-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J2JQj9UunGykJHQGjXls0UobxvgqrVlWC4PmEw9Ne3RQdfbHmELa+I88pAvr0nV/ 8B0vWTdRq1yaHz+H8+5dfw== 0000950123-96-004424.txt : 19960816 0000950123-96-004424.hdr.sgml : 19960816 ACCESSION NUMBER: 0000950123-96-004424 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHUBB CORP CENTRAL INDEX KEY: 0000020171 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 132595722 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08661 FILM NUMBER: 96612027 BUSINESS ADDRESS: STREET 1: 15 MOUNTAIN VIEW RD P O BOX 1615 CITY: WARREN STATE: NJ ZIP: 07061 BUSINESS PHONE: 9805802000 10-Q 1 FORM 10-Q FOR P/E 6/30/96 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 ------------------------- OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ___________________ Commission file number 1-8661 ------------- THE CHUBB CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) NEW JERSEY 13-2595722 - ------------------------------- -------------------- (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 15 MOUNTAIN VIEW ROAD, WARREN, NEW JERSEY 07061-1615 - ----------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (908) 903-2000 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- The number of shares of common stock outstanding as of July 31, 1996 was 174,279,753. 2 THE CHUBB CORPORATION INDEX Page Number Part I. Financial Information: Item 1 - Financial Statements: Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995.......................... 1 Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 1996 and 1995..... 2 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1995...................... 3 Notes to Consolidated Financial Statements.................... 4 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 7 Part II. Other Information: Item 4 - Submission of Matters to a Vote of Security Holders.... 14 Item 6 - Exhibits and Reports on Form 8-K....................... 16 3 Page 1 THE CHUBB CORPORATION CONSOLIDATED BALANCE SHEETS
June 30, Dec. 31, 1996 1995 --------- --------- (in millions) Assets Invested Assets Short Term Investments............................... $ 540.7 $ 484.5 Fixed Maturities Held-to-Maturity Tax Exempt (market $2,697.8 and $3,004.8)......... 2,585.4 2,826.7 Taxable (market $406.1 and $433.9)................ 395.7 402.5 Available-for-Sale Tax Exempt (cost $4,069.2 and $3,607.9)........... 4,207.5 3,860.6 Taxable (cost $5,680.0 and $5,282.7).............. 5,688.4 5,513.0 Equity Securities (cost $516.3 and $493.4)........... 618.5 587.8 Policy and Mortgage Loans............................ 219.5 212.3 --------- --------- TOTAL INVESTED ASSETS......................... 14,255.7 13,887.4 Cash................................................... 6.4 11.9 Accrued Investment Income.............................. 233.6 245.3 Premiums Receivable.................................... 1,033.2 872.9 Reinsurance Recoverable on Property and Casualty Unpaid Claims......................................... 1,753.9 1,973.7 Prepaid Reinsurance Premiums........................... 355.9 484.4 Funds Held for Asbestos-Related Settlement............. 828.3 1,038.1 Deferred Policy Acquisiton Costs Property and Casualty Insurance...................... 586.2 558.7 Life and Health Insurance............................ 676.3 612.7 Real Estate Assets..................................... 1,754.0 1,742.6 Deferred Income Tax.................................... 271.5 159.7 Other Assets........................................... 1,270.5 1,409.1 --------- --------- TOTAL ASSETS.................................. $23,025.5 $22,996.5 ========= ========= Liabilities Property and Casualty Unpaid Claims.................... $ 9,510.6 $ 9,588.2 Life and Health Policy Liabilities..................... 3,080.2 2,943.1 Unearned Premiums...................................... 2,560.0 2,570.7 Short Term Debt........................................ 243.5 187.6 Long Term Debt......................................... 1,079.9 1,156.0 Dividend Payable to Shareholders....................... 47.3 42.7 Accrued Expenses and Other Liabilities................. 1,229.0 1,245.5 --------- --------- TOTAL LIABILITIES............................. 17,750.5 17,733.8 --------- --------- Shareholders' Equity Common Stock - $1 Par Value; 175,622,794 and 87,819,355 Shares (Note 5)............................ 175.6 87.8 Paid-In Surplus........................................ 686.7 778.2 Retained Earnings...................................... 4,437.7 4,206.5 Foreign Currency Translation Losses, Net of Income Tax. (16.1) (3.4) Unrealized Appreciation of Investments, Net............ 154.6 345.9 Receivable from Employee Stock Ownership Plan.......... (110.7) (115.0) Treasury Stock, at Cost - 1,248,278 and 518,468 Shares (Note 5)............................... (52.8) (37.3) --------- --------- TOTAL SHAREHOLDERS' EQUITY.................... 5,275.0 5,262.7 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.... $23,025.5 $22,996.5 ========= =========
See Notes to Consolidated Financial Statements. 4 Page 2 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF INCOME PERIODS ENDED JUNE 30
Second Quarter Six Months ------------------ ------------------ 1996 1995 1996 1995 -------- -------- -------- -------- (in millions) Revenues Premiums Earned and Policy Charges.... $1,228.0 $1,177.3 $2,490.4 $2,351.1 Investment Income..................... 232.7 218.8 466.8 437.1 Real Estate........................... 51.0 79.4 217.4 148.0 Realized Investment Gains............. 15.1 50.3 37.1 53.7 -------- -------- -------- -------- Total Revenues................. 1,526.8 1,525.8 3,211.7 2,989.9 -------- -------- -------- -------- Benefits, Claims and Expenses Insurance Claims and Policyholders' Benefits............................. 815.9 788.4 1,707.7 1,575.3 Amortization of Deferred Policy Acquisition Costs.................... 333.9 294.0 661.6 587.7 Other Insurance Operating Costs and Expenses............................. 97.7 118.4 204.7 231.0 Real Estate Cost of Sales and Expenses 46.1 73.3 206.0 147.2 Investment Expenses................... 3.7 3.6 8.8 8.3 Corporate Expenses.................... 7.4 7.5 14.7 15.8 -------- -------- -------- -------- Total Benefits, Claims and Expenses...................... 1,304.7 1,285.2 2,803.5 2,565.3 -------- -------- -------- -------- Income Before Federal and Foreign Income Tax............................. 222.1 240.6 408.2 424.6 Federal and Foreign Income Tax.......... 47.8 55.6 82.5 92.9 -------- -------- -------- -------- Net Income.............................. $ 174.3 $ 185.0 $ 325.7 $ 331.7 ======== ======== ======== ======== Average Common and Common Equivalent Shares Outstanding (In Thousands)...... 180,416 179,756 180,436 179,646 PER SHARE DATA - -------------- Net Income.............................. $ .98 $ 1.04 $ 1.83 $ 1.87 Dividends Declared...................... .27 .24 1/2 .54 .49
See Notes to Consolidated Financial Statements. 5 Page 3 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30
1996 1995 --------- --------- (in millions) Cash Flows from Operating Activities Net Income............................................. $ 325.7 $ 331.7 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Increase in Property and Casualty Unpaid Claims, Net. 142.2 286.7 Increase in Unearned Premiums, Net................... 117.8 107.1 Increase in Premiums Receivable...................... (160.3) (153.9) Decrease (Increase) in Funds Held for Asbestos- Related Settlement.................................. 209.8 (483.6) Decrease in Medical Malpractice Reinsurance Related Receivable.................................. 191.2 - Increase in Deferred Policy Acquisiton Costs......... (56.9) (62.0) Realized Investment Gains............................ (37.1) (53.7) Other, Net........................................... (19.0) 52.7 --------- --------- Net Cash Provided by Operating Activities.............. 713.4 25.0 --------- --------- Cash Flows from Investing Activities Proceeds from Sales of Fixed Maturities................ 2,049.0 1,786.8 Proceeds from Maturities of Fixed Maturities........... 702.5 324.9 Proceeds from Sales of Equity Securities............... 161.4 286.3 Purchases of Fixed Maturities.......................... (3,353.3) (2,609.9) Purchases of Equity Securities......................... (157.4) (86.1) Decrease (Increase) in Short Term Investments, Net..... (56.2) 224.6 Increase (Decrease) in Net Payable from Security Transactions Not Settled.............................. (7.5) 119.1 Additions to Real Estate Assets, Net................... (20.0) (25.3) Other, Net............................................. (54.6) (72.1) --------- --------- Net Cash Used in Investing Activities.................. (736.1) (51.7) --------- --------- Cash Flows from Financing Activities Deposits Credited to Policyholder Funds................ 227.9 241.4 Withdrawals from Policyholder Funds.................... (82.8) (68.9) Proceeds from Issuance of Long Term Debt............... 2.0 151.5 Repayment of Long Term Debt............................ (78.1) (269.7) Increase in Short Term Debt, Net....................... 55.9 48.2 Dividends Paid to Shareholders......................... (89.9) (82.4) Repurchase of Shares................................... (34.0) - Other, Net............................................. 16.2 9.6 --------- --------- Net Cash Provided by Financing Activities.............. 17.2 29.7 --------- --------- Net Increase (Decrease) in Cash.......................... (5.5) 3.0 Cash at Beginning of Year................................ 11.9 5.6 --------- --------- Cash at End of Period.................................. $ 6.4 $ 8.6 ========= =========
See Notes to Consolidated Financial Statements. 6 Page 4 THE CHUBB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1) General The amounts included in this report are unaudited but include those adjustments, consisting of normal recurring items, which management considers necessary for a fair presentation. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes in the 1995 Annual Report to Shareholders. 2) Discontinued Operations In the second quarter of 1996, the Corporation announced a plan to exit the group health insurance business. A definitive agreement was reached on May 31, 1996 with Healthsource Inc. under which Healthsource will acquire the Corporation's 85% interest in ChubbHealth, Inc., a health maintenance organization, for $25 million. The sale is subject to regulatory approvals and is expected to be completed no later than the second quarter of 1997. Also, the life and health insurance subsidiaries discontinued the marketing of traditional group health indemnity business. Due to various contractual and regulatory requirements, group health indemnity coverages will be renewed in certain jurisdictions until an orderly transition to another carrier or termination of coverage can occur. The group health insurance operations have been accounted for as discontinued operations. However, the Corporation's results of operations for periods prior to the second quarter of 1996 have not been restated since amounts attributable to the group health insurance business were not significant. It is expected that the sale of ChubbHealth will result in an after tax gain of approximately $15 million which will be substantially offset by costs relating to the life and health insurance subsidiaries' exit from the traditional indemnity business. The discontinued group health business had no effect on net income in the second quarter of 1996. Results of the discontinued group health insurance operations included in the consolidated statements of income were as follows:
Periods Ended June 30 --------------------------------- Second Quarter Six Months -------------- -------------- 1996 1995 1996 1995 ---- ---- ---- ---- (in millions) Premiums earned........................ - $82.5 $57.5 $186.6 Net loss............................... - (1.9) (1.0) (6.1)
3) Investments Short term investments, which have an original maturity of one year or less, are carried at amortized cost which approximates market value. Fixed maturities classified as held-to-maturity are carried at amortized cost. Fixed maturities classified as available-for-sale and equity securities are carried at market value as of the balance sheet date. 7 Page 5 The net change in unrealized appreciation or depreciation of investments carried at market value was as follows:
Periods Ended June 30 ---------------------------------------------------- Second Quarter Six Months ------------------- ---------------------- 1996 1995 1996 1995 ------- ------- ------- ------- (in millions) Change in unrealized appreciation of equity securities ................. $ 4.2 $ 1.9 $ 7.8 $ 43.9 Change in unrealized appreciation or depreciation of fixed maturities .. (103.8) 166.7 (336.3) 427.3 Change in deferred policy acquisition cost adjustment ................... 7.0 (30.7) 34.2 (60.0) ------- ------- ------- ------- (92.6) 137.9 (294.3) 411.2 Deferred income tax (credit), net of change in valuation allowance ...... (32.4) 48.2 (103.0) 94.2 ------- ------- ------- ------- Change in unrealized appreciation or depreciation of investments, net ... $ (60.2) $ 89.7 $(191.3) $ 317.0 ======= ======= ======= =======
A valuation allowance of $49.6 million was provided at December 31, 1994 related to future tax benefits on unrealized depreciation of investments carried at market value. At March 31, 1995, there was unrealized appreciation of such investments. Therefore, the valuation allowance was eliminated in the first quarter of 1995. The valuation allowance had no impact on net income. 4) Property and Casualty Unpaid Claims A discussion of the 1993 Fibreboard asbestos-related settlement is presented in Note 14 of the notes to consolidated financial statements in the 1995 Annual Report to Shareholders. The following developments during 1996 relate to the settlement. In July 1996, the United States Court of Appeals for the Fifth Circuit affirmed the 1995 judgment of the United States District Court of the Eastern District of Texas, which approved the global settlement agreement among Pacific Indemnity Company (a subsidiary of the Corporation), Continental Casualty Company (a subsidiary of CNA Financial Corporation), Fibreboard Corporation and attorneys representing claimants against Fibreboard for all future asbestos-related bodily injury claims against Fibreboard, which are claims that were not filed in court before August 27, 1993. The Court also affirmed the approval of the trilateral agreement among Pacific Indemnity, Continental Casualty and Fibreboard to settle all pending and future asbestos-related bodily injury claims resulting from insurance policies that were, or may have been, issued to Fibreboard by the two insurers. The trilateral agreement will be triggered if the global settlement agreement is disapproved. The affirmation of these agreements will have no effect on the amount of loss reserves provided for the setttlement. While there may be a request for review by the entire Fifth Circuit as well as an appeal to the United States Supreme Court, management is optimistic that the approval of the settlement will be upheld. However, if both the global settlement agreement and the trilateral agreement are disapproved, there can be no assurance that the loss reserves established for future claims would be sufficient to pay all amounts which ultimately could become payable in respect of future asbestos-related bodily injury claims against Fibreboard. 8 Page 6 5) Shareholders' Equity On March 1, 1996, the Board of Directors approved a two-for-one stock split payable to shareholders of record as of April 19, 1996. Accordingly, in the consolidated balance sheet at June 30, 1996, the shares of common stock issued and the shares held as treasury stock reflect the effect of the stock split. At the same time, the Board of Directors approved an increase in the number of authorized shares of common stock of the Corporation from 300 million shares to 600 million shares. 6) Per Share Data Earnings per share amounts are based on the weighted average number of common and common equivalent shares outstanding. The 6% guaranteed exchangeable subordinated notes are considered to be common equivalent shares. The computation assumes the addition to income of the after-tax interest expense applicable to such notes. The number of shares and per share amounts have been retroactively adjusted to reflect the two-for-one stock split. 9 Page 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 AND FOR THE QUARTERS ENDED JUNE 30, 1996 AND 1995 PROPERTY AND CASUALTY INSURANCE Earnings from our property and casualty business were modestly lower in the first six months of 1996 compared with the same period of 1995. The decrease in 1996 was due in large part to higher catastrophe losses, resulting primarily from the winter storms in the eastern part of the United States in the first quarter. Investment income increased in 1996 compared with 1995. Property and casualty income after taxes amounted to $269.9 million in the first six months of 1996 and $149.6 million in the second quarter compared with $278.6 million and $136.6 million, respectively, in 1995. Net premiums written were $2.4 billion in the first six months of 1996 and $1.3 billion in the second quarter, representing increases of 12.5% and 10.4%, respectively, over the comparable periods of 1995. More than half of the premium growth was due to changes in certain reinsurance agreements which are discussed below. The marketplace continued to be competitive, particularly in the commercial classes. Price increases continued to be difficult to achieve. Substantial premium growth was achieved outside the United States from our expanding international branch network. Effective January 1, 1996, the agreements pertaining to the exchange of reinsurance on a quota share basis with the Sun Alliance Group plc were amended to reduce the portion of each company's business that is reinsured with the other. The Corporation's property and casualty subsidiaries now retain a greater portion of the business they write directly and assume less reinsurance from Sun Alliance. As a result of these changes in retention, net premiums written in the first six months of 1996 increased by $31.4 million for the personal classes and $67.5 million for the commercial classes and decreased by $23.0 million for reinsurance assumed. There was an additional impact on net premiums written in the first quarter of 1996 due to the effect of the portfolio transfers of unearned premiums as of January 1, 1996 resulting from these changes. The effect of these portfolio transfers was an increase in net premiums written of $30.6 million for the personal classes and $61.0 million for the commercial classes and a decrease of $65.2 million for reinsurance assumed. Also, effective January 1, 1996, our casualty excess of loss reinsurance program was modified, principally for excess liability and executive protection coverages. The changes include an increase in the initial retention for each loss from $5 million to $10 million and an increase in the initial aggregate amount of losses retained for each year before reinsurance becomes available. These changes in our casualty reinsurance program increased net premiums written in the first six months of 1996 by approximately $55 million. Underwriting results were profitable in 1996 and 1995. Our combined loss and expense ratio was 98.8% in the first six months of 1996 and 96.3% in the second quarter compared with 96.3% and 96.4%, respectively, in 1995. 10 Page 8 The loss ratio was 66.6% for the first six months of 1996 and 64.3% for the second quarter compared with 63.9% and 64.5%, respectively, in the prior year. The loss ratios continue to reflect the favorable experience resulting from the consistent application of our disciplined underwriting standards. Catastrophe losses in the first six months of 1996 amounted to $83.9 million which represented 3.7 percentage points of the loss ratio compared with $49.1 million or 2.5 percentage points in 1995. Catastrophe losses for the second quarter of 1996 amounted to $10.9 million or 1.0 percentage point of the loss ratio compared with $42.7 million or 4.2 percentage points in 1995. Our expense ratio was 32.2% for the first six months of 1996 and 32.0% for the second quarter compared with 32.4% and 31.9%, respectively, in 1995. The discussion of underwriting results reflects certain reclassifications to present results in a manner more consistent with the way the property and casualty business is now managed. Prior period amounts have been restated to conform with the new presentation. Underwriting results during 1996 and 1995 by class of business were as follows:
Six Months Ended June 30 ---------------------------------------- Net Premiums Combined Loss and Written Expense Ratios ----------------- ---------------- 1996 1995 1996 1995 ---- ---- ---- ---- (in millions) Personal Insurance Automobile........................ $ 121.9 $ 99.4 85.5% 90.4% Homeowners........................ 274.7 217.9 112.6 93.5 Other............................. 130.3 105.5 67.5 73.9 -------- -------- ----- ----- Total Personal................ 526.9 422.8 95.3 87.9 -------- -------- ----- ----- Commercial Insurance Multiple Peril.................... 325.7 275.6 118.2 106.4 Casualty.......................... 421.8 375.1 111.2 111.2 Workers' Compensation............. 128.0 106.2 96.3 96.8 Property and Marine............... 255.2 214.6 93.0 87.5 Executive Protection.............. 381.6 319.3 81.6 81.9 Other............................. 275.8 248.0 87.4 100.8 -------- -------- ----- ----- Total Commercial.............. 1,788.1 1,538.8 99.0 98.3 -------- -------- ----- ----- Reinsurance Assumed................. 68.6 157.6 N/M 101.4 -------- -------- ----- ----- Total......................... $2,383.6 $2,119.2 98.8% 96.3% ======== ======== ===== =====
The combined loss and expense ratio for Reinsurance Assumed was not meaningful for the first six months of 1996 due to the effect of the portfolio transfer of unearned premiums on the expense ratio. 11 Page 9
Quarter Ended June 30 ---------------------------------------- Net Premiums Combined Loss and Written Expense Ratios ----------------- ----------------- 1996 1995 1996 1995 ---- ---- ---- ---- (in millions) Personal Insurance Automobile........................ $ 62.3 $ 53.6 81.8% 90.3% Homeowners........................ 144.6 123.5 98.2 99.6 Other............................. 65.4 57.5 69.6 71.9 -------- -------- ----- ----- Total Personal................ 272.3 234.6 87.5 90.7 -------- -------- ----- ----- Commercial Insurance Multiple Peril.................... 167.2 152.2 117.4 112.2 Casualty.......................... 213.1 195.7 108.7 111.9 Workers' Compensation............. 55.1 50.1 97.0 95.8 Property and Marine............... 143.8 122.6 87.9 79.8 Executive Protection.............. 200.6 168.1 82.8 77.6 Other............................. 136.8 138.6 88.3 100.8 -------- -------- ----- ----- Total Commercial.............. 916.6 827.3 98.1 97.6 -------- -------- ----- ----- Reinsurance Assumed................. 66.9 75.4 107.6 101.3 -------- -------- ----- ----- Total......................... $1,255.8 $1,137.3 96.3% 96.4% ======== ======== ===== =====
PERSONAL INSURANCE Premiums from personal insurance coverages, which represent approximately 22% of the premiums written by our property and casualty insurance subsidiaries, increased 24.6% in the first six months of 1996 and 16.1% in the second quarter compared with the similar periods in 1995. More than half of such growth in the first six months of 1996 was due to the changes in the reinsurance agreement with Sun Alliance which resulted in the portfolio transfer of unearned premiums as of January 1, 1996 as well as an increase in our retention percentage for these classes. Similarly, almost half of the growth in the second quarter for these classes was due to the increase in our retention. Excluding the effects of the changes in the reinsurance agreement, homeowners and other non-automobile premiums increased due to further progress made to increase premiums written in non-catastrophe prone areas and personal automobile premiums increased as a result of an increase in the number of in-force policies for high value automobiles. Our personal insurance business produced less profitable underwriting results in the first six months of 1996 than the highly profitable results in the prior year due to the adverse effect of significant catastrophe losses in the first quarter. The combined loss and expense ratios were 95.3% for the first six months of 1996 and 87.5% for the second quarter compared with 87.9% and 90.7%, respectively, in 1995. Homeowners results were unprofitable in the first six months of 1996 compared with profitable results in the same period in 1995. Significant weather-related catastrophe losses adversely affected homeowners results in the first six months of both years, but more so in 1996. Catastrophe losses for this class represented 23.7 percentage points of the loss ratio for the first six months of 1996 and 5.2 percentage points for the second quarter compared 12 Page 10 with 12.9 and 21.9 percentage points, respectively, in the comparable 1995 periods. Homeowners results in 1995 also benefited from fewer large losses. Other personal coverages, which include insurance for personal valuables and excess liability, produced highly profitable results in 1996 and 1995 due to continued favorable loss experience. Our automobile business produced profitable results in 1996 and 1995 due primarily to stable loss frequency and severity. COMMERCIAL INSURANCE Premiums from commercial insurance, which represent approximately 75% of our total writings, increased by 16.2% in the first six months of 1996 and 10.8% in the second quarter compared with the similar periods in 1995. Approximately half of the growth in premiums in the first six months of 1996 was due to the changes in the reinsurance agreement with Sun Alliance which resulted in the portfolio transfer of unearned premiums as of January 1, 1996 as well as an increase in our retention percentage for these classes. Similarly, 40% of the growth in the second quarter for these classes was due to the increase in our retention. In addition, premium growth in 1996 for the excess liability component of our casualty coverages and for our executive protection coverages benefited from the changes in our casualty excess of loss reinsurance program. Excluding the effects of the changes in our reinsurance agreements, premium growth was due primarily to the selective writing of new accounts and exposure growth on existing business. The competitive market has continued to place significant pressure on prices and has made price increases difficult to achieve for most coverages. Premium growth for property and marine, executive protection and financial institution coverages was strong outside the United States. Our commercial insurance business produced modestly profitable underwriting results in 1996 and 1995. The combined loss and expense ratios were 99.0% for the first six months of 1996 and 98.1% for the second quarter compared with 98.3% and 97.6%, respectively, in 1995. Multiple peril results deteriorated substantially in 1996 compared with 1995 due in large part to an increase in catastrophe losses in the property component of this business and an increase in the frequency of large losses in the liability component. Catastrophe losses in the first six months of 1996 represented 5.1 percentage points of the loss ratio for this class compared with only 1.6 percentage points in 1995. Results for our casualty business were similarly unprofitable in 1996 and 1995. Casualty results were adversely affected in both years by increases in loss reserves for asbestos-related and toxic waste claims. The excess liability component of our casualty coverages has remained profitable due to favorable loss experience in this class. Results in the automobile component were also profitable in 1996 and 1995. Workers' compensation results were profitable in 1996 and 1995. Results in our voluntary business have benefited from reform of the benefit provisions of workers' compensation laws in many states and the impact of medical cost containment and disability management activities. Results from our share of the involuntary pools and mandatory business in which we must participate by law also benefited from these positive factors. 13 Page 11 Property and marine results were profitable in 1996 and 1995. Results in both years benefited from stable loss frequency and severity. Executive protection results were highly profitable in 1996 and 1995 due to favorable loss experience. Our financial institutions business produced more profitable results in 1996 than in 1995. The financial fidelity portion of this business was highly profitable in both years. The non-fidelity results were adversely affected in 1995 by significant catastrophe losses in the second quarter. Results in our other commercial classes improved in 1996 compared with 1995, but remained modestly unprofitable. The improvement was primarily in surety results which were profitable in 1996 compared with unprofitable results in 1995 due to several large losses. REINSURANCE ASSUMED Reinsurance assumed is treaty reinsurance assumed primarily from Sun Alliance. The substantial decrease in premiums written in the first six months of 1996 compared with the same period in 1995 was due to the effects of the changes in the reinsurance agreement with Sun Alliance whereby the Corporation's property and casualty subsidiaries assume less reinsurance from Sun Alliance. The impact on net written premiums was particularly significant due to the first quarter effect of the $65 million portfolio transfer of unearned premiums back to Sun Alliance as of January 1, 1996. Underwriting results for this segment were somewhat unprofitable in the first six months of 1996 compared with near breakeven results in the prior year. LOSS RESERVES Loss reserves, net of reinsurance recoverable, increased by $142.2 million during the first six months of 1996. The increase would have been greater except that loss reserves were reduced by $216.0 million in the second quarter as the result of payments in that amount related to the 1993 Fibreboard asbestos-related settlement. Substantial reserve growth continued to occur in those liability coverages, primarily excess liability and executive protection, that are characterized by delayed loss reporting and extended periods of settlement. Loss reserves also increased by approximately $35 million due to the net effect of the portfolio transfers of unpaid claims as of January 1, 1996 resulting from the changes in the reinsurance agreements between the Corporation's property and casualty subsidiaries and Sun Alliance. Losses incurred related to asbestos and toxic waste claims were $76.9 million in the first six months of 1996 and $91.1 million for the same period in 1995. A discussion of the 1993 Fibreboard asbestos-related settlement is incorporated by reference from Item 7 of the Corporation's Form 10-K for the year ended December 31, 1995. The following developments during 1996 relate to the settlement. In July 1996, the United States Court of Appeals for the Fifth Circuit affirmed the 1995 judgment of the United States District Court of the Eastern District of Texas, which approved the global settlement agreement among Pacific Indemnity Company (a subsidiary of the Corporation), Continental Casualty Company (a subsidiary of CNA Financial Corporation), Fibreboard Corporation and attorneys representing claimants against Fibreboard for all future asbestos-related bodily injury claims against Fibreboard, which are claims that were not filed in court before August 27, 1993. The Court also affirmed the approval of the trilateral 14 Page 12 agreement among Pacific Indemnity, Continental Casualty and Fibreboard to settle all pending and future asbestos-related bodily injury claims resulting from insurance policies that were, or may have been, issued to Fibreboard by the two insurers. The trilateral agreement will be triggered if the global settlement agreement is disapproved. The affirmation of these agreements will have no effect on the amount of loss reserves provided for the settlement. While there may be a request for review of either or both of these agreements by the entire Fifth Circuit as well as an appeal to the United States Supreme Court, management remains optimistic that the settlement will be upheld. However, if both the global settlement agreement and the trilateral agreement are disapproved, there can be no assurance that the loss reserves established for future claims would be sufficient to pay all amounts which ultimately could become payable in respect of future asbestos-related bodily injury claims against Fibreboard. INVESTMENTS Investment income after deducting expenses and taxes increased by 7.2% in the first six months of 1996 and 7.3% in the second quarter compared with the same periods in 1995. The growth was due to an increase in invested assets since the second quarter of 1995, reflecting strong cash flow from operations. The effective tax rate on investment income was 15.5% in both the first six months of 1996 and 1995. In the first six months of 1996, new cash was invested in tax-exempt bonds and taxable bonds. We maintain investments in highly liquid, short term securities at all times to provide for immediate cash needs. LIFE AND HEALTH INSURANCE Life and health insurance earnings after taxes were $16.8 million for the first six months of 1996 compared with $12.4 million in 1995. Premiums and policy charges for personal insurance amounted to $167.1 million in the first six months of 1996, an increase of 9.6% over the comparable period in 1995. Earnings from personal insurance were $17.8 million in the first six months of 1996 compared with $18.5 million in 1995. The earnings decrease is due to high mortality in 1996, particularly in the second quarter; this was offset in part by operating efficiencies realized from the consolidation of service centers in 1995. In the second quarter of 1996, the Corporation announced a plan to exit the group health insurance business. A definitive agreement was reached on May 31 with Healthsource Inc. under which Healthsource will acquire the Corporation's 85% interest in ChubbHealth, Inc., a health maintenance organization, for $25 million. The sale is subject to regulatory approvals and is expected to be completed no later than the second quarter of 1997. Also, the life and health insurance subsidiaries discontinued the marketing of traditional group health indemnity business. Due to various contractual and regulatory requirements, group health indemnity coverages will be renewed in certain jurisdictions until an orderly transition to another carrier or termination of coverage can occur. 15 Page 13 The group health insurance operations have been accounted for as discontinued operations. However, the Corporation's results of operations for periods prior to the second quarter of 1996 have not been restated since amounts attributable to the group health insurance business were not significant. It is expected that the sale of ChubbHealth will result in an after tax gain of approximately $15 million which will be substantially offset by costs relating to our exit from the traditional indemnity business. The discontinued group health business had no effect on net income in the second quarter of 1996. Results of the discontinued group health insurance operations included in the consolidated statements of income were as follows:
Periods Ended June 30 --------------------------------------- Second Quarter Six Months -------------- ----------------- 1996 1995 1996 1995 ---- ---- ---- ---- (in millions) Premiums earned ............. - $82.5 $57.5 $186.6 Net loss ................... - (1.9) (1.0) (6.1)
Gross investment income increased by 4.8% in the first six months of 1996 compared with the same period in 1995. Excluding investment income related to the discontinued group health insurance operations, gross investment income increased by 9.0% in the first six months of 1996. Such growth was due to an increase in invested assets since the second quarter of 1995. The new cash available for investment was due primarily to increases in deposits credited to policyholder funds. In the first six months of 1996, new cash was invested primarily in corporate bonds. To provide for liquidity, funds believed to be sufficient to meet any unusual needs for cash have been maintained in short term securities. REAL ESTATE Real estate earnings after taxes were $7.0 million for the first six months of 1996 compared with $0.5 million in 1995. Real estate earnings in 1996 benefited from the sale of several rental properties in the first quarter. Results in 1995 reflect a first quarter charge of $6.5 million after taxes resulting from the initial application of Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, which established new criteria for measuring impairment of a loan. Revenues were $217.4 million in the first six months of 1996 compared with $148.0 million in 1995. The increase in 1996 was due to the sale of rental properties. INVESTMENT GAINS AND LOSSES Decisions to sell securities are governed principally by considerations of investment opportunities and tax consequences. As a result, realized investment gains and losses may vary significantly from period to period. Net investment gains before taxes of $37.1 million were realized in the first six months of 1996 compared with net gains of $53.7 million for the same period in 1995. 16 Page 14 PART II. OTHER INFORMATION -------------------------- Item 4 - Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ The Annual Meeting of Shareholders of The Chubb Corporation was held on April 23, 1996. Matters submitted to Shareholders at the meeting were as follows (the number of votes cast has not been adjusted to reflect the two-for-one stock split effective April 19, 1996): Votes were cast in the following manner in connection with the election of each Director to serve until the next Annual Meeting of Shareholders. Votes Against Director Votes For or Withheld - -------- --------- ----------- John C. Beck 75,306,310 25,864 James I. Cash, Jr. 75,284,974 47,200 Percy Chubb, III 75,008,414 323,760 Joel J. Cohen 75,007,222 324,952 David H. Hoag 75,305,793 26,381 Robert V. Lindsay 75,291,391 40,783 Thomas C. MacAvoy 75,299,710 32,464 Gertrude G. Michelson 75,295,845 36,329 Dean R. O'Hare 75,285,342 46,832 Warren B. Rudman 75,294,875 37,299 David G. Scholey 75,005,138 327,036 Raymond G. H. Seitz 75,008,384 323,790 Lawrence M. Small 75,305,300 26,874 Richard D. Wood 75,289,791 42,383 For each Director, there were 218,084 abstaining votes. There were no broker non-votes cast. Votes were cast in the following manner in connection with the proposal to approve The Chubb Corporation Annual Incentive Compensation Plan (1996). Votes For Votes Against --------- ------------- 72,339,258 2,279,126 There were 931,874 abstaining votes and no broker non-votes cast. Votes were cast in the following manner in connection with the proposal to approve The Chubb Corporation Long-Term Stock Incentive Plan (1996). Votes For Votes Against --------- ------------- 55,112,802 14,690,450 There were 883,210 abstaining votes and 4,863,796 broker non-votes cast. 17 Page 15 Votes were cast in the following manner in connection with the proposal to approve The Chubb Corporation Stock Option Plan for Non-Employee Directors (1996). Votes For Votes Against --------- ------------- 64,957,063 4,685,191 There were 1,044,208 abstaining votes and 4,863,796 broker non-votes cast. Votes were cast in the following manner in connection with the proposal to approve the selection of Ernst & Young LLP as the independent auditors of the Registrant for the year 1996. Votes For Votes Against --------- ------------- 75,241,626 141,330 There were 167,302 abstaining votes and no broker non-votes cast. 18 Page 16 Item 6 - Exhibits and Reports on Form 8-K - ----------------------------------------- A. Exhibit 3.1 - Restated Certificate of Incorporation filed herewith B. Exhibit 10.1 - Material Contracts - The Chubb Corporation Annual Incentive Compensation Plan (1996) incorporated by reference to Exhibit A of the registrant's definitive proxy statement for the Annual Meeting of Shareholders held on April 23, 1996. - The Chubb Corporation Long-Term Stock Incentive Plan (1996), as amended, filed herewith. - The Chubb Corporation Stock Option Plan for Non-Employee Directors (1996) incorporated by reference to Exhibit C of the registrant's definitive proxy statement for the Annual Meeting of Shareholders held on April 23, 1996. C. Exhibit 11.1 - Computation of earnings per share. D. Reports on Form 8-K - There were no reports on Form 8-K filed for the three months ended June 30, 1996. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, The Chubb Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE CHUBB CORPORATION (Registrant) By: /s/ Henry B. Schram ------------------------------- Henry B. Schram Senior Vice-President and Chief Accounting Officer Date: August 14, 1996 19 EXHIBIT INDEX EXHIBIT NO DESCRIPTION 3.1 - Restated Certificate of Incorporation filed herewith 10.1 - Material Contracts - The Chubb Corporation Annual Incentive Compensation Plan (1996) incorporated by reference to Exhibit A of the registrant's definitive proxy statement for the Annual Meeting of Shareholders held on April 23, 1996. - The Chubb Corporation Long-Term Stock Incentive Plan (1996), as amended, filed herewith. - The Chubb Corporation Stock Option Plan for Non-Employee Directors (1996) incorporated by reference to Exhibit C of the registrant's definitive proxy statement for the Annual Meeting of Shareholders held on April 23, 1996. 11.1 - Computation of earnings per share. 27.1 - Financial Data Schedule. EX-3.1 2 RESTATED CERTIFICATE OF INCORPORATION 1 RESTATED CERTIFICATE OF INCORPORATION OF THE CHUBB CORPORATION THIS IS TO CERTIFY that THE CHUBB CORPORATION, a New Jersey corporation under and by virtue of the provisions of Title 14A of the Revised Statutes of New Jersey and the several amendments thereof and supplements thereto, does hereby restate and integrate its Certificate of Incorporation, pursuant to Section 14A:9-5 of The New Jersey Business Corporation Act, as follows: FIRST: The name of the Corporation is THE CHUBB CORPORATION. SECOND: The location of the current registered office in the State of New Jersey is 15 Mountain View Road, Warren, New Jersey 07059, and the name of the agent currently therein and in charge thereof upon whom process against the Corporation may be served is Henry G. Gulick. THIRD: The objects for which the Corporation is formed are as follows: (a) To purchase or otherwise acquire, and to own and hold, shares of capital stock of corporations engaged in any kind of business, including, without limitation, the insurance business, the business of managing insurance concerns, individual or corporate, and any other business relating directly or indirectly to insurance; or of any corporation owning shares of capital stock of any such corporation; and to furnish to such corporations and concerns, or to others, advisory, consulting or other services relating to their businesses; (b) To engage in any other business whatsoever, either in addition to or in lieu of the foregoing; (c) To act as principal, agent, partner or joint adventurer, or in any other legal capacity, in any transaction; (d) To apply for, obtain, register, buy, lease, or otherwise acquire, hold, use, own, sell, assign or otherwise dispose of any trade marks, trade names, or distinctive marks; any patents, inventions, improvements and processes used in connection with or secured under letters patent or similar letters or rights, of the United States or any foreign country or government, and to use, develop, grant licenses in respect of or otherwise turn to account the same; (e) To lend and advance money or give credit to such persons, firms, corporations or associations on such terms as it may deem expedient; (f) To acquire by purchase, exchange, lease, rental, license or otherwise, to hold, develop, improve, divide and 2 subdivide, any property, real or personal, which it may deem proper to accomplish the aforesaid purposes, and from time to time to sell, lease, mortgage, exchange, license or otherwise dispose of or encumber the same; (g) To acquire and carry on all or any part of the business or property of any corporation, association, co-partnership or person, and to undertake in connection therewith any liability of any corporation, association, co-partnership or person possessed of property suitable for any of the purposes of the Corporation or for carrying on any business which the Corporation is authorized to carry on, and to issue shares, stocks or obligations of the Corporation and to pay cash as the consideration for the same, at such valuation as the directors of the Corporation may determine; (h) To acquire by purchase, subscription or otherwise, and to hold, sell, assign, transfer, mortgage, pledge or otherwise dispose of, shares of the capital stock and bonds, debentures or other evidences of indebtedness created by any other corporation or corporations, domestic or foreign, and, while the holder thereof, to exercise all the rights to vote thereon; (i) To purchase, hold, and re-issue shares of its capital stock; (j) To borrow money, to make and issue promissory notes, bills of exchange, bonds, debentures and obligations and evidences of indebtedness of all kinds, whether secured by mortgage, pledge or otherwise, without limit as to amount, and to secure the same by mortgage, pledge, or otherwise; (k) To enter into, make, perform and carry out contracts of every sort and kind with any person, firm, association, corporation, private, public or municipal, or body politic and with the government of the United States or any State, District of Columbia, territory, or Commonwealth or possession thereof, or with any foreign government, or any political subdivision thereof; (l) To conduct its business in any of the States, Commonwealths or possessions of the United States, in the District of Columbia, and in any and all foreign countries; to have one or more offices therein and to hold, purchase, mortgage and convey real and personal property unlimitedly therein; (m) To aid by loan, guaranty or in any other manner any corporation or association, any bonds, other securities or evidences of indebtedness or shares of stock of which are held by or for the Corporation or in which the Corporation shall have any interest, and to do any other acts or things designed to protect or enhance the value of any such bonds, 2 3 other securities or evidences of indebtedness or such shares of stock or any other property of the Corporation; (n) To do everything necessary, suitable, convenient or proper for the accomplishment of any of the purposes or the attainment of any one or more of the objects herein enumerated or incidental to the powers herein named, or which shall at any time appear conducive or expedient for the protection or benefit of the Corporation, either as holder of any interest in any property or otherwise, with all the powers now or hereafter conferred by the laws of this State upon corporations under the act hereinabove referred to. The foregoing clauses shall be construed both as objects and powers, and except where otherwise expressed, such objects and powers shall be in no way limited or restricted by reference to or inference from the terms of any other clauses in this Certificate of Incorporation, but the objects and powers so specified shall be regarded as independent objects and powers, and it is hereby expressly provided that the foregoing enumeration of specific objects and powers shall not be held to limit or restrict in any manner the powers of the Corporation. FOURTH: The total number of shares of capital stock which the Corporation shall have authority to issue is six hundred four million (604,000,000) shares, of which six hundred million (600,000,000) shares, of the par value of one dollar ($1) per share, amounting in the aggregate to six hundred million dollars ($600,000,000) shall be Common Stock (hereinafter called "Common Stock") and four million (4,000,000) shares, of the par value of one dollar ($1) per share, amounting in the aggregate to four million dollars ($4,000,000), shall be Preferred Stock (hereinafter called "Preferred Stock"). SECTION A. PROVISIONS RELATING TO COMMON STOCK. 1. Each share of Common Stock shall have one vote and, except as provided in Section B of this Article Fourth or by an amendment to the Certificate of Incorporation adopted by the Board of Directors establishing any series of Preferred Stock, the exclusive voting power for all purposes shall be fixed in the holders of the Common Stock. 2. Subject to the provisions of law and the preference of the Preferred Stock, dividends may be paid on the Common Stock of the Corporation at such time and in such amounts as the Board of Directors may deem advisable. 3. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation and the amounts to which the holders of the Preferred Stock shall be entitled, the holders of the Common Stock shall be entitled to share ratably in the remaining assets of the Corporation. SECTION B. PROVISIONS RELATING TO PREFERRED STOCK. 1. The Preferred Stock may be issued, from time to 3 4 time, in one or more series, each of such series to have such designation and such relative voting, dividend, liquidation, conversion and other rights, preferences and limitations as are stated and expressed herein and in such amendment or amendments to the Certificate of Incorporation establishing such series as are adopted by the Board of Directors as hereinafter provided and as are not inconsistent with this Article Fourth. 2. Authority is hereby expressly vested in and granted to the Board of Directors of the Corporation, subject to the provisions of this paragraph 2, to adopt an amendment or amendments to the Certificate of Incorporation dividing the shares of Preferred Stock into one or more series and, with respect to each such series, fixing the following: (a) the number of shares to constitute such series and the distinctive designation thereof; (b) the annual dividend rate on the shares of such series and the date or dates from which dividends shall be accumulated as herein provided; (c) the times when and the prices at which shares of such series shall be redeemable, the limitations and restrictions with respect to such redemptions and the amount, if any, in addition to any accumulated dividends thereon which the holders of shares of such series shall be entitled to receive upon the redemption thereof, which amount may vary at different redemption dates and may differ in the case of shares redeemed through the operation of any purchase, retirement or sinking fund from the case of shares otherwise redeemed; (d) the amount, if any, in addition to any accumulated dividends thereon which the holders of shares of such series shall be entitled to receive upon the liquidation, dissolution or winding up of the Corporation, which amount may vary depending on whether such liquidation, dissolution or winding up is voluntary or involuntary and, if voluntary, may vary at different dates; (e) whether or not the shares of such series shall be subject to the operation of a purchase, retirement or sinking fund and, if so, the extent to and manner in which such purchase, retirement or sinking fund shall be applied to the purchase or redemption of the shares of such series for retirement or for other corporate purposes and the terms and provisions relative to the operation of the said fund or funds; (f) whether or not the shares of such series shall be convertible into shares of stock of any other class or classes, or of any other series of Preferred 4 5 Stock or series of other class of shares, and if so convertible, the price or prices, the rate or rates of conversion and the method, if any, of adjusting the same; (g) the limitations and restrictions, if any, to be effective while any shares of such series are outstanding upon the payment of dividends or making of other distribution on, and upon the purchase, redemption or other acquisition by the Corporation or any subsidiary of, the Common Stock, or (with the exception of the Preferred Stock) any other class or classes of stock of the Corporation ranking on a parity with or junior to the shares of such series either as to dividends or upon liquidation; (h) the conditions or restrictions, if any, upon the creation of indebtedness of the Corporation or of any subsidiary, or upon the issue of any additional stock (including additional shares of such series or of any other series or of any other class) ranking on a parity with or prior to the shares of such series either as to dividends or upon liquidation; (i) the voting powers, if any, of the series in addition to the voting powers provided in paragraph 12 hereof; (j) such other preferences and relative, participating, optional or other special rights, or qualifications, limitations or restrictions, as shall not be inconsistent with this Article Fourth. The Board of Directors also shall have authority to change the designation of shares, or the relative rights, preferences and limitations of the shares, of any theretofore established series of Preferred Stock, no shares of which have been issued, and further, the Board shall have authority to increase or decrease the number of shares of any series previously determined by it (provided, however, that the number of shares of any series shall not be decreased to a number less than that of the shares of that series then outstanding). 3. All shares of any one series of Preferred Stock shall be identical with each other in all respects, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon shall be cumulative; and all series shall rank equally and be identical in all respects, except as permitted by the provisions of this Section B of this Article Fourth. 4. Subject to the provisions of paragraph 17 of this Section B of this Article Fourth, before any dividends (other than dividends payable in Common Stock) on any class or classes of stock of the Corporation ranking junior to the Preferred Stock as to dividends shall be declared or paid or 5 6 set apart for payment, the holders of shares of Preferred Stock of each series shall be entitled to receive dividends, but only when and as declared by the Board of Directors, at the annual rate, and no more, fixed in the amendment to the Certificate of Incorporation establishing such series, payable in each year on such dates as may be fixed in such amendment to the Certificate of Incorporation, to holders of record on such respective dates as may be determined by the Board of Directors in advance of the payment of each particular dividend. With respect to each series of Preferred Stock such dividends shall be cumulative from the date or dates fixed in the amendment to the Certificate of Incorporation establishing such series. No dividends shall be declared on any series of Preferred Stock in respect of any dividend period unless there shall likewise be or have been declared on all shares of Preferred Stock of each other series at the time outstanding like dividends for all dividend periods coinciding with or ending before such dividend period, ratably in proportion to the respective annual dividend rates fixed therefore as hereinbefore provided. Accruals of dividends shall not bear interest. 5. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, before any payment or distribution of the assets of the Corporation (whether capital or surplus) shall be made to or set apart for the holders of any class or classes of stock of the Corporation ranking junior to the Preferred Stock upon liquidation, the holders of each series of shares of Preferred Stock shall be entitled to receive the amount payable upon such liquidation, dissolution or winding up for such series as fixed by the amendment to the Certificate of Incorporation establishing such series, plus an amount equal to all dividends accumulated to the date of final distribution to such holders, but such holders shall not be entitled to any further payment. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of shares of Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributed among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purposes of this paragraph 5, the voluntary sale, conveyance, lease, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all the property or assets of the Corporation or a consolidation or merger of the Corporation with one or more other corporations (whether or not the Corporation is the corporation surviving such consolidation or merger) shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary. 6. Subject to any requirements which may be applicable to the redemption of any given series of Preferred Stock as provided in the amendment or amendments to the Certificate of Incorporation establishing such series 6 7 of Preferred Stock, the Corporation may, at its option, except as provided in paragraph 10 of this Section B of this Article Fourth, redeem at any time the whole or from time to time any part of the Preferred Stock of any series at the time outstanding, at the redemption price or prices stated in said amendment or amendments to the Certificate of Incorporation, plus in every case an amount equal to all accumulated dividends with respect to each share so to be redeemed (the total sum so payable on any such redemption being herein referred to as the "redemption price"). Notice of every such redemption shall be mailed at least 30 days in advance of the date designated for such redemption (herein called the "redemption date") to the holders of record of shares of Preferred Stock so to be redeemed at their respective addresses as the same shall appear on the books of the Corporation. In case of the redemption of a part only of any series of Preferred Stock at the time outstanding, the shares of such series so to be redeemed shall be selected by lot or in such other manner as the Board of Directors may determine. 7. If said notice of redemption shall have been given as aforesaid and if, on or before the redemption date, the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares so called for redemption, then, from and after the redemption date, notwithstanding that any certificates for shares of Preferred Stock so called for redemption shall not have been surrendered for cancellation, the shares represented thereby shall be deemed to be not issued and outstanding, the right to receive dividends thereon shall cease to accrue from and after the redemption date and all rights of holders of the shares of Preferred Stock so called for redemption shall forthwith, after the redemption date, cease and terminate, excepting only the right to receive the redemption price therefor but without interest. Any funds so set aside by the Corporation, which shall not be required for such redemption because of the exercise of any right of conversion subsequent to the date such funds are set aside, shall revert to the general funds of the Corporation, and any funds so set aside by the Corporation and unclaimed at the end of six years from the date fixed for such redemption shall revert to the general funds of the Corporation after which reversion the holders of such shares so called for redemption shall look only to the Corporation for payment of the redemption price, and such shares shall still be deemed to be not issued and outstanding. 8. If, on or before the redemption date, the Corporation shall deposit in trust, with a bank or trust company in the Borough of Manhattan, The City of New York, having a capital and surplus of at least $5,000,000, the funds necessary for the redemption of the shares of Preferred Stock so called for redemption, to be applied to the redemption of such shares, and if on or before such date the Corporation shall have given notice of redemption as aforesaid or made provision satisfactory to such bank or 7 8 trust company for the timely giving thereof, then from and after the date of such deposit all shares of Preferred Stock so called for redemption shall be deemed to be not issued and outstanding, and all rights of the holders of such shares of Preferred Stock so called for redemption shall cease and terminate, excepting only the right to receive the redemption price therefor, but without interest, and the right to exercise on or before the date fixed for redemption privileges of conversion, if any, not theretofore otherwise expiring. Any funds so deposited, which shall not be required for such redemption because of the exercise of any such right of conversion subsequent to the date of such deposit, shall be returned to the Corporation. In case the holders of shares of Preferred Stock which shall have been called for redemption shall not, within one year after the redemption date, claim the amount deposited with respect to the redemption thereof, any such bank or trust company shall, upon demand, pay over to the Corporation such unclaimed amounts and thereupon such bank or trust company shall be relieved of all responsibility in respect thereof to such holders and such holders shall look only to the Corporation for the payment thereof. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time. Any such unclaimed amounts paid over by any such bank or trust company to the Corporation shall for a period terminating six years after the date fixed for redemption, be set aside and held by the Corporation in the manner and with the same effect as if such unclaimed amounts had been set aside under the preceding paragraph 7 of this Section B of this Article Fourth. 9. Shares of Preferred Stock which have been issued and reacquired in any manner by the Corporation (excluding, until the Corporation elects to retire them, shares which are held as treasury shares, but including shares redeemed, shares purchased and retired, whether through the operation of a retirement or sinking fund or otherwise, and shares which, if convertible, have been converted into shares of stock of any other class or classes or of any other series of Preferred Stock or series of other class of shares) shall, upon compliance with any applicable provisions of the New Jersey Business Corporation Act, have the status of authorized and unissued shares of Preferred Stock and may be reissued as a part of the series of which they were originally a part (if the terms of such series do not prohibit such reissue) or as part of a new series of Preferred Stock to be established by an amendment to the Certificate of Incorporation adopted by the Board of Directors or as part of any other series of Preferred Stock the terms of which do not prohibit such reissue. 10. If at any time the Corporation shall have failed to pay dividends in full on the Preferred Stock, thereafter and until dividends in full, including all accumulated and unpaid dividends to the next preceding dividend payment date on the Preferred Stock outstanding, shall have been declared and set apart for payment or paid, (a) the Corporation, without the affirmative vote or consent 8 9 of the holders of at least 66-2/3% in interest of the Preferred Stock at the time outstanding, given in person or by proxy, either in writing or by resolution adopted either at a meeting called for the purpose or at an annual meeting of stockholders of the Corporation, the holders of the Preferred Stock, regardless of series, consenting or voting (as the case may be) separately as a class, shall not redeem less than all the Preferred Stock at such time outstanding, other than in accordance with paragraph 16 hereof, and (b) neither the Corporation nor any subsidiary shall purchase any Preferred Stock except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of Preferred Stock of all series upon such terms as the Board of Directors, in their sole discretion after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series, shall determine (which determination shall be final and conclusive) will result in fair and equitable treatment among the respective series; provided, that (i) the Corporation, to meet the requirements of any purchase, retirement or sinking fund provisions with respect to any series, may use shares of such series acquired by it prior to such failure and then held by it as treasury stock and (ii) nothing shall prevent the Corporation from completing the purchase or redemption of shares of Preferred Stock for which a purchase contract was entered into for any purchase, retirement or sinking fund purposes, or the notice of redemption of which was initially published, prior to such default. 11. So long as any of the Preferred Stock is outstanding, the Corporation will not: (a) Without the affirmative vote or consent of the holders of at least 66-2/3% of all the Preferred Stock at the time outstanding, given in person or by proxy, either in writing or by resolution adopted either at a meeting called for the purpose or at an annual meeting of stockholders of the Corporation, the holders of the Preferred Stock, regardless of series, consenting or voting (as the case may be) separately as a class, (i) create, or increase the authorized number of shares of, any class or classes of stock ranking prior to the Preferred Stock, either as to dividends or upon liquidation, or (ii) amend, alter or repeal any of the provisions of this Article Fourth so as adversely to affect the preferences, special rights or powers of the Preferred Stock; (b) Without the affirmative vote or consent of the holders of at least 66-2/3% of any series of the Preferred Stock at the time outstanding, given in person or by proxy, either in writing or by resolution adopted either at a special meeting called for the purpose or at an annual meeting of stockholders of the Corporation, the holders of such series of the Preferred Stock consenting or voting (as the case may be) separately as a class, amend, alter or repeal any 9 10 of the provisions of the amendment or amendments to the Certificate of Incorporation establishing such series so as adversely to affect the preferences, special rights or powers of the Preferred Stock of such series; (c) Without the affirmative vote or consent of the holders of at least a majority of all the Preferred Stock at the time outstanding, given in person or by proxy, either in writing or by resolution adopted either at a special meeting called for the purpose or at an annual meeting of stockholders of the Corporation, the holders of the Preferred Stock, regardless of series, consenting or voting (as the case may be) separately as a class, (i) increase the authorized amount of the Preferred Stock, or (ii) create, or increase the authorized number of shares of, any other class or classes of stock ranking on a parity with the Preferred Stock either as to dividends or upon liquidation; provided, however, that any vote or consent required by clause (ii) of subparagraph (a) above may be given or made effective by the filing of an appropriate amendment of the Corporation's Certificate of Incorporation without obtaining the vote or consent of the holders of the Common Stock of the Corporation (the right to give such vote or consent being expressly waived by holders of such Common Stock) unless the action to be taken would adversely affect the preferences, rights or powers of the Common Stock; and provided further that any vote or consent required by subparagraph (b) above may be given and made effective by the filing of an appropriate amendment of the Corporation's Certificate of Incorporation without obtaining the vote or consent of the holders of any other series of the Preferred Stock or the holders of the Common Stock of the Corporation (the right to give such vote or consent being expressly waived by all holders of such other series of Preferred Stock and the holders of the Common Stock) unless the action to be taken would adversely affect the preferences, rights or powers of such other series of Preferred Stock or Common Stock, as the case may be. 12. Whenever, at any time or times, dividends payable on the Preferred Stock shall be in default in an aggregate amount equivalent to six full quarterly dividends on any series of Preferred Stock at the time outstanding, the number of directors then constituting the Board of Directors of the Corporation shall ipso facto be increased by two, and the outstanding Preferred Stock shall, in addition to any other voting rights, have the exclusive right, voting separately as a class and without regard to series, to elect two directors of the Corporation to fill such newly created directorships. Whenever such right of the holders of the Preferred Stock shall have vested, such right may be exercised initially either at a special meeting of such holders of the Preferred Stock called as provided in paragraph 13 of this Section B of this Article Fourth or at any annual meeting of stockholders held for the purpose of 10 11 electing directors, and thereafter at such annual meetings. The right of the holders of the Preferred Stock, voting separately as a class, to elect members of the Board of Directors of the Corporation as aforesaid shall continue until such time as all dividends accumulated on the Preferred Stock to the dividend payment date next preceding the date of any such determination shall have been paid in full, or declared and set apart in trust for payment, at which time the right of the holders of the Preferred Stock so to vote separately as a class shall terminate, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned. Upon such termination the number of directors constituting the Board of Directors shall be reduced as provided in paragraph 15 of this Section B. 13. At any time when the special voting right shall have vested in the holders of the Preferred Stock then outstanding as provided in the preceding paragraph 12 of this Section B of this Article Fourth, and if such right shall not already have been initially exercised, a proper officer of the Corporation, upon the written request of the holders of record of at least 10% in amount of the Preferred Stock then outstanding, regardless of series, addressed to the secretary of the Corporation shall call a special meeting of the holders of the Preferred Stock and of any other class or classes of stock having voting power with respect thereto, for the purpose of electing directors. Such meeting shall be held at the earliest practicable date upon the same form of notice as is required for annual meetings of stockholders at the place for the holding of annual meetings of stockholders of the Corporation (or such other suitable place as is designated by said officer). If such meeting shall not be called by the proper officer of the Corporation within 20 days after the personal service of such written request upon the secretary of the Corporation, or within 20 days after mailing the same within the United States of America, by registered mail addressed to the secretary of the Corporation at its principal office (such mailing to be evidenced by the registry receipt issued by the postal authorities), then the holders of record of at least 10% in amount of the Preferred Stock then outstanding, regardless of series, may designate in writing one of their number to call such meeting at the expense of the Corporation, and such meeting may be called by such person so designated upon the same form of notice as is required for annual meetings of stockholders and shall be held at the place for the holding of annual meetings of stockholders of the Corporation (or such other suitable place as is designated by such person). Any holder of Preferred Stock so designated shall have access to the stock books of the Corporation for the purpose of causing a meeting of stockholders to be called pursuant to these provisions. Notwithstanding the provisions of this paragraph 13, no such special meeting shall be called during the period within 90 days immediately preceding the date fixed for the next annual meeting of stockholders of the Corporation. 11 12 14. At any meeting held for the purpose of electing directors at which the holders of the Preferred Stock shall have the special right, voting separately as a class, to elect directors as provided in paragraph 12 of this Section B of this Article Fourth, the presence, in person or by proxy, of the holders of 33-1/3% of the Preferred Stock at the time outstanding shall be required and be sufficient to constitute a quorum of such class for the election of either director pursuant to said paragraph 12. At any such meeting or adjournment thereof, (a) the absence of a quorum of the Preferred Stock shall not prevent the election of the directors to be elected otherwise than pursuant to said paragraph 12, and the absence of a quorum of stock other than the Preferred Stock shall not prevent the election of the directors to be elected pursuant to said paragraph 12, and (b) in the absence of such quorum, either of the Preferred Stock or of stock other than the Preferred Stock, or both, a majority of the holders, present in person or by proxy, of the class or classes of stock which lack a quorum shall have power to adjourn the meeting for the election of directors whom they are entitled to elect, from time to time without notice other than announcement at the meeting, until a quorum shall be present. 15. During any period when the holders of the Preferred Stock have the right to vote as a class for directors as provided in paragraph 12 of this Section B of this Article Fourth, (a) the directors so elected by the holders of the Preferred Stock shall continue in office until their successors shall have been elected by such holders or until termination of the right of the holders of the Preferred Stock to vote as a class for directors, and (b) any vacancies in the Board of Directors shall be filled only by vote of a majority (even if that be only a single director) of the remaining directors theretofore elected by the holders of the class or classes of stock which elected the director whose office shall have become vacant. Immediately upon any termination of the right of holders of the Preferred Stock to vote as a class for directors as provided in paragraph 12 of this Section B of this Article Fourth, (a) the term of office of the directors so elected by the holders of Preferred Stock shall terminate, and (b) the number of directors shall be such number as may be provided for in the by-laws irrespective of any increase made pursuant to the provisions of said paragraph 12. 16. If in any case the amounts payable with respect to any requirements to retire shares of the Preferred Stock are not paid in full in the case of series with respect to which such requirements exist, the number of shares to be retired in each series shall be in proportion to the respective amounts which would be payable on account of such requirements if all amounts payable were met in full. 17. Whenever, at any time, full cumulative dividends as aforesaid for all past dividend periods and for the current dividend period shall have been paid or declared 12 13 and set apart for payment on the then outstanding Preferred Stock, and after complying with all the provisions with respect to any purchase, retirement or sinking fund or funds for any one or more series of Preferred Stock, the Board of Directors may, subject to the provisions hereof with respect to the payment of dividends on any other class or classes of stock, declare dividends on any such other class or classes of stock ranking junior to the Preferred Stock as to dividends subject to the respective terms and provisions, if any, applying thereto, and the Preferred Stock shall not be entitled to share therein. Upon any liquidation, dissolution or winding up of the Corporation, after payment shall have been made in full to the Preferred Stock as provided in paragraph 5 of this Article Fourth, but not prior thereto, any other class or classes of stock ranking junior to the Preferred Stock upon liquidation shall, subject to the respective terms and provisions, if any, applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, or the proceeds thereof, and the Preferred Stock shall not be entitled to share therein. 18. For the purposes of this Section B of this Article Fourth and of any amendment or amendments to the Certificate of Incorporation adopted by the Board of Directors establishing any series of Preferred Stock and of any certificate filed with the Secretary of State of New Jersey (unless otherwise provided in any such amendment or certificate): (a) The amount of dividends "accumulated" on any share of Preferred Stock of any series as at any dividend date shall be deemed to be the amount of any unpaid dividends accumulated thereon to and including such dividend date, whether or not earned or declared, and the amount of dividends "accumulated" on any share of Preferred Stock of any series as at any date other than a dividend date shall be calculated as the amount of any unpaid dividends accumulated thereon to and including the last preceding dividend date, whether or not earned or declared, plus an amount equivalent to the pro rata portion of a dividend at the annual dividend rate fixed for the shares of such series for the period after such last preceding dividend date to and including the date as of which the calculation is made. (b) Any class or classes of stock of the Corporation shall be deemed to rank (i) prior to the Preferred Stock either as to dividends or upon liquidation if the holders of such class or classes shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of the Preferred Stock; 13 14 (ii) on a parity with the Preferred Stock either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Preferred Stock, if the holders of such class or classes of stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority one over the other with respect to the holders of the Preferred Stock; (iii) junior to the Preferred Stock either as to dividends or upon liquidation if the rights of the holders of such class or classes shall be subject or subordinate to the rights of the holders of the Preferred Stock in respect of the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be. 19. So long as any shares of Preferred Stock shall be outstanding, the Common Stock shall be deemed to rank junior to the Preferred Stocks as to dividends and upon liquidation. SECTION B-1. PROVISIONS RELATING TO SERIES A PARTICIPATING CUMULATIVE PREFERRED STOCK. 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series A Participating Cumulative Preferred Stock" and the number of shares constituting such series shall be 500,000. 2. DIVIDENDS AND DISTRIBUTIONS. (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the Series A Participating Cumulative Preferred Stock with respect to dividends, the holders of shares of Series A Participating Cumulative Preferred Stock, in preference to the shares of Common Stock, par value $1 per share, of the Company (the "Common Stock"), and any other stock of the Company junior to the Series A Participating Cumulative Preferred Stock with respect to dividends, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on March 15, June 15, September 15 and December 15 in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Participating Cumulative Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment 14 15 hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Participating Cumulative Preferred Stock. In the event the Company shall at any time after June 2, 1989 (the "Rights Declaration Date") (i) declare or pay any dividend on Common Stock payable in shares of Common Stock (ii) subdivide the outstanding Common Stock (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Participating Cumulative Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Subject to the provisions of paragraph 17 of Section B of this Article Fourth, the Company shall declare a dividend or distribution on the Series A Participating Cumulative Preferred Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series A Participating Cumulative Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Participating Cumulative Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Participating Cumulative Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Participating Cumulative Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such quarterly dividend payment date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the 15 16 shares of Series A Participating Cumulative Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Participating Cumulative Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 60 days prior to the date fixed for the payment thereof. 3. VOTING RIGHTS. In addition to any other voting rights required by law, the holders of shares of Series A Participating Cumulative Preferred Stock shall have only the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Participating Cumulative Preferred Stock shall entitle the holder thereof to one vote on all matters submitted to a vote of the shareholders of the Company, and each fractional share of Series A Participating Cumulative Preferred Stock shall entitle the holder thereof to a pro rata fractional vote. In the event the Company shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Participating Cumulative Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series A Participating Cumulative Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Company. (C) (i) If at any time dividends on any Series A Participating Cumulative Preferred Stock shall be in arrears in an amount equal to six quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a "default period") which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Participating Cumulative Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Preferred Stock (including holders of the Series A Participating Cumulative Preferred Stock) with dividends in arrears in an amount equal to six quarterly dividends thereon, voting as a class, 16 17 irrespective of series, shall have the right to elect two Directors. (ii) During any default period, such voting right of the holders of Series A Participating Cumulative Preferred Stock may be exercised initially at a special meeting called pursuant to sub-paragraph (iii) of this paragraph 3(C) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that neither such voting right nor the right of the holders of any other series of Preferred Stock, if any, to increase, in certain cases, the authorized number of Directors shall be exercised unless the holders of 33-1/3 percent in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Preferred Stock of such voting right. At any meeting at which the holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect Directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two Directors or, if such right is exercised at an annual meeting, to elect two Directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of Directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect Directors in any default period and during the continuance of such period, the number of Directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or PARI PASSU with the Series A Participating Cumulative Preferred Stock. (iii) Unless the holders of Preferred Stock shall, during an existing default period, have previously exercised their right to elect Directors, the Board of Directors may order, or any stockholder or stockholders owning in the aggregate not less than ten percent of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of a special meeting of the holders of Preferred Stock, which meeting shall thereupon be called by the President, a Vice President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this sub-paragraph (C) (iii) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any stockholder or stockholders owning in the aggregate not less than ten 17 18 percent of the total number of shares of Series A Participating Cumulative Preferred Stock outstanding. Notwithstanding the provisions of this sub-paragraph (C)(iii), no such special meeting shall be called during the period within 90 days immediately preceding the date fixed for the next annual meeting of the stockholders. (iv) In any default period, the holders of Common Stock, and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of Directors until the holders of Preferred Stock shall have exercised their right to elect two (2) Directors voting as a class, after the exercise of which right (x) the Directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in sub-paragraph (C)(ii) of this paragraph 3) be filled by vote of a majority of the remaining Directors theretofore elected by the holders of the class of stock which elected the Director whose office shall have become vacant. (v) Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Stock as a class to elect Directors shall cease, (y) the term of any Directors elected by the holders of Preferred Stock as a class shall terminate, and (z) the number of Directors shall be such number as may be provided for in the certificate of incorporation or by-laws irrespective of any increase made pursuant to the provisions of sub-paragraph (C)(ii) of this paragraph 3 (such number being subject, however, to change thereafter in any manner provided by law or in the certificate of incorporation or by-laws). Any vacancies in the Board of Directors occurring after the expiration of a default period shall be filled in the manner provided for in the certificate of incorporation or by-laws. (D) Except as set forth herein, holders of Series A Participating Cumulative Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. 4. CERTAIN RESTRICTIONS. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Participating Cumulative Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Participating Cumulative Preferred Stock outstanding shall have been paid in full or set aside for payment, the Company shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking 18 19 junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Participating Cumulative Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Participating Cumulative Preferred Stock, except dividends paid ratably on the Series A Participating Cumulative Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Participating Cumulative Preferred Stock, provided that the Company may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Company ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Participating Cumulative Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series A Participating Cumulative Preferred Stock, or any shares of stock ranking on a parity with the Series A Participating Cumulative Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Company shall not permit any subsidiary of the Company to purchase or otherwise acquire for consideration any shares of stock of the Company unless the Company could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. 5. REACQUIRED SHARES. Any shares of Series A Participating Cumulative Preferred Stock purchase or otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth in the Certificate of Incorporation. 19 20 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation, dissolution or winding up of the Company, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Participating Cumulative Preferred Stock unless, prior thereto, the holders of shares of Series A Participating Cumulative Preferred Stock shall have received $100.00 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Participating Cumulative Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, of not less than 100 times the aggregate amount to be distributed per share to holders of Common Stock, or (2) to the holders of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Participating Cumulative Preferred Stock, except distributions made ratable on the Series A Participating Cumulative Preferred Stock and all other such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Company shall at any time after the Rights Declaration Date declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Participating Cumulative Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 7. CONSOLIDATION, MERGER, ETC. In case the Company shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Participating Cumulative Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Company shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number 20 21 of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Participating Cumulative Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 8. NO REDEMPTION. The shares of Series A Participating Cumulative Preferred Stock shall not be redeemable. 9. RANK. The Series A Participating Cumulative Preferred Stock shall rank junior with respect to payment of dividends and on liquidation to all other series of the Company's preferred stock outstanding on the date hereof and to all such other series that may be issued after the date hereof except to the extent that any such other series specifically provides that it shall rank junior to the Series A Participating Cumulative Preferred Stock. 10. AMENDMENT. The Restated Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Participating Cumulative Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least a majority of the outstanding shares of Series A Participating Cumulative Preferred Stock, voting separately as a class. 11. FRACTIONAL SHARES. Series A Participating Cumulative Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, to receive dividends thereon, and to participate in any distribution of assets and to have the benefit of all other rights of holders of Series A Participating Cumulative Preferred Stock. FIFTH: The names and addresses of the current fourteen members of the Board of Directors are as follows: NAMES ADDRESSES John C. Beck 330 Madison Ave. New York, NY 10017-5001 James I. Cash, Jr. Baker Library #187 Soldiers Field Boston, MA 02163 Percy Chubb, III 15 Mountain View Road Warren, NJ 07059 Joel J. Cohen 277 Park Avenue New York, NY 10172 21 22 David H. Hoag 25 West Prospect Avenue Cleveland, OH 44115 Robert V. Lindsay R.R. #3, Box 219 Millbrook, NY 12545 Thomas C. MacAvoy Box 6550 Charlottesville, VA 22906 Gertrude G. Michelson Herald Square New York, NY 10001 Dean R. O'Hare 15 Mountain View Road Warren, NJ 07059 Warren B. Rudman 1615 L Street, NW Washington, DC 20036 David G. Scholey One Finsbury Avenue London EC2M 2PP, England Raymond G. H. Seitz One Broadgate London EC2M 7HA, England Lawrence M. Small 3900 Wisconsin Ave., NW Washington, DC 20016-2899 Richard D. Wood Lilly Corporate Center Indianapolis, IN 46285 SIXTH: The duration of the Corporation shall be perpetual. SEVENTH: Meetings of stockholders may be held in the State of New Jersey or in the City of New York, State of New York, at such place therein as may from time to time be designated by the directors and stated in the notice of meeting. Election of directors need not be by ballot unless otherwise provided in the By-laws. At all meetings of stockholders, every stockholder entitled to vote thereat shall have one vote for each share standing in his name on the books of the Corporation. Any action which at any meeting of stockholders requires the vote, assent or consent of two-thirds in interest of all of the stockholders, or of two-thirds in interest of each class of stockholders having voting powers thereon, may be taken upon the vote, assent or consent of two-thirds in interest of the stockholders present and voting at such meeting in person or by proxy, or, where a vote, assent, or consent by classes is required, may be taken upon the vote, assent or consent of two-thirds in interest of the stockholders of each class so present and voting. EIGHTH: Except as otherwise provided by statute, the Board of Directors shall exercise all corporate powers, and in addition thereto and to all other powers now or hereafter conferred by law or by this Certificate of Incorporation or the By-laws, shall have power: (a) To hold meetings, to have one or more offices, and to keep the books of the Corporation, except as otherwise 22 23 expressly provided by law, at such places, whether within or without the State of New Jersey, as may from time to time be designated by the Board; (b) To appoint an Executive Committee from among its members, which Committee may, subject to the By-Laws, exercise the power of the directors in the management of the business, affairs and property of the Corporation during the intervals between the meetings of the Board; (c) To make, alter and repeal by-laws of the Corporation, subject to the reserved power of the stockholders to make, alter and repeal by-laws; (d) To determine whether and to what extent, at what times and places and under what conditions and regulations, the accounts and books of the Corporation, or any of them, shall be open to the inspection of the stockholders, and no stockholder shall have any right to inspect any account, record, book or document of the Corporation except as conferred by statute of the State of New Jersey, or as authorized by the Board; (e) To fix and determine, from time to time, and to vary, the amount of the working capital of the Corporation, to appropriate or set apart reserves for any corporate purpose, to determine what, if any, dividends shall be declared and paid to stockholders out of the surplus or net profits and to direct and determine the use and disposition of any surplus or net profits over and above the capital of the Corporation; (f) In its discretion, to use or apply any funds of the Corporation lawfully available therefor for the purchase or acquisition of shares of the capital stock or bonds or other securities of the Corporation, in the market or otherwise, at such price as may be fixed by the Board, and to such extent and in such manner and for such purposes and upon such terms as the Board may deem expedient and as may be permitted by law; (g) In its discretion, to make any lawful disposition of any paid-in or capital surplus, or create any reserves out of the same, or charge to the same organization expenses or other similar expenses properly chargeable to capital account; (h) From time to time in such manner and upon such terms and conditions as may be determined by the Board, to provide and carry out and recall, abolish, revise, alter or change, one or more plan or plans for (1) the issue or the purchase and sale of its capital stock or granting of options therefor to any or all of the employees, officers or directors of the Corporation, or of any subsidiaries and the payment for such stock in installments or at one time, with or without the right to vote thereon pending payment 23 24 therefor in full, and for aiding any such persons in paying for such stock by contributions, compensation for services, or otherwise; (2) the participation by any or all of the employees, officers or directors of the Corporation or of any subsidiaries in the profits of the Corporation or of any branch, division or subsidiary thereof, as part of the Corporation's legitimate expenses; and (3) the furnishing to any or all of the employees, officers or directors of the Corporation or of any subsidiaries, at the expense, wholly or in part, of the Corporation, of insurance against accident, sickness, death, disability, unemployment or other calamity or liability, pension or retirement benefits, education, or other services and protection for their relief or general welfare; (i) From time to time to authorize and issue obligations of the Corporation, secured or unsecured, to include therein such covenants and restrictions and such provisions as to redeemability, subordination, convertibility or otherwise, and with such maturities, as the Board in its sole discretion may determine, and to authorize the mortgaging or pledging, as security therefor, of any part or all of the property of the Corporation, real or personal, including after-acquired property. NINTH: No holder of any stock or other security of the Corporation of any class now or hereafter authorized shall, as such holder, be entitled as of right or have any preemptive right to purchase any shares of capital stock of the Corporation now or hereafter authorized, or any securities or other instruments evidencing the right to acquire any shares of capital stock of the Corporation, whether such shares or securities or instruments be unissued, or issued and thereafter acquired by the Corporation. TENTH: No contract or other transaction between this Corporation and any other corporation, and no act of this Corporation, shall in any way be affected or invalidated by the fact that any of the directors of this Corporation are pecuniarily or otherwise interested in or are directors or officers of such other corporation; any director individually or any firm of which any director may be a member may be a party to or may be pecuniarily or otherwise interested in any contract or transaction of this Corporation, provided that the fact that he or such firm is so interested shall be disclosed or shall have been known to the Board of Directors or a majority thereof; and any director of this Corporation who is also a director or officer of such other corporation or who is so interested may be counted in determining the existence of a quorum at any meeting of the Board of Directors of this Corporation which shall authorize any such contract or transaction and may vote thereat to authorize any such contract or transaction with like force and effect as if he were not such director or officer of such other corporation or so interested. 24 25 ELEVENTH: From time to time any of the provisions of this Certificate of Incorporation may be amended, altered or repealed, and other provisions authorized by the laws of the State of New Jersey at the time in force may be added or inserted in the manner and at the time prescribed or permitted by said laws; and all rights at any time conferred upon the stockholders of the Corporation by this Certificate of Incorporation are granted subject to the provisions of this Article ELEVENTH. TWELFTH: SECTION A. A Director or Officer of the Corporation shall not be personally liable to the Corporation or its stockholders for damages for breach of any duty owed to the Corporation or its stockholders, except for liability for any breach of duty based upon an act or omission (i) in breach of such Director's or Officer's duty of loyalty to the Corporation or stockholders, (ii) not in good faith or involving a knowing violation of law or (iii) resulting in receipt by such Director or Officer of an improper personal benefit. The provisions of this section shall be effective as and to the fullest extent that, in whole or in part, they shall be authorized or permitted by the laws of the State of New Jersey. No repeal or modification of the foregoing provisions of this Section A nor, to the fullest extent permitted by law, any modification of law shall adversely affect any right or protection of a Director or Officer of the Corporation which exists at the time of such repeal or modification. SECTION B. l. As used in this Section B: (a) "corporate agent" means any person who is or was a director, officer of employee of the Corporation and any person who is or was a director, officer, trustee or employee of any other enterprise, serving, or continuing to serve, as such at the written request of the Corporation, signed by the Chairman or the President or pursuant to a resolution of the Board of Directors, or the legal representative of any such person; (b) "other enterprise" means any domestic or foreign corporation, other than the Corporation, and any partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise, whether or not for profit, served by a corporate agent; (c) "expenses" means reasonable costs, disbursements and counsel fees; (d) "liabilities" means amounts paid or incurred in satisfaction of settlements, judgments, fines and penalties; (e) "proceeding" means any pending, threatened or completed civil, criminal, administrative or arbitrative action, suit or proceeding, and any appeal therein and any inquiry or investigation which could lead to such action, suit or proceeding, and shall include any proceeding as so 25 26 defined existing at or before, and any proceedings relating to facts occurring or circumstances existing at or before, the adoption of this Section B. 2. Each corporate agent shall be indemnified by the Corporation against his expenses and liabilities in connection with any proceeding involving the corporate agent by reason of his having been such corporate agent to the fullest extent permitted by applicable law as the same exists or may hereafter be amended or modified. The right to indemnification conferred by this paragraph 2 shall also include the right to be paid by the Corporation the expenses incurred in connection with any such proceeding in advance of its final disposition to the fullest extent authorized by applicable law as the same exists or may hereafter be amended or modified. The right to indemnification conferred in this paragraph 2 shall be a contract right. 3. The Corporation may purchase and maintain insurance on behalf of any corporate agent against any expenses incurred in any proceeding and any liabilities asserted against him by reason of his having been a corporate agent, whether or not the corporation would have the power to indemnify him against such expenses and liabilities under applicable law as the same exists or may hereafter be amended or modified. The Corporation may purchase such insurance from, or such insurance may be reinsured in whole or in part by, an insurer owned by or otherwise affiliated with the Corporation, whether or not such insurer does business with other insureds. The rights and authority conferred in this Section B shall not exclude any other right to which any person may be entitled under this Certificate of Incorporation, the By-Laws, any agreement, vote of stockholders or otherwise. No repeal or modification of the foregoing provisions of this Section B nor, to the fullest extent permitted by law, any modification of law, shall adversely affect any right or protection of a corporate agent which exists at the time of such repeal or modification. IN WITNESS WHEREOF, The Chubb Corporation has executed this Restated Certificate of Incorporation under its seal and the hand of its Chairman, attested by its Vice President and Secretary, on this 1st day of May, 1996. THE CHUBB CORPORATION Attest: By: /s/ Dean R. O'Hare -------------------------- Dean R. O'Hare Chairman By: /s/ Henry G. Gulick ----------------------------- Henry G. Gulick Vice President and Secretary 26 27 CERTIFICATE OF ADOPTION OF THE RESTATED CERTIFICATE OF INCORPORATION OF THE CHUBB CORPORATION The undersigned, on behalf of THE CHUBB CORPORATION, does hereby certify that: 1. The name of the corporation is THE CHUBB CORPORATION. 2. The RESTATED CERTIFICATE OF INCORPORATION OF THE CHUBB CORPORATION attached hereto was duly adopted by the Board of Directors, pursuant to Section 14A:9-5(2) of The New Jersey Business Corporation Act, at a meeting duly convened and held on March 1, 1996. 3. This RESTATED CERTIFICATE OF INCORPORATION OF THE CHUBB CORPORATION only restates and integrates but does not substantively amend the provisions of the Certificate of Incorporation of THE CHUBB CORPORATION as heretofore amended. IN WITNESS WHEREOF, THE CHUBB CORPORATION has made this Certificate under its seal and the hand of its Chairman, attested by its Vice President and Secretary, on the 1st day of May, 1996. THE CHUBB CORPORATION Attest: By: /s/ Dean R. O'Hare ------------------------- Dean R. O'Hare Chairman By: /s/ Henry G. Gulick ----------------------------- Henry G. Gulick Vice President and Secretary 27 28 STATE OF NEW JERSEY } } COUNTY OF SOMERSET } BE IT REMEMBERED, that on the 1st day of May, 1996, the Subscriber, a Notary Public, personally appeared HENRY G. GULICK, Vice President and Secretary of THE CHUBB CORPORATION, the corporation named in and which executed the foregoing certificate, who being by me duly sworn, according to law, does depose and say and make proof to my satisfaction that he is the Vice President and Secretary of said corporation; that he saw said DEAN R. O'HARE as such Chairman sign said certificate with said seal affixed thereto and deliver said certificate as the voluntary act and deed of said corporation, by its order and by authority of its Board of Directors for the uses and purposes therein expressed; and that said HENRY G. GULICK signed his name thereto at the same time as subscribing witness. Subscribed and sworn to before me the day and year aforesaid. - ----------------------------------- (Notarial Seal) 28 EX-10.1 3 LONG-TERM STOCK INCENTIVE PLAN 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE CHUBB CORPORATION LONG-TERM STOCK INCENTIVE PLAN (1996) ------------------ (CHUBB LOGO) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- As Approved By Shareholders on April 23, 1996 and As Amended on June 14, 1996 2 THE CHUBB CORPORATION LONG-TERM STOCK INCENTIVE PLAN (1996) SECTION 1. Purpose The purposes of The Chubb Corporation Long-Term Stock Incentive Plan (1996) (the "Plan") are to promote the interests of The Chubb Corporation and its shareholders by (i) attracting and retaining executive personnel and other key employees of outstanding ability; (ii) motivating executive personnel and other key employees, by means of performance-related incentives, to achieve longer-range performance goals; and (iii) enabling such employees to participate in the long-term growth and financial success of The Chubb Corporation. SECTION 2. Definitions. "Affiliate" shall mean any corporation or other entity which is not a Subsidiary but as to which the Corporation possesses a direct or indirect ownership interest and has representation on the board of directors or any similar governing body. "Award" shall mean a grant or award under Sections 6 through 9, inclusive, of the Plan, as evidenced in a written document delivered to a Participant as provided in Section 10(b). "Board of Directors" shall mean the Board of Directors of the Corporation. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Committee" shall mean the Organization & Compensation Committee of the Board of Directors. "Common Stock" or "Stock" shall mean the Common Stock, $1.00 par value, of the Corporation. "Corporation" shall mean The Chubb Corporation. "Designated Beneficiary" shall mean the beneficiary designated by the Participant, in a manner determined by the Committee, to receive amounts due the Participant in the event of the Participant's death. In the absence of an effective designation by the Participant, Designated Beneficiary shall mean the Participant's estate. "Employee" shall mean any key employee of the Employer. "Employer" shall mean the Corporation and any Subsidiary or Affiliate. "Fair Market Value" shall mean the average of the highest and lowest sales prices reported for consolidated trading of issues listed on the New York Stock Exchange on the date in question, or, if the Stock shall not have been traded on such date, the average of such highest and lowest sales prices on the first day prior thereto on which the Stock was so traded. "Fiscal Year" shall mean the fiscal year of the Corporation. "Incentive Stock Option" shall mean a stock option granted under Section 6 which is intended to meet the requirements of Section 422 of the Code. "Nonstatutory Stock Option" shall mean a stock option granted under Section 6 which is not intended to be an Incentive Stock Option. "Option" shall mean an Incentive Stock Option or a Nonstatutory Stock Option and shall include a Restoration Option. "Participant" shall mean an Employee who is selected by the Committee to receive an Award under the Plan. 1 3 "Payment Value" shall mean the dollar amount assigned to a Performance Share which shall be equal to the Fair Market Value of the Common Stock on the day of the Committee's determination under Section 8(c)(1) with respect to the applicable Performance Cycle. "Performance Cycle" or "Cycle" shall mean the period of years selected by the Committee during which the performance is measured for the purpose of determining the extent to which an award of Performance Shares has been earned. "Performance Goals" shall mean the objectives established by the Committee for a Performance Cycle, for the purpose of determining the extent to which Performance Shares which have been contingently awarded for such Cycle are earned. "Performance Share" shall mean an award granted pursuant to Section 8 of the Plan expressed as a share of Common Stock. "Prior Plans" shall mean The Chubb Corporation Long-Term Stock Incentive Plan (1992), Long-Term Stock Incentive Plan (1989) and the Stock Option Plan (1984). "Restoration Option" shall mean a stock option granted pursuant to Section 6(d). "Restricted Period" shall mean the period of years selected by the Committee during which a grant of Restricted Stock or Restricted Stock Units may be forfeited to the Corporation. "Restricted Stock" shall mean shares of Common Stock contingently granted to a Participant under Section 9 of the Plan. "Restricted Stock Unit" shall mean a fixed or variable dollar denominated unit contingently awarded under Section 9 of the Plan. "Stock Appreciation Right" shall mean a right granted under Section 7. "Subsidiary" shall mean any business entity in which the Corporation possesses directly or indirectly fifty percent (50%) or more of the total combined voting power. SECTION 3. Administration The Plan shall be administered by the Committee. The Committee shall have sole and complete authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the operation of the Plan as it shall from time to time deem advisable, and to interpret the terms and provisions of the Plan. The Committee may delegate to one or more executive officers of the Corporation the power to make Awards to Participants who are not executive officers or directors of the Corporation provided the Committee shall fix the maximum amount of such Awards for the group and a maximum for any one Participant. The Committee's decisions shall be binding upon all persons, including the Corporation, stockholders, an Employer, Employees, Participants and Designated Beneficiaries. SECTION 4. Eligibility All Employees who, in the opinion of the Committee, have the capacity for contributing in a substantial measure to the successful performance of the Corporation are eligible to be Participants in the Plan. SECTION 5. Maximum Amount Available for Awards (a) The maximum number of shares of Stock in respect of which Awards may be made under the Plan shall be 8,730,000 shares of Common Stock plus up to an additional 5,270,000 shares of Common Stock to the extent shares of Common Stock are reacquired by the Corporation, including shares purchased in the open market, after April 23, 1996. Not more than 3,500,000 shares may be awarded as Restricted Stock, Restricted Stock Units or Performance Shares and not more than 8,730,000 shares may be awarded as incentive stock options. Subject to the foregoing, Shares of Common Stock may be made available from the authorized but unissued shares of the Corporation or from shares reacquired by the Corporation, including shares purchased in the open market. In the event that (i) an Option or Stock Appreciation Right under the Plan or the Prior Plans is settled for cash or expires or is terminated unexercised as to any shares of Common Stock covered 2 4 thereby, or (ii) any Award under the Plan or the Prior Plans in respect of shares is cancelled or forfeited for any reason without the delivery of shares of Common Stock, such shares shall thereafter be again available for award pursuant to the Plan. In the event that any Option or other Award granted is exercised through the delivery of shares of Common Stock, the number of shares of Common Stock available for Awards under the Plan shall be increased by the number of shares so surrendered. (b) No Employee may be granted under the Plan in any calendar year Options or Stock Appreciation Rights on more than 300,000 shares of Common Stock and no Employee may be granted in any calendar year more than 80,000 Performance Shares or 80,000 shares of Restricted Stock or Restricted Stock Units. (c) In the event that the Committee shall determine that any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock at a price substantially below fair market value, or other similar corporate event affects the Common Stock such that an adjustment is required in order to preserve the benefits or potential benefits intended to be made available under this Plan, then the Committee shall, in its sole discretion, and in such manner as the Committee may deem equitable, adjust any or all of (1) the number and kind of shares which thereafter may be awarded or optioned and sold or made the subject of Stock Appreciation Rights under the Plan, (2) the number and kind of shares subject to outstanding Options and other Awards, and (3) the grant, exercise or conversion price with respect to any of the foregoing and/or, if deemed appropriate, make provision for a cash payment to a Participant or a person who has an outstanding Option or other Award provided, however, that the number of shares subject to any Option or other Award shall always be a whole number. SECTION 6. Stock Options (a) Grants. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees to whom Options shall be granted, the number of shares to be covered by each Option, the option price therefor and the conditions and limitations applicable to the exercise of the Option including but not limited to, whether, and to what extent and under what circumstances amounts payable upon exercise of an Option shall be deferred at the election of the holder of such Option. The Committee shall have the authority to grant Incentive Stock Options, or to grant Nonstatutory Stock Options, or to grant both types of options. In the case of Incentive Stock Options, the terms and conditions of such grants shall be subject to and comply with such rules as may be prescribed by Section 422 of the Code, as from time to time amended, and any implementing regulations. (b) Option Price. The Committee shall establish the option price at the time each Option is granted, which price shall not be less than 100% of the Fair Market Value of the Common Stock on the date of grant. (c) Exercise. (1) Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify in the applicable Award or thereafter, provided, however, that in no event may any Option granted hereunder be exercisable after the expiration of ten years from the date of such grant. The Committee may impose such conditions with respect to the exercise of Options, including without limitation, any relating to the application of federal or state securities laws, as it may deem necessary or advisable. (2) No shares shall be delivered pursuant to any exercise of an Option until payment in full of the option price therefor is received by the Corporation. Such payment may be made in cash, or its equivalent, or, if and to the extent permitted by the Committee, by exchanging shares of Common Stock owned for at least six months by the optionee (which are not the subject of any pledge or other security interest), or by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the Fair Market Value of any such Common Stock so tendered to the Corporation, valued as of the date of such tender, is at least equal to such option price. (d) Restoration Options. In the event that any Participant delivers shares of Common Stock in payment of the exercise price of any Option granted hereunder in accordance with Section 6(c)(2), the Committee shall have the authority to grant or provide for the automatic grant of a Restoration Option to such 3 5 Participant. The grant of a Restoration Option shall be subject to the satisfaction of such conditions or criteria as the Committee in its sole discretion shall establish from time to time. A Restoration Option shall entitle the holder thereof to purchase a number of shares of Common Stock equal to the number of such shares so delivered upon exercise of the original Option and, in the discretion of the Committee, the number of shares, if any, tendered to the Corporation to satisfy any withholding tax liability arising in connection with the exercise of the original Option. A Restoration Option shall have a per share exercise price of not less than 100% of the per share Fair Market Value of the Common Stock on the date of grant of such Restoration Option, a term not longer than the remaining term of the original Option at the time of exercise thereof, and such other terms and conditions as the Committee in its sole discretion shall determine. SECTION 7. Stock Appreciation Rights (a) The Committee may, with sole and complete authority, grant Stock Appreciation Rights in tandem with an Option, in addition to an Option, or freestanding and unrelated to an Option. Stock Appreciation Rights granted in tandem with or in addition to an Option may be granted either at the same time as the Option or at a later time. Stock Appreciation Rights shall not be exercisable earlier than six months after grant, shall not be exercisable after the expiration of ten years from the date of grant and shall have an exercise price of not less than 100% of the Fair Market Value of the Common Stock on the date of grant. (b) A Stock Appreciation Right shall entitle the Participant to receive from the Corporation an amount equal to the excess of the Fair Market Value of a share of Common Stock on the exercise of the Stock Appreciation Right over the grant price thereof, provided that the Committee may for administrative convenience determine that, for any Stock Appreciation Right which is not related to an Incentive Stock Option which Stock Appreciation Right can only be exercised during limited periods of time in order to satisfy the conditions of certain rules of the Securities and Exchange Commission, the exercise of any such Stock Appreciation Right for cash during such limited period shall be deemed to occur for all purposes hereunder on the day during such limited period on which the Fair Market Value of the Stock is the highest. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted prior to such determination as well as Stock Appreciation Rights thereafter granted. The Committee shall determine upon the exercise of a Stock Appreciation Right whether such Stock Appreciation Right shall be settled in cash, shares of Common Stock or a combination of cash and shares of Common Stock. SECTION 8. Performance Shares (a) The Committee shall have sole and complete authority to determine the Employees who shall receive Performance Shares and the number of such shares for each Performance Cycle, and to determine the duration of each Performance Cycle and the value of each Performance Share. There may be more than one Performance Cycle in existence at any one time, and the duration of Performance Cycles may differ from each other. (b) The Committee shall establish Performance Goals for each Cycle based on any one or more of the following: the operating earnings, net earnings, return on equity, income, market share, shareholder return, combined ratio, level of expenses or growth in revenue. During any Cycle, the Committee may adjust the Performance Goals for such Cycle as it deems equitable in recognition of unusual or non-recurring events affecting the Corporation, changes in applicable tax laws or accounting principles, or such other factors as the Committee may determine, provided, however, that no such adjustment shall be applicable to the extent such adjustment would result in a disallowance of a tax deduction pursuant to Section 162(m) of the Code. (c)(1) As soon as practicable after the end of a Performance Cycle, the Committee shall determine the number of Performance Shares which have been earned on the basis of performance in relation to the established Performance Goals. (2) Payment Values of earned Performance Shares shall be distributed to the Participant or, if the Participant has died, to the Participant's Designated Beneficiary, as soon as practicable after the expiration of 4 6 the Performance Cycle and the Committee's determination under paragraph (1), above. The Committee shall determine whether Payment Values are to be distributed in the form of cash and/or shares of Common Stock. SECTION 9. Restricted Stock and Restricted Stock Units (a) Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees to whom shares of Restricted Stock and Restricted Stock Units shall be granted, the number of shares of Restricted Stock and the number of Restricted Stock Units to be granted to each Participant, the duration of the Restricted Period during which, and the conditions under which, the Restricted Stock and Restricted Stock Units may be forfeited to the Corporation, and the other terms and conditions of such Awards. The Restricted Period shall consist of at least one year (which may be shortened or waived by the Committee at any time in its discretion) with respect to one or more Participants or Awards outstanding. In its discretion, the Committee may establish performance conditions with respect to awards of Restricted Stock and Restricted Stock Units based on one or more of the same items listed in Section 8(b) in respect of Performance Shares during a performance period selected by the Committee. (b) Shares of Restricted Stock and Restricted Stock Units may not be sold, assigned, transferred, pledged or otherwise encumbered, except as herein provided, during the Restricted Period. Certificates issued in respect of shares of Restricted Stock shall be registered in the name of the Participant and deposited by such Participant, together with a stock power endorsed in blank, with the Corporation. At the expiration of the Restricted Period, the Corporation shall deliver such certificates to the Participant or the Participant's legal representative. Payment for Restricted Stock Units shall be made to the Corporation in cash and/or shares of Common Stock, as determined at the sole discretion of the Committee. SECTION 10. General Provisions (a) Withholding. The Employer shall have the right to deduct from all amounts paid to a Participant in cash (whether under this Plan or otherwise) any taxes required by law to be withheld in respect of Awards under this Plan. In the case of payments of Awards in the form of Common Stock, at the Committee's discretion the Participant may be required to pay to the Employer the amount of any taxes required to be withheld with respect to such Common Stock, or, in lieu thereof, the Employer shall have the right to retain (or the Participant may be offered the opportunity to elect to tender) the number of shares of Common Stock whose Fair Market Value equals the amount required to be withheld. (b) Awards. Each Award hereunder shall be evidenced in writing, delivered to the Participant and shall specify the terms and conditions thereof and any rules applicable thereto, including but not limited to the effect on such Award of the death, retirement or other termination of employment of the Participant and the effect thereon, if any, of a change in control of the Corporation. (c) Non-transferability. (i) Except as provided in (ii) below, no Award shall be assignable or transferable, and no right or interest of any Participant shall be subject to any lien, obligation or liability of the Participant, except by will or the laws of descent and distribution. (ii) Notwithstanding subparagraph (i) above, the Committee may determine that an Award may be transferred pursuant to a qualified domestic relations order, as determined by the Committee or its designee or that an Option may be transferred by an Employee to one or more members of the Employee's immediate family, to a partnership of which the only partners are members of the Employee's immediate family, or to a trust established by the Employee for the benefit of one or more members of the Employee's immediate family. For this purpose immediate family means the Employee's spouse, parents, children, grandchildren and the spouses of such parents, children and grandchildren. A transferee described in this subparagraph may not further transfer an Option. An Option transferred pursuant to this subparagraph shall remain subject to all of the applicable provisions of the Plan and the written option agreement. (d) No Right to Employment. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Employer. Further, the Employer expressly reserves the right at any time to dismiss a Participant free from 5 7 any liability, or any claim under the Plan, except as provided herein or in any agreement entered into with respect to an Award. (e) No Rights as Stockholder. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed under the Plan until he or she has become the holder thereof. Notwithstanding the foregoing, in connection with each grant of Restricted Stock hereunder, the applicable Award shall specify if and to what extent the Participant shall not be entitled to the rights of a stockholder in respect of such Restricted Stock. (f) Construction of the Plan. The validity, construction, interpretation, administration and effect of the Plan and of its rules and regulations, and rights relating to the Plan, shall be determined solely in accordance with the laws of New York. (g) Effective Date. Subject to the approval of the stockholders of the Corporation, the Plan shall be effective on April 23, 1996. No Options or Awards may be granted under the Plan after December 31, 2001; provided, however, that the authority for grant of Restoration Options hereunder in accordance with Section 6(d) shall continue, subject to the provisions of Section 5, as long as any Option granted hereunder remains outstanding. (h) Amendment of Plan. The Board of Directors may amend, suspend or terminate the Plan or any portion thereof at any time, provided that no amendment shall be made without stockholder approval if such approval is necessary to comply with any tax or regulatory requirement, including for these purposes any approval requirement which is a prerequisite for exemptive relief under Section 16(b) of the Securities Exchange Act of 1934 with which the Committee has determined it is necessary or desirable to have the Corporation comply. Notwithstanding anything to the contrary contained herein, the Committee may amend the Plan in such manner as may be necessary so as to have the Plan conform with local rules and regulations. (i) Amendment of Award. The Committee may amend, modify or terminate any outstanding Award with the Participant's consent at any time prior to payment or exercise in any manner not inconsistent with the terms of the Plan, including without limitation, (i) to change the date or dates as of which (A) an Option or Stock Appreciation Right becomes exercisable; (B) a Performance Share is deemed earned; (C) Restricted Stock becomes nonforfeitable; or (ii) to cancel and reissue an Award under such different terms and conditions as it determines appropriate, except that an outstanding stock option shall not be amended to reduce its original exercise price other than in connection with a transaction described in Section 5(c). 6 EX-11.1 4 COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11.1 THE CHUBB CORPORATION COMPUTATION OF EARNINGS PER SHARE PERIODS ENDED JUNE 30
Second Quarter Six Months -------------- ------------- 1996 1995 1996 1995 ---- ---- ---- ---- (in millions) Net income.................................. $174.3 $185.0 $325.7 $331.7 After-tax interest expense on 6% guaranteed exchangeable subordinated notes............ 2.5 2.5 4.9 4.9 ------ ------ ------ ------ Net income for computing earnings per share. $176.8 $187.5 $330.6 $336.6 ====== ====== ====== ====== Average number of common shares outstanding. 174.6 174.0 174.6 173.8 Additional shares from assumed conversion of 6% guaranteed exchangeable subordinated notes as if each $1,000 of principal amount had been converted at issuance into 23.256 shares of common stock........ 5.8 5.8 5.8 5.8 ------ ------ ------ ------ Average number of common and common equivalent shares assumed outstanding for computing earnings per share.............. 180.4 179.8 180.4 179.6 ====== ====== ====== ====== Net income per share........................ $ .98 $ 1.04 $ 1.83 $ 1.87
The number of shares and per share amounts have been retroactively adjusted to reflect the two-for-one stock split effective April 19, 1996. EX-27.1 5 FINANCIAL DATA SCHEDULE
7 THE CHUBB CORPORATION Financial Data Schedule(*) (*) This schedule contains summary financial information extracted from the Consolidated Balance Sheets and the Consolidated Statements of Income and is qualified in its entirety by reference to such financial statements. 1,000,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 9,896 2,981 3,104 619 10 0 14,256 6 45 1,263 23,026 12,591 2,560 0 0 1,323 176 0 0 5,099 23,026 2,491 467 37 217 1,708 662 205 408 82 326 0 0 0 326 1.83 0 0 0 0 0 0 0 0 DEBT-HELD-FOR-SALE REPRESENTS FIXED MATURITY INVESTMENTS CLASSIFIED AS AVAILABLE-FOR-SALE AND CARRIED AT MARKET VALUE AS PRESCRIBED BY SFAS NO. 115. DEBT-CARRYING-VALUE REPRESENTS FIXED MATURITY INVESTMENTS CLASSIFIED AS HELD-TO-MATURITY AND CARRIED AT AMORTIZED COST AS PRESCRIBED BY SFAS NO. 115. DEBT-MARKET-VALUE REPRESENTS THE RELATED MARKET VALUE OF FIXED MATURITIES CLASSIFIED AS HELD-TO-MATURITY. RECOVER-REINSURE REPRESENTS REINSURANCE RECOVERABLE ON PAID CLAIMS. POLICY-LOSSES EXCLUDE THE REDUCTIONS FOR REINSURANCE RECOVERABLES ON UNPAID CLAIMS ($1,754) AND POLICY LIABILITIES ($194), AS PRESCRIBED BY SFAS NO. 113. SUCH AMOUNTS ARE INCLUDED IN TOTAL ASSETS. UNEARNED-PREMIUMS EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUMS ($356), AS PRESCRIBED BY SFAS NO. 113. THIS PREPAID AMOUNT IS INCLUDED IN TOTAL ASSETS. NOTES-PAYABLE INCLUDES SHORT-TERM DEBT OF $243 AND LONG-TERM DEBT OF $1,080. OTHER-SE INCLUDES PAID-IN SURPLUS; RETAINED EARNINGS; FOREIGN CURRENCY TRANSLATION LOSSES, NET OF INCOME TAX; UNREALIZED APPRECIATION OF INVESTMENTS, NET; RECEIVABLE FROM ESOP AND TREASURY STOCK. OTHER-INCOME REPRESENTS REVENUES FROM REAL ESTATE OPERATIONS. AMOUNTS FOR SECURITIES ACT INDUSTRY GUIDE 6 AND EXCHANGE ACT INDUSTRY GUIDE 4 DISCLOSURES ARE REQUIRED FOR ANNUAL FILINGS ONLY. ACCORDINGLY, NO AMOUNTS WILL BE REPORTED FOR INTERIM FILINGS.
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