CRUM & FORSTER HOLDINGS INC, S-1, 1998-02-09

CRUM & FORSTER HOLDINGS INC
S-1, 1998-02-09

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 9, 1998

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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CRUM & FORSTER HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 6411 223258258
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)

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305 MADISON AVENUE
MORRISTOWN, NJ 07960
(973) 490-6600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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JOSEPH W. BROWN, JR.
CHAIRMAN
CRUM & FORSTER HOLDINGS, INC.
305 MADISON AVENUE
MORRISTOWN, NJ 07960
(973) 490-6600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

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COPIES TO:

MARK KESSEL, ESQ. PETER R. O'FLINN, ESQ.
SHEARMAN & STERLING LARS BANG-JENSEN, ESQ.
599 LEXINGTON AVENUE LEBOEUF, LAMB, GREENE & MACRAE, L.L.P.
NEW YORK, NEW YORK 10022 125 WEST 55TH STREET
(212) 848-4000 NEW YORK, NEW YORK 10019-5389
(212) 424-8000

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APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon 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 statement 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 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
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
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<S> <C> <C>
Common Stock, par value $1.00 per share... $100,000,000 $29,500
</TABLE>
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(1) Estimated pursuant to Rule 457 solely for purposes of calculating the
registration fee.

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>

EXPLANATORY NOTE

This registration statement contains two forms of the prospectus: one to be
used in connection with a United States and Canadian offering of the
registrant's Common Stock (the "U.S. Prospectus") and one to be used in
connection with a concurrent international offering of Common Stock (the
"International Prospectus" and, together with the U.S. Prospectus, the
"Prospectuses"). The International Prospectus will be identical to the U.S.
Prospectus except that it will have a different front cover page. The U.S.
Prospectus is included herein and is followed by the front cover page to be
used in the International Prospectus. The front cover page for the
International Prospectus included herein has been labelled "Alternate Page for
International Prospectus." Final forms of each Prospectus will be filed with
the Securities and Exchange Commission under Rule 424(b) of the General Rules
and Regulations under the Securities Act of 1933, as amended.
<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 THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued February 9, 1998

Shares
Crum & Forster Holdings, Inc.
COMMON STOCK

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OF THE SHARES OFFERED HEREBY, SHARES ARE BEING OFFERED INITIALLY IN
THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS (THE "U.S. OFFERING")
AND SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND
CANADA BY THE INTERNATIONAL UNDERWRITERS (THE "INTERNATIONAL OFFERING"
AND, TOGETHER WITH THE U.S. OFFERING, THE "OFFERING"). SEE
"UNDERWRITERS." ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE
BEING SOLD BY TALEGEN HOLDINGS, INC., A WHOLLY OWNED INDIRECT
SUBSIDIARY OF XEROX CORPORATION. SEE "OWNERSHIP OF COMMON STOCK."
THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF
SHARES BY TALEGEN. PRIOR TO THE OFFERING, THERE HAS BEEN NO
PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS
CURRENTLY EXPECTED THAT THE INITIAL PUBLIC OFFERING PRICE PER
SHARE WILL BE BETWEEN $ AND $ . SEE "UNDERWRITERS" FOR A
DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING
THE INITIAL PUBLIC OFFERING PRICE.

-----------

APPLICATION WILL BE MADE TO HAVE THE COMMON STOCK APPROVED FOR LISTING ON THE
UNDER THE SYMBOL " ."

-----------

SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR
A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY
PROSPECTIVE
PURCHASERS
OF THE COMMON
STOCK OFFERED
HEREBY.

-----------

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.

-----------
PRICE $ A SHARE
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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS(1) STOCKHOLDER(2)
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<S> <C> <C> <C>
Per Share................................ $ $ $
Total(3)................................. $ $ $
</TABLE>
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(1) The Company, the Selling Stockholder and Xerox Corporation have agreed
to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriters."
(2) Before deducting estimated expenses of $ .
(3) The Selling Stockholder has granted to the U.S. Underwriters an option
to purchase up to additional shares of Common Stock at the price to
public less underwriting discounts and commissions set forth above
solely to cover over-allotments, if any. If the U.S. Underwriters
exercise such option in full, the Price to Public, Underwriting
Discounts and Commissions and Proceeds to Selling Stockholder will be
$ , $ and $ , respectively. See "Underwriters."

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The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel for the Underwriters. It is
expected that delivery of the Shares will be made on or about , 1998, at
the office of Morgan Stanley & Co. Incorporated, New York, N.Y., against
payment therefor in immediately available funds.

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MORGAN STANLEY DEAN WITTER
CIBC OPPENHEIMER
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
, 1998
<PAGE>

FOR NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA
NOR HAS THE COMMISSIONER OF INSURANCE PASSED UPON THE ACCURACY OR THE ADEQUACY
OF THIS DOCUMENT.
---------------
The Company, as an insurance holding company, owns all of the outstanding
voting securities of certain property and casualty insurance companies
domiciled in the States of New York, New Jersey and Ohio. State insurance
holding company statutes applicable to the Company require prior approval by
the appropriate insurance regulators of any acquisition of control of a
domestic insurance company or of any company which controls a domestic
insurance company. "Control" is generally presumed to exist through the
beneficial ownership of 10% or more of the outstanding securities of a
domestic insurance company or of any company which controls a domestic
insurance company. Beneficial ownership includes the acquisition, directly or
indirectly (by revocable proxy or otherwise), of voting stock of the Company.
Any purchaser of shares of Common Stock representing 10% or more of the voting
power of the Company will be presumed to have acquired control of the domestic
insurance subsidiaries unless the relevant insurance regulator, following
application by such purchaser in each insurance subsidiary's state of
domicile, determines otherwise. If any person acquires 10% or more of the
outstanding shares of the Company's Common Stock without obtaining prior
approval from the relevant insurance regulator, the insurer or the insurance
regulator is entitled to injunctive relief, including enjoining any proposed
acquisition, or seizing shares owned by such person, and such shares would not
be entitled to be voted. See "Business--Regulation."
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."

NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, TALEGEN OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------
For investors outside the United States: No action has been or will be taken
in any jurisdiction by the Company, Talegen or any Underwriter that would
permit a public offering of the Common Stock or possession or distribution of
a prospectus in any jurisdiction where action for that purpose is required,
other than in the United States. Persons into whose possession this Prospectus
comes are advised by the Company, Talegen and the Underwriters to inform
themselves about, and to observe any restrictions as to, the offering of the
Common Stock and the distribution of this Prospectus.
---------------
Until , 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock, whether or not participating in
this distribution, may be required to deliver a Prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a
Prospectus when acting as Underwriters and with respect to their unsold
allotments or subscriptions.

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TABLE OF CONTENTS

<TABLE>
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PAGE
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Prospectus Summary...................... 3
Risk Factors............................ 13
Use of Proceeds......................... 20
Dividend Policy......................... 20
Capitalization.......................... 21
Selected Financial Information.......... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 24
Business................................ 35
Management.............................. 65
Ownership of Common Stock............... 72
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Certain Transactions.......................................................... 72
Description of Capital Stock.................................................. 81
Shares Eligible for Future Sale............................................... 83
Certain United States Federal Tax Consequences for Non-United States Holders.. 84
Underwriters.................................................................. 87
Legal Matters................................................................. 90
Experts....................................................................... 90
Available Information......................................................... 90
Glossary of Selected Insurance Terms.......................................... G-1
Index to Financial Statements................................................. F-1
</TABLE>

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The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by its independent
accountants and quarterly reports for the first three quarters of each fiscal
year containing unaudited consolidated financial information.

2
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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information herein and
the Company's Consolidated Financial Statements, including the notes thereto,
appearing elsewhere in this Prospectus. As used in this Prospectus, unless the
context otherwise requires, (i) all financial data have been prepared using
generally accepted accounting principles ("GAAP"), (ii) "Talegen" or "Selling
Stockholder" means Talegen Holdings, Inc. and, where appropriate, its
subsidiaries, (iii) "CFI" and the "Company" mean Crum & Forster Holdings, Inc.
and, where appropriate, its insurance company subsidiaries (the "Insurance
Companies") and its non-insurance company subsidiaries, and its predecessors
and their subsidiaries, (iv) "Xerox" means Xerox Corporation and (v) the
information contained in this Prospectus assumes an estimated initial public
offering price of $ per share and that the U.S. Underwriters' over-allotment
option is not exercised and gives effect to a for split of the Common
Stock. Certain information contained in this summary and elsewhere in this
Prospectus, including information with respect to the Company's plans and
strategy, are forward-looking statements. For a discussion of important factors
which could cause actual results to differ materially from the forward-looking
statements contained herein, see "Risk Factors." See "Glossary of Selected
Insurance Terms" for definitions of certain insurance terms used herein.

Unless otherwise indicated, financial information and operating statistics
applicable to the Company set forth in this Prospectus are based on United
States GAAP and not statutory accounting practices ("SAP"). In conformity with
industry practice, data derived from A.M. Best Company, Inc. ("A.M. Best")
sources, generally used herein for industry comparisons, are based on statutory
accounting practices.

THE COMPANY

OVERVIEW
CFI is a national commercial lines property and casualty insurance group that
operates on a regional basis and underwrites business produced by a limited
number of preferred independent agents and brokers. The Company, which has
operated for more than a century under the well-known Crum & Forster name,
underwrites a broad array of commercial insurance products targeted to mid-
sized businesses. These products principally include multiple peril,
automobile, workers' compensation, umbrella and general liability coverages.
With net premiums written of $956 million in 1996, the Company is among the 30
largest writers of commercial lines insurance in the United States based on
1996 statutory data published by A.M. Best. At September 30, 1997, CFI had
total assets of $5.4 billion.

The Company believes its key competitive advantage is its strong
relationships with a group of preferred independent agents and brokers which it
identifies as "Custom Agents." CFI considers the Custom Agents to be its
primary customers because it believes these agents serve as risk managers for
many of the insureds and exercise substantial influence over their choices of
coverage and carrier. Custom Agents are selected based on their commercial
lines focus, production of profitable business and professional reputation. In
addition, each Custom Agent must have a business plan and strategy that is
consistent with CFI's and must exhibit a commitment to maintaining a long-term,
profitable business relationship with the Company. As of September 30, 1997,
the Company had 586 Custom Agents which accounted for 90% of gross premiums
written during the first nine months of 1997.

CFI operates on a regional basis through 20 offices that provide local,
market sensitive service and knowledge in support of its Custom Agents.
Substantially all underwriting and claims functions are performed in the
regional offices. The Company's management, reporting and control structures
are organized to support regional decision making while emphasizing discipline
and consistency in CFI's core underwriting and claims functions. Though CFI
operates on a regional basis, it is also recognized as a national writer with
the ability to offer countrywide account service capabilities.

3
<PAGE>

CFI is a wholly owned subsidiary of Talegen, which is a wholly owned
subsidiary of Xerox Financial Services, Inc. ("XFSI"), which is, in turn, a
wholly owned subsidiary of Xerox. In January 1993, Xerox announced its
strategic decision to disengage from its insurance and other financial services
businesses, which include Talegen and the Company, in order to focus on its
core document processing business. The uncertainties regarding the Company's
future ownership and operations created by the Xerox disengagement process have
impacted CFI's ability to effectively execute its strategy, which relies
heavily on mutual commitments to long-term, stable relationships with current
and prospective Custom Agents. The Company believes that the Offering will
remove many of these uncertainties.

CFI has recently taken steps intended to enhance growth and profitability.
Effective January 1, 1998, CFI strengthened its senior management team through
the full-time involvement of Joseph W. Brown, Jr., previously Chairman and CEO
of Talegen and, prior to that, President and CEO of Fireman's Fund Insurance
Company. The Company anticipates that, following the Offering, Mr. Brown and
other members of the senior management team will own equity interests in the
Company. This ownership is intended to provide the senior management team with
economic incentives aligned with the success of the Company. The management
team is focused on improving profitability through a number of steps including
(i) leveraging CFI's relationship with its Custom Agents to increase
penetration, (ii) maintaining disciplined underwriting, (iii) continuing
expense management measures to improve the Company's internal expense ratios,
(iv) maintaining a strong balance sheet and strong ratings to attract high-
quality business, and (v) repositioning the Company's investment portfolio to
enhance investment income.

STRATEGY
CFI's objective is to enhance shareholder value by leveraging its Custom
Agent relationships through its regional operating structure. The following
paragraphs describe the major elements of the Company's strategy.

Strong Custom Agent Relationships. The central focus of the Company is to
capitalize on market opportunities by continuing to strengthen its
relationships with its Custom Agents and by identifying and appointing
additional Custom Agents. In order to enhance relationships with its Custom
Agents, CFI seeks to provide a stable market, generalist products, strong local
expertise and decision making, ready access to CFI's senior management and
attractive agent compensation. In addition, CFI develops individual business
plans on an annual basis with each of its Custom Agents. The number of Custom
Agents was 494 at December 31, 1993 and 586 at September 30, 1997. The average
gross premium written per Custom Agent increased by 33% from $1.2 million in
1993 to $1.6 million in 1996. CFI believes there is substantial opportunity to
further increase the amount of business produced by its Custom Agents because
it estimates that it currently has less than a 10% share of the total Custom
Agents' commercial lines book of business. Consistent with its strategy to
focus on Custom Agents, CFI reduced the number of non-Custom Agents from 468 at
December 31, 1993 to 159 at September 30, 1997.

4
<PAGE>

Evidencing CFI's stable, long-term relationships with its Custom Agents, over
75% of the Custom Agents have represented the Company for more than five years
as of September 30, 1997. As of the same date, approximately 31% of the Custom
Agents have represented CFI for more than 20 years. This latter group remains a
strong part of CFI's Custom Agent force, having produced over one-third of the
Company's gross premiums written through all Custom Agents for the nine months
ended September 30, 1997.

Decentralized Regional Approach. The Company operates through 20 regional
offices, each focusing on building relationships with the Custom Agents within
its region by providing the products and services that address their needs.
Substantially all underwriting and claims functions are performed in the
regional offices, subject to well-defined boundaries designed to assure quality
underwriting and claims handling. The Company believes that operating on a
decentralized, regional basis allows it to compete effectively with regional
competitors while benefiting from its national scale by offering countrywide
account service capabilities and its financial capacity relative to many
regional carriers. CFI's regional operations allow it to obtain local knowledge
of legal, regulatory, economic and cultural factors that influence the profit
potential of insurance products and enable the Company to respond quickly to
business developments and opportunities. Each of CFI's seven most senior
officers is actively involved with the regions and works directly with Custom
Agents to gain a better understanding of their needs.

Focus on Generalist Commercial Lines Products for Middle Market
Businesses. CFI applies a generalist approach to the commercial lines middle
market by offering products which fulfill the majority of the insurance needs
of mid-sized businesses. The Company believes that its generalist products and
ability to meet most account needs of mid-size businesses have helped the
Company strengthen its relationships with Custom Agents during a time when many
competitors have specialized their product offerings. The Company also seeks to
provide a stable market by consistently offering its generalist products, while
actively working to tailor products to meet specific needs. CFI has used these
approaches to differentiate itself from its competitors. Approximately 91% of
the Company's gross premiums written for 1996 were derived from the following
five lines of business: multiple peril (26%), automobile (25%), workers'
compensation (18%), umbrella (14%) and general liability (8%). Gross premiums
written per account averaged approximately $78,000 per year for the nine months
ended September 30, 1997.

Disciplined Underwriting. CFI's underwriting standards focus on profitability
more than on premium growth or market share, which at times may limit premium
growth when market conditions do not meet the Company's pricing and
underwriting standards. Underwriting authority levels related to class, risk
grade and policy limits are delegated to regional underwriters based on
demonstrated individual expertise. The Company utilizes sophisticated
monitoring systems to track pricing levels on both new and renewal business,
thus facilitating pricing discipline within the regional offices. To manage its
liability exposure relative to its capital, reserves and willingness to retain
underwriting risk, CFI purchases both treaty and facultative reinsurance from a
limited number of high-quality reinsurers. In addition, CFI applies various
techniques to manage and limit its property catastrophe exposure, including
modelling tools to evaluate potential catastrophe exposures and to allocate
both underwriting capacity and reinsurance costs across the regions. In part
due to its disciplined underwriting approach, the Company's statutory accident
year pure loss ratios were better than the commercial lines insurance industry
averages, as extracted from data published by A.M. Best, in each of the last
four years for which industry data is available. CFI's average statutory
accident year pure loss ratio from 1993 to 1996 was 59.8% while the commercial
lines industry average accident year pure loss ratio as extracted from data
published by A.M. Best over the same period was 63.4%. The Company's statutory
accident year pure loss ratio for the nine months ended September 30, 1997 was
63.1%.

5
<PAGE>

of expertise in the insurance lines and for the types of accounts that the
Company underwrites. CFI's claims management productivity and efficiency are
illustrated by a 41.0% increase in claims managed per claims handling
professional at September 30, 1997 as compared to December 31, 1994. The
Company also experienced a 9.7% decrease in average legal fees per litigated
liability claim on suits closed during the nine-month period ended September
30, 1997 as compared to those closed in 1996, while CFI's average indemnity
fees paid per claim were reduced by 14.9% on these same claims. The Company's
claims staff leverages its expertise to assist Custom Agents in problem solving
and tailoring programs to address specific client needs. Substantially all
claims are handled by the regional offices, although specialized units handle
umbrella, environmental and construction defect claims. In addition, regardless
of the line of business, claims identified as having major litigation potential
are managed by a specialized team of claims professionals and monitored by
senior management.

Growth Opportunities. The Company has increased its gross premiums written
through Custom Agents from approximately $599 million in 1993 to approximately
$960 million in 1996. The Company intends to grow over time by increasing sales
through its existing Custom Agents as a result of both increased penetration by
CFI and growth in the agents' businesses. CFI believes there is substantial
opportunity to increase its share of Custom Agents' premium volume because it
estimates that its current share of the total commercial lines premium produced
by its Custom Agents is under 10%. The average gross premiums written per
Custom Agent increased by 33% from $1.2 million in 1993 to $1.6 million in
1996.

Furthermore, CFI intends to grow over time by appointing additional Custom
Agents, particularly in territories which are identified as having profit
potential and which are currently underserved by the Company. This expansion
will build on the experience gained through the Company's expansion in its
Western Region, where premium volume increased by more than 48% during the
three years ended December 31, 1996. The number of Custom Agents was 494 at
December 31, 1993 and 586 at September 30, 1997.

Aggressive Expense Management. CFI seeks to continue the substantial progress
it has made since 1993 in reducing its cost structure while increasing the
productivity of its employees. The Company has improved its operating expense
ratio from December 1993 to September 1997 by 3.3 points, from 25.7% to 22.4%,
respectively. Over the same period, gross premiums written per employee
increased 50% from $426,000 to $640,000. CFI's cost cutting accomplishments are
the result of: (i) reductions in staff and streamlined management functions and
operations consistent with a decentralized, regional business emphasis; (ii)
changes in processes and tools that contribute to productivity including
sharing best practices among regional offices; and (iii) specific efforts to
implement economic incentives designed to promote a performance-based culture.
CFI intends to continue to reduce costs through these initiatives. In
connection with its expense management activities, CFI reduced its workforce
from 2,421 at December 31, 1993 to 1,705 at September 30, 1997, a decrease of
approximately 30%.

CFI has made significant investments in technology designed to enhance
productivity in underwriting and claims administration and to improve the
quality and responsiveness of front-line decision making. The Company has
installed LAN-based workstations linking its employees and has developed and
implemented new rate/quote/policy issuance and claim management and information
systems. These enhanced communications and information capabilities, along with
other technology improvements, have enabled CFI to replace certain existing
systems with more flexible and less costly applications. Further, CFI believes
that its improved technology will enable it to expand into new territories at
modest incremental expense.

6
<PAGE>

The Company maintains a proactive approach to its reserves, having
strengthened its net reserves by $282 million over the last four years. The
Company is continuing to review its loss and loss expense reserves. While the
Company believes that its current reserves are adequate to meet its expected
obligations, it has retained an independent actuarial consulting firm to do
further analysis on its latent and non-latent loss and loss expense reserves.
Based on both of the reviews at this stage, the Company may increase its
reserves net of reinsurance by up to $250 million. CFI will make a
determination upon completion of this study, which is expected by the end of
the first quarter of 1998, on whether to make any reserve strengthening and, if
so, on the amount of such strengthening.

CFI is currently rated "A (Excellent)" by A.M. Best and has a claims paying
rating of "A" by Standard & Poor's Ratings Services ("Standard & Poor's").
CFI's A.M. Best rating is the third highest of 15 categories, while its
Standard & Poor's rating is the third highest of nine rating categories.

Enhance Investment Income. As of September 30, 1997, approximately $1.9
billion, or 63% of total investments of $3.0 billion, was in short-term
investments. The remainder of the portfolio was invested in fixed- income
securities with average ratings equivalent to "Aa" by Moody's Investor Services
Inc. ("Moody's") and a duration approximating 4.4 years. Following the
completion of the Offering, the Company intends to reposition its investment
portfolio over time with the objective of increasing both the yield and
duration. The Company will seek to invest in high-quality, fixed-income
securities with an average rating of approximately "Aa" and a duration more
closely approximating the duration of its liabilities while maintaining
sufficient liquidity to meet cash requirements.

NEW MANAGEMENT ROLES
Effective January 1, 1998, the Company strengthened its senior management
team through the full time involvement of Joseph W. Brown, Jr., previously
Chairman and Chief Executive Officer of Talegen and, prior to that, President
and Chief Executive Officer of Fireman's Fund Insurance Company. Mr. Brown has
been Chairman of the Company since 1992, but his focus was primarily on his
Talegen responsibilities. In December, 1997, he resigned his Talegen positions
to devote himself exclusively to his expanded responsibilities with the
Company.

Mr. Brown is highly qualified to direct the execution of CFI's business
strategy with the goal of improving operating and financial performance and
enhancing shareholder value. In his prior role as Chairman and Chief Executive
Officer of Talegen, Mr. Brown was the principal architect of the Talegen
Restructuring (as defined herein), one of the largest, most complex legal and
financial restructurings implemented in the property and casualty insurance
industry in recent years. Thereafter, Mr. Brown simultaneously oversaw both
improved strategic focus at the seven stand-alone Talegen insurance groups and
the sales of six of the units to date. Mr. Brown also brings to his new
responsibilities the benefit of significant industry experience gained in over
17 years with Firemen's Fund Insurance Company during which he held various
senior management positions culminating in his appointment as Chief Executive
Officer.

James A. Stark, President of CFI since 1993, will focus primarily on
enhancing relationships with Custom Agents and managing day-to-day operations
of CFI. Having begun his career with the Crum and Forster organization in 1964
in the underwriting area, Mr. Stark progressed rapidly through the field
organization and managed two different regional offices before moving to the
corporate office in 1978. In 1988, he was appointed President of a predecessor
to CFI. During his years of experience with the Company, Mr. Stark has
developed close working relationships with substantially all of the Custom
Agents, as well as an indepth understanding of the underwriting, pricing, loss
control, claims handling and other insurance aspects which contribute to the
Company's success.

Messrs. Brown and Stark have already begun to work with CFI's regional and
home office management teams to structure plans designed to improve the
strategy execution, financial results and competitive position of

7
<PAGE>

the Company. These plans include improving processes to select Custom Agents
and to develop additional profitable business with them, leveraging the use of
existing technology tools, and exporting best practices across the
organization. The Company believes there are opportunities to achieve further
gains in productivity, loss experience, investment results and overall returns
to investors.

BACKGROUND TO THE OFFERING
In January 1993, Xerox announced its strategic decision to disengage from its
insurance and other financial services businesses, which include Talegen and
the Company, in order to focus on its core document processing business. Until
1993, CFI's two principal insurance subsidiaries, United States Fire Insurance
Company ("U.S. Fire") and The North River Insurance Company ("North River"),
were members of an underwriting pool with certain other insurance subsidiaries
of Talegen. Under this pooling arrangement, all of the business written by the
pool members was shared pursuant to a predetermined percentage. During 1993, a
major restructuring of the Talegen insurance operations (the "Talegen
Restructuring") was completed under the direction of Talegen's senior
management and with the approval of the insurance regulators of each state in
which the Talegen insurance subsidiaries were domiciled. As part of the Talegen
Restructuring, the pooling arrangement was commuted and Talegen's insurance
company subsidiaries were reorganized into seven independent operating groups,
each focused on a different segment of the insurance market. CFI was the only
operating group to retain the Crum & Forster name. The Talegen Restructuring
included the realignment, effective January 1, 1993, of certain business
segments among five of the seven operating groups, including the Company. The
other two operating groups were composed of insurance companies that did not
participate in the intercompany pool. This realignment included the transfer of
a number of insurance policies (and the related assets and liabilities) from
the original issuing companies to insurance companies dedicated to the
respective types of business going forward. To effect these transfers, CFI and
the other operating groups entered into assumption and indemnity reinsurance
agreements providing for 100% quota share reinsurance of the subject insurance
policies. These agreements were designed to permanently vest in the assuming
company all of the liabilities which may arise under the subject insurance
policies. They included an obligation on the part of the assuming company to
attempt to novate certain of the subject insurance policies, completely
replacing the ceding company as the insurer on such policies. In addition to
the quota share reinsurance and novation obligations, these agreements delegate
all claims handling and policy administration obligations related to such
policies to the assuming companies and reassigned all third-party reinsurance
associated with such policies from the ceding company to the assuming company,
in each case, regardless of the success of the novation process. The Talegen
Restructuring also included the realignment of underwriting and claims staff
along with the transfer of insurance policies among Talegen entities to provide
continuity with policyholders and agents in the handling of the assumed books
of business. See "Certain Transactions--Talegen Restructuring."

Talegen and XFSI have completed the sale of six of the seven insurance groups
established through the Talegen Restructuring, two of which were completed in
1995, three in 1997 and one in January 1998. CFI is the sole remaining
insurance operation under Talegen ownership. Through the Offering (assuming the
U.S. Underwriters' over-allotment option is exercised), Talegen intends to
divest all of its ownership interests in CFI. The uncertainties regarding the
Company's future ownership and operations created by Xerox's disengagement
process have impacted CFI's ability to effectively execute its strategy, which
relies heavily on mutual commitments to long-term, stable relationships with
current and prospective Custom Agents. The Company believes that the Offering
will remove many of these uncertainties.

Immediately following the completion of the Offering, assuming the U.S.
Underwriters' over-allotment option is not exercised, Talegen will own
shares of Common Stock, or approximately % of the Company's outstanding
shares. Talegen intends to sell these shares in the future at such times and on
such terms as it shall determine to be advantageous to Talegen, subject to its
agreement with the Underwriters described herein. See "Ownership of Common
Stock," "Certain Transactions" and "Shares Eligible for Future Sale."

8
<PAGE>

TRANSACTIONS CONTEMPORANEOUS WITH AND FOLLOWING THE OFFERING
At the time of, or following, the consummation of the Offering, the Company
will enter into the following transactions (the "Transactions"):

. The Company will sell its 70% interest in a Xerox training facility in
Virginia to Xerox Realty Corporation and terminate its lease with Xerox
for $82 million in cash, which will result in a $62 million capital
contribution. XFSI will assume any federal income tax liability
associated with this sale.

. XFSI will redeem $182 million of promissory notes held by the Company.

. Talegen will make a $75 million capital contribution to CFI. Immediately
following the Offering, the Company plans to use the proceeds from the
capital contribution to purchase an aggregate excess of loss reinsurance
cover.

. The Company plans to issue $150 million of debt. Certain costs incurred
in acquiring the debt, which will be capitalized in conjunction with the
issuance of the debt, are assumed to be $2 million.

. The Company plans to repay a $115 million promissory note to Talegen
with a portion of the proceeds of the debt it incurs, and to use the
remainder to meet holding company liquidity needs, including payment of
dividends to stockholders.

. The management fees paid to Talegen, which amounted to $21 million, $8
million, $8 million, $9 million, and $6 million for 1993, 1994, 1995,
1996 and the nine months ended September 30, 1997, respectively, will be
discontinued. Management fees for 1993 were calculated using a different
rate than that used for subsequent periods.

. The fees paid for the management of the Company's investment portfolio
will be reduced. Giving effect to this adjustment for prior periods
would have resulted in a decrease to investment expenses of $4 million,
$4 million, $5 million, $5 million and $4 million for 1993, 1994, 1995,
1996 and the nine months ended September 30, 1997, respectively.

. The subsidy provided by Talegen relating to a portion of the lease
payments for the Company's home office in Morristown, New Jersey, will
be discontinued. As a result, the Company will record a liability of $27
million which represents unfavorable lease payments for the remaining
term under the lease.

. Talegen will assume responsibility for the Company's pension
liabilities. As a result, the Company will write-off $8 million of
prepaid pension assets.

. Xerox will retain $105 million of deferred tax benefits that would
otherwise be due to the Company, comprised primarily of $60 million of
deferred tax sharing payments and $44 million associated with 1990
through 1994 uncollectible reinsurance deductions.

For the period immediately following the Offering, the Company's pre-tax
results of operations will be reduced by $174 million and total shareholder's
equity will be reduced by $43 million resulting from certain of the
Transactions.

INVESTMENT PORTFOLIO RESTRUCTURING
Since 1992, CFI's investment portfolio has been invested largely in short-
term securities. The Company liquidated its investment portfolio in 1992 to
assist in obtaining regulatory approval for the Talegen Restructuring. The
Company completed limited reinvestment of the portfolio beginning in 1994
before again liquidating its investments in 1995 in connection with a proposed
sale of Talegen. The Company then engaged in limited reinvestment activities in
early 1996, increasing mid-term fixed-income holdings to approximately 35% of
the total portfolio. In the fourth quarter of 1997, much of this reinvested
portfolio was again liquidated to realize capital gains presented by lower
interest rates in the fixed-income markets.

As of September 30, 1997, approximately $1.9 billion, or 63% of total
investments of $3.0 billion, was in short-term investments. The remainder of
the portfolio was invested in fixed-income securities with average ratings of
"Aa" and a duration approximating 4.4 years. During 1993 through 1996 and the
nine months ended September 30, 1997, the average annualized after-tax yield on
the Company's portfolio was 2.64%, 3.20%, 3.70%, 3.54% and 3.79%, respectively.
Following the completion of the Offering, the Company intends to reposition its
investment portfolio over time with the objective of increasing both the yield
and duration. The Company will seek to invest in high-quality, fixed-income
securities with an average rating of approximately "Aa" and a duration more
closely approximating the duration of its liabilities while maintaining
sufficient liquidity to meet cash requirements.

9
<PAGE>

THE OFFERING

Common Stock offered
hereby:

U.S. Offering.............. shares

International Offering..... shares

Total..................... shares

Common Stock to be
outstanding after the
Offering...................
shares

Use of Proceeds............. The Company will not receive any of the
proceeds from the sale of shares of Common
Stock by the Selling Stockholder. See "Use of
Proceeds."

Dividend Policy............. Subject to financial results and declaration by
the Company's Board of Directors, the Company
intends to pay regular quarterly cash dividends
on its Common Stock. The Company currently
intends to pay an initial quarterly cash
dividend of $ per share. There can be no
assurance, however, that dividends will be
paid. The Company's ability to pay dividends is
subject to certain restrictions. See "Dividend
Policy."

Proposed Symbol........... " "

RISK FACTORS

For a discussion of certain factors that should be considered in evaluating
an investment in the Common Stock, see "Risk Factors."

10
<PAGE>

SUMMARY FINANCIAL INFORMATION

Summary historical consolidated financial data of CFI for the four years
ended December 31, 1996 and the nine months ended September 30, 1996 and 1997
are set forth below. The information as of December 31, 1993, 1994, 1995 and
1996, and for each of the years in the four-year period ended December 31,
1996, has been derived from the audited consolidated financial statements of
CFI for such periods. The consolidated information as of September 30, 1997 and
for the nine-month periods ended September 30, 1996 and 1997 is unaudited, but
in the opinion of management reflects all adjustments necessary for a fair
presentation of such data.

The combined statutory data as of and for the years ending December 31, 1993,
1994, 1995 and 1996 and as of and for the nine-month periods ended September
30, 1996 and 1997 have been derived from annual and quarterly statutory
financial statements filed with the domiciliary states of the Insurance
Companies and prepared in accordance with SAP, which differs from GAAP. The
combined annual and quarterly statutory data presented herein are unaudited,
but in the opinion of management reflect all adjustments necessary for a fair
presentation of such data.

The operating data for the nine months ended September 30, 1997 are not
necessarily indicative of results of operations for the entire year. The
selected financial information presented below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Company's consolidated financial statements and notes
thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ---------------
1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------- ------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Gross premiums written......... $1,031 $1,022 $1,121 $1,106 $ 837 $ 818
Net premiums written........... 836 887 960 956 724 728
Net premiums earned............ 807 854 930 959 725 710
Net investment income.......... 110 134 158 171 125 140
Net realized investment gains.. 40 11 48 2 1 1
Other income................... 17 15 15 10 8 10
------ ------ ------ ------ ------- ------
Total revenues................ 974 1,014 1,151 1,142 859 861
------ ------ ------ ------ ------- ------
Losses and expenses:
Losses and loss expenses....... 573 605 767 928 734 573
Underwriting, acquisition and
other insurance expenses...... 300 312 307 325 248 236
Dividends to policyholders..... 5 (4) 6 11 9 8
General expenses............... 16 7 13 10 7 2
Goodwill write-off(1).......... -- -- -- 151 -- --
Interest expense............... -- 1 10 8 5 6
------ ------ ------ ------ ------- ------
Total losses and expenses..... 894 921 1,103 1,433 1,003 825
------ ------ ------ ------ ------- ------
Earnings (loss) before federal
income taxes(2)............... 80 93 48 (291) (144) 36
Provision for income tax
expense (benefit)............. 20 23 (17) (47) (49) 12
------ ------ ------ ------ ------- ------
Net earnings (loss)........... $ 60 $ 70 $ 65 $ (244) $ (95) $ 24
====== ====== ====== ====== ======= ======
</TABLE>

11
<PAGE>

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------- ---------------------
1993 1994 1995 1996 1996 1997
------ ------ ------ ------ --------- ----------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Gross premiums written
through Custom Agents.. $ 599 $ 725 $ 908 $ 960 $ 724 $ 734
Staff count............. 2,421 2,125 1,906 1,792 1,828 1,705
Average gross premiums
written per Custom
Agent.................. $ 1.2 $ 1.4 $ 1.5 $ 1.6 $ 1.6 $ 1.7
GAAP loss and loss
expense ratio--accident
year(3)................ 71.3% 77.5% 76.0% 79.7% 79.7% 78.9%
GAAP loss and loss
expense ratio--calendar
year(4)................ 71.0 70.8 82.5 96.8 101.2 80.7
GAAP underwriting
expense ratio(4)....... 37.2 36.5 33.0 33.9 34.2 33.2
GAAP dividend ratio(4).. .6 (.4) .7 1.1 1.2 1.1
------ ------ ------ ------ --------- ----------
GAAP combined ratio(4).. 108.8% 106.9% 116.2% 131.8% 136.6% 115.0%
====== ====== ====== ====== ========= ==========
BALANCE SHEET DATA (AT
PERIOD END):
Total investments and
cash................... $2,479 $2,606 $2,851 $2,998 $ 3,037
Total assets............ 5,044 4,773 5,247 5,184 5,381
Unpaid losses and loss
expenses............... 3,160 2,948 3,240 3,417 3,597
Debt.................... -- 150 132 115 115
Shareholder's equity.... 1,268 1,051 1,213 1,035 1,060
COMBINED STATUTORY DATA:
Statutory net income
(loss)................. $ 524(/5/) $ 83 $ 65 $ (86) $ (108) $ 24
Policyholders' surplus.. 767 809 851 803 824
Ratio of net premiums
written to surplus(6).. 1.0x 1.1x 1.2x 1.2x 1.3x 1.1x
</TABLE>
- - --------
(1) See Note 1k to the Company's consolidated financial statements included
elsewhere in this Prospectus.
(2) Excluding prior accident year reserve strengthening actions for the years
ended December 31, 1995 and December 31, 1996 of $97 million and $173
million, respectively, and the goodwill write-off for 1996 of $151 million,
the net earnings from operations before federal income taxes would have
been $145 million and $33 million for 1995 and 1996, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Reserves."
(3) As developed through September 30, 1997.
(4) The GAAP loss and loss expense ratio represents the sum of losses and loss
expenses incurred as a percentage of net premiums earned. The GAAP
underwriting, acquisition and other insurance expense ratio represents
underwriting expenses as a percentage of net premiums earned. The GAAP
dividend ratio represents dividends to policyholders as a percentage of net
premiums earned. The GAAP combined ratio represents the sum of the GAAP
loss and loss expense ratio, the GAAP underwriting expense ratio and the
GAAP dividend ratio.
(5) Statutory net income in 1993 was affected by $473 million of net realized
investment gains and tax benefits related to the Talegen Restructuring.
Excluding these items, statutory net income would have been $51 million.
(6) Represents the ratio of statutory net premiums written for the period to
policyholders' surplus at the end of such period. The ratios as of
September 30, 1996 and 1997 are calculated using statutory net premiums
written from the four quarters which precede the interim date.

12
<PAGE>

RISK FACTORS

An investment in the Common Stock involves a significant degree of risk.
Prospective investors should consider carefully, in addition to the other
information contained in this Prospectus, the following factors before
purchasing shares of Common Stock offered hereby. Certain information
contained in this Prospectus, including information with respect to the
Company's plans and strategy for its business are forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements as a
result of certain factors including those set forth in the following risk
factors and elsewhere in this Prospectus.

FLUCTUATIONS AND UNCERTAINTY OF PROPERTY AND CASUALTY INSURANCE INDUSTRY
RESULTS
The results of companies in the property and casualty insurance industry
have historically been subject to broad fluctuations. The industry's
profitability can be affected significantly by price competition, 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 assets 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
related to levels of industry underwriting capacity which have affected almost
all product lines. 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. Current levels of
competitive pressures in most of the principal product lines underwritten by
the Company have lasted longer and have been more severe than the Company had
anticipated and are not expected to improve in the foreseeable future.
Therefore, there can be no assurance that pricing pressures will not continue
to adversely affect the Company. See "-- Competition" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

UNCERTAINTY REGARDING ADEQUACY OF LOSS AND LOSS EXPENSE RESERVES; EXPOSURE TO
LATENT LIABILITIES
CFI maintains loss and loss expense reserves to cover its estimated ultimate
liability for losses and loss expenses with respect to reported and unreported
claims incurred as of the end of each accounting period. CFI's gross loss and
loss expense reserves were $2.9 billion, $3.2 billion, $3.4 billion and $3.6
billion at December 31, 1994, December 31, 1995, December 31, 1996 and
September 30, 1997, respectively. These reserves do not represent an exact
measurement of liability, but are CFI's estimates based upon various factors
including: (i) actuarial projections of what CFI, 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 and additional lags
between the time of reporting and final settlement of claims. The inherent
uncertainties of estimating loss and loss expense 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 asbestos, environmental and other latent exposure
claims. The possibility that these claims would emerge was often not
anticipated at the time the policies were written, and traditional actuarial
reserving methodologies have not been useful in accurately estimating ultimate
losses and expenses for these types of claims. In addition, the loss
settlement period of certain of these claims may extend for decades after the
expiration of the policy period, and during such time it often becomes
necessary to adjust, sometimes to a significant degree, the estimates of
liability on a claim either upward or downward. The asbestos reserves of CFI,
net of reinsurance, were $38 million, $122 million, $107 million and $98
million at December 31, 1994, 1995 and 1996 and September 30, 1997,
respectively; while, at the same time, the environmental reserves of CFI, net
of reinsurance, were $61 million,

13
<PAGE>

$126 million, $201 million and $190 million, respectively, and the reserves
for other latent exposure claims, net of reinsurance, were $59 million, $42
million, $87 million and $61 million, respectively. Among the uncertainties
relating to such reserves 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. Because of these uncertainties, the
range of exposure represented by asbestos, environmental and other latent
exposure claims is more difficult to estimate and is subject to a higher
degree of variability than such a range for non-latent exposure claims. In
addition to asbestos, environmental and latent reserves, CFI's liability
reserves included $109 million at September 30, 1997 for construction defect
claims. At present, CFI's construction defect reserves relate to California
exposures; however, there can be no assurance that trends in litigation and
judicial determinations that have resulted in construction defect liabilities
in California will not be followed in other states, resulting in similar
liabilities arising in other parts of the country. See "Business -- Reserves."

From time to time, CFI has found it necessary to significantly increase its
reserves with respect to liabilities incurred in prior accident years. During
the years ended December 31, 1995 and 1996, the Company increased its
estimates of such net liabilities by $97 million and $173 million,
respectively. See "Business --Reserves." To the extent reserves prove to be
deficient in the future, the Company will have to increase its reserves by the
amount of such deficiency and incur a charge to earnings in the period such
reserves are increased. CFI believes that it is possible that the outcome of
the uncertainties regarding reserves (including reserves for asbestos,
environmental and other latent exposure claims and construction defect claims)
could result in a liability exceeding the reserves by an amount that would be
material to CFI's financial condition or results of operations in a future
period.

RECENT OPERATING LOSSES; 1998 GROWTH PROSPECTS
In 1996, CFI had a loss before federal income taxes of $291 million,
including the $173 million increase in its net loss and loss expense reserves
related to 1995 and prior accident years and a write-off of goodwill equal to
$151 million in 1996. See "-- Fluctuation and Uncertainty of Property and
Casualty Insurance Industry Results," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business." While the
Company has recently taken measures designed to enhance the Company's growth
and profitability over time, management anticipates that the Company may
experience a decline in premiums in 1998 as a result of a number of factors,
including market conditions and uncertainties regarding CFI's ownership. In
addition, there can be no assurance that these measures will have the intended
effect of improving the Company's overall results of operations or that CFI
will be profitable in the future.

POTENTIAL UNCOLLECTIBILITY OF, AND CONSIDERATIONS RELATED TO, REINSURANCE AND
OTHER RISK TRANSFERS
CFI uses reinsurance to help manage its exposure to insurance risks. The
availability and cost of reinsurance are subject to prevailing market
conditions, both in terms of price and available capacity, which can affect
CFI's business volume and profitability. Although reinsurance makes the
assuming reinsurer liable to CFI to the extent of the risk ceded, CFI is not
relieved of its primary liability to its insureds as the direct insurer. As a
result, CFI bears credit risk with respect to its reinsurers. CFI made
significant use of reinsurance during the 1970s and early 1980s from a large
number of reinsurers. Since that time, the Company has generally increased the
portion of the business it retains while reducing the number and improving the
overall credit quality of reinsurers used for its reinsurance contracts.
However, there can be no assurance that CFI's reinsurers will pay all
reinsurance claims on a timely basis or at all. At September 30, 1997, CFI had
reinsurance recoverables on paid and unpaid losses and loss expenses, net of
uncollectible reinsurance reserves, of $1.2 billion due from several hundred
reinsurers, however, the preponderance of these recoverables is with a
relative few reinsurers. At such date, CFI's ten largest gross reinsurance
recoverables (exclusive of recoverables from life insurance companies related
to contingent obligations associated with structured settlements) aggregated
$808 million, including $302 million from International Insurance Company
("IIC"), a subsidiary of The Resolution Group, Inc. ("TRG"), a former Talegen
subsidiary, and $234 million from Ridge Reinsurance Limited ("Ridge Re"), a
special purpose Bermuda reinsurer and a wholly owned subsidiary of XFSI, which
constituted the two largest reinsurance recoverables.

14
<PAGE>

In connection with the Talegen Restructuring, CFI entered into reinsurance
agreements with other insurance companies that are or were owned, indirectly,
by Talegen (together with CFI, the "Talegen Insurance Companies") to transfer,
through 100% quota share reinsurance, certain books of business that were not
consistent with CFI's commercial lines middle market strategy. In addition to
the reinsurance arrangements, certain of these reinsured insurance policies
have also been novated to the Talegen Insurance Companies that reinsured these
policies, and additional subject policies continue to be novated as claims are
reported. For policies affected by this novation process, one of the other
Talegen Insurance Companies is substituted for CFI as the insurer and becomes
directly liable to the insured. The novation process was approved by the
insurance regulators of each state; however, in the event that an assuming
company fails to meet its obligations on policies that had been novated to it
due to insolvency or otherwise, policyholders under such policies could seek
judicial relief to have the novations invalidated. There can be no certainty
that a court would enforce a policy novation against a challenge by a
policyholder even if the appropriate novation procedures under state insurance
law had been satisfied. A judicial determination that a policy novation was
invalid would result in CFI retaining the direct obligation to the
policyholder for the subject policy. CFI would retain the right to collect the
amount of any future payments it makes under such a policy from the assuming
company, although the collectibility would be affected by the solvency of the
assuming company. See "Certain Transactions -- Talegen Restructuring." There
can be no assurance that these policy novations will not be subject to
challenge in the future by affected policyholders or will otherwise be
determined to be invalid, which could result in CFI's retaining primary
liability for some or all of such policies. Furthermore, the Company no longer
has the benefit of common ownership with the other Talegen Insurance Companies
in the coordination of the reinsurance arrangements and the novation process
and the resolution of disputes, if any, among such companies.

As a result of the transfer of business among the Talegen Insurance
Companies in the Talegen Restructuring, based upon the carried reserves at
each assuming company, TRG, Westchester Specialty Group and Coregis Group as
of September 30, 1997 had assumed $813 million, $144 million and $90 million,
respectively, of gross reserves from CFI on policies originally written by the
Insurance Companies, of which $516 million, $116 million and $85 million,
respectively, have been determined by the Company to relate to insurance
policies subject to novation and $297 million, $28 million and $5 million,
respectively, have been determined to be a reinsurance recoverable by CFI.
Reinsurance from third-party reinsurers applicable to the business assumed
from CFI was assigned by CFI to the assuming companies. The current
availability of such reinsurance is reflected in the net reserves related to
the assumed business carried by each assuming company. In the event of non-
payment due to insolvency or otherwise by an assuming company, there can be no
assurance that such third-party reinsurance will be available directly to CFI
for any payments the Company becomes obligated to make to insureds under the
transferred policies.

Since the Talegen Restructuring, TRG's business has consisted primarily of
resolving claims and collecting reinsurance recoverables in connection with
insurance and reinsurance policies originally issued by IIC and other Talegen
Insurance Companies. TRG currently does not write new business other than as
may be legally required in connection with existing policies. See "Business --
Use of Reinsurance," "-- Uncollectible Reinsurance" and "Certain
Transactions -- Talegen Restructuring."

COMPETITION
The commercial lines property and casualty insurance industry is highly
competitive, and the Company believes that it will remain so for the
foreseeable future. CFI faces competition from domestic and foreign insurers,
many of which are larger and have greater financial, marketing and management
resources than CFI. Competition in the commercial lines property and casualty
insurance industry is based on many factors, including overall financial
strength of the insurer, ratings by rating agencies, price, policy terms and
conditions, services offered, reputation, agent and broker compensation and
experience. The existing levels of competitive pressure and excess industry
capacity have lasted longer and have been more severe than the Company had
anticipated. The Company's challenge is to retain business and attract new
business on terms offering acceptable return potential in an environment where
both established competitors and newer entrants aggressively compete for
premiums. There can be no assurance that CFI will not face increased
competition in the future from other insurance companies, and that such
increased competition, should it occur, will not have a material adverse
effect on CFI. See "Business -- Competition."

15
<PAGE>

Several commercial property and casualty insurers and industry groups and
associations 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 to allow for better
control of risk management and costs. It is not possible to predict how
continued growth in alternative forms of risk protection will affect CFI's
future operations.

CATASTROPHE LOSSES
The property and casualty insurance industry has experienced, and in the
future can be expected to experience, 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 condition.
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 insured
exposure 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.
CFI 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 however, that selective underwriting practices or
the catastrophe reinsurance purchased by CFI will be adequate to protect the
Company against material catastrophe losses or that such reinsurance will
continue to be available to CFI in the future at commercially reasonable
rates. See "-- Potential Uncollectibility of, and Considerations Related to,
Reinsurance and Other Risk Transfers" and "Business -- Reserves" and "-- Use
of Reinsurance." Furthermore, states have from time to time passed legislation
that has the effect of limiting the ability of insurers to manage risk, such
as legislation prohibiting an insurer from withdrawing from catastrophe-prone
areas. Although CFI attempts to limit its exposure to catastrophic events, it
is possible that a catastrophic event or multiple catastrophic events could
have a material adverse effect on CFI's results of operations or financial
condition.

DIVIDEND RESTRICTIONS; EARNED SURPLUS OF U.S. FIRE
CFI is a holding company with no direct operations, whose principal asset is
the capital stock of the Insurance Companies. CFI relies primarily on
dividends from the Insurance Companies to meet its obligations for payment of
interest and principal on outstanding debt obligations, holding company
expenses and dividends to shareholders. The ability of the Insurance Companies
to pay dividends to CFI in the future will depend on their statutory surplus,
earnings and on regulatory restrictions. CFI's principal insurance company
subsidiaries are U.S. Fire, domiciled in the State of New York, and North
River, domiciled in the State of New Jersey. New York law governing payment of
dividends by domestic insurance companies provides that an insurer domiciled
in New York must obtain the prior approval of the state insurance commissioner
for the declaration or payment of any dividend which, together with dividends
declared or paid in the preceding 12 months, exceeds "Ordinary Dividends"
defined as 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.
Adjusted net investment income includes a carry forward of undistributed net
investment income for two years. Such declaration or payment is further
limited by earned surplus, as determined in accordance with statutory
accounting practices prescribed or permitted in New York. As a result of
reserve strengthening actions undertaken by U.S. Fire during 1995 and 1996,
U.S. Fire reported negative earned surplus at December 31, 1995 and December
31, 1996 and, as a result, U.S. Fire currently has no ordinary dividend
capacity. In connection with the Offering, the Company is requesting the NYID
to allow U.S. Fire to reset its earned surplus accounts to $0 as of the first
day following the end of the quarter in which the closing of the Offering
occurs, and to further allow U.S. Fire to pay shareholder and policyholder
dividends from earnings, if any, recognized in fiscal quarters after the
closing of the Offering. There can be no assurance that the NYID will grant
such a request.

New Jersey laws provide that an insurer domiciled in the state must obtain
the approval of the state insurance commissioner for payment of any dividend
which, together with dividends paid in the previous 12

16
<PAGE>

months, exceeds "Ordinary Dividends" defined as 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
Jersey, ordinary dividends may not be paid unless prior notice has been given
to the insurance commissioner within five business days after the dividend is
declared and 30 days prior to payment. Under New Jersey law, North River had
$17 million of ordinary dividend capacity at December 31, 1996.

As of December 31, 1996, the aggregate amount available for the payment of
ordinary dividends by the Insurance Companies during 1997 was $19 million of
which $5 million has been paid through September 30, 1997. 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, including the payment of interest on its outstanding
indebtedness and to pay dividends. Further, no prediction can be made as to
whether any legislative proposals relating to dividend regulations in New York
or New Jersey 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. 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. 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Regulation --
Regulation of Dividends and Other Payments from Insurance Companies."

REGULATION
CFI is subject to extensive regulation and supervision in the states in
which it does business. Regulators oversee matters relating to rate setting
with respect to 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, authorized lines of business, transactions with related parties,
the payment of dividends and a variety of other financial and non-financial
components of an insurance company's business. The rates that an insurance
company 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 shareholders or other investors. It is possible that future regulatory
changes or developments may impede rate increases or other actions that CFI
proposes to take to enhance its operating results or fundamentally change the
business environment in which it operates. Future legislative or regulatory
changes or developments, depending on their nature and magnitude, could have a
material adverse effect on CFI. See "Business -- Regulation."

The capacity for an insurance company's growth in premiums is in part a
function of its statutory surplus. Maintaining appropriate levels of statutory
surplus, as measured by statutory accounting practices and procedures, is
considered important by state insurance regulatory authorities and the private
agencies that rate insurers' claims paying ability and financial strength.
Failure to maintain certain levels of statutory surplus could result in
increased regulatory scrutiny, action by state regulatory authorities or a
downgrade by rating agencies. See "Business -- Regulation."

All fifty states have insurance guaranty fund laws requiring property and
casualty insurance companies doing business within the state to participate,
through the payment of assessments, in guaranty funds or associations, which
are organized to pay contractual obligations under insurance policies issued
by impaired or insolvent insurance companies. These assessments may increase
in the future depending upon the rate of insolvencies of insurance companies.
Although the amount of any assessments applicable to guaranty funds cannot be
predicted with certainty, the Company believes that future guaranty fund
association assessments for known insurer insolvencies will not have a
material adverse effect on its results of operations or financial condition.
See "Business -- Regulation -- Guaranty Funds."

17
<PAGE>

As a condition of its licenses to do business, each Insurance Company
typically 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. See
"Business -- Regulation -- Shared Markets." The amount of future losses or
assessments from such shared market mechanisms and pooling arrangements cannot
be predicted with certainty. The underwriting results of these pools
traditionally have been unprofitable. There can be no assurance that future
losses or assessments from such mechanisms and pooling arrangements will not
have a material adverse effect on CFI's results of operations or financial
condition.

In recent years, the insurance regulatory framework has come under increased
federal scrutiny, and certain state legislatures have considered or enacted
laws that altered and, in many cases, increased state authority to regulate
insurance companies and insurance holding companies. Further, the National
Association of Insurance Commissioners (the "NAIC") and state insurance
regulators are re-examining existing laws and regulations, specifically
focusing on investment practices, risk-based capital guidelines,
interpretations of existing laws and the development of new laws. In addition,
several committees of Congress have made inquiries and conducted hearings as
part of a broad study of the regulation of insurance companies. Although the
federal government currently does not regulate the business of insurance
directly, federal initiatives often affect the insurance industry in a variety
of ways. CFI cannot predict with certainty the effect any proposed or future
legislation or NAIC initiatives may have on the conduct of CFI's business or
the financial condition or results of operations of the Company. See
"Business -- Regulation."

DEPENDENCE ON INVESTMENT INCOME
CFI, like other property and casualty insurance companies, depends on income
generated by its investment portfolio for a significant portion of its
earnings. Property and casualty insurers (including CFI) 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. As a result of Talegen's desire to
insulate the Company's investment portfolio from exposure to fluctuations
associated with long-term interest rates in connection with the proposed sale
of Talegen, CFI liquidated its investment portfolio and invested primarily in
fixed-income securities with maturities of one year or less. CFI intends,
however, to increase the diversity and duration of its investment portfolio,
which may involve increasing the risks associated therewith. See "Business --
Investments." No assurance can be given that CFI will not suffer a
significant decline in investment yields in future periods. A significant
decline in investment yields could have a material adverse effect on CFI's
results of operations. See "Business -- Investments."

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. CFI is rated "A (Excellent)" by A.M. Best, its third highest of 15
categories, and has a claims paying ability rating by Standard & Poor's of
"A," its third highest of nine ratings categories. Such ratings are neither a
rating of securities nor a recommendation to buy, hold or sell any security.
Each of the rating agencies reviews its ratings periodically, and there can be
no assurance that current ratings will be maintained in the future. A
significant downgrade in such ratings could have a material adverse effect on
the results of operations of CFI. See "Business -- Ratings."

DEPENDENCE ON KEY PERSONNEL
The Company's business is currently managed by a small number of key
management and operating personnel. The loss of the services of key personnel,
especially those of Messrs. Brown and Stark, or the inability to attract,
recruit and retain sufficient or additional qualified personnel, could have a
material adverse effect on the Company. See "Management."

18
<PAGE>

NO PRIOR PUBLIC MARKET FOR THE COMMON STOCK
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price of the Common Stock will be determined by
negotiations between the Selling Stockholder and the Underwriters based on
several factors and may not be indicative of the market price of the Common
Stock after the Offering. For a description of the factors to be considered in
determining the initial public offering price, see "Underwriters -- Pricing of
the Offering." Although the Common Stock is expected to be approved for
listing on , there can be no assurance that an active trading market for
the Common Stock will develop, or, if developed, that such a market will be
sustained. The market price for shares of Common Stock may be significantly
affected by such factors as the timing of future sales of Common Stock by
Talegen, the Company's premiums, investment income, earnings and cash flow,
differences between the Company's actual results and results expected by
investors and analysts, news announcements or other developments affecting the
Company or changes in general market conditions.

ANTI-TAKEOVER EFFECTS
Under applicable state insurance laws and regulations, no person may acquire
control of the Insurance Companies or of any person controlling them unless
such person has filed a statement containing specified information with
appropriate regulatory authorities and approval for such acquisition is
obtained. Under applicable laws and regulations, any person acquiring
directly, by stock ownership, or indirectly (by revocable proxy or otherwise),
10% or more of the voting stock of any other person is presumed to have
acquired "control of such person."

Certain provisions of the Company's Certificate of Incorporation, as amended
(the "Certificate of Incorporation"), and By-laws (the "By-laws"), including
the creation of staggered terms for the Board of Directors and limitations on
the ability of shareholders to call special meetings of shareholders, may be
deemed to have anti-takeover effects and may delay, defer or prevent a
takeover attempt that a shareholder might consider in its best interest. Such
provisions also may adversely affect prevailing market prices for the Common
Stock. See "Description of Capital Stock -- Certain Charter and By-law
Provisions."

After completion of the Offering, the Company's authorized capital stock
will include shares of authorized but unissued Preferred Stock (the "Preferred
Stock"). Any class or series of Preferred Stock could have rights which would
adversely affect the rights of the holders of the Common Stock. The issuance
of additional shares of Common Stock or a new series of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions or
other corporate purposes, could have the effect of diluting current
shareholders' ownership interests in the Company or of making it more
difficult for a third party to acquire, or discouraging a third party from
acquiring, a majority of the outstanding voting stock of the Company. See
"Description of Capital Stock."

SHARES ELIGIBLE FOR FUTURE SALE
Talegen currently intends to sell any remaining ownership interest in CFI as
market conditions permit, subject to its agreement with the Underwriters
described below, and the requirements of Rule 144 under the Securities Act of
1933, as amended (the "Securities Act"). Upon completion of the Offering,
there will be shares of Common Stock outstanding. All of the shares of
Common Stock sold in the Offering will be freely tradeable without restriction
or further registration under the Securities Act by persons other than
"affiliates" of CFI. The shares of Common Stock owned by Talegen (assuming the
U.S. Underwriters' over-allotment option is not exercised) will continue to be
"restricted securities" as defined in Rule 144 under the Securities Act. Such
shares may not be sold in the absence of registration under the Securities Act
or under an exemption from such registration, including, among others, the
exemption provided by Rule 144 under the Securities Act. In connection with
the Offering, the Company, Talegen and Xerox have agreed that, without the
prior written consent of Morgan Stanley & Co. Incorporated ("Morgan Stanley")
on behalf of the Underwriters, they will not offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or enter into any swap or
other arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of

19
<PAGE>

the Common Stock for a period of 180 days (90 days in the case of Talegen and
Xerox) after the date of this Prospectus, other than, with respect to CFI,
pursuant to existing benefit plans. The Company has granted Talegen demand and
piggyback registration rights with respect to its shares of Common Stock. See
"Shares Eligible for Future Sale." The future sale of a substantial number of
shares of Common Stock in the public market following the Offering could
adversely affect the market price for the Common Stock and could make it more
difficult for the Company to raise funds through an equity offering in the
future.

USE OF PROCEEDS

The Company will not receive any of the proceeds from the sale of shares of
Common Stock by Talegen.

DIVIDEND POLICY

Subject to the Company's financial results and declaration by the Board of
Directors, the Company intends to pay regular quarterly cash dividends on its
Common Stock. The Company currently intends to pay an initial quarterly cash
dividend of $ per share. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity -- Holding Company
Liquidity." There can be no assurance, however, that dividends will be paid.
The Company's ability to pay dividends is subject to certain restrictions.

The Company is a holding company and has no direct operations. The Company's
principal asset is the capital stock of the Insurance Companies. The Company
will primarily rely on dividends from the Insurance Companies to meet its
obligations which include the payment of dividends to stockholders. The
Insurance Companies are subject to the laws of the states in which they are
domiciled that limit the amount of dividends that an insurance company can
pay. U.S. Fire had no ordinary dividend capacity at December 31, 1996. See
"Risk Factors -- Dividend Restrictions; Earned Surplus of U.S. Fire" and
"Business -- Regulation."

20
<PAGE>

CAPITALIZATION

The following table sets forth the actual capitalization of the Company as
of September 30, 1997 and as adjusted to give effect to the Transactions. As
all of the shares of Common Stock offered hereby are owned by the Selling
Stockholder, the sale of such shares will not have an effect on the Company's
capitalization. This table should be read in conjunction with "Selected
Financial Information," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
AS ADJUSTED
FOR THE
ACTUAL TRANSACTIONS(1)
------ ---------------
(IN MILLIONS)
<S> <C> <C>
Debt................................................... $ 115 $ 150
Shareholder's equity:
Common stock and additional paid-in capital........... 1,105 1,242
Accumulated deficit................................... (59) (239)
Net unrealized gains on investment securities......... 14 14
------ ------
Total shareholder's equity........................... 1,060 1,017(/2/)
------ ------
Total capitalization................................ $1,175 $1,167
====== ======
</TABLE>
- - --------
(1)As adjusted to give effect to the Transactions to be consummated
contemporaneously with and following the Offering:

<TABLE>
<CAPTION>
(A) (B) (C) (D) (E) (F) (G) (H) (I)
HOME
XEROX XFSI TALEGEN OFFICE PREPAID
TRAINING PROMISSORY CAPITAL REINSURANCE PROMISSORY LEASE PENSION INCOME
FACILITY NOTES CONTRIBUTION COVER DEBT NOTE ACCRUAL ASSET TAXES TOTAL
-------- ---------- ------------ ----------- ---- ---------- ------- ------- ------ -----
INCREASE (DECREASE)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investments and cash.... $82 $182 $75 $(75) $148 $(115) $297
Receivables due from
affiliates and other
assets................. (182) 2 $(8) (188)
Buildings and
equipment.............. (24) (24)
Current and deferred
income taxes........... 4 26 $ 9 $(105) (66)
Debt.................... 150 (115) 35
Accrued Liabilities..... 27 27
Common stock and
additional paid-in
capital................ 62 75 137
Retained earnings....... (49) (18) (8) (105) (180)
</TABLE>
- - --------
(a) Represents the receipt of $82 million in cash for the sale of a Xerox
training facility in Virginia from Xerox Realty Corporation and from Xerox
for the termination of the lease thereon and the related eliminations of a
$24 million building and a $4 million deferred tax liability resulting in
a $62 million capital contribution.
(b) Represents the redemption of $182 million of promissory notes due from
XFSI.
(c) Represents the receipt of a $75 million capital contribution.
(d) Represents the cost, $75 million, of an aggregate excess of loss
reinsurance cover the Company plans to purchase immediately following the
Offering, net of related taxes.
(e) Represents the issuance of $150 million of new debt by the Company and the
capitalization of $2 million of costs incurred in acquiring such debt.
(f) Represents the repayment of the Company's $115 million promissory note to
Talegen.
(g) Represents the assumption of a $27 million unfavorable lease liability,
net of related taxes, resulting from Talegen's discontinuance of the
subsidy it currently provides for the Company's home office in Morristown,
New Jersey.
(h) Represents $8 million of prepaid pension assets which will be written off
by the Company since Talegen will be assuming the responsibility for the
Company's pension liabilities.
(i) Represents $105 million of deferred tax benefits Xerox will retain that
would otherwise be due to the Company, comprised primarily of $60 million
of deferred tax sharing payments and $44 million associated with 1990
through 1994 uncollectible reinsurance deductions.

(2) See "Prospectus Summary -- Transactions Contemporaneous with and Following
the Offering."

21
<PAGE>

SELECTED FINANCIAL INFORMATION

Selected consolidated financial data of CFI for the four years ended
December 31, 1996 and the nine months ended September 30, 1996 and 1997 are
set forth below. The information as of December 31, 1993, 1994, 1995 and 1996,
and for each of the years in the four-year period ended December 31, 1996, has
been derived from the audited consolidated financial statements of CFI for
such periods. The consolidated information as of September 30, 1997 and for
the nine-month periods ended September 30, 1996 and 1997 is unaudited, but in
the opinion of management reflects all adjustments necessary for a fair
presentation of such data.

The combined statutory data as of and for the years ended December 31, 1993,
1994, 1995 and 1996 and as of and for the nine months ended September 30, 1996
and 1997 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. The
combined annual and quarterly statutory data presented herein are unaudited,
but in the opinion of management reflect all adjustments necessary for a fair
presentation of such data.

The operating data for the nine months ended September 30, 1997 are not
necessarily indicative of results of operations for the entire year. The
selected financial information presented below should be read in conjunction
with "Management's Discussion and Analysis of Financial Conditions and Results
of Operations" and the Company's consolidated financial statements and notes
thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ---------------
1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------- ------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Gross premiums written......... $1,031 $1,022 $1,121 $1,106 $ 837 $ 818
Net premiums written........... 836 887 960 956 724 728
Net premiums earned............ 807 854 930 959 725 710
Net investment income.......... 110 134 158 171 125 140
Net realized investment gains.. 40 11 48 2 1 1
Other income................... 17 15 15 10 8 10
------ ------ ------ ------ ------- ------
Total revenues................. 974 1,014 1,151 1,142 859 861
------ ------ ------ ------ ------- ------
Losses and expenses:
Losses and loss expenses....... 573 605 767 928 734 573
Underwriting, acquisition and
other insurance expenses...... 300 312 307 325 248 236
Dividends to policyholders..... 5 (4) 6 11 9 8
General expenses............... 16 7 13 10 7 2
Goodwill write-off(1).......... -- -- -- 151 -- --
Interest expense............... -- 1 10 8 5 6
------ ------ ------ ------ ------- ------
Total losses and expenses...... 894 921 1,103 1,433 1,003 825
------ ------ ------ ------ ------- ------
Earnings (loss) before federal
income taxes(2)............... 80 93 48 (291) (144) 36
Provision for income tax
expense (benefit)............. 20 23 (17) (47) (49) 12
------ ------ ------ ------ ------- ------
Net earnings (loss)............ $ 60 $ 70 $ 65 $ (244) $ (95) $ 24
====== ====== ====== ====== ======= ======
</TABLE>

22
<PAGE>

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- --------------
1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ ------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Gross premiums written by
line of business:
Multiple peril............ $ 185 $ 216 $ 260 $ 284 $ 212 $ 235
Automobile................ 245 242 276 273 209 201
Workers' compensation..... 224 178 200 197 147 158
Umbrella.................. 192 189 183 161 125 104
General liability......... 91 94 101 91 68 58
Other..................... 94 103 101 100 76 62
------ ------ ------ ------ ------ ------
Total..................... $1,031 $1,022 $1,121 $1,106 $ 837 $ 818
====== ====== ====== ====== ====== ======
Gross premiums written
through Custom Agents..... $ 599 $ 725 $ 908 $ 960 $ 724 $ 734
Staff count................ 2,421 2,125 1,906 1,792 1,828 1,705
Average gross premiums
written per Custom Agent.. $ 1.2 $ 1.4 $ 1.5 $ 1.6 $ 1.6 $ 1.7
GAAP loss and loss expense
ratio--accident year(3)... 71.3% 77.5% 76.0% 79.7% 79.7% 78.9%
GAAP loss and loss expense
ratio--calendar year(4)... 71.0 70.8 82.5 96.8 101.2 80.7
GAAP underwriting expense
ratio(4).................. 37.2 36.5 33.0 33.9 34.2 33.2
GAAP dividend ratio(4)..... .6 (.4) .7 1.1 1.2 1.1
------ ------ ------ ------ ------ ------
GAAP combined ratio(4)..... 108.8% 106.9% 116.2% 131.8% 136.6% 115.0%
====== ====== ====== ====== ====== ======
BALANCE SHEET DATA (AT
PERIOD END):
Total investments and
cash...................... $2,479 $2,606 $2,851 $2,998 $3,037
Total assets............... 5,044 4,773 5,247 5,184 5,381
Unpaid losses and loss ex-
penses.................... 3,160 2,948 3,240 3,417 3,597
Debt....................... -- 150 132 115 115
Shareholder's equity....... 1,268 1,051 1,213 1,035 1,060
COMBINED STATUTORY DATA:
Statutory net income
(loss).................... $ 524(/5/) $ 83 $ 65 $ (86) $ (108) $ 24
Policyholders' surplus..... 767 809 851 803 824
Ratio of net premiums writ-
ten to surplus(6)......... 1.0x 1.1x 1.2x 1.2x 1.3x 1.1x
</TABLE>
- - --------
(1) See Note 1k to the Company's consolidated financial statements included
elsewhere in this Prospectus.
(2) Excluding prior accident year reserve strengthening actions for the years
ended December 31, 1995 and December 31, 1996 of $97 million and $173
million, respectively, and the goodwill write-off for 1996 of $151
million, the net earnings before federal income taxes would have been $145
million and $33 million for 1995 and 1996, respectively. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Business--Reserves."
(3) As developed through September 30, 1997.
(4) The GAAP loss and loss expense ratio represents the sum of losses and loss
expenses incurred as a percentage of net premiums earned. The GAAP
underwriting, acquisition and other insurance expense ratio represents
underwriting expenses as a percentage of net premiums earned. The GAAP
dividend ratio represents dividends to policyholders as a percentage of
net premiums earned. The GAAP combined ratio represents the sum of the
GAAP loss and loss expense ratio, the GAAP underwriting expense ratio, and
the GAAP dividend ratio.
(5) Statutory net income in 1993 was affected by $473 million of net realized
investment gains and tax benefits related to the Talegen Restructuring.
Excluding these items, statutory net income would have been $51 million.
(6) Represents the ratio of statutory net premiums written for the period to
policyholders' surplus at the end of such period. The ratios as of
September 30, 1996 and 1997 are calculated using statutory net premiums
written from the four quarters which precede the interim date.

23
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and notes thereto included
elsewhere in this Prospectus. Certain information contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" are
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors," "Business -- Reserves," "Business -- Investments"
and elsewhere in this Prospectus.

OVERVIEW

THE INDUSTRY
Historically, the commercial lines property and casualty insurance industry
has been highly cyclical. During the 1990s, the industry has generally
experienced low growth in premium writings and competitive conditions,
including intense price competition, which adversely affected profitability.

The low rate of premium growth in commercial insurance lines during this
period is the result of many factors. First, systemic changes arose due to
changes in law with regard to certain insurance coverages and claims, and as a
result of new technologies. The reform of workers' compensation laws in many
states in recent years and the increasing safety features of automobiles are
examples of systemic changes that have reduced the trends of claims costs
which are reflected in premium rates. Second, strategic activities of insurers
designed to reduce the trend of claims costs had effects which reduced premium
rates. These activities included defense cost containment, medical cost
management, loss control and safety engineering and fraud prevention. Third,
the emergence of alternative risk management mechanisms such as large
deductible policies, captive insurance companies, and loss sensitive insurance
programs provided insureds with alternatives to traditional insurance.
Finally, the growth in statutory surplus of the property and casualty
insurance industry substantially exceeded the growth in premium in recent
years, resulting in increased capacity to support business writings and
increased price competition.

Cyclical trends and the profitability of the industry may be significantly
affected by other unpredictable developments, such as catastrophic events,
fluctuations in interest rates and developments affecting the market prices of
investments, and inflation levels. Catastrophic events include natural
disasters such as hurricanes, earthquakes, and windstorms, as well as man-made
disasters such as explosions, with both types of events having the potential
to result in large insured losses. Recently, the number and size of
catastrophic property losses have resulted in a decline in underwriting
profitability, as has increased reserves for environmental, asbestos and other
latent exposures. Fluctuations in interest rates and in market prices affect
both the income provided by investments and capital gains and losses from
invested assets. Favorable investment results can mitigate the impact of
underwriting losses and result in gains in industry surplus, as seen in recent
years. Inflationary pressures may affect the size of losses and loss trends.
In addition, inflation also can affect industry premium levels as inflation in
exposure bases such as payroll or sales will tend to be reflected in increased
premium. In recent years, inflation levels have been low relative to those
experienced in the early and mid-1980's, and this has had a substantial effect
on loss cost trends. The demand for property and casualty insurance can also
vary significantly with fluctuations in the overall level of economic
activity.

THE COMPANY
CFI is a national commercial lines property and casualty insurance group
that operates on a regional basis and underwrites business produced by a
limited number of preferred independent agents and brokers. The Company
applies a generalist approach to the commercial lines middle market by
underwriting a broad array of commercial insurance products, primarily
including multiple peril, automobile, workers' compensation, umbrella and
general liability coverages, targeted to mid-sized businesses. The Company
believes its key competitive

24
<PAGE>

advantage is its strong relationships with a group of preferred independent
agents and brokers which it identifies as Custom Agents. CFI operates on a
regional basis through 20 offices that provide local, market sensitive service
and knowledge in support of its Custom Agents.

GROSS PREMIUMS WRITTEN; NET PREMIUMS WRITTEN; NET PREMIUMS EARNED
Gross premiums written are the sum of direct premiums written through CFI's
agents and brokers and premiums assumed by CFI, principally from non-voluntary
pools. CFI's gross premiums written increased by $84 million, or 8.2%, to $1.1
billion from 1994 to 1996. Underlying this growth in gross premiums written
has been the Company's focus on its Custom Agents, as demonstrated by the
growth in the number of its Custom Agents to 604 at December 31, 1996 from 516
at December 31, 1994. In addition, over this same period premium volume
produced by its Custom Agents increased by $235 million, or 32.4%, to $960
million in 1996 from $725 million in 1994. Furthermore, the average gross
premiums written per Custom Agent increased by 14.3% from $1.4 million in 1994
to $1.6 million in 1996. As a result, CFI received 87% of its gross premiums
written through Custom Agents in 1996 as compared to 71% in 1994. The growth
in gross premiums written was achieved despite a reduction in the number of
non-Custom Agents over the same period.

Net premiums written are gross premiums written less premiums ceded to
reinsurers which are made in order to limit the Company's exposure to loss.
Net premiums written increased by $69 million, or 7.8%, to $956 million from
1994 to 1996 for the same reasons that gross premiums written increased as
described above. However, the increase in net premiums written was slightly
less than the increase in gross premiums written because of the purchase of
additional umbrella reinsurance, partially offset by reduced reliance on
facultative reinsurance.

Net premiums earned reflect the amount of net premiums written applicable to
the portion of the policy term that expires in a given year. CFI generally
earns premiums on a pro rata basis over the period in which the coverages are
provided. Net premiums earned increased by $105 million, or 12.3%, to $959
million from 1994 to 1996. The larger increase in net premiums earned relative
to net premiums written was principally attributable to the lag in recognizing
an increase in net premiums written in 1994 and 1995.

NET INVESTMENT INCOME
Changes in the interest rate environment affect the prospective return on
newly invested and reinvested funds. Although rising interest rates enhance
available returns, they reduce the market value of existing fixed-income
investments and the availability of gains on the disposition thereof. Since
September 1992, the Company's investment portfolio has been largely invested
in short-term securities. During 1996, the Company began implementing an
investment strategy to reposition the portfolio to have a duration that more
closely approximates the duration of its liabilities and that was designed to
maximize after-tax investment income, within acceptable risk and volatility
criteria. In the fourth quarter of 1997, a portion of this portfolio was
liquidated to realize capital gains presented by lower interest rates in the
fixed-income securities market. Following the Offering, the Company will seek
over time to invest in high-quality, fixed-income securities with an average
rating of approximately "Aa" and a duration more closely approximating the
duration of its liabilities while maintaining sufficient liquidity to meet
cash requirements.

Net investment income increased by $37 million, or 27.6%, to $171 million
from 1994 to 1996. This increase in net investment income was due to a higher
average investment yield, a higher average level of invested assets and a
shift from non-taxable to taxable investments.

LOSSES AND LOSS EXPENSES
As premiums are earned, loss and loss expense reserves are established by
CFI 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 the losses are actually reported, recorded or
paid. Calendar year losses and loss

25
<PAGE>

expenses reflect the total incurred losses and loss expenses recorded during a
calendar year, regardless of when the losses are actually reported, recorded
or paid. Calendar year losses and loss expenses are the total loss and loss
expenses for the current accident year plus any net strengthening or reduction
in the year of reserves for prior accident years. Funding levels for accident
year incurred losses are established by CFI management based upon analyses and
recommendations of its actuaries and senior management. See "Business --
Reserves."

The Company regularly monitors and evaluates its loss and loss expense and
uncollectible reinsurance reserve adequacy. In recent years, CFI expanded the
methodologies it uses to analyze its reserves, added newly available sources
of data, and utilized outside consultants to supplement its internal
management review process. One of the particular challenges for the Company
and the property and casualty insurance industry in general is to improve the
understanding, recognition and management of asbestos, environmental and other
latent exposures. As part of its overall effort to understand and adequately
reserve for these exposures that were written in the past, CFI has undertaken
extensive work in recent years and plans to continue to refine its
understanding and response capabilities with regard to latent exposures. Since
1986, the Company's policy has been to expressly exclude asbestos and
environmental claims coverage from its insurance policies. The Company's
liabilities with respect to such claims thus arise almost exclusively from
policies written prior to such time. The Company continues to focus on the
management of its exposure to asbestos, environmental and other latent
exposure claims and employs Envision Claims Management Corporation
("Envision"), a previously affiliated service company which specializes in
managing latent exposure claims, to service and process these claims.

The Company's ongoing emphasis and scrutiny of the adequacy of its reserves
led to (i) a complete review of CFI's balance sheet as part of the Talegen
Restructuring in 1992 and (ii) a project started in 1995 and completed in 1996
to develop reserve evaluation methodologies for its latent exposures
(asbestos, environmental and other). See "Business--Reserves." As a result,
CFI's gross loss and loss expense reserve levels were increased in 1995 and
1996 by $400 million and $176 million, respectively, and net loss and loss
expense reserves were increased by $97 million and $173 million, respectively.
The Company is continuing to review its loss and loss expense reserves. While
the Company believes that its current reserves are adequate to meet its
expected obligations, it has retained an independent actuarial consulting firm
to do further analysis on its latent and non-latent loss and loss expense
reserves. Based on both of the reviews at this stage, the Company may increase
its reserves net of reinsurance by up to $250 million. CFI will make a
determination upon completion of this study, which is expected by the end of
the first quarter of 1998, on whether to make any reserve strengthening and,
if so, on the amount of such strengthening.

Establishment of reserves is an inherently uncertain process and actual
losses and loss expenses may deviate, perhaps substantially, from the reserves
reflected in CFI's financial statements. Any material deficiency in reserve
estimates, as compared to actual losses and loss expenses, could result in a
charge to earnings which could have a material adverse effect on the Company's
financial condition or results of operations. See "Risk Factors -- Uncertainty
Regarding Adequacy of Loss and Loss Expense Reserves; Exposure to Latent
Liabilities" and "Business -- Reserves."

Losses and loss expenses incurred increased by $323 million, or 53.4%, to
$928 million from 1994 to 1996. This increase was principally due to 1996
reserve actions of $173 million, which was $165 million greater than 1994's
reserve actions of $8 million. Losses for 1996 were also impacted by unusually
high property losses, including increased catastrophe losses of $14 million
(principally related to the Pacific Northwest storms), as well as large
medical losses in the workers' compensation line. Additional losses were also
realized as a result of the growth in net premiums earned.

UNDERWRITING, ACQUISITION AND OTHER INSURANCE EXPENSES (UNDERWRITING
EXPENSES)
Underwriting, acquisition and other insurance expenses are composed
principally of external expenses, relating to agents' compensation
(commissions) and premium taxes, and internal underwriting expenses, which are
a component of operating expenses. The internal underwriting expenses are
those operating expenses related to underwriting and policy issuance as well
as related administrative expenses. CFI's efforts to reduce expenses

26
<PAGE>

are primarily focused on total operating expenses which are a broader
reflection of the Company's progress in expense control. See "Business --
Strategy -- Aggressive Expense Management."

A key priority of CFI is to achieve continued internal underwriting expense
ratio reductions. The Company has been increasing efficiency and productivity
by implementing technology improvements, reducing staff and enhancing
management controls and financial oversight. For example, from 1994 to 1996,
total staffing declined 15.7% from 2,125 to 1,792. Continuing the trend, total
staffing has further declined to 1,705 through September 30, 1997. This
staffing decline contributed to CFI's 28.3% improvement in productivity, as
measured by gross premiums written per employee, which increased from
approximately $481,000 in 1994 to $617,000 in 1996. To support these
productivity improvements, the Company has made significant investments in
technology initiatives designed to enhance productivity in underwriting and
claims administration and to improve the quality and responsiveness of front-
line decision making. Technology expenses increased by $14 million, or 43.8%,
from 1994 to 1996. The Company expects that beginning in 1998, technology
expenses will decline to approximately $43 million and reach a normalized
annual rate of approximately $38 million by 2000 (as compared to $46 million
for 1996). However, no assurance can be given that the Company's technology
expenses will decline as expected, and unexpected systems complications,
longer than expected development times, higher year 2000 remediation expenses
and increases in outsourced vendor expenses are among the reasons which could
cause technology expenses to be higher than expected.

Related to its staff reductions, the Company has effected reductions in
other expense categories such as benefits and equipment (other than technology
equipment), where expenses were reduced by $4 million and $3 million,
respectively, from 1994 to 1996. Benefit programs have been revised in recent
years to reduce and better control medical costs of active and retired
employees. Because of the productivity improvements achieved to date, and in
particular the reduced staffing levels, non-technology operating expenses
(including expenses related to underwriting activities, claims handling and
certain general and administrative expenses) declined $4 million, or 2.3%,
from 1994 to 1996, which partially offset the increase in technology costs.

CFI's underwriting expense ratio decreased by 2.6 points, from 36.5% in 1994
to 33.9% in 1996, reflecting growth of 12.3% in net premiums earned
accompanied by an increase of only 4.2% in underwriting expenses. Underlying
the underwriting expense growth were increases in both external and internal
underwriting expenses. The increase in external underwriting expenses
(principally commissions and premium taxes) resulted from the increase in net
premiums earned, partially offset by lower commission costs. Internal
underwriting expenses increased due to higher technology costs that were
partially offset by savings in non-technology expenses resulting from the
productivity improvements discussed above. During the nine months ended
September 30, 1997, the Company's underwriting expense ratio decreased to
33.2% from 34.2% for the first nine months of 1996, principally as a result of
favorable adjustments to the contingent commission reserve in 1997.

RESULTS OF OPERATIONS

COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996
Gross Premiums Written; Net Premiums Written; Net Premiums Earned. Gross
premiums written by CFI decreased by $19 million, or 2.3%, to $818 million for
the nine months ended September 30, 1997 from $837 million for the same period
in 1996. The decrease in gross premiums written was primarily due to
reductions in gross premiums written from non-Custom Agents, lower non-
voluntary premiums, as well as competitive pressures on pricing levels and
constraints on growth of new business stemming from competition. In addition,
the Company believes that uncertainty among current and prospective Custom
Agents regarding CFI's future ownership and its potential effects on the
stability of relationships has adversely affected premium volume. This
uncertainty increased in 1997 due to Talegen's progress in selling four
formerly affiliated companies of CFI in accordance with Xerox's disengagement
process. The gross premiums written through Custom Agents increased by $10
million, or 1.4%, to $734 million for the nine months ended September 30, 1997
from $724 million for the same period in 1996 while the gross premiums written
per Custom Agent increased to $1.7 million in the nine months ended September
30, 1997 from $1.6 million for the same period in 1996. In addition, CFI
received

27
<PAGE>

90% of its gross premiums written through Custom Agents in 1997 as compared to
86% in 1996. However, the number of Custom Agents decreased to 586 at
September 30, 1997 from 604 at September 30, 1996. The decline in the number
of Custom Agents during the nine months ended September 30, 1997 was the
result of terminations of non-performing Custom Agents, consolidation activity
among Custom Agents and reluctance among some prospective Custom Agents to
commit to long-term relationships with the Company pending the outcome of its
future ownership. Gross premiums written increased in the nine months ended
September 30, 1997 as compared to the same period in 1996 in the multiple
peril and workers' compensation lines by $23 million and $11 million,
respectively, and decreased in all other lines of business. The increase in
the multiple peril line was related to the growth in business from Custom
Agents. The increase in the workers' compensation line of business resulted
from premium adjustments partially offset by higher retrospective return
premiums and lower non-voluntary premiums. The lower premiums reported in
remaining lines of business were principally due to market competition which
decreased pricing and was particularly pronounced in the umbrella line of
business, where gross premiums written decreased by $21 million.

CFI's net premiums written increased by $4 million, or 0.6%, to $728 million
for the nine months ended September 30, 1997 from $724 million for the same
period in 1996. The increase in net premiums written, while gross premiums
written declined, was due to reduced reliance on reinsurance and lower
property reinsurance costs.

CFI's net premiums earned decreased by $15 million, or 2.1%, to $710 million
for the nine months ended September 30, 1997 from $725 million for the same
period in 1996, due to the earnings impact of lower premium volume after the
impact of workers' compensation premium adjustments.

Net Investment Income. CFI's net investment income increased by $15 million,
or 12.0%, to $140 million for the nine months ended September 30, 1997 from
$125 million for the same period in 1996. The increase was due to a higher
level of average assets invested in the first nine months of 1997 compared to
the first nine months of 1996 and an increase in the investment yield
resulting from the reinvestment of the portfolio. On an annualized basis, the
average investment yield, excluding net rental income from the Xerox training
facility and investment expenses, increased to 6.1% for the nine months ended
September 30, 1997 from 5.6% for the nine months ended September 30, 1996.

Losses and Loss Expenses. CFI's losses and loss expenses decreased by $161
million, or 21.9%, to $573 million for the nine months ended September 30,
1997 from $734 million for the same period in 1996. On a calendar year basis,
the loss and loss expense ratio of 80.7% in the nine months ended September
30, 1997 was significantly lower than the 101.2% for the same period in 1996
due to the 1996 reserve actions. CFI's accident year loss and loss expense
ratio was 78.9% for the nine months ended September 30, 1997, which was lower
than the 1996 full year accident year loss and loss expense ratio of 79.7%,
primarily reflecting more favorable loss experience in the property lines of
business (multiple peril-property, fire and inland marine). The catastrophe
loss ratio for the nine months ended September 30, 1997 was .7% while the 1996
full year ratio was 3.0%.

Underwriting, Acquisition and Other Insurance Expenses (Underwriting
Expenses). CFI's underwriting expenses decreased $12 million, or 4.8%, to $236
million for the nine months ended September 30, 1997 from $248 million for the
same period in 1996. External underwriting expenses decreased by $10 million,
or 7.1%, to $131 million for the nine months ended September 30, 1997 from
$141 million for the same period in 1996 principally due to the decrease in
net premiums earned and lower contingent commission expense. Internal
underwriting expenses decreased by $2 million, or 1.9%, to $105 million for
the nine months ended September 30, 1997 from $107 million for the same period
in 1996, primarily as a result of staff reductions.

Other. General expenses decreased $5 million to $2 million for the nine
months ended September 30, 1997 from $7 million for the same period in 1996 as
a result of the write-off of goodwill in 1996.

Provision for Income Taxes. The provision for income taxes increased to an
expense of $12 million for the nine months ended September 30, 1997 from a
benefit of $49 million for the same period in 1996, primarily due to the
increase in earnings before federal income taxes.

28
<PAGE>

COMPARISON OF 1996 TO 1995
Gross Premiums Written; Net Premiums Written; Net Premiums Earned. Gross
premiums written by CFI remained relatively constant at $1.1 billion in 1996
and 1995. The Company believes that uncertainty among Custom Agents regarding
CFI's future ownership adversely affected premium volume growth in 1996.
Although premium volume remained constant, CFI continued to grow both the
number of Custom Agents and the volume of gross premiums written through
Custom Agents in 1996. The number of Custom Agents increased from 589 at
December 31, 1995 to 604 at December 31, 1996 while the gross premiums written
from Custom Agents increased by $52 million, or 5.7%, to $960 million for 1996
from $908 million in 1995. Gross premiums written per Custom Agent increased
from $1.5 million in 1995 to $1.6 million in 1996. As a result, CFI received
87% of its gross premiums written through Custom Agents in 1996 as compared to
81% in 1995. Gross premiums written decreased in the umbrella and general
liability lines by $22 million and $10 million, respectively. The reduction in
premiums from umbrella and general liability reflected the combined impact of
reduced volume from non-Custom Agents and the loss of umbrella policies where
market pricing was below levels acceptable to CFI. Partially offsetting these
lines of business decreases was increased multiple peril business of $24
million.

CFI's net premiums written decreased by $4 million, or .4%, to $956 million
in 1996 from $960 million in 1995. The smaller decrease in net premiums
written relative to the decline in gross premiums written resulted from
reduced reliance on reinsurance and lower property reinsurance costs.

CFI's net premiums earned, however, increased by $29 million, or 3.1%, to
$959 million in 1996 from $930 million in 1995. Net premiums earned increased
while net premiums written decreased as a result of the recognition in 1996 of
net premiums written in prior periods.

Net Investment Income. CFI's net investment income increased $13 million, or
8.2%, to $171 million in 1996 from $158 million in 1995. The increase was
primarily due to a higher level of invested assets in 1996 compared to 1995.
The average investment yield, excluding net rental income from the Xerox
training facility and investment expenses, was 5.7% in both 1995 and 1996.

Net Realized Investment Gains. CFI's net realized investment gains decreased
by $46 million to $2 million in 1996, from $48 million in 1995 due to the
liquidation of investments in 1995 in connection with the proposed sale of
Talegen. See "Business -- Investments."

Losses and Loss Expenses. CFI's losses and loss expenses increased $161
million, or 21%, to $928 million in 1996 from $767 million in 1995. In 1996,
primarily as a result of refining certain elements of its latent exposure
methodologies, gross and net loss and loss expense reserves were strengthened
by $176 million and $173 million, respectively, including an addition to the
reserve for uncollectible reinsurance of $32 million, while in 1995 net
reserves for loss and loss expenses were increased by $97 million. On a
calendar year basis, the increase in the loss and loss expense ratio of 14.3
points from 82.5% in 1995 to 96.8% in 1996 was due primarily to these reserve
actions. Reserve strengthening accounted for 10.4 points of the loss and loss
expense ratio in 1995 and 18.0 points in 1996. The 1996 accident year loss and
loss expense ratio developed through September 30, 1997 was 79.7%, which was
higher when compared to the 1995 accident year loss and loss expense ratio of
76.0%, primarily reflecting unfavorable development in the automobile and
property lines of business.

Underwriting, Acquisition and Other Insurance Expenses (Underwriting
Expenses). CFI's underwriting expenses increased by $18 million, or 5.9%, to
$325 million in 1996 from $307 million in 1995. External underwriting expenses
increased by $5 million, or 2.8%, to $182 million in 1996 from $177 million in
1995 due to higher net premiums earned over the same period. Internal
underwriting expenses increased by $13 million, or 10.0%, to $143 million in
1996 from $130 million in 1995, primarily reflecting increases in non-
technology expenses. The increased level of non-technology expenses was due to
the reduction of reserves for premium deficiencies and certain other items in
1995 that did not recur in 1996. These 1995 reserve reductions also
contributed to an increase in the underwriting expense ratio of .9 points from
33.0% in 1995 to 33.9% in 1996.

29
<PAGE>

Other. Interest expense decreased by $2 million, or 20.0%, to $8 million for
1996 from $10 million in 1995, which reflects principal payments made on term
debt. Unamortized goodwill of $151 million was written off in 1996 based upon
the revaluation of this asset in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of."

Provision for Income Taxes. The income tax benefit increased from $17
million in 1995 to $47 million in 1996, primarily due to the impact of the
reserve increases in 1996, a reduction in investment income attributable to
tax-exempt securities and the release of certain redundant tax liabilities in
1995.

COMPARISON OF 1995 TO 1994

Gross Premiums Written; Net Premiums Written; Net Premiums Earned. Gross
premiums written by CFI increased by $99 million, or 9.7%, to $1.12 billion in
1995 from $1.02 billion in 1994. The growth in gross premiums written resulted
from an increase in the number of Custom Agents from 516 at year end 1994 to
589 at year end 1995 and an increase in average gross premiums written per
Custom Agent, which rose from $1.4 million in 1994 to $1.5 million in 1995. As
a result, CFI received 81% of its gross premiums written in 1995 compared to
71% in 1994 from its Custom Agents. During 1995 as compared to 1994, gross
premiums written increased in all lines of business except umbrella, which
declined by $6 million as a result of lower volume from non-Custom Agents.

Net premiums written increased by $73 million, or 8.2%, to $960 million in
1995 from $887 million in 1994. The increase in net premiums written was less
than the increase in gross premiums written due to the purchase of additional
umbrella reinsurance partially offset by reduced reliance on reinsurance.

Net premiums earned increased by $76 million, or 8.9% to $930 million in
1995 from $854 million in 1994 due to the earnings impact of higher premium
volume.

Net Investment Income. CFI's net investment income increased by $24 million,
or 17.9%, to $158 million in 1995 from $134 million in 1994. This increase was
due to a higher level of invested assets in 1995 compared to 1994 and a higher
average investment yield. On an annualized basis, the average investment
yield, excluding net rental income from the Xerox training facility and
investment expenses, was 5.7% in 1995 compared to 5.0% in 1994.

Net Realized Investment Gains. CFI's net realized investment gains increased
by $37 million to $48 million in 1995 from $11 million in 1994, primarily due
to the net gains realized during the 1995 liquidation of the investment
portfolio in connection with the proposed sale of Talegen.

Losses and Loss Expenses. CFI's losses and loss expenses increased by $162
million, or 26.8%, to $767 million for 1995 from $605 million in 1994. On a
calendar year basis, CFI's loss and loss expense ratio increased 11.7 points
from 70.8% in 1994 to 82.5% in 1995. During 1995, prior accident year gross
loss and loss expense reserves were strengthened by $352 million and
uncollectible reinsurance reserves were strengthened by $53 million. The
increase in the calendar year loss and loss expense ratio and the absolute
increase in the amount of incurred losses and loss expenses were caused
primarily by net prior accident year reserve strengthening of $97 million in
1995 as compared to $8 million in 1994. On an accident year basis, after
consideration of all prior accident year reserve strengthening recorded
through September 30, 1997, the loss and loss expense ratio decreased by 1.5
points, from 77.5% in 1994 to 76.0% in 1995. This improvement was primarily
due to lower multiple peril property losses experienced in 1995 as compared to
1994.

Underwriting, Acquisition and Other Insurance Expenses (Underwriting
Expenses). CFI's underwriting expenses decreased by $5 million, or 1.6%, to
$307 million in 1995 from $312 million in 1994. External underwriting expenses
decreased by $2 million, or 1.1%, to $177 million in 1995 from $179 million in
1994, while internal underwriting expenses decreased by $3 million, or 2.3%,
from $133 million in 1994 to $130

30
<PAGE>

million in 1995. Despite an increase in net premiums earned during this
period, external expenses were reduced, largely as a result of lower
commission costs. The decrease in internal underwriting expenses reflected a
decrease in non-technology expenses due to headcount reductions and related
productivity improvements combined with expense benefits primarily resulting
from a reduction of premium deficiencies and other redundant reserves,
partially offset by an increase in technology expenses. The decrease in
underwriting expenses combined with an increase in net premiums earned
resulted in a 3.5 point decrease in the total underwriting expense ratio from
36.5% to 33.0%.

Other. Interest expense increased by $9 million to $10 million in 1995 from
$1 million in 1994 primarily due to the full year of interest recorded on bank
debt which was issued in the fourth quarter of 1994.

Provision for Income Taxes. The 1995 provision for income taxes decreased by
$40 million from an expense of $23 million in 1994 to a benefit of $17 million
in 1995 due to lower earnings before income taxes as a result of the reserve
strengthening discussed above, higher 1995 tax-exempt interest income and the
release of certain redundant tax liabilities in 1995.

QUARTERLY RESULTS OF OPERATIONS

The following table presents the Company's quarterly results of operations
for 1996 and 1997.

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
1997
Net premiums earned.......................... $237 $235 $ 238 N/A
Net investment income........................ 45 48 47 N/A
Losses and expenses.......................... 267 276 282 N/A
Earnings before income taxes................. 18 10 8 N/A
Income taxes................................. 6 3 3 N/A
---- ---- ----- -----
Net earnings................................. $ 12 $ 7 $ 5 N/A
==== ==== ===== =====
1996
Net premiums earned.......................... $234 $247 $ 244 $ 234
Net investment income........................ 40 42 43 46
Losses and expenses.......................... 266 278 459 430
Earnings (loss) before income taxes.......... 11 14 (169) (147)
Income taxes (benefits)...................... 4 6 (59) 2
---- ---- ----- -----
Net earnings (loss).......................... $ 7 $ 8 $(110) $(149)
==== ==== ===== =====
</TABLE>

The third quarter of 1996 includes reserve strengthening actions of $173
million primarily resulting from CFI's refining certain elements of its
methodologies to estimate latent exposures. The income tax benefits recognized
in the third quarter of 1996 were primarily due to the tax impact from these
actions. The fourth quarter of 1996 includes a goodwill write-off of $151
million.

LIQUIDITY AND CAPITAL RESOURCES

CONSOLIDATED LIQUIDITY
Cash provided by operating activities primarily consists of premium
collections, reinsurance collections, investment income and income tax
receipts. Cash provided from these sources is generally used for loss and loss
expense payments, policy acquisition costs, operating expenses, the purchase
of reinsurance coverage, debt service and repayment, income tax payments and
dividends.

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<PAGE>

Cash provided by operating activities amounted to $191 million, $138 million
and $116 million for 1994, 1995 and 1996, respectively, and $73 million and
$46 million for the nine months ended September 30, 1996 and 1997,
respectively. Cash provided by operating activities decreased in 1995,
primarily as a result of lower receipts for income taxes than in 1994,
partially offset by increased cash flows from premium collections and
investment income. The decrease of $27 million between the nine months ended
September 30, 1996 and the same period in 1997 was due to higher loss and loss
expense payments and lower loss recoveries, which were partially offset by
lower expense and reinsurance premium payments.

Total cash used in investing activities during 1994, 1995 and 1996 was $175
million, $101 million and $156 million, respectively, and was principally the
result of the positive cash flows from operations and, in 1996, capital
contributions. Total cash used in investing activities for the nine months
ended September 30, 1996 and 1997 amounted to $101 million and $30 million,
respectively. Cash used to purchase additional investments in 1997 was less
than in 1996 due to the lower positive cash flow from operations, as well as
less cash available from financing activities.

Cash (used in) provided by financing activities amounted to $(14) million,
$(39) million and $38 million for 1994, 1995 and 1996, respectively. Cash
provided by (used in) financing activities amounted to $27 million and $(6)
million for the nine-month periods ended September 30, 1996 and 1997,
respectively. During 1994, CFI issued bank debt of $150 million, the proceeds
of which were used to pay shareholder dividends to Talegen. During 1996,
proceeds received from a loan from Talegen and capital contributions from
Talegen were used to repay outstanding bank debt. The cash flows from
financing activities for the nine months ended September 30, 1996 included a
$27 million repayment of debt and a capital contribution from Talegen of $54
million. Cash flows used in financing activities for the nine months ended
September 30, 1997 included a $6 million dividend to Talegen, while no
dividends were paid to Talegen during 1996.

The aggregate carrying value of invested assets, including cash and short-
term investments, was $2.6 billion, $2.9 billion and $3.0 billion as of
December 31, 1994, 1995 and 1996, respectively. The aggregate carrying value
of invested assets, including cash and short-term investments, increased by
$39 million from December 31, 1996 to September 30, 1997. The increase in
invested assets in 1995 over 1994 resulted from positive cash flow from
operations generated during 1995 and lower unrealized losses on investment
securities due to a general decline in interest rates. The increase in
invested assets in 1996 over 1995 resulted from positive cash flow from
operations and financing activities noted above. The increase in invested
assets during the first nine months of 1997 was due to increases in the market
value of investment securities due to lower interest rates and positive cash
flow from operations.

Beginning in the third quarter of 1995, CFI liquidated its investment
portfolio to assist the proposed sale of Talegen. As a result of the
liquidation and subsequent reinvestment, the average maturity of CFI's
investment portfolio decreased from four years at the end of 1994 to an
average maturity of less than three years at the end of 1996. Consistent with
CFI's investment strategy, the proportion of fixed maturities in its
investment portfolio increased from 8% as of December 31, 1995 to 36% as of
December 31, 1996. The fixed maturity investments purchased during 1996 were
mainly high-quality (primarily rated "Aa" or higher) corporate bonds and
mortgage and other asset-backed securities. Of the total invested assets at
September 30, 1997, approximately $1.9 billion, or 63%, was in short-term
investments.

Following the completion of the Offering, the Company intends to reposition
its investment portfolio over time with the objective of increasing the yield
and duration of its investment portfolio. The Company will seek to invest in
high-quality, fixed-income securities with an average rating of approximately
"Aa" and a duration more closely approximating the duration of its liabilities
while maintaining sufficient liquidity to meet immediate cash requirements.
See "Business -- Investments."

CFI's shareholder's equity was $1.1 billion, $1.2 billion, $1.0 billion and
$1.1 billion as of December 31, 1994, 1995 and 1996 and September 30, 1997,
respectively. Cash dividends of $173 million, $21 million, $0 and

32
<PAGE>

$6 million were paid to Talegen during 1994, 1995 and 1996 and the nine months
ended September 30, 1997, respectively. The Company also distributed $6
million of real estate as a dividend to Talegen in 1994. Net unrealized losses
on investment securities, which are recorded as a direct reduction to equity,
were $115 million as of December 31, 1994, which improved to a loss of $1
million as of December 31, 1995, and improved to a gain, net of deferred
income of taxes, of $7 million as of December 31, 1996, which increased to $14
million through September 30, 1997, primarily due to the general decline in
interest rates.

Combined statutory net income (loss) for the Company amounted to $83
million, $65 million and $(86) million for the years ended December 31, 1994,
1995 and 1996, respectively. The decrease in statutory net income (loss) from
1995 to 1996 was primarily due to the reserve actions taken in 1996. See
"Business --Reserves." Combined policyholders' surplus of CFI has increased
from $809 million at December 31, 1994 to $824 million at September 30, 1997
and the ratio of statutory net premiums written to surplus has remained
relatively stable at 1.1x over the same period. Statutory surplus is an
important measure utilized by CFI, regulators and rating agencies to assess
the Company's 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
calculations based on policyholders' surplus, statutory net income, and
investment income. See "Business -- Regulation --Regulation of Dividends and
Other Payments from Insurance Companies."

POLICYHOLDERS' SURPLUS AND OPERATING LEVERAGE

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Combined policyholders' sur-
plus........................... $ 809 $ 851 $ 803 $ 774 $ 824
Operating leverage (statutory
net premiums written to end of
period surplus) (1)............ 1.1x 1.2x 1.2x 1.3x 1.1x
</TABLE>
- - --------
(1) The ratios as of September 30, 1996 and 1997 were calculated using net
premiums written from the four quarters which precede the interim date.

As of September 30, 1997, the Company had a net deferred tax asset of $236
million, which primarily related to temporary differences that are expected to
reverse over 10 to 15 years as net ordinary deductions for tax purposes.
Contemporaneously with the Offering, $105 million of deferred tax benefits
will be retained by Xerox. Realization of this net deferred tax asset, after
deducting the amount to be retained by Xerox, will require the Company to
generate approximately $374 million of taxable income over 10 to 15 years,
before reversal of these temporary differences, although there can be no
assurance that such taxable income will be achieved.

HOLDING COMPANY LIQUIDITY
As a holding company, the Company has no direct operations and relies
primarily on dividends from the Insurance Companies to meet cash needs.
Historically, the Company's principal need for liquidity consisted of debt
service obligations in connection with a $115 million promissory note issued
to Talegen and dividend payments on its Common Stock. The promissory note
bears interest at the rate of 7.4% per annum and matures in 2006. In
connection with the Offering, the Company expects to issue debt of $150
million, with $115 million of the proceeds used to repay the aforementioned
promissory note and $33 million, after expenses, retained by the Company. In
addition, the Company expects to establish a bank credit facility to provide
for up to $25 million in further borrowings. After the Offering, the Company's
principal needs for liquidity are expected to be debt service obligations and
dividend payments on its Common Stock.

The ability of the Insurance Companies to pay dividends to the Company is
subject, among other things, to limitations imposed by the insurance laws and
regulations of the state in which each Insurance Company is domiciled.
Currently, U.S. Fire has no ordinary dividend capacity. See "Risk Factors --
Dividend Restrictions; Earned Surplus of U.S. Fire."

33
<PAGE>

During the nine months ended September 30, 1997, the Company received
dividends in the amount of $5 million from the Insurance Companies. The
maximum dividends that could be paid by the Insurance Companies to the Company
in 1997 without prior approval of the appropriate insurance regulators were
$19 million.

YEAR 2000 REMEDIATION
Systems remediation to comply with year 2000 is an industry issue. Since
1994, the Company has required that all new systems and enhancements meet its
year 2000 compliance standards and has implemented a plan to make critical
existing systems meet such standards. The Company believes that these
remediation efforts will be completed during 1999 and has estimated the cost
at approximately $6 million; however, there can be no assurance that such
remediation will be completed as planned or that costs will not substantially
exceed estimates.

ACCOUNTING STANDARDS NOT YET ADOPTED
Statement of Financial Accounting Standards No. 128 "Earnings per Share"
establishes standards for computing and presenting earnings per share ("EPS")
and applies to entities with publicly held common stock or potential common
stock. It simplifies current standards for computing earnings per share and
makes them comparable to international EPS standards. This Statement is
effective for financial statements issued for periods ending after December
15, 1997, including interim periods. This Statement requires restatement of
all prior-period EPS data presented. The adoption of this statement is not
expected to have a material effect on CFI's results of operations or financial
condition.

Statement of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" establishes standards for disclosing
information about an entity's capital structure. This statement consolidates
existing disclosure requirements. This statement applies to all entities and
is effective for financial statements issued for periods ending after December
15, 1997. The adoption of this statement is not expected to have a material
effect on CFI's results of operations or financial condition.

Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" establishes standards for reporting comprehensive income and its
components (revenues, expenses, gains and losses) in financial statements.
This Statement is effective for fiscal years beginning after December 15, 1997
and requires reclassification of comparative periods disclosed. The adoption
of this statement is not expected to have a material effect on CFI's results
of operations or financial condition.

Statement of Financial Accounting Standards No. 131 "Disclosure about
Segments of an Enterprise and Related Information" establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements. This Statement is effective for
fiscal years beginning after December 15, 1997 and requires comparative
information for prior periods to be restated. The adoption of this statement
is not expected to have a material effect on CFI's results of operations or
financial condition.

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 setting
appropriate loss reserves as well as insurance rates. CFI's methods, used both
to estimate loss liabilities for claims incurred but not yet reported ("IBNR")
and to calculate insurance rates, reflect the effects of inflation when
estimating ultimate loss costs. CFI uses internal and industry insurance data
as well as government economic indices in estimating the effects of inflation
on insurance premium rates and loss liabilities. However, until claims are
ultimately settled, the full effect of inflation on CFI's results cannot be
known. Due to changing inflationary pressures, CFI regularly evaluates its
premium rates and loss liabilities, including IBNR loss reserves, for
inflation effects.

34
<PAGE>

BUSINESS

OVERVIEW
CFI is a national commercial lines property and casualty insurance group
that operates on a regional basis and underwrites business produced by a
limited number of preferred independent agents and brokers. The Company, which
has operated for more than a century under the well-known Crum & Forster name,
underwrites a broad array of commercial insurance products targeted to mid-
sized businesses. These products principally include multiple peril,
automobile, workers' compensation, umbrella and general liability coverages.
With net premiums written of $956 million in 1996, the Company is among the 30
largest writers of commercial lines insurance in the United States based on
1996 statutory data published by A.M. Best. At September 30, 1997, CFI had
total assets of $5.4 billion.

The Company believes its key competitive advantage is its strong
relationships with a group of preferred independent agents and brokers which
it identifies as "custom agents" or "potential custom agents" (collectively,
"Custom Agents"). CFI considers the Custom Agents to be its primary customers
because it believes these agents serve as risk managers for many of the
insureds and exercise substantial influence over their choices of coverage and
carrier. As of September 30, 1997, the Company had 586 Custom Agents which
accounted for 90% of gross premiums written during the first nine months of
1997. CFI believes there is substantial opportunity to increase its share of
the Custom Agents' premium volume because it estimates that its current share
of the total commercial lines premium produced by its Custom Agents is under
10%.

CFI operates on a regional basis through 20 offices that provide local,
market sensitive service and knowledge in support of its Custom Agents.
Substantially all underwriting and claims handling functions are performed in
the regional offices. The Company's management, reporting and control
structures are organized to support regional decision making while emphasizing
discipline and consistency in CFI's core underwriting and claims functions.
Though CFI operates on a regional basis, it is also recognized as a national
writer with the ability to offer countrywide account service capabilities.

CFI is a wholly owned subsidiary of Talegen, which is a wholly owned
subsidiary of XFSI, which is, in turn, a wholly owned subsidiary of Xerox. In
January 1993, Xerox announced its strategic decision to disengage from its
insurance and other financial services businesses, which include Talegen and
the Company, in order to focus on its core document processing business. The
uncertainties regarding the Company's future ownership and operations created
by the Xerox disengagement process have impacted CFI's ability to effectively
execute its strategy, which relies heavily on mutual commitments to long-term,
stable relationships with current and prospective Custom Agents. The Company
believes that the Offering will remove many of these uncertainties.

STRATEGY
CFI's objective is to enhance shareholder value by leveraging its Custom
Agent relationships through its regional operating structure. Critical
elements of the Company's strategy include: (i) enhancing its strong
relationships with Custom Agents; (ii) operating through a decentralized
regional structure; (iii) applying a generalist approach to the commercial
lines middle market; (iv) maintaining attractive loss exposure through

35
<PAGE>

disciplined underwriting and superior claims management; (v) leveraging its
Custom Agent relationships to take advantage of growth opportunities; (vi)
reducing operating expenses; (vii) maintaining the Company's strong balance
sheet and strong ratings; and (viii) repositioning the Company's investment
portfolio to enhance investment income. The following paragraphs describe the
major elements of the Company's strategy.

Strong Custom Agent Relationships. The central focus of the Company is to
capitalize on market opportunities by continuing to strengthen its
relationships with its Custom Agents and by identifying and appointing
additional Custom Agents. Custom Agents are selected based on their commercial
lines focus, production of profitable business and professional reputation. In
addition, each Custom Agent must have a business plan and strategy that is
consistent with CFI's and must exhibit a commitment to maintaining a long-
term, profitable business relationship with the Company. Potential custom
agents share the strategic characteristics of a custom agent, but their
relationships with CFI are still developing. Custom agents typically serve as
potential custom agents for one to two years before being appointed as custom
agents. In order to enhance relationships with its Custom Agents, CFI seeks to
provide a stable market, generalist products, strong local expertise and
decision making, ready access to CFI's senior management and attractive agent
compensation. In addition, CFI develops individual business plans on an annual
basis with each of its Custom Agents.

The number of Custom Agents was 494 at December 31, 1993 and 586 at
September 30, 1997. Consistent with its strategy to focus on Custom Agents,
CFI has reduced the number of non-Custom Agents from 468 on December 31, 1993
to 159 on September 30, 1997. The success of the Company's accelerated efforts
since 1993 to focus on its Custom Agents is evidenced by the increasing
percentage of the Company's total gross premiums written produced by its
Custom Agents and the increasing average gross premiums written per Custom
Agent as displayed in the following table.

GROSS PREMIUMS WRITTEN THROUGH CUSTOM AGENTS

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------ SEPTEMBER 30,
1993 1994 1995 1996 1997
------ ------ ------ ------ -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Total gross premiums written.... $1,031 $1,022 $1,121 $1,106 $818
Gross premiums written through
Custom Agents.................. $ 599 $ 725 $ 908 $ 960 $734
Custom Agents as percentage of
total.......................... 58% 71% 81% 87% 90%
Average gross premiums written
per
Custom Agent................... $ 1.2 $ 1.4 $ 1.5 $ 1.6 $1.7(1)
</TABLE>
- - --------
(1) Annualized.

As indicated in the above table, only approximately 10% of CFI's total
premium volume for the nine months ended September 30, 1997 related to
business produced by non-Custom Agents. This premium was derived principally
from non-voluntary business as well as business from those agents who did not
meet the Company's Custom Agent criteria. CFI anticipates that in future years
it will derive similar small percentages of its overall premium volume from
these sources, in part due to business produced through former Custom Agents
who cease to meet the Company's criteria for such status. The Company
maintains a quarterly monitoring process with each of its appointed Custom
Agents focused on performance objectives for renewal and new business, loss
experience and mix of business. CFI takes a series of corrective actions,
culminating in termination of relationships, with those Custom Agents who fail
to achieve mutually agreed objectives.

While the Company has expanded the number of Custom Agents, premium growth
on a "same store sales" basis (period to period growth from existing Custom
Agents) has also been attained. The Company's premium growth rates achieved
through its Custom Agents from 1993 to 1996 are substantially greater than
those achieved by the commercial lines industry. The following table provides
data illustrating these trends.

36
<PAGE>

GROWTH IN CUSTOM AGENT PREMIUMS WRITTEN

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997
----- ----- ----- ----- -------------
<S> <C> <C> <C> <C> <C>
Number of Custom Agents............. 494 516 589 604 586
Increase in gross premiums written
through
Custom Agents...................... 19.6% 21.0% 25.2% 5.7% 1.4%
Increase in gross premiums written
through same
prior year Custom Agents ("same
store sales")...................... 18.5 18.4 19.0 4.5 .7
Commercial lines insurance industry
increase
(decrease) in net premiums written
(1)................................ 4.5 2.4 (.8) 2.1 N/A
Increase (decrease) in total CFI net
premiums written(2)................ N/A 13.9 12.4 (3.9) (1.1)
</TABLE>
- - --------
(1) Source: A.M. Best.
(2) Reflects statutory net premiums written.

The decline in the rate of growth of the Custom Agent gross premiums written
during 1996 and the first nine months of 1997 primarily resulted from
competitive pricing pressures in the commercial lines marketplace which
affected the industry as a whole and the Company's adherence to its
disciplined underwriting standards. In addition, the Company believes that
uncertainty among current and prospective Custom Agents regarding CFI's future
ownership adversely impacted gross premiums written. The decline in the number
of Custom Agents during the nine months ended September 30, 1997 was primarily
the result of CFI's termination of underperforming Custom Agents, as well as
consolidation activities among Custom Agents and reluctance among some
prospective Custom Agents to commit to long-term relationships with the
Company pending the outcome of its future ownership. The Company will continue
to actively manage its relationships with its Custom Agents, including
selective termination or rehabilitation of underperforming agents as
appropriate.

CFI pays commissions to Custom Agents in two components: scheduled
commissions, which are generally a percentage of premiums varying by line of
business; and contingent or profit sharing commissions, which are primarily
based on the loss experience of the business placed by the Custom Agents with
the Company. Contingent commissions paid by CFI provide an economic incentive
for Custom Agents to place profitable business with the Company.

To attract the highest quality business, CFI also provides eligible Custom
Agents with the opportunity to share in the profitability of business they
produce through ownership in 19 reinsurance companies, the Captives, formed by
CFI and approximately 90% owned by the agents. CFI cedes a portion of certain
premiums produced by the Custom Agent shareholders to these Captives. The
Company established its initial Captive in 1985 and is one of the few
commercial lines insurers to offer such a program to agents. At September 30,
1997, a total of 262 Custom Agents, or 62% of those eligible to own shares,
were Captive shareholders. The Company believes that the Captives have
substantially enhanced its relationships with Custom Agents by allowing the
Custom Agents to share in the profitability of the Captives while at the same
time exposing the Custom Agents to the underwriting process and financial
operations of an insurer. In addition, the Company believes that the use of
Captives has encouraged the Custom Agent shareholders to place their highest
quality business with the Company and provides the Company a competitive
advantage that can not be easily duplicated by its competitors. The business
reinsured by the Captive program has historically exhibited higher retention
ratios and lower loss ratios than that of the Company as a whole. For example,
the business reinsured by the Captives program had a retention ratio of 86%
for the nine months ended September 30, 1997, as compared to a retention ratio
of 78% for business of the entire Company during that period. The statutory
combined ratios for the portion of the business subject to the Captive program
that was retained by CFI in each of the years from 1993 through 1996 was
103.0%, 106.0%, 107.3% and 105.9%, respectively. Direct premiums written by
the Company which were subject to the Captive program more than doubled from
$90 million in 1993 to $196 million in 1996, resulting in 1996 cessions to the
Captives of $37 million. See "-- Pricing and Underwriting" and "-- Claims
Management."

37
<PAGE>

Evidencing CFI's stable, long-term relationships with its Custom Agents,
over 75% of the Custom Agents have represented the Company for more than five
years as of September 30, 1997. As of the same date, approximately 31% of the
Custom Agents have represented CFI for more than 20 years. This latter group
remains a strong part of CFI's Custom Agent force, having produced over one-
third of the Company's gross premiums written through all Custom Agents for
the nine months ended September 30, 1997.

CUSTOM AGENT TENURE WITH CFI
AS OF SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
PERCENT OF
GROSS
YEARS AS NUMBER OF PERCENT OF GROSS PREMIUMS PREMIUMS
COMPANY AGENT CUSTOM AGENTS CUSTOM AGENTS WRITTEN WRITTEN
- - ------------- ------------- ------------- -------------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
4 or less................. 127 22% $ 84 11%
5 to 10 years............. 119 20 167 23
11 to 15 years............ 76 13 108 15
16 to 20 years............ 79 14 99 14
21 to 25 years............ 43 7 54 7
26 years or more.......... 142 24 222 30
--- --- ---- ---
Total................... 586 100% $734 100%
=== === ==== ===
</TABLE>

Decentralized Regional Approach. The Company operates through 20 regional
offices, each focusing on building relationships with the Custom Agents within
its region by providing the products and services that address their needs.
Substantially all underwriting and claims functions are performed in the
regional offices subject to well-defined boundaries designed to assure quality
underwriting and claims handling. The Company believes that operating on a
decentralized, regional basis allows it to compete effectively with regional
competitors while benefiting from its national scale by offering countrywide
account service capabilities and its financial capacity relative to many
regional carriers. CFI's regional operations allow it to obtain local
knowledge of legal, regulatory, economic and cultural factors that influence
the profit potential of insurance products and enable the Company to respond
quickly to business developments and opportunities. The annual business plans
written by Custom Agents and CFI are developed through CFI's regional offices.

To enhance its regional focus, CFI flattened its organizational structure in
1993 and substantially broadened regional authority by moving decision-making
functions to the regional offices. Each of CFI's seven most senior officers is
actively involved with the regions and works directly with Custom Agents to
gain a better understanding of their needs. This structure facilitates the
integration of product expertise, account coordination and service, and
leverages senior management's significant experience, which averages over 20
years in the insurance industry. In addition, the Company has introduced and
emphasizes a performance-based culture including a compensation program tied
to regional results as well as the Company's overall results.

The geographic distribution of the Company's premium volume is well
diversified, with no region accounting for less than 2% or more than 11% of
the Company's gross premiums written in 1996. In addition, no state accounted
for more than 13% of direct premiums written. See "-- Geographic
Distribution."

Focus on Generalist Commercial Lines Products for Middle Market
Businesses. CFI applies a generalist approach to the commercial lines middle
market by offering products which fulfill the majority of the insurance needs
of mid-sized businesses. CFI believes that its generalist products and ability
to meet most account needs of mid-size businesses have helped the Company
strengthen its relationships with Custom Agents during a time when many
competitors have specialized their product offerings. The Company also seeks
to provide a stable market by consistently offering its generalist products,
while actively working to tailor products to meet specific market needs. The
Company has used these approaches to differentiate itself from its
competitors. Approximately 91% of the Company's gross premiums written for
1996 were derived from the following five lines of business: multiple peril
(26%), automobile (25%), workers' compensation (18%), umbrella (14%) and
general liability (8%). In most cases, the Company does not compete for
accounts generating annual premiums of less than

38
<PAGE>

$10,000, nor does the Company actively seek to compete for business from
Fortune 500(R) companies. Gross premiums written per account averaged
approximately $78,000 per year for the nine months ended September 30, 1997.

Disciplined Underwriting. CFI's underwriting standards focus on
profitability more than on premium growth or market share, which at times may
limit premium growth when market conditions do not meet the Company's pricing
and underwriting standards. Underwriting authority levels related to class,
risk grade and policy limits are delegated to regional underwriters based on
demonstrated individual expertise. The Company believes that having broad
underwriting authority in its regions allows it to respond more quickly to the
demands of its Custom Agents. In addition, CFI's consistent generalist
products allow the underwriting staff to develop a high degree of expertise in
the lines they underwrite. CFI audits and risk class monitoring indicate that
the profile of risks underwritten by the Company through its Custom Agents in
recent years has been relatively constant, as has the mix of premium by line
of business. See "-- Selected Product and Ratio Information." The Company
utilizes sophisticated monitoring systems to track pricing levels on both new
and renewal business, thus facilitating pricing discipline within the regional
offices. To manage its liability to exposure relative to its capital, reserves
and willingness to retain underwriting risk, CFI purchases both treaty and
facultative reinsurance from a limited number of high-quality reinsurers. In
addition, CFI applies various techniques to manage and limit its property
catastrophe exposure, including modelling tools to evaluate potential
catastrophe exposures and to allocate both underwriting capacity and
reinsurance costs across the regions. In part due to its disciplined
underwriting approach, in each of the last four years for which industry data
is available, the Company's statutory accident year pure loss ratios were
better than the commercial lines insurance industry averages as displayed
below:

ACCIDENT YEAR PURE LOSS RATIO(1)

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------- SEPTEMBER 30,
1993 1994 1995 1996(2) 1997
----- ----- ----- -------- -------------
<S> <C> <C> <C> <C> <C>
CFI............................... 55.9% 60.2% 59.5% 63.5% 63.1%
Commercial lines insurance indus-
try.............................. 59.8 65.9 63.2 64.8 N/A
</TABLE>
- - --------
(1) CFI pure loss ratios reflect statutory data as of September 30, 1997.
Commercial lines insurance industry pure loss ratios for all commercial
lines were extracted from 1996 data published by A.M. Best.
(2) The Company's 1996 accident year pure loss ratio was negatively affected
by an unusually large increase in loss severity (including higher than
average catastrophe losses) experienced in the multiple peril-property
line of business and an unusually high number of large property damage
losses.

Superior Claims Management. In addition to directly affecting the financial
results of the Company, claims management is the most important after-sale
service to Custom Agents and insureds. Policyholder satisfaction with the
claims handling process is a determining factor in policy retention. The
Company believes that its stable business focus on generalist products have
allowed its claims professionals to develop a high degree of expertise in the
insurance lines and for the types of accounts that the Company underwrites.
CFI's claims management productivity and efficiency are illustrated by a 41.0%
increase in claims managed per claims handling professional at September 30,
1997 as compared to December 31, 1994. The Company experienced a 9.7% decrease
in average legal fees per litigated liability claim on suits closed during the
nine-month period ended September 30, 1997 as compared to those closed in
1996, while CFI's average indemnity fees paid per claim were reduced by 14.9%
on these same claims. The Company's claims staff leverages its expertise to
assist Custom Agents in problem solving and tailoring programs to address
specific client needs. Substantially all claims are handled by the regional
offices, although specialized units handle umbrella, environmental and
construction defect claims. In addition, regardless of the line of business,
claims identified as having major litigation potential are managed by a
specialized team of claims professionals and monitored by senior management.

39
<PAGE>

Growth Opportunities. The Company has increased its gross premiums written
from Custom Agents from approximately $599 million in 1993 to approximately
$960 million in 1996. The Company intends to grow over time by increasing
sales through its existing Custom Agents as a result of both increased
penetration by CFI and growth in the Custom Agents' businesses. CFI believes
there is substantial opportunity to increase its share of Custom Agents'
premium volume because it estimates that its current share of the total
commercial lines premium produced by its Custom Agents is under 10%. The
average gross premiums written per Custom Agent increased by 33% from $1.2
million in 1993 to $1.6 million in 1996.

Furthermore, CFI intends to grow over time by developing and appointing
additional Custom Agents, particularly in territories which are identified as
having profit potential and which are currently underserved by the Company.
This expansion will build on the experience gained through the Company's
expansion in its Western Region, where premium volume increased by more than
48% during the three years ending December 31, 1996. The number of Custom
Agents was 494 at December 31, 1993 and 586 at September 30, 1997.

CFI believes that the completion of the Offering and the resolution of the
Company's future ownership structure should also have a beneficial impact on
the Company's growth opportunities.

Aggressive Expense Management. CFI seeks to continue the substantial
progress it has made since 1993 in reducing its cost structure while
increasing the productivity of its employees. The Company has improved its
operating expense ratio from December, 1993 to September, 1997 by 3.3 points,
from 25.7% to 22.4%, respectively. Over the same period, gross premiums
written per employee increased 50% from $426,000 to $640,000. CFI's cost
cutting accomplishments are the result of: (i) reductions in staff and
streamlined management functions and operations consistent with a
decentralized, regional business emphasis; (ii) changes in processes and tools
that contribute to productivity including sharing best practices among
regional offices; and (iii) specific efforts to implement economic incentives
designed to promote a performance-based culture. CFI intends to continue to
reduce costs through these initiatives. The Company also exited from its
servicing carrier business and consolidated several claims offices.

CFI has made significant investments in technology designed to enhance
productivity in underwriting and claims administration and to improve the
quality and responsiveness of front-line decision making. The Company has
installed LAN-based workstations linking its employees and has developed and
implemented new rate/quote/policy issuance and claim management and
information systems. These enhanced communications and information
capabilities, along with other technology improvements, have enabled CFI to
replace certain existing systems with more flexible and less costly
applications. Further, CFI believes that its improved technology will enable
it to continue to achieve productivity improvements and expand into new
territories at modest incremental expense.

40
<PAGE>

The impact of CFI's aggressive expense management is reflected in the
following table:

PRODUCTIVITY AND OPERATING EXPENSES

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
NINE MONTHS
ENDED
SEPTEMBER 30,
1993 1994 1995 1996 1997
------ ------ ------ ------ -------------
(DOLLARS IN MILLIONS, EXCEPT AS NOTED)
<S> <C> <C> <C> <C> <C>
PRODUCTIVITY
Staff count............... 2,421 2,125 1,906 1,792 1,705
Gross premiums written per
employee (in thousands).. $ 426 $ 481 $ 588 $ 617 $ 640(/1/)
Gross premiums written per
non-claims employee
(in thousands)........... 619 704 857 936 1,003(/1/)
Claims per claims associ-
ate...................... n/a 227 274 305 319(/1/)
OPERATING EXPENSES
Compensation and bene-
fits..................... $ 142 $ 134 $ 122 $ 123 $ 88
Technology................ 25 32 43 46 34
Rent, occupancy and equip-
ment..................... 28 22 18 18 14
Servicing carrier and fee
income................... (26) (4) (1) (2) (2)
Talegen management fee.... 21(/2/) 8 8 9 6
Other..................... 17 15 15 23 19
------ ------ ------ ------ -----
Total................... $ 207 $ 207 $ 205 $ 217 $ 159
====== ====== ====== ====== =====
Internal underwriting ex-
pense(3)................. $ 138 $ 133 $ 130 $ 143 $ 105
Unallocated loss adjust-
ment expense paid........ 69 74 75 74 54
------ ------ ------ ------ -----
Total operating
expenses............... $ 207 $ 207 $ 205 $ 217 $ 159
====== ====== ====== ====== =====
Ratio of operating expenses
to net premiums earned..... 25.7% 24.2% 22.0% 22.6% 22.4%
</TABLE>
- - --------
(1) Annualized.
(2) Calculated using a different rate than that used for subsequent periods.
(3) External underwriting expenses were $162 million, $179 million, $177
million, $182 million, and $131 million for 1993, 1994, 1995, 1996 and the
nine months ended September 30, 1997, respectively. Total underwriting,
acquisition and other insurance expenses were $300 million, $312 million,
$307 million, $325 million and $236 million for 1993, 1994, 1995, 1996 and
the nine months ended September 30, 1997.

Maintain Strong Balance Sheet and Strong Ratings. The Company believes that
a strong balance sheet and strong ratings are crucial to attracting and
retaining high-quality business. At September 30, 1997, CFI had total assets
of $5.4 billion and shareholder's equity of $1.1 billion. The Company had a
net premiums written to surplus ratio of 1.1x as of September 30, 1997. The
strength of CFI's balance sheet is supported by its current use of a limited
number of high-quality reinsurers. CFI ceded principally to 36 approved
reinsurers (other than Captives and pools and associations whose combined
ceded premiums amounted to $39 million) in 1996 and only 38 approved
reinsurers through September 30, 1997 (other than Captives and pools and
associations whose combined ceded premiums amounted to $27 million during the
1997 period). The premiums ceded to reinsurers in 1996 (other than Captives
and pools and associations) amounted to approximately $111 million, with $78
million or 70.3% of this amount being ceded to ten reinsurers. The following
table lists the Company's top ten reinsurers, by ceded premiums, in 1996.

41
<PAGE>

TEN LARGEST REINSURERS, BY CEDED PREMIUMS IN 1996

<TABLE>
<CAPTION>
PERCENT OF
CEDED CEDED BEST
REINSURER PREMIUMS PREMIUMS RATING(1)
- - --------- ------------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
General Reinsurance Corporation........... $20 18.0% A++
Zurich Reinsurance Centre, Inc. .......... 13 11.9 A
NAC Reinsurance Corporation............... 8 7.2 A+
Munich American Reinsurance Company....... 7 6.2 A+
Universal Bonding Insurance Company....... 6 5.4 A-
Lloyd's syndicates........................ 5 4.5 NR
Employers Reinsurance Corporation......... 5 4.5 A++
St. Paul Fire and Marine Insurance Compa-
ny....................................... 5 4.5 A+
Hartford Fire Insurance Company........... 5 4.5 A+
Partner Reinsurance Company Ltd. ......... 4 3.6 A+
--- ----
Total................................... $78 70.3%
=== ====
</TABLE>
- - --------
(1) "A++" is the highest, "A+" is the second highest (both of which are
"Superior" ratings), "A" is the third highest and "A-" is the fourth
highest (both of which are "Excellent" ratings) of the 15 A.M. Best
ratings. "NR" indicates a company that is not rated.

CFI is currently rated "A (Excellent)" by A.M. Best and has a claims paying
rating of "A" by Standard & Poor's. CFI's A.M. Best rating is the third
highest of 15 categories, while its Standard & Poor's rating is the third
highest of nine rating categories.

Enhance Investment Income. As of September 30, 1997, approximately $1.9
billion, or 63% of total investments of $3.0 billion, was in short-term
investments to assist the sale of the Company. The remainder of the portfolio
was invested in fixed-income securities with average ratings equivalent to
"Aa" and a duration approximating 4.4 years. Following the completion of the
Offering, the Company intends to reposition its investment portfolio over time
with the objective of increasing both the yield and duration. The Company will
seek to invest in high-quality, fixed-income securities with an average rating
of approximately "Aa" and a duration more closely approximating the duration
of its liabilities while maintaining sufficient liquidity to meet immediate
cash requirements.

42
<PAGE>

GEOGRAPHIC DISTRIBUTION
The Company is licensed and currently writes insurance in all 50 states,
Washington, D.C., Puerto Rico, United States Virgin Islands and Guam. The
geographic distribution of the Company's premium volume is well diversified,
with no state accounting for more than 13% of direct premiums written,
although New York and New Jersey accounted for 12.4% and 10.2%, respectively,
of direct premiums written in 1996. In addition, no region accounted for less
than 2% or more than 11% of the Company's gross premiums written in 1996. The
following table displays the Company's regional offices and the distribution
of gross premiums written by regional office during the nine months ended
September 30, 1997.

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------------
REGIONAL OFFICE NUMBER OF EMPLOYEES GROSS PREMIUMS WRITTEN
--------------- ------------------- ----------------------
(IN THOUSANDS)
<S> <C> <C>
North Jersey.................... 85 $78,952
Western......................... 118 72,519
Orlando......................... 76 67,793
New York........................ 87 62,546
Boston.......................... 65 45,847
Baltimore....................... 56 43,798
Charlotte....................... 51 40,981
Detroit......................... 39 35,744
Kansas City..................... 39 35,339
Cincinnati...................... 49 33,728
Milwaukee....................... 43 31,580
Chicago......................... 64 31,505
Texas........................... 84 31,503
Denver.......................... 46 31,042
Philadelphia.................... 57 30,672
Pittsburgh...................... 44 30,223
Connecticut..................... 43 27,978
Minneapolis..................... 44 25,764
Atlanta......................... 46 25,021
Upstate New York................ 42 24,731
</TABLE>

SELECTED PRODUCT INFORMATION
As a generalist, the Company does not seek to specialize in one or more
lines. Rather, the Company attempts to serve the needs of its Custom Agents
and to utilize its underwriting and financial resources in an "account"
approach to business, whereby the Company provides multiple commercial lines
of coverage for a mid-sized business. The following table sets forth gross
premiums written by line of business.

GROSS PREMIUMS WRITTEN BY LINE OF BUSINESS

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------- SEPTEMBER 30,
LINE OF BUSINESS 1993 1994 1995 1996 1997
- - ---------------- ---------- ---------- ---------- ---------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Multiple peril.......... $ 185 18% $ 216 21% $ 260 23% $ 284 26% $ 235 29%
Automobile.............. 245 24 242 24 276 25 273 25 201 24
Workers' compensation... 224 22 178 17 200 18 197 18 158 19
Umbrella................ 192 18 189 19 183 16 161 14 104 13
General liability....... 91 9 94 9 101 9 91 8 58 7
Other................... 94 9 103 10 101 9 100 9 62 8
------ --- ------ --- ------ --- ------ --- ------- ------
Total................... $1,031 100% $1,022 100% $1,121 100% $1,106 100% $ 818 100%
====== === ====== === ====== === ====== === ======= ======
</TABLE>

43
<PAGE>

Multiple peril provides coverage for businesses against third-party
liability from accidents occurring on their premises or arising out of their
operations, such as injuries sustained from products sold. It also insures
business property for damage, such as that caused by fire, wind, hail, water,
theft, and vandalism and protects businesses from financial loss due to
business interruption. Typical multiple peril risks insured by CFI include
residential and commercial rental properties such as apartments, shopping
centers and office buildings.

Automobile provides coverage against losses from personal bodily injury,
bodily injury to third parties, property damage to an insured's vehicle,
property damage to other vehicles and other property resulting from the
ownership, maintenance or use of automobiles and trucks. CFI's automobile
exposures generally are commercial fleets of private passenger vehicles and
servicing-type vehicles, such as vans and light trucks. In addition, the
Company insures transportation industry exposures such as limousines.

Workers' compensation provides coverage for the obligations of an employer
under state law to provide its employees with specified benefits for work-
related injuries, deaths and diseases, regardless of fault. CFI generally
writes workers' compensation business in support of multiple peril policies
and exposures as described above. This product can also be the principal line
written for an account in the contracting, service or manufacturing sectors.
Typically, there are four types of benefits payable under workers'
compensation policies: medical benefits, disability benefits, death benefits,
and vocational rehabilitation benefits. The Company offers two types of
workers' compensation products: (i) guaranteed cost products in which policy
premiums are fixed and do not vary as a result of the insured's loss
experience; and (ii) retrospectively rated policies, in which premiums are
adjusted based on the actual loss experience of the insured during the policy
period. The Company emphasizes cost containment methods which involve
employers, employees, and care providers in a joint and coordinated effort
that focuses on cost-effective and quality care for injured employees and
their early return to work, thus seeking to achieve savings in both service
delivery and loss payout.

Umbrella provides coverage in excess of or supplementing other liability
coverages. Umbrella coverage is intended to provide additional insurance
protection to business for losses that exceed the limits of their liability
policies. The majority of umbrella policies CFI writes are on accounts for
which it provides other coverages.

General liability provides coverage for liability exposures including bodily
injury and property damage arising from products sold and general business
operations. General liability includes coverages for directors' and officers'
liability arising in their official capacities and errors and omissions
insurance for acts or failures to act under specified circumstances. CFI
writes very little of this business on a monoline basis, since most of this
coverage is included in the multiple peril policies described above. The risks
that CFI does write on separate policies are generally single exposures such
as "event" coverage.

Other coverages underwritten by the Company include: inland marine, which
provides coverage for goods in transit and "builders risk" for buildings in
the course of construction and for tools and contractors' equipment; fidelity
and surety, where fidelity coverage guarantees faithful performance of an
obligation or indemnifies an insured for loss due to embezzlement or
misappropriation of funds, and surety coverage provides a third party with
guarantee of a statutory obligation between two other parties; and
miscellaneous property insurance which provides coverage for loss or damage to
buildings, inventory, and equipment from natural disasters and events such as
vandalism and theft, fires and storms.

PRICING AND UNDERWRITING
Most of the Company's business is written on policy forms developed by the
Insurance Services Office ("ISO"), an independent industry support
organization. The coverage provided by these forms is sometimes enhanced or
modified by the Company to address specific underwriting, marketing or
geographic considerations. Similarly, most rates are based on loss data
provided by ISO or, for workers' compensation, the National Council on
Compensation Insurance, also an independent industry support organization,
adjusted to reflect the Company's own experience, expenses and profit targets.
The Company's underwriting standards focus on profitability more than on
premium growth or market share, which at times may limit premium growth when
market conditions do not meet the Company's pricing and underwriting
standards.

44
<PAGE>

Underwriting authority levels related to class, risk grade and policy limits
are delegated to regional underwriters based on demonstrated individual
expertise. The Company believes that having broad underwriting authority in
its regions allows the Company to respond more quickly to the demands of its
Custom Agents than a more centralized structure would allow. The Company
maintains two sophisticated price monitoring systems into which relevant data
from each policy underwritten by the Company is entered. This data provides
information for the underwriters, regional management and home office
management which gives them a better understanding of the potential
profitability of the business written.

In recent years the Company has focused increasingly on catastrophe exposure
analysis and management. The Company employs catastrophe exposure modelling to
evaluate and control its exposure to a probable maximum loss ("PML") as a
result of any single event. These models are utilized directly by regional
underwriters in areas prone to catastrophic events, such as hurricanes in
Florida and earthquakes in California, to evaluate the impact of underwriting
decisions on PML exposure and capacity allocated to the regions. The Company
incurred net catastrophe losses of $14 million, $15 million, $25 million, $29
million and $5 million for the years ended December 31, 1993, 1994, 1995, 1996
and the nine months ended September 30, 1997, respectively, representing 1.7%,
1.8%, 2.7%, 3.0% and .7% of net premiums earned for the same periods.

The table below sets forth industry losses and Company losses from the ten
largest insured catastrophes over the past decade.

<TABLE>
<CAPTION>
ESTIMATED TOTAL
INDUSTRY(2) CFI
--------------- -----------------------
CATASTROPHE(1) GROSS LOSSES GROSS LOSSES NET LOSSES
- - -------------- --------------- ------------ ----------
(IN MILLIONS)
<S> <C> <C> <C>
HURRICANE ANDREW (1992)............... $15,500 $90 $10
NORTHRIDGE EARTHQUAKE (1994).......... 12,500 1 1
HURRICANE HUGO (1989)................. 4,200 14 11
HURRICANE OPAL (1995)................. 2,100 2 2
NORTHEAST WINTER STORMS (1993)........ 1,800 5 5
OAKLAND FIRE (1991)................... 1,700 0 0
HURRICANE INIKI (1992)................ 1,600 8 6
HURRICANE FRAN (1996)................. 1,600 8 8
TEXAS AND NEW MEXICO WIND, HAIL,
FLOODING (1995)...................... 1,100 2 2
LOMA PRIETA EARTHQUAKE (1989)......... 900 1 1
</TABLE>
- - --------
(1) CFI also incurred gross and net losses of $15 million in 1996 from the
Pacific Northwest Storms catastrophe, the largest catastrophe net loss the
Company has experienced.
(2) Source: A.M. Best.

CLAIMS MANAGEMENT

The Company believes that its claims management practices provide an
advantage in the market. As of September 30, 1997, approximately 38% of the
Company's employees were dedicated to claims management and administration.
These employees include adjusters, litigation specialists, staff attorneys,
regional and corporate management, line specialists and support staff. The
Company has developed claims cost management methodologies designed to
monitor, control, and measure all aspects of the claims resolution process.
The Company has also developed and implemented competitive medical management
and managed care programs to control workers' compensation claim costs. The
claims function emphasizes the achievement of superior results as measured by
audited outcomes against qualitative and quantitative Company objectives;
financial integrity via both investigative specialists who attempt to limit
fraudulent claims activity and a program to pursue appropriate subrogation and
recovery opportunities; and exceptional service whereby Company resources are
brought to bear in managing and resolving claims. The Company's claims efforts
are assisted by technology supportive of the dual objectives of reducing
claims costs and enhancing the future sales efforts of Custom Agents. The
Company's Claims Assist Workstation incorporates workload management features
along with an electronic

45
<PAGE>

claims file, which has increased productivity and provides enhanced access to
claims file progress notes. CFI's claims management abilities are illustrated
by a 41.0% increase in claims managed per claims handling professional at
September 30, 1997 as compared to December 31, 1994. The Company experienced a
9.7% decrease in average legal fees per litigated liability claim on suits
closed during the nine-month period ended September 30, 1997 as compared to
those closed in 1996, while CFI's average indemnity fees paid per claim were
reduced by 14.9% on these same claims.

Substantially all claims are handled by the Company's 20 regional offices,
although specialized units handle umbrella, environmental and construction
defect claims. Of the Company's 642 employees dedicated to claims management
on September 30, 1997, 82 were located at the Company's headquarters. The
Company periodically conducts internal reviews and audits to monitor the
regional offices' adherence to claim policies and procedures, the adequacy of
case reserves, loss expenses, productivity and service standards.

The Company will continue to emphasize the management of its exposure to
asbestos, environmental and other latent claims from policies underwritten
prior to 1986. CFI employs Envision to service and process these claims. The
Company believes this approach is essential in building and maintaining data
bases that contribute to claims and issues management, and the expertise that
enables effective management of the many complex aspects of such claims. In
addition, the Company regularly evaluates the methodologies it uses to analyze
its liability and utilizes outside actuarial consultants to supplement its
internal review process. See "-- Reserves."

RESERVES

Background. Losses from claims and related claims handling and legal
expenses 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 paid 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. CFI, 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.

Reserves are established by CFI to provide for the estimated amount 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 have not yet been reported. 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 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 CFI management's assessment of severity and
frequency of the claim, industry trends and related costs.

46
<PAGE>

Gross reserves for CFI as of December 31, 1994, 1995 and 1996 and September
30, 1997 were $2.9 billion, $3.2 billion, $3.4 billion and $3.6 billion,
respectively. Net reserves of the Company as of December 31, 1994, 1995 and
1996 and September 30, 1997 were $2.2 billion, $2.2 billion, $2.4 billion and
$2.4 billion, respectively. The Company is continuing to review its loss and
loss expense reserves. While the Company believes that its current reserves
are adequate to meet its expected obligations, it has retained an independent
actuarial consulting firm to do further analysis on its latent and non-latent
loss and loss expense reserves. Based on both of the reviews at this stage,
the Company may increase its reserves net of reinsurance by up to $250
million. CFI will make a determination upon completion of this study, which is
expected by the end of the first quarter of 1998, on whether to make any
reserve strengthening and, if so, on the amount of such strengthening.

Monitoring of Insurance Reserves. CFI monitors its liabilities arising from
business written and adjusts carried reserves as conditions change and new
information emerges. CFI employs an actuarial staff, some members of which, as
Fellows of the Casualty Actuarial Society ("Fellows") and Members of the
American Academy of Actuaries, are qualified loss reserve specialists who
perform regular actuarial reviews of claim developments and resulting reserve
requirements. In total, CFI currently employs four Fellows. On a semi-annual
basis, detailed actuarial studies of gross reserves and reserves net of
reinsurance are conducted by line of business and accident year. Actual claims
activity is monitored monthly and compared to expected levels to detect
variances or trends indicating changes in liabilities. In addition, at each
year end, the loss liabilities for the Insurance Companies are analyzed and
reserves are certified to the Insurance Commissioner of each Insurance
Company's state of domicile by an independent, outside actuary appointed by
such Insurance Company's Board of Directors.

CFI's actuaries and senior management meet to discuss the semi-annual
actuarial studies and initiate appropriate reserve funding actions, if
necessary. Historically, an oversight committee at Talegen has also reviewed
and approved all reserve funding actions.

Estimates of loss and loss expense liabilities are affected primarily by the
types and amounts of insurance coverages 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 and loss expense
development patterns and various other factors. Such factors can include
increased damage awards by the courts, known changes in judicial
interpretations of legal liability for asbestos-related, environmental and
other latent exposure claims and 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.

47
<PAGE>

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

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------- SEPTEMBER 30,
1994 1995 1996 1997
------ ------ ------ -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
GAAP net liability for unpaid losses and
loss expenses.......................... $2,168 $2,184 $2,385 $2,407
Reserves for uncollectible reinsurance
and commutations(1).................... (16) (36) (35) (39)
Cessions to Ridge Re related to uncol-
lectible reinsurance(2)................ -- 45 45 45
Other................................... 22 25 16 14
------ ------ ------ ------
SAP liability for unpaid losses and loss
expenses(3)............................ 2,174 2,218 2,411 2,427
Cessions to Ridge Re from U.S. Fire
related to losses and loss
expenses(4)............................ 5 157 157 157
------ ------ ------ ------
SAP liability for unpaid losses and loss
expenses............................... $2,179 $2,375 $2,568 $2,584
====== ====== ====== ======
</TABLE>
- - --------
(1) Reserves for uncollectible unpaid reinsurance and commutations are
recorded as a component of the net liability for unpaid losses and loss
expenses for GAAP purposes, whereas for SAP purposes uncollectible
reinsurance and commutation reserves related to 1993 and prior accident
years are recorded as a component of other liabilities.
(2) Cessions to Ridge Re caused by strengthening of uncollectible reinsurance
reserves reduce the liability for net unpaid losses and loss expenses for
GAAP purposes but decrease other liabilities for U.S. Fire and increase
other assets for North River for SAP purposes.
(3) Balances per Loss and Loss Expense Reserve Development Table.
(4) Cessions to Ridge Re by U.S. Fire are required by the NYID to be recorded
as a reduction to other liabilities rather than a reduction to the
liability for unpaid losses and loss expenses. Total cessions to Ridge Re
by U.S. Fire were $5 million in 1994 and $191 million in 1995 ($39
million for uncollectible reinsurance and $152 million for loss and loss
expenses) whereas total cessions to Ridge Re by North River were $38
million in 1995 ($6 million for uncollectible reinsurance and $32 million
for loss and loss expenses).

CFI's GAAP and SAP reserves for unpaid losses and loss expenses have been
recorded on a full value basis except for long-term disability claims which
have been discounted at a rate of 5%.

48
<PAGE>

Loss Development Data. The table below presents a reconciliation of the net
liability for unpaid losses and loss expenses for each of the years in the
three-year period ended December 31, 1996 and the nine-month period ended
September 30, 1997.

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------- SEPTEMBER 30,
1994 1995 1996 1997
------- ------- ------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Gross unpaid loss and loss expense re-
serves at beginning of year............. $ 3,160 $ 2,948 $ 3,240 $3,417
Less reinsurance recoverables on unpaid
losses and loss expenses.............. 868 780 1,056 1,032
------- ------- ------- ------
Net balance at beginning of year......... 2,292 2,168 2,184 2,385
------- ------- ------- ------
Incurred losses and loss expenses related
to:
Current year accident losses........... 597 670 755 569
Prior year accident losses............. 8 97 173 4
------- ------- ------- ------
Total incurred losses and loss ex-
penses.............................. 605 767 928 573
------- ------- ------- ------
Paid losses and loss expenses related to:
Current year accident losses........... 164 196 225 121
Prior year accident losses............. 565 555 502 430
------- ------- ------- ------
Total paid losses and loss expenses.. 729 751 727 551
------- ------- ------- ------
Net balances at end of year.............. 2,168 2,184 2,385 2,407
------- ------- ------- ------
Plus reinsurance recoverables on unpaid
losses and loss expenses.............. 780 1,056 1,032 1,190
------- ------- ------- ------
Gross unpaid loss and loss expense re-
serves at end of year................... $ 2,948 $ 3,240 $ 3,417 $3,597
======= ======= ======= ======
Ceded incurred losses and loss ex-
penses -- Ridge Re...................... $ 5 $ 229 $ -- $ --
Ceded incurred losses and loss ex-
penses -- other......................... 287 158 76 204
------- ------- ------- ------
Ceded incurred losses and losses ex-
penses -- total......................... $ 292 $ 387 $ 76 $ 204
======= ======= ======= ======
</TABLE>

During each of 1995 and 1996 and the nine months ended September 30, 1997,
the Company increased reserves for prior periods. The reserve strengthening
was primarily the result of improved information and methodological advances
that are used to produce estimates of liabilities associated with certain
exposures that have proved difficult for CFI, and for the industry as a whole.
Specifically, reserves were increased to make provision for latent
liabilities, uncollectible reinsurance associated with latent liabilities, and
California construction defects exposure. Net reserves for prior accident
years were increased by $97 million during 1995 and by $173 million in 1996
and by $4 million through September 30, 1997. Making up this net change of
$274 million were increases of $334 million for latent liabilities, $125
million for construction defects exposures and $85 million for uncollectible
reinsurance. Offsetting these increases were a reduction in reserves of $41
million for other reserve categories and $229 million of reinsurance
recoverables from Ridge Re of which $184 million related to losses and loss
adjustment expenses and $45 million related to uncollectible reinsurance. Each
of these exposures and the increases recorded are more fully discussed in the
paragraphs below.

Latent liabilities include reserves for environmental, asbestos and other
types of latent exposures, such as those associated with breast implants,
chemical exposure, tobacco products and other exposures which can result in
insurance claims that were not contemplated when policies were originally
written. The estimation of ultimate losses arising from environmental,
asbestos and other latent exposures (together referred to as latent
liabilities) has presented a particular challenge to CFI, and to the insurance
industry, because traditional actuarial methods are inadequate for such
estimation. The problem of estimating reserves for environmental and asbestos
exposures, in particular, resulted in the development of new methods which
incorporate new sources of data with the historical claims experience.

49
<PAGE>

Building on methodologies first published by the Casualty Actuarial Society
in the third quarter of 1994, the Company and Talegen completed the first
phase of a project to develop and implement methods to provide estimates of
ultimate losses for asbestos and environmental exposures. This resulted in a
model which, in turn, was the basis for increasing reserves in 1995 for latent
liabilities by $186 million on a net basis. During 1996, the model was further
refined and tested, and the amount and quality of data used in modelling was
significantly enhanced. These improvements led to a 1996 reserve increase for
latent exposures of $145 million on a net basis. For the nine months ended
September 30, 1997, the Company increased its reserves for latent exposures by
$3 million on a net basis.

Construction defect ("CD") is a term used by the industry to refer to any
third party claim where property damage occurs or is alleged to have occurred
as a result of the insured's work, work performed on the insured's behalf or
product failure in condominiums, townhouses, single family homes or commercial
buildings involving one or more policy periods, excluding environmental
exposures. Although claims involving CD have been experienced by the insurance
industry and the Company historically, beginning in the late 1980's insurers
who had written general contractors or subcontractors policies in California
began to receive a growing number of CD cases, with claims spread over several
accident years. With the increase in CD claims received by the Company, a
specialized CD claims unit was established to manage all such claims in 1992.
With increased emphasis on evaluating and understanding CD exposure,
substantial effort was undertaken to segregate data and develop a methodology
to provide better estimates of ultimate losses associated with the exposure.
The efforts led to a net reserve increase during 1995 of $12 million.
Refinement of costing methods and estimation of the impact of recent court
decisions and legislation resulted in the Company increasing its net reserves
for California CD exposure in 1996 by $101 million. For the nine months ended
September 30, 1997, the Company increased its reserves for CD exposure by $12
million on a net basis.

Uncollectible reinsurance reserves are established by CFI to the extent that
its evaluation of the ability or willingness of reinsurers to indemnify ceded
exposure pursuant to reinsurance agreements indicates that the Company will
not receive full recovery of ceded balances. This evaluation involves both the
creditworthiness of reinsurers, their anticipated interpretation of the
applicability of reinsurance agreements to certain types of claims or
exposures, and collections experience. In general, latent liability claims
present a need to establish this reserve both because of their inherent
complexity and attendant issues and because these exposures arise under
insurance policies that, in many cases, were written during the 1950's, 1960's
and 1970's, when CFI used a large number of reinsurers, and applicable
reinsurance programs included reinsurers which subsequently encountered
financial difficulties. As reserves for latent liability exposure were
increased, the Company also increased reserves for uncollectible reinsurance.
Reserves for uncollectible reinsurance were increased by $53 million and $32
million in 1995 and 1996, respectively.

Finally, as reserve actions were undertaken with respect to latent
liability, construction defects and uncollectible reinsurance exposures,
reserves for all other lines continued to be evaluated and various movements
in this segment were undertaken. From 1995 through September 1997, CFI
recorded an aggregate reduction in net reserves for all other lines totalling
$29 million.

The loss and loss expense reserve development table illustrates the
development of statutory balance sheet liabilities for 1986 through 1996. 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 net 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.

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 CFI'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,

50
<PAGE>

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 the following table.

LOSS AND LOSS EXPENSE RESERVE DEVELOPMENT

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for unpaid
losses and loss
expenses -- GAAP....... 1,845 2,153 2,185 2,330 2,424 2,174 2,357 2,292 2,168 2,184 2,385
Increase (decrease) for
GAAP adjustments(2).... 1 (4) (6) (9) (26) (16) 17 6 6 34 26
Liability for unpaid
losses and loss
expenses -- SAP(2)..... 1,846 2,149 2,179 2,321 2,398 2,158 2,374 2,298 2,174 2,218 2,411
Paid (cumulative) as of:
One year later......... 524 635 647 660 734 722 500 565 522 470
Two years later........ 957 1,096 1,092 1,190 1,280 1,100 938 933 860
Three years later...... 1,304 1,428 1,484 1,628 1,562 1,462 1,244 1,182
Four years later....... 1,546 1,711 1,819 1,829 1,843 1,706 1,421
Five years later....... 1,754 1,981 1,961 2,041 2,038 1,847
Six years later........ 1,962 2,080 2,119 2,197 2,148
Seven years later...... 2,018 2,201 2,250 2,291
Eight years later...... 2,110 2,319 2,331
Nine years later....... 2,210 2,385
Ten years later........ 2,273
Liability re-estimated
as of:
One year later......... 1,942 2,125 2,312 2,472 2,390 2,737 2,378 2,306 2,273 2,349
Two years later........ 1,956 2,325 2,465 2,395 2,929 2,648 2,407 2,355 2,361
Three years later...... 2,163 2,497 2,345 2,903 2,809 2,665 2,429 2,420
Four years later....... 2,386 2,370 2,794 2,819 2,820 2,689 2,483
Five years later....... 2,255 2,782 2,740 2,851 2,828 2,782
Six years later........ 2,604 2,728 2,800 2,863 2,955
Seven years later...... 2,549 2,800 2,819 3,000
Eight years later...... 2,637 2,832 2,952
Nine years later....... 2,679 2,949
Ten years later........ 2,788
Net deficiency.......... (942) (800) (773) (679) (557) (624) (109) (122) (187) (131) --
End of year:
Gross liability(1)..... 3,102 2,829 3,128 3,289
Reinsurance
recoverable........... 804 655 910 878
Net liability.......... 2,298 2,174 2,218 2,411
One year later:
Gross re-estimated
liability............. 3,112 3,274 3,289
Re-estimated
reinsurance
recoverable........... 806 1,001 940
Net re-estimated
liability............. 2,306 2,273 2,349
Two years later:
Gross re-estimated
liability............. 3,513 3,387
Re-estimated
reinsurance
recoverable........... 1,158 1,026
Net re-estimated
liability............. 2,355 2,361
Three years later:
Gross re-estimated
liability............. 3,602
Re-estimated
reinsurance
recoverable........... 1,182
Net re-estimated
liability............. 2,420
Gross deficiency........ (500) (558) (161) --
</TABLE>
- - --------
(1) Gross liability information is not available for periods prior to 1993.
(2) Net of recoverable from Ridge Re.

51
<PAGE>

Asbestos, Environmental and Other Latent Exposures. Claims resulting from
asbestos, environmental and other latent exposures have provided unique and
difficult challenges to the insurance industry and to the Company through its
historical writings. The possibility that these claims would emerge was
typically not contemplated at the time the policies were written, and
traditional actuarial reserving methodologies have not been useful in
accurately estimating ultimate losses. CFI contracts with Envision, a separate
company that is now part of TRG, to handle asbestos, environmental and other
latent exposure claims.

Asbestos 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 claims have come from manufacturers of
asbestos because their claims have typically involved many injured parties.
Over time, case law has become reasonably well developed in the asbestos
bodily injury claim area, and many of these claims from manufacturers have
been settled. Recently, however, the number of asbestos bodily injury claims
pertaining to 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 from these claims have generally been less to
date than those with the asbestos manufacturers, the per-claim exposures have
also tended to be less.

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 resulting 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 have
compounded the industry's difficulties in adequately assessing these complex
exposures. However, as case law continues to develop on a state-by-state
basis, uncertainty may be reduced if judicial rulings become more consistent.

The principal federal statute that requires cleanup of environmental damage
is the Comprehensive Environmental Response, Compensation and Liability Act
passed in 1980 and better known as "Superfund." 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. As the funding authorization for
Superfund that expired in December 1995 has not yet been reinstated, the
future of Superfund appears to be uncertain. Many different reform proposals
have been put forth, most of which generally have been supported by the
insurance industry. It is not possible to predict what effect legislative
changes or the reauthorization of Superfund will have on the Company's future
results.

Other latent exposure claims include those for asbestos-in-building,
chemical exposure, repetitive stress, surgical breast implants and tobacco and
tobacco-related products, as well as other exposures that were not anticipated
at the time the policies were written.

Prior to 1995, the Company established case and IBNR reserves for latent
exposure claims that had been reported. The IBNR reserves were established
primarily to cover adverse development on known claims. Case reserves were 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 (the "EPA"), the Company and
Talegen initiated a project in 1994 to create and implement costing
methodologies to provide estimates of aggregate ultimate losses for asbestos
and environmental exposures. During 1995 and 1996, results of the costing
methodologies and the data available led CFI to strengthen its gross asbestos
reserves by $182 million and gross environmental reserves by $196 million.
Additionally, case development and IBNR strengthening led to an increase in
gross other latent exposure reserves of $72 million during 1995 and 1996. The
Company will continue to monitor the adequacy of its latent exposure reserves
as new information is received and assessed and as refinements to the
methodologies are made. Furthermore, as judicial patterns emerge through the
appellate process and remove or

52
<PAGE>

add to the uncertainties related to asbestos, environmental and other latent
exposures, additional liabilities and reinsurance recoverables could arise.
Historical reserve development information for asbestos, environmental and
other latent exposures are as follows:

RESERVE AND CLAIM DEVELOPMENT INFORMATION BY LATENT EXPOSURE CATEGORY (1)

<TABLE>
<CAPTION>
NINE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
1993 AND -------------------------------- SEPTEMBER 30,
PRIOR PERIODS (2) 1994 (2) 1995 1996 1997
------------------- --------- ---------- ---------- --------------
GROSS NET GROSS NET GROSS NET GROSS NET GROSS NET
--------- --------- ----- --- ----- ---- ----- ---- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASBESTOS
Beginning loss and
allocated loss expense
reserves.............. n/a n/a n/a n/a $ 55 $ 38 $190 $122 $ 199 $ 107
Indemnity claim
payments
(recoveries).......... $ 98 $ 32 $ 14 $(4) 11 7 8 7 12 6
Allocated loss expense
payments.............. 47 20 9 17 10 9 9 8 5 6
Incurred loss and
allocated loss
expenses.............. n/a n/a n/a n/a 156 100 26 -- 2 3
---- ---- ---- ---- ------ ------
Ending loss and
allocated loss expense
reserve............... n/a n/a $ 55 $38 $190 $122 $199 $107 $ 184 $ 98
---- ---- ---- ---- ------ ------
End of year open claims
(3)................... 314 292 263 279 273
--------- --- ---- ---- ------
ENVIRONMENTAL(4)
Beginning loss and
allocated loss expense
reserves.............. n/a n/a n/a n/a $ 79 $ 61 $177 $126 $ 235 $ 201
Indemnity claim
payments.............. $ 40 $ 27 $ 12 $ 9 18 14 9 9 6 6
Allocated loss expense
payments.............. 38 35 8 8 6 6 7 7 5 5
Incurred loss and
allocated loss
expenses.............. n/a n/a n/a n/a 122 85 74 91 1 0
---- ---- ---- ---- ------ ------
Ending loss and
allocated loss
expenses reserves..... n/a n/a $ 79 $61 $177 $126 $235 $201 $ 225 $ 190
---- ---- ---- ---- ------ ------
End of year open claims
(3)................... 1,137 858 663 561 551
--------- --- ---- ---- ------
OTHER LATENT EXPOSURES
Beginning loss and
allocated loss expense
reserves.............. n/a n/a n/a n/a $112 $ 59 $ 71 $ 42 $ 107 $ 87
Indemnity claim
payments--Farm & Home
(5)................... $ 277 $ 140 $ 19 $62 44 11 16 3 27 25
Other indemnity claim
payments.............. 10 7 1 1 8 5 2 3 2 0
Allocated loss expense
payments.............. 12 12 2 2 4 2 3 3 1 1
Incurred loss and
allocated loss
expenses.............. n/a n/a n/a n/a 15 1 57 54 0 0
---- ---- ---- ---- ------ ------
Ending loss and
allocated loss expense
reserves.............. n/a n/a $112 $59 $ 71 $ 42 $107 $ 87 $ 77 $ 61
---- ---- ---- ---- ------ ------
End of year open claims
(3)................... 316 279 236 261 246
--------- --- ---- ---- ------
</TABLE>
- - --------
(1) Included are case, IBNR and allocated loss adjustment expense reserves.
Gross latent exposure reserves do not include amounts that are fully
reinsured with current and former affiliated companies due to the lack of
historical data. Net latent exposure reserves have not been reduced for
recoverables from Ridge Re because the Ridge Re contract is an aggregate
excess of loss contract covering all lines of business. The net reserves
presented additionally exclude reserves for uncollectible reinsurance. See
discussion of Ridge Re and the reserve for uncollectible reinsurance in
Note 5 to the Company's consolidated financial statements included
elsewhere in this Prospectus and "Risk Factors -- Potential
Uncollectibility of, and Considerations Related to, Reinsurance and Other
Risk Transfers."
(2) Beginning in 1994, IBNR and allocated loss expense reserves were allocated
to these latent exposure claim categories. Prior to 1994, similar
allocations were not made; thus, the comparable data for 1994 and prior
years is not available (n/a).
(3) An open claim is counted for each insured and claim type for which CFI has
been notified of a potential loss. Thus, if CFI 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).
(4) The costing methodologies used to provide estimates of aggregate ultimate
losses for environmental exposures assume no change in the current
Superfund laws.
(5) A significant amount of paid claims relates to claims associated with Farm
& Home Savings Association, now known as Roosevelt Bank ("Farm & Home"),
the developer of the Southbend subdivision in Friendswood, Texas that is
located close to the Brio Superfund site. See discussion of litigation
associated with these claims in Note 15 to the Company's consolidated
financial statements included elsewhere in this Prospectus. 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.

Construction Defect Claims. The issue of CD liability first arose in
California in the 1960s when a California appellate court held that new homes
were a "product" and that the "manufacturer" should be held to a strict
liability (that is, liability without regard to fault) standard. Since the
original case, the courts have

53
<PAGE>

continued to refine that opinion and have increased the potential exposure of
the builder, the design professionals and their insurance carriers. Starting
in the late 1980s, insurers who had written general contractors' or
subcontractors' policies in California began to receive a growing number of CD
claims, many of which involved damage or the manifestation of damage from
ground subsidence. The litigation costs of these claims are generally greater
than for other tort cases, as many claims involve large numbers of defendants
and extensive expert analysis and depositions.

The emergence of the CD claims that began in the late 1980s was spread over
many accident years. Frequently, claims from a single construction project can
span several policy periods. The statute of limitations for these claims (ten
years for latent defects, four years for patent defects, three years from
discovery) allows for a significant reporting tail, a loss reporting
characteristic similar to latent claims.

Recent court decisions and legislation are expected to affect the number and
cost of California CD claims in the future. The most significant of these was
the Montrose decision in 1995 which changed the determination of which policy
years were involved in CD claims. For many carriers, this decision increased
the number of CD claims reported, but is not expected to materially affect the
overall cost of these claims. Carriers may be called to contribute to
additional claims, but are expected to receive greater participation from
other carriers on other claims.

California's earthquake building codes and its geological conditions, such
as expansive soil landslides, leave the state more vulnerable to these claims
than other states. While CD claims have and continue to be reported in states
other than California, insurers have not experienced the significant influx of
claim reporting activity experienced by California since the late 1980s.

CFI wrote general contractor business in California, during the early to
mid-1980s plus certain trade group programs, which included artisans and small
contractors during the mid-1980s to early 1990s. The former program was
greatly curtailed by 1987 and the latter totally eliminated in 1990. As a
result, CFI's exposure to California CD claims is in runoff as most newly
reported construction defect claims have been from policies written prior to
1990.

During 1992, it became clear that there were significant advantages to
managing these claims within a centralized claims unit. By late 1992, the
Construction Defect Claims Unit was formed to promote consistency in claims
handling and administration and to consolidate the expertise and specialized
skills needed to close these claims efficiently.

During 1993, CFI developed costing methodologies to provide estimates of
aggregate ultimate losses for these claims. The methods were refined as new
information was received and assessed. During the 1994 through 1996 period,
CFI strengthened its construction defect reserves by $144.7 million on a gross
basis and $127.9 million on a net basis. Estimates of reserve needs have
remained stable since June 1996 and have been supported by reviews and
analyses by independent outside actuaries, although no assurance can be given
that such estimates will remain stable. CFI will continue to monitor the
adequacy of its California CD reserves as new information is received and
assessed and as refinements to the methodologies are made.

REINSURANCE

In order to moderate the potential impact of unusually severe losses, the
Insurance Companies cede 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 an
Insurance Company from its primary liability to its policyholder, the
reinsurer that accepts the risk assumes an obligation to the Insurance
Company. 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 policies, or by facultative arrangements, wherein
reinsurance is provided for individual risks based on individual negotiations.

54
<PAGE>

Current Reinsurance Programs. Talegen has a reinsurance security committee
composed of senior members of Talegen who currently approve the reinsurers
with whom the Company does business. The approval process utilizes credit
analyses performed by a subsidiary of TRG and reviewed by the committee in
order to assess the creditworthiness of each reinsurer. The credit criteria
under which such approvals are granted have become increasingly restrictive
over the past several years as the Company has intentionally placed business
with what are believed to be financially secure reinsurance companies. As a
result of the more restrictive guidelines, the number of approved reinsurers
has been reduced from over 200 in 1992 to 38 high-quality reinsurers at
September 30, 1997. After the Offering, CFI intends to maintain the same
quality standards, and its reinsurance committee will assume the role formerly
performed by the Talegen reinsurance committee.

CFI views catastrophe and insurance risk management as an integral and
proactive segment of its overall property business strategy. CFI identifies
and defines the exposures assumed through the use of technology and external
software, tabulates aggregate exposures, calculates PML estimates, and
develops a risk management strategy which includes exposure caps, retention
guidelines and the analytically based purchase of catastrophe reinsurance. CFI
believes that catastrophe and risk management enables it to identify
geographic areas for potential premium growth as well as providing a benchmark
for adequate pricing of property exposures.

The Company purchases both treaty and facultative reinsurance to limit the
amount of risk it retains. 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.

CFI limits its exposure to risk 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, CFI purchases additional facultative reinsurance to increase
capacity or to further reduce its retentions.

As of September 30, 1997, the maximum net retention per occurrence for a
casualty risk was $7 million for CFI. In addition, CFI purchases a contingency
cover to provide protection from multiple claims from a single event. As of
September 30, 1997, CFI's property reinsurance treaties provided reinsurance
limits of $45 million in excess of $5 million per occurrence. CFI also
purchases $115 million of reinsurance for property catastrophe losses in
excess of a $15 million retention per occurrence. CFI co-participates on
various layers of the catastrophe reinsurance contract, with a maximum co-
participation of $15.5 million.

Reinsurance Recoverables. 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
1995, 1996 and the nine months ended September 30, 1997, 87%, 89% and 90%,
respectively, of gross premiums ceded to reinsurers, excluding reinsurance
ceded to captives, pools and associations, were placed with up to 38 high-
quality reinsurers. Reinsurance recoverables, net of uncollectible reinsurance
reserves, were $1.2 billion as of December 31, 1995, $1.1 billion as of
December 31, 1996 and $1.2 billion as of September 30, 1997. Included in net
reinsurance recoverables at September 30, 1997 are reserves for uncollectible
paid and unpaid reinsurance and commutation proceeds totaling $46 million.

Set forth below is a table of reinsurers accounting for CFI's ten largest
gross reinsurance recoverables as of September 30, 1997. Gross reinsurance
recoverables from these reinsurers totalled approximately $808 million as of
September 30, 1997, or 63% of reinsurance recoverable balances. Amounts
recoverable from Captives, other pools and associations and contingent
obligations associated with structured settlements with life insurance
companies amounted to an additional $213 million, or 17% of gross reinsurance
recoverables, at September 30, 1997. Thus, although the Insurance Companies
have recoverables from several hundred reinsurers, the preponderance of the
amount is with a relative few.

55
<PAGE>

GROSS REINSURANCE RECOVERABLES
AS OF SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
GROSS
BEST REINSURANCE % OF
REINSURER RATING(1) RECOVERABLES TOTAL
- - --------- --------- ------------- -----
(IN MILLIONS)
<S> <C> <C> <C>
International Insurance Company(2)............. B++(3) $ 302 23.6%
Ridge Reinsurance Limited(4)(2)................ NR 234 18.3
American Re-Insurance Company.................. A+ 70 5.5
Swiss Reinsurance America Corporation.......... A 58 4.5
Facility Reinsurance Corporation (formerly
Texas Workers' Compensation Insurance
Facility)..................................... NR 31 2.4
Westchester Fire Insurance Company(2).......... A 28 2.2
General Reinsurance Corporation................ A++ 27 2.1
Employers Reinsurance Corporation.............. A++ 22 1.7
Universal Bonding Insurance Company............ A- 18 1.4
National Reinsurance Company................... A+ 18 1.4
------ -----
Subtotal..................................... $ 808 63.1%
Captives and other pools and associations...... 57 4.4
Life insurance companies' contingent
obligations associated with structured
settlements................................... 156 12.2
All other (5).................................. 260 20.3
------ -----
Total gross recoverables..................... $1,281 100.0%
====== =====
</TABLE>
- - --------
(1) The A.M. Best rating system includes ratings of "A++" and "A+" (which are
"Superior" ratings), "A" and "A-" (which are "Excellent" ratings), "B++"
and "B+" (which are "Very Good" ratings) and 9 lower ratings categories.
"NR" represents a company that is not rated.
(2) Former affiliate of CFI.
(3) Represents the highest rating given by A.M. Best for an insurance company
in run-off.
(4) Although Ridge Re, a subsidiary of XFSI, is not rated by A.M. Best, all
payment obligations, including those currently in effect, are secured by
irrevocable letters of credit issued by third-party banks and guarantees
by XFSI.
(5) Includes recoverables from Lloyd's syndicates of approximately $14
million.

Since 1992, the Insurance Companies have been parties to a reinsurance
treaty with Ridge Re (the "Ridge Re Treaty"). Pursuant to the Ridge Re Treaty,
Ridge Re has agreed to reinsure 85% of all the Insurance Companies' aggregate
net losses (which principally include losses and allocated loss expenses and
losses from uncollectible reinsurance, net of salvage, subrogation and other
recoverables) up to the limits of the Ridge Re Treaty, 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 defined in
the Ridge Re Treaty). As the Insurance Companies establish reserves that, in
the aggregate, increase their net losses in excess of the Retention Amount,
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, Ridge Re is required to reimburse the Insurance Companies
for 85% of such net losses. As of December 31, 1995, CFI had ceded to Ridge Re
100% of its limit under the Ridge Re Treaty (including losses from
uncollectible reinsurance). Consequently, since that time, CFI has been and
will be responsible for any additional adverse net loss and loss expense
development for 1992 and prior accident years. The following table identifies
the aggregate developed losses (i.e., the Retention Amounts plus the amount of
aggregate developed losses that have developed on 1992 and prior accident
years), the Retention Amount, the cumulative ceded losses through September
30, 1997 and the contractual coverage under the Ridge Re Treaty for CFI.

56
<PAGE>

<TABLE>
<CAPTION>
AGGREGATE CUMULATIVE
DEVELOPED RETENTION CEDED CONTRACTUAL
LOSSES AMOUNT (1) LOSSES (2) COVERAGE
--------- ---------- ---------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Balances at September 30, 1997..... $2,621 $2,264 $275 $275
</TABLE>
- - --------
(1) Retention amounts principally 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% insurance group coinsurance amounts (i.e., for every dollar of
ceded losses the Insurance Company will be able to cede (recover) eighty-
five cents from Ridge Re).

Other than the reinsurance recoverables from Ridge Re and IIC, no other
reinsurer's gross reinsurance recoverables represented more than 6% of CFI's
gross reinsurance recoverables at September 30, 1997.

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 The Resolution Reinsurance Service Company ("RRSC"), a
specialized group of work-out experts and a subsidiary of TRG, to aid in the
management of the more complicated cases. This unit 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, CFI maintains
reserves for uncollectible reinsurance. See Note 5 to the Company's
consolidated financial statements included elsewhere in this Prospectus.

INVESTMENTS

The Company's investment policy and guidelines, after the repositioning
described below, will seek to maximize after-tax total return through a
portfolio having risk and return characteristics appropriate to the Company's
insurance obligations, operations and financial condition. The investment
policy and guidelines of each Insurance Company must also comply with
applicable laws and regulations which generally prescribe the kind, quality,
and concentration of investments. Subject to limits and qualifications, these
laws and regulations permit investments in federal, state and municipal
obligations, corporate bonds, preferred and common equity securities, real
estate mortgages and real estate.

Since 1992, CFI's investment portfolio has been invested largely in short-
term securities. The Company liquidated its investment portfolio in 1992 to
assist in obtaining regulatory approval for the Talegen Restructuring. The
Company completed limited reinvestment of the portfolio beginning in 1994
before again liquidating its investments in 1995 in connection with a proposed
sale of Talegen. The Company then engaged in limited reinvestment activities
in early 1996, increasing mid-term fixed-income holdings to approximately 35%
of the total portfolio. In the fourth quarter of 1997, much of this reinvested
portfolio was again liquidated to realize capital gains presented by lower
interest rates in the fixed-income markets. As of September 30, 1997,
approximately $1.9 billion, or 63% of total investments of $3.0 billion, was
in short-term investments. The remainder of the portfolio was invested in
fixed-income securities with average ratings of "Aa" and a duration
approximating 4.4 years. Following the completion of the Offering, the Company
intends to reposition its investment portfolio over time with the objective of
increasing both the yield and duration. The Company will seek to invest in
high-quality, fixed-income securities with an average rating of approximately
"Aa" and a duration more closely approximating the duration of its liabilities
while maintaining sufficient liquidity to meet immediate cash requirements.

At September 30, 1997, fixed maturity investments accounted for $1.1 billion
or 36.8% of the portfolio, while short-term investments accounted for $1.9
billion or 63.2% of the portfolio. Of the fixed maturity

57
<PAGE>

investments, 99.5% were invested in bonds rated "A" or higher with
approximately 64.7% invested in bonds rated "Aaa." The average duration of the
combined fixed maturity and short-term investment portfolios was 1.8 years.
The combination of non-investment grade and non-rated securities totalled only
$6 million, representing .5% of CFI's fixed maturity investments as of
September 30, 1997. The high percentage of short-term investments in the
Company's investment portfolio is a result of the liquidation of the portfolio
described above.

The table below reflects the average amount of consolidated investments, net
investment income earned and the yield thereon for CFI for the years ended
December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
---------------------- SEPTEMBER 30,
1994 1995 1996 1997
------ ------ ------ -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Average investments (at fair value)... $2,539 $2,725 $2,923 $3,012
Net investment income(1).............. 119 147 159 131
Average pre-tax yield(1)(2)........... 4.70% 5.38% 5.44% 5.81%(/3/)
Average after-tax yield(1)(2)......... 3.20 3.70 3.54 3.79(/3/)
</TABLE>
- - --------
(1) Excluding net rental income from the Xerox training facility.
(2) Excluding investment expenses, the average pre-tax yields would be 4.95%,
5.65%, 5.70% and 6.10% while the average after-tax yields would be 3.36%,
3.87%, 3.71% and 3.98% for the years ended December 31, 1994, 1995 and
1996 and the nine months ended September 30, 1997 (on an annualized
basis), respectively.
(3) Annualized.

The following table summarizes, by type, the combined investments of CFI at
December 31, 1996 and September 30, 1997 (on the basis of estimated fair
value). See Note 2 to the Company's consolidated financial statements included
elsewhere in this Prospectus for additional information regarding the
investments by type.

<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT SEPTEMBER 30, 1997
--------------------- ---------------------
PERCENT OF PERCENT OF
FAIR VALUE PORTFOLIO FAIR VALUE PORTFOLIO
---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government and government
agencies and authorities........ $ 170 5.7% $ 163 5.4%
States, municipalities and polit-
ical subdivisions............... 22 .7 18 .6
Mortgage and other asset-backed
securities...................... 483 16.1 520 17.2
All other corporate fixed maturi-
ties............................ 415 13.9 411 13.6
Short-term investments............. 1,907 63.6 1,914 63.2
------ ----- ------ -----
Total investments available for
sale.......................... $2,997 100.0% $3,026 100.0%
====== ===== ====== =====
</TABLE>

The following table sets forth the contractual maturity distribution of
CFI's fixed maturities at December 31, 1996 and September 30, 1997:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT SEPTEMBER 30, 1997
--------------------- ---------------------
PERCENT OF PERCENT OF
FAIR VALUE PORTFOLIO FAIR VALUE PORTFOLIO
---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Contractual maturity:
Within one year.................. $ 2 .2% $ 1 .1%
After one year but within five... 271 24.9 276 24.8
After five years but within ten.. 249 22.8 232 20.9
After ten years.................. 85 7.8 83 7.5
Mortgage and other asset-backed
securities...................... 483 44.3 520 46.7
------ ----- ------ -----
Total fixed maturities......... $1,090 100.0% $1,112 100.0%
====== ===== ====== =====
</TABLE>

58
<PAGE>

The following table indicates the composition of the Company's fixed
maturities according to Moody's or equivalent ratings as of December 31, 1996
and September 30, 1997:

<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT SEPTEMBER 30, 1997
--------------------- ---------------------
PERCENT OF PERCENT OF
FAIR VALUE PORTFOLIO FAIR VALUE PORTFOLIO
---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Moody's rating or equivalent:
Aaa.............................. $ 692 63.5% $ 719 64.7%
Aa............................... 114 10.5 131 11.8
A................................ 276 25.3 256 23.0
------ ----- ------ -----
Total investment grade......... 1,082 99.3 1,106 99.5
Non-investment grade(1).......... 8 .7 6 .5
------ ----- ------ -----
Total fixed maturities......... $1,090 100.0% $1,112 100.0%
====== ===== ====== =====
</TABLE>
- - --------
(1) Includes investments not rated.

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. As of December 31, 1996 and September
30, 1997, over 99% of the Company's fixed-income securities were designated
Category 1 by the NAIC.

REGULATION

General. The Insurance Companies are subject to detailed regulation
throughout the United States. Although there is limited federal regulation of
the insurance business, each state has a comprehensive system for regulating
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.
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 New York, New Jersey and Ohio.

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, and are expected to have, no significant
impact on CFI.

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

59
<PAGE>

regulators at any time. In addition, these insurance regulators periodically
examine each insurer's financial condition, adherence to statutory accounting
practices, and compliance with insurance department rules and regulations. The
1993 examination report of North River contained no financial adjustments and
the 1993 examination report of U.S. Fire contained financial adjustments that
were addressed as part of the 1995 and 1996 strengthening transactions.

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 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 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 differ 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 and 1996 reserve strengthening that caused it to report a
negative earned surplus position at December 31, 1996, U.S. Fire, the
Company's New York-domiciled Insurance Company, has no ordinary dividend
capacity in 1997. However, the Company, in connection with the Offering, is
approaching the NYID to allow U.S. Fire to reset its earned surplus accounts
to $0 as of the first day following the end of the quarter in which the
closing of the Offering occurs, and to further allow U.S. Fire to pay
shareholder and policyholder dividends from earnings recognized in fiscal
quarters after the closing of the Offering. There can be no assurance that the
NYID will grant such a request. 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.

As of December 31, 1996, the aggregate amount available for the payment of
ordinary dividends by the Insurance Companies during 1997 was $19 million, of
which $5 million has been paid through September 30, 1997.

60
<PAGE>

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 prohibit such payments
that would otherwise be permitted without prior approval.

Statutory Surplus and Capital. In connection with the licensing of insurance
companies, an insurance regulator 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. See "Risk Factors -- Regulation."

Risk-Based Capital. In order to enhance the regulation of insurer solvency,
the NAIC adopted risk-based capital ("RBC") requirements for property and
casualty insurance 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 reserve setting; (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 ratio 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, the "Regulatory Action Level," 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, the ACL, 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, the "Mandatory Control Level," 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, 1996, the capital of each
Insurance Company exceeded the Company Action Level, and, as a result, no
regulatory response or action was 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 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 in which certain IRIS ratios of one or more of the Insurance
Companies have fallen outside of the usual ranges. In all instances where
follow-up information was requested, the Company's responses have not resulted
in additional requests or further action.

Investment Regulation. The Insurance Companies are subject to state laws and
regulations that require diversification of investment portfolios and that
limit the amount of investments in certain investment categories. Failure to
comply with these laws and regulations may cause non-conforming investments to
be treated as non-

61
<PAGE>

admitted assets for purposes of measuring statutory surplus and, in some
instances, would require divestiture. As of September 30, 1997, CFI believes
its 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 the
one applicable 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 the occurrence of an insolvency. New Jersey,
North Carolina and Pennsylvania have created, by statute, a separate guaranty
association for workers' compensation business. 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.

Property and casualty guaranty fund assessments incurred by CFI totaled $5
million, $2 million, $2 million, and $2 million for 1994, 1995, 1996 and the
nine months ended September 30, 1997, respectively. The Company's policy is to
accrue for insolvencies when the loss is probable and the assessment amount
can be reasonably estimated. In the case of most insurance insolvencies, the
ability of CFI 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, CFI believes that future guaranty association assessments for known
insurer insolvencies will not have a material adverse effect on its results of
operations or financial condition.

Shared Markets. As a condition of its license to do business, the Insurance
Companies are 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. The
Insurance Companies' participation in such shared markets or pooling
mechanisms is generally proportionate to the amount of each 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 Automobile Insurance
Procedure ("CAIP"), uses a limited number of servicing carriers to handle
assignments from other insurers. The CAIP servicing carrier is paid a fee for
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. CFI incurred an underwriting loss from participation in such
mandatory pools and underwriting associations of $3 million, $0, $7 million
and $2 million in 1994, 1995, 1996 and for the nine months ended September 30,
1997, respectively.

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<PAGE>

The amount of future losses or assessments from the shared market mechanisms
and pooling arrangements described above cannot be predicted with certainty.
The underwriting results of these pools traditionally have been unprofitable.
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, CFI does not expect future losses or assessments to have a
material adverse effect on its liquidity or capital resources.

Possible Legislative and Regulatory Changes. In recent years, the insurance
industry has been subject to increased scrutiny by regulators and legislators.
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 CFI. See "Risk Factors--Regulation."

COMPETITION

The commercial lines property and casualty insurance industry is highly
competitive and the Company believes that it will remain so, resulting in
little prospect for periods of dramatically improved pricing in the
foreseeable future. CFI faces competition from domestic and foreign insurers,
many of which are larger and have greater financial, marketing and management
resources than CFI. The Company's national competitors include CNA Financial
Corporation, Travelers Property Casualty Corp., American International Group
Inc., Chubb Group, and USF&G Corp. Although large, national insurers often
have substantial financial strength and broad product offerings, the Company
views regional companies to be its most significant competitors as a result of
their in-depth knowledge of the local insurance marketplace and responsiveness
to local needs. The Company believes that it is able to effectively compete
with both national and regional companies due to its strong relationships with
its Custom Agents, generalist business approach, and its local market presence
and responsiveness resulting from its decentralized organization and decision
making.

Competition in the commercial lines 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. The existing
levels of competitive pressure and excess industry capacity have lasted longer
and have been more severe than the Company had anticipated. In particular, in
recent years, the Company experienced greater competition than anticipated,
particularly in the workers' compensation and general liability (umbrella)
lines markets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company's challenge is to retain
business and attract new business on terms offering acceptable return
potentials in an environment where both established competitors and newer
entrants are aggressively seeking premium growth. The Company believes that it
is not uncommon for its competitors to write business at prices that are below
known loss costs, particularly for workers' compensation products. There can
be no assurance that CFI will not face increased competition in the future and
that such increased competition will not have a material adverse effect on the
Company. See "Risk Factors--Competition."

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

63
<PAGE>

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. CFI is rated "A (Excellent)" by A.M. Best and has a claims paying
ability rating by Standard & Poor's of "A."

LEGAL PROCEEDINGS

In the ordinary course of business, CFI receives claims asserting alleged
injuries and damages from asbestos, environmental and other latent exposures.
As a result of these claims, CFI reviews required reserves and reinsurance
recoverables. In each of these areas of exposure, the Company litigates
individual cases when appropriate and endeavors to settle other claims on
favorable terms.

CFI is involved in numerous other lawsuits (other than asbestos,
environmental and other latent exposure claims) arising, for the most part, in
the ordinary course of its business operations either as a liability insurer
defending third-party claims brought against its insureds or as an insurer
defending coverage claims brought against it. Although there can be no
assurances, CFI believes, based on information currently available, that the
ultimate resolution of these legal proceedings will not likely have a material
adverse effect on CFI's results of operations or financial condition. See
"Business--Reserves--Asbestos, Environmental and Other Latent Exposures" and
Note 15 to the Company's consolidated financial statements included elsewhere
in this Prospectus.

PROPERTIES

CFI leases approximately 201,887 square feet of space in Morristown, New
Jersey for its home office and also leases office space for its regional
offices. CFI does not own any of the real estate used for its operations. See
"Certain Transactions--Lease Agreements."

EMPLOYEES

As of September 30, 1997, CFI employed, excluding 47 temporary personnel,
1,658 persons. None of these employees is represented by a labor union and the
Company considers its employee relations to be good.

64
<PAGE>

MANAGEMENT

DIRECTORS AND OFFICERS OF THE COMPANY

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

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Joseph W. Brown, Jr........................ 49 Chairman of the Board and Director
James A. Stark............................. 55 President and Director
Gary C. Tolman............................. 46 Treasurer and Director
Richard P. Lutenski........................ 47 Director
Stuart B. Ross............................. 60 Director
</TABLE>

It is contemplated that, following the Offering, Mr. Tolman will resign as
Treasurer and Director of the Company and Mr. Lutenski will resign as Director
of the Company and additional individuals who are not officers of CFI will be
appointed to the Company's Board of Directors.

Joseph W. Brown, Jr. became Chairman and Director in July 1993, and joined
the Company as an employee with direct involvement in day-to-day operations
effective January 1998. From January 1992 through December 1997, Mr. Brown
served as Chairman of the Board and Chief Executive Officer of Talegen, a
period during which he oversaw the Talegen Restructuring and the Xerox
disengagement processes. Prior to joining Talegen, Mr. Brown had been with
Fireman's Fund Insurance Companies for 17 years during which he held positions
from actuary to Chief Executive Officer. Mr. Brown is a member of the Boards
of MBIA, Inc., Constitution Re Corporation and Talegen, and Vice Chairman of
the Boards of the American Institute for Chartered Property & Casualty
Underwriters and the Insurance Institute of America. He is a Fellow of the
Property Casualty Actuarial Society and a Member of the American Academy of
Actuaries and the Society of Chartered Property & Casualty Underwriters.

James A. Stark assumed his current positions as President and Director in
July 1993. He is Chairman of the Board, President, Chief Executive Officer and
a Director of each of the Insurance Companies. Since joining a predecessor of
the Company in 1964, Mr. Stark has progressed through various underwriting and
management positions in both field and home office operations, and was
appointed President of a predecessor to CFI in 1988.

Gary C. Tolman became an officer and Director of the Company in July 1993
and serves as Chief Executive Officer, President, Treasurer and Director of
Talegen. He has served in senior executive positions with Talegen and its
predecessors since May 1992. Prior to joining Talegen, Mr. Tolman was a Senior
Vice President at Fireman's Fund Insurance Company from 1990 to April 1992.

Richard P. Lutenski became a Director of the Company in March 1995. Since
1995, he has been Chief Financial Officer, Treasurer, Vice President and
Director of Crum & Forster Indemnity Company, North River and U.S. Fire and
Director and Treasurer of Crum and Forster Insurance Company and Crum &
Forster Underwriters Co. of Ohio. Prior to joining the organization in 1995,
Mr. Lutenski was Chief Financial and Investment Officer for Amerisure
Companies.

Stuart B. Ross became a Director of the Company in January 1998. Since 1990,
he has been Executive Vice President of Xerox and Chairman, Chief Executive
Officer and President of XFSI. Mr. Ross is a member of the Board of EKCO
Group, Inc.

The Company's Board of Directors will be divided into three classes, each of
which will serve a term of three years. The Class I directors will consist of
Mr. Stark and directors to be nominated, and their term of office will expire
at the annual meeting of shareholders in 1999; the Class II Directors will
consist of Mr. Ross and directors to be nominated, and their term of office
will expire at the annual meeting of shareholders in 2000; the Class III
directors will consist of Mr. Brown and directors to be nominated, and their
term of office will expire at the annual meeting of shareholders in 2001. At
each annual meeting of shareholders, the successors to the class of directors
whose term then expires will be elected to hold office for a term expiring at
the third succeeding annual meeting, and each director will hold office until
his successor is elected and qualified. The executive officers of the Company
are elected at the annual meeting of the Board of Directors and serve at the
discretion of the Board.

65
<PAGE>

DIRECTORS AND EXECUTIVE OFFICERS OF U.S. FIRE

The following table sets forth certain information regarding the directors
and certain executive officers of U.S. Fire, the Company's principal insurance
subsidiary.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James A. Stark............................. 55 Chairman of the Board, President, Chief
Executive Officer and Director
Richard P. Lutenski........................ 47 Chief Financial Officer, Treasurer, Vice
President and Director
Martin M. Doto............................. 43 Vice President and Director
Patricia A. Drago.......................... 44 Vice President and Director
Valerie J. Gasparik........................ 46 Secretary
Dennis J. Hammer........................... 48 Controller, Vice President and Director
James E. Marran............................ 57 Vice President and Director
Francis W. Rode............................ 55 Vice President and Director
Frances A. Smith........................... 49 Vice President and Director
Steven W. Sumner........................... 42 Vice President and Director
Robert T. Wheeler.......................... 55 Vice President and Director
Jorge A. Echemendia........................ 40 Director
</TABLE>

James A. Stark (see "--Directors and Officers of the Company").

Richard P. Lutenski (see "--Directors and Officers of the Company").

Martin M. Doto became a Director of Crum & Forster Indemnity Company in 1995
and of U.S. Fire in 1993. He became a Vice President of Crum & Forster
Indemnity Company in 1995 and of North River and U.S. Fire in 1993 and is
assigned as regional Vice President to the Upstate New York Regional Office.
He joined the organization in 1976, and has held a number of managerial
positions.

Patricia A. Drago became a Director of Crum and Forster Insurance Company
and Crum & Forster Indemnity Company in 1995 and of Crum & Forster
Underwriters Co. of Ohio, North River and U.S. Fire in 1993. She became Vice
President of Crum & Forster Indemnity Company in 1995 and of North River in
1989 and U.S. Fire in 1991 and functions as chief claims officer. Prior to
joining the organization in 1980, she was a liability specialist with
Underwriters Adjustment Corp.

Valerie J. Gasparik became Secretary of the Insurance Companies in 1996. She
functions as assistant general counsel for the Insurance Companies. Prior to
joining the organization in 1988, she was with Morgan Stanley & Co.
Incorporated.

66
<PAGE>

Dennis J. Hammer became a Director of Crum & Forster Indemnity Company in
1995 and of U.S. Fire in 1996. He became Vice President and Controller of Crum
& Forster Indemnity Company in 1995, Vice President in 1989 and Controller in
1992 of North River and Vice President in 1989 and Controller in 1993 of U.S.
Fire, Vice President of Crum and Forster Insurance Company in 1993 and Crum &
Forster Underwriters Co. of Ohio in 1995. Prior to joining the organization in
1979, he was with KPMG Peat Marwick LLP.

James E. Marran became a Director of Crum and Forster Insurance Company,
Crum & Forster Indemnity Company, Crum & Forster Underwriters Co. of Ohio,
North River and U.S. Fire and Vice President of Crum and Forster Insurance
Company, Crum & Forster Indemnity Company, North River and U.S. Fire in 1996.
He functions as the chief underwriting officer. Prior to joining the
organization in 1996, he was with Ernst & Young LLP.

Francis W. Rode became a Director and Vice President of Crum & Forster
Indemnity Company in 1995, Vice President of U.S. Fire and North River in
1994, Director of Crum & Forster Underwriters Co. of Ohio in 1996 and Director
of U.S. Fire in 1994. He functions as chief human resources officer. Prior to
joining the organization in July 1994, he was with Gemini Consulting.

Frances A. Smith became a Director of Crum & Forster Indemnity Company in
1995 and of U.S. Fire in 1993, Vice President of Crum and Forster Insurance
Company in 1993, Crum & Forster Underwriters Co. of Ohio in 1993 and U.S. Fire
in 1989, and in 1995, Vice President of Crum & Forster Indemnity Company and
in 1992 Vice President of North River. She functions as the chief actuarial
officer. Prior to joining the organization in 1977, she was with USF&G Corp.

Steven W. Sumner became a Director of Crum & Forster Indemnity Company and
U.S. Fire in 1996. He became Vice President of Crum & Forster Indemnity
Company, North River and U.S. Fire in 1995 and functions as regional Vice
President of the New York Metropolitan Regional Office. Prior to joining the
organization in 1995, he was with American International Group Inc.

Robert T. Wheeler became a Director of Crum & Forster Underwriters Co. of
Ohio and U.S. Fire in 1993 and of Crum & Forster Indemnity Company in 1995. He
became Vice President of Crum & Forster Indemnity Company in 1995 and North
River in 1993 and U.S. Fire in 1993 and functions as chief information
officer. Prior to joining the organization in 1993, he was with Fireman's Fund
Insurance Company from 1964.

Jorge A. Echemendia became a Director of Crum & Forster Indemnity Company
and U.S. Fire in August 1997. He functions as marketing manager for the New
York Regional Office. He joined the organization in 1980.

EXECUTIVE COMPENSATION

CFI's compensation program for its executive officers for the fiscal year
ended December 31, 1997 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 CFI for
all services rendered in all capacities to CFI paid or accrued during the
fiscal year ended December 31, 1997 to the Chief Executive Officer of CFI and
the four other most highly compensated executive officers of CFI
(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.

67
<PAGE>

SUMMARY COMPENSATION TABLE

SALARY AND INCENTIVE COMPENSATION
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------
OTHER
ANNUAL ALL OTHER
NAME AND PRINCIPLE POSITION SALARY BONUSES COMPENSATION COMPENSATION
- - --------------------------- ------ ------- ------------ ------------
(1) (2) (2)
<S> <C> <C> <C> <C>
James A. Stark........................
Chairman of the Board, President,
Chief Executive
Officer of U.S. Fire
Francis W. Rode.......................
Vice President of U.S. Fire
Patricia A. Drago.....................
Vice President of U.S. Fire
Robert W. Wheeler.....................
Vice President of U.S. Fire
Richard P. Lutenski...................
Chief Financial Officer, Vice
President, Treasurer of
U.S. Fire
</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>
ALL OTHER
OTHER ANNUAL COMPENSATION COMPENSATION
---------------------------------------- -----------------
QUALIFIED NON- NON-
PLAN QUALIFIED QUALIFIED QUALIFIED MOVING TRANSFER
NAMED EXECUTIVE OFFICER MATCH PLAN MATCH BASIC BASIC EXPENSE ALLOWANCE
- - ----------------------- --------- ---------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
James A. Stark..........
Francis W. Rode.........
Patricia A. Drago.......
Robert W. Wheeler.......
Richard P. Lutenski.....
</TABLE>

EMPLOYEE ARRANGEMENTS

All of CFI's executive officers participate (with other selected employees)
in the Talegen Holdings, Inc. Retention Incentive Plan and the U.S. Fire
Insurance Company Enhanced Severance Plan. These plans are intended to
encourage executives to remain employed with CFI. In connection with Joseph W.
Brown, Jr.'s full-time involvement with the Company, CFI is negotiating a
compensation package for Mr. Brown that is expected to include stock, stock
options and cash.

CFI'S PAY-FOR-PERFORMANCE COMPENSATION PLAN

CFI's management compensation is based on CFI's three-year average after tax
return on equity ("ATROE") as adjusted. It is governed by a Pay-for-
Performance Compensation Plan which became effective January 1, 1994 and
covers all associates, except the Chief Executive Officer whose compensation
is determined on a discretionary basis by the Chairman of the Board of
Talegen.

Salaries of senior management members are based on competitive market rates
as determined by salary surveys for comparable companies. Salaries are only
adjusted when the competitive market rate for a given position moves 10% or
more above the salary paid for that position and if a sufficient salary
adjustment pool has been earned based on the adjusted three-year average
ATROE.

68
<PAGE>

Annual bonuses for senior management members are only earned if the adjusted
three-year average ATROE equals 8% or more. Individual bonuses are based both
upon Company and individual performance and are paid out over three years at
the rate of 40% in year one and 30% in each of the following two years.
Bonuses typically range from 10% to 100% of salary.

TALEGEN RETIREMENT PLANS

All subsidiaries of Talegen are participating employers in the Talegen
Retirement Plans. Through May 31, 1985, employees of CFI working in the United
States were covered under the Employees Retirement Plan of Crum & Forster, a
noncontributory qualified defined benefit plan (the "Original Retirement
Plant"). The Original Retirement Plan provided a retirement benefit at age 65.
The annual retirement benefit for a participant was equal to 2% of the
member's Average Final Compensation (as defined below) multiplied by years of
credited service as a participant up to 25 years, plus 0.75% of such Average
Final Compensation multiplied by years of credited service as a participant in
excess of 25 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 Retirement Plan of Talegen Holdings, Inc. (formerly
known as the Retirement Plan of Crum and Forster, Inc.), 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 multiplied by years of credited
service, less a reduction for Social Security payments. Effective June 30,
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. On December 1, 1996, a participant not otherwise vested
became 100% vested in his retirement benefit. 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. Effective December 1, 1996, the service
requirement for early retirement was eliminated. 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. CFI ceases to be a participating employer in the Terminated
Retirement Plan as of the consummation of the Offering.

Talegen's subsidiaries have reimbursed and will reimburse Talegen for that
portion of the annual funding cost of the Terminated Retirement Plan
applicable to employees of each subsidiary through the consummation of the
Offering. During 1996, the Company, along with Talegen and its subsidiaries
made additional contributions so that the market value of assets exceeded the
benefit obligation. As of January 1, 1997, the market value of assets
continued to exceed the benefit obligation in the Terminal Retirement Plan.
CFI's contribution to the Terminated Retirement Plan for the year ended
December 31, 1996 was $8.9 million.

69
<PAGE>

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.

YEARS OF CREDITED SERVICE THROUGH JUNE 30, 1993

<TABLE>
<CAPTION>
60 MONTH
AVERAGE FINAL
COMPENSATION 5 10 15 20 25 30
- - ------------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
$175,000 $ 9,360 $18,240 $26,660 $35,210 $44,240 $ 53,270
200,000 10,860 21,140 30,850 40,680 51,000 61,330
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 16,860 32,720 47,590 62,580 78,070 93,550
350,000 19,860 38,510 55,960 73,540 91,600 109,660
</TABLE>

Compensation covered by the Terminated Retirement Plan excludes overtime
earnings, 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.
Stark -- $300,014 (29 years), Ms. Drago -- $175,006 (12 years) and Mr.
Wheeler -- $175,006 ( 1/3 year). Mr. Lutenski and Mr. Rode are not eligible
for benefits under the Retirement Plan.

TALEGEN INDIVIDUAL RETIREMENT PLAN

All subsidiaries of Talegen are participating employers in The Individual
Retirement Plan of Talegen Holdings, Inc. (the "IRP"). Employees of
subsidiaries of Talegen with at least one year of service (including the Named
Executive Officers) are eligible to participate. CFI 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. CFI 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 basic and performance contributions. In the
case of employees hired after July 1, 1993, such participants become 100%
vested in employer regular matching contributions after completion of five
years of service. Effective April 1, 1997, all employees not otherwise vested
became 100% vested in employee regular matching contributions. 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 1997, $10,000 in 1998).

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 Offering and the
subsidiaries will thereafter establish or maintain a similar plan. The
required contribution by CFI for the year ended December 31, 1996 was $4.2
million.

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. CFI ceases to be a participating employer in the Supplemental SIRP as
of the consummation of the Offering but intends to establish or maintain a
similar plan.

70
<PAGE>

Selected executives of the subsidiaries of Talegen who were participants in
previous defined benefit 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. Prior to December 1996, 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. Effective
December 1, 1996, the service requirement was eliminated; therefore, any
participant attaining age 55 may receive a reduced early retirement benefit.
Effective July 1, 1993, accruals under the SERP were discontinued.

The table set forth below illustrates the approximate SERP annual retirement
benefits, after reduction for Social Security benefits, benefits payable from
the Terminated Retirement Plan (after reflecting compensation limits in effect
as of December 31, 1993) and benefits payable from the Original Retirement
Plan. These benefits 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 indicated.

YEARS OF CREDITED SERVICE
THROUGH JUNE 30, 1993

<TABLE>
<CAPTION>
60 MONTH
AVERAGE FINAL
COMPENSATION 5 10 15 20 25 30
------------- ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
$175,000 $ 0 $ 2,550 $ 5,390 $ 8,020 $ 9,770 $ 0
200,000 0 4,550 7,640 10,520 12,520 0
225,000 0 6,550 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
</TABLE>

Compensation covered by the SERP excludes overtime earnings, 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. Stark -- $300,014 (29 years), Ms. Drago --
$175,006 (12 years) and Mr. Wheeler -- $175,006 ( 1/3 year). Mr. Lutenski and
Mr. Rode are not eligible for benefits under the SERP.

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 is a non-qualified plan and benefits under this plan are payable
solely from general corporate assets. Effective December 31, 1996, Talegen
assumed all liabilities under the SERP. The Supplemental IRP is also a non-
qualified plan with benefits payable solely from general corporate assets. A
reserve of $.6 million have been accrued with respect to the Supplemental IRP
as of December 31, 1996.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDE PARTICIPATION

The full Board of Directors acts as a compensation committee. Immediately
prior to the completion of the Offering the Board of Directors will establish
an Audit Committee and a Compensation Committee. The Board of Directors may
also establish other committees to assist in the discharge of its
responsibilities.

71
<PAGE>

OWNERSHIP OF COMMON STOCK

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, at the date hereof and after giving
effect to the Offering.

As of the date hereof, none of the outstanding Common Stock of the Company
is owned by any director or executive officer of the Company.

<TABLE>
<CAPTION>
PRIOR TO THE AFTER THE
OFFERING OFFERING
----------------- -----------------
NUMBER PERCENTAGE NUMBER PERCENTAGE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Xerox Corporation(/1/)...................... 100%
800 Longridge Road
Stamford, CT 06904
</TABLE>
- - --------
(1) The record owner of these shares is Talegen. Xerox indirectly owns 100% of
the outstanding capital stock of Talegen.

CERTAIN TRANSACTIONS

TALEGEN RESTRUCTURING

General. In January 1993, Xerox announced its strategic decision to
disengage from its insurance and other financial services businesses in order
to focus on its core document processing business. To facilitate the
disengagement process for the property and casualty insurance operations,
Talegen recapitalized and legally restructured its insurance operations into
seven stand-alone operating groups, including CFI, effective January 1, 1993.
The Talegen Restructuring, which was approved in September 1993 by the
insurance departments of all states in which the Talegen Insurance Companies
were domiciled, included a redistribution of assets and liabilities of certain
of the insurance companies dedicated to five of the seven operating groups,
including the Company.

In connection with the Talegen Restructuring, CFI and certain of the other
Talegen Insurance Companies received significant balance sheet support from
XFSI in the form of cash, notes and aggregate excess of loss reinsurance
protection from Ridge Re, a single purpose Bermuda insurance company wholly
owned by XFSI. Ridge Re continues to provide aggregate excess of loss
reinsurance protection up to contractual limits to the Insurance Companies and
certain other current and former Talegen insurance subsidiaries. See
"Business-- Reinsurance Recoverable."

Prior to the Talegen Restructuring the assets and liabilities associated
with business written by each of the CFI insurance companies were shared
("pooled") through intercompany reinsurance arrangements with the other
Talegen Insurance Companies. Specifically, the business written by Crum and
Forster Insurance Company, Crum & Forster Indemnity Company and Crum & Forster
Underwriters Co. of Ohio (or their predecessors) was reinsured by U.S. Fire or
North River. Those two companies, in turn, participated in a reinsurance pool
with three other Talegen Insurance Companies in which the liabilities on all
direct and assumed business written by or reinsured into any of those five
pool participants were shared among them in specific percentage allocations
through intercompany reinsurance arrangements (the "intercompany pool"). The
effect of these arrangements was to pool the insurance business of all
participating Talegen Insurance Companies, including the Insurance Companies.

Pursuant to the Talegen Restructuring, the intercompany pool and other
internal reinsurance arrangements were commuted, both prospectively and
retroactively, and the full liability previously placed (or ceded) into the
pool was transferred back to U.S. Fire, North River and the other Talegen
Insurance Companies which originally wrote such business.

72
<PAGE>

The Talegen Restructuring also included the realignment of certain business
segments among and between five of the seven new stand-alone insurance groups.
The other two operating groups were composed of insurance companies that did
not participate in the intercompany pool. This realignment required the
transfer of a number of policies (and the related assets and liabilities) from
the original issuing insurers to the insurance companies which were dedicated
to one of the five insurance groups as part of the Talegen Restructuring. The
Insurance Companies ceded certain policies to other Talegen Insurance
Companies which had become dedicated to types of coverages that did not fit
CFI's commercial lines middle market strategy and assumed policies from other
Talegen Insurance Companies that fit CFI's strategy. As part of the
realignment, underwriting and claims staff transferred with the respective
books of business, thus ensuring consistent contact with policyholders and
producers and providing the insurance groups with the expertise and experience
necessary for their respective specialized operations.

The Insurance Companies transferred business to and from the other Talegen
Insurance Companies by executing Assumption and Indemnity Reinsurance
Agreements ("Assumption Agreements"). These Assumption Agreements provide for
the 100% quota share reinsurance of the subject business by the assuming
company. These Assumption Agreements were designed to permanently vest in the
assuming company all of the liabilities which may arise under the insurance
policies that it assumed, whether or not there has been an effective novation
of such policy. In addition to the quota share reinsurance obligation, the
Assumption Agreements delegate the claims handling and policy administration
obligations for transferred policies from the ceding company to the assuming
company, and also assign all third-party reinsurance associated with
transferred policies from the ceding company to the assuming company.

As part of the Assumption Agreements, the assuming company is required by
contract to seek novation of certain policies. Novation of an insurance policy
effects the legal substitution of one insurance company for the original
policy-issuing company. The legal requirements for the effective novation of
an insurance policy are established on a state-by-state basis, typically
through a state's insurance laws and regulations, and generally call for
either the express or implied consent of the policyholder.

Talegen received the approval of the insurance department in each of the 50
states and the District of Columbia for the specific novation process that
would be pursued for each state's policyholders. Of the 50 states: nine states
required the insurer to obtain affirmative consent of the policyholder; 17
states required the insurer to provide an opportunity to the policyholder to
accept or reject the novation during a finite period of time after which, in
the absence of a response, the policyholder is implied to have accepted
novation; and 24 states permitted an insurer to deem the policy novated upon
mailing of the notice of transfer unless an objection is subsequently received
from the policyholder within a specified period of time (typically 30 days).
In each case, the original company is relieved of liability if the novation
was properly effected and is enforceable in accordance with applicable state
law and/or regulation. However, there can be no assurance that a reviewing
court would not apply a different standard for a policy novation from that
prescribed by state insurance law or regulation.

The policies covered by the Assumption Agreements that have been subjected
to the novation process consist of: (i) policies for which the policy period
had not expired at the time the Talegen Restructuring became effective; and
(ii) expired policies that had a pending claim at the time the novation
process began or that have subsequently had a claim opened. Novation has not
been sought for policies whose policy period had expired at the time of the
Talegen Restructuring and which did not have a pending claim at such time or
subsequently. However, novation continues to be sought whenever a new claim is
received under a policy that is within the books of business subject to
novation and has not previously been subjected to the novation process.

In addition, certain classes of policies were not included in the novation
process. These classes include personal lines business, assumed reinsurance
policies and other situations where practical business considerations impeded
the novation process. To the extent that either: (i) certain classes of
business were excluded from the novation process; or (ii) individual policies
were not novated or attempted to be novated, the liabilities related to such
policies are transferred between the insurance companies through the continued
application of the 100% quota share reinsurance, consistent with standard
reinsurance provisions. These provisions include the

73
<PAGE>

requirement for the assuming company (including the Insurance Companies, if
applicable) to post letters of credit or other acceptable security to the
extent necessary to provide the ceding company with full statutory financial
statement credit for reinsurance balances in accordance with applicable state
insurance department requirements. This requirement would come into effect to
the extent that an assuming company (including the Insurance Companies, if
applicable) is not deemed an "authorized" reinsurer by certain applicable
state insurance departments.

The Insurance Companies and each of the other current and former Talegen
Insurance Companies are currently classified as "authorized" reinsurers by
applicable state insurance departments. If the assuming company were to become
unauthorized, to the extent the novation process is not pursued or is
unsuccessful (and, accordingly, such ceded reinsurance balances do not
decrease), the potential letter of credit obligations of the assuming company
to the ceding company would continue.

Since the Talegen Restructuring, the Insurance Companies and the other
former Talegen Insurance Companies have continued to pursue the novation
process with the goal of transferring as many of the subject policies as
possible to the appropriate insurance companies. CFI intends to continue the
novation process after the Offering is completed. Despite their sale by
Talegen, the former Talegen Insurance Companies are contractually obligated to
continue the novation process.

The estimated gross carried reserves at September 30, 1997, associated with
the policy liabilities transferred between the Insurance Companies and the
other former Talegen Insurance Companies (without giving effect to novation or
reinsurance), were: (i) $1.0 billion transferred from the Insurance Companies
(ceded) to other Talegen Insurance Companies; and (ii) $492 million
transferred to the Insurance Companies (assumed) from other Talegen Insurance
Companies. Pursuant to the Assumption Agreements, reserve balances are
developed by the assuming companies, consistent with the law of any
jurisdiction having regulatory authority with respect to the particular
insurance policies. Further, each assuming reinsurer provides the ceding
company with a copy of its actuarial certification. To the extent that a
specific individual policy has not been novated (whether because novation was
not attempted, the policyholder rejected the novation or the policyholder did
not specifically give its affirmative consent in certain states, or
otherwise), the associated estimated gross reserves are transferred via 100%
quota share reinsurance rather than by novation. Based upon the relative
success factor of the novation process since the Talegen Restructuring, an
estimate of the ultimate reserves associated with policies which will not be
novated (and, hence, which will be reinsured) is calculated. This estimation
process gives consideration to the types of business subject to transfer
(e.g., line of business) and the relative distribution of transferred policies
by state of individual policyholders. To the extent that results of the
novation process vary from historical levels, that portion of reserves related
to policies not previously subjected to the novation process could change. No
assurance can be made that the reserve estimates or the estimation process
utilized will not change as or when additional data becomes available or as
estimation techniques are refined. See "Risk Factors--Adequacy of Reserves."

At September 30, 1997, an estimated 70% of the gross reserves associated
with policies transferred by the Insurance Companies to the other Talegen
Insurance Companies were considered by the transferee companies to be novated.
At September 30, 1997, an estimated 91% of the gross reserves associated with
policies transferred from other Talegen Insurance Companies to the Insurance
Companies were considered by the Insurance Companies to be novated. These
estimates include actual novation results with respect to case reserves and
the application of historical novation experience by policy count to IBNR
reserves. In each case, the assuming company bears the responsibility for the
related reserve determinations and the ceding company may, as a practical
matter, be affected by such determination. These determinations are generally
included in the reported reserves of the ceding companies, including the
Insurance Companies. Although Talegen had extensive discussions with state
insurance regulators on behalf of the Company and the other Talegen Insurance
Companies regarding applicable regulatory requirements prior to attempting to
perfect novations, the actual novation results which form the basis for the
historical novation experience depend upon a number of assumptions, judgments
and interpretations concerning among other things, statutory and regulatory
provisions, which may be called into question. Moreover, the novation process
involves a massive accumulation, transmittal and compilation of data.

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<PAGE>

Inevitably, in such a process there are technical difficulties, including
changes in the addresses and names of insureds, which could in individual
instances call into question the validity of what was thought to be a valid
novation. No assurance can be given that current estimates of actual novation
results and historical novation experience will be accurate predictions of the
ultimate success rate with respect to novations. Moreover, no assurance can be
made that the estimates will not change as or when additional data becomes
available or as estimation techniques are further refined. As of September 30,
1997, the estimated reinsurance balances related to non-novated policies
subject to the Assumption Agreements were as follows:

REINSURANCE BALANCES(1)(2) UNDER
ASSUMPTION AGREEMENTS

<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
---------------------
(IN MILLIONS)
<S> <C>
CEDED RECOVERABLES(3)(4)
The Resolution Group................................. $297
Westchester Specialty Group.......................... 28
Coregis Group........................................ 5
----
$330
====
ASSUMED PAYABLES(3)(5)
The Resolution Group................................. $ 8
Westchester Specialty Group.......................... 4
Industrial Indemnity Group........................... 31
----
$ 43
====
</TABLE>
- - --------
(1) Balances are presented gross without giving effect to any third party or
Ridge Re reinsurance recoverables. The estimates include actual novation
results with respect to case reserves and the application of historical
novation experience based on policies previously novated with respect to
IBNR reserves in estimating future novation results.
(2) Indicated balances are those ceded and assumed by the respective insurance
company members of the indicated groups.
(3) Reinsurance balances recoverable from and payable to Talegen Insurance
Companies and CFI reflect reserves related to policies reinsured under the
Assumption Agreements but neither novated nor considered novated based
upon the estimation process described above. These agreements provide 100%
quota share reinsurance and assign and delegate to the assuming company
full authority to handle and dispose of claims under the subject policies.
(4) Under the 100% quota share reinsurance, the assuming company is obligated
to pay fully all claims directly under the subject policies; in this
event, the Insurance Companies, not having paid the policyholders, may not
recover any reinsurance proceeds from the assuming company.
(5) In cases where one of the Insurance Companies is the assuming company, the
Insurance Company will pay claims under the subject policies directly; in
this event, the ceding company will not pay claims and will not recover
any reinsurance proceeds from the Insurance Company.

Credit Risk. The reinsurance of liabilities arising from the transfer of
policies between the Insurance Companies and the other Talegen Insurance
Companies pursuant to the Assumption Agreements could potentially present the
Insurance Companies with certain associated credit risks. For example, if
another current or former Talegen Insurance Company has assumed a U.S. Fire
policy pursuant to the Assumption Agreement (and thus is handling a claim
under the policy) but does not perform the obligations owed under the policy,
U.S. Fire could potentially be liable for that failure unless a novation had
previously been effectuated in accordance with applicable state law and/or
regulation. Although under such circumstances U.S. Fire could have claims
against the assuming insurer under the Assumption Agreements, such claims are
subject to the risks of litigation

75
<PAGE>

and collectibility and may not be satisfied in full, particularly in the case
of an insolvency of an assuming company. In addition, the receiver or the
trustee of such an insolvent assuming company might seek to collect, for the
benefit of the estate of such insolvent insurer, any third party reinsurance
that was assigned pursuant to the Assumption Agreements to the assuming
company with respect to the transferred policies. In such circumstances,
pursuant to the Assumption Agreements, the Company could make a claim as a
general unsecured creditor (subordinate to policyholder claims) against the
estate of the insolvent assuming company for amounts paid by the Insurance
Company under such transferred policies, but there can be no assurance that
the Insurance Company could collect any amounts due under such Assumption
Agreements from the estate of the insolvent company.

The table below provides additional detail on the estimated gross reserve
balances and such balances net of third party reinsurance recoverable
balances, before and after giving effect to novation, associated with CFI
policies that have been transferred to the other Talegen Insurance Companies,
pursuant to the Assumption Agreements.

CEDED RECOVERABLE BALANCES UNDER ASSUMPTION AGREEMENTS(1)
AS OF SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
GROSS RECOVERABLES(1) NET RECOVERABLES(2)
--------------------- -------------------------------------------------
AFTER THIRD- AFTER THIRD-PARTY
PARTY REINSURANCE REINSURANCE AND RIDGE RE
------------------------ ------------------------
BEFORE AFTER BEFORE AFTER BEFORE AFTER
GIVING GIVING GIVING GIVING GIVING GIVING
EFFECT TO EFFECT TO EFFECT TO EFFECT TO EFFECT TO EFFECT TO
NOVATION NOVATION(3) NOVATION NOVATION(2)(3) NOVATION NOVATION(2)(3)
--------- ----------- --------- -------------- --------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
The Resolution Group.... $ 813 $297 $482 $174 $329 $119
Westchester Specialty
Group.................. 144 28 107 20 81 15
Coregis Group........... 90 5 70 4 70 4
Industrial Indemnity
Group.................. 2 0 0 0 0 0
------ ---- ---- ---- ---- ----
Total................. $1,049 $330 $659 $198 $480 $138
====== ==== ==== ==== ==== ====
</TABLE>
- - --------
(1) Under the 100% quota share reinsurance, reserve balances are developed by
the assuming companies consistent with the law of any jurisdiction having
regulatory authority with respect to the particular insurance policies.
The assuming company is obligated to pay fully all claims directly under
the subject policies and collect all third party reinsurance; in this
event, the Insurance Companies, not having paid the policyholders, may not
recover any reinsurance proceeds from the assuming company.
(2) The amounts shown as net recoverables are net of any third party
reinsurance which has been assigned to the assuming company by the ceding
company. The amounts have been adjusted based on current estimates of
uncollectible reinsurance.
(3) These estimates include actual novation results with respect to case
reserves and the application of historical novation experience based on
policies previously novated with respect to IBNR reserves in estimating
future novation results.

No assurance can be made that the estimation processes utilized in
determining ceded balances after giving effect to novation will not change as
or when additional data becomes available, or as estimation techniques are
refined, or if the financial condition of any assuming company should change.
Further, the estimated reserves associated with transferred policies (and the
related credit risk) will change over time. For example, as individual claims
are adjusted and paid by the assuming insurance company, reserves (and
associated credit risk) will decrease. Conversely, to the extent of adverse
development, if any, reserves (and associated credit risk) will increase until
such time as the individual claims are adjusted and paid.

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<PAGE>

In May 1997, Talegen completed the sale of the Coregis Group to a subsidiary
of General Electric Capital Corporation and in August 1997 sold the Industrial
Indemnity Group to Fremont Indemnity Corporation, a subsidiary of Fremont
General Corporation, a workers' compensation insurance company doing business
primarily in the western United States. In October 1997, XFSI sold The
Resolution Group to an investor group led by certain members of the management
of TRG and including a number of insurance industry participants such as
American Re-Insurance Company, Risk Capital Reinsurance Company, Securities
Capital Partners (I & II), L.P. and White Mountains Holdings, Inc. Talegen
also sold the Westchester Specialty Group to a subsidiary of ACE Limited, a
large insurance and reinsurance company based in Bermuda, in January 1998.
None of these sales affected the contractual rights and obligations of any of
the parties under the assumption and indemnity agreements.

TAX ALLOCATION AGREEMENT

In conjunction with the Offering, XFSI, Talegen, and CFI will enter into a
Tax Allocation and Indemnification Agreement (the "Tax Agreement") which sets
forth each party's rights and obligations with respect to certain tax matters.

Effective as of the date the Offering is completed (the "Closing Date"), the
Tax Agreement terminates any tax agreement to which CFI or any of its
subsidiaries, on the one hand, and Talegen or any of its subsidiaries (other
than CFI and its subsidiaries), on the other hand, were a party to at any time
at or before the Closing Date, including the existing tax agreement between
Talegen and CFI and its subsidiaries. The Tax Agreement also extinguishes any
and all intercompany liabilities that exist immediately before the Closing
Date with respect to taxes between CFI and any of its subsidiaries, on the one
hand, and Talegen and any of its subsidiaries (other than CFI and its
subsidiaries), on the other hand. CFI and each of its subsidiaries will also
execute tax releases that eliminate any and all intercompany tax agreements
and obligations existing at any time at or before the Closing Date between CFI
and any of its subsidiaries, on the one hand, and Xerox, XFSI, Talegen and any
of their subsidiaries (other than CFI and its subsidiaries), on the other
hand.

The Tax Agreement addresses each party's responsibility for filing tax
returns and for payment of taxes through the Closing Date. For tax periods
through the Closing Date (1997 and part of 1998), CFI and its subsidiaries
will be included in the Xerox consolidated federal income tax return, and
Xerox will be responsible for paying taxes shown to be due in that return.
Under the Tax Agreement, tax sharing payments are to be made between CFI and
XFSI in respect of federal income taxes for 1997 and for 1998 through the
Closing Date.

The federal tax sharing calculations will be done on a pro forma basis as
though CFI and its subsidiaries filed a consolidated federal income tax return
apart from Xerox and its other subsidiaries, but taking into account certain
pro forma adjustments. The most significant pro forma adjustment is the
elimination from the calculation of the taxable income of CFI and its
subsidiaries of the income from cancellation of the lease on, and from the
intercompany sale of, the Xerox training facility located in Virginia. If the
pro forma taxable income calculations result in taxable income for CFI and its
subsidiaries for the respective tax period, the applicable regular tax and
alternative minimum tax is calculated and the larger amount of the two is paid
by CFI to XFSI. If the calculation results in a loss, CFI is paid the actual
tax benefit realized from the loss by the Xerox affiliated group in the Xerox
consolidated federal income tax return as originally filed for the applicable
tax period.

CFI and its subsidiaries will be responsible for filing all tax returns
(other than federal income tax returns) that include CFI and/or any of its
subsidiaries. CFI will be responsible for paying the taxes shown as due in
those returns.

For taxable periods after the Closing Date, where permitted by law, CFI and
its subsidiaries must elect to carry forward any net operating loss, net
capital loss, credit or other item that would, absent such election, be
carried back to a pre-closing taxable year of CFI and its subsidiaries in
which CFI and its subsidiaries participated in the filing of a consolidated or
combined tax return with Xerox or one of its other subsidiaries.

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<PAGE>

In accordance with the Tax Agreement, XFSI will indemnify, on an after-tax
basis, CFI and its subsidiaries against all tax liabilities for all taxable
periods through December 31, 1997, except:

(A) for federal tax sharing payments (described above) and for taxes paid
by CFI and its subsidiaries in connection with originally filed tax returns
for those periods;

(B) to the extent of an amount equal to taxes accrued as a current
liability in the GAAP financial statements as of December 31, 1997 of CFI
and its subsidiaries, (i) as reduced by an amount equal to the lesser of
any current federal income taxes accrued for the 1997 taxable year or the
federal tax sharing payments that are made with respect to the 1997 taxable
year, and (ii) as reduced by an amount equal to the lesser of all current
taxes (other than current federal income taxes) accrued for the 1997
taxable year in such financial statements or the amount of any tax payments
made with originally filed non-federal income tax returns filed with
respect to the 1997 taxable year; and

(C) to the extent that any such tax liability is attributable to an
adjustment that results in an increase in the taxable income of CFI or its
subsidiaries for any taxable periods through December 31, 1997 and a
related decrease in the taxable income of CFI or its subsidiaries in a
taxable period beginning on or after January 1, 1998.

The XFSI indemnification also covers any assessment against CFI or its
subsidiaries for joint and several liability for taxes in respect of any other
member of the Xerox affiliated group of companies pursuant to federal, state,
local or foreign law.

XFSI and Talegen will be entitled to any overpayment, refund or credit of
taxes related to CFI and its subsidiaries for tax periods through December 31,
1997. Included therein are the benefits attributable to certain uncollectible
reinsurance deductions for the 1990 through 1994 taxable years; these benefits
are payable to XFSI and Talegen even if realized in taxable years subsequent
to 1994.

CFI and its subsidiaries agree to cooperate with XFSI on all tax matters
(such as tax audits or examinations) as well as retaining all necessary
records related to all periods ending on or before the Closing Date. Such
cooperation includes providing reasonable requested assistance, documents and
other information without charge.

LOANS TO AFFILIATES

XFSI issued two intercompany promissory notes (individually a "Note," and
together the "Notes"), guaranteed by Xerox, in an aggregate principal amount
of $182 million on December 31, 1992. One Note, in the principal amount of $82
million, was issued to Talegen and subsequently assigned by Talegen to North
River on December 31, 1992. The second Note, in the principal amount of $100
million, was issued to Talegen and subsequently assigned by Talegen to U.S.
Fire pursuant to a Capital Contribution Agreement between XFSI, Talegen and
U.S. Fire. The Notes mature on the earlier of June 30, 1998 and the date of
sale of more than 50% of the stock of the Company and bear a variable interest
rate approximately equal to the "A" corporate bond rate, reset annually. At
December 31, 1997, the Notes carried an interest rate of 6.26%.
Contemporaneously with the Offering, the Notes will be repaid by XFSI.

LOANS FROM AFFILIATES

On November 27, 1996, the Company borrowed $115 million from Talegen in
exchange for an unsecured promissory note in that amount. Interest on the
promissory note is payable quarterly in arrears at a fixed rate of 7.4% per
annum and the principal is due on November 27, 2006. The proceeds received for
the promissory note were used to repay the previously outstanding bank debt.
Contemporaneously with the Offering, the promissory note will be repaid by
CFI.

INTERCOMPANY SERVICE AGREEMENTS

Since January 1993, the Company has received various services from Talegen
and its affiliates under several general service agreements (together the
"Service Agreements") between Talegen and the Insurance Companies. The Service
Agreements were renegotiated in 1993 as part of the Talegen Restructuring.

78
<PAGE>

The services provided by Talegen to the Insurance Companies include, but are
not limited to, the following: corporate communications and public relations
policies, actuarial, audit, executive, legal, personnel, benefits and benefit
plans, accounting, tax and other financial services other than investment
management services, which are specifically excluded. Management fees incurred
by the Insurance Companies under these agreements for 1994, 1995 and 1996 and
for the nine months ended September 30, 1997 were approximately $8 million, $8
million, $9 million and $6 million, respectively. In connection with the
Offering, these service agreements will be discontinued.

From April 1995 through February 1997, Apprise Corp. ("Apprise"), a
subsidiary of Talegen, and U.S. Fire were party to a series of Information
Services Agreements pursuant to which Apprise provided U.S. Fire with certain
data processing, data communications, systems maintenance, payroll, management
and administrative and related services, in addition to consulting, software
development and/or licensing services. On January 1, 1996, Apprise assigned
all of its rights and obligations associated with the Information Services
Agreement to Infocus Employee Services, Inc. ("Infocus"), a subsidiary of
Talegen, to the extent that such rights relate to the provision of information
services associated with the administration of U.S. Fire's employee benefit
plans and payroll system. Apprise retained its rights and obligations under
the Information Services Agreement that do not relate to those assigned to
Infocus on January 1, 1996. Apprise fees incurred for each of the years ended
December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1997
excluding amounts related to the administration of U.S. Fire's employee
benefit plans and payroll system, were approximately $26 million, $32 million,
$34 million and $23 million, respectively. Fees incurred by U.S. Fire for the
administration of its employee benefit plans and payroll system by Apprise and
Infocus were $1 million, $2 million, $2 million and $1 million for the years
ended December 31, 1994, 1995 and 1996 and the nine months ended September 30,
1997.

On March 1, 1997, Andersen Consulting LLP acquired certain assets of Apprise
and entered into a five- year information technology service agreement with
U.S. Fire. The agreement contains a buyout provision allowing for the
cancellation of the agreement with penalties. The Company intends to continue
its relationship with Andersen Consulting LLP after the consummation of the
Offering.

Since 1985, the Insurance Companies' asbestos, environmental and other
latent exposure claims have been serviced and processed by Envision, a
separate service company that is a subsidiary of TRG and a former subsidiary
of Talegen. Fees paid to Envision for each of the years ended December 31,
1994, 1995 and 1996 and for the nine months ended September 30, 1997 were $4
million, $4 million, $5 million and $4 million, respectively. The Company
intends to continue its relationship with Envision after the consummation of
the Offering.

With respect to the management of recoveries due from reinsurers, the
Insurance Companies operate under service agreements with certain subsidiaries
of TRG (IIC and RRSC). In October 1997, XFSI sold its interests in TRG to
third-parties. Employees of these entities assist in the identification of
potential collection problems, provide collection services and aid in the
management of the more complicated cases. Fees paid to these entities for
1994, 1995, 1996 and the nine months ended September 30, 1997 were
approximately $3 million, $4 million, $2 million and $1 million, respectively.
The Company intends to continue its relationships with these entities after
the consummation of the Offering.

XEROX TRAINING FACILITY

The Company currently owns a 70% interest in a Xerox training facility
located in Virginia. The remaining 30% ownership interest is owned by Xerox
Realty Corporation, Talegen, on behalf of the Company and the other owners,
entered into an operating lease dated December 1, 1985 with XFSI (the "Lease")
with respect to the training facility. The Lease will be assigned by XFSI to
Xerox. The initial term of the Lease expires on November 30, 2010 and will be
renewable at the option of Xerox. Rental income recorded by the Company under
the terms of the Lease amounted to $13 million in each of the three years
ended December 1994, 1995 and 1996 and $9 million in the nine months ended
September 30, 1997. Contemporaneously with the Offering, the Company's
interest in the training facility will be sold for cash to Xerox Realty
Corporation and the lease will be terminated and a cash payment for such
termination will be made to the Company by Xerox.

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<PAGE>

LEASE AGREEMENTS

In 1997, the Company assumed the lease agreement (the "Agreement") for the
Company's home office in Morris County, New Jersey from Talegen Properties,
Inc. Pursuant to this Agreement, the Company leases 201,887 square feet for an
initial term expiring November 2009. Rent payments for this lease totaled $3.6
million for the nine months ended September 30, 1997, of which $1.9 million
was recorded as rent expense by the Company and the remainder was subsidized
by Talegen. The Company subleases 33,795 square feet to several subtenants
including Envision, which occupies 27,723 square feet through March 2001.
Total annual sublease income, excluding amounts applicable to operating
expenses, is $.7 million. Contemporaneous with the Offering, the subsidy
provided by Talegen will be discontinued and the Company will record a
liability of $27 million, which represents unfavorable lease payments for the
remaining term of the lease. See "Capitalization."

INVESTMENT SERVICES AGREEMENTS

The Company received investment services from First Quadrant Corp. ("First
Quadrant") pursuant to an Investment Services Agreement between First Quadrant
and North River dated January 1, 1993 and an Investment Services Agreement
between First Quadrant and the Company dated August 1, 1995 (together the
"Investment Services Agreements"). First Quadrant was owned by Talegen until
1996. In August 1995, the assets of First Quadrant's insurance investment
services unit were sold to American Re Asset Management, Inc. ("ARAM"), an
unaffiliated company. Since then, the Company has received investment services
from ARAM under the Investment Services Agreements. Service fees incurred
under the Investment Services Agreements in 1994, 1995, 1996 and the nine
months ended September 30, 1997 were approximately $6 million, $7 million, $7
million and $6 million, respectively. The Company intends to continue its
relationship with ARAM following consummation of the Offering, however, fees
paid to ARAM under the Investment Services Agreements will be reduced.

CERTAIN REINSURANCE AGREEMENTS

Pursuant to a Reinsurance Agreement effective December 31, 1992 (the
"Reinsurance Agreement"), Ridge Re, a special purpose Bermuda Reinsurer which
is a wholly owned subsidiary of XFSI, provides aggregate excess of loss
reinsurance to the Insurance Companies. Under the Reinsurance Agreement, and
subject to stated limits, Ridge Re will reimburse the Company for 85% of any
and all ultimate net losses in excess of the contractual retention amount.
Ridge Re's obligations under the Reinsurance Agreement are guaranteed by XFSI.
Coverage is provided for losses and loss expenses incurred and uncollectible
reinsurance for losses occurring on accident years 1992 and prior, net of all
salvage, subrogation and other recoverables. The coverage totals $234 million,
which is net of 15% coinsurance. A premium amount of $110 million, which is
being paid over a 10-year period by XFSI and guaranteed by Xerox, was ceded by
the Company to Ridge Re as consideration for the risk assumed by Ridge Re.
Subject to certain commutation provisions, this coverage remains in effect
until all 1992 and prior accident year claims are paid. The Company made no
cessions to Ridge Re in 1993 and 1996. The Company made $5 million and $229
million in cessions to Ridge Re in 1994 and 1995, respectively. As of December
31, 1995, the Company received letters of credit from Ridge Re on the
cumulative amount ceded. At September 30, 1997, the Company had reinsurance
recoverables of $234 million due from Ridge Re.

In connection with the Talegen Restructuring, the Insurance Companies
entered into a series of Assumption and Indemnity Reinsurance Agreements with
certain other Talegen Insurance Companies. These agreements, each effective
January 1, 1993, provided for the 100% quota share reinsurance of the subject
business and also required the assuming companies to pursue novation of the
subject business to provide for a complete transfer of the business and the
replacement of the ceding companies as the insurers on the subject policies.
The Insurance Companies are, on the various agreements, assuming and ceding
companies. The purpose of these agreements was to facilitate the establishment
of legally and operationally distinct operating groups within the Talegen
insurance operations. Accordingly, the business transferred under the
agreements (substantially all of which related to policies written on or prior
to December 31, 1992) is from companies that had originally written the
business on a direct basis to those companies that would be continuing to
write that type of business under the restructured Talegen operations. Certain
discontinued books of business were also transferred (to IIC) under these
agreements. Under these assumption reinsurance agreements, the premiums paid
and other asset transfers and contributions made as part of the Talegen
Restructuring were determined on the basis of the capital required to support
each company's business following the reinsurance transactions.

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<PAGE>

DESCRIPTION OF CAPITAL STOCK

The following summary description relating to the capital stock of CFI,
while complete in all material respects, does not purport to be complete.
Reference is made to the Certificate of Incorporation for a detailed
description of the capital stock of CFI.

GENERAL

The Certificate of Incorporation authorizes CFI to issue shares of
capital stock, of which shares are designated as Common Stock and
shares are designated as Preferred Stock. Upon issuance of shares of Common
Stock pursuant to the Offering, all such shares will be fully paid and non-
assessable. Prior to the closing of the Offering, Talegen owned all of the
outstanding shares of capital stock of CFI.

COMMON STOCK

Holders of record of Common Stock are entitled to one vote for each share
held of record and do not have any preemptive, conversion or other rights to
subscribe for additional shares of Common Stock or any other securities of
CFI. There are no cumulative voting rights. Consequently, the holder or
holders of record of more than 50% of the outstanding shares of Common Stock
can elect all of CFI's directors. Holders of record of Common Stock are
entitled to such dividends as may be declared by the Board of Directors out of
funds legally available therefor. See "Dividend Policy" and "Business--
Regulation--Regulation of Dividends and Other Payments from Insurance
Subsidiaries." On liquidation, dissolution or winding up of CFI, the holders
of Common Stock are entitled to receive pro rata the net assets of CFI
remaining after the payment of all creditors and liquidation preferences, if
any. All issued and outstanding shares of Common Stock are validly issued,
fully paid and non-assessable.

PREFERRED STOCK

CFI's Board of Directors is authorized, subject to any limitations
prescribed by law, from time to time to issue up to an aggregate of
million shares of Preferred Stock in one or more series, each of such series
to have such voting powers, full or limited, or no voting powers, and such
designations, preferences and relative, participating, optional or other
special rights, and such qualifications, limitations or restrictions thereof,
as shall be determined by the Board of Directors in a resolution or
resolutions providing for the issue of such Preferred Stock. Thus, any series
may, if so determined by the Board of Directors, have full voting rights with
the Common Stock or superior or limited voting rights, be convertible into
Common Stock or another security of the Company, and have such other relative
rights, preferences and limitations as the Company's Board of Directors shall
determine. As a result, any class or series of Preferred Stock could have
rights which would adversely affect the rights of the holders of the Common
Stock. The shares of any class or series of Preferred Stock need not be
identical. The issuance of a new series of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions or other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or discouraging a third party from acquiring, a
majority of the outstanding voting stock of CFI. As of the date of this
Prospectus, no shares of Preferred Stock were outstanding, and CFI has no
present plan to issue any Preferred Stock.

CERTAIN CHARTER AND BY-LAW PROVISIONS

CFI's Certificate of Incorporation and By-laws contain certain provisions
that are intended to enhance the likelihood of continuity and stability in the
composition of CFI's Board of Directors and in the policies formulated by the
Board and to delay, defer or prevent a change in control of CFI if the Board
determines that such a change in control is not in the best interest of CFI,
its shareholders and other constituencies. These provisions could have the
effect of discouraging certain attempts to acquire CFI or remove incumbent
management even if some or a majority of CFI shareholders deemed such an
attempt to be in its best interest. In addition to these provisions, the
regulatory restrictions on acquisitions of securities of CFI may also deter

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<PAGE>

attempts to effect, or prevent the consummation of, a change in control of
CFI. See "Risk Factors--Anti-Takeover Effects" and "Business--Regulation--
Insurance Regulation Concerning Change or Acquisition of Control."

Pursuant to the Certificate of Incorporation and By-laws, the Board of
Directors of CFI will be divided into three classes serving staggered three-
year terms, subject to the rights of the holders of shares of any class or
series of Preferred Stock. In addition, the Certificate of Incorporation and
By-laws of CFI limit the ability of shareholders to call special meetings of
shareholders by requiring that any such special meeting be called only by
holders of a majority of the outstanding shares of Common Stock upon not less
than 60 days notice.

CFI's Certificate of Incorporation provides that no director of CFI shall be
liable to CFI or its shareholders for monetary damages for any breach of
fiduciary duty as a director, except to the extent otherwise required by
Delaware General Corporation Law. This provision does not prevent shareholders
from obtaining injunctive or other equitable relief against directors nor does
it shield directors from liability under Federal or state securities laws. In
addition, the Certificate of Incorporation provides that CFI shall, to the
maximum extent permitted by law, indemnify any person by reason of the fact
that he is or was or has agreed to be a director or officer of CFI or while a
director or officer of CFI is or was serving at the request of CFI as a
director, officer, partner, trustee, employee or agent of any corporation,
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, subject to such person having met the
standards for conduct required for such indemnification under Delaware law.

DELAWARE ANTI-TAKEOVER LAW

Under Section 203 of the Delaware General Corporation Law (the "Delaware
anti-takeover law"), certain "business combinations" between a Delaware
corporation whose stock generally is publicly traded or held of record by more
than 2,000 stockholders and an "interested stockholder" are prohibited for a
three-year period following the date such stockholder became an interested
stockholder, unless (i) the corporation has elected in its certificate of
incorporation not to be governed by the Delaware anti-takeover law (CFI has
made such an election), (ii) the business combination was approved by the
board of directors of the corporation before the other party to the business
combination became an interested stockholder, (iii) upon consummation of the
transaction that made it an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
commencement of the transaction (excluding voting stock owned by directors who
are also officers or held in employee benefit plans in which the employees do
not have a confidential right to tender or vote stock held by the plan), or
(iv) the business combination was approved by the board of directors of the
corporation and ratified by 66 2/3% of the voting stock which the interested
stockholder did not own. The three-year prohibition also does not apply to
certain business combinations proposed by an interested stockholder following
the announcement or notification of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors.
The term "business combination" is defined generally to include mergers or
consolidations between a Delaware corporation and an "interested stockholder",
transactions with an "interested stockholder" involving the assets or stock of
the corporation or its majority-owned subsidiaries and transactions which
increase an interested stockholder's percentage ownership of stock. The term
"interested stockholder" is defined generally as those stockholders who become
beneficial owners of 15% or more of a Delaware corporation's voting stock.

TRANSFER AGENT

The transfer agent and registrar for CFI's Common Stock is .

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SHARES ELIGIBLE FOR FUTURE SALE

Immediately following the completion of the Offering, Talegen will own
shares of Common Stock, or approximately % of the shares outstanding
(assuming the U.S. Underwriters' over-allotment option is not exercised).
Talegen intends to sell such shares in the future at such times and on such
terms as it shall determine to be advantageous to it. Prior to the Offering
there has been no market for the Common Stock of the Company. The Company can
make no predictions as the effect, if any, that sales of shares or the
availability of shares for sale will have on the market price prevailing from
time to time. Nevertheless, sales of significant amounts of the Common Stock
in the public market could adversely affect the market price of the common
Stock and could impair the Company's future ability to raise capital through
an offering of its equity securities. See "Risk Factors--Shares Eligible for
Future Sale."

Upon completion of the Offering, the Company will have a total of shares
of Common Stock outstanding. Of these shares, the shares of Common Stock
sold in the Offering will be freely tradeable without restriction under the
Securities Act, except for any such shares which may be acquired by an
"affiliate" of the Company (an "Affiliate") as that term is defined in Rule
144 under the Securities Act, which shares will be subject to the resale
limitations of Rule 144. The remaining shares of Common Stock outstanding
will be "restricted securities" as the term is defined by Rule 144 under the
Securities Act. The Company has granted to Talegen demand and piggyback
registration rights with respect to its shares of Common Stock. See "Certain
Transactions--Registration Rights."

The Company, the Selling Stockholder and Xerox have entered into "lock-up"
agreements with the Underwriters, providing that they will not (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (provided that such shares or securities are
either currently owned by such person or are thereafter acquired from the
Company) or (ii) enter into any swap or other agreement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
such shares of Common Stock, whether any such transaction described in clause
(i) or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise, for a period of 180 days (90 days in the
case of Xerox and the Selling Stockholder) after the date of the Prospectus
without the prior written consent of Morgan Stanley on behalf of the
Underwriters.

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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
FOR NON-U.S. HOLDERS

GENERAL

The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a Non-U.S. Holder. For this purpose, the term "Non-U.S. Holder" is
defined as any person that, for United States federal income tax purposes,
qualifies as: (i) a foreign corporation; (ii) a non-resident alien individual;
or (iii) a foreign partnership or a foreign estate or trust (as such terms are
defined in the Code). This discussion does not address all aspects of United
States federal income and estate taxes and does not deal with foreign, state
and local tax consequences that may be relevant to such Non-U.S. Holders in
light of their personal circumstances, or to certain types of Non-U.S. Holders
which may be subject to special treatment under United States federal income
tax laws (for example, insurance companies, tax exempt organizations,
financial institutions and broker-dealers). Furthermore, this discussion is
based on current provisions of the Code, existing and proposed Treasury
regulations promulgated thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly with retroactive effect. PROSPECTIVE INVESTORS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE,
LOCAL AND NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND
DISPOSING OF SHARES OF COMMON STOCK.

An individual may, subject to certain exceptions, be deemed to be a resident
alien (as opposed to a nonresident alien) by virtue of being present in the
United States for (i) at least 31 days in the current calendar year and (ii)
for an aggregate of at least 183 days during a three-year period ending in the
current calendar year (counting for the purposes of such 183 days all of the
days present in the current year, one-third of the days present in the
immediately preceding year, and one-sixth of the days present in the second
preceding year). U.S. resident aliens are subject to U.S. federal income
taxation as if they were U.S. citizens.

DIVIDENDS

In general, dividends paid to a Non-U.S. Holder of Common Stock will be
subject to United States withholding tax at a 30% rate or such lower rate as
may be provided by an applicable income tax treaty between the United States
and the country of which the Non-U.S. Holder is a tax resident, unless (i) the
dividends are effectively connected with the conduct of a trade or business of
the Non-U.S. Holder within the United States and the Non-U.S. Holder provides
the payor with proper documentation or (ii) if a tax treaty applies, the
dividends are attributable to a U.S. permanent establishment maintained by the
Non-U.S. Holder. Certain certification and disclosure requirements must by
complied with in order to be exempt from withholding under the effectively
connected income exemption or to claim the benefit of an applicable tax treaty
rate. Specifically, a Non-U.S. Holder generally will have to file with the
Company or its dividend paying agent certain forms (including, currently, a
Form 4224 (in the case of effectively connected income) or Form 1001 (in the
case of treaty benefits) and for dividend payments made after December 31,
1998, subject to certain transition rules, a Form W-8 unless, in the case of
dividend payments made outside the United States with respect to an offshore
account, certain documentary evidence procedures are complied with by the
paying agent either directly or through an intermediary) and may also have to
file an exemption or reduced treaty rate certificate or letter in accordance
with the terms of an applicable treaty. Dividends that are effectively
connected with the conduct of a trade or business within the United States or,
if a tax treaty applies, are attributable to a United States permanent
establishment, are subject to United States federal income tax on a net income
basis (that is, after allowance for applicable deductions) at applicable
graduated individual or corporate rates. Any such effectively connected
dividends received by a foreign corporation may, under certain circumstances,
be subject to an additional "branch profits tax" at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty.

Under current United States Treasury regulations (which, subject to certain
transition rules, shall remain in effect with respect to dividend payments
made before January 1, 1999), dividends paid to an address outside the United
States are presumed to be paid to a resident of such country for purposes of
the withholding discussed

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<PAGE>

above (unless the payor has knowledge to the contrary) and, under the current
interpretation of United States Treasury regulations, for purposes of
determining the applicability of a tax treaty rate. However, in the case of
dividends paid after December 31, 1998, a Non-U.S. Holder generally would be
subject to United States withholding tax at a 31% rate under the backup
withholding rules described below, rather than at a 30% rate or a reduced rate
under an income tax treaty, unless certain certification procedures are
complied with, directly or through an intermediary (or, in the case of payments
made outside the United States with respect to an offshore account, the payor
does not have actual knowledge that the payee is a United States Person).

A Non-U.S. Holder of Common Stock eligible for a reduced rate of United
States withholding tax may obtain a refund of any excess amounts withheld by
timely filing an appropriate claim for refund with the Internal Revenue Service
(the "Service").

GAIN ON DISPOSITION OF COMMON STOCK

A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Common Stock unless (i) (a) the gain is effectively connected with a trade or
business conducted by the Non-U.S. Holder within the United States, or (b) if
an income tax treaty applies, the gain is attributable to a United States
permanent establishment maintained by the Non-U.S. Holder, (ii) in the case of
a Non-U.S. Holder who is an individual and holds the Common Stock as a capital
asset, such holder is present in the United States for 183 or more days in the
taxable year of the sale or other disposition and certain other conditions are
met, (iii) the Non-U.S. Holder is subject to tax pursuant to certain provisions
of the Code applicable to United States expatriates, or (iv) the Company is or
has been a "U.S. real property holding corporation" (a "USRPHC") for United
States federal income tax purposes at any time within the shorter of the five-
year period preceding such disposition or the period such Non-U.S. Holder held
the Common Stock. If the Company were, or to become, a USRPHC, gains realized
upon a disposition of Common Stock by a Non-U.S. Holder that did not directly
or indirectly own more than 5% of the Common Stock during the shorter of the
periods described above generally would not be subject to United States federal
income tax so long as the Common Stock is "regularly traded" on an established
securities market within the meaning of applicable United States Treasury
regulations. The Company believes that it has not been, is not currently, and
does not anticipate becoming, a USRPHC for United States federal income tax
purposes.

If a Non-U.S. Holder who is an individual falls under clause (i) above, such
individual generally will be taxed on the net gain derived from a sale under
applicable graduated United States federal income tax rates. If an individual
Non-U.S. Holder falls under clause (ii) above, such individual generally will
be subject to a flat 30% tax on the gain derived from a sale, which may be
offset by certain United States capital losses (notwithstanding the fact that
such individual is not considered a resident alien of the United States). Thus,
individual Non-U.S. Holders who have spent (or expect to spend) more than a de
minimis period of time in the United States in the taxable year to which they
contemplate a sale of Common Stock are urged to consult their tax advisors
prior to the sale in order to determine the likely U.S. tax consequences of
such sale.

If a Non-U.S. Holder that is a foreign corporation falls under clause (i)
above, it generally will be taxed on its net gain under regular graduated
United States federal income tax rates and, in addition, will be subject to the
branch profits tax equal to 30% of its "effectively connected earnings and
profits" within the meaning of the Code for the taxable year, as adjusted for
certain items, unless it qualifies for a lower rate under an applicable income
tax treaty.

FEDERAL ESTATE TAX

Common Stock owned or treated as owned by an individual who is neither a
United States citizen nor a United States resident (as defined for United
States federal estate tax purposes) at the time of death will be included in
the individual's gross estate for United States federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise and, therefore, may
be subject to United States federal estate tax.

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INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

Under United States Treasury regulations, the Company must report annually
to the Service and to each Non-U.S. Holder the amount of dividends paid to
such holder and the tax withheld with respect to such dividends. These
information reporting requirements apply even if withholding was not required
because the dividends were effectively connected with a trade or business in
the United States of the Non-U.S. Holder or withholding was reduced or
eliminated by an applicable income tax treaty. Copies of the information
returns reporting such dividends and withholding may also be made available to
the tax authorities in the country in which the Non-U.S. Holder is a resident
under the provisions of an applicable income tax treaty or agreement.

United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments made to persons that fail to
furnish certain information in accordance with the United States information
reporting requirements) generally will not apply to (i) dividends paid to Non-
U.S. Holders that are already subject to the 30% withholding discussed above
or (ii) under current United States Treasury regulations, dividends paid
before January 1, 1999 to a Non-U.S. Holder at an address outside of the
United States. However, in the case of dividends paid after December 31, 1998,
a Non-U.S. Holder generally would be subject to backup withholding at a 31%
rate, unless certain certification procedures are complied with, directly or
through an intermediary (or, in the case of payments made outside the United
States with respect to an offshore account, the payor does not have actual
knowledge that the payee is a United States person.

Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of Common Stock
to beneficial owners that are not "exempt recipients" and that fail to provide
in the manner required certain identifying information.

In general, backup withholding and information reporting will not apply to a
payment of the gross proceeds of a sale of Common Stock effected at a foreign
office of a broker. If, however, such broker is, for United States federal
income tax purposes, (i) a U.S. person, (ii) a controlled foreign corporation,
(iii) a foreign person, 50% or more of whose gross income for certain periods
is derived from activities that are effectively connected with the conduct of
a trade or business in the United States, or (iv) for payments made after
December 31, 1998, a foreign partnership with certain U.S. connections, such
payments will not be subject to backup withholding but will be subject to
information reporting, unless (a) such broker has documentary evidence in its
records that the beneficial owner is a Non-U.S. Holder and certain other
conditions are met, or (b) the beneficial owner otherwise establishes an
exemption (for example, by providing the foreign broker that effected the sale
with a Form W-8). However, backup withholding will apply to such payments if
the foreign broker has actual knowledge that the payee is a United States
person and such payee has not provided all necessary information to the broker
for purposes of the information reporting requirements. Given the complexity
of the information reporting and backup withholding rules, as well as the
existence of two separate sets of United States Treasury regulations (either
of which may apply, depending upon the date a particular payment is made),
Non-U.S. Holders should consult their tax advisors regarding the application
of such rules to their particular situations, the availability of an exemption
therefrom, and the procedure for obtaining such an exemption, if available.

Payment by a United States office of a broker of the proceeds of a sale of
Common Stock is subject to both backup withholding and information reporting
unless the beneficial owner certifies under penalties of perjury that it is a
Non-U.S. Holder (for example, by providing the U.S. broker that effected the
sale with a Form W-8), or otherwise establishes an exemption. Backup
withholding is not an additional tax. Any amounts withheld under the backup
withholding rules will be allowed as a refund or a credit against such
holder's U.S. federal income tax liability provided the required information
is furnished in a timely manner to the Service.

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<PAGE>

UNDERWRITERS

Under the terms and subject to the conditions in an Underwriting Agreement
dated the date hereof (the "Underwriting Agreement"), the U.S. Underwriters
named below for whom Morgan Stanley & Co. Incorporated, CIBC Oppenheimer
Corp., Goldman, Sachs & Co. and Smith Barney Inc. are acting as U.S.
Representatives, and the International Underwriters named below for whom
Morgan Stanley & Co. International Limited, CIBC Oppenheimer LTD, Goldman
Sachs International and Smith Barney Inc. are acting as International
Representatives, have severally agreed to purchase, and the Selling
Stockholder has agreed to sell to them, severally, the respective number of
shares of Common Stock set forth opposite the names of such Underwriters
below:

<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated..............................
CIBC Oppenheimer Corp. ........................................
Goldman, Sachs & Co. ..........................................
Smith Barney Inc...............................................
----
Subtotal......................................................
----
International Underwriters:
Morgan Stanley & Co. International Limited.....................
CIBC Oppenheimer LTD...........................................
Goldman Sachs International....................................
Smith Barney Inc...............................................
----
Subtotal......................................................
----
Total.........................................................
====
</TABLE>

The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively
referred to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all of the shares of Common Stock offered hereby (other than
those shares covered by the U.S. Underwriters' over-allotment option described
below) if any such shares are taken.

Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions, (i)
it is not purchasing any Shares (as defined herein) for the account of anyone
other than a United States or Canadian Person (as defined herein) and (ii) it
has not offered or sold, and will not offer or sell, directly or indirectly,
any Shares or distribute any prospectus relating to the Shares outside the
United States or Canada or to anyone other than a United States or Canadian
Person. Pursuant to the Agreement between U.S. and International Underwriters,
each International Underwriter has represented and agreed that, with certain
exceptions, (i) it is not purchasing any Shares (as defined herein) for the
account of any United States or Canadian Person and (ii) it has not offered or
sold, and will not offer or sell, directly or indirectly, any Shares or
distribute any prospectus relating to the Shares within the United States or
Canada or to a United States or Canadian Person. With respect to any
Underwriter that is a U.S. Underwriter and an International Underwriter, the
foregoing representations and agreements (i) made by it in its capacity as a
U.S. Underwriter apply only to it in its capacity as a U.S. Underwriter and
(ii) made by it in its capacity as an International Underwriter apply only to
it in its capacity as an International Underwriter. The foregoing limitations
do not apply to stabilization transactions or to certain other transactions
specified in the Agreement between U.S. and International Underwriters. As
used herein, "United States or Canadian Person" means any national or resident
of the United States or Canada, or any corporation, pension, profit-sharing or
other trust or

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<PAGE>

other entity organized under the laws of the United States or Canada or of any
political subdivision thereof (other than a branch located outside the United
States and Canada of any United States or Canadian Person), and includes any
United States or Canadian branch of a person who is otherwise not a United
States or Canadian Person. All shares of Common Stock to be purchased by the
Underwriters under the Underwriting Agreement are referred to herein as the
"Shares."

Pursuant to the Agreement between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and International Underwriters of
any number of Shares as may be mutually agreed. The per share price of any
Shares sold shall be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per
share amount of the concession to dealers set forth below.

Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has
agreed not to offer or sell, any Shares, directly or indirectly, in any
province or territory of Canada or to, or for the benefit of, any resident of
any province or territory of Canada in contravention of the securities laws
thereof and has represented that any offer or sale of Shares in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus
in the province or territory of Canada in which such offer or sale is made.
Each U.S. Underwriter has further agreed to send to any dealer who purchases
from it any of the Shares a notice stating in substance that, by purchasing
such Shares, such dealer represents and agrees that it has not offered or
sold, and will not offer or sell, directly or indirectly, any of such Shares
in any province or territory of Canada or to, or for the benefit of, any
resident of any province or territory of Canada in contravention of the
securities laws thereof and that any offer or sale of Shares in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus
in the province or territory of Canada in which such offer or sale is made,
and that such dealer will deliver to any other dealer to whom it sells any of
such Shares a notice containing substantially the same statement as is
contained in this sentence.

Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not
offered or sold and, prior to the date six months after the closing date from
the sale of the Shares to the International Underwriters, will not offer or
sell any Shares to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing
of investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (ii) it has complied and will comply
with all applicable provisions of the Financial Services Act 1986 with respect
to anything done by it in relation to the Shares in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and
will only issue or pass on in the United Kingdom any document received by it
in connection with the offering of the Shares to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996, or is a person to whom such document
may otherwise lawfully be issued or passed on.

Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to, or for the account of any resident thereof, any of the Shares acquired in
connection with the distribution contemplated hereby, except for offers or
sales to Japanese International Underwriters or dealers and except pursuant to
any exemption from the registration requirements of the Securities and
Exchange Law and otherwise in compliance with applicable provisions of
Japanese law. Each International Underwriter has further agreed to send to any
dealer who purchases from it any of the Shares a notice stating in substance
that, by purchasing such Shares, such dealer represents and agrees that it has
not offered or sold, and will not offer or sell, any of such Shares, directly
or indirectly, in Japan or to, or for the account of any resident thereof,
except for offers or sales to Japanese International Underwriters or dealers
and except pursuant to any exemption from the registration requirements of the
Securities and Exchange Law and otherwise in compliance with applicable
provisions of Japanese law, and that such dealer will send to any other dealer
to whom it sells any of such Shares a notice containing substantially the same
statement as is contained in this sentence.

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<PAGE>

The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the
cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in
excess of $ a share to other Underwriters or to certain dealers. After the
initial offering of the shares of Common Stock, the offering price and other
selling terms may from time to time be varied by the Representatives.

The Selling Stockholder has granted to the U.S. Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
aggregate of additional shares of Common Stock at the public offering
price set forth on the cover page hereof, less underwriting discounts and
commissions. The U.S. Underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, made in connection with the
offering of the shares of Common Stock offered hereby. To the extent such
option is exercised, each U.S. Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares of Common Stock as the number set forth next to such U.S.
Underwriter's name in the preceding table bears to the total number of shares
of Common Stock set forth next to the names of all the U.S. Underwriters in
the preceding table.

The Underwriters have informed the Selling Stockholder that they do not
intend sales to discretionary accounts to exceed 5% of the total number of
shares of Common Stock offered by them.

Application has been made to have the Common Stock approved for listing on
under the symbol " ."

The Company, the Selling Stockholder and Xerox have agreed that they will
not, (a) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock (provided that such shares or
securities are either currently owned by such person or are thereafter
acquired from the Company) or (b) enter into any swap or other agreement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of such shares of Common Stock, whether any such transaction
described in clause (a) or (b) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise, for a period of 180 days
(90 days in the case of the Selling Stockholder and Xerox) after the date of
the Prospectus without the prior written consent of Morgan Stanley on behalf
of the Underwriters, other than (i) the sale to the Underwriters of the shares
of Common Stock offered hereby and (ii) the issuance by the Company of options
to purchase Common Stock under existing benefit plans of the Company and (iii)
the issuance by the Company of shares of Common Stock upon the exercise of an
option sold or granted pursuant to existing benefit plans of the Company that
are outstanding on the date of the Prospectus.

In order to facilitate the Offerings of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the Offering, creating a short position in the Common Stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the Common Stock, the Underwriters may bid for, and purchase
shares of Common Stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an Underwriter or a dealer for
distributing the Common Stock in the Offering, if the syndicate repurchases
previously distributed Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in
these activities, and may end any of these activities at any time.

The Company, the Selling Stockholder, Xerox Corporation and the Underwriters
have agreed to indemnify each other against certain liabilities, including
liabilities under the Securities Act.

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<PAGE>

At the request of CFI, the Underwriters are reserving up to shares of
Common Stock (the "Reserved Shares") offered in the U.S. Offering for sales to
employees, officers and directors of the Company and certain Custom Agents
(the "Directed Share Program"). The number of shares of Common Stock available
for sale to the general public will be reduced to the extent such persons
purchase such Reserved Shares. Any Reserved Shares not so purchased will be
offered by the Underwriters to the general public on the same basis as the
other shares of Common Stock offered hereby.

PRICING OF THE OFFERING

Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiation between
the Selling Stockholder and the U.S. Representatives. Among the factors to be
considered in determining the initial public offering price will be the
Company's record of operations, the Company's current financial condition and
future prospects, the experience of its management, the economics of the
industry in general, the general condition of the equity securities market and
the market prices of similar securities of companies considered comparable to
the Company and such other factors as may be deemed relevant. There can be no
assurance that a regular trading market for the shares of Common Stock will
develop after the Offering or, if developed, that a public trading market can
be sustained. There can be no assurance that the prices at which the Common
Stock will sell in the public market after the Offering will not be lower than
the price at which it is issued by the Underwriters in the Offering.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Shearman & Sterling, New York, New York and for the
Underwriters by LeBoeuf, Lamb, Greene & MacRae, L.L.P., a limited liability
partnership including professional corporations, New York, New York. LeBoeuf,
Lamb, Greene & MacRae, L.L.P. has represented Talegen, its subsidiaries
(including the Company) and affiliates in connection with various matters.

EXPERTS

The consolidated financial statements and financial statement schedules of
the Company and its subsidiaries, as of December 31, 1996 and 1995, and for
each of the years in the three-year period ended December 31, 1996, included
herein and elsewhere in the Registration Statement, have been included herein
and in the Registration Statement in reliance upon the reports of KPMG Peat
Marwick LLP, independent certified public accountants, appearing herein and
elsewhere in the Registration Statement, and upon the authority of said firm
as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus is a part and
which term shall encompass all amendments, exhibits and schedules thereto) on
Form S-1 under the Securities Act of 1933 (the "Securities Act") with respect
to the shares of Common Stock offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement, certain parts of
which are omitted from this Prospectus in accordance with the rules and
regulations of the Commission. For further information about the Company and
the securities offered hereby, reference is made to the Registration
Statement. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete
and, in each instance, reference is made to the copy of such contract,
agreement or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in its entirety by such reference.

90
<PAGE>

Upon completion of the Offering, the Company will be subject to the
information and reporting requirements of the Exchange Act and in accordance
therewith, will be required to file reports, proxy statements and other
information with the Commission. The Registration Statement, reports, proxy
statements and other information filed by the Company with the Commission, may
be inspected and copied at the public reference facilities maintained by 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 Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Such material may also be accessed electronically by means of the
Commission's home page on the Internet at http://www.sec.gov.

91
<PAGE>

GLOSSARY OF SELECTED INSURANCE TERMS

Accident year................ The annual accounting period in which loss
events occurred, regardless of when the losses
are actually reported, recorded or paid.

Admitted assets.............. Assets of an insurer permitted by a state to be
taken into account in determining the insurer's
financial condition for statutory purposes.

Admitted insurer............. A company authorized to transact insurance
business within a state whether as licensed
insurer or on a surplus lines basis.

Alternative market........... The segment of the insurance market which 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.

A.M. Best.................... A.M. Best Company, Inc. is a rating agency and
publisher for the insurance industry.

Assigned risk pools.......... Reinsurance pools which cover risks for those
unable to purchase insurance in the voluntary
market because the risk is too great or rate
adequacy has reduced the supply of insurance.
The costs of the risks associated with these
pools are charged back to insurance carriers in
proportion to their direct writings.

Assume....................... To accept from the primary insurer or reinsurer
all or a portion of the liability underwritten
by such primary insurer or reinsurer.

Assumed reinsurance.......... Insurance liabilities acquired from a ceding
company through reinsurance.

Assumption reinsurance....... A transaction whereby the ceding company
transfers its entire obligation under the
policy to the reinsurer, who becomes liable for
all obligations under the policy, including
collecting premiums and paying benefits.

Attachment point............. The amount of losses above which excess of loss
reinsurance becomes operative.

Broker....................... One who negotiates contracts of insurance or
reinsurance, receiving a commission from the
insurer or reinsurer for placement and other
services rendered.

Calendar year................ The calendar year in which loss events were
recorded, regardless of when the losses are
actually reported or paid.

Capacity..................... The percentage of surplus, or the dollar amount
of exposure, that an insurer or reinsurer is
willing or able 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...................... A reinsurance company formed by CFI in which
Custom Agents that meet certain eligibility
requirements invest their own capital and hold
approximately 90% of the shares while CFI holds
the remainder of the shares.

G-1
<PAGE>

Case reserves................
Loss reserves established with respect to
outstanding, individually reported claims.

Casualty insurance........... Insurance which 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 event triggering a claim, usually
involving risks such as fire, earthquake,
windstorm, explosion and other similar events.

Catastrophe loss............. Loss and directly identified loss expenses from
catastrophes.

Catastrophe reinsurance...... A form of excess of loss property reinsurance
which, 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."

Claim........................ Request by an insured for indemnification by an
insurance company for loss incurred from an
insured peril.

Combined ratio............... The sum of the loss and loss expense ratio, the
underwriting expense ratio and the dividend
ratio, each determined in accordance with GAAP
or SAP, as applicable. A combined ratio under
100% generally indicates an underwriting
profit. A combined ratio over 100% generally
indicates an underwriting loss.

Commercial lines............. The various kinds of insurance which are
written for businesses.

Commutation; commuted........ An agreement providing for the payment and
complete discharge of all obligations between
parties to a reinsurance agreement, including
future obligations.

Deductible................... The amount of loss that an insured retains.

Direct premiums written...... The amounts charged by a primary insurer to
insureds in exchange for coverages provided in
accordance with the terms of an insurance
contract generally excluding any assumed
reinsurance premiums.

Dividend ratio............... Relationship of policyholder dividends to net
premiums earned.

Excess liability............. Additional casualty coverage above the first
layer.

G-2
<PAGE>

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.

Fidelity and surety Insurance which guarantees performance of an
programs.................... obligation or indemnifies for loss due to
embezzlement or wrongful abstraction of money,
securities or other property.

Generally accept accounting
principles ("GAAP")......... The method of accounting used for reporting to
shareholders as defined by the American
Institute of Certified Public Accountants or
the Financial Accounting Standards Board.

Gross premiums written....... The sum of direct premiums written and
reinsurance premiums assumed during a given
period.

Guaranteed cost products..... An insurance policy where the premiums charged
will not be adjusted for actual loss experience
during the covered period.

Guaranty fund................ State-regulated mechanism which is financed by
assessing insurers doing business in those
states. Should insolvencies of an insurer
occur, these funds are available to meet some
or all of the insolvent insurer's obligations
to policyholders.

High or large deductible An insurance policy where the customer assumes
policy...................... at least $25,000 or more of each loss.

Incurred but not reported
("IBNR") claims............. Claims under policies that have been incurred
but have not yet been reported to the insurer
by the insured.

Incurred but not reported
("IBNR") reserves........... Reserves for estimated losses and loss expenses
which have been incurred but not yet reported
to the insurer.

Indemnity reinsurance........ A transaction whereby the reinsurer agrees to
indemnify the ceding company against all or
part of the loss that the latter may sustain
under the policies it issued that are being
reinsured. The ceding company remains primarily
liable as the direct insurer on all risks
ceded.

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.

Insurance Regulatory
Information System ("IRIS") Financial ratios calculated by the NAIC to
ratios...................... assist state insurance departments in
monitoring the financial condition of insurance
companies.

Internal operating All internal costs associated with acquiring
expenses.................... and writing a policy, internal claim servicing
costs which are not assigned to a specific
policy and certain general and administrative
costs.

G-3
<PAGE>

Known loss costs.............
Loss and loss adjustment expenses commonly
expected for a given type of risk based on
historical and projected experience. In a
highly competitive market, an underwriter may
price a policy unprofitably, i.e. with an
insufficient provision for known loss costs, in
order to maintain or increase market share.

Leakage...................... The overpayment of a loss or loss adjustment
expense as a result of less-than-optimal
handling of a claim or failure to collect a
payment due from responsible third party, which
is determined by subsequent auditing of the
claim file.

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 The ratio of incurred losses and loss expenses
ratio....................... to net premiums earned.

Loss and loss expense A balance sheet liability for unpaid losses and
reserves.................... loss expenses which represents estimates of
amounts needed to pay losses and expenses,
including legal fees and the expense of
administering the claims adjustment process,
both on claims which have been reported but
have not yet been resolved and on claims which
have occurred but have not yet been reported.

Loss expenses................ The expenses of settling claims, including
legal and other fees and the portion of
internal operating expenses allocated to claim
settlement costs.

Loss reserves................ Liabilities 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 consist
of case reserves and IBNR reserves.

Losses and loss expenses..... The sum of losses and loss expenses incurred.

Losses incurred.............. The total losses sustained by an insurance
company under a policy or policies, whether
paid or unpaid. Losses incurred include a
provision for IBNR.

Middle market................ Describes the insureds and products targeted by
CFI, generally mid-sized companies and standard
commercial lines such as workers' compensation,
multiple peril, automobile, general liability
and umbrella. In most cases CFI does not
compete for accounts generating annual premiums
of less than $10,000, nor does CFI actively
seek business from Fortune 500(R) companies.

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 and the District
of Columbia organized to promote

G-4
<PAGE>

consistency of regulatory practice and
statutory accounting standards throughout the
United States.

Net premiums earned.......... The portion of premiums written that is
recognized for accounting purposes as revenue
during a period, i.e., the portion of premiums
written that applies to expired policies after
the assumption and cessation of reinsurance.

Net premiums written......... Gross premiums written less premiums ceded to
reinsurers.

Novation.....................
The substitution of an insurer (assuming
company) for the original issuing insurer
(ceding company) under an insurance policy,
whereby the assuming company accepts all of the
rights and liabilities of the insurer under the
policy from the effective date of the novation
and the ceding company is relieved of any
further obligation under the novated policy.

Policyholders' 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.
Policyholder surplus is also referred to as
"statutory surplus," "surplus" or "surplus as
regards policyholders" for statutory accounting
purposes.

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.

Premiums..................... The amount charged during the year on policies
and contracts issued, renewed or reinsured by
an insurance company.

Probable maximum loss PML is the underwriter's estimate of the
("PML")... largest loss expected to occur and is important
in considering reinsurance needs.

Property insurance...........
Insurance that provides coverage to a person
with an insurable interest in tangible property
for that person's 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.

Rate of renewal/retention
ratio....................... Current period renewal accounts or policies as
a percentage of the prior period accounts or
policies.

Rates........................ Amounts charged per unit of insurance.

Redundancy (deficiency)......
Estimates in reserves change as more
information becomes known about the frequency
and severity of claims for each year. A
redundancy (deficiency) exists when the
original liability estimate is greater (less)
than the re-estimated liability. The cumulative
redundancy (deficiency) is the aggregate net
change in estimates over time subsequent to
establishing the original liability estimate.

G-5
<PAGE>

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.

Reserves or loss reserves.... Estimated liabilities established by an insurer
to reflect the estimated costs of claims
payments that the insurer will ultimately be
required to pay with respect to insurance it
has written.

Residual market (involuntary Insurance market which provides coverage for
business)................... risks unable to purchase insurance 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.

Risk-based capital ("RBC")... A measure adopted by the NAIC for assessing the
minimum statutory capital requirements of
insurers.

Risk retention............... The amount or portion of a risk an insurer
retains for its own account after ceded
reinsurance. Losses above the stated retention
level are collectible from the reinsurer. The
retention level may be stated as a percentage
or dollar amount.

Salvage...................... The amount of money an insurer recovers through
the sale of property transferred to the insurer
as a result of a loss payment.

Second injury fund........... The purpose of a second injury fund is to
encourage employers to hire and retain workers
who have pre-existing physical impairments and
to provide economic relief to such employers
should a second injury occur. The cost is
shared by the insurance industry, funded
through assessments to insurance companies
based on either premiums or losses.

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.

G-6
<PAGE>

Standard & Poor's............
Standard & Poor's Ratings Group is a rating
agency and publisher for the business and
corporate industry. It is a division of McGraw-
Hill Companies, Inc.

Standard policy forms........ Self-contained pre-printed policy language used
when a large number of insureds face similar
loss exposures.

Statutory accounting
practices ("SAP")........... The accounting principles required by statute,
regulation, or rule, or permitted by specific
approval by the insurance department in the
company's state of domicile for recording
transactions and preparing financial
statements.

Statutory surplus............ As determined under SAP, the amount remaining
after all liabilities, including loss reserves,
are subtracted from all admitted assets. This
sum is regarded as financial protection to
policyholders in the event an insurance company
suffers unexpected or catastrophic losses.

Structured settlements....... Periodic payments to an injured person or
survivor for a determined number of years or
for life, typically in settlement of a claim
under a liability policy.

Subrogation.................. A principle of law incorporated in insurance
policies, which enables an insurance company,
after paying a loss to its insured, to recover
the amount of the loss from another who is
legally liable for it.

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 a specified type or category
of risks defined in a reinsurance agreement (a
"treaty") between a ceding company and a
reinsurer. Typically, in treaty reinsurance,
the ceding company is obligated to cede, and
the reinsurer is obligated to accept, specific
risks originally underwritten by the ceding
company.

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.

Unassigned funds (surplus)... The undistributed and unappropriated amount of
policyholder surplus.

Underwriter.................. An individual who examines, accepts or rejects
risks and classifies accepted risks in order to
charge an appropriate premium for each accepted
risk. The underwriter is expected to select
business that will produce an average risk of
loss no greater than that anticipated for the
class of business.

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.

G-7
<PAGE>

Underwriting expense ratio...
The ratio of underwriting, acquisition and
other insurance expenses incurred to net
premiums earned. (For statutory purposes, the
ratio of underwriting expenses incurred to net
premiums written.)

Underwriting expenses........ All costs associated with acquiring and
servicing business, including commissions,
premium taxes, general and administrative
expenses.

Underwriting profit or
underwriting loss results... The pre-tax profit or loss experienced by a
property and casualty insurance company after
deducting loss and loss adjustment expenses,
underwriting expenses and policyholder
dividends from net earned premiums. This profit
or loss calculation includes reinsurance
assumed and ceded but excludes investment
income.

Unearned premium............. The portion of premiums written that is
allocable to the unexpired portion of the
policy term.

Voluntary market.............
The market in which a person seeking insurance
obtains coverage without the assistance of
residual market mechanisms.

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.

G-8
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Auditors for Crum & Forster Holdings, Inc.......... F-2
Consolidated Balance Sheets of Crum & Forster Holdings, Inc. as of
December 31, 1995 and December 31, 1996................................. F-3
Consolidated Statements of Operations of Crum & Forster, Holdings, Inc.
for the years ended December 31, 1994, December 31, 1995, and December
31, 1996................................................................ F-4
Consolidated Statements of Shareholder's Equity of Crum & Forster
Holdings, Inc. for the years ended December 31, 1994, December 31, 1995,
and December 31, 1996................................................... F-5
Consolidated Statements of Cash Flows of Crum & Forster Holdings, Inc.
for the years ended December 31, 1994, December 31, 1995, and December
31, 1996................................................................ F-6
Notes to Consolidated Financial Statements............................... F-7
Consolidated Balance Sheet of Crum & Forster Holdings, Inc. as of
September 30, 1997 (unaudited).......................................... F-25
Consolidated Statements of Operations of Crum & Forster Holdings, Inc.
for the nine month periods ended September 30, 1996 and September 30,
1997 (unaudited)........................................................ F-26
Consolidated Statement of Shareholder's Equity of Crum & Forster
Holdings, Inc. for the nine month period ended September 30, 1997
(unaudited)............................................................. F-27
Consolidated Statements of Cash Flows of Crum & Forster Holdings, Inc.
for the nine month periods ended September 30, 1996 and September 30,
1997(unaudited)......................................................... F-28
Notes to Interim Financial Statements (unaudited)........................ F-29
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

To The Board of Directors and Shareholder
of Crum & Forster Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of Crum &
Forster Holdings, Inc., and subsidiaries as of December 31, 1995 and 1996, and
the related consolidated statements of operations, shareholder's equity and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's 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 aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of Crum & Forster
Holdings, Inc. and subsidiaries at December 31, 1995 and 1996, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1996, in conformity with generally accepted
accounting principles.

/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP

Short Hills, New Jersey
January 14, 1997

F-2
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1995 AND 1996
(IN MILLIONS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost: 1995 --
$237; 1996 -- $1,079)...................................... $ 236 $1,090
Short-term investments, at amortized cost which approximates
fair value.................................................. 2,612 1,907
------ ------
Total investments.......................................... 2,848 2,997
Cash........................................................... 3 1
Accrued investment income...................................... 29 20
Receivables:
Premiums (net of reserve for uncollectible receivables:
1995 -- $15; 1996 -- $17)................................... 369 366
Other........................................................ 32 20
Reinsurance recoverables....................................... 1,156 1,076
Prepaid reinsurance premiums................................... 42 41
Current income taxes receivable................................ 3 27
Deferred policy acquisition costs.............................. 98 92
Deferred income taxes.......................................... 213 228
Buildings and equipment........................................ 54 55
Due from affiliates............................................ 187 184
Cost of acquired business in excess of net assets.............. 157 --
Other assets................................................... 56 77
------ ------
Total assets............................................... $5,247 $5,184
====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Unpaid losses and loss expenses.............................. $3,240 $3,417
Unearned premiums............................................ 447 444
Debt......................................................... 132 115
Dividends to policyholders................................... 11 15
Accounts payable and accrued liabilities..................... 204 158
------ ------
Total liabilities.......................................... 4,034 4,149
------ ------
Shareholder's equity:
Common stock and additional paid-in capital (includes $1 par
value common stock, 1,000 shares authorized, issued and
outstanding)................................................ 1,050 1,105
Retained earnings (accumulated deficit)...................... 164 (77)
Net unrealized (losses) gains on investment securities....... (1) 7
------ ------
Total shareholder's equity................................. 1,213 1,035
------ ------
Total liabilities and shareholder's equity................. $5,247 $5,184
====== ======
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN MILLIONS)

<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Revenues:
Net premiums earned.................................. $ 854 $ 930 $ 959
Net investment income................................ 134 158 171
Net realized investment gains........................ 11 48 2
Other income......................................... 15 15 10
------ ------ ------
Total revenues..................................... 1,014 1,151 1,142
------ ------ ------
Losses and expenses:
Losses and loss expenses............................. 605 767 928
Underwriting, acquisition and other insurance ex-
penses.............................................. 312 307 325
Dividends to policyholders........................... (4) 6 11
Interest expense..................................... 1 10 8
Goodwill write-off................................... -- -- 151
Other expenses....................................... 7 13 10
------ ------ ------
Total losses and expenses.......................... 921 1,103 1,433
------ ------ ------
Earnings (loss) from operations before income tax-
es................................................ 93 48 (291)
Income tax provision (benefit)......................... 23 (17) (47)
------ ------ ------
Net earnings (loss)................................ $ 70 $ 65 $ (244)
====== ====== ======
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY

YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN MILLIONS)

<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Common stock and additional
paid-in capital:
Balance at beginning of
year....................... $1,038 $1,050 $1,050
Capital adjustments......... 9 -- --
Capital contribution........ 3 -- 55
------ ------ ------
Balance at end of year.... 1,050 1,050 1,105
------ ------ ------
Retained earnings (accumulated
deficit):
Balance at beginning of
year....................... 232 121 164
Net earnings (loss)......... 70 65 (244)
Dividends to shareholder.... (179) (21) --
Minimum pension liability
adjustment................. (2) (1) 3
------ ------ ------
Balance at end of year.... 121 164 (77)
------ ------ ------
Net unrealized (losses) gains
on investment securities:
Balance at beginning of
year....................... 3 (115) (1)
Change in unrealized
(losses) gains............. (120) 114 12
Change in deferred income
taxes...................... 2 -- (4)
------ ------ ------
Balance at end of year.... (115) (1) 7
------ ------ ------
Cumulative translation
adjustments:
Balance at beginning of
year....................... (5) (5) --
Change in translation
adjustments, net........... -- 5 --
------ ------ ------
Balance at end of year.... (5) -- --
------ ------ ------
Total shareholder's
equity................. $1,051 $1,213 $1,035
====== ====== ======
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN MILLIONS)

<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)............................... $ 70 $ 65 $ (244)
------- ------- -------
Adjustments to reconcile net earnings (loss) to
cash flows from operating activities:
Net realized investment gains................... (11) (48) (2)
Depreciation and amortization................... 31 32 24
Goodwill write-off.............................. -- -- 151
Changes in:
Unpaid losses and loss expenses............... (201) 292 177
Unearned premiums............................. 19 40 (3)
Other liabilities............................. (49) 29 (42)
Underwriting assets........................... 115 (245) 87
Deferred policy acquisition costs............. (5) (14) 6
Income tax provision (benefit).................. 23 (17) (47)
Receipts for income taxes....................... 202 5 4
Other........................................... (3) (1) 5
------- ------- -------
Total adjustments........................... 121 73 360
------- ------- -------
Net cash provided from operating
activities................................. 191 138 116
------- ------- -------
Cash flows from investing activities:
Cash used for the purchase of fixed maturities and
equity securities................................ (1,012) (424) (1,083)
Proceeds from sale or maturity of fixed maturities
and equity securities............................ 146 2,596 238
Decrease (increase) in short-term investments..... 611 (2,265) 705
Proceeds from Xerox Financial Services, Inc.
notes............................................ 89 -- --
Proceeds from sale of fixed assets................ -- 14 --
Purchase of fixed assets.......................... (9) (22) (16)
------- ------- -------
Net cash used in investing activities....... (175) (101) (156)
------- ------- -------
Cash flows from financing activities:
Dividends to shareholder.......................... (173) (21) --
Repayment of debt................................. -- (18) (132)
Proceeds from issuance of debt.................... 150 -- 115
Capital contributions............................. -- -- 55
Capital adjustments............................... 9 -- --
------- ------- -------
Net cash (used in) provided by financing
activities................................. (14) (39) 38
------- ------- -------
Cash increase (decrease) during the year............ 2 (2) (2)
Cash at beginning of year........................... 3 5 3
------- ------- -------
Cash at end of year................................. $ 5 $ 3 $ 1
======= ======= =======
Supplemental disclosure of cash flow information:
Interest paid..................................... $ 1 $ 9 $ 9
======= ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. BASIS OF CONSOLIDATION
Crum & Forster Holdings, Inc. (the Company) is a wholly-owned subsidiary of
Talegen Holdings, Inc. (Talegen). Talegen 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 which
include Talegen and the Company. In connection with this strategy, during 1992
and 1993, Talegen completed a major recapitalization and restructuring of its
business operations into seven stand-alone insurance operating groups (one of
which is the Company) each with an independent holding company that, in turn,
owns one or more insurance companies.

The Company is a national writer of a broad array of commercial property and
casualty insurance distributed through a select network of independent agents
and brokers. The Company's focus and operations are highly decentralized
through 20 regional offices located throughout the United States. The
consolidated financial statements include the accounts of the Company and all
of its subsidiaries including five insurance companies (the Insurance
Companies) and two non-insurance companies. All significant intercompany
transactions have been eliminated.

B. INVESTMENTS
Fixed maturities and equity securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses on
investment securities net of tax charged or credited as a separate component
of shareholder's equity.

Fair values for fixed maturities are based on quoted market prices or dealer
quotations. Where quoted market prices or dealer quotations are not available,
as is the case for certain mortgage and other asset-backed securities, fair
values are measured utilizing quoted market prices for similar securities or
by using discounted cash flow methods. Amortized cost for fixed maturities is
historical cost adjusted for the amortization of premiums and discounts, which
are amortized using the effective interest method over the estimated remaining
term of the securities, adjusted for anticipated prepayments.

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
statement of operations is made only when the decline in the fair value of
fixed maturities and equity securities is other than temporary. Investment
income is recorded when earned.

C. PREMIUMS
Premiums are generally earned pro-rata over the period in which the
coverages are provided. Unearned premiums represent the portion of premiums
written that is applicable to the unexpired terms of policies in force. Earned
premiums include estimates of certain premiums due, including audits and
adjustments on retrospectively rated policies. Prepaid reinsurance premiums
represent the unexpired portion of premiums ceded to reinsurers. The reserve
for uncollectible premiums is determined principally on the basis of past
collection experience.

D. POLICY ACQUISITION COSTS
Policy acquisition costs are comprised primarily of commissions, premium
taxes and that portion of internal expenses that vary with and are related to
the acquisition of new and renewal insurance policies. These costs are
deferred by major product group and 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 costs include $235 million, $232 million and $244 million of
policy acquisition costs which were amortized during 1994, 1995 and 1996,
respectively.

F-7
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1. BASIS OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--
(CONTINUED)

E. LOSSES AND LOSS EXPENSES
Losses and loss expenses are charged to expense as incurred. The reserves
for unpaid losses and loss expenses are determined on the basis of claim
adjusters' evaluations and other estimates, including those for incurred but
not reported (IBNR) losses, future salvage and subrogation recoveries and
discounting of long-term disability reserves for workers' compensation claims
at a rate of 5%. 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 Company
continually monitors gross and net loss and loss expense reserves of its
insurance companies for business written in both the current and prior years,
and Talegen 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 the 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.

G. PENSION, POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The cost of pension, postretirement 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 the Company's assets and
liabilities. Such temporary differences are primarily due to tax basis
discount on unpaid losses and loss expenses, uncollectible reinsurance,
adjustment for unearned premiums, tax benefits of net operating loss
carryforwards and deferred policy acquisition costs. Additionally, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that the rate changes. 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. BUILDINGS AND EQUIPMENT
Buildings and equipment are carried at cost and are shown net of accumulated
depreciation. Buildings, equipment and capitalized software are depreciated on
a straight-line basis over 40 years, 3 to 5 years and 3 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,
1995 and 1996, accumulated depreciation on buildings and equipment was $50
million and $56 million, respectively.

J. DIVIDENDS TO POLICYHOLDERS
Dividends to policyholders are charged to operations as the related premiums
are earned and include a provision for undeclared dividends to policyholders.

F-8
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1. BASIS OF CONSOLIDATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--
(CONTINUED)

K. COST OF ACQUIRED BUSINESS IN EXCESS OF NET ASSETS (GOODWILL)
Goodwill is reported net of accumulated amortization and its recoverability
is regularly reviewed by the Company's management. In the fourth quarter of
1996, following an announcement by Xerox that a transaction to sell Talegen to
investor groups led by Kohlberg Kravis Roberts & Co. had been terminated, the
Company was placed for sale. Concurrently, the carrying values of the
underlying assets were reevaluated according to
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
As a result, the remaining $151 million of unamortized goodwill at December
31, 1996 attributable to Xerox's acquisition of the Company was written off
and charged to expense.

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
historical data, are ultimately based on management's reasoned expectations of
future events. In addition, the Company's realization of deferred tax assets
is dependent on generating sufficient future taxable income. It is reasonably
possible that those 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.

M. RESTATEMENT OF FINANCIAL STATEMENTS
In connection with a proposed public offering of the Company's common stock,
goodwill previously carried at Talegen, has been retroactively pushed down to
the separate financial statements of the Company and the Company retroactively
conformed its generally accepted accounting principles and statutory methods
of recognizing discount on loss reserves for the workers' compensation line of
business. The effects of recording goodwill and discounting loss reserves
increased retained earnings at December 31, 1992 by $175 million and $10
million, respectively.

N. RECLASSIFICATIONS
Certain reclassifications, which were not material, have been made to the
1994 and 1995 consolidated financial statements to conform with the 1996
presentation.

F-9
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. INVESTMENTS AND INVESTMENT INCOME
The components of the investment portfolio at December 31, 1995 and 1996
follow (in millions):

<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED INVESTMENT INVESTMENT FAIR
1995 COST GAINS LOSSES VALUE
---- --------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government and government
agencies and authorities......... $ 220 $ -- $ 1 $ 219
States, municipalities and
political subdivisions........... 11 -- -- 11
All other corporate fixed
maturities....................... 6 -- -- 6
------ ----- ---- ------
Total fixed maturities.......... 237 -- 1 236
Short-term investments.............. 2,612 -- -- 2,612
------ ----- ---- ------
Total investments available-for-
sale........................... $2,849 $ -- $ 1 $2,848
====== ===== ==== ======
<CAPTION>
1996
----
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government and government
agencies and authorities......... $ 169 $ 2 $ 1 $ 170
States, municipalities and
political subdivisions........... 22 -- -- 22
All other corporate fixed
maturities....................... 412 5 2 415
Mortgage and other asset-backed
securities....................... 476 8 1 483
------ ----- ---- ------
Total fixed maturities.......... 1,079 15 4 1,090
Short-term investments.............. 1,907 -- -- 1,907
------ ----- ---- ------
Total investments available-for-
sale........................... $2,986 $ 15 $ 4 $2,997
====== ===== ==== ======
</TABLE>

The pre-tax change in unrealized investment (losses) gains for fixed
maturities and equity securities for each of the three years ended December
31, follow (in millions):

<TABLE>
<CAPTION>
1994 1995 1996
----- ---- ----
<S> <C> <C> <C>
Fixed maturities............................................ $(111) $114 $ 12
Equity securities........................................... (9) -- --
----- ---- ----
Total..................................................... $(120) $114 $ 12
===== ==== ====
</TABLE>

At December 31, 1995 and 1996, approximately 89% and 46%, respectively, of
the Company's total investments were comprised of U.S. Treasury securities and
other securities issued by U. S. Government agencies and authorities.

During 1996, the Company made certain investments in mortgage and other
asset-backed securities. Included in mortgage and other asset-backed
securities as of December 31, 1996 are $213 million of collateral mortgage
obligations (CMOs) and $162 million of pass-through securities issued by GNMA,
FNMA or FHLMC. Approximately 90% of the Company's CMO holdings are fully
collateralized by GNMA, FNMA or FHLMC securities. The Company generally
purchases CMOs that are protected against prepayment risk through purchasing
planned amortization class (PAC) tranches, which have stable prepayment
characteristics. The Company does not purchase residual interests in mortgage-
backed securities. Virtually all mortgage and other asset-backed securities
are rated AAA.

F-10
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

2. INVESTMENTS AND INVESTMENT INCOME--(CONTINUED)
Securities carried at $88 million and $94 million at December 31, 1995 and
1996, respectively, were deposited by the Company with governmental
authorities or designated custodian banks as required by laws affecting
insurers.

The amortized cost and fair value of the Company's fixed maturities at
December 31, 1996, by contractual maturity, follow (in millions):

<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- ------
<S> <C> <C>
Contractual maturity:
Within one year.......................................... $ 2 $ 2
After one year but within five........................... 268 271
After five years but within ten.......................... 249 249
After ten years.......................................... 84 85
Mortgage and other asset-backed securities............... 476 483
------ ------
Total fixed maturities................................. $1,079 $1,090
====== ======
</TABLE>

Actual maturities may 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 may 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>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Interest on fixed maturities............................... $ 98 $105 $ 48
Dividends on equity securities............................. 2 2 --
Interest on short-term investments......................... 19 45 116
Other...................................................... 22 14 15
Investment expenses........................................ (7) (8) (8)
---- ---- ----
Net investment income.................................... $134 $158 $171
==== ==== ====
</TABLE>

The components of net realized investment gains for each of the three years
ended December 31, follow (in millions):

<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Fixed maturities:
Gross gains.............................................. $ 3 $ 60 $--
Gross losses............................................. (2) (23) --
Equity securities:
Gross gains.............................................. 12 21 --
Gross losses............................................. (4) (4) --
Other...................................................... 2 (6) 2
--- ---- ----
Net realized investment gains............................ $11 $ 48 $ 2
=== ==== ====
</TABLE>

F-11
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3. INCOME TAXES
Talegen and the Company are included in the Xerox consolidated federal
income tax return. Accordingly, Xerox and Talegen and, in turn, the Company
and its subsidiaries entered into a tax sharing agreement effective in 1983
which provides that the Company will pay or be reimbursed for the Company's
tax liabilities or benefits generated. The right to reimbursement for these
tax benefits does not expire due to any statutory period of limitation under
the Internal Revenue Code. The agreement generally provides that subsidiaries
shall compute their tax liability on a separate return basis and any benefit
on the basis of actual benefits utilized in offsetting the liabilities of the
other companies in the Talegen group. Income taxes reflected in the
consolidated statements of operations are the Company's share of the Xerox
consolidated tax provision.

The components of the income tax provision (benefits) for each of the three
years ended December 31, follow (in millions):

<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Current tax provision (benefit)............................ $ 5 $(39) $(28)
Deferred tax provision (benefit)........................... 18 22 (19)
--- ---- ----
Income tax provision (benefit)........................... $23 $(17) $(47)
=== ==== ====
</TABLE>

A reconciliation of 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>
1994 1995 1996
---- ----- -----
<S> <C> <C> <C>
U.S. Federal statutory income tax rate.................. 35.0% 35.0% 35.0%
Goodwill write-off...................................... -- -- (18.2)
Change in estimate of tax liability..................... -- (62.5) --
Tax exempt interest..................................... (3.9) (12.0) --
Dividends received deduction............................ (0.6) (1.5) --
Revision of prior years' liability...................... (8.7) (1.1) --
Other................................................... 2.9 6.7 (0.6)
---- ----- -----
Effective income tax rate............................. 24.7% (35.4)% 16.2%
==== ===== =====
</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 income in
the period that the rate changes. In 1995, resolution of significant tax
issues resulted in a benefit to earnings of approximately $30 million.

F-12
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3. 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, 1995 and 1996 follow (in millions):

<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Tax basis discount on unpaid losses and loss expenses........... $133 $125
Uncollectible reinsurance....................................... 42 43
Adjustment for unearned premiums................................ 26 25
Tax benefits of net operating loss carryforwards................ 12 43
Severance and leasehold provisions.............................. 6 5
Other........................................................... 45 45
---- ----
Total deferred tax assets..................................... 264 286
---- ----
Deferred tax liabilities:
Deferred policy acquisition costs............................... 34 32
Depreciation and amortization................................... 6 5
Other........................................................... 11 21
---- ----
Total deferred tax liabilities................................ 51 58
---- ----
Net deferred tax assets....................................... $213 $228
==== ====
</TABLE>

Pursuant to the tax sharing agreement at December 31, 1994, the Company had
a tax benefit related to net operating loss carryforwards of $9 million
available to be utilized. The Company was allocated additional tax benefits of
$3 million and $31 million in 1995 and 1996, respectively. At December 31,
1996 the Company has $43 million of tax benefits of net operating loss
carryforwards available to be utilized.

The valuation allowance was $40 million at December 31, 1994. The valuation
allowance decreased in 1995 by $40 million due to the elimination of the
deferred tax assets recorded for unrealized losses on investment securities in
1994. The valuation allowance at December 31, 1995 is immaterial due to
unrealized losses on investment securities of only $1 million. There is no
valuation allowance at December 31, 1996. Changes in the valuation allowance
were recorded directly to shareholder's equity.

F-13
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4. UNPAID LOSSES AND LOSS EXPENSES
Activity related to unpaid losses and loss expenses for each of the three
years ended December 31, follow (in millions):

<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Gross unpaid losses and loss expenses, January 1...... $3,160 $2,948 $3,240
Reinsurance recoverable............................... 868 780 1,056
------ ------ ------
Net unpaid losses and loss expenses, January 1.... 2,292 2,168 2,184
------ ------ ------
Incurred losses and loss expenses related to:
Current accident year losses........................ 597 670 755
Prior accident year losses.......................... 8 97 173
------ ------ ------
Total incurred losses and loss expenses........... 605 767 928
------ ------ ------
Paid losses and loss expenses related to:
Current accident year losses........................ 164 196 225
Prior accident year losses.......................... 565 555 502
------ ------ ------
Total paid losses and loss expenses............... 729 751 727
------ ------ ------
Net unpaid losses and loss expenses, December 31...... 2,168 2,184 2,385
Reinsurance recoverables on unpaid losses and loss ex-
penses............................................... 780 1,056 1,032
------ ------ ------
Gross unpaid losses and loss expenses, December
31............................................... $2,948 $3,240 $3,417
====== ====== ======
Incurred losses and loss expenses ceded to Ridge
Reinsurance Limited (Ridge Re)....................... $ 5 $ 229 $ --
Incurred losses and loss expenses ceded to other rein-
surers............................................... 287 158 76
------ ------ ------
Total ceded incurred losses and loss expenses....... $ 292 $ 387 $ 76
====== ====== ======
</TABLE>

During 1995 and 1996, the provision for incurred losses and loss expenses
was increased through net strengthening of prior accident year gross unpaid
loss and loss expense reserves of $400 million and $176 million, respectively.
After consideration of uncollectible reinsurance reserve strengthening of $53
million and $32 million in 1995 and 1996, respectively, and ceded reinsurance,
net loss and loss expense reserves were strengthened by $97 million and $173
million in 1995 and 1996, respectively. The reserve strengthening primarily
resulted from unfavorable loss development in commercial casualty coverages
and the increase in latent exposure reserves.

LATENT EXPOSURES
Claims resulting from asbestos, environmental and other latent exposures
have provided unique challenges to the insurance industry and to the Company
through its historical writings. The possibility that these claims would
emerge was typically not contemplated at the time the policies were written,
and traditional actuarial reserving methodologies have not been useful in
accurately estimating ultimate losses.

Asbestos claims, which began to emerge in the 1970's, were the first type of
latent exposure to cause significant losses to the insurance industry.
Historically, the largest asbestos claims have come from manufacturers of
asbestos because their claims have typically involved many injured parties.
Over time, case law has become reasonably well developed in the asbestos
bodily injury claim area and many of these claims from manufacturers have
settled. Recently, however, the number of asbestos bodily injury claims from
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 from these claims have been less than those with the asbestos
manufacturers, the per-claim exposures have also been less.

F-14
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4. UNPAID LOSSES AND LOSS EXPENSES--(CONTINUED)
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 resulting 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 Comprehensive Environmental Response, Compensation
and Liability Act (Superfund) reform have compounded the industry's
difficulties in adequately assessing these complex exposures. However, case
law continues to develop on a state-by-state basis and may reduce uncertainty
in this area if judicial rulings become more consistent.

Prior to 1995, the Company established case and IBNR reserves for asbestos
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 (EPA), the
Company initiated a project in 1995 to create and implement comprehensive,
sophisticated costing methodologies to provide estimates of aggregate ultimate
losses for asbestos and environmental exposures. Utilizing these methodologies
and the data available, in 1995, gross reserves for asbestos and environmental
exposures were increased by $156 million and $122 million, respectively.

Although the methodologies used to estimate asbestos and environmental
reserves in 1996 are consistent with those used in 1995, refinements to the
data used in the methodologies made as the project was being completed caused
estimates of ultimate loss and loss expense to be higher than the amounts
estimated in 1995. Specifically, as a result of hazardous waste site
identification efforts begun in 1995 and completed in 1996, the estimated
ultimate number of sites associated with insureds was increased in 1996.
Additionally, values for insureds' share of exposure on some of the larger
sites were adjusted based upon estimated share values received directly from
the EPA and other sources. The above refinements increased the Company's
estimate of environmental claim exposures and led to an increase of gross
reserves in 1996 of $74 million. With respect to asbestos exposures, estimated
costs attributable to known claims increased and led to an increase of gross
reserves in 1996 of $26 million.

Other latent exposure claims include asbestos-in-building, chemical
exposure, repetitive stress, surgical breast implants and tobacco and tobacco
related products, as well as other exposures where the possibility of such
claims arising was not contemplated when the policies were written. Case
reserves are established for other latent exposures as they become known by
the Company and as information becomes known to estimate reserve needs. In
1995, case development led to an increase in gross other latent exposure
reserves of $15 million. Additionally, in 1996, reserves for IBNR were
increased to a level whereby reserves for other latent exposures, relative to
recent paid losses and loss expenses, are comparable to such reserves for
asbestos and environmental claims. Case development and the IBNR reserve
strengthening led to an increase in 1996 of gross other latent exposure
reserves of $57 million.

Due to the previously discussed hazardous waste site identification efforts
and other data gathering activities in 1995 and 1996, and as a result of the
significant effort to develop, test, and refine the model, the Company does
not anticipate making material changes to its latent exposure costing
methodologies at this time. The Company will continue to monitor the adequacy
of its reserves for asbestos, environmental and other latent exposures as new
information is received and assessed and as refinements to the methodologies
are made.

F-15
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

4. UNPAID LOSSES AND LOSS EXPENSES--(CONTINUED)
As judicial patterns emerge through the appellate process and remove or add
to uncertainties related to asbestos, environmental and other latent
exposures, additional liabilities and reinsurance recoverables could arise.
Total reserves for asbestos, environmental and other latent exposures as of
December 31, 1994, 1995 and 1996 are as follows:

<TABLE>
<CAPTION>
1994 1995 1996
----------------- ----------------- -----------------
GROSS NET GROSS NET GROSS NET
RESERVES RESERVES RESERVES RESERVES RESERVES RESERVES
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Latent exposure area
reserves(1)
Asbestos.............. $ 55 $ 38 $190 $122 $199 $107
Environmental......... 79 61 177 126 235 201
Other latent
exposures............ 112 59 71 42 107 87
---- ---- ---- ---- ---- ----
Total(1)............ $246 $158 $438 $290 $541 $395
==== ==== ==== ==== ==== ====
</TABLE>
- - --------
(1) Included are case, IBNR reserves and allocated loss expense reserves.
Gross latent exposure reserves do not include amounts that are fully
reinsured with affiliated companies. Net latent exposure reserves have not
been reduced for recoverables from Ridge Re because the Ridge Re contract
is an aggregate excess of loss contract covering all lines of business.
The net reserves presented additionally exclude reserves for uncollectible
reinsurance. See Note 5 for further explanation of Ridge Re and the
reserve for uncollectible reinsurance.

The Company does not believe that liabilities associated with incurred
asbestos 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, the Company also does not
expect that liabilities associated with incurred claims in these other 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 necessarily used in estimating all
latent exposures, actual results could significantly differ from the Company's
current estimates.

5. REINSURANCE
The Company reinsures, in the ordinary course of business, certain risks
with other insurance and reinsurance companies. These arrangements provide the
means for greater diversification of business and serve to limit the net loss
potential of unusually severe or frequent losses. With respect to potential
property, business interruption and non-voluntary assessment losses arising
out of catastrophes, the Company purchases catastrophe reinsurance. In
addition to the catastrophe reinsurance, the Company is covered by excess of
loss reinsurance which provides $80 million of additional aggregate protection
to the Company's insurance subsidiaries and insurance companies owned by two
of Talegen's other subsidiaries.

The ceding of insurance does not discharge the original insurer from its
primary liability to its policyholder, however the insurance 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-16
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

5. REINSURANCE--(CONTINUED)
The components of the Company's net premiums written and net premiums earned
for each of the three years ended December 31 follow (in millions):

<TABLE>
<CAPTION>
1994 1995 1996
----- ------ ------
<S> <C> <C> <C>
Premiums written:
Direct............................................ $ 953 $1,060 $1,065
Assumed from other companies, pools or
associations..................................... 69 61 41
Ceded to other companies, pools or associations... (135) (161) (150)
----- ------ ------
Net premiums written............................ $ 887 $ 960 $ 956
===== ====== ======
<CAPTION>
1994 1995 1996
----- ------ ------
<S> <C> <C> <C>
Premiums earned:
Direct............................................ $ 926 $1,019 $1,063
Assumed from other companies, pools or
associations..................................... 70 62 49
Ceded to other companies, pools or associations... (142) (151) (153)
----- ------ ------
Net premiums earned............................. $ 854 $ 930 $ 959
===== ====== ======
</TABLE>

The components of the Company's net reinsurance recoverables at December 31,
1995 and 1996 follow (in millions):

<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Reinsurance receivable on paid losses and loss expenses....... $ 100 $ 44
Reinsurance recoverable on unpaid losses and loss expenses.... 1,056 1,032
------ ------
Reinsurance recoverables.................................... $1,156 $1,076
====== ======
</TABLE>

Reinsurance recoverables are net of a reserve for uncollectible reinsurance
of $46 million and $68 million at December 31, 1995 and 1996, respectively.

The Company made significant use of reinsurance during the 1970s and the
early 1980s and, accordingly, has current and/or future net reinsurance
recoverables from several hundred reinsurers. Since that time, the Company has
generally increased the portion of business retained while reducing the number
of reinsurers used. During 1995 and 1996, excluding the reinsurance ceded to
pools, associations and similar organizations, the Company ceded 87% and 89%,
respectively, of total ceded premiums written to approximately 35 reinsurers.
As of December 31, 1995 and 1996, reinsurance recoverables from International
Insurance Company, a subsidiary of TRG, a wholly owned subsidiary of XFSI were
$189 million and $163 million, respectively. Reinsurance recoverables from
Ridge Re were $234 million as of December 31, 1995 and 1996. As of December
31, 1996, the individual non-affiliated reinsurers with the highest share of
the recoverable balance accounted for 5% and 4%, of the total net reinsurance
recoverables, respectively.

The Company 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 provides an estimate of the amount that will be
ultimately collected from these troubled reinsurers. In addition to the
reinsurers' ability to pay claims, from time to time disputes arise over
amounts and reinsurance coverage. The Company pursues its remedies in these
cases and recognizes the impact of developments in these situations as the
disputes are resolved. Management believes the reinsurance recoverables, net
of the reserve for uncollectible reinsurance, are valid and collectible.

F-17
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

5. REINSURANCE--(CONTINUED)
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 Company's insurance subsidiaries. Under the terms of the
reinsurance coverage, which is guaranteed by XFSI, and subject to stated
limits, Ridge Re will reimburse the Company for 85% of any and all ultimate
net losses, if any, in excess of the contractual retention amount. Coverage is
provided for unfavorable development subsequent to December 31, 1992 on losses
and loss expenses incurred and uncollectible reinsurance for losses occurring
on accident years 1992 and prior, net of all salvage, subrogation, and other
recoverables. The coverage, which has been fully utilized, totals $234
million, which is net of 15% coinsurance. A premium amount of $110 million,
which is being provided by XFSI and guaranteed by Xerox, was ceded by the
Company to Ridge Re as consideration for the risk assumed by Ridge Re. As of
December 31, 1996, the Company received letters of credit from Ridge Re on the
cumulative amount ceded.

In connection with the Talegen restructuring, the Company's insurance
subsidiaries entered into reinsurance agreements with other insurance
companies then owned, indirectly, by Talegen (together with the Company, the
Talegen Insurance Companies) to transfer, through 100% quota share
reinsurance, certain books of business that were not consistent with the
Company's strategy. In addition to the reinsurance arrangements, certain of
these reinsured insurance policies have also been novated to the Talegen
Insurance Companies that reinsured these policies and additional subject
policies continue to be novated as claims are reported. For policies affected
by this novation process, one of the other Talegen Insurance Companies is
substituted for the original issuing insurance company as the insurer and
becomes directly liable to the insured. As of December 31, 1996, other Talegen
Insurance Companies had assumed approximately $1.0 billion of gross reserves
from the Company on policies originally written by the Company's insurance
subsidiaries, of which approximately $700 million related to novated policies.
The novation process was approved by the insurance regulators of each state;
however, in the event that an assuming company fails to meet its obligations
on policies that had been novated to it due to insolvency or otherwise,
policyholders under such policies could seek judicial relief to have the
novations invalidated. There can be no certainty that a court would enforce a
policy novation against a challenge by a policyholder even if the appropriate
novation procedures under state insurance law had been satisfied. A judicial
determination that a policy novation was invalid would result in the Company
retaining the direct obligation to the policyholder for the subject policy.
The Company would retain the right to collect the amount of any future
payments it makes under such a policy from the assuming company through the
reinsurance arrangements, although the collectibility would be affected by the
solvency of the assuming company.

6. SALVAGE AND SUBROGATION
Estimates of salvage and subrogation recoveries on unpaid losses and loss
expenses which have been recorded as a reduction of unpaid losses and loss
expenses amounted to $28 million and $29 million at December 31, 1995 and
1996, respectively.

F-18
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7. PENSIONS
Talegen sponsors one principal noncontributory defined benefit pension plan
(the Plan) that covers employees of the Company, who meet eligibility
requirements. Effective July 1, 1993, the Plan was amended to limit the
accrual of further benefits to its participants under the terms of the Plan.
Contributions are made 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. During 1996, the
Company, along with Talegen's other operating subsidiaries, made contributions
to bring the Plan to a fully funded status.

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>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested................................................. $ 64 $ 76 $ 83
Nonvested.............................................. 5 7 3
---- ---- ----
Accumulated benefit obligation(1).................... 69 83 86
Effect of projected future compensation levels........... 2 -- --
---- ---- ----
Projected benefit obligation......................... 71 83 86
Fair value of plan assets, primarily listed stocks and
government securities................................... 56 69 94
---- ---- ----
Projected benefit obligation in excess of (less than)
plan assets......................................... 15 14 (8)
Unrecognized net loss.................................... (7) (9) (8)
---- ---- ----
Accrued (prepaid) pension expense(2)................... 8 5 (16)
Adjustment required to recognize minimum pension
liability............................................... 5 7 --
---- ---- ----
Net liability (asset) recognized in consolidated balance
sheets(3)............................................... $ 13 $ 12 $(16)
==== ==== ====
Assumptions used in the accounting were:
Discount rates......................................... 8.50% 7.25% 7.25%
Rates of increase in compensation levels............... 5.50% 5.50% --
Expected long-term rate of return on plan assets....... 8.50% 8.50% 8.50%
Net periodic defined pension cost for 1994, 1995 and 1996
include the following components:
Interest cost on projected benefit obligation.......... $ 6 $ 6 $ 6
Actual return on plan assets........................... -- (14) (11)
Net amortization and deferrals......................... (5) 9 6
---- ---- ----
Net periodic defined benefit pension cost(4)......... $ 1 $ 1 $ 1
==== ==== ====
</TABLE>
- - --------
(1) The accumulated benefit obligation of the Company for the years ended
December 31, 1994, 1995 and 1996 was $31 million, $37 million and $39
million, respectively.
(2) The accrued (prepaid) pension expense of the Company for the years ended
December 31, 1994, 1995 and 1996 was $3 million, $1 million and $(8)
million, respectively.
(3) The net liability (asset) recognized in the Company's consolidated balance
sheets is $6 million, $6 million and $(8) million, for the three years
ended December 31, 1994, 1995 and 1996, respectively.
(4) The Company's share of this expense was approximately $1 million in each
of the two years ended December 31, 1994 and 1995. The Company's share of
this expense was immaterial for the year ended December 31, 1996.

F-19
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7. PENSIONS--(CONTINUED)
Talegen also sponsors a defined contribution plan (savings plan) covering
substantially all the employees of Talegen and its subsidiaries. The savings
plan provides for a basic contribution equal to 3% of an employee's
compensation, a matching contribution based on participants' contributions and
a discretionary performance-related contribution made at the discretion of the
Company. 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. Total savings plan
expense incurred by the Company was $5 million for each of the three years
ended December 31, 1994, 1995 and 1996.

8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain medical benefits for its retirees and Talegen
provides certain life insurance benefits for retirees of Talegen and its
subsidiaries. Retiree medical benefits are provided to those employees who
were age 50 on January 1, 1994 and who ultimately retire with 15 years of
service and all employees who retired prior to January 1, 1994.

Following is a reconciliation of the funded status of the Company's
postretirement medical and the Talegen postretirement life insurance plans as
of December 31, 1995 and 1996 (in millions):

<TABLE>
<CAPTION>
MEDICAL LIFE
---------- ----------
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.......................................... $ 10 $ 8 $ 12 $12
Fully eligible active participants................ 2 2 -- 1
Other active participants......................... 2 2 1 1
---- ---- ---- ---
Total(1)........................................ 14 12 13 14
Deferred actuarial gain (loss)...................... 8 8 -- (1)
Net transition liability............................ (11) (10) (6) (5)
---- ---- ---- ---
Accrued cost recognized in consolidated balance
sheets(2)...................................... $ 11 $ 10 $ 7 $ 8
==== ==== ==== ===
</TABLE>
- - --------
(1) The accumulated postretirement life insurance benefit obligation
pertaining to the Company is $7 million at December 31, 1995 and 1996.
(2) The accrued postretirement life insurance benefit cost recognized in the
Company's consolidated balance sheets is $4 million at December 31, 1995
and 1996.

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 not have a material impact on the service and interest cost
and the accumulated postretirement benefit obligation.

The discount rate used to determine the funded status as of December 31,
1995 and 1996 was 7.25%.

F-20
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

8. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS--(CONTINUED)
The components of the Company's postretirement medical benefit cost and the
Talegen postretirement life insurance benefit cost for each of the three years
ended December 31, follow (in millions):

<TABLE>
<CAPTION>
MEDICAL LIFE
-------------- --------------
1994 1995 1996 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Interest cost................................. $ 1 $ 1 $-- $ 1 $ 1 $ 1
Amortization of transition liability.......... 1 -- 1 -- -- --
---- ---- ---- ---- ---- ----
Total(1).................................... $ 2 $ 1 $ 1 $ 1 $ 1 $ 1
==== ==== ==== ==== ==== ====
</TABLE>
- - --------
(1) Postretirement life insurance benefit cost recorded by the Company was
approximately $1 million in each of the three years ended December 31,
1994, 1995 and 1996.

9. DEBT
On December 7, 1994, the Company entered into a $150 million unsecured
credit agreement with several banks. The outstanding principal amount due at
December 31, 1995 was $132 million which was prepaid on November 27, 1996. On
November 27, 1996, the Company borrowed $115 million from Talegen in exchange
for an unsecured promissory note in that amount. Interest on the promissory
note is payable quarterly in arrears at a fixed rate of 7.4% per annum and the
principal is due on November 27, 2006. The proceeds received for the note were
used to repay the previously outstanding bank debt.

10. RELATED PARTY TRANSACTIONS
Included in amounts due from affiliates are promissory notes, issued by XFSI
and guaranteed by Xerox, which aggregate $182 million at both December 31,
1995 and 1996, respectively. These notes 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. At December
31, 1996 these notes carry an interest rate of 6.56%. Notes amounting to $89
million which were issued on June 1, 1989, matured during 1994.

The Company receives data processing, claims settlement and other services
from affiliates and Talegen under various service agreements. Additionally, in
1994 and 1995, the Company received investment services from an affiliate
which was sold by Talegen in 1995. Fees incurred under these agreements for
each of the three years ended December 31, 1994, 1995 and 1996 were
approximately $47 million, $58 million and $52 million, respectively.

The Company, with certain other Talegen subsidiaries (the Lessors), own a
training facility located in Loudoun County, Virginia. The Company has a 70%
interest in the ownership of the facility. Talegen, on behalf of the Lessors,
entered into a long-term operating lease dated December 1, 1985 with XFSI. The
primary term of the lease expires on November 30, 2010 and is renewable at the
option of XFSI. Rental income recorded by the Company under the terms of the
lease amounted to $13 million in each of the three years ended December 31,
1994, 1995 and 1996.

F-21
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10. RELATED PARTY TRANSACTIONS--(CONTINUED)
Under reinsurance agreements in effect between the Company and insurance
subsidiaries of other Talegen insurance operating groups and TRG, reinsurance
assumed and ceded at December 31, 1995 and 1996 follow (in millions):

<TABLE>
<CAPTION>
1995 1996
----------------------- -----------------------
REINSURANCE REINSURANCE REINSURANCE REINSURANCE
ASSUMED CEDED ASSUMED CEDED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Unearned premiums.......... $23 $-- $ 2 $--
Unpaid losses and loss
expenses.................. $60 $213 $75 $180
</TABLE>

The net earnings of the Company is not impacted by reinsurance ceded under
these reinsurance agreements.

11. STATUTORY INFORMATION
The Company's insurance subsidiaries are restricted by insurance laws as to
the amount of dividends they may pay without the approval of regulatory
authorities. The amount of restricted net assets of the Company's insurance
subsidiaries plus the amount of shareholder's equity for the Company's non-
insurance operations (which is not restricted by insurance laws) is $1.0
billion at December 31, 1996. There are additional restrictions regarding the
amount of loans and advances that these subsidiaries may make to the Company.
These restrictions indirectly limit the payment of dividends and the making of
loans and advances by the Company to Talegen.

Generally accepted accounting principles differ in certain respects from the
statutory accounting practices prescribed or permitted by insurance regulatory
authorities for the Company's insurance subsidiaries. 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, which is expected to be completed in
1999, 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 of permitted practices on the Company's
statutory policyholders surplus is not significant.

Statutory net income (loss) amounted to $83 million, $65 million and $(86)
million, for the years ended December 31, 1994, 1995 and 1996, respectively.
Statutory policyholders' surplus amounted to $809 million, $851 million and
$803 million, at December 31, 1994, 1995 and 1996, 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, deferred policy acquisition costs, unrealized
gains (losses) on investment securities and shareholder's equity of non-
insurance operations.

12. SHAREHOLDER'S EQUITY
Cash dividends paid to Talegen in 1994 and 1995 amounted to $173 million and
$21 million, respectively. The Company also made a dividend to Talegen of its
ownership in certain real estate in 1994 which amounted to $6 million. No
dividends were paid to Talegen in 1996.

F-22
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

13. FAIR VALUE OF FINANCIAL INSTRUMENTS
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
partners.

The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1995 and 1996 (in
millions).

<TABLE>
<CAPTION>
1995 1996
--------------- ---------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Investments.................................. $2,848 $2,848 $2,997 $2,997
Debt......................................... $ 132 $ 132 $ 115 $ 113
</TABLE>

The fair value of investments are based on quoted market prices or dealer
quotes at the reporting date for those or similar investments.

The fair value of the Company's debt at December 31, 1995 approximates the
carrying value as the interest rates are calculated using current market
rates. At December 31, 1996, the fair value is based on borrowing rates
currently available for debt with similar terms and maturities.

See Notes 2 and 5 regarding concentrations of investments and reinsurance
recoverables, respectively.

14. LEASES
The Company leases certain land, buildings and equipment under operating
leases which expire through 2009. The total rent expense under operating
leases amounted to $17 million, $16 million and $13 million, for the years
ended December 31, 1994, 1995 and 1996, 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, 1996 are
summarized below (in millions):

<TABLE>
<S> <C>
1997..................................... $15
1998..................................... 12
1999..................................... 11
2000..................................... 9
2001..................................... 9
Later years.............................. 41
---
Total minimum lease payments............. $97
===
</TABLE>

Approximately $22 million of the above total lease payments result from
leases that were entered into in 1984 by the Company and Talegen affiliates
jointly and severally in conjunction with sale leaseback transactions. The
leases terminate in 2009 although extensions are available under each lease
agreement. The minimum lease payments shown in the preceding table do not
include possible future rental adjustments based on inflation. The Company's
performance under these leases has been guaranteed by Talegen. The property
sales were financed in part by purchase money notes that have an aggregate
carrying value of $15 million at December 31, 1996.

F-23
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

15. LITIGATION
Farm & Home Savings Association, now known as Roosevelt Bank, (Farm & Home)
and certain of the Insurance Companies entered into an agreement
(Indemnification Agreement) under which 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). 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 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.
In addition, Farm & Home presently has pending motions for summary judgement
which would dispose of many of the claims asserted. If not settled or resolved
by summary judgement, one or more of these cases can be expected to be tried
in 1997. Management believes that resolution of the Southbend subdivision
claims will not have a material adverse effect on the liquidity or the
financial position of the Company.

The Company is a party to various lawsuits arising in the ordinary course of
its business. Management believes the outcome of this litigation will not have
a material adverse effect on the Company's liquidity or financial position.

F-24
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

CONSOLIDATED BALANCE SHEET

SEPTEMBER 30, 1997
(IN MILLIONS, EXCEPT SHARE DATA)
(UNAUDITED)

<TABLE>
<S> <C>
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost: $1,089)............. $1,112
Short-term investments, at amortized cost which approximates fair
value............................................................... 1,914
------
Total investments.................................................. 3,026
Cash................................................................... 11
Accrued investment income.............................................. 26
Receivables:
Premiums (net of reserve for uncollectible receivables $16).......... 381
Other................................................................ 18
Reinsurance recoverables............................................... 1,235
Prepaid reinsurance premiums........................................... 40
Current income taxes................................................... 2
Deferred policy acquisition costs...................................... 89
Deferred income taxes.................................................. 236
Land, buildings and equipment (net of accumulated depreciation $57).... 52
Due from affiliates.................................................... 184
Other assets........................................................... 81
------
Total assets....................................................... $5,381
======
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Unearned premiums.................................................... $ 461
Unpaid losses and loss expenses...................................... 3,597
Debt................................................................. 115
Dividends to policyholders........................................... 18
Accounts payable and accrued liabilities............................. 130
------
Total liabilities.................................................. 4,321
======
Shareholder's equity:
Common stock and additional paid-in capital (includes $1 par value
common stock, 1,000 shares authorized, issued and outstanding)...... 1,105
Accumulated deficit.................................................. (59)
Net unrealized gains on investments.................................. 14
------
Total shareholder's equity......................................... 1,060
------
Total liabilities and shareholder's equity....................... $5,381
======
</TABLE>

See accompanying notes to interim financial statements.

F-25
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(IN MILLIONS)
(UNAUDITED)

<TABLE>
<CAPTION>
1996 1997
------ ----
<S> <C> <C>
Revenue:
Net premiums earned............................................. $ 725 $710
Net investment income........................................... 125 140
Net realized capital gains...................................... 1 1
Other income.................................................... 8 10
------ ----
Total revenues................................................ 859 861
====== ====
Losses and expenses:
Losses and loss expenses........................................ 734 573
Underwriting, acquisition and other insurance expenses.......... 248 236
Dividends to policyholders...................................... 9 8
Interest expense................................................ 5 6
Other expenses.................................................. 7 2
------ ----
Total losses and expenses..................................... 1,003 825
====== ====
(Loss) earnings from operations before income taxes........... (144) 36
Income tax (benefit) provision.................................... (49) 12
------ ----
Net (loss) earnings........................................... $ (95) $ 24
====== ====
</TABLE>

See accompanying notes to interim financial statements.

F-26
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN MILLIONS)
(UNAUDITED)

<TABLE>
<S> <C>
Common stock and additional paid-in capital:
Balance at beginning and end of period................................ $1,105
------
Accumulated deficit:
Balance at beginning of year.......................................... (77)
Net earnings.......................................................... 24
Dividends to shareholder.............................................. (6)
------
Balance at end of period............................................ (59)
------
Net unrealized gains on investment securities:
Balance at beginning of year.......................................... 7
Change in unrealized gains............................................ 11
Change in deferred income taxes....................................... (4)
------
Balance at end of period............................................ 14
------
Total shareholder's equity........................................ $1,060
======
</TABLE>

See accompanying notes to interim financial statements.

F-27
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(IN MILLIONS)
(UNAUDITED)

<TABLE>
<CAPTION>
1996 1997
------- -----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) earnings......................................... $ (95) $ 24
Adjustments to reconcile net (loss) earnings to net cash from
operating activities:
Net realized investment gains............................. (1) (1)
Depreciation and amortization............................. 17 12
Changes in certain assets and liabilities:
Unpaid losses and loss expenses......................... 161 180
Unearned premiums....................................... (1) 17
Other liabilities....................................... (40) (22)
Underwriting assets..................................... 78 (180)
Deferred policy acquisition costs....................... 4 3
Income tax (benefit) provision............................ (49) 12
Other..................................................... (1) 1
------- -----
Net cash provided by operating activities............. 73 46
------- -----
Cash flows from investing activities:
Cash used for the purchase of fixed maturity securities..... (1,064) (133)
Proceeds from sale or maturity of fixed maturities.......... 158 123
Net change in unsettled securities.......................... 30 (3)
Decrease (increase) in short-term investments............... 786 (7)
Purchase of fixed assets.................................... (11) (10)
------- -----
Net cash used by investing activities................. (101) (30)
------- -----
Cash flows from financing activities:
Dividends to shareholder.................................... -- (6)
Repayment of debt........................................... (27) --
Capital contributions....................................... 54 --
------- -----
Net cash provided (used) by financing activities...... 27 (6)
Net (decrease) increase in cash....................... (1) 10
Cash at beginning of period................................... 3 1
------- -----
Cash at end of period......................................... $ 2 $ 11
======= =====
Supplemental disclosure of cash flow information:
Interest paid............................................... $ 7 $ 6
======= =====
</TABLE>

See accompanying notes to interim financial statements.

F-28
<PAGE>

CRUM & FORSTER HOLDINGS, INC.

NOTES TO INTERIM FINANCIAL STATEMENTS

SEPTEMBER 30, 1997
(UNAUDITED)

(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Crum & Forster Holdings, Inc. (the Company) is a wholly-owned subsidiary of
Talegen Holdings, Inc. (Talegen), which 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 which
include Talegen and the Company. During 1992 and 1993, Talegen completed a
major recapitalization and restructuring of its business operations into seven
stand-alone insurance operating groups (one of which is the Company) each with
an independent holding company that, in turn, owns one or more insurance
companies.

The accompanying consolidated financial statements include the accounts of
the Company and all of its consolidated subsidiaries as of September 30, 1997
and the related consolidated statements of operations, shareholder's equity
and cash flows for the nine month period ended September 30, 1997 and the
consolidated statements of operations and cash flows for the nine month period
ended September 30, 1996, 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 the Company. 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 to the
consolidated audited balance sheets of the Company as of December 31, 1995 and
1996 and the related consolidated statements of operations, shareholder's
equity and cash flows for each of the years in the three year period ended
December 31, 1996.

(2) CONTINGENCIES
The Company is a party to various lawsuits primarily incidental to the
ordinary course of its business, which management believes will not have a
materially adverse effect on its liquidity or financial position.

F-29
<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 THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
PROSPECTUS (Subject to Completion)
Issued February 9, 1998

Shares
Crum & Forster Holdings, Inc.
COMMON STOCK

-----------

OF THE SHARES OFFERED HEREBY, SHARES ARE BEING OFFERED INITIALLY
OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS (THE
"INTERNATIONAL OFFERING") AND SHARES ARE BEING OFFERED INITIALLY INSIDE
THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS (THE "U.S.
OFFERING" AND, TOGETHER WITH THE INTERNATIONAL OFFERING, THE
"OFFERING"). SEE "UNDERWRITERS." ALL OF THE SHARES OF COMMON STOCK
OFFERED HEREBY ARE BEING SOLD BY TALEGEN HOLDINGS, INC., A WHOLLY
OWNED INDIRECT SUBSIDIARY OF XEROX CORPORATION. SEE "OWNERSHIP OF
COMMON STOCK." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS
FROM THE SALE OF SHARES BY TALEGEN. PRIOR TO THE OFFERING, THERE
HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY.
IT IS CURRENTLY EXPECTED THAT THE INITIAL PUBLIC OFFERING
PRICE PER SHARE WILL BE BETWEEN $ AND $ . SEE
"UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE
CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING
PRICE.

-----------

APPLICATION WILL BE MADE TO HAVE THE COMMON STOCK APPROVED FOR LISTING ON THE
UNDER THE SYMBOL " ."

-----------

SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF
THE COMMON STOCK OFFERED HEREBY.

-----------

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.

-----------

PRICE $ A SHARE

-----------

<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) SELLING STOCKHOLDER(2)
-------- -------------- ----------------------
<S> <C> <C> <C>
Per Share........................ $ $ $
Total(3)......................... $ $ $
</TABLE>
- - -----
(1) The Company, the Selling Stockholder and Xerox Corporation have agreed
to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriters."
(2) Before deducting estimated expenses of $ .
(3) The Selling Stockholder has granted to the U.S. Underwriters an option
to purchase up to additional shares of Common Stock at the price to
public less underwriting discounts and commissions set forth above
solely to cover over-allotments, if any. If the U.S. Underwriters
exercise such option in full, the Price to Public, Underwriting
Discounts and Commissions and Proceeds to Selling Stockholder will be
$ , $ and $ , respectively. See "Underwriters."

-----------

The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel for the Underwriters. It is
expected that delivery of the Shares will be made on or about , 1998, at the
office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment
therefor in immediately available funds.

-----------

MORGAN STANLEY DEAN WITTER
CIBC OPPENHEIMER LTD.
GOLDMAN SACHS INTERNATIONAL
SALOMON SMITH BARNEY
, 1998
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the various expenses payable in connection
with the offering of the shares being registered hereby, other than
underwriting discounts and commissions. All the amounts shown are estimates,
except the Securities and Exchange Commission registration fee and the NASD
filing fee. All of such expenses are being borne by the Company.

<TABLE>
<S> <C>
SEC registration fee............................................. $29,500
NASD filing fee ................................................. 10,500
listing fee................................................... *
Accounting fees and expenses..................................... *
Legal fees and expenses.......................................... *
Printing and engraving expenses.................................. *
Registrar and transfer agent's fees.............................. *
Miscellaneous fees and expenses.................................. *
-------
Total........................................................ $ *
=======
</TABLE>
- - --------
* To be filed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 ("Section 145") of the Delaware General Corporation Law
("DGCL"), in summary, empowers a Delaware corporation, within certain
limitations, to indemnify its officers, directors, employees and agents
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement, actually and reasonably incurred by them in connection
with any suit or proceeding other than by or on behalf of the corporation, if
they acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interest of the corporation, and, with respect to a
criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful.

With respect to actions by or on behalf of the corporation, Section 145
permits a corporation to indemnify its officers, directors, employees and
agents against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit,
provided such person meets the standard of conduct described in the preceding
paragraph, except that no indemnification is permitted in respect of any claim
where such person has been found liable to the corporation, unless the Court
of Chancery or the court in which such action or suit was brought approves
such indemnification and determines that such person is fairly and reasonably
entitled to be indemnified.

Article Eight of the Certificate of Incorporation of the Company provides
for the indemnification of officers and directors and certain other parties of
the Company to the fullest extent permitted by law.

The Underwriting Agreement provides for indemnification by the Underwriters
of the Company, its directors and officers, and persons who control the
Company within the meaning of Section 15 of the Securities Act for certain
liabilities, including liabilities under the Securities Act, under certain
circumstances.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

In the three years preceding the filing of this Registration Statement, the
Company has not issued nor sold any securities that were not registered under
the Securities Act.

II-1
<PAGE>

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- - ------- -----------------------
<S> <C>
*1.1 Form of Underwriting Agreement among the Company, Talegen, Xerox and the Underwriters.
*3.1 Certificate of Incorporation of the Company.
*3.2 By-laws of the Company.
*4.1 Form of Certificate for Common Stock.
*5.1 Opinion of Shearman & Sterling.
*10.1 Tax Allocation and Indemnification Agreement
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP.
*23.2 Consent of Shearman & Sterling (included in Exhibit 5.1).
24.1 Power of Attorney (see signature pages).
*27.1 Financial Data Schedule.
</TABLE>
- - --------
* To be filed by amendment.

(b) Financial Statement Schedules

The following financial statement schedules are included herein;

Schedule I -- Summary of Investments -- Other than Investments in Related
Parties
Schedule II -- Condensed Financial Information of Crum & Forster Holdings,
Inc.
Schedule III -- Supplementary Insurance Information
Schedule IV -- Reinsurance
Schedule V -- Valuation and Qualifying Accounts
Schedule VI -- Supplemental Information Concerning Property and Casualty
Insurance Operations

All other schedules are omitted because they are either not required, not
applicable or the required information is included in the financial statements
or notes thereto.

ITEM 17. UNDERTAKINGS

The Company hereby undertakes to provide to the underwriters at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company
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 Company 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 Act and will be governed by the
final adjudication of such issue.

II-2
<PAGE>

The Company hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be a 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
of 1933, 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 MORRISTOWN, STATE OF
NEW JERSEY, ON THE 9TH DAY OF FEBRUARY, 1998.

Crum & Forster Holdings, Inc.

/s/ Gary C. Tolman
By: _________________________________
Name: Gary C. Tolman
Title: Treasurer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Gary C. Tolman and Richard P. Lutenski and each
of them, as 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 (until revoked in writing), to sign any and all
amendments, including post-effective amendments, and supplements to this
Registration Statement, and any registration statement relating to the same
offering as this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) and the Securities Act of 1933, and to file the same,
with 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 and necessary to be done, 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, or any of them, or his
or their substitute 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 BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED BELOW, ON THIS 9TH DAY OF FEBRUARY, 1998.

NAME TITLE

/s/ Joseph W. Brown, Jr. Chairman of the Board and Director
- - ------------------------------------- (Principal Executive Officer)
JOSEPH W. BROWN, JR.

/s/ James A. Stark President and Director
- - -------------------------------------
JAMES A. STARK

/s/ Gary C. Tolman Treasurer and Director (Principal
- - ------------------------------------- Financial Officer)
GARY C. TOLMAN

/s/ Richard P. Lutenski Director (Principal Accounting
- - ------------------------------------- Officer)
RICHARD P. LUTENSKI

/s/ Stuart B. Ross Director
- - -------------------------------------
STUART B. ROSS

II-4
<PAGE>

INDEX TO FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors on Schedules of Crum & Forster Holdings,
Inc..................................................................... S-2
Schedule I--Summary of Investments--Other than Investments in Related
Parties................................................................. S-3
Schedule II--Condensed Financial Information of Crum & Forster Holdings,
Inc.--Parent Company............................................ S-4
Schedule III--Supplementary Insurance Information........................ S-7
Schedule IV--Reinsurance................................................. S-8
Schedule V--Valuation and Qualifying Accounts............................ S-9
Schedule VI--Supplemental Information Concerning Property and Casualty
Insurance Operations.................................................... S-10
</TABLE>

S-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholder
Crum & Forster Holdings, Inc.:

Under date of January 14, 1997, we reported on the consolidated balance
sheets of Crum & Forster Holdings, Inc. and subsidiaries as of December 31,
1996 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, 1996, 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.

/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP

Short Hills, New Jersey
January 14, 1997

S-2
<PAGE>

SCHEDULE I

CRUM & FORSTER HOLDINGS, INC.

SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
(IN MILLIONS)

<TABLE>
<CAPTION>
AMOUNT AT
WHICH SHOWN
AMORTIZED ESTIMATED IN THE
TYPE OF INVESTMENT COST FAIR VALUE BALANCE SHEET
------------------ --------- ---------- -------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States Government and government
agencies and authorities................. $ 169 $ 170 $ 170
States, municipalities and political sub-
divisions................................ 22 22 22
All other corporate bonds................. 412 415 415
Mortgage and other asset-backed securi-
ties..................................... 476 483 483
------ ------ ------
Total fixed maturities.................. 1,079 1,090 1,090
Short-term investments...................... 1,907 1,907 1,907
------ ------ ------
Total investments....................... $2,986 $2,997 $2,997
====== ====== ======
</TABLE>

S-3
<PAGE>

SCHEDULE II

CRUM & FORSTER HOLDINGS, INC.

CONDENSED FINANCIAL INFORMATION OF CRUM & FORSTER HOLDINGS, INC. -- PARENT
COMPANY
BALANCE SHEETS

DECEMBER 31, 1995 AND 1996
(IN MILLIONS)

<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
ASSETS
Investments:
Short-term investments, at amortized cost which approximates
fair value.................................................. $ 18 $ 10
Investment in consolidated subsidiaries...................... 1,325 1,134
------ ------
Total investments.......................................... 1,343 1,144
Other assets................................................. 4 6
------ ------
Total assets............................................... $1,347 $1,150
====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Debt......................................................... $ 132 $ 115
Accounts payable and accrued liabilities..................... 2 --
------ ------
Total liabilities.......................................... 134 115
------ ------
Shareholder's equity:
Common stock and additional paid-in capital (includes $1 par
value common stock, 1,000 shares authorized, issued and out-
standing)................................................... $1,050 $1,105
Retained earnings (accumulated deficit)...................... 164 (77)
Net unrealized (loss) gain on investment securities.......... (1) 7
------ ------
Total shareholder's equity................................. 1,213 1,035
------ ------
Total liabilities and shareholder's equity................. $1,347 $1,150
====== ======
</TABLE>

The condensed financial statements of Crum & Forster Holdings, Inc. should be
read in conjunction with the consolidated financial statements and accompanying
notes of Crum & Forster Holdings, Inc. included elsewhere herein.

S-4
<PAGE>

SCHEDULE II

CRUM & FORSTER HOLDINGS, INC.

CONDENSED FINANCIAL INFORMATION OF CRUM & FORSTER HOLDINGS, INC. -- PARENT
COMPANY
STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN MILLIONS)

<TABLE>
<CAPTION>
1994 1995 1996
---- ---- -----
<S> <C> <C> <C>
Revenues:
Equity in the net earnings (loss) of subsidiaries........... $ 71 $ 49 $(238)
Net investment and other income............................. -- 2 --
---- ---- -----
Total revenues............................................ 71 51 (238)
Expenses:
Interest expense............................................ 1 10 8
Other expenses.............................................. -- -- 1
---- ---- -----
Total expenses............................................ 1 10 9
---- ---- -----
Earnings (loss) from operations before income taxes....... 70 41 (247)
Provision for income taxes (benefits)......................... -- (24) (3)
---- ---- -----
Net earnings (loss)......................................... $ 70 $ 65 $(244)
==== ==== =====
</TABLE>

Crum & Forster Holdings, Inc. and its subsidiaries file a consolidated
federal income tax return. The provision for income tax represents Crum &
Forster Holdings, Inc.'s share of the consolidated federal income tax under its
tax allocation agreement with Xerox and its tax allocation agreement with its
subsidiaries.

S-5
<PAGE>

SCHEDULE II

CRUM & FORSTER HOLDINGS, INC.

CONDENSED FINANCIAL INFORMATION OF CRUM & FORSTER HOLDINGS, INC. -- PARENT
COMPANY
STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN MILLIONS)

<TABLE>
<CAPTION>
1994 1995 1996
----- ---- -----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................... $ 70 $ 65 $(244)
----- ---- -----
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Equity in the net (loss) earnings of subsidiaries........ (71) (49) 238
Dividends from subsidiaries.............................. 42 48 5
Income tax benefits...................................... -- (24) (3)
Other, net............................................... (1) 2 (1)
----- ---- -----
Total adjustments...................................... (30) (23) 239
----- ---- -----
Net cash used by operations............................ 40 42 (5)
----- ---- -----
Cash flows from investing activities:
(Increase) decrease in short-term investments............ (15) (3) 8
Contributions to subsidiaries............................ (11) -- (41)
----- ---- -----
Net cash used in investment activities................. (26) (3) (33)
----- ---- -----
Cash flows from financing activities:
Dividends to shareholder................................. (173) (21) --
Repayment of debt........................................ -- (18) (132)
Proceeds from issuance of debt........................... 150 -- 115
Capital contributions.................................... -- -- 55
Capital adjustments...................................... 9 -- --
----- ---- -----
Net cash (used) provided in financing activities....... (14) (39) 38
----- ---- -----
Net change in cash..................................... -- -- --
----- ---- -----
Cash at beginning of year.................................. -- -- --
Cash at end of year........................................ $ -- $-- $ --
===== ==== =====
Other cash flows information:
Interest paid.............................................. $ 1 $ 9 $ 9
===== ==== =====
</TABLE>

S-6
<PAGE>

SCHEDULE III

CRUM & FORSTER HOLDINGS, INC.

SUPPLEMENTARY INSURANCE INFORMATION
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN MILLIONS)

<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Deferred policy acquisition costs......................... $ 84 $ 98 $ 92
Unpaid losses and loss expenses........................... 2,948 3,240 3,417
Unearned premiums......................................... 407 447 444
Net premiums earned....................................... 854 930 959
Net investment income..................................... 134 158 171
Losses and loss expenses.................................. 605 767 928
Amortization of deferred policy acquisition costs......... 235 232 244
Other insurance expenses.................................. 77 75 81
Net premiums written...................................... 887 960 956
</TABLE>

S-7
<PAGE>

SCHEDULE IV

CRUM & FORSTER HOLDINGS, INC.

REINSURANCE
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN MILLIONS)

<TABLE>
<CAPTION>
CEDED TO ASSUMED FROM
OTHER OTHER
COMPANIES, COMPANIES, PERCENTAGE OF
POOLS OR POOLS OR NET AMOUNT
DIRECT AMOUNT ASSOCIATIONS ASSOCIATIONS AMOUNT ASSUMED TO NET
------------- ------------ ------------ ------ --------------
<S> <C> <C> <C> <C> <C>
1994............. $ 953 (135) 69 $ 887 7.78%
1995............. $1,060 (161) 61 $ 960 6.35%
1996............. $1,065 (150) 41 $ 956 4.29%
</TABLE>

S-8
<PAGE>

SCHEDULE V

CRUM & FORSTER HOLDINGS, INC.

VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN MILLIONS)

<TABLE>
<CAPTION>
BALANCE AT CHARGES TO CHARGES TO OTHER BALANCE AT
BEGINNING OF COSTS AND ACCOUNTS -- END OF
PERIOD DESCRIPTION PERIOD EXPENSES DESCRIBE DEDUCTIONS PERIOD
- - ------ ----------- ------------ ---------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1994 Reserve for uncollectible premiums..... $13 $-- $ 3(c) $ (2)(a) $14
1995 Reserve for uncollectible premiums..... $14 -- 4 (3)(a) $15
1996 Reserve for uncollectible premiums..... $15 -- 6 (4)(a) $17
1994 Reserve for uncollectible reinsurance.. $ 8 -- -- (4)(b) $ 4
1995 Reserve for uncollectible reinsurance.. $ 4 55 -- (13)(b) $46
1996 Reserve for uncollectible reinsurance.. $46 33 -- (11)(b) $68
</TABLE>
- - --------
(a) Primarily represents uncollectible premiums written off to the reserve.
(b) Primarily represents uncollectible reinsurance recoverable balances written
off to the reserve.
(c) Primarily represents increases to the reserve for uncollectible premiums
charged to earned premiums.

S-9
<PAGE>

SCHEDULE VI

CRUM & FORSTER HOLDINGS, INC.

SUPPLEMENTAL INFORMATION CONCERNING PROPERTY -- CASUALTY INSURANCE OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN MILLIONS)

<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Deferred policy acquisition costs......................... $ 84 $ 98 $ 92
Unpaid losses and loss expenses........................... 2,948 3,240 3,417
Unearned premiums......................................... 407 447 444
Net premiums earned....................................... 854 930 959
Net investment income..................................... 134 158 171
Losses and loss expenses incurred:
Current year............................................ 597 670 755
Prior year.............................................. 8 97 173
Amortization of deferred policy acquisition costs......... 235 232 244
Paid losses and loss expenses............................. 729 751 727
Net premiums written...................................... 887 960 956
</TABLE>

S-10
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF DOCUMENT NO.
- - ------- ----------------------- ----
<S> <C> <C>
*1.1 Form of Underwriting Agreement among the Company, Talegen, Xerox and the Underwriters.
*3.1 Certificate of Incorporation of the Company.
*3.2 By-laws of the Company.
*4.1 Form of Certificate for Common Stock.
*5.1 Opinion of Shearman & Sterling.
*10.1 Tax Allocation and Indemnification Agreement
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP.
*23.2 Consent of Shearman & Sterling (included in Exhibit 5.1).
24.1 Power of Attorney (see signature pages).
*27.1 Financial Data Schedule.
</TABLE>
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* To be filed by amendment.

<PAGE>

EXHIBIT 21.1

Subsidiaries of the Company
---------------------------

The following are the only subsidiaries of the Company:

Crum and Forster Insurance Company
Crum & Forster Custom Securities, Inc.
Crum & Forster Indemnity Company
Crum & Forster Underwriters Co. of Ohio
Southbend Properties, Inc.
The North River Insurance Company
United States Fire Insurance Company

<PAGE>

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

The Board of Directors
Crum & Forster Holdings, Inc.

We consent to the use of our reports included herein and to the reference to
our Firm under the heading "Experts" in the prospectus.

/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP

Short Hills, N.J.
February 9, 1998