]
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-5686
The Continental Corporation
(Exact name of registrant as specified in its charter)
New York 13-2610607
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
180 Maiden Lane, New York, New York 10038
(Address of principal executive offices)
(Zip Code)
(212) 440-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
The number of shares outstanding of each of the issuer's classes of
common stock as of May 10, 1995 is as follows:
55,498,029 shares of Common Stock
Page 1 of Pages
The Exhibit Index is located on Page
THE CONTINENTAL CORPORATION
INDEX
Page
Part I- Financial Information
Item 1 - Financial Statements:
Consolidated Statements of Income -
Three Months Ended March 31, 1995 and 1994 3 - 4
Consolidated Balance Sheets -
March 31, 1995 and December 31, 1994 5
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1995 and 1994 6
Notes to Consolidated Financial Statements 7 - 17
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 18 - 25
Signature 26
Exhibit Index 27
Exhibit 1 28 - 29
THE CONTINENTAL CORPORATION
Part I - Financial Information
Item 1 - Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
(millions, except share and per share amounts)
Three Months Ended
March 31,
1995 1994
Revenues:
Premiums $831.2 $1,104.1
Net Investment Income 130.8 122.1
Realized Capital Gains, Net 92.9 32.0
Other Revenues 20.7 21.8
Total Revenues 1,075.6 1,280.0
Expenses:
Losses and Loss Expenses 669.8 978.0
Insurance Operating Expenses 268.6 377.2
Other Expenses 22.9 30.9
Interest on Corporate Borrowings 13.8 8.8
Total Expenses 975.1 1,394.9
Income (Loss) from Continuing Operations
before Income Taxes (Benefits) 100.5 (114.9)
Income Taxes (Benefits):
Current 6.2 (22.7)
Deferred 45.4 (2.3)
Total Income Taxes (Benefits) 51.6 (25.0)
Income (Loss) from Continuing Operations 48.9 (89.9)
Income from Discontinued Operations,
Net of Income Taxes - -
Net Income (Loss) $48.9 $(89.9)
Net Income (Loss) Available
to Common Shareholders $39.5 $(89.9)
See Notes to Consolidated Financial Statements. (Continued)
THE CONTINENTAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME, CONTINUED
(millions, except share and per share amounts)
Three Months Ended
March 31,
1995 1994
Per Common Share:
Income (Loss) from Continuing Operations,
Available to Common Shareholders $0.71 $(1.62)
Income from Discontinued Operations,
Net of Income Taxes - -
Net Income (Loss),
Available to Common Shareholders $0.71 $(1.62)
Dividends Declared - $0.25
Weighted Average Shares of
Common Stock Outstanding 55,490,063 55,417,104
See Notes to Consolidated Financial Statements.
THE CONTINENTAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(millions, except par values and share amounts)
March 31, December 31,
1995 1994
Assets:
Investments:
Fixed Maturities Available-for-Sale at Fair Value
(Amortized Cost $6,355.6; 1994 - $6,089.2) $6,237.4 $5,795.0
Equity Securities Available-for-Sale at Fair Value
(Cost $62.9; 1994 - $96.9) 75.4 120.9
Other Long-Term Investments at Fair Value (Cost
$502.3; 1994 - $530.4) 508.0 537.7
Other Short-Term Investments 980.1 1,794.8
Total Investments 7,800.9 8,248.4
Cash and Cash Equivalents 122.1 92.7
Premiums Receivable 767.7 919.9
Accrued Interest and Dividends 102.9 107.8
Reinsurance Receivables 3,636.4 3,670.2
Prepaid Reinsurance Premiums 433.5 452.5
Reinsurance Recoverable 280.3 301.8
Deferred Policy Acquisition Costs 315.1 383.9
Property and Equipment, Net 392.0 401.0
Deferred Tax Asset 509.7 555.1
Other Assets 569.9 748.1
Net Assets of Discontinued Operations 103.2 88.2
Total Assets $15,033.7 $15,969.6
Liabilities:
Outstanding Losses and Loss Expenses $9,547.1 $10,278.4
Unearned Premiums 1,749.8 2,071.6
Short-Term Debt 211.2 211.5
Long-Term Debt 776.7 775.9
Accounts Payable and Accrued Expenses 33.3 102.5
Accrued Employee Benefits 320.9 311.9
Other Liabilities 962.6 1,027.1
Total Liabilities 13,601.6 14,778.9
Commitments and Contingencies - -
Redeemable Preferred Stocks:
Series T at Fair Value (828,100 Shares
Authorized and Issued) $200
per Share Liquidation Value 164.9 164.9
Series F at Fair Value (171,900 Shares
Authorized and Issued) $200
per Share Liquidation Value 34.1 34.1
Series H at Fair Value (375,000 Shares
Authorized and Issued) $200
per Share Liquidation Value 74.6 74.6
Series G Option 1.4 1.4
Total Redeemable Preferred Stocks 275.0 275.0
Shareholders' Equity:
Preferred Stock - $4 Par Value - 0.3
Common Stock - $1 Par Value 65.7 65.7
Paid-in Capital 612.9 612.9
Retained Earnings 1,020.9 981.3
Net Unrealized Depreciation of Investments (116.3) (283.9)
Cumulative Foreign Currency
Translation Adjustment (61.2) (95.7)
Common Stock in Treasury at Cost
(10,238,005 shares; 1994 - 10,240,005 shares) (364.9) (364.9)
Total Shareholders' Equity 1,157.1 915.7
Total Liabilities, Commitments
and Contingencies, Redeemable Preferred
Stocks and Shareholders' Equity $15,033.7 $15,969.6
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE CONTINENTAL CORPORATION
(millions)
Three Months Ended
March 31,
1995 1994
Cash Flows From Operating Activities:
Income (Loss) from Continuing Operations $48.9 $(89.9)
Adjustments to Reconcile Income (Loss) from
Continuing Operations to Net Cash
Used in Continuing Operating Activities:
Realized Capital Gains (92.9) (32.0)
Outstanding Losses and Loss Expenses (3.4) (110.7)
Unearned Premiums (163.6) (8.1)
Premiums Receivable 10.0 (224.2)
Reinsurance Recoverable 21.5 30.7
Prepaid Reinsurance Premiums 19.0 (5.6)
Reinsurance Receivables (107.6) 157.5
Deferred Tax Asset 45.4 (2.3)
Deferred Acquisition Costs 48.2 8.0
Depreciation and Amortization 14.0 12.3
Other-Net 81.3 93.5
Net Cash Provided from (Used in)
Continuing Operating Activities (79.2) (176.5)
Net Cash Used in Discontinuing
Operating Activities - (0.5)
(79.2) (177.0)
Cash Flows From Investing Activities:
Net Purchase of Property and Equipment 4.0 (7.9)
Cost of Investments Purchased (1,281.7) (955.0)
Proceeds from Investments Sold 929.0 649.5
Proceeds from Investments Matured 108.1 263.4
Net (Increase) Decrease in Long-Term Investments 27.3 (114.9)
Net Decrease (Increase) in Short-Term Investments 12.4 394.7
Sale of Subsidiaries 318.9 -
Net Cash (Used in) Provided from
Investing Activities (118.0) 229.8
Cash Flows From Financing Activities:
Proceeds from Treasury Shares Sold - 2.0
Dividends to Shareholders - (13.6)
Redemption of Preferred Stock (2.7) -
Decrease in Short-Term Debt (0.3) (5.9)
Other (Decrease) Increase in Long-Term Debt (6.4) 0.9
Net Cash Used in Financing Activities (9.4) (16.6)
Net Increase in Cash and Cash Equivalents 29.4 36.2
Cash and Cash Equivalents at Beginning of Year 92.7 58.5
Cash and Cash Equivalents at End of Period $122.1 $94.7
See Notes to Consolidated Financial Statements.
THE CONTINENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Basis of Presentation
The Consolidated Financial Statements include the accounts of The
Continental Corporation and its majority-owned subsidiaries (collectively,
"Continental"). These financial statements have been prepared in
conformity with generally accepted accounting principles and are unaudited.
These interim statements necessarily rely heavily on estimates. In the
opinion of management, all material adjustments have been made. All
adjustments recorded in Continental's interim statements are of a normal
recurring nature except for the charges incurred in the first quarter 1994
for the restructuring charge. Certain reclassifications have been made to
the prior year's financial information to conform to the 1995 presentation.
Note 2: Investments
Fixed maturities available-for-sale consist of certain bonds and redeemable
preferred stocks, presented at fair value, that management may not hold
until maturity. Equity securities available-for-sale are comprised of
common stocks and nonredeemable preferred stocks which are reported at fair
value.
Other investments are comprised of money market instruments and
certificates of deposit, which are reported at amortized cost; notes
receivable, time deposits and federal funds sold, which are reported at
cost; venture capital investments and mortgage receivables, which are
reported at lower of cost or fair value; investments in minority
affiliates, which are reported under the equity method of accounting; and
investment in limited partnerships, which are reported at fair value.
These other investments are classified as short-term if their original
maturity is one year or less. All investment transactions are recorded on
the settlement date.
Realized capital gains and losses on the sales of investments are included
as a component of revenues, based upon the specific identification method.
Provisions for other than temporary impairment of investment carrying
values are included in realized capital losses. Unrealized gains and
losses on investments reported at fair value, net of related deferred
taxes, are reflected in shareholders' equity.
For derivative financial investments which are recorded using hedge
accounting, the resulting gains and losses are recorded as an adjustment to
the carrying value of the underlying security and related unrealized
appreciation/(depreciation) of investments. For all other derivative
investments, the resulting gains and losses are recorded as an adjustment
to the carrying value of the derivative financial investments with the
related change in value recognized through earnings.
At March 31, 1995, Continental did not invest in the securities of any
issuer, except securities issued/backed by U.S. or Canadian government
agencies, in excess of 10% of total shareholders' equity.
Note 3: Reinsurance
In the ordinary course of business, Continental cedes business on both a
pro-rata and excess of loss basis to other insurers and reinsurers.
Purchasing reinsurance enables Continental to limit its exposure to
catastrophic events and other concentrations of risk. However, purchasing
reinsurance does not relieve Continental of its obligations to its
insureds. Continental assumes business from other reinsurance
organizations, primarily through its participation in voluntary and
involuntary risk-sharing pools.
Continental reviews the creditworthiness of its reinsurers on an ongoing
basis. To minimize potential problems, Continental's policy is to purchase
reinsurance only from carriers who meet its credit quality standards. It
has also taken and is continuing to take steps to settle existing
reinsurance arrangements with reinsurers who do not meet its credit quality
standards. Continental does not believe that there is a significant
solvency risk concerning its reinsurers. In addition, Continental
regularly evaluates the adequacy of its reserves for uncollectible
reinsurance. Continental believes that it makes adequate provisions for
the ultimate collectibility of its reinsurance claims and therefore
believes the collection of these net recoverables to be probable.
Continental has in place various reinsurance arrangements with respect to
its current operations. These arrangements are subject to retentions,
coverage limits and other policy terms. Some of the principal reinsurance
treaty arrangements which are presently in effect are an excess of loss
treaty reducing Continental's liability on individual property losses, a
blanket casualty program reducing Continental's liability on third party
liability losses, a clash casualty program reducing Continental's liability
on multiple insured/single event losses and a property catastrophe program
with a net retention of $50 million in both 1995 and 1994 reducing its
liability from catastrophic events. Continental also uses individual risk
facultative and other facultative agreements to further reduce its
liabilities.
Continental also has in place, for future potential adverse
reserve development, an aggregate excess of loss reinsurance
contract with a limit of $400 million. This contract was
purchased in 1992 from National Indemnity Insurance Company. It
covers losses and allocated loss expenses for 1991 and prior
policy years. The business covered includes all lines of
business written by Continental's domestic property and casualty
insurance subsidiaries, with specific exclusions for nuclear
exposure, war risks, and business written through the Workers'
Compensation Reinsurance Bureau and involuntary market pools,
insolvency and guarantee fund assessments, taxes, unallocated
loss adjustment expenses and extra contractual obligations.
Effective July 1, 1994, Continental entered into a quota share
agreement (i.e., the Quota Share Cession) to reinsure a portion
of its domestic personal lines business with a major U.S.
reinsurer. From July 1, 1994 through December 31, 1995,
Continental's quota share participation is 50% of the covered
lines. Continental expects to cede premiums related to this
agreement of approximately $300 million per year, through
December 31, 1995. This arrangement will help Continental lower
its premium-to-surplus ratio and further reduce its exposure to
catastrophes subject to the agreement's catastrophe coverage
limits.
Note 4: Restructuring Charges
In March 1994, Continental's senior management approved a
definitive plan to re-engineer the operations of Continental's
Agency & Brokerage division (including home office, field claims
and underwriting), selected operations of Continental's Special
Operations division, particularly its multinational unit, and
several corporate staff divisions, including Human Resources,
Corporate Claims, Actuarial, Finance, and Legal. The locations
identified for re-engineering are Cranbury, New Jersey; New York,
New York; Duluth, Georgia; Chicago, Illinois; Dallas, Texas;
Glens Falls, New York; Overland Park, Kansas; Rancho Cordova,
California; Columbus, Ohio; York, Pennsylvania and certain
overseas locations. These re-engineering efforts planned the
elimination of 680 positions (net of new hires and transfers
resulting from approximately 1,200 terminations), from a total
company workforce of 12,255 at year end 1993, within one year from
approval of the plan, as well as the achievement of business-
related expense savings by first quarter of 1995. During 1994,
substantially all of the employees identified for termination in
the first quarter 1994 re-engineering plan were notified that
their positions have been eliminated. The re-engineering efforts
also included vacating leased space at 27 locations. As of
December 31, 1994, all of these locations have effectively been
vacated. Continental has also implemented additional cost saving
measures in several employee benefit programs. The first quarter
1994 re-engineering plan included severance packages for all
affected employees as well as extended benefits and out placement
counseling for many of them. Underwriting results for first
quarter 1994 included a $45 million restructuring charge,
including $29 million in expected severance and related benefits
and $16 million in expected lease vacation and other associated
costs. As of March 31, 1995, effectively all costs associated
with the restructuring charge have been paid.
In June, 1994, Continental announced additional steps with a goal
to improve its profitability and strenghten the capital base of its
domestic insurance subsidiaries. To improve its profitability,
Continental began to curtail its property writings, especially in
catastrophe prone areas. Also to further reduce its operating expenses,
in the second quarter of 1994, Continental reconsidered its staffing
needs and developed another plan in the third quarter of 1994 that
would result in a further net reduction of approximately 1,100 positions
(in addition to the terminations of approximately 1,200 from the first
quarter). Management believes that its re-engineering efforts in 1994
will create annual pre-tax savings of about $120 million compared with
Continental's reported 1993 expenses.
Note 5: Income Taxes (Benefits)
The provision for income taxes (benefits) from continuing
operations was as follows:
Three Months Ended
(millions) March 31,
1995 1994
Current Tax Expenses (Benefit):
U.S. Federal $ 4 $(23)
Foreign 2 -
Total Current Expenses (Benefit) 6 (23)
Deferred Tax Expenses (Benefit):
U.S. Federal 46 -
Foreign - (2)
Total Deferred Expenses (Benefit) 46 (2)
Total Income Taxes (Benefit) $52 $(25)
In the first three months of 1995, a reduction in current income
taxes of $72 million for regular tax and $38 million for
alternative minimum tax was recognized through the utilization of
tax net operating loss carryforwards. In the first three months
of 1994, there was no reduction in current income taxes through
the utilization of tax net operating loss carryforward and tax
credit carryforwards.
Unused domestic net operating loss carryforwards at March 31,
1995 available for use in future years on a tax return basis,
amount to $972 million for regular tax and $621 million for AMT
and expire at various stages through the year 2009.
Continental also has a foreign tax credit, general business
credit and AMT credit carryforwards of $30 million, $15 million
and $14 million, respectively; the foreign tax and general
business credits expire at various stages through the year 2000.
Set forth below are the significant differences between the U.S.
federal income tax rate and the effective tax rates as reflected
in the accompanying Consolidated Statements of Income:
Three Months Ended
March 31,
(millions, except percentages)
1995 1994
% of % of
Pretax Pretax
Amount Income Amount Income
Income (Loss) from Continuing
Operations Before Income Taxes (Benefits) $101 $(115)
Statutory Federal Corporate Tax (Benefit) 35 35% (40) (35)%
Increases (Reductions) in
Taxes Resulting from:
Tax-Exempt Interest (3) (3) (6) (5)
Dividends Received Deduction - - (1) (1)
Foreign Income at Higher Rates (1) (1) (2) (2)
Change in Valuation Allowance - - 46 40
Current Alternative Minimum Tax
Benefits - - (23) (20)
Disallowance of Tax Loss on
Sale of Casualty 21 21 - -
Other - - 1 1
Total Income Taxes (Benefit) $ 52 52% $ (25) (22)%
The effective tax rate has increased primarily because Continental is in
a regular tax position in the first quarter of 1995 as compared to a current
Alternative Minimum Tax position in the first quarter of 1994 and because of
the disallowance of the Tax Loss on the sale of Casualty in 1995. A Tax Loss
was generated on the sale of Casualty due to book/tax basis differences
caused primarily by loss reserve discounting.
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1994 and March 31, 1995, and December
31, 1993 and March 31, 1994 and the provision for deferred income
taxes under SFAS #109 "Accounting for Income Taxes" for the three
months ended March 31, 1995 and 1994 are presented on pages 11 and 12.
The net deferred tax asset, before considering deferred taxes
(benefits) on unrealized appreciation\(depreciation) of
investments, decreased by $46 million at March 31, 1995. The
decrease was caused predominately by a decrease in tax net
operating loss (NOL's) carryforwards and a decrease in the loss
reserve discounting and unearned premium reserve as a result of
the sale of Casualty Insurance Company partially offset by a
reduction in deferred tax liability related to installment receivables.
In light of significant re-engineering of operations in 1994 and
the expected results such actions will have on increasing future
taxable income, management believes it is more likely than not
that a significant portion of the deferred tax asset will be
realized against future taxable income.
The valuation allowance for deferred tax assets was $231 million
at December 31, 1994. The net change in the valuation allowance
for deferred tax assets was a decrease of $57 million, resulting
in a $174 million valuation allowance at March 31, 1995. The $57
million decrease in the valuation allowance resulted from a
decrease in the deferred tax assets attributable to a decrease in
unrealized depreciation in the securities portfolio.
Deferred Tax (Expense) Benefit
Statement
(millions) Balance of Shareholders' Balance
December 31, 1994 Income Equity Mar. 31, 1995
Deferred Tax Assets:
Unearned Premium Reserve $ 108 $(19) $ - $ 89
Loss Reserve Discounting 290 (54) - 236
Adoption of SFAS No. 106 70 - - 70
Net Operating Loss Carryforward 303 (15) - 288
Tax Credit Carryforwards 55 4 - 59
Real Estate Basis Differences 37 (1) - 36
Allowance for Bad Debts 17 1 - 18
Capital Leases 8 - - 8
Provision for Early Retirement 4 - - 4
Unrealized Depreciation of
Investments 92 - (57) 35
Accrual for Retrospectively
Rated Premiums - 1 - 1
Other Items 23 (2) - 21
Total Gross Deferred Tax Assets 1,007 (85) (57) 865
Valuation Allowance (231) - 57 (174)
Net Deferred Tax Assets 776 (85) - 691
Deferred Tax Liabilities:
Deferred Acquisition Costs 129 11 - 118
Audit Premiums 43 - - 43
Installment Receivables 29 23 - 6
Other Items 20 5 - 15
Total Gross Deferred
Tax Liabilities 221 39 - 182
Deferred Tax Asset, Net $555 $(46) $ - $ 509
Deferred Tax (Expense) Benefit
(millions) Statement
Balance of Shareholders' Balance
Dec. 31, 1993 Income Equity Mar. 31, 1994
Deferred Tax Assets:
Unearned Premium Reserve $127 $ (1) $ - $ 126
Loss Reserve Discounting 245 1 - 246
Adoption of SFAS No. 106 70 - - 70
Net Operating Loss Carryforward - 45 - 45
Tax Attribute Carryforwards 73 - - 73
Real Estate Basis Differences 47 (1) - 46
Allowance for Bad Debts 16 1 - 17
Capital Leases 15 - - 15
Provision for Early Retirement 15 - - 15
Other Items 28 - - 28
Total Gross Deferred Tax Assets 636 45 - 681
Valuation Allowance (136) (46) - (182)
Net Deferred Tax Assets 500 (1) - 499
Deferred Tax Liabilities:
Deferred Acquisition Costs 154 1 - 153
Accrual for Retrospectively
Rated Premiums 13 1 - 12
Audit Premiums 43 - - 43
Installment Receivables 18 - - 18
Unrealized Appreciation of
Investments 165 - 125 40
Other Items 65 1 - 64
Total Gross Deferred
Tax Liabilities 458 3 125 330
Deferred Tax Asset, Net $42 $(4) $125 $169
Note 6: Debt
In 1994, Continental extended the maturity of its revolving
credit facility from December 30, 1994 to December 31, 1995 and
increased the revolving credit facility by $60 million to permit
borrowings of up to $210 million from a syndicate of banks.
Under the revolving credit agreement, Continental was required,
among other things, not to exceed a modified debt to capital
ratio (debt plus shareholders' equity, excluding net unrealized
appreciation (depreciation) of investments, plus redeemable
preferred stocks), of 45%, for the period through June 29, 1995,
and 40%, thereafter, and to maintain a minimum level of statutory
surplus for its domestic insurance subsidiaries of, for the
period through June 29, 1995, $1,400 million and, thereafter,
$1,465 million. At March 31, 1995 (the most recent date for
compliance computations), Continental's modified debt to capital
ratio was approximately 39% and statutory surplus for its
domestic insurance subsidiaries was $1,673 million. On May 9,
1995, Continental repaid all borrowings under the revolving
credit facility with funds obtained from CNA. The facility was
terminated on May 10, 1995, after the merger (See Note 14:
Subsequent Event).
Note 7: Preferred Stock
On February 13, 1995, Continental called for redemption its two
issues of $4.00 par value, $2.50 cumulative preferred stock
(Series A and Series B) at $50 per share plus accrued and unpaid
dividends of $.60 per share. $3 million was transferred to
Chemical Bank, as redemption agent for the redemption of those
shares. Prior to the call for redemption, Continental had
2,750,000 shares of Series A Preferred Stock authorized and
issued and 1,094,096 shares of Series B Preferred Stock
authorized and issued. Each share of such Series A Preferred
Stock and Series B Preferred Stock was convertible into 2.2
shares of Continental common stock prior to March 10, 1995.
Holders of 7,255 shares of Series A Preferred Stock and 3,516
shares of Series B Preferred Stock exercised their right to
convert their holdings to Common Stock prior to March 10, 1995.
At March 31, 1995, $1 million had been paid to holders of
Series A Preferred Stock and $1 million to holders of Series B
Preferred Stock upon redemption of their shares. At March 31,
1995, 28,480 shares of Series A Preferred Stock and 23,422
shares of Series B Preferred Stock remained unredeemed. At
March 31, 1995, no shares of Series A Preferred Stock or Series B
Preferred Stock remained outstanding.
Note 8: Redeemable Preferred Stock
The Series T (828,100 shares authorized and issued) and Series F
(171,900 shares authorized and issued) are a $200 per share
liquidation value redeemable, cumulative, non-convertible
preferred stock. These series (issued December 9, 1994) are
redeemable under certain circumstances at the liquidation value
plus an additional amount reflecting any increase in the per
share price of Continental's common stock over $15.75 based on an
average market price during a period relating to a notice of
redemption. These preferred shares will pay an annual dividend
of 9.75% of liquidation value. During first quarter 1995, there
were no dividends paid on these preferred shares. These
preferred shares are recorded at their relative fair value of
$165 million and 34 million, respectively. Differences between
the fair value and liquidation value are being accreted using the
interest method through a charge to retained earnings, which for
first quarter 1995 was insignificant. In addition, changes in
redemption prices resulting from changes in the additional
amounts referred to above will adjust through retained earnings.
The Series H (375,000 shares authorized and issued) is a $200 per
share liquidation value redeemable, cumulative, non-convertible
preferred stock. This series (issued on December 9, 1994)
matures in 10 years and is redeemable under certain
circumstances. These preferred shares will pay an annual
dividend of 12% of liquidation value. During first quarter 1995,
there were no dividends paid on these preferred shares. These
preferred shares are recorded at their relative fair value of $75
million. Any differences between the fair value and liquidation
value are being accreted using the interest method through a
charge to retained earnings, which for first quarter 1995 was
insignificant.
An option was also issued to CNA to acquire $125 million
liquidation value of another series of 9.75% non-convertible
preferred stock. The option, exercisable if the CNA merger
agreement was terminated, and its underlying preferred stock will
be redeemable under certain circumstances for an amount
reflecting any increases in the per share price of the common
stock over $17.75 based on an average market price during a
period relating to a notice of redemption plus, in the case of
the underlying preferred stock, the liquidation value. This
option is recorded at its relative fair value of $1 million.
Effective May 10, 1995, the Merger was approved and the option
is not exerciseable (See Note 14: Subsequent Event).
Note 9: Employee Stock Options and Performance Awards
Continental has a Long-Term Incentive Plan under which it grants
performance awards and issues stock options to key employees.
Nine million shares of common stock, the maximum number of shares
which may be issued under the Plan, have been reserved for
issuance. Continental has granted both incentive stock options
and nonqualified stock options under the Plan.
No stock option has been granted with an exercise price below the
market price of Continental's common stock at the time of grant.
Performance awards are payable in either cash or shares of
Continental's common stock in amounts based on Continental's
performance for four-year award cycles determined by the
Compensation Committee of the Board of Directors. As of March
31, 1995, 596,450 of such shares were reserved for possible
payment of such awards. As a condition of the Merger with CNA,
Continental will pay $20 per reserved share pro-rated by the
percentage of time each share is in the four year cycle. Since
the Merger was completed on May 10, 1995, Continental expects to
pay approximately $5 million related to this transaction.
The stock options are accounted for as common stock equivalents
and are used in computing earnings per share. Options for
3,642,275 shares (at a weighted average exercise price of $29.54
per share) were outstanding, of which 3,626,225 were then
exercisable. During the first quarter 1995, no options we
exercised. As a condition of the Merger with CNA, Continental
will exchange the outstanding options for $0.25 per share. Since
the Merger was completed on May 10, 1995, Continental expects to
pay approximately $1 million related to this transaction.
Note 10: Discontinued Operations
The financial statements reflect the operating results and
balance sheet items of the discontinued insurance operations
separately from continuing operations. Operating results of the
discontinued operations were as follows:
Three Months Ended
March 31,
(millions) 1995 1994
Total Revenues $ 14 $ 18
Total Expenses 14 18
Income before Income Taxes - -
Income Taxes - -
Income from Discontinued Insurance Operations $ - $ -
Net assets of discontinued insurance operations at March 31, 1995
and December 31, 1994 were as follows:
March 31, December 31,
(millions) 1995 1994
Assets
Cash and Investments $700 $733
Other Assets 820 807
1,520 1,540
Liabilities
Outstanding Losses and Loss Expenses 1,113 1,155
Unearned Premiums 2 1
Other Liabilities 302 296
1,417 1,452
Net Assets $103 $88
Note 11: Asbestos-Related, Other Toxic Tort and Environmental
Pollution Claims
Prior to the third quarter of 1994, Continental did not establish
reserves for incurred but not reported asbestos-related, other
toxic tort and environmental pollution claims (the "Environmental
IBNR Claims") because the existence of significant uncertainties,
(including difficulties in determining the frequency and severity
of potential claims and in predicting the outcome of judicial
decisions, as case law evolves regarding liability exposure,
insurance coverage and interpretation of policy language) and the
absence of standard techniques to measure exposure did not allow
ultimate liabilities to be reasonably estimated in accordance
with accepted actuarial standards.
While Continental continues to believe that it is not possible to
reasonably estimate ultimate liabilities for Environmental IBNR
Claims, it has concluded that different measurement techniques,
based on industry averages, for estimating a reserve for
unreported environmental claims have been sufficiently developed,
and accepted in the industry, to permit Continental to determine
a reasonable gross estimate for Environmental IBNR Claims.
However, due to the continuing level of uncertainty involved with
environmental exposures, Continental may incur future charges for
Environmental IBNR Claims which may be material to Continental's
financial position, results of operations or liquidity.
Included in Continental's liability for outstanding losses and
loss expenses are gross undiscounted reserves of $791 million for
asbestos-related, other toxic tort and environmental pollution
claims. At March 31, 1995 the gross undiscounted reported
environmental reserves for losses and loss expenses
(Environmental Claims) were $331 million ($354 million at
December 31, 1994) and gross undiscounted Environmental IBNR
reserves were $460 million ($480 million at December 31, 1994).
The $331 million represents Continental's current best estimate
for reported Environmental Claims. The $460 million represents
Continental's best estimate for its Environmental IBNR Claims,
using a measurement technique believed to be reasonable, based
upon information currently available. However, it is not
possible at this time to estimate the amount of additional
liability related to the Environmental IBNR Claims that is at
least reasonably possible to exist.
Included in Continental's reinsurance asset are amounts due for
reported Environmental Claims of $164 million at March 31, 1995
($175 million at December 31, 1994). A reinsurance asset of $80
million was recorded in conjunction with the establishment of the
reserve for Environmental IBNR Claims, but was fully reserved for
as not recoverable due to the degree of uncertainty in the
collectibility of such amounts in the third quarter 1994.
The technique utilized by Continental involves measuring total
net reserves for reported Environmental Claims and Environmental
IBNR Claims in terms of the number of years such reserves could
fund the net annual payments for these claims. Such technique is
consistent with that utilized by an insurance rating agency and
by the actuarial profession in some of its discussion papers for
its preliminary work with respect to such liabilities. At the
end of 1992, the industry was at a net environmental reserve to
net environmental paid ratio ("Survival Ratio") of six times such
paid losses, which had been increasing and was expected to
continue to increase further. At December 31, 1994 Continental's
net environmental claims reserves would comprise approximately
nine times its historical average net paid losses and loss
expenses for these claims.
Net losses and loss expenses include charges for reported
Environmental Claims and Environmental IBNR Claims of $0
and $18 million for the quarters ended March 31, 1995 and March
31, 1994, respectively.
Most of Continental's environmental pollution claims result from
general liability policies written prior to 1986. Certain
provisions of these policies have been subject to wide-ranging
challenges by policyholders and/or differing interpretations by
courts in various jurisdictions, with inconsistent conclusions as
to the applicability of coverage for environmental pollution
claims. Asbestos-related claims have generally arisen out of
product liability coverage provided by Continental under general
liability policies written prior to 1986. Thereafter, asbestos-
related product exclusions were included in general liability
policies. Other toxic tort claims have also generally arisen out
of product coverage under general liability policies. These
claims involve a variety of allegations of bodily injury arising
from exposure over a period of time to products alleged to be
harmful or toxic.
Note 12: Sale of Subsidiary
In February 1995, Continental sold the stock of Casualty
Insurance Company ("Casualty"), an Illinois insurance company
engaged in the workers' compensation insurance business, to a
subsidiary of Fremont General Corporation, a California-based
corporation, for $225 million in cash and a $25 million note.
During the period from January 1 to February 21, 1995, Casualty
wrote $53 million in premiums. Continental recognized a pre-tax
gain of approximately $96 million and, on an after-tax basis
approximately $50 million on that sale.
Note 13: Proposed Sale of Subsidiaries
Continental has engaged in preliminary discussions to sell
Continental Asset Management Corp., its asset management company,
and proposes to sell California Central Trust Bank Corporation, a
California State-chartered, FDIC-insured bank. Continental does
not expect the sale of these operations to have a significant
impact on its financial position, results of operations or
liquidity.
Note 14: Subsequent Event
CNA Merger - On December 6, 1994, Continental entered into an
Agreement and Plan of Merger by and among Continental, CNA
Financial Corporation ("CNA") and Chicago Acquisition Corp.
("Acquisition"), a wholly-owned subsidiary of CNA, providing for
the Merger of Acquisition with and into Continental ("Merger")
and the conversion of each share of Continental's common stock
into the right to receive $20, in cash, without interest (other
than shares as to which dissenters' rights have been properly
exercised under New York law and certain shares held by
Continental's subsidiaries). On May 9, 1995, at a Special
Meeting of Shareholders called to approve the Merger Agreement,
holders of 77% of the outstanding shares of Continental Common
Stock voted to approve the Merger Agreement and the Merger.
Final regulatory approvals of the Merger were received on May 9,
1995. The Merger was consummated on May 10, 1995, and
Continental became a subsidiary of CNA.
Settlement of Certain Litigation - Beginning on December 7, 1994,
five purported class actions were filed in New York State Supreme
Court, New York County, against Continental, directors of
Continental and CNA by persons claiming to be stockholders of
Continental and relating to the Merger Agreement. The plaintiffs
in those actions alleged that directors of Continental breached
their fiduciary duties when they approved the Merger Agreement
by, among other things, agreeing to the Merger at an unfair and
inadequate price, failing to adequately "shop" Continental and
failing to maximize the value for Continental's shareholders.
The plaintiffs in two of those actions named CNA as a defendant
and alleged that CNA aided and abetted the breaches of fiduciary
duty. The plaintiff in another of those actions alleged that
directors of Continental violated Sections 715 and 717 of the New
York Business Corporation Law (which sections relate to the
duties of officers and directors). The plaintiffs in one or more
of those purported class actions sought, among other relief, an
injunction prohibiting the Merger and unspecified monetary
damages.
On May 5, 1995, counsel for the plaintiffs in the five class
actions and counsel for the defendants entered into a memorandum
of understanding ("MOU") pursuant to which they agreed to pursue
a final settlement of the actions. Pursuant to the MOU
Continental had earlier agreed to amplify certain disclosures to
be contained in the Proxy Statement, dated March 29, 1995, which
was submitted to Continental's shareholders in connection with
the Special Meeting of Shareholders for approval of the Merger
(the "Proxy Statement"), and to ask Goldman, Sachs & Co., the
financial advisor to Continental in connection with the Merger,
to bring down the fairness opinion issued by Goldman, Sachs & Co.
in connection with the Merger, to the date of the Proxy
Statement. Pursuant to its undertaking, Continental obtained a
bring-down of Goldman, Sachs & Co.'s fairness opinion, dated
March 27, 1995, and in the Proxy Statement made disclosure of the
bring-down of the Goldman, Sachs & Co. fairness opinion and
expanded the discussion of the information presented to the Board
of Directors of Continental in connection with its December 6
meeting to consider the Merger Agreement. In the MOU the
defendants agreed not to object to an application by plaintiffs'
counsel to the Court for an award of attorneys' fees and
disbursements in an aggregate amount not to exceed $360,000,
which fees would be paid by Continental upon approval by the
Court.
The MOU contemplates the completion of a Stipulation of
Settlement containing certain additional provisions relating to
the settlement, including, inter alia: (a) a denial by defendants
that they committed or threatened to commit any violations of
law, and the proviso that they enter into the Stipulation of
Settlement to eliminate the burden and expense of further
litigation and to facilitate the Merger; (b) a release to be
granted from each plaintiff and the class to the defendants and
certain other parties; and (c) a condition to settlement
permitting the plaintiffs to conduct certain additional
discovery. The settlement of the purported class actions is
subject to notice to the purported class and a hearing by the
Court as to the fairness and reasonableness of the settlement
and certain other technical conditions.
Pending Litigation -On March 9, 1995, Continental received by
facsimile transmission a copy of a First Amended Complaint, entitled
Gannon v. Continental Insurance Company, et al., which amended complaint
was purportedly filed in the Superior Court of New Jersey,
Middlesex County Law Division. The original complaint against
Continental Insurance Company, Continental and certain officers
and former officers of Continental alleged certain claims
purportedly arising from the termination of the plaintiff in or
about May 1994, including allegations of discrimination based on
plaintiff's age and gender. The allegations of the amended
complaint include, in addition to the employment related claims
of the original complaint, allegations of violations of certain
federal securities and state laws by certain current and former
officers and directors of Continental in connection with annual
and other filings made by Continental with the Securities and
Exchange Commission, waste of corporate assets and breaches of
fiduciary duties in connection with the compensation of officers
and the approval of the Merger. Those claims are purportedly
made on behalf of a class of persons alternatively described as
all persons who purchased Continental's Common Stock during an
undisclosed period and holders of 7,500 shares of Continental
Common Stock.
In connection with the purported class claims, the plaintiff
seeks, among other relief, the appointment of a stockholders
committee, disgorgement of certain payments to senior executives
and directors of Continental, and a declaration that the proxy
statement submitted to former stockholders of Continental on
March 29, 1995, and the actions taken by those former
stockholders at the Special Meeting held on May 9, 1995 have no
legal effect. Continental does not believe that the litigation
is likely to have a material adverse effect on the financial
condition of it or Continental Insurance Company. Continental
also does not believe that the purported class allegations of the
amended complaint will have an effect on the Merger, which was
consummated on May 10, 1995.
Continental and a number of its subsidiaries are involved in purported class
actions pending in state court in Illinois, entitled Ryan Versus Kansas City
Fire and Marine, et al. That case, purportedly on behalf of Illinois
auto insureds and other similarly situated Continental insureds
nationwide, alleges improper policy overcharges for youthful driver
family members. The case seeks quantification and return of alleged
youthful driver overcharges for the past ten years, with interest, and
injunctive relief against such practices. Illinois jurisdiction
has been challenged with respect to Continental and several of its
subsidiaries. A motion to dismiss has been filed with respect to all
Continental defendants other than Kansas City Fire and Marine, on the
grounds that plaintiff does not have a right to sue any defendant other
than Kansas City Fire and Marine, with which he was insured. Continental
and its subsidiaries intend to vigorously defend against this action. In
light of Continental's recent operating results, an adverse decision in this
action may have a material impact on results of operations and liquidity.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Business Operations: Continental's principal business is
property and casualty insurance. Its Insurance Operations are
comprised of three segments: Agency & Brokerage Commercial,
Agency & Brokerage Personal and Specialized Commercial. The
results of Continental's non-insurance operations, including
investment management, claims adjusting and risk management, are
reported in the Corporate & Other Operations segment.
Continental's Insurance Operations generated 98% of consolidated
revenues for the first quarter of 1995, including 77% from
premiums earned and 21% from investment activities (net
investment income and realized capital gains).
Results of Operations - First quarter 1995 compared with first
quarter 1994.
Summary: Continuing operations provided net income of $49
million for the first quarter 1995. The net result for the first
quarter 1994 was a $90 million loss from continuing operations,
including a one-time $45 million charge to restructure the field
claims operations and several corporate staff units.
On December 6, 1994, Continental entered into an Agreement and
Plan of Merger by and among Continental, CNA Financial
Corporation ("CNA") and Chicago Acquisition Corp.
("Acquisition"), a wholly-owned subsidiary of CNA, providing for
the Merger of Acquisition with and into Continental ("Merger")
and the conversion of each share of Continental's common stock
into the right to receive $20, in cash, without interest (other
than shares as to which dissenters' rights have been properly
exercised under New York law and certain shares held by
Continental's subsidiaries). On May 9, 1995, at a Special
Meeting of Shareholders called to approve the Merger Agreement,
holders of 77% of the outstanding shares of Continental common
stock voted to approve the Merger Agreement and the Merger.
Final regulatory approvals of the Merger were received on May 9,
1995. The Merger was consummated on May 10, 1995, and
Continental became a subsidiary of CNA.
The Certificate of Incorporation was amended effective May 10, 1995
to reflect the Certificate of Incorporation, as amended, of Chicago
Acquisition Corporation.
Insurance Operations: The Insurance Operations had a first
quarter 1995 income before income taxes of $115 million, a $215
million increase from the first quarter of 1994. First quarter
underwriting results improved $144 million while investment
results improved $71 million, including a $61 million increase in
realized capital gains (primarily from the 1995 sale of
subsidiary - see "Other Developments - Sale of Subsidiary") and a
$10 million increase in net investment income, primarily due to
higher available short-term investment yields.
The $144 million increase in underwriting results was primarily
due to an $87 million decrease in catastrophe losses, a
substantial decrease in weather-related losses not officially
designated as catastrophe and expense savings realized as a
result of the 1994 re-engineering. First quarter 1994
underwriting results reflected a $45 million restructuring
charge ($26 million in loss expenses and $19 million in
insurance operating expenses). For the 1995 quarter, premiums
earned decreased $273 million, primarily due to the 1994 sale
of Continental's Canadian operations (a reduction in premiums
earned of $78 million in the first quarter 1995 as compared to
the first quarter of 1994) and the February 21, 1995 sale of
Casualty Insurance Company ("Casualty") (a reduction in premiums
earned of $40 million in the first quarter 1995 as compared to
the first quarter of 1994), a substantial decrease in the amount
of risk accepted, and the cession of $51 million of domestic
personal lines business under a quota share agreement (the "Quota
Share Cession"), partially offset by a modest price increase.
Losses and loss expenses decreased $308 million, primarily due to
the aforementioned $87 million decrease in catastrophe losses,
the sales of the Canadian operations (resulting in a $72 million
decrease in losses and loss expenses) and Casualty (resulting in
a $21 million decrease in losses and loss expenses), the
reduction in non-catastrophe weather-related losses, the
decrease in the amount of risk accepted and the cession of $36
million in losses relating to the Quota Share Cession. First
quarter 1994 losses and loss expenses included a $26 million
charge associated with the first quarter 1994 restructuring.
First quarter 1995 insurance operating expenses decreased $108
million primarily due to the sales of the Canadian operations (
which accounted for $25 million in first quarter 1994 expenses)
and Casualty (which accounted for $8 million in reduced
expenses), a decrease in acquisition expenses associated with the
substantial decrease in the amount of risk accepted, expense
savings realized as a result of the 1994 re-engineering, and
ceded commission income of $11 million relating to the Quota
Share Cession.
The Insurance Operations premiums earned and underwriting results
for the first quarters of 1995 and 1994 were as follows:
Premiums Earned Underwriting Results
March 31, March 31,
1995 1994 1995 1994
(millions)
INSURANCE SEGMENTS*
Agency & Brokerage Commercial $388 $522 ($53) ($169)
Agency & Brokerage Personal 137 226 (16) (45)
Specialized Commercial 306 356 (38) (37)
Total Insurance Operations $831 $1,104 ($107) ($251)
* Distinct investment portfolios are not maintained for individual
insurance segments; accordingly, Insurance Operations' investment
results are explained in aggregate below.
The Agency & Brokerage Commercial segment's first quarter 1995
underwriting results improved $116 million from first quarter
1994, primarily due to a $46 million decrease in catastrophe
losses, the decrease in non-catastrophe weather-related losses
and expense savings realized as a result of the 1994 re-
engineering. The 1994 underwriting result included a $29 million
restructuring charge ($17 million in loss expenses and $12
million in insurance operating expenses). Premiums earned
decreased $134 million, primarily due to a substantial decrease
in the amount of risk accepted in the standard package commercial
lines business and the sale of the Canadian operations ($52
million), partially offset by a modest price increase. Losses
and loss expenses decreased $197 million, primarily due to the
decrease in the amount of risk accepted, the sale of the Canadian
operations ($51 million), the $46 million decrease in
catastrophe losses, and lower non-catastrophe weather-related
losses. Insurance operating expenses decreased $53 million,
primarily due to lower acquisition expenses resulting from the
decrease in the amount of risk accepted, the sale of the Canadian
operations ($18 million) and expense savings realized as a result
of the 1994 re-engineering. The 1994 insurance operating expenses
included a $12 million restructuring charge.
The Agency & Brokerage Personal segment's first quarter 1995
underwriting results improved $29 million from first quarter
1994, primarily due to a $35 million decrease in catastrophe
losses, the decrease in non-catastrophe weather-related losses
and expense savings realized as a result of the 1994 re-
engineering partially offset by increased loss experience (other
than catastrophe and non-catastrophe weather-related losses), on
personal package business. The 1994 underwriting result included
a $13 million restructuring charge ($9 million in loss expenses
and $4 million in insurance operating expenses). Premiums earned
decreased $89 million primarily due to the Quota Share Cession
($51 million), the sale of the Canadian operations ($26 million)
and a decrease in the amount of risk accepted partially offset by
a modest price increase. Losses and loss expenses decreased by
$74 million, primarily due to the aforementioned $35 million
decrease in catastrophe losses, the cession of $36 million in
losses under the Quota Share Cession and the sale of the Canadian
operations ($20 million), partially offset by the aforementioned
increased loss experience. Insurance operating expenses
decreased by $44 million, primarily due to the expense savings
realized as a result of the 1994 re-engineering, the cession of
$11 million in Insurance operating expenses under the Quota Share
Cession and the sale of the Canadian operations ($7 million).
The Specialized Commercial segment's first quarter 1995
underwriting results decreased $1 million from first quarter
1994. Premiums earned decreased by $50 million, primarily due
to the sale of Casualty ($40 million) and a decrease in the
amount of risk accepted, partially offset by a modest price
increase. Losses and loss expenses decreased by $37 million,
primarily due to the sale of Casualty ($23 million) and the
decrease in the amount of risk accepted. Insurance operating
expenses decreased $12 million, primarily due to the sale of
Casualty ($8 million).
First quarter 1995 net investment income for the Insurance
Operations was $129 million, compared with $119 million for the
first quarter 1994. The increase in net investment income of $10
million was primarily due to a substantial increase in interest
rates on short-term investments (approximately a 280 basis point
increase in average available short-term yields) which more than
offset the decrease in average invested assets resulting from the
sale of Casualty and the Canadian operations. Fixed income
securities include short-term investments, fixed maturity
investments and non-redeemable preferred stocks, and comprised
92% of Continental's investments.
First quarter 1995 realized capital gains for the Insurance
Operations were $93 million, compared with $32 million for the
first quarter 1994. The increase of $61 million resulted
primarily from the $96 million pre-tax gain on the sale of
Casualty, partially offset by 1995 sales of depreciated
securities from the fixed maturities portfolio and the sales of
other investments which generated a realized loss of $3 million
(compared to realized gains of $16 million in the first quarter
of 1994). Sales of common stocks generated realized gains of $16
million in the first quarter of 1994.
Corporate & Other Operations: Corporate and Other Operations
generated a loss, before income tax benefits, of $14 million for
the first quarter 1995, compared with a $15 million loss in the
first quarter 1994.
Income Taxes: Continental recorded income tax expense of $52
million in the first quarter 1995 ($50 million in federal income
taxes and $2 million in foreign income taxes). In the first
quarter of 1994, Continental recorded federal and foreign income
tax benefits of $23 million and $2 million, respectively.
The effective tax rate has increased primarily because Continental is in
a regular tax position in the first quarter of 1995 as compared to a current
Alternative Minimum Tax position in the first quarter of 1994 and because of
the disallowance of the Tax Loss on the sale of Casualty in 1995. A Tax Loss
was generated on the sale of Casualty due to book/tax basis differences
caused primarily by loss reserve discounting.
Other Developments:
Economic Issues: Price levels in the property and casualty
insurance markets materially affect Continental's underwriting
results. Continental is re-underwriting its existing book of
business to focus on those areas in which management believes
Continental can achieve an underwriting profit. The slowdown in
Continental's premium growth from the first quarter 1994 reflects
actions taken in 1994 to significantly curtail business for which
management believes prices continued to be inadequate relative to
loss costs. Future premiums, net income and cash flow will
depend on the degree to which these efforts are successful.
Inflation generally increases the cost of losses covered by
insurance contracts. However, the effect of inflation varies by
line of business. Since the overall rate of inflation has been
relatively constant and historically normal in recent years, such
effects have been less significant than in previous years, except
in medical care costs. The medical cost inflation rate, while
now generally decreasing, is still higher than the overall
inflation rate. Lines of insurance involving medical care costs,
such as automobile, workers' compensation and medical
malpractice, comprised 33% (excluding Casualty, which was sold
in February 1995) of Continental's premiums earned for the first
quarter 1995, as compared with 35% (excluding Casualty) in the
first quarter of 1994. The methods used by Continental to
estimate individual case reserves and reserves for unreported
claims implicitly consider the effect of inflation in the
projection of ultimate loss costs.
Asbestos-Related, Other Toxic Tort and Environmental Pollution
Claims: Prior to the third quarter of 1994, Continental did not
establish reserves for incurred but not reported asbestos-
related, other toxic tort and environmental pollution claims (the
"Environmental IBNR Claims") because the existence of significant
uncertainties (including difficulties in determining the
frequency and severity of potential claims and in predicting the
outcome of judicial decisions, as case law evolves regarding lia
bility exposure, insurance coverage and interpretation of policy
language) and the absence of standard techniques to measure
exposure did not allow ultimate liabilities to be reasonably
estimated in accordance with accepted actuarial standards.
While Continental continues to believe that it is not possible to
reasonably estimate ultimate liabilities for Environmental IBNR
Claims, it has concluded that different measurement techniques,
based on industry averages, for estimating a reserve for
Environmental IBNR Claims have been sufficiently developed and
accepted in the industry, to permit Continental to determine a
reasonable gross estimate for Environmental IBNR Claims.
However, due to the continuing level of uncertainty involved with
environmental exposures, Continental may incur future charges for
Environmental IBNR Claims which may be material to Continental's
financial position, results of operations or liquidity.
Included in Continental's liability for outstanding losses and
loss expenses are gross undiscounted reserves of $791 million for
asbestos-related, other toxic tort and environmental pollution
claims. At March 31, 1995 the gross undiscounted reported
environmental reserves for losses and loss expenses
(Environmental Claims) were $331 million ($354 million at December
31, 1994) and gross undiscounted Environmental IBNR reserves were
$460 million ($480 million at December 31, 1994). The $331 million
represents Continental's current best estimate for reported
Environmental Claims. The $460 million represents Continental's
best estimate for its Environmental IBNR Claims, using a
measurement technique believed to be reasonable, based upon
information currently available. However, it is not possible at
this time to estimate the amount of additional liability related
to the Environmental IBNR Claims that is at least reasonably
possible to exist.
Included in Continental's reinsurance assets are amounts due for
reported Environmental Claims of $164 million at March 31, 1995
($103 million at March 31, 1994). A reinsurance asset of
$80 million was recorded in conjunction with the establishment of
the reserve for Environmental IBNR Claims, but was fully reserved
for as not recoverable due to the degree of uncertainty in the
collectibility of such amounts in the third quarter of 1994.
The technique used by Continental to determine its environmental
IBNR reserves involves measuring total net reserves for reported
Environmental Claims and Environmental IBNR Claims in terms of
the number of years such reserves could fund the net annual
payments for these claims. Such technique is consistent with
that used by an insurance rating agency and by the actuarial
profession in some of its discussion papers for its preliminary
work with respect to such liabilities. At the end of 1992, the
industry was at a net environmental reserve to net environmental
paid ratio ("Survival Ratio") of six times such paid losses,
which had been increasing and was expected to continue to
increase further. At December 31, 1994, Continental's net
environmental claims reserves would comprise approximately nine
times its historical average net paid losses and loss expenses
for such claims.
Net losses and loss expenses included charges for reported
Environmental Claims and Environmental IBNR Claims of $0
and $18 million during the quarter ended March 31, 1995 and March
31, 1994, respectively.
Most of Continental's environmental pollution claims result from
general liability policies written prior to 1986. Certain
provisions of these policies have been subject to wide-ranging
challenges by policyholders and/or differing interpretations by
courts in various jurisdictions, with inconsistent conclusions as
to the applicability of coverage for environmental pollution
claims. Asbestos-related claims have generally arisen out of
product liability coverage provided by Continental under general
liability policies written prior to 1986. Thereafter, asbestos-
related product exclusions were included in general liability
policies. Other toxic tort claims have also generally arisen out
of product liability coverage under general liability policies.
These claims involve a variety of allegations of bodily injury
arising from exposure over a period of time to products alleged
to be harmful or toxic.
Restructuring Charge: In March 1994, Continental's senior
management approved a definitive plan to re-engineer the
operations of Continental's Agency & Brokerage division
(including home office, field claims and underwriting), selected
operations of Continental's Special Operations division,
particularly its multinational unit, and several corporate staff
divisions, including Human Resources, Corporate Claims,
Actuarial, Finance, and Legal. The locations identified for re-
engineering were Cranbury, New Jersey; New York, New York;
Duluth, Georgia; Chicago, Illinois; Dallas, Texas; Glens Falls,
New York; Overland Park, Kansas; Rancho Cordova, California;
Columbus, Ohio; York, Pennsylvania and certain overseas
locations. These re-engineering efforts planned the elimination
of 680 positions (net of new hires and transfers and resulting
from approximately 1,200 terminations), from a total company
workforce of 12,255 at year end 1993, within one year for
approval of the plan, as well as the achievement of business-
related expense savings by the first quarter of 1995. During
1994, substantially all of the employees identified for
termination in the first quarter 1994 re-engineering plan were
notified that their positions had been eliminated. The re-
engineering plan also included vacating leased space at 27
locations. As of December 31, 1994, all of these locations have
effectively been vacated. Continental has also implemented
additional cost saving measures in several employee benefit
programs. The first quarter 1994 re-engineering plan included
severance packages for all affected employees as well as extended
benefits and out placement counseling for many of them.
Underwriting results for first quarter 1994 included a $45
million restructuring charge, including $29 million in expected
severance and related benefits and $16 million in expected lease
vacation and other associated costs. As of March 31, 1995,
effectively all costs associated with the restructuring charge
have been paid.
In June, 1994, Continental announced additional steps with a goal
to improve its profitability and strenghten the capital base of its
domestic insurance subsidiaries. To improve its profitability,
Continental began to curtail its property writings, especially in
catastrophe prone areas. Also to further reduce its operating expenses,
in the second quarter of 1994, Continental reconsidered its staffing
needs and developed another plan in the third quarter of 1994 that
would result in a further net reduction of approximately 1,100 positions
(in addition to the terminations of approximately 1,200 from the first
quarter). Management believes that its re-engineering efforts in 1994
will create annual pre-tax savings of about $120 million compared with
Continental's reported 1993 expenses.
Sale of Subsidiary: In February 1995, Continental sold the stock
of Casualty Insurance Company ("Casualty"), an Illinois insurance
company engaged in the workers' compensation insurance business,
to a subsidiary of Fremont General Corporation, a California-
based corporation, for $225 million in cash and a $25 million
note. During the period from January 1 to February 21, 1995,
Casualty wrote $53 million in premiums. Continental recognized a
pre-tax gain of approximately $96 million and, on an after-tax
basis of approximately $50 million on that sale.
Proposed Sale of Subsidiaries: Continental has engaged in
preliminary discussions to sell Continental Asset Management
Corp., its asset management company, and proposes to sell
California Central Trust Bank Corporation, a California State-
chartered, FDIC-insured bank. Continental does not expect the
sale of these operations to have a significant impact on its
financial position, results of operations or liquidity.
New Accounting Pronouncements: Effective December 31, 1994,
Continental adopted SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments,"
which increased the required disclosure about derivative
financial instruments. This statement did not materially change
the way Continental accounts for or discloses its derivative
instruments.
Financial Resources and Liquidity
Cash Flow Analysis: Operating activities for the first quarter
1995 used $79 million in cash and cash equivalents, whereas
operating activities for the first quarter 1994 used cash and
cash equivalents of $176 million. The principal causes for the
decrease in cash used by operations were a $126 million
decrease in underwriting expenses paid and a $141 million
decrease in loss and loss expenses paid. These increases in cash
provided were partially offset by a $170 million decrease in
premiums collected and a $27 million decrease in investment
income received.
Investing activities for the first quarter 1995 provided $118 million
in cash and cash equivalents, whereas investing activities for
the first quarter 1994 provided $230 million in cash and cash
equivalents. Increases in investments are reported as uses of
cash and cash equivalents, and proceeds from sales, redemptions
and maturities of investments are reported as provisions of cash
and cash equivalents. The decrease in cash provided by investing
activities is primarily due to higher 1995 net sales of
securities as a result of decreased cash used by operating
activities.
Financing activities for the first quarter 1995 used $9 million
in cash and cash equivalents, whereas financing activities for
the first quarter 1994 used $17 million in cash and cash
equivalents. Increases in borrowings are reported as provisions
of cash and cash equivalents, while decreases in borrowings and
payments of dividends are reported as uses of cash and cash
equivalents. The decrease in cash used in financing activities
is primarily due to $13 million in dividends paid to shareholders
during 1994 compared to no dividends paid to shareholders in
1995.
As a result of the operating, investing and financing activities
described above, cash and cash equivalents provided by operations
decreased $7 million from the first quarter of 1994.
Liquidity: To meet its cash obligations, including claims
payments, operating expenses, interest and principal payments on
debt, declared shareholder dividends and taxes, Continental holds
cash reserves, short-term money market instruments and other
fixed income securities with maturities of less than one year.
During 1994, Continental sold preferred stock and an option for
$275 million in cash to Continental Casualty Company, a wholly-
owned subsidiary of CNA. That preferred stock and option remain
outstanding. At May 10, 1995, with the consummation of the
Merger, the option is not exerciseable.
During the first quarter of 1995, Continental's domestic
insurance subsidiaries paid it $16 million in dividends. Each of
the states in which one or more of these subsidiaries are
domiciled has enacted a formula which governs the maximum amount
of dividends that such subsidiaries may pay without prior
regulatory approval. These formulas, which are substantially
similar, limit such dividends based on such factors as
policyholder surplus, net income, net investment income, and/or
unassigned surplus. Under the restrictions currently in effect,
the maximum amount available for payment of dividends to
Continental by its domestic insurance subsidiaries during the
year ending December 31, 1995 without regulatory approval is
estimated to be $45 million in addition to the $16 million paid
in the first quarter of 1995. Continental anticipates that divi
dends from its domestic insurance subsidiaries will enable it to
meet its near-term obligations for interest and principal
payments on debt, preferred stock dividends, corporate expenses
and taxes. To the extent that its insurance subsidiaries do not
generate amounts available for distribution sufficient to meet
Continental's cash requirements without regulatory approval,
Continental would seek approval for additional distributions.
During 1994, Continental extended the maturity of its revolving
credit facility from December 30, 1994 to December 31, 1995 and
increased the revolving credit facility by $60 million to permit
borrowings of up to $210 million from a syndicate of banks. At
March 31, 1995, Continental had a $205 million balance
outstanding under the facility. Under the revolving credit
agreement, Continental was required, among other things, not to
exceed a modified debt to capital ratio (debt plus shareholders'
equity, excluding net unrealized appreciation (depreciation) of
investments, plus redeemable preferred stocks), of 45%, for the
period through June 29, 1995, and 40%, thereafter, and to
maintain a minimum level of statutory surplus for its domestic
insurance subsidiaries of, for the period through June 29, 1995,
$1,400 million and, thereafter, $1,465 million. At March 31,
1995 (the most recent date for compliance computations),
Continental's modified debt to capital ratio was approximately
39% and statutory surplus for its domestic insurance subsidiaries
was $1,673 million. On May 9, 1995, Continental repaid all
borrowings under the revolving credit facility with funds
obtained from CNA. The facility was terminated on May 10, 1995,
after the merger. (See "Subsequent Events--Repayment and
Termination of Bank Facility").
Investments: Fixed maturities available-for-sale consist of
certain bonds and redeemable preferred stocks that management may
not hold until maturity and which have an average Moody's rating
of Aal (or its Standard & Poor's equivalent). Continental's
fixed maturities available-for-sale had a balance sheet fair
value of $6,237 million at March 31, 1995 (compared with a fair
value of $5,795 million at December 31, 1994) and included
mortgage-backed securities with a fair value of $1,518 million
and an amortized cost of $1,561 million at March 31, 1995
(compared with a fair value of $1,432 million and an amortized
cost of $1,516 million at December 31, 1994). Continental's
mortgage-backed securities have an average Moody's rating of Aaa,
Moody's highest rating, (or its Standard & Poor's equivalent),
and an average life of 6 years. Continental has an
insignificant investment in collateralized mortgage obligations
which put the return of principal at risk if interest rates or
prepayment patterns fluctuate. At March 31, 1995 and December
31, 1994, Continental's fixed maturities available for sale
portfolio classified by Moody's rating was as follows:
Percentage of Fixed Maturities
Available for Sale Portfolio
March 31, December 31,
1995 1994
Moody's Rating
Aaa 65.8% 62.1%
Aa 14.2% 15.0%
A 13.2% 15.2%
Baa 6.5% 7.2%
Below Baa 0.3% 0.5%
100.0% 100.0%
At March 31, 1995, the fixed maturities portfolio included an
immaterial amount of securities, the fair value of which is
expected to be lower than their carrying value for more than a
temporary period; such investments have been recorded in the
accompanying Consolidated Balance Sheets at their net realizable
value.
Continental also maintains an equity securities portfolio, the
fair value of which was $75 million at March 31, 1995 compared
with a fair market value of $121 million at December 31, 1994.
The $46 million decrease was primarily due to sales of equity
securities in 1994.
Unrealized depreciation on investments decreased $163 million,
before income taxes, from December 31, 1994, primarily as a
result of a increase in value due to decreased interest rates,
partially offset by a reduction in unrealized appreciation on
equity securities. Unrealized depreciation on fixed maturities
decreased $176 million. Unrealized appreciation on common stocks
decreased $12 million. Unrealized appreciation on other long-
term investments decreased $1 million. In addition, unrealized
depreciation on investments held by discontinued
operations decreased $5 million, before income taxes, from
December 31, 1994.
It is management's intent, to enter into derivative financial
investments primarily as economic hedges against the fixed income
portfolio. At March 31, 1995, the total notional value of
Continental's derivative financial investments amounted to $155
million and included financial futures contracts, interest rate
swap agreements, options and foreign currency forward contracts.
Continental does not expect to recognize material gains or losses
related to these investments.
Book Value: Continental's book value per share at March 31, 1995
was $20.85, compared with $16.46 at December 31, 1994, reflecting
a $3.02 per share decline in the unrealized depreciation of
investments (primarily due to the decrease in interest rates
during 1995), the $.71 per share income for the first quarter
1995, and a $.62 per share improvement in the foreign currency
translation adjustment.
Sale of Premiums Receivable: In December 1994, Continental sold
$408 million of premium receivables balances. This sale
accelerated the cash flow from the sold receivables, increasing
cash provided by operations in 1994 but reducing cash by $182
million for the first quarter of 1995, when that portion of the
receivables would have been collected. As a result, the balance
sheet caption "Premiums Receivable" at March 31, 1995, is lower
by $226 million than it otherwise would have been. In the event
that the receivables are not collected, Continental's credit risk
is limited to the amount that the purchasers of such receivables
hold as a deposit ($13 million at March 31, 1995).
In December 1993, Continental sold $513 million of premiums
receivables balances. This sale accelerated the cash flow from
the sold receivables, increasing cash provided by operations in
1993 but reducing cash by $259 million for the first quarter of
1994, when that portion of the receivables would have been
collected. As a result, the balance sheet caption "Premiums
Receivable" at March 31, 1994, was lower by $254 million than it
otherwise would have been.
Redemption of Series A and Series B Preferred Stock: On
February 13, 1995, Continental called for redemption its two
issues of $4.00 par value, $2.50 cumulative preferred stock
(Series A and Series B) at $50 per share plus accrued and unpaid
dividends of $.60 per share. $3 million was transferred to
Chemical Bank, as redemption agent for the redemption of those
shares. Prior to the call for redemption, Continental had
2,750,000 shares of Series A Preferred Stock authorized and
issued and 1,094,096 shares of Series B Preferred Stock
authorized and issued. Each share of such Series A Preferred
Stock and Series B Preferred Stock was convertible into 2.2
shares of Continental common stock prior to March 10, 1995.
Holders of 7,255 shares of Series A Preferred Stock and 3,516
shares of Series B Preferred Stock exercised their right to
convert their holdings to Common Stock prior to March 10, 1995.
At March 31, 1995, $1 million had been paid to holders of
Series A Preferred Stock and $1 million to holders of Series B
Preferred Stock upon redemption of their shares. At March 31,
1995, 28,480 shares of Series A Preferred Stock and 23,422
shares of Series B Preferred Stock remained unredeemed. At
March 31, 1995, no shares of Series A Preferred Stock or Series B
Preferred Stock remained outstanding.
Subsequent Events
CNA Merger: As noted above, the merger of Continental and
Acquisition was consummated on May 10, 1995. Each outstanding
common share of Continental (other than those shares owned by
shareholders who properly exercised their dissenters' rights
under New York law in certain shares held by Continental's
subsidiaries) was converted into the right to receive $20 cash,
without interest.
Repayment and Termination of Bank Facility: On May 9, 1995,
Continental repaid the entire amount outstanding under its
revolving credit facility. The repayment of the $205 million
outstanding under that facility on May 9 was funded through a
loan from CNA Financial Corporation ("CNA"). The facility was
terminated May 10, 1995 and Continental became a subsidiary of
CNA.
Settlement of Certain Litigation: Beginning on December 7, 1994,
five purported class actions were filed in New York State Supreme
Court, New York County, against Continental, directors of
Continental and CNA by persons claiming to be stockholders of
Continental and relating to the Merger Agreement. The plaintiffs
in those actions alleged that directors of Continental breached
their fiduciary duties when they approved the Merger Agreement
by, among other things, agreeing to the Merger at an unfair and
inadequate price, failing to adequately "shop" Continental and
failing to maximize the value for Continental's shareholders.
The plaintiffs in two of those actions named CNA as a defendant
and alleged that CNA aided and abetted the breaches of fiduciary
duty. The plaintiff in another of those actions alleged that
directors of Continental violated Sections 715 and 717 of the New
York Business Corporation Law (which sections relate to the
duties of officers and directors). The plaintiffs in one or more
of those purported class actions sought, among other relief, an
injunction prohibiting the Merger and unspecified monetary
damages.
On May 5, 1995, counsel for the plaintiffs in the five class
actions and counsel for the defendants entered into a memorandum
of understanding ("MOU") pursuant to which they agreed to pursue
a final settlement of the actions. Pursuant to the MOU
Continental had earlier agreed to amplify certain disclosures to
be contained in the Proxy Statement, dated March 29, 1995, which
was submitted to Continental's shareholders in connection with
the Special Meeting of Shareholders for approval of the Merger
(the "Proxy Statement"), and to ask Goldman, Sachs & Co., the
financial advisor to Continental in connection with the Merger,
to bring down the fairness opinion issued by Goldman, Sachs & Co.
in connection with the Merger, to the date of the Proxy
Statement. Pursuant to its undertaking, Continental obtained a
bring-down of Goldman, Sachs & Co.'s fairness opinion, dated
March 27, 1995, and in the Proxy Statement made disclosure of the
bring-down of the Goldman, Sachs & Co. fairness opinion and
expanded the discussion of the information presented to the Board
of Directors of Continental in connection with its December 6
meeting to consider the Merger Agreement. In the MOU the
defendants agreed not to object to an application by plaintiffs'
counsel to the Court for an award of attorneys' fees and
disbursements in an aggregate amount not to exceed $360,000,
which fees would be paid by Continental upon approval by the
Court.
The MOU contemplates the completion of a Stipulation of
Settlement containing certain additional provisions relating to
the settlement, including, inter alia: (a) a denial by defendants
that they committed or threatened to commit any violations of
law, and the proviso that they enter into the Stipulation of
Settlement to eliminate the burden and expense of further
litigation and to facilitate the Merger; (b) a release to be
granted from each plaintiff and the class to the defendants and
certain other parties; and (c) a condition to settlement
permitting the plaintiffs to conduct certain additional
discovery. The settlement of the purported class actions is
subject to notice to the purported class and a hearing by the
Court as to the fairness and reasonableness of the settlement
and certain other technical conditions.
Pending Litigation - On March 9, 1995, Continental received by facsimile
transmission a copy of a First Amended Complaint, entitled Gannon v.
Continental Insurance Company, et al., which amended complaint
was purportedly filed in the Superior Court of New Jersey,
Middlesex County Law Division. The original complaint against
Continental Insurance Company, Continental and certain officers
and former officers of Continental alleged certain claims
purportedly arising from the termination of the plaintiff in or
about May 1994, including allegations of discrimination based on
plaintiff's age and gender. The allegations of the amended
complaint include, in addition to the employment related claims
of the original complaint, allegations of violations of certain
federal securities and state laws by certain current and former
officers and directors of Continental in connection with annual
and other filings made by Continental with the Securities and
Exchange Commission, waste of corporate assets and breaches of
fiduciary duties in connection with the compensation of
officers and the approval of the Merger. Those claims are
purportedly made on behalf of a class of persons alternatively
described as all persons who purchased Continental's Common Stock
during an undisclosed period and holders of 7,500 shares of
Continental Common Stock.
In connection with the purported class claims, the plaintiff
seeks, among other relief, the appointment of a stockholders
committee, disgorgement of certain payments to senior executives
and directors of Continental, and a declaration that the proxy
statement submitted to former stockholders of Continental on
March 29, 1995, and the actions taken by those former
stockholders at the Special Meeting held on May 9, 1995 have no
legal effect. Continental does not believe that the litigation
is likely to have a material adverse effect on the financial
condition of it or Continental Insurance Company. Continental
also does not believe that the purported class allegations of the
amended complaint will have an effect on the Merger, which was
consummated on May 10, 1995.
Continental and a number of its subsidiaries are involved in purported class
actions pending in state court in Illinois, entitled Ryan Versus Kansas City
Fire and Marine, et al. That case, purportedly on behalf of Illinois
auto insureds and other similarly situated Continental insureds
nationwide, alleges improper policy overcharges for youthful driver
family members. The case seeks quantification and return of alleged
youthful driver overcharges for the past ten years, with interest, and
injunctive relief against such practices. Illinois jurisdiction
has been challenged with respect to Continental and several of its
subsidiaries. A motion to dismiss has been filed with respect to all
Continental defendants other than Kansas City Fire and Marine, on the
grounds that plaintiff does not have a right to sue any defendant other
than Kansas City Fire and Marine, with which he was insured. Continental
and its subsidiaries intend to vigorously defend against this action. In
light of Continental's recent operating results, an adverse decision in this
action may have a material impact on results of operations and liquidity.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
The Continental Corporation
Registrant
By s\ Peter E. Jokiel
Dated: May 15, 1995
Peter E. Jokiel
Senior Vice President and
Chief Financial Officer
Mr. Jokiel has signed this Report on behalf of the
Registrant in his capacity as a duly authorized officer and as
the Chief Financial Officer of the Registrant.
EXHIBIT INDEX
The following is a list of exhibits hereto required to be filed
by Item 601 of Regulation S-K.
Exhibit No.
(11) Statement Re: Computation of Per Share Earnings. Exhibit 1
(20) The Proxy Statement dated March 29, 1995, and previously filed with
the Commission is herein filed by reference.
EXHIBIT 1
THE CONTINENTAL CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(millions, except share and per share amounts)
Three Months Ended
March 31,
1995 1994
Income (Loss) from Continuing Operations $ 48.9 $ (89.9)
Adjusted for:
Preferred Stock Dividends 9.4 -
Income (Loss) from Continuing Operations
Available to Common Shareholders 39.5 (89.9)
Income (Loss) from Discontinued
Operations, Net of Income Taxes - -
Net Income (Loss) Available
to Common Shareholders $ 39.5 $ (89.9)
Weighted Average Shares of
Common Stock Outstanding:
Primary 55,490,063 55,417,104
Fully Diluted 55,490,063 55,538,335
(Continued)
EXHIBIT 1
THE CONTINENTAL CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS, CONTINUED
(millions, except share and per share amounts)
Three Months Ended
March 31,
1995 1994
Earnings Per Share:
Income (Loss) Per Common Share
from Continuing Operations
Primary (1) $ 0.71 $ (1.62)
Fully Diluted (2) $ 0.71 $ (1.62)
Income (Loss) from Discontinued
Operations, Net of Income
Taxes
Primary (1) - -
Fully Diluted (2) - -
Net Income Per Common Share
Primary (1) $ 0.71 $ (1.62)
Fully Diluted (2) $ 0.71 $ (1.62)
(1) Per share amounts are computed on the weighted average
number of common equivalent shares outstanding during the period.
Common equivalent shares include the dilutive effect of stock
options and shares which would become issuable pursuant to
performance awards. Dividend requirements on all preferred
shares are deducted from earnings to derive common earnings, upon
which primary per share earnings are based.
(2) Fully diluted per share amounts are computed on the weighted
average number of common equivalent shares outstanding during the
period, increased by the assumed conversion of all convertible
securities as of the beginning of each period. Fully diluted
earnings amounts are based on earnings after deduction of
preferred dividends on shares which are not convertible, but
before deduction of dividends on convertible preferred shares.
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 6,237,400,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 75,400,000
<MORTGAGE> 78,800,000
<REAL-ESTATE> 9,200,000
<TOTAL-INVEST> 7,800,900,000
<CASH> 122,100,000
<RECOVER-REINSURE> 280,300,000
<DEFERRED-ACQUISITION> 315,100,000
<TOTAL-ASSETS> 15,033,700,000
<POLICY-LOSSES> 9,547,100,000
<UNEARNED-PREMIUMS> 1,749,800,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 987,900,000
<COMMON> 65,700,000
0
275,000,000
<OTHER-SE> 1,091,400,000
<TOTAL-LIABILITY-AND-EQUITY> 15,033,700,000
831,200,000
<INVESTMENT-INCOME> 130,800,000
<INVESTMENT-GAINS> 92,900,000
<OTHER-INCOME> 20,700,000
<BENEFITS> 669,800,000
<UNDERWRITING-AMORTIZATION> 31,800,000
<UNDERWRITING-OTHER> 236,800,000
<INCOME-PRETAX> 100,500,000
<INCOME-TAX> 51,600,000
<INCOME-CONTINUING> 48,900,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,900,000
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.71
<RESERVE-OPEN> 6,608,200,000
<PROVISION-CURRENT> 29,700,000
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 667,800,000
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 5,910,700,000
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
