organization and each of the other
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the jurisdiction of its organization, in each case, with
corporate power to own its properties and conduct its business as now being
conducted and is duly licensed (in the case of the Insurance Subsidiaries),
qualified and in good standing to transact business in each jurisdiction (as
listed in Schedule 4.5) where, by virtue of its business carried on or
properties owned, it is required to be so licensed (in the case of the Insurance
Subsidiaries) or qualified and where the failure to be so licensed (in the case
of the Insurance Subsidiaries) or qualified, individually or in the aggregate,
would have a Material Adverse Effect on the Company and the Subsidiaries, taken
as a whole. To the extent requested of Seller by Buyer, Seller has made
available to Buyer a complete and correct copy of the certificates of
incorporation, bylaws and other organizational documents of each Section 4.5
Subsidiary and the minute books of each such Subsidiary. The minute books
include copies of minutes of all meetings of the directors or

<PAGE>

shareholders of each such Subsidiary held on or after January 1, 1993 and
complete and accurate copies of all resolutions passed by the directors or
actions by written consent of the shareholders on or after January 1, 1993.

4.6 Ridge Re. (a) Ridge Re is duly organized, validly existing and
--------
in good standing under the laws of Bermuda and has full corporate power and
authority to conduct its business as it is presently being conducted and to own,
lease and operate its properties and assets. Ridge Re is duly licensed,
qualified or otherwise authorized as an alien corporation to conduct the
reinsurance business conducted by it and is in good standing in each
jurisdiction in which such license, qualification or authorization is necessary
under the applicable law and where the failure to be so licensed, qualified or
otherwise authorized, individually or in the aggregate, would have a Material
Adverse Effect on the Company and the Subsidiaries, taken as a whole.

(b) Seller owns of record and beneficially all of the outstanding
capital stock of Ridge Re free and clear of all Encumbrances, including without
limitation, any agreement, understanding or restriction affecting the voting
rights or other incidents of record or beneficial ownership pertaining to such
shares; provided that Parent and Seller make no representation in this sentence
--------
regarding the ability of Seller to transfer or otherwise dispose of such shares
without registration or qualification under, or in compliance with, applicable
Federal or state securities laws to a Person who is not an "accredited investor"
(as defined in Rule 501 of Regulation D under the Securities Act) or without
compliance with applicable insurance laws. There are no subscriptions, options,
warrants, calls, commitments, preemptive rights or other rights of any kind
outstanding to which Parent, Seller, Ridge Re or any of their respective
Affiliates is a party for the purchase of, nor any securities convertible or
exchangeable for, any equity interests of Ridge Re, except as set forth in
Schedule 4.6. Schedule 4.6 contains a true and complete list of all agreements
and other instruments pursuant to which Parent, Seller or any Affiliate is
obligated or required, under any circumstance, to make contributions to the
capital of Ridge Re.

(c) Each of Ridge Re and each Insurance Subsidiary has all necessary
corporate authority to enter into the Ridge Re Endorsements to which it will be
a party and has taken all necessary corporate authority to consummate the
transactions contemplated thereby and to perform its obligations thereunder.
Subject to the occurrence of the Closing, each of the Ridge Re Endorsements will
be duly executed and delivered by Ridge Re in Bermuda and by the Insurance
Subsidiaries parties thereto. Upon execution and delivery by the parties
thereto, each of the Ridge Re Treaties, as amended by the applicable Ridge Re
Endorsement, will be a legal, valid and binding obligation of Ridge Re,
enforceable in accordance with its terms, subject to the effects

<PAGE>

of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing.

4.7 Absence of Certain Changes or Events. To the Knowledge of
------------------------------------
Seller, except as expressly contemplated by this Agreement or as described on
Schedule 4.7 or reflected in the Company Interim Financial Statements, since
June 30, 1995, there has not been any:

(a) change in the business, condition (financial or otherwise),
Permits, assets, Liabilities, working capital, earnings or operations of
the Company or any Subsidiary, except for changes which have not,
individually or in the aggregate, had or are not reasonably likely to have
a Material Adverse Effect on the Company and the Subsidiaries, taken as a
whole;

(b) acquisition of material assets or properties or of securities or
business of any other Person by the Company or any Subsidiary (in each
case, other than acquisitions in the ordinary course of business consistent
with past practice) or any merger, consolidation or amalgamation involving
the Company or any Subsidiary, except (i) the acquisition of Cash
Equivalents as part of the process of converting substantially all of the
Company and the Subsidiaries' investment portfolio into cash and Cash
Equivalents prior to the date of this Agreement and the reinvestment
thereof in accordance with the Investment Policy after the date of this
Agreement and (ii) the purchase by the Company of preferred stock of Filoli
for a purchase price of $2,500,000;

(c) sale, assignment, lease or transfer of (i) the Crostex/Camfex
Contracts, the Seller Notes (except transfers in accordance with, and to
the extent Parent and Seller comply with, Section 6.12) or any interest in
the Leesburg Training Facility (except transfers in accordance with, and to
the extent Parent and Seller comply with, Section 6.13) or (ii) any other
material assets (including any portion of the investment portfolio) of the
Company or any Subsidiary, other than in the case of (ii) (W) in the
ordinary course of business consistent with past practices, (X) converting
substantially all of the Company and the Subsidiaries' investment portfolio
into cash and Cash Equivalents prior to the date of this Agreement and
dispositions of securities in accordance with the Investment Policy after
the date of this Agreement, (Y) the First Quadrant Asset Sale and (Z) the
First Quadrant Final Sale;

(d) incurrence by the Company or any Subsidiary of any indebtedness
for borrowed money or incurrence,

<PAGE>

assumption or guarantee of, or any other act to become responsible for, any
obligations of any other Person, or making of loans or advances by the
Company or any Subsidiary to any Person (including, without limitation, any
broker or agent), except (i) advances to American All Risk Group ("AARG")
----
to the extent required under a credit agreement in effect on the date
hereof, a true and complete copy of which has been previously made
available to Buyer, (ii) loans by IIC to Filoli in an aggregate principal
amount of up to $17,500,000, (iii) loans to employees made in the ordinary
course of business consistent with past practice for relocation expenses
and (iv) the issuance of insurance policies in the ordinary course of
business consistent with past practice;

(e) cancellation of any indebtedness or waiver or compromise of any
rights (including agent balances) having a value to the Company or any
Subsidiary of $500,000 or more, including the Seller Notes and the
Crostex/Camfex Purchase Money Notes, whether or not in the ordinary course
of business (other than settlements in the ordinary course of business of
claims and salvage and subrogation rights arising under contracts of
insurance underwritten, assumed or ceded by the Company or any Subsidiary
which settlements have not had nor would be reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect on the Company
and the Subsidiaries, taken as a whole and the terminations, modifications
and commutations permitted by clause (j) below), provided that for purposes
--------
of this paragraph the Company's elimination of a deferred tax asset in an
amount equal to $7,000,000 relating to the Company's former participation
in the ESOP shall not constitute a cancellation;

(f) failure of the Company or any Subsidiary to pay any creditor any
amount owed to such creditor (in excess of $1,000,000 in the aggregate for
all such creditors) when due (after the expiration of any applicable grace
periods) except for failures to pay in the ordinary course of business or
if the Company or any Subsidiary is disputing the amount due in good faith;

(g) payment by the Company or any Subsidiary of any material
Liability before the same became due in accordance with its terms other
than in the ordinary course of business consistent with past practice;

(h) material change in the underwriting, reinsurance, marketing,
claim processing and payment, financial or accounting practices or policies
of the Company or any Subsidiary, except as required by law, generally
accepted accounting principles or Statutory Accounting Principles;

<PAGE>

(i) except to the extent required under employee and director benefit
plans or policies, agreements or arrangements as in effect on the Balance
Sheet Date and except in connection with the Long Term Incentive Program
attached as Attachment A and the Stock Option Agreement attached as Exhibit
A to the Employment Agreement among Joseph W. Brown, Jr., Parent and the
Company and the five related agreements with management of the Company or
TRG (collectively, the "Long Term Incentive Program"), (1) increase in the
---------------------------
compensation or fringe benefits of any of the directors, officers or
employees of the Company or any Subsidiary (except for increases in salary
or wages of employees of the Company or any Subsidiary who are not officers
of the Company in the ordinary course of business in accordance with past
practice), (2) except for the letter agreement dated June 1, 1995 between
II and Robert Puccinelli, and the Employment Agreement (and related grants
of stock options and restricted stock) dated as of January 1, 1996 between
Infocus Employee Services, Inc. and Andrew Vadyak (on terms and conditions
reasonably satisfactory to Buyer), grant of any severance or termination
pay or entrance into any employment, consulting or severance agreement or
arrangement with any present or former director, officer or employee of the
Company or any Subsidiary or amendment of any such arrangement or agreement
or (3) establishment, adoption, entrance into, amendment of or termination
of any (X) collective bargaining agreement or (Y) plan or agreement to
provide bonuses, profit sharing, stock options, restricted stock, pensions,
retirement benefits, deferred compensation, employment or benefits upon
termination for the benefit of any directors, officers or any group of
other employees of the Company or any Subsidiary;

(j) (i) entry into or modification of any reinsurance or retrocession
agreement by the Company or any Subsidiary other than in the ordinary
course of business consistent with past practice, except for those which
have not had nor are reasonably likely to have, individually or in the
aggregate, a Material Adverse Effect on the Company and the Subsidiaries,
taken as a whole or (ii) termination or commutation of any reinsurance or
retrocession agreement legally carried on the books of the Subsidiaries at
the time of such termination or commutation at $5,000,000 or more;

(k) entry into, termination or modification by the Company or any
Subsidiary of any Contract, agreement, commitment, transaction, or
instrument (including, without limitation, relating to any borrowing,
lending, capital expenditure, capital contribution or capital financing),
except entering into, terminating or modifying contracts, agreements,
commitments, transactions, or instruments (i) in the ordinary course of
business, (ii) as permitted by clauses (i) and (j) above and (iii) for a
contribution of an

<PAGE>

amount not to exceed $4,000,000 by CGI to Coregis Managers Corporation
(Il.); provided that except as disclosed on Schedule 4.7, no modifications
--------
shall have been made to the Crostex/Camfex Contracts, the Subsidiary Credit
Agreements or the Ridge Re Treaties;

(l) entry into a material joint venture, partnership or similar
arrangement by the Company or any Subsidiary with any Person;

(m) any capital expenditure or execution of any lease or commitment
for the foregoing by the Company or any Subsidiary involving annual
payments in excess of $100,000;

(n) lapse or termination or failure to renew any Permit of the
Company or any Subsidiary, in each case other than with respect to Permits
the failure of which to be in effect would not have, individually or in the
aggregate, a Material Adverse Effect on the Company and the Subsidiaries,
taken as a whole;

(o) (i) declaration, setting aside or payment of any dividends or
distributions (whether in cash, stock or property) in respect of any
capital stock of the Company or (ii) any redemption, purchase or other
acquisition of any of the capital stock of the Company or any Subsidiary
(other than a wholly owned Subsidiary), except for payments permitted under
the Tax Agreement;

(p) issuance by the Company or any Subsidiary of, or commitment of
the Company or any Subsidiary to issue, any shares of capital stock or
obligations or securities convertible into or exchangeable for shares of
capital stock except for issuances or commitments by any Subsidiary to
issue any such securities to the Company or any wholly owned Subsidiary;

(q) amendment of the certificate of incorporation or bylaws of
the Company or any Subsidiary; or

(r) agreement by the Company or any Subsidiary to do any of the
foregoing.

4.8 Title to Assets, Etc. The Company and the Subsidiaries have good
---------------------
title to or valid and subsisting leasehold interests in all real and material
personal property and other material assets on their books and reflected on the
balance sheets included in the Company Interim Financial Statements and the
Subsidiary Interim Financial Statements, as applicable, or acquired in the
ordinary course of business since September 30, 1995 which would have been
required to be reflected on such balance sheets if acquired on or prior to
September 30, 1995, other than (i) assets which have been disposed of in the
ordinary course of business or pursuant to the First Quadrant Final Sale

<PAGE>

and (ii) assets which were disposed in connection with the conversion of the
Company and the Subsidiaries' investment portfolio into cash and Cash
Equivalents (the "Assets"). None of the Assets is subject to any Encumbrance,
------
except for Encumbrances reflected in the financial statements contained in
Schedule 4.12, as applicable, or which in the aggregate are not substantial in
amount and do not materially detract from the value of the property or assets
subject thereto or interfere with the present use.

4.9 Contracts and Commitments. (a) None of the Company or any
-------------------------
Subsidiary is a party to any written or oral:

(i) Contracts not otherwise listed in Schedule 4.9;

(ii) except as listed on Schedule 4.9, treaties and agreements with,
and undertakings or commitments to, any governmental or regulatory
authority materially affecting the business of the Company and the
Subsidiaries taken as a whole and not made in the ordinary course of
business;

(iii) except as described in Schedule 4.9, contracts or agreements
containing covenants limiting the freedom of the Company or any Subsidiary
to engage in any line of business in any geographic area or to compete with
any Person or to incur indebtedness for borrowed money;

(iv) except as described in Schedule 4.9 and for reinsurance and
retrocession agreements, contracts or agreements containing "change in
control" or similar provisions;

(v) except as listed on Schedule 4.9, employment contracts or
agreements, including without limitation contracts to employ executive
officers and other contracts with officers or directors of the Company or
any Subsidiary which cannot be terminated by the Company or the Subsidiary
upon notice of sixty days or less without penalty or premium and involve
annual compensation in excess of $100,000 individually; or

(vi) contracts or agreements providing for the indemnification by
the Company or any Subsidiary of any Person except for contracts entered
into in the ordinary course of business consistent with past practice.

(b) Except as set forth on Schedule 4.9, none of the Company or any
Subsidiary is (and, to the Knowledge of the Seller, no other party is) (i) in
material breach of or materially in default under, any of the Contracts (or with
or without notice or lapse of time or both, would be in material breach of or
materially in default under any of the Contracts) or (ii) in breach or default
under any of the Contracts (with or

<PAGE>

without notice or lapse of time or both) if such breach or default would permit
a party other than the Company or a Subsidiary to terminate such Contract. None
of Parent, Seller, the Company or any Subsidiary has delivered or received
notice of termination or written notice of an intention to terminate to or from
any other party to any Contract except as described on Schedule 4.9.

(c) Other than the Ridge Re Treaties and treaties between Ridge Re
and subsidiaries of TRG, Viking and Constitution Re, respectively (copies of
which have been provided to Buyer), Ridge Re is not a party to any reinsurance
or retrocession agreement or treaty, and, except in connection with such
treaties, does not engage in any business. Set forth in Schedule 4.9 is the
amount of cover as of the date of this Agreement available under each of the
Ridge Re Treaties. True and complete copies of the Ridge Re Treaties are
contained in Schedule 1.1D. Each of the Ridge Re Treaties is in full force and
effect and constitutes a legal, valid and binding obligation of the parties
thereto, enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing. None of Parent, Seller,
the Company or any Subsidiary has received any notice from Ridge Re or any
governmental or regulatory authority (i) that any Ridge Re Treaty is not
enforceable against any party thereto or (ii) regarding the availability or
enforceability of the cover under any Ridge Re Treaty. No party to a Ridge Re
Treaty has received notice of termination of, or written notice of an intention
to terminate, any Ridge Re Treaty. No party to a Ridge Re Treaty is in breach
of or violation of or default under any Ridge Re Treaty (or with or without
notice or lapse of time or both, would be in breach of or violation of or
default under any Ridge Re Treaty), except for breaches, violations or defaults
by an Insurance Subsidiary which would not permit Ridge Re to terminate the
applicable Ridge Re Treaty or which would not provide Ridge Re with a defense to
any payment obligation of Ridge Re thereunder.

4.10 No Conflict or Violation. Except as set forth in Schedule 4.10,
------------------------
neither the execution, delivery and performance of this Agreement or any of the
Ancillary Agreements nor the consummation of the transactions contemplated
hereby or thereby will result in (a) a violation of or a conflict with any
provision of the certificate of incorporation or bylaws of Parent, Seller, Ridge
Re, the Company or any Section 4.5 Subsidiary, (b) a breach of, or a default
under, any term or provision of any contract, agreement, indebtedness, lease,
Encumbrance, commitment, license, franchise, Permit, authorization or concession
to which (i) Parent, Seller or Ridge Re is a party or is subject or by which any
assets (including investments) of any of them are bound or (ii) the Company or
any

<PAGE>

Subsidiary is a party or is subject or by which any assets (including
investments) of any of them are bound, which breach or default in the case of
clause (ii) would have, individually or in the aggregate, a Material Adverse
Effect on the Company and the Subsidiaries, taken as a whole, or in the case of
clauses (i) and (ii) would interfere in any material way with the ability of
Parent or Seller to consummate the transactions contemplated by this Agreement
or any of the Ancillary Agreements or the Ridge Re Treaties, as amended by the
applicable Ridge Re Endorsements, (c) subject to obtaining the approvals
referred to in Section 4.11, a violation by Parent, Seller, Ridge Re, the
Company or any Subsidiary of any statute, rule, regulation, ordinance, code,
order, judgment, writ, injunction, decree or award, which violation would have,
individually or in the aggregate, a Material Adverse Effect on the Company and
the Subsidiaries, taken as a whole, or interfere in any material way with the
ability of Parent, Seller or Ridge Re to consummate the transactions
contemplated by this Agreement or any of the Ancillary Agreements, (d) the
imposition of any Encumbrance, restriction or charge on the business of the
Company or any Subsidiary or on any material assets of the Company or the
Subsidiaries, (e) the creation or exercisability of any right of termination,
cancellation or acceleration under any Contract or (f) result in the breach of
any of the terms or conditions of, constitute a default under, or otherwise
cause any impairment of, any Permit, which breach, default or impairment would
result, individually or in the aggregate, in a Material Adverse Effect on the
Company and the Subsidiaries, taken as a whole.

4.11 Consents and Approvals. Except for (i) the approval of this
----------------------
Agreement, the Ancillary Agreements and the transactions contemplated hereby and
thereby (including, without limitation, the Financing), and the new intercompany
tax agreements among the Company and the Subsidiaries which shall be effective
as of the Closing, by each of the governmental and regulatory authorities listed
on Schedule 4.11, (ii) the approval of this Agreement, the Ancillary Agreements
and the transactions contemplated hereby and thereby (including, without
limitation, the Financing), and the new intercompany tax agreements among the
Company and the Subsidiaries which shall be effective as of the Closing, by any
other governmental or regulatory authorities, the failure of which to obtain
would not, individually or in the aggregate, have a Material Adverse Effect on
the Company and the Subsidiaries, taken as a whole, (iii) filings in respect of
the transactions contemplated hereby required to be made for compliance with the
applicable provisions of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations promulgated thereunder, (iv)
------------
filings under the Securities Act and the rules promulgated thereunder in
connection with the sale of the Underwritten Notes, (v) the filing of premerger
notification reports under the HSR Act and (vi) consents, approvals,
authorizations, declarations, filings and registrations required (x) by the
nature of the business or ownership of Holdings and Buyer or (y) solely by
reason of the

<PAGE>

Financing (excluding any consents, approvals, authorizations, declarations,
filings or registrations otherwise required in connection with this Agreement,
the Ancillary Agreements or the transactions contemplated hereby or thereby), no
consent, approval or authorization of, or declaration, filing or registration
with, any governmental or regulatory authority, or any other Person, is required
to be made or obtained by Parent, Seller, Ridge Re, the Company, any Subsidiary,
Buyer or Holdings on or prior to the Closing Date in connection with the
execution or delivery of this Agreement or any of the Ancillary Agreements, the
performance of this Agreement, the Guarantees, the Tax Agreement, or the Ridge
Re Treaties, as amended by the applicable Ridge Re Endorsements, or the
consummation of the transactions contemplated hereby and thereby.

4.12 Financial Statements. (a) Seller has heretofore delivered to
--------------------
Buyer the Company GAAP Financial Statements, the Subsidiary GAAP Financial
Statements, the Ridge Re GAAP Financial Statements, the Company Interim
Financial Statements, the Subsidiary Interim Financial Statements, the Ridge Re
Interim Financial Statements and the Convention Statements. A copy of each of
the foregoing financial statements is included in Schedule 4.12.

(b) Except as otherwise set forth therein, (i) the Company GAAP
Financial Statements are based on the books and records of the Company and its
Subsidiaries, fairly present in all material respects the financial condition
and consolidated results of operations of the Company and its Subsidiaries, as
of the dates and for the periods indicated therein, have been prepared in
accordance with GAAP (as in effect at the time of the respective financial
statements) consistently applied, and have been audited by KPMG Peat Marwick
LLP, (ii) each of the Subsidiary GAAP Financial Statements are based on the
books and records of the GAAP Subsidiaries to which such statements relate,
fairly present in all material respects the financial condition and consolidated
results of operations of such Subsidiaries, as of the dates and for the periods
indicated therein, have been prepared in accordance with GAAP (as in effect at
the time of the respective financial statements) consistently applied, and have
been audited by KPMG Peat Marwick LLP and (iii) the Ridge Re GAAP Financial
Statements are based on the books and records of Ridge Re, fairly present in all
material respects the financial condition and results of operation of Ridge Re,
as of the dates and for the periods indicated therein, have been prepared in
accordance with GAAP (as in effect at the time of the respective financial
statements) consistently applied, and have been audited by KPMG Peat Marwick
LLP.

(c) The Company Interim Financial Statements, the Subsidiary Interim
Financial Statements and the Ridge Re Interim Financial Statements were prepared
in the ordinary course of business and have been prepared on a consistent basis
through the periods indicated and in a manner consistent with that employed

<PAGE>

in the Company GAAP Financial Statements, the Subsidiary GAAP Financial
Statements and the Ridge Re GAAP Financial Statements, as the case may be. The
Company Interim Financial Statements, the Subsidiary Interim Financial
Statements and the Ridge Re Interim Financial Statements do not contain full
footnote disclosures in accordance with United States generally accepted
accounting principles and are subject to normal recurring year-end adjustments,
but otherwise fairly present in all material respects the financial condition
and results of operations of the Company, the GAAP Subsidiaries and Ridge Re, as
the case may be, as of the dates and for the periods indicated therein except as
otherwise set forth therein.

(d) Except as otherwise set forth therein, the Convention Statements
and the statutory balance sheets and income statements included in such
Convention Statements fairly present in all material respects the statutory
financial condition and results of operations of the respective Insurance
Subsidiaries and Ridge Re, as the case may be, as of the dates and for the
periods indicated therein and have been prepared in accordance with Statutory
Accounting Principles (as in effect at the time of the respective financial
statements) consistently applied throughout the periods indicated, except as
expressly set forth therein. The statutory balance sheets and income statements
included in the Convention Statements for the years ended December 31, 1993 and
1994 have been audited by KPMG Peat Marwick LLP.

4.13 Litigation. To the Knowledge of Seller, except as set forth on
----------
Schedule 4.13, there is no action, order, writ, injunction, judgment, fine or
decree outstanding or suit, litigation, proceeding, labor dispute (other than
routine grievance procedures or routine, uncontested claims for benefits under
any benefit plans for any officers, employees or agents of the Company or any
Subsidiary (collectively, "Personnel")), arbitral action, investigation or
---------
reported claim, in each case including, without limitation, those involving any
governmental or regulatory authority and excluding those relating to insurance
and reinsurance policies (collectively, "Actions") pending or threatened by or
-------
against or relating to (i) the Company or any Subsidiary, (ii) any benefit plan
for Personnel or any fiduciary or administrator thereof or (iii) the
transactions contemplated by this Agreement and the Ancillary Agreements. None
of the Company or any Subsidiary is in default with respect to any order, writ,
injunction, judgment, fine or decree of any court or governmental or regulatory
agency, and there are no unsatisfied judgments against the Company or any
Subsidiary which would have, individually or in the aggregate, a Material
Adverse Effect on the Company and the Subsidiaries, taken as a whole.

4.14 Liabilities. (a) Except as set forth in Schedule 4.14, the
-----------
Company and the Subsidiaries do not have any direct or indirect indebtedness,
liability, claim, loss, damage, deficiency, obligation or responsibility, fixed
or unfixed,

<PAGE>

choate or inchoate, liquidated or unliquidated, secured or unsecured, accrued,
absolute, contingent or otherwise ("Liabilities"), other than (i) Liabilities
-----------
fully and adequately reflected (including by reducing any numerical amount set
forth) in one or more line items on, reserved on, or disclosed in the footnotes
to, the balance sheets included in the Company Interim Financial Statements or
the Subsidiary Interim Financial Statements, or disclosed in the footnotes to
the Company GAAP Financial Statements or the Subsidiary GAAP Financial
Statements, (ii) Liabilities incurred in the ordinary course of business,
consistent with past practice and the provisions of this Agreement and the
Ancillary Agreements, (iii) Liabilities relating to future benefits, losses,
claims and expenses arising under insurance and reinsurance policies of the
Insurance Subsidiaries, (iv) Liabilities disclosed in response to any other
representation, (v) Liabilities of a type that are subject to any other
representation (without regard to any specific exclusions from such
representation, including any specific exclusions from the definitions used
therein) and (vi) Liabilities which have, or are reasonably likely to have a net
ultimate cost of $25,000 or less, on an individual basis or in the aggregate to
the extent such Liabilities arise out of a related series of events.

(b) As of the date of this Agreement, no more than $358,500,000
aggregate principal amount of indebtedness is outstanding under the credit
agreements contained in Schedule 4.14 (the "Subsidiary Credit Agreements").
----------------------------

(c) The Company and the Subsidiaries have no Liabilities for rate
roll-backs or refunds under California Proposition 103 and all proceedings
thereunder relating to the Company and the Subsidiaries have ceased.

(d) Each of the Company and each Subsidiary has paid in full all
guaranty fund assessments required by any regulatory authority to be paid by it
prior to the date of this Agreement. As of the date of this Agreement, except
as set forth in Schedule 4.14 and except as and to the extent paid prior to June
30, 1995 or reserved against in the Convention Statements or disclosed in the
notes thereto, the Company and the Subsidiaries have not received any guarantee
fund assessments.

4.15 Investments. (a) As of the date of this Agreement, at least 85%
-----------
of the investment portfolio for the Company and the Subsidiaries consists of
cash and Cash Equivalents and at least 61% of the investment portfolio
(excluding cash and Cash Equivalents) for the Company and the Subsidiaries
consists of fixed income securities rated at least AA by Moody's or by S&P. As
of the date hereof, at least 57% of the fixed income portfolio (excluding cash
and Cash Equivalents) has a maturity of one year or less.

(b) To the Knowledge of Seller, as of the Closing Date, the Company
and the Subsidiaries have good and marketable

<PAGE>

title to the investments in their investment portfolios, provided that no
--------
representation is made as to the transferability thereof.

4.16 Reserves. Seller has delivered to Buyer true and complete copies
--------
of all actuarial reports or actuarial certificates in the possession or control
of Parent, Seller, the Company or any of the Subsidiaries relating to the
adequacy of the claims reserves of any of the Subsidiaries for any period ended
on or after December 31, 1993. Notwithstanding the foregoing representations
contained in this Section or anything contained in Section 4.12, 4.14 or 6.2,
Holdings and Buyer acknowledge that Parent and Seller are not making any
representations, express or implied in or pursuant to this Agreement, concerning
the loss reserves or loss adjustment expense reserves of the Company or any of
the Subsidiaries including, without limitation, (i) whether such reserves are
adequate or sufficient, or (ii) whether such reserves were determined in
accordance with any actuarial, statutory or other standard, or concerning any
other "line item" or asset, liability or equity amount which would be affected
thereby.

4.17 Compliance with Law; Permits; Regulatory Matters. (a) Except as
------------------------------------------------
set forth on Schedule 4.17, the Company and the Subsidiaries are in compliance
with all applicable laws, statutes, ordinances and regulations, whether Federal,
foreign, state or local, except where the failure to comply would not,
individually or in the aggregate, have a Material Adverse Effect on the Company
and the Subsidiaries, taken as a whole. Since January 1, 1993, none of the
Company or any Subsidiary has received any written notice to the effect that, or
otherwise been advised that, it is not in compliance with any such statute,
regulation, order, ordinance or other law where the failure to comply would,
prior to June 30, 1998, individually or in the aggregate, have a Material
Adverse Effect on the Company and the Subsidiaries, taken as a whole.

(b) Except as set forth on Schedule 4.17, the Company and the
Subsidiaries hold all Permits necessary for the ownership and conduct of the
respective businesses of the Company and the Subsidiaries in each of the
jurisdictions in which the Company and the Subsidiaries conduct or operate their
respective businesses in the manner now conducted, and such Permits are in full
force and effect except where the failure to hold any Permit or the failure of
any Permit to be in full force and effect would not, individually or in the
aggregate, have a Material Adverse Effect on the Company and the Subsidiaries,
taken as a whole. The consummation of the transactions contemplated by this
Agreement will not result in any revocation, cancellation or suspension of any
such Permit except as a result of the status of Buyer and its Affiliates, and,
there are no pending or threatened suits, proceedings or investigations with
respect to revocation, cancellation, suspension or nonrenewal thereof, and,
there has occurred no event which (whether with notice or lapse of time or both)
will result in such a revocation, cancellation, suspension

<PAGE>

or nonrenewal thereof, in any such case except where such a revocation,
cancellation, suspension or non-renewal would not, individually or in the
aggregate, have a Material Adverse Effect on the Company and the Subsidiaries,
taken as a whole.

(c) All insurance policies issued by the Insurance Subsidiaries, as
now in force are, to the extent required under applicable law, are in a form
acceptable to applicable regulatory authorities or have been filed and not
objected to (or such objection has been withdrawn or resolved) by such
authorities within the period provided for objection, except where such failure
or objection would not, individually or in the aggregate, have a Material
Adverse Effect on the Company and the Subsidiaries, taken as a whole. Neither
the Company nor any Subsidiary which is not an Insurance Subsidiary has issued
any insurance policies. Except as set forth on Schedule 4.17, (i) all material
reports, statements, documents, registrations, filings and submissions to state
insurance regulatory authorities complied in all material respects with
applicable law in effect when filed and (ii) no material deficiencies have been
asserted by any such regulatory authority with respect to such reports,
statements, documents, registrations, filings or submissions that have not been
satisfied or that would, individually or in the aggregate, have a Material
Adverse Effect on the Company and the Subsidiaries, taken as a whole. Except as
set forth on Schedule 4.17, all premium rates established by the Insurance
Subsidiaries that are required to be filed with or approved by insurance
regulatory authorities have been so filed or approved, the premiums charged
conform to the premiums so filed or approved and comply (or complied at the
relevant time) with the insurance laws applicable thereto except where such
failures to comply, individually or in the aggregate, would not have a Material
Adverse Effect on the Company and the Subsidiaries, taken as a whole.

4.18 No Brokers. Except as previously disclosed in writing to Buyer,
----------
neither Parent, Seller nor the Company has employed, or is subject to any valid
claim of, any broker, finder, consultant or other intermediary in connection
with the transactions contemplated by this Agreement who will be entitled to a
fee or commission in connection with such transactions. Parent is solely
responsible for any such payment, fee or commission that may be due to any
Person so previously disclosed to Buyer in connection with the transactions
contemplated hereby.

4.19 No Other Agreements to Sell the Assets or the Company. Except as
-----------------------------------------------------
set forth in Schedule 4.19, none of Parent, Seller, the Company or any
Subsidiary has any agreement, absolute or contingent, with any other Person to
sell the capital stock, assets (other than sales of assets that would not be
prohibited under Section 4.7(c)) or business of the Company or any Subsidiary or
to effect any merger, consolidation or other reorganization of the Company or
any Subsidiary or to enter into

<PAGE>

any agreement with respect thereto, except for any agreements regarding the
First Quadrant Final Sale.

4.20 Proprietary Rights. (a) Except as set forth in Schedule 4.20,
------------------
Parent, Seller and their Affiliates (other than the Company and the
Subsidiaries) have no right or title to or interest in the trademarks, service
marks, copyrights, trade names and the applications and registrations therefor
and the trade secrets, software and other proprietary rights used in and
material to the business of the Company or any of its Subsidiaries
(collectively, "Intellectual Property").
---------------------

(b) Schedule 4.20 sets forth a complete and correct list and brief
description of all Intellectual Property that is material to the Company or any
Subsidiary. With respect to intellectual property owned by the Company or a
Subsidiary, such entity has the sole and exclusive right to use and is the sole
and exclusive registered owner of all right, title and interest in and to the
Intellectual Property. The Intellectual Property which is not owned by the
Company or a Subsidiary is being used by the Company or a Subsidiary only with
the consent of or license from the rightful owner thereof, and all such licenses
are in full force and effect.

(c) To the Knowledge of Seller no activity in which the Company or a
Subsidiary is engaged or any product which the Company or a Subsidiary sells, or
any advertising that they employ, or the use of any of the Intellectual
Property, breaches, violates, infringes or interferes with any rights of any
third party or, except for the payment of computer software licensing fees,
requires payment for the use of any patent, trade-name, trade secret, trade-
mark, copyright or other intellectual property right or technology of another.

4.21 Employee Benefit Plans. (a) Schedule 4.21 contains a true and
----------------------
complete list of each "employee benefit plan" (within the meaning of section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), including, without limitation, multiemployer plans within the meaning
-----
of ERISA section 3(37)), stock purchase, stock option, severance, employment,
change-in-control, fringe benefit, collective bargaining, bonus, incentive,
deferred compensation and all other employee benefit plans, agreements,
programs, policies or other arrangements, whether or not subject to ERISA
(including any funding mechanism therefor now in effect or required in the
future as a result of the transactions contemplated by this Agreement or
otherwise), whether formal or informal, oral or written, legally binding or not,
under which any employee or former employee of the Company or any Subsidiary has
any present or future right to benefits or under which the Company or any
Subsidiary has any present or future liability. All such plans, agreements,
programs, policies and arrangements shall be collectively referred to as the
"Company Plans".
-------------

<PAGE>

(b) With respect to each Company Plan, the Company has delivered to
the Buyer a current, accurate and complete copy (or, to the extent no such copy
exists, an accurate description) thereof and, to the extent applicable, (i) any
related trust agreement, annuity contract or other funding instrument; (ii) the
most recent determination letter; (iii) any summary plan description and other
written communications (or a description of any oral communications) by the
Company or any Subsidiary to their employees concerning the extent of the
benefits provided under a Company Plan; and (iv) for the three most recent years
(A) the Form 5500 and attached schedules; (B) audited financial statements;
(C) actuarial valuation reports; and (D) attorney's response to an auditor's
request for information.

(c) (i) Each Company Plan, in all material respects, has been
established and administered in accordance with its terms and in compliance with
the applicable provisions of ERISA, the Code and other applicable laws, rules
and regulations; (ii) each Company Plan which is intended to be qualified within
the meaning of Code section 401(a) is so qualified and has received a favorable
determination letter as to its qualification and nothing has occurred, whether
by action or failure to act, which would cause the loss of such qualification;
(iii) except as listed on Schedule 4.21, with respect to any Company Plan, no
actions, suits or claims (other than routine claims for benefits in the ordinary
course) are pending or threatened, no facts or circumstances exist which could
give rise to any such actions, suits or claims, and the Company will promptly
notify Buyer in writing of any pending or threatened claims arising between the
date hereof and the Closing Date; (iv) neither the Company, any Subsidiary nor
any other party has engaged in a prohibited transaction, as such term is defined
under Code section 4975 or ERISA section 406, which would subject the Company,
any Subsidiary or the Buyer to any material taxes, penalties or other
liabilities under Code section 4975 or ERISA sections 409 or 502(i); (v) no
event has occurred and no condition exists that would subject the Company,
either directly or by reason of its affiliation with any member of its
"Controlled Group" (defined as any organization which is a member of a
controlled group of organizations within the meaning of Code sections 414(b),
(c), (m) or (o)), or any Subsidiary to any material tax, fine or penalty imposed
by ERISA, the Code or other applicable laws, rules and regulations including,
but not limited to the taxes imposed by Code sections 4971, 4972, 4977, 4979,
4980B, 4976(a) or the fine imposed by ERISA section 502(c); (vi) all insurance
premiums required to be paid with respect to Company Plans as of the Closing
Date have been or will be paid prior thereto and adequate reserves have been
provided for on the Company's Interim Financial Statements as of September 30,
1995, to the extent required by GAAP, for any premiums (or portions thereof)
attributable to service on or prior to the Closing Date; (vii) for each Company
Plan with respect to which a Form 5500 has been filed, no material change has
occurred with respect to the matters covered by the most recent Form since the
date thereof;

<PAGE>

(viii) all contributions required to be made prior to the Closing Date under the
terms of any Company Plan, the Code, ERISA or other applicable laws, rules and
regulations have been or will be timely made and adequate reserves have been
provided for on the Company's Interim Financial Statements as of September 30,
1995, to the extent required by GAAP, for all benefits attributable to service
on or prior to the Closing Date; (ix) no Company Plan provides for an increase
in benefits on or after the Closing Date; and (x) no Company Plan (excluding any
agreement between the Company and individual employees) contains any contractual
language which limits the Company's ability to amend or terminate such Company
Plan without obligation or liability (other than those obligations and
liabilities for which specific assets have been set aside in a trust or other
funding vehicle or reserved for on the Company's Interim Financial Statements as
of September 30, 1995).

(d) (i) No Company Plan has incurred any "accumulated funding
deficiency" as such term is defined in ERISA section 302 and Code section 412
(whether or not waived); (ii) no event or condition exists which would be deemed
a reportable event within the meaning of ERISA section 4043 which could result
in a material liability to the Company, any member of its Controlled Group or
any Subsidiary, and no condition exists which could subject the Company, any
member of its Controlled Group or any Subsidiary to a material fine under ERISA
section 4071; (iii) as of the Closing Date, the Company, each member of its
Controlled Group and each Subsidiary will have made all premium payments
required to be made prior to the Closing Date to the PBGC; (iv) neither the
Company, any member of its Controlled Group nor any Subsidiary is subject to any
liability to the PBGC for any plan termination occurring on or prior to the
Closing Date; (v) no amendment has occurred which has required or would require
the Company, any member of its Controlled Group or any Subsidiary to provide
security pursuant to Code section 401(a)(29); and (vi) neither the Company, any
member of its Controlled Group nor any Subsidiary has engaged in a transaction
which could subject it to material liability under ERISA section 4069.

(e) With respect to each of the Company Plans which is not a
multiemployer plan within the meaning of section 4001(a)(3) of ERISA but is
subject to Title IV of ERISA, the funded status of each such Company Plan, as of
January 1, 1995, is as reported in the actuarial valuation reports dated as of
January 1, 1995. To the Knowledge of Seller, no material adverse change in the
funded status of such Company Plans has occurred since January 1, 1995, and no
material defects or omissions existed in the data provided to the preparers of
the actuarial valuation reports discussed in the preceding sentence.

(f) There are no multiemployer plans (within the meaning of section
4001(a)(3) of ERISA) to which the Company, any member of its Controlled Group or
any Subsidiary has or had any

<PAGE>

liability or contributes (or has at any time contributed or had an obligation to
contribute).

(g) (i) Each Company Plan which is intended to meet the requirements
for tax-favored treatment under Subchapter B of Chapter 1 of Subtitle A of the
Code meets such requirements; and (ii) the Company and the Subsidiaries have no
trusts intended to be qualified within the meaning of Code section 501(c)(9),
and, except as listed on Schedule 4.21, had no such trusts in the past.

(h) Schedule 4.21 sets forth, on a plan-by-plan basis, the present
value of any benefits payable presently or in the future to present or former
employees of the Company or any Subsidiary under any Company Plan (excluding any
agreements between the Company and individual employees which were not entered
into as part of any plan or program) that is not fully funded and not subject to
the reporting requirements of ERISA (if such amounts are not reflected in the
financial statements included in Schedule 4.12) which present value is as
reported in the most recent actuarial valuation or other reports done with
respect to each such plan. To the Knowledge of Seller, no material adverse
increase in the amount of such present values has occurred since the date of the
most recent report, and no material defects or omissions existed in the reports,
or, if applicable, in the data provided to the preparers of the reports.

(i) Except as set forth on Schedule 4.21 or referenced in Section
9.5, no Company Plan exists which could result in the payment to any Company
employee or Subsidiary employee of any money or other property or accelerate or
provide any other rights or benefits to any Company employee or Subsidiary
employee as a result of the transactions contemplated by this Agreement, whether
or not such payment would constitute a parachute payment within the meaning of
Code section 280G. The aggregate cost to the Company and its Subsidiaries, in
the event that all Company Plans set forth in Schedule 4.21 are triggered, shall
not exceed $1,050,000.

(j) Neither the Company nor any Subsidiary is obligated or otherwise
required to pay any bonuses (annual or otherwise) to Joseph W. Brown, Jr., or to
any managing director of the Company on or after the date of the Closing.

(k) No Company Plan operates within or is subject to the jurisdiction
of any foreign country, other than as described on Schedule 4.21.

(l) None of the amounts payable to any Company employee or any
Subsidiary employee as a result of the transactions contemplated by this
Agreement will be non-deductible under Section 280G of the Code.

<PAGE>

4.22 Employment-Related Matters. Except as set forth in Schedule
--------------------------
4.22, (a) none of the Company or the Subsidiaries is a party to, or otherwise
bound by, any consent decree with, or citation by, any government agency
relating to employees or employment practices, (b) none of the Company or any of
the Subsidiaries has closed any plant or facility, or effectuated any layoffs of
employees within the past six months, nor have the Company or the Subsidiaries
planned or announced any such action or programs for the future, and (c) the
Company and the Subsidiaries are in compliance with their respective obligations
pursuant to the Worker Adjustment and Retraining Notification Act of 1988 and
any similar state notification law.

4.23 Transactions with Certain Persons. (a) To the Knowledge of
---------------------------------
Seller, neither any officer, director or employee of Parent, Seller, the Company
or any Subsidiary nor any member of any such Person's immediate family is
presently a party to any material transaction with the Company or any
Subsidiary, including, without limitation, any Contract, or other binding
arrangement (i) providing for the furnishing of material services (except in
such Person's capacity as an officer, director, employee or consultant) by, (ii)
providing for the rental of material real or personal property from, or (iii)
otherwise requiring material payments to (other than for services as officers,
directors or employees of Parent, Seller, the Company or any Subsidiary) any
such Person.

(b) Schedule 4.23 sets forth all contracts, agreements and
arrangements in effect on or after January 1, 1995, and all transactions
(including, without limitation, the provision of any services or the sale of any
goods) since January 1, 1994 between the Company or any Subsidiary, on the one
hand, and Parent or any Affiliate of Parent (excluding the Company and the
Subsidiaries, but including TRG and any of its subsidiaries), on the other,
excluding contracts, agreements and arrangements (i) relating to the use or
purchase of products leased or sold by Parent in the ordinary course of Parent's
document processing business, (ii) involving payments by or to the Company or
any Subsidiary that do not exceed $100,000 in the aggregate or (iii)
specifically referred to in the financial statements contained in Schedule 4.12.
Certain Subsidiaries hold $275,000,000 aggregate principal amount of promissory
notes issued by Seller and unconditionally guaranteed by Parent and $75,000,000
aggregate principal amount of notes issued by Credit Corp. (such notes,
collectively, the "Seller Notes"). Schedule 4.23 identifies the current holders
------------
of each of the Seller Notes.
(c) Except in the ordinary course of business consistent with past
practice, since the Balance Sheet Date, Seller and the Company and/or any
Subsidiary have not settled any intercompany trade receivables and payables.

4.24 Taxes. (a) Filing of Tax Returns. Seller and the
----- ---------------------
Company (and any affiliated group of which the Company is now or has been a
member) have timely filed with the appropriate

<PAGE>

taxing authorities all Federal, and to the Knowledge of Seller, state and local
Tax Returns and Information Returns required to be filed through the date
hereof. All such Federal, and to the Knowledge of Seller, state and local Tax
Returns and Information Returns are complete and accurate in all material
respects. The Company is a member of an affiliated group of corporations,
within the meaning of Section 1504 of the Code, that includes Seller and Parent,
and Parent is the common parent of the affiliated group.

(b) Payment of Taxes. All Taxes shown in the Tax Returns referred to
----------------
in Section 4.24(a) above that are due and payable by the Company and its
Subsidiaries before the date hereof have been paid.

(c) Liens for Taxes. There are no liens or other Encumbrances on any
---------------
of the assets of the Company or any Subsidiary that arose in connection with any
failure (or alleged failure) to pay any Tax.

(d) Audit History. Except as set forth in Schedule 4.24, there is no
-------------
action, suit, proceeding, investigation, audit or claim now pending or, to the
Knowledge of Seller, proposed against or with respect to the Company or any of
its Subsidiaries or any affiliated group of which the Company and its
Subsidiaries is or has been a member that relates to Tax liabilities
attributable to items of income, gain, deduction, loss or credits of the Company
or any of its Subsidiaries.

(e) Prior Affiliated Groups. Except as set forth in Schedule 4.24
-----------------------
and except for the affiliated group of corporations of which the Company and the
Subsidiaries is currently a member and of which Parent is the common parent, the
Company and the Subsidiaries have never been members of an affiliated group of
corporations, within the meaning of Section 1504 of the Code.

(f) Withholding. The Company and the Subsidiaries have withheld and
-----------
paid all Federal, and to the Knowledge of Seller, state and local Taxes required
to have been withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder or other third party.

(g) FIRPTA. Neither the Company nor any of the Subsidiaries have
------
been a United States real property holding corporation within the meaning of
Section 897(c)(2) of the Code during the five-year period ending on the date
hereof.

(h) Material Adverse Effect. A representation with respect to Taxes
-----------------------
contained in this Section 4.24 shall be deemed to be accurate unless an
inaccuracy contained therein has a Material Adverse Effect on the Company and
the Subsidiaries.

<PAGE>

4.25 Reinsurance and Retrocessions. Schedule 4.25 contains a list as
-----------------------------
of the date of this Agreement of all treaty reinsurance or retrocession treaties
and agreements in force to which any Subsidiary is a party (including any
terminated or expired treaty or agreement under which there remains any
outstanding liability with respect to paid or unpaid case reserves in excess of
$500,000), any terminated or expired treaty or agreement under which there
remains any outstanding liability from one reinsurer with respect to paid or
unpaid case reserves in excess of $100,000 and any treaty or agreement with any
Affiliate of such Subsidiary, the effective date of each such treaty or
agreement, and the termination date of any treaty or agreement which has a
definite termination date. To the Knowledge of Seller, no Subsidiary is in
default in any respect as to any provision of any reinsurance or retrocession
treaty or agreement or has failed to meet the underwriting standards required
for any business reinsured thereunder except for defaults which, individually or
in the aggregate, would not have a Material Adverse Effect on the Company and
the Subsidiaries, taken as a whole.

4.26 1992/93 Restructuring. All novations made pursuant to the
---------------------
1992/93 Restructuring and any amendments to the Ridge Re Treaties made prior to
the date hereof, were made in accordance with all applicable laws, rules and
regulations at the time such novations or amendments were completed except where
the failure to do so (i) would not, individually or in the aggregate, have a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole,
or (ii) was a result of the failure by the Company or any Subsidiary to obtain
the consent of any insured or policyholder to the novation or assumption of the
relevant insurance policy. Notwithstanding the foregoing, Buyer and Holdings
acknowledges that Seller and Parent shall have no liability to Buyer or Holdings
for breach of this representation with respect to any novation or assumption, or
any amendment to the Ridge Re Treaties, which results in any liability for the
Company or any of its Subsidiaries, if there is a corresponding benefit realized
(or any liability avoided) by the Company or any other Subsidiary or TRG or any
of its subsidiaries.

4.27 Capital Commitments. Schedule 4.27 contains a list of all
-------------------
capital commitments as of the date of this Agreement of the Company or any
Subsidiary in excess of $100,000.

4.28 Environmental Laws. (a) Except as set forth on Schedule 4.28,
------------------
each of the Company and each Subsidiary complies and has complied with all
applicable Environmental Laws, and possesses and complies with and has possessed
and complied with all Environmental Permits required under such laws except
where the failure to be in possession of or to comply with such Environmental
Permits, or where the failure to be in compliance with any Environmental Law,
would not have, individually or in the aggregate, a Material Adverse Effect on
the Company and the Subsidiaries, taken as a whole. There are no past, present,
or

<PAGE>

anticipated future events, conditions, circumstances, practices, plans or legal
requirements that could reasonably be expected to prevent, or materially
increase the burden on the Company or any Subsidiary of their complying with
applicable Environmental Laws or of their obtaining, renewing, or complying with
all Environmental Permits required under such laws. There are and have been no
Materials of Environmental Concern or other conditions at any property owned,
operated or otherwise used by the Company or any Subsidiary now or in the past,
or at any other location, that could reasonably be expected to give rise to
liability of the Company or any Subsidiary under any Environmental Law. Parent,
Seller and the Company have provided to Buyer true and complete copies of all
Environmental Reports prepared within the last five years in their possession or
control.

(b) Notwithstanding the representations contained in this Section,
Buyer acknowledges that Parent and Seller are not making any representations
(express or implied in or pursuant to this Agreement) with respect to any
violation of or noncompliance with Environmental Law or Environmental Permits,
or failure to obtain Environmental Permits, in each case by reason of any policy
of insurance, reinsurance, indemnity, guaranty or assumption of liability of any
party, entered into by the Company or any Insurance Subsidiary.

4.29 Acquisition for Investment. Each of Seller and Parent
--------------------------
acknowledges that the Securities have not been registered under the Securities
Act, or under any state securities laws. Each of Seller and Parent (to the
extent Parent acquires Securities pursuant to Section 11.3) is acquiring the
Securities solely for its own account and not with a view to any distribution or
other disposition of such Securities or any part thereof, or interest therein,
except in accordance with the Securities Act. Each of Seller and Parent is an
"accredited investor" (as defined in Rule 501 of Regulation D under the
Securities Act).

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF BUYER AND HOLDINGS
----------------------------------------------------

Buyer and Holdings hereby represent and warrant to Seller and Parent
as follows:

5.1 Organization of Buyer and Holdings. Each of Buyer and Holdings
----------------------------------
is duly organized, validly existing and in good standing under the laws of the
State of Delaware and has full corporate power and authority to conduct its
business and to own and lease its properties.

5.2 Authorization. Each of Buyer and Holdings has all necessary
-------------
corporate authority to enter into this Agreement

<PAGE>

and the Tax Agreement and has taken all necessary corporate action to consummate
the transactions contemplated hereby and thereby and to perform its obligations
hereunder and thereunder. This Agreement and the Tax Agreement have been duly
executed and delivered by each of Buyer and Holdings. Assuming the due
execution of this Agreement by Parent and Seller, this Agreement is a legal,
valid and binding obligation of each of Buyer and Holdings enforceable against
each of them in accordance with its terms, and assuming the due execution of the
Tax Agreement by Parent, Seller and the Company, the Tax Agreement is a legal,
valid and binding obligation of Buyer enforceable against Buyer in accordance
with its terms, in each case, subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at law) and an
implied covenant of good faith and fair dealing. Subject to the occurrence of
the Closing, the TOPrS Side Letter will be duly executed and delivered by
Holdings and the partnership party thereto. Upon execution and delivery by
Holdings and such partnership of the TOPrS Side Letter and assuming the due
execution of the TOPrS Side Letter by Seller, the TOPrS Side Letter will be a
legal, valid and binding obligation of Holdings and such partnership,
enforceable in accordance with its terms, subject to the effects of bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and other similar
laws relating to or affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at law) and an
implied covenant of good faith and fair dealing.

5.3 No Conflict or Violation. Neither the execution, delivery and
------------------------
performance of this Agreement or the Tax Agreement by Holdings and Buyer, nor
the execution, delivery and performance of the Indenture or the TOPrS Side
Letter or the issuance of Debentures by Holdings, nor the execution, delivery
and performance of the Trust Agreement by Holdings, as depositor, nor the
issuance of the Preferred Securities by Trust, nor the issuance, if issued, of
Holdings Common Stock by Holdings pursuant to the provisions of Section 11.3 nor
the consummation by Buyer, Holdings or Trust of the transactions contemplated
hereby or thereby will result in (a) a violation of or a conflict with any
provision of the certificate of incorporation or bylaws, in the case of Holdings
or Buyer, or any provisions of the Trust Agreement, in the case of Trust, (b) a
breach of, or a default under, any term or provision of any contract, agreement,
indebtedness, lease, Encumbrance, commitment, license, franchise, Permit,
authorization or concession (including any agreements, documents or instruments
(the "Financing Documents") constituting part of the financing required to
-------------------
consummate the transactions contemplated by this Agreement (the "Financing")) to
---------
which Buyer, Holdings or Trust is a party or is subject or by which any assets
of Buyer, Holdings or Trust are bound, which breach or default is in a Financing
Document or would, individually or in the

<PAGE>

aggregate, have a Material Adverse Effect on Buyer or Holdings or interfere in
any material way with the ability of Buyer or Holdings to consummate the
transactions contemplated by this Agreement, the TOPrS Side Letter and the Tax
Agreement, to the extent a party thereto, or (c) subject to obtaining the
approvals referred to in Section 4.11, a violation by Buyer, Holdings or Trust
of any statute, rule, regulation, ordinance, code, order, judgment, writ,
injunction, decree or award, which violation would, individually or in the
aggregate, have a Material Adverse Effect on Buyer or Holdings or their
respective ability to consummate the transactions contemplated by this Agreement
and the Tax Agreement, to the extent a party thereto.

5.4 No Brokers. Except for the services of Merrill Lynch & Co.,
----------
neither Buyer nor Holdings has employed, or is subject to the valid claim of,
any broker, finder, consultant or other intermediary in connection with the
transactions contemplated by this Agreement who will be entitled to a fee or
commission in connection with such transactions. Buyer is solely responsible
for any such payment, fee or commission that may be due to Merrill Lynch & Co.
in connection with the transactions contemplated by this Agreement.

5.5 Acquisition for Investment. Buyer acknowledges that the Stock
--------------------------
has not been registered under the Securities Act or under any state securities
laws. Buyer is acquiring the Stock solely for its own account and not with a
view to any distribution or other disposition of the Stock or any part thereof,
or interest therein, except in accordance with the Securities Act. Buyer is an
"accredited investor" (as defined in Rule 501 of Regulation D under the
Securities Act).

5.6 Organizational Documents. Copies of the certificate of
------------------------
incorporation and bylaws of Buyer and Holdings have heretofore been delivered to
Seller and such copies are true, accurate and complete, without any amendment,
modification or supplement, as of the date of this Agreement and the Closing
Date (except such amendments, modifications or supplements which would not have
a Material Adverse Effect on Seller or which change the amount of authorized
capital stock).

5.7 Capitalization of Buyer. (a) All the outstanding shares of
-----------------------
capital stock of Buyer are owned, directly or indirectly, by Holdings. As of
the Closing Date, investment partnerships affiliated with KKR shall own,
directly or indirectly, no less than 70% of the common stock of Holdings, which
percentage shall be reduced to reflect any investment made by Parent and/or
Seller pursuant to Section 11.3.

(b) In the event that Parent and/or Seller acquires any of the
Holdings Common Stock as provided in Section 11.3 hereof, such shares will be
duly authorized, validly issued, fully paid and nonassessable, and free of
preemptive rights.

<PAGE>

5.8 Consents and Approvals. Except for (i) consents, approvals,
----------------------
authorizations, declarations, filings and registrations required by the nature
of the business or ownership of Parent, Seller, the Company and the
Subsidiaries, (ii) filings in respect of the transactions contemplated hereby
required to be made for compliance with the applicable provisions of the
Exchange Act and the rules and regulations promulgated thereunder, (iii) filings
under the Securities Act and the rules promulgated thereunder in connection with
the sale of the Underwritten Notes and (iv) the filing of premerger notification
reports under the HSR Act, no consents, approval or authorization of, or decla-
ration, filing or registration with, any governmental or regulatory authority,
or any other Person, is required to be made or obtained by Buyer, Holdings or
any of their respective Affiliates in connection with the execution, delivery
and performance of this Agreement, the Ancillary Agreements and the consummation
of the transactions contemplated hereby and thereby.

5.9 Financial Obligations. Buyer has received and delivered copies
---------------------
to Seller of (i) a commitment letter from senior lenders regarding the
transactions contemplated by this Agreement, (ii) the Underwriter Letter, (iii)
a letter with respect to equity Financing (other than that to be provided by
management of the Company), which letter is addressed to Seller and (iv) an
agreement in principal between Buyer and management of the Company with respect
to the investment by management referred to in Section 8.19.

5.10 Solvency. At the Closing (after and giving effect to the
--------
acquisition of the Stock and the Financing), neither Buyer, Holdings, Trust nor
the Company will (i) be insolvent (either because its financial condition is
such that the sum of its debts is greater than the fair value of its assets or
because the present fair saleable value of its assets will be less than the
amount required to pay its probable liability on its debts as they become
absolute and matured), (ii) has unreasonably small capital with which to engage
in its business or (iii) has incurred or plan to incur debts beyond its ability
to pay as they become absolute and matured.

5.11 Trust. (a) As of the Closing, (i) Trust shall have been duly
-----
created and be validly existing in good standing as a business trust under the
Business Trust Act of the State of Delaware with full business trust power and
authority to (A) own property and to conduct its business, (B) issue and perform
its obligations under the Preferred Securities and the Common Securities and (C)
consummate the transactions contemplated by the Trust Agreement; (ii) Trust
shall be duly qualified to transact business as a foreign company and shall be
in good standing in any other jurisdiction in which such qualification is neces-
sary, except to the extent that the failure to so qualify or be in good standing
would not have a Material Adverse Effect on Trust; (iii) Trust shall not be a
party to or otherwise bound by any material agreement other than those listed in
Schedule 5.11;

<PAGE>

(iv) Trust shall be treated for United States federal income tax purposes as a
grantor trust and not as an association taxable as a corporation; and (v) Trust
shall be reported as a consolidated subsidiary of Holdings pursuant to GAAP.

(b) At the Closing, the Common Securities shall be duly authorized by
the Trust Agreement and, when issued and delivered by Trust to Holdings against
payment therefor, will be validly issued and (subject to the terms of the Trust
Agreement) fully paid and non-assessable undivided beneficial interests in the
assets of Trust; the issuance of the Common Securities shall not be subject to
preemptive or other similar rights; and at the Closing all of the issued and
outstanding Common Securities will be directly owned by Holdings free and clear
of any Encumbrances.

(c) Prior to the Closing, the Trust Agreement shall have been duly
authorized by Holdings and, at the Closing, will have been duly executed and
delivered by Holdings and the Trustees, and will be a legal, valid and binding
obligation of Holdings (as depositor) and the Trustees enforceable in accordance
with its terms, subject to the effects of bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally, general equitable principles (whether
considered in a proceeding in equity or at law) and an implied covenant of good
faith and fair dealing.

(d) Prior to the Closing, the guarantee agreements relating to Trust
shall have been duly authorized by Holdings and, when validly executed and
delivered by Holdings, will be a legal, valid and binding obligation of Holdings
enforceable in accordance with its terms, subject to the effects of bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and other similar
laws relating to or affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at law) and an
implied covenant of good faith and fair dealing.

(e) Prior to the Closing, the Preferred Securities shall have been
duly authorized by the Trust Agreement and, when issued and delivered against
payment of the consideration therefor, will be validly issued and (subject to
the terms of the Declaration) fully paid and nonassessable undivided beneficial
interests in Trust, and will be entitled to the benefits of the Trust Agreement;
the issuance of the Preferred Securities shall not be subject to preemptive or
other similar rights; and (subject to the terms of the Trust Agreement) holders
of Preferred Securities will be entitled to the same limitation of personal
liability under Delaware law as extended to stockholders of private corporations
for profit.

(f) Prior to the Closing, the Indenture shall have been duly
authorized by Holdings and, assuming due authorization by the trustee
thereunder, when validly executed and delivered by

<PAGE>

Holdings and such trustee, will be a legal, valid and binding obligation of
Holdings enforceable in accordance with its terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing.

(g) Prior to the Closing, the Debentures shall have been duly
authorized by Holdings and, at the Closing, will have been duly executed by
Holdings and, when authenticated in the manner provided for in the Indenture and
delivered against payment therefor, will be a legal, valid and binding
obligation of Holdings enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally, general equitable principles (whether considered in a proceeding in
equity or at law) and an implied covenant of good faith and fair dealing, and
will be in the form contemplated by the Indenture.

ARTICLE VI

ACTIONS BY PARENT, SELLER, HOLDINGS AND BUYER
---------------------------------------------
PRIOR TO THE CLOSING
--------------------

Parent, Seller, Holdings and Buyer covenant as follows for the period
from the date hereof to the Closing Date (except, in the case of Section 6.16,
for the period specified in such Section):

6.1 Maintenance of Business and Preservation of Permits and Services.
------------------------------------------- --------------------
Except as expressly contemplated by this Agreement, Seller shall cause the
Company and each Subsidiary to carry on its business, in the ordinary course
consistent with past practice. Neither Parent nor Seller shall cause the
Company or any Subsidiary to terminate an officer thereof or to diminish the
duties or responsibilities of such officer.

6.2 Additional Financial Statements. As soon as reasonably
-------------------------------
practicable after the end of the applicable period, Seller shall furnish to
Buyer (a) the quarterly convention statements of the Subsidiaries for all
interim quarterly periods subsequent to September 30, 1995, which shall have
been prepared on a basis consistent with the Convention Statements and, with
respect to the financial statements included therein, in accordance with
Statutory Accounting Principles, (b) the quarterly financial statements of the
Company, the GAAP Subsidiaries and Ridge Re for all quarterly periods subsequent
to September 30, 1995, which shall have been prepared in accordance with
generally accepted accounting principles and on a basis consistent with the
Company GAAP Financial Statements, the Subsidiary GAAP Financial Statements and
the Ridge Re GAAP Financial Statements, as the case may be, subject to normal
year-end adjustments and the absence of footnote disclosure, (c) the
consolidated financial statements for the Company, each of the GAAP Subsidiaries
and Ridge Re for the year ended December 31, 1995, which shall have been
prepared in accordance with generally accepted accounting principles and on a
basis consistent with the Company GAAP Financial Statements, the

<PAGE>

Subsidiary GAAP Financial Statements and the Ridge Re GAAP Financial Statements,
as the case may be, and (d) (to the extent ordinarily prepared) all monthly
financial statements of the Company, the Subsidiaries and Ridge Re (for months
subsequent to June 1995), which shall have been prepared in a manner consistent
with past practice.

6.3 Certain Prohibited Transactions. Parent and Seller agree to
-------------------------------
cause the Company and each Subsidiary not to, without the prior written approval
of Buyer or except as expressly contemplated by this Agreement:

(a) terminate, cancel or amend any insurance coverage maintained by
the Company or any of its Subsidiaries with respect to any material assets
of the Company or any Subsidiary which is not replaced by an adequate
amount of insurance coverage or is not deemed unnecessary in the reasonable
judgment of the Company;

(b) settle any pending or threatened Action relating to an insurance
claim in an amount in excess of $5,000,000 above the policy limit relating
to such claim or settle any other pending or threatened Action in an amount
in excess of $1,000,000; or

(c) take any action which causes any representation or warranty
(other than Section 4.7(a)) of Parent or Seller in this Agreement to be or
become untrue at Closing or results in a material breach of any covenant
made by Parent or Seller in this Agreement.

6.4 Investigation by Buyer. Parent and Seller shall, and shall use
----------------------
their reasonable efforts to cause the Company and the Subsidiaries to, allow
Buyer during regular business hours through Buyer's employees, agents and
representatives, to make such investigation of the business, properties, books
and records of the Company and the Subsidiaries, and to conduct such examination
of the condition of the Company and the Subsidiaries, as Buyer reasonably deems
necessary or advisable to familiarize itself with such business, properties,
books, records, condition and other matters, and to verify the representations
and warranties of Seller hereunder; provided, however, that any information
-------- -------
obtained from Seller or the Company shall be deemed to be Evaluation Material
for purposes of the Confidentiality Agreement dated August 3, 1995, between
Seller and Kohlberg Kravis Roberts Co., L.P. (the

<PAGE>

"Confidentiality Agreement") and shall be subject to the Confidentiality
-------------------------
Agreement.

6.5 Consents. (a) As soon as practicable after execution and
--------
delivery of this Agreement, Buyer and Seller shall make all filings required
under the HSR Act. Buyer and Seller will each furnish all information as may be
required by any other state regulatory agency properly asserting jurisdiction or
by the Federal Trade Commission and the United States Department of Justice
under the HSR Act in order that the requisite approvals for the purchase and
sale of the Stock pursuant hereto, and the transactions contemplated hereby, be
obtained or to cause any applicable waiting periods to expire.

(b) Buyer shall use its best efforts to file Form A change of control
applications with the applicable state insurance regulators referred to in
Schedule 4.11 within 45 days from the date hereof. Buyer will use its
reasonable efforts to obtain insurance regulatory approvals as soon as possible
following the Form A change of control filings. Parent and Seller shall
cooperate with Buyer to obtain such approvals.

(c) Seller and Buyer will, as soon as practicable, commence to take
all other action required to obtain as promptly as practicable all necessary
consents, approvals, authorizations and agreements of, and to give all notices
and make all other filings with, any third parties, including governmental
authorities, necessary to authorize, approve or permit the consummation of the
transactions contemplated hereby and by the Ancillary Agreements, including all
consents, approvals and waivers referred to in Sections 7.4 and 8.2 hereof, and
Buyer, Parent and Seller shall cooperate with each other with respect thereto.

(d) Buyer and Seller will cooperate in seeking applicable regulatory
approval so as to permit the Subsidiaries to continue to pay management fees to
the Company following the Closing at the same level as are currently being paid.

(e) Buyer and Seller will cooperate in seeking applicable regulatory
approval so as to permit IIC to pay to II prior to Closing an extraordinary
dividend of at least $50,000,000. To the extent such approval is obtained,
Seller shall cause IIC to pay to II prior to Closing an extraordinary dividend
of at least $50,000,000.

(f) Notwithstanding the foregoing, however, none of Parent, Seller,
Holdings, Buyer, the Company or the Subsidiaries shall be required to agree to
any limitations, requirements or conditions of, any third party including, but
not limited to, any insurance regulatory body, or make any payment to any party
including the Company or any Subsidiary in order to obtain consents referred to
in Sections 7.4 and 8.2. Parent and Seller shall be entitled to have a
representative or representatives present at

<PAGE>

all meetings that may be held by Buyer, Holdings or Trust with insurance
regulators.

6.6 Notification of Certain Matters. Parent and Seller, to the
-------------------------------
extent within the actual knowledge of an officer of Parent or Seller listed on
Schedule 1.1B, shall give prompt notice to Buyer, and Buyer, to the extent
within the knowledge of Buyer, shall give prompt notice to Seller, of (i) the
occurrence, or failure to occur, of any event which occurrence or failure would
be likely to cause any representation or warranty contained in this Agreement to
be untrue or inaccurate in any material respect any time from the date hereof to
the Closing Date, (ii) any material failure of Parent, Seller, Holdings or
Buyer, as the case may be, to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder (and each party shall
use all reasonable efforts to remedy such failure), (iii) any notice or other
communication from any Person alleging that the consent of such Person is or may
be required in connection with the transactions contemplated by this Agreement
and the Ancillary Agreements, (iv) any notice or other communication from any
governmental or regulatory agency or authority in connection with the
transactions contemplated by this Agreement and the Ancillary Agreements, (v)
any Actions that, if pending or threatened on the date hereof, would have been
required to have been disclosed pursuant to Section 4.13 and (vi) any Actions
that relate to the consummation of the transactions contemplated by this
Agreement and the Ancillary Agreements.

6.7 No Solicitations. (a) Parent, Seller and each of their
----------------
respective Affiliates, including the Company and the Subsidiaries, will not,
directly or indirectly, solicit any inquiries or proposals or enter into or
continue any discussions, negotiations, understandings, arrangements or
agreements relating to the sale or exchange of any Stock, the merger or
amalgamation of the Company or any of its Subsidiaries with, or the direct or
indirect disposition of a significant amount of the Company's assets or any
Subsidiary's assets or business to any Person other than Buyer and Holdings or
their Affiliates or provide any assistance or any information to or otherwise
cooperate with any Person in connection with any such inquiry, proposal or
transaction (except that the Company may direct inquiries to Buyer, which shall
not disclose confidential information about the Company or any of its
Subsidiaries in connection with responding to such inquiries). In the event
that Parent, Seller or any of their Affiliates, including the Company and the
Subsidiaries receives a solicited or unsolicited inquiry, proposal or offer for
such a transaction or obtains information that such an offer is likely to be
made, Parent and Seller will provide Buyer with notice thereof as soon as
practical after receipt thereof, including the identity of the prospective
purchaser or soliciting party. Buyer and Holdings agree that to the extent they
engage in any discussions regarding the Company or the Subsidiaries with
potential purchasers of the capital

<PAGE>

stock or businesses thereof, Buyer and Holdings shall not include officers or
employees of the Company or the Subsidiaries in such discussions.

(b) The parties acknowledge that there may be no adequate remedy at
law for a breach of Section 6.7(a) and that money damages may not be an adequate
remedy for breach of such Section. Therefore, the parties agree that Buyer
shall have the right, in addition to any other rights it may have, to injunctive
relief and specific performance of Section 6.7(a) in the event of any breach of
such Section. The remedy set forth in the preceding two sentences is cumulative
and shall in no way limit any other remedy any party hereto has at law, in
equity or pursuant hereto.

6.8 Cooperation; Accounting and Other Matters. (a) Seller shall, and
-----------------------------------------
Seller shall use its reasonable efforts to cause the Company to, cooperate with
Buyer in respect of any proposed public offering or private placement of
securities, and arrangements of other financing by Buyer, the proceeds of which
are to be used to finance a portion of the purchase of the Stock by Buyer
(provided, however, that Seller shall not be obligated to participate in such
-------- -------
financing or the marketing thereof and shall not be obligated to be a party to
any underwriting, private placement or other agreement with respect thereto),
and shall, without limitation of the foregoing, cause such Company financial
statements to be prepared as may be required by the rules and regulations of the
Securities and Exchange Commission promulgated under the Securities Act.

(b) Buyer shall give Seller and Parent a reasonable opportunity to
review any references to Seller, Parent, this Agreement or the transactions
contemplated hereby in any registration statement or private placement
memorandum relating to the sale of securities the proceeds of which are to be
used to finance a portion of the purchase of the Stock by Buyer and any
amendments or supplements thereto by providing to Seller and Parent drafts of
such registration statement or private placement memorandum or any amendments or
supplements thereto prior to filing such documents with the Securities and
Exchange Commission or distributing such documents to potential purchasers of
privately placed securities and allow Seller and Parent a reasonable opportunity
(as determined under the circumstances and consistent with the overall timing
constraints applicable to preparation of such registration statement, private
placement memorandum, amendment or supplement) to review and comment thereon.

6.9 Investment Portfolio. (a) Parent and Seller shall cause the
--------------------
Company and the Subsidiaries to manage the investment portfolio for the Company
and the Subsidiaries in accordance with the Investment Policy.

<PAGE>

(b) Five days prior to the Closing Date, Parent and Seller shall
cause the Company to deliver to Buyer a list of all Investments in the
investment portfolio for the Company and the Subsidiaries as of such date.

6.10 Reinsurance Agreements. Seller shall cause the Company and each
----------------------
Subsidiary not to, without the prior written approval of Buyer (which approval
shall not be unreasonably withheld), except in the ordinary course of business
consistent with past practice (i) except for the Ridge Re Endorsements, amend
any reinsurance or retrocession agreement, (ii) enter into or commit to enter
into any loss portfolio transfer or other similar transaction, agreement or
arrangement or series of related transactions, agreements or arrangements
involving any ceded reinsurance of the Company or any Subsidiary, (iii) enter
into or commit to enter into any reinsurance or retrocession contract or treaty
except to replace, renew or extend existing reinsurance and retrocession
agreements and treaties on terms which are not different in any material respect
from the terms of the agreement or treaty being replaced, renewed or extended,
as the case may be, or (iv) commute or terminate any contract of reinsurance,
provided that Seller shall cause the Company and each Subsidiary not to commute
- --------
or terminate any such contract which at the time of commutation or termination
is legally carried on the books of the Company and the Subsidiaries in an amount
of $5,000,000 or more. All reinsurance or retrocession agreements or treaties
permitted by this Section shall not have a change of control or similar
provision which would require the Company or any Subsidiary to obtain a consent
to consummate the transactions contemplated hereby (unless such provisions shall
have been waived prior to Closing).

6.11 Dividends. Seller and Parent shall cause the Company not to (i)
---------
declare, set aside or pay any dividends or distributions (whether in cash, stock
or property) in respect of any capital stock of the Company, (ii) make any other
payment or distribution to Parent, Seller or any Affiliate of Parent (excluding
the Company and the Subsidiaries, but including TRG and its subsidiaries), or
(iii) redeem, purchase or otherwise acquire any of the capital stock of the
Company or any Subsidiary, except for (A) payments permitted under the Tax
Agreement, (B) payments under the contracts, agreements or arrangements referred
to in Schedule 4.23 or described in clauses (i), (ii) or (iii) of Section
4.23(b), (C) the dividends contemplated by Sections 6.18(i) and 9.7 and (D)
distributions to Seller of any proceeds received by the Company (gross of any
income tax obligations) from the First Quadrant Final Sale or of any amounts
received by the Company (gross of any income tax obligations) as proceeds or
purchase price adjustments from the Viking Sale or Constitution Re Sale. For
purposes of the exception set forth in (D) in the preceding sentence, proceeds
shall include any amounts (net of any state tax obligations for which the
Company is liable under the stock purchase agreement for the company whose sale
generated such proceeds) subsequently

<PAGE>

received after the date of this Agreement with respect to tax payments from such
companies but shall not include any tax payments previously received. In
addition, as soon as practicable after the date of this Agreement, the Company
shall distribute $100,000 to Seller in respect of the Constitution Re 1994 tax
shortfall.

6.12 Seller Notes. The Company and the Subsidiaries shall not dispose
------------
of the Seller Notes to a Person other than a Subsidiary, except that the Company
and the Subsidiaries may dispose of all or a portion of the Seller Notes prior
to Closing to a Person other than a Subsidiary if upon such disposition Seller
shall pay to the Company the excess of (i) the aggregate principal amount of the
Seller Notes so disposed plus accrued but unpaid interest through the date of
such disposition over (ii) the Third Party Amount. To the extent not already
disposed of, immediately prior to Closing, (i) Seller shall repay the
outstanding principal amounts and any accrued but unpaid interest thereon under
the Seller Notes issued by it and held at that time by the Company or any
Subsidiary and (ii) Parent shall cause Credit Corp. to repay the outstanding
principal amounts and any accrued but unpaid interest thereon under the Seller
Notes issued by Credit Corp. and held at that time by the Company or any
Subsidiary.

6.13 Leesburg Training Facility. The Company and the Subsidiaries
--------------------------
shall not dispose of any of their interests in the ground lease agreement among
Parent and certain of the Subsidiaries or the lease agreement among Seller and
such Subsidiaries, each dated as of December 1, 1985 and each relating to
approximately six acres of land in Loudon County, Virginia and a training
facility located thereon or their fee interests in such facility (the "Leesburg
--------
Training Facility"), to a Person other than a Subsidiary, except that the
- -----------------
Company and the Subsidiaries may dispose of their interests (in whole or in
part) in the Leesburg Training Facility prior to Closing to a Person other than
a Subsidiary if upon such disposition Seller pays to the Company the excess of
(i) the greater of $118,000,000 and the statutory carrying value of the Leesburg
Training Facility as of December 31, 1995 over (ii) the Third Party Amount. If
no Third Party Amount has been received by the Company or any Subsidiary prior
to the Closing, immediately prior to Closing, Parent and Seller agree to cause
an amount equal to the greater of (i) the statutory carrying value of the
Leesburg Training Facility as of December 31, 1995 and (ii) $118,000,000, to be
contributed to such Subsidiaries, allocated to such Subsidiaries in accordance
with Schedule 6.13 (such contributed amount, the "Leesburg Training Facility
--------------------------
Amount"). At Closing, the Company shall cause to be transferred to Seller or an
- ------
Affiliate of Seller any remaining interests the Company or any of the
Subsidiaries has in the Leesburg Training Facility. Upon any transfer of the
Leesburg Training Facility in accordance with this Section 6.13, the Company and
the Subsidiaries shall have no further rights or obligations relating to the
Leesburg Training Facility.

<PAGE>

6.14 Reserves and Book-Up. (a) Effective as of December 31, 1995,
--------------------
Parent and Seller shall cause the reserves of CFI and its subsidiaries and WSG
and its subsidiaries for periods prior to December 31, 1992 to be increased for
statutory accounting and GAAP purposes in an amount so that after 85% of such
increase is ceded to Ridge Re pursuant to the applicable Ridge Re Treaties, CFI
and its subsidiaries and WSG and its subsidiaries shall have ceded to Ridge Re
the maximum amount of losses and loss adjustment expenses permitted under the
applicable Ridge Re Treaties. Immediately following such increases and
effective as of December 31, 1995, Parent and Seller shall cause CFI and its
subsidiaries and WSG and its subsidiaries to make the cession referred to in the
immediately preceding sentence.

(b) Effective as of December 31, 1995 Parent and Seller shall cause
II and its subsidiaries to increase their reserves for statutory accounting and
GAAP purposes by an additional $50,000,000 and cede 85% of such increase to
Ridge Re pursuant to the applicable Ridge Re Treaty.

(c) During 1996 and at least one day prior to the Closing Date,
Parent and Seller shall cause the reserves of CFI and its subsidiaries and WSG
and its subsidiaries to be increased for statutory accounting and GAAP purposes
in the amounts specified by Buyer and/or Seller, but not to exceed an additional
$115,000,000 and $100,000,000, respectively (beyond the increases required by
paragraph (a) above).

6.15 Rating Agency Presentations. Buyer shall give Seller reasonable
---------------------------
notice of any meetings prior to the Closing Date with A.M. Best & Co. ("A.M.
----
Best") to discuss the insurance claims paying ratings of the Insurance
- ----
Subsidiaries, and Seller at its option may have a representative at such
meetings.

6.16 Certain Admitted Assets. Parent and Seller shall indemnify,
-----------------------
guaranty or otherwise post credit support to the extent that as of the Closing
Date the Insurance Subsidiaries shall not have received credit for statutory
purposes for the Crostex/Camfex Purchase Money Notes in an amount equal to at
least $35 million. Such indemnity, guaranty or credit support shall continue
until final maturity of such notes but only in the amount provided in the
preceding sentence.

6.17 Intercompany Accounts. (a) Except as provided in Sections 6.12
---------------------
and 6.13, all intercompany accounts (other than those relating to Taxes and
those under or relating to reinsurance contracts and arrangements) between the
Company and any Subsidiary, on the one hand, and Parent and any of its
Affiliates (other than the Company and its Subsidiaries), on the other hand, as
of the Closing shall be settled at fair value (irrespective of the terms of
payment of such intercompany accounts) in the manner provided in this Section.
At least five business days prior to the Closing, Seller shall prepare and

<PAGE>

deliver to Buyer a statement setting out in reasonable detail the calculation of
all such intercompany account balances based upon the latest available financial
information as of such date and, to the extent reasonably requested by Buyer,
provide Buyer with supporting documentation to verify the underlying
intercompany charges and transactions. All such intercompany account balances
shall be paid in full in cash prior to the Closing. All intercompany
reinsurance agreements shall remain in effect and shall be settled in the
ordinary course of business. All intercompany accounts relating to Taxes will
be governed by the Tax Agreement.

(b) As promptly as practicable, but no later than 60 days after the
Closing Date, Seller shall cause to be prepared and delivered to Buyer a
statement setting out in reasonable detail the calculation of such intercompany
account balances as of the Closing Date (giving effect to any settlement under
subsection (a) and any other payments). Buyer and Seller shall cooperate in the
preparation of any such calculation including the provision of supporting
documentation to verify the underlying intercompany charges, transactions and
payments. If Buyer disagrees with Seller's calculation of such intercompany
balances Buyer may, within 30 days after delivery of such statement, deliver a
notice to Seller disagreeing with such calculation and setting forth Buyer's
calculation of such amount. If Buyer and Seller are unable to resolve such
disagreement within 30 days thereafter, such disagreement shall be resolved by
independent accountants of nationally recognized standing reasonably
satisfactory to Buyer and Seller. The net amount of any such intercompany
balance shall be paid in cash promptly thereafter, together with interest
thereon from and including the Closing Date to but excluding the date of payment
at a rate equal to 5% per annum. Such interest shall be payable at the same
time as the payable to which it relates and shall be calculated daily on the
basis of a year of 365 days and the actual number of days elapsed.

6.18 Certain Required Transfers. Prior to the Closing Date, Parent
--------------------------
and Seller shall cause TRG to transfer all of the outstanding capital stock of
Envision to the Company.

6.19 Financing. Buyer shall use its reasonable efforts to obtain
---------
financing that will satisfy the condition in Section 8.9 hereof.

6.20 Dividends Received by TRG. In the event that Seller receives
-------------------------
cash dividends from TRG between January 1, 1996 and the Closing, immediately
prior to Closing Seller shall make a capital contribution to the Company in an
amount (the "TRG Contributed Dividends") equal to the lesser of the dividends so
-------------------------
received and the TRG Dividend Replacement Amount. Seller shall use reasonable
efforts to have TRG's subsidiaries distribute the fullest amount permitted by
insurance regulators and applicable

<PAGE>

law (not to exceed the TRG Dividend Replacement Amount) to it prior to Closing.

6.21 Capital Contribution by Seller. Immediately prior to Closing,
------------------------------
Seller shall make a capital contribution to the Company in an amount equal to
$1,700,000.

6.22 TOPrS. Seller and Buyer shall, and Holdings shall cause an
-----
affiliated investment partnership to, execute and deliver the TOPrS Side Letter
at the Closing.

6.23 Subsidiary Credit Agreements. In the event any indebtedness
----------------------------
under any Subsidiary Credit Agreement is prepaid, including by reason of any
acceleration thereof, with funds contributed by Seller for the purpose of such
prepayment, the cash payable pursuant to Section 2.2 shall be increased by an
amount equal to such indebtedness. No such prepayment shall constitute a breach
of this Agreement.

ARTICLE VII

CONDITIONS TO OBLIGATIONS OF PARENT AND SELLER
----------------------------------------------

The obligations of Parent and Seller to consummate the transactions
contemplated hereby on the Closing Date are subject, in the discretion of Parent
and Seller, to the satisfaction or waiver, on or prior to the Closing Date, of
each of the following conditions:

7.1 Representations, Warranties and Covenants. All representations
-----------------------------------------
and warranties of Buyer and Holdings contained in this Agreement and the
Ancillary Documents to which Buyer or Holdings is a party shall be true and
correct in all material respects (except that such representations and
warranties specifically qualified by materiality shall be read for purposes of
this Section so as not to require an additional degree of materiality) as of the
date of this Agreement and (except to the extent such representations and
warranties speak as of an earlier date) as of the Closing Date as if such
representations and warranties were made on and as of the Closing Date, any
breaches of such representations and warranties as of the Closing Date
(determined for purposes of this clause without regard to any materiality
qualifications in such representations and warranties) taken together shall not
have a Material Adverse Effect on Holdings, Buyer, the Company and the
Subsidiaries, taken as a whole (assuming that the Closing shall have occurred),
or on Parent or Seller, and Buyer and Holdings shall have performed in all
material respects all agreements and covenants required hereby to be performed
by them prior to or at the Closing Date. There shall be delivered to Seller a
certificate (signed by the President of Buyer and the President of Holdings) to
the foregoing effect.

<PAGE>

7.2 HSR Act. The applicable waiting period, including any extension
-------
thereof, under the HSR Act shall have expired.

7.3 No Governmental or Other Proceeding; Illegality. (a) No Action
-----------------------------------------------
shall be pending or threatened which seeks to enjoin, restrain or prohibit the
consummation of the transactions contemplated by this Agreement (including,
without limitation, the execution, delivery and performance of any Ancillary
Agreement by the parties thereto) which either Parent or Seller reasonably
believes presents a material risk that it or its Affiliates would suffer
substantial monetary damage (whether or not indemnified under this Agreement).

(b) There shall not be in effect any statute, rule, regulation or
order of any court, governmental or regulatory body which prohibits or makes
illegal the transactions contemplated hereby, including, without limitation, the
execution or delivery of any of the Ancillary Agreements or the performance of
any of the Guarantees, the Tax Agreement or the Ridge Re Treaties, as amended by
the applicable Ridge Re Endorsements.

7.4 Consents. All consents, approvals and waivers from governmental
--------
authorities and other parties necessary to permit Seller and Parent to
consummate the transactions contemplated hereby shall have been obtained, unless
the failure to obtain any such consent, approval or waiver would not have a
Material Adverse Effect on Seller or Parent, as the case may be, provided,
--------
however, that no such consent, approval or waiver shall contain any limitations,
- -------
requirements or conditions on Parent or Seller or require Parent or Seller to
make any payment to any party including the Company or any Subsidiary.

7.5 Opinion of Counsel. Buyer shall have delivered to Seller an
------------------
opinion of Simpson Thacher & Bartlett, substantially in the form of Exhibit E-1,
an opinion of King & Spalding, special tax counsel to Holdings and Buyer,
substantially in the form of Exhibit E-2, and an opinion of Richards, Layton &
Finger, special Delaware counsel to Holdings and Buyer, substantially in the
form of Exhibit E-3.

7.6 Certificates. Buyer and Holdings will furnish Seller with such
------------
certificates of their respective officers, directors and others to evidence
compliance with the conditions set forth in this Article VII as may be
reasonably requested by Seller.

7.7 Corporate Documents. Seller shall have received from Buyer and
-------------------
Holdings resolutions adopted by the Board of Directors of Buyer and Holdings
approving this Agreement, the Tax Agreement, the TOPrS Side Letter and the
Debentures, as applicable, and the transactions contemplated hereby and thereby,
certified by the corporate secretary or assistant secretary of Holdings and
Buyer, as applicable.

<PAGE>

7.8 TRG Closing. TRG Acquisition shall have simultaneously purchased
-----------
all of the outstanding shares of TRG capital stock pursuant to the TRG
Agreement.

7.9 Registration Rights Agreement. Trust and Holdings shall have
-----------------------------
executed and delivered to Seller a Registration Rights Agreement substantially
in the form of Exhibit F.

7.10 Solvency Matters. Buyer shall have provided to Seller, any
----------------
solvency letters or similar opinions or certificates relating to the solvency
and adequate capitalization of Buyer, Holdings or the Company and/or the ability
of Buyer, Holdings or the Company to pay its debts that are given to any banks
or other lenders in connection with the acquisition of the Stock at the same
time as such letters, opinions or certificates are provided to such banks or
other lenders.

7.11 Capitalization. Holdings shall have received no less than
--------------
$500,000,000 in equity and the amount of indebtedness for borrowed money of
Holdings and Buyer shall be no more than $1,325,000,000 (excluding the
Debentures).

7.12 Company Certificates. Seller shall have received (i) a
--------------------
certificate signed by each of the persons listed on Schedule 1.1C dated as of
the date of this Agreement, and (ii) a certificate signed by each of such
persons dated as of the Closing Date, in each case substantially in the form of
Exhibit G.

7.13 Subsidiary Releases. All of the domestic U.S. Subsidiaries
-------------------
included in the consolidated federal income tax return of Parent which are
Subsidiaries as of Closing shall have executed and delivered to Parent and
Seller the releases of any and all obligations under existing tax sharing
agreements substantially in the form of Exhibit H.

ARTICLE VIII

CONDITIONS TO OBLIGATIONS OF HOLDINGS AND BUYER
-----------------------------------------------

The obligations of Holdings and Buyer to consummate the transactions
contemplated hereby are subject, in the discretion of Buyer, to the satisfaction
or waiver, on or prior to the Closing Date, of each of the following conditions:

8.1 Representations, Warranties and Covenants. All representations
-----------------------------------------
and warranties of Parent and Seller contained in this Agreement and the
Ancillary Agreements to which Parent or Seller is a party shall be true and
correct in all material respects (except that such representations and
warranties specifically qualified by materiality shall be read for purposes of
this Section so as not to require an additional degree of

<PAGE>

materiality) as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as if such representations and warranties were made on and as of the
Closing Date, any breaches of such representations and warranties as of the
Closing Date (determined for purposes of this clause without regard to any
materiality qualifications in such representations and warranties) taken
together shall not have a Material Adverse Effect on the Company and the
Subsidiaries, taken as a whole, and Parent and Seller shall have performed in
all material respects all agreements and covenants (other than those contained
in Section 6.3(c) and clauses (i), (ii) and (v) of Section 6.6) required hereby
to be performed by them, respectively, prior to or at the Closing Date. There
shall be delivered to Buyer a certificate of each of Parent and Seller (signed
by an Executive Vice President of Parent and the President of Seller) to the
foregoing effect.

8.2 Consents. All consents, approvals and waivers (a) referred to in
--------
clauses (i) and (ii) of Section 4.11, (b) referred to on Schedule 4.10, (c)
under reinsurance and retrocession agreements for the accident year in which the
Closing occurs that would be terminable as a result of consummation of the
transactions contemplated by this Agreement and the Ancillary Agreements, (d)
under all other reinsurance and retrocession agreements that would be terminable
as a result of consummation of the transactions contemplated by this Agreement
and the Ancillary Agreements and (e) under the reinsurance treaties described in
Ex. 1 (part A) of Schedule 4.25 shall have been obtained in form and substance
satisfactory to Buyer, acting reasonably, and shall be in full force and effect,
except, in the case of consents, approvals and waivers referred to in clauses
(b), (c) and (d), consents, approvals or waivers the failure of which to obtain
would not, individually or in the aggregate, result in a Material Adverse Effect
on the Company and the Subsidiaries, taken as a whole, provided, however, that
-------- -------
in the case of clauses (a), (b), (c), (d) and (e), no such consent, approval or
waiver shall contain any limitations, requirements or conditions on Holdings,
Buyer, the Company or a Subsidiary or require Holdings, Buyer, the Company or a
Subsidiary to make any payment to any party including in the case of Holdings or
Buyer, to the Company or, in the case of Holdings, Buyer or the Company, to any
Subsidiary, provided further, that the approval of any intercompany tax
----------------
agreements referred to in either Section 4.11(i) or (ii) for a period after
Closing shall not be a condition to the obligations of Buyer and Holdings
hereunder, and provided still further, that with respect to any intercompany tax
----------------------
agreement among the Company and the Subsidiaries for the period January 1, 1995
through Closing, the obligations of Buyer and Holdings hereunder shall be
conditioned only on the approval of an agreement that is reasonably consistent
with those provisions of the Tax Agreement that provide for the amount and time
for payments attributable to Taxes.

<PAGE>

8.3 HSR Act. The applicable waiting period, including any extension
-------
thereof, under the HSR Act shall have expired.

8.4 No Governmental or Other Proceeding; Illegality. (a) No Action
-----------------------------------------------
shall be pending or threatened which seeks to enjoin, restrain or prohibit the
consummation of the transactions contemplated by this Agreement (including,
without limitation, the execution, delivery and performance of any Ancillary
Agreement by the parties thereto) or to impose limitations on the ability of
Buyer to exercise full rights of ownership of the Stock or to require the
divestiture by Buyer of the Stock or by the Company, Buyer, Holdings or any of
their Affiliates of any assets or businesses, which either Holdings or Buyer
reasonably believes presents a material risk that it or its Affiliates
(including the Company and the Subsidiaries after the Closing Date) would not
realize substantially all of the benefits of the transactions contemplated by
this Agreement or would suffer substantial monetary damages (whether or not
indemnified under this Agreement).

8.5 Opinion of Counsel. Seller shall have delivered to Buyer an
------------------
opinion of Skadden, Arps, Slate, Meagher & Flom, substantially in the form of
Exhibit I-l, an opinion of Richard S. Paul, Senior Vice President and General
Counsel of Seller, substantially in the form of Exhibit I-2, an opinion of
Richard N. Frasch, general counsel of the Company, substantially in the form of
Exhibit I-3, an opinion of Cox & Wilkinson, special Bermuda counsel to Parent
and Seller, substantially in the form of Exhibit I-4, an opinion of LeBoeuf,
Lamb, Greene & MacRae, special tax counsel to Parent and Seller, as to the
matters set forth in Exhibit I-5, which opinion shall otherwise be in form and
substance reasonably satisfactory to Buyer, an opinion of counsel (who shall be
reasonably acceptable to Buyer) as to matters of Indiana law set forth in
Exhibit I-6, which opinion shall otherwise be in form and substance reasonably
satisfactory to Buyer, and an opinion of counsel (who shall be reasonably
acceptable to Buyer) as to matters of New Jersey law set forth in Exhibit I-7,
which opinion shall otherwise be in form and substance reasonably satisfactory
to Buyer.

8.6 Certificates. Parent and Seller shall furnish Buyer with such
------------
certificates of the respective officers of Parent and Seller and others to
evidence compliance with the conditions set forth in this Article VIII as may be
reasonably requested by Buyer.

<PAGE>

8.7 Corporate Documents. Buyer shall have received from Parent and
-------------------
Seller resolutions adopted by the respective boards of directors of Parent and
Seller approving this Agreement and the other Ancillary Agreements to which
Parent or Seller is or will be a party and the transactions contemplated hereby
and thereby, certified by the corporate secretary or assistant secretary of
Parent and Seller, as applicable.

8.8 TRG Closing. TRG Acquisition shall have simultaneously purchased
-----------
all of the outstanding shares of TRG's capital stock pursuant to the TRG
Agreement.

8.9 Financing. Buyer shall have obtained proceeds from financing
---------
sources on terms and conditions consistent with the Underwriter Letter and with
the senior bank commitment letter provided by Buyer to Seller prior to the date
hereof, and otherwise reasonably satisfactory to Buyer.

8.10 No Material Adverse Effect. Since June 30, 1995, there shall not
--------------------------
have occurred any event, change or development (including, without limitation,
the suspension, revocation or other termination of any Permit) which
individually or in the aggregate, has had or is reasonably likely to have a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole.

8.11 No Change in Rating. Buyer shall have received confirmation from
-------------------
A.M. Best that upon Closing the A.M. Best's policyholder's rating for each
Insurance Subsidiary will be "A-" (without negative implications) or better, and
after giving effect to the transactions contemplated by this Agreement, the
Ancillary Agreements and the Financing Documents.

8.12 Resignation of Officers and Directors. All Persons who are
-------------------------------------
directors and/or officers of the Company and/or any of the Subsidiaries whose
principal employment is as an officer and/or employee of Seller and/or Parent,
shall have resigned such directorships and/or such offices.

8.13 Transfer Taxes. Seller shall have caused all appropriate stock
--------------
transfer tax stamps to be affixed to the certificate or certificates
representing the Stock.

8.14 Seller Notes. Seller and Credit Corp. shall have made the
------------
payments contemplated by Section 6.12 and repaid all amounts outstanding under
any Seller Notes that are still held by the Company and any Subsidiary together
with any accrued but unpaid interest thereon.

8.15 Leesburg Training Facility Amount. The Leesburg Training
---------------------------------
Facility Amount shall have been paid, as provided in Section 6.13.

<PAGE>

8.16 Reserves and Book-Up. All of the transactions described in
--------------------
Section 6.14 shall have been consummated.

8.17 Ridge Re Endorsements. Ridge Re, Seller and each Subsidiary
---------------------
listed on Schedule 8.17 shall have executed and delivered to Buyer endorsements
to the Ridge Re Treaties substantially in the form of Exhibit J.

8.18 Guarantees. Parent shall have executed and delivered to Buyer
----------
guarantees for the benefit of each Subsidiary listed on Schedule 8.18
substantially in the form of Exhibit K and Parent and Seller shall have executed
and delivered to Buyer guarantees for the benefit of each Subsidiary listed on
Schedule 8.18 substantially in the form of Exhibit L.

8.19 Management Investment. Members of the management of the Company
---------------------
and the Subsidiaries designated by Holdings shall have invested in the capital
stock of Holdings on terms substantially consistent with the agreements in
principle delivered to Seller prior to the date hereof or otherwise satisfactory
to Holdings.

ARTICLE IX

ACTIONS BY PARENT, SELLER,
AND BUYER AFTER THE CLOSING
---------------------------

9.1 Books and Records. Parent, Seller and Buyer agree that so long
-----------------
as any books, records and files relating to the business, properties, assets or
operations of the Company or the Subsidiaries, to the extent that they pertain
to the operations of the Company or the Subsidiaries prior to the Closing Date,
remain in existence and available, each party (at its expense) shall have the
right to inspect and to make copies of the same at any time during normal
business hours for any proper purpose. Parent and Seller further agree that, to
the extent such records have not otherwise been delivered to the Company or
Buyer, Parent and Seller will not destroy or dispose of any material books,
records or files relating to the investment portfolio existing as of the Closing
Date without first offering to provide such books, records or files to Buyer and
that, in any event, Buyer shall have the right to inspect and to make copies of
the same at any time during normal business hours for any proper purpose, to the
extent reasonably requested by Buyer.

9.2 First Quadrant Final Sale, Viking Sale and Constitution Re Sale.
---------------------------------------------------------------
If the Company shall, after the Closing Date, receive any proceeds from the
First Quadrant Final Sale, or any amount as purchase price adjustments from the
Viking Sale or Constitution Re Sale, Buyer shall cause the Company to remit such
amounts (net of any tax obligation of Buyer, the Company or any Subsidiary) to
Seller as promptly as practicable.

<PAGE>

9.3 Covenants Regarding the Securities. In connection with any sale,
----------------------------------
transfer or other disposition of all or any part of the Securities under an
exemption from registration under the Securities Act, if requested by Buyer,
Seller (or Parent, if such Securities are held by Parent) will deliver to
Holdings an opinion of counsel (which may be the General Counsel of Parent or,
if such Securities are held by Seller, of Seller), reasonably satisfactory in
form and substance to Holdings, that such exemption is available; provided,
--------
however, that in case of any sale or other transfer of Securities to any Person
- -------
who is a qualified institutional buyer as defined in Rule 144A under the
Securities Act, no opinion of counsel shall be required if Seller (or Parent, if
such Securities are held by Parent) provides to Holdings an officer's
certificate to the effect that such Person is a qualified institutional buyer as
defined in Rule 144A under the Securities Act. Parent and Seller hereby agree
and acknowledge that upon original issuance thereof, and until such time as the
same is no longer required under the applicable requirements of the Securities
Act, the Securities (and all securities issued in exchange therefor or
substitution thereof) shall bear, until such restrictions are no longer
applicable, the following legend:

"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933
ACT"). THEY MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN COMPLIANCE WITH
THE REGISTRATION PROVISIONS OF THE 1933 ACT AND ANY APPLICABLE STATE
BLUE SKY LAWS OR SECURITY LAWS OR PURSUANT TO AN AVAILABLE EXEMPTION
FROM SUCH PROVISIONS."

Parent and Seller further agree and acknowledge that any Holdings
Common Stock acquired in accordance with Section 11.3 shall also bear (until
such time as such restrictions are no longer applicable) the following legend:

"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT
OF FIRST REFUSAL AND CERTAIN OTHER RESTRICTIONS ON TRANSFER AS SET
FORTH IN THAT CERTAIN STOCKHOLDERS AGREEMENT, BETWEEN NEW TALEGEN
HOLDINGS CORPORATION AND XEROX FINANCIAL SERVICES, INC., A COPY OF
WHICH MAY BE OBTAINED FROM THE SECRETARY OF NEW TALEGEN HOLDINGS
CORPORATION."

9.4 Crostex/Camfex Purchase Money Notes. Seller and Parent shall
-----------------------------------
indemnify, guaranty or otherwise post credit support pursuant to the covenant
set forth in Section 6.16 from and after the Closing.

9.5 Certain Employee Benefit Matters. (a) Parent and its Affiliates
--------------------------------
(other than the Company, the Subsidiaries, TRG and its subsidiaries) shall
retain all liabilities and obligations under the employee stock ownership plan
("ESOP") in which employees of the Company and the Subsidiaries participated
----

<PAGE>

prior to January 1, 1993. All awards made to such participants under the ESOP
shall fully vest as of the Closing Date.

(b) Parent and its Affiliates (other than the Company, the
Subsidiaries, TRG and its subsidiaries) shall retain all liabilities and
obligations under the Long Term Incentive Program for the benefit of the
participants listed on Schedule 9.5. All payments due to such participants
under the Long Term Incentive Program shall be made at Closing.

9.6 Transfer Taxes. Seller shall pay, or cause to be paid, all stock
--------------
transfer and other transfer taxes required to be paid in connection with the
sale and delivery to Buyer of the Stock.

9.7 Dividends Received by TRG. To the extent that the TRG Dividend
-------------------------
Replacement Amount exceeds the TRG Contributed Dividends as of Closing, Seller
shall cause TRG to declare and pay at Closing a dividend to Seller in the form
of a promissory note issued by TRG and in a principal amount equal to such
excess, and immediately thereafter Seller shall contribute such note to the
Company and assign to the Company all its rights thereunder. Such note shall be
payable at such times as TRG shall have cash available (after the payment of its
indebtedness and other corporate expenses). Interest shall accrue thereon at a
rate per annum equal to the Overdue Rate (as defined in the Tax Agreement).

9.8 Ridge Re. On and after the Closing Date, Parent and Seller shall
--------
cause Ridge Re to refrain from (i) entering into any reinsurance or retrocession
agreement or treaty and (ii) engaging in any business other than in connection
with the Ridge Re Treaties, as amended by the applicable Ridge Re Endorsements,
and the other treaties referenced in the first sentence of Section 4.9(c) as in
effect on the date hereof, provided that the obligations contained in this
--------
Section 9.8 shall terminate upon consummation of the sale of Ridge Re to a
Qualified Transferee.

9.9 Further Assurances. On and after the Closing Date, Parent,
------------------
Seller, the Company, Holdings and Buyer will take all appropriate action and
execute all documents, instruments or conveyances of any kind which may be
reasonably necessary or advisable to carry out any of the provisions hereof,
including without limitation, putting Buyer in possession and operating control
of the business of the Company.

ARTICLE X

INDEMNIFICATION
---------------

10.1 Survival of Representations and Warranties. Holdings and Buyer
------------------------------------------
have the right to rely fully upon the representations, warranties, covenants and
agreements of Parent

<PAGE>

and Seller contained in this Agreement and the Ancillary Agreements. Parent and
Seller have the right to rely fully upon the representations, warranties,
covenants and agreements of Holdings and Buyer contained in this Agreement and
the Ancillary Agreements. All such representations and warranties (including
the Schedules hereto and the certificates delivered in accordance with Sections
7.1 and 8.1 hereof, insofar as the Schedules and such certificates relate to
such representations and warranties) shall be deemed to be repeated at Closing
for purposes of this Article X and, except as set forth in the last sentence of
this Section, shall survive the execution and delivery hereof and the Closing,
and thereafter (i) in the case of the representations and warranties contained
in Sections 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, 4.18, 5.1, 5.2, 5.4, 5.7 and 5.11
(other than clauses (iii), (iv) and (v) of Section 5.11(a)) hereof, such
representations and warranties shall survive without limitation as to time, (ii)
in the case of the representations and warranties contained in Sections 4.21,
4.24 and 4.28 hereof, such representations and warranties shall survive until 90
days after the expiration of the applicable statute of limitations with respect
to the subject matter thereof and (iii) in the case of all other representations
and warranties, such representations and warranties shall expire on the date two
years following the Closing Date; provided, however, that any representation or
-------- -------
warranty shall survive the time it would otherwise terminate pursuant to this
Section to the extent that notice of a breach thereof giving rise to a right of
indemnification shall have been given by a party hereto in accordance with
Section 10.3 hereof prior to such time. All of the covenants and agreements of
the parties contained in this Agreement and the Ancillary Agreements to be
performed on or after the date of this Agreement shall survive the Closing
without limitation as to time. Notwithstanding the foregoing, none of the
following representations and warranties (including the Schedules hereto and the
certificates delivered in accordance with Sections 7.1 and 8.1 hereof, insofar
as the Schedules and such certificates relate to such representations and
warranties) shall survive the Closing: (i) representations and warranties
contained in Sections 4.16, 4.21(e), 4.21(h) and 5.10 and in clauses (iii), (iv)
and (v) of Section 5.11(a); and (ii) representations and warranties contained in
any Section of Article IV and which relate to Excluded Activities.

10.2 Indemnification. (a) Parent and Seller shall jointly and
---------------
severally defend, indemnify and hold harmless Buyer, the Company and their
Affiliates and each director and officer of such Persons against any loss,
damage, claim, liability, judgment or settlement of any nature or kind,
including all costs and expenses relating thereto, including without limitation,
interest, penalties and reasonable attorneys' fees (collectively "Damages"),
-------
arising out of, resulting from or relating to:

(i) subject to Section 10.1, the breach of any representation or
warranty of Parent or Seller contained in this Agreement (other than in
Section 4.18), any Ancillary

<PAGE>

Agreement or any certificate delivered pursuant hereto or thereto;
provided, however, that such Persons shall be entitled to indemnification
-------- -------
hereunder only when and to the extent that the aggregate of all such
Damages exceeds $10,000,000;

(ii) the breach of any covenant or agreement (whether to be
performed prior to or after Closing) of Parent or Seller contained in this
Agreement, any Ancillary Agreement or any certificate delivered pursuant
hereto or thereto;

(iii) any facts, circumstances, conditions, events or actions
existing or occurring at any time with respect to Constitution Re, First
Quadrant and Viking and any subsidiary of any of the foregoing (other than
liabilities related to the business represented by the First Quadrant Asset
Sale) (collectively, the "Excluded Business");
-----------------

(iv) any Action brought by a security holder or creditor of Seller
or Parent in their capacity as such;

(v) long term incentive payments (including payments arising out of
the sale of the Company or the Excluded Business) payable to the Persons
listed on Schedule 10.2 including payments under the Long Term Incentive
Program;

(vi) the breach of the representations and warranties contained in
Section 4.18;

(vii) any facts, circumstances, conditions, events or actions
existing or occurring after the Closing Date with respect to the Leesburg
Training Facility; and

(viii) the breach, if any, by CFI or WSG of the respective Subsidiary
Credit Agreement to which it is a party in connection with any of the
reserving actions described in Section 6.14(a).

The foregoing provisions of this Section 10.2(a) shall not apply with
respect to any Damages arising out of (and no indemnification hereunder shall be
available with respect to) any (i) breach of any representation or warranty of
Parent or Seller that is terminated as provided in Section 10.1 (subject,
however, to the proviso contained in Section 10.1), (ii) breaches of the
representations and warranties of Parent and Seller contained in this Agreement
and the Ancillary Agreements which would result in the failure of any of the
conditions in Section 8.1 to be satisfied if Holdings or Buyer had actual
knowledge of such breaches (or received notice thereof pursuant to Section 6.6)
prior to the Closing Date, (iii) breach of any representation or warranty
contained in Section 4.21(h), (iv) breach of any representation or warranty to
the extent it relates to Excluded

<PAGE>

Activities, (v) action that breaches Section 6.3(c) to the extent such action
relates to Excluded Activities (except if such action is directed by Parent or
Seller or, prior to or at the time taken, an officer listed on Schedule 1.1B
knew that such action was to be taken), (vi) breach of any covenant to be
performed prior to Closing to the extent it relates to Excluded Activities,
other than a breach of Section 6.1, 6.3(a), 6.3(b), 6.10 or 6.14, (vii) action
that breaches Section 6.2 or Section 6.9 (except in each case if such action is
directed by Parent or Seller or, prior to or at the time taken, an officer
listed on Schedule 1.1B knew that such action was to be taken) or (viii)
underfunding of Company Plans (including fines and penalties assessed by
governmental authorities relating thereto).

(b) Buyer shall defend, indemnify and hold harmless Seller, Parent
and their Affiliates and each director or officer of such Persons against any
Damages arising out of, resulting from or relating to:

(i) subject to Section 10.1, the breach of any representation or
warranty of Holdings or Buyer contained in this Agreement (other than in
Section 5.4), any Ancillary Agreement or any certificate delivered pursuant
hereto or thereto; provided, however, that such Persons shall be entitled
-------- -------
to indemnification hereunder only when and to the extent that the aggregate
of all such Damages exceeds $10,000,000;

(ii) the breach of any covenant or agreement (whether to be
performed prior to or after Closing) of Holdings or Buyer contained in this
Agreement, any Ancillary Agreement or any certificate delivered pursuant
hereto or thereto;

(iii) third party claims in connection with the sale of the
Underwritten Notes, provided that (x) such Damages did not result from any
act or omission by Parent, Seller or any Affiliate (other than the Company
or any Subsidiary) or any director, officer, employee or agent thereof and
(y) any Notice (as defined in Section 10.3 below) related to an
indemnification claim under this clause (iii) must be delivered prior to
the third anniversary following the Closing Date and no Notice may be
delivered thereafter; and

(iv) the breach of the representations and warranties contained in
Section 5.4.

The foregoing provisions of this Section 10.2(b) shall not apply with
respect to any Damages arising out of (and no indemnification hereunder shall be
available with respect to) any (i) breach of any representation or warranty of
Holdings or Buyer that is terminated (subject, however, to the proviso contained
in Section 10.1), (ii) breaches of the representations and warranties of
Holdings and Buyer contained in this Agreement and

<PAGE>

the Ancillary Agreements which would result in the failure of any of the
conditions in Section 7.1 to be satisfied if Parent or Seller had actual
knowledge of such breaches (or received notice thereof pursuant to Section 6.6)
prior to the Closing Date or (iii) any breach of any representation or warranty
contained in Section 5.10 or in clauses (iii), (iv) or (v) or Section 5.11(a).

(c) For purposes of clause (i) of Section 10.2(a), (X) a "Material
Adverse Effect" (as such term is used in any representation or warranty
contained in Article IV other than the representations and warranties contained
in Section 4.7(a)) shall be deemed to have occurred if the aggregate of all
Damages related to any such representation or warranty shall exceed $100,000 and
(Y) the representations and warranties contained in Sections 4.7, 4.13 and
4.15(b) shall be read as if such representations and warranties do not include
the words "Knowledge of Seller".

(d) The term "Damages" as used in this Article X is not limited to
matters asserted by third parties against any Person entitled to be indemnified
under this Article X, but includes Damages incurred or sustained by any such
Person in the absence of third party claims.

(e) No claim for Damages under this Article X may be asserted or
pursued by any former Subsidiary against Parent or Seller, unless, prior to the
date that such former Subsidiary shall have ceased to be a "Subsidiary", such
former Subsidiary shall have delivered a Notice to Parent or Seller relating to
such claim.

10.3 Indemnification Procedures. (a) In the event that any Person
--------------------------
shall incur or suffer any Damages in respect of which indemnification may be
sought hereunder, such Person (the "Indemnitee") may assert a claim for
----------
indemnification by written notice (the "Notice") to the party from whom
------
indemnification is being sought (the "Indemnitor"), stating the amount of
----------
Damages, if known, and the nature and basis of such claim. In the case of
Damages arising or which may arise by reason of any third-party claim, promptly
after receipt by an Indemnitee of written notice of the assertion or the
commencement of any Action with respect to any matter in respect of which
indemnification may be sought hereunder, the Indemnitee shall give Notice to the
Indemnitor and shall thereafter keep the Indemnitor reasonably informed with
respect thereto, provided that failure of the Indemnitee to give the Indemnitor
prompt notice as provided herein shall not relieve the Indemnitor of any of its
obligations hereunder, except to the extent that the Indemnitor is materially
prejudiced by such failure. In case any such Action is brought against any
Indemnitee, the Indemnitor shall be entitled to assume the defense thereof, by
written notice of its intention to do so to the Indemnitee within 30 days after
receipt of the Notice. If the Indemnitor shall assume the defense of such
Action, it shall not settle such Action without the prior written consent of the

<PAGE>

Indemnitee, which consent shall not be unreasonably withheld, provided that an
--------
Indemnitee shall not be required to consent to any settlement that (i) does not
include as an unconditional term thereof the giving by the claimant or the
plaintiff of a release of the Indemnitee from all liability with respect to such
Action or (ii) involves the imposition of equitable remedies or the imposition
of any material obligations on such Indemnitee other than financial obligations
for which such Indemnitee will be indemnified hereunder. As long as the
Indemnitor is contesting any such Action in good faith and on a timely basis,
the Indemnitee shall not pay or settle any claims brought under such Action.
Notwithstanding the assumption by the Indemnitor of the defense of any Action as
provided in this Section, the Indemnitee shall be permitted to participate in
the defense of such Action and to employ counsel at its own expense; provided,
--------
however, that if the defendants in any Action shall include both an Indemnitor
- -------
and any Indemnitee and such Indemnitee shall have reasonably concluded that
counsel selected by Indemnitor has a conflict of interest because of the
availability of different or additional defenses to such Indemnitee, such
Indemnitee shall have the right to select separate counsel to participate in the
defense of such Action on its behalf, at the expense of the Indemnitor; provided
--------
that the Indemnitor shall not be obligated to pay the expenses of more than one
separate counsel for all Indemnitees, taken together.

(b) If the Indemnitor shall fail to notify the Indemnitee of its
desire to assume the defense of any such Action within the prescribed period of
time, or shall notify the Indemnitee that it will not assume the defense of any
such Action, then the Indemnitee may assume the defense of any such Action, in
which event it may do so acting in good faith in such manner as it may deem
appropriate, and the Indemnitor shall be bound by any determination made in such
Action, provided, however, that the Indemnitee shall not be permitted to settle
-------- -------
such action without the consent of the Indemnitor. No such determination or
settlement shall affect the right of the Indemnitor to dispute the Indemnitee's
claim for indemnification. The Indemnitor shall be permitted to join in the
defense of such Action and to employ counsel at its own expense.

(c) Amounts payable by the Indemnitor to the Indemnitee in respect of
any Damages for which such party is entitled to indemnification hereunder shall
be payable by the Indemnitor as incurred by the Indemnitee.

(d) In the event of any dispute between the parties regarding the
applicability of the indemnification provisions of this Agreement, the
prevailing party shall be entitled to recover all Damages incurred by such party
arising out of, resulting from or relating to such dispute.

10.4 Insurance Proceeds and Tax Limitations. The amount of any
--------------------------------------
Damages or other liability for which

<PAGE>

indemnification is provided under this Agreement shall be net of any amounts
recovered or recoverable by the Indemnitee under insurance policies with respect
to such Damages or other liability and shall be (i) increased to take account of
any Tax cost incurred (grossed up for such increase) by the Indemnitee arising
from the receipt of indemnity payments hereunder (unless such indemnity payment
is treated as an adjustment to the purchase price hereunder for tax purposes)
and (ii) reduced to take account of any Tax benefit realized by the Indemnitee
arising from the incurrence or payment of any such Damages or other liability.
Such Tax cost or Tax benefit, as the case may be, shall be computed for any year
using the Indemnitee's actual tax liability with and without (i) the incurrence
or payment of any Damages or other liability for which indemnification is
provided under this Agreement or (ii) the payment of any indemnification
payments made pursuant to this Agreement in such year. In the event that the
Indemnitee will actually realize a Tax cost or Tax benefit for a year(s)
subsequent to the year in which the indemnity payment is made, a payment in
respect of such Tax cost or Tax benefit shall be made in such subsequent
year(s). Any indemnity payment made pursuant to this Agreement will be treated
as an adjustment to the purchase price hereunder for Tax purposes, unless a
determination (as defined in Section 1313 of the Code) with respect to the
Indemnitee causes any such payment not to constitute an adjustment to the
purchase price for United States Federal income tax purposes.

10.5 Tax Indemnification. Notwithstanding anything to the contrary in
-------------------
this Agreement, the rights and obligations of the parties with respect to
indemnification for any and all Tax matters (other than with respect to any
representations and warranties contained herein relating to Tax matters, except
to the extent Buyer or Holdings is indemnified under the provisions of the Tax
Agreement) shall be governed by the Tax Agreement and shall not be subject to
this Article X, including any calculation pursuant to clause (i) of Section
10.2(a).

ARTICLE XI

MISCELLANEOUS
-------------

11.1 Termination. This Agreement may be terminated and the
-----------
transactions contemplated hereby abandoned:

(a) by mutual consent of the parties; or

(b) by Parent and Seller, on the one hand, or Holdings and Buyer, on
the other hand, on June 17, 1996 if it can be reasonably anticipated that
the approvals referred to in Section 4.11(i) cannot be obtained without the
applicable regulatory authorities imposing an additional material economic
burden on Parent or Seller, on the one hand, or Holdings, Buyer, the
Company and the Subsidiaries, taken as a whole, on the other hand; or

<PAGE>

(c) by Parent and Seller, on the one hand, or Holdings and Buyer, on
the other hand, if the conditions to such parties' obligations set forth in
Articles VII and VIII, as the case may be, have not been satisfied (or
waived by the party entitled to the benefit thereof) on or before
August 17, 1996; provided that if the approvals referred to in Section
--------
4.11(i) have not been obtained by August 17, 1996, this Agreement shall not
be terminated prior to October 17, 1996 if it can be reasonably anticipated
that such approvals can be obtained by October 17, 1996; or

(d) by Parent and Seller, on the one hand, or Holdings and Buyer, on
the other hand, if the TRG Agreement is terminated in accordance with its
terms.

Upon termination of this Agreement pursuant to this Section 11.1, this
Agreement shall be void and of no further force and effect (except as provided
in the last sentence of this paragraph) and no party shall have any liability to
any other party under this Agreement unless such party has (a) willfully failed
to have performed its obligations hereunder or (b) knowingly made a
misrepresentation of any matter set forth herein. For purposes of the
immediately preceding sentence, with respect to obligations of the Company or
any Subsidiary to take or refrain from taking any action under this Agreement or
obligations of Parent or Seller to cause the Company or any Subsidiary to take
or refrain from taking any action under this Agreement, neither Parent nor
Seller shall be deemed to have "willfully failed" unless, in each case, such
action or failure to act is directed by Parent or Seller or occurs with
knowledge of an officer listed on Schedule 1.1B or 1.1C; provided that if such
--------
action or failure is (X) not directed by Parent or Seller, (Y) occurs with the
knowledge of an officer listed on Schedule 1.1C and (Z) occurs without the
knowledge of an officer listed on Schedule 1.1B, Buyer shall recover only its
Third Party Expenses and Seller and Parent shall have no further liability under
this Agreement. For purposes of the second preceding sentence, neither Parent
nor Seller shall be deemed to have "knowingly" made a misrepresentation unless
an officer listed on Schedule 1.1B or 1.1C knows such representation is untrue
when made; provided that if a representation is known to be untrue when this
--------
Agreement is executed by the parties hereto by an officer listed on Schedule
1.1C but not by an officer listed on Schedule 1.1B, Buyer shall recover only its
Third Party Expenses and Seller and Parent shall have no further liability under
this Agreement. Notwithstanding a termination of this Agreement, the provisions
of Sections 11.2(b) and 11.11, the last sentences of Sections 4.18 and 5.4 and
the confidentiality provision of the proviso to Section 6.4 hereof shall
continue in full force and effect.

<PAGE>

11.2 Confidentiality. (a) Parent and Seller shall assign to the
---------------
Company at or prior to, and with effect from and after the Closing, all of their
respective rights under the Confidentiality Agreement and under any other
confidentiality agreements with third Persons relating to the business of the
Company or any of the Subsidiaries.

(b) Except as otherwise required by law (including if required by any
stock exchange on which any of the securities of any party or their respective
Affiliates are listed or by any securities commission or similar regulatory
authority having jurisdiction over any such party or any of its Affiliates),
Buyer, Holdings, Seller and Parent shall keep confidential all aspects of the
transactions contemplated hereby, including the fact that this Agreement has
been executed. Notwithstanding the foregoing or the terms of the
Confidentiality Agreement, Buyer, Holdings and their respective Affiliates and
Seller, Parent and their respective Affiliates may disclose information
concerning the transactions contemplated hereby in connection with the financing
of such transactions by Holdings and Buyer, to potential equity investors in
Holdings or any of its Affiliates, as necessary to obtain any consents
referenced in Section 8.2 and, in the case of Parent, as it, in its sole
discretion, deems appropriate in light of its status as a Person with public
stockholders. The parties will use their reasonable efforts to make the release
to be issued announcing the Closing a mutually acceptable joint release. Before
issuing any other press release with respect to the transactions contemplated by
this Agreement, the parties will use reasonable efforts to provide each other
with a reasonable opportunity to review and comment on any such announcement.

11.3 Parent Option. (a) Parent and/or Seller shall have the right to
-------------
purchase up to an aggregate of 19.9% of the Holdings Common Stock immediately
prior to the Closing for a per share purchase price equal to the per share
purchase price paid or payable by other stockholders of Holdings on or prior to
the Closing Date, provided that if investment partnerships affiliated with KKR
--------
shall have invested, as of the Closing Date, in a corporation which wholly-owns
Holdings (rather than investing directly in Holdings), references to "Holdings
Common Stock" in this Section 11.3, Sections 5.3, 5.7(b) and 9.3 and clause (b)
of the definition of "Securities" contained in Section 1.1 shall be deemed to be
references to the common stock of such corporation and references to "Holdings"
and "New Talegen Holdings Corporation" in Section 9.3 shall be deemed to be
references to such corporation. Parent and/or Seller shall pay the aggregate
purchase price for any shares to be purchased pursuant to this Section in cash,
payable by wire transfer in immediately available funds to an account which
Buyer shall designate in writing to Parent no less than two business days prior
to the Closing Date. To exercise such right, Parent and/or Seller must deliver
irrevocable written notice to Buyer within 45 days from the date hereof which
indicates the percentage interest (after

<PAGE>

giving effect to its purchase) of Holdings Common Stock that Parent and/or
Seller desire to purchase hereunder, but not to exceed an aggregate of 19.9%
(which irrevocable notice shall bind Parent, subject to the last sentence of
this Section, to make such purchase on the Closing Date). No such notice shall
be effective unless Parent and/or Seller concurrently delivers a notice under
Section 11.3 of the TRG Agreement which indicates Parent's and/or Seller's
election to purchase the same aggregate percentage interest in the securities
covered by the election thereunder that Parent and/or Seller elect to purchase
hereunder. Notwithstanding the foregoing, if this Agreement is terminated
pursuant to Section 11.1, Parent and Seller shall cease to have the right to
purchase Holdings Common Stock hereunder, whether or not their rights had been
previously exercised, and any notice which shall have been delivered pursuant to
this Section shall be void and of no effect.

(b) Any Holdings Common Stock purchased by Parent and/or Seller
pursuant to paragraph (a) above shall be subject to the terms and conditions set
forth in Exhibit M.

11.4 Assignment. Neither this Agreement nor any of the rights or
----------
obligations hereunder may be assigned by Parent or Seller without the prior
written consent of Holdings or Buyer, or by Holdings or Buyer without the prior
written consent of Parent or Seller. Subject to the foregoing, this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, and no other Person shall have any right,
benefit or obligation hereunder.

11.5 Notices. Unless otherwise provided herein, any notice, request,
-------
instruction or other document to be given hereunder by any party to the others
shall be in writing and delivered in Person or by courier or facsimile
transmission or mailed by certified mail, postage prepaid, return receipt
requested (such mailed notice to be effective on the date such receipt is
acknowledged), as follows:

If to Parent or
Seller: Xerox Financial Services, Inc.
100 First Stamford Place
Stamford, Connecticut 06904-2347
Attn: Stuart B. Ross
Chairman & Chief Executive
Officer
Fax: (203) 325-6822

and

<PAGE>

Xerox Corporation
800 Long Ridge Road
Stamford, Connecticut 06904
Attn: Richard Paul, Esq.
General Counsel
Fax: (203) 968-3446

With a copy to: Skadden, Arps, Slate, Meagher &
Flom
919 Third Avenue
New York, New York 10022
Attn: Lou R. Kling, Esq.
and
Peter Allan Atkins, Esq.
Fax: (212) 735-2000

If to Holdings or
Buyer: New Talegen Holdings Corporation
c/o Kohlberg Kravis Roberts & Co.
2800 Sand Hill Road, Suite 200
Menlo Park, California 94025
Attn: Saul A. Fox
Fax: (415) 233-6594

With copies to: Joseph W. Brown
Talegen Holdings, Inc.
Waterfront Center One
1011 Western Avenue, Suite 1000
Seattle, Washington 98101
Fax: (206) 654-2633

Gary I. Horowitz, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Fax: (212) 455-2502

or to such other place and with such other copies as either party may designate
as to itself by written notice to the others.

11.6 Choice of Law. This Agreement shall be construed, interpreted
-------------
and the rights of the parties determined in accordance with the internal laws of
the State of New York, without regard to the conflict of law principles thereof.

11.7 Entire Agreement; Amendments and Waivers. This
----------------------------------------
Agreement, together with the Ancillary Agreements and the Confidentiality
Agreement (except to the extent superseded hereby), constitutes the entire
agreement among the parties pertaining to the subject matter hereof and
supersedes all prior agreements, understandings, negotiations and discussions,
whether oral or written, of the parties. No supplement, modification or waiver
of this Agreement (including, without limitation, any Schedule hereto) shall be
binding unless executed in writing by

<PAGE>

all parties. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provision hereof (whether or
not similar), nor shall such waiver constitute a continuing waiver unless
otherwise expressly provided. With respect to breaches of any representation,
warranty or covenant contained herein, unless this Agreement shall have been
terminated pursuant to Section 11.1, the sole remedy of the parties against each
other shall be the indemnification rights set forth in Section 10.2.

11.8 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

11.9 Invalidity. In the event that any one or more of the provisions
----------
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision of this Agreement or any other such instrument.

11.10 Headings. The headings of the Articles and
--------
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.

11.11 Expenses. Subject to Section 11.1, Seller and Buyer will
--------
each be liable for its own costs and expenses incurred in connection with the
negotiation, preparation, execution or performance of this Agreement.

11.12 [Intentionally Omitted].
---------------------

11.13 Joint and Several. (a) All covenants, representations and
-----------------
warranties made by Parent or Seller in this Agreement shall be deemed to be
joint and several covenants, representations and warranties of Parent and
Seller.

(b) All covenants, representations and warranties made by Holdings or
Buyer in this Agreement shall be deemed to be joint and several covenants,
representations and warranties of Holdings and Buyer.

11.14 No Third Party Beneficiaries. This Agreement shall inure
----------------------------
exclusively to the benefit of and be binding upon the parties hereto and their
respective successors, assigns, executors and legal representatives. Except as
expressly provided in Section 10.2, nothing in this Agreement, express or
implied, is intended to confer on any Person other than the parties hereto or
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.

<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Agreement,
or have caused this Agreement to be duly executed on their respective behalf by
their respective officers thereunto duly authorized, as of the day and year
first above written.

XEROX CORPORATION

/s/ Stuart B. Ross
-----------------------------------
Name: Stuart B. Ross
Title: Executive Vice President

XEROX FINANCIAL SERVICES, INC.

/s/ Stuart B. Ross
-----------------------------------
Name: Stuart B. Ross
Title: Chairman, President and
Chief Executive Officer

NEW TALEGEN HOLDINGS CORPORATION

/s/ Saul A. Fox
-----------------------------------
Name: Saul A. Fox
Title: President and Chief
Executive Officer

TALEGEN ACQUISITION CORPORATION

/s/ Saul A. Fox
-----------------------------------
Name: Saul A. Fox
Title: President and Chief
Executive Officer

EXHIBIT 3.1

CERTIFICATE OF INCORPORATION

COMPATRIOT CORPORATION

The undersigned, in order to form a corporation for the purpose
hereinafter stated, under and pursuant to the provisions of the Delaware General
Corporation Law, hereby certifies that:

1. The name of the Corporation is Compatriot Corporation.

2. The registered office and registered agent of the Corporation is
The Prentice-Hall Corporation System, Inc., 32 Loockerman Square, Suite L-100,
Dover, Kent County, Delaware 19901.

3. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.

4. The total number of shares of stock that the Corporation is
authorized to issue is 1,000 shares of Common Stock, par value $0.01 each.

5. The name and address of the incorporator is, Ola E. Lotfy, 425
Lexington Avenue, New York, New York 10017.

6. The Board of Directors of the Corporation, acting by majority
vote, may alter, amend or repeal the By-Laws of the Corporation.

7. Except as otherwise provided by the Delaware General Corporation
Law as the same exists or may hereafter be amended, no director of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director. Any repeal or
modification of this Article SEVENTH by the stockholders of the Corporation
shall not adversely affect any right of protection of a director of the
Corporation existing at the time of such repeal or modification.

IN WITNESS WHEREOF, the undersigned has signed this Certificate of
Incorporation on May 12, 1995.

/s/ Ola E. Lotfy
-------------------------
Ola E. Lotfy
Sole Incorporator

EXHIBIT 3.2

CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
COMPATRIOT CORPORATION
----------------------

COMPATRIOT CORPORATION, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"),

DOES HEREBY CERTIFY:

First: Article 1 of the Certificate of Incorporation be, and it
hereby is, amended to read as follows:

"1. The name of the Corporation is Talegen Acquisition Corporation"

Second: The Corporation has not received any payment for any of
its stock and pursuant to Section 241 of the Delaware General Corporation
Law, this Certificate of Amendment of the Certificate of Incorporation was
duly adopted by the Board of Directors of the Corporation as of December 11,
1995.

IN WITNESS WHEREOF, the Corporation has caused this Certificate to
be signed by Saul A. Fox, its President and Chief Executive Officer, and
attested by Frederick M. Goltz, its Vice President, Secretary and Assistant
Treasurer, on this 11th day of December, 1995.

COMPATRIOT CORPORATION

By: /s/ Saul A. Fox
-----------------------------
President and Chief Executive
Officer

ATTEST:

By: /s/ Frederick M. Goltz
-------------------------
Vice President, Secretary
and Assistant Treasurer

EXHIBIT 3.3

COMPATRIOT CORPORATION

BY-LAWS

ARTICLE I

MEETING OF STOCKHOLDERS
-----------------------

Section 1. Place of Meeting and Notice. Meetings of the stockholders
---------------------------
of the Corporation shall be held at such place either within or without the
State of Delaware as the Board of Directors may determine.

Section 2. Annual and Special Meetings. Annual meetings of
---------------------------
stockholders shall be held, at a date, time and place fixed by the Board of
Directors and stated in the notice of meeting, to elect a Board of Directors and
to transact such other business as may properly come before the meeting.
Special meetings of the stockholders may be called by the President for any
purpose and shall be called by the President or Secretary if directed by the
Board of Directors or requested in writing by the holders of not less than 25%
of the capital stock of the Corporation. Each such stockholder request shall
state the purpose of the proposed meeting.

Section 3. Notice. Except as otherwise provided by law, at least 10
------
and not more than 60 days before each meeting of stockholders, written notice of
the time, date and place of the meeting, and, in the case of a special meeting,
the purpose or purposes for which the meeting is called, shall be given to each
stockholder.

Section 4. Quorum. At any meeting of stockholders, the holders of
------
record, present in person or by proxy, of a majority of the Corporation's issued
and outstanding capital stock shall constitute a quorum for the transaction of
business, except as otherwise provided by law. In the absence of a quorum, any
officer entitled to preside at or to act as secretary of the meeting shall have
power to adjourn the meeting from time to time until a quorum is present.

Section 5. Voting. Except as otherwise provided by law, all matters
------
submitted to a meeting of stockholders shall be decided by vote of the holders
of record, present in person or by proxy, of a majority of the Corporation's
issued and outstanding capital stock.

<PAGE>
2

ARTICLE II

DIRECTORS
---------

Section 1. Number, Election and Removal of Directors. The number of
-----------------------------------------
Directors that shall constitute the Board of Directors shall be not less than
one nor more than fifteen. The first Board of Directors shall consist of two
Directors. Thereafter, within the limits specified above, the number of
Directors shall be determined by the Board of Directors or by the stockholders.
The Directors shall be elected by the stockholders at their annual meeting.
Vacancies and newly created directorships resulting from any increase in the
number of Directors may be filled by a majority of the Directors then in office,
although less than a quorum, or by the sole remaining Director or by the
stockholders. A Director may be removed with or without cause by the
stockholders.

Section 2. Meetings. Regular meetings of the Board of Directors
--------
shall be held at such times and places as may from time to time be fixed by the
Board of Directors or as may be specified in a notice of meeting. Special
meetings of the Board of Directors may be held at any time upon the call of the
President and shall be called by the President or Secretary if directed by the
Board of Directors. Telegraphic or written notice of each special meeting of
the Board of Directors shall be sent to each Director not less than two days
before such meeting. A meeting of the Board of Directors may be held without
notice immediately after the annual meeting of the stockholders. Notice need
not be given of regular meetings of the Board of Directors.

Section 3. Quorum. One-third of the total number of Directors shall
------
constitute a quorum for the transaction of business. If a quorum is not present
at any meeting of the Board of Directors, the Directors present may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until such a quorum is present. Except as otherwise provided by law,
the Certificate of Incorporation of the Corporation, these By-Laws or any
contract or agreement to which the Corporation is a party, the act of a majority
of the Directors present at any meeting at which there is a quorum shall be the
act of the Board of Directors.

Section 4. Committees of Directors. The Board of Directors may, by
-----------------------
resolution adopted by a majority of the whole Board, designate one or more
committees, including without limitation an Executive Committee, to have and
exercise such power and authority as the Board of Directors shall specify. In
the absence or disqualification of a member of a committee, the member or
members thereof present at any meeting and not

<PAGE>
3

disqualified from voting, whether or not he, she or they constitute a quorum,
may unanimously appoint another Director to act at the meeting in place of any
such absent or disqualified member.

ARTICLE III

OFFICERS
--------

The officers of the Corporation shall consist of a President, a
Secretary, a Treasurer and such other additional officers with such titles as
the Board of Directors shall determine, all of whom shall be chosen by and shall
serve at the pleasure of the Board of Directors. Such officers shall have the
usual powers and shall perform all the usual duties incident to their respective
offices. All officers shall be subject to the supervision and direction of the
Board of Directors. The authority, duties or responsibilities of any officer of
the Corporation may be suspended by the President with or without cause. Any
officer elected or appointed by the Board of Directors may be removed by the
Board of Directors with or without cause.

ARTICLE IV

INDEMNIFICATION
---------------

To the fullest extent permitted by the Delaware General Corporation
Law, the Corporation shall indemnify any current or former Director or officer
of the Corporation and may, at the discretion of the Board of Directors,
indemnify any current or former employee or agent of the Corporation against all
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with any threatened, pending or
completed action, suit or proceeding brought by or in the right of the
Corporation or otherwise, to which he or she was or is a party or is threatened
to be made a party by reason of his or her current or former position with the
Corporation or by reason of the fact that he or she is or was serving, at the
request of the Corporation, as a director, officer, partner, trustee, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise.

ARTICLE V

GENERAL PROVISIONS
------------------

Section 1. Notices. Whenever any statute, the Certificate of
-------
Incorporation or these By-Laws require notice to be given to any Director or
stockholder, such notice may

<PAGE>
4

be given in writing by mail, addressed to such Director or stockholder at his or
her address as it appears on the records of the Corporation, with postage
thereon prepaid. Such notice shall be deemed to have been given when it is
deposited in the United States mail. Notice to Directors may also be given by
telegram or telecopy.

Section 2. Fiscal Year. The fiscal year of the Corporation shall be
-----------
fixed by the Board of Directors.

As adopted on the 12th day of May, 1995.

EXHIBIT 23.1

The Board of Directors
Talegen Holdings, Inc.:

We consent to the inclusion of our reports dated January 17, 1996, with
respect to the consolidated balance sheets of Talegen Holdings, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of earnings, shareholder's equity, and cash flows for each of the
years in the three-year period ended December 31, 1995, and all related
schedules, which reports appear in the Form S-1 of Talegen Acquisition
Corporation. We also consent to the reference to our firm under the heading
"Experts" in the prospectus.

KPMG Peat Marwick LLP

Short Hills, New Jersey
June 4, 1996

EXHIBIT 23.2

INDEPENDENT AUDITORS' CONSENT

To the Board of Directors
of Talegen Acquisition Corporation:

We consent to the use in this Registration Statement of Talegen Acquisition
Corporation on Form S-1 of our report dated March 15, 1996, appearing in the
Prospectus, which is part of this Registration Statement.

We also consent to the reference to us under the heading "Experts" in such
Prospectus.

Deloitte & Touche LLP
New York, New York
June 5, 1996

Exhibit 25

Conformed Copy

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST
INDENTURE ACT OF 1939 OF A CORPORATION
DESIGNATED TO ACT AS TRUSTEE

CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)

MARINE MIDLAND BANK
(Exact name of trustee as specified in its charter)

New York 16-1057879
(Jurisdiction of incorporation (I.R.S. Employer
or organization if not a U.S. Identification No.)
national bank)

140 Broadway, New York, N.Y. 10005-1180
(212) 658-1000 (Zip Code)
(Address of principal executive offices)

Eric Parets
Senior Vice President
Marine Midland Bank
140 Broadway
New York, New York 10005-1180
Tel: (212) 658-6560
(Name, address and telephone number of agent for service)

TALEGEN ACQUISITION CORPORATION
(Exact name of obligor as specified in its charter)

Delaware 94-3236449
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

1011 Western Avenue, Suite 1000
Seattle, Washington 98104
(206) 654-2600 (Zip Code)
(Address of principal executive offices)

Senior Subordinated Debentures
(Title of Indenture Securities)

<PAGE>

General
Item 1. General Information.
-------------------

Furnish the following information as to the trustee:

(a) Name and address of each examining or supervisory
authority to which it is subject.

State of New York Banking Department.

Federal Deposit Insurance Corporation, Washington, D.C.

Board of Governors of the Federal Reserve System,
Washington, D.C.

(b) Whether it is authorized to exercise corporate trust powers.

Yes.

Item 2. Affiliations with Obligor.
--------------------------

If the obligor is an affiliate of the trustee, describe
each such affiliation.

None

<PAGE>

Item 16. List of Exhibits.
-----------------

Exhibit
-------

T1A(i) * - Copy of the Organization Certificate of
Marine Midland Bank.

T1A(ii) * - Certificate of the State of New York
Banking Department dated December 31,
1993 as to the authority of Marine
Midland Bank to commence business.

T1A(iii) - Not applicable.

T1A(iv) * - Copy of the existing By-Laws of Marine
Midland Bank as adopted on January 20,
1994.

T1A(v) - Not applicable.

T1A(vi) * - Consent of Marine Midland Bank required
by Section 321(b) of the Trust
Indenture Act of 1939.

T1A(vii) - Copy of the latest report of condition
of the trustee (March 31, 1996),
published pursuant to law or the
requirement of its supervisory or
examining authority.

T1A(viii) - Not applicable.

T1A(ix) - Not applicable.

* Exhibits previously filed with the Securities and Exchange
Commission with Registration No. 33-53693 and incorporated herein by
reference thereto.

<PAGE>

SIGNATURE

Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee,
Marine Midland Bank, a banking corporation and trust company organized under
the laws of the State of New York, has duly caused this statement of
eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York and State of New York on the 24th day
of May 1996.

MARINE MIDLAND BANK

By: /s/Frank J. Godino
--------------------------------
Frank J. Godino
Corporate Trust Officer

<PAGE>

Exhibit T1A (vii)

Board of Governors of the
Federal Reserve System
OMB Number: 7100-0036
Federal Deposit Insurance
Corporation
OMB Number: 3064-0052
Office of the Comptroller
of the Currency
1
OMB Number: 1557-0081

Federal Financial Institutions Examination CouncilExpires March 31, 1999

This financial information has not been reviewed, or confirmed
for accuracy or relevance, by the Federal Reserve System.Please refer to page
i,
Table of Contents, for
the required disclosure
of estimated burden.
(950630)
------------
(RCRI 9999)
Consolidated Reports of Condition and Income for
A Bank With Domestic and Foreign Offices--FFIEC 031

Report at the close of business
March 31, 1996
This report is required by law; 12 This report form is to be filed by
U.S.C. Sec.324 (State member banks); 12 banks with branches and
U.S.C. Sec. 1817 (State nonmember consolidated subsidiaries in U.S.
banks); and 12 U.S.C. Sec.161 territories and possessions, Edge
(National banks). or Agreement subsidiaries, foreign
branches, consolidated foreign
subsidiaries, or International
Banking Facilities.

NOTE: The Reports of Condition and The Reports of Condition and Income
Income must be signed by an are to be prepared in accordance
authorized officer and the Report of with Federal regulatory authority
Condition must be attested to by not instructions. NOTE: These
less than two directors (trustees) instructions may in some cases
for State nonmember banks and three differ from generally accepted
directors for State member and accounting principles.
National Banks.
We, the undersigned directors
I, Gerald A. Ronning, Executive VP &
----------------------------------
(trustees), attest to the
Controller
---------- correctness of this Report of
Name and Title of Officer Condition (including the supporting
Authorized to Sign Report schedules) and declare that it has
of the named bank do hereby declare been examined by us and to the best
that these Reports of Condition and of our knowledge and belief has been
Income (including the supporting prepared in conformance with the
schedules) have been prepared in instructions issued by the
conformance with the instructions appropriate Federal regulatory
issued by the appropriate Federal authority and is true and correct.
regulatory authority and are true to
the best of my knowledge and /s/ Henry J. Nowak
------------------------------------
believe.
Director (Trustee)
/s/ Bernard J. Kennedy
------------------------------------
/s/ Gerald A. Ronning
----------------------------------
Signature of Officer Authorized to Director (Trustee)
Sign Report /s/ James H. Cleave
------------------------------------
4/25/96
----------------------------
Date of Signature Director (Trustee)

<PAGE>

For Banks Submitting Hard Copy
Report Forms:
National Banks: Return the original
State Member Bank: Return the only in the special return address
original and one copy to the envelope provided. If express mail
appropriate Federal Reserve District is used in lieu of the special
Bank. return address envelope, return the
original only to the FDIC, c/o
State Nonmember Banks: Return the Quality Data Systems, 2127 Espey
original only in the special return Court, Suite 204, Crofton, MD 21114.
address envelope provided. If
express mail is used in lieu of the
special return address envelope,
return the original only to the
FDIC, c/o Quality Data Systems, 2127
Espey Court, Suite 204, Crofton, MD
21114.

FDIC Certificate 0 0 5 8 9
Number
(RCRI

<PAGE>

NOTICE
This form is intended to assist institutions with state publication
requirements. It has not been approved by any state banking
authorities. Refer to your appropriate state banking authorities
for your state publication requirements.

REPORT OF CONDITION

Consolidating domestic and foreign subsidiaries of the
Marine Midland Bank of Buffalo
Name of Bank City
in the state of New York, at the close of business
March 31, 1996

ASSETS
Thousands
of dollars
Cash and balances due from depository
institutions:

Noninterest-bearing balances
currency and coin......................... $1,344,915
Interest-bearing balances ................ 1,536,664
Held-to-maturity securities............... 0
Available-for-sale securities............. 3,338,156

Federal Funds sold and securities purchased
under agreements to resell in domestic
offices of the bank and of its Edge and
Agreement subsidiaries, and in IBFs:

Federal funds sold....................... 439,200
Securities purchased under
agreements to resell..................... 323,578

Loans and lease financing receivables:
Loans and leases net of unearned
income............................... 13,404,283
LESS: Allowance for loan and lease
losses............................... 470,421
LESS: Allocated transfer risk reserve 0

Loans and lease, net of unearned
income, allowance, and reserve........... 12,933,862
Trading assets........................... 818,882
Premises and fixed assets (including
capitalized leases)...................... 177,937

Other real estate owned..................... 4,004
Investments in unconsolidated
subsidiaries and associated companies....... 0
Customers' liability to this bank on
acceptances outstanding..................... 24,688
Intangible assets........................... 60,829
Other assets................................ 436,079
Total assets................................ 21,438,794

<PAGE>

LIABILITIES

Deposits:
In domestic offices.................. 13,972,231
Noninterest-bearing.................. 3,227,485
Interest-bearing..................... 10,744,746

In foreign offices, Edge, and Agreement
subsidiaries, and IBFs.................. 2,915,229

Noninterest-bearing.................. 0
Interest-bearing..................... 2,915,229
Federal funds purchased and securities sold
under agreements to repurchase in domestic
offices of the bank and its Edge and
Agreement subsidiaries, and in IBFs:

Federal funds purchased............. 759,940
Securities sold under agreements to
repurchase..........................
809,703
Demand notes issued to the U.S. Treasury 111,294
Trading Liabilities.................... 323,875

Other borrowed money:
With original maturity of one year
or less............................. 83,438
With original maturity of more than
one year............................ 0
Mortgage indebtedness and obligations
under capitalized leases............... 34,696
Bank's liability on acceptances
executed and outstanding............... 24,688
Subordinated notes and debentures...... 225,000
Other liabilities...................... 467,094
Total liabilities...................... 19,727,188
Limited-life preferred stock and
related surplus........................ 0

EQUITY CAPITAL
Perpetual preferred stock and related
surplus............................... 0
Common Stock.......................... 185,000
Surplus............................... 1,633,098
Undivided profits and capital reserves. (115,039)
Net unrealized holding gains (losses)
on available-for-sale securities....... 8,547
Cumulative foreign currency translation
adjustments............................ 0
Total equity capital................... 1,711,606
Total liabilities, limited-life
preferred stock, and equity capital... 21,438,794