<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549
                                    FORM 10-K

(Mark One)
[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 
         OF 1934 (FEE REQUIRED)

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
         EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

FOR THE TRANSITION PERIOD FROM                  TO
                               -----------------  -----------------
COMMISSION FILE NUMBER 0-8162
                       ------

                         ACCEL INTERNATIONAL CORPORATION
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

              DELAWARE                                  31-0788334     
   -------------------------------                  -------------------
   (State or other jurisdiction of                  (I.R.S. Employer
    incorporation or organization)                  Identification No.)

     12603 S.W. FRWY, STE. 315, STAFFORD, TEXAS         77477
    -------------------------------------------       ----------
    (Address of principal executive offices)          (Zip Code)

                                  281-565-8010
                         -------------------------------
                         (Registrant's Telephone Number)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:  None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                               Title of each class
                         -------------------------------
                          COMMON STOCK, $.10 PAR VALUE

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [ ]

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 aggregate market value of Common Stock held by non-affiliates on January 31,
1999 was approximately $10,200,000.

As of January 31, 1999, there were 8,554,966 shares of Common Stock, $.10 par
value per share outstanding.


                      DOCUMENTS INCORPORATED BY REFERENCE:

Not applicable.



<PAGE>   2



                                     PART I

ITEM 1. BUSINESS

(a)              GENERAL DEVELOPMENT OF BUSINESS

ACCEL International Corporation ("ACCEL") is an insurance holding company
incorporated in Delaware in June 1978 as the successor to an Ohio corporation,
formerly Acceleration Corporation, organized in 1969. Unless the context
requires otherwise, the "Company" includes ACCEL and its subsidiaries. The
Company, through its subsidiary, Acceleration National Insurance Company
("ANIC"), is engaged in the underwriting and sale of property/casualty insurance
products, concentrating on commercial lines of business. The Company offers
various policies covering trucking, charter buses, and limousines, as well as
other specialized products tailored to groups such as crane operators and gun
dealers. The Company offers these products through general agents ("GA").
See NARRATIVE DESCRIPTION OF BUSINESS for further information.

In addition to property and casualty insurance products, the Company
historically sold, principally through automobile dealers, credit life and
credit accident and health insurance and extended service contracts
(collectively the "Auto Aftermarket Group"). Effective December 31, 1997, the
Company sold its entire Auto Aftermarket Group to Lyndon Insurance Group, Inc.,
Lyndon Life Insurance Company and Lyndon Property Insurance Company, all of
which are subsidiaries of Frontier Insurance Group, Inc. (collectively,
"Lyndon"), for approximately $41 million (the "Lyndon Transaction"). As a result
of the Lyndon Transaction, the Company ceased to be engaged in the Auto
Aftermarket Group, which businesses are described below under "NARRATIVE
DESCRIPTION OF BUSINESS - Discontinued Operations and Disposed Lines of
Business".

(b)              FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The Company operates predominantly in the property and casualty insurance
segment with a second segment for Corporate which includes Accel's equity method
investment in USA Insurance Group, Inc. (see "Note C" in the Notes to
Consolidated Financial Statements) and other corporate investments. See
NARRATIVE DESCRIPTION OF BUSINESS and "Note K" in the Notes to Consolidated
Financial Statements.

(c)              NARRATIVE DESCRIPTION OF BUSINESS

GENERAL

The Company's property and casualty segment consists of coverages for long haul
trucking, charter buses and limousines, as well as specialized products tailored
for crane operators and gun dealers, all of which coverages are sold through
GAs. Also included are lines previously discontinued which include commercial
multi-peril, farmowners' multi-peril, ancillary inland marine and realtors'
errors and omissions coverages ("REO"). The Company's property and casualty
segment also includes extended service contracts which were insured by ANIC and
sold primarily through automobile dealers, and which were wholly reinsured on
January 1, 1998 as part of the Company's sale of the Auto Aftermarket Group to
Lyndon.

Premiums for the Company's long haul trucking and charter bus line comprised
82.4 %, 74.1% and 53.8% of the Company's gross premiums written from continuing
operations in 1998, 1997 and 1996, respectively. Extended service contracts
(which the Company sold as a result of the Lyndon Transaction) represented
15.4%, 23.8%, and 32.7% of the Company's gross premiums written from continuing
operations in 1998, 1997 and 1996, respectively. The extended service contract
business was ceded 100% to Lyndon effective as of January 1, 1998.

The Company's property and casualty business is conducted through ANIC. ANIC has
licenses to conduct business in 47 states and the District of Columbia. The
majority of the Company's direct premiums written in 1998, 1997 and 1996 were
derived from sales in Florida (16.2%, 16.7% and 9.0%, respectively), Ohio (6.8%,
12.5% and 23.5%, respectively), New Jersey (8.4%, 2.4% and .1%, respectively),
Georgia (4.6%, 12.1% and 18.6%, respectively), New York (19.2%, 11.8% and 1.1%
respectively) and Virginia (7.0%, 10.4% and 8.0%, respectively). During 1995 and
early 1996, ANIC was subject to a re-qualification requirement in the state of
Michigan. The re-qualification was denied. Therefore, as of March 1996, ANIC was
no longer licensed in Michigan, and accordingly discontinued writings in said
state.


                                       2
<PAGE>   3

CONTINUING OPERATIONS

General. As a result of the Lyndon Transaction, the Company ceased to be engaged
in the Auto Aftermarket Group, which is described below under Discontinued
Operations and Disposed Lines of Business. The Company intends to use its
remaining resources to seek to develop and expand the property and casualty
insurance business of ANIC as described below.

Commercial Auto Liability. In 1996, the Company began offering coverage to
operators of long haul trucks and charter buses. The program is marketed by a
GA, Transportation Insurance Specialists ("TIS"), and its affiliate, Countrywide
Insurance Agency, Inc., which have extensive experience in this product line.
Commercial automobile liability insurance has become one of the Company's
primary product lines. Gross premiums written marketed by these agencies for the
Company for this product line were approximately $35.7 million, $30.3 million
and $13.8 million in 1998, 1997 and 1996 respectively (see "Note F" in the Notes
to Consolidated Financial Statements).

New Property and Casualty Products. In 1997, the Company commenced new marketing
initiatives for certain property and casualty products including a package
policy for crane operators consisting of general liability, inland marine and
commercial auto coverages. The Company's crane program is targeted toward
qualified operators who lease cranes for specific projects. The Company uses an
independent administrator, The Crane Institute in Maitland, Florida, to conduct
underwriting survey work and loss control in this specialized field. The
Company's business strategy for this product line is to achieve slow controlled
growth with extensive underwriting reviews. Direct premiums written by the
Company for this product line in 1998 were approximately $485,000 as compared to
$198,000 in 1997.

DISCONTINUED OPERATIONS AND DISPOSED LINES OF BUSINESS 

The Lyndon Transaction. As noted above, effective as of December 31, 1997, the
Company consummated the sale of its entire Auto Aftermarket Group, consisting of
credit insurance and extended service contracts sold primarily through
automobile dealers, to Lyndon for approximately $41 million in cash. More
specifically, such transaction included (i) the sale by the Company to Lyndon
Insurance Group, Inc. and Lyndon Life Insurance Company of all the outstanding
capital stock of the Company's wholly owned subsidiaries, Acceleration Life
Insurance Company ("ALIC"), Acceleration National Service Corporation ("ANSC")
and Dublin International Limited ("Dublin") and (ii) the sale by the Company's
wholly owned subsidiary, ANIC, to Lyndon Property Insurance Company ("Lyndon
Property"), of ANIC's vehicle extended service contract business. See "Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and "Note B" to the Notes to Consolidated Financial Statements. As a
result of the Lyndon Transaction, the Company ceased to be engaged in the Auto
Aftermarket Group businesses. In connection with the Lyndon Transaction, Lyndon
Property and ANIC entered into two reinsurance agreements effective January 1,
1998 pursuant to which ANIC ceded to Lyndon Property and Lyndon Property assumed
and reinsured the extended service programs and all insurance policies issued
after the closing date of the Lyndon Transaction by Lyndon Property in the name
of ANIC.

The Company recognized a gain on the sale of the Auto Aftermarket Group in 1997
totaling $3.2 million after federal income taxes. The gain on sale was reflected
in the accompanying Consolidated Statement of Operations in 1997 as a gain from
continuing operations of $10.3 million from the sale of ANIC's vehicle extended
service contract business and ANSC and a loss from discontinued operations of
$7.1 million from the sale of ALIC and Dublin (excluding the provision for
operating loss of $495,000 during the phase-out period). See "Note B" to the
Notes to Consolidated Financial Statements.

Extended Service Contracts. Prior to the sale of the Company's Auto Aftermarket
Group to Lyndon, the Company sold extended service contracts under the name
"Co$tguard" which covered the cost of labor and certain parts for the repair of
automobiles and watercraft. In addition, the Company agreed to sell extended
service contracts for a period of eighteen months following closing of the sale
to Lyndon which period expires in July 1999 with the underlying business being
fully ceded to Lyndon Property. The Company's product covered towing, rental car
reimbursement and other benefits during the entire contract term and enabled a
purchaser to obtain from the selling dealer a service contract covering the cost
(in excess of a deductible amount where applicable) of repairs to covered parts
subsequent to the expiration of the applicable manufacturer's warranty. The
Company marketed its extended service contracts primarily through the same group
of automobile dealers who marketed the Company's credit insurance. The extended
service contract program was marketed on a net cost basis to automobile dealers
who then established the retail price for the contract. The net cost paid by the
dealer included (i) the premiums for a contractual liability policy provided the
dealer by ANIC and (ii) administrative and marketing fees. In 1998, 1997 and
1996, the program accounted for approximately 15.4%, 23.8% and 32.7%,
respectively, of the Company's gross premiums written from continuing
operations.

EMPLOYEES

As of December 31, 1998, the Company employed 28 full-time equivalent employees
compared to 37 (excluding 57 individuals who ceased to be employed by the
Company as a result of the Lyndon Transaction) as of December 31, 1997.


                                       3
<PAGE>   4

REINSURANCE WITH UNAFFILIATED INSURANCE COMPANIES

Reinsurance enables insurance companies to provide greater diversification of
risks and at the same time minimize risk exposure. The reinsurer reimburses the
Company for any claims on the reinsured portion of the risk. Although
reinsurance does not discharge the Company from primary liability to the insured
for the full amount of the insurance coverage, the industry and regulatory
practice is to exclude the reinsured portion of the risk from the consolidated
statements of operations.

COMPETITION

In the commercial auto business, the Company competes with insurance companies
which are larger and have greater capital resources available and whose industry
ratings are at higher levels than ANIC. The principal factors that enable the
Company to compete are the relationship with the GA and the level of service
provided to accounts. The Company's strategy with respect to such business is to
attempt to focus on product categories and market areas in which the major
property/casualty insurance companies are not fully addressing.

REGULATION

The Company is subject to regulation in the states in which it conducts
business. The extent of such regulation varies from state to state; but in
general, all states have statutory restrictions and a supervisory agency which
has broad discretionary administrative powers. Such regulation is designed
primarily to protect policyholders and relates to the licensing of insurers and
their agents, the approval of policy forms, the methods of computing reserves,
the form and content of financial reports and the type and concentration of
permitted investments. Ohio and other jurisdictions in which the Company
conducts business have enacted legislation providing for specific regulation of
the relationship between licensed insurers and affiliated members of a holding
company group. Such legislation generally (1) establishes requirements and
procedures relative to the approval or disapproval of mergers and other
acquisitions of control, (2) prescribes the filing of registration statements by
insurers which are members of the holding company group, (3) subjects the
holding company to reporting requirements, (4) establishes standards for
transactions between insurers and their holding companies and between members of
a holding company group and (5) controls the payment of extraordinary dividends.
The dividends which the Company may receive from ANIC are subject to regulatory
requirements as to minimum capital and surplus. In addition to regulatory
considerations, management considers the overall financial strength of an
operating entity before dividends are paid to ACCEL.

Generally, the net assets of ANIC available for transfer to ACCEL are limited to
the amounts that ANIC's net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital and surplus requirements;
however, payments of such amounts as dividends are currently subject to
regulation by Ohio law. The regulation limits the annual dividend or
distribution of an insurer to the greater of (1) net income of the previous year
or (2) 10% of unassigned surplus as of the end of the previous year. In
addition, all dividends must come from earned surplus to qualify as a
non-extraordinary dividend. Amounts greater than this would be considered
extraordinary dividends and could not be paid without permission of the
Department of Insurance of the State of Ohio ("Ohio Department"). Based on this
regulation, any dividend distribution by ANIC in 1999 would be subject to the
approval of the Ohio Department.

The Ohio Department imposes risk based capital ("RBC") requirements on insurance
enterprises, including ANIC. The RBC Model serves as a benchmark for the
regulation of property/casualty insurance companies by state insurance
regulators. RBC provides for targeted surplus levels based on formulas which
specify various weighting factors that are applied to financial balances or
various levels of activity based on the perceived degree of risk, and are set
forth in the RBC requirements. Such formulas focus on four general types of
risk: (a) the risk with respect to the company's assets (asset or default risk);
(b) the risk of default on amounts due from reinsurers, policyholders or other
creditors (credit risk); (c) the risk of under-estimating liabilities from
business already written or inadequately pricing business to be written in the
coming year (underwriting risk); and, (d) the risk associated with items such as
excessive premium growth, contingent liabilities and other items not reflected
on the balance sheet (off-balance sheet risk). The amount determined under such
formulas is called the authorized control level RBC ("ACLC").

The RBC guidelines define specific capital levels based on a company's ACLC that
are determined by the ratio of the company's total adjusted capital ("TAC") to
its ACLC. TAC is equal to statutory capital, plus or minus certain other
specified adjustments. The specific capital levels, in declining order, and
applicable ratios are generally as follows: "Company Action Level" where TAC is
less than or equal to 2.0 times ACLC; "Regulatory Action Level" where TAC is
less than or equal to 1.5 ACLC; "Authorized Control Level" where TAC is less
than or equal to 1.0 times ACLC; and, "Mandatory Control Level" where TAC is
less than or equal to 0.7 times ACLC. Companies at the Company Action Level must
submit a comprehensive financial plan to the insurance commissioner of the state
of domicile. Companies at the Regulatory Action Level are subject to a mandatory
examination or analysis by the commissioner and possible required corrective
actions. At the Authorized Control 


                                       4
<PAGE>   5

Level, a company is subject to, among other things, the commissioner placing it
under regulatory control. At the Mandatory Control Level, the insurance
commissioner is required to place a company under regulatory control.

The level of ANIC's ACLC was affected in 1998 by the cession on January 1, 1998
of unearned premium reserves totaling $13,867,000 for the vehicle extended
service contract business in conjunction with the sale of the vehicle extended
service contract business to Lyndon Property on December 31, 1997 as discussed
in "Note B" in the Notes to Consolidated Financial Statements. The cession of
the unearned premium reserves reduced net written premiums, which negatively
impacted the RBC calculation. At December 31, 1998, ANIC's TAC as included in
the 1998 statutory annual statement was $16,010,000 or 1.1 times its ACLC.
Accordingly, ANIC is within the Regulatory Action Level. Excluding the cession
of the vehicle extended service contract business, ANIC would have exceeded all
required RBC levels at December 31, 1998.

The Company has been in discussions with the Ohio Department regarding its 1998
RBC calculation due to the aforementioned effect of the reinsurance cession. The
Ohio Department currently is not requiring the Company to file a RBC
comprehensive financial plan or invoking other remedies available under
prescribed statutes. The Company anticipates no significant regulatory action as
a result of the 1998 RBC calculation.

ITEM 2.  PROPERTIES

The Company's executive offices are located at 12603 Southwest Freeway, Suite
315, Stafford, Texas, 77477. The Company leases approximately 7,000 square feet
at this location with annual rental on a five-year lease expiring in September
2000 of approximately $70,000. As of December 31, 1998, the Company's legal and
information systems departments are located at 475 Metro Place North, Dublin,
Ohio. The Company leases approximately 6,000 square feet in Dublin, Ohio, under
a five-year lease expiring in July 2001 at an annual rental of approximately
$65,000. Effective in March 1999, the lease in Dublin, Ohio was cancelled and
the legal and information systems departments relocated to 2550 Corporate
Exchange Drive, Columbus, Ohio.

ITEM 3.  LEGAL PROCEEDINGS

Due to the nature of its operations, the Company, is at all times subject to
pending and threatened legal actions that arise in the normal course  of its
activities.  In management's evaluation of certain pending matters, based on
the advice or information and analysis of outside counsel, the accompanying
consolidated financial statements would not be materially affected by the
outcome of any legal proceedings or contingent liabilities, except that recent
developments in the long-term care insurance litigation discussed below involve
one or more theories of damages which if decided against defendants, including
the Company, might ultimately prove material.
        
In July 1991, the Company acquired 100% of RGL.  Galaxy Insurance Company
("Galaxy"), a wholly owned subsidiary of RGL, wrote commercial property
insurance, property and casualty, and assumed treaty reinsurance.  Galaxy
became statutorily insolvent at June 30, 1994.  Due to the insolvency of
Galaxy, the Company wrote its investment in RGL to zero and deconsolidated RGL
as of April 1, 1994.

On October 7, 1994, the Liquidation Bureau took control of Galaxy pursuant to
an order of liquidation of the New York Supreme Court.  Prior to the
liquidation of Galaxy, ANIC had issued certain certificates of suretyship
("Certificates") with respect to certain Galaxy insurance policies each of
which provided that ANIC would assume the responsibilities of Galaxy under the
specified policy if Galaxy became insolvent or financially unable to meet its
obligations on the underlying policy, but only if certain conditions were met.
In particular, the Certificates provided that ANIC's assumption of liability
was contingent upon the insured's executing and delivering all agreements,
assignments or evidences of subrogation satisfactory to ANIC respecting
payments made or liabilities assumed.

In May 1996, the Liquidation Bureau, acting on behalf of the New York
Property/Casualty Insurance Security Funds (the "Guaranty Fund"), informally
advised the Company that on behalf of the Guaranty Fund it intended to seek
indemnification or reimbursement from ANIC for claims paid by the Guaranty Fund
to Galaxy insureds on policies which may have been covered by the Certificates.
The company has taken the position that the Guaranty Fund has no right to seek
indemnification unless Galaxy insureds who hold properly issued Certificates
have executed assignments and evidences of subrogation to ANIC.  Even if any
Galaxy insured properly made such a claim directly to ANIC, the Company has
been advised by counsel that if ANIC paid any such claim, it would have the
right, under assignment and subrogation agreements with its insureds, to assert
all rights that the insureds could have asserted to recover the loss amounts
from any other source, including the Guaranty Fund.

In early 1998, the Superintendent of Insurance of the State of New York, as
Liquidator of Galaxy and Administrator of the Guaranty Fund ("Superintendent"),
filed suit against ANIC in New York State Supreme Court.  The complaint
alleged, among other things, breach of contract and demanded that ANIC
specifically perform its alleged obligations under the Certificates.  The
complaint asked for an amount in excess of $6.5 million in damages.

As reflected above, the suit requested indemnification or reimbursement for the
claims paid or to be paid by the Guaranty Fund to Galaxy insureds on policies
which may have been covered by the Certificates.  ANIC has maintained that the
Guaranty Fund does not have the right to seek indemnification unless the terms
and conditions of validly issued Certificates have been strictly complied with.
Accordingly, ANIC filed for dismissal of the suit which motion was granted by
the Court on October 6, 1998.  Thereafter, the Superintendent moved to reargue
and renew his opposition to ANIC's motion to dismiss.  By an Order dated
February 23, 1999, the Court denied the Superintendent's motion to reargue.  No
decision has yet been rendered on the motion to renew.  The Superintendent also
filed a Notice of Appeal of the Court's Decision and Order dismissing the
complaint.  ANIC will continue to defend vigorously against the
Superintendent's lawsuit.

In November 1997, suit was filed against ALIC by three long-term care
policyholders seeking to represent a class of North Dakota policyholders
alleging breach of contract, fraud and misrepresentation regarding an alleged
promise not to raise premiums "too much".  Said long-term care insurance
business was entirely reinsured to and assumed by Commonwealth Life Insurance
Company ("Commonwealth") of Louisville, Kentucky, in 1991.  The matter was
tendered to Commonwealth to defend on behalf of ALIC pursuant to the applicable
provisions of the reinsurance agreement between the parties, and Commonwealth
also tendered the matter back to ALIC.

The allegations of fraud and misrepresentation at the time of sale of the
long-term care policies are based on alleged statements that premiums "would
not be raised too much" even though the policy on its face stated that the
"Company reserves the right to increase premiums at anytime."  Moreover,
premiums were increased subsequent to the reinsurance of the business to
Commonwealth by ALIC,  and the increases appear to have been approved by the
proper regulatory authority.   Plaintiffs amended their complaint to set forth
allegations that the policies were intentionally underpriced and/or poorly
underwritten, so as to justify premium increases and induce policy lapses.  The
Company and Commonwealth are cooperating to vigorously defend the matter. Joint
motions to dismiss and to strike the class action allegations were filed in the
U.S. District Court, District of North Dakota, Southeastern Division. The Court
acted to deny all pending motions without prejudice to refiling until
development of the record occurred.  The parties have undertaken to conduct
discovery to develop the record as directed by the Court.  Based thereon, the
Company filed a motion for summary judgment. On March 16, 1999, the Court
issued a Memorandum and Order denying Defendant's motion for summary judgment 
and granting Plaintiff's motion for class certification.  The Company has
petitioned for interlocutory appeals  of both rulings.  These recent
developments involve one or more theories of damages which if decided against
defendants, including the Company, might ultimately prove material although
management cannot currently estimate a range of potential loss.  In the event
the plaintiffs prevail, the Company believes that it has a basis on which to
seek indemnification from Commonwealth.
        
On March 3, 1999, a complaint was filed in the Circuit Court of Pinellas
County, Florida to represent a class of all Florida purchasers of long-term
care insurance sold by ALIC.  The allegations are similar to the allegations in
the North Dakota litigation above.  No response to the complaint has yet been
filed by the Company.  The Company intends to deny any liability therein  and
to continue to defend its interests vigorously in these matters.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable


                                       5
<PAGE>   6


                                     PART II

ITEM 5.  MARKET FOR ACCEL'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

(a)      ACCEL's common stock is traded over-the-counter National Market Issues,
         under the NASDAQ symbol ACLE.

The following table sets forth the quarterly range of over-the-counter prices
for ACCEL's stock during the last two years. These prices have been adjusted for
common stock dividends, if any, and do not include retail mark-up, mark-down, or
commissions and do not always necessarily represent actual transactions.

<TABLE>
<CAPTION>
             1998               High              Low                    1997                  High               Low
             ----               ----              ---                    ----                  ----               ---
<S>                             <C>               <C>                  <C>                   <C>                <C>   
         4th Quarter            3.375             2.125                4th Quarter           $3.813             $3.375
         3rd Quarter            3.375             2.188                3rd Quarter            4.125              3.500
         2nd Quarter            3.500             2.875                2nd Quarter            3.125              2.875
         1st Quarter            3.500             3.063                1st Quarter            3.250              2.813
</TABLE>

(b)      The approximate number of holders of record of ACCEL's common stock 
         ($.10 par value) as of January 31, 1999, was 574 holders.

(c)      Dividends paid on common stock:

              1998 and 1997-- 0 per share

Restrictions on present or future ability to pay dividends: Since June 1992,
ACCEL's Board of Directors have suspended payment of cash dividends on the
common stock until the Company returns to a level of profitability which will
sustain such payments.


                                       6
<PAGE>   7
ITEM 6. SELECTED FINANCIAL DATA

                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                        1998           1997           1996           1995            1994**
                                                    -----------------------------------------------------------------------
                                                            (Thousands of dollars, except per share data & ratios)
<S>                                                 <C>             <C>            <C>            <C>             <C>      
Gross premiums written                              $  43,285       $  40,897      $  25,629      $  12,371       $  60,504
Premiums ceded                                        (24,476)        (17,118)        (9,416)        (5,435)        (12,495)
Net premiums written                                   18,809          23,779         16,213          6,936          48,009
Premiums earned                                        18,824          18,717         12,466          7,459          47,600
Net investment income:
     Interest and dividends                             2,150           1,939          1,692          1,570           6,678
     Realized gains (losses)                              (44)          1,051            432            201             808
Total revenue                                          21,307          35,286         21,529         11,653          57,519
Loss and loss adjustment expenses                      22,051          15,373         10,145          6,878          24,997
Income (loss) before taxes
     and other items                                  (10,721)          8,116          1,370         (3,601)         (4,905)
Income (loss) from continuing operations              (10,451)          7,015          1,327         (2,964)             --
Income (loss) from discontinued operations                 --          (5,900)           646          1,504              --
Extraordinary item                                         --              --            131             --              --
Net income (loss)                                     (10,451)          1,115          2,104         (1,460)         (5,238)
Earnings per common share--basic:
     Income (loss) from continuing operations           (1.22)            .82            .23           (.67)             --
     Income (loss) from discontinued operations            --            (.69)           .11            .34              --
     Extraordinary item                                    --              --            .02             --              --
     Net income (loss)                                  (1.22)            .13            .36           (.33)          (1.18)
Earnings per common share--assuming dilution:
     Income (loss) from continuing operations           (1.22)            .82            .23           (.67)             --
     Income (loss) from discontinued operations            --            (.69)           .11            .34              --
     Extraordinary item                                    --              --            .02             --              --
     Net income (loss)                                  (1.22)            .13            .36           (.33)          (1.18)
At end of year:
     Invested assets                                   36,294          33,921         30,302         23,697          98,189
     Total assets                                      94,618         104,094        191,325        183,507         179,948
     Policy reserves
         and liabilities                               61,984          52,014         31,945         21,942         106,936
     Notes payable                                         --              --         15,000         22,531          18,462
     Common stockholders' equity                       23,101          33,589         31,641         20,560          15,366

Return on average common
     stockholders' equity                              (36.87)%        3.42 %         8.06 %          (8.13)%        (23.84)%

Book value per common share                         $    2.70       $    3.88      $    3.68      $    4.62       $    3.46
</TABLE>

Note:  Net income (loss) per share reflects the adoption of the Financial 
       Accounting Standards Board's Statement of Financial Accounting Standards
       No. 128, Earnings per Share ("EPS"). Both basic EPS and EPS assuming
       dilution have been presented accordingly.

**  1994 has not been restated for discontinued operations.


                                       7
<PAGE>   8



ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OPERATING RESULTS FOR THE THREE YEARS ENDED DECEMBER 31, 1998

OPERATING RESULTS AND DISCONTINUED OPERATIONS

The Company's loss before income taxes for 1998 was $10.7 million. A major
factor affecting the loss was adverse development of insurance losses (excluding
unallocated loss adjustment expense) of $4.2 million, of which $3.1 million
related to commercial auto and $1.1 million related to lines of business in
run-off. The adverse development for commercial auto of $3.1 million consisted
primarily of a revision of the actuarial ultimate losses in 1998 for the 1996
and 1997 loss years. This adverse development was attributable to certain types
of commercial auto insurance which the Company is no longer writing, including
large fleets, paratransit vehicles and business in under-performing territories.
The Company is focusing its ongoing efforts in commercial auto on insuring
charter buses and small fleets which the Company defines as fleets of 1 to 25
vehicles. The Company's primary product line, commercial auto, produced a
negative underwriting margin of $6.4 million in 1998 including the effects of
the loss development.

Also contributing to the loss before income taxes in 1998 were $.9 million loss
incurred on discontinued lines of business, primarily consisting of agriculture,
realtors' errors and omissions and auto dealership coverages; general and
administrative expenses of $5.6 million; taxes, licenses and fees other than
premium taxes of $.4 million; and deficit in the income of an affiliated company
of $.2 million offset by net investment income of $2.2 million and other income
of $.6 million.

Commercial auto produced gross premiums of $35.7 million in 1998 compared to
$30.3 million and $13.8 million in 1997 and 1996, respectively. The Company's
other products within the property and casualty segment (excluding extended
service contracts which were sold to Lyndon effective December 31, 1997)
continued their growth, producing $1.5 million in gross premiums written in 1998
compared to $.4 million and $.1 million in 1997 and 1996, respectively.

On October 20, 1997, ACCEL entered into agreements to sell to Lyndon Insurance
Group, Inc. and Lyndon Life Insurance Company (collectively, "Lyndon") the
outstanding capital stock of ALIC, ANSC and Dublin (collectively, the "Target
Corporations") for $30.2 million in cash and to sell to Lyndon Property
Insurance Company ("Lyndon Property") the vehicle extended service contract
business of ACCEL's wholly owned subsidiary, ANIC, for $10.3 million in cash.
The sale was effective December 31, 1997.

The agreements provided that within 125 days after the closing, the sales price
for the Target Corporations would be decreased or increased by the amount, if
any, by which the Target Corporations' combined stockholder's equity in
accordance with generally accepted accounting principles ("GAAP") as of December
31, 1997 was less than or greater than, respectively, $31.6 million. As of
December 31, 1997, the combined GAAP stockholder's equity of the Target
Corporations was $32.1 million which resulted in a net sales price of
approximately $41.0 million.

The "receivable from sale of discontinued and disposed of operations"
("receivable from sale") of approximately $.7 million as of December 31, 1998
represents the difference of approximately $.5 million between the net sales
price of $41 million and the initial sales price of $40.5 million and
approximately $.2 million related to the cession of vehicle extended service
contract reserves to Lyndon Property. The receivable from sale of approximately
$25 million as of December 31, 1997, represents the net sales proceeds of $41
million less the note payable and accrued interest of $16 million transferred to
ALIC by an unaffiliated company on December 31, 1997. The Company has filed a
legal action seeking declaratory judgment relief relating to a disagreement with
Lyndon concerning the exact amount of the net sales price. Accordingly, the
receivable from sale may be more or less than $.7 million. The Company believes
the resolution of the matter will not have a material adverse effect on the
financial condition or results of operations of the Company.

As discussed further below, the after-tax net gain in 1997 on sale of the Auto
Aftermarket Group was $3.2 million which was comprised of $10.3 million in
continuing operations and ($7.1 million) in discontinued operations (excluding
the provision for operating loss of $495,000 during the phase-out period). The
gain was based upon the purchase price of approximately $41 million offset by
the Company's equity in the sold subsidiaries of approximately $32.1 million,
the write-off of goodwill related to ALIC of $.6 million, costs associated with
the sale of $.8 million and federal income taxes related to the sale of $4.3
million.

Upon consummation of the aforementioned sale, the Company ceased to be engaged
in the Auto Aftermarket Group business. The consolidated financial statements of
the Company for 1997 and 1996 reflect the disposition of ALIC and Dublin which
comprised the Life/Health business segment. Accordingly, the revenues, benefits
and expenses, assets and liabilities, and cash flows of ALIC and Dublin have
been excluded from the respective captions in the consolidated statements of
operations, consolidated balance sheets and consolidated statements of cash
flows. The net operating results of these entities have been reported, net of
applicable 


                                       8
<PAGE>   9

income taxes, as "Income from discontinued operations"; the assets and
liabilities of these entities have been reported as "Assets of discontinued
operations" and "Liabilities of discontinued operations"; and the net cash flows
of these entities have been reported as "Net cash (used in) provided by
discontinued operations."

The gain of $10.3 million from the sale of the vehicle extended service contract
business was reflected within continuing operations of the Company in 1997 as a
result of this business comprising only a portion of the Company's property and
casualty business segment. Income before federal income taxes related to the
vehicle extended service contract business included in continuing operations was
$360,000 and $740,000 for 1997 and 1996, respectively.

Effective January 1, 1998, ANIC ceded to Lyndon via quota share reinsurance 100%
of its liability related to existing and future vehicle extended service
business written on ANIC's policy forms. In connection with the sale, ANIC
granted Lyndon the authority to write new vehicle extended service contracts
insured by contractual liability policies issued in the name of ANIC for a
maximum period of eighteen months which expires in July 1999. All new business
written by Lyndon utilizing ANIC's policy forms will be automatically reinsured
by Lyndon under the terms of the aforementioned reinsurance agreements.

The Company's income before income taxes and discontinued operations for 1997
was $8.1 million. This income was primarily the result of the gain on the sale
of the vehicle extended service contract business to Lyndon which amounted to
$10.3 million. The Company's other products within the property and casualty
segment continued their growth, producing $31.2 million in gross premiums
written in 1997 compared to $17.3 million in 1996.

The operating results for 1997 were impacted by the write-off of approximately
$150,000 in capitalized software costs related to software which was included in
the sale of assets for the vehicle extended service contract business and the
write-off of approximately $1.25 million in deferred tax assets for ACCEL and
ANIC in order to reflect deferred tax realizable values as a result of the sale
of the Auto Aftermarket Group.

The Company's income before income taxes, discontinued operations, and
extraordinary item for 1996 was $1.4 million. This income is primarily the
result of the recognition of $4.3 million of other income related to a legal
settlement. In 1996, particularly in the first half, the Company continued to
experience adverse loss development on discontinued lines of business in the
property and casualty segment. Adverse development on the farmowners and related
discontinued lines amounted to $800,000.

REVENUE

Gross premium writings for 1998 were $43.3 million compared to $40.9 million and
$25.6 million for 1997 and 1996, respectively. Premiums written increased from
1997 by $5.4 million for commercial auto and $1 million for other property and
casualty programs offset by a decrease of $3.9 million for the vehicle extended
service contract program which was fully ceded to Lyndon Property. The increase
in premiums written in 1997 compared to 1996 was primarily the result of
increases of $16.8 million for the new property and casualty programs and $1.4
million for the vehicle extended service contract program. See Table II
following the narrative in Management's Discussion and Analysis.

Net premium earned was $18.8 million, $18.7 million and $12.5 million for 1998,
1997 and 1996, respectively. Commercial auto net premium earned was $18.3
million, $11.2 million and $5 million in 1998, 1997 and 1996, respectively. The
total net premium earned was comparable in 1998 and 1997 as the increase in
commercial auto net premium earned offset the decrease of $6.2 million in the
extended service contract line. The increase in 1997 as compared to 1996 was due
to the development and expansion by the Company into property and casualty lines
of business.

EXPENSES AND OTHER

The net loss and loss adjustment expense ratios increased to 117.1% in 1998 from
82.1% in 1997 due to losses incurred in the commercial auto line and the
resulting reserve strengthening. The net loss and loss adjustment expense ratios
remained relatively consistent at 82.1% in 1997 compared to 81.4% in 1996. See
Table I following the narrative in Management's Discussion and Analysis for
further information on key operating ratios and see Table III for reserve
development for the preceding ten years and a reconciliation of the beginning
and ending liability for unpaid losses and loss adjustment expense.

The effect of the Company's material lines of business that are in runoff was as
follows for 1998: net incurred losses and loss adjustment expenses ("LAE") for
the discontinued REO line of business were $245,000 in relation to zero earned
premium. The total number of open claims at December 31, 1998 was 7 and the
related reserves were $90,000. Net incurred losses and LAE for the discontinued
agriculture lines of business at December 31, 1998 were $541,000. The net impact
on the Company's loss ratio and net loss for these two discontinued lines of
business in 1998 was approximately 4% and $.7 million loss, respectively.


                                       9
<PAGE>   10

The effect of the Company's material lines of business that are in runoff was as
follows for 1997: net incurred losses and loss adjustment expenses ("LAE") for
the discontinued REO line of business were ($355,000) in relation to zero earned
premium. This result was due in large part to a re-evaluation of LAE reserves
that lowered the reserve to the expected ultimate cost of settling the claims.
The total number of open claims at December 31, 1997 was 10 and the related
reserves were $351,000. Net incurred losses and LAE for the discontinued
agriculture lines of business at December 31, 1997 were ($77,000). The net
impact on the loss ratio and net income for these discontinued lines of business
in 1997 was immaterial.

A positive impact on 1997 earnings was the level of service fees on the extended
service contracts which increased to $3.1 million in 1997 from $2.5 million in
1996. This increase was due to an overall increase in the fee levels as opposed
to an increase in contract volume. These service fees were non-recurring in 1998
due to the sale of the extended service contract business to Lyndon Property as
discussed previously.

Commissions and selling expenses as a percent of gross premiums written
decreased to 17.0% in 1998 from 22.2% in 1997 and 21.2% in 1996. This decrease
in 1998 is due largely to commercial auto becoming the predominant product line
for the Company. Commercial auto has significantly lower acquisition costs than
the Company's extended service contract business which was fully ceded to Lyndon
effective January 1, 1998.

Reinsurance expense recoveries increased $1.8 million in 1998 and $1.7 million
in 1997 due to the increase in the long-haul trucking business written and
reinsurance agreements in place on this business.

The Company's general and administrative expenses increased in 1998 by $.8
million or 18% and increased $1 million or 25% between 1997 and 1996. A factor
affecting the comparison of general and administrative expenses in 1998 to
previous years was the allocation of overhead expenses in previous years among
the Company and its subsidiaries sold effective December 31, 1997. In 1998, the
overhead expenses were fully absorbed by the Company. The increase in 1998 was
primarily due to increased salaries of $.6 million of which the majority related
to the change in allocation as previously discussed, increased legal fees of $.2
million, increased underwriting costs and association dues of $.1 million each
which were both the result of increased commercial auto premium writings since
1996 and various other expenses totaling $.3 million. These increases were
offset by decreased consulting fees of $.2 million and $.3 million in expense
reimbursements received from Lyndon in connection with Lyndon's usage of the
Company's information systems.

The 1997 increase in general and administrative expenses is primarily attributed
to the following expense categories: salaries and wages which increased due to
an increase in the number of personnel related to the Property and Casualty
product lines as well as normal salary increases; employee welfare which
increased as a result of expenses associated with the Company's 401(K) plan and
additional group insurance expenses; and rent which increased as a result of the
sale of the Company's Dublin, Ohio office building in March 1996 and the
subsequent rental of office space in Dublin, Ohio and Stafford, Texas. In
addition, the Company wrote-off in 1997 approximately $150,000 in capitalized
software costs related to software which was included in the sale of assets for
the vehicle extended service contract business.

Effective April 1, 1998, the Company purchased a 25% interest in the common
stock of USA Insurance Group, Inc. ("USAIG"), the parent company of
Transportation Insurance Services, the Company's general agent, and a 50%
shareholder in Countrywide Insurance Agency, Inc., for $5 million. This
investment is accounted for using the equity method. At December 31, 1998, the
investment in USAIG exceeded the Company's share of the underlying net assets by
$4.1 million and is being amortized on the straight-line method over 10 years
based upon a review of the operations, including a persistency review of USAIG's
producing sub-agents. The Company recorded a net expense of $189,000 in 1998 for
its investment in USAIG that is comprised of its share of USAIG's earnings of
$142,000 offset by amortization of $331,000.

STRATEGIC PARTNERSHIP

The Company's Board of Directors has engaged Advest, Inc., an investment banking
firm, to assist the Company in finding a strategic partner or purchaser for
itself or its insurance subsidiaries, with an eye to enhancing overall
shareholder value.

LIQUIDITY, CAPITAL RESOURCES AND OTHER

The Company's cash flows from operations have generally been adequate for its
current operating needs. The Company's long haul trucking, charter bus and
paratransit business generally is written for a term of one year with the
casualty claim-related liabilities extending beyond that period. The Company's
liability on vehicle extended service contracts typically has extended for
either one-year or five-year periods. However as previously discussed, the
Company's existing vehicle extended service contract business was ceded to
Lyndon Property effective January 1, 1998.


                                       10
<PAGE>   11

The Company maintains liquidity in its investment portfolio to generally
correspond with the liabilities outstanding on its lines of business. At
December 31, 1998, the estimated duration of the Company's fixed income
investment portfolio was 2.3 years while the estimated liability duration was
approximately 1.4 years. Currently, an interest rate change of 1% would impact
the fair value of the fixed maturity portfolio and stockholders' equity by a
decline of approximately $.8 million if interest rates rose and an increase of
approximately $.7 million if interest rates declined.

The Company's "available for sale" fixed maturity securities at December 31,
1998 included $4.6 million of mortgage-backed securities, $2 million of
collateralized mortgage obligation securities and $12.7 million of asset-backed
collateralized securities. The mortgage and asset-backed securities are subject
to risks associated with variable prepayments. As such, those securities may
have a different actual maturity and yield than planned at the time of purchase.
The degree to which a security is susceptible to either gains or losses is
influenced by the difference between its amortized cost and par value, relative
sensitivity of the underlying mortgages to prepayment risk in a changing
interest rate environment and relative priority of the securities in the overall
securitization.

The Company limits the extent of its risks on fixed maturity securities by
generally avoiding securities whose cost significantly exceeds par, by
purchasing securities which are backed by stable collateral, and by
concentrating on securities that have either a planned amortization or
sequential pay classes. The collateralized mortgage obligations and asset backed
securities owned have primarily short to intermediate average lives. At December
31, 1998, the Company did not have a significant amount of higher risk mortgage
or asset backed securities which had a significant risk of loss or principal.
There are negligible default risks on the mortgage and asset backed security
portfolios as a whole as the vast majority of the assets are either guaranteed
by U. S. government-sponsored entities or are supported in the securitization
structure by junior securities enabling the assets to achieve high investment
grade status. The Company's collateralized mortgage obligations and asset backed
securities are predominantly sequential pay with little or no exposure to
interest only obligations ("IOs") or inverse IOs.

Ohio domiciled insurance companies are subject to Ohio law which regulates the
ability of insurance companies to pay dividends. The regulation limits the
annual dividend or distribution of an insurer to the greater of (1) net income
of the previous year or (2) 10% of unassigned surplus as of the end of the
previous year. In addition, all dividends must come from earned surplus to
qualify as a non-extraordinary dividend. Amounts greater than this would be
considered extraordinary dividends and could not be paid without permission of
the Ohio Department. Based on this regulation, ANIC would require Ohio
Department approval to pay any dividend to ACCEL during 1999. See "Note O" in
the Notes to Consolidated Financial Statements for a discussion regarding Risk
Based Capital.

Upon closing in January 1998 of the sale of the Auto Aftermarket Group, the
Company used a portion of the proceeds to retire the outstanding balance of $15
million of senior notes held by ALIC, which had received them from an
unaffiliated company, along with accrued interest of approximately $1.1 million,
to make a capital contribution of $3.5 million to ANIC, to pay taxes on the sale
of approximately $4.3 million, to transfer $8.8 million in cash to Lyndon in
connection with the ceding of the existing vehicle extended service contract
business on January 1, 1998 and utilized the remainder for general corporate
purposes.

The estimates for policy reserves are continually under review and adjusted as
necessary as experience develops or new information becomes known; such
adjustments are included in current operations. These liabilities are
necessarily subject to the impact of future changes in claim severity, frequency
and other factors. Although considerable variability is inherent in such
estimates, based on recent evaluations management believes that the current
level of policy reserves will be adequate to cover anticipated claim
liabilities. Accordingly, the ultimate amounts required for settlement of policy
benefits may vary significantly from the amounts included in the accompanying
consolidated financial statements.

Due to the nature of its operations, the Company is at all times subject to
pending and threatened legal actions that arise in the normal course of its
activities. For information regarding legal proceedings involving the Company
including developments relating to the insolvency of Galaxy Insurance Company (a
subsidiary of the Company) and a suit against ALIC, who has been indemnified by
the Company, by three long-term care policyholders, see "Note M" in the Notes to
Consolidated Financial Statements.

In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and display of income and its
components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. The Company adopted SFAS No. 130 as of
January 1, 1998 and has presented comprehensive income for all periods presented
in the Consolidated Statements of Common Stockholders' Equity.


                                       11
<PAGE>   12

In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information, which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services major customers, and the material countries in which
the entity holds assets and reports revenue. The Company adopted SFAS No. 131 as
of January 1, 1998. Comparative information for 1997 and 1996 has been restated.

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction and, if it is, the type of
hedge transaction. The Company does not expect the adoption of SFAS No. 133 to
have a material impact on its consolidated financial statements because the
Company does not currently hold any derivative instruments.

Although the cumulative effects of inflation on premium growth cannot be fully
determined, increases in the value of commercial property results in increased
premiums for property coverages. The combination of severity (which is affected
by inflation) and frequency of loss trends in commercial auto and general
liability are recognized in premium increases or decreases by the adoption of
filed premium rates.

The National Association of Insurance Commissioners ("NAIC") has completed and
adopted a project to codify statutory accounting principles with a provision for
commissioner discretion in the determination of appropriate statutory accounting
for insurers. Although the NAIC has indicated that January 1, 2001 is the
expected date of implementation, the implementation is ultimately dependent upon
the insurer's state of domicile. Implementation of the codified statutory
principles may affect the surplus level of ANIC on a statutory basis. Management
is unable at this time to determine what impact, if any this project will have
on the statutory surplus of ANIC.

YEAR 2000 CONSIDERATION

The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches. The
Company's plan for assessment and renovation of these issues is grouped by
hardware, system and operating software, application system software, end-user
decision support software, telecommunications, office (non-information
technology) systems, service provider relationships and business partner
relationships. Within each grouping, components representing mission-critical
operations to the Company have been prioritized. Hardware, operating software,
application software, telecommunications, and key business partner relationships
necessary to conduct the basic business of the Company have progressed beyond
the renovation phase and are being validated or implemented. Additionally, the
Company is performing final assessments of supportive components within each
group to verify that normal life cycles and third party provider efforts have
matured to compliance levels. The Company expects little renovation will be
required from this phase other than completion of its general ledger system
implementation which is scheduled to be completed by the end of the second
quarter of 1999.

Since January 1996, the Company has incurred approximately $120,000 in costs
associated with the Year 2000 project. The Company expects to incur
approximately $60,000 in remaining costs prior to the project's anticipated
completion by the end of the second quarter of 1999. Management is in constant
appraisal of the project status and is supportive and committed to successful
completion. Based on the Company's current state of readiness and project
progress, management has determined that the effect on the Company's financial
condition and earnings is not material. Should any of the Company's benchmarks
be compromised from the planned completion timetables, the Company has
contingency plans in the form of contractual resource relationships, which will
be activated to accelerate the delinquent task.


CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

The 1995 Private Securities Litigation Reform Act provides issuers the
opportunity to make cautionary statements regarding forward-looking statements.
Accordingly, any forward-looking statement contained herein or in any other oral
or written statement by the Company or any of its officers, directors or
employees is qualified by the fact that actual results of the Company may differ
materially from such statement due to the following important factors, among
other risks and uncertainties inherent in the Company's business: state
insurance regulations, rate competition, adverse changes in interest rates,
unforeseen losses with respect to loss and settlement expense reserves for
unreported and reported claims, and catastrophic events.


                                       12
<PAGE>   13


                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

                                     TABLE I

        Several key operating ratios of the Company are as follows:

<TABLE>
<CAPTION>
                                                                        Consolidated Results
                                                              (Thousands of dollars, except ratios)
                                                                1998           1997           1996
                                                             ---------      ---------      ---------
<S>                                                          <C>            <C>            <C>      
        Gross premiums written                               $  43,285      $  40,897      $  25,629
        Net premiums earned                                  $  18,824      $  18,717      $  12,466
        RATIOS:
            Loss and LAE incurred to net premiums earned         117.1%          82.1%          81.4%
            Commissions and selling expenses and
                general and administrative expenses
                to gross premiums written                         30.0%          33.9%          36.1%
            Commissions and selling expenses,
                reinsurance expense recovery
                and change in deferred policy
                acquisition costs to net premiums earned          14.8%          22.9%          25.0%
            Taxes, licenses and fees to gross
                premiums written                                   3.6%           3.2%           4.3%
</TABLE>



                                       13
<PAGE>   14

                                    TABLE II
                        Changes in Gross Premiums Written
                             Year Ended December 31
                      (Thousands of dollars, except ratios)

<TABLE>
<CAPTION>
                                                                                1998                       1997
                                                                                 vs.           %            vs.            %
Gross Premiums Written                    1998        1997         1996         1997         Change        1996         Change
======================                 =======================================================================================
<S>                                    <C>          <C>          <C>          <C>            <C>         <C>           <C>    
Continuing lines of business:
   Commercial auto                     $ 35,678     $ 30,293     $ 13,793     $  5,385       17.8 %      $ 16,500      119.6 %
   Commercial multi-peril                   543          215          100          328      152.6 %           115      115.0 %
   Extended service contracts             5,821        9,744        8,375       (3,923)       (40.3)%       1,369       16.3 %
   Other property/casualty lines            958          230           18          728      316.5 %           212     1177.8 %
                                       --------     --------     --------     --------     --------      --------     --------
       Total continuing lines            43,000       40,482       22,286        2,518        6.2 %        18,196       81.6 %
                                       --------     --------     --------     --------     --------      --------     --------

Discontinued lines of business
 included in continuing operations:
   Medical and miscellaneous
       life and health                      306          441        1,985         (135)       (30.6)%      (1,544)       (77.8)%
   Vendor's single interest                 (21)         (35)         (59)          14        (40.0)%          24        (40.7)%
   Agriculture, REO and other
       property & casualty                   --            1          362           (1)      (100.0)%        (361)       (99.7)%
   Other                                     --            8        1,055           (8)      (100.0)%      (1,047)       (99.2)%

                                       --------     --------     --------     --------     --------      --------     --------
Total discontinued lines                    285          415        3,343         (130)       (31.3)%      (2,928)       (87.6)%
                                       --------     --------     --------     --------     --------      --------     --------
Gross premiums written
   from continuing operations          $ 43,285     $ 40,897     $ 25,629     $  2,388          5.8%     $ 15,268         59.6%
                                       ========     ========     ========     ========     ========      ========     ========
</TABLE>


                                       14
<PAGE>   15


                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

                                    TABLE III
 Analysis of Loss and Loss Adjustment Expense Development (Thousands of dollars)

<TABLE>
<CAPTION>
                                            1987         1988         1989         1990         1991         1992         1993     
                                         ==========================================================================================
<S>                                      <C>          <C>          <C>          <C>          <C>          <C>          <C>         
Reserves for unpaid losses and loss
     adjustment expenses, net of
     reinsurance recoverable             $  1,548     $  2,266     $  2,978     $  3,415     $ 26,038     $ 15,689     $  9,380    

Liability reestimated as of:
     One year later                      $  1,797     $  2,281     $  2,416     $  2,871     $ 31,548     $ 14,945     $  9,335    
     Two years later                        1,961        2,262          979        5,386       31,791       15,552       10,036    
     Three years later                      1,960        1,495        2,054        5,966       32,387       16,345       11,132    
     Four years later                       1,667        2,248        2,172        6,245       32,963       17,195       10,776    
     Five years later                       2,068        2,365        2,054        6,502       33,751       16,916       11,240
     Six years later                        2,069        2,302        2,083        6,952       33,529       17,369
     Seven years later                      2,110        2,323        2,121        6,871       33,842
     Eight years later                      2,110        2,372        2,116        7,195
     Nine years later                       2,120        2,418        2,126
     Ten years later                        2,113        2,418

Cumulative redundancy (deficiency)       $   (565)    $   (152)    $    852     $ (3,780)    $ (7,804)    $ (1,680)    $ (1,860)   

Cumulative amount of liability paid,
     net of reinsurance recoverables,
     paid through:
     One year later                      $  1,616     $  1,866     $  1,235     $ (9,966)    $ 19,319     $  8,802     $  5,779    
     Two years later                        1,960        1,953       (3,875)        (492)      26,487       12,442        7,346    
     Three years later                      1,960          367         (164)       3,313       29,815       13,820        9,624    
     Four years later                       1,332        1,551        1,373        4,726       30,949       15,834       10,337    
     Five years later                       2,003        2,096        1,681        5,477       32,622       16,493       11,040
     Six years later                        2,048        2,207        1,708        6,330       33,126       17,199
     Seven years later                      2,110        2,312        1,921        6,727       33,672
     Eight years later                      2,110        2,323        2,046        7,150
     Nine years later                       2,113        2,418        2,081
     Ten years later                        2,113        2,418

Net reserve - December 31                                                                                              $  9,380    
Reinsurance recoverables                                                                                                  1,400    
                                                                                                                       --------
Gross reserve                                                                                                          $ 10,780
                                                                                                                       ========

<CAPTION>
                                             1994         1995         1996         1997         1998
                                         ============================================================
<S>                                       <C>          <C>          <C>          <C>          <C>     
Reserves for unpaid losses and loss
     adjustment expenses, net of
     reinsurance recoverable              $  5,489     $  5,413     $  5,198     $  7,782     $ 16,135

Liability reestimated as of:
     One year later                       $  6,146     $  5,606     $  5,124     $ 12,429
     Two years later                         7,473        5,216        7,468
     Three years later                       7,100        6,227
     Four years later                        8,077
     Five years later                    
     Six years later                     
     Seven years later                   
     Eight years later                   
     Nine years later                    
     Ten years later                     

Cumulative redundancy (deficiency)        $ (2,588)    $   (814)    $ (2,270)    $ (4,647)

Cumulative amount of liability paid,
     net of reinsurance recoverables,
     paid through:
     One year later                       $  2,702     $  3,280     $  3,490     $  6,008
     Two years later                         5,561        4,532        5,567
     Three years later                       6,594        5,837
     Four years later                        7,687
     Five years later                    
     Six years later                     
     Seven years later                   
     Eight years later                   
     Nine years later                    
     Ten years later                     

Net reserve - December 31                 $  5,489     $  5,413     $  5,198     $  7,782     $ 16,135
Reinsurance recoverables                       891        2,238        5,818       14,250       33,389
                                         -------------------------------------------------------------
Gross reserve                             $  6,380     $  7,651     $ 11,016     $ 22,032     $ 49,524
                                         =============================================================

</TABLE>


Note:  This table excludes the consolidated reserves of Randjill Group, Ltd 
       which was acquired by the Company in 1991 and deconsolidated by the 
       Company in 1994.


                                       15
<PAGE>   16
                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

                             TABLE III - (CONTINUED)
    Reconciliation of Liability for Unpaid Losses and Loss Adjustment Expense

<TABLE>
<CAPTION>
                                                                                1998         1997        1996
                                                                              --------     --------     --------
                                                                                     (Thousands of dollars)
<S>                                                                           <C>          <C>          <C>     
Liability for insurance claims at beginning of year                           $ 22,028     $ 11,016     $  7,653

Less reinsurance recoverables                                                  (14,250)      (5,820)      (2,240)
                                                                              --------     --------     --------

Net balances at beginning of year                                                7,778        5,196        5,413

Loss and loss adjustment expenses incurred:
  Loss and loss adjustment expense incurred for events of the current year      17,330       15,705       10,086

  Loss and loss adjustment expense incurred for events of prior years            4,721         (332)          59
                                                                              --------     --------     --------

Total loss and loss adjustment expenses incurred                                22,051       15,373       10,145

Payments:
  Loss and loss adjustment expenses for insured events
     of the current year                                                         7,616        9,558        7,215
  Loss and loss adjustment expenses for insured events
     in prior years                                                              6,063        3,233        3,147
                                                                              --------     --------     --------

Total payments                                                                  13,679       12,791       10,362
                                                                              --------     --------     --------

Net balances at end of year                                                     16,150        7,778        5,196

Plus reinsurance recoverables                                                   33,385       14,250        5,820
                                                                              --------     --------     --------

Liability for insurance claims at end of year                                 $ 49,535     $ 22,028     $ 11,016
                                                                              ========     ========     ========
</TABLE>

The table above reflects increases in the liability for insurance claims in 1998
resulting from the Company's continued expansion into the Commercial Auto
business. Maturity of claims for this line of business has resulted in recording
in 1998 $3,667,000 in additional policy benefits incurred for prior policy
years. Additionally, lines of business discontinued prior to 1995 were
reevaluated resulting in the recording in 1998 of $859,000 in additional policy
benefits incurred.


                                       16
<PAGE>   17


ITEM 7A.  QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK MANAGEMENT

The Company is exposed to market risk, including changes in interest rates. To
manage the volatility relating to this exposure, the Company manages the
duration of its invested assets to stay within a reasonable range of the
duration of its liabilities. The Company does not hold or issue derivative
instruments. The table below provides information about the Company's other
financial instruments that are sensitive to changes in interest rates. The
financial instruments are grouped by market risk exposure category. All
instruments are denominated in U.S. dollars.

Significant interest rate risk sensitive instruments as of December 31, 1998
were:

<TABLE>
<CAPTION>
                                                                                                        TOTAL
                                                                                                        FAIR
                            1999      2000       2001       2002       2003    Thereafter   TOTAL       VALUE
                            ----      ----       ----       ----       ----    ----------   -----       -----
                                               (Millions of dollars)
<S>                       <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>   
INVESTMENTS IN FIXED MATURITY SECURITIES

Principal Amount          $ 3.62     $ 4.45     $ 8.46     $ 4.29     $ 5.01     $ 3.87     $29.70     $30.34

Book Value                  3.61       4.47       8.54       4.35       5.05       3.92      29.95

Average Interest Rate       6.56%      6.85%      6.58%      6.61%      6.56%      6.67%      6.63%      6.27%

SHORT-TERM INVESTMENTS

Principal Amount          $ 1.20         --         --         --         --         --     $ 1.20     $ 1.20

Book Value                  1.20         --         --         --         --         --       1.20

Average Interest Rate       5.12%        --         --         --         --         --       5.12%      5.12%
</TABLE>


                                       17
<PAGE>   18


                           ANNUAL REPORT ON FORM 10-K

                   ITEM 8, ITEM 14(a)(1) and (2), (c) and (d)

                   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

                                CERTAIN EXHIBITS

                          FINANCIAL STATEMENT SCHEDULES

                          YEAR ENDED DECEMBER 31, 1998

                         ACCEL INTERNATIONAL CORPORATION

                                 STAFFORD, TEXAS



                                       18
<PAGE>   19





                          INDEPENDENT AUDITORS' REPORT






The Board of Directors and Stockholders
ACCEL International Corporation:


We have audited the consolidated financial statements of ACCEL International
Corporation and subsidiaries (the Company) as listed in the accompanying index.
In connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ACCEL
International Corporation and subsidiaries as of December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedules when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.



                                                                        KPMG LLP




Houston, Texas
March 26, 1999


                                       19
<PAGE>   20

                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                December 31,
                                                              1998        1997
                                                            --------    --------
                                                          (Thousands of dollars)
<S>                                                          <C>         <C>   
ASSETS

Investments
     Investments available for sale, at fair value:
         Fixed maturities (cost: 1998--$29,953,000; 
            1997--$21,614,000)                              $ 30,343    $ 21,789
         Equity securities (cost:  1997--$4,879,000)              --       4,879
         Short-term investments
            (cost:  1998--$1,204,000; 1997--$7,253,000)        1,204       7,253
     Other invested assets                                     4,747          --
                                                            --------    --------
                                                              36,294      33,921

Cash                                                           2,587       1,589

Receivables:
     Premiums in process of transmittal, less
         allowance (1998--$200,000; 1997--$130,000)            7,975      11,633
     Amounts due from reinsurers                              36,877      16,739
     Amounts due from former subsidiaries                         65       1,201
                                                            --------    --------
                                                              44,917      29,573

Accrued investment income                                        282         252
Prepaid reinsurance premiums                                   5,913       9,567
Deferred policy acquisition costs                              2,803       3,112
Equipment--at cost, less accumulated
     depreciation (1998--$1,673,000;  1997--$1,416,000)          474         409
Leasehold improvements, less accumulated amortization
     (1998--$13,000; 1997--$3,000)                                24          35
Receivable from sale of discontinued and disposed
     of operations                                               703      24,987
Other assets                                                     621         649
                                                            --------    --------
                                                              10,820      39,011
                                                            --------    --------




Total assets                                                $ 94,618    $104,094
                                                            ========    ========
</TABLE>

                                                                     (Continued)

                                       20
<PAGE>   21

                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

                   CONSOLIDATED BALANCE SHEETS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                               December 31,
                                                            1998          1997
                                                          ---------     ---------
                                                          (Thousands of dollars)
<S>                                                       <C>           <C>      
     LIABILITIES AND STOCKHOLDERS' EQUITY

     Policy Reserves and Liabilities:
         Unearned premium reserves                        $  12,449     $  29,986
         Insurance claims                                    49,535        22,028
                                                          ---------     ---------
                                                             61,984        52,014
     Other Liabilities:
         Amounts withheld for others                          2,118         2,076
         Deferred reinsurance commissions                     1,508         1,635
         Amounts due reinsurers                               3,583         4,563
         Commissions payable                                     --         2,842
         Accounts payable and other liabilities               2,162         3,097
         Payable to former subsidiaries                           3            --
         Current federal income taxes                           159         4,278
                                                          ---------     ---------
                                                              9,533        18,491
                                                          ---------     ---------
                                                             71,517        70,505
                                                          ---------     ---------



     Commitments and Contingencies

     Redeemable Preferred Stock:
         Authorized shares--1,000,000x
            no issued or outstanding shares                      --            --

     Common stockholders' equity:
         Common stock, $.10 par value
            Authorized shares (1998--15,000,000; 
                  1997--15,000,000) 
            Issued shares (1998--9,468,196; 
                  1997--9,445,183)                              947           944
         Additional paid-in capital                          32,659        32,610
         Retained earnings (accumulated deficit)             (3,800)        6,518
         Less treasury shares at cost (1998--913,230;
                  1997--797,420)                             (6,962)       (6,599)
         Accumulated other comprehensive income                 257           116
                                                          ---------     ---------
                           Net stockholders' equity          23,101        33,589
                                                          ---------     ---------


         Total liabilities & stockholders' equity         $  94,618     $ 104,094
                                                          =========     =========
</TABLE>


     See notes to consolidated financial statements.



                                       21
<PAGE>   22

                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                                     1998         1997       1996
                                                                   --------     --------     ------
                                                               (Thousands of dollars, except per share data)
<S>                                                                <C>          <C>          <C>     
REVENUE:
     Gross premiums written--Notes F and G                         $ 43,285     $ 40,897     $ 25,629
     Less reinsurance ceded--Note G                                  24,476       17,118        9,416
                                                                   --------     --------     --------
        Net premiums written                                         18,809       23,779       16,213
     Decrease (increase) in unearned premium reserves                    15       (5,062)      (3,747)
                                                                   --------     --------     --------
        Net premiums earned--Note G                                  18,824       18,717       12,466
     Net investment income--Note C:
        Interest and dividends                                        2,150        1,939        1,692
        Realized gains (losses)                                         (44)       1,051          432
     Equity in income of affiliated company                            (189)          --           --
     Service fees on extended service
        contracts                                                        --        3,051        2,450
     Other income--Notes B and Q                                        566       10,528        4,489
                                                                   --------     --------     --------
                                                                     21,307       35,286       21,529
                                                                   --------     --------     --------
BENEFITS AND EXPENSES:
     Loss and loss adjustment expenses--Notes G and I                22,051       15,373       10,145
     Commissions and selling expenses                                 7,355        9,100        5,436
     Reinsurance expense recovery                                    (4,868)      (3,083)      (1,381)
     General and administrative                                       5,615        4,776        3,821
     Taxes, licenses and fees                                         1,567        1,312        1,107
     Interest--Note E                                                    --        1,425        1,969
     Decrease (increase) in deferred policy
        acquisition costs                                               308       (1,733)        (938)
                                                                   --------     --------     --------
                                                                     32,028       27,170       20,159
                                                                   --------     --------     --------
INCOME (LOSS) BEFORE FEDERAL INCOME
     TAXES, DISCONTINUED OPERATIONS
     AND EXTRAORDINARY ITEM                                         (10,721)       8,116        1,370

     Federal income taxes--Note H:
        Current expense (benefit)                                      (270)         (52)          --
        Deferred expense (benefit)                                       --        1,153           43
                                                                   --------     --------     --------
                                                                       (270)       1,101           43
                                                                   --------     --------     --------

INCOME (LOSS) FROM CONTINUING OPERATIONS                            (10,451)       7,015        1,327

Discontinued operations--Note B:
       Income from operations of discontinued business
           segment (net of income tax of  ($93,000) in 1997
        and ($238,000) in 1996)                                          --        1,744          646
      Loss on disposal of business segment, including
           provision for operating loss of  $495,000 during
           phase-out period (net of income tax of  $2,020,000)           --       (7,644)          --
                                                                   --------     --------     --------

INCOME (LOSS) BEFORE EXTRAORDINARY
     ITEM                                                           (10,451)       1,115        1,973

Extraordinary item--gain on
     extinguishment of debt--Note E                                      --           --          131
                                                                   --------     --------     --------

NET INCOME (LOSS)                                                  $(10,451)    $  1,115     $  2,104
                                                                   ========     ========     ========
</TABLE>


                                                                     (Continued)



                                       22
<PAGE>   23



                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                             Year Ended December 31,
                                                      1998             1997              1996
                                                 -------------     -------------     -------------
                                                  (Thousands of dollars, except per share data)

<S>                                              <C>               <C>               <C>          
Earnings per common share--basic:
     Income (loss) from continuing operations    $       (1.22)    $        0.82     $        0.23
     Income from discontinued operations                    --               .20               .11
     Loss on disposal of business segment                   --              (.89)               --
     Income (loss) before extraordinary item             (1.22)              .13               .34
     Extraordinary item                                     --                --               .02
                                                 -------------     -------------     -------------
     Net income (loss)                           $       (1.22)    $        0.13     $        0.36
                                                 =============     =============     =============
Earnings per common share--assuming dilution:
     Income (loss) from continuing operations    $       (1.22)    $        0.82     $        0.23
     Income from discontinued operations                    --               .20               .11
     Loss on disposal of business segment                   --              (.89)               --
     Income (loss) before extraordinary item             (1.22)              .13               .34
     Extraordinary item                                     --                --               .02
                                                 -------------     -------------     -------------
     Net income (loss)                           $       (1.22)    $        0.13     $        0.36
                                                 =============     =============     =============
Weighted average number of common
     shares outstanding                              8,573,574         8,610,757         5,904,398
                                                 =============     =============     =============
</TABLE>


See notes to consolidated financial statements.


                                       23
<PAGE>   24

                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
                  Years Ended December 31, 1998, 1997 and 1996
                             (Thousands of dollars)

<TABLE>
<CAPTION>
                                                                   Retained     Common                  Accumulated
                                                       Additional  earnings      stock                     other
                                            Common      paid-in   (accumulated  held in                comprehensive
                                            stock       capital    deficit)     treasury    ESOP loan     income         Net
                                           --------    ---------- ------------  --------    ---------  -------------  --------
<S>                                        <C>         <C>        <C>           <C>         <C>        <C>            <C>     
Balances at December 31, 1995              $    524    $ 23,702    $  3,299    $ (6,599)    $   (161)    $   (205)    $ 20,560
   Comprehensive income (loss):
       Net loss                                                       2,104                                              2,104
       Other comprehensive
           income (loss), net:
          Change in valuation allowance
           for unrealized appreciation
           on investment securities              --          --          --          --           --         (373)        (373)
                                           --------    --------    --------    --------     --------     --------     --------
       Other comprehensive
           income                                --          --          --          --           --         (373)        (373)
                                           --------    --------    --------    --------     --------     --------     --------
   Comprehensive income (loss)                   --          --       2,104          --           --         (373)       1,731
   Payments on ESOP loan                         --          --          --          --          129           --          129
   Issuance of 110,000 shares of
       Common Stock under
       Common Stock Option Plan
           (Note J)                              11         223          --          --           --           --          234
   Issuance of 4,047,310 shares of
       Common Stock in conjunction
       with the Rights Offering and
       Supplemental Offering (Note E)           405       8,582          --          --           --           --        8,987
                                           --------    --------    --------    --------     --------     --------     --------
Balances at December 31, 1996                   940      32,507       5,403      (6,599)         (32)        (578)      31,641     
   Comprehensive income:
       Net income                                --          --       1,115          --           --           --        1,115     
       Other comprehensive
           income (loss), net:
          Change in net unrealized
           appreciation on
           investment securities                 --          --          --          --           --          694          694     
                                           --------    --------    --------    --------     --------     --------     --------
       Other comprehensive
           income                                --          --          --          --           --          694          694     
                                           --------    --------    --------    --------     --------     --------     --------
   Comprehensive income                          --          --       1,115                                   694        1,809     
   Payments on ESOP loan                         --          --          --          --           32           --           32     
   Issuance of 44,021 shares of
       Common Stock under
       Common Stock Option Plan                   4         103          --          --           --           --          107     
                                           --------    --------    --------    --------     --------     --------     --------
Balances at December 31, 1997              $    944    $ 32,610    $  6,518    $ (6,599)    $     --     $    116     $ 33,589
</TABLE>

                                                                     (Continued)


                                       24
<PAGE>   25

                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
                  Years Ended December 31, 1998, 1997 and 1996
                             (Thousands of dollars)

<TABLE>
<CAPTION>
                                                                   Retained     Common                  Accumulated
                                                       Additional  earnings      stock                     other
                                            Common      paid-in   (accumulated  held in                comprehensive
                                            stock       capital    deficit)     treasury    ESOP loan     income         Net
                                           --------    ---------- ------------  --------    ---------  -------------  --------
<S>                                        <C>         <C>        <C>           <C>         <C>        <C>            <C>     
Balances at December 31, 1997              $    944    $ 32,610     $  6,518     $ (6,599)    $--    $    116        $ 33,589
   Comprehensive income (loss):                                                                                   
       Net loss                                              --     (10,451)          --       --          --         (10,451)
       Other comprehensive                                                                                        
           income (loss), net:                                                                                    
          Change in valuation allowance                                                                           
           for unrealized appreciation                                                                            
           on investment securities              --          --          133           --      --         141             274
                                           --------    --------     --------     --------     ---    --------        --------
       Other comprehensive                                                                                        
           income                                --          --          133           --      --         141             274
                                           --------    --------     --------     --------     ---    --------        --------
       Comprehensive income (loss)               --          --      (10,318)          --      --         141         (10,177)
   Purchase of 115,810 shares as                                                                                  
       treasury stock                            --          --           --         (363)     --          --            (363)
   Issuance of 23,013 shares of                                                                                   
       Common Stock under                                                                                         
       Common Stock Option Plan                   3          49           --           --      --          --              52
                                                                                                                  
                                           --------    --------     --------     --------     ---    --------        --------
Balances at December 31, 1998              $    947    $ 32,659     $ (3,800)    $ (6,962)    $--    $    257        $ 23,101
                                           ========    ========     ========     ========     ===    ========        ========
</TABLE>


      See notes to consolidated financial statements.


                                       25
<PAGE>   26

                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                            1998         1997          1996
                                                                          --------     --------     --------
                                                                                (Thousands of dollars)
<S>                                                                       <C>          <C>          <C>     
OPERATING ACTIVITIES:
     Income (loss) from continuing operations                             $(10,451)    $  7,015     $  1,327
     Adjustments to reconcile income (loss) from continuing operations
         to net cash (used in) provided by operating activities:
             Equity method investment, net                                     189           --           --
             Change in premiums receivable                                   3,658       (5,174)      (5,659)
             Change in accrued investment income                               (30)          11          (72)
             Change in prepaid reinsurance premiums                          3,654       (3,995)      (5,572)
             Change in amounts withheld for others                              42        1,713          363
             Change in unearned premium reserves                           (17,537)       9,057        6,674
             Change in insurance claim reserves                             27,507       11,012        3,363
             Change in amounts due to and from reinsurers                  (21,118)      (8,087)        (300)
             Change in other assets, other liabilities
                and accrued income taxes                                    (6,729)         935        1,713
             Interest paid in kind                                              --           --          403
             Accrual of discount on fixed maturity securities                  (40)         (51)         (62)
             Amortization of premium on fixed maturity securities               79           52           39
             Amortization of deferred policy acquisition  costs              7,925        4,457        2,226
             Policy acquisition costs deferred                              (7,616)      (6,151)      (3,431)
             Reinsurance commissions earned                                 (4,870)      (3,122)      (1,381)
             Reinsurance commissions received                                4,743        4,102        1,894
             Provision for depreciation and amortization                       267          110          111
             Net realized gains on investments                                 (44)      (1,051)        (432)
                                                                          --------     --------     --------
     Net cash (used in) provided bycontinuing operations                   (20,371)      10,833        1,204
     Net cash (used in) provided bydiscontinued operations                  39,431       (7,605)      (1,969)
                                                                          --------     --------     --------
     Net cash (used in) provided by operating activities
         before extraordinary item                                          19,060        3,228         (765)
             Extraordinary gain                                                 --           --          131
                                                                          --------     --------     --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES                         19,060        3,228         (634)
                                                                          --------     --------     --------

INVESTING ACTIVITIES:
     Sale of investments available for sale                                 15,824       17,677        9,070
     Purchase of investments available for sale                            (13,318)     (19,552)     (15,406)
     Equity method investment, net                                          (4,936)          --           --
     Other, net                                                               (321)        (318)        (160)
                                                                          --------     --------     --------
NET CASH USED IN INVESTING ACTIVITIES                                       (2,751)      (2,193)      (6,496)
                                                                          --------     --------     --------

FINANCING ACTIVITIES:
     Payment of ESOP loan                                                       --           32          129
     Repayment of notes payable                                            (15,000)          --         (600)
     Issuance of Common Stock under Stock Option Plan                           52          107          234
     Issuance of Common Stock under Rights Offering                             --           --        3,284
     Repurchase of Treasury Shares                                            (363)          --           --
                                                                          --------     --------     --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                        (15,311)         139        3,047
                                                                          --------     --------     --------
NET INCREASE (DECREASE) IN CASH                                                998        1,174       (4,083)
Cash at beginning of year                                                    1,589          415        4,498
                                                                          --------     --------     --------
CASH AT END OF YEAR                                                       $  2,587     $  1,589     $    415
                                                                          ========     ========     ========

Supplemental schedule of non-cash financing activities:
     Cancellation of Subordinated Notes as consideration
     for the purchase of Common Stock--Note E                                   --           --     $  5,703
                                                                          ========     ========     ========

     Transfer of note payable to ALIC--Note E                                   --     $ 15,000     $  1,500
                                                                          ========     ========     ========
</TABLE>

See notes to consolidated financial statements.



                                       26
<PAGE>   27

                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996

NOTE A--SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION: The accompanying consolidated financial statements of
ACCEL International Corporation ("ACCEL") and subsidiaries (collectively
referred to herein as the "Company") have been prepared in accordance with
generally accepted accounting principles ("GAAP") which, as to the insurance
company subsidiaries, differ in some respects from statutory accounting
practices prescribed or permitted by state insurance departments. The
significant accounting policies followed by the Company that materially affect
financial reporting are summarized below.

PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
include the accounts of ACCEL and its wholly-owned subsidiaries except for
Randjill Group, Ltd ("RGL") (see Note M). As discussed more fully in Note B,
Acceleration Life Insurance Company ("ALIC") and Dublin International Limited
("Dublin") are presented as discontinued operations. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.

DESCRIPTION OF BUSINESS: ACCEL is an insurance holding company incorporated in
Delaware. The Company is engaged in the underwriting and sale of
property/casualty insurance products, concentrating on commercial lines of
business. The Company offers various policies covering long-haul trucking,
charter bus, limousine and paratransit vehicle fleets, as well as other
specialized products tailored to other groups such as crane operators and gun
dealers. The Company offers these products through general agents. The Company
is subject to competition from other insurers throughout the states in which it
writes business. The Company is also subject to regulation by the insurance
departments of states in which it is licensed, and undergoes periodic
examinations by those departments.

In addition to the property and casualty insurance products described above, the
Company historically sold, principally through automobile dealers, credit life
and credit accident and health insurance and extended service contracts ("Auto
Aftermarket Group"). Effective December 31, 1997, the Company sold its Auto
Aftermarket Group as discussed more fully in Note B. As a result of this
transaction, the Company ceased to be engaged in the auto aftermarket credit
insurance and extended service contract businesses.

The following is a description of the most significant risks facing
property/casualty insurers and how the Company mitigates those risks:

     LEGAL/REGULATORY RISK is the risk that changes in the legal or regulatory
     environment in which an insurer operates may result in additional expenses
     not anticipated by the insurer in pricing its products. That is, regulatory
     initiatives, new legal theories or insurance company insolvencies through
     guaranty fund assessments may create costs for the insurer beyond those
     currently recorded in the consolidated financial statements. The Company
     mitigates this risk by operating throughout the United States, thus
     reducing its exposure to any single jurisdiction and also by employing
     underwriting and loss adjusting practices which identify and minimize the
     adverse impact of this risk.

     CREDIT RISK is the risk that issuers of securities owned by the Company
     will default or that other parties, including reinsurers, which owe the
     Company money, will not pay. The Company minimizes this risk by adhering to
     a conservative investment strategy, by maintaining reinsurance and credit
     and collection policies and by providing for any amounts deemed
     uncollectible.

     INTEREST RATE RISK is the risk that interest rates will change and cause a
     decrease in the value of an insurer's investments. The Company mitigates
     this risk by attempting to match the maturity schedule of its assets with
     the expected payouts of its liabilities. To the extent that liabilities
     come due more quickly than assets mature, an insurer would have to borrow
     funds or sell assets prior to maturity and potentially recognize a gain or
     loss.

ACCOUNTING ESTIMATES: In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosures of contingent
assets and liabilities as of the date of the consolidated financial statements
and revenues and expenses for the reporting period. Actual results could differ
significantly from those estimates.

The most significant estimates include those used in determining deferred policy
acquisition costs and the liability for insurance claims. Although some
variability is inherent in these estimates, management believes the amounts
provided are adequate. The estimates are continually reviewed and adjusted as
necessary. Such adjustments are generally reflected in current operations.


                                       27
<PAGE>   28

                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

INVESTMENTS: The Company classifies its fixed maturity and equity securities as
available for sale, therefore these securities are carried at fair value and the
unrealized appreciation or depreciation is reported in accumulated other
comprehensive income as a separate component of stockholders' equity after
giving effect to applicable income taxes.

Short-term investments, which include U. S. Treasury securities, commercial
paper and certificates of deposit are carried at cost which approximates fair
value.

The investment in a company in which the Company has a 25% interest is accounted
for utilizing the equity method where the cost of the investment is adjusted for
the Company's proportionate share of the investee's undistributed earnings or
losses as well as any dividends paid by the investee.

Realized gains and losses on the disposal of investments are determined by
specific identification and are included in the consolidated statements of
operations.

When an other than temporary decline in value is recognized, the specific
investment is carried at estimated realizable value and its original book value
is reduced to reflect such impairment of the investment. Such reductions in book
value are reflected in realized investment losses for the period in which they
were written down. For mortgage backed securities, when the present value of
estimated future cash flows discounted at a risk-free rate of return is less
than the cost basis of the investment, an impairment loss is recognized by
writing the investment down to its fair value.

FAIR VALUES OF FINANCIAL INSTRUMENTS: The fair value of a financial instrument
is the amount at which the financial instrument could be exchanged in a current
transaction between willing parties. In cases where quoted market prices are not
available, fair value is based on estimates using present value or other
valuation techniques.

These techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Although fair value
estimates are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in the immediate settlement of the instruments. The disclosure
requirements related to financial instruments exclude certain assets and
liabilities. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.

The tax ramifications of the related unrealized gains and losses may have a
significant effect on fair value estimates and have not been considered in the
estimates.

The carrying amounts reported in the consolidated balance sheets for cash,
short-term investments, accrued investment income, premiums in process of
transmittal, and amounts due from reinsurers approximate their fair value.

Fair values for fixed maturity, equity and asset and mortgage-backed securities
are based on quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments at amortized value (see Note C).

DEFERRED POLICY ACQUISITION COSTS: The costs (principally commissions and
certain expenses of policy issuance) of acquiring or renewing insurance
business, all of which vary with and are directly related to the production of
business, have been deferred. These deferred policy acquisition costs are
amortized in a manner related to the recognition of premiums earned. Anticipated
investment income is considered in determining recoverability of deferred costs.

EQUIPMENT AND DEPRECIATION: Equipment is carried at cost less accumulated
depreciation. Depreciation is provided using the straight-line method over an
estimated useful asset life of five years.

LEASEHOLD IMPROVEMENTS: Leasehold improvements are carried at cost less
accumulated amortization. Amortization is provided using the straight-line
method over the term of the five year lease.



                                       28
<PAGE>   29

                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

PREMIUM INCOME RECOGNITION AND UNEARNED PREMIUM RESERVES: Unearned premium
reserves on property and casualty products are calculated on the pro rata
method. Unearned premium reserves on the extended service contracts are based on
the historical emergence pattern of claims. The Company's primary liability on
new car contracts exists subsequent to the expiration of manufacturers'
warranties. This method results in premium being recognized in direct proportion
to the emergence of benefits on these contracts.

INSURANCE CLAIMS: The liabilities for insurance claims are determined using
statistical analyses and represent estimates of the ultimate net cost of all
reported and unreported claims that are unpaid at year end. Considerable
variability is inherent in such estimates and actual results will likely differ
from those estimates.

FEDERAL INCOME TAXES: ACCEL and its subsidiaries file a consolidated federal
income tax return. The provision for income taxes is based on income for
financial reporting purposes, after permanent differences. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under this
method, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce the deferred tax
assets to the amounts expected to be realized.

REINSURANCE: Reinsurance premiums ceded and reinsurance recoveries on losses and
loss adjustment expenses incurred are deducted from the respective income and
expense accounts. Assets and liabilities related to reinsurance ceded are
reported on a gross basis.

DEFERRED REINSURANCE COMMISSIONS: Commissions and ceding fees received in
connection with premiums ceded are deferred and amortized in a manner related to
the recognition of premiums earned. Earned ceding fees, commissions and
experience refunds are reported as reinsurance expense recoveries in the
consolidated statements of operations.

STOCK OPTION PLANS: Prior to January 1, 1996, the Company accounted for its
stock option plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123
(see Note J).

EARNINGS PER COMMON SHARE: Net income and net loss per common share are computed
using the weighted average number of common shares outstanding during the
period. Effective December 31, 1997, the Company adopted SFAS No. 128, Earnings
per Share. This standard, which did not have an effect on net income,
establishes standards for computing and presenting earnings per share. Earnings
per share for 1996 have been restated to comply with SFAS No. 128.

RECLASSIFICATIONS: Certain amounts in the 1997 and 1996 consolidated financial
statements have been reclassified to conform with the 1998 presentation.


NOTE B - SALE OF AUTO AFTERMARKET GROUP

On October 20, 1997, ACCEL entered into agreements to sell to Lyndon Insurance
Group, Inc. and Lyndon Life Insurance Company (collectively, "Lyndon") the
outstanding capital stock of ALIC, Acceleration National Service Company
("ANSC") and Dublin (collectively, the "Target Corporations") for $30.2 million
in cash and to sell to Lyndon Property Insurance Company ("Lyndon Property")
assets related to the vehicle extended service contract business of ACCEL's
wholly owned


                                       29
<PAGE>   30

                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE B - SALE OF AUTO AFTERMARKET GROUP (CONTINUED)

subsidiary, Acceleration National Insurance Company ("ANIC"), for $10.3 million
in cash. The sale was effective December 31, 1997.

The agreements provided that within 125 days after the closing, the sales price
for the Target Corporations would be decreased or increased by the amount, if
any, by which the Target Corporations' combined GAAP stockholder's equity as of
December 31, 1997 was less than or greater than, respectively, $31.6 million. As
of December 31, 1997, the combined GAAP stockholder's equity of the Target
Corporations was $32.1 million which resulted in a net sales price of
approximately $41.0 million.

The "Receivable from sale of discontinued and disposed of operations" of
approximately $25 million as of December 31, 1997 in the Consolidated Balance
Sheets represents the sales proceeds of $41 million less the note payable and
accrued interest of $16 million transferred to ALIC by an unaffiliated company
on December 31, 1997 (see Note E). The after-tax net gain on sale of the Auto
Aftermarket Group in 1997 was $3.2 million which was comprised of $10.3 million
in continuing operations (included in "Other income" in the 1997 Consolidated
Statement of Operations) and ($7.1 million) in discontinued operations
(excluding the provision for operating loss of $495,000 during the phase-out
period). The income tax expense of $2 million included in the loss on disposal
of business segment in the 1997 consolidated statement of operations includes
$1.5 million of current tax expense for the distribution of the policyholders'
surplus account as a result of the sale of ALIC (see Note H), current tax
expense of $2.8 million for the gain on the sale of the subsidiaries included in
discontinued operations, and $2.5 million deferred tax benefit and $.2 million
current tax expense, respectively, related to the operations during the
phase-out period of the subsidiaries included in discontinued operations.

In conjunction with the sale, on January 1, 1998, ANIC ceded via a quota share
reinsurance agreement 100% of its liability related to the vehicle extended
service contract business to Lyndon Property. Upon consummation of the
aforementioned sale, the Company ceased to be engaged in the auto aftermarket
credit insurance and extended service contract businesses. The consolidated
financial statements of the Company have been reclassified to reflect the
disposition of ALIC, ANSC and Dublin that comprised the Life/Health business
segment. Accordingly, the assets, liabilities, revenues, benefits and expenses,
and cash flows of ALIC and Dublin have been excluded from the respective
captions in the consolidated balance sheets, consolidated statements of
operations, and consolidated statements of cash flows for periods presented
prior to 1998. The net operating results of these entities have been reported,
net of applicable income taxes, as "Income from discontinued operations", the
assets and liabilities of these entities have been reported as "Assets of
discontinued operations" and "Liabilities of discontinued operations", and the
net cash flows of these entities have been reported as "Net cash (used in)
provided by discontinued operations."



                                       30
<PAGE>   31


                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE B - SALE OF AUTO AFTERMARKET GROUP (CONTINUED)

Summarized information for the discontinued operations is as follows:

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                         1997         1996
                                                       --------     --------
                                                       (Thousands of dollars)
<S>                                                    <C>          <C>     
Revenue                                                $ 31,815     $ 36,416
Income before provision for
     income taxes                                        (3,787)         884
Income from discontinued operations, including loss
     on disposal, net of income taxes                    (5,900)         646
</TABLE>

<TABLE>
<CAPTION>
                                                             Prior to Sale on
                                                                December 31,
                                                                    1997    
                                                                 ---------
                                                          (Thousands of dollars)
<S>                                                              <C>
Total assets, consisting primarily of investments,
     receivables, prepaid reinsurance premiums and
     deposits, and deferred policy acquisition costs             $ 124,011
Total liabilities, consisting primarily of policy
     reserves and claims                                            91,855
                                                                 ---------
Net assets of discontinued operations                            $  32,156
                                                                 =========
</TABLE>

The vehicle extended service contract business sold to Lyndon Property and ANSC
were components of the Company's property/casualty business segment, and
therefore are included in continuing operations for all periods presented. The
Company continues to write property/casualty insurance products. The sale
resulted in a gain of $10.3 million which is included in "Other income" in the
1997 consolidated statement of operations.

Total assets consisting primarily of investments, cash, premiums receivable and
amounts due from affiliates for the vehicle extended service contract business
were $17.6 million as of December 31, 1997. Total liabilities consisting
primarily of unearned premium reserves, loss reserves and commissions payable
for the vehicle extended service contract business were $17.6 million as of
December 31, 1997. Other summarized financial information for the vehicle
extended service contract business for the years ended December 31, 1997 and
1996 is as follows:

<TABLE>
<CAPTION>
                                                         1997         1996
                                                        ------       ------
                                                       (Thousands of dollars)
<S>                                                     <C>          <C>   
Revenue, primarily premiums and fee income on
  vehicle extended service contracts                    $9,223       $9,129
Net income                                                 360          740
</TABLE>



                                       31
<PAGE>   32


                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE C--INVESTMENTS

At December 31, 1998 and 1997, investments in cash and securities with a
carrying value of $5,458,000 and $5,484,000, respectively, were on deposit with
state insurance departments to satisfy regulatory requirements.

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                                1998        1997        1996 
                                                               -------     -------     -------
                                                                    (Thousands of dollars)
<S>                                                            <C>         <C>         <C>     
The change in net unrealized gains (losses) on fixed
maturity and equity securities, net of taxes, is summarized
as follows:

        Securities available for sale:
          Fixed maturities                                     $   141     $   250     $  (385)
          Equity securities                                         --         444         (21)
          Short-term investments                                    --          --          33
                                                               -------     -------     -------
                                                               $   141     $   694     $  (373)
                                                               =======     =======     =======

Realized gains (losses) on investments are summarized
as follows:

        Securities available for sale:
          Fixed maturities:
            Gross realized gains                               $    20     $   102     $   134
            Gross realized losses                                   --         (14)         --

          Equity securities:
            Gross realized gains                                    77       1,206         298
            Gross realized losses                                 (131)       (243)         --
        Short-term investments:
            Gross realized losses                                  (10)         --          --
                                                               -------     -------     -------
                                                               $   (44)    $ 1,051     $   432
                                                               =======     =======     =======

The major sources of investment income are summarized
as follows:

        Fixed maturities                                       $ 1,847     $ 1,465     $ 1,343
        Equity securities                                           --         312         232
        Short-term investments                                     505         297         164
        Other                                                       --          --          91
                                                               -------     -------     -------
                                                                 2,352       2,074       1,830
        Investment expenses                                       (202)       (135)       (138)
                                                               -------     -------     -------
           Net investment income                               $ 2,150     $ 1,939     $ 1,692
                                                               =======     =======     =======
</TABLE>


                                       32
<PAGE>   33

                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE C--INVESTMENTS--(CONTINUED)

The amortized cost and estimated fair value of fixed maturity securities by
category, all of which were available for sale, are as follows:

<TABLE>
<CAPTION>
                                                            Gross       Gross
                                              Amortized   unrealized  unrealized  Fair
                                                cost        gains       losses    value
                                              -----------------------------------------
                                                       (Thousands of dollars)
<S>                                           <C>        <C>        <C>         <C>    
December 31, 1998
U. S. Treasury and U. S. government
   agency securities                          $ 6,688    $   195    $    --     $ 6,883
State and political subdivision securities        110          5         --         115
Mortgage-backed securities                      4,499         68         (2)      4,565
Collateralized mortgage obligations             2,031         15         --       2,046
Asset-backed securities                        12,655         94        (18)     12,731
U. S. corporate securities                      3,970         41         (8)      4,003
                                              -------    -------    -------     -------
      Total                                   $29,953    $   418    $   (28)    $30,343
                                              =======    =======    =======     =======

December 31, 1997
U. S. Treasury and U. S. government
   agency securities                          $ 5,414    $    85    $    --     $ 5,499
State and political subdivision securities        180          9         --         189
Mortgage-backed securities                      2,980         24         --       3,004
Collateralized mortgage obligations             2,419         --         (3)      2,416
Asset-backed securities                         9,574         95        (20)      9,649
U. S. corporate securities                      1,047          9        (24)      1,032
                                              -------    -------    -------     -------
      Total                                   $21,614    $   222    $   (47)    $21,789
                                              =======    =======    =======     =======
</TABLE>

The amortized cost and estimated fair value of fixed maturity securities, all of
which were available for sale, at December 31, 1998, by contractual maturity,
are summarized as follows:

<TABLE>
<CAPTION>
                                            Amortized      Fair
Maturity                                      cost         value
--------                                    ---------    -------
                                           (Thousands of dollars)
<S>                                         <C>          <C>    
Due in one year or less                     $   900      $   906
Due after one year through five years         8,062        8,267
Due after five years through ten years        1,054        1,072
Due after ten years                             752          756
Mortgage-backed securities                    4,499        4,565
Collateralized mortgage obligations           2,031        2,046
Asset-backed securities                      12,655       12,731
                                            -------      -------
        Total                               $29,953      $30,343
                                            =======      =======
</TABLE>

The expected maturities in the foregoing table will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalty. Mortgage-backed securities owned have an expected
weighted average maturity of over 10 years.

Proceeds from the sale of securities available-for-sale during 1998, 1997 and
1996 were $76,276,00, $18,011,000 and $8,728,000, respectively. Gross gains of
$97,000 ($1,308,000 in 1997 and $432,000 in 1996) and gross losses of $131,000
($257,000 in 1997 and $0 in 1996) were realized on those sales.

Effective April 1, 1998, the Company purchased a 25% interest in the common
stock of USA Insurance Group, Inc. ("USAIG"), the parent company of
Transportation Insurance Service, the Company's general agent, for $5 million.
This investment is included in other invested assets and is accounted for using
the equity method. At December 31, 1998, the investment in USAIG exceeded the
Company's share of the underlying net assets by $4,088,000 and is being
amortized on the straight-line method over 10 years. During 1998, the Company
received $63,125 in dividends from USAIG.


                                       33
<PAGE>   34

                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE C--INVESTMENTS--(CONTINUED)

Following is a summary of financial position and results of operations of USAIG
(thousands of dollars):

<TABLE>
<CAPTION>
                                   Year Ended
                                December 31, 1998
                                -----------------
<S>                                <C>    
Current assets                     $12,970
Property, plant and equipment          315
Other assets                         2,950
                                   -------
Total assets                       $16,235
                                   =======

Current liabilities                $13,198
Long term debt                         397
                                   -------
Total liabilities                  $13,595
                                   =======
Shareholders' equity               $ 2,640
                                   =======

Total revenue                      $14,398
                                   =======
Net income                         $   855
                                   =======
</TABLE>

NOTE D--STOCKHOLDERS' EQUITY AND TRANSFER LIMITATIONS

Generally, the net assets of ANIC available for transfer to ACCEL are limited to
the amounts that ANIC's net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital and surplus requirements;
however, payments of such amounts as dividends are currently subject to
regulation by Ohio law. The regulation limits the annual dividend or
distribution of an insurer to the greater of (1) net income of the previous year
or (2) 10% of unassigned surplus as of the end of the previous year. In
addition, all dividends must come from earned surplus to qualify as a
non-extraordinary dividend. Amounts greater than this would be considered
extraordinary dividends and could not be paid without permission of the
Department of Insurance of the State of Ohio ("Ohio Department"). Based on this
regulation, ANIC would require Ohio Department approval to pay any dividend to
ACCEL during 1999.

The statutory basis capital and surplus and net income (loss) of ANIC, as
reported to insurance regulatory authorities, are summarized as follows:

<TABLE>
<CAPTION>
                                                                            ANIC
                                                                            ----
                                                                     (Thousands of dollars)
<S>                                                                        <C>
        Statutory capital and surplus at December 31:
                            1998                                           $ 16,010
                            1997                                             25,258

        Statutory net income (loss) for year ended December 31:
                            1998                                           $ (9,173)
                            1997                                              8,826
                            1996                                                884
</TABLE>


                                       34
<PAGE>   35

                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE E--NOTES PAYABLE

In 1991, ACCEL issued $5.8 million of subordinated notes (the "Subordinated
Notes"). The Subordinated Notes had a nine-year term with no principal payable
until maturity, and with interest at 10.125% per annum. Effective June 30, 1992,
ACCEL amended the notes to permit the issuance of additional notes for the
purpose of making interest payments, provided, however, that ACCEL could at its
option pay cash in lieu of issuing additional notes in any denomination of less
than $1,000. As a result, ACCEL issued additional notes totaling $403,000 and
$569,000 for the 1996 and 1995 interest payments, respectively.

Of the Subordinated Notes described above, a significant portion were held by
Chase Insurance Holdings Corporation ("CIHC"), a company related through common
ownership by a stockholder and director of the Company.

On July 25, 1996, the Company commenced an offering of non-transferable rights
(the "Rights Offering") to stockholders of record as of June 18, 1996. Under the
provisions of the Rights Offering, the Company permitted CIHC and its affiliate
to tender the principal amount of their Subordinated Notes for cancellation as
consideration (in lieu of cash) for the purchase of shares of common stock
pursuant to the Rights Offering. On August 23, 1996, CIHC and its affiliate
tendered the $5.6 million principal amount of their Subordinated Notes plus an
additional $83,759 of accrued interest thereon under the terms of the Rights
Offering. At the conclusion of the offering, CIHC and its affiliate had reduced
their holding of Subordinated Notes to $0.

In a separate transaction, the Company retired $731,533 principal amount of
Subordinated Notes held by an unrelated third party for consideration of
$600,000. The Company recognized an extraordinary gain on this transaction of
$131,533 in 1996. No federal income tax was recognized related to this gain due
to the consolidated tax position of the Company.

The result of the two aforementioned transactions was to retire all outstanding
Subordinated Notes.

On December 29, 1995, the Company issued senior notes (the "Senior Notes")
totaling $16.5 million at 9.50%, maturing on April 1, 2001. The proceeds from
these notes were used to retire a previous loan outstanding and to liquidate an
intercompany loan between ACCEL and an insurance subsidiary. The Senior Notes
were payable to the same unaffiliated company which was a party to a reinsurance
agreement with ALIC. This reinsurance agreement was structured such, that as
future profits emerged on the reinsured block of business, the profits would be
held by the reinsurance company, and ultimately applied to pay interest on and
to redeem the Senior Notes. Profits in excess of the amount required to retire
the Senior Notes were to be returned to ALIC. As of December 31, 1996, $1.5
million of the profits on this block of business were released to ALIC in the
form of the aforementioned Senior Notes. This release resulted in a balance of
$15.0 million of Senior Notes outstanding as of December 31, 1996. The
reinsurance agreement between ALIC and the unaffiliated company was commuted on
December 31, 1997 as a condition of the sale of the Auto Aftermarket Group. The
Senior Notes were transferred from the unaffiliated company to ALIC in
connection with the commutation of the reinsurance agreement on December 31,
1997 and retired with proceeds from the sale.

During 1997 and 1996, ACCEL paid interest on notes of $1,069,000 and $403,000,
respectively.

NOTE F--BUSINESS CONCENTRATION

Commercial Auto has become a primary product line for the Company since its
introduction as a new product in 1996. The program is marketed by a general
agent located in Florida, Transportation Insurance Specialists ("TIS"), and its
affiliate, Countrywide Insurance Agency, Inc. ("Countrywide"). Gross written
premium was $35.7 million, $30.3 million and $13.8 million for 1998, 1997 and
1996, respectively. Gross earned premium was $37.2 million, $23.6 million and
$8.4 million, respectively, for 1998, 1997 and 1996 while premium receivable,
net of commission, due from the general agents was $7.7 million and $10.6
million, respectively, as of December 31, 1998 and 1997. The Company owns a 25%
equity interest in USAIG, the parent company of TIS and Countrywide (see Note
C).


                                       35
<PAGE>   36


                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE G--REINSURANCE

The ceding of insurance through reinsurance agreements does not discharge the
primary liability of the original underwriter to the insured, but it is the
practice of insurers to treat risks that have been reinsured with other
companies, to the extent of the reinsurance, as though they were not risks for
which the original insurer is liable. Should the reinsurer not be able to meet
its obligations, those obligations are the ultimate responsibility of the
Company. Therefore, in financial statement presentation, premiums earned and
loss and loss adjustment expenses are presented net of that portion of risks
reinsured with other companies.

In 1996, the Company entered into reinsurance contracts associated with its
property and casualty lines. Under these agreements, the Company transfers a
percentage of risk to the related reinsurer. The Company also has agreements
which transfer risks after a predetermined loss has been reached. Premiums ceded
amounted to $24.5 million, $17.1 million, $9.4 million for 1998, 1997 and 1996,
respectively. Unearned premium reserves associated with these agreements at
December 31, 1998 and 1997 are $5.9 million and $9.6 million, respectively, and
the liability for insurance claims is $33.4 million and $14.3 million at
December 31, 1998 and 1997, respectively.

Premiums written and earned in 1998, 1997 and 1996 are summarized as follows:

<TABLE>
<CAPTION>
                               1998                             1997                             1996  
                    -------------------------         -------------------------         -------------------------
                     Written          Earned           Written          Earned          Written           Earned 
                    --------         --------         --------         --------         --------         --------
                                                       (Thousands of dollars)
<S>                 <C>              <C>              <C>              <C>              <C>              <C>     
Direct              $ 37,872         $ 42,297         $ 38,848         $ 30,885         $ 25,629         $ 18,953
Assumed                5,413            4,660            2,049              957               --               --
Ceded                (24,476)         (28,133)         (17,118)         (13,125)          (9,416)          (6,487)
                    --------         --------         --------         --------         --------         --------
Net premiums        $ 18,809         $ 18,824         $ 23,779         $ 18,717         $ 16,213         $ 12,466
                    ========         ========         ========         ========         ========         ========
</TABLE>


Loss and loss adjustment expenses incurred in 1998, 1997 and 1996 are summarized
as follows:

<TABLE>
<CAPTION>
                                    1998           1997           1996
                                  --------       --------       --------
                                          (Thousands of dollars)
<S>                               <C>            <C>            <C>     
Direct                            $ 48,296       $ 27,593       $ 15,198
Assumed                              5,007          1,150             --
Ceded                              (31,252)       (13,370)        (5,053)
                                  --------       --------       --------
Net loss and loss adjustment
  expenses                        $ 22,051       $ 15,373       $ 10,145
                                  ========       ========       ========
</TABLE>


NOTE H--FEDERAL INCOME TAXES

The Company files a consolidated federal income tax return with its
subsidiaries.

In 1998, 1997 and 1996 the Company paid $3,856,000, $825,000 and $1,100,000,
respectively, in federal income taxes.

Total income tax expense (benefit) differed from the amount computed by applying
the statutory federal income tax rate to income (loss) before taxes as follows:

<TABLE>
<CAPTION>
                                                         Year Ended December 31,
                                                     1998          1997          1996 
                                                    -------       -------       -------
                                                           (Thousands of dollars)
<S>                                                 <C>           <C>           <C>    
        Income tax (benefit) at statutory rate      $(3,645)      $ 2,769       $   465
        Amortization of goodwill                        104            36            36
        Dividends-received deduction                     --           (50)          (55)
        Tax-exempt interest                              --           (10)           (9)
        Net operating loss                               --        (1,656)           --
        Net operating loss for future use                --        (2,353)           --
        Valuation allowance                           3,553         2,329          (319)
        Refund of prior year taxes                     (270)           --            --
        Other, net                                      (12)           36           (75)
                                                    -------       -------       -------
        Federal income tax expense (benefit)        $  (270)      $ 1,101       $    43
                                                    =======       =======       =======
</TABLE>


                                       36
<PAGE>   37

                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE H--FEDERAL INCOME TAXES--(CONTINUED)

The tax effects of temporary differences that give rise to significant
components of the deferred tax assets and liabilities at December 31, 1998 and
1997 are summarized as follows:

<TABLE>
<CAPTION>
                                                                    December 31,
                                                               1998          1997
                                                              -------       -------
                                                             (Thousands of dollars)
<S>                                                           <C>           <C>    
        Deferred Tax Liabilities:
            Deferred policy acquisition costs                 $   953       $ 1,057
            Other                                                 293           285
                                                              -------       -------
                                                                1,246         1,342
                                                              -------       -------
        Deferred Tax Assets:
            Unearned premium reserves                             444         1,388
            Deferred reinsurance commissions                      513           556
            Net operating loss carryforward                     6,660         1,917
            Insurance reserves                                    275           132
            Vehicle extended service contract adjustment           --            --
            Other                                                  36           115
                                                              -------       -------
        Total deferred tax assets                               7,928         4,108
            Valuation allowance                                (6,682)       (2,766)
                                                              -------       -------
        Net deferred tax assets                                 1,246         1,342
                                                              -------       -------
                                                                   --       $    --
                                                              =======       =======
</TABLE>

The Company has $19.6 million of net operating losses that are available to
reduce future income taxes and will expire as follows: $6.9 million in 2009 and
$12.7 million in 2018.

The Company has determined the valuation allowance related to the deferred tax
assets based on its analysis of future deductible amounts. This analysis
included a schedule of the deductibility of non-life items pursuant to Section
801 of the Internal Revenue Code and a determination of the realization of
losses generated by available for sale securities. The Company recorded a
valuation allowance of $1,726,000 and $1,353,000 as of December 31, 1996 and
January 1, 1996, respectively.

A portion of the change in the valuation allowance in 1998 is due to an increase
in the deferred tax liability for unrealized gains on investments. This decrease
in the valuation allowance is reflected as an increase to retained earnings in
the accompanying consolidated statement of stockholders' equity.




                                       37
<PAGE>   38

                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE I--LIABILITY FOR INSURANCE CLAIMS

The following table provides a reconciliation of beginning and ending liability
balances for the Company's insurance claims for 1998, 1997 and 1996.

<TABLE>
<CAPTION>
                                                             1998            1997         1996 
                                                           --------------------------------------
                                                                   (Thousands of dollars)
<S>                                                        <C>            <C>            <C>     
     Liability for insurance claims
       at beginning of year                                $ 22,028       $ 11,016       $  7,653

       Less reinsurance recoverables                        (14,250)        (5,820)        (2,240)
                                                           --------       --------       --------

     Net balances at beginning of year                        7,778          5,196          5,413

     Loss and loss adjustment expenses incurred:

       Loss and loss adjustment expenses incurred for
         events of the current year                          17,330         15,705         10,086

       Loss and loss adjustment expenses incurred for
      events of prior years                                   4,721           (332)            59
                                                           --------       --------       --------

     Total Loss and loss adjustment expenses incurred        22,051         15,373         10,145
                                                           --------       --------       --------


     Payments:

       Loss and loss adjustment expenses for insured
         events of the current year                           7,616          9,558          7,215

       Loss and loss adjustment expenses for insured
         events in prior years                                6,063          3,233          3,147
                                                           --------       --------       --------

     Total payments                                          13,679         12,791         10,362
                                                           --------       --------       --------

     Net balances at end of year                             16,150          7,778          5,196

     Plus reinsurance recoverables                           33,385         14,250          5,820
                                                           --------       --------       --------

     Liability for insurance claims
       at end of year                                      $ 49,535       $ 22,028       $ 11,016
                                                           ========       ========       ========
</TABLE>


The table above reflects increases in the liability for insurance claims
resulting from the Company's continued expansion into the Commercial Auto
business. Maturity of claims for this line of business has resulted in recording
$3,667,000 in additional loss and loss adjustment expenses incurred in 1998 for
prior policy years. In addition, lines of business discontinued prior to 1995
were reevaluated resulting in the recording of $859,000 in additional loss and
loss adjustment expenses incurred in 1998.

In establishing the liability for insurance claims, management considers facts
currently known and the current state of the law and coverage litigation.
Liabilities are recognized for known claims (including the cost of related
litigation) when sufficient information has been developed to indicate the
involvement of a specific insurance policy, and management can reasonably
estimate its liability. In addition, liabilities have been established to cover
additional exposures on both known and unasserted claims. Estimates of the
liabilities are reviewed and updated continually.


NOTE J--COMMON STOCKS AND COMMON STOCK OPTIONS

In 1992, the Board of Directors voted to suspend payment of cash dividends on
the common stock until the Company returns to a level of profitability that will
sustain the payment of cash dividends.



                                       38
<PAGE>   39


                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE J--COMMON STOCKS AND COMMON STOCK OPTIONS--(CONTINUED)

ACCEL's Board of Directors approved an Employee Stock Ownership Plan ("ESOP")
during 1989. In 1990, the ESOP entered into an agreement with ALIC to borrow up
to $1.0 million for the purchase of ACCEL's common stock. This loan was retired
in 1997.

During November 1989, ACCEL's Board of Directors also approved a stock buy back
program to repurchase up to 1,000,000 common shares in the open market. ACCEL
has purchased 229,185 shares at a cost of $1.7 million under this program. The
buy back program was funded from internally generated funds.

During 1982, ACCEL adopted a stock option plan (the "82 Plan") under which
shares of common stock were made available to eligible officers and key
personnel. Under the terms of the 82 Plan, the option price had to be at least
100% of the fair value at the date of grant, and, accordingly, there were no
charges to income resulting from grants. Options were granted at prices ranging
from $2.769 to $11.750 per share from April 1982 through April 1992. The options
become exercisable after one year of continuous employment in installments of
50% at the end of the first and the second year from the date of grant and
expired ten years from the date of grant. A total of 300,000 (349,672 after
giving effect to all subsequent stock dividends) shares had been reserved for
options under the 82 Plan. No additional shares may be granted under the 82
Plan.

During 1987, ACCEL adopted the 1987 Incentive Stock Option Plan (the "87 Plan").
The 87 Plan provided for incentive stock options with respect to a maximum of
300,000 (347,287 after giving effect to all subsequent stock dividends) shares
of common stock of ACCEL prior to the expiration of the 87 Plan in April 1997.
During June of 1991, ACCEL's Board of Directors and shareholders approved the
First Restatement of the 1987 Stock Incentive Plan (the "Restated Plan"). The
Restated Plan replaced the 87 Plan except as to options granted and outstanding
under the 87 Plan. The Restated Plan reserved an additional 450,000 shares for
key employees and 50,000 shares for non-employee directors. Options could be
granted prior to expiration of the Restated Plan covering shares subject to
lapsed or terminated options. No additional shares may be granted under the 87
Plan or the Restated Plan.

During May 1995, two new Key Employees were granted stock options under ACCEL's
Restated Plan. Under the terms of their arrangement with ACCEL, both were
granted stock options for ACCEL's common stock in lieu of salary for their first
year of service. Options for 150,000 shares were granted at an option price per
share of $2.125, the fair value of ACCEL's common stock on the date of grant.
The options vest immediately and become exercisable one year following the date
of grant; however, they would become exercisable immediately upon either a)
change of control of ACCEL, or b) involuntary termination. The options would be
forfeited if employment with ACCEL was voluntarily terminated prior to May 23,
1996. The options will lapse five years from the effective date of grant.

At the end of their first and second years of service, the status of these two
key employees was evaluated by the Compensation Committee and based on the value
of their services, began receiving compensation effective June 1, 1996. As part
of their compensation both were granted stock options pursuant to the 1996 Stock
Incentive Plan (the "96 Plan"). In 1996, options for 165,000 shares were granted
at an option price per share of $2.50, the fair value of ACCEL's common stock on
the date of grant. In 1997, options for 90,000 shares were granted at an option
price per share of $2.75, the fair value of ACCEL's common stock on the date of
grant. The terms are identical to the aforementioned options granted in May
1995.

In June 1996, ACCEL stockholders approved the adoption of the 96 Plan. The 96
Plan provides for stock options, stock appreciation rights, restricted stock,
phantom stock and performance awards. No award may be granted after June 11,
2006, the expiration date of the 96 Plan. The total number of shares of common
stock available under the 96 Plan is 1,000,000 shares and up to 100,000 shares
may be issued pursuant to the exercise of outside directors' stock options.

Options granted to employees or independent agents of the Company under the 96
Plan will be priced at not less than 100% of the fair value of the common stock
on the date of grant and will become exercisable as to 25% of the shares subject
to the option upon completion of each full year of employment until fully
vested. Grants of options to outside directors under the 96 Plan will also be
priced at 100% of fair value on the date of grant but, in the absence of any
provisions in an option to the contrary, the options will become exercisable as
to 50% of the shares subject to the option upon completion of each full year
until vested. In substantially all other respects, the 96 Plan contains
provisions similar to the previous plans.


                                       39
<PAGE>   40


                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE J--COMMON STOCKS AND COMMON STOCK OPTIONS--(CONTINUED)

On August 28, 1996, the Board of Directors of the Company approved a resolution
to offer to all key employees holding options outstanding that were priced in
excess of the current market value the opportunity to receive "re-priced"
options. Such key employees were permitted to surrender, cancel and terminate
any or all outstanding options (whether vested or not) and receive options for
an equal number of shares under the 96 Plan at the then current price of $2.50
per share. The re-priced or "replacement" options would be newly granted options
and become exercisable in accordance with the vesting provisions of the 96 Plan.
A total of 161,371 shares were surrendered by key employees as part of the
re-pricing opportunity and 4,500 shares were not surrendered.

The following table summarizes activity under the respective plans.

<TABLE>
<CAPTION>
                                        1998                                1997                                  1996
                             ---------------------------         ----------------------------        ----------------------------
                               Number          Weighted            Number           Weighted           Number           Weighted
                             of Shares        Avg. Price         of Shares         Avg. Price        Of Shares         Avg. Price
                             ---------        ----------         ---------         ----------        ---------         ----------
<S>                           <C>             <C>                 <C>              <C>                <C>              <C>     
1996 Plan
Outstanding at
    beginning of year         558,054         $   2.595           430,371          $  2.514                --                --
Outstanding at
    end of year               858,623         $   2.720           558,054          $  2.595           430,371          $  2.514
Exercisable                   368,359         $   2.589           205,821          $  2.509                --                --
Granted                       338,500         $   2.933           207,000          $  2.750           430,371    *     $  2.514
Exercised                       4,513         $   2.569            28,021          $  2.554                --                --
Forfeited                      33,418         $   2.798            51,296          $  2.563                --                --
Expired                            --                --                --                --                --                --

1987 Restated Plan-Employees
Outstanding at
    beginning of year         122,285         $   3.347           191,881          $  4.503           500,569          $  4.595
Outstanding at
    end of year                67,500         $   2.238           122,285          $  3.347           191,881          $  4.503
Exercisable                    67,500         $   2.238           122,285          $  3.328           190,754          $  4.507
Granted                            --                --                --                --                --                --
Exercised                      18,500         $   2.125            12,000          $  2.125           110,000          $  2.125
Forfeited                      36,285         $   6.035                --                --           198,688    *     $  6.050
Expired                            --                --            57,596          $  7.451                --                --
</TABLE>

* Includes 161,371 shares that were surrendered under the repricing offer to key
  employees.


                                       40
<PAGE>   41


                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE J--COMMON STOCKS AND COMMON STOCK OPTIONS--(CONTINUED)

<TABLE>
<CAPTION>
                                     1998                         1997                         1996
                            ------------------------     -----------------------     ------------------------
                             Number        Weighted       Number       Weighted        Number       Weighted
                            of Shares     Avg. Price     of Shares    Avg. Price     of Shares     Avg. Price
                            ---------     ----------     ---------    ----------     ---------     ----------
<S>                          <C>           <C>           <C>           <C>           <C>           <C>   
1987 Restated Plan-Non Employee Directors
Outstanding at
    beginning of year        36,000        $6.025        49,000        $5.860        49,000        $5.860
Outstanding at
    end of year              36,000        $6.025        36,000        $6.025        49,000        $5.860
Exercisable                  36,000        $6.025        36,000        $6.025        44,500        $6.226
Granted                          --            --            --            --            --            --
Exercised                        --            --         4,000        $2.375            --            --
Forfeited                        --            --         9,000        $6.347            --            --
Expired                          --            --            --            --            --            --

1982 Plan
Outstanding at
    beginning of year        15,049        $6.263        18,524        $6.486        67,401        $7.686
Outstanding at
    end of year                  --            --        15,049        $6.263        18,524        $6.486
Exercisable                      --            --        15,049        $6.263        18,524        $6.486
Granted                          --            --            --            --            --            --
Exercised                        --            --            --            --            --            --
Forfeited                        --            --            --            --         8,209        $7.457
Expired                      15,049        $6.263         3,475        $7.451        40,668        $8.278
</TABLE>

The following table summarizes information about stock options outstanding at
December 31, 1998:

<TABLE>
<CAPTION>
        Range of           # Outstanding          Weighted Avg.        Weighted Avg.           # Exercisable          Weighted Avg.
    Exercise Prices         at 12/31/98          Remaining Life       Exercise Prices           at 12/31/98          Exercise Prices
    ---------------        -------------         --------------       ---------------          -------------         ---------------
<S>                         <C>                   <C>                  <C>                      <C>                     <C>
        $2 - $4               938,123                   8.04                $2.687                447,859                 $1.671
        $4 - $6                12,000                    4.5                $5.188                 12,000                 $5.188
        $6 - $8                    --                     --                    --                     --                     --
        $8 - $10               12,000                    2.5                $9.750                 12,000                 $9.750
</TABLE>

The per share weighted-average fair value of stock options granted during 1998,
1997 and 1996 was $1.56, $1.42 and $1.20, respectively, on the date of grant
using the Black Scholes option-pricing model with the following weighted-average
assumptions: 1998 - expected dividend yield 0%, risk-free interest rate of
6.00%, and expected lives of 5 to 10 years (based on the terms of the grant);
1997 - expected dividend yield 0%, risk-free interest rate of 6.00%, and
expected lives of 5 to 10 years (based on the terms of the grant); 1996 -
expected dividend yield 0%, risk-free interest rates ranging from 6.85% to 7.09%
(based on the date of the grant), and expected lives of 5 to 10 years (based on
the terms of the grant). The Company used a volatility factor of 25% in
determining the fair value of options for pro forma purposes.

The Company applies APB Opinion No. 25 in accounting for these plans and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements.



                                       41
<PAGE>   42


                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE J--COMMON STOCKS AND COMMON STOCK OPTIONS--(CONTINUED)

Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net income
(loss) would have been reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                                1998               1997              1996
                                                                             ----------         ----------        ----------
<S>                                                                          <C>                <C>               <C>       
          Net income (loss) as reported (in millions)                        $  (10,451)        $    1,115        $    2,104
          Pro forma net income (loss) (in millions)                             (10,603)             1,044             1,980

          Net income (loss) per share as reported - basic                    $    (1.22)        $      .13        $      .36
          Net income (loss) per share as reported - assuming dilution        $    (1.22)               .13               .36
          Pro forma net income (loss) per share - basic                      $    (1.24)               .12               .34
          Pro forma net income (loss) per share - assuming dilution          $    (1.24)               .12               .34
</TABLE>

Pro forma net income reflects only options granted subsequent to 1994.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
periods from one to four years and compensation cost for options granted prior
to January 1, 1995 is not considered.

The Company's stock options were not included in diluted earnings per share
because their effect on the periods presented was antidilutive.

NOTE K--SEGMENT INFORMATION

The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, in 1998. This standard, which does not have an effect
on net income, established standards for disclosing segment information.

The Company operated primarily in the property/casualty insurance industry
within the United States with a second segment for Corporate which includes the
Company's equity method investment in USAIG (see Note C) and other corporate
investments. The Company's management has determined the operating segments
based upon how the business is managed and operated. There are no intersegment
sales. The allocations of certain general expenses and investment income within
segments are based on a number of assumptions, and the reported operating
results would change if different methods were applied. Depreciation and capital
expenditures are not considered material.

Segment information is summarized as follows:

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                                 1998              1997             1996   
                                                               ---------         ---------         ---------
                                                                           (Thousands of dollars)
<S>                                                            <C>               <C>               <C>      
Revenue:

        Property/Casualty                                      $  21,058         $  35,055         $  19,380
        Corporate                                                    249               231             2,149
                                                               ---------         ---------         ---------
           Total                                               $  21,307         $  35,286         $  21,529
                                                               =========         =========         =========
Equity in net income (loss) of equity method investees:
        Property/Casualty                                             --                --                --
        Corporate                                              $    (189)               --                --
                                                               ---------         ---------         ---------
           Total                                               $    (189)               --                --
                                                               =========         =========         =========
Income (loss) before income taxes, discontinued
  operations and extraordinary item:
        Property/Casualty                                      $  (9,682)        $   9,901         $   1,774
        Corporate                                                 (1,039)           (1,785)             (404)
                                                               ---------         ---------         ---------
           Total                                               $ (10,721)        $   8,116         $   1,370
                                                               =========         =========         =========
Identifiable assets:
        Property/Casualty                                      $  87,934         $  89,303         $  54,503
        Corporate                                                  6,684            14,791               855
                                                               ---------         ---------         ---------
           Total                                               $  94,618         $ 104,094         $  55,358
                                                               =========         =========         =========
Investment in equity method investees:
        Property/Casualty                                      $      --                --                --
        Corporate                                                  4,747                --                --
                                                               ---------         ---------         ---------
           Total                                               $   4,747                --                --
                                                               =========         =========         =========
</TABLE>



                                       42
<PAGE>   43

                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE L--RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN

The Acceleration Retirement Savings Plan became effective in 1985. During 1989,
ACCEL's Board of Directors approved changes to this plan to include an ESOP and
concurrently changed the plan name to the "Acceleration Retirement Savings and
Stock Ownership Plan" ("Plan"). For the first six months of 1997 and 1996, the
Board authorized contributions to the Plan at a level that would fund a 100%
match of the first 6% of each participating employee's tax deferred
contributions.

Effective July 1, 1997, the Company reorganized the Plan into two separate
Plans. One plan, the ACCEL International Corporation 401K Plan ("401K Plan"),
authorized contributions at a level that would fund a 75% match of the first 6%
of each participating employee's tax deferred contributions. The second plan,
the ACCEL International Corporation Stock Ownership Plan ("ESOP Plan"),
authorized a 2% discretionary funding to the plan for each eligible employee.
The Company incurred contribution expense for 1998, 1997 and 1996 of $111,000,
$209,000 and $187,000, respectively.

The 401K Plan allows all employees who meet certain eligibility requirements and
choose to participate to defer a percentage of their salary and contribute to
the 401K Plan on a tax deferred basis. The Company contributions to the ESOP
Plan are used to purchase shares of ACCEL's common stock. As a result of the
reorganization of the 401K and ESOP Plans, the Company funded $68,000 as a
partial termination in 1997.


NOTE M--COMMITMENTS AND CONTINGENCIES

Due to the nature of its operations, the Company is at all times subject to
pending and threatened legal actions that arise in the normal course of its
activities. In management's evaluation of certain pending matters, based on the
advice or information and analysis of outside counsel, the accompanying
consolidated financial statements would not be materially affected by the
outcome of any legal proceedings or contingent liabilities, except that recent
developments in the long-term care insurance litigation discussed below involve
one or more theories of damages which if decided against defendants, including
the Company, might ultimately prove material.

In July 1991, the Company acquired 100% of RGL. Galaxy Insurance Company
("Galaxy"), a wholly owned subsidiary of RGL, wrote commercial property
insurance, property and casualty, and assumed treaty reinsurance. Galaxy became
statutorily insolvent at June 30, 1994. Due to the insolvency of Galaxy, the
Company wrote its investment in RGL to zero and deconsolidated RGL as of 
April 1, 1994.

On October 7, 1994, the Liquidation Bureau took control of Galaxy pursuant to an
order of liquidation of the New York Supreme Court. Prior to the liquidation of
Galaxy, ANIC had issued certain certificates of suretyship ("Certificates") with
respect to certain Galaxy insurance policies each of which provided that ANIC
would assume the responsibilities of Galaxy under the specified policy if Galaxy
became insolvent or financially unable to meet its obligations on the underlying
policy, but only if certain conditions were met. In particular, the
Certificates provided that ANIC's assumption of liability was contingent upon
the insured's executing and delivering all agreements, assignments or evidences
of subrogation satisfactory to ANIC respecting payments made or liabilities
assumed.

In May 1996, the Liquidation Bureau, acting on behalf of the New York
Property/Casualty Insurance Security Funds (the "Guaranty Fund"), informally
advised the Company that on behalf of the Guaranty Fund it intended to seek
indemnification or reimbursement from ANIC for claims paid by the Guaranty Fund
to Galaxy insureds on policies which may have been covered by the Certificates.
The company has taken the position that the Guaranty Fund has no right to seek
indemnification unless Galaxy insureds who hold properly issued Certificates
have executed assignments and evidences of subrogation to ANIC. Even if any
Galaxy insured properly made such a claim directly to ANIC, the Company has been
advised by counsel that if ANIC paid any such claim, it would have the right,
under assignment and subrogation agreements with its insureds, to assert all
rights that the insureds could have asserted to recover the loss amounts from
any other source, including the Guaranty Fund.

In early 1998, the Superintendent of Insurance of the State of New York, as
Liquidator of Galaxy and Administrator of the Guaranty Fund ("Superintendent"),
filed suit against ANIC in New York State Supreme Court. The complaint alleged,
among other things, breach of contract and demanded that ANIC specifically
perform its alleged obligations under the Certificates. The complaint asked for
an amount in excess of $6.5 million in damages.


                                       43
<PAGE>   44

                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE M--COMMITMENTS AND CONTINGENCIES--(CONTINUED)

As reflected above, the suit requested indemnification or reimbursement for the
claims paid or to be paid by the Guaranty Fund to Galaxy insureds on policies
which may have been covered by the Certificates. ANIC has maintained that the
Guaranty Fund does not have the right to seek indemnification unless the terms
and conditions of validly issued Certificates have been strictly complied with.
Accordingly, ANIC filed for dismissal of the suit which motion was granted by
the Court on October 6, 1998. Thereafter, the Superintendent moved to reargue
and renew his opposition to ANIC's motion to dismiss. By an Order dated
February 23, 1999, the Court denied the Superintendent's motion to reargue. No
decision has yet been rendered on the motion to renew. The Superintendent also
filed a Notice of Appeal of the Court's Decision and Order dismissing the
complaint. ANIC will continue to defend vigorously against the Superintendent's
lawsuit.

In November 1997, suit was filed against ALIC by three long-term care
policyholders seeking to represent a class of North Dakota policyholders
alleging breach of contract, fraud and misrepresentation regarding an alleged
promise not to raise premiums "too much". Said long-term care insurance
business was entirely reinsured to and assumed by Commonwealth Life Insurance
Company ("Commonwealth") of Louisville, Kentucky, in 1991. The matter was
tendered to Commonwealth to defend on behalf of ALIC pursuant to the applicable
provisions of the reinsurance agreement between the parties, and Commonwealth
also tendered the matter back to ALIC.

The allegations of fraud and misrepresentation at the time of sale of the
long-term care policies are based on alleged statements that premiums "would not
be raised too much" even though the policy on its face stated that the "Company
reserves the right to increase premiums at anytime." Moreover, premiums were
increased subsequent to the reinsurance of the business to Commonwealth by ALIC,
and the increases appear to have been approved by the proper regulatory
authority.  Plaintiffs amended their complaint to set forth allegations that
the policies were intentionally underpriced and/or poorly underwritten, so as to
justify premium increases and induce policy lapses. The Company and
Commonwealth are cooperating to vigorously defend the matter. Joint motions to
dismiss and to strike the class action allegations were filed in the U.S.
District Court, District of North Dakota, Southeastern Division. The Court
acted to deny all pending motions without prejudice to refiling until
development of the record occurred. The parties have undertaken to conduct
discovery to develop the record as directed by the Court. Based thereon, the
Company filed a motion for summary judgment. On March 16, 1999, the Court
issued a Memorandum and Order denying Defendant's motion for summary judgment
and granting Plaintiff's motion for class certification. The Company has
petitioned for interlocutory appeals of both rulings. These recent
developments involve one or more theories of damages which if decided against
defendants, including the Company, might ultimately prove material although
management cannot currently estimate a potential range of loss. In the
event the plaintiffs prevail, the Company believes that it has a basis on which
to seek indemnification from Commonwealth.

On March 3, 1999, a complaint was filed in the Circuit Court of Pinellas County,
Florida to represent a class of all Florida purchasers of long-term care
insurance sold by ALIC. The allegations are similar to the allegations in the
North Dakota litigation above. No response to the complaint has yet been filed
by the Company. The Company intends to deny any liability therein and to
continue to defend its interests vigorously in these matters. 

The Company currently leases office space under two operating leases which
expire in 2000 and 2001. These leases are accounted for as operating leases.
Minimum rental commitments in effect at December 31, 1998 are as follows:

<TABLE>
<CAPTION>
             Year Payable              Annual Minimum Rentals
             ------------              ----------------------
<S>                                       <C>      
                 1999                        $ 144,000
                 2000                          125,000
                 2001                           38,000
                 Total                       $ 307,000
</TABLE>

The amount of rent charged to continuing operations was $188,000, $80,000 and
$68,000 in 1998, 1997 and 1996, respectively.


NOTE N--RELATED PARTY TRANSACTIONS

As more fully described in Note E, during 1996 the Company retired all of the
outstanding Subordinated Notes held by CIHC.



                                       44
<PAGE>   45

                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE O--RISK BASED CAPITAL

The Ohio Department imposes risk based capital ("RBC") requirements on insurance
enterprises, including ANIC. The RBC Model serves as a benchmark for the
regulation of property/casualty insurance companies by state insurance
regulators. RBC provides for targeted surplus levels based on formulas which
specify various weighting factors that are applied to financial balances or
various levels of activity based on the perceived degree of risk, and are set
forth in the RBC requirements. Such formulas focus on four general types of
risk: (a) the risk with respect to the company's assets (asset or default risk);
(b) the risk of default on amounts due from reinsurers, policyholders or other
creditors (credit risk); (c) the risk of under-estimating liabilities from
business already written or inadequately pricing business to be written in the
coming year (underwriting risk); and, (d) the risk associated with items such as
excessive premium growth, contingent liabilities and other items not reflected
on the balance sheet (off-balance sheet risk). The amount determined under such
formulas is called the authorized control level RBC ("ACLC").

The RBC guidelines define specific capital levels based on a company's ACLC that
are determined by the ratio of the company's total adjusted capital ("TAC") to
its ACLC. TAC is equal to statutory capital, plus or minus certain other
specified adjustments. The specific capital levels, in declining order, and
applicable ratios are generally as follows: "Company Action Level" where TAC is
less than or equal to 2.0 times ACLC; "Regulatory Action Level" where TAC is
less than or equal to 1.5 ACLC; "Authorized Control Level" where TAC is less
than or equal to 1.0 times ACLC; and, "Mandatory Control Level" where TAC is
less than or equal to 0.7 times ACLC. Companies at the Company Action Level must
submit a comprehensive financial plan to the insurance commissioner of the state
of domicile. Companies at the Regulatory Action Level are subject to a mandatory
examination or analysis by the commissioner and possible required corrective
actions. At the Authorized Control Level, a company is subject to, among other
things, the commissioner placing it under regulatory control. At the Mandatory
Control Level, the insurance commissioner is required to place a company under
regulatory control.

The level of ANIC's ACLC was affected in 1998 by the cession on January 1, 1998
of unearned premium reserves totaling $13,867,000 for the vehicle extended
service contract business in conjunction with the sale of the vehicle extended
service contract business to Lyndon Property on December 31, 1997 as discussed
in Note B. The cession of the unearned premium reserves reduced net written
premiums, which negatively impacted the RBC calculation. At December 31, 1998,
ANIC's TAC as included in the 1998 statutory annual statement was $16,010,000 or
1.1 times its ACLC. Accordingly, ANIC is within the Regulatory Action Level.
Excluding the cession of the vehicle extended service contract business, ANIC
would have exceeded all required RBC levels at December 31, 1998.

The Company has been in discussions with the Ohio Department regarding its 1998
RBC calculation due to the aforementioned effect of the reinsurance cession. The
Ohio Department currently is not requiring the Company to file a RBC
comprehensive financial plan or invoking other remedies available under
prescribed statutes. The Company anticipates no significant regulatory action as
a result of the 1998 RBC calculation.


                                       45
<PAGE>   46


                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

NOTE P--QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)

Quarterly consolidated results of operations for 1998 and 1997 are summarized as
follows:

<TABLE>
<CAPTION>
                                                     First           Second            Third           Fourth
                                                    Quarter          Quarter          Quarter          Quarter
                                                   --------         --------         --------         --------
                                                            (Thousands of dollars, except per share data)
1998
<S>                                                <C>              <C>              <C>              <C>     
Premiums written from continuing operations        $ 13,791         $ 11,141         $  8,772         $  9,581
Premiums earned from continuing operations            4,883            5,413            3,746            4,782
Loss and loss adjustment expense incurred
  from continuing operations                          3,869            4,368            3,570           10,244

Net loss                                               (508)            (851)            (647)          (8,445)

Net loss per common share:                             (.06)            (.10)            (.08)            (.99)
  Basic and assuming dilution

1997
Premiums written from continuing operations        $  7,416         $ 12,307         $  9,402         $ 11,772
Premiums earned from continuing operations            3,814            4,210            4,476            6,217
Loss and loss adjustment expense incurred
  from continuing operations                          2,766            3,401            3,160            6,046

Net income                                              225              378              429               83

Net income per common share:
  Basic and assuming dilution                           .03              .04              .05              .01
</TABLE>

The increase in loss and loss adjustment expense in the fourth quarter of 1998
is the result of an actuarial review of reserves which produced a strengthening
of reserves for continuing and discontinued lines of business.


NOTE Q--LITIGATION PROCEEDS

In 1996, ACCEL received a total of $4,291,085 in proceeds from a legal action
brought by the Company against a non-affiliated marketing organization. With the
approval of the Ohio Department the proceeds from the settlement were shared
equally between ACCEL and ANIC. These proceeds have been categorized as "Other
income" in the accompanying 1996 consolidated statement of operations.


NOTE R--COMPREHENSIVE INCOME

The following reconciles the components of other comprehensive income for the
years ended December 31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                                       1998           1997          1996
                                                      ------         ------        ------
                                                            (Thousands of dollars)
<S>                                                   <C>            <C>           <C>
Unrealized holding gains (losses)
        arising during the period,
        net of taxes of $88, $146, 
        and $(333)                                    $  170        $  283        $ (648)

Less:  Reclassification adjustments for
        gains (losses) included in net income,
        net of taxes of $(15),
        $211, and $141                                $  (29)        $  411        $  275
                                                      ------         ------        ------

Net unrealized gains (losses) on securities,
        arising during the period,
        net of taxes of $73,
        $357, and $(192)                              $  141         $  694        $ (373)
                                                      ======         ======        ======
</TABLE>


                                       46
<PAGE>   47

                                    PART III


ITEM 9.       DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

              Not Applicable.


ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

              The executive officers, their respective ages and business
              experience are as follows: Raymond H. Deck (76), Chairman of the
              Board; Douglas J. Coats (66), President and Chief Executive
              Officer; Cynthia A. Moore (37), Senior Vice President, Treasurer
              and Chief Financial Officer; Nicholas Z. Alexander (63), Senior
              Vice President, Secretary and General Counsel; and Bryce E. Farmer
              (47), Senior Vice President - Administration.

              Mr. Deck was named Chairman of the Board effective October 1,
              1998. He has been a Director of the Company since 1990. He also
              serves as President of Chase Insurance Enterprises, Inc.,
              Hartford, Connecticut.

              Mr. Coats joined the Company on May 23, 1995, when he was
              appointed Executive Vice President and a member of the Board of
              Directors. Prior thereto, he was Executive Vice President of
              Ranger Insurance Company, Houston, Texas for more than five years.

              Ms. Moore joined the Company on August 28, 1996 when she was
              elected Senior Vice President and Chief Financial Officer. On
              December 31, 1997 she was elected Treasurer of the Company and was
              appointed a member of the Board of Directors on October 1, 1998.
              Prior thereto she was an Audit Executive with Ernst & Young LLP
              for more than five years.

              Mr. Alexander was named Senior Vice President, Secretary and
              General Counsel of the Company in 1992 and prior thereto was Vice
              President, Secretary and General Counsel of the Company for more
              than five years.

              Mr. Farmer joined the Company in February 1996 and was elected
              Senior Vice President-Administration on March 12, 1996. Prior
              thereto he had been Senior Vice President-Corporate Development
              with Universal Underwriters Group, Overland Park, Kansas between
              June 1993 and November 1995. Prior thereto, he had been with
              Ranger Insurance Company, Houston, Texas for more than five years
              as Senior Vice President-Administration.


The following table sets forth certain information relating to the directors of
the Company:

<TABLE>
<CAPTION>
                                                                              Number of shares of Common
Names, Position with the                                                      Stock owned beneficially,
Company and Age                                                               directly or indirectly, on
(as of January 31, 1999)       Principal Occupation for past       Director   January 31, 1999, (except      Percent
                               five years/other Directorships        Since    as otherwise noted) (1)       of Class
------------------------       ---------------------------------   --------   ---------------------------   --------
<S>                            <C>                                 <C>        <C>                            <C> 
       Robert Betagole         President of Mike Albert Leasing,   1970         117,491  (5)                   1.4%
        Director, 70           Inc., Cincinnati, OH.

       David T. Chase          President and Director of           1985       4,343,148  (6)                  50.8%
        Director, 60           D. T. Chase Enterprises, Inc.,
             (2)               Hartford, CT.
</TABLE>



                                       47
<PAGE>   48




<TABLE>
<CAPTION>
                                                                              Number of shares of Common
Names, Position with the                                                      Stock owned beneficially,
Company and Age                                                               directly or indirectly, on
(as of January 31, 1999)       Principal Occupation for past       Director   January 31, 1999, (except     Percent
                               five years/other Directorships        Since    as otherwise noted) (1)      of Class
------------------------       ----------------------------------  --------   ---------------------------  ---------
<S>                            <C>                                 <C>                <C>                  <C>
      Douglas J. Coats         President and Chief Executive       1995               143,660              1.7%
      President, Chief         Officer of the Company since
      Executive Officer        October 1, 1998.  Prior thereto
      and Director, 66         he was Executive Vice President
                               of the Company since May 23, 1995.
                               Prior thereto he was Executive
                               Vice President of Ranger
                               Insurance Company, Houston, TX
                               since August, 1987.

       Raymond H. Deck         Chairman of the Board of the        1990               243,287              2.8%
        Director, 76           Company since October, 1998.
         (2) (3) (4)           President of Chase Insurance
                               Enterprises, Inc., Hartford, CT.

       Richard Desich          President of Mid-Ohio Securities    1997                35,350                 *
        Director, 63           Corp., Elyria, OH

       Kermit G. Hicks         President of Hicks Chevrolet,       1981                65,314  (7)            *
        Director, 63           Inc., Greencastle, PA.  Also,
         (2) (3) (4)           Chairman of the Board of Tower
                               Bancorp Inc., and its wholly
                               owned subsidiary First National
                               Bank of Greencastle.

       Cindy A. Moore          Senior Vice President and Chief     1998                13,791                 *
        Director, 37           Financial Officer of the Company
                               since August 28, 1996. Elected 
                               Treasurer of the Company 
                               December 31, 1997 and appointed a 
                               member of the Board of Directors on 
                               October 1, 1998. Prior thereto she 
                               was an Audit Executive with
                               Ernst & Young LLP

       Stephen M. Qua          President of Qua Buick, Inc.        1970                40,358                 *
        Director, 66           Cleveland, OH
         (2) (3) (4)

       John P. Redding         Senior Vice President,              1997                 1,000                 *
        Director, 40           David  T. Chase Enterprises,
                               Inc., Hartford, CT

All Directors and Officers as a group (12 persons)                                  5,077,613 (8)         59.3%
</TABLE>



                                       48
<PAGE>   49

----------

(1)  On January 31, 1999, there were 8,554,966 shares of the Company's Common
     Stock issued and outstanding. Except as noted, includes shares owned by
     spouse, minor children or certain other family members, or held as
     custodian or trustee for the benefit of spouse or children, or owned by
     corporations of which such person is an officer or principal stockholder,
     over which shares such directors have sole or shared voting or investment
     power. With respect to the Directors, includes an aggregate of 182,000
     shares which are subject to immediately exercisable options. Of the 182,000
     shares subject to options, the following Directors have options to purchase
     the number of shares indicated after their names: Mr. Betagole, 7,500; Mr
     Chase, 7,500; Mr. Coats, 135,000; Mr. Deck, 7,500; Mr. Desich, 1,000; Mr.
     Hicks, 7,500; Ms. Moore, 7,500; Mr. Qua, 7,500; and Mr. Redding, 1,000.

(2)  Member of Executive Committee (Mr. Deck, Chairman)

(3)  Member of Audit Committee (Mr. Qua, Chairman)

(4)  Member of Compensation Committee (Mr. Deck, Chairman)

(5)  Includes 16,371 shares as to which Mr. Betagole disclaims beneficial
     ownership.

(6)  See footnotes (2) and (5) at pages 52 and 52 herein.

(7)  Includes 9,696 shares as to which Mr. Hicks claims beneficial ownership on
     an indirect basis.

(8)  This amount includes 52,628 shares which are subject to immediately
     exercisable options (other than for Mr. Coats and Ms. Moore included in (1)
     above), and 20,537 shares owned by all officers in their Acceleration
     Retirement Savings and Stock Ownership Plan accounts as of December 31,
     1998.


ITEM 11. EXECUTIVE COMPENSATION

SUMARY

The following table is a summary of certain information concerning the
compensation awarded or paid to, or earned by, the Company's current Chief
Executive Officer and each of the Company's other most highly compensated
executive officers whose total annual salary and bonus for the fiscal year ended
December 31, 1998, exceeded $100,000 (the "named executives") during each of the
last three fiscal years:

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

                                                          Annual Compensation              Long Term Compensation
                                                         ---------------------       ----------------------------------
                                                                                       Securities            All Other
   Year      Name, Age, and Principal Position           Salary        Bonus            Underlying         Compensation
   ----      ---------------------------------             ($)          ($)          Options/SAR's (#)       ($) (1)
                                                         -------       -------       -----------------     ------------
<S>          <C>                                         <C>           <C>            <C>                  <C>
   1998      Thomas H. Friedberg, 60  (2)                250,688            --               60,000             3,037
             Chairman of the Board, President
             and Chief Executive Officer
   1997                                                  275,000            --               60,000            14,300
   1996                                                  140,000            --              110,000             2,183
   1998      Douglas J. Coats, 66  (2)                   162,728            --               30,000             6,318
             President and Chief Executive Officer
 
   1997                                                  137,500            --               30,000            12,980
   1996                                                   71,250            --               55,000             2,611
   1998      Nicholas Z. Alexander, 63                   129,200            --               10,000             4,740
             Senior Vice President, Secretary and
             General Counsel
   1997                                                  119,600            --               10,000            11,514
   1996                                                  115,000            --               10,000             8,628
   1998      Bryce E. Farmer, 48  (3)                    112,333            --               10,000             1,012
             Senior Vice President
             Administration
   1997                                                  109,200            --               10,000             3,151
   1996                                                   97,125            --               10,000               318
   1998      William E. Merritt, Jr., 64  (4)            110,867            --               10,000             4,083
             Senior Vice President
             Claims
   1997                                                  107,362            --               10,000            10,243
   1996                                                   60,480            --                   --             3,067
</TABLE>

(1)  Represents approximate amounts contributed on behalf of each such executive
     to the Acceleration Retirement Savings and Stock Ownership Plan.


                                       49
<PAGE>   50

(2)  Mr. Friedberg retired as Chairman of the Board, President and Chief
     Executive Officer of the Company on September 30, 1998. Mr. Coats was
     appointed President and Chief Executive Officer of the Company, and named
     Chairman of the Board of Acceleration National Insurance Company on October
     1, 1998.

(3)  Mr. Farmer commenced employment with the Company on February 5, 1996.

(4)  Mr. Merritt commenced employment with the Company on June 7, 1996, and due
     to illness, went on long term disability on January 1, 1999.

The following table sets forth information concerning individual grants of
options to purchase the Company's Common Stock made to the named executives in
1998:

                        OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>

                                                                                          Potential Realizable Value
                               INDIVIDUAL GRANTS IN 1998                                   at Assumed Annual Rates
                                                                                         of Stock Price Appreciation
                                                                                               for Option Term
--------------------------------------------------------------------------------------------------------------------
                              Number of      Percent of
                              Securities        Total
                              Underlying       Options       Exercise or
                               Options/      Granted to      Base Price     Expiration
                                 SARs       Employees in     ($ Sh) (1)        Date          5% ($)        10% ($)
           Name              Granted (#)     Fiscal Year
           ----              -----------    ------------     -----------    ----------       ------        -------
<S>                             <C>             <C>            <C>           <C>             <C>            <C>   
Thomas H. Friedberg             60,000          35.6%          $3.219        9/30/99         12,597         25,473
Douglas J. Coats                30,000          17.8%          $3.219        6/16/03         26,678         58,952
Nicholas Z. Alexander           10,000          5.9%           $3.219        6/16/08         20,243         51,299
Bryce E. Farmer                 10,000          5.9%           $3.219        6/16/08         20,243         51,299
William E. Merritt, Jr.         10,000          5.9%           $3.219        6/16/08         20,243         51,299
</TABLE>

(1)      Market price of the Company's Common Stock on date of grant.

The following table sets forth certain information regarding individual
exercises of stock options during 1998 by each of the named executives:

    AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES

<TABLE>
<CAPTION>

                                  Shares       Value
                                 Acquired     Realized         Number of Securities             Value of Unexercised
           Name                     on      (Mkt. Price       Underlying Unexercised          In-The-Money Options at
           ----                  Exercise   at Exercise             Options at                  Fiscal year End (1)
                                   (#)          Less            Fiscal Year End(#)
                                 --------     Exercise
                                               Price)        Exercisable Unexercisable       Exercisable Unexercisable
                                             ---------       ----------- -------------       ----------- -------------
<S>                               <C>        <C>             <C>          <C>                <C>          <C>      
Thomas H. Friedberg                  0           N/A          170,000          60,000          48,750             N/A
Douglas J. Coats                     0           N/A          135,000          30,000          61,875             N/A
Nicholas Z. Alexander                0           N/A           37,628          42,627          17,236          10,360
Bryce E. Farmer                      0           N/A            7,500          22,500           2,188           2,813
William E. Merritt, Jr.              0           N/A            7,500          22,500           2,188           2,813
</TABLE>


(1)   Intended to represent the amount by which the market price of the
      Company's Common Stock on December 31, 1998 ($2.875) exceeded the exercise
      prices of unexercised options on that date.



                                       50
<PAGE>   51



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the named
executive's beneficial ownership of the Common Stock of the company as of
January 31, 1999:

<TABLE>
<CAPTION>
                                                              Shares of Common Stock of
                                                              Company Beneficially Owned
                                                            --------------------------------------
Title of Class        Name of Officer                       Number (1)            Percent of Class
--------------        ---------------                       ----------            ----------------
<S>                   <C>                                   <C>                   <C>  
Common Stock          Thomas H. Friedberg                      425,000                4.96%
Common Stock          Douglas J. Coats                         143,660                1.67%
Common Stock          Nicholas Z. Alexander                     58,899                    *
Common Stock          Bryce E. Farmer                            9,985                    *
Common Stock          William E. Merritt, Jr.                    9,330                    *
</TABLE>


(1)        The amounts shown represent the total shares owned outright by such
           individuals together with shares which are issuable upon the exercise
           of all stock options which are currently exercisable. Specifically,
           the following individuals have the right to acquire the shares
           indicated after their names, upon the exercise of such stock option:
           Mr. Friedberg, 175,000; Mr. Coats, 135,000; Mr.
           Alexander, 37,628; Mr. Farmer, 7,500; and Mr. Merritt, 7,500.

           o   Less than 1% of outstanding Common Stock.

The following table sets forth certain information as of January 31, 1999
(except as otherwise noted) with respect to stockholders known to the Company to
be the beneficial owners of more than five percent (5%) of any class of the
Company's voting securities:

<TABLE>
<CAPTION>
                                Name and Address                        Amount of                        Percent
Title of Class                  of Beneficial Owner                     Beneficial Ownership (1)         of Class
--------------                  -------------------                     -------------------------        --------
<S>                             <C>                                     <C>                              <C>
Common Stock                    David T. Chase                          4,343,148  Shares (2)            50.8%
                                D. T. Chase Enterprises, Inc.
                                One Commercial Plaza
                                Hartford  CT   06103

                                Arnold L. Chase                         1,167,824 Shares (3)             13.7%
                                D. T. Chase Enterprises, Inc.
                                One Commercial Plaza
                                Hartford  CT   06103

                                The Darland Trust                       1,167,824 Shares (4)             13.7%
                                P. O. Box 472
                                St. Peter's House, Le Bordage
                                St. Peter Port
                                Guernsey GYI6AX
                                Channel Islands

                                Rhoda L. Chase                          2,000,000 Shares (5)             23.4%
                                c/o Chase Enterprises, Inc.
                                One Commercial Plaza
                                Hartford  CT   06103

                                Spitzer Profit Sharing and              750,250 Shares (6)                8.7%
                                Savings Plan
                                150 E. Bridge Street
                                Elyria  OH   44035

                                Dimensional Fund Advisors Inc.          427,724 Shares (7)                5.0%
                                1299 Ocean Avenue
                                Santa Monica  CA   90401
</TABLE>


                                       51
<PAGE>   52

(1)   Except as otherwise noted, the Company has no reason to believe that any
      beneficial owner listed above does not have sole voting and investment
      power with respect to these shares.

(2)   Includes 7,500 shares of Common Stock subject to immediately exercisable
      options. According to a Schedule 13D filed with the Commission, Mr. David
      T. Chase has, to the extent temporarily transferred to him, sole power to
      vote and dispose of 880,000 shares of Common Stock loaned to him by his
      wife, Rhoda L. Chase (the "Rhoda Chase Borrowed Shares") and shares the
      power to dispose or to direct the disposition of (i) 1,120,000 shares
      beneficially owned by Rhoda L. Chase (ii) 1,167,824 shares beneficially
      owned by his son, Arnold L. Chase, and (iii) 1,167,824 shares beneficially
      owned by The Darland Trust (the "Trust"), a trust whose beneficiaries are
      his daughter, Cheryl A. Chase, and her children.

(3)   According to a Schedule 13D filed with the Commission, Mr. Arnold L. Chase
      shares the power to dispose or to direct the disposition of the 1,167,824
      shares owned by him with Mr. David T. Chase and has the sole power to vote
      or direct the vote of such shares. Such shares are also included in the
      above table in Mr. David T. Chase's shares.

(4)   According to a Schedule 13D filed with the Commission, the Trust shares
      the power to dispose or to direct the disposition of the 1,167,824 shares
      owned by it with Mr. David T. Chase and has the sole power to vote or
      direct the vote of such shares. Such shares are also included in the above
      table in Mr. David T. Chase's shares.

(5)   According to a Schedule 13D filed with the Commission, Rhoda L. Chase has
      the sole power to vote or to direct the vote of all such shares, except to
      the extent that she may be deemed to have temporarily transferred the sole
      power to vote or to direct the vote of the 880,000 Rhoda Chase Borrowed
      Shares to David T. Chase. Rhoda L. Chase shares the power to dispose or to
      direct the disposition of 1,120,000 of the shares of Common Stock owned by
      her with David T. Chase. Rhoda L. Chase has the sole power to dispose or
      to direct the disposition of the Rhoda Chase Borrowed Shares, except to
      the extent that she may be deemed to have temporarily transferred such
      power to David T. Chase. The shares of Common Stock owned by Rhoda L.
      Chase are also included in the above table in David T. Chase's shares.

(6)   Spitzer Profit Sharing and Savings Plan under agreement dated December 31,
      1973, is an employee Benefit Plan, Pension Fund subject to the provisions
      of the Employee Retirement Income Security Act of 1974.

(7)   Dimensional Fund Advisors Inc. ("Dimensional"), an investment advisor
      registered under Section 203 of the Investment Advisors Act of 1940, is
      deemed to have beneficial ownership of 427,724 shares of ACCEL
      International Corporation common stock as of December 31, 1998. All of
      such securities are owned by advisory clients of Dimensional, no one of
      which, to the knowledge of Dimensional, owns more than 5% of the class of
      securities. Dimensional disclaims beneficial ownership of all such
      securities.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Not Applicable.



                                       52
<PAGE>   53


                                     PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

ITEM 14 (a) (l) AND (2)--INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES COVERED BY INDEPENDENT AUDITORS' REPORT

The following consolidated financial statements of ACCEL International
Corporation and subsidiaries are included in Item 8:


         Independent Auditors' Report
         Consolidated balance sheets--December 31, 1998 and 1997
         Consolidated statements of operations--Years ended December 31, 1998,
           1997 and 1996 
         Consolidated statements of common stockholders' equity--Years ended 
           December 31, 1998, 1997 and 1996 
         Consolidated statements of cash flows--Years ended December 31, 
           1998, 1997 and 1996
         Notes to consolidated financial statements

The following financial statement schedules of ACCEL International Corporation
and subsidiaries are included in Item 14 (d):

         Schedule I -- Summary of Investments - Other than Investments in
           Related Parties 
         Schedule II -- Condensed Financial Information of Registrant 
         Schedule III -- Supplementary Insurance Information 
         Schedule IV -- Reinsurance 
         Schedule V -- Supplemental Information Concerning Property-Casualty 
           Insurance Operations

All other schedules to the consolidated financial statements required by Article
7 of Regulation S-X are not required under the related instructions or are
inapplicable or the required information is provided in the consolidated
financial statements, and the schedules therefore have been omitted.


ITEM 14 (c)--EXHIBITS


                                       53
<PAGE>   54


<TABLE>
<CAPTION>
              Exhibit
              Number          Description
              ----------      -----------
<S>                           <C>
              (3)             Articles of Incorporation and By-Laws.

                              3.1 Restated Certificate of Incorporation of the
                              Registrant. (Incorporated by reference to Exhibit
                              (3)1(g) of Registrant's Report on Form 10-K for
                              the year ended December 31, 1989.)

                              3.2 By-laws of Registrant. (Incorporated by
                              reference to Exhibit B of the Registrant's
                              definitive Proxy Statement as filed with the
                              Commission on June 9, 1978.)

                              3.3 Amendment to Article III, Section 3.02 of the
                              Registrant's By-Laws as passed by the Board of
                              Directors of the Registrant on December 1, 1978.
                              (Incorporated by reference to Exhibit (9)(b) of
                              the Registrant's Report on Form 10-Q for the
                              quarter ended March 31, 1979.)

                              3.4 Amendment to Article II, Section 2.04 of the
                              Registrant's By-Laws as passed by the Board of
                              Directors of the Registrant on October 23, 1981.
                              (Filed with the Registrant's Amendment #1 to the
                              Registration Statement on Form S-7 as Exhibit
                              (4)3(c) and incorporated herein by reference.)

                              3.5 Amendment to Article II, Section 2.02 of the
                              Registrant's By-Laws as approved by the Board of
                              Directors of the Registrant on June 18, 1985.
                              (Incorporated by reference to Exhibit (3) 2(d) to
                              Registrant's Report on Form 10-K for the year
                              ended December 31, 1985.)

                              3.6 Amendment to Article II, Section 2.02 of the
                              Registrant's By-Laws as approved by the Board of
                              Directors of the Registrant on March 29, 1988.
                              (Incorporated by reference to Exhibit (3)2(e) of
                              Registrants Report on Form 10-K for the year ended
                              December 31, 1989.)

                              3.7 Amendment to Article VIII and the
                              redesignation and alteration of the former Article
                              VIII as Article IX. (Incorporated by reference to
                              Exhibit (3)2(f) of Registrant's Report on Form
                              10-K for the year ended December 31, 1989.)

              (10)            Material Contracts.

                              Previously filed Material Contracts which are
                              either terminated or deemed to be in the ordinary
                              course of business to the Registrant are no longer
                              identified.

                              10.1 Verification of coverage of current Directors
                              and Officers Liability Policy for ACCEL
                              International Corporation as issued by Reliance
                              Insurance Company, indicating coverage for the
                              period from November 27, 1998 to November 27,
                              1999.

                              10.2 The Company's 1982 Incentive Stock Option
                              Plan. (Incorporated by reference to Exhibit A to
                              the Company's definitive Proxy Statement for the
                              1982 annual meeting of stockholders of the
                              Company.)

                              10.3 The Company's 1987 Incentive Stock Option
                              Plan. (Incorporated by reference to Exhibit (10)
                              7. to the Registrant's Report on Form 10-K for the
                              year ended December 31, 1987.)
</TABLE>


                                       54
<PAGE>   55

<TABLE>
<CAPTION>
              Exhibit
              Number          Description
              ----------      -----------
<S>                           <C>
              (10)            10.4 The Company's first restatement of the 1987 
              Cont.           Stock Incentive Plan. (Incorporated by reference
                              to Exhibit A to the Company's definitive Proxy
                              Statement for the 1990 annual meeting of
                              stockholders of the Company.)

                              10.5 The Company's 1996 Stock Incentive Plan.
                              (Incorporated by reference to Exhibit A to the
                              Company's definitive Proxy Statement for the 1996
                              annual meeting of stockholders of the Company.)

                              10.6 Termination Agreement with Consumers Life
                              Insurance effective July 31, 1996. (Incorporated
                              by reference to Form 10-K for year ended December
                              31, 1996.)

                              10.7 Amendment to Termination Agreement with
                              Consumers Life Insurance Company effective October
                              9, 1996. (Incorporated by reference to Form 10-K
                              for year ended December 31, 1996.)

                              10.8. Stock Acquisition Agreement dated October
                              20, 1997 by and among ACCEL International
                              Corporation, Lyndon Life Insurance Company and
                              Lyndon Insurance Group, Inc. (Incorporated by
                              reference to the Proxy Statement filed in
                              connection with the Special Shareholders' meeting
                              held December 30, 1997.)

                              10.9. Asset Purchase Agreement dated October 20,
                              1997 by and among ACCEL International Corporation,
                              Acceleration National Insurance Company, and
                              Lyndon Life Insurance Company. (Incorporated by
                              reference to the Proxy Statement filed in
                              connection with the Special Shareholders' meeting
                              held December 30, 1997.)

                              10.10. Amendment No. 1 to Stock Acquisition
                              Agreement dated January 2, 1998 by and among ACCEL
                              International Corporation, Acceleration National
                              Insurance Company, Lyndon Life Insurance Company
                              and Lyndon Insurance Group, Inc. (Incorporated by
                              reference to the Form 8-K dated December 31,
                              1997.)

              (21)            Subsidiaries of the Registrant

                              21.1 See Organizational Chart - all such Companies
                              are incorporated herein by reference and are
                              presently doing business under their respective
                              INCORPORATED NAMES.

              (23)            23.1  Consent of Independent Auditors'

              (24)            24.1  Powers of Attorney

              (27)            27.1  Financial Data Schedule incorporated herein 
                              by reference to the EDGAR filing of the Registrant
                              for the year ended December 31, 1998.
</TABLE>



                                       55
<PAGE>   56

ITEM 14(d)--SCHEDULES

                      SCHEDULE I - SUMMARY OF INVESTMENTS -

                    OTHER THAN INVESTMENTS IN RELATED PARTIES

                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

                                DECEMBER 31, 1998

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------

            Column A                              Column B      Column C         Column D
-------------------------------------------------------------------------------------------
                                                                                 Amount at
                                                                                which shown
                                                                                  in the
                                                                  Fair            Balance
         Type of Investment                         Cost*         Value           Sheet
-------------------------------------------------------------------------------------------
                                                         (Thousands of dollars)
<S>                                               <C>            <C>            <C>    
Available for sale securities:
   Fixed maturities:
     United States government and
       government agencies and authorities        $ 6,688        $ 6,883        $ 6,883
     States, municipalities and
       political subdivisions                         110            115            115
     Mortgage and asset-backed securities          19,185         19,342         19,342
     All other corporate bonds                      3,970          4,003          4,003
                                                  -------        -------        -------
   Total                                           29,953         30,343         30,343

    Short-term investments                          1,204          1,204          1,204
                                                  -------        -------        -------
     Total investments                            $31,157        $31,547        $31,547
                                                  =======        =======        =======
</TABLE>


*    Original cost of equity securities, adjusted for any permanent write down,
     and, as to fixed maturities, original cost reduced by repayments and
     adjusted for amortization of premiums or accrual of discounts.






See accompanying independent auditors' report.


                                       56
<PAGE>   57


           SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                                 BALANCE SHEETS

                ACCEL INTERNATIONAL CORPORATION (PARENT COMPANY)

<TABLE>
<CAPTION>
                                                                                December 31,
                                                                             1998             1997 
                                                                         --------         --------
                                                                           (Thousands of dollars)
<S>                                                                      <C>              <C>     
ASSETS

  Investments                                                            $  4,748         $      1
  Cash                                                                        883               73
  Notes and receivables from consolidated subsidiaries*                        --                1
  Investments in subsidiaries*                                             18,579           27,986
  Receivable from sale of discontinued and disposed of operations             703           14,687
  Other                                                                       337              254
                                                                         --------         --------
                                                                         $ 25,250         $ 43,002
                                                                         ========         ========

LIABILITIES AND COMMON STOCKHOLDERS' EQUITY

  Accounts payable and other liabilities                                 $     98         $    795
  Notes and accounts payable to subsidiaries*                               1,477            3,758
  Payable related to discontinued operations                                   53              220
  Current federal income tax                                                  521            4,640
                                                                         --------         --------
                                                                            2,149            9,413
                                                                         --------         --------


  Common stockholders' equity:
    Common stock                                                              947              944
    Additional paid-in capital                                             32,659           32,610
    Retained earnings (accumulated deficit) (including
      undistributed earnings of subsidiaries and affiliates:
      1998--$(493,000); 1997--$(8,700,000);                                (3,800)           6,518
    Treasury shares at cost                                                (6,962)          (6,599)
    Accumulated other comprehensive income                                    257              116
                                                                         --------         --------
                                                                           23,101           33,589
                                                                         --------         --------
                                                                         $ 25,250         $ 43,002
                                                                         ========         ========
</TABLE>


*    Eliminated in consolidation

     The condensed financial statements should be read in conjunction with the
     consolidated financial statements and notes thereto of ACCEL International
     Corporation and subsidiaries.





See accompanying independent auditors' report.


                                       57
<PAGE>   58

           SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                            STATEMENTS OF OPERATIONS

                ACCEL INTERNATIONAL CORPORATION (PARENT COMPANY)


<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                              1998             1997             1996 
                                                            --------         --------         --------
                                                                      (Thousands of dollars)
<S>                                                         <C>              <C>              <C>     
INCOME
   Net investment income:
     Dividends from subsidiaries                            $     --         $  5,011         $     --
     Interest                                                    144               --                3
     Realized gains                                               --              226               --
     Equity in income of affiliated company                     (189)              --               --
   Other income                                                  294                8            2,146
                                                            --------         --------         --------
                                                                 249            5,245            2,149
EXPENSES
   General, administrative, taxes, licenses and fees           1,288              488              374
   Interest                                                       --            1,532            2,178
                                                            --------         --------         --------
                                                               1,288            2,020            2,552
                                                            --------         --------         --------

   INCOME (LOSS) BEFORE INCOME
     TAXES AND OTHER ITEMS                                    (1,039)           3,225             (403)

Federal income taxes (benefit)                                  (270)             286               43
Other item--equity in undistributed net income
   (loss) of consolidated subsidiaries                        (9,682)           8,673            1,525
Other item--undistributed net income (loss)
   of former subsidiaries                                         --          (10,497)             894
                                                            --------         --------         --------
   INCOME (LOSS) BEFORE
     EXTRAORDINARY ITEM                                      (10,451)           1,115            1,973

Extraordinary item-gain on extinguishment of debt                 --               --              131
                                                            --------         --------         --------

   NET INCOME (LOSS)                                        $(10,451)        $  1,115         $  2,104
                                                            ========         ========         ========
</TABLE>

     The condensed financial statements should be read in conjunction with the
     consolidated financial statements and notes thereto of ACCEL International
     Corporation and subsidiaries.






See accompanying independent auditors' report.


                                       58
<PAGE>   59

           SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                             STATEMENT OF CASH FLOWS
                ACCEL INTERNATIONAL CORPORATION (PARENT COMPANY)

<TABLE>
<CAPTION>
                                                                                                Year Ended December 31,
                                                                                         1998             1997             1996
                                                                                       --------         --------         --------
                                                                                                  (Thousands of dollars)
<S>                                                                                    <C>              <C>              <C>     
OPERATING ACTIVITIES:
     Income (loss) from continuing operations                                          $(10,451)        $  7,015         $  1,327
     Adjustments to reconcile income (loss) from continuing operations
         to net cash (used in) provided by operating activities:
             Change in notes and receivables due from subsidiaries                            1               (2)             388
             Change in notes and accounts payable due to subsidiaries
                 and former subsidiaries                                                 (2,281)             578             (233)
             Change in other assets, other liabilities and accrued income taxes          (4,899)            (266)             741
             Interest paid in kind                                                           --               --              403
             Equity in (gains) losses of subsidiaries                                     9,682           (8,673)          (1,525)
             Equity in income of affiliated company                                         189               --               --
             Provision for amortization of goodwill                                          --               65              106
                                                                                       --------         --------         --------
     Net cash (used in) provided by continuing operations                                (7,759)          (1,283)           1,207
     Net cash (used in) provided by discontinued operations                              28,816            1,221             (248)
                                                                                       --------         --------         --------
     Net cash (used in) provided by operating activities
       before extraordinary item                                                         21,057              (62)             959
             Extraordinary gain                                                              --               --              131
                                                                                       --------         --------         --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                                      21,057              (62)           1,090
                                                                                       --------         --------         --------

INVESTING ACTIVITIES:
     Equity method investment, net                                                       (4,936)              --             (496)
                                                                                                        --------         --------
NET CASH USED IN INVESTING ACTIVITIES                                                    (4,936)              --             (496)
                                                                                       --------         --------         --------

FINANCING ACTIVITIES:
     Repayment of notes payable                                                         (15,000)              --             (600)
     Repayment of notes to subsidiary                                                        --               --           (3,927)
     Issuance of Common Stock under Stock Option Plan                                        52              107              234
     Issuance of Common Stock under Rights Offering                                          --               --            3,284
     Repurchase of treasury shares                                                         (363)              --               --
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                     (15,311)             107           (1,009)
                                                                                       --------         --------         --------
     NET INCREASE (DECREASE) IN CASH                                                        810               45             (415)
Cash at beginning of year                                                                    73               28              443
                                                                                       --------         --------         --------
CASH AT END OF YEAR                                                                    $    883         $     73         $     28
                                                                                       ========         ========         ========

Supplemental schedule of non-cash financing activities:
     Cancellation of Subordinated Notes as consideration
     for the purchase of Common Stock--Note E                                                --               --         $  5,703
                                                                                       ========         ========         ========

     Transfer of note payable to ALIC--Note E                                          $     --         $ 15,000         $  1,500
                                                                                       ========         ========         ========
</TABLE>

The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of ACCEL International
Corporation and subsidiaries.

See accompanying independent auditors' report.


                                       59
<PAGE>   60

               SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
Column A                 Column B     Column C     Column D      Column E        Column F      Column G       Column H     
---------------------------------------------------------------------------------------------------------------------------
                                              December 31,                                       Year ended December 31,
                         ------------------------------------------------------  ------------------------------------------
                         Deferred     Reserve                     Other                                        Benefits,   
                         policy       for future                  policy                                       claims,     
                         acquisition  policy       Unearned       claim and                       Net         losses and   
                         costs        benefits     Premiums       benefits       Premium        investment    settlement   
                                                                  payable        revenue        income (1)    expenses     
---------------------------------------------------------------------------------------------------------------------------
                                                         (Thousands of dollars)
<S>                      <C>            <C>        <C>            <C>            <C>            <C>            <C>         
1998
Property/Casualty        $ 2,803        $--        $12,449        $49,535        $18,824        $ 1,967        $22,051     
Corporate                     --         --             --             --             --            139             --     
                         -------        ---        -------        -------        -------        -------        -------     
      TOTAL              $ 2,803        $--        $12,449        $49,535        $18,824        $ 2,106        $22,051     
                         =======        ===        =======        =======        =======        =======        =======     

1997
Property/Casualty        $ 3,112        $--        $29,986        $22,028        $18,717        $ 2,764        $15,373     
Corporate                     --         --             --             --             --            226             --     
                         -------        ---        -------        -------        -------        -------        -------     
      TOTAL              $ 3,112        $--        $29,986        $22,028        $18,717        $ 2,990        $15,373     
                         =======        ===        =======        =======        =======        =======        =======     

1996
Property/Casualty        $ 1,418        $--        $20,929        $11,016        $12,466        $ 2,121        $10,145     
Corporate                     --          7             --             --             --              3             --     
                         -------        ---        -------        -------        -------        -------        -------     
      TOTAL              $ 1,418        $ 7        $20,929        $11,016        $12,466        $ 2,124        $10,145     
                         =======        ===        =======        =======        =======        =======        =======     

<CAPTION>
---------------------------------------------------------------------
                           Column I        Column J         Column K
---------------------------------------------------------------------
                                  Year ended December 31,
                         --------------------------------------------
                           Amortization                    
                           of deferred                     
                           policy          Other       
                           acquisition     operating        Premiums
                           costs (2)       expenses (1)     written 
---------------------------------------------------------------------
                              (Thousands of dollars)
<S>                          <C>             <C>            <C>    
1998
Property/Casualty            $   308         $ 8,381        $43,285
Corporate                         --           1,288             --
                             -------         -------        -------
      TOTAL                  $   308         $ 9,669        $43,285
                             =======         =======        =======

1997
Property/Casualty            $(1,733)        $11,617        $40,897
Corporate                         --           1,913             --
                             -------         -------        -------
      TOTAL                  $(1,733)        $13,530        $40,897
                             =======         =======        =======

1996
Property/Casualty            $  (938)        $ 8,609        $25,629
Corporate                         --           2,343             --
                             -------         -------        -------
      TOTAL                  $  (938)        $10,952        $25,629
                             =======         =======        =======
</TABLE>


(1)      For 1996, allocations for investment income and other operating
         expenses are based on a number of assumptions and results would change
         if different methods were applied. For all years net investment income
         includes realized gains and losses.

(2)      Represents the net (increase) decrease in deferred policy acquisition
         costs.

See  accompanying independent auditors' report.


                                       60
<PAGE>   61

                            SCHEDULE IV - REINSURANCE
                ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES

<TABLE>
<CAPTION>
Column A                             Column B         Column C         Column D       Column E        Column F
--------------------------------------------------------------------------------------------------------------------
                                                     Ceded to          Assumed                        Percentage  
                                      Gross           other           from other                      of amount
                                      amount         companies        companies       Net amount      assumed to net
--------------------------------------------------------------------------------------------------------------------
                                                                (Thousands of dollars)
<S>                                  <C>             <C>              <C>             <C>                 <C>  
Year Ended December 31, 1998:

Premiums

     Property and casualty           $ 37,872        $(24,476)        $  5,413        $ 18,809            28.8%
                                     ========        ========         ========        ========        ========

Year Ended December 31, 1997:

Premiums

     Property and casualty           $ 38,848        $(17,118)        $  2,049        $ 23,779             8.6%
                                     ========        ========         ========        ========        ========

Year Ended December 31, 1996:

Premiums

     Property and casualty           $ 25,629        $ (9,416)            --          $ 16,213             0.0%
                                     ========        ========         ========        ========        ========
</TABLE>




See accompanying independent auditors' report.

                                       61
<PAGE>   62
                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) 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.


ACCEL INTERNATIONAL CORPORATION



BY:      /s/ Cindy A. Moore
         -------------------------------------
         Cynthia A. Moore
         Senior Vice President, 
         Chief Financial Officer and Treasurer

DATE:    March 29, 1999
         --------------


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

<TABLE>
<CAPTION>
         SIGNATURE                              TITLE                                                         DATE
         ---------                              -----                                                         ----
<S>                                   <C>                                                                   <C> 
   /S/ Robert Betagole*               Director                                                              February 22, 1999
----------------------------
      Robert Betagole

    /S/ David T. Chase*               Director                                                              February 24, 1999
----------------------------
      David T. Chase

   /S/ Douglas J. Coats*              Director, President and Chief Executive Officer                       February 17, 1999
----------------------------          (principal executive officer)
     Douglas j. Coats                 

   /S/ Raymond H. Deck*               Director and Chairman of the Board                                    February 18, 1999
----------------------------
      Raymond H. Deck

    /S/ Richard Desich*               Director                                                              February 22, 1999
----------------------------
      Richard Desich

   /S/ Kermit G. Hicks*               Director                                                              February 22, 1999
----------------------------
      Kermit G. Hicks

   /S/ Cynthia A. Moore*              Director, Sr. Vice President, Chief Financial Officer and             March 3, 1999
----------------------------          Treasurer (principal financial and accounting officer)
     Cynthia A. Moore                 

    /S/ Stephen M. Qua*               Director                                                              February 19, 1999
----------------------------
      Stephen M. Qua

   /S/ John P. Redding*               Director                                                              February 25, 1999
----------------------------
      John P. Redding

*By:           /S/ Nicholas Z. Alexander                                                                    February 22, 1999
           ----------------------------------
                 Nicholas Z. Alexander
                   Attorney-in-Fact
</TABLE>


<PAGE>   63

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
              Exhibit
              Number          Description
              ----------      -----------
<S>                           <C>
              (3)             Articles of Incorporation and By-Laws.

                              3.1 Restated Certificate of Incorporation of the
                              Registrant. (Incorporated by reference to Exhibit
                              (3)1(g) of Registrant's Report on Form 10-K for
                              the year ended December 31, 1989.)

                              3.2 By-laws of Registrant. (Incorporated by
                              reference to Exhibit B of the Registrant's
                              definitive Proxy Statement as filed with the
                              Commission on June 9, 1978.)

                              3.3 Amendment to Article III, Section 3.02 of the
                              Registrant's By-Laws as passed by the Board of
                              Directors of the Registrant on December 1, 1978.
                              (Incorporated by reference to Exhibit (9)(b) of
                              the Registrant's Report on Form 10-Q for the
                              quarter ended March 31, 1979.)

                              3.4 Amendment to Article II, Section 2.04 of the
                              Registrant's By-Laws as passed by the Board of
                              Directors of the Registrant on October 23, 1981.
                              (Filed with the Registrant's Amendment #1 to the
                              Registration Statement on Form S-7 as Exhibit
                              (4)3(c) and incorporated herein by reference.)

                              3.5 Amendment to Article II, Section 2.02 of the
                              Registrant's By-Laws as approved by the Board of
                              Directors of the Registrant on June 18, 1985.
                              (Incorporated by reference to Exhibit (3) 2(d) to
                              Registrant's Report on Form 10-K for the year
                              ended December 31, 1985.)

                              3.6 Amendment to Article II, Section 2.02 of the
                              Registrant's By-Laws as approved by the Board of
                              Directors of the Registrant on March 29, 1988.
                              (Incorporated by reference to Exhibit (3)2(e) of
                              Registrants Report on Form 10-K for the year ended
                              December 31, 1989.)

                              3.7 Amendment to Article VIII and the
                              redesignation and alteration of the former Article
                              VIII as Article IX. (Incorporated by reference to
                              Exhibit (3)2(f) of Registrant's Report on Form
                              10-K for the year ended December 31, 1989.)

              (10)            Material Contracts.

                              Previously filed Material Contracts which are
                              either terminated or deemed to be in the ordinary
                              course of business to the Registrant are no longer
                              identified.

                              10.1 Verification of coverage of current Directors
                              and Officers Liability Policy for ACCEL
                              International Corporation as issued by Reliance
                              Insurance Company, indicating coverage for the
                              period from November 27, 1998 to November 27,
                              1999.

                              10.2 The Company's 1982 Incentive Stock Option
                              Plan. (Incorporated by reference to Exhibit A to
                              the Company's definitive Proxy Statement for the
                              1982 annual meeting of stockholders of the
                              Company.)

                              10.3 The Company's 1987 Incentive Stock Option
                              Plan. (Incorporated by reference to Exhibit (10)
                              7. to the Registrant's Report on Form 10-K for the
                              year ended December 31, 1987.)
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<PAGE>   64

<TABLE>
<CAPTION>
              Exhibit
              Number          Description
              ----------      -----------
<S>                           <C>
              (10)            10.4 The Company's first restatement of the 1987 
              Cont.           Stock Incentive Plan. (Incorporated by reference
                              to Exhibit A to the Company's definitive Proxy
                              Statement for the 1990 annual meeting of
                              stockholders of the Company.)

                              10.5 The Company's 1996 Stock Incentive Plan.
                              (Incorporated by reference to Exhibit A to the
                              Company's definitive Proxy Statement for the 1996
                              annual meeting of stockholders of the Company.)

                              10.6 Termination Agreement with Consumers Life
                              Insurance effective July 31, 1996. (Incorporated
                              by reference to Form 10-K for year ended December
                              31, 1996.)

                              10.7 Amendment to Termination Agreement with
                              Consumers Life Insurance Company effective October
                              9, 1996. (Incorporated by reference to Form 10-K
                              for year ended December 31, 1996.)

                              10.8. Stock Acquisition Agreement dated October
                              20, 1997 by and among ACCEL International
                              Corporation, Lyndon Life Insurance Company and
                              Lyndon Insurance Group, Inc. (Incorporated by
                              reference to the Proxy Statement filed in
                              connection with the Special Shareholders' meeting
                              held December 30, 1997.)

                              10.9. Asset Purchase Agreement dated October 20,
                              1997 by and among ACCEL International Corporation,
                              Acceleration National Insurance Company, and
                              Lyndon Life Insurance Company. (Incorporated by
                              reference to the Proxy Statement filed in
                              connection with the Special Shareholders' meeting
                              held December 30, 1997.)

                              10.10. Amendment No. 1 to Stock Acquisition
                              Agreement dated January 2, 1998 by and among ACCEL
                              International Corporation, Acceleration National
                              Insurance Company, Lyndon Life Insurance Company
                              and Lyndon Insurance Group, Inc. (Incorporated by
                              reference to the Form 8-K dated December 31,
                              1997.)

              (21)            Subsidiaries of the Registrant

                              21.1 See Organizational Chart - all such Companies
                              are incorporated herein by reference and are
                              presently doing business under their respective
                              INCORPORATED NAMES.

              (23)            23.1  Consent of Independent Auditors'

              (24)            24.1  Powers of Attorney

              (27)            27.1  Financial Data Schedule incorporated herein 
                              by reference to the EDGAR filing of the Registrant
                              for the year ended December 31, 1998.
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