-----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, TPJgDhc7gBGq+1w1lFkZazralOg4kT0bW8Yp4HbdJxVGjDoTN/zmZIps/KXCcM3R dyKobVcCfTYSwR81lBs/qg== 0000950123-99-004716.txt : 19990517 0000950123-99-004716.hdr.sgml : 19990517 ACCESSION NUMBER: 0000950123-99-004716 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHUBB CORP CENTRAL INDEX KEY: 0000020171 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 132595722 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08661 FILM NUMBER: 99623780 BUSINESS ADDRESS: STREET 1: 15 MOUNTAIN VIEW RD P O BOX 1615 CITY: WARREN STATE: NJ ZIP: 07061 BUSINESS PHONE: 9089032000 10-Q 1 CHUBB CORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 For the quarterly period ended March 31, 1999 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 For the transition period from to Commission file number 1-8661 THE CHUBB CORPORATION (Exact name of registrant as specified in its charter) NEW JERSEY 13-2595722 (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 15 MOUNTAIN VIEW ROAD, WARREN, NEW JERSEY 07061-1615 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (908) 903-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- The number of shares of common stock outstanding as of April 30, 1999 was 161,677,080. 2 THE CHUBB CORPORATION INDEX Page Number ----------- Part I. Financial Information: Item 1 - Financial Statements: Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998......................... 1 Consolidated Statements of Income for the Three Months Ended March 31, 1999 and 1998................... 2 Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 1999 and 1998........... 3 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998................... 4 Notes to Consolidated Financial Statements.................... 5 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 9 Part II. Other Information: Item 6 - Exhibits and Reports on Form 8-K....................... 17 3 Page 1 THE CHUBB CORPORATION CONSOLIDATED BALANCE SHEETS
Mar. 31, Dec. 31, 1999 1998 --------- --------- (in millions) Assets Invested Assets Short Term Investments............................... $ 541.7 $ 344.2 Fixed Maturities Held-to-Maturity - Tax Exempt (market $2,068.9 and $2,140.2)..................................... 1,940.8 2,002.2 Available-for-Sale Tax Exempt (cost $6,830.3 and $6,509.3)........... 7,216.8 6,935.1 Taxable (cost $4,153.1 and $4,259.0).............. 4,245.8 4,381.6 Equity Securities (cost $795.6 and $1,002.6)......... 830.5 1,092.2 --------- --------- TOTAL INVESTED ASSETS......................... 14,775.6 14,755.3 Cash................................................... 9.9 8.3 Accrued Investment Income.............................. 203.5 221.0 Premiums Receivable.................................... 1,210.8 1,199.3 Reinsurance Recoverable on Unpaid Claims............... 1,266.3 1,306.6 Prepaid Reinsurance Premiums........................... 126.4 134.6 Funds Held for Asbestos-Related Settlement............. 605.9 607.4 Deferred Policy Acquisition Costs...................... 733.8 728.7 Real Estate Assets..................................... 743.3 746.0 Deferred Income Tax.................................... 339.8 320.8 Other Assets........................................... 956.2 718.0 --------- --------- TOTAL ASSETS.................................. $20,971.5 $20,746.0 ========= ========= Liabilities Unpaid Claims.......................................... $10,514.9 $10,356.5 Unearned Premiums...................................... 2,933.6 2,915.7 Long Term Debt......................................... 607.4 607.5 Dividend Payable to Shareholders....................... 52.1 50.3 Accrued Expenses and Other Liabilities................. 1,213.5 1,171.9 --------- --------- TOTAL LIABILITIES............................. 15,321.5 15,101.9 --------- --------- Shareholders' Equity Common Stock - $1 Par Value; 175,984,913 and 175,989,202 Shares.................................... 176.0 176.0 Paid-In Surplus........................................ 531.5 546.7 Retained Earnings...................................... 5,738.8 5,604.0 Accumulated Other Comprehensive Income Unrealized Appreciation of Investments, Net of Tax.... 334.2 414.7 Foreign Currency Translation Losses, Net of Tax....... (31.1) (36.0) Receivable from Employee Stock Ownership Plan.......... (86.3) (86.3) Treasury Stock, at Cost - 14,448,615 and 13,722,376 Shares..................................... (1,013.1) (975.0) --------- --------- TOTAL SHAREHOLDERS' EQUITY.................... 5,650.0 5,644.1 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.... $20,971.5 $20,746.0 ========= =========
See Notes to Consolidated Financial Statements. 4 Page 2 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED MARCH 31
1999 1998 -------- -------- (in millions) Revenues Premiums Earned..................................... $1,379.8 $1,314.1 Investment Income................................... 208.9 204.1 Real Estate......................................... 9.4 24.5 Realized Investment Gains........................... 31.5 44.6 -------- -------- Total Revenues............................... 1,629.6 1,587.3 -------- -------- Claims and Expenses Insurance Claims.................................... 908.0 819.5 Amortization of Deferred Policy Acquisition Costs... 373.7 361.9 Other Insurance Operating Costs and Expenses........ 92.2 87.7 Real Estate Cost of Sales and Expenses.............. 10.3 25.4 Investment Expenses................................. 5.2 5.3 Corporate Expenses.................................. 13.6 8.2 Restructuring Charge................................ - 40.0 -------- -------- Total Claims and Expenses.................... 1,403.0 1,348.0 -------- -------- Income Before Federal and Foreign Income Tax.......... 226.6 239.3 Federal and Foreign Income Tax........................ 39.7 47.5 -------- -------- Net Income............................................ $ 186.9 $ 191.8 ======== ======== Average Common Shares Outstanding..................... 161.4 168.3 Average Common and Potentially Dilutive Shares Outstanding................................... 163.2 171.9 Net Income Per Share Basic................................................ $1.16 $1.14 Diluted.............................................. 1.14 1.12 Dividends Declared Per Share.......................... .32 .31
See Notes to Consolidated Financial Statements. 5 Page 3 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME THREE MONTHS ENDED MARCH 31
1999 1998 ------ ------ (in millions) Net Income............................................ $186.9 $191.8 ------ ------ Other Comprehensive Income (Loss) Change in Unrealized Appreciation of Investments, Net of Tax......................... (80.5) 23.1 Foreign Currency Translation Gains (Losses), Net of Tax......................... 4.9 (1.8) ------ ------ (75.6) 21.3 ------ ------ Comprehensive Income.................................. $111.3 $213.1 ====== ======
See Notes to Consolidated Financial Statements. 6 Page 4 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31
1999 1998 ------- --------- (in millions) Cash Flows from Operating Activities Net Income.............................................. $ 186.9 $ 191.8 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Increase in Unpaid Claims, Net........................ 198.7 135.5 Increase in Unearned Premiums, Net.................... 26.1 17.4 Depreciation.......................................... 15.4 16.0 Realized Investment Gains............................. (31.5) (44.6) Other, Net............................................ (29.6) (20.8) ------- --------- Net Cash Provided by Operating Activities............... 366.0 295.3 ------- -------- Cash Flows from Investing Activities Proceeds from Sales of Fixed Maturities................. 393.2 1,134.6 Proceeds from Maturities of Fixed Maturities............ 205.6 161.6 Proceeds from Sales of Equity Securities................ 435.8 102.6 Purchases of Fixed Maturities........................... (752.0) (1,270.3) Purchases of Equity Securities.......................... (204.0) (88.4) Purchase of Interest in Hiscox plc...................... (145.3) - Increase in Short Term Investments, Net................. (197.5) (167.4) Increase in Net Payable from Security Transactions Not Settled............................................ 46.0 126.1 Other, Net.............................................. (23.9) (21.8) ------- --------- Net Cash Used in Investing Activities................... (242.1) (23.0) ------- --------- Cash Flows from Financing Activities Repayment of Long Term Debt............................. (.4) (150.2) Dividends Paid to Shareholders.......................... (50.3) (49.0) Repurchase of Shares.................................... (75.2) (89.1) Other, Net.............................................. 3.6 17.3 ------- --------- Net Cash Used in Financing Activities................... (122.3) (271.0) -------- --------- Net Increase in Cash...................................... 1.6 1.3 Cash at Beginning of Year................................. 8.3 11.5 ------- --------- Cash at End of Period................................... $ 9.9 $ 12.8 ======= =========
See Notes to Consolidated Financial Statements. 7 Page 5 THE CHUBB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1) General The amounts included in this report are unaudited but include those adjustments, consisting of normal recurring items, which management considers necessary for a fair presentation. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes in the 1998 Annual Report to Shareholders. 2) Adoption of New Accounting Pronouncement Effective January 1, 1999, the Corporation adopted Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which was issued by the American Institute of Certified Public Accountants. The SOP requires that certain costs incurred to develop or obtain computer software for internal use should be capitalized and amortized over the software's expected useful life. Prior to 1999, the Corporation expensed all development costs of internal use computer software. The SOP has been applied prospectively. Adoption of SOP 98-1 resulted in an increase to net income of $2.8 million or $.02 per diluted share for the three months ended March 31, 1999. 3) Investments Short term investments, which have an original maturity of one year or less, are carried at amortized cost which approximates market value. Fixed maturities classified as held-to-maturity are carried at amortized cost. Fixed maturities classified as available-for-sale and equity securities are carried at market value as of the balance sheet date. The net change in unrealized appreciation of investments carried at market value was as follows:
Three Months Ended March 31 -------------------- 1999 1998 ------- ------ (in millions) Change in unrealized appreciation of equity securities................................... $ (54.7) $ 64.5 Change in unrealized appreciation of fixed maturities.................................... (69.2) (29.0) ------- ------ (123.9) 35.5 Deferred income tax (credit)......................... (43.4) 12.4 ------- ------ Change in unrealized appreciation of investments, net.................................... $ (80.5) $ 23.1 ======= ======
8 Page 6 4) Restructuring Charge In the first quarter of 1998, the Corporation recorded a restructuring charge of $40 million related to the implementation of a cost control initiative. Of the $40 million restructuring charge, $30 million was comprised of accruals for providing enhanced pension benefits and postretirement medical benefits to employees who accepted an early retirement incentive offer and $5 million was severance costs for employees who were terminated. The remainder of the charge was for other expenses such as the cost of outplacement services. The initiative was substantially completed in 1998 with no significant differences from original estimates. The liabilities related to the enhanced pension and postretirement medical benefits were included in the pension and postretirement medical benefits liabilities, which will be reduced as benefit payments are made over time. Of the other restructuring costs, approximately $3 million remained unpaid at March 31, 1999. 5) Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended March 31 ----------------------- 1999 1998 ------ ------ (in millions, except per share amounts) Basic earnings per share: Net income..................................... $186.9 $191.8 ====== ====== Weighted average number of common shares outstanding............................ 161.4 168.3 ====== ====== Basic earnings per share....................... $ 1.16 $ 1.14 ====== ====== Diluted earnings per share: Net income..................................... $186.9 $191.8 ====== ====== Weighted average number of common shares outstanding............................ 161.4 168.3 Additional shares from assumed exercise of stock-based compensation awards............ 1.8 3.6 ------ ------ Weighted average number of common shares and potential common shares assumed outstanding for computing diluted earnings per share............................ 163.2 171.9 ====== ====== Diluted earnings per share..................... $ 1.14 $ 1.12 ====== ======
9 Page 7 6) Segment Information Effective December 31, 1998, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes new standards for reporting information about operating segments in annual financial statements and requires the reporting of selected segment information in interim reports to shareholders. The property and casualty operations include three reportable underwriting segments and the investment function. The underwriting segments are personal, standard commercial and specialty commercial. The personal and commercial segments are managed separately because they target different customers. The commercial business is further distinguished by those classes of business that are generally available in broad markets and are of a more commodity nature (standard) and those classes available in more limited markets that require specialized underwriting and claim settlement (specialty). Standard commercial classes include multiple peril, casualty and workers' compensation and specialty commercial classes include property and marine, executive protection, financial institutions and other commercial classes. Revenues and income before income tax of the operating segments were as follows:
Three Months Ended March 31 ------------------------- 1999 1998 -------- -------- (in millions) Revenues Property and casualty insurance Premiums earned Personal................................. $ 345.1 $ 313.4 Standard commercial...................... 500.4 494.9 Specialty commercial..................... 534.3 505.8 -------- -------- 1,379.8 1,314.1 Investment income.......................... 195.9 187.6 -------- -------- Total property and casualty insurance.... 1,575.7 1,501.7 Corporate and other.......................... 22.4 41.0 Realized investment gains.................... 31.5 44.6 -------- -------- Total revenues........................... $1,629.6 $1,587.3 ======== ========
10 Page 8
Three Months Ended March 31 ------------------------- 1999 1998 -------- -------- (in millions) Income (loss) before income tax Property and casualty insurance Underwriting Personal................................. $ 41.8 $ 64.1 Standard commercial...................... (87.8) (73.8) Specialty commercial..................... 48.8 55.0 -------- -------- 2.8 45.3 Increase in deferred policy acquisition costs................................... 5.1 4.9 Other charges............................ (2.0) (5.2) -------- -------- Underwriting income........................ 5.9 45.0 Investment income.......................... 191.7 183.4 Restructuring charge....................... - (40.0) -------- -------- Total property and casualty insurance.... 197.6 188.4 Corporate and other.......................... (2.5) 6.3 Realized investment gains.................... 31.5 44.6 -------- -------- Total income before income tax........... $ 226.6 $ 239.3 ======== ========
7) Pending Acquisition On February 8, 1999, the Corporation announced that it entered into a definitive merger agreement under which it would acquire Executive Risk Inc. Executive Risk is a specialty insurance company offering directors and officers, errors and omissions and professional liability coverages. The acquisition will be accounted for using the purchase method of accounting. The agreement provides that Executive Risk shareholders will receive 1.235 shares of the Corporation's common stock for each outstanding common share of Executive Risk. The agreement contemplates that approximately 13,730,000 shares of common stock of the Corporation will be issued to Executive Risk shareholders and approximately 2,3000,000 shares of common stock of the Corporation will be reserved for issuance upon exercise of Executive Risk stock options. The total value of the transaction is expected to be approximately $850 million. Completion of the acquisition is subject to approval by Executive Risk shareholders and various regulatory authorities. Closing is expected by the end of the second quarter of 1999. 11 Page 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1999 AND 1998 SUMMARY OF FINANCIAL RESULTS The following is a summary of the Corporation's operating results for the first quarter of 1999 and 1998:
Quarter Ended March 31 ---------------------- 1999 1998 -------- -------- (in millions) PROPERTY AND CASUALTY INSURANCE Underwriting Net Premiums Written................................. $1,405.9 $1,331.5 Increase in Unearned Premiums........................ (26.1) (17.4) -------- -------- Premiums Earned................................... 1,379.8 1,314.1 -------- -------- Claims and Claim Expenses............................ 908.0 819.5 Operating Costs and Expenses......................... 460.7 446.0 Increase in Deferred Policy Acquisition Costs........ (5.1) (4.9) Dividends to Policyholders........................... 10.3 8.5 -------- -------- Underwriting Income Before Income Tax................ 5.9 45.0 Federal and Foreign Income Tax....................... 2.1 16.2 -------- -------- Underwriting Income.................................. 3.8 28.8 -------- -------- Investments Investment Income Before Expenses and Income Tax..... 195.9 187.6 Investment Expenses.................................. 4.2 4.2 -------- -------- Investment Income Before Income Tax.................. 191.7 183.4 Federal and Foreign Income Tax....................... 28.7 28.9 -------- -------- Investment Income.................................... 163.0 154.5 -------- -------- Property and Casualty Income.......................... 166.8 183.3 CORPORATE AND OTHER, Net of Tax........................ (.4) 5.5 -------- -------- CONSOLIDATED OPERATING INCOME BEFORE RESTRUCTURING CHARGE........................... 166.4 188.8 Restructuring Charge, Net of Tax....................... - (26.0) -------- -------- CONSOLIDATED OPERATING INCOME.......................... 166.4 162.8 REALIZED INVESTMENT GAINS, Net of Tax.................. 20.5 29.0 -------- -------- CONSOLIDATED NET INCOME................................ $ 186.9 $ 191.8 ======== ========
12 Page 10 PROPERTY AND CASUALTY INSURANCE Property and casualty earnings were lower in the first quarter of 1999 compared with the same period of 1998 due to a decrease in underwriting income, partially offset by an increase in investment income. Property and casualty income after taxes amounted to $166.8 million in the first quarter of 1999 compared with $183.3 million in 1998. Net premiums written were $1,405.9 million in the first quarter of 1999, an increase of 5.6% compared with the first quarter of 1998. Premium growth in personal lines remained strong. In commercial lines, intense competition in the worldwide marketplace has made profitable premium growth difficult, particularly in the standard commercial classes, which include multiple peril, casualty and workers' compensation. Competitors continued to place significant pressure on pricing and coverage terms as they sought to maintain or increase market share. However, our strategy to improve the pricing in the standard commercial classes has shown some early success thus far in 1999. Substantial premium growth in the first quarter of 1999 was achieved outside the United States, particularly in Europe, our largest foreign market. Underwriting results were profitable in the first quarter of 1999 and 1998. Our combined loss and expense ratio was 99.2% in the first quarter of 1999 compared with 96.1% in 1998. The loss ratio deteriorated to 66.3% in the first quarter of 1999 from 62.8% in 1998 due in part to higher catastrophe losses. The loss ratio, while somewhat higher in 1999, continues to reflect the favorable experience resulting from the consistent application of our disciplined underwriting standards. Catastrophe losses during the first quarter of 1999 were 2.9 percentage points of the loss ratio compared with 2.3 percentage points of the loss ratio in 1998. Catastrophe losses in 1999 resulted primarily from a series of winter storms in the United States in January. In 1998, catastrophe losses resulted primarily from the winter ice storms in Canada. Our expense ratio was 32.9% in the first quarter of 1999 compared with 33.3% in 1998. The lower ratio in 1999 was due to salary and overhead expenses remaining flat compared with the first quarter of 1998. Such expenses were flat due primarily to a cost control initiative implemented during 1998 and, to a lesser extent, a change in accounting that resulted in the capitalization of certain costs incurred to develop computer software for internal use. The cost control initiative resulted in approximately 500 job reductions in the home office and the branch network through a combination of early retirements, terminations and attrition. Other savings include vendor management, consulting expenses and other operating costs. 13 Page 11 Underwriting results during 1999 and 1998 by class of business were as follows:
Quarter Ended March 31 ---------------------------------------- Net Premiums Combined Loss and Written Expense Ratios ------------------- ----------------- 1999 1998 1999 1998 -------- -------- ----- ----- (in millions) Personal Insurance Automobile........................ $ 77.2 $ 70.6 83.1% 89.0% Homeowners........................ 177.9 154.8 101.4 85.8 Other............................. 79.6 73.9 66.2 63.3 -------- -------- ----- ----- Total Personal................ 334.7 299.3 88.9 81.1 -------- -------- ----- ----- Standard Commercial Insurance Multiple Peril.................... 189.1 189.6 120.4 118.4 Casualty.......................... 214.0 231.8 116.8 114.2 Workers' Compensation............. 96.0 97.8 116.3 101.0 -------- ------ ----- ----- Total Standard................ 499.1 519.2 117.9 113.4 -------- ------ ----- ----- Specialty Commercial Insurance Property and Marine............... 127.7 128.0 98.7 116.6 Executive Protection.............. 243.4 223.4 81.9 71.8 Financial Institutions............ 109.3 98.0 83.3 83.0 Other............................. 91.7 63.6 98.5 95.8 -------- -------- ----- ----- Total Specialty Commercial.... 572.1 513.0 88.6 88.6 -------- -------- ----- ------ Total Commercial.............. 1,071.2 1,032.2 102.6 100.9 -------- -------- ------ ----- Total......................... $1,405.9 $1,331.5 99.2% 96.1% ======== ======== ===== =====
PERSONAL INSURANCE Premiums from personal insurance coverages, which represent 24% of total premiums written, increased by 11.8% in the first quarter of 1999 compared with the same quarter in 1998. We continued to grow our homeowners and other non-automobile business, primarily in non-catastrophe prone areas. Personal automobile premiums also increased as a result of an increase in the number of in-force policies for high value automobiles. Premiums outside the United States grew by over 50% although from a small base. Our personal insurance business produced highly profitable underwriting results in the first quarter of 1999 and 1998. The combined loss and expense ratio was 88.9% in the first quarter of 1999 compared with 81.1% in 1998. Our homeowners business produced breakeven results in 1999 compared with highly profitable results in 1998. The deterioration in 1999 was due to an increase in both catastrophe and non-catastrophe related losses, the latter due in part to one $7 million loss. Catastrophe losses represented 11.4 percentage points of the loss ratio for this class in the first quarter of 1999 compared with 7.8 percentage points in 1998. Our automobile business produced profitable results in 1999 and 1998 due primarily to stable loss frequency and severity. Other personal coverages, which include insurance for personal valuables and excess liability, produced highly profitable results in both years due to continued favorable loss experience. 14 Page 12 STANDARD COMMERCIAL INSURANCE Premiums from standard commercial insurance, which represent 35% of our total writings, decreased by 3.9% in the first quarter of 1999 compared with the same period a year ago. The decrease was the result of the strategy we put in place in late 1998 to renew good business at adequate prices and not renew underperforming accounts where we cannot attain price adequacy. On that business that was renewed, rates increased modestly in the first quarter of 1999 and we expect this trend to continue. Retention levels were lower compared with the first quarter of 1998. Approximately half of the non-renewals were the result of business we chose not to renew and half were the result of customers not accepting the price increases we instituted. Our standard commercial insurance business produced highly unprofitable results in the first quarter of 1999 and 1998. The combined loss and expense ratio was 117.9% in the first quarter of 1999 compared with 113.4% in 1998. Multiple peril results were unprofitable by a similar margin in 1999 and 1998 due, in large part, to inadequate prices. Results in 1999 deteriorated in the property component of this business due primarily to several large overseas losses. Results in the liability component improved in 1999 due to a lower frequency of large losses. Catastrophe losses represented 6.8 percentage points of the loss ratio for this class in the first quarter of 1999 compared with 5.5 percentage points in 1998. Results for our casualty business were unprofitable by a similar margin in 1999 and 1998. Casualty results were adversely affected in both years by incurred losses relating to asbestos-related and toxic waste claims. The excess liability component of our casualty coverages produced modestly unprofitable underwriting results in both 1999 and 1998. Results for the primary liability component were extremely unprofitable in both years due to a high frequency of large losses. Results in the automobile component were more unprofitable in 1999 than in 1998. Our commercial automobile book of business is inadequately priced. Results in 1999 deteriorated due to an increase in the frequency of losses. Workers' compensation results deteriorated in 1999 from the marginally unprofitable results in 1998. The deterioration in 1999 was due to an increase in the frequency of losses. Results in both periods reflect the cumulative effect of price reductions over the past several years. SPECIALTY COMMERCIAL INSURANCE Premiums from specialty commercial insurance, which represent 41% of our total writings, increased by 11.5% in the first quarter of 1999 compared with the same period a year ago. Substantial premium growth was achieved in 1999 in our executive protection business and in the professional liability component of our financial institutions business due primarily to the selective writing of new accounts and an emphasis on new products. In addition, other commercial business includes $17 million of premiums in 1999 from our new Chubb Re operation. Property and marine premiums were flat in 1999 compared with the first quarter of 1998 due to the effect on retention levels of pricing initiatives and non-renewing certain unprofitable accounts. Our specialty commercial insurance business produced highly profitable underwriting results in the first quarter of 1999 and 1998. The combined loss and expense ratio was 88.6% in both years. 15 Page 13 Property and marine results were modestly profitable in 1999 compared with unprofitable results in 1998. The substantial improvement in 1999 was due to a decrease in the frequency of large losses and the positive effect of the pricing initiatives and the culling of unprofitable accounts. Results in 1999 and 1998 were adversely affected by several large overseas losses. Catastrophe losses represented 3.6 percentage points of the loss ratio for this class in the first quarter of 1999 compared with 3.4 percentage points in 1998. Executive protection results were highly profitable in 1999 and 1998 due to favorable loss experience on U.S. and foreign business, particularly in the directors and officers and fiduciary liability components. Our financial institutions business produced highly profitable results in both years due to the favorable loss experience in the fidelity component. Results in our other commercial classes were modestly profitable in 1999 and 1998. Our surety business produced highly profitable results in both years which more than offset the unprofitable results in our aviation business. LOSS RESERVES Gross loss reserves were $10,514.9 million and $10,356.5 million at March 31, 1999 and December 31, 1998, respectively. Reinsurance recoverables on such loss reserves were $1,266.3 million and $1,306.6 million at March 31, 1999 and December 31, 1998, respectively. Loss reserves, net of reinsurance recoverable, increased by $198.7 million during the first quarter of 1999. Substantial reserve growth continued to occur in those liability classes, primarily excess liability and executive protection, that are characterized by delayed loss reporting and extended periods of settlement. Losses incurred related to asbestos and toxic waste claims were $12.8 million in the first quarter of 1999 and $17.9 million in 1998. INVESTMENTS Investment income after deducting expenses and taxes increased by 5.5% in the first quarter of 1999 compared with the same period in 1998. The growth was due to an increase in invested assets since the first quarter of 1998, reflecting strong cash flow from operations over the period, partially offset by lower average yields on new investments. The effective tax rate on investment income decreased to 15.0% in the first quarter of 1999 from 15.8% in the comparable period in 1998 due to holding a larger proportion of our investment portfolio in tax-exempt securities. New cash available for investment in the first quarter of 1999 was invested in tax-exempt bonds. During the quarter, we reduced our equity securities portfolio by approximately $200 million with $145 million of the proceeds used to fund the purchase of a 27% interest in Hiscox plc, a leading U.K. personal and commercial specialty insurer. The property and casualty subsidiaries maintain sufficient investments in highly liquid, short term securities to provide for immediate cash needs. 16 Page 14 CORPORATE AND OTHER Corporate and other includes investment income earned on corporate invested assets, interest and other expenses not allocable to the operating subsidiaries, and the results of our real estate subsidiary. Corporate and other produced a loss after taxes of $.4 million in the first quarter of 1999 compared with income of $5.5 million in the first quarter of 1998 due primarily to higher interest expense in 1999. RESTRUCTURING CHARGE In the first quarter of 1998, the Corporation recorded a restructuring charge of $40 million, or $26 million after taxes, related to the implementation of a cost control initiative. Of the $40 million restructuring charge, $30 million was comprised of accruals for providing enhanced pension benefits and postretirement medical benefits to employees who accepted an early retirement incentive offer and $5 million was severance costs for employees who were terminated. The remainder of the charges was for other expenses such as the cost of outplacement services. The initiative was substantially completed in 1998 with no significant differences from original estimates. The liabilities related to the enhanced pension and postretirement medical benefits were included in the pension and postretirement medical benefits liabilities, which will be reduced as benefit payments are made over time. Of the other restructuring costs, approximately $3 million remained unpaid at March 31, 1999. INVESTMENT GAINS AND LOSSES Decisions to sell securities are governed principally by considerations of investment opportunities and tax consequences. As a result, realized investment gains and losses may vary significantly from period to period. Net investment gains before taxes of $31.5 million were realized in the first quarter of 1999 compared with net gains of $44.6 million for the same period in 1998. CAPITAL RESOURCES In March 1997, the Board of Directors authorized the repurchase of up to 17,500,000 shares of common stock. In July 1998, the Board of Directors authorized the repurchase of up to an additional 12,500,000 shares. Through March 31, 1999, the Corporation repurchased 19,246,300 shares under the 1997 and 1998 authorizations, including 1,251,400 shares repurchased in open-market transactions in the first quarter of 1999 at a cost of $75.2 million. As of March 31, 1999, 10,753,700 shares remained under the current share repurchase authorizations. YEAR 2000 READINESS DISCLOSURE The Year 2000 issue relates to the inability of certain information technology (IT) systems and applications as well as non-IT systems, such as equipment with imbedded chips and microprocessors, to properly process data containing dates beginning with the year 2000. The issue exists because many systems used two digits rather than four to define the applicable year. Such systems 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. 17 Page 15 As of March 31, 1999, we completed remediation and testing procedures on 95% of our mainframe IT systems, including all mission critical systems except one. We expect to complete the remediation and testing of all remaining systems by June 1999, except for three minor applications that we expect will be completed in the third quarter of 1999. We have also completed an inventory and assessment of all our personal computers, servers and other non-mainframe computers. We expect that all such computers and related software will be Year 2000 ready in the third quarter of 1999. We have also assessed our non-IT systems and believe that the failure of any of these systems would have minimal impact on our operations. The Corporation and its subsidiaries have interaction with many third parties, including producers, reinsurers, financial institutions, vendors, suppliers and others. We have initiated contact with these parties regarding their plans for Year 2000 readiness. We are in the process of evaluating the responses and following up with those parties from whom we have received no response. The information obtained is being used to develop business contingency plans to address any mission critical operations that may be adversely impacted by the noncompliance of a third party with whom we interact. We have electronic data interchanges with some third parties. We are physically testing such interchanges for Year 2000 compliance. We expect that such testing will be completed by June 1999. We have identified those third parties that are critical to our operations and are assessing risks with respect to the potential failure of such parties to be Year 2000 ready. However, we do not have control over these third parties and are unable to determine whether all such third parties will address the Year 2000 issue successfully, including third parties located outside the United States where it is believed that Year 2000 remediation efforts in general may be less advanced. Management cannot determine the effect on the Corporation's future operating results of the failure of third parties to be Year 2000 ready. Our Year 2000 plans have been developed with the intention of minimizing the need for actual implementation of contingency activities. A substantial portion of 1999 is being used to monitor systems already remediated for Year 2000 for any unidentified problems and to perform additional remediation and testing as necessary. Nonetheless, in order to address any unexpected difficulties that may arise, we will keep our core Year 2000 readiness team intact until June 2000. Additionally, we are in the process of developing contingency plans to continue business in the unlikely event that one or more of our critical systems fail. We believe that we are taking the necessary measures to address Year 2000 issues that may arise and that our internal systems will be compliant. Notwithstanding such efforts, significant Year 2000 problems could arise. In particular, the prolonged failure of power and telecommunications systems could have a material adverse effect on our operations. Similarly, Year 2000 related difficulties experienced by our producers or financial institutions have the potential to materially disrupt our business. Given the uncertain nature of Year 2000 problems that may arise, management cannot determine at this time whether the consequences of Year 2000 related problems will have a material impact on the Corporation's financial position or results of operations. 18 Page 16 We expect that the cost to address the Year 2000 IT systems issue, including compensation of employees and the cost of consultants, will approximate $36 million. Approximately $32 million was incurred as of March 31, 1999, of which $2 million was incurred in the first quarter of 1999. These amounts do not include the cost of computer equipment purchased to replace equipment that would have been upgraded in the normal course of business, but not necessarily prior to January 2000. 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. It is possible that Year 2000 related losses may emerge that would adversely affect operating results in future periods. At this time, in the absence of any significant claims experience, management cannot determine the nature and extent of any losses, the availability of coverage for such losses or the likelihood of significant claims. PENDING ACQUISITION On February 8, 1999, the Corporation announced that it entered into a definitive merger agreement under which it would acquire Executive Risk Inc. Executive Risk is a specialty insurance company offering directors and officers, errors and omissions and professional liability coverages. The acquisition will be accounted for using the purchase method of accounting. The agreement provides that Executive Risk shareholders will receive 1.235 shares of the Corporation's common stock for each outstanding common share of Executive Risk. The agreement contemplates that approximately 13,730,000 shares of common stock of the Corporation will be issued to Executive Risk shareholders and approximately 2,3000,000 shares of common stock of the Corporation will be reserved for issuance upon exercise of Executive Risk stock options. The total value of the transaction is expected to be approximately $850 million. Completion of the acquisition is subject to approval by Executive Risk shareholders and various regulatory authorities. Closing is expected by the end of the second quarter of 1999. FORWARD LOOKING INFORMATION Certain statements in this document 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 result in", "is expected to", "are continuing to", "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 and Exchange Commission and specifically to: risks or uncertainties associated with the Corporation's expectations with respect to its activity value analysis program, its business retention estimates or the completion of the Executive Risk merger; 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 development of major year 2000 liabilities, the inability to reinsure certain risks economically, the adequacy of loss reserves, as well as general market conditions, competition, pricing and restructurings. 19 Page 17 PART II. OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K A. Exhibits Exhibit 4 - Instruments defining the rights of security holders, including debentures - Rights Agreement dated as of March 12, 1999 between The Chubb Corporation and First Chicago Trust Company of New York, as Rights Agent, incorporated by reference to Exhibit (99.1) of the Registrant's Report to the Securities and Exchange Commission on Form 8-K dated March 12, 1999. Exhibit 10 - Material Contracts - The Chubb Corporation Estate Enhancement Program filed herewith. - The Chubb Corporation Estate Enhancement Program for Non-Employee Directors filed herewith. Exhibit 27 - Financial Data Schedule - Financial Data Schedule filed herewith. B. Reports on Form 8-K The Registrant filed a current report on Form 8-K on January 19, 1999 with respect to the announcement on January 18, 1999 of its preliminary financial results for the quarter and year ended December 31, 1998. The Registrant filed a current report on Form 8-K on February 10, 1999 with respect to the announcement on February 8, 1999 that the Registrant entered into a definitive merger agreement under which the Registrant will acquire Executive Risk Inc. The Registrant filed a current report on Form 8-K on March 15, 1999 with respect to the announcement on March 12, 1999 that the Registrant had adopted a new shareholder rights plan, replacing the Registrant's existing plan, which was due to expire on June 12, 1999. The Registrant filed a current report on Form 8-K on March 30, 1999 for the purpose of filing the Rights Agreement dated as of March 12, 1999 between The Chubb Corporation and First Chicago Trust Company of New York, as Rights Agent. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, The Chubb Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE CHUBB CORPORATION (Registrant) By: /s/ Henry B. Schram -------------------------------- Henry B. Schram Senior Vice-President and Chief Accounting Officer Date: May 14, 1999 EX-10.1 2 ESTATE ENHANCEMENT PROGRAM 1 The Chubb Corporation Estate Enhancement Program 1. Purpose The purpose of The Chubb Corporation Estate Enhancement Program (the "Plan") is to provide key executives of The Chubb Corporation and its subsidiaries the ability to elect life insurance coverage pursuant to a split-dollar life insurance arrangement in return for forgoing receipt of certain benefits under the Pension Excess Benefit Plan of The Chubb Corporation, Chubb & Son Inc. and Participating Affiliates (the "Pension Excess Plan"). 2. Definitions For purposes of this Plan, the following terms have the meanings set forth below: 2.01 Adjusted Company Death Benefit means the portion of the Policy death benefit payable to the Company solely as a result of an Alternative Death Benefit Election being in effect for the Policy, and shall be determined by subtracting from the amount of Policy death benefit paid to the Company an amount equal to the portion of the Policy death benefit that would have been paid to the Company if an Alternative Death Benefit Election was not in effect for the Policy. 2.02 Agreement means the Agreement executed by the Participant (or other Policy Owner) and the Company implementing the terms of this Plan. 2.03 Alternative Death Benefit means a Company-paid death benefit paid by the Company to the Former Policy Owner's beneficiary(ies) pursuant to an Alternative Death Benefit Election under Section 8 of the Plan. 2.04 Alternative Death Benefit Amount means, with respect to a Participant, an amount that, after subtracting any Company federal, state, and local income tax savings resulting from the deductibility of the payment for corporate tax purposes, is equal to the Adjusted Company Death Benefit reduced by the income taxes (if any) payable by the Company as a result of receiving the Adjusted Company Death Benefit. The Alternative Death Benefit Amount shall be determined at the time the payment is to be made, based on the Company's federal, state and local income tax rate -1- 2 (calculated at the marginal tax rate then applicable to the Company, but net of any federal deduction for state and local taxes) at the time of the payment, and shall be determined by the Plan Administrator. 2.05 Alternative Death Benefit Election means an election made by the Policy Owner pursuant to Section 8 of the Plan. 2.06 Board of Directors means the Board of Directors of the Company. 2.07 Change in Control means a change in control of the Company, as such term is defined in The Chubb Corporation Stock Option Plan for Non-Employee Directors (1996) as in effect on the Effective Date. 2.08 Collateral Assignment means the Collateral Assignment executed by the Policy Owner pursuant to Section 6.02 of the Plan. 2.09 Committee means the Organization & Compensation Committee of the Board of Directors of The Chubb Corporation that will administer the Plan pursuant to the provisions of Section 14.02 of the Plan. 2.10 Company means The Chubb Corporation and, for such other purposes as determined by the Committee, shall include any subsidiary of The Chubb Corporation. 2.11 Company Death Benefit means the portion of the Policy's death benefit payable to Company as provided in Section 7. 2.12 Compensation means amounts a Participant agrees to forego to participate in the Plan pursuant to Section 3.02, and shall include all or any portion of (i) an amount equal to seventy-five (75%) of the Participant's accrued lump sum benefit under the Pension Excess Plan; or (ii) any other amounts the Committee deems Compensation for the purpose of this Plan. 2.13 Effective Date means December 10, 1998. 2.14 Elector means the person or persons who are entitled to make or revoke an Alternative Death Benefit Election pursuant to Section 8.01. 2.15 Eligible Executive means any executive of The Chubb Corporation or the Chubb & Son division of Federal Insurance Company who is an Executive -2- 3 Vice President or higher, or such other key executives of the Company as may be designated by the Chairman of The Chubb Corporation. 2.16 Enrollment and Election to Forego Compensation Form means the form used by a Participant to make an election to forego Compensation pursuant to Section 3.02 of the Plan. 2.17 Former Policy Owner means the person(s) or entity that is the Policy Owner immediately prior to when an Alternative Death Benefit Election is first made with respect to a Policy. 2.18 Insurer means, with respect to a Participant's Policy, the insurance company issuing the Policy on the Participant's life (or on the lives of the Participant and the Participant's spouse, in the case of a Survivorship Policy) pursuant to the provisions of the Plan. 2.19 Participant means an Eligible Executive who elects to participate in the Plan. 2.20 Participant's Coverage Amount means the portion of the Policy's death benefit payable to the beneficiary(ies) of the Policy Owner as provided in Section 7. 2.21 Participant Premium means the amount of premium payment, if any, paid by the Participant, Policy Owner or Former Policy Owner pursuant to Section 5.02. 2.22 Plan Administrator means the Committee, or its designee. 2.23 Policy means the life insurance coverage acquired on the life of the Participant (or on the lives of the Participant and the Participant's spouse, in the case of a Survivorship Policy) by the Company. 2.24 Policy Owner means the person or entity designated as owner on the application for the Policy, or the person or entity to which a Policy Owner assigns his or her interest in the Policy. 2.25 Premium means, with respect to a Policy on the life of a Participant (or the lives of a Participant and a Participant's spouse, if the Policy is a Survivorship Policy), the amount the Company is obligated, pursuant to the terms of the Plan, to pay to the Insurer with respect to such Policy. -3- 4 2.26 Survivorship Policy means a Policy insuring the lives of the Participant and a Participant's spouse, with the death benefit payable at the death of the last survivor of the Participant and his or her spouse. 3. Participation 3.01 Eligibility. Any Eligible Executive shall be eligible to participate in the Plan. An Eligible Executive shall become a Participant by completing such forms, documents and procedures as specified by the Plan Administrator. The Participant (and, in the case of a Survivorship Policy, the Participant's spouse) shall cooperate with the Insurer by furnishing any and all information requested by the Insurer in order to facilitate the issuance of the Policy, including furnishing such medical information and taking such physical examinations as the Insurer may deem necessary. In the absence of such cooperation, the Company shall have no obligation to the Participant to allow him or her to participate in the Plan. 3.02 Election to Forego Compensation. As a condition of participating in the Plan, each Participant shall be required to make an election in which the Participant shall commit to forego the receipt of a specified type and amount of Compensation. The Participant shall make an election to forego Compensation by execution of an Enrollment and Election to Forego Compensation Form prior to the Policy effective date. 4. Amount and Type of Coverage The amount and type of coverage provided under the Policy shall be that amount and type specified in the Agreement. 5. Payment of Premiums 5.01 Company Payments. The Company shall pay Premiums equal to four times the amount of the Compensation foregone by a Participant as provided in the Enrollment and Election to Forego Compensation Form. The Premium amount corresponding to a foregone amount related to an accrued benefit under the Pension Excess Plan shall be paid within thirty (30) days after the Policy is issued. 5.02 Participant Payments. Unless otherwise provided in an Agreement, a Participant, Policy Owner (other than the Company, if the Company -4- 5 becomes the Policy Owner pursuant to Section 8), or Former Policy Owner shall not be required to pay any portion of the Premium due on the Policy. However, the Participant, Policy Owner or Former Policy Owner may elect to pay a premium to the Insurer with respect to the Policy. 6. Policy Ownership 6.01 Ownership. Except as otherwise provided in this Plan and related Agreement, the Policy Owner shall be the sole and exclusive owner of a Participant's Policy. 6.02 Company's Rights. The Company shall not have any ownership rights in the Policy (except as provided in Section 8). The Company's rights shall be limited to: (1) the right to receive a portion of the Policy death benefit in the event of the payment of the Policy death benefit while the Collateral Assignment is in effect with respect to the Policy; and, (2) the right to receive all of the proceeds of any surrender, withdrawal or loan processed while the Collateral Assignment is in effect, as specified in the Agreement. In exchange for the Company's agreement to pay the Premiums described in Section 5.01 of the Plan and the Participant's Agreement, the Policy Owner shall execute a Collateral Assignment to the Company of the rights provided to the Company under this Plan and related Agreement. The Company shall have the right to direct the Policy Owner in writing to take any required action consistent with these rights, and upon the receipt of such written direction from the Company, the Policy Owner promptly shall take such action as is necessary to comply therewith. The Company shall have the right to assign any part or all of its interest in the Policy, subject to the Policy Owner's rights, and the terms and conditions of this Plan and related Agreement, to any person, entity or trust by the execution of a written instrument delivered to the Policy Owner. 6.03 Prohibited Policy Transactions. The Policy Owner shall not borrow from, hypothecate, withdraw cash value from, surrender in whole or in part, cancel, or in any other manner encumber a Policy without the prior written consent of the Company (or without the prior written consent of the Former Policy Owner, if the Company is the Policy Owner). 6.04 Investment of Policy Cash Values. If the Policy provides the Policy Owner with a choice of investment funds for the Policy cash values, the -5- 6 Policy Owner shall invest the cash values in the funds selected by and in the proportions specified by the Company. 6.05 Possession of Policy. The Policy Owner shall maintain possession of the Policy. 7. Death Benefit Upon the death of the Participant (or the death of the survivor of the Participant and the Participant's spouse, if the Policy is a Survivorship Policy), the death benefit under the Policy shall be divided as follows: a. The Company shall be entitled to receive as the Company Death Benefit an amount equal to the sum of: (i) the Policy cash accumulation value immediately prior to the death of the Participant (or the death of the survivor of the Participant and the Participant's spouse, if the Policy is a Survivorship Policy) and before any surrender charges; plus (ii) twenty-five percent (25%) of the face amount of the Policy. For the purposes of the preceding sentence, the Policy face amount shall equal the sum of the face amount at the time the Policy death benefit is paid, plus the amount of any face amount reduction made pursuant to Section 9. If the Policy provides for a death benefit equal to the sum of the face amount of the Policy and any cash account or accumulation value, any Company Death Benefit should first be paid from the cash account or accumulation value portion of the death benefit. b. The beneficiary(ies) of the Policy Owner shall be entitled to receive the Participant's Coverage Amount, which shall consist of the excess, if any, of the Policy's death benefit over the Company Death Benefit. 8. Alternative Death Benefit Election 8.01 Alternative Death Benefit Election. The Alternative Death Benefit Election provided for in this Section may be made or revoked by the person or persons designated as the Elector in the Participant's Agreement. If no such person is designated in the Agreement, or if no designated person is living and able to make the election, the election may be made or revoked by the Policy Owner (except that an election cannot be made or revoked by the Company, if the Company becomes the Policy Owner). Any such election shall be filed with the Plan -6- 7 Administrator in such form as may be prescribed by the Plan Administrator. When an Alternative Death Benefit Election is made, the Policy Owner shall immediately transfer the ownership of the Policy to the Company, and the Company shall be designated as beneficiary to receive the entire Policy death benefit. In addition, using a form provided by the Plan Administrator, the Former Policy Owner shall designate a beneficiary to receive the Alternative Death Benefit. The Elector may revoke the Alternative Death Benefit Election. In the event of such a revocation, the Company shall continue to be the Policy Owner and shall, by endorsement filed with the Insurer, provide the Former Policy Owner the right to designate a beneficiary of an amount of Policy death benefit equal to the Participant's Coverage Amount. The revocation of an Alternative Death Benefit Election shall not preclude an Elector from making a later Alternative Death Benefit Election (or from revoking such later election). An Alternative Death Benefit Election (or an election to revoke such an election) shall be effective when any necessary documentation is submitted to and accepted by the Insurer. The Policy Owner (or Former Policy Owner, if applicable) and the Company will promptly submit any required forms or documents to the Insurer when an Alternative Death Benefit Election is made or revoked. 8.02 Payment of Benefit. The Alternative Death Benefit shall be paid by the Company from the general funds of the Company, and shall not constitute an insurance benefit. It shall be paid by the Company to the Former Policy Owner's beneficiary(ies) within thirty (30) days after the Company receives the death benefit for the Participant's Policy. The amount of the payment shall be equal to the Alternative Death Benefit Amount. As long as an Alternative Death Benefit Election is in effect, the beneficiary(ies) of the Former Policy Owner shall receive only the Alternative Death Benefit, and shall not be entitled to receive any portion of any death benefits that would become payable under the Participant's Policy. 9. Election to Reduce Policy Face Amount The Policy Owner (except the Company, if the Company becomes a Policy Owner) or, if applicable, the Former Policy Owner, may elect to reduce the Policy -7- 8 face amount, except that the Policy face amount shall not be reduced to an amount less than the Company Death Benefit. If the Company is the Policy Owner, then, within sixty (60) days of receipt of a written request from the Former Policy Owner, the Company shall complete and submit the necessary forms to the Insurer to reduce the Policy face amount in accordance with the Former Policy Owner's request. The Company may elect, in its discretion, to unilaterally reduce the face amount of a Participant's Policy if, based on projections provided by the Insurer or its agent, and assuming a Policy cash value investment return rate for all future years equal to the average of the actual rates realized on the Policy cash values for the immediately preceding three (3) years, the Policy would lapse: (1) in less than ten (10) years, if the Insured (or younger surviving Insured, if the Policy is a Survivorship Policy and both Insureds are living at the time the determination is made) is under ninety (90) years of age; (2) in less than eight (8) years if the Insured (or younger surviving Insured, if the Policy is a Survivorship Policy and both Insureds are living at the time the determination is made) is ninety (90) years of age or older, but is under ninety-five (95) years of age; or, (3) in less than five (5) years, if the Insured (or younger surviving Insured, if the Policy is a Survivorship Policy and both Insureds are living at the time the determination is made) is ninety-five (95) years of age or older. If any reduction is made pursuant to the preceding sentence, the maximum allowable reduction shall be to the highest face amount that would satisfy the requirements of the preceding sentence. In exercising its discretion to reduce the face amount, the Company shall consider whether there is a reasonable risk of Policy lapse absent a face amount reduction, after considering the health of the Insured(s) and other appropriate factors. 10. Change in Control If there is a Change in Control: a. notwithstanding any provisions to the contrary in Section 14.01, the Plan shall become irrevocable for all Participants in the Plan at the time of the Change in Control; b. the Company immediately shall transfer the ownership of all Participants' Policies owned by the Company to an irrevocable trust created by the Company to: (i) hold any such Policies in accordance with the terms of the -8- 9 Plan, and (ii) pay any Alternative Death Benefit that becomes payable under Section 8 of this Plan; and c. except as otherwise provided in this Section, the provisions of the Plan shall continue to apply as if there had been no Change in Control. The occurrence of a Change in Control shall not preclude a Policy Owner from thereafter making (or revoking) an Alternative Death Benefit Election pursuant to Section 8. However, if a Policy Owner makes an Alternative Death Benefit Election after a Change in Control, the ownership of the Policy shall be transferred to the trust created pursuant to this Section, and not directly to the Company as provided in Section 8. Notwithstanding the creation and funding of an irrevocable trust in accordance with the provisions of this Section, the Company or its successor shall continue to be responsible for its obligations under the Plan to the extent not satisfied by such trust, including any Alternative Death Benefits payable under Section 8 if such amounts are not paid by the trust for any reason, or if the trust's assets become insufficient to pay any required amounts. 11. Company Default 11.01 Company Default. A Company Default shall be deemed to have occurred with respect to a Policy if the Company processes or attempts to process a policy loan, or a complete or partial surrender, or a cash value withdrawal without prior written approval from the Policy Owner (or Former Policy Owner, if applicable). 11.02 Rights upon Company Default. In the event of a Company Default as described in Section 11.01, the Policy Owner (or Former Policy Owner, if applicable) shall have the right to require the Company to cure the Company Default by notifying the Company in writing within sixty (60) days after the Company Default occurs, or if later, within thirty (30) days after the Policy Owner (or Former Policy Owner) becomes aware of the Company Default. If the Company fails to cure the Company Default within sixty (60) days after being notified by the Policy Owner (or Former Policy Owner) of the Company Default, the Policy Owner (or Former Policy Owner) shall have the right to require the Company to transfer its interest in the Participant's Policy to the Policy Owner (or Former Policy -9- 10 Owner). The Policy Owner (or Former Policy Owner) may exercise this right by notifying the Company, in writing, within sixty (60) days after the Company Default occurs. Upon receipt of such notice, the Company shall immediately transfer its rights in the Policy to the Policy Owner (or Former Policy Owner), either by a release of the Collateral Assignment, or by a transfer of ownership if the Company is the Policy Owner, and the Company shall thereafter have no rights with respect to such Policy. A Policy Owner's (or Former Policy Owner's) failure to exercise its rights under this Section shall not be deemed to release the Company from any of its obligations under the Plan, and shall not preclude the Policy Owner (or Former Policy Owner) from seeking other remedies with respect to the Company Default. Also, a Policy Owner's (or Former Policy Owner's) failure to exercise its rights under this Section will not preclude the Policy Owner (or Former Policy Owner) from exercising such rights upon a later Company Default. 12. Governing Laws and Notices 12.01 Governing Law. This Plan shall be governed by and construed in accordance with the substantive law of New Jersey without giving effect to the choice of law rules of New Jersey. 12.02 Notices. All notices hereunder shall be in writing and sent by first class mail with postage prepaid. Any notice to the Company shall be addressed to the attention of the Manager of Compensation and Benefits of Chubb & Son at 15 Mountain View Road, Warren, NJ 07059. Any notice to the Participant (or other Policy Owner or Former Policy Owner) shall be addressed to the Participant (or other Policy Owner or Former Policy Owner) at the address following such party's signature on his or her Agreement. Any party may change its address by giving written notice of such change to the other party pursuant to this Section. 13. Miscellaneous Provisions 13.01 Gender. The masculine pronoun includes the feminine and the singular includes the plural where appropriate for valid construction. 13.02 Cooperation with Insurer. In order to be eligible to participate in this Plan, the Participant (and, in the case of a Survivorship Policy, the -10- 11 Participant's spouse) shall cooperate with the Insurer by furnishing any and all information requested by the Insurer in order to facilitate the issuance of the policy, including furnishing such medical information and taking such physical examinations as the Insurer may deem necessary. In the absence of such cooperation, the Company shall have no obligation to the Participant to allow him or her to participate in the Plan. 13.03 Cancellation of Policy. If the Insurer cancels the Participant's Policy pursuant to Policy provisions related to the suicide of the Participant (or the Participant's spouse, if the Policy is a Survivorship Policy), a material misstatement of information, nondisclosure of medical information, or any other Policy provision, then no benefits shall be payable to the beneficiary(ies) of such Participant (or other Policy Owner, or Former Policy Owner, where applicable). In such case, after the Company receives the amount payable to the Company as a result of the cancellation of the Policy, the Company shall pay to the Participant (or the Participant's estate, if the Participant has died) an amount equal to the Compensation already foregone by the Participant in accordance with the Participant's election under Section 3.02 plus any amounts paid by the Participant or other Policy Owner or Former Policy Owner under Section 5.02, or, if less, twenty-five percent (25%) of the amount the Company receives from the Insurer upon cancellation of the Participant's Policy. 13.04 Inconsistent Terms. In the event of any inconsistency between the terms of this Plan as described herein and the terms of any Policy purchased hereunder or any related Agreement, the terms of such Policy or Agreement shall be controlling as to that Participant, or his or her Policy Owner or Former Policy Owner, if other than the Participant, his successor-in-interest (if any) and his or her beneficiary or beneficiaries. 14. Amendment, Termination, Administration, and Successors 14.01 Amendment/Termination. The Board of Directors of the Company may amend, modify or terminate the Plan at any time, but any such amendment, modification or termination will not affect the rights of any Participant, Policy Owner or Former Policy Owner under any Agreement entered into with the Company prior to the date of such amendment, modification or termination without the Participant's, Policy Owner's or Former Policy Owner's written consent. Notwithstanding the prior -11- 12 sentence of this Section, the Board of Directors shall have the unilateral right to terminate the Plan and cancel the Company's obligations hereunder and any Agreements entered into hereunder if there is any material adverse change (as determined by the Company in its sole discretion) in the tax or financial consequences to the Company with respect to the Plan. In the event a Participant's Agreement is terminated as a result of a termination of the Plan pursuant to the preceding sentence, the Company shall immediately pay to the Participant (or, if the Participant is not living, to the Policy Owner, if the Policy Owner is not the Company or a trust created pursuant to Section 10 of the Plan, or to the Former Policy Owner, if the Policy Owner is the Company or a trust created pursuant to Section 10 of the Plan) an amount equal to the sum of: (a) the actual amount of Compensation foregone by the Participant under the Agreement; (b) interest, at a rate equal to the rate that would have been payable for such period of time under the Stable Value Fund of the Capital Accumulation Plan of The Chubb Corporation, Chubb & Son Inc. and Participating Affiliates ("CCAP") compounded annually, on the actual foregone Compensation from the date the Compensation was foregone to the date the payment under this Section is made; (c) the amount of any federal, state and local income and gift taxes paid by the Participant and the Participant's spouse as a result of the life insurance coverage provided under the Plan; (d) interest, at a rate equal to the rate that would have been payable for such period of time under the Stable Value Fund of CCAP, compounded annually, on any such taxes referred to in subsection (c) of this Section 14.01 from April 15 of the year following the year to which such taxes relate to the date the payment under this Section is made; (e) the amount of any payment made under Section 5.02; and, (f) interest, at a rate equal to the rate that would have been payable for such period of time under the Stable Value Fund of CCAP, compounded annually, on any payment referred to in subsection (e) of this Section 14.01 from the date such payment was made to the date the payment under this Section is made. When a payment is made pursuant to this Section, the Participant's Agreement shall immediately terminate and, if the Company is not the Policy Owner, the Policy Owner shall immediately transfer all interest in the Policy to the Company, and thereafter, the Participant, Policy Owner (other than the Company) and Former Policy Owner (if any) shall have no further rights or interest in the Policy. For the purpose of this paragraph, if the Stable Value Fund -12- 13 referred to does not exist for any period of time for which an interest rate calculation is required under this paragraph, the interest rate payable for such period shall be a comparable rate determined by the Plan Administrator, in its discretion, except that any rate so determined shall not be less than 6%. 14.02 Administration. This Plan shall be administered by the Plan Administrator. The Plan Administrator shall have the authority to make, amend, interpret, and enforce all rules and regulations for the administration of the Plan and decide or resolve any and all questions, including interpretations of the Plan, as may arise in connection with the Plan in the Plan Administrator's sole discretion. In the administration of this Plan, the Plan Administrator from time to time may employ agents and delegate to them or to others such administrative duties as it sees fit. The Plan Administrator from time to time may consult with counsel, who may be counsel to the Company. The decision or action of the Plan Administrator (or its designee) with respect to any question arising out of or in connection with the administration, interpretation and application of this Plan shall be final and conclusive and binding upon all persons having any interest in the Plan. The Company shall indemnify and hold harmless the Plan Administrator and any employees of the Company or its subsidiaries to whom administrative duties under this Plan are delegated, against any and all claims, loss, damage, expense or liability arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Plan Administrator or such employees of the Company or its subsidiaries. 14.03 Successors. The terms and conditions of this Plan shall inure to the benefit of and bind the Company and the Participant and their successors, assignees (including any Assignee), and representatives. The Company shall have the right to absolutely and irrevocably assign its rights, title and interest in a Policy without the consent of the Participant (or Assignee). -13- EX-10.2 3 PROGRAM FOR NON-EMPLOYEE DIRECTORS 1 Exhibit 10 The Chubb Corporation Estate Enhancement Program for Non-Employee Directors 1. Purpose The purpose of The Chubb Corporation Estate Enhancement Program for Non-Employee Directors (the "Plan") is to provide non-employee members of the Board of Directors of The Chubb Corporation (the "Company") the ability to elect life insurance coverage pursuant to a split-dollar life insurance arrangement in return for forgoing receipt of certain benefits under The Chubb Corporation Deferred Compensation Plan for Non-Employee Directors. 2. Definitions For purposes of this Plan, the following terms have the meanings set forth below: 2.01 Adjusted Company Death Benefit means the portion of the Policy death benefit payable to the Company solely as a result of an Alternative Death Benefit Election being in effect for the Policy, and shall be determined by subtracting from the amount of Policy death benefit paid to the Company an amount equal to the portion of the Policy death benefit that would have been paid to the Company if an Alternative Death Benefit Election was not in effect for the Policy. 2.02 Agreement means the Agreement executed by the Participant (or other Policy Owner) and the Company implementing the terms of this Plan. 2.03 Alternative Death Benefit means a Company-paid death benefit paid by the Company to the Former Policy Owner's beneficiary(ies) pursuant to an Alternative Death Benefit Election under Section 8 of the Plan. 2.04 Alternative Death Benefit Amount means, with respect to a Participant, an amount that, after subtracting any Company federal, state, and local income tax savings resulting from the deductibility of the payment for corporate tax purposes, is equal to the Adjusted Company Death Benefit reduced by the income taxes (if any) payable by the Company as a result of receiving the Adjusted Company Death Benefit. The Alternative Death Benefit Amount shall be determined at the time the payment is to be made, based on the Company's federal, state and local income tax rate -1- 2 (calculated at the marginal tax rate then applicable to the Company, but net of any federal deduction for state and local taxes) at the time of the payment, and shall be determined by the Plan Administrator. 2.05 Alternative Death Benefit Election means an election made by the Policy Owner pursuant to Section 8 of the Plan. 2.06 Board of Directors means the Board of Directors of the Company. 2.07 Change in Control means a change in control of the Company, as such term is defined in The Chubb Corporation Stock Option Plan for Non-Employee Directors (1996). 2.08 Collateral Assignment means the Collateral Assignment executed by the Policy Owner pursuant to Section 6.02 of the Plan. 2.09 Company means The Chubb Corporation. 2.10 Company Death Benefit means the portion of the Policy's death benefit payable to Company as provided in Section 7. 2.11 Compensation means amounts a Participant agrees to forego to participate in the Plan pursuant to Section 3.02, and shall include all or any portion of (i) the Participant's account balance under The Chubb Corporation Deferred Compensation Plan for Non-Employee Directors; or (ii) any other amounts the Board of Directors deems Compensation for the purpose of this Plan. 2.12 Director means a member of the Board of Directors of the Company who is not an employee of the Company or a subsidiary of the Company. 2.13 Effective Date means December 10, 1998. 2.14 Elector means the person or persons who are entitled to make or revoke an Alternative Death Benefit Election pursuant to Section 8.01. 2.15 Enrollment and Election to Forego Compensation Form means the form used by a Participant to make an election to forego Compensation pursuant to Section 3.02 of the Plan. -2- 3 2.16 Former Policy Owner means the person(s) or entity that is the Policy Owner immediately prior to when an Alternative Death Benefit Election is first made with respect to a Policy. 2.17 Insurer means, with respect to a Participant's Policy, the insurance company issuing the Policy on the Participant's life (or on the lives of the Participant and the Participant's spouse, in the case of a Survivorship Policy) pursuant to the provisions of the Plan. 2.18 Participant means a Director who elects to participate in the Plan. 2.19 Participant's Coverage Amount means the portion of the Policy's death benefit payable to the beneficiary(ies) of the Policy Owner as provided in Section 7. 2.20 Participant Premium means the amount of premium payment, if any, paid by the Participant, Policy Owner or Former Policy Owner pursuant to Section 5.02. 2.21 Plan Administrator means the Board of Directors, or its designee. 2.22 Policy means the life insurance coverage acquired on the life of the Participant (or on the lives of the Participant and the Participant's spouse, in the case of a Survivorship Policy) by the Company. 2.23 Policy Owner means the person or entity designated as owner on the application for the Policy, or the person or entity to which a Policy Owner assigns his or her interest in the Policy. 2.24 Premium means, with respect to a Policy on the life of a Participant (or the lives of a Participant and a Participant's spouse, if the Policy is a Survivorship Policy), the amount the Company is obligated, pursuant to the terms of the Plan, to pay to the Insurer with respect to such Policy. 2.25 Survivorship Policy means a Policy insuring the lives of the Participant and a Participant's spouse, with the death benefit payable at the death of the last survivor of the Participant and his or her spouse. -3- 4 3. Participation 3.01 Eligibility. Any Director shall be eligible to participate in the Plan. A Director shall become a Participant by completing such forms, documents and procedures as specified by the Plan Administrator. The Participant (and, in the case of a Survivorship Policy, the Participant's spouse) shall cooperate with the Insurer by furnishing any and all information requested by the Insurer in order to facilitate the issuance of the Policy, including furnishing such medical information and taking such physical examinations as the Insurer may deem necessary. In the absence of such cooperation, the Company shall have no obligation to the Participant to allow him or her to participate in the Plan. 3.02 Election to Forego Compensation. As a condition of participating in the Plan, each Participant shall be required to make an election in which the Participant shall commit to forego the receipt of a specified type and amount of Compensation. The Participant shall make an election to forego Compensation by execution of an Enrollment and Election to Forego Compensation Form prior to the Policy effective date. 4. Amount and Type of Coverage The amount and type of coverage provided under the Policy shall be that amount and type specified in the Agreement. 5. Payment of Premiums 5.01 Company Payments. The Company shall pay Premiums equal to four times the amount of the Compensation foregone by a Participant as provided in the Enrollment and Election to Forego Compensation Form. The Premium amount corresponding to a foregone amount related to a balance in The Chubb Corporation Deferred Compensation Plan for Non-Employee Directors shall be paid within thirty (30) days after the Policy is issued. 5.02 Participant Payments. Unless otherwise provided in an Agreement, a Participant, Policy Owner (other than the Company, if the Company becomes the Policy Owner pursuant to Section 8), or Former Policy Owner shall not be required to pay any portion of the Premium due on the -4- 5 Policy. However, the Participant, Policy Owner or Former Policy Owner may elect to pay a premium to the Insurer with respect to the Policy. 6. Policy Ownership 6.01 Ownership. Except as otherwise provided in this Plan and related Agreement, the Policy Owner shall be the sole and exclusive owner of a Participant's Policy. 6.02 Company's Rights. The Company shall not have any ownership rights in the Policy (except as provided in Section 8). The Company's rights shall be limited to: (1) the right to receive a portion of the Policy death benefit in the event of the payment of the Policy death benefit while the Collateral Assignment is in effect with respect to the Policy; and, (2) the right to receive all of the proceeds of any surrender, withdrawal or loan processed while the Collateral Assignment is in effect, as specified in the Agreement. In exchange for the Company's agreement to pay the Premiums described in Section 5.01 of the Plan and the Participant's Agreement, the Policy Owner shall execute a Collateral Assignment to the Company of the rights provided to the Company under this Plan and related Agreement. The Company shall have the right to direct the Policy Owner in writing to take any required action consistent with these rights, and upon the receipt of such written direction from the Company, the Policy Owner promptly shall take such action as is necessary to comply therewith. The Company shall have the right to assign any part or all of its interest in the Policy, subject to the Policy Owner's rights, and the terms and conditions of this Plan and related Agreement, to any person, entity or trust by the execution of a written instrument delivered to the Policy Owner. 6.03 Prohibited Policy Transactions. The Policy Owner shall not borrow from, hypothecate, withdraw cash value from, surrender in whole or in part, cancel, or in any other manner encumber a Policy without the prior written consent of the Company (or without the prior written consent of the Former Policy Owner, if the Company is the Policy Owner). 6.04 Investment of Policy Cash Values. If the Policy provides the Policy Owner with a choice of investment funds for the Policy cash values, the Policy Owner shall invest the cash values in the funds selected by and in the proportions specified by the Company. -5- 6 6.05 Possession of Policy. The Policy Owner shall maintain possession of the Policy. 7. Death Benefit Upon the death of the Participant (or the death of the survivor of the Participant and the Participant's spouse, if the Policy is a Survivorship Policy), the death benefit under the Policy shall be divided as follows: a. The Company shall be entitled to receive as the Company Death Benefit an amount equal to the sum of: (i) the Policy cash accumulation value immediately prior to the death of the Participant (or the death of the survivor of the Participant and the Participant's spouse, if the Policy is a Survivorship Policy) and before any surrender charges; plus (ii) twenty-five percent (25%) of the face amount of the Policy. For the purposes of the preceding sentence, the Policy face amount shall equal the sum of the face amount at the time the Policy death benefit is paid, plus the amount of any face amount reduction made pursuant to Section 9. If the Policy provides for a death benefit equal to the sum of the face amount of the Policy and any cash account or accumulation value, any Company Death Benefit should first be paid from the cash account or accumulation value portion of the death benefit. b. The beneficiary(ies) of the Policy Owner shall be entitled to receive the Participant's Coverage Amount, which shall consist of the excess, if any, of the Policy's death benefit over the Company Death Benefit. 8. Alternative Death Benefit Election 8.01 Alternative Death Benefit Election. The Alternative Death Benefit Election provided for in this Section may be made or revoked by the person or persons designated as the Elector in the Participant's Agreement. If no such person is designated in the Agreement, or if no designated person is living and able to make the election, the election may be made or revoked by the Policy Owner (except that an election cannot be made or revoked by the Company, if the Company becomes the Policy Owner). Any such election shall be filed with the Plan Administrator in such form as may be prescribed by the Plan Administrator. When an Alternative Death Benefit Election is made, the -6- 7 Policy Owner shall immediately transfer the ownership of the Policy to the Company, and the Company shall be designated as beneficiary to receive the entire Policy death benefit. In addition, using a form provided by the Plan Administrator, the Former Policy Owner shall designate a beneficiary to receive the Alternative Death Benefit. The Elector may revoke the Alternative Death Benefit Election. In the event of such a revocation, the Company shall continue to be the Policy Owner and shall, by endorsement filed with the Insurer, provide the Former Policy Owner the right to designate a beneficiary of an amount of Policy death benefit equal to the Participant's Coverage Amount. The revocation of an Alternative Death Benefit Election shall not preclude an Elector from making a later Alternative Death Benefit Election (or from revoking such later election). An Alternative Death Benefit Election (or an election to revoke such an election) shall be effective when any necessary documentation is submitted to and accepted by the Insurer. The Policy Owner (or Former Policy Owner, if applicable) and the Company will promptly submit any required forms or documents to the Insurer when an Alternative Death Benefit Election is made or revoked. 8.02 Payment of Benefit. The Alternative Death Benefit shall be paid by the Company from the general funds of the Company, and shall not constitute an insurance benefit. It shall be paid by the Company to the Former Policy Owner's beneficiary(ies) within thirty (30) days after the Company receives the death benefit for the Participant's Policy. The amount of the payment shall be equal to the Alternative Death Benefit Amount. As long as an Alternative Death Benefit Election is in effect, the beneficiary(ies) of the Former Policy Owner shall receive only the Alternative Death Benefit, and shall not be entitled to receive any portion of any death benefits that would become payable under the Participant's Policy. 9. Election to Reduce Policy Face Amount The Policy Owner (except the Company, if the Company becomes a Policy Owner) or, if applicable, the Former Policy Owner, may elect to reduce the Policy face amount, except that the Policy face amount shall not be reduced to an amount less than the Company Death Benefit. If the Company is the Policy -7- 8 Owner, then, within sixty (60) days of receipt of a written request from the Former Policy Owner, the Company shall complete and submit the necessary forms to the Insurer to reduce the Policy face amount in accordance with the Former Policy Owner's request. The Company may elect, in its discretion, to unilaterally reduce the face amount of a Participant's Policy if, based on projections provided by the Insurer or its agent, and assuming a Policy cash value investment return rate for all future years equal to the average of the actual rates realized on the Policy cash values for the immediately preceding three (3) years, the Policy would lapse: (1) in less than ten (10) years, if the Insured (or younger surviving Insured, if the Policy is a Survivorship Policy and both Insureds are living at the time the determination is made) is under ninety (90) years of age; (2) in less than eight (8) years if the Insured (or younger surviving Insured, if the Policy is a Survivorship Policy and both Insureds are living at the time the determination is made) is ninety (90) years of age or older, but is under ninety-five (95) years of age; or, (3) in less than five (5) years, if the Insured (or younger surviving Insured, if the Policy is a Survivorship Policy and both Insureds are living at the time the determination is made) is ninety-five (95) years of age or older. If any reduction is made pursuant to the preceding sentence, the maximum allowable reduction shall be to the highest face amount that would satisfy the requirements of the preceding sentence. In exercising its discretion to reduce the face amount, the Company shall consider whether there is a reasonable risk of Policy lapse absent a face amount reduction, after considering the health of the Insured(s) and other appropriate factors. 10. Change in Control If there is a Change in Control: a. notwithstanding any provisions to the contrary in Section 14.01, the Plan shall become irrevocable for all Participants in the Plan at the time of the Change in Control; b. the Company immediately shall transfer the ownership of all Participants' Policies owned by the Company to an irrevocable trust created by the Company to: (i) hold any such Policies in accordance with the terms of the Plan, and (ii) pay any Alternative Death Benefit that becomes payable under Section 8 of this Plan; and -8- 9 c. except as otherwise provided in this Section, the provisions of the Plan shall continue to apply as if there had been no Change in Control. The occurrence of a Change in Control shall not preclude a Policy Owner from thereafter making (or revoking) an Alternative Death Benefit Election pursuant to Section 8. However, if a Policy Owner makes an Alternative Death Benefit Election after a Change in Control, the ownership of the Policy shall be transferred to the trust created pursuant to this Section, and not directly to the Company as provided in Section 8. Notwithstanding the creation and funding of an irrevocable trust in accordance with the provisions of this Section, the Company or its successor shall continue to be responsible for its obligations under the Plan to the extent not satisfied by such trust, including any Alternative Death Benefits payable under Section 8 if such amounts are not paid by the trust for any reason, or if the trust's assets become insufficient to pay any required amounts. 11. Company Default 11.01 Company Default. A Company Default shall be deemed to have occurred with respect to a Policy if the Company processes or attempts to process a policy loan, or a complete or partial surrender, or a cash value withdrawal without prior written approval from the Policy Owner (or Former Policy Owner, if applicable). 11.02 Rights upon Company Default. In the event of a Company Default as described in Section 11.01, the Policy Owner (or Former Policy Owner, if applicable) shall have the right to require the Company to cure the Company Default by notifying the Company in writing within sixty (60) days after the Company Default occurs, or if later, within thirty (30) days after the Policy Owner (or Former Policy Owner) becomes aware of the Company Default. If the Company fails to cure the Company Default within sixty (60) days after being notified by the Policy Owner (or Former Policy Owner) of the Company Default, the Policy Owner (or Former Policy Owner) shall have the right to require the Company to transfer its interest in the Participant's Policy to the Policy Owner (or Former Policy Owner). The Policy Owner (or Former Policy Owner) may exercise this right by notifying the Company, in writing, within sixty (60) days after the Company Default occurs. Upon receipt of such notice, the Company shall -9- 10 immediately transfer its rights in the Policy to the Policy Owner (or Former Policy Owner), either by a release of the Collateral Assignment, or by a transfer of ownership if the Company is the Policy Owner, and the Company shall thereafter have no rights with respect to such Policy. A Policy Owner's (or Former Policy Owner's) failure to exercise its rights under this Section shall not be deemed to release the Company from any of its obligations under the Plan, and shall not preclude the Policy Owner (or Former Policy Owner) from seeking other remedies with respect to the Company Default. Also, a Policy Owner's (or Former Policy Owner's) failure to exercise its rights under this Section will not preclude the Policy Owner (or Former Policy Owner) from exercising such rights upon a later Company Default. 12. Governing Laws and Notices 12.01 Governing Law. This Plan shall be governed by and construed in accordance with the substantive law of New Jersey without giving effect to the choice of law rules of New Jersey. 12.02 Notices. All notices hereunder shall be in writing and sent by first class mail with postage prepaid. Any notice to the Company shall be addressed to the attention of the Corporate Secretary of The Chubb Corporation at the principal office of the Company at 15 Mountain View Road, Warren, NJ 07061. Any notice to the Participant (or other Policy Owner or Former Policy Owner) shall be addressed to the Participant (or other Policy Owner or Former Policy Owner) at the address following such party's signature on his or her Agreement. Any party may change its address by giving written notice of such change to the other party pursuant to this Section. 13. Miscellaneous Provisions 13.01 Gender. The masculine pronoun includes the feminine and the singular includes the plural where appropriate for valid construction. 13.02 Cooperation with Insurer. In order to be eligible to participate in this Plan, the Participant (and, in the case of a Survivorship Policy, the Participant's spouse) shall cooperate with the Insurer by furnishing any and all information requested by the Insurer in order to facilitate the -10- 11 issuance of the policy, including furnishing such medical information and taking such physical examinations as the Insurer may deem necessary. In the absence of such cooperation, the Company shall have no obligation to the Participant to allow him or her to participate in the Plan. 13.03 Cancellation of Policy. If the Insurer cancels the Participant's Policy pursuant to Policy provisions related to the suicide of the Participant (or the Participant's spouse, if the Policy is a Survivorship Policy), a material misstatement of information, nondisclosure of medical information, or any other Policy provision, then no benefits shall be payable to the beneficiary(ies) of such Participant (or other Policy Owner, or Former Policy Owner, where applicable). In such case, after the Company receives the amount payable to the Company as a result of the cancellation of the Policy, the Company shall pay to the Participant (or the Participant's estate, if the Participant has died) an amount equal to the Compensation already foregone by the Participant in accordance with the Participant's election under Section 3.02 plus any amounts paid by the Participant or other Policy Owner or Former Policy Owner under Section 5.02, or, if less, twenty-five percent (25%) of the amount the Company receives from the Insurer upon cancellation of the Participant's Policy. 13.04 Inconsistent Terms. In the event of any inconsistency between the terms of this Plan as described herein and the terms of any Policy purchased hereunder or any related Agreement, the terms of such Policy or Agreement shall be controlling as to that Participant, or his or her Policy Owner or Former Policy Owner, if other than the Participant, his successor-in-interest (if any) and his or her beneficiary or beneficiaries. 14. Amendment, Termination, Administration, and Successors 14.01 Amendment/Termination. The Board of Directors of the Company may amend, modify or terminate the Plan at any time, but any such amendment, modification or termination will not affect the rights of any Participant, Policy Owner or Former Policy Owner under any Agreement entered into with the Company prior to the date of such amendment, modification or termination without the Participant's, Policy Owner's or Former Policy Owner's written consent. Notwithstanding the prior sentence of this Section, the Board of Directors shall have the unilateral right to terminate the Plan and cancel the Company's obligations -11- 12 hereunder and any Agreements entered into hereunder if there is any material adverse change (as determined by the Company in its sole discretion) in the tax or financial consequences to the Company with respect to the Plan. In the event a Participant's Agreement is terminated as a result of a termination of the Plan pursuant to the preceding sentence, the Company shall immediately pay to the Participant (or, if the Participant is not living, to the Policy Owner, if the Policy Owner is not the Company or a trust created pursuant to Section 10 of the Plan, or to the Former Policy Owner, if the Policy Owner is the Company or a trust created pursuant to Section 10 of the Plan) an amount equal to the sum of: (a) the actual amount of Compensation foregone by the Participant under the Agreement; (b) interest, at a rate equal to the rate that would have been payable for such period of time under the Stable Value Fund in The Chubb Corporation CCAP, compounded annually, on the actual foregone Compensation from the date the Compensation was foregone to the date the payment under this Section is made; (c) the amount of any federal, state and local income and gift taxes paid by the Participant and the Participant's spouse as a result of the life insurance coverage provided under the Plan; (d) interest, at a rate equal to the rate that would have been payable for such period of time under the Stable Value Fund in The Chubb Corporation CCAP, compounded annually, on any such taxes referred to in subsection (c) of this Section 14.01 from April 15 of the year following the year to which such taxes relate to the date the payment under this Section is made; (e) the amount of any payment made under Section 5.02; and, (f) interest, at a rate equal to the rate that would have been payable for such period of time under the Stable Value Fund in The Chubb Corporation CCAP, compounded annually, on any payment referred to in subsection (e) of this Section 14.01 from the date such payment was made to the date the payment under this Section is made. When a payment is made pursuant to this Section, the Participant's Agreement shall immediately terminate and, if the Company is not the Policy Owner, the Policy Owner shall immediately transfer all interest in the Policy to the Company, and thereafter, the Participant, Policy Owner (other than the Company) and Former Policy Owner (if any) shall have no further rights or interest in the Policy. For the purpose of this paragraph, if the Stable Value Fund referred to does not exist for any period of time for which an interest rate calculation is required under this paragraph, the interest rate payable for such period shall be a comparable rate -12- 13 determined by the Plan Administrator, in its discretion, except that any rate so determined shall not be less than 6%. 14.02 Administration. This Plan shall be administered by the Plan Administrator. The Plan Administrator shall have the authority to make, amend, interpret, and enforce all rules and regulations for the administration of the Plan and decide or resolve any and all questions, including interpretations of the Plan, as may arise in connection with the Plan in the Plan Administrator's sole discretion. In the administration of this Plan, the Plan Administrator from time to time may employ agents and delegate to them or to others such administrative duties as it sees fit. The Plan Administrator from time to time may consult with counsel, who may be counsel to the Company. The decision or action of the Plan Administrator (or its designee) with respect to any question arising out of or in connection with the administration, interpretation and application of this Plan shall be final and conclusive and binding upon all persons having any interest in the Plan. The Company shall indemnify and hold harmless the Plan Administrator and any employees of the Company or its subsidiaries to whom administrative duties under this Plan are delegated, against any and all claims, loss, damage, expense or liability arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Plan Administrator or such employees of the Company or its subsidiaries. 14.03 Successors. The terms and conditions of this Plan shall inure to the benefit of and bind the Company and the Participant and their successors, assignees (including any Assignee), and representatives. The Company shall have the right to absolutely and irrevocably assign its rights, title and interest in a Policy without the consent of the Participant (or Assignee). -13- EX-27 4 FINANCIAL DATA SCHEDULE
7 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 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 11,463 1,941 2,069 831 0 0 14,776 10 89 734 20,972 10,515 2,934 0 0 607 176 0 0 5,474 20,972 1,380 209 32 9 908 374 92 227 40 187 0 0 0 187 1.16 1.14 0 0 0 0 0 0 0 DEBT-HELD-FOR-SALE REPRESENTS FIXED MATURITY INVESTMENTS CLASSIFIED AS AVAILABLE-FOR-SALE AND CARRIED AT MARKET VALUE AS PRESCRIBED BY SFAS NO. 115. DEBT-CARRYING-VALUE REPRESENTS FIXED MATURITY INVESTMENTS CLASSIFIED AS HELD-TO-MATURITY AND CARRIED AT AMORTIZED COST AS PRESCRIBED BY SFAS NO. 115. DEBT-MARKET-VALUE REPRESENTS THE RELATED MARKET VALUE OF FIXED MATURITIES CLASSIFIED AS HELD-TO-MATURITY. RECOVER-REINSURE REPRESENTS REINSURANCE RECOVERABLE ON PAID CLAIMS. POLICY-LOSSES EXCLUDE THE REDUCTIONS FOR REINSURANCE RECOVERABLES ON UNPAID CLAIMS ($1,266), AS PRESCRIBED BY SFAS NO. 113. SUCH AMOUNTS ARE INCLUDED IN TOTAL ASSETS. UNEARNED-PREMIUMS EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUMS ($126) AS PRESCRIBED BY SFAS NO. 113. THIS PREPAID AMOUNT IS INCLUDED IN TOTAL ASSETS. NOTES-PAYABLE INCLUDES LONG-TERM DEBT OF $607. OTHER-SE INCLUDES PAID IN SURPLUS; RETAINED EARNINGS; FOREIGN CURRENCY TRANSLATION LOSSES, NET OF INCOME TAX; UNREALIZED APPRECIATION OF INVESTMENTS, NET; RECEIVABLE FROM ESOP AND TREASURY STOCK. OTHER-INCOME REPRESENTS REVENUES FROM REAL ESTATE OPERATIONS. AMOUNTS FOR SECURITIES ACT INDUSTRY GUIDE 6 AND EXCHANGE ACT INDUSTRY GUIDE 4 DISCLOSURES ARE REQUIRED FOR ANNUAL FILINGS ONLY. ACCORDINGLY, NO AMOUNTS WILL BE REPORTED FOR INTERIM FILINGS.
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