Consolidation - We combine our financial statements with those of our subsidiaries and present them on a consolidated basis. The consolidated financial statements do not include the results of material transactions between us and our subsidiaries or among our subsidiaries. Our foreign underwriting operations' results are recorded on a one-month to one-quarter lag due to time constraints in obtaining and analyzing such results for inclusion in our consolidated financial statements on a current basis. In the event that significant events occur in the subsequent period, the impact is included in the current period results.

Discontinued Operations - In 1997, we sold our insurance brokerage operation, Minet. As a result, the financial statements for 1997 and 1996 reflect insurance brokerage results as discontinued operations.

Reclassifications - We reclassified some amounts in our 1997 and 1996 financial statements and notes to conform with the 1998 presentation. These reclassifications had no effect on net income, or common or preferred shareholders' equity, as previously reported for those years.

Use of Estimates - We make estimates and assumptions that have an effect on the amounts that we report in our financial statements. Our most significant estimates are those relating to our reserves for property-liability losses and loss adjustment expenses and life policy benefits. We continually review our estimates and make adjustments as necessary, but actual results could turn out significantly different than what we envisioned when we made these estimates.

Stock Split - In May 1998, we declared a 2-for-1 stock split. All references in these financial statements and related notes to per-share amounts and to the number of shares of common stock reflect the effect of this stock split on all periods presented unless otherwise noted.

Accounting for Our Property-Liability Insurance Operations

Premiums Earned - Premiums on insurance policies are our largest source of revenue. We recognize the premiums as revenues evenly over the policy terms using the daily pro rata method. We record the premiums that we have not yet recognized as revenues as unearned premiums on our balance sheet. Assumed reinsurance premiums are recognized as revenues proportionately over the contract period. Premiums earned are recorded in our statement of income net of our cost to purchase reinsurance.

Insurance Losses and Loss Adjustment Expenses - Losses represent the amounts we paid or expect to pay to claimants for events that have occurred. The costs of investigating, resolving and processing these claims are known as loss adjustment expenses ("LAE"). We record these items on our statement of income net of reinsurance, meaning that we reduce our gross losses and loss adjustment expenses incurred by the amounts we have recovered or will recover under reinsurance contracts.

We establish reserves for the estimated total unpaid cost of losses and loss adjustment expenses, which cover events that occurred in 1998 and prior years. These reserves reflect our estimates of the total cost of claims that were reported to us, but not yet paid, and the cost of claims incurred but not yet reported to us (IBNR). Our estimates consider such variables as past loss experience, current claim trends and the prevailing social, economic and legal environments. We reduce our loss reserves for estimated amounts of salvage and subrogation. Estimated amounts recoverable from reinsurers on unpaid losses and loss adjustment expenses are reflected as assets. We believe that the reserves we have established are adequate to cover the ultimate costs of losses and loss adjustment expenses. Final claim payments, however, may differ from the established reserves, particularly when these payments may not occur for several years. Any adjustments we make to reserves are reflected in the results for the year during which the adjustments are made.

We participate in Lloyd's of London as an investor in underwriting syndicates and as the owner of three managing agencies. We record our pro rata share of syndicate assets, liabilities, revenues and expenses, after making adjustments to convert Lloyd's accounting to U.S. GAAP. The most significant U.S. GAAP adjustments relate to income recognition. Lloyd's syndicates determine underwriting results by year of account at the end of three years. We record adjustments to recognize underwriting results as incurred, including the expected ultimate cost of losses incurred. These adjustments to losses are based on actuarial analysis of syndicate accounts, including forecasts of expected ultimate losses provided by the syndicates. Financial information is available on a timely basis for the syndicates controlled by the managing agencies that we own, which make up the majority of the company's investment in Lloyd's syndicates. Syndicate results are recorded on a one-quarter lag due to time constraints in obtaining and analyzing such results for inclusion in our consolidated financial statements on a current basis.

Our liabilities for unpaid losses and LAE related to tabular workers' compensation and certain assumed reinsurance coverage are discounted to the present value of estimated future payments. Prior to discounting, these liabilities totaled $866.2 million and $776.2 million at Dec. 31, 1998 and 1997, respectively. The total discounted liability reflected on our balance sheet was $668.6 million and $575.8 million at Dec. 31, 1998 and 1997, respectively. The liability for workers' compensation was discounted using rates of up to 3.5%, based on state-prescribed rates. The liability for certain assumed reinsurance coverage was discounted using rates up to 8.0%, based on our return on invested assets or, in many cases, on yields contractually guaranteed to us on funds held by the ceding companies.

Policy Acquisition Expenses - The costs directly related to writing an insurance policy are referred to as policy acquisition expenses and consist of commissions, state premium taxes and other direct underwriting expenses. Although these expenses arise when we issue a policy, we defer and amortize them over the same period as the corresponding premiums are recorded as revenues.

On a regular basis, we perform an analysis of the deferred policy acquisition costs in relation to the expected recognition of revenues, and reflect adjustments as period costs.

Accounting for Our Life Insurance Operations

Premiums - Premiums on life insurance policies with fixed and guaranteed premiums and benefits, premiums on annuities with significant life contingencies and premiums on structured settlement annuities are recognized when due. Premiums received on universal life policies and investment-type annuity contracts are not recorded as revenues; instead, they are recognized as deposits on our balance sheet. Policy charges and surrender penalties are recorded as revenues.

Policy Benefits - Ordinary life insurance reserves are computed under the net level premium method. A uniform portion of each year's premium is used for calculating the reserve. The reserves also reflect assumptions we make for future investment yields, mortality and withdrawal rates. These assumptions reflect our experience, modified to reflect anticipated trends, and provide for possible adverse deviation. Reserve interest rate assumptions are graded and range from 2.5% to 6.0%.

Universal life and deferred annuity reserves are computed on the retrospective deposit method, which produces reserves equal to the cash value of the contracts. Such reserves are not reduced for charges that would be deducted from the cash value of policies surrendered. Reserves on immediate annuities with guaranteed payments are computed on the prospective deposit method, which produces reserves equal to the present value of future benefit payments.

Policy Acquisition Expenses - We consider anticipated policy benefits, remaining costs of servicing the policies and anticipated investment income in determining the recoverability of deferred acquisition costs for interest-sensitive life and annuity products. Deferred policy acquisition costs (DPAC) on ordinary life business are amortized over their assumed premium paying periods based on assumptions consistent with those used for computing policy benefit reserves. Universal life and investment annuity acquisition costs are amortized in proportion to the present value of their estimated gross profits over the products' assumed durations, which we regularly evaluate and adjust as appropriate.

Equity-Indexed Annuities - Interest on our equity-indexed annuities is credited to the equity portion of these annuities annually based on an average gain in the S&P 500 Index during the policy year. We purchase one-year options with similar terms as the index component to provide us with the same return on the S&P 500 Index as we guarantee to the annuity contract holder. We carry a reserve on these annuities at an amount equal to the premium deposited, plus the increase in the market value of the option purchased based on the S&P 500 Index, plus the amortization of the original purchase price of the option.

Accounting for Our Asset Management Operations

The John Nuveen Company comprises our asset management segment. We held a 78% and 77% interest in Nuveen on Dec. 31, 1998 and 1997, respectively. Nuveen sponsors and markets open-end and closed-end (exchange-traded) managed funds, defined portfolios (unit investment trusts) and individual managed accounts. They also underwrite and trade municipal bonds. They hold in inventory securities that will be sold to individuals or security dealers. Those inventory securities are carried at market value.

Nuveen's revenues include investment advisory fees, revenues from the distribution of defined portfolios and managed fund investment products, interest income, gains and losses from the sale of inventory securities, and gains and losses from changes in the market value of investment products and securities held temporarily.

We consolidate 100% of Nuveen's assets, liabilities, revenues and expenses, with reductions on the balance sheet and statement of income for the minority shareholders' proportionate interest in Nuveen's equity and earnings. Minority interest of $67.1 million and $63.1 million was recorded in other liabilities at the end of 1998 and 1997, respectively.

Nuveen repurchased and retired 0.7 million and 1.8 million of its common shares in 1998 and 1997, respectively, for a total cost of $27 million in 1998 and $55 million in 1997. Our proceeds from the Nuveen repurchases totaled $41 million in 1997.

Accounting for Our Investments

Fixed Maturities - Our entire fixed maturity investment portfolio is classified as available-for-sale. Accordingly, we carry that portfolio on our balance sheet at estimated fair value.

Equities - Our equity securities are also classified as available-for-sale and carried at estimated fair value.

Real Estate and Mortgage Loans - Our real estate investments include apartments and office buildings and other commercial land and properties that we own directly or in which we have a partial interest through joint ventures with other investors. Our mortgage loan investments consist of fixed-rate loans collateralized by apartment, warehouse and office properties.

For direct real estate investments, we carry land at cost and buildings at cost less accumulated depreciation and valuation adjustments. We depreciate real estate assets on a straight-line basis over 40 years. Tenant improvements are amortized over the term of the corresponding lease. The accumulated depreciation of our real estate investments was $108.4 million and $93.0 million at Dec. 31, 1998 and 1997, respectively.

We use the equity method of accounting for our direct real estate joint ventures, which means we carry these investments at cost, adjusted for our share of earnings or losses, and reduced by cash distributions from the joint ventures and valuation adjustments.

We carry our mortgage loans at estimated fair value, representing the unpaid principal balances less any valuation adjustments. Valuation allowances are recognized for loans with deterioration in collateral performance that are deemed other than temporary. The estimated fair value of mortgage loans at Dec. 31, 1998 was $629 million.

Venture Capital - We invest in small- to medium-sized companies. These investments are in the form of limited partnerships or direct ownership. The limited partnerships are carried at our equity in the estimated market value of the investments held by these limited partnerships. The investments we own directly are carried at estimated fair value.

Securities Lending - We participate in a securities lending program whereby certain securities from our portfolio are loaned to other institutions for short periods of time. We receive a fee from the borrower in return. Our policy is to require collateral equal to 102 percent of the fair value of the loaned securities. We maintain full ownership rights to the securities loaned. In addition, we have the ability to sell the securities while they are on loan. We have an indemnification agreement with the lending agents in the event a borrower becomes insolvent or fails to return securities.

Realized Investment Gains and Losses - We record the cost of each individual investment so that when we sell any of them, we are able to identify and record the gain or loss on that transaction on our statement of income.

We continually monitor the difference between the cost and estimated fair value of our investments. If any of our investments experience a decline in value that we believe is other than temporary, we establish a valuation allowance for the decline and record a realized loss on the statement of income.

Unrealized Appreciation and Depreciation - For investments we carry at estimated fair value, we record the difference between cost and fair value, net of deferred taxes, as a part of common shareholders' equity. This difference is referred to as unrealized appreciation or depreciation. In our life insurance operations, deferred policy acquisition costs and certain reserves are adjusted for the impact on estimated gross margins as if the net unrealized gains and losses on securities had actually been realized. The change in unrealized appreciation or depreciation during the year is a component of comprehensive income.

Goodwill

Goodwill is the excess of the amount we paid to acquire a company over the fair value of its net assets, reduced by amortization and any subsequent valuation adjustments. We amortize goodwill over periods of up to 40 years. The accumulated amortization of goodwill was $203.5 million and $153.1 million at Dec. 31, 1998 and 1997, respectively.

Impairment of Long-lived Assets and Intangibles

We monitor the value of our long-lived assets to be held and used for recoverability based on our estimate of the future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition considering any events or changes in circumstances which indicate that the carrying value of an asset may not be recoverable. We monitor the value of our goodwill based on our estimates of discounted future earnings. If either estimate is less than the carrying amount of the asset, we reduce the carrying value to fair value with a corresponding charge to expenses. We monitor the value of our long-lived assets, and certain identifiable intangibles, to be disposed of and report them at the lower of carrying value or fair value less our estimated cost to sell.

Office Properties and Equipment

We carry office properties and equipment at depreciated cost. We depreciate these assets on a straight-line basis over the estimated useful lives of the assets. The accumulated depreciation for office properties and equipment was $405.3 million and $369.4 million at the end of 1998 and 1997, respectively.

Foreign Currency Translation

We assign functional currencies to our foreign operations, which are generally the currencies of the local operating environment. Foreign currency amounts are remeasured to the functional currency, and the resulting foreign exchange gains or losses are reflected in the statement of income. Functional currency amounts are then translated into U.S. dollars. The unrealized gain or loss from this translation is recorded as a part of common shareholders' equity. The change in unrealized foreign currency translation gain or loss during the year is a component of comprehensive income. Both the remeasurement and translation are calculated using current exchange rates for the balance sheets and average exchange rates for the statements of income.

In highly inflationary economies, the functional currency is the U.S. dollar. Monetary assets and liabilities are translated into U.S. dollars using exchange rates in effect at the balance sheet date, whereas nonmonetary balances are translated using historical exchange rates. Revenue and expense accounts are translated using the average exchange rates prevailing during the year for monetary transactions and historical exchange rates for nonmonetary transactions. Realized gains or losses resulting from translation are included in the statement of income.

Supplemental Cash Flow Information

Interest and Income Taxes Paid - We paid interest of $71.1 million in 1998, $81.1 million in 1997 and $85.5 million in 1996. We paid federal income taxes of $68.3 million in 1998, $99.3 million in 1997 and $96.3 million in 1996.

Noncash Financing Activities - The John Nuveen Company issued $45 million of preferred stock in 1997 to fund a portion of its purchase of Flagship Resources, Inc. In December 1997, we issued $112 million of common stock in consideration for our acquisition of TITAN Holdings, Inc. Cash provided from operating activities in 1997 does not include a $104 million portion of a coinsurance contract purchased to cede certain structured settlement annuity obligations (see Note 15 "Reinsurance"). During 1996, we entered into a coinsurance contract with an unaffiliated life insurance company to cede a portion of our block of single premium deferred annuities (the "broker SPDA block"). As part of the noncash transaction, we transferred $932 million of investments and other assets to the coinsurer, and recorded a reinsurance receivable of $964 million.