-----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, DARwzmE/GEtaPdND0BwSelyx8YYci/GEkSEqY23LXBSWmLiA9Cm3yGYWkzIrOP3Y Lt4LVWsCYJgUnZa0FkG0Wg== 0000950123-98-003019.txt : 19980330 0000950123-98-003019.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950123-98-003019 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 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-K SEC ACT: SEC FILE NUMBER: 001-08661 FILM NUMBER: 98576451 BUSINESS ADDRESS: STREET 1: 15 MOUNTAIN VIEW RD P O BOX 1615 CITY: WARREN STATE: NJ ZIP: 07061 BUSINESS PHONE: 9805802000 10-K 1 THE CHUBB CORPORATION 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO________ Commission File No. 1-8661
THE CHUBB CORPORATION (Exact name of registrant as specified in its charter) NEW JERSEY 13-2595722 (State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.) organization) 15 MOUNTAIN VIEW ROAD, P.O. BOX 1615 WARREN, NEW JERSEY 07061-1615 (Address of principal executive offices) (Zip Code)
(908) 903-2000 (Registrant's telephone number) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Common Stock, par value $1 per share New York Stock Exchange Series A Participating Cumulative Preferred Stock Purchase Rights New York Stock Exchange (Title of each class) (Name of each exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None (Title of class) 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. . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant was $13,506,798,832 as of March 9, 1998. 168,518,126 Number of shares of common stock outstanding as of March 9, 1998 DOCUMENTS INCORPORATED BY REFERENCE Portions of The Chubb Corporation 1997 Annual Report to Shareholders are incorporated by reference in Parts I, II and IV of this Form 10-K. Portions of the definitive Proxy Statement for the Annual Meeting of Shareholders on April 28, 1998 are incorporated by reference in Part III of this Form 10-K. ================================================================================ 2 PART I. ITEM 1. BUSINESS GENERAL The Chubb Corporation (the Corporation) was incorporated as a business corporation under the laws of the State of New Jersey in June 1967. The Corporation is a holding company with subsidiaries principally engaged in two industries: property and casualty insurance and real estate. On May 13, 1997, the Corporation completed the sale of its life and health insurance subsidiaries to Jefferson-Pilot Corporation. Accordingly, the life and health insurance subsidiaries have been classified as discontinued operations in the consolidated financial statements. The Corporation and its subsidiaries employed approximately 11,000 persons worldwide on December 31, 1997. Revenues, income from continuing operations before income tax and identifiable assets for each industry segment for the three years ended December 31, 1997 are included in Note (14) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1997 Annual Report to Shareholders. The property and casualty insurance subsidiaries provide insurance coverages principally in the United States, Canada, Europe and parts of Australia, Latin America and the Far East. The real estate subsidiaries have no international operations. Revenues, income from operations before income tax and identifiable assets of the property and casualty insurance subsidiaries by geographic area for the three years ended December 31, 1997 are included in Note (15) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1997 Annual Report to Shareholders. PROPERTY AND CASUALTY INSURANCE GROUP The Property and Casualty Insurance Group (the Group) is composed of Federal Insurance Company (Federal), Pacific Indemnity Company (Pacific Indemnity), Vigilant Insurance Company (Vigilant), Great Northern Insurance Company (Great Northern), Chubb Custom Insurance Company (Chubb Custom), Chubb National Insurance Company (Chubb National), Chubb Indemnity Insurance Company (Chubb Indemnity), Chubb Insurance Company of New Jersey (Chubb New Jersey), Texas Pacific Indemnity Company, Northwestern Pacific Indemnity Company, Chubb Insurance Company of Canada, Chubb Insurance Company of Europe, S.A., Chubb Insurance Company of Australia Limited, Chubb do Brasil Companhia de Seguros and Chubb Atlantic Indemnity Ltd. The Group presently underwrites most forms of property and casualty insurance. All members of the Group write non-participating policies. Several members of the Group also write participating policies, particularly in the workers' compensation class of business, under which dividends are paid to the policyholders. Premiums Written An analysis of the Group's premiums written during the past three years is shown in the following table:
DIRECT REINSURANCE REINSURANCE NET PREMIUMS PREMIUMS PREMIUMS PREMIUMS YEAR WRITTEN ASSUMED(A) CEDED(A) WRITTEN - ---- -------- ----------- ----------- -------- (IN MILLIONS) 1995............................. $4,907.3 $747.3 $1,348.6 $4,306.0 1996............................. 5,166.5 436.8 829.5 4,773.8 1997............................. 5,524.4 162.9 239.3 5,448.0
- --------------- (a) Intercompany items eliminated. Reinsurance premiums assumed and ceded decreased in 1996 and 1997 due to changes in reinsurance agreements with the Royal & Sun Alliance Insurance Group plc (Sun Alliance). These changes are described in Note (11) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1997 Annual Report to Shareholders. 2 3 The net premiums written during the last five years for major classes of the Group's business are incorporated by reference from page 16 of the Corporation's 1997 Annual Report to Shareholders. One or more members of the Group are licensed and transact business in each of the 50 states of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, Canada, Europe and parts of Australia, Latin America and the Far East. In 1997, approximately 84% of the Group's direct business was produced in the United States, where the Group's businesses enjoy broad geographic distribution with a particularly strong market presence in the Northeast. The four states accounting for the largest amounts of direct premiums written were New York with 13%, California with 10%, New Jersey with 6% and Pennsylvania with 5%. No other state accounted for 5% or more of such premiums. Approximately 9% of the Group's direct premiums written was produced in Europe and 4% was produced in Canada. Underwriting Results A frequently used industry measurement of property and casualty insurance underwriting results is the combined loss and expense ratio. This ratio is the sum of the ratio of incurred losses and related loss adjustment expenses to premiums earned (loss ratio) plus the ratio of underwriting expenses to premiums written (expense ratio) after reducing both premium amounts by dividends to policyholders. When the combined ratio is under 100%, underwriting results are generally considered profitable; when the combined ratio is over 100%, underwriting results are generally considered unprofitable. Investment income, other non-underwriting income or expense and income taxes are not reflected in the combined ratio. The profitability of property and casualty insurance companies depends on income from both underwriting operations and investments. The net premiums and the loss, expense and combined loss and expense ratios of the Group for the last five years are shown in the following table:
NET PREMIUMS (IN MILLIONS) COMBINED ---------------------- LOSS AND LOSS EXPENSE EXPENSE YEAR WRITTEN EARNED RATIOS RATIOS RATIOS - ---- ------- ------ ------ ------- -------- 1993............................. $ 3,646.3 $ 3,504.8 82.5% 32.3% 114.8% 1994............................. 3,951.2 3,776.3 67.0 32.5 99.5 1995............................. 4,306.0 4,147.2 64.7 32.1 96.8 1996............................. 4,773.8 4,569.3 66.2 32.1 98.3 1997............................. 5,448.0 5,157.4 64.5 32.4 96.9 --------- --------- ------- ------- --------- Total for five years ended December 31, 1997............. $22,125.3 $21,155.0 68.3% 32.3% 100.6% ========= ========= ======= ======= =========
Results for 1993 includes the effects of a $675.0 million increase in unpaid claims related to an agreement for the settlement of asbestos-related litigation and a $125.0 million return premium to the Group related to the commutation of a medical malpractice reinsurance agreement. Excluding the effects of these items, the loss ratio, the expense ratio and the combined loss and expense ratio were 65.5%, 33.5% and 99.0%, respectively, for the year 1993 and 65.5%, 32.5% and 98.0%, respectively, for the five years ended December 31, 1997. The combined loss and expense ratios during the last five years for major classes of the Group's business are incorporated by reference from page 16 of the Corporation's 1997 Annual Report to Shareholders. Another frequently used measurement in the property and casualty insurance industry is the ratio of statutory net premiums written to policyholders' surplus. At December 31, 1997 and 1996, such ratio for the Group was 2.13 and 1.93, respectively. The increase in the ratio in 1997 was due to Federal distributing its investment in a real estate subsidiary to the Corporation in the form of a dividend. 3 4 Producing and Servicing of Business In the United States and Canada, the Group is represented by approximately 3,600 independent agents and accepts business on a regular basis from an estimated 450 insurance brokers. In most instances, these agents and brokers also represent other companies which compete with the Group. The offices maintained by the Group assist these agents and brokers in producing and servicing the Group's business. In addition to the administrative offices in Warren, New Jersey, the Group operates 5 zone offices and 61 branch and service offices in the United States and Canada. The Group's overseas business is developed by its foreign agents and brokers through local branch offices of the Group and by its United States and Canadian agents and brokers. Overseas business was also obtained from reinsurance assumed on a quota share basis from certain subsidiaries of Sun Alliance. Effective January 1, 1997, this reinsurance agreement was terminated. In conducting its overseas business, the Group reduces the risks relating to currency fluctuations by maintaining investments in those foreign currencies in which the Group transacts business, with characteristics similar to the liabilities in those currencies. The net asset or liability exposure to the various foreign currencies is regularly reviewed. Business for the Group is also produced through participation in a number of underwriting pools and syndicates including, among others, Associated Aviation Underwriters, Cargo Reinsurance Association, American Cargo War Risk Reinsurance Exchange and American Accident Reinsurance Group. Such pools and syndicates provide underwriting capacity for risks which an individual insurer cannot prudently underwrite because of the magnitude of the risk assumed or which can be more effectively handled by one organization due to the need for specialized loss control and other services. Reinsurance In accordance with the normal practice of the insurance industry, the Group assumes and cedes reinsurance with other insurers or reinsurers. These reinsurance arrangements provide greater diversification of business and minimize the Group's maximum net loss arising from large risks or from hazards of potential catastrophic events. A large portion of the Group's reinsurance is effected under contracts known as treaties under which all risks meeting prescribed criteria are automatically covered. For many years, a portion of the insurance business written by the Group was reinsured on a quota share basis with a subsidiary of Sun Alliance. Effective January 1, 1997, this reinsurance agreement was terminated. Additional information related to the Group's ceded reinsurance with the subsidiary of Sun Alliance is included in Note (11) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1997 Annual Report to Shareholders and in Item 7 on pages 17 and 18 of this report. Most of the Group's remaining treaty reinsurance arrangements consist of excess of loss and catastrophe contracts with other insurers or reinsurers which protect against a specified part or all of certain types of losses over stipulated amounts arising from any one occurrence or event. In certain circumstances, reinsurance is also effected by negotiation on individual risks. The amount of each risk retained by the Group is subject to maximum limits which vary by line of business and type of coverage. Retention limits are continually reviewed and are revised periodically as the Group's capacity to underwrite risks changes. Additional information related to the Group's reinsurance programs is included in Item 7 of this report on pages 17 and 18. Reinsurance contracts do not relieve the Group of its obligation to the policyholders. The collectibility of reinsurance is subject to the solvency of the reinsurers. The Group is selective in regard to its reinsurers, placing reinsurance with only those reinsurers with strong balance sheets and superior underwriting ability. The Group monitors the financial strength of its reinsurers on an ongoing basis. As a result, uncollectible amounts have not been significant. The Group has an exposure to insured losses caused by hurricanes, earthquakes, winter storms, windstorms and other catastrophic events. The frequency and severity of catastrophes are unpredict- 4 5 able. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. The Group continually assesses its concentration of underwriting exposures in catastrophe prone areas and develops strategies to manage this exposure through individual risk selection, subject to regulatory constraints, and through the purchase of catastrophe reinsurance. The Group has invested in modeling techniques that allow it to better monitor catastrophe exposures. In addition, the Group maintains records showing concentrations of risk in catastrophe prone areas such as California (earthquake and brush fires) and the Southeast coast of the United States (hurricanes). In recent years, the Group has increased its initial retention limit for each catastrophic event. The Group has also raised its reinsurance coverage limits for each event. The Group's current principal catastrophe reinsurance program provides coverage for individual catastrophic events of approximately 73% of losses between $100.0 million and $450.0 million. Unpaid Claims and Claim Adjustment Expenses and Related Amounts Recoverable from Reinsurers Insurance companies are required to establish a liability in their accounts for the ultimate costs (including claim adjustment expenses) of claims which have been reported but not settled and of claims which have been incurred but not reported. Insurance companies are also required to report as assets the portion of such liability that will be recovered from reinsurers. The process of establishing the liability for unpaid claims and claim adjustment expenses is an imprecise science subject to variables that are influenced by both internal and external factors. This is true because claim settlements to be made in the future will be impacted by changing rates of inflation (particularly medical cost inflation) and other economic conditions, changing legislative, judicial and social environments and changes in the Group's claim handling procedures. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss to the Group and the settlement of the loss. Approximately 60% of the Group's net unpaid claims and claim adjustment expenses at December 31, 1997 were for IBNR--claims which had not yet been reported to the Group, some of which were not yet known to the insured, and future development on reported claims. In spite of this imprecision, financial reporting requirements dictate that insurance companies report a single amount as the estimate of unpaid claims and claim adjustment expenses as of each evaluation date. These estimates are continually reviewed and updated. Any resulting adjustments are reflected in current operating results. The Group's estimates of losses for reported claims are established judgmentally on an individual case basis. Such estimates are based on the Group's particular experience with the type of risk involved and its knowledge of the circumstances surrounding each individual claim. These estimates are reviewed on a regular basis or as additional facts become known. The reliability of the estimation process is monitored through comparison with ultimate settlements. The Group's estimates of losses for unreported claims are principally derived from analyses of historical patterns of the development of paid and reported losses by accident year for each class of business. This process relies on the basic assumption that past experience, adjusted for the effects of current developments and likely trends, is an appropriate basis for predicting future outcomes. For certain classes of business where anticipated loss experience is less predictable because of the small number of claims and/or erratic claim severity patterns, the Group's estimates are based on both expected and actual reported losses. Salvage and subrogation estimates are developed from patterns of actual recoveries. The Group's estimates of unpaid claim adjustment expenses are based on analyses of the relationship of projected ultimate claim adjustment expenses to projected ultimate losses for each class of business. Claim staff has discretion to override these expense formulas where judgment indicates such action is appropriate. The Group's estimates of reinsurance recoverable related to reported and unreported claims and claim adjustment expenses represent the portion of such liabilities that will be recovered from reinsurers. Amounts recoverable from reinsurers are recognized as assets at the same time and in a manner consistent with the liabilities associated with the reinsured policies. 5 6 The anticipated effect of inflation is implicitly considered when estimating liabilities for unpaid claims and claim adjustment expenses. Estimates of the ultimate value of all unpaid claims are based in part on the development of paid losses, which reflect actual inflation. Inflation is also reflected in the case estimates established on reported open claims which, when combined with paid losses, form another basis to derive estimates of reserves for all unpaid claims. There is no precise method for subsequently evaluating the adequacy of the consideration given to inflation, since claim settlements are affected by many factors. The following table provides a reconciliation of the beginning and ending liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, and a reconciliation of the ending net liability to the corresponding liability on a gross basis for the years ended December 31, 1997, 1996 and 1995:
YEARS ENDED DECEMBER 31 ------------------------------ 1997 1996 1995 ---- ---- ---- (IN MILLIONS) Net liability, beginning of year....................... $7,755.9 $7,614.5 $6,932.9 ------- ------- ------- Net incurred claims and claim adjustment expenses Provision for claims occurring in the current year... 3,372.3 3,053.6 2,705.8 Decrease in estimates for claims occurring in prior years............................................. (65.3) (42.8) (35.8) ------- ------- ------- 3,307.0 3,010.8 2,670.0 ------- ------- ------- Net payments for claims and claim expenses related to Current year......................................... 1,080.0 980.0 737.7 Prior years.......................................... 1,418.3 1,889.4 1,250.7 ------- ------- ------- 2,498.3 2,869.4 1,988.4 ------- ------- ------- Net liability, end of year............................. 8,564.6 7,755.9 7,614.5 Reinsurance recoverable, end of year................... 1,207.9 1,767.8 1,973.7 ------- ------- ------- Gross liability, end of year........................... $9,772.5 $9,523.7 $9,588.2 ======= ======= =======
As reestimated at December 31, 1997, the liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, as established at the previous year-end was redundant by $65.3 million. This compares with favorable development of $42.8 million and $35.8 million during 1996 and 1995, respectively. Such redundancies were reflected in the Group's operating results in these respective years. Each of the past three years benefited from favorable claim severity trends for certain liability classes; this was offset each year in varying degrees by increases in claims and claim adjustment expenses relating to asbestos and toxic waste claims. As a result of the changes to the reinsurance agreements with Sun Alliance, there were portfolio transfers of gross loss reserves and reinsurance recoverable as of January 1, 1996 and 1997. The effect of these portfolio transfers was a decrease in gross loss reserves of $183.8 million and $209.3 million and a decrease in reinsurance recoverable of $470.0 million and $244.3 million in 1997 and 1996, respectively. Unpaid claims and claim adjustment expenses, net of reinsurance recoverable, increased by $808.7 million in 1997 compared with $141.4 million and $681.6 million in 1996 and 1995, respectively. The 1996 increase would have been greater except that loss reserves were reduced as the result of significant payments during the year related to the settlement of asbestos-related claims against Fibreboard Corporation. The Fibreboard reserves and related loss payments are presented in the table on page 7. The Fibreboard settlement is further discussed in Item 7 of this report on pages 21 and 22. Excluding the Fibreboard reserves and the effect of the portfolio transfers, loss reserves, net of reinsurance recoverable, increased by $516.5 million or 7% in 1997, $562.9 million or 9% in 1996, and $731.8 million or 12% in 1995. Substantial reserve growth has occurred each year in those liability classes, primarily excess liability and executive protection, that are characterized by delayed loss 6 7 reporting and extended periods of settlement. These coverages represent a significant portion of the Group's business. The Group continues to emphasize early and accurate reserving, inventory management of claims and suits, and control of the dollar value of settlements. The number of outstanding claims at year-end 1997 was approximately 3% higher than the number at year-end 1996, which was in turn 7% higher than that at year-end 1995. Such increases were due in part to a shift for certain liability classes toward a book of business with more frequent and less severe claims, offset somewhat in 1997 by a significantly lower number of outstanding property claims at year-end 1997 due to the absence of catastrophes toward the end of the year. The uncertainties relating to unpaid claims, particularly for asbestos and toxic waste claims on insurance policies written many years ago, are discussed in Item 7 of this report on pages 21 through 24. The following table provides a reconciliation of the beginning and ending liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, related to asbestos and toxic waste claims for the years ended December 31, 1997, 1996 and 1995. Reinsurance recoveries related to such claims are not significant.
YEARS ENDED DECEMBER 31 ------------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------- ------------------------------ ------------------------------ FIBREBOARD ALL FIBREBOARD ALL FIBREBOARD ALL RELATED OTHER TOTAL RELATED OTHER TOTAL RELATED OTHER TOTAL ---------- ----- ----- ---------- ----- ----- ---------- ----- ----- (IN MILLIONS) Net liability, beginning of year........................ $542.7 $415.9 $ 958.6 $999.2 $343.8 $1,343.0 $1,049.4 $240.9 $1,290.3 Net incurred claims and claim adjustment expenses......... 6.0 119.2 125.2 5.0 145.7 150.7 10.0 171.8 181.8 Net payments for claims....... -- (8.6)(a) (8.6) 461.5 73.6 535.1 60.2 68.9 129.1 ------ ------ -------- ------ ------ -------- -------- ------ -------- Net liability, end of year.... $548.7 $543.7 $1,092.4 $542.7 $415.9 $ 958.6 $ 999.2 $343.8 $1,343.0 ====== ====== ======== ====== ====== ======== ======== ====== ========
(a) As a result of the termination of the reinsurance agreements with Sun Alliance, there was a portfolio transfer of asbestos and toxic waste loss reserves as of January 1, 1997. The effect of the portfolio transfer was to increase loss reserves by $55.6 million and decrease paid losses by the same amount. The loss portfolio transfer had no effect on incurred claims and claim adjustment expenses. There were approximately 3,700 asbestos claims outstanding at December 31, 1997 compared with 3,900 asbestos claims outstanding at December 31, 1996 and 4,700 asbestos claims outstanding at December 31, 1995. In 1997, approximately 1,300 claims were opened and 1,500 claims were closed. In 1996, approximately 1,800 claims were opened and 2,600 claims were closed. In 1995, approximately 2,600 claims were opened and 1,300 claims were closed. Generally, an asbestos claim is established for each lawsuit against an insured where potential liability has been determined to exist under a policy issued by a member of the Group. However, when multiple insurers respond to one or more lawsuits involving an insured and a member of the Group is not the principal insurer in directing the litigation, generally, all asbestos litigation involving that insured is counted as one claim. Therefore, a counted claim can have from one to thousands of claimants. As a result, management does not believe the above claim count data is meaningful for analysis purposes. Indemnity payments per claim have varied over time due primarily to wide variations in insureds, policy terms and types of claims. Management cannot predict whether indemnity payments per claim will increase, decrease or remain the same. There were approximately 800 toxic waste claims outstanding at December 31, 1997 and 1996 and 700 toxic waste claims outstanding at December 31, 1995. Approximately 300 claims were opened in 1997, 400 claims were opened in 1996 and 300 claims were opened in 1995. There were approximately 300 claims closed in 1997 and 1996 and 200 claims closed in 1995. Generally, a toxic waste claim is established for each lawsuit, or alleged equivalent, against an insured where potential liability has been determined to exist under a policy issued by a member of the Group. Because indemnity payments to date for toxic waste claims have not been significant in the aggregate and have varied from claim to claim, management cannot determine whether past claims experience will prove to be representative of future claims experience. 7 8 The table on page 9 presents the subsequent development of the estimated year-end liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, for the ten years prior to 1997. The top line of the table shows the estimated liability for unpaid claims and claim adjustment expenses recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and loss adjustment expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Group. The upper section of the table shows the reestimated amount of the previously recorded net liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims for each individual year. The increase or decrease is reflected in the current year's operating results. The "cumulative deficiency (redundancy)" as shown in the table represents the aggregate change in the reserve estimates from the original balance sheet dates through December 31, 1997. The amounts noted are cumulative in nature; that is, an increase in a loss estimate that related to a prior period occurrence generates a deficiency in each intermediate year. For example, a deficiency recognized in 1993 relating to losses incurred prior to December 31, 1987, such as the $675.0 million increase in loss reserves related to the Fibreboard settlement, would be included in the cumulative deficiency amount for each year in the period 1987 through 1992. Yet, the deficiency would be reflected in operating results only in 1993. The effect of changes in estimates of the liabilities for claims occurring in prior years on income before income taxes in each of the past three years is shown in the reconciliation table on page 6. In each of the years 1987 through 1996, there was favorable development for certain liability classes as the result of favorable claim severity trends. In each of these years, this favorable development was offset, in varying degrees, by unfavorable development related to additional provisions for asbestos and toxic waste claims. The years 1987 through 1992 in particular reflect the effects of the $675.0 million increase in loss reserves related to the Fibreboard settlement. The cumulative net deficiencies experienced relating to asbestos and toxic waste claims were also, to varying degrees, the result of: (1) an increase in the actual number of claims filed; (2) an increase in the number of unasserted claims estimated; (3) an increase in the severity of actual and unasserted claims; and (4) an increase in litigation costs associated with such claims. Conditions and trends that have affected development of the liability for unpaid claims and claim adjustment expenses in the past will not necessarily recur in the future. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies based on the data in this table. The middle section of the table on page 9 shows the cumulative amount paid with respect to the reestimated liability as of the end of each succeeding year. For example, in the 1987 column, as of December 31, 1997 the Group had paid $2,954.1 million of the currently estimated $4,420.0 million of claims and claim adjustment expenses that were unpaid at the end of 1987; thus, an estimated $1,465.9 million of losses incurred through 1987 remain unpaid as of December 31, 1997, approximately 75% of which relates to asbestos and toxic waste claims. The lower section of the table on page 9 shows the gross liability, reinsurance recoverable and net liability recorded at each year-end beginning with 1992 and the reestimation of these amounts as of December 31, 1997. Amounts for years prior to the implementation of Statement of Financial Accounting Standards No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts, have not been presented. 8 9 ANALYSIS OF CLAIM AND CLAIM ADJUSTMENT EXPENSE DEVELOPMENT
DECEMBER 31 --------------------------------------------------------------------------------------- YEAR ENDED 1987 1988 1989 1990 1991 1992 1993 1994 1995 ---------- ---- ---- ---- ---- ---- ---- ---- ---- ---- (IN MILLIONS) Net Liability for Unpaid Claims and Claim Adjustment Expenses............ $2,818.6 $3,374.3 $3,880.1 $4,301.1 $4,743.9 $5,267.6 $6,450.0 $6,932.9 $7,614.5 Net Liability Reestimated as of: One year later...................... 2,776.9 3,360.5 3,846.2 4,272.3 4,716.3 5,932.4 6,420.3 6,897.1 7,571.7 Two years later..................... 2,835.9 3,336.0 3,854.2 4,244.7 5,368.5 5,904.1 6,363.1 6,874.5 7,520.9 Three years later................... 2,831.0 3,359.8 3,839.8 4,933.0 5,336.5 5,843.5 6,380.4 6,829.8 Four years later.................... 2,891.7 3,385.1 4,567.4 4,941.7 5,302.6 5,894.6 6,338.1 Five years later.................... 2,961.0 4,203.9 4,602.5 4,969.5 5,389.5 5,863.3 Six years later..................... 3,897.2 4,265.2 4,686.3 5,079.3 5,375.3 Seven years later................... 3,993.7 4,387.6 4,800.4 5,094.2 Eight years later................... 4,157.1 4,522.5 4,817.2 Nine years later.................... 4,304.9 4,550.7 Ten years later..................... 4,420.0 Cumulative Net Deficiency (Redundancy)......................... 1,601.4 1,176.4 937.1 793.1 631.4 595.7 (111.9) (103.1) (93.6) Cumulative Net Deficiency Related to Asbestos and Toxic Waste Claims...... 2,121.3 2,030.3 1,901.3 1,756.3 1,508.5 1,348.6 572.9 457.7 275.9 Cumulative Amount of Net Liability Paid as of: One year later...................... 694.7 761.6 880.4 919.1 931.2 1,039.9 1,272.0 1,250.7 1,889.4 Two years later..................... 1,108.3 1,226.3 1,383.9 1,407.2 1,479.9 1,858.5 1,985.7 2,550.7 2,678.2 Three years later................... 1,419.1 1,555.1 1,715.9 1,808.7 2,083.0 2,332.3 3,015.8 3,073.7 Four years later.................... 1,651.6 1,778.8 1,958.6 2,292.0 2,386.9 3,181.4 3,264.5 Five years later.................... 1,818.2 1,966.1 2,346.9 2,490.2 3,125.8 3,323.0 Six years later..................... 1,961.9 2,307.9 2,500.9 3,174.7 3,200.4 Seven years later................... 2,281.0 2,422.7 3,120.6 3,200.4 Eight years later................... 2,370.5 3,009.5 3,126.5 Nine years later.................... 2,952.4 3,014.2 Ten years later..................... 2,954.1 Gross Liability, End of Year.......... $7,220.9 $8,235.4 $8,913.2 $9,588.2 Reinsurance Recoverable, End of Year................................ 1,953.3 1,785.4 1,980.3 1,973.7 ------- ------- ------- ------- Net Liability, End of Year............ $5,267.6 $6,450.0 $6,932.9 $7,614.5 ======= ======= ======= ======= Reestimated Gross Liability........... $7,869.1 $8,340.7 $9,020.2 $9,647.0 Reestimated Reinsurance Recoverable... 2,005.8 2,002.6 2,190.4 2,126.1 ------- ------- ------- ------- Reestimated Net Liability............. $5,863.3 $6,338.1 $6,829.8 $7,520.9 ======= ======= ======= ======= Cumulative Gross Deficiency (Redundancy)........................ $ 648.2 $ 105.3 $ 107.0 $ 58.8 ======= ======= ======= ======= DECEMBER 31 ----------------- YEAR ENDED 1996 1997 ---------- ---- ---- Net Liability for Unpaid Claims and Claim Adjustment Expenses............ $7,755.9 $8,564.6 Net Liability Reestimated as of: One year later...................... 7,690.6 Two years later..................... Three years later................... Four years later.................... Five years later.................... Six years later..................... Seven years later................... Eight years later................... Nine years later.................... Ten years later..................... Cumulative Net Deficiency (Redundancy)......................... (65.3) Cumulative Net Deficiency Related to Asbestos and Toxic Waste Claims...... 125.2 Cumulative Amount of Net Liability Paid as of: One year later...................... 1,418.3 Two years later..................... Three years later................... Four years later.................... Five years later.................... Six years later..................... Seven years later................... Eight years later................... Nine years later.................... Ten years later..................... Gross Liability, End of Year.......... $9,523.7 $9,772.5 Reinsurance Recoverable, End of Year................................ 1,767.8 1,207.9 ------- ------- Net Liability, End of Year............ $7,755.9 $8,564.6 ======= ======= Reestimated Gross Liability........... $9,519.3 Reestimated Reinsurance Recoverable... 1,828.7 ------- Reestimated Net Liability............. $7,690.6 ======= Cumulative Gross Deficiency (Redundancy)........................ $ (4.4) =======
- --------------- The cumulative deficiencies for the years 1987 through 1992 include the effect of the $675.0 million increase in claims and claim adjustment expenses related to the Fibreboard settlement. 9 10 Members of the Group are required to file annual statements with insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis). The differences between the liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, reported in the accompanying consolidated financial statements in accordance with generally accepted accounting principles (GAAP) and that reported in the annual statutory statements of the U.S. subsidiaries are as follows:
DECEMBER 31 -------------------- 1997 1996 ---- ---- (IN MILLIONS) Net liability reported on a statutory basis -- U.S. subsidiaries.............................................. $8,086.3 $7,305.2 Additions (reductions): Unpaid claims and claim adjustment expenses of foreign subsidiaries........................................... 553.9 528.8 Other reserve differences................................. (75.6) (78.1) -------- -------- Net liability reported on a GAAP basis...................... $8,564.6 $7,755.9 ======== ========
Investments Investment decisions are centrally managed by investment professionals based on guidelines established by management and approved by the board of directors for each member of the Group. The main objectives in managing the investment portfolio of the Group are to maximize after-tax investment income and total investment returns while minimizing credit risks in order to provide maximum support to the insurance underwriting operations. To accomplish this, the investment function must be highly integrated with the operating functions and capable of responding to the changing conditions in the marketplace. Investment strategies are developed based on many factors including underwriting results and the Group's resulting tax position, regulatory requirements, fluctuations in interest rates and consideration of other market risks. The investment portfolio of the Group is primarily comprised of high quality bonds, principally tax-exempt, U.S. Treasury, government agency, mortgage-backed securities and corporate issues. In addition, the portfolio includes equity securities held primarily with the objective of capital appreciation. In 1997, the Group invested new cash primarily in tax-exempt bonds and, to a lesser extent, corporate bonds and mortgage-backed securities. In 1996, the Group invested new cash primarily in mortgage-backed securities and tax-exempt bonds. In 1995, the Group invested new cash primarily in tax-exempt bonds. In each year, the Group tried to achieve the appropriate mix in its portfolio to balance both investment and tax strategies. At December 31, 1997 and 1996, 68% of the Group's fixed maturity portfolio was invested in tax-exempt bonds compared with 73% at December 31, 1995. The investment results of the Group for each of the past three years are shown in the following table.
AVERAGE PERCENT EARNED INVESTED INVESTMENT ---------------------- YEAR ASSETS(A) INCOME(B) BEFORE TAX AFTER TAX - ---- --------- ---------- ---------- --------- (IN MILLIONS) 1995............................. $ 9,342.3 $603.0 6.5% 5.4% 1996............................. 10,333.8 646.1 6.3 5.3 1997............................. 11,725.9 711.2 6.1 5.1
- --------------- (a) Average of amounts for the years presented with fixed maturity securities at amortized cost and equity securities at market value. (b) Investment income after deduction of investment expenses, but before applicable income tax. 10 11 CHUBB & SON INC. Chubb & Son Inc., a wholly-owned subsidiary of the Corporation, was incorporated in 1959 under the laws of New York as a successor to the partnership of Chubb & Son which was organized in 1882 by Thomas Caldecot Chubb to act as underwriter and manager of insurance companies. Through December 31, 1997, Chubb & Son Inc. was the manager of Federal, Vigilant, Great Northern, Chubb Custom, Chubb National, Chubb Indemnity and Chubb New Jersey and also provided certain services to Pacific Indemnity and other members of the Property and Casualty Insurance Group for which it was reimbursed. Acting subject to the supervision and control of the Boards of Directors of the members of the Group, Chubb & Son Inc. provided day to day executive management and operating personnel and made available the economy and flexibility inherent in the common operation of a group of insurance companies. On December 31, 1997, all management and service agreements between Chubb & Son Inc. and the insurers listed above were terminated. Effective January 1, 1998, Federal became the manager of Vigilant, Pacific Indemnity, Great Northern, Chubb National, Chubb Indemnity and Chubb New Jersey. The terms of the new management agreements are substantially similar to the management agreements previously in effect with Chubb & Son Inc. The employees of Chubb & Son Inc. were transferred to the newly-constituted Chubb & Son division of Federal, which now performs the management and other services previously performed by Chubb & Son Inc. REAL ESTATE GROUP The Real Estate Group is composed of Bellemead Development Corporation and its subsidiaries. The Real Estate Group is involved in commercial development activities primarily in New Jersey and residential development activities primarily in central Florida. In October 1996, the Corporation announced that it was exploring the possible sale of all or a portion of its real estate assets. In March 1997, the Corporation entered into an agreement with a prospective purchaser to perform due diligence in anticipation of executing a contract for the sale of substantially all of its commercial properties. In June 1997, a definitive agreement was reached with the purchaser. In November, the sale of almost all of the properties covered by the agreement reached in June was closed for $736.9 million. The buyer is a joint venture formed by Paine Webber Real Estate Securities Inc., Morgan Stanley Real Estate Fund II, L.P. and Gale & Wentworth, L.L.C. Closing on the few remaining properties under the agreement is expected to occur in 1998. In addition to the November sale to the joint venture, several other commercial properties as well as residential properties were sold in 1997. The Corporation is continuing to explore the sale of certain of its remaining properties. The Corporation plans to retain approximately $375.0 million of undeveloped land which is expected to be developed in the future. In addition, the Corporation plans to retain certain properties and land parcels under lease. Additional information related to the Corporation's real estate operations is included in Item 7 of this report on pages 27 and 28. DISCONTINUED OPERATIONS On May 13, 1997, the Corporation completed the sale of Chubb Life Insurance Company of America and its subsidiaries, Chubb Colonial Life Insurance Company and Chubb Sovereign Life Insurance Company, to Jefferson-Pilot Corporation for $875.0 million in cash, subject to various closing adjustments, none of which were material. In 1996, the Corporation recognized a loss of $22.0 million related to the sale of the life and health insurance subsidiaries. The purchase price was not adjusted to reflect results of operations subsequent to December 31, 1996. Therefore, the discontinued life and health insurance operations did not affect the Corporation's net income in 1997 and will not affect net income in future periods. Earnings from the discontinued life and health insurance operations were $48.5 million and $42.2 million, including realized investment gains of $8.2 million and $14.2 million, in 1996 and 1995, respectively. 11 12 REGULATION, PREMIUM RATES AND COMPETITION The Corporation is a holding company with subsidiaries primarily engaged in the property and casualty insurance business and is therefore subject to regulation by certain states as an insurance holding company. All states have enacted legislation which regulates insurance holding company systems such as the Corporation and its subsidiaries. This legislation generally provides that each insurance company in the system is required to register with the department of insurance of its state of domicile and furnish information concerning the operations of companies within the holding company system which may materially affect the operations, management or financial condition of the insurers within the system. All transactions within a holding company system affecting insurers must be fair and equitable. Notice to the insurance commissioners is required prior to the consummation of transactions affecting the ownership or control of an insurer and of certain material transactions between an insurer and any person in its holding company system and, in addition, certain of such transactions cannot be consummated without the commissioners' prior approval. The Property and Casualty Insurance Group is subject to regulation and supervision in the states in which it does business. In general, such regulation is for the protection of policyholders rather than shareholders. The extent of such regulation varies but generally has its source in statutes which delegate regulatory, supervisory and administrative powers to a department of insurance. The regulation, supervision and administration relate to, among other things, the standards of solvency which must be met and maintained; the licensing of insurers and their agents; restrictions on insurance policy terminations; unfair trade practices; the nature of and limitations on investments; premium rates; restrictions on the size of risks which may be insured under a single policy; deposits of securities for the benefit of policyholders; approval of policy forms; periodic examinations of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of companies or for other purposes; limitations on dividends to policyholders and shareholders; and the adequacy of provisions for unearned premiums, unpaid claims and claim adjustment expenses, both reported and unreported, and other liabilities. The extent of insurance regulation on business outside the United States varies significantly among the countries in which the Group operates. Some countries have minimal regulatory requirements, while others regulate insurers extensively. Foreign insurers in many countries are faced with greater restrictions than domestic competitors. In certain countries, the Group has incorporated insurance subsidiaries locally to improve its position. In December 1993, the National Association of Insurance Commissioners adopted a risk-based capital formula for property and casualty insurance companies. This formula is used by state regulatory authorities to identify insurance companies which may be undercapitalized and which merit further regulatory attention. The formula prescribes a series of risk measurements to determine a minimum capital amount for an insurance company, based on the profile of the individual company. The ratio of a company's actual policyholders' surplus to its minimum capital requirement will determine whether any state regulatory action is required. At December 31, 1997, each member of the Group had more than sufficient capital to meet the risk-based capital requirement. Regulatory requirements applying to premium rates vary from state to state, but generally provide that rates not be "excessive, inadequate or unfairly discriminatory." Rates for many lines of business, including automobile and homeowners insurance, are subject to prior regulatory approval in many states. However, in certain states, prior regulatory approval of rates is not required for most lines of insurance which the Group underwrites. Ocean marine insurance rates are exempt from regulation. Subject to regulatory requirements, the Group's management determines the prices charged for its policies based on a variety of factors including claim and claim adjustment expense experience, inflation, tax law and rate changes, and anticipated changes in the legal environment, both judicial and legislative. Methods for arriving at prices vary by type of business, exposure assumed and size of risk. Underwriting profitability is affected by the accuracy of these assumptions, by the willingness of 12 13 insurance regulators to approve changes in those rates which they control and by such other matters as underwriting selectivity and expense control. The property and casualty insurance industry is highly competitive both as to price and service. Members of the Group compete not only with other stock companies but also with mutual companies, other underwriting organizations and alternative risk sharing mechanisms. Some competitors obtain their business at a lower cost through the use of salaried personnel rather than independent agents and brokers. Rates are not uniform for all insurers and vary according to the types of insurers and methods of operation. The Group competes for business not only on the basis of price, but also on the basis of availability of coverage desired by customers and quality of service, including claim adjustment service. The Group's products and services are generally designed to serve specific customer groups or needs and to offer a degree of customization that is of value to the insured. There are more than 3,000 property and casualty insurance companies in the United States operating independently or in groups and no single company or group is dominant. According to A.M. Best, the Group is the 12th largest United States property and casualty insurance group based on 1996 net premiums written. The relatively large size and underwriting capacity of the Group provide opportunities not available to smaller companies. The property and casualty insurance industry in the United States has a history of cyclical performance with successive periods of deterioration and improvement over time. Price competition increased in the property and casualty marketplace during 1987 and has continued through 1997, particularly in the commercial classes. The Group continues to be selective in the writing of new business and to reinforce the sound relationships with customers who appreciate the stability, expertise and added value the Group provides. In all states, insurers authorized to transact certain classes of property and casualty insurance are required to become members of an insolvency fund. In the event of the insolvency of a licensed insurer writing a class of insurance covered by the fund in the state, all members are assessed to pay certain claims against the insolvent insurer. Fund assessments are proportionately based on the members' written premiums for the classes of insurance written by the insolvent insurer. A portion of these assessments is recovered in certain states through premium tax offsets and policyholder surcharges. In 1997, such assessments to the members of the Group amounted to approximately $2.3 million. The amount of future assessments cannot be reasonably estimated. State insurance regulation requires insurers to participate in assigned risk plans, reinsurance facilities and joint underwriting associations, which are mechanisms that generally provide applicants with various basic insurance coverages when they are not available in voluntary markets. Such mechanisms are most prevalent for automobile and workers' compensation insurance, but a majority of states also mandate participation in Fair Plans or Windstorm Plans, which provide basic property coverages. Some states also require insurers to participate in facilities that provide homeowners and crime insurance. Participation is based upon the amount of a company's voluntary written premiums in a particular state for the classes of insurance involved. These involuntary market plans generally are underpriced and produce unprofitable underwriting results. In several states, insurers, including members of the Group, participate in market assistance plans. Typically, a market assistance plan is voluntary, of limited duration and operates under the supervision of the insurance commissioner to provide assistance to applicants unable to obtain commercial and personal liability and property insurance. The assistance may range from identifying sources where coverage may be obtained to pooling of risks among the participating insurers. Although the federal government and its regulatory agencies generally do not directly regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways. Current and proposed federal measures which may significantly affect the insurance business include securities litigation reform, tort reform, hazardous waste removal and liability measures, containment of medical costs, employee benefits regulation, automobile safety regulation, financial services 13 14 deregulation including the removal of barriers preventing banks from engaging in the insurance business and the taxation of insurance companies. Insurance companies are also affected by a variety of state and federal legislative and regulatory measures as well as by decisions of their courts that define and extend the risks and benefits for which insurance is provided. These include redefinitions of risk exposure in areas such as product liability and commercial general liability as well as extension and protection of employee benefits, including pension, workers' compensation and disability benefits. Legislative and judicial developments pertaining to asbestos and toxic waste exposures are discussed in Item 7 of this report on pages 21 through 24. ITEM 2. PROPERTIES The executive offices of the Corporation and the administrative offices of the Property and Casualty Group are in Warren, New Jersey. The Real Estate Group's corporate headquarters is located in Roseland, New Jersey. The Property and Casualty Insurance Group maintains zone administrative and branch offices in major cities throughout the United States and also has offices in Canada, Europe, Australia, the Far East and Latin America. Office facilities are leased with the exception of a building in Branchburg, New Jersey. Management considers its office facilities suitable and adequate for the current level of operations. See Note (12) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1997 Annual Report to Shareholders. ITEM 3. LEGAL PROCEEDINGS The Corporation and its subsidiaries are defendants in various lawsuits arising out of their businesses. It is the opinion of management that the final outcome of these matters will not materially affect the consolidated financial position of the registrant. Information regarding certain litigation to which property and casualty insurance subsidiaries of the Corporation are a party is included in Item 7 of this report on pages 21 through 24. 14 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the shareholders during the last quarter of the year ended December 31, 1997. EXECUTIVE OFFICERS OF THE REGISTRANT
YEAR OF AGE(A) ELECTION(B) ------ ----------- Dean R. O'Hare, Chairman of the Corporation................. 55 1972 Douglas A. Batting, Executive Vice President of Chubb & Son Inc.(c)................................................... 55 1996 John P. Cavoores, Executive Vice President of Chubb & Son Inc.(c)................................................... 40 1996 Robert P. Crawford, Jr., Executive Vice President of the Corporation(d)............................................ 56 1994 John J. Degnan, President of the Corporation................ 53 1994 Gail E. Devlin, Senior Vice President of the Corporation.... 59 1981 Edward Dunlop, Senior Vice President of the Corporation(d)............................................ 57 1995 David S. Fowler, Senior Vice President of the Corporation... 52 1989 Henry G. Gulick, Vice President and Secretary of the Corporation............................................... 54 1975 David B. Kelso, Executive Vice President of the Corporation............................................... 45 1996 Charles M. Luchs, Executive Vice President of Chubb & Son Inc.(c)................................................... 58 1996 Andrew A. McElwee, Jr., Senior Vice President of the Corporation............................................... 43 1997 Glenn A. Montgomery, Senior Vice President of the Corporation............................................... 45 1997 Thomas F. Motamed, Executive Vice President of the Corporation............................................... 49 1997 Donn H. Norton, Executive Vice President of the Corporation............................................... 56 1985 Michael O'Reilly, Executive Vice President of the Corporation............................................... 54 1976 Robert Rusis, Senior Vice President and General Counsel of the Corporation........................................... 64 1990 Henry B. Schram, Senior Vice President of the Corporation... 51 1985
- --------------- (a) Ages listed above are as of April 28, 1998. (b) Date indicates year first elected or designated as an executive officer. (c) In connection with the establishment of the Chubb & Son division of Federal Insurance Company, Messrs. Batting, Cavoores and Luchs were elected Executive Vice Presidents of the Chubb & Son division of Federal effective January 1, 1998. (d) Messrs. Crawford and Dunlop retired as executive officers of the registrant effective December 31, 1997. All of the foregoing officers serve at the pleasure of the Board of Directors of the Corporation or listed subsidiary and have been employees of the Corporation or a subsidiary of the Corporation for more than five years except for David B. Kelso. Prior to joining Chubb in 1996, Mr. Kelso was Executive Vice President of First Commerce Corporation in New Orleans, where he had also served as Chief Financial Officer. Mr. Kelso was previously a partner and head of the North American Banking Practice for The MAC Group (now known as Gemini Consulting), an international general management consulting firm. 15 16 PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Incorporated by reference from the Corporation's 1997 Annual Report to Shareholders, page 62. ITEM 6. SELECTED FINANCIAL DATA Selected financial data for the five years ended December 31, 1997 are incorporated by reference from the Corporation's 1997 Annual Report to Shareholders, pages 36 and 37. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion presents our past results and our expectations for the near term future. The supplementary financial information and the consolidated financial statements and related notes, all of which are integral parts of the following analysis of our results and our financial position, are incorporated by reference from the Corporation's 1997 Annual Report to Shareholders, pages 15, 16 and 38 through 59. Certain statements in this document, as well as certain statements incorporated by reference herein, may be considered to be "forward looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995, such as statements that include the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions. Such statements are subject to certain risks and uncertainties. The factors which could cause actual results to differ materially from those suggested by any such statements include, but are not limited to, those discussed or identified from time to time in the Corporation's public filings with the Securities & Exchange Commission and specifically to: risks or uncertainties associated with the Corporation's expectations with respect to its activity value analysis program, year 2000 liabilities, its market risk evaluations or with respect to announced real estate plans or premium growth and investment income or cash flow projections and, more generally, to: general economic conditions including changes in interest rates and the performance of the financial markets, changes in domestic and foreign laws, regulations and taxes, changes in competition and pricing environments, regional or general changes in asset valuations, the occurrence of significant natural disasters, the inability to reinsure certain risks economically, the adequacy of loss reserves, as well as general market conditions, competition, pricing and restructurings. Operating income from continuing operations, which excludes realized investment gains and losses, was $701 million in 1997 compared with $434 million in 1996 and $584 million in 1995. Operating income in 1996 reflects a fourth quarter charge of $160 million after taxes related to the write-down of the carrying value of certain real estate assets. Income from continuing operations, which includes realized investment gains and losses related to such operations, was $770 million in 1997 compared with $486 million in 1996 and $655 million in 1995. Decisions to sell securities are governed principally by considerations of investment opportunities and tax consequences. Thus, realized investment gains and losses may vary significantly from year to year. In May 1997, the Corporation completed the sale of its life and health insurance operations to Jefferson-Pilot Corporation for $875 million in cash, subject to closing adjustments, none of which were material. The life and health insurance operations have been classified as discontinued operations. Net income, which includes the results of the discontinued operations, amounted to $770 million in 1997 compared with $513 million in 1996 and $697 million in 1995. PROPERTY AND CASUALTY INSURANCE Property and casualty earnings were substantially higher in 1997 than in 1996 and 1995. Property and casualty income after taxes was $670 million in 1997 compared with $561 million in 1996 and 16 17 $563 million in 1995. The increase in earnings in 1997 was due to highly profitable underwriting results as well as strong growth in investment income compared with 1996. Earnings in 1996 were adversely affected by 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 the prior year. Earnings in 1995 benefited from highly profitable underwriting results. Catastrophe losses were $57 million in 1997, $142 million in 1996 and $64 million in 1995. Our initial retention level for each catastrophic event is approximately $100 million. We did not have any recoveries from our catastrophe reinsurance coverage during the past three years since there were no individual catastrophes for which our losses exceeded the initial retention. Reported net premiums written amounted to $5.4 billion in 1997, an increase of 14% compared with 1996. Reported net premiums written increased 11% in 1996 compared with 1995. Personal coverages accounted for $1.3 billion or 24% of 1997 premiums written and commercial coverages for $4.1 billion or 76%. A portion of the increase in premiums written in both 1997 and 1996 was due to changes in certain reinsurance agreements, which are discussed below. For many years, a portion of the U.S. insurance business written by the Corporation's property and casualty subsidiaries was reinsured on a quota share basis with a subsidiary of the Sun Alliance Group plc. Similarly, a subsidiary of the Corporation assumed a portion of Sun Alliance's property and casualty business on a quota share basis. Effective January 1, 1996, the agreements pertaining to the exchange of reinsurance were amended to reduce the portion of each company's business reinsured with the other. Consequently, during 1996, the Corporation's property and casualty subsidiaries retained a greater portion of the business they wrote directly and assumed less reinsurance from Sun Alliance. As a result of the 1996 merger of Sun Alliance with Royal Insurance Holdings plc, these agreements were terminated effective January 1, 1997. Therefore, in 1997, the property and casualty subsidiaries retained an even greater portion of the business they wrote directly and assumed no reinsurance from Sun Alliance. There was an additional impact on net premiums written in the first quarter of 1996 and 1997 due to the effect of the portfolio transfers of unearned premiums as of January 1 of each year resulting from the changes in retention. A comparison of reported net premiums written with net premiums written adjusted to reflect the changes to the reinsurance agreements with Sun Alliance follows:
1997 1996 1995 ---- ---- ---- (in millions) Reported net premiums written............................. $5,448 $4,774 $4,306 Premiums assumed from Sun Alliance........................ (4) 203 368 ------ ------ ------ Net premiums written, excluding premiums assumed from Sun Alliance............................................ 5,452 4,571 3,938 Portfolio transfers of unearned premiums.................. 175 92 Increase in retention -- 1997............................. 392 ------ ------ Adjusted net premiums written (1997 compared with 1996)... $4,885 4,479 ====== Increase in retention -- 1996............................. 202 ------ ------ Adjusted net premiums written (1996 compared with 1995)... $4,277 $3,938 ====== ======
Net premiums written, as adjusted, increased 9% in 1997 compared with 1996. Similarly, net premiums written, as adjusted, increased 9% in 1996 compared with 1995. After a review of the costs and benefits of our casualty excess of loss reinsurance program, effective January 1, 1996, we modified the program, principally for the excess liability and executive protection classes. The changes included 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 1996 by approximately $130 million compared with the prior year. During 1996, we continued to evaluate the relative costs and benefits of the program. As a result, effective 17 18 January 1, 1997, we again modified the program, increasing the initial retention for each loss from $10 million to $25 million. This change in our casualty reinsurance program increased net premiums written in 1997 by approximately $65 million compared with 1996. These changes have had a positive impact on the cash flows and resulting investment income of the property and casualty subsidiaries. Premium growth in 1997 and 1996 was also due to the selective writing of new business, exposure growth on existing business and the purchase of additional coverages by current customers. The worldwide marketplace continued to be competitive, particularly in the commercial classes in the United States. Competitors continued to place significant pressure on pricing as they attempted to maintain or increase market share. As a result, price increases continued to be difficult to achieve. In this environment, we have focused on our specialty lines where we emphasize the added value we provide to our customers. Substantial premium growth in both years was achieved outside the United States from our international branch network. Underwriting results were profitable in each of the past three years. The combined loss and expense ratio, the common measure of underwriting profitability, was 96.9% in 1997 compared with 98.3% in 1996 and 96.8% in 1995. The loss ratio was 64.5% in 1997 compared with 66.2% in 1996 and 64.7% in 1995. The loss ratios continue to reflect the favorable experience resulting from the consistent application of our disciplined underwriting standards. Losses from catastrophes represented 1.1 percentage points of the loss ratio in 1997 compared with 3.1 percentage points in 1996 and 1.5 percentage points in 1995. Our expense ratio was 32.4% in 1997 compared with 32.1% in both 1996 and 1995. Reported premium growth in the first quarter of 1998 will be distorted when compared with 1997 due to the Sun Alliance related transactions in the first quarter of 1997. As a result, reported net premiums written are expected to show a decline in the first quarter of 1998. During the fourth quarter of 1997, the Corporation began an activity value analysis process to identify and then eliminate low-value activities and to improve operational efficiency so that we can reduce expenses and redirect resources to those current activities and new initiatives that have the greatest potential to contribute to the future results of the Corporation. Implementation will commence in the second quarter of 1998. The cost control initiative will result in job reductions in both the home office and the branch network. While we have not yet fully quantified the impact of the initiative, we hope to achieve annual pre-tax savings in the $100 to $150 million range, beginning in 1999. Such savings are based on the elimination of certain payroll and payroll-related costs, lease costs and other operating costs. The Corporation expects to record a restructuring charge in the first quarter of 1998 related to the implementation of the cost control initiative. The amount of the charge has not yet been quantified. PERSONAL INSURANCE Reported premiums from personal insurance increased 26% in 1997 compared with a 20% increase in 1996. The effect on net premiums written of the changes to the reinsurance agreement with Sun Alliance was as follows:
1997 1996 1995 ---- ---- ---- (in millions) Reported net premiums written............................... $1,306 $1,039 $867 Portfolio transfers of unearned premiums.................... 66 31 Increase in retention -- 1997............................... 139 ------ ------ Adjusted net premiums written (1997 compared with 1996)..... $1,101 1,008 ====== Increase in retention -- 1996............................... 64 ------ ---- Adjusted net premiums written (1996 compared with 1995)..... $ 944 $867 ====== ====
18 19 Net premiums written, as adjusted, increased 9% in 1997 compared with 1996 and 9% in 1996 compared with 1995. We continued to grow our homeowners and other non-automobile business in non-catastrophe prone areas while maintaining our disciplined approach to pricing and risk selection. 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 substantial underwriting profits in each of the past three years. The combined loss and expense ratio was 83.1% in 1997 compared with 91.7% in 1996 and 87.1% in 1995. The profitability of our homeowners business each year is affected substantially by the amount of catastrophe losses we incur. Homeowners results were highly profitable in 1997, benefiting from modest catastrophe losses and reduced loss frequency. Results for this class were unprofitable in 1996 as catastrophe losses, particularly those caused by the winter storms, adversely affected results. Homeowners results were profitable in 1995 due to lower loss frequency. Catastrophe losses represented only 2.9 percentage points of the loss ratio for this class in 1997 compared with 16.7 percentage points in 1996 and 10.3 percentage points in 1995. Our automobile business produced substantial profits in each of the last three years. Results in each year benefited from stable loss frequency and severity. Automobile results were adversely affected each year by losses from the mandated business that we are required by law to accept for those individuals who cannot obtain coverage in the voluntary market. Other personal coverages, which include insurance for personal valuables and excess liability, were highly profitable in each of the past three years. Personal excess liability profitability increased in 1996 and again in 1997 due to favorable loss experience. COMMERCIAL INSURANCE Reported premiums from commercial insurance increased 17% in 1997 compared with 15% in 1996. The effect on net premiums written of the changes to the reinsurance agreement with Sun Alliance was as follows:
1997 1996 1995 ---- ---- ---- (in millions) Reported net premiums written............................. $4,146 $3,532 $3,071 Portfolio transfers of unearned premiums.................. 109 61 Increase in retention -- 1997............................. 253 ------ ------ Adjusted net premiums written (1997 compared with 1996)... $3,784 3,471 ====== Increase in retention -- 1996............................. 138 ------ ------ Adjusted net premiums written (1996 compared with 1995)... $3,333 $3,071 ====== ======
Net premiums written, as adjusted, increased 9% in 1997 compared with 1996 and 9% in 1996 compared with 1995. Premium growth in 1997 and 1996 for the excess liability component of our casualty coverages and for our executive protection coverages benefited from the changes to our casualty excess of loss reinsurance program. Premium growth in both years was also due to the selective writing of new accounts, exposure growth on existing business and the purchase of additional coverages by current customers. Premium growth was stronger outside the United States. Growth in the United States continues to be hindered by intense competition which has resulted in declining prices for several classes of business. Our strategy of working closely with our customers and our ability to differentiate our products have enabled us to renew a large percentage of our business. Our commercial insurance business produced near breakeven underwriting results in each of the past three years. The combined loss and expense ratio was 100.7% in 1997 compared with 99.7% in 1996 and 99.3% in 1995. Multiple peril results were unprofitable in each of the past three years due, in large part, to inadequate prices. Results for this class were also adversely affected in each of the past three years, but 19 20 more so in 1997, by increases in loss reserves for asbestos-related and toxic waste claims. Multiple peril results were similar in 1997 and 1996 as an improvement in 1997 in the property component, due in part to an absence of catastrophe losses, was offset by higher losses in the liability component resulting from an increase in the frequency of large losses. Results for this class benefited in 1995 from an absence of catastrophe losses. Catastrophe losses represented 1.5 percentage points of the loss ratio for this class in 1997 compared with 4.8 percentage points in 1996 and 1.0 percentage point in 1995. Results for our casualty business were similarly unprofitable in each of the past three years. In each year, casualty results were adversely affected by increases in loss reserves for asbestos-related and toxic waste claims. The amount of such reserve strengthening in the casualty classes decreased in 1996 and again in 1997. The excess liability component of our casualty coverages has remained profitable due to favorable loss experience in this class. Results for the primary liability component were extremely unprofitable in 1997 and 1996 due to an increased frequency of losses. Results in the automobile component were unprofitable in 1997 compared with breakeven results in 1996 and profitable results in 1995. The deterioration in 1997 was due to an increase in the frequency of large losses. Workers' compensation results were unprofitable in 1997 and 1996 compared with profitable results in 1995. Results deteriorated in 1996 and again in 1997 due in large part to the cumulative effect of price reductions over the past several years. Results continued to benefit, however, from the reform of 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 have also benefited from these positive factors. Property and marine results were unprofitable in 1997 compared with profitable results in 1996 and 1995. Results in 1997 were adversely affected by an increase in the frequency of large losses, including several large overseas losses. Results in 1997 and 1996 were adversely affected by catastrophe losses which were insignificant in 1995. Catastrophe losses for this class represented 4.9 percentage points of the loss ratio in 1997 compared with 4.5 percentage points in 1996 and 0.8 of a percentage point in 1995. Our executive protection results were highly profitable in each of the past three years due to favorable loss experience. Our financial institutions business was also profitable during the same period. Results in our other commercial classes were profitable in 1997 compared with the near breakeven results in 1996 and unprofitable results in 1995. This improvement was primarily attributable to our surety business, which produced increasingly profitable results in 1996 and 1997 compared with unprofitable results in 1995 due to several large losses. REINSURANCE ASSUMED Reinsurance assumed is treaty reinsurance that was assumed from Sun Alliance. The reinsurance agreement with Sun Alliance was terminated effective January 1, 1997. However, due to the lag in our reporting of such business, net premiums written in the first quarter of 1997 included $90 million related to business we assumed from Sun Alliance for the second half of 1996. Net premiums written for this segment were reduced by $94 million and $65 million in the first quarter of 1997 and 1996, respectively, due to the effect of the portfolio transfers of unearned premiums back to Sun Alliance as of January 1 of each year. Net premiums written in 1996 were substantially lower than in 1995 due to the changes in the reinsurance agreement with Sun Alliance whereby we assumed less reinsurance from them. Underwriting results for this segment in 1997, which represent our share of the Sun Alliance business for the last six months of 1996, were near breakeven. Underwriting results were also near breakeven in 1996 and 1995. 20 21 LOSS RESERVES Loss reserves are our property and casualty subsidiaries' largest liability. At the end of 1997, gross loss reserves totaled $9.8 billion compared with $9.5 billion and $9.6 billion at year-end 1996 and 1995, respectively. Reinsurance recoverable on such loss reserves was $1.2 billion at year-end 1997 compared with $1.8 billion and $2.0 billion at the end of 1996 and 1995, respectively. As a result of the changes to the reinsurance agreements with Sun Alliance, there were portfolio transfers of gross loss reserves and reinsurance recoverable as of January 1, 1996 and 1997. The effect of these portfolio transfers was a decrease in gross loss reserves of $184 million and $209 million and a decrease in reinsurance recoverable of $470 million and $244 million in 1997 and 1996, respectively. Loss reserves, net of reinsurance recoverable, increased by $809 million in 1997 compared with $141 million in 1996. The 1996 increase would have been greater except that loss reserves were reduced as the result of significant payments during the year related to the settlement of asbestos-related claims against Fibreboard Corporation, which is discussed below. Loss reserves included $549 million, $543 million and $999 million at year-end 1997, 1996 and 1995, respectively, related to the Fibreboard settlement. Loss and expense payments related to the settlement aggregated $462 million in 1996 and $60 million in 1995. There were no such payments in 1997. Excluding the Fibreboard reserves and the effect of the portfolio transfers, loss reserves, net of reinsurance recoverable, increased by $517 million or 7% in 1997 compared with $562 million or 9% in 1996. Substantial reserve growth has occurred each year in those liability classes, primarily excess liability and executive protection, that are characterized by delayed loss reporting and extended periods of settlement. During 1997, we experienced overall favorable development of $65 million on loss reserves established as of the previous year-end. This compares with favorable development of $43 million in 1996 and $36 million in 1995. Such favorable development was reflected in operating results in these respective years. Results in each of the past three years benefited from favorable claim severity trends for certain liability classes; this was offset each year in varying degrees by losses incurred relating to asbestos and toxic waste claims. The process of establishing loss reserves is an imprecise science and reflects significant judgmental factors. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss and the settlement of the loss. In fact, approximately 60% of our net loss reserves at December 31, 1997 were for IBNR -- claims that had not yet been reported to us, some of which were not yet known to the insured, and future development on reported claims. Judicial decisions and legislative actions continue to broaden liability and policy definitions and to increase the severity of claim payments. As a result of this and other societal and economic developments, the uncertainties inherent in estimating ultimate claim costs on the basis of past experience have increased significantly, further complicating the already complex loss reserving process. The uncertainties relating to asbestos and toxic waste claims on insurance policies written many years ago are exacerbated by judicial and legislative interpretations of coverage that in some cases have tended to erode the clear and express intent of such policies and in other cases have expanded theories of liability. The industry is engaged in extensive litigation over these coverage and liability issues and is thus confronted with a continuing uncertainty in its efforts to quantify these exposures. Our most costly asbestos exposure relates to an insurance policy issued to Fibreboard Corporation by Pacific Indemnity Company in 1956. In 1993, Pacific Indemnity Company, a subsidiary of the Corporation, entered into a global settlement agreement with 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. This agreement is subject to final appellate court approval. Pursuant to the global settlement agreement, a $1.525 billion trust fund will be established to pay future claims, which are claims that 21 22 were not filed in court before August 27, 1993. Pacific Indemnity will contribute approximately $538 million to the trust fund and Continental Casualty will contribute the remaining amount. In December 1993, upon execution of the global settlement agreement, Pacific Indemnity and Continental Casualty paid their respective shares into an escrow account. Upon final court approval of the settlement, the amount in the escrow account, including interest earned thereon, will be transferred to the trust fund. All of the parties have agreed to use their best efforts to seek final court approval of the global settlement agreement. Pacific Indemnity and Continental Casualty reached a separate agreement for the handling of all asbestos-related bodily injury claims pending on August 26, 1993 against Fibreboard. Pacific Indemnity's obligation under this agreement with respect to such pending claims is approximately $635 million, all of which has been paid. The agreement further provides that the total responsibility of both insurers with respect to pending and future asbestos-related bodily injury claims against Fibreboard will be shared between Pacific Indemnity and Continental Casualty on an approximate 35% and 65% basis, respectively. Pacific Indemnity, Continental Casualty and Fibreboard entered into a trilateral agreement to settle all present 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 ultimately disapproved. Pacific Indemnity's obligation under the trilateral agreement is therefore similar to, and not duplicative of, that under those agreements described above. The trilateral agreement reaffirms portions of an agreement reached in March 1992 between Pacific Indemnity and Fibreboard. Among other matters, that 1992 agreement eliminates any Pacific Indemnity liability to Fibreboard for asbestos-related property damage claims. In July 1995, the United States District Court of the Eastern District of Texas approved the global settlement agreement and the trilateral agreement. The judgments approving these agreements were appealed to the United States Court of Appeals for the Fifth Circuit. In July 1996, the Fifth Circuit Court affirmed the 1995 judgments of the District Court. The objectors to the global agreement appealed to the United States Supreme Court. In June 1997, the United States Supreme Court set aside the ruling by the Fifth Circuit Court that had approved the global agreement and ordered the Fifth Circuit Court to reconsider its approval in light of a June 1997 ruling by the Supreme Court rejecting an unrelated settlement that included several former asbestos manufacturers. In January 1998, the Fifth Circuit Court again affirmed the global settlement agreement, ruling that it was legally distinct from the other settlement. It is expected that objectors to the settlement will petition the Supreme Court to review the decision. The Supreme Court would then have to decide whether to take the appeal. The trilateral agreement, however, was never appealed to the United States Supreme Court and is final. As a result, management continues to believe that the uncertainty of Pacific Indemnity's exposure with respect to asbestos-related bodily injury claims against Fibreboard has been eliminated. Since 1993, a California Court of Appeal has agreed, in response to a request by Pacific Indemnity, Continental Casualty and Fibreboard, to delay its decisions regarding asbestos-related insurance coverage issues that are currently before it and involve the three parties exclusively, while the approval of the global settlement is pending in court. Continental Casualty and Pacific Indemnity have dismissed disputes against each other which involved Fibreboard and were in litigation. We have additional potential asbestos exposure, primarily on insureds for which we wrote excess liability coverages. Such exposure has increased due to the erosion of much of the underlying limits. The number of claims against such insureds and the value of such claims have increased in recent years due in part to the non-viability of other defendants. Our remaining asbestos exposures are mostly peripheral defendants, including a mix of manufacturers and distributors of certain products that contain asbestos as well as premises owners. Generally, these insureds are named defendants on a regional rather than a nationwide basis. We continue to 22 23 receive notices of new asbestos claims and new exposures on existing claims as more peripheral parties are drawn into litigation to replace the now defunct mines and bankrupt manufacturers. Legal guidelines regarding coverage for asbestos claims have begun to articulate more consistent standards regarding the extent of the insurers' coverage obligation and the method of allocation of costs among insurers. However, we still do not know the universe of potential claims. Therefore, uncertainty remains as to our ultimate liability for asbestos-related claims. Hazardous waste sites are another significant potential exposure. Under the federal "Superfund" law and similar state statutes, when potentially responsible parties (PRPs) fail to handle the clean-up, regulators have the work done and then attempt to establish legal liability against the PRPs. The PRPs, with proper government authorization in many instances, disposed of toxic materials at a waste dump site or transported the materials to the site. Most sites have multiple PRPs. Insurance policies issued to PRPs were not intended to cover the clean-up costs of pollution and, in many cases, did not intend to cover the pollution itself. Pollution was not a recognized hazard at the time many of these policies were written. In more recent years, policies specifically exclude such exposures. As the costs of environmental clean-up have become substantial, PRPs and others have increasingly filed claims with their insurance carriers. Litigation against insurers extends to issues of liability, coverage and other policy provisions. There is great uncertainty involved in estimating our liabilities relating to these claims. First, the underlying liabilities of the claimants are extremely difficult to estimate. At any given clean-up site, the allocation of remediation costs among governmental authorities and the PRPs varies greatly. Second, different courts have addressed liability and coverage issues regarding pollution claims and have reached inconsistent conclusions in their interpretation of several issues. These significant uncertainties are not likely to be resolved in the near future. Uncertainties also remain as to the Superfund law itself, which has generated far more litigation than it has provided cleanup of hazardous waste sites. Superfund's taxing authority expired on December 31, 1995. Notwithstanding continued pressure by the insurance industry and other interested parties to achieve a legislative solution which would reform the liability provisions of the law, Congress has not yet addressed the issue. It is currently not possible to predict the direction that any reforms may take, when they may occur or the effect that any changes may have on the insurance industry. The Superfund law does not address non-Superfund sites. For that reason, it does not cover all existing hazardous waste exposures, such as those involving sites that are subject to state law only. There remains significant uncertainty as to the cost of remediating the state sites. Because of the large number of state sites, such sites could prove even more costly in the aggregate than Superfund sites. Litigation costs remain substantial, particularly for hazardous waste claims. A substantial portion of the funds we have expended to date has been for legal fees incurred in the prolonged litigation of coverage issues. Primary policies provide a limit on indemnity payments but many do not limit defense costs. This sometimes leads to the payment of defense costs in multiples of the policy limits. Reserves for asbestos and toxic waste claims cannot be estimated with traditional loss reserving techniques. We have established case reserves and expense reserves for costs of related litigation where sufficient information has been developed to indicate the involvement of a specific insurance policy. In addition, IBNR reserves have been established to cover additional exposures on both known and unasserted claims. These reserves are continually reviewed and updated. Losses incurred relating to asbestos and toxic waste claims were $125 million in 1997, $151 million in 1996 and $182 million in 1995. Further increases in loss reserves in 1998 and future years are possible as legal and factual issues concerning asbestos and toxic waste claims are clarified, although the amounts cannot be reasonably estimated. 23 24 Management believes that the aggregate loss reserves of the property and casualty subsidiaries at December 31, 1997 were adequate to cover claims for losses which had occurred, including both those known to us and those yet to be reported. In establishing such reserves, management considers facts currently known and the present state of the law and coverage litigation. However, given the expansion of coverage and liability by the courts and the legislatures in the past and the possibilities of similar interpretations in the future, particularly as they relate to asbestos and toxic waste claims, as well as the uncertainty in determining what scientific standards will be deemed acceptable for measuring hazardous waste site clean-up, additional increases in loss reserves may emerge that would adversely affect results in future periods. The amount cannot reasonably be estimated at the present time. OTHER UNCERTAINTIES The Corporation's property and casualty subsidiaries have an exposure to insured losses caused by hurricanes, earthquakes, winter storms, windstorms and other catastrophic events. The frequency and severity of catastrophes are unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. The Corporation continually assesses its concentration of underwriting exposures in catastrophe prone areas and develops strategies to manage this exposure through individual risk selection, subject to regulatory constraints, and through the purchase of catastrophe reinsurance. In recent years, the Corporation has invested in modeling technologies that allow us to better monitor catastrophe exposures. We also continue to explore and analyze credible scientific evidence, including the impact of global climate change, that may affect our potential exposure under insurance policies. The Year 2000 issue relates to computer programs that were written using two digits rather than four to define the applicable year. Such programs may recognize the date "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of normal business activities or other unforeseen problems. In 1995, we initiated a project to ensure Year 2000 compliance of the Corporation's computer systems and applications. Management believes that all key systems that are not already Year 2000 compliant will be modified or replaced by the end of 1999 and that the costs to modify or replace such systems will not have a significant impact on the Corporation's operating results or financial position. We are also coordinating with entities with which we interact to address potential Year 2000 issues to minimize the potential adverse consequences, if any, that could result from the failure of such entities to address this issue. An additional concern to the Corporation is the potential future impact of the Year 2000 issue on insurance coverages written by our property and casualty subsidiaries. The Year 2000 issue is a risk for some of our insureds and needs to be considered during the underwriting process similar to any other risk to which our customers may be exposed. We have established a dedicated team to identify Year 2000 issues across all product lines. It is possible that Year 2000 related losses may emerge that would adversely affect operating results in future periods. The amount cannot be estimated at the present time. INVESTMENTS AND LIQUIDITY Investment income after taxes increased 9% in 1997 compared with 7% in 1996. Growth was primarily due to increases in invested assets, which reflected strong cash flow from operations over the period, partially offset by lower average yields on new investments. The effective tax rate on our investment income was 16.7% in 1997 compared with 15.8% in 1996 and 15.9% in 1995. The effective tax rate increased in 1997 as the percentage of our investment income subject to tax increased. Generally, premiums are received by our property and casualty subsidiaries months or even years before losses are paid under the policies purchased by such premiums. These funds are used first to make current claim and expense payments. The balance is invested to augment the investment income 24 25 generated by the existing portfolio. Historically, cash receipts from operations, consisting of insurance premiums and investment income, have provided more than sufficient funds to pay losses, operating expenses and dividends to the Corporation. New cash available for investment by the property and casualty subsidiaries was approximately $1,260 million in 1997 compared with $1,150 million in 1996 and $430 million in 1995. New cash in 1997 and 1996 included approximately $330 million and $40 million, respectively, received as the net result of the portfolio transfers of unearned premiums and loss reserves as of January 1 of each year related to the changes to the reinsurance agreements with Sun Alliance. New cash in 1996 also included $191 million received in January as a result of the commutation of a stop loss reinsurance agreement related to medical malpractice unpaid claims arising from business written prior to 1985. The substantially lower amount in 1995 was due to the designation of $480 million of new cash as funds held for asbestos-related settlement. Income on these assets accrued for the benefit of participants in the class settlement of asbestos-related bodily injury claims against Fibreboard. In 1997, new cash was invested primarily in tax-exempt bonds and, to a lesser extent, corporate bonds and mortgage-backed securities. In addition, $250 million of foreign bonds were sold in the first quarter, due to the reduction in foreign liabilities resulting from the termination of the reinsurance agreements with Sun Alliance, with the proceeds invested in U.S. dollar denominated securities. In 1996, we invested new cash primarily in mortgage-backed securities and tax-exempt bonds. In 1995, we invested new cash primarily in tax-exempt bonds. In each year, we tried to achieve the appropriate mix in our portfolio to balance both investment and tax strategies. The property and casualty subsidiaries maintain sufficient investments in highly liquid, short-term securities at all times to provide for immediate cash needs and the Corporation maintains bank credit facilities that are available to respond to unexpected cash demands. CORPORATE Investment income earned on corporate invested assets and interest and other expenses not allocable to the operating subsidiaries are reflected in the corporate segment. Corporate income after taxes was $36 million in 1997 compared with $20 million in 1996 and $15 million in 1995. The increase in corporate income in 1997 was due primarily to a reduction in interest expense. MARKET RISK The main objectives in managing the investment portfolios of the Corporation and its property and casualty subsidiaries are to maximize after-tax investment income and total investment returns while minimizing credit risks in order to provide maximum support to the insurance underwriting operations. Investment strategies are developed based on many factors including underwriting results and our resulting tax position, regulatory requirements, fluctuations in interest rates and consideration of other market risks. Investment decisions are centrally managed by investment professionals based on guidelines established by management and approved by the boards of directors. Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. The market risks related to financial instruments of the Corporation and its property and casualty subsidiaries primarily relate to the investment portfolio, which exposes the Corporation to risks related to interest rates and, to a lesser extent, credit quality, prepayment, foreign currency exchange rates and equity prices. Analytical tools and monitoring systems are in place to assess each of these elements of market risk. Interest rate risk is the price sensitivity of a fixed income security to changes in interest rates. We view these potential changes in price within the overall context of asset and liability management. Our actuaries estimate the payout pattern of our liabilities, primarily our property and casualty loss reserves, to determine their duration, which is the present value of the weighted average payments expressed in years. We set duration targets for our fixed income investment portfolios after consideration of the duration of these liabilities and other factors, which we believe mitigates the overall effect of interest rate risk for the Corporation. 25 26 The table below provides information about the Corporation's fixed maturity investments at December 31, 1997 that are sensitive to changes in interest rates. The table presents cash flows of principal amounts and related weighted average interest rates by expected maturity dates. The cash flows are based on the earlier of the call date or the maturity date or, for mortgage-backed securities, expected payment patterns. Actual cash flows could differ from the expected amounts. FIXED MATURITIES
EXPECTED CASH FLOWS OF PRINCIPAL AMOUNTS TOTAL --------------------- ESTIMATED AMORTIZED MARKET 1998 1999 2000 2001 2002 THEREAFTER COST VALUE ---- ---- ---- ---- ---- ---------- --------- --------- (in millions) Tax-exempt.................... $387 $423 $384 $520 $563 $5,332 $ 7,609 $ 8,114 Average interest rate..... 6.5% 6.7% 6.3% 6.5% 5.9% 5.7% -- -- Taxable -- other than mortgage-backed securities.................. 158 308 146 258 140 1,578 2,588 2,675 Average interest rate..... 7.7% 6.3% 6.7% 6.8% 7.3% 7.0% -- -- Mortgage-backed securities.... 231 162 167 180 177 861 1,778 1,811 Average interest rate..... 7.1% 7.3% 7.4% 7.3% 7.4% 7.4% -- -- ---- ---- ---- ---- ---- ------ ------- ------- Total......................... $776 $893 $697 $958 $880 $7,771 $11,975 $12,600 ==== ==== ==== ==== ==== ====== ======= =======
The Corporation and its property and casualty subsidiaries have consistently invested in high quality marketable securities. As a result, we believe that the Corporation has minimal credit quality risk. Taxable bonds in our domestic portfolio comprise U.S. Treasury, government agency, mortgage- backed and corporate securities. Approximately 80% of taxable bonds are issued by the U.S. Treasury or U.S. government agencies or are rated AA or better by Moody's or Standard and Poor's. Of the tax exempt bonds, approximately 90% are rated AA or better with more than half rated AAA. Less than 1% of our bond portfolio is below investment grade. Both taxable and tax exempt bonds have an average maturity of approximately 9 years. Our taxable bond portfolio includes mortgage-backed securities, which comprised 40% and 35% of this portfolio at year-end 1997 and 1996, respectively. About 60% of our mortgage-backed securities holdings at December 31, 1997 related to residential mortgages consisting of government agency pass-through securities, government agency collateralized mortgage obligations (CMOs) and AAA rated non-agency CMOs backed by government agency collateral or single family home mortgages. The majority of the CMOs are actively traded in liquid markets and market value information is readily available from broker/dealers. An additional 35% of our mortgage-backed securities are invested in call protected AAA rated commercial securities. Prepayment risk refers to the changes in prepayment patterns that can either shorten or lengthen the expected timing of the principal repayments and thus the average life and the effective yield of a security. Such risk exists primarily within our portfolio of mortgage-backed securities. We monitor such risk regularly. We invest primarily in those classes of mortgage-backed securities that are less subject to prepayment risk. Foreign currency risk is the sensitivity to foreign exchange rate fluctuations of the market value and investment income related to foreign currency denominated financial instruments. The functional currency of our foreign operations is generally the currency of the local operating environment since their business is primarily transacted in such local currency. We reduce the risks relating to currency fluctuations by maintaining investments in those foreign currencies in which we transact business. Such investments have characteristics similar to our liabilities in those currencies. At December 31, 1997, the property and casualty subsidiaries held foreign investments of $1.1 billion supporting their international operations. Such foreign investments have quality and maturity characteristics similar to our domestic portfolio. The principal currencies creating foreign exchange rate risk for the Corporation are the Canadian dollar and the British pound sterling. The table on the following page provides 26 27 information about the Corporation's fixed maturity investments denominated in these two currencies at December 31, 1997. The table presents cash flows of principal amounts in U.S. dollars by expected maturity dates. Actual cash flows could differ from the expected amounts. FOREIGN CURRENCY DENOMINATED FIXED MATURITIES
EXPECTED CASH FLOWS OF PRINCIPAL AMOUNTS TOTAL --------------------- ESTIMATED AMORTIZED MARKET 1998 1999 2000 2001 2002 THEREAFTER COST VALUE ---- ---- ---- ---- ---- ---------- --------- --------- (in millions) Canadian dollar........... $-- $6 $16 $47 $43 $195 $307 $337 British pound sterling.... -- -- 19 23 5 175 222 229
Equity price risk is the potential loss arising from changes in the value of equity securities. In general, equities have more year-to-year price variability than intermediate term high grade bonds. However, returns over longer time frames have been consistently higher. Our equity securities are high quality and readily marketable. All of the above risks are monitored on an ongoing basis. A combination of in-house systems and proprietary models and externally licensed software are used to analyze individual securities as well as each portfolio. These tools provide the portfolio managers with information to assist them in the evaluation of the market risks of the portfolio. REAL ESTATE In October 1996, the Corporation announced that it was exploring the possible sale of all or a significant portion of its real estate assets. In March 1997, the Corporation entered into an agreement with a prospective purchaser to perform due diligence in anticipation of executing a contract for the sale of substantially all of its commercial properties. Because the plan to pursue the sales of these assets in the near term represented a significant change in circumstances relating to the manner in which these assets would be used, we reassessed the recoverability of their carrying value as of December 31, 1996. As a result, we recorded an impairment loss of $255 million, or $160 million after tax, in the fourth quarter of 1996 to reduce the carrying value of these assets to their estimated fair value. In June 1997, a definitive agreement was reached with the purchaser. In November, the sale of almost all of the properties covered by the agreement reached in June was closed for $737 million, which included $628 million in cash and the assumption of $109 million in debt. The buyer is a joint venture formed by Paine Webber Real Estate Securities Inc., Morgan Stanley Real Estate Fund II, L.P. and Gale & Wentworth, L.L.C. Closing on the few remaining properties under the agreement is expected to occur in 1998. In addition to the November sale to the joint venture, we sold several other commercial properties as well as residential properties in 1997. We are continuing to explore the sale of certain of our remaining properties. We plan to retain approximately $375 million of undeveloped land which we expect will be developed in the future. In addition, we plan to retain certain properties and land parcels under lease. Real estate operations resulted in a loss after taxes of $5 million in 1997 compared with a loss of $147 million in 1996 and income of $6 million in 1995. The loss in 1996 reflects the $160 million after tax impairment charge. Results in 1996 benefited from the sale of several rental properties and a decrease in interest expense caused by lower average interest rates. Results in 1995 benefited from a land sale. Results in both 1996 and 1995 also benefited from increases in earnings from residential sales. In each of the last three years, results were adversely affected by a high proportion of interest costs charged directly to expense rather than being capitalized. 27 28 Revenues were $616 million in 1997, $320 million in 1996 and $288 million in 1995. Revenues in 1997 include $380 million from the November sale of real estate properties. Proceeds received from that sale which related to mortgages receivable are not classified as revenues. Revenues in 1996 and 1995 included higher levels of revenues from residential development. Revenues in 1996 also included the sale of rental properties while 1995 revenues included the land sale. The Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in the first quarter of 1996. SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets. SFAS No. 121 requires that we analyze our individual buildings, leased land and development sites on a continuing basis to determine if an impairment loss has occurred. Estimates are made of the revenues and operating costs, plus any additional costs to be incurred to complete development, of the property in the future through an assumed holding period based on our intended use of the property. The time value of money is not considered in assessing whether an impairment has occurred. If it is determined that impairment has occurred, measurement of such impairment is based on the fair value of the assets. The $255 million write-down of real estate assets in 1996 was made in accordance with the provisions of SFAS No. 121. Loans receivable, which were issued in connection with our joint venture activities and other property sales, are primarily purchase money mortgages. Such loans are generally collateralized by buildings and, in some cases, land. We continually evaluate the ultimate collectibility of such loans and establish appropriate reserves. Our valuation approach is similar to that utilized under SFAS No. 121, except that cash flows are discounted at the receivable interest rates. The reserve for possible uncollectible receivables was increased by charges against income of $18 million in 1995, including $10 million from the initial application of SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which established new criteria for measuring impairment of a loan. Such charges were not significant in 1996 and 1997. Management believes the reserve of $24 million at December 31, 1997 adequately reflects the current condition of the portfolio. The carrying value of the real estate assets we plan to dispose of in the near term is based on the estimated fair value of these assets. The recoverability of the carrying value of the remaining real estate assets is assessed based on our ability to fully recover costs through a future revenue stream. The process by which SFAS No. 121 is applied and necessary write-downs are calculated assumes these properties will be developed and disposed of over a period of time. The assumptions reflect a continued improvement in demand for office space, an increase in rental rates and the ability and intent to obtain financing in order to hold and develop such remaining properties and protect our interests over the long term. Management believes that it has made adequate provisions for impairment of real estate assets. However, if the assets are not sold or developed as presently contemplated, it is possible that additional impairment losses may be recognized. Real estate activities have been funded with short-term credit instruments, primarily commercial paper, and debt issued by Chubb Capital Corporation as well as with term loans and mortgages. The weighted average interest cost on short-term credit instruments approximated 5 1/4% in 1997, 5 1/2% in 1996 and 6% in 1995. In 1997, interest rates on term loans approximated 7 1/2% and for mortgages the range of interest rates was 5% to 12%. Proceeds from the November 1997 sale were used to repay the outstanding short term debt and certain term loans and mortgages as well as to reduce intercompany borrowings from Chubb Capital. In February 1998, the remaining $300 million of intercompany borrowings from Chubb Capital was converted into preferred stock of the real estate subsidiary. As a result of the November 1997 sale, real estate revenues will be significantly reduced in the future. The reduction in revenues will be substantially offset by significant reductions in interest expense due to the decrease in debt outstanding and in payroll costs and other operating expenses. 28 29 INVESTMENT GAINS AND LOSSES Net investment gains realized by the Corporation and its property and casualty insurance subsidiaries were as follows:
1997 1996 1995 ---- ---- ---- (in millions) Equity securities........................................... $ 75 $69 $ 89 Fixed maturities............................................ 30 11 20 ---- --- ---- Realized investment gains before tax........................ $105 $80 $109 ==== === ==== Realized investment gains after tax......................... $ 68 $52 $ 71 ==== === ====
Sales of equity securities in each of the last three years resulted in realized investment gains due primarily to the significant appreciation in the United States equity markets. A primary reason for the sale of fixed maturities in each of the last three years has been to improve our after-tax portfolio return without sacrificing quality where market opportunities have existed to do so. Fixed maturities which the Corporation and its insurance subsidiaries have the ability and intent to hold to maturity are classified as held-to-maturity. The remaining fixed maturities, which may be sold prior to maturity to support our investment strategies, such as in response to changes in interest rates and the yield curve or to maximize after-tax returns, are classified as available-for-sale. Fixed maturities classified as held-to-maturity are carried at amortized cost while fixed maturities classified as available-for-sale are carried at market value. At December 31, 1997, 18% of the fixed maturity portfolio was classified as held-to-maturity compared with 22% at December 31, 1996 and 30% at December 31, 1995. The unrealized appreciation or depreciation of investments carried at market value, which includes equity securities and fixed maturities classified as available-for-sale, is reflected in a separate component of shareholders' equity, net of applicable deferred income tax. The unrealized market appreciation before tax of those fixed maturities carried at amortized cost was $147 million, $130 million and $178 million at December 31, 1997, 1996 and 1995, respectively. Such unrealized appreciation was not reflected in the consolidated financial statements. Changes in unrealized market appreciation of fixed maturities were due to fluctuations in interest rates. DISCONTINUED OPERATIONS -- LIFE AND HEALTH INSURANCE On May 13, 1997, the Corporation completed the sale of Chubb Life Insurance Company of America to Jefferson-Pilot Corporation for $875 million in cash, subject to various closing adjustments, none of which were material. In 1996, the Corporation recognized a loss of $22 million related to the sale of the life and health insurance operations. The purchase price was not adjusted to reflect results of operations subsequent to December 31, 1996. Therefore, the discontinued life and health insurance operations did not affect the Corporation's net income in 1997 and will not affect net income in future periods. Earnings from the discontinued life and health insurance operations were $49 million and $42 million in 1996 and 1995, respectively, including realized investment gains of $8 million and $14 million. CAPITAL RESOURCES In February 1994, the Board of Directors authorized the repurchase of up to 10,000,000 shares of common stock. Through March 6, 1997, the Corporation repurchased 6,851,600 shares under the 1994 share repurchase program, including 3,148,600 shares repurchased in the first quarter of 1997. On March 7, 1997, the Board of Directors replaced the 1994 program with a new share repurchase program, which authorizes the repurchase of up to 17,500,000 shares of common stock. Through December 31, 1997, the Corporation repurchased 9,791,900 shares under the new repurchase program. 29 30 In the aggregate, the Corporation repurchased 12,940,500 shares in open-market transactions in 1997 at a cost of $828 million. In 1996, 1,700,000 shares were repurchased at a cost of $83 million. The Corporation filed a shelf registration statement which the Securities and Exchange Commission declared effective in June 1995, under which up to $400 million of various types of securities may be issued by the Corporation or Chubb Capital. No securities have been issued under this registration statement. The Corporation has outstanding $60 million of unsecured 8 3/4% notes due in 1999. In 1998, the Corporation will pay as a mandatory sinking fund an amount sufficient to redeem $30 million of principal. At December 31, 1997, Chubb Capital had outstanding $150 million of 6% notes due in 1998 and $100 million of 6 7/8% notes due in 2003. The notes are unsecured and are guaranteed by the Corporation. A substantial portion of the proceeds were used to support our real estate operations. The debt due in 1998 was repaid in February using proceeds from the real estate sales. As of January 1, 1997, Chubb Capital had outstanding $229 million of 6% exchangeable subordinated notes due May 15, 1998. In 1997, the holders of almost all of the notes elected the option to exchange them into shares of common stock of the Corporation, resulting in the issuance of 5,316,565 shares of common stock. The remaining notes were redeemed. In July 1997, the Corporation entered into two credit agreements with a group of banks that provide for unsecured borrowings of up to $500 million in the aggregate. The $200 million short term revolving credit facility terminates on July 10, 1998 and may be renewed or replaced. The $300 million medium term revolving credit facility terminates on July 11, 2002. On the respective termination dates, any loans then outstanding become payable. There have been no borrowings under these agreements. These agreements replaced an agreement similar to the medium term agreement, which terminated, as well as the Corporation's lines of credit. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and qualitative disclosures about market risk are included in Item 7, pages 25 through 27 of this report. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated financial statements of the Corporation at December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 and the Report of Independent Auditors thereon and the Corporation's unaudited quarterly financial data for the two-year period ended December 31, 1997 are incorporated by reference from the Corporation's 1997 Annual Report to Shareholders, pages 38 through 61. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 30 31 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the Corporation's Directors is incorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 28, 1998, pages 2 through 4. Information regarding the executive officers is included in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 28, 1998, pages 8 through 20 other than the Performance Graphs and the Organization and Compensation Committee Report appearing on pages 13 through 17. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 28, 1998, pages 5 through 7. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 28, 1998, pages 20 and 21. 31 32 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS AND 2. SCHEDULES The financial statements and schedules listed in the accompanying index to financial statements and financial statement schedules are filed as part of this report. 3. EXHIBITS The exhibits listed in the accompanying index to exhibits are filed as part of this report. (b) REPORTS ON FORM 8-K The Registrant filed a current report on Form 8-K dated November 10, 1997 with respect to the announcement on November 10, 1997 that the Registrant's real estate subsidiary, Bellemead Development Corporation, closed the sale of a substantial portion of its commercial real estate properties to a joint venture company formed by Paine Webber Real Estate Securities Inc., Morgan Stanley Real Estate Fund II, L.P. and Gale & Wentworth, L.L.C. for $737 million. For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 2-90826 (filed May 1, 1984), 33-29185 (filed June 7, 1989), 33-30020 (filed July 18, 1989), 33-49230 (filed July 2, 1992), 33-49232 (filed July 2, 1992), 333-09273 (filed July 31, 1996) and 333-09275 (filed July 31, 1996): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 32 33 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. THE CHUBB CORPORATION (REGISTRANT) March 6, 1998 By /s/ DEAN R. O'HARE ------------------------------- (DEAN R. O'HARE, CHAIRMAN AND CHIEF EXECUTIVE OFFICER) PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE --------- ----- ---- /s/ DEAN R. O'HARE Chairman, Chief March 6, 1998 - --------------------------------------------------- Executive Officer and (DEAN R. O'HARE) Director /s/ JOHN C. BECK Director March 6, 1998 - --------------------------------------------------- (JOHN C. BECK) /s/ SHEILA P. BURKE Director March 6, 1998 - --------------------------------------------------- (SHEILA P. BURKE) /s/ JAMES I. CASH, JR. Director March 6, 1998 - --------------------------------------------------- (JAMES I. CASH, JR.) /s/ PERCY CHUBB, III Director March 6, 1998 - --------------------------------------------------- (PERCY CHUBB, III) /s/ JOEL J. COHEN Director March 6, 1998 - --------------------------------------------------- (JOEL J. COHEN) /s/ JAMES M. CORNELIUS Director March 6, 1998 - --------------------------------------------------- (JAMES M. CORNELIUS) /s/ DAVID H. HOAG Director March 6, 1998 - --------------------------------------------------- (DAVID H. HOAG) /s/ THOMAS C. MACAVOY Director March 6, 1998 - --------------------------------------------------- (THOMAS C. MACAVOY)
33 34
SIGNATURE TITLE DATE --------- ----- ---- /s/ GERTRUDE G. MICHELSON Director March 6, 1998 - --------------------------------------------------- (GERTRUDE G. MICHELSON) /s/ WARREN B. RUDMAN Director March 6, 1998 - --------------------------------------------------- (WARREN B. RUDMAN) Director March 6, 1998 - --------------------------------------------------- (DAVID G. SCHOLEY) /s/ RAYMOND G.H. SEITZ Director March 6, 1998 - --------------------------------------------------- (RAYMOND G.H. SEITZ) /s/ LAWRENCE M. SMALL Director March 6, 1998 - --------------------------------------------------- (LAWRENCE M. SMALL) /s/ RICHARD D. WOOD Director March 6, 1998 - --------------------------------------------------- (RICHARD D. WOOD) /s/ JAMES M. ZIMMERMAN Director March 6, 1998 - --------------------------------------------------- (JAMES M. ZIMMERMAN) /s/ DAVID B. KELSO Executive Vice President and March 6, 1998 - --------------------------------------------------- Chief Financial Officer (DAVID B. KELSO) /s/ HENRY B. SCHRAM Senior Vice President and March 6, 1998 - --------------------------------------------------- Chief Accounting Officer (HENRY B. SCHRAM)
34 35 THE CHUBB CORPORATION INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF INDEPENDENT AUDITORS (ITEM 14(a))
ANNUAL REPORT TO SHAREHOLDERS FORM 10-K PAGE PAGE ---------------- --------- Report of Independent Auditors 60 -- Consolidated Balance Sheets at December 31, 1997 and 1996 39 -- Consolidated Statements of Income for the Years Ended Decem- ber 31, 1997, 1996 and 1995 38 -- Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 40 -- Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 41 -- Notes to Consolidated Financial Statements 42 -- Supplementary Information (unaudited) Quarterly Financial Data 61 -- Schedules: I -- Consolidated Summary of Investments -- Other than Investments in Related Parties at December 31, 1997 -- 37 II -- Condensed Financial Information of Registrant at December 31, 1997 and 1996 and for the Years Ended December 31, 1997, 1996 and 1995 -- 38 III -- Consolidated Supplementary Insurance Information at and for the Years Ended December 31, 1997, 1996 and 1995 -- 41 IV -- Consolidated Reinsurance for the Years Ended De- cember 31, 1997, 1996 and 1995 -- 42 VI -- Consolidated Supplementary Property and Casualty Insurance Information for the Years Ended December 31, 1997, 1996 and 1995 -- 42
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto. The consolidated financial statements and supplementary information listed in the above index, which are included in the Annual Report to Shareholders of The Chubb Corporation for the year ended December 31, 1997, are hereby incorporated by reference. 35 36 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of The Chubb Corporation of our report dated February 20, 1998 included in the 1997 Annual Report to Shareholders of The Chubb Corporation. Our audits also included the financial statement schedules of The Chubb Corporation listed in Item 14(a). These schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-3: No. 33-59111 and Form S-8: No. 2-90826, No. 33-29185, No. 33-30020, No. 33-49230, No. 33-49232, No. 333-09273 and No. 333-09275) of our report dated February 20, 1998, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) of The Chubb Corporation. ERNST & YOUNG LLP New York, New York March 25, 1998 36 37 THE CHUBB CORPORATION SCHEDULE I CONSOLIDATED SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES (IN MILLIONS) DECEMBER 31, 1997
AMOUNT AT WHICH COST OR SHOWN IN AMORTIZED MARKET THE TYPE OF INVESTMENT COST VALUE BALANCE SHEET ------------------ --------- ------ ------------- Short term investments................................ $ 725.1 $ 725.1 $ 725.1 --------- --------- --------- Fixed maturities Bonds United States Government and government agencies and authorities................................ 1,636.6 1,672.0 1,669.6 States, municipalities and political subdivisions................................... 7,561.2 8,063.8 7,919.6 Foreign.......................................... 1,022.5 1,066.4 1,066.4 Public utilities................................. 190.7 195.8 195.8 All other corporate bonds........................ 1,412.9 1,442.5 1,442.5 --------- --------- --------- Total bonds............................ 11,823.9 12,440.5 12,293.9 Redeemable preferred stocks......................... 151.1 159.5 159.5 --------- --------- --------- Total fixed maturities................. 11,975.0 12,600.0 12,453.4 --------- --------- --------- Equity securities Common stocks Banks, trusts and insurance companies............ 23.9 39.8 39.8 Industrial, miscellaneous and other.............. 710.0 831.3 831.3 --------- --------- --------- Total equity securities................ 733.9 871.1 871.1 --------- --------- --------- Total invested assets.................. $13,434.0 $14,196.2 $14,049.6 ========= ========= =========
37 38 THE CHUBB CORPORATION SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS -- PARENT COMPANY ONLY (IN MILLIONS) DECEMBER 31
1997 1996 ---- ---- Assets Invested Assets Short Term Investments................................. $ 420.8 $ 9.7 Taxable Fixed Maturities -- Available-for-Sale (cost $330.8 and $792.9).................................... 334.9 786.8 Equity Securities (cost $66.4 and $52.1)............... 83.6 86.9 -------- -------- TOTAL INVESTED ASSETS............................. 839.3 883.4 Cash...................................................... .6 -- Investment in Consolidated Subsidiaries Continuing Operations.................................. 4,779.6 3,714.7 Discontinued Operations................................ -- 843.4 Other Assets.............................................. 231.4 212.6 -------- -------- TOTAL ASSETS...................................... $5,850.9 $5,654.1 ======== ======== Liabilities Long Term Debt............................................ 60.0 90.0 Dividend Payable to Shareholders.......................... 49.0 47.2 Deferred Income Tax....................................... 39.5 15.0 Accrued Expenses and Other Liabilities.................... 45.3 39.0 -------- -------- TOTAL LIABILITIES................................. 193.8 191.2 -------- -------- Shareholders' Equity Preferred Stock -- Authorized 4,000,000 Shares; $1 Par Value; Issued -- None........................... -- -- Common Stock -- Authorized 600,000,000 Shares; $1 Par Value; Issued 176,037,850 and 176,084,173 Shares................................................. 176.0 176.1 Paid-In Surplus........................................... 593.0 695.7 Retained Earnings......................................... 5,101.7 4,530.5 Foreign Currency Translation Losses, Net of Income Tax.... (25.7) (15.6) Unrealized Appreciation of Investments, Net of Income Tax.................................................... 400.1 238.7 Receivable from Employee Stock Ownership Plan............. (96.7) (106.3) Treasury Stock, at Cost -- 7,320,410 and 1,223,182 Shares................................................. (491.3) (56.2) -------- -------- TOTAL SHAREHOLDERS' EQUITY........................ 5,657.1 5,462.9 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $5,850.9 $5,654.1 ======== ========
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 1997 Annual Report to Shareholders. 38 39 THE CHUBB CORPORATION SCHEDULE II (CONTINUED) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME -- PARENT COMPANY ONLY (IN MILLIONS) YEARS ENDED DECEMBER 31
1997 1996 1995 ---- ---- ---- Investment Income........................................... $ 71.8 $ 41.5 $ 20.0 Realized Investment Gains (Losses).......................... 13.2 12.8 (.5) Investment Expenses......................................... (1.8) (2.0) (1.1) Corporate Expenses.......................................... (34.9) (33.4) (33.4) ------ ------ ------ 48.3 18.9 (15.0) Federal and Foreign Income Tax (Credit)..................... 44.0 (.1) 2.7 ------ ------ ------ 4.3 18.8 (17.7) Equity in Income from Continuing Operations of Consolidated Subsidiaries.............................................. 765.2 467.4 672.1 ------ ------ ------ INCOME FROM CONTINUING OPERATIONS...................... 769.5 486.2 654.4 Equity in Income from Discontinued Operations............... -- 26.5 42.2 ------ ------ ------ NET INCOME............................................. $769.5 $512.7 $696.6 ====== ====== ======
The Corporation and its domestic subsidiaries file a consolidated federal income tax return. The Corporation's federal income tax represents its allocation of federal income tax under the Corporation's tax allocation agreements with its subsidiaries. The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 1997 Annual Report to Shareholders. 39 40 THE CHUBB CORPORATION SCHEDULE II (CONTINUED) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY (IN MILLIONS) YEARS ENDED DECEMBER 31
1997 1996 1995 ---- ---- ---- Cash Flows from Operating Activities Net Income................................................ $ 769.5 $ 512.7 $ 696.6 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Equity in Income of Continuing Operations of Consolidated Subsidiaries............................ (765.2) (467.4) (672.1) Equity in Income from Discontinued Operations.......... -- (26.5) (42.2) Realized Investment (Gains) Losses..................... (13.2) (12.8) .5 Other, Net............................................. 16.9 (12.7) 5.2 ------- ------- ------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.............................. 8.0 (6.7) (12.0) ------- ------- ------- Cash Flows from Investing Activities Proceeds from Sales of Fixed Maturities................... 600.1 237.7 110.2 Proceeds from Maturities of Fixed Maturities.............. 49.1 104.9 13.3 Proceeds from Sales of Equity Securities.................. 89.7 17.3 2.5 Proceeds from Sale of Discontinued Operations, Net........ 861.2 -- -- Purchases of Fixed Maturities............................. (606.3) (398.0) (39.6) Purchases of Equity Securities............................ (84.0) (16.1) (8.7) Decrease (Increase) in Short Term Investments, Net........ (411.1) 53.0 (1.2) Dividends Received from Consolidated Subsidiaries......... 280.0 275.2 244.0 Capital Contributions to Consolidated Subsidiaries........ -- -- (24.0) Other, Net................................................ 19.6 (23.4) (40.1) ------- ------- ------- NET CASH PROVIDED BY INVESTING ACTIVITIES............ 798.3 250.6 256.4 ------- ------- ------- Cash Flows from Financing Activities Proceeds from Exercise of Stock Option by Subsidiary...... 249.3(a) -- -- Repayment of Long Term Debt............................... (30.0) (30.0) (30.0) Dividends Paid to Shareholders............................ (196.5) (184.2) (167.8) Repurchase of Shares...................................... (827.9) (82.5) -- Other, Net................................................ (.6) 52.7 (46.6) ------- ------- ------- NET CASH USED IN FINANCING ACTIVITIES................ (805.7) (244.0) (244.4) ------- ------- ------- Net Increase (Decrease) in Cash............................. .6 (.1) -- Cash at Beginning of Year................................... -- .1 .1 ------- ------- ------- CASH AT END OF YEAR.................................. $ .6 $ -- $ .1 ======= ======= =======
- --------------- (a) In 1997 and 1996, Chubb Capital Corporation, a subsidiary of the Corporation, exercised its option to obtain 5,316,565 shares and 480,464 shares, respectively, of the Corporation's common stock. Chubb Capital exchanged such shares for $228.6 million and $20.7 million, respectively, of its 6% exchangeable subordinated notes. In 1997, Chubb Capital paid the Corporation for the cost of those shares. In 1997, a $264.4 million investment in a real estate development subsidiary was received as a dividend from a subsidiary of the Corporation. In addition, $410.7 million of fixed maturity securities were contributed to an investment company subsidiary of the Corporation. In 1996, $520.3 million of fixed maturity securities were received as a dividend from the investment company subsidiary. These noncash transactions have been excluded from the statements of cash flows. The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 1997 Annual Report to Shareholders. 40 41 THE CHUBB CORPORATION SCHEDULE III CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION (IN MILLIONS)
DECEMBER 31 YEAR ENDED DECEMBER 31 --------------------------------- --------------------------------- DEFERRED POLICY NET ACQUISITION UNPAID UNEARNED PREMIUMS INVESTMENT INSURANCE SEGMENT COSTS CLAIMS PREMIUMS EARNED INCOME CLAIMS ------- ----------- -------- -------- -------- ---------- --------- 1997 Property and Casualty Insurance Personal............................................ $174.5 $ 675.5 $ 644.7 $1,188.1 $ 595.5 Commercial.......................................... 502.4 9,097.0 2,051.9 3,874.4 2,646.1 Reinsurance Assumed................................. -- -- -- 94.9 65.4 Investments......................................... $711.2* ------ -------- -------- -------- ------ -------- $676.9 $9,772.5 $2,696.6 $5,157.4 $711.2 $3,307.0 ====== ======== ======== ======== ====== ======== 1996 Property and Casualty Insurance Personal............................................ $146.1 $ 688.5 $ 591.9 $ 969.7 $ 570.5 Commercial.......................................... 425.2 8,652.8 1,926.8 3,315.6 2,252.6 Reinsurance Assumed................................. 29.9 182.4 98.8 284.0 187.7 Investments......................................... $646.1* ------ -------- -------- -------- ------ -------- $601.2 $9,523.7 $2,617.5 $4,569.3 $646.1 $3,010.8 ====== ======== ======== ======== ====== ======== 1995 Property and Casualty Insurance Personal............................................ $131.5 $ 692.0 $ 548.1 $ 847.5 $ 442.5 Commercial.......................................... 367.2 8,498.5 1,842.3 2,952.8 2,000.8 Reinsurance Assumed................................. 60.0 397.7 180.3 346.9 226.7 Investments......................................... $603.0* ------ -------- -------- -------- ------ -------- $558.7 $9,588.2 $2,570.7 $4,147.2 $603.0 $2,670.0 ====== ======== ======== ======== ====== ======== YEAR ENDED DECEMBER 31 ----------------------------------- AMORTIZATION OTHER OF DEFERRED INSURANCE POLICY OPERATING ACQUISITION COSTS AND PREMIUMS SEGMENT COSTS EXPENSES WRITTEN ------- ------------ --------- -------- 1997 Property and Casualty Insurance Personal............................................ $ 340.3 $ 68.2 $1,306.4 Commercial.......................................... 1,021.1 262.6 4,145.4 Reinsurance Assumed................................. 41.2 (3.8) Investments......................................... -------- ------ -------- $1,402.6 $330.8 $5,448.0 ======== ====== ======== 1996 Property and Casualty Insurance Personal............................................ $ 273.5 $ 58.5 $1,039.2 Commercial.......................................... 849.5 231.7 3,532.1 Reinsurance Assumed................................. 115.0 202.5 Investments......................................... -------- ------ -------- $1,238.0 $290.2 $4,773.8 ======== ====== ======== 1995 Property and Casualty Insurance Personal............................................ $ 254.0 $ 53.7 $ 866.8 Commercial.......................................... 750.6 208.3 3,070.7 Reinsurance Assumed................................. 116.4 368.5 Investments......................................... -------- ------ -------- $1,121.0 $262.0 $4,306.0 ======== ====== ========
- --------------- * Property and casualty assets are available for payment of claims and expenses for all classes of business; therefore, such assets and the related investment income have not been identified with specific groupings of classes of business. 41 42 THE CHUBB CORPORATION SCHEDULE IV CONSOLIDATED REINSURANCE (IN MILLIONS) YEARS ENDED DECEMBER 31
PROPERTY AND CASUALTY INSURANCE PREMIUMS EARNED ----------------------------------------------- PERCENTAGE OF CEDED ASSUMED AMOUNT DIRECT TO OTHER FROM OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET ------ --------- ---------- ------ ------------- 1997......................................... $5,315.8 $ 450.8 $292.4 $5,157.4 5.7 ======== ======== ====== ======== 1996......................................... $5,023.5 $ 987.2 $533.0 $4,569.3 11.7 ======== ======== ====== ======== 1995......................................... $4,754.4 $1,319.3 $712.1 $4,147.2 17.2 ======== ======== ====== ========
THE CHUBB CORPORATION SCHEDULE VI CONSOLIDATED SUPPLEMENTARY PROPERTY AND CASUALTY INSURANCE INFORMATION (IN MILLIONS) YEARS ENDED DECEMBER 31
CLAIMS AND CLAIM ADJUSTMENT EXPENSES INCURRED RELATED TO ---------------------- PAID CLAIMS AND CURRENT PRIOR CLAIM ADJUSTMENT YEAR YEARS EXPENSES -------- -------- ---------------- 1997.................................................. $3,372.3 $(65.3) $2,498.3 ======== ====== ======== 1996.................................................. $3,053.6 $(42.8) $2,869.4 ======== ====== ======== 1995.................................................. $2,705.8 $(35.8) $1,988.4 ======== ====== ========
42 43 THE CHUBB CORPORATION EXHIBITS (ITEM 14(a))
DESCRIPTION ----------- (2) -- Plan of acquisition, reorganization, arrangement, liquidation or succession Stock Purchase Agreement dated as of February 23, 1997 between Jefferson-Pilot Corporation and the registrant incorporated by reference to Exhibit 2.1 of the registrant's Report to the Securities and Exchange Commission on Form 10-Q for the three months ended March 31, 1997. (Confidential treatment granted with respect to certain portions thereof.) (3) -- Articles of Incorporation and By-Laws Restated Certificate of Incorporation. Incorporated by reference to Exhibit (3) of the registrant's Report to the Securities and Exchange Commission on Form 10-Q for the six months ended June 30, 1996. Restated By-Laws. Incorporated by reference to Exhibit (3) of the registrant's Report to the Securities and Exchange Commission on Form 10-Q for the six months ended June 30, 1997. (4) -- The registrant is not filing any instruments evidencing any indebtedness since the total amount of securities authorized under any single instrument does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. Copies of such instruments will be furnished to the Securities and Exchange Commission upon request. (10) -- Material contracts Global Settlement Agreement among Fibreboard Corporation, Continental Casualty Company, CNA Casualty Company of California, Columbia Casualty Company, Pacific Indemnity Company, and the Settlement Class and together with Exhibits A through D incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1993. Settlement Agreement with Fibreboard Corporation, Continental Casualty Company, CNA Casualty Company of California and Columbia Casualty Company incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-Q for the nine months ended September 30, 1993. Continental-Pacific Agreement with Continental Casualty Company incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-Q for the nine months ended September 30, 1993. Amendment to the Continental-Pacific Agreement with Continental Casualty Company incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1994. Executive Compensation Plans and Arrangements. 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, incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-Q for the six months ended June 30, 1996.
43 44
DESCRIPTION ----------- 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. The Chubb Corporation Long-Term Stock Incentive Plan (1992) incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1992. The Chubb Corporation Stock Option Plan (1984) incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1994. The Chubb Corporation Stock Option Plan for Non-Employee Directors (1992) incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1992. The Chubb Corporation Deferred Compensation Plan for Directors incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1995. Executive Severance Agreements and their amendments incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1994. Executive Severance Agreements incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1995. Executive Severance Agreement incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-Q for the six months ended June 30, 1997. Executive Severance Agreements filed herewith. Contract for consulting and advisory services with Percy Chubb III, a director of the registrant, incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1996. (11) -- Computation of earnings per share incorporated by reference from Note (16) of the notes to consolidated financial statements of the 1997 Annual Report to Shareholders. (13) -- Pages 15, 16, and 36 through 62 of the 1997 Annual Report to Shareholders. (21) -- Subsidiaries of the registrant filed herewith. (23) -- Consent of Independent Auditors (see page 36 of this report).
44 EX-10 2 EXECUTIVE SEVERANCE AGREEMENT 1 [LETTERHEAD OF THE CHUBB CORPORATION] June 19, 1997 Mr. Michael O'Reilly Dear Mr. O'Reilly: In order to induce you to remain in the employ of The Chubb Corporation (the "Company") and in consideration of your continuing in the Company's employ, the Company agrees to provide the severance benefits specified below on the terms and subject to the conditions stated. However, in the absence of a Change in Control of the Company, as defined below, nothing in this Agreement shall affect the Company's normal right to terminate your employment or your right to leave its employ. 1. Change in Control. For purposes of this Agreement a Change in Control will be deemed to have occurred (A) if following (i) a tender or exchange offer for voting securities of the Company, (ii) a proxy contest for the election of Directors of the Company or (iii) a merger or consolidation or sale of all or substantially all of the business or assets of the Company, the Directors of the Company immediately prior to the initiation of such event cease to constitute a majority of the Board of Directors of the Company upon the occurrence of such event or within one year after such event, or (B) if any "person" or "group" (as defined under the beneficial ownership rules of Sections 12(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934 and Rule 13d-3 thereunder) acquires ownership or control, or power to control, 25% or more of the outstanding voting securities of the Company without prior approval or ratification by a majority of the Company's Directors in office at the time of such event. 2. Conditions to Severance Benefits. The benefits provided for in Section 5 shall be payable or accrue to you if (a) a Change in Control has occurred and (b) your employment with the Company has terminated within two years after the Change in Control, other 2 Mr. Michael O'Reilly June 19, 1997 Page 2. than termination by reason of (i) your death, (ii) your retirement at normal retirement age ("Retirement") under the Company's pension plan as in effect immediately prior to the Change in Control, (iii) your voluntary termination other than for Good Reason, (iv) your retirement for Disability or (v) your discharge for cause. Termination by you of your employment for "Good Reason" shall mean termination by you of your employment, subsequent to a Change in Control, because of: (A) the assignment to you, without your express written consent, of any duties inconsistent with your positions, duties, responsibilities, authority and status with the Company and its principal subsidiaries immediately prior to such Change in Control, or a change in your reporting responsibilities, titles or offices as in effect immediately prior to the Change in Control, or any removal of you from or any failure to re-elect you to any of such positions, except in connection with the termination of your employment for Cause, Disability, Retirement, as a result of your death or by you without Good Reason; (B) a reduction by the Company in your base salary as in effect at the time of such Change in Control; (C) a failure by the Company to continue (or to replace with equivalent plans) the Performance Share Plan, the Annual Incentive Compensation Plan or any other Bonus Plan in which you participated for the year immediately preceding such Change in Control (the "Bonus Plans") which are in effect at the time of such Change in Control or a failure by the Company to continue you as a participant in such Bonus Plans (or equivalent plans) on a basis which would entitle you to receive under such Bonus Plans (or equivalent plans) amounts at least equal to the average amounts you received pursuant to such Bonus Plans for the three years preceding such Change in Control; (D) the Company's requiring you to maintain your principal office or conduct your principal activities anywhere other than at the Company's principal executive offices in the New York Metropolitan area, including Somerset County, New Jersey; (E) the failure by the Company to continue in effect (or to replace with equivalent plans) the Company's Capital Accumulation Plan or any other compensation plan, any stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health and accident plan, financial services plan, hospital-medical plan, dental plan, or disability plan in which you are participating or eligible to participate at the time of such Change in Control, or the taking of any action by the Company which would adversely affect your participation in or materially reduce your benefits under any such plans (or equivalent plans) or 3 Mr. Michael O'Reilly June 19, 1997 Page 3. deprive you of any material fringe benefit enjoyed or to be enjoyed by you at the time of such Change in Control; (F) the failure by the Company to obtain the assumption of the agreement to perform this Agreement by any successor as contemplated in Section 7 hereof; (G) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the applicable requirements with respect to such Notice; or (H) a determination made by you in good faith, whether before or after the date you are eligible for early retirement under the Company's pension plan, that as a result of such Change in Control you are not able to discharge your duties effectively; or (I) any termination of this Agreement pursuant to Section 6 prior to the expiration of two years from the occurrence of the Change in Control. Termination of your employment for "Cause" shall mean termination because of (A) the willful and continued failure by you substantially to perform your duties with the Company and its principal subsidiaries (other than any such failure resulting from your incapacity due to physical or mental illness), after a demand for substantial performance is delivered to you by the Chief Executive Officer of the Company, which specifically identifies the manner in which such executive believes that you have not substantially performed your duties, or (B) the willful engaging by you in misconduct which is materially injurious to the Company, monetarily or otherwise. For purposes of this paragraph, no act, or failure to act, on your part shall be considered "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in or not opposed to the best interests of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a Notice of Termination from the Chief Executive Officer of the Company after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board of Directors, and a finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clauses (A) or (B) of the first sentence of this paragraph and specifying the particulars thereof in detail. Termination of your employment for Disability shall mean termination in accordance with the provisions of the Company's Long Term Disability Plan as in effect immediately preceding the Change in Control. 3. Notice of Termination. Any purported termination of your employment shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific 4 Mr. Michael O'Reilly June 19, 1997 Page 4. termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. No purported termination of your employment by the Company shall be effective if it is not effected pursuant to a Notice of Termination satisfying the requirements of this Section 3. 4. Date of Termination. "Date of Termination" shall mean (A) if your employment is terminated for Disability, 30 days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such 30-day period) and (B) if your employment is terminated for any other reason, the date on which a Notice of Termination is given. 5. Severance Benefits. Subject to the conditions in Section 2, on termination of your employment you shall be entitled to the following benefits: (A) You shall be entitled to an amount (the "Severance Compensation") equal to 2 times the sum of (i) one year's salary at the annual rate in effect at the time of the Change in Control and (ii) the average for the three calendar years preceding such Change in Control of your bonuses under the Annual Incentive Compensation Plan (1984) (or successor plan), provided, however, that your Severance Compensation shall not be greater than the amount you would have received as salary and such bonuses from the Company had you remained in the employ of the Company from the Date of Termination until your normal retirement date under the Company's pension plan (on the assumption that your salary would remain at the same annual rate as in effect at the time of Change in Control and that your annual bonuses would be the average for the three calendar years preceding such Change in Control of such bonuses). The Severance Compensation will be payable in fill on the Date of Termination. (B) The Company shall also pay to you an amount equal to all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce or retain any right or benefit provided by this Agreement); (C) The Company shall maintain in full force and effect, for your continued benefit until the earlier of (a) two years after the Date of Termination or, (b) your commencement of full time employment with a new employer, all life insurance, hospital-medical, dental, health and accident, and disability plans in which you were entitled to participate immediately prior to such Change in Control, provided that your continued participation is possible under the general terms and provisions of such plans and programs. In the event that your participation in any such plan or program is barred for any reason whatsoever, the 5 Mr. Michael O'Reilly June 19, 1997 Page 5. Company shall arrange to provide you with benefits substantially similar to those which you are entitled to receive under such plan or program; (D) You shall not be required to mitigate the amount of any payment provided for in this Section 5 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Section 5 be reduced by any compensation earned by you as the result of employment by another employer after the Date of Termination or otherwise. 6. Term of Agreement. This Agreement shall have an initial term of two (2) years from the date hereof and shall be automatically extended at the expiration of said two-year period for successive two (2) year periods unless the Company gives you one year's prior written notice that it is terminating this Agreement at the expiration of the then current two year period. 7. Successors; Binding Agreement. (A) The Company will require any purchaser of all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to you to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such purchase had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business or assets as aforesaid which executes and delivers the agreement provided for in this Section 7(A) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (B) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, divisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate. 8. Notices. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Chairman of the Company, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 6 Mr. Michael O'Reilly June 19, 1997 Page 6. 9. Miscellaneous. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by you and such officer as may be specifically designated by the Board of Directors of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement; provided, however, that this Agreement shall not supersede or in any way affect the rights, duties or obligations you may have under any other written agreement with the Company. This Agreement shall be governed by, and construed in accordance with, the laws (other than principles of conflicts of laws) of the State of New York. 10. Validity. The invalidity or unenforceability of any provision of this Agreement in any respect shall not affect the validity or enforceability of such provision in any other respect or of any other provision of this Agreement, all of which shall remain in full force and effect. If the foregoing correctly sets forth our understanding on the subject matter hereof, kindly sign and return to the Company the enclosed copy hereof, which will thereupon become our binding agreement. Sincerely, THE CHUBB CORPORATION /s/ Dean R. O'Hare ------------------------------ Dean R. O'Hare Chairman Agreed to this 30 day of June, 1997 /s/ Michael O'Reilly - ----------------------------- Michael O'Reilly EX-10 3 EXECUTIVE SEVERENCE AGREEMENT 1 [LETTERHEAD OF THE CHUBB CORPORATION] March 7, 1997 Mr. David B. Kelso Dear Mr. Kelso: In order to induce you to remain in the employ of The Chubb Corporation (the "Company") and in consideration of your continuing in the Company's employ, the Company agrees to provide the severance benefits specified below on the terms and subject to the conditions stated. However, in the absence of a Change in Control of the Company, as defined below, nothing in this Agreement shall affect the Company's normal right to terminate your employment or your right to leave its employ. 1. Change in Control. For purposes of this Agreement a Change in Control will be deemed to have occurred (A) if following (i) a tender or exchange offer for voting securities of the Company, (ii) a proxy contest for the election of Directors of the Company or (iii) a merger or consolidation or sale of all or substantially all of the business or assets of the Company, the Directors of the Company immediately prior to the initiation of such event cease to constitute a majority of the Board of Directors of the Company upon the occurrence of such event or within one year after such event, or (B) if any "person" or "group" (as defined under the beneficial ownership rules of Sections 12(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934 and Rule 13d-3 thereunder) acquires ownership or control, or power to control, 25% or more of the outstanding voting securities of the Company without prior approval or ratification by a majority of the Company's Directors in office at the time of such event. 2. Conditions to Severance Benefits. The benefits provided for in Section 5 shall be payable or accrue to you if (a) a Change in Control has occurred and (b) your employment with the Company has terminated within two years after the Change in 2 Mr. David B. Kelso March 7, 1997 Page 2. Control, other than termination by reason of (i) your death, (ii) your retirement at normal retirement age ("Retirement") under the Company's pension plan as in effect immediately prior to the Change in Control, (iii) your voluntary termination other than for Good Reason, (iv) your retirement for Disability or (v) your discharge for cause. Termination by you of your employment for "Good Reason" shall mean termination by you of your employment, subsequent to a Change in Control, because of: (A) the assignment to you, without your express written consent, of any duties inconsistent with your positions, duties, responsibilities, authority and status with the Company and its principal subsidiaries immediately prior to such Change in Control, or a change in your reporting responsibilities, titles or offices as in effect immediately prior to the Change in Control, or any removal of you from or any failure to re-elect you to any of such positions, except in connection with the termination of your employment for Cause, Disability, Retirement, as a result of your death or by you without Good Reason; (B) a reduction by the Company in your base salary as in effect at the time of such Change in Control; (C) a failure by the Company to continue (or to replace with equivalent plans) the Performance Share Plan, the Annual Incentive Compensation Plan or any other Bonus Plan in which you participated for the year immediately preceding such Change in Control (the "Bonus Plans") which are in effect at the time of such Change in Control or a failure by the Company to continue you as a participant in such Bonus Plans (or equivalent plans) on a basis which would entitle you to receive under such Bonus Plans (or equivalent plans) amounts at least equal to the average amounts you received pursuant to such Bonus Plans for the three years preceding such Change in Control; (D) the Company's requiring you to maintain your principal office or conduct your principal activities anywhere other than at the Company's principal executive offices in the New York Metropolitan area, including Somerset County, New Jersey; (E) the failure by the Company to continue in effect (or to replace with equivalent plans) the 3 Mr. David B. Kelso March 7, 1997 Page 3. Company's Capital Accumulation Plan or any other compensation plan, any stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health and accident plan, financial services plan, hospital-medical plan, dental plan, or disability plan in which you are participating or eligible to participate at the time of such Change in Control, or the taking of any action by the Company which would adversely affect your participation in or materially reduce your benefits under any such plans (or equivalent plans) or deprive you of any material fringe benefit enjoyed or to be enjoyed by you at the time of such Change in Control; (F) the failure by the Company to obtain the assumption of the agreement to perform this Agreement by any successor as contemplated in Section 7 hereof; (G) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the applicable requirements with respect to such Notice; or (H) a determination made by you in good faith, whether before or after the date you are eligible for early retirement under the Company's pension plan, that as a result of such Change in Control you are not able to discharge your duties effectively; or (I) any termination of this Agreement pursuant to Section 6 prior to the expiration of two years from the occurrence of the Change in Control. Termination of your employment for "Cause" shall mean termination because of (A) the willful and continued failure by you substantially to perform your duties with the Company and its principal subsidiaries (other than any such failure resulting from your incapacity due to physical or mental illness), after a demand for substantial performance is delivered to you by the Chief Executive Officer of the Company, which specifically identifies the manner in which such executive believes that you have not substantially performed your duties, or (B) the willful engaging by you in misconduct which is materially injurious to the Company, monetarily or otherwise. For purposes of this paragraph, no act, or failure to act, on your part shall be considered "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in or not opposed to the best interests of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall 4 Mr. David B. Kelso March 7, 1997 Page 4. have been delivered to you a copy of a Notice of Termination from the Chief Executive Officer of the Company after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board of Directors, and a finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clauses (A) or (B) of the first sentence of this paragraph and specifying the particulars thereof in detail. Termination of your employment for Disability shall mean termination in accordance with the provisions of the Company's Long Term Disability Plan as in effect immediately preceding the Change in Control. 3. Notice of Termination. Any purported termination of your employment shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. No purported termination of your employment by the Company shall be effective if it is not effected pursuant to a Notice of Termination satisfying the requirements of this Section 3. 4. Date of Termination. "Date of Termination" shall mean (A) if your employment is terminated for Disability, 30 days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such 30-day period) and (B) if your employment is terminated for any other reason, the date on which a Notice of Termination is given. 5. Severance Benefits. Subject to the conditions in Section 2, on termination of your employment you shall be entitled to the following benefits: (A) You shall be entitled to an amount (the "Severance Compensation") equal to 2 times the sum of (i) one year's salary at the annual rate in effect at the time of the Change in Control and (ii) the average for the three calendar years preceding such Change in Control of your bonuses under the Annual Incentive Compensation Plan (1984) (or successor plan), provided, however, that your Severance Compensation shall not be greater than the amount you would have received as salary and such bonuses from the Company had you remained in the employ of the Company from the Date of Termination until your normal retirement date under the 5 Mr. David B. Kelso March 7, 1997 Page 5. Company's pension plan (on the assumption that your salary would remain at the same annual rate as in effect at the time of Change in Control and that your annual bonuses would be the average for the three calendar years preceding such Change in Control of such bonuses). The Severance Compensation will be payable in full on the Date of Termination. (B) The Company shall also pay to you an amount equal to all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce or retain any right or benefit provided by this Agreement); (C) The Company shall maintain in full force and effect, for your continued benefit until the earlier of (a) two years after the Date of Termination or, (b) your commencement of full time employment with a new employer, all life insurance, hospital-medical, dental, health and accident, and disability plans in which you were entitled to participate immediately prior to such Change in Control, provided that your continued participation is possible under the general terms and provisions of such plans and programs. In the event that your participation in any such plan or program is barred for any reason whatsoever, the Company shall arrange to provide you with benefits substantially similar to those which you are entitled to receive under such plan or program; (D) You shall not be required to mitigate the amount of any payment provided for in this Section 5 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Section 5 be reduced by any compensation earned by you as the result of employment by another employer after the Date of Termination or otherwise. 6. Term of Agreement. This Agreement shall have an initial term of two (2) years from the date hereof and shall be automatically extended at the expiration of said two-year period for successive two (2) year periods unless the Company gives you one year's prior written notice that it is terminating this Agreement at the expiration of the then current two year period. 7. Successors; Binding Agreement. (A) The Company will require any purchaser of all 6 Mr. David B. Kelso March 7, 1997 Page 6. or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to you to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such purchase had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business or assets as aforesaid which executes and delivers the agreement provided for in this Section 7(A) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (B) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, divisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate. 8. Notices. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Chairman of the Company, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. Miscellaneous. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by you and such officer as may be specifically designated by the Board of Directors of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement; provided, however, 7 Mr. David B. Kelso March 7, 1997 Page 7. that this Agreement shall not supersede or in any way affect the rights, duties or obligations you may have under any other written agreement with the Company. This Agreement shall be governed by, and construed in accordance with, the laws (other than principles of conflicts of laws) of the State of New York. 10. Validity. The invalidity or unenforceability of any provision of this Agreement in any respect shall not affect the validity or enforceability of such provision in any other respect or of any other provision of this Agreement, all of which shall remain in full force and effect. If the foregoing correctly sets forth our understanding on the subject matter hereof, kindly sign and return to the Company the enclosed copy hereof, which will thereupon become our binding agreement. Sincerely, THE CHUBB CORPORATION /s/ Dean R. O'Hare ------------------------------ Dean R. O'Hare Chairman Agreed to this 7th day of March, 1997 /s/ David B. Kelso - ----------------------------- David B. Kelso EX-13 4 1997 ANNUAL REPORT TO SHAREHOLDERS 1 SUPPLEMENTARY FINANCIAL DATA
IN MILLIONS YEARS ENDED DECEMBER 31 1997 1996 1995 -------- -------- -------- PROPERTY AND CASUALTY INSURANCE UNDERWRITING Net Premiums Written................................... $5,448.0 $4,773.8 $4,306.0 Increase in Unearned Premiums.......................... (290.6) (204.5) (158.8) -------- -------- -------- Premiums Earned........................................ 5,157.4 4,569.3 4,147.2 -------- -------- -------- Claims and Claim Expenses.............................. 3,307.0 3,010.8 2,670.0 Operating Costs and Expenses........................... 1,777.4 1,547.4 1,393.3 Increase in Deferred Policy Acquisition Costs.......... (75.7) (42.5) (29.2) Dividends to Policyholders............................. 31.7 23.3 18.9 -------- -------- -------- Underwriting Income Before Income Tax.................. 117.0 30.3 94.2 Federal and Foreign Income Tax......................... 39.5 13.2 38.5 -------- -------- -------- UNDERWRITING INCOME.................................... 77.5 17.1 55.7 -------- -------- -------- INVESTMENTS Investment Income Before Expenses and Income Tax....... 721.4 656.2 613.3 Investment Expenses.................................... 10.2 10.1 10.3 -------- -------- -------- Investment Income Before Income Tax.................... 711.2 646.1 603.0 Federal and Foreign Income Tax......................... 118.9 101.9 95.8 -------- -------- -------- INVESTMENT INCOME...................................... 592.3 544.2 507.2 -------- -------- -------- PROPERTY AND CASUALTY INCOME.............................. 669.8 561.3 562.9 -------- -------- -------- REAL ESTATE Revenues.................................................. 616.1 319.8 287.8 Cost of Sales and Expenses................................ 624.7 555.7(a) 280.1 -------- -------- -------- Real Estate Income (Loss) Before Income Tax............... (8.6) (235.9) 7.7 Federal Income Tax (Credit)............................... (3.5) (89.1) 1.7 -------- -------- -------- REAL ESTATE INCOME (LOSS)................................. (5.1) (146.8)(a) 6.0 -------- -------- -------- CORPORATE, NET OF TAX....................................... 36.4 19.7 14.8 -------- -------- -------- CONSOLIDATED OPERATING INCOME FROM CONTINUING OPERATIONS........................................... 701.1 434.2 583.7 REALIZED INVESTMENT GAINS FROM CONTINUING OPERATIONS, NET OF TAX................................................ 68.4 52.0 70.7 -------- -------- -------- CONSOLIDATED INCOME FROM CONTINUING OPERATIONS......... 769.5 486.2 654.4 INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX (B)......... -- 26.5 42.2 -------- -------- -------- CONSOLIDATED NET INCOME................................ $ 769.5 $ 512.7 $ 696.6 ======== ======== ========
(a) The 1996 real estate loss reflects a net charge of $160.0 million for the after-tax effect of a $255.0 million write-down of the carrying value of certain real estate assets to their estimated fair value. (b) In May 1997, the Corporation sold its life and health insurance operations, which have been classified as discontinued operations. The above federal and foreign income tax provisions represent allocations of the consolidated provision. 15 2 PROPERTY AND CASUALTY UNDERWRITING RESULTS NET PREMIUMS WRITTEN (In Millions of Dollars)
1997 1996 1995 1994 1993 Personal Insurance Automobile...................... $ 298.6 $ 243.1 $ 200.3 $ 188.0 $ 192.1 Homeowners...................... 697.4 546.1 455.6 436.5 434.1 Other........................... 310.4 250.0 210.9 204.3 201.6 -------- -------- -------- -------- -------- Total Personal............. 1,306.4 1,039.2 866.8 828.8 827.8 -------- -------- -------- -------- -------- Commercial Insurance Multiple Peril.................. 813.6 671.0 575.7 522.6 480.8 Casualty........................ 915.8 818.0 717.3 667.8 728.9(a) Workers' Compensation........... 296.7 243.7 223.4 201.6 181.1 Property and Marine............. 583.0 495.0 426.3 360.0 277.5 Executive Protection............ 891.4 775.7 647.0 596.4 515.2 Other........................... 644.9 528.7 481.0 458.8 415.1 -------- -------- -------- -------- -------- Total Commercial........... 4,145.4 3,532.1 3,070.7 2,807.2 2,598.6(a) -------- -------- -------- -------- -------- Total Before Reinsurance Assumed................. 5,451.8 4,571.3 3,937.5 3,636.0 3,426.4(a) Reinsurance Assumed............... (3.8) 202.5 368.5 315.2 219.9 -------- -------- -------- -------- -------- Total...................... $5,448.0 $4,773.8 $4,306.0 $3,951.2 $3,646.3(a) ======== ======== ======== ======== ========
(a) Includes a $125.0 million return premium to the Corporation's property and casualty insurance subsidiaries related to the commutation of a medical malpractice reinsurance agreement. Excluding this return premium, net premiums written were $603.9 million for Casualty, $2,473.6 million for Commercial, $3,301.4 million for Total Before Reinsurance Assumed and $3,521.3 million in Total. A portion of the increase in net premiums written in both 1996 and 1997 was due to changes to the reinsurance agreements with the Royal & Sun Alliance Insurance Group plc. Effective January 1, 1996, these agreements were amended to reduce the portion of each company's business reinsured with the other. The agreements were terminated effective January 1, 1997. COMBINED LOSS AND EXPENSE RATIOS Personal Insurance Automobile...................... 86.6% 86.5% 87.4% 96.3% 97.5% Homeowners...................... 88.9 104.3 93.8 110.2 100.1 Other........................... 66.9 69.3 72.6 80.7 84.2 -------- -------- -------- -------- -------- Total Personal............. 83.1 91.7 87.1 99.8 95.6 -------- -------- -------- -------- -------- Commercial Insurance Multiple Peril.................. 118.7 118.1 110.0 112.4 117.2 Casualty........................ 113.5 113.3 113.8 101.9 175.8(b) Workers' Compensation........... 105.0 101.8 95.1 103.9 117.3 Property and Marine............. 105.5 97.8 92.9 102.5 98.7 Executive Protection............ 74.5 76.5 82.1 81.4 78.4 Other........................... 88.9 89.3 95.1 100.2 99.1 -------- -------- -------- -------- -------- Total Commercial........... 100.7 99.7 99.3 99.4 121.4(b) -------- -------- -------- -------- -------- Total Before Reinsurance Assumed................. 96.6 97.9 96.5 99.5 115.0(b) Reinsurance Assumed............... N/M N/M 99.2 100.1 112.4 -------- -------- -------- -------- -------- Total...................... 96.9% 98.3% 96.8% 99.5% 114.8%(b) ======== ======== ======== ======== ========
(b) Includes the effects of a $675.0 million increase in unpaid claims related to an agreement for the settlement of asbestos-related litigation and the $125.0 million return premium related to the commutation of a medical malpractice reinsurance agreement. Excluding the effects of these items, the combined loss and expense ratio was 97.4% for Casualty, 99.2% for Commercial, 98.3% for Total Before Reinsurance Assumed and 99.0% in Total. The combined loss and expense ratio, expressed as a percentage, is the key measure of underwriting profitability traditionally used in the property and casualty insurance business. It is the sum of the ratio of losses to premiums earned plus the ratio of underwriting expenses to premiums written after reducing both premium amounts by dividends to policyholders. 16 3 TEN YEAR FINANCIAL SUMMARY (in millions except for per share amounts)
FOR THE YEAR 1997 1996 1995 1994 REVENUES Property and Casualty Insurance Premiums Earned................................... $5,157.4 $4,569.3 $4,147.2 $3,776.3 Investment Income................................. 721.4 656.2 613.3 570.5 Real Estate........................................ 616.1 319.8 287.8 204.9 Corporate Investment Income........................ 63.9 55.4 54.4 49.4 Realized Investment Gains (Losses)................. 105.2 79.8 108.8 54.1 TOTAL REVENUES.................................. 6,664.0 5,680.5 5,211.5 4,655.2 COMPONENTS OF NET INCOME* Property and Casualty Insurance Underwriting Income (Loss)(b)..................... 77.5 17.1 55.7 (7.8) Investment Income................................. 592.3 544.2 507.2 475.0 Real Estate Income (Loss).......................... (5.1) (146.8)(e) 6.0 (2.0) Corporate Income (Loss)............................ 36.4 19.7 14.8 7.6 OPERATING INCOME FROM CONTINUING OPERATIONS..... 701.1 434.2 583.7 472.8 Realized Investment Gains (Losses) from Continuing Operations........................... 68.4 52.0 70.7 35.1 INCOME FROM CONTINUING OPERATIONS............... 769.5 486.2 654.4 507.9 Income from Discontinued Operations................ -- 26.5 42.2 20.6 NET INCOME...................................... 769.5 512.7 696.6 528.5 DILUTED EARNINGS PER SHARE Operating Income from Continuing Operations........ $4.00 $2.44 $3.27 $2.66 Income from Continuing Operations.................. 4.39 2.73 3.67 2.85 Income from Discontinued Operations................ -- .15 .23 .11 Net Income(b)...................................... 4.39 2.88(e) 3.90 2.96 DIVIDENDS DECLARED ON COMMON STOCK................... 198.3 188.7 170.6 161.1 Per Share.......................................... 1.16 1.08 .98 .92 CHANGE IN UNREALIZED APPRECIATION OR DEPRECIATION OF INVESTMENTS, NET................................... 161.4 (107.2) 470.2 (487.9) AT YEAR END TOTAL ASSETS......................................... $19,615.6 $19,938.9 $19,636.3 $17,761.0 INVESTED ASSETS Property and Casualty Insurance.................... 12,777.3 11,190.7 10,013.6 8,938.8 Corporate.......................................... 1,272.3 890.4 906.6 879.5 UNPAID CLAIMS........................................ 9,772.5 9,523.7 9,588.2 8,913.2 LONG TERM DEBT....................................... 398.6 1,070.5 1,150.8 1,279.6 TOTAL SHAREHOLDERS' EQUITY........................... 5,657.1 5,462.9 5,262.7 4,247.0 Per Common Share................................... 33.53 31.24 30.14 24.46
* The federal and foreign income tax provided for each component of income represents its allocated portion of the consolidated provision. Prior year earnings per share amounts have been restated to reflect the changes prescribed by Statement of Financial Accounting Standards No. 128, Earnings per Share. The diluted per share amounts include any dilutive effects of convertible securities and of awards under employee stock-based compensation plans. In May 1997, the Corporation sold its life and health insurance operations, which have been classified as discontinued operations. Amounts prior to 1994 do not reflect the accounting changes prescribed by Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, as restatement of prior year amounts was not permitted. The change in unrealized appreciation or depreciation of investments for 1994 excludes the increase in unrealized appreciation, as of January 1, 1994, of $220.5 million resulting from the change in accounting principle. 36 4
FOR THE YEAR 1993 1992 1991 1990 1989 1988 REVENUES Property and Casualty Insurance Premiums Earned................................... $3,504.8(a) $3,163.3 $3,037.2 $2,836.1 $2,693.5 $2,705.5 Investment Income................................. 541.7 501.1 477.0 463.4 426.2 364.1 Real Estate........................................ 160.6 150.0 140.9 174.9 221.3 155.2 Corporate Investment Income........................ 52.7 57.2 46.3 39.6 25.2 17.8 Realized Investment Gains (Losses)................. 210.6 174.1 61.1 39.6 40.2 (19.6) TOTAL REVENUES.................................. 4,470.4 4,045.7 3,762.5 3,553.6 3,406.4 3,223.0 COMPONENTS OF NET INCOME* Property and Casualty Insurance Underwriting Income (Loss)(b)..................... (337.5)(c) (15.3) 18.6 20.7(d) (25.0) 15.8 Investment Income................................. 455.4 422.8 397.6 371.4 330.1 290.6 Real Estate Income (Loss).......................... (2.2) 10.0 25.0 40.0 42.0 40.0 Corporate Income (Loss)............................ 14.4 19.8 16.3 14.7 .7 (5.3) OPERATING INCOME FROM CONTINUING OPERATIONS..... 130.1 437.3 457.5 446.8 347.8 341.1 Realized Investment Gains (Losses) from Continuing Operations........................... 137.3 114.8 40.3 25.8 26.4 (14.0) INCOME FROM CONTINUING OPERATIONS............... 267.4 552.1 497.8 472.6 374.2 327.1 Income from Discontinued Operations................ 76.8 65.0 54.2 49.5 46.6 32.5 NET INCOME...................................... 324.2(f) 617.1 552.0 522.1 420.8 359.6 DILUTED EARNINGS PER SHARE Operating Income from Continuing Operations........ $ .77 $2.47 $2.61 $2.59 $2.03 $2.03 Income from Continuing Operations.................. 1.52 3.10 2.84 2.74 2.18 1.94 Income from Discontinued Operations................ .42 .36 .30 .28 .27 .19 Net Income(b)...................................... 1.83(c)(f) 3.46 3.14 3.02(d) 2.45 2.13 DIVIDENDS DECLARED ON COMMON STOCK................... 150.8 139.6 127.8 109.1 96.5 87.8 Per Share.......................................... .86 .80 .74 .66 .58 .54 CHANGE IN UNREALIZED APPRECIATION OR DEPRECIATION OF INVESTMENTS, NET................................... 46.5 (82.1) 12.2 (19.4) 70.3 29.9 AT YEAR END TOTAL ASSETS......................................... $16,729.5 $15,197.6 $13,885.9 $12,347.8 $11,390.4 $9,699.4 INVESTED ASSETS Property and Casualty Insurance.................... 8,403.1 7,767.5 7,086.6 6,297.8 5,793.7 5,153.0 Corporate.......................................... 965.7 955.8 840.3 688.4 647.8 366.2 UNPAID CLAIMS........................................ 8,235.4 7,220.9 6,591.3 6,016.4 5,605.0 4,585.8 LONG TERM DEBT....................................... 1,267.2 1,065.6 1,045.8 812.6 604.2 353.7 TOTAL SHAREHOLDERS' EQUITY........................... 4,196.1 3,954.4 3,541.6 2,882.6 2,603.7 2,238.4 Per Common Share................................... 23.92 22.59 20.37 17.60 15.42 13.77
(a) Premiums earned have been increased by a $125.0 million return premium to the Corporation's property and casualty insurance subsidiaries related to the commutation of a medical malpractice reinsurance agreement. (b) Net income has been increased by tax benefits of $6.4 million or $.04 per share in 1992, $7.2 million or $.04 per share in 1991, $10.8 million or $.06 per share in 1990, $19.2 million or $.11 per share in 1989 and $20.4 million or $.12 per share in 1988 related to the exclusion from taxable income of a portion of the "fresh start" discount on property and casualty unpaid claims as a result of the Tax Reform Act of 1986. (c) Net income has been reduced by a net charge of $357.5 million or $1.96 per share for the after-tax effects of a $675.0 million increase in unpaid claims related to an agreement for the settlement of asbestos-related litigation and the $125.0 million return premium related to the commutation of a medical malpractice reinsurance agreement. (d) Net income has been increased by the one-time benefit of a $14.0 million or $.08 per share elimination of deferred income taxes related to estimated property and casualty salvage and subrogation recoverable as a result of the Revenue Reconciliation Act of 1990. (e) Net income has been reduced by a net charge of $160.0 million or $.89 per share for the after-tax effect of a $255.0 million write-down of the carrying value of certain real estate assets to their estimated fair value. (f) Net income has been reduced by a one-time charge of $20.0 million or $.11 per share for the cumulative effect of changes in accounting principles resulting from the Corporation's adoption of Statements of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, and No. 109, Accounting for Income Taxes. Income before the cumulative effect of changes in accounting principles was $344.2 million or $1.94 per share. 37 5 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF INCOME
IN MILLIONS YEARS ENDED DECEMBER 31 1997 1996 1995 REVENUES -------- -------- -------- Premiums Earned (Note 11).............................. $5,157.4 $4,569.3 $4,147.2 Investment Income (Note 3)............................. 785.3 711.6 667.7 Real Estate............................................ 616.1 319.8 287.8 Realized Investment Gains (Note 3)..................... 105.2 79.8 108.8 -------- -------- -------- TOTAL REVENUES.................................... 6,664.0 5,680.5 5,211.5 -------- -------- -------- CLAIMS AND EXPENSES Insurance Claims (Notes 11 and 13)..................... 3,307.0 3,010.8 2,670.0 Amortization of Deferred Policy Acquisition Costs (Note 5).................................................... 1,402.6 1,238.0 1,121.0 Other Insurance Operating Costs and Expenses........... 330.8 290.2 262.0 Real Estate Cost of Sales and Expenses (Note 4)........ 624.7 555.7 280.1 Investment Expenses.................................... 12.0 12.3 11.9 Corporate Expenses..................................... 12.8 26.6 29.5 -------- -------- -------- TOTAL CLAIMS AND EXPENSES......................... 5,689.9 5,133.6 4,374.5 -------- -------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE FEDERAL AND FOREIGN INCOME TAX.......................... 974.1 546.9 837.0 FEDERAL AND FOREIGN INCOME TAX (NOTE 8)..................... 204.6 60.7 182.6 -------- -------- -------- INCOME FROM CONTINUING OPERATIONS................. 769.5 486.2 654.4 DISCONTINUED OPERATIONS, NET OF TAX (NOTE 2) Income from Operations................................. -- 48.5 42.2 Loss on Disposal....................................... -- (22.0) -- -------- -------- -------- INCOME FROM DISCONTINUED OPERATIONS............... -- 26.5 42.2 -------- -------- -------- NET INCOME........................................ $ 769.5 $ 512.7 $ 696.6 ======== ======== ======== BASIC EARNINGS PER SHARE (NOTES 1 AND 16) Income from Continuing Operations...................... $ 4.48 $ 2.79 $ 3.77 Income from Discontinued Operations.................... -- .15 .23 -------- -------- -------- Net Income........................................ $ 4.48 $ 2.94 $ 4.00 ======== ======== ======== DILUTED EARNINGS PER SHARE (NOTES 1 AND 16) Income from Continuing Operations...................... $ 4.39 $ 2.73 $ 3.67 Income from Discontinued Operations.................... -- .15 .23 -------- -------- -------- Net Income........................................ $ 4.39 $ 2.88 $ 3.90 ======== ======== ========
See accompanying notes. 38 6 THE CHUBB CORPORATION CONSOLIDATED BALANCE SHEETS
IN MILLIONS DECEMBER 31 1997 1996 ASSETS --------- --------- Invested Assets (Note 3) Short Term Investments................................. $ 725.1 $ 275.9 Fixed Maturities Held-to-Maturity -- Tax Exempt (market $2,347.2 and $2,573.4)........................................... 2,200.6 2,443.6 Available-for-Sale Tax Exempt (cost $5,408.4 and $4,415.1)........... 5,766.9 4,622.6 Taxable (cost $4,366.0 and $4,038.7).............. 4,485.9 4,092.7 Equity Securities (cost $733.9 and $540.5)............. 871.1 646.3 --------- --------- TOTAL INVESTED ASSETS................................ 14,049.6 12,081.1 Cash...................................................... 11.5 4.7 Accrued Investment Income................................. 203.8 195.3 Premiums Receivable....................................... 1,144.4 984.9 Reinsurance Recoverable on Unpaid Claims (Note 11)........ 1,207.9 1,767.8 Prepaid Reinsurance Premiums.............................. 115.2 326.7 Funds Held for Asbestos-Related Settlement (Note 13)...... 599.5 599.9 Deferred Policy Acquisition Costs (Note 5)................ 676.9 601.2 Real Estate Assets (Notes 4 and 7)........................ 790.0 1,604.0 Deferred Income Tax (Note 8).............................. 317.0 365.6 Other Assets.............................................. 499.8 564.3 Net Assets of Discontinued Operations (Note 2)............ -- 843.4 --------- --------- TOTAL ASSETS......................................... $19,615.6 $19,938.9 ========= ========= LIABILITIES Unpaid Claims (Note 13)................................... $ 9,772.5 $ 9,523.7 Unearned Premiums......................................... 2,696.6 2,617.5 Short Term Debt (Note 7).................................. -- 189.5 Long Term Debt (Note 7)................................... 398.6 1,070.5 Dividend Payable to Shareholders.......................... 49.0 47.2 Accrued Expenses and Other Liabilities.................... 1,041.8 1,027.6 --------- --------- TOTAL LIABILITIES.................................... 13,958.5 14,476.0 --------- --------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 12 AND 13) SHAREHOLDERS' EQUITY (NOTES 9 AND 18) Preferred Stock -- Authorized 4,000,000 Shares; $1 Par Value; Issued -- None........................... -- -- Common Stock -- Authorized 600,000,000 Shares; $1 Par Value; Issued 176,037,850 and 176,084,173 Shares................................................. 176.0 176.1 Paid-In Surplus........................................... 593.0 695.7 Retained Earnings......................................... 5,101.7 4,530.5 Foreign Currency Translation Losses, Net of Income Tax.... (25.7) (15.6) Unrealized Appreciation of Investments, Net of Income Tax (Note 3)............................................... 400.1 238.7 Receivable from Employee Stock Ownership Plan............. (96.7) (106.3) Treasury Stock, at Cost -- 7,320,410 and 1,223,182 Shares................................................. (491.3) (56.2) --------- --------- TOTAL SHAREHOLDERS' EQUITY........................... 5,657.1 5,462.9 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $19,615.6 $19,938.9 ========= =========
See accompanying notes. 39 7 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN MILLIONS YEARS ENDED DECEMBER 31 1997 1996 1995 -------- -------- -------- PREFERRED STOCK Balance, Beginning and End of Year..................... $ -- $ -- $ -- -------- -------- -------- COMMON STOCK Balance, Beginning of Year............................. 176.1 87.8 87.8 Two-for-One Stock Split................................ -- 87.8 -- Shares Issued upon Exchange of Long Term Debt.......... -- .5 -- Share Activity under Option and Incentive Plans........ (.1) -- -- -------- -------- -------- Balance, End of Year.............................. 176.0 176.1 87.8 -------- -------- -------- PAID-IN SURPLUS Balance, Beginning of Year............................. 695.7 778.2 786.6 Two-for-One Stock Split................................ -- (87.8) -- Exchange of Long Term Debt............................. (68.4) 20.8 -- Reductions Resulting from Share Activity under Option and Incentive Plans..................... (34.3) (15.5) (8.4) -------- -------- -------- Balance, End of Year.............................. 593.0 695.7 778.2 -------- -------- -------- RETAINED EARNINGS Balance, Beginning of Year............................. 4,530.5 4,206.5 3,680.5 Net Income............................................. 769.5 512.7 696.6 Dividends Declared (per share $1.16, $1.08 and $.98)... (198.3) (188.7) (170.6) -------- -------- -------- Balance, End of Year.............................. 5,101.7 4,530.5 4,206.5 -------- -------- -------- FOREIGN CURRENCY TRANSLATION GAINS (LOSSES) Balance, Beginning of Year............................. (15.6) (3.4) 9.8 Change During Year, Net of Income Tax (Note 15)........ (10.1) (12.2) (13.2) -------- -------- -------- Balance, End of Year.............................. (25.7) (15.6) (3.4) -------- -------- -------- UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS Balance, Beginning of Year............................. 238.7 345.9 (124.3) Change During Year, Net (Note 3)....................... 161.4 (107.2) 470.2 -------- -------- -------- Balance, End of Year.............................. 400.1 238.7 345.9 -------- -------- -------- RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN Balance, Beginning of Year............................. (106.3) (115.0) (123.0) Principal Repayments................................... 9.6 8.7 8.0 -------- -------- -------- Balance, End of Year.............................. (96.7) (106.3) (115.0) -------- -------- -------- TREASURY STOCK, AT COST Balance, Beginning of Year............................. (56.2) (37.3) (70.4) Repurchase of Shares................................... (827.9) (82.5) -- Shares Issued upon Exchange of Long Term Debt.......... 304.4 -- -- Share Activity under Option and Incentive Plans........ 88.4 63.6 33.1 -------- -------- -------- Balance, End of Year.............................. (491.3) (56.2) (37.3) -------- -------- -------- TOTAL SHAREHOLDERS' EQUITY........................ $5,657.1 $5,462.9 $5,262.7 ======== ======== ========
See accompanying notes. 40 8 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
IN MILLIONS YEARS ENDED DECEMBER 31 1997 1996 1995 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income................................................ $ 769.5 $ 512.7 $ 696.6 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Increase in Unpaid Claims, Net......................... 808.7 141.4 681.6 Increase in Unearned Premiums, Net..................... 290.6 204.5 158.8 Increase in Premiums Receivable........................ (159.5) (124.5) (96.2) Decrease (Increase) in Funds Held for Asbestos-Related Settlement.......................... .4 438.2 (480.0) Decrease (Increase) in Medical Malpractice Reinsurance Related Receivable................................... -- 191.2 (66.2) Increase in Deferred Policy Acquisition Costs.......... (75.7) (42.5) (29.2) Deferred Income Tax Credit............................. (33.3) (117.6) (16.8) Write-down of Real Estate Assets....................... -- 255.0 -- Depreciation........................................... 62.2 59.0 53.5 Realized Investment Gains.............................. (105.2) (79.8) (108.8) Income from Discontinued Operations, Net............... -- (26.5) (42.2) Other, Net............................................. 7.4 188.2 73.7 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES......................................... 1,565.1 1,599.3 824.8 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sales of Fixed Maturities -- Available-for- Sale..................................................... 3,682.6 3,430.5 3,953.9 Proceeds from Maturities of Fixed Maturities.............. 658.5 762.9 651.4 Proceeds from Sales of Equity Securities.................. 401.3 383.0 302.3 Proceeds from Sale of Discontinued Operations, Net........ 861.2 -- -- Purchases of Fixed Maturities............................. (5,394.8) (5,520.5) (5,466.0) Purchases of Equity Securities............................ (519.3) (395.2) (145.1) Decrease (Increase) in Short Term Investments, Net........ (449.2) 153.4 269.3 Proceeds from Sale of Real Estate Properties.............. 759.6 17.4 10.4 Additions to Real Estate Assets........................... (40.1) (94.3) (71.7) Purchases of Fixed Assets, Net............................ (71.0) (58.7) (68.4) Other, Net................................................ 41.1 (53.2) (24.0) --------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES................ (70.1) (1,374.7) (587.9) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Issuance of Long Term Debt.................. 10.2 86.0 173.9 Repayment of Long Term Debt............................... (344.9) (145.6) (302.7) Increase (Decrease) in Short Term Debt, Net............... (189.5) 37.8 34.3 Dividends Paid to Shareholders............................ (196.5) (184.2) (167.8) Repurchase of Shares...................................... (827.9) (82.5) -- Other, Net................................................ 60.4 56.7 31.7 --------- --------- --------- NET CASH USED IN FINANCING ACTIVITIES................ (1,488.2) (231.8) (230.6) --------- --------- --------- Net Increase (Decrease) in Cash............................. 6.8 (7.2) 6.3 Cash at Beginning of Year................................... 4.7 11.9 5.6 --------- --------- --------- CASH AT END OF YEAR.................................. $ 11.5 $ 4.7 $ 11.9 ========= ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION Cash Paid During the Year for Interest (Net of Amounts Capitalized).................. $ 60.4 $ 77.7 $ 83.5 Federal and Foreign Income Taxes....................... 253.5 163.3 192.0
See accompanying notes. 41 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of The Chubb Corporation (Corporation) and its subsidiaries. Significant intercompany transactions have been eliminated in consolidation. The consolidated financial statements reflect estimates and judgments made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Corporation is a holding company with subsidiaries principally engaged in two industries: property and casualty insurance and real estate. On May 13, 1997, the Corporation completed the sale of its life and health insurance subsidiaries. The life and health insurance subsidiaries have been classified as discontinued operations (see Note (2)). All footnote disclosures reflect continuing operations only, unless otherwise noted. In the fourth quarter of 1997, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share. SFAS No. 128 establishes new standards for computing and presenting earnings per share. SFAS No. 128 requires presentation of basic earnings per share and diluted earnings per share. Prior period earnings per share amounts have been restated. The adoption of SFAS No. 128 did not have a significant effect on the Corporation's earnings per share. Certain other amounts in the consolidated financial statements for prior years have been reclassified to conform with the 1997 presentation. (b) Investments Short term investments, which have an original maturity of one year or less, are carried at amortized cost. Fixed maturities, which include bonds and redeemable preferred stocks, are purchased to support the investment strategies of the Corporation and its insurance subsidiaries. These strategies are developed based on many factors including rate of return, maturity, credit risk, tax considerations and regulatory requirements. Fixed maturities which may be sold prior to maturity to support the investment strategies of the Corporation and its insurance subsidiaries are classified as available-for-sale and carried at market value as of the balance sheet date. Those fixed maturities which the Corporation and its insurance subsidiaries have the ability and positive intent to hold to maturity are classified as held-to-maturity and carried at amortized cost. Premiums and discounts arising from the purchase of mortgage-backed securities are amortized using the interest method over the estimated remaining term of the securities, adjusted for anticipated prepayments. Equity securities, which include common stocks and non-redeemable preferred stocks, are carried at market value as of the balance sheet date. Unrealized appreciation or depreciation of investments carried at market value is excluded from income and credited or charged directly to a separate component of shareholders' equity, net of applicable deferred income tax. Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold and are credited or charged to income. (c) Premium Revenues and Related Expenses Property and casualty insurance premiums are earned on a monthly pro rata basis over the terms of the policies. Revenues include estimates of audit premiums and premiums on retrospectively rated policies. Unearned premiums represent the portion of premiums written applicable to the unexpired terms of policies in force. Acquisition costs, consisting of commissions, premium taxes and other costs that vary with and are primarily related to the production of business, are deferred by major product groups and amortized over the period in which the related premiums are earned. Deferred policy acquisition costs are reviewed to determine that they do not exceed recoverable amounts, after considering anticipated investment income. (d) Unpaid Claims Liabilities for unpaid claims include the accumulation of individual case estimates for claims reported as well as estimates of unreported claims and claim settlement expenses, less estimates of anticipated salvage and subrogation recoveries. Estimates are based upon past claim experience modified for current trends as well as prevailing economic, legal and social conditions. Such estimates are continually reviewed and updated. Any resulting adjustments are reflected in current operating results. (e) Reinsurance In the ordinary course of business, the Corporation's insurance subsidiaries assume and cede reinsurance with other insurance companies and are members of various pools and associations. These arrangements provide greater diversification of business and minimize the maximum net loss potential arising from large risks. A large portion of the reinsurance is effected under contracts known as treaties and in some instances by negotiation on individual risks. Certain of these arrangements consist of excess of loss and catastrophe contracts which protect against losses over stipulated amounts arising from any one occurrence or event. Ceded reinsurance contracts do not relieve the Corporation's insurance subsidiaries of their obligation to the policyholders. 42 10 Prepaid reinsurance premiums represent the portion of insurance premiums ceded to reinsurers applicable to the unexpired terms of the reinsurance contracts in force. Commissions received related to reinsurance premiums ceded are considered in determining net acquisition costs eligible for deferral. Reinsurance recoverable on unpaid claims represent estimates of the portion of such liabilities that will be recovered from reinsurers. Amounts recoverable from reinsurers are recognized as assets at the same time and in a manner consistent with the liabilities associated with the reinsured policies. (f) Funds Held for Asbestos-Related Settlement Funds held for asbestos-related settlement are assets of the Corporation's property and casualty insurance subsidiaries that accrue income for the benefit of participants in the class settlement of asbestos-related bodily injury claims against Fibreboard Corporation (see Note (13)). (g) Real Estate Real estate properties are carried at cost, net of write-downs for impairment. Real estate taxes, interest and other carrying costs incurred prior to completion of the assets for their intended use are capitalized. Also, costs incurred during the initial leasing of income producing properties are capitalized until the project is substantially complete, subject to a maximum time period subsequent to completion of major construction activity. Effective January 1, 1996, the Corporation adopted SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets. Under SFAS No. 121, real estate properties are reviewed for impairment whenever events or circumstances indicate that the carrying value of such properties may not be recoverable. In performing the review for recoverability of carrying value, estimates are made of the future undiscounted cash flows from each of the properties during the period the property will be held and upon its eventual disposition. If the expected future undiscounted cash flows are less than the carrying value of such properties, an impairment loss is recognized resulting in a write-down of the carrying value of the property. Measurement of such impairment is based on the fair value of the property. Depreciation of real estate properties is calculated using the straight-line method over the estimated useful lives of the properties. Real estate mortgages and notes receivable are carried at unpaid principal balances less an allowance for uncollectible amounts. A loan is considered impaired when it is probable that all principal and interest amounts will not be collected according to the contractual terms of the loan agreement. An allowance for uncollectible amounts is established to recognize any such impairment. Measurement of impairment is based on the discounted future cash flows of the loan, subject to the estimated fair value of the underlying collateral. These cash flows are discounted at the loan's effective interest rate. Rental revenues are recognized on a straight-line basis over the term of the lease. Profits on land, townhome unit and commercial building sales are recognized at closing, subject to compliance with applicable accounting guidelines. Profits on high-rise condominium unit sales are recognized using the percentage of completion method, subject to achievement of a minimum level of unit sales. Profits on construction contracts are recognized using the percentage of completion method. (h) Property and Equipment Property and equipment used in operations are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. (i) Stock-Based Compensation The intrinsic value method of accounting is used for stock-based compensation plans. Under the intrinsic value method, compensation cost is measured as the excess, if any, of the quoted market price of the stock at the measurement date over the amount an employee must pay to acquire the stock. (j) Income Taxes The Corporation and its domestic subsidiaries file a consolidated federal income tax return. Deferred income tax assets and liabilities are recognized for the expected future tax effects attributable to temporary differences between the financial reporting and tax bases of assets and liabilities, based on enacted tax rates and other provisions of tax law. The effect of a change in tax laws or rates is recognized in income in the period in which such change is enacted. U. S. federal income taxes are accrued on undistributed earnings of foreign subsidiaries. (k) Foreign Exchange Assets and liabilities relating to foreign operations are translated into U.S. dollars using current exchange rates; revenues and expenses are translated into U.S. dollars using the average exchange rates for each year. The functional currency of foreign operations is generally the currency of the local operating environment since their business is primarily transacted in such local currencies. Translation gains and losses, net of applicable income tax, are excluded from income and accumulated in a separate component of shareholders' equity. 43 11 (l) Cash Flow Information In the statement of cash flows, short term investments are not considered to be cash equivalents. The effect of changes in foreign exchange rates on cash balances was immaterial. In 1997 and 1996, $228.6 million and $20.7 million of exchangeable subordinated notes were exchanged for 5,316,565 shares and 480,464 shares, respectively, of common stock of the Corporation. In 1997, $108.6 million of long term debt was assumed by a joint venture as a part of the sale of real estate properties. These noncash transactions have been excluded from the consolidated statements of cash flows. (m) Accounting Pronouncements Not Yet Adopted In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 125 provides new accounting and reporting standards for transfers of financial assets and extinguishments of liabilities. The Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. Transactions covered by this Statement would include securitizations, repurchase agreements and securities lending. SFAS No. 125, as amended by SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125, is effective January 1, 1998 and is to be applied prospectively. Adoption of this Statement is not expected to have a significant impact on the Corporation's financial position or results of operations. In December 1997, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments. The SOP provides guidance for determining when a liability for guaranty-fund and other insurance-related assessments should be recognized and how such liability should be measured. The Corporation will adopt SOP 97-3 as of January 1, 1998. Restatement of financial statements for periods before the year SOP 97-3 is adopted is not permitted. The adoption of SOP 97-3 is not expected to have a significant impact on the Corporation's financial position or results of operations. (2) DISCONTINUED OPERATIONS On May 13, 1997, the Corporation completed the sale of Chubb Life Insurance Company of America and its subsidiaries to Jefferson-Pilot Corporation for $875.0 million in cash, subject to various closing adjustments, none of which were material. In 1996, the Corporation recognized a loss of $22.0 million related to the sale of the life and health insurance subsidiaries. The purchase price was not adjusted to reflect results of operations subsequent to December 31, 1996. Therefore, the discontinued life and health insurance operations did not affect the Corporation's net income in 1997 and will not affect net income in future periods. The results of the discontinued operations were as follows:
Years Ended December 31 ----------------------- 1996 1995 ---- ---- (in millions) Total revenues...................... $816.8 $877.7 Total benefits, claims and expenses.......................... 743.9 814.6 ------ ------ Income before federal income tax............................. 72.9 63.1 Federal income tax.................. 24.4 20.9 ------ ------ Income from operations............ $ 48.5 $ 42.2 ====== ======
The assets and liabilities of the discontinued operations at December 31, 1996 were as follows:
(in millions) Assets Invested assets................................. $3,185.3 Other assets.................................... 1,546.5 -------- Total assets.............................. 4,731.8 -------- Liabilities Life and health policy liabilities.............. 3,230.7 Other liabilities............................... 657.7 -------- Total liabilities......................... 3,888.4 -------- Net assets of discontinued operations............. $ 843.4 ========
(3) INVESTED ASSETS AND RELATED INCOME (a) The sources of net investment income were as follows:
Years Ended December 31 ------------------------------------ 1997 1996 1995 ---- ---- ---- (in millions) Fixed maturities................... $726.1 $669.7 $604.3 Equity securities.................. 10.8 10.0 12.3 Short term investments............. 47.6 23.9 35.1 Other.............................. .8 8.0 16.0 ------ ------ ------ Gross investment income........... 785.3 711.6 667.7 Investment expenses................ 12.0 12.3 11.9 ------ ------ ------ $773.3 $699.3 $655.8 ====== ====== ======
(b) Realized investment gains and losses were as follows:
Years Ended December 31 ------------------------------------ 1997 1996 1995 ---- ---- ---- (in millions) Gross realized investment gains Fixed maturities.................. $56.3 $ 56.4 $ 66.7 Equity securities................. 93.8 75.5 95.4 ----- ------ ------ 150.1 131.9 162.1 ----- ------ ------ Gross realized investment losses Fixed maturities.................. 26.5 45.7 46.5 Equity securities................. 18.4 6.4 6.8 ----- ------ ------ 44.9 52.1 53.3 ----- ------ ------ Realized investment gains.......... 105.2 79.8 108.8 Income tax......................... 36.8 27.8 38.1 ----- ------ ------ $68.4 $ 52.0 $ 70.7 ===== ====== ======
44 12 (c) The components of unrealized appreciation of investments carried at market value were as follows:
December 31 ----------------------- 1997 1996 ---- ---- (in millions) Equity securities Gross unrealized appreciation........................... $160.6 $115.0 Gross unrealized depreciation........................... 23.4 9.2 ------ ------ 137.2 105.8 ------ ------ Fixed maturities Gross unrealized appreciation........................... 486.0 297.1 Gross unrealized depreciation........................... 7.6 35.6 ------ ------ 478.4 261.5 ------ ------ 615.6 367.3 Deferred income tax liability............................. 215.5 128.6 ------ ------ $400.1 $238.7 ====== ======
The change in unrealized appreciation or depreciation of investments carried at market value was as follows:
Years Ended December 31 ------------------------------------- 1997 1996 1995 ---- ---- ---- (in millions) Continuing operations Change in unrealized appreciation of equity securities.... $ 31.4 $ 17.3 $ 60.9 Change in unrealized appreciation or depreciation of fixed maturities.............................................. 216.9 (119.6) 499.1 ------ ------- ------ 248.3 (102.3) 560.0 Deferred income tax (credit).............................. 86.9 (35.8) 196.0 Decrease in valuation allowance........................... -- -- (31.6) ------ ------- ------ Change in unrealized appreciation or depreciation......... 161.4 (66.5) 395.6 Discontinued operations, net................................ -- (40.7) 74.6 ------ ------- ------ $161.4 $(107.2) $470.2 ====== ======= ======
The unrealized appreciation or depreciation of fixed maturities carried at amortized cost is not reflected in the financial statements. The change in unrealized appreciation of fixed maturities of continuing operations carried at amortized cost was an increase of $16.8 million, a decrease of $48.2 million and an increase of $150.4 million for the years ended December 31, 1997, 1996 and 1995, respectively. (d) The amortized cost and estimated market value of fixed maturities were as follows:
December 31 -------------------------------------------------------------------------------- 1997 1996 --------------------------------------------------- ------------------------ Gross Gross Estimated Gross Amortized Unrealized Unrealized Market Amortized Unrealized Cost Appreciation Depreciation Value Cost Appreciation --------- ------------ ------------ --------- --------- ------------ (in millions) Held-to-maturity -- Tax exempt.......... $ 2,200.6 $146.7 $ .1 $ 2,347.2 $2,443.6 $131.2 --------- ------ ---- --------- --------- ------ Available-for-sale Tax exempt............................ 5,408.4 358.6 .1 5,766.9 4,415.1 210.1 --------- ------ ---- --------- --------- ------ Taxable U.S. Government and government agency and authority obligations....................... 594.3 9.9 .1 604.1 1,092.3 5.8 Corporate bonds..................... 819.9 27.0 2.4 844.5 317.7 7.5 Foreign bonds....................... 1,022.5 46.3 2.4 1,066.4 1,169.2 58.5 Mortgage-backed securities.......... 1,778.2 35.8 2.6 1,811.4 1,444.5 15.1 Redeemable preferred stocks......... 151.1 8.4 -- 159.5 15.0 .1 --------- ------ ---- --------- --------- ------ 4,366.0 127.4 7.5 4,485.9 4,038.7 87.0 --------- ------ ---- --------- --------- ------ Total available-for-sale.......... 9,774.4 486.0 7.6 10,252.8 8,453.8 297.1 --------- ------ ---- --------- --------- ------ Total fixed maturities............ $11,975.0 $632.7 $7.7 $12,600.0 $10,897.4 $428.3 ========= ====== ==== ========= ========= ====== December 31 ------------------------ 1996 ------------------------ Gross Estimated Unrealized Market Depreciation Value ------------ --------- (in millions) Held-to-maturity -- Tax exempt.......... $ 1.4 $ 2,573.4 ----- --------- Available-for-sale Tax exempt............................ 2.6 4,622.6 ----- --------- Taxable U.S. Government and government agency and authority obligations....................... 8.4 1,089.7 Corporate bonds..................... 1.8 323.4 Foreign bonds....................... 11.3 1,216.4 Mortgage-backed securities.......... 11.5 1,448.1 Redeemable preferred stocks......... -- 15.1 ----- --------- 33.0 4,092.7 ----- --------- Total available-for-sale.......... 35.6 8,715.3 ----- --------- Total fixed maturities............ $37.0 $11,288.7 ===== =========
45 13 The amortized cost and estimated market value of fixed maturities at December 31, 1997 by contractual maturity were as follows:
Estimated Amortized Market Cost Value --------- --------- (in millions) Held-to-Maturity Due in one year or less............... $ 111.3 $ 112.8 Due after one year through five years............................... 644.8 678.2 Due after five years through ten years............................... 930.6 999.7 Due after ten years................... 513.9 556.5 -------- -------- $2,200.6 $2,347.2 ======== ======== Available-for-Sale Due in one year or less............... $ 194.9 $ 197.0 Due after one year through five years............................... 1,100.2 1,132.9 Due after five years through ten years............................... 2,871.2 3,039.4 Due after ten years................... 3,829.9 4,072.1 -------- --------- 7,996.2 8,441.4 Mortgage-backed securities............ 1,778.2 1,811.4 -------- --------- $9,774.4 $10,252.8 ======== =========
Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations. (e) The Corporation engages in securities lending whereby certain securities from its portfolio are loaned to other institutions for short periods of time. Cash collateral from the borrower, equal to the market value of the loaned securities plus accrued interest, is deposited with a lending agent and retained and invested by the lending agent to provide additional income for the Corporation. At December 31, 1997 and 1996, the Corporation had no securities loaned to other institutions. The maximum amount of loaned securities outstanding during 1997 was approximately $230.0 million. (4) REAL ESTATE In October 1996, the Corporation announced that it was exploring the possible sale of all or a portion of its real estate assets. In March 1997, the Corporation entered into an agreement with a prospective purchaser to perform due diligence in anticipation of executing a contract for the sale of substantially all of its commercial properties. Because the plan to pursue the sale of these assets in the near term represented a significant change in circumstances relating to the manner in which these assets would be used, the recoverability of their carrying value as of December 31, 1996 was reassessed. As a result, an impairment loss of $255.0 million was recognized in 1996 to reduce the carrying value of these assets to their estimated fair value. This charge was included in real estate cost of sales and expenses in the consolidated statements of income. In June 1997, a definitive agreement was reached with the purchaser. In November, the sale of almost all of the properties covered by the agreement reached in June was closed for $736.9 million, which included $628.3 million in cash and the assumption of $108.6 million in debt. The buyer is a joint venture formed by Paine Webber Real Estate Securities Inc., Morgan Stanley Real Estate Fund II, L.P. and Gale & Wentworth, L.L.C. Closing on the few remaining properties under the agreement is expected to occur in 1998. The Corporation is continuing to explore the sale of certain of its remaining properties. The components of real estate assets were as follows:
December 31 ------------------- 1997 1996 ---- ---- (in millions) Mortgages and notes receivable (net of allowance for uncollectible amounts of $24.0 and $85.7)........................... $123.8 $ 502.4 Income producing properties.................. 163.8 584.5 Construction in progress..................... 95.8 135.0 Land under development and unimproved land... 406.6 382.1 ------ -------- $790.0 $1,604.0 ====== ========
Substantially all mortgages and notes receivable are secured by buildings and land. The ultimate collectibility of the receivables is evaluated continuously and an appropriate allowance for uncollectible amounts established. Mortgages and notes receivable had an estimated aggregate fair value of $121.0 million and $487.2 million at December 31, 1997 and 1996, respectively. The fair value amounts represent point-in-time estimates that are not relevant in predicting future earnings or cash flows related to such receivables. Depreciation expense related to income producing properties was $2.7 million, $11.0 million and $14.1 million for 1997, 1996 and 1995, respectively. (5) DEFERRED POLICY ACQUISITION COSTS Policy acquisition costs deferred and the related amortization charged against income were as follows:
Years Ended December 31 --------------------------------- 1997 1996 1995 ---- ---- ---- (in millions) Balance, beginning of year.... $ 601.2 $ 558.7 $ 529.5 --------- --------- --------- Costs deferred during year Commissions and brokerage... 775.0 653.5 592.7 Premium taxes and assessments............... 124.9 114.7 108.0 Salaries and overhead....... 578.4 512.3 449.5 --------- --------- --------- 1,478.3 1,280.5 1,150.2 Amortization during year...... (1,402.6) (1,238.0) (1,121.0) --------- --------- --------- Balance, end of year.......... $ 676.9 $ 601.2 $ 558.7 ========= ========= =========
46 14 (6) PROPERTY AND EQUIPMENT Property and equipment included in other assets were as follows:
December 31 ------------------- 1997 1996 ---- ---- (in millions) Cost.......................................... $391.7 $363.1 Accumulated depreciation...................... 178.2 155.5 ------ ------ $213.5 $207.6 ====== ======
Depreciation expense related to property and equipment was $59.5 million, $48.0 million and $39.4 million for 1997, 1996 and 1995, respectively. (7) DEBT AND CREDIT ARRANGEMENTS (a) Short term debt consisted of commercial paper issued by Chubb Capital Corporation (Chubb Capital), a subsidiary of the Corporation, to support the real estate operations. Borrowings were unsecured and were on terms and at interest rates generally extended to prime borrowers. The weighted average interest rate on short term debt approximated 5 1/2% at December 31, 1996. (b) Long term debt consisted of the following:
December 31 --------------------------------------- 1997 1996 ----------------- ------------------- Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- ----- (in millions) Term loans................ $ 40.1 $ 40.3 $ 311.4 $ 313.6 Mortgages................. 48.5 47.3 189.8 191.6 8 3/4% notes.............. 60.0 62.7 90.0 93.9 6% notes.................. 150.0 150.0 150.0 149.7 6 7/8% notes.............. 100.0 102.5 100.0 101.0 6% exchangeable subordinated notes...... -- -- 229.3 278.7 ------ ------ -------- -------- $398.6 $402.8 $1,070.5 $1,128.5 ====== ====== ======== ========
The term loans and mortgages are obligations of the real estate subsidiaries. The term loans mature in varying amounts through 2000. Substantially all term loans are at an interest rate equivalent to the lower of the prime rate or a rate associated with the lender's cost of funds. The mortgages payable are due in varying amounts monthly through 2010. At December 31, 1997, interest rates on term loans approximated 7 1/2% and for mortgages payable the range of interest rates was 6% to 12%. The term loans and mortgages payable are secured by real estate assets with a net book value of $212.2 million at December 31, 1997. The Corporation has outstanding $60.0 million of unsecured 8 3/4% notes due November 15, 1999. The notes are subject to mandatory sinking fund payments in amounts sufficient to redeem $30.0 million of principal on a pro rata basis on November 15, 1998 at a redemption price of 100% of their principal amount. At December 31, 1997, Chubb Capital had outstanding $150.0 million of 6% notes due February 1, 1998 and $100.0 million of 6 7/8% notes due February 1, 2003. These notes are unsecured and are guaranteed by the Corporation. The 6% notes were paid when due. Chubb Capital called for redemption on May 14, 1997 the 6% exchangeable subordinated notes due May 15, 1998. Prior to the redemption date, the holders of $228.6 million of the notes elected the option to exchange each $1,000 of principal amount into 23.256 shares of common stock of the Corporation, resulting in the issuance of 5,316,565 shares of common stock. The remaining notes were redeemed at 101.7% of the principal amount plus accrued interest. The Corporation filed a shelf registration statement which the Securities and Exchange Commission declared effective in June 1995, under which up to $400.0 million of various types of securities may be issued by the Corporation or Chubb Capital. No securities have been issued under this registration statement. The amounts of long term debt due annually during the five years subsequent to December 31, 1997 are as follows:
Years Ending Term Loans December 31 and Mortgages Notes Total ------------ ------------- ----- ----- (in millions) 1998.................. $ 1.5 $180.0 $181.5 1999.................. 45.6 30.0 75.6 2000.................. 37.5 -- 37.5 2001.................. .3 -- .3 2002.................. .4 -- .4
(c) Interest costs of $72.4 million, $89.5 million and $98.6 million were incurred in 1997, 1996 and 1995, respectively, of which $8.7 million, $12.8 million and $16.4 million were capitalized. (d) In July 1997, the Corporation entered into two credit agreements with a group of banks that provide for unsecured borrowings of up to $500.0 million in the aggregate. The $200.0 million short term revolving credit facility terminates on July 10, 1998 and may be renewed or replaced. The $300.0 million medium term revolving credit facility terminates on July 11, 2002. On the respective termination dates for these agreements, any loans then outstanding become payable. There have been no borrowings under these agreements. Various interest rate options are available to the Corporation, all of which are based on market rates. These facilities replaced a $300.0 million revolving credit facility, which terminated, and the Corporation's lines of credit. Unused credit facilities are available for general corporate purposes and to support the commercial paper borrowing arrangement. 47 15 (8) FEDERAL AND FOREIGN INCOME TAX (a) Income tax expense consisted of the following components:
Years Ended December 31 --------------------------- 1997 1996 1995 ---- ---- ---- (in millions) Current tax United States............................................. $194.4 $ 152.1 $177.9 Foreign................................................... 43.5 26.2 21.5 Deferred tax credit, principally United States.............. (33.3) (117.6) (16.8) ------ ------- ------ $204.6 $ 60.7 $182.6 ====== ======= ======
(b) The provision for federal and foreign income tax gives effect to permanent differences between income for financial reporting purposes and taxable income. Accordingly, the effective income tax rate is less than the statutory federal corporate tax rate. The reasons for the lower effective tax rate were as follows:
Years Ended December 31 -------------------------------------------------------- 1997 1996 1995 ---------------- ----------------- ----------------- % of % of % of Pre-Tax Pre-Tax Pre-Tax Amount Income Amount Income Amount Income ------ ------- ------ ------- ------ ------- (in millions) Income from continuing operations before federal and foreign income tax...................................... $974.1 $546.9 $837.0 ====== ======= ======= Tax at statutory federal income tax rate.................. $340.9 35.0% $191.4 35.0% $293.0 35.0% Tax exempt interest income................................ (126.4) (13.0) (119.0) (21.8) (114.1) (13.6) Other, net................................................ (9.9) (1.0) (11.7) (2.1) 3.7 .4 ------ ----- ------- ----- ------- ----- Actual tax.......................................... $204.6 21.0% $ 60.7 11.1% $182.6 21.8% ====== ===== ======= ===== ======= =====
(c) The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities were as follows:
December 31 -------------------- 1997 1996 ---- ---- (in millions) Deferred income tax assets Unpaid claims............................................. $572.6 $522.0 Unearned premiums......................................... 160.8 142.2 Postretirement benefits................................... 62.9 52.9 Other, net................................................ 27.9 8.2 ------ ------ Total................................................... 824.2 725.3 ------ ------ Deferred income tax liabilities Deferred policy acquisition costs......................... 210.4 185.8 Real estate assets........................................ 81.3 45.3 Unrealized appreciation of investments.................... 215.5 128.6 ------ ------ Total................................................... 507.2 359.7 ------ ------ Net deferred income tax asset......................... $317.0 $365.6 ====== ======
48 16 (9) STOCK-BASED COMPENSATION PLANS (a) In 1996, the Corporation adopted the Long-Term Stock Incentive Plan (1996), which succeeded the Long-Term Stock Incentive Plan (1992). The Long-Term Stock Incentive Plan (1996) provides for the granting of stock options, performance shares, restricted stock and other stock-based awards to key employees. The maximum number of shares of the Corporation's common stock in respect to which stock-based awards may be granted under the 1996 plan is 14,000,000. At December 31, 1997, 11,605,119 shares were available for grant under the 1996 Plan. Stock options are granted at exercise prices not less than the fair market value of the Corporation's common stock on the date of grant. The terms and conditions upon which options become exercisable may vary among grants. Options expire no later than ten years from the date of grant. Information concerning stock options granted under the Long-Term Stock Incentive Plans and a prior stock option plan is as follows:
1997 1996 1995 ----------------------------- ---------------------------- ---------------------------- Number Weighted Average Number Weighted Average Number Weighted Average of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price --------- ---------------- --------- ---------------- --------- ---------------- Outstanding, beginning of year....... 8,058,829 $41.48 6,565,034 $37.59 5,449,618 $35.11 Granted.............................. 2,753,007 61.05 2,504,048 48.82 1,994,230 41.12 Exercised............................ (1,486,812) 38.39 (782,403) 31.77 (738,332) 28.13 Forfeited............................ (200,221) 51.69 (227,850) 43.26 (140,482) 40.93 ---------- --------- --------- Outstanding, end of year............. 9,124,803 47.67 8,058,829 41.48 6,565,034 37.59 ========== ========= ========= Exercisable, end of year............. 5,932,905 42.54 4,852,845 38.10 3,961,586 35.35
December 31, 1997 ---------------------------------------------------------------------------------- Options Outstanding Options Exercisable ------------------------------------------------- ------------------------------ Weighted Average Range of Number Weighted Average Remaining Number Weighted Average Option Exercise Price Outstanding Exercise Price Contractual Life Exercisable Exercise Price --------------------- ----------- ---------------- ---------------- ----------- ---------------- $14.31 - $36.03.................... 1,038,649 $30.86 3.4 1,038,649 $30.86 $40.97 - $77.69.................... 8,086,154 49.82 7.5 4,894,256 45.01 --------- --------- 9,124,803 47.67 7.0 5,932,905 42.54 ========= =========
Performance share awards are based on the achievement of various goals over performance cycle periods. The cost of such awards is expensed over the performance cycle. Such awards are payable in cash, in shares of the Corporation's common stock or in a combination of both. Restricted stock awards consist of shares of common stock of the Corporation granted at no cost. Shares of restricted stock become outstanding when granted, receive dividends and have voting rights. The shares are subject to forfeiture and to restrictions which limit the sale or transfer during the restriction period. An amount equal to the fair market value of the shares at the date of grant is expensed over the restriction period. The Corporation uses the intrinsic value based method of accounting for stock-based compensation, under which compensation cost is measured as the excess, if any, of the quoted market price of the stock at the measurement date over the amount an employee must pay to acquire the stock. Since the exercise price of stock options granted under the Long-Term Stock Incentive Plans is not less than the market price of the underlying stock on the date of grant, no compensation cost has been recognized for such grants. The aggregate amount charged against income (including continuing and discontinued operations) with respect to performance share and restricted stock awards was $14.4 million, $10.2 million and $8.6 million in 1997, 1996 and 1995, respectively. The following pro forma net income and earnings per share information has been determined as if the Corporation had accounted for stock-based compensation awarded under the Long-Term Stock Incentive Plans using the fair value based method. Under the fair value method, the estimated fair value of awards at the grant date would be charged against income on a straight-line basis over the vesting period. The pro forma effect on net income for 1996 and 1995 is not representative of the pro forma effect on net income in future years because, as required by SFAS No. 123, Accounting for Stock-Based Compensation, no consideration has been given to awards granted prior to 1995.
1997 1996 1995 ---------------------- ---------------------- ---------------------- As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma -------- -------- -------- -------- -------- -------- (in millions except for per share amounts) Net income............................. $769.5 $746.3 $512.7 $496.6 $696.6 $692.4 Diluted earnings per share............. 4.39 4.26 2.88 2.79 3.90 3.88
49 17 The weighted average fair value of options granted under the Long-Term Stock Incentive Plans during 1997, 1996 and 1995 were $13.83, $11.04 and $10.18, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions. The risk-free interest rates for 1997, 1996 and 1995 were 6.5%, 5.9% and 6.3%, respectively. The expected volatility of the market price of the Corporation's common stock for 1997, 1996 and 1995 grants was 16.3%, 18.3% and 19.3%, respectively. The expected average term of the granted options was 5 years for 1997 and 5 1/2 years for 1996 and 1995. The dividend yield was 1.9% for 1997 and 2.1% for 1996 and 1995. (b) The Corporation has a leveraged Employee Stock Ownership Plan (ESOP) in which substantially all employees are eligible to participate. At its inception in 1989, the ESOP used the proceeds of a $150.0 million loan from the Corporation to purchase 7,792,204 newly issued shares of the Corporation's common stock. The loan is due in September 2004 and bears interest at 9%. The Corporation has recorded the receivable from the ESOP as a separate reduction of shareholders' equity on the consolidated balance sheets. This balance is reduced as repayments are made on the loan principal. The Corporation and its participating subsidiaries make semi-annual contributions to the ESOP in amounts determined at the discretion of the Corporation's Board of Directors. The contributions, together with the dividends on the shares of common stock in the ESOP, are used by the ESOP to make loan interest and principal payments to the Corporation. As interest and principal are paid, a portion of the common stock is allocated to eligible employees. The Corporation uses the cash payment method of recognizing ESOP expense. In 1997, 1996 and 1995, cash contributions to the ESOP of $12.2 million, $12.7 million and $12.3 million, respectively, were charged against income (including continuing and discontinued operations). Dividends on shares of common stock in the ESOP used for debt service were $6.2 million, $4.6 million and $4.5 million in 1997, 1996 and 1995, respectively. The number of allocated and unallocated shares held by the ESOP at December 31, 1997 were 3,023,768 and 3,636,364, respectively. All such shares are considered outstanding for the computation of earnings per share. (c) The Corporation has a Stock Purchase Plan under which substantially all employees are eligible to purchase shares of the Corporation's common stock based on compensation. Shares are purchased at a price equal to the fair market value on the date of grant. At December 31, 1997, there were 469,326 subscribed shares at a price of $52.81. The right to purchase such shares expires in December 1998. No compensation cost has been recognized for such rights. Had the fair value method been used, the cost would have been immaterial. (10) EMPLOYEE BENEFITS (a) The Corporation and its subsidiaries have several non-contributory defined benefit pension plans covering substantially all employees. The benefits are generally based on an employee's years of service and average compensation during the last five years of employment. Pension costs are determined using the projected unit credit method. The Corporation's policy is to make annual contributions that meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The components of net pension cost (including continuing and discontinued operations) were as follows:
Years Ended December 31 ------------------------------ 1997 1996 1995 ---- ---- ---- (in millions) Service cost of current period...................... $ 19.9 $ 20.6 $ 20.4 Interest cost on projected benefit obligation.......... 30.3 26.0 23.8 Actual return on plan assets...................... (78.7) (49.1) (68.5) Net amortization and deferral.................... 41.6 17.5 42.7 ------ ------ ------ Net pension cost.......... $ 13.1 $ 15.0 $ 18.4 ====== ====== ======
The decrease in net pension cost in 1996 was due primarily to the reduction, effective January 1, 1996, in the assumed rate of increase in future compensation levels. 50 18 The following table sets forth the plans' funded status and amounts recognized in the balance sheets:
December 31 ------------------- 1997 1996 ---- ---- (in millions) Actuarial present value of benefit obligation for service rendered to date: Accumulated benefit obligation based on current salary levels, including vested benefits of $307.0 and $261.4.. $318.8 $273.9 Additional amount related to projected future salary increases............... 116.2 107.0 ------ ------ Projected benefit obligation for service rendered to date.............. 435.0 380.9 Plan assets at fair value................... 487.8 426.9 ------ ------ Plan assets in excess of projected benefit obligation................................ (52.8) (46.0) Unrecognized net gain from past experience different from that assumed............... 120.7 98.5 Unrecognized prior service costs............ (8.8) (4.6) Unrecognized net asset at January 1, 1985, being recognized principally over 19 years..................................... 6.4 6.9 ------ ------ Pension liability included in other liabilities............................. $ 65.5 $ 54.8 ====== ======
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation at December 31, 1997 and 1996 was 7 1/2% and 7 3/4%, respectively, and the rate of increase in future compensation levels was 5% for both years. The expected long term rate of return on assets was 9% for both years. Plan assets are principally invested in publicly traded stocks and bonds. (b) The Corporation and its subsidiaries provide certain other postretirement benefits, principally health care and life insurance, to retired employees and their beneficiaries and covered dependents. Substantially all employees may become eligible for these benefits upon retirement if they meet minimum age and years of service requirements. The expected cost of these benefits is accrued during the years that the employees render the necessary service. The Corporation does not fund these benefits in advance. Benefits are paid as covered expenses are incurred. Health care coverage is contributory. Retiree contributions vary based upon a retiree's age, type of coverage and years of service with the Corporation. Life insurance coverage is non-contributory. The components of net postretirement benefit cost (including continuing and discontinued operations) were as follows:
Years Ended December 31 ---------------------------------- 1997 1996 1995 ---- ---- ---- (in millions) Service cost of current period.... $ 4.9 $ 6.0 $ 5.7 Interest cost on accumulated benefit obligation.............. 8.8 8.6 7.9 Net amortization and deferral..... (.7) -- -- ----- ----- ----- Net postretirement benefit cost.......................... $13.0 $14.6 $13.6 ===== ===== =====
The components of the accumulated postretirement benefit obligation were as follows:
December 31 ------------------- 1997 1996 ---- ---- (in millions) Retirees.................................... $ 55.9 $ 42.8 Fully eligible active plan participants..... 5.1 8.4 Other active plan participants.............. 64.8 63.4 ------ ------ Accumulated postretirement benefit obligation................................ 125.8 114.6 Unrecognized net gain from past experience different from that assumed............... 18.1 13.2 ------ ------ Postretirement benefit liability included in other liabilities.................... $143.9 $127.8 ====== ======
The weighted average discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation at December 31, 1997 and 1996 was 7 1/2% and 7 3/4%, respectively. At December 31, 1997, the weighted average health care cost trend rate used to measure the accumulated postretirement cost for medical benefits was 10 1/2% for 1998 and was assumed to decrease gradually to 6% for the year 2005 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amount of the accumulated postretirement benefit obligation and the net postretirement benefit cost reported. To illustrate, a one percent increase in the trend rate for each year would increase the accumulated postretirement benefit obligation at December 31, 1997 by $19.3 million and the aggregate of the service and interest cost components of net postretirement benefit cost for the year ended December 31, 1997 by $2.5 million. (c) The Corporation and its subsidiaries have a savings plan, the Capital Accumulation Plan, in which substantially all employees are eligible to participate. Under this plan, the employer makes a matching contribution equal to 100% of each eligible employee's pre-tax elective contributions, up to 4% of the employee's compensation. Contributions are invested at the election of the employee in the Corporation's common stock or in various other investment funds. Employer contributions of $15.0 million, $14.5 million and $13.4 million were charged against income (including continuing and discontinued operations) in 1997, 1996 and 1995, respectively. 51 19 (11) REINSURANCE Premiums earned and insurance claims are reported net of reinsurance in the consolidated statements of income. The effect of reinsurance on the premiums written and earned of the property and casualty insurance subsidiaries was as follows:
Years Ended December 31 ------------------------------ 1997 1996 1995 ---- ---- ---- (in millions) Direct premiums written....... $5,524.4 $5,166.5 $4,907.3 Reinsurance assumed Royal & Sun Alliance........ (3.8) 202.5 368.5 Other....................... 166.7 234.3 378.8 Reinsurance ceded Royal & Sun Alliance........ 174.6 (269.2) (535.5) Other....................... (413.9) (560.3) (813.1) -------- -------- -------- Net premiums written........ $5,448.0 $4,773.8 $4,306.0 ======== ======== ======== Direct premiums earned........ $5,315.8 $5,023.5 $4,754.4 Reinsurance assumed Royal & Sun Alliance........ 94.9 284.0 346.9 Other....................... 197.5 249.0 365.2 Reinsurance ceded Royal & Sun Alliance........ -- (348.0) (520.5) Other....................... (450.8) (639.2) (798.8) -------- -------- -------- Net premiums earned......... $5,157.4 $4,569.3 $4,147.2 ======== ======== ========
The Royal & Sun Alliance Insurance Group plc is the beneficial owner of 5.4% of the Corporation's common stock. A property and casualty insurance subsidiary of the Corporation assumed on a quota share basis a portion of the property and casualty insurance business written by certain subsidiaries of Royal & Sun Alliance. Similarly, a portion of the U.S. insurance business written by the Corporation's property and casualty insurance subsidiaries was reinsured on a quota share basis with a subsidiary of Royal & Sun Alliance. Effective January 1, 1996, the reinsurance agreements with Royal & Sun Alliance were amended to reduce the amount of each company's business reinsured with the other. Effective January 1, 1997, the agreements were terminated. The changes to the agreements in 1996 and their termination in 1997 resulted in portfolio transfers of the business previously ceded to Royal & Sun Alliance back to the Corporation's property and casualty insurance subsidiaries and of the business previously assumed by the Corporation's property and casualty insurance subsidiaries back to Royal & Sun Alliance. The effect of the portfolio transfers was a reduction of ceded premiums written of $174.6 million and $91.6 million in 1997 and 1996, respectively, and a reduction of assumed premiums written of $93.6 million and $65.2 million in 1997 and 1996, respectively. The 1997 assumed reinsurance premiums written and earned from Royal & Sun Alliance include business assumed for the second half of 1996 which was reported on a lag. Reinsurance recoveries by the property and casualty insurance subsidiaries which have been deducted from insurance claims were $346.8 million, $651.9 million and $936.1 million in 1997, 1996 and 1995, respectively. Such amounts included recoveries of $251.4 million and $333.8 million in 1996 and 1995, respectively, from the subsidiary of Royal & Sun Alliance. Reinsurance recoverable on property and casualty unpaid claims included approximately $471.0 million at December 31, 1996 from the subsidiary of Royal & Sun Alliance. (12) LEASES The Corporation and its subsidiaries occupy office facilities under lease agreements which expire at various dates through 2019; such leases are generally renewed or replaced by other leases. In addition, the Corporation's subsidiaries lease data processing, office and transportation equipment. Most leases contain renewal options for increments ranging from three to five years; certain lease agreements provide for rent increases based on price-level factors. All leases are operating leases. Rent expense was as follows:
Years Ended December 31 ------------------------------ 1997 1996 1995 ---- ---- ---- (in millions) Office facilities.......................... $71.1 $67.6 $67.0 Equipment.................................. 12.6 11.8 12.8 ----- ----- ----- $83.7 $79.4 $79.8 ===== ===== =====
At December 31, 1997, future minimum rental payments required under non-cancellable operating leases were as follows:
Years Ending December 31 - ------------ (in millions) 1998..................................... $ 67.3 1999..................................... 70.8 2000..................................... 68.9 2001..................................... 60.6 2002..................................... 52.9 After 2002............................... 346.6 ------ $667.1 ======
52 20 (13) UNPAID CLAIMS The process of establishing loss reserves is an imprecise science and reflects significant judgmental factors. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss and the settlement of the loss. Judicial decisions and legislative actions continue to broaden liability and policy definitions and to increase the severity of claim payments. As a result of this and other societal and economic developments, the uncertainties inherent in estimating ultimate claim costs on the basis of past experience have increased significantly, further complicating the already complex loss reserving process. The uncertainties relating to asbestos and toxic waste claims on insurance policies written many years ago are exacerbated by judicial and legislative interpretations of coverage that in some cases have tended to erode the clear and express intent of such policies and in others have expanded theories of liability. The industry is engaged in extensive litigation over these coverage and liability issues and is thus confronted with a continuing uncertainty in its effort to quantify these exposures. In 1993, Pacific Indemnity Company, a subsidiary of the Corporation, entered into a global settlement agreement with 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. This agreement is subject to final appellate court approval. Pursuant to the global settlement agreement, a $1,525.0 million trust fund will be established to pay future claims, which are claims that were not filed in court before August 27, 1993. Pacific Indemnity will contribute $538.2 million to the trust fund and Continental Casualty will contribute the remaining amount. In December 1993, upon execution of the global settlement agreement, Pacific Indemnity and Continental Casualty paid their respective shares into an escrow account. Pacific Indemnity's share is included in funds held for asbestos-related settlement. Upon final court approval of the settlement, the amount in the escrow account, including interest earned thereon, will be transferred to the trust fund. All of the parties have agreed to use their best efforts to seek final court approval of the global settlement agreement. Pacific Indemnity and Continental Casualty reached a separate agreement for the handling of all asbestos-related bodily injury claims pending on August 26, 1993 against Fibreboard. Pacific Indemnity's obligation under this agreement with respect to such pending claims is approximately $635.0 million, all of which has been paid. The agreement further provides that the total responsibility of both insurers with respect to pending and future asbestos-related bodily injury claims against Fibreboard will be shared between Pacific Indemnity and Continental Casualty on an approximate 35% and 65% basis, respectively. Pacific Indemnity, Continental Casualty and Fibreboard entered into a trilateral agreement to settle all present 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 ultimately disapproved. Pacific Indemnity's obligation under the trilateral agreement is therefore similar to, and not duplicative of, that under those agreements described above. The trilateral agreement reaffirms portions of an agreement reached in March 1992 between Pacific Indemnity and Fibreboard. Among other matters, that 1992 agreement eliminates any Pacific Indemnity liability to Fibreboard for asbestos-related property damage claims. In July 1995, the United States District Court of the Eastern District of Texas approved the global settlement agreement and the trilateral agreement. The judgments approving these agreements were appealed to the United States Court of Appeals for the Fifth Circuit. In July 1996, the Fifth Circuit Court affirmed the 1995 judgments of the District Court. The objectors to the global agreement appealed to the United States Supreme Court. In June 1997, the United States Supreme Court set aside the ruling by the Fifth Circuit Court that had approved the global agreement and ordered the Fifth Circuit Court to reconsider its approval in light of a June 1997 ruling by the Supreme Court rejecting an unrelated settlement that included several former asbestos manufacturers. In January 1998, the Fifth Circuit Court again affirmed the global settlement agreement, ruling that it was legally distinct from the other settlement. It is expected that objectors to the settlement will petition the Supreme Court to review the decision. The Supreme Court would then have to decide whether to take the appeal. The trilateral agreement, however, was never appealed to the United States Supreme Court and is now final. As a result, management continues to believe that the uncertainty of Pacific Indemnity's exposure with respect to asbestos-related bodily injury claims against Fibreboard has been eliminated. Since 1993, a California Court of Appeal has agreed, in response to a request by Pacific Indemnity, Continental Casualty and Fibreboard, to delay its decisions regarding asbestos-related insurance coverage issues that are currently before it and involve the three parties exclusively, while the approval of the global settlement is pending in court. Continental Casualty and Pacific Indemnity have dismissed disputes against each other which involved Fibreboard and were in litigation. The property and casualty insurance subsidiaries have additional potential asbestos exposure, primarily on insureds for which excess liability coverages were written. Such exposure has increased due to the erosion of much of the underlying limits. The number of claims against such insureds and the value of such claims have increased in recent years due in part to the non-viability of other defendants. 53 21 The remaining asbestos exposures are mostly peripheral defendants, including a mix of manufacturers and distributors of certain products that contain asbestos as well as premises owners. Generally, these insureds are named defendants on a regional rather than a nationwide basis. Notices of new asbestos claims and new exposures on existing claims continue to be received as more peripheral parties are drawn into litigation to replace the now defunct mines and bankrupt manufacturers. Legal guidelines regarding coverage for asbestos claims have begun to articulate more consistent standards regarding the extent of the insurers' coverage obligation and the method of allocation of costs among insurers. However, the universe of potential claims is still unknown. Therefore, uncertainty remains as to the property and casualty insurance subsidiaries' ultimate liability for asbestos-related claims. Hazardous waste sites are another significant potential exposure. Under the federal "Superfund" law and similar state statutes, when potentially responsible parties (PRPs) fail to handle the clean-up, regulators have the work done and then attempt to establish legal liability against the PRPs. The PRPs disposed of toxic materials at a waste dump site or transported the materials to the site. Insurance policies issued to PRPs were not intended to cover the clean-up costs of pollution and, in many cases, did not intend to cover the pollution itself. As the costs of environmental clean-up have become substantial, PRPs and others have increasingly filed claims with their insurance carriers. Litigation against insurers extends to issues of liability, coverage and other policy provisions. There is great uncertainty involved in estimating the property and casualty insurance subsidiaries' liabilities relating to these claims. First, the underlying liabilities of the claimants are extremely difficult to estimate. At any given clean-up site, the allocation of remediation costs among governmental authorities and the PRPs varies greatly. Second, different courts have addressed liability and coverage issues regarding pollution claims and have reached inconsistent conclusions in their interpretation of several issues. These significant uncertainties are not likely to be resolved in the near future. Uncertainties also remain as to the Superfund law itself. Superfund's taxing authority expired on December 31, 1995. It is currently not possible to predict the direction that any reforms may take, when they may occur or the effect that any changes may have on the insurance industry. Reserves for asbestos and toxic waste claims cannot be estimated with traditional loss reserving techniques. Case reserves and expense reserves for costs of related litigation have been established where sufficient information has been developed to indicate the involvement of a specific insurance policy. In addition, incurred but not reported reserves have been established to cover additional exposures on both known and unasserted claims. These reserves are continually reviewed and updated. A reconciliation of the beginning and ending liability for unpaid claims, net of reinsurance recoverable, and a reconciliation of the net liability to the corresponding liability on a gross basis is as follows:
1997 1996 1995 ---- ---- ---- (in millions) Gross liability, beginning of year........................... $9,523.7 $9,588.2 $8,913.2 Reinsurance recoverable, beginning of year.............. 1,767.8 1,973.7 1,980.3 -------- -------- -------- Net liability, beginning of year........................... 7,755.9 7,614.5 6,932.9 -------- -------- -------- Net incurred claims and claim expenses related to Current year................. 3,372.3 3,053.6 2,705.8 Prior years.................. (65.3) (42.8) (35.8) -------- -------- -------- 3,307.0 3,010.8 2,670.0 -------- -------- -------- Net payments for claims and claim expenses related to Current year................. 1,080.0 980.0 737.7 Prior years.................. 1,418.3 1,889.4 1,250.7 -------- -------- -------- 2,498.3 2,869.4 1,988.4 -------- -------- -------- Net liability, end of year....... 8,564.6 7,755.9 7,614.5 Reinsurance recoverable, end of year.................... 1,207.9 1,767.8 1,973.7 -------- -------- -------- Gross liability, end of year..... $9,772.5 $9,523.7 $9,588.2 ======== ======== ========
During 1997, the property and casualty insurance subsidiaries experienced overall favorable development of $65.3 million on net unpaid claims established as of the previous year-end. This compares with favorable development of $42.8 million and $35.8 million in 1996 and 1995, respectively. Such redundancies were reflected in operating results in these respective years. Each of the past three years benefited from favorable claim severity trends for certain liability classes; this was offset each year in varying degrees by increases in unpaid claims relating to asbestos and toxic waste claims. Management believes that the aggregate loss reserves of the property and casualty insurance subsidiaries at December 31, 1997 were adequate to cover claims for losses which had occurred, including both those known and those yet to be reported. In establishing such reserves, management considers facts currently known and the present state of the law and coverage litigation. However, given the expansion of coverage and liability by the courts and the legislatures in the past and the possibilities of similar interpretations in the future, particularly as they relate to asbestos and toxic waste claims, as well as the uncertainty in determining what scientific standards will be deemed acceptable for measuring hazardous waste site clean-up, additional increases in loss reserves may emerge which would adversely affect results in future periods. The amount cannot reasonably be estimated at the present time. 54 22 (14) BUSINESS SEGMENTS The property and casualty insurance subsidiaries underwrite most forms of property and casualty insurance in the United States, Canada, Europe and parts of Australia, Latin America and the Far East. The geographic distribution of property and casualty business in the United States is broad with a particularly strong market presence in the Northeast. The real estate subsidiary is involved in commercial development activities primarily in New Jersey and residential development activities primarily in central Florida. Revenues, income from continuing operations before income tax and identifiable assets of each industry segment were as follows:
Years Ended December 31 ------------------------------ 1997 1996 1995 ---- ---- ---- Revenues (in millions) Property and casualty insurance Premiums earned....................................... $5,157.4 $4,569.3 $4,147.2 Investment income..................................... 721.4 656.2 613.3 Real estate............................................... 616.1 319.8 287.8 -------- -------- -------- 6,494.9 5,545.3 5,048.3 Corporate investment income............................... 63.9 55.4 54.4 Realized investment gains Property and casualty insurance....................... 90.2 65.2 95.1 Corporate............................................. 15.0 14.6 13.7 -------- -------- -------- Total revenues...................................... $6,664.0 $5,680.5 $5,211.5 ======== ======== ======== Income (loss) from continuing operations before income tax Property and casualty insurance........................... $ 828.2 $ 676.4 $ 697.2 Real estate............................................... (8.6) (235.9) 7.7 -------- -------- -------- 819.6 440.5 704.9 Corporate................................................. 49.3 26.6 23.3 Realized investment gains Property and casualty insurance....................... 90.2 65.2 95.1 Corporate............................................. 15.0 14.6 13.7 -------- -------- -------- Income from continuing operations before federal and foreign income tax.................................. $ 974.1 $ 546.9 $ 837.0 ======== ======== ========
December 31 --------------------------------- 1997 1996 1995 ---- ---- ---- (in millions) Identifiable assets Property and casualty insurance........................... $17,592.4 $16,577.9 $16,157.7 Real estate............................................... 815.2 1,641.3 1,842.8 --------- --------- --------- Total identifiable assets........................... 18,407.6 18,219.2 18,000.5 Corporate................................................. 1,424.7 959.8 959.4 Adjustments and eliminations.............................. (216.7) (83.5) (168.2) Net assets of discontinued operations..................... -- 843.4 844.6 --------- --------- --------- Total assets........................................ $19,615.6 $19,938.9 $19,636.3 ========= ========= =========
The following additional information is with respect to the more significant groupings of classes of business for the property and casualty insurance operations:
Years Ended December 31 ------------------------------------ 1997 1996 1995 ---- ---- ---- (in millions) Premiums earned Personal.................................................. $1,188.1 $ 969.7 $ 847.5 Commercial................................................ 3,874.4 3,315.6 2,952.8 Reinsurance assumed....................................... 94.9 284.0 346.9 -------- -------- -------- Total premiums earned............................... $5,157.4 $4,569.3 $4,147.2 ======== ======== ======== Income (loss) from operations before income tax Personal.................................................. $ 184.1 $ 67.2 $ 97.3 Commercial................................................ (55.4) (18.2) (6.9) Reinsurance assumed....................................... (11.7) (18.7) 3.8 -------- -------- -------- Underwriting income................................. 117.0 30.3 94.2 Net investment income..................................... 711.2 646.1 603.0 -------- -------- -------- Income from operations before income tax............ $ 828.2 $ 676.4 $ 697.2 ======== ======== ========
55 23 The underwriting income or loss by class of business reflects allocations of certain significant underwriting expenses using allocation methods deemed reasonable. Other acceptable allocation methods could produce different results by groupings of classes of business. Property and casualty assets are available for payment of claims and expenses for all classes of business; therefore, such assets and the related investment income have not been identified with specific groupings of classes of business. (15) INTERNATIONAL OPERATIONS The international business of the property and casualty insurance segment is conducted through subsidiaries that operate solely outside of the United States and branch offices of domestic subsidiaries. The assets and liabilities related to such operations are located primarily in the countries in which the insurance risks are written. Prior to 1997, international business was also obtained from treaty reinsurance assumed from Royal & Sun Alliance. Shown below is a summary of revenues, income from operations before income tax and identifiable assets of the property and casualty insurance subsidiaries by geographic area:
Years Ended December 31 ----------------------------------- 1997 1996 1995 ---- ---- ---- (in millions) Revenues United States............................................. $ 4,886.8 $ 4,145.7 $ 3,715.1 International............................................. 992.0 1,079.8 1,045.4 --------- --------- --------- Total................................................... $ 5,878.8 $ 5,225.5 $ 4,760.5 ========= ========= ========= Income from operations before income tax United States............................................. $ 744.4 $ 571.6 $ 592.7 International............................................. 83.8 104.8 104.5 --------- --------- --------- Total................................................... $ 828.2 $ 676.4 $ 697.2 ========= ========= =========
December 31 ----------------------------------- 1997 1996 1995 ---- ---- ---- (in millions) Identifiable assets United States............................................. $15,826.8 $14,573.4 $14,055.3 International............................................. 1,765.6 2,004.5 2,102.4 --------- --------- --------- Total................................................... $17,592.4 $16,577.9 $16,157.7 ========= ========= =========
Foreign currency translation gains or losses credited or charged directly to the separate component of shareholders' equity were as follows:
Years Ended December 31 ------------------------------------ 1997 1996 1995 ---- ---- ---- (in millions) Losses on translation of foreign currencies................. $(15.3) $(15.1) $(15.9) Income tax (credit) Current................................................. (5.0) (3.8) (6.0) Deferred................................................ (.2) .9 3.3 ------ ------ ------ $(10.1) $(12.2) $(13.2) ====== ====== ======
56 24 (16) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted income from continuing operations per share:
Years Ended December 31 -------------------------------- 1997 1996 1995 ---- ---- ---- (in millions except for per share amounts) Basic earnings per share: Income from continuing operations......................... $769.5 $486.2 $654.4 ====== ====== ====== Weighted average number of common shares outstanding...... 171.6 174.2 173.9 ====== ====== ====== Income from continuing operations per share............... $ 4.48 $ 2.79 $ 3.77 ====== ====== ====== Diluted earnings per share: Income from continuing operations......................... $769.5 $486.2 $654.4 After-tax interest expense on 6% exchangeable subordinated notes................................................... 3.3 9.7 9.8 ------ ------ ------ Income from continuing operations for computing diluted earnings per share...................................... $772.8 $495.9 $664.2 ====== ====== ====== Weighted average number of common shares outstanding...... 171.6 174.2 173.9 Additional shares from assumed conversion of 6% exchangeable subordinated notes as if each $1,000 of principal amount had been converted at issuance into 23.256 shares of common stock........................... 1.8 5.8 5.8 Additional shares from assumed exercise of stock-based compensation awards..................................... 2.8 1.6 1.2 ------ ------ ------ Weighted average number of common shares and potential common shares assumed outstanding for computing diluted earnings per share...................................... 176.2 181.6 180.9 ====== ====== ====== Income from continuing operations per diluted share....... $ 4.39 $ 2.73 $ 3.67 ====== ====== ======
For additional disclosures regarding the exchangeable subordinated notes and stock-based compensation awards, see Notes (7) and (9). (17) FAIR VALUES OF FINANCIAL INSTRUMENTS Fair values of financial instruments are based on quoted market prices where available. Fair values of financial instruments for which quoted market prices are not available are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rates and the estimated amounts and timing of future cash flows. Accordingly, the derived fair value estimates cannot be substantiated by comparison to independent markets and are not necessarily indicative of the amounts that could be realized in immediate settlement of the instrument. Certain financial instruments, particularly insurance contracts, are excluded from fair value disclosure requirements. The methods and assumptions used to estimate the fair value of financial instruments are as follows: (i) The carrying value of short term investments approximates fair value due to the short maturities of these investments. (ii) Fair values of fixed maturities with active markets are based on quoted market prices. For fixed maturities that trade in less active markets, fair values are obtained from independent pricing services. Fair values of fixed maturities are principally a function of current interest rates. Care should be used in evaluating the significance of these estimated market values which can fluctuate based on such factors as interest rates, inflation, monetary policy and general economic conditions. (iii) Fair values of equity securities are based on quoted market prices. (iv) Fair values of real estate mortgages and notes receivable are estimated individually as the value of the discounted future cash flows of the loan, subject to the estimated fair value of the underlying collateral. The cash flows are discounted at rates based on a U.S. Treasury security with a maturity similar to the loan, adjusted for credit risk. (v) The carrying value of short term debt approximates fair value due to the short maturities of this debt. (vi) Long term debt consists of term loans, mortgages payable and long term notes. Fair values of term loans approximate the carrying values because such loans consist primarily of variable-rate debt that reprices frequently. Fair values of mortgages payable are estimated using discounted cash flow analyses. Fair values of long term notes are based on prices quoted by dealers. 57 25 The carrying values and fair values of financial instruments were as follows:
December 31 ------------------------------------------- 1997 1996 --------------------- ------------------- Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- ----- (in millions) Assets Invested assets Short term investments.................................. $ 725.1 $ 725.1 $ 275.9 $ 275.9 Fixed maturities (Note 3) Held-to-maturity...................................... 2,200.6 2,347.2 2,443.6 2,573.4 Available-for-sale.................................... 10,252.8 10,252.8 8,715.3 8,715.3 Equity securities....................................... 871.1 871.1 646.3 646.3 Real estate mortgages and notes receivable (Note 4)....... 123.8 121.0 502.4 487.2 Liabilities Short term debt (Note 7).................................. -- -- 189.5 189.5 Long term debt (Note 7)................................... 398.6 402.8 1,070.5 1,128.5
(18) SHAREHOLDERS' EQUITY (a) The authorized but unissued preferred shares may be issued in one or more series and the shares of each series shall have such rights as fixed by the Board of Directors. (b) 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. The activity of the Corporation's common stock was as follows:
Years Ended December 31 ---------------------------------------- 1997 1996 1995 ---- ---- ---- (number of shares) Common stock issued Balance, beginning of year................................ 176,084,173 87,819,355 87,798,286 Two-for-one stock split................................... -- 87,819,355 -- Shares issued upon exchange of long term debt............. 2,440 480,464 -- Share activity under option and incentive plans........... (48,763) (35,001) 21,069 ----------- ----------- ---------- Balance, end of year.................................. 176,037,850 176,084,173 87,819,355 ----------- ----------- ---------- Treasury stock Balance, beginning of year................................ 1,223,182 518,468 977,580 Two-for-one stock split................................... -- 518,468 -- Repurchase of shares...................................... 12,940,500 1,700,000 -- Shares issued upon exchange of long term debt............. (5,314,125) -- -- Share activity under option and incentive plans........... (1,529,147) (1,513,754) (459,112) ----------- ----------- ---------- Balance, end of year.................................. 7,320,410 1,223,182 518,468 ----------- ----------- ---------- Common stock outstanding, end of year................. 168,717,440 174,860,991 87,300,887 =========== =========== ==========
(c) The Corporation has a Shareholder Rights Plan under which each shareholder has one-quarter of a right for each share of common stock of the Corporation held. Each right entitles the holder to purchase from the Corporation one one-hundredth of a share of Series A Participating Cumulative Preferred Stock at an exercise price of $225. The rights attach to all outstanding shares of common stock and trade with the common stock until the rights become exercisable. The rights are subject to adjustment to prevent dilution of the interests represented by each right. The rights will become exercisable and will detach from the common stock ten days after a person or group either acquires 25% or more of the outstanding shares of the Corporation's common stock or announces a tender or exchange offer which, if consummated, would result in that person or group owning 25% or more of the outstanding shares of the Corporation's common stock. In the event that any person or group acquires 25% or more of the outstanding shares of the Corporation's common stock, each right will entitle the holder, other than such person or group, to purchase that number of shares of the Corporation's common stock having a market value of two times the exercise price of the right. In the event that, following the acquisition of 25% or more of the Corporation's outstanding common stock by a person or group, the Corporation is acquired in a merger or other business combination transaction or 50% or more of the Corporation's assets or earning power is sold, each right will entitle the holder to purchase common stock of the acquiring company having a value equal to two times the exercise price of the right. 58 26 The rights do not have the right to vote or to receive dividends. The rights may be redeemed in whole, but not in part, at a price of $.01 per right by the Corporation at any time until the tenth day after the acquisition of 25% or more of the Corporation's outstanding common stock by a person or group. The rights will expire at the close of business on June 12, 1999, unless previously redeemed by the Corporation. (d) The Corporation's insurance subsidiaries are required to file annual statements with insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis). For such subsidiaries, generally accepted accounting principles (GAAP) differ in certain respects from statutory accounting practices. A comparison of shareholders' equity on a GAAP basis and policyholders' surplus on a statutory basis is as follows:
December 31 ------------------------------------------------ 1997 1996 --------------------- --------------------- GAAP Statutory GAAP Statutory ---- --------- ---- --------- (in millions) Property and casualty insurance subsidiaries*............... $4,162.5 $2,596.0 $3,788.7 $2,514.2 Discontinued life and health insurance operations........... -- -- 843.4 328.3 -------- -------- -------- -------- 4,162.5 $2,596.0 4,632.1 $2,842.5 ======== ======== Real estate subsidiary*..................................... 264.4 -- Corporate and eliminations.................................. 1,230.2 830.8 -------- -------- $5,657.1 $5,462.9 ======== ========
A comparison of GAAP and statutory net income is as follows:
Years Ended December 31 --------------------------------------------------------------------------- 1997 1996 1995 --------------------- --------------------- --------------------- GAAP Statutory GAAP Statutory GAAP Statutory -------- --------- -------- --------- -------- --------- (in millions) Property and casualty insurance subsidiaries*..... $752.3 $652.4 $453.3 $560.2 $640.8 $571.2 Discontinued life and health insurance operations...................................... -- -- 26.5** 34.0 42.2 26.8 ------ ------ ------ ------ ------ ------ 752.3 $652.4 479.8 $594.2 683.0 $598.0 ====== ====== ====== Corporate and eliminations........................ 17.2 32.9 13.6 ------ ------ ------ $769.5 $512.7 $696.6 ====== ====== ======
* A property and casualty subsidiary owned the real estate subsidiary until December 1997, when the real estate subsidiary was distributed to the Corporation in the form of a dividend. ** Includes the $22.0 million after-tax loss on disposal. (e) The Corporation's ability to continue to pay dividends to shareholders and interest on debt obligations is affected by the availability of liquid assets held by the Corporation and by the dividend paying ability of its property and casualty insurance subsidiaries. Various state insurance laws restrict the Corporation's property and casualty insurance subsidiaries as to the amount of dividends they may pay to the Corporation without the prior approval of regulatory authorities. The restrictions are generally based on net income and on certain levels of policyholders' surplus as determined in accordance with statutory accounting practices. Dividends in excess of such thresholds are considered "extraordinary" and require prior regulatory approval. During 1997, these subsidiaries paid cash dividends to the Corporation totaling $280.0 million. The maximum dividend distribution that may be made by the property and casualty insurance subsidiaries to the Corporation during 1998 without prior approval is approximately $825.0 million. 59 27 REPORT OF INDEPENDENT AUDITORS ERNST & YOUNG LLP 787 Seventh Avenue New York, New York 10019 The Board of Directors and Shareholders The Chubb Corporation We have audited the accompanying consolidated balance sheets of The Chubb Corporation as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Chubb Corporation at December 31, 1997 and 1996 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. As described in Note (1)(g) to the financial statements, The Chubb Corporation changed its methods of accounting for impairment of long-lived assets in 1996. February 20, 1998 /s/ ERNST & YOUNG LLP 60 28 QUARTERLY FINANCIAL DATA Summarized unaudited quarterly financial data for 1997 and 1996 are shown below. In management's opinion, the interim financial data contain all adjustments, consisting of normal recurring items, necessary to present fairly the results of operations for the interim periods.
Three Months Ended ----------------------------------------------------------------------------------------- March 31 June 30 September 30 December 31 ------------------- ------------------- ------------------- ------------------- 1997 1996 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- ---- ---- (in millions except for per share amounts) Revenues.............................. $1,576.9 $1,481.6 $1,509.6 $1,382.0 $1,568.8 $1,357.0 $2,008.7 $1,459.9 Claims and expenses................... 1,331.4 1,311.2 1,270.2 1,174.3 1,322.3 1,168.3 1,766.0 1,479.8 Federal and foreign income tax (credit)............................ 53.4 30.0 50.7 42.9 52.5 34.4 48.0 (46.6) -------- -------- -------- -------- -------- -------- -------- -------- Income from continuing operations... 192.1 140.4 188.7 164.8 194.0 154.3 194.7 26.7 Income (loss) from discontinued operations, net of tax............ -- 11.0 -- 9.5 -- 10.9 -- (4.9) -------- -------- -------- -------- -------- -------- -------- -------- Net income...................... $ 192.1 $ 151.4 $ 188.7 $ 174.3 $ 194.0 $ 165.2 $ 194.7 $ 21.8 ======== ======== ======== ======== ======== ======== ======== ======== Basic earnings per share Income from continuing operations... $ 1.11 $ .81 $ 1.10 $ .94 $ 1.12 $ .88 $ 1.15 $ .16 Income (loss) from discontinued operations........................ -- .06 -- .05 -- .06 -- (.02) -------- -------- -------- -------- -------- -------- -------- -------- Net income...................... $ 1.11 $ .87 $ 1.10 $ .99 $ 1.12 $ .94 $ 1.15 $ .14 ======== ======== ======== ======== ======== ======== ======== ======== Diluted earnings per share Income from continuing operations... $ 1.08 $ .79 $ 1.08 $ .92 $ 1.10 $ .86 $ 1.13 $ .16 Income (loss) from discontinued operations........................ -- .06 -- .05 -- .06 -- (.02) -------- -------- -------- -------- -------- -------- -------- -------- Net income...................... $ 1.08 $ .85 $ 1.08 $ .97 $ 1.10 $ .92 $ 1.13 $ .14 ======== ======== ======== ======== ======== ======== ======== ======== Underwriting ratios Losses to premiums earned........... 63.9% 68.8% 63.3% 64.3% 65.3% 65.4% 65.5% 66.4% Expenses to premiums written........ 32.4 32.5 32.0 32.0 32.2 31.8 32.9 32.0 -------- -------- -------- -------- -------- -------- -------- -------- Combined........................ 96.3% 101.3% 95.3% 96.3% 97.5% 97.2% 98.4% 98.4% ======== ======== ======== ======== ======== ======== ======== ========
On May 13, 1997, the Corporation completed the sale of its life and health insurance operations. These operations have been classified as discontinued operations. Loss from discontinued operations for the fourth quarter of 1996 reflects a charge of $22.0 million or $.12 per diluted share ($.12 per basic share) for the after-tax loss on the sale. Claims and expenses for the fourth quarter of 1996 include a $255.0 million write-down of the carrying value of certain real estate assets to their estimated fair value. Income from continuing operations for the quarter has been reduced by a charge of $160.0 million or $.89 per diluted share ($.91 per basic share) for the after-tax effect of the write-down. Earnings per share amounts for the first three quarters of 1997 and the four quarters of 1996 have been restated to reflect the changes prescribed by Statement of Financial Accounting Standards No. 128, Earnings per Share. 61 29 COMMON STOCK DATA The common stock of the Corporation is listed and principally traded on the New York Stock Exchange (NYSE). The following are the high and low closing sale prices as reported on the NYSE Composite Tape and the quarterly dividends declared for each quarter of 1997 and 1996.
1997 ---------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Common stock prices High.................................................... $62.25 $67.63 $71.75 $78.13 Low..................................................... 53.00 51.25 65.56 65.88 Dividends declared.......................................... .29 .29 .29 .29 1996 ---------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Common stock prices High.................................................... $52.13 $49.88 $50.00 $55.50 Low..................................................... 46.94 44.13 41.38 45.50 Dividends declared.......................................... .27 .27 .27 .27
At March 9, 1998, there were approximately 8,000 common shareholders of record. 62 EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 THE CHUBB CORPORATION EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Significant subsidiaries at December 31, 1997 of The Chubb Corporation, a New Jersey Corporation, and their subsidiaries (indented), together with the percentages of ownership, are set forth below.
PERCENTAGE PLACE OF OF SECURITIES INCORPORATION OWNED COMPANY ------------- ------------- Federal Insurance Company................................... Indiana 100% Vigilant Insurance Company............................. New York 100 Chubb Insurance Company of Australia Limited...... Australia 100 Pacific Indemnity Company.............................. Wisconsin 100 Northwestern Pacific Indemnity Company............ Oregon 100 Texas Pacific Indemnity Company................... Texas 100 Great Northern Insurance Company....................... Minnesota 100 Chubb Insurance Company of New Jersey.................. New Jersey 100 Chubb Custom Insurance Company......................... Delaware 100 Chubb National Insurance Company....................... Indiana 100 Chubb Indemnity Insurance Company...................... New York 100 CC Canada Holdings Ltd................................. Canada 100 Chubb Insurance Company of Canada................. Canada 100 Chubb Insurance Company of Europe, S.A................. Belgium 100 Chubb Atlantic Indemnity Ltd. .............................. Bermuda 100 DHC Corporation........................................ Delaware 100 Chubb do Brasil Companhia de Seguros.............. Brazil 99 Bellemead Development Corporation........................... Delaware 100 Chubb & Son Inc............................................. New York 100 Chubb Capital Corporation................................... New Jersey 100
- --------------- Certain other subsidiaries of the Corporation and its consolidated subsidiaries have been omitted since, in the aggregate, they would not constitute a significant subsidiary. 45 EX-27 6 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 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 10,253 2,201 2,347 871 0 0 14,050 12 50 677 19,616 9,773 2,697 0 0 399 176 0 0 5,481 19,616 5,158 785 105 616 3,307 1,403 331 974 204 770 0 0 0 770 4.48 4.39 7,756 3,372 (65) 1,080 1,418 8,565 (65) 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 ($1,208), AS PRESCRIBED BY SFAS NO. 113. SUCH AMOUNTS ARE INCLUDED IN TOTAL ASSETS. UNEARNED-PREMIUMS EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUMS ($115) AS PRESCRIBED BY SFAS NO. 113. THIS PREPAID AMOUNT IS INCLUDED IN TOTAL ASSETS. NOTES-PAYABLE INCLUDES LONG-TERM DEBT OF $399. 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.
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