<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 1994
===============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
<TABLE>
<S> <C>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _________ TO __________
Commission File No. 1-8661
</TABLE>
THE CHUBB CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEW JERSEY 13-2595722
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
15 MOUNTAIN VIEW ROAD, P.O. BOX 1615
WARREN, NEW JERSEY 07061-1615
(Address of principal executive offices) (Zip Code)
</TABLE>
(908) 903-2000
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<S> <C>
Common Stock, par value $1 per share New York Stock Exchange
Series A Participating Cumulative
Preferred Stock Purchase Rights New York Stock Exchange
(Title of each class) (Name of each exchange on which registered)
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X. No. .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant was $6,520,075,104 as of March 7, 1994.
87,736,074
Number of shares of common stock outstanding as of March 7, 1994
DOCUMENTS INCORPORATED BY REFERENCE
Portions of The Chubb Corporation 1993 Annual Report to Shareholders are
incorporated by reference in Parts I, II and IV of this Form 10-K. Portions of
the definitive Proxy Statement for the Annual Meeting of Shareholders on April
26, 1994 are incorporated by reference in Part III herein.
===============================================================================
<PAGE> 2
PART I.
ITEM 1. BUSINESS
GENERAL
The Chubb Corporation (the Corporation) was incorporated as a business
corporation under the laws of the State of New Jersey in June 1967. The
Corporation is a holding company and is principally engaged, through
subsidiaries, in three industries: property and casualty insurance, life and
health insurance and real estate development. The Corporation and its
subsidiaries employed approximately 10,500 persons on December 31, 1993.
Revenues, income from operations before income tax and identifiable assets for
each industry segment for the three years ended December 31, 1993 are included
in Note (16) of the notes to consolidated financial statements incorporated by
reference from the Corporation's 1993 Annual Report to Shareholders.
The property and casualty insurance subsidiaries provide insurance
coverages on a direct and assumed basis, principally in the United States,
Canada, Europe, Australia and the Far East. The life and health insurance and
real estate development subsidiaries have no international operations. Revenues,
income from operations before income tax and identifiable assets of the property
and casualty insurance subsidiaries by geographic area for the three years ended
December 31, 1993 are included in Note (17) of the notes to consolidated
financial statements incorporated by reference from the Corporation's 1993
Annual Report to Shareholders.
PROPERTY AND CASUALTY INSURANCE GROUP
The Property and Casualty Insurance Group (the Group) is composed of
Federal Insurance Company (Federal), Pacific Indemnity Company (Pacific
Indemnity), Vigilant Insurance Company (Vigilant), Great Northern Insurance
Company (Great Northern), Chubb Insurance Company of New Jersey (Chubb New
Jersey), Chubb Custom Insurance Company (Chubb Custom), Chubb National Insurance
Company (Chubb National), Texas Pacific Indemnity Company, Northwestern Pacific
Indemnity Company, Chubb Insurance Company of Canada, Chubb Insurance Company of
Europe, S.A., Chubb Insurance Company of Australia, Limited and Chubb Atlantic
Indemnity Ltd.
The Group presently underwrites most forms of property and casualty
insurance. All members of the Group write non-participating policies. Several
members of the Group also write participating policies, particularly in the
workers' compensation class of business, under which dividends are paid to the
policyholders.
Premiums Written
An analysis of the Group's premiums written during the past three years is
shown in the following table.
<TABLE>
<CAPTION>
DIRECT REINSURANCE REINSURANCE NET
PREMIUMS PREMIUMS PREMIUMS PREMIUMS
YEAR WRITTEN ASSUMED(a) CEDED(a) WRITTEN
- ---- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
1991........................ $3,646,728 $488,666 $1,023,130 $3,112,264
1992........................ 3,983,239 376,776 1,117,509 3,242,506
1993........................ 4,268,104 565,140 1,186,949 3,646,295
</TABLE>
- ---------------
(a) Intercompany items eliminated.
The net premiums written during the last five years for major insurance
classes of the Group are incorporated by reference from page 12 of the
Corporation's 1993 Annual Report to Shareholders.
One or more members of the Group are licensed and transact business in each
of the 50 states of the United States, the District of Columbia, Puerto Rico,
the Virgin Islands, Canada and parts of Europe, Australia and the Far East. In
1993, approximately 88% of the Group's direct business was produced in the
United States, where the Group's businesses enjoy broad geographic distribution
with a particularly strong market presence in the Northeast. The four states
accounting for the largest amounts of direct premiums written were New York with
15%, California with 14%, New Jersey with 6% and Pennsylvania with 5%. No other
state accounted for 5% or more of such premiums. Approximately 4% of the Group's
direct premiums written were produced in Canada.
2
<PAGE> 3
Underwriting Results
A frequently used industry measurement of property and casualty insurance
underwriting results is the combined loss and expense ratio. This ratio is the
sum of the ratio of incurred losses and related loss adjustment expenses to
premiums earned (loss ratio) plus the ratio of underwriting expenses to premiums
written (expense ratio) after reducing both premium amounts by dividends to
policyholders. When the combined ratio is under 100%, underwriting results are
generally considered profitable; when the combined ratio is over 100%,
underwriting results are generally considered unprofitable. Investment income,
deferred policy acquisition costs, other non-underwriting income or expense and
income taxes are not reflected in the combined ratio. The profitability of
property and casualty insurance companies depends on income from both
underwriting operations and investments.
The net premiums and the loss, expense and combined ratios of the Group for
the last five years are shown in the following table.
<TABLE>
<CAPTION>
NET PREMIUMS COMBINED
(IN THOUSANDS) LOSS AND
------------------------- LOSS EXPENSE EXPENSE
YEAR WRITTEN EARNED RATIOS RATIOS RATIOS
- ---- ------- ------ ------ ------- --------
<S> <C> <C> <C> <C> <C>
1989......................... $ 2,734,918 $ 2,693,553 67.0% 34.5% 101.5%
1990......................... 2,919,663 2,836,135 65.2 34.5 99.7
1991......................... 3,112,264 3,037,168 64.4 35.1 99.5
1992......................... 3,242,506 3,163,288 66.7 34.4 101.1
1993......................... 3,646,295 3,504,838 82.5 32.3 114.8
----------- ----------- ---- ---- -----
Total for five years ended
December 31, 1993......... $15,655,646 $15,234,982 69.6% 34.1% 103.7%
=========== =========== ==== ==== =====
</TABLE>
The 1993 ratios include the effects of a $675 million increase in unpaid
claims related to an agreement for the settlement of asbestos-related litigation
and a $125 million return premium to the Group related to the commutation of a
medical malpractice reinsurance agreement. Excluding the effects of these items,
the loss ratio, the expense ratio and the combined loss and expense ratio were
65.5%, 33.5% and 99.0%, respectively, for the year 1993 and 65.7%, 34.4% and
100.1%, respectively, for the five years ended December 31, 1993.
The combined loss and expense ratios during the last five years for major
classes of the Group's business are incorporated by reference from page 12 of
the Corporation's 1993 Annual Report to Shareholders.
Producing and Servicing of Business
In the United States and Canada, the Group is represented by approximately
3,000 independent agents and accepts business on a regular basis from an
estimated 500 insurance brokers. In most instances, these agents and brokers
also represent other companies which compete with the Group. The offices
maintained by the Group assist these agents and brokers in producing and
servicing the Group's business. In addition to the administrative offices of
Chubb & Son Inc. in Warren, New Jersey, the Group operates six zonal management
offices and 63 branch and service offices in the United States and Canada.
The Group's overseas business is developed by its foreign agents and
brokers through local branch offices of the Group and by its United States and
Canadian agents and brokers. Overseas business is also obtained from foreign
treaty reinsurance assumed principally, but not exclusively, from the Sun
Alliance Group plc (Sun Group). In conducting its overseas business, the Group
attempts to minimize the risks relating to currency fluctuations.
3
<PAGE> 4
Business for the Group is also produced through participation in a number
of underwriting pools and syndicates including, among others, Associated
Aviation Underwriters, Industrial Risk Insurers, American Accident Reinsurance
Group, American Excess Insurance Association, Cargo Reinsurance Association and
American Cargo War Risk Reinsurance Exchange. Such pools and syndicates provide
underwriting capacity for risks which an individual insurer cannot prudently
underwrite because of the magnitude of the risk assumed or which can be more
effectively handled by one organization due to the need for specialized loss
control service.
Reinsurance
In accordance with the normal practice of the insurance industry, the Group
assumes and cedes reinsurance with other insurers or reinsurers. These
reinsurance arrangements provide greater diversification of business and
minimize the Group's maximum net loss arising from large risks or from hazards
of catastrophic potentialities.
A large portion of the Group's reinsurance is effected under contracts
known as treaties under which all risks meeting prescribed criteria are
automatically covered. A substantial portion of the Group's ceded reinsurance is
on a quota share basis with a subsidiary of the Sun Group. Most of the remaining
reinsurance arrangements consist of excess of loss and catastrophe contracts
with other insurers or reinsurers which protect against a specified part or all
of certain types of losses over stipulated amounts arising from any one
occurrence or event. In some instances, reinsurance is effected by negotiation
on individual risks. The amount of each risk retained by the Group is subject to
maximum limits which vary by line of business and type of coverage. Retention
limits are continually reviewed and are revised periodically as the Group's
capacity to underwrite risks changes. Reinsurance contracts do not relieve the
Group of its obligation to the policyholders.
The collectibility of reinsurance is subject to the solvency of the
reinsurers. The Group is selective in regard to its reinsurers, placing
reinsurance with only those reinsurers with strong balance sheets and superior
underwriting ability. The Group monitors the financial strength of its
reinsurers on an ongoing basis. As a result, uncollectible amounts have not been
significant.
The severity of recent catastrophes, particularly Hurricane Andrew in 1992,
has demonstrated to insurers, including the Group, that assumptions on the
damage potential of catastrophes have been too optimistic. The Group maintains
records showing concentrations of risks in catastrophe prone areas such as
California (earthquakes and brush fires) and the Southeast coast of the United
States (hurricanes). The Group continually assesses its concentration of
underwriting exposures in catastrophe prone areas. The Group is continuing to
develop strategies which will further limit the aggregation of exposure in any
one catastrophic event.
The catastrophe reinsurance market has suffered large losses in recent
years. As a result, the reinsurance market's capacity was substantially reduced
in 1993 and the cost of available coverages rose significantly. In response, the
Group has increased its retention levels for individual catastrophe losses. The
effect on the Group's exposure to future catastrophe losses will depend on the
severity of such losses.
Unpaid Claims and Claim Adjustment Expenses and Related Amounts Recoverable
from Reinsurers
Insurance companies are required to make provision in their accounts for
the ultimate costs (including claim adjustment expenses) of claims which have
been reported but not settled and of claims which have been incurred but not
reported as well as for the portion of such provision that will be recovered
from reinsurers.
4
<PAGE> 5
The process of establishing the liability for unpaid claims and claim
adjustment expenses is an imprecise science subject to variables that are
influenced by both internal and external factors. This is true because claim
settlements to be made in the future will be impacted by changing rates of
inflation (particularly medical cost inflation) and other economic conditions,
changing legislative, judicial and social environments and changes in the
Group's claim handling procedures. In many liability cases, significant periods
of time, ranging up to several years or more, may elapse between the occurrence
of an insured loss, the reporting of the loss to the Group and the settlement of
the loss. Approximately 50% of the Group's unpaid claims and claim adjustment
expenses are provided for IBNR--claims which have not yet been reported to the
Group, some of which were not yet known to the insured, and future development
on reported claims. In spite of this imprecision, financial reporting
requirements dictate that insurance companies report a single amount as the
estimate of unpaid claims and claim adjustment expenses as of each evaluation
date. These estimates are continually reviewed and updated. Any resulting
adjustments are reflected in current operating results.
The Group's estimates of losses for reported claims are established
judgmentally on an individual case basis. Such estimates are based on the
Group's particular experience with the type of risk involved and its knowledge
of the circumstances surrounding each individual claim. These estimates are
reviewed on a regular basis or as additional facts become known. The reliability
of the estimating process is monitored through comparison with ultimate
settlements.
The Group's estimates of losses for unreported claims are principally
derived from analyses of historical patterns of the development of paid and
reported losses by accident year for each class of business. This process relies
on the basic assumption that past experience, adjusted for the effects of
current developments and likely trends, is an appropriate basis for predicting
future events. For certain classes of business where anticipated loss experience
is less predictable because of the small number of claims and/or erratic claim
severity patterns, the Group's estimates are based on both expected and actual
reported losses. Salvage and subrogation estimates are developed from patterns
of actual recoveries.
The Group's estimates of unpaid claim adjustment expenses are based on
analyses of the relationship of projected ultimate claim adjustment expenses to
projected ultimate losses for each class of business. Claims staff has
discretion to override these expense formulas either upward or downward where
judgment indicates such action is appropriate.
In 1993, the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 113, Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts. SFAS No. 113 establishes the
conditions required for a contract with a reinsurer to be accounted for as
reinsurance and prescribes accounting and reporting standards for those
contracts. SFAS No. 113 requires that reinsurance recoverable on unpaid claims
be reported separately as an asset on the balance sheet rather than the previous
practice of reducing the liability for unpaid claims and claim adjustment
expenses by such amount.
The Group's estimates of reinsurance recoverable related to reported and
unreported claims and claim adjustment expenses, which represent the portion of
such liabilities that will be recovered from reinsurers, are determined in a
manner consistent with the liabilities associated with the reinsured policies.
The anticipated effect of inflation is implicitly considered when
estimating liabilities for unpaid claims and claim adjustment expenses.
Estimates of the ultimate value of all unpaid claims are based in part on paid
losses, which reflect actual inflation. Inflation is also reflected in estimates
established on reported open claims which, when combined with paid losses, form
another basis to derive estimates of reserves for all open claims. There is no
precise method for subsequently evaluating the adequacy of the consideration
given to inflation, since claim settlements are affected by many factors.
5
<PAGE> 6
The following table provides a reconciliation of the beginning and ending
liability for unpaid claims and claim adjustment expenses, net of reinsurance
recoverable, and a reconciliation of the ending net liability to the
corresponding liability on a gross basis for the years ended December 31, 1993,
1992 and 1991.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------
1993 1992 1991
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Net liability, beginning of year........................ $5,267.6 $4,743.9 $4,301.1
-------- -------- --------
Net incurred claim and claim adjustment expenses
Provision for claims occurring in the current year.... 2,214.3 2,125.7 1,970.2
Increase in prior years' claims estimate relating to
an agreement for the settlement of asbestos-related
litigation......................................... 675.0 -- --
Decrease in estimates for other claims occurring in
prior years........................................ (10.2) (27.6) (28.8)
-------- -------- --------
2,879.1 2,098.1 1,941.4
-------- -------- --------
Net payments for claims occurring in
Current year.......................................... 656.8 643.2 579.5
Prior years........................................... 1,039.9 931.2 919.1
-------- -------- --------
1,696.7 1,574.4 1,498.6
-------- -------- --------
Net liability, end of year.............................. 6,450.0 5,267.6 4,743.9
Reinsurance recoverable, end of year.................... 1,785.4 1,953.3 1,847.4
-------- -------- --------
Gross liability, end of year............................ $8,235.4 $7,220.9 $6,591.3
======== ======== ========
</TABLE>
In 1993, Pacific Indemnity entered into a global settlement agreement with
Continental Casualty Company (a subsidiary of CNA Financial Corporation),
Fibreboard Corporation, and attorneys representing claimants against Fibreboard
for all future asbestos-related bodily injury claims against Fibreboard. This
settlement relates to an insurance policy issued to Fibreboard by Pacific
Indemnity in 1956. Pacific Indemnity and Continental Casualty reached a separate
agreement for the handling of all pending asbestos-related bodily injury claims
against Fibreboard. Prior to the settlement, the Group had paid $40 million and
had existing loss reserves of $545 million to cover a portion of its obligation
under these agreements. This amount included $300 million of IBNR reserves which
were not previously classified as specific reserves for asbestos claims since it
was management's belief that doing so would increase the demands of plaintiffs'
attorneys. At the time the settlement was negotiated, the Group increased its
loss reserves by $675 million. The Fibreboard settlement is further discussed in
Item 7 of this report on pages 23 and 24.
As a result of the $675 million increase, in 1993, the estimated liability
for unpaid claims and claim adjustment expenses, net of reinsurance recoverable,
as established at the previous year-end was deficient by $664.8 million. This
compares with favorable development of $27.6 million and $28.8 million during
1992 and 1991, respectively. Such deficiency and redundancies were reflected in
the Group's operating results in these respective years. Excluding the $675
million, the Group experienced favorable development of $10.2 million in 1993.
Each of the past three years benefited from favorable claim frequency and
severity trends for certain liability classes; this was offset each year in
varying degrees by increases in unpaid claims and claim adjustment expenses
relating to asbestos and toxic waste claims.
6
<PAGE> 7
Unpaid claims and claim adjustment expenses, net of reinsurance
recoverable, increased 22% in 1993, after increases of 11% and 10% in 1992 and
1991, respectively. The significant increase in 1993 was primarily due to the
$675 million increase related to the Fibreboard settlement. Excluding this $675
million, reserves increased by 10% in 1993. Substantial reserve growth has
occurred each year in those liability coverages, primarily excess liability and
executive protection, that have delayed loss reporting and extended periods of
settlement. These coverages have become a more significant portion of the
Group's business in recent years. The Group continues to emphasize early and
accurate reserving, inventory management of claims and suits, and control of the
dollar value of settlements. The number of outstanding claims at year-end 1993
was approximately 7% lower than the number at year-end 1992. This decrease was
due primarily to the settlement during 1993 of the large number of open claims
at December 31, 1992 relating to Hurricane Andrew and the December 1992 storm in
the Northeast.
The uncertainties relating to unpaid claims, particularly for asbestos and
toxic waste claims on insurance policies written many years ago, are discussed
in Item 7 of this report on pages 23 through 25.
There were approximately 4,000 asbestos and toxic waste claims outstanding
at December 31, 1993 and 1992 compared with approximately 5,000 claims
outstanding at December 31, 1991. The decrease in 1992 was primarily the result
of fewer asbestos-related new arisings as well as increases in bulk settlements
and closed claims relating to asbestos claims. The following table provides a
reconciliation of the beginning and ending liability for unpaid claims and claim
adjustment expenses, net of reinsurance recoverable, related to asbestos and
toxic waste claims for the years ended December 31, 1993, 1992 and 1991.
Reinsurance recoveries related to asbestos and toxic waste claims are not
significant.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------
1993 1992 1991
-------- ------ ------
<S> <C> <C> <C>
(IN MILLIONS)
Net liability, beginning of year..................... $ 435.4 $370.6 $334.6
Net incurred claim and claim adjustment
expenses
Increase in reserves related to the
Fibreboard settlement........................... 675.0 -- --
IBNR reserves reclassified as reserves specifically
related to the Fibreboard settlement............ 300.0 -- --
Other.............................................. 100.7 119.9 87.8
Net payments for claims.............................. 78.2 55.1 51.8
-------- ------ ------
Net liability, end of year........................... $1,432.9 $435.4 $370.6
======== ====== ======
</TABLE>
During 1984, the Group discontinued writing medical malpractice business.
The Group entered into a stop loss reinsurance agreement, effective year-end
1985, which provides that the reinsurer will pay up to $285 million of losses
and allocated loss adjustment expenses for this discontinued class of business
in excess of the initial $225 million to be paid by the Group subsequent to
December 31, 1985. The agreement also provides that the Group may elect to
commute the remaining liability from the reinsurer as of December 31, 1995 and
receive payment, at that time, of an amount determined by the agreement. The
cost of this reinsurance was $173.5 million.
Since the effective date of this agreement, the Group has paid an aggregate
of $249.9 million of medical malpractice losses and loss adjustment expenses and
has recovered the amount in excess of $225 million from the reinsurer. The
amount of paid losses is approximately 55% of what was anticipated at the time
the business was reinsured eight years ago. As a result of the favorable loss
experience over this extended period, the Group reduced both its gross medical
malpractice liability for unpaid claims and claim adjustment expenses and the
related reinsurance recoverable by approximately $125 million in 1993. At that
time, the Group announced its intention to exercise the election to commute the
stop loss reinsurance agreement. The commutation will result in a return premium
to the Group of approximately $125 million, which was recognized in 1993.
7
<PAGE> 8
The table on page 9 presents the subsequent development of the estimated
year-end liability for unpaid claims and claim adjustment expenses, net of
reinsurance recoverable, for the ten years prior to 1993. The top line of the
table shows the estimated liability for unpaid claims and claim adjustment
expenses recorded at the balance sheet date for each of the indicated years.
This liability represents the estimated amount of losses and loss adjustment
expenses for claims arising in all prior years that are unpaid at the balance
sheet date, including losses that had been incurred but not yet reported to the
Group. The upper section of the table shows the reestimated amount of the
previously recorded liability based on experience as of the end of each
succeeding year. The estimate is increased or decreased as more information
becomes known about the frequency and severity of claims for each individual
year. The increase or decrease is reflected in the current year's operating
results.
The "cumulative deficiency" as shown in the table represents the aggregate
change in the reserve estimates from the original balance sheet dates through
December 31, 1993. The amounts noted are cumulative in nature; that is, an
increase in a loss estimate that related to a prior period occurrence generates
a deficiency in each intermediate year. For example, a deficiency recognized in
1993 relating to losses incurred prior to December 31, 1983, such as that
related to the Fibreboard settlement, would be included in the cumulative
deficiency amount for each year in the period 1983 through 1992. Yet, the
deficiency would be reflected in operating results only in 1993. The effect of
changes in estimates of the liabilities for claims occurring in prior years on
income before income taxes in each of the past three years is shown in the
reconciliation table on page 6.
A substantial portion of the cumulative deficiencies in liability estimates
from 1983 through 1992 relates to additional provisions for asbestos and toxic
waste claims, particularly the Fibreboard settlement. The cumulative
deficiencies in the 1983 through 1985 columns were also due to additional
provisions for medical malpractice claims as well as the substantially increased
severity and complexity of liability claims. The cumulative deficiencies
experienced relating to asbestos and toxic waste claims were, to varying
degrees, the result of: (1) an increase in the actual number of claims filed;
(2) an increase in the number of unasserted claims estimated; (3) an increase in
the severity of actual and unasserted claims; and (4) an increase in litigation
costs associated with such claims.
Conditions and trends that have affected development of the liability for
unpaid claims and claim adjustment expenses in the past will not necessarily
recur in the future. Accordingly, it is not appropriate to extrapolate future
redundancies or deficiencies based on the data in this table.
The lower section of the table on page 9 shows the cumulative amount paid
with respect to the reestimated liability as of the end of each succeeding year.
For example, in the 1983 column, as of December 31, 1993 the Group had paid
$1,707.6 million of the currently estimated $3,142.9 million of claims and claim
adjustment expenses that were unpaid at the end of 1983; thus, an estimated
$1,435.3 million of losses incurred through 1983 remain unpaid as of December
31, 1993, most of which relates to the Fibreboard settlement.
Members of the Group are required to file annual statements with state
insurance regulatory authorities prepared on an accounting basis prescribed or
permitted by such authorities (statutory basis). In 1993, the Group amended its
statutory basis of accounting to reflect salvage and subrogation recoveries on
an accrual basis as a reduction of the liability for unpaid claims and claim
adjustment
8
<PAGE> 9
ANALYSIS OF CLAIM AND CLAIM ADJUSTMENT EXPENSE DEVELOPMENT
(NET OF REINSURANCE RECOVERABLE)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------------------------------------------------
YEAR ENDED 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS)
Net Liability for Unpaid Claims
and Claim Adjustment
Expenses...................... $1,112.8 $1,306.9 $1,602.2 $2,141.3 $2,818.6 $3,374.3 $3,880.1 $4,301.1 $4,743.9 $5,267.6 $6,450.0
Net Liability Reestimated as
of:
One year later............... 1,208.7 1,495.6 1,814.6 2,238.6 2,776.9 3,360.5 3,846.2 4,272.3 4,716.3 5,932.4
Two years later.............. 1,379.5 1,660.6 1,989.3 2,313.9 2,835.9 3,336.0 3,854.2 4,244.7 5,368.5
Three years later............ 1,486.5 1,817.6 2,108.5 2,433.2 2,831.0 3,359.8 3,839.8 4,933.0
Four years later............. 1,595.8 1,901.4 2,231.2 2,493.3 2,891.7 3,385.1 4,567.4
Five years later............. 1,651.8 2,005.6 2,353.4 2,585.8 2,961.0 4,203.9
Six years later.............. 1,738.2 2,093.6 2,433.5 2,687.2 3,897.2
Seven years later............ 1,816.1 2,176.6 2,569.0 3,745.2
Eight years later............ 1,891.5 2,322.5 3,673.4
Nine years later............. 2,040.9 3,441.6
Ten years later.............. 3,142.9
Cumulative Deficiency*......... 2,030.1 2,134.7 2,071.2 1,603.9 1,078.6 829.6 687.3 631.9 624.6 664.8**
Cumulative Amount of
Net Liability Paid as of:
One year later............... 465.9 585.7 658.4 651.3 694.7 761.6 880.4 919.1 931.2 1,039.9
Two years later.............. 765.7 941.1 1,058.1 1,061.6 1,108.3 1,226.3 1,383.9 1,407.2 1,479.9
Three years later............ 996.8 1,207.0 1,356.7 1,362.9 1,419.1 1,555.1 1,715.9 1,808.7
Four years later............. 1,168.5 1,397.3 1,568.5 1,595.7 1,651.6 1,778.8 1,958.6
Five years later............. 1,287.2 1,544.1 1,730.0 1,775.3 1,818.2 1,966.1
Six years later.............. 1,386.1 1,646.7 1,867.6 1,907.1 1,961.9
Seven years later............ 1,459.3 1,756.4 1,971.4 2,032.9
Eight years later............ 1,547.7 1,841.8 2,085.5
Nine years later............. 1,620.9 1,937.1
Ten years later.............. 1,707.6
</TABLE>
- ---------------
* The cumulative deficiencies for the years 1983 through 1992 include the
effect of the increase in the liability for unpaid claims and claim
adjustment expenses related to the Fibreboard settlement.
** The medical malpractice gross liability for unpaid claims and claim
adjustment expenses and the related reinsurance recoverable were both reduced
by approximately $125 million in 1993. Excluding the effect of this item, the
deficiency resulting from the reestimation of the December 31, 1992 liability
for unpaid claims and claim adjustment expenses as of December 31, 1993 on a
gross basis was not significantly different from that on a net basis.
9
<PAGE> 10
expenses. Prior to 1993, salvage and subrogation recoveries were recorded on a
cash basis in the statutory basis financial statements. The differences between
the liability for unpaid claims and claim adjustment expenses, net of
reinsurance recoverable, reported in the accompanying consolidated financial
statements in accordance with generally accepted accounting principles (GAAP)
and that reported in the annual statutory statements are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1993 1992
-------- --------
<S> <C> <C>
(IN MILLIONS)
Net liability reported on a statutory basis............ $6,435.8 $5,475.1
Additions (Reductions):
Medical malpractice stop loss reinsurance reserve.... (88.5) (216.3)
Salvage and subrogation recoveries recorded on a cash
basis for statutory and on an accrual basis for
GAAP in 1992...................................... -- (60.3)
Other reserve differences............................ 102.7 69.1
-------- --------
Net liability reported on a GAAP basis................. $6,450.0 $5,267.6
======== ========
</TABLE>
Investments
For each member of the Group, current investment policy is implemented by
management which reports to its Board of Directors.
The main objective of the investment portfolio of the Group is to provide
maximum support to the insurance underwriting operations. To accomplish this,
the investment function must be highly integrated with the operating functions
and capable of responding to the changing conditions in the marketplace.
Investment strategies are developed based on a variety of factors including
underwriting results and the Group's resulting tax position, fluctuations in
interest rates and regulatory requirements.
The investment portfolio of the Group is primarily composed of high quality
bonds, principally tax-exempt, U.S. Treasury, government agency and corporate
issues. In addition, the portfolio includes common stocks held primarily with
the objective of capital appreciation.
In 1993 and 1992, the Group invested new cash primarily in tax-exempt
bonds. In each year the Group tried to achieve the appropriate mix in its
portfolio to balance both investment and tax strategies. In 1993, the Group
reduced its taxable bond portfolio by $225 million and increased its short term
investments so that funds are readily available to pay amounts related to the
Fibreboard settlement. At December 31, 1993, 75% of the Group's fixed maturity
portfolio was invested in tax-exempt bonds compared with 71% at the previous
year-end.
The investment results of the Group for each of the past three years are
shown in the following table.
<TABLE>
<CAPTION>
CHANGE IN
AVERAGE PERCENT EARNED UNREALIZED
INVESTED INVESTMENT ----------------------- REALIZED APPRECIATION
YEAR ASSETS(a) INCOME(b) BEFORE TAX AFTER TAX GAINS(c) (c)(d)
- ---- ---------- ------------ ---------- --------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
1991................ $6,692,199 $466,081 7.0% 5.9% $ 50,656 $ 87,553
1992................ 7,427,017 490,183 6.6 5.7 96,704 (38,585)
1993................ 8,085,302 529,591 6.6 5.6 172,925 51,842
</TABLE>
- ---------------
(a) Average of amounts at beginning and end of calendar year.
(b) Investment income after deduction of investment expenses, but before
applicable income tax, excluding income from rental of real estate and
fixed assets.
(c) Before applicable income tax.
(d) Relates to equity securities.
10
<PAGE> 11
CHUBB & SON INC.
Chubb & Son Inc., a wholly-owned subsidiary of the Corporation, was
incorporated in 1959 under the laws of New York as a successor to the
partnership of Chubb & Son which was organized in 1882 by Thomas Caldecot Chubb
to act as underwriter and manager of insurance companies. Chubb & Son Inc. is
the manager of Federal, Vigilant, Great Northern, Chubb New Jersey, Chubb Custom
and Chubb National. Chubb & Son Inc. also provides certain services to Pacific
Indemnity and other members of the Property and Casualty Insurance Group for
which it is reimbursed.
Acting subject to the supervision and control of the Boards of Directors of
the members of the Group, Chubb & Son Inc. provides day to day executive
management and operating personnel and makes available the economy and
flexibility inherent in the common operation of a group of insurance companies.
In addition, Chubb & Son Inc. arranges for the exchange of reinsurance between
members of the Group.
Chubb & Son Inc. is the United States manager for Samsung Fire & Marine
Insurance Company, Ltd. (formerly known as Ankuk Fire & Marine Insurance
Company, Ltd.). Through December 31, 1993, Chubb & Son Inc. managed the aviation
departments of certain other insurance companies. Effective January 1, 1994,
Associated Aviation Underwriters, Inc., a company 50% owned by Chubb and Son
Inc., assumed management of this aviation business.
LIFE AND HEALTH INSURANCE GROUP
The Life and Health Insurance Group (Life Group) includes Chubb Life
Insurance Company of America (Chubb Life) and its wholly-owned subsidiaries, The
Colonial Life Insurance Company of America (Colonial) and Chubb Sovereign Life
Insurance Company (Sovereign).
The Life Group, which markets a wide variety of insurance and investment
products, is principally engaged in the sale of personal and group life and
health insurance as well as annuity contracts. These products, some of which
combine life insurance and investment attributes, include traditional insurance
products such as term, whole life, and accident and health insurance, as well as
fixed premium interest-sensitive life, universal life and variable universal
life insurance and mutual funds. The target market of the Life Group is small-to
medium-sized business establishments and those people, often the proprietors of
such businesses, whose needs for financial planning are more complex and diverse
than average.
One or more of the companies in the Life Group are licensed and transact
business in each of the 50 states, the District of Columbia, Puerto Rico, Guam
and the Virgin Islands. Personal life and health insurance is marketed primarily
through approximately 1,400 personal producing general agents and 20,600
brokers. Group life and health insurance is marketed through approximately 9,100
brokers.
The executive, accounting, actuarial and administrative activities of the
Life Group other than Sovereign are located at the Chubb Life headquarters in
Concord, New Hampshire. Sovereign's activities are administered both in Concord
and Santa Barbara, California. The group insurance operations are mainly located
in Parsippany, New Jersey. Personal insurance operations are in Concord, Santa
Barbara and Chattanooga, Tennessee.
The following tables present highlights of the Life Group.
LIFE INSURANCE IN-FORCE*
<TABLE>
<CAPTION>
PERSONAL
----------------------------------------
PARTICIPATING NON-PARTICIPATING GROUP TOTAL
----------------- -------------------- ------------------- --------------------
YEAR AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ---- ------- ------- ----------- ------- ---------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
1991...... $95,079 .2% $34,565,026 83.3% $6,842,363 16.5% $41,502,468 100%
1992...... 88,001 .2 39,950,972 86.0 6,415,545 13.8 46,454,518 100
1993...... 81,278 .1 47,740,633 88.0 6,460,954 11.9 54,282,865 100
</TABLE>
- ---------------
* Before deduction for reinsurance ceded.
11
<PAGE> 12
PREMIUM AND POLICY CHARGE REVENUES BY CLASS
<TABLE>
<CAPTION>
PERSONAL GROUP
------------------------------------------------------- -------------------------------------
ACCIDENT AND ACCIDENT AND
ORDINARY LIFE HEALTH ANNUITIES LIFE HEALTH
------------------ ---------------- --------------- ---------------- ------------------
YEAR AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ---- ------- ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
1991...... $171,903 27.1% $17,449 2.7% $2,378 .4% $44,852 7.1% $397,434 62.7%
1992...... 192,202 27.9 18,558 2.7 2,938 .4 44,389 6.4 431,086 62.6
1993...... 216,591 27.0 19,121 2.4 4,294 .5 47,041 5.9 514,189 64.2
</TABLE>
REVENUES, ASSETS AND CAPITAL AND SURPLUS
<TABLE>
<CAPTION>
TOTAL
PREMIUMS GROSS CAPITAL
AND POLICY INVESTMENT AND
YEAR CHARGES INCOME ASSETS SURPLUS
- ---- ---------- ---------- --------- --------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
1991................................. $634,016 $177,654 $2,951,704 $673,981
1992................................. 689,173 192,748 3,150,630 736,801
1993................................. 801,236 205,891 3,529,802 758,419
</TABLE>
The main objective of the investment portfolio of the Life Group is to earn
a rate of return in excess of that required to satisfy the obligations to
policyholders and to cover expenses. The portfolio of the Life Group is
comprised primarily of mortgage-backed securities and corporate bonds. The Life
Group invests predominantly in investment grade, current coupon fixed-income
securities with stable cash flow characteristics and maturities which are
consistent with life insurance reserve requirements. The investment strategy
emphasizes maintaining portfolio quality while achieving competitive investment
yields. The investment results of the Life Group for each of the past three
years are shown in the following table.
<TABLE>
<CAPTION>
CHANGE IN
AVERAGE UNREALIZED
INVESTED INVESTMENT PERCENT REALIZED APPRECIATION
YEAR ASSETS(a) INCOME(b) EARNED GAINS(c) (c)(d)
- ---- --------- ---------- ------ -------- ---------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
1991........................ $1,996,103 $174,870 8.8% $ 4,629 $7,023
1992........................ 2,136,161 189,500 8.9 13,288 2,783
1993........................ 2,341,028 202,771 8.7 22,056 4,720
</TABLE>
- ---------------
(a) Average of amounts at beginning and end of calendar year.
(b) Investment income after deduction of investment expenses, but before
applicable income tax, excluding income from real estate.
(c) Before applicable income tax.
(d) Relates to equity securities.
Reinsurance
The companies in the Life Group, in accordance with common industry
practice, reinsure portions of the life insurance risks they underwrite with
other companies. At the present time, the maximum amount of life insurance
retained on any one life by the Life Group is $1,250,000, excluding accidental
death benefits. Including accidental death benefits, the Life Group accepts a
maximum net retention of $1,400,000.
Policy Liabilities
Premium receipts from universal life and other interest-sensitive contracts
are established as policyholder account balances. Charges for the cost of
insurance and policy administration are assessed against the policyholder
account balance. The amount remaining after such charges represents the policy
liability before applicable surrender charges. Benefit reserves on individual
life insurance contracts with fixed and guaranteed premiums and benefits are
computed so that amounts, with additions from actuarial net premiums to be
received and with interest on such reserves compounded annually at certain
assumed rates, will be sufficient to meet expected policy obligations.
12
<PAGE> 13
In accordance with generally accepted accounting principles, certain additional
factors are considered in the reserve computation as more fully set forth in
Note (1)(e) of the notes to consolidated financial statements incorporated by
reference from the Corporation's 1993 Annual Report to Shareholders.
Group life reserves represent the unearned premium. Group medical reserves
are computed utilizing "lag and adjusted lag" methods. These methods take into
account historical claim experience and adjust for current medical inflation and
changes in claim backlog.
REAL ESTATE DEVELOPMENT GROUP
The Real Estate Development Group (Real Estate Group) is composed of
Bellemead Development Corporation and its subsidiaries. The Real Estate Group is
involved with commercial and residential real estate development.
The Real Estate Group develops real estate properties itself rather than
through third party developers. It is distinguished from most other real estate
developers in that it coordinates all phases of the development process from
concept to completion. The services offered to its customers include land
acquisition, site planning, architecture, engineering, construction, financing,
marketing and property management. Upon completion of development, the
properties may be either owned and operated for the Real Estate Group's own
account or sold to third parties. The Real Estate Group directly manages
virtually all of the properties which it either owns or has sold and retained
interests in through secured loans. The Real Estate Group's continuing
investment interests in joint ventures generally consist of the ownership and
lease of the underlying land and the management and operation of the buildings.
The Real Estate Group's commercial development activities center around
acquiring suburban, multi-site land parcels in locations considered prime for
office development, and then developing the land in progressive stages. The Real
Estate Group's activities include a few metropolitan office building projects.
Commercial development activities are primarily in northern and central New
Jersey with additional operations in Connecticut, Florida, Illinois, Maryland,
Michigan, Pennsylvania and Texas.
The Real Estate Group owns 4,455,000 square feet of office and industrial
space, of which 87% is leased. The Real Estate Group has varying interests in an
additional 6,080,000 square feet of office and industrial space which is 92%
leased.
Residential development activities of the Real Estate Group are primarily
in central Florida.
The Real Estate Group currently has undeveloped land holdings of
approximately 4,600 acres, with primary holdings in New Jersey and Florida and
lesser holdings in six additional states.
REGULATION, PREMIUM RATES AND COMPETITION
The Corporation is a holding company primarily engaged in the insurance
business and is therefore subject to regulation by certain states as an
insurance holding company. California, Indiana, Minnesota, New Hampshire, New
Jersey, New York and all other states have enacted legislation which regulates
insurance holding company systems such as the Corporation and its subsidiaries.
This legislation generally provides that each insurance company in the system is
required to register with the department of insurance of its state of domicile
and furnish information concerning the operations of companies within the
holding company system which may materially affect the operations, management or
financial condition of the insurers within the system. All transactions within a
holding company system affecting insurers must be fair and equitable. Notice to
the insurance commissioners is required prior to the consummation of
transactions affecting the ownership or control of an insurer and of certain
material transactions between an insurer and any person in its holding company
system and, in addition, certain of such transactions cannot be consummated
without the commissioners' prior approval.
13
<PAGE> 14
Property and Casualty Insurance
The Property and Casualty Insurance Group is subject to regulation and
supervision in the states in which it does business. In general, such regulation
is for the protection of policyholders rather than shareholders. The extent of
such regulation varies but generally has its source in statutes which delegate
regulatory, supervisory and administrative powers to a department of insurance.
The regulation, supervision and administration relate to, among other things,
the standards of solvency which must be met and maintained; the licensing of
insurers and their agents; restrictions on insurance policy terminations; unfair
trade practices; the nature of and limitations on investments; premium rates;
restrictions on the size of risks which may be insured under a single policy;
deposits of securities for the benefit of policyholders; approval of policy
forms; periodic examinations of the affairs of insurance companies; annual and
other reports required to be filed on the financial condition of companies or
for other purposes; limitations on dividends to policyholders and shareholders;
and the adequacy of provisions for unearned premiums, unpaid claims and claim
adjustment expenses, both reported and unreported, and other liabilities.
In December 1993, the National Association of Insurance Commissioners
adopted a risk-based capital formula for property and casualty insurance
companies. This formula will be used by state regulatory authorities to identify
insurance companies which may be undercapitalized and which merit further
regulatory attention. The formula prescribes a series of risk measurements to
determine a minimum capital amount for an insurance company, based on the
profile of the individual company. The ratio of a company's actual
policyholders' surplus to its minimum capital requirement will determine whether
any state regulatory action is required. The risk-based capital requirement will
be applicable to property and casualty insurance companies for the first time as
of year-end 1994. Based on preliminary calculations using 1993 data, each member
of the Group has more than sufficient capital to meet the risk-based capital
requirement.
Regulatory requirements applying to premium rates vary from state to state,
but generally provide that rates not be "excessive, inadequate or unfairly
discriminatory." Rates for many lines of business, including automobile and
homeowners insurance, are subject to prior regulatory approval in many states.
However, in certain states, prior regulatory approval of rates is not required
for most lines of insurance which the Group underwrites. Ocean marine insurance
rates are exempt from regulation.
Subject to regulatory requirements, the Group's management determines the
prices charged for its policies based on a variety of factors including claim
and claim adjustment expense experience, inflation, tax law and rate changes,
and anticipated changes in the legal environment, both judicial and legislative.
Methods for arriving at rates vary by type of business, exposure assumed and
size of risk. Underwriting profitability is affected by the accuracy of these
assumptions, by the willingness of insurance regulators to grant increases in
those rates which they control and by such other matters as underwriting
selectivity and expense control.
In all states, insurers authorized to transact certain classes of property
and casualty insurance are required to become members of an insolvency fund. In
the event of the insolvency of an insurer writing a class of insurance covered
by the fund in the state, all members are assessed to pay certain claims against
the insolvent insurer. Fund assessments are proportionately based on the
members' written premiums for the classes of insurance written by the insolvent
insurer. A portion of these assessments is recovered in certain states through
premium tax offsets and policyholder surcharges. In 1993, such assessments to
the members of the Group amounted to approximately $8 million. The amount of
future assessments cannot be reasonably estimated.
State insurance regulation requires insurers to participate in assigned
risk plans, reinsurance facilities and joint underwriting associations, which
are mechanisms to provide risks with various basic insurance coverages when they
are not available in voluntary markets. Such mechanisms are most prevalent for
automobile and workers' compensation insurance, but a majority of states also
mandate participation in Fair Plans or Windstorm Plans, which provide basic
property coverages. Some states also require insurers to participate in
facilities that provide homeowners, crime and medical malpractice insurance.
Participation is based upon the amount of a company's voluntary written premiums
in a particular state for the classes of insurance involved. These involuntary
market plans generally are underpriced and produce unprofitable underwriting
results.
14
<PAGE> 15
In several states, insurers, including members of the Group, participate in
market assistance plans. Typically, a market assistance plan is voluntary, of
limited duration and operates under the supervision of the insurance
commissioner to provide assistance to applicants unable to obtain commercial and
personal liability and property insurance. The assistance may range from
identifying sources where coverage may be obtained to pooling of risks among the
participating insurers.
The extent of insurance regulation on business outside the United States
varies significantly among the countries in which the Group operates. Some
countries have minimal regulatory requirements, while others regulate insurers
extensively. Foreign insurers in many countries are faced with greater
restrictions than domestic competitors. Such restrictions include the need to
secure new licenses and compulsory cessions of reinsurance. In certain countries
the Group has incorporated insurance subsidiaries locally to improve its
position.
The property and casualty insurance industry is highly competitive both as
to price and service. Members of the Group compete not only with other stock
companies but also with mutual companies, other underwriting organizations and
alternative risk sharing mechanisms. Some competitors obtain their business at a
lower cost through the use of salaried personnel rather than independent agents
and brokers. Rates are not uniform for all insurers and vary according to the
types of insurers and methods of operation. The Group competes for business not
only on the basis of price, but also on the basis of availability of coverage
desired by customers and quality of service, including claim adjustment service.
The Group's products and services are generally designed to serve specific
customer groups or needs and to offer a degree of customization that is of value
to the insured.
There are approximately 3,900 property and casualty insurance companies in
the United States operating independently or in groups and no single company or
group is dominant. According to A.M. Best, the Group is the 14th largest United
States property and casualty insurance group based on 1992 net premiums written.
The relatively large size and underwriting capacity of the Group make available
opportunities not available to smaller companies.
The property and casualty insurance industry has a history of cyclical
performance with successive periods of deterioration and improvement over time.
The industry and the Group experienced substantial underwriting losses from 1980
through 1984. Beginning in 1984, the industry and the Group were able to
increase prices and tighten underwriting terms. Substantial price increases were
achieved in most commercial lines from 1984 through 1986. Price competition
increased in the property and casualty marketplace during 1987 and has continued
through 1993, particularly in the commercial classes. In 1993, property related
business experienced some rate firming in the wake of the unprecedented
catastrophes of 1992; however, price increases in casualty lines continued to be
difficult to achieve. The Group continues to be selective in the writing of new
business and to reinforce the sound relationships with its customers who
appreciate the stability, expertise and added value the Group provides. In the
personal lines, the regulatory climate for obtaining rate increases continues to
be difficult, particularly in the automobile class.
Life and Health Insurance
The members of the Life Group are subject to regulation and supervision in
each state in which they do business. Such regulation and supervision is
generally of the character indicated in the first two paragraphs under the
preceding caption, "Property and Casualty Insurance." The risk-based capital
formula for life and health insurers was first effective as of year-end 1993.
Each member of the Life Group had more than sufficient capital at December 31,
1993 to meet the risk-based capital requirement.
The Life Group operates in a highly competitive industry in which it does
not hold a significant market share. The Life Group competes in the personal
insurance market not only with other life insurance companies but also with
other financial institutions. By offering a full line of products, including
interest-sensitive and variable products, both with and without life
contingencies, the Life Group meets this competition for its selected customer
group. The Life Group also competes in the small group health insurance market
by offering competitively priced indemnity products with comprehensive benefits,
and a full line of ancillary products including group dental, life and long term
disability. In 1993, the Life Group accelerated its involvement in managed care
through the
15
<PAGE> 16
development of ChubbHealth Inc., a health maintenance organization that will
serve the New York City metropolitan area. ChubbHealth is a joint venture with
Healthsource, Inc. ChubbHealth is in the final stages of licensing and will be
operational during the first half of 1994.
Members of the Life Group also participate in insolvency funds. In 1993,
insolvency fund assessments to the members of the Life Group amounted to
approximately $2 million.
There are approximately 2,000 legal reserve life insurance companies in the
United States. According to the National Underwriter, a trade publication, as of
January 1, 1993, Chubb Life, Colonial and Sovereign ranked 71st, 151st and
167th, respectively, among such companies based on total insurance in-force.
Legislative and Judicial Developments
Although the federal government and its regulatory agencies generally do
not directly regulate the business of insurance, federal initiatives often have
an impact on the business in a variety of ways. Current and proposed federal
measures which may significantly affect the insurance business include health
care reform initiatives, containment of medical care costs, limitations on
health insurance premiums, toxic waste removal and liability measures, financial
services deregulation, solvency regulation, employee benefits regulation,
automobile safety regulation, the taxation of insurance companies, the tax
treatment of insurance products and modification of the limited exemption for
the business of insurance from the federal antitrust laws.
Enacted and contemplated health care reform on both a national and state
level are reshaping the health insurance industry. Federal legislation on health
insurance is being considered which, if enacted, could create less favorable
conditions for the health insurance industry. Significant changes are not
expected to become operational for some time. It is currently not possible to
predict the long term impact of health care reforms on the Life Group's
business.
Insurance companies are also affected by a variety of state and federal
legislative and regulatory measures as well as by decisions of their courts that
define and extend the risks and benefits for which insurance is provided. These
include redefinitions of risk exposure in areas such as product liability and
commercial general liability as well as extension and protection of employee
benefits, including pension, workers' compensation and disability benefits.
Regulatory concerns with insurance risk classification have increased
significantly in recent years. There is continuous legislative, regulatory and
judicial activity regarding the use of gender in determining premium rates and
benefit payments. Also, some states have restricted the use of underwriting
criteria related to Human Immunodeficiency Virus related illnesses. The
Corporation's insurance subsidiaries have taken steps to limit their
underwriting exposures in those jurisdictions that severely restrict
underwriting freedom.
In July 1992, New York adopted legislation implementing changes in the
small employer group health insurance market. The major provisions became
effective April 1, 1993. New Jersey adopted similar legislation in November
1992, which generally became effective January 1, 1994. Both laws significantly
affect the manner in which the Life Group and other small group health indemnity
insurers conduct business. In general, the laws create community based rating,
mandate prior approval of rates by the insurance department, require open
enrollment periods, limit pre-existing condition exclusions and eliminate health
underwriting for insured groups with fewer than 50 covered lives. Several
lawsuits have been filed by a number of insurers, including a member of the Life
Group, to overturn the New York law and regulations. Certain provisions of the
law have been successfully challenged; however, the New York Superintendent of
Insurance has appealed such decisions. Approximately 80% of the Life Group's
group health insurance premiums are written in New York and New Jersey. The Life
Group has taken actions, including redesigning products and restructuring rates
and sales commissions, which will allow the Life Group to remain competitive
with other small employer group health indemnity insurers in New York and New
Jersey.
In 1988, voters in California approved Ballot Proposition 103, an insurance
reform initiative, which is discussed in Item 7 of this report on page 22.
16
<PAGE> 17
In 1990, New Jersey adopted legislation imposing controls over automobile
insurance risk selection, pricing, coverage and termination. The New Jersey
statute also applied the state's antitrust laws to automobile insurers,
abolished the deficit-ridden Automobile Joint Underwriting Association (JUA),
established a Market Transition Facility (MTF) to issue automobile policies
until the implementation of an assigned risk mechanism on October 1, 1992 and
levied an assessment and surtax on certain insurance coverages to help defray
the estimated $3 billion obligation of the JUA. Under the law, insurers must
make special rate filings to recoup these added charges from their insurance
customers. The MTF has also generated a deficit during its two year existence.
Pursuant to statute, the deficit is required to be allocated to automobile
insurers, including members of the Group, based on market share. Regulations
permit insurers to apply for a surcharge to recover these allocations when paid.
In December 1993, the Group entered into an agreement with the Insurance
Commissioner to pay approximately $10 million as its share of the then projected
deficit of $900 million. The Group's share is subject to adjustment based on any
changes in the estimated deficit. The agreement also entitles the Group to a
refund or credit of any payments made in the event that litigation commenced by
representatives of the insurance industry challenging the Insurance
Commissioner's authority to allocate the deficit to insurers is successful. Such
litigation is currently pending. In March 1994, the acting Insurance
Commissioner announced that the deficit had been reestimated to be approximately
$1.3 billion. The Group's share of the reestimated deficit is approximately $15
million.
ITEM 2. PROPERTIES
The executive offices of the Corporation and the administrative offices of
the Property and Casualty Group are in Warren, New Jersey. The Life Group has
its administrative offices in Concord, New Hampshire; Parsippany, New Jersey;
Chattanooga, Tennessee and Santa Barbara, California. The Real Estate Group's
corporate headquarters is located in Roseland, New Jersey. The insurance
subsidiaries maintain zonal and branch offices in major cities throughout the
United States, and members of the Property and Casualty Insurance Group also
have offices in Canada, Europe, Australia and the Far East. Office facilities
are leased with the exception of buildings in Branchburg, New Jersey,
Chattanooga and Santa Barbara, and a portion of the Life Group's home office
complex in Concord. Management considers its office facilities suitable and
adequate for the current level of operations. See Note (11) of the notes to
consolidated financial statements incorporated by reference from the
Corporation's 1993 Annual Report to Shareholders.
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are defendants in various lawsuits
arising out of their businesses. It is the opinion of management that the final
outcome of these matters will not materially affect the consolidated financial
position of the registrant.
Information regarding certain litigation to which property and casualty
insurance subsidiaries of the Corporation are a party is included in Item 7 of
this report on pages 23 and 24.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the last
quarter of the year ended December 31, 1993.
17
<PAGE> 18
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
YEAR OF
AGE(a) ELECTION(b)
<S> <C> <C>
Dean R. O'Hare, Chairman of the Corporation.............................. 51 1972
Percy Chubb, III, Vice Chairman of the Corporation....................... 59 1971
Richard D. Smith, President of the Corporation........................... 65 1983
Randell G. Craig, Executive Vice President of Chubb Life................. 48 1994
Robert P. Crawford, Jr., Executive Vice President of the Corporation..... 52 1994
John J. Degnan, Vice Chairman and General Counsel of Chubb & Son Inc. ... 49 1994
Gail E. Devlin, Senior Vice President of the Corporation................. 55 1981
David S. Fowler, Senior Vice President of the Corporation................ 48 1989
Henry G. Gulick, Vice President and Secretary of the Corporation......... 50 1975
Donn H. Norton, Executive Vice President of the Corporation.............. 52 1985
Michael O'Reilly, Senior Vice President of the Corporation............... 50 1976
Robert Rusis, Senior Vice President and General Counsel of the
Corporation............................................................ 60 1990
Henry B. Schram, Senior Vice President of the Corporation................ 47 1985
Theresa M. Stone, Senior Vice President of the Corporation............... 49 1990
John F. Swope, Executive Vice President of the Corporation............... 55 1985
George T. Van Gilder, Executive Vice President of Chubb & Son Inc. ...... 50 1994
</TABLE>
- ---------------
(a) Ages listed above are as of April 26, 1994.
(b) Date indicates year first elected or designated as an executive
officer.
All of the foregoing officers serve at the pleasure of the Board of
Directors of the Corporation or listed subsidiary and have been employees of the
Corporation or a subsidiary of the Corporation for more than five years except
for Randell G. Craig, John J. Degnan and Theresa M. Stone. Mr. Craig joined
Chubb Life in 1990 and was previously a vice president with Crown Life Insurance
Company. Prior to joining Chubb & Son Inc. in 1990, Mr. Degnan was a senior
partner in the New Jersey law firm of Shanley & Fisher. Ms. Stone, who joined
the Corporation in 1990, was previously a principal with Morgan Stanley & Co.
Incorporated.
18
<PAGE> 19
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Incorporated by reference from the Corporation's 1993 Annual Report to
Shareholders, page 67.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended December 31, 1993 are
incorporated by reference from the Corporation's 1993 Annual Report to
Shareholders, pages 38 and 39.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion presents our past results and our expectations for
the near term future. The supplementary financial information and consolidated
financial statements and related notes, all of which are integral parts of the
following analysis of our results and our financial position, are incorporated
by reference from the Corporation's 1993 Annual Report to Shareholders, pages
11, 12 and 40 through 61.
Net income amounted to $324 million in 1993 compared with $617 million in
1992 and $552 million in 1991. Net income in 1993 reflects a net charge of $357
million after taxes related to an agreement for the settlement of
asbestos-related litigation and the Corporation's intention to exercise its
option to commute an unrelated existing medical malpractice reinsurance
agreement. Net income in 1993 also reflects a one-time charge of $20 million for
the cumulative effect of adopting new accounting requirements for postretirement
benefits other than pensions and for income taxes.
Net income included realized investment gains after taxes of $152 million,
$124 million and $43 million in 1993, 1992 and 1991, respectively. Decisions to
sell securities are governed principally by considerations of investment
opportunities and tax consequences. Thus, realized investment gains and losses
may vary significantly from year to year. As a result, net income may not be
indicative of our operating performance for the period.
PROPERTY AND CASUALTY INSURANCE
Property and casualty income was significantly lower in 1993 compared with
1992 and 1991 due to a $675 million increase in loss reserves related to an
agreement for the settlement of asbestos-related litigation (the "$675 million
charge"), which is further described under Loss Reserves. This was partially
offset by a $125 million return premium to the property and casualty insurance
subsidiaries related to the Corporation's intention to exercise its option to
commute an existing medical malpractice reinsurance agreement (the "$125 million
return premium").
Property and casualty income after taxes was $118 million in 1993 compared
with $407 million in 1992 and $416 million in 1991. Excluding the effects of the
$675 million charge and the $125 million return premium, property and casualty
income after taxes was $475 million in 1993. Results for 1993 benefited from
lower catastrophe losses and an increase in investment income compared with the
prior year. The earnings decrease in 1992 was due to a decline in underwriting
results caused by substantial catastrophe losses, including those from Hurricane
Andrew, partially offset by an increase in investment income. Catastrophe losses
were $89 million in 1993 compared with $175 million in 1992 and $72 million in
1991.
Net premiums written, excluding the $125 million return premium, amounted
to $3.5 billion in 1993, an increase of 9% compared with 1992, which was in turn
4% higher than 1991. Personal coverages accounted for $814 million or 23% of
1993 premiums written, standard commercial coverages for $1,202 million or 34%,
specialty commercial coverages for $1,270 million or 36% and reinsurance assumed
for $235 million or 7%. The marketplace continued to be competitive,
particularly in the commercial classes. Property related business experienced
some rate firming in 1993 in the wake of the unprecedented catastrophes of 1992,
but price increases in casualty lines continued to be difficult to
19
<PAGE> 20
achieve. We have continued to be selective in the writing of new business and to
reinforce the sound relationships with our customers who appreciate the
stability, expertise and added value we provide.
Due to the adverse effect of the $675 million charge, underwriting results
were extremely unprofitable in 1993. The combined loss and expense ratio, the
common measure of underwriting profitability, was 114.8% in 1993 compared with
101.1% in 1992 and 99.5% in 1991. Excluding the effects of the $675 million
charge and the $125 million return premium, the combined loss and expense ratio
was 99.0% in 1993.
The loss ratio was 82.5% in 1993 compared with 66.7% in 1992 and 64.4% in
1991. Excluding the effects of the $675 million charge and the $125 million
return premium, the loss ratio was 65.5% in 1993, continuing to reflect the
favorable experience resulting from the consistent application of our
underwriting standards. Losses from catastrophes represented 2.5, 5.6 and 2.4
percentage points of the loss ratio in 1993, 1992 and 1991, respectively.
Our expense ratio was 32.3% in 1993 compared with 34.4% in 1992 and 35.1%
in 1991. Excluding the effect of the $125 million return premium, the expense
ratio was 33.5% in 1993. The improvement from the comparable 1992 ratio was due
to lower commissions and to growth in written premiums at a somewhat greater
rate than the increase in overhead expenses. The decrease in the expense ratio
in 1992 was due to lower commissions. Expenses were reduced by contingent profit
sharing accruals of $9 million in each of the three years relating to the
medical malpractice reinsurance agreement. We anticipate a similar accrual
during 1994. There will be no further profit sharing allowance under this
agreement after 1994.
The effect of Hurricane Andrew on our underwriting results in 1992 was
mitigated to a great extent by our catastrophe reinsurance program. The
catastrophe reinsurance market has suffered large losses in recent years. As a
result, the reinsurance market's capacity was substantially reduced in 1993 and
the cost of available coverages rose significantly. We responded by increasing
our retention levels for individual catastrophe losses. The effect of this
change on our 1993 underwriting results was not significant due to the absence
of severe catastrophe losses.
PERSONAL INSURANCE
Premiums from personal insurance increased 2% in 1993 compared with a 2%
decrease in 1992. It continues to be difficult to write new homeowners and other
non-automobile business due to our disciplined pricing as well as the weakness
in residential real estate markets. Personal automobile premiums have remained
level over the past three years as modest rate increases have offset a reduction
in the number of in force policies, which is consistent with our plan to control
our exposure in this class.
Our personal insurance business produced an underwriting profit in 1993
compared with underwriting losses in 1992 and 1991. All classes contributed to
the 1993 improvement. The combined loss and expense ratio was 95.8% in 1993
compared with 104.6% in 1992 and 103.1% in 1991. Underwriting results in each of
these years were adversely affected by significant catastrophe losses in the
homeowners class, particularly Hurricane Andrew in 1992.
Homeowners results, excluding the impact of catastrophes, benefited in 1992
and 1993 from disciplined pricing and stable loss frequency and severity.
Catastrophe losses for this class represented 13.4 percentage points of the loss
ratio for 1993 compared with 25.0 percentage points in 1992 and 13.1 percentage
points in 1991. Our automobile business was modestly profitable in 1993 compared
with breakeven results in 1992 and unprofitable results in 1991. The improvement
in 1993 was due to stable loss frequency and severity while in 1992 it was
primarily due to a reduced frequency of losses. Automobile results were
adversely affected each year by significant losses from the mandated business
which we are required by law to accept for those individuals who cannot obtain
coverage in the voluntary market. Other personal coverages, which include
insurance for personal valuables and excess liability, were increasingly
profitable in 1992 and 1993.
20
<PAGE> 21
STANDARD COMMERCIAL INSURANCE
Excluding the $125 million return premium discussed below, premiums from
standard commercial insurance, which include coverages for multiple peril,
casualty and workers' compensation, increased 6% in 1993 compared with 2% in
1992. The competitive market has continued to place significant pressure on
rates. Premium growth in 1993 was most significant in the multiple peril class;
such growth was due primarily to improved renewal retention as well as exposure
growth on such renewals.
Medical malpractice business, which we stopped writing in 1984, was
reinsured effective year-end 1985. Under the provisions of the reinsurance
agreement, we may elect to commute the remaining liability from the reinsurer as
of December 31, 1995 and receive payment, at that time, of an amount determined
by the agreement. In August 1993, the Corporation announced its intention to
exercise this election. As the result of the favorable loss payment pattern in
the eight years since this business was reinsured, the commutation will result
in a return premium to the property and casualty insurance subsidiaries of
approximately $125 million, which was recognized in the third quarter of 1993.
Our standard commercial underwriting results were unprofitable in each of
the past three years. Such results were extremely unprofitable in 1993 due to
the adverse effect of the $675 million charge. The combined loss and expense
ratio was 149.7% in 1993 compared with 105.7% in 1992 and 102.6% in 1991.
Excluding the effects of the $675 million charge and the $125 million return
premium, the combined loss and expense ratio was 107.6% in 1993.
Casualty results include the effects of the $675 million charge and the
$125 million return premium. Excluding the effects of these items, casualty
results were near breakeven in 1993 compared with profitable results in 1992 and
1991. The excess liability component deteriorated somewhat in 1993 but remained
profitable due to the relative price adequacy and favorable loss experience in
this class. These favorable results were offset in varying degrees in each of
the past three years by increases in loss reserves on general liability business
written in earlier years, particularly for asbestos-related and toxic waste
claims. Results in the automobile component were modestly profitable in each of
the last three years.
Multiple peril results were similarly unprofitable in each of the last
three years due to the less than adequate prices. Results in the property
component of this business improved in 1993 due to a reduction in the impact of
catastrophe losses. This was offset by a deterioration in the liability
component that was due to an increase in the frequency and severity of losses.
Results in 1992 were adversely affected by higher catastrophe losses, primarily
from Hurricane Andrew and the civil disorder in Los Angeles. Catastrophe losses
for this class represented 3.6 percentage points of the loss ratio for 1993
compared with 10.1 percentage points in 1992 and 1.3 percentage points in 1991.
Workers' compensation results were extremely unprofitable in each of the
past three years. Results in our voluntary business have benefited somewhat from
rate increases and a reduced frequency of losses. Results in this class have
been aggravated each year, but particularly in 1991, by our share of the
significant losses incurred by the involuntary pools and mandatory business in
which we must participate by law.
SPECIALTY COMMERCIAL INSURANCE
Premiums from specialty commercial insurance increased 10% in 1993 compared
with 11% in 1992. The growth was due primarily to rate and exposure increases in
several of our smaller specialty classes. Price increases for most of our
executive protection and financial fidelity coverages were difficult to achieve.
Our strategy of working closely with our customers and our ability to
differentiate our products has enabled us to retain a large percentage of our
business.
The specialty commercial business produced substantial underwriting profits
in each of the past three years with combined loss and expense ratios of 91.0%
in 1993, 90.5% in 1992 and 90.3% in 1991. Our executive protection, financial
fidelity and surety results were highly profitable in each year due to favorable
loss experience.
21
<PAGE> 22
Marine results were profitable in 1993 and 1992 compared with near
breakeven results in 1991. Results in several of our smaller specialty classes
deteriorated in 1993 compared with the prior two years, due primarily to an
increased frequency of large losses.
REINSURANCE ASSUMED
Premiums from reinsurance assumed, which is primarily treaty reinsurance
assumed from the Sun Alliance Group plc, increased 46% in 1993 compared with 9%
in 1992. The growth in 1993 was due to an increase in our participation in the
business of Sun Alliance and a firming of rates in Sun Alliance's markets,
primarily in the United Kingdom.
Underwriting results for this segment, while substantially improved in 1993
due to the firming of rates, have been unprofitable in each of the last three
years. The combined loss and expense ratio was 111.8% in 1993 compared with
126.9% in 1992 and 119.3% in 1991. Results in 1992 were adversely affected by
our share of the substantial mortgage indemnity insurance losses experienced by
Sun Alliance in the United Kingdom. Results in 1991 reflect the adverse effect
on Sun Alliance of excessive price competition and a damaging recession in the
United Kingdom.
REGULATORY INITIATIVES
In 1988, voters in California approved Ballot Proposition 103, an insurance
reform initiative which affects most property and casualty insurers writing
business in the state. Approximately 14% of the direct business of the
Corporation's property and casualty subsidiaries is written in California.
Provisions of Proposition 103 would have required insurers to roll back property
and casualty insurance rates for certain lines of business to 20 percent below
November 1987 levels and would have required an additional 20 percent reduction
in automobile rates by November 1989. In 1989, the California Supreme Court,
ruling on the constitutional challenge to Proposition 103, ruled that an insurer
is entitled to a fair rate of return.
The regulations implementing the rate determination and premium rollback
provisions of Proposition 103 continue to evolve. A California Superior Court
decision declared invalid and void the rollback and rate review regulations
proposed by the elected Insurance Commissioner. The Court decision prohibits the
Commissioner from enforcing the regulations as well. The Commissioner has
appealed the Superior Court decision to the California Supreme Court and the
outcome of that appeal is uncertain. In a separate action, a California Court of
Appeal has ruled that Proposition 103 regulations need not be submitted for
approval to the California Office of Administrative Law. A petition for review
has been filed with the California Supreme Court. There are at present no
regulations in force or proposed which establish a final rollback formula.
None of our property and casualty subsidiaries have been among the
companies thus far ordered to refund premiums for the rollback period. Based on
our analysis of the operating results of our property and casualty subsidiaries
in the State of California during the rollback period, it is management's belief
that it is probable that any final court decision will not result in premium
refunds of a material amount by the Corporation's property and casualty
subsidiaries.
LOSS RESERVES
Loss reserves are our property and casualty subsidiaries' largest
liability. At the end of 1993, gross loss reserves totaled $8.2 billion compared
with $7.2 billion and $6.6 billion at year-end 1992 and 1991, respectively.
Reinsurance recoverable on such loss reserves was $1.8 billion at the end of
1993 compared with $2.0 billion and $1.8 billion at year-end 1992 and 1991,
respectively. Loss reserves, net of reinsurance recoverable, increased 22% in
1993, after increases of 11% and 10% in 1992 and 1991, respectively. The
significant increase in 1993 was primarily due to the $675 million increase
related to the settlement of asbestos-related litigation. Excluding this $675
million, loss reserves increased by 10% in 1993. Substantial reserve growth has
occurred each year in those liability coverages, primarily excess
22
<PAGE> 23
liability and executive protection, that have delayed loss reporting and
extended periods of settlement. These coverages have become a more significant
portion of our business in recent years.
The process of establishing loss reserves is an imprecise science and
reflects significant judgmental factors. In many liability cases, significant
periods of time, ranging up to several years or more, may elapse between the
occurrence of an insured loss, the reporting of the loss and the settlement of
the loss. In fact, approximately 50% of our loss reserves at December 31, 1993
were for claims that had not yet been reported to us, some of which were not yet
known to the insured, and for future development on reported claims.
Judicial decisions and legislative actions continue to broaden liability
and policy definitions and to increase the severity of claim payments. As a
result of this and other societal and economic developments, the uncertainties
inherent in estimating ultimate claim costs on the basis of past experience have
increased significantly, further complicating the already difficult loss
reserving process.
The uncertainties relating to asbestos and toxic waste claims on insurance
policies written many years ago are exacerbated by judicial and legislative
interpretations of coverage that in some cases have tended to erode the clear
and express intent of such policies and in others have expanded theories of
liability. The industry is engaged in extensive litigation over these coverage
and liability issues and is thus confronted with a continuing uncertainty in its
effort to quantify these exposures.
Our most costly asbestos exposure relates to an insurance policy issued to
Fibreboard Corporation by Pacific Indemnity Company in 1956. In 1993, Pacific
Indemnity Company, a subsidiary of the Corporation, entered into a global
settlement agreement with Continental Casualty Company (a subsidiary of CNA
Financial Corporation), Fibreboard Corporation, and attorneys representing
claimants against Fibreboard for all future asbestos-related bodily injury
claims against Fibreboard. This agreement is subject to court approval. Pursuant
to the global settlement agreement, a $1.525 billion trust fund will be
established to pay future claims, which are claims that were not filed in court
before August 27, 1993. Pacific Indemnity will contribute approximately $538
million to the trust fund and Continental Casualty will contribute the remaining
amount. In December 1993, upon execution of the global settlement agreement,
Pacific Indemnity and Continental Casualty paid their respective shares into an
escrow account. Upon final court approval of the settlement, which could take up
to two years or more, the amount in the escrow account, including interest
earned thereon, will be transferred to the trust fund.
All of the parties have agreed to use their best efforts to seek court
approval of the global settlement agreement. Although it is likely that this
agreement will be challenged, management is optimistic that the courts will
approve the settlement.
Pacific Indemnity and Continental Casualty have reached a separate
agreement for the handling of all pending asbestos-related bodily injury claims
against Fibreboard. Pacific Indemnity's obligation under this agreement is not
expected to exceed $635 million, most of which is expected to be paid over the
next two years. The agreement further provides that the total responsibility of
both insurers with respect to pending and future asbestos-related bodily injury
claims against Fibreboard will be shared between Pacific Indemnity and
Continental Casualty on an approximate 35% and 65% basis, respectively.
Pacific Indemnity, Continental Casualty and Fibreboard have entered into a
trilateral agreement, subject to court approval, to settle all present and
future asbestos-related bodily injury claims resulting from insurance policies
that were, or may have been, issued to Fibreboard by the two insurers. The
trilateral agreement will be triggered if the global settlement agreement is
disapproved. Pacific Indemnity's obligation under the trilateral agreement is
therefore similar to, and not duplicative of, that under those agreements
described above.
23
<PAGE> 24
The trilateral agreement reaffirms portions of an agreement reached in
March 1992 between Pacific Indemnity and Fibreboard. Among other matters, that
1992 agreement eliminates any Pacific Indemnity liability to Fibreboard for
asbestos-related property damage claims.
Pacific Indemnity, Continental Casualty and Fibreboard have requested a
California Court of Appeal to delay its decisions regarding asbestos-related
insurance coverage issues, which are currently before it and involve the three
parties exclusively, while the approval of the global settlement is pending in
court. Continental Casualty and Pacific Indemnity have dismissed disputes
against each other which involved Fibreboard and were in litigation.
Prior to the settlement, the Corporation's property and casualty
subsidiaries had paid $40 million and had existing loss reserves of $545 million
to cover a portion of their obligation under these agreements. This amount
included $300 million of general liability incurred but not reported (IBNR)
reserves which were not previously classified as specific reserves for asbestos
claims since it was management's belief that doing so would increase the demands
of plaintiffs' attorneys. Additional loss reserves of $675 million were provided
in the third quarter of 1993 at the time the settlement was negotiated.
Management believes that, as a result of the global settlement agreement
and the trilateral agreement, the uncertainty of our exposure with respect to
asbestos-related bodily injury claims against Fibreboard has been greatly
reduced. However, if both the global settlement agreement and the trilateral
agreement are disapproved, there can be no assurance that the loss reserves
established for future claims would be sufficient to pay all amounts which
ultimately could become payable in respect of future asbestos-related bodily
injury claims against Fibreboard.
Other than Fibreboard, our remaining asbestos exposures are mostly limited
to peripheral regional defendants, principally distributors. We continue to
receive new asbestos claims and new exposures on existing claims as more
peripheral parties are drawn into litigation to replace the now defunct mines
and bankrupt manufacturers. The recent claims are complex in that they include
significant and yet unresolved liability issues. Further, we still do not know
the universe of potential claims.
Hazardous waste sites are another significant potential exposure. Under the
existing "Superfund" law and similar state statutes, when potentially
responsible parties (PRPs) fail to handle the clean-up, regulators will have the
work done and then attempt to establish legal liability against the PRPs. The
PRPs, with proper government authorization in many instances, disposed of toxic
materials at a waste dump site or transported the materials to the site. Most
sites have multiple PRPs. As the cost of environmental clean-up continues to
grow, PRPs and others continue to file claims with their insurance carriers.
Insurance policies issued to PRPs were not intended to cover the clean-up costs
of pollution and, in many cases, did not intend to cover the pollution itself.
Pollution was not a recognized hazard at the time many of these policies were
written. In some cases, however, more recent policies specifically excluded such
exposures. Ensuing litigation extends to issues of liability, coverage and other
policy provisions.
There is great uncertainty involved in estimating our liabilities related
to these claims. First, the underlying liabilities of the claimants are
extremely difficult to estimate. At any given clean-up site, the allocation of
financial responsibility among the governmental authorities and PRPs varies
greatly. Second, various courts have addressed liability and coverage issues
regarding pollution claims and have reached inconsistent conclusions in their
interpretation of several issues. These significant uncertainties are not likely
to be resolved in the near future.
Uncertainties also remain as to the Superfund law itself. The law, which is
subject to reauthorization in 1994, has generated far more litigation than it
has provided clean up. The Clinton Administration has recently unveiled its plan
for rewriting the Superfund law. The proposal creates a new Superfund insurance
trust and includes a new non-judicial arbitration process aimed at removing
Superfund disputes from the courts. It also creates a new tax on commercial
insurance companies to be used to fund the trust and to settle Superfund related
lawsuits between PRPs and their insurers. It also
24
<PAGE> 25
provides for some relaxation of clean-up standards under certain conditions. We
view this proposal as a positive first step. However, it does not yet come close
to achieving its essential objectives -- resolving 90% of Superfund claims in
litigation at a cost which is fair and affordable to the insurance industry. It
is important to note that the proposal does not address non-Superfund site
cases. For that reason, it does not cover all existing toxic waste litigation,
for example, sites that are subject to state law only.
Litigation costs continue to escalate, particularly for toxic waste claims.
A substantial portion of the funds expended to date has been for legal fees
incurred in the prolonged litigation of coverage issues. Many policies provide
an indemnity policy limit but an unlimited contract for defense costs. This
language in the policy sometimes leads to the payment of defense costs in
sizable multiples of the policy limits.
Reserves for asbestos and toxic waste claims cannot be estimated with
traditional loss reserving techniques. Case reserves and costs of related
litigation have been established where sufficient information has been developed
to indicate the involvement of a specific insurance policy. In addition, IBNR
reserves have been established to cover additional exposures on both known and
unasserted claims. These reserves are continually reviewed and updated. Other
than the $675 million increase in loss reserves related to the Fibreboard
settlement and the reclassification of $300 million of general liability IBNR
reserves as specific reserves for this settlement, the increase in loss reserves
relating to asbestos and toxic waste claims was $101 million in 1993 compared
with $120 million in 1992 and $88 million in 1991. Further increases in such
reserves in 1994 and future years are possible as legal and factual issues
concerning these claims are clarified, although the amounts cannot be reasonably
estimated.
During 1993, due to the $675 million increase in loss reserves related to
the Fibreboard settlement, we experienced overall unfavorable development of
$665 million on loss reserves established as of the previous year-end. This
compares with favorable development of $28 million and $29 million in 1992 and
1991, respectively. Such deficiency and redundancies were reflected in operating
results in these respective years. Excluding the effect of the $675 million
increase in loss reserves related to the Fibreboard settlement, we experienced
favorable development of $10 million during 1993. Each of the past three years
benefited from favorable claim frequency and severity trends for certain
liability classes; this was offset each year in varying degrees by increases in
loss reserves relating to asbestos and toxic waste claims.
Management believes that the aggregate loss reserves of the property and
casualty subsidiaries at December 31, 1993 were adequate to cover claims for
losses which had occurred, including both those known to us and those yet to be
reported. In establishing such reserves, management considers facts currently
known and the present state of the law and coverage litigation. However, given
the expansion of coverage and liability by the courts and the legislatures in
the past and the possibilities of similar interpretations in the future,
particularly as they relate to asbestos and toxic waste claims, as well as the
uncertainty in determining what scientific standards will be acceptable for
measuring hazardous waste site clean-up, additional increases in loss reserves
may emerge which may adversely affect results in future periods. This emergence
cannot reasonably be estimated.
INVESTMENTS AND LIQUIDITY
Investment income after taxes increased 8% in 1993 compared with 6% in
1992. Growth was primarily due to significant increases in invested assets,
which reflected strong cash flow from operations over the period, offset in part
by lower yields on new investments. The effective tax rate on our investment
income was 14.7% in 1993 compared with 14.3% in 1992 and 15.3% in 1991. The
increase in the effective tax rate in 1993 was due to the increase in the
federal corporate tax rate from 34% to 35%, offset in part by holding a larger
proportion of tax-exempt securities in our investment portfolio. In 1992, the
effective tax rate decreased due to our holding a larger proportion of
tax-exempt securities in our investment portfolio.
25
<PAGE> 26
Generally, premiums are received by our property and casualty subsidiaries
months or even years before we pay the losses under the policies purchased by
such premiums. These funds are used first to make current claim and expense
payments. The balance is invested to augment the investment income generated by
the existing portfolio. Historically, more than sufficient funds have been
provided from insurance revenues to pay losses, operating expenses and dividends
to the Corporation.
Cash available for investment was approximately $480 million in 1993
compared with $655 million in 1992 and $730 million in 1991. The decrease in
1993 was due to the $538 million paid in December into an escrow account related
to the Fibreboard settlement.
The main objective of the investment portfolio of the property and casualty
companies is to provide maximum support to the insurance underwriting
operations. Investment strategies are developed based on many factors including
underwriting results and our resulting tax position, fluctuations in interest
rates and regulatory requirements.
In 1993 and 1992, we invested new cash primarily in tax-exempt bonds. In
each year we tried to achieve the appropriate mix in our portfolio to balance
both investment and tax strategies. In 1993, we reduced our taxable bond
portfolio by approximately $225 million and increased our short-term
investments.
The property and casualty subsidiaries have consistently invested in high
quality marketable securities. Taxable bonds in our domestic portfolio comprise
U.S. Treasury, government agency and corporate issues. Approximately 90% of our
taxable bonds are either backed by the U.S. government or rated AA or better by
Moody's or Standard & Poor's. Of the tax-exempt bonds, practically all are rated
A or better, with approximately half rated AAA. Both taxable and tax-exempt
bonds have an average maturity of 9 years. Actual maturities could differ from
contractual maturities because borrowers may have the right to call or prepay
obligations. Common stocks are high quality and readily marketable. Foreign
investments are managed to provide liquidity to support insurance operations
outside of the United States, while minimizing our exposure to currency
fluctuations.
The property and casualty subsidiaries maintain sufficient investments in
highly liquid, short-term securities at all times to provide for immediate cash
needs. At year-end 1993, such investments were at a higher than normal level so
that funds are readily available to pay amounts related to the Fibreboard
settlement. The Corporation maintains bank credit facilities that are available
to respond to unexpected cash demands.
LIFE AND HEALTH INSURANCE
Life and health insurance earnings after taxes were $63 million in 1993
compared with $56 million in 1992 and $51 million in 1991. Premiums and policy
charges were $801 million in 1993 compared with $689 million in 1992 and $634
million in 1991.
PERSONAL INSURANCE
Earnings from personal insurance were $37 million in 1993 compared with $34
million in 1992 and $33 million in 1991. Earnings increased in 1993 primarily
due to an increase in the spread between interest earned on our invested assets
and interest credited to policyholders on interest-sensitive products. Earnings
in 1992 were adversely affected by higher mortality experience, primarily in our
universal life and term life products. As the result of various adjustments, the
tax rate on personal insurance earnings was 26%, 18% and 28% in 1993, 1992 and
1991, respectively.
Premiums and policy charges amounted to $240 million in 1993 compared with
$214 million in 1992 and $192 million in 1991. New sales of personal insurance
as measured by annualized premiums were $88 million in 1993 compared with $71
million in 1992 and $54 million in 1991. Marketing initiatives conducted with
our property and casualty insurance distribution system together with the
increasing popularity of variable universal life products have contributed to
our growth.
26
<PAGE> 27
GROUP INSURANCE
Earnings from group insurance were $26 million in 1993 compared with $22
million in 1992 and $18 million in 1991. Group health rate levels have kept pace
with medical costs over this three year period. Group life insurance, which is
primarily marketed as an ancillary product to group health insurance,
contributed modestly to earnings in each of the last three years.
Premiums were $561 million in 1993 compared with $475 million in 1992 and
$442 million in 1991. New group sales as measured by annualized premiums were
$323 million in 1993 compared with $118 million in 1992 and $161 million in
1991.
Approximately 80% of our group health premiums are written in New York and
New Jersey. Both states have adopted legislation which eliminates health
insurance underwriting, creates community based rating and limits pre-existing
condition exclusions for insured groups with fewer than 50 covered lives. As the
result of this legislation, we had anticipated a reduction in premium and sales
levels in 1993. However, we were able to offer a competitive product in New
York, which is our major market, at a time when several insurers reduced their
market share, resulting in substantial increases in premiums and sales. Sales
decreased in 1992 due to our adherence to disciplined pricing as well as state
legislative actions which disrupted our markets in several jurisdictions.
We expect higher levels of competition in the small group market in 1994
and, as a result, anticipate that we will experience a reduction in premium and
sales levels.
Enacted and contemplated health care reform on both a national and state
level are reshaping the health insurance industry. Federal legislation on health
insurance is being considered which, if enacted, could create less favorable
conditions for the health insurance industry. Significant changes are not
expected to become operational for some time. It is currently not possible to
predict the long term impact of health care reforms on our business.
We believe that traditional indemnity plans will be a less viable product
option in the long term for both the consumer and the companies selling such
plans. Recognizing this, we have accelerated our involvement in managed care and
also worked to lessen our dependence on medical premium. The most visible action
we have taken in 1993 is the development of ChubbHealth Inc., a health
maintenance organization that will serve the New York City metropolitan area.
ChubbHealth is in the final stages of licensing and will be operational during
the first half of 1994.
We have also increased our emphasis on managed care outside New York by
offering preferred provider organizations, which are networks of hospitals,
clinics and doctors that offer cost savings compared with traditional indemnity
plans. Ancillary coverages, like dental, long-term disability and group life,
complete the product offering to this market segment.
INVESTMENTS AND LIQUIDITY
Gross investment income increased 7% in 1993 compared with 8% in 1992.
Premium receipts in excess of payments for benefits and expenses, together with
investment income, continue to provide cash for new investments. New cash
available amounted to $225 million in 1993 compared with $120 million in 1992
and $115 million in 1991. The increase in new cash in 1993 was due to the
significant increase in group health premiums and to new single premium sales.
In 1993 and 1992, new cash was invested primarily in mortgage-backed
securities and corporate bonds. We invest predominantly in investment grade
current coupon fixed-income securities with stable cash flow characteristics and
maturities which are consistent with life insurance reserve requirements.
Approximately 95% are investment grade and nearly half are rated AAA. We
maintain sufficient funds in short-term securities to meet unusual needs for
cash.
27
<PAGE> 28
REAL ESTATE DEVELOPMENT
Real estate operations resulted in a loss after taxes of $2 million in 1993
compared with income of $10 million in 1992 and $25 million in 1991. Earnings
were adversely affected by progressively higher portions of interest costs being
charged directly to expense rather than being capitalized and by provisions each
year for possible uncollectible receivables related to mortgages. Results were
also adversely affected in 1993 by a $3 million tax charge related to the
federal corporate tax rate increase. Revenues were $161 million in 1993 compared
with $150 million in 1992 and $141 million in 1991.
Our commercial real estate activities centered around acquiring suburban,
multi-site land parcels in locations considered prime for office development,
and then developing the land in progressive stages. We expanded our activities
to include a few metropolitan office building projects. We develop real estate
properties ourselves rather than through third party developers. We are
distinguished from most other real estate developers in that we coordinate all
phases of the development process from concept to completion. Upon completion of
development, the properties may be either owned and operated for our own account
or sold to third parties. We directly manage virtually all of the properties
which we either own or have sold and retained interests in through secured
loans.
Our continuing investment interests in joint ventures generally consist of
the ownership and lease of the underlying land and the management and operation
of the buildings. Our agreements with joint ventures to manage all aspects of
the ventured properties, including debt structures, tenant leasing, and building
improvements and maintenance, have put us in a strong position to protect our
ongoing financial interests in the current difficult real estate environment.
The real estate industry continues to suffer from a significantly reduced
demand for real estate investment. For the past several years, the supply of
available office space has exceeded the demand. The slowdown in the economy
exacerbated the problem as businesses consolidated their facilities, increasing
the supply of available space. While selected real estate markets have
experienced increases in leasing activity and some stability in rental rates,
the oversupply of available office space for lease in most markets and the
resultant depressed rental rates will continue to cause downward pressure on the
earnings of the real estate industry.
In light of the current real estate market conditions, we have curtailed
our construction of new office buildings in recent years. In 1991 and 1992, we
completed high-rise office buildings in Washington, D.C. and New Jersey, which
are currently approximately 95% leased. Also, in 1991, we acquired a 1.2 million
square foot office building, which is 87% leased, and adjacent land in Dallas
for approximately $200 million, which includes a $114 million assumed mortgage.
In 1993, we focused on completing and leasing newly-constructed facilities
and maintaining established properties at high occupancy levels. We also
commenced construction on three new suburban office buildings in locations where
there are indications of tenant interest. Other than this new construction,
development activities consist almost exclusively of preconstruction type
efforts such as site planning, zoning and similar activities. As a consequence,
we expect revenues for the next several years to come from ongoing income from
owned properties and from management and financing activities related to
previously sold properties or properties held in joint ventures. This does not
preclude us from entertaining proposals to purchase our properties when such
offers provide a reasonable return.
Our vacancy rates are better than the average in substantially all markets
in which we operate. We have been successful in both retaining existing tenants
and securing new ones and have not had significant credit problems with tenants.
During 1993, a total of 1,710,000 square feet was leased compared with 1,790,000
square feet in 1992 and 1,402,000 square feet in 1991. At December 31, 1993, we
owned or had interests in 10,915,000 square feet of office and industrial space.
Our vacancy rate was 10% at year-end 1993 compared with 14% at year-end 1992 and
17% at year-end 1991. The high vacancy rate in 1991 was the result of several
multi-year projects being completed in a difficult leasing market.
28
<PAGE> 29
The decreases in the vacancy rate in 1992 and 1993 were due to our ability to
market a significant amount of the new space which became available in 1991.
In certain markets, renewing leases in established buildings has been
difficult as newly-constructed space is available nearby at similar rates. While
we have experienced significant leasing activity over the past two years, we
have had to enter into multiple year leases at depressed market rental rates.
This, together with the lack of construction and transaction based activity,
will place continued pressure on our real estate earnings for the next several
years. We expect that in 1994 a larger portion of interest costs will be charged
directly to expense as a result of several recently completed projects becoming
fully operational during 1993 and development activities being curtailed at some
of our office parks.
Ultimate net realizable value for real estate assets is determined based on
our ability to fully recover costs through a future revenue stream supported
principally by rental revenues. In many instances, there currently is not an
active market for commercial real estate. Therefore, the prices which might be
realized if we were forced to liquidate such properties on an immediate sale
basis would probably be less than the carrying values. In light of current
market conditions and our intent and ability to hold properties for the long
term, our primary focus is to ensure that we can recover our costs through
ownership and operation rather than sale.
Individual buildings and development sites are analyzed on a continuing
basis with estimates made of both additional costs to be incurred to complete
development where necessary and the estimated revenues and operating costs of
the property in the future. The time value of money is not considered in
assessing revenues versus costs. Revenue assumptions take into account local
market conditions with respect to the lease-up periods, occupancy rates, and
current and future construction activity. There are uncertainties as to the
actual realization of the assumptions relative to future revenues and future
costs. However, management does not believe there is any permanent impairment in
real estate carrying values.
The loans receivable issued in connection with our joint venture activities
include primarily purchase money mortgages. Such loans, which represent only 2%
of consolidated assets, are generally collateralized by buildings and land. The
ultimate collectibility of such loans, of which no significant amounts are due
in the near term, is evaluated continuously and appropriate reserves
established. Our agreements to manage all aspects of the ventured properties
have played a significant role in enabling us to control potential
collectibility issues related to these receivables. We have had no significant
foreclosures or in-substance foreclosures. The reserve for potential
uncollectible amounts was increased by $22 million in both 1993 and 1992 and $9
million in 1991, principally related to loans on selected properties currently
experiencing high vacancy rates. Management believes the reserve at December 31,
1993 adequately reflects the current condition of the portfolio; however, if
conditions in the real estate market do not improve, additional reserves may be
required.
The fair value of these loans receivable is estimated through the use of
valuation techniques which consider the net cash flows of the properties serving
as the underlying collateral for the loans. The fair value of the loans
represents a point-in-time estimate that is not relevant in predicting future
earnings or cash flows related to such loans. The difference between the
aggregate fair value of $394 million and the carrying value of $425 million at
December 31, 1993 is not expected to be realized as we intend to hold the loan
portfolio to maturity.
Our Florida residential development activities continued during 1993. All
but nine units at a 181 unit mid-rise condominium project completed in 1991 have
been sold. We completed construction of a 120 unit oceanfront high-rise
condominium during 1992. At year-end 1993, 103 units were sold. Construction of
a 104 unit mid-rise condominium project commenced in 1993 with 41 units already
under contract.
Real estate activities are funded with short-term credit instruments,
primarily commercial paper, as well as term loans and debt issued by the
Corporation and Chubb Capital Corporation, a subsidiary
29
<PAGE> 30
of the Corporation. The weighted average interest cost on short-term credit
instruments approximated 3.3% in 1993 compared with 4.6% in 1992 and 7.2% in
1991. The interest rates on term loans ranged from 4.3% to 9.9% in 1993.
Cash from operations combined with the ability to utilize the Corporation's
commercial paper facility will provide sufficient funds for 1994. Term loans and
mortgages which become due in 1994 are expected in most cases to be refinanced
under similar terms.
CORPORATE
The Corporation called for redemption on April 15, 1991 the $200 million of
5 1/2% convertible notes that were due in 1993. Prior to the redemption date,
all but $85,000 of the notes were converted, resulting in the issuance of
4,687,123 shares of the Corporation's common stock.
The Corporation has outstanding $150 million of unsecured 8 3/4% notes due
in 1999. In each of the years 1995 through 1998, the Corporation will pay as a
mandatory sinking fund an amount sufficient to redeem $30 million of principal.
Chubb Capital has outstanding $100 million of unsecured 8 5/8% notes due in
1995, which are guaranteed by the Corporation. The proceeds have been used to
support our real estate operations.
In May 1991, Chubb Capital sold in the Eurodollar market $250 million of 6%
subordinated notes due in 1998. The notes are guaranteed by the Corporation and
exchangeable into its common stock. Of the proceeds, $150 million has been used
to support our real estate operations.
In February 1993, Chubb Capital sold $150 million of 6% notes due in 1998
and $100 million of 6 7/8% notes due in 2003. The notes are guaranteed by the
Corporation. A substantial portion of the proceeds has been used to repay
certain short-term debt and term loans incurred to support the real estate
operations.
In November 1991, the Corporation entered into a revolving credit agreement
with a group of banks that provides for unsecured borrowings of up to $300
million. There have been no borrowings under this agreement. The agreement
terminates on November 30, 1994 at which time any loans then outstanding become
payable. Management anticipates that a similar credit agreement will replace
this agreement.
In November 1992, the Corporation and Sun Alliance partially reduced their
investment in the shares of each other. The proceeds from our sale of Sun
Alliance shares were approximately $230 million. The sales have not affected the
ongoing business relationship between the Corporation's property and casualty
subsidiaries and Sun Alliance.
Investment income earned on corporate invested assets and interest expense
not allocable to the operating subsidiaries are reflected in the corporate
segment. Corporate income after taxes was $14 million in 1993 compared with $20
million in 1992 and $16 million in 1991.
INVESTMENT GAINS AND LOSSES
Investment gains were realized by the Corporation and its insurance
subsidiaries in 1993, 1992 and 1991. Such gains before taxes consisted of the
following:
<TABLE>
<CAPTION>
1993 1992 1991
---- ---- ---
<S> <C> <C> <C>
(in millions)
Equity securities......................................... $ 60 $133 $ 3
Fixed maturities.......................................... 173 54 63
---- ---- ---
$233 $187 $66
==== ==== ===
</TABLE>
30
<PAGE> 31
A restructuring of the equity security portfolio begun in 1992 resulted in
significant realized investment gains in 1992 and 1993. In addition,
approximately $75 million of investment gains were realized in 1992 from the
Corporation's partial sale of its investment in Sun Alliance.
Equity securities are reported in our financial statements at market value.
The unrealized appreciation on such securities is reflected as a separate
component of shareholders' equity, net of applicable deferred income tax.
The Corporation and its insurance subsidiaries purchase long-term fixed
maturity securities which have income, duration and credit quality
characteristics which fit the long-range strategic plans of our businesses. We
monitor the mix of taxable and tax-exempt fixed maturity securities in order to
maximize after-tax returns.
Those fixed maturity investments which may be sold prior to maturity to
support our investment strategies, such as in response to changes in interest
rates and the yield curve or to maximize after-tax returns, are considered
available for sale and carried at the lower of the aggregate amortized cost or
market value. At each of the last three year-ends, the aggregate market value of
these securities has exceeded their amortized cost. Those fixed maturities which
the Corporation and its insurance subsidiaries have the ability and intent to
hold to maturity are considered held for investment and carried at amortized
cost.
A primary reason for the sale of fixed maturities in each of the last three
years has been to improve our after-tax portfolio yield without sacrificing
quality, where market opportunities have existed to do so. Declining interest
rates and the resulting appreciation of our fixed maturity securities made it
difficult to adjust our portfolio during those years without realizing
significant investment gains. The significantly higher gains in 1993 were due to
the sale of fixed maturities in the first half of the year as part of the
realignment of our portfolio and in the latter part of the year to realize gains
to partially offset the reduction of statutory surplus of the property and
casualty subsidiaries resulting from the decrease in earnings related to the
Fibreboard settlement.
At December 31, 1993, 1992 and 1991, the unrealized market appreciation of
our fixed maturity portfolio was $736 million, $523 million and $490 million,
respectively. Such unrealized appreciation was not reflected in the consolidated
financial statements. The 1993 amount comprises fixed maturities with gross
unrealized appreciation aggregating $771 million and those with gross unrealized
depreciation aggregating $35 million.
FEDERAL INCOME TAXES
The Omnibus Budget Reconciliation Act of 1993 was enacted in August 1993.
One provision of the Act increased the federal corporate tax rate from 34% to
35%, retroactive to January 1, 1993. In addition to applying the higher tax rate
to pre-tax income for 1993, the federal income tax provision for 1993 reflects
the effect of the rate increase on deferred income tax assets and liabilities.
This effect was a tax benefit of approximately $5 million. The effect on the
various business segments was as follows:
<TABLE>
<CAPTION> Tax
Provision
(Benefit)
-------------
<S> <C>
(in millions)
Property and casualty insurance
Underwriting.................................................. $(11)
Investment income............................................. 2
Life and health insurance....................................... 1
Real estate..................................................... 3
</TABLE>
In 1992, property and casualty underwriting income after taxes included a
benefit of $12 million resulting from a reversal of income tax reserves based on
a settlement of prior years' taxes. Life and
31
<PAGE> 32
health insurance income after taxes included similar benefits of $5 million and
$3 million in 1993 and 1992, respectively.
The Tax Reform Act of 1986 requires the property and casualty subsidiaries
to discount loss reserves for tax purposes as of January 1, 1987 and provides
that the initial discount on such loss reserves be excluded from taxable income.
The benefit of this exclusion amounted to $7 million in 1991 and $6 million in
1992. There was no similar benefit in 1993 since, for accounting purposes, the
remaining "fresh start" benefit was recognized effective January 1, 1993 as part
of the cumulative effect of the change in accounting principle upon the
Corporation's adoption of the new accounting requirements for income taxes.
The Corporation's federal income tax payments for 1991 and 1992 were $160
million and $175 million, respectively. Tax payments for 1993 are expected to
approximate only $80 million due to the substantial underwriting loss resulting
from the increase in loss reserves related to the settlement of asbestos-related
litigation.
NEW ACCOUNTING PRONOUNCEMENTS
In 1993, the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions, SFAS No. 109, Accounting for Income Taxes, and SFAS No.
113, Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts. These pronouncements and their effect on the
consolidated financial statements are discussed in Note (2) of the Notes to
Consolidated Financial Statements incorporated by reference from the
Corporation's 1993 Annual Report to Shareholders.
The Financial Accounting Standards Board has also issued SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, which is effective in 1995,
and SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, which is effective in 1994. These pronouncements, which will affect
the Corporation's consolidated financial statements when adopted, are discussed
in Note (1)(o) of the Notes to Consolidated Financial Statements incorporated by
reference from the Corporation's 1993 Annual Report to Shareholders.
SUBSEQUENT EVENTS
In January 1994, the Los Angeles area experienced a major earthquake. Also,
in January 1994, the Eastern and Midwestern parts of the United States
experienced severe winter storms. Losses from these catastrophes are estimated
to amount to $125 million net of reinsurance, including $90 million from the
earthquake and $35 million from the storm activity. The effect of these
catastrophe losses on after-tax earnings is expected to approximate $81 million,
which will be reflected in the first quarter of 1994. Additional claims may be
reported which could increase the estimate.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of the Corporation at December 31, 1993
and 1992 and for each of the three years in the period ended December 31, 1993
and the Report of Independent Auditors thereon and the Corporation's unaudited
quarterly financial data for the two-year period ended December 31, 1993 are
incorporated by reference from the Corporation's 1993 Annual Report to
Shareholders, pages 40 through 63.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
32
<PAGE> 33
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Corporation's Directors is incorporated by
reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Shareholders on April 26, 1994, pages 2 through 5. Information
regarding the executive officers is included in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Corporation's definitive Proxy Statement
for the Annual Meeting of Shareholders on April 26, 1994, pages 14 through 30
other than the Performance Graph and the Organization and Compensation Committee
Report appearing on pages 19 through 26.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Corporation's definitive Proxy Statement
for the Annual Meeting of Shareholders on April 26, 1994, pages 6 through 9.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Corporation's definitive Proxy Statement
for the Annual Meeting of Shareholders on April 26, 1994, pages 30 through 32.
33
<PAGE> 34
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS AND 2. SCHEDULES
The financial statements and schedules listed in the accompanying
index to financial statements and financial statement schedules are filed
as part of this report.
3. EXHIBITS
The exhibits listed in the accompanying index to exhibits are filed as
part of this report.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the last quarter of the
period covered by this report.
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which undertaking shall be
incorporated by reference into registrant's Registration Statements on Form S-8
Nos. 33-12208 (filed June 12, 1987), 33-29185 (filed June 7, 1989), and 33-30020
(filed July 18, 1989):
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
34
<PAGE> 35
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS ANNUAL REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
THE CHUBB CORPORATION
(REGISTRANT)
March 4, 1994
By /s/ DEAN R. O'HARE
----------------------------
(DEAN R. O'HARE, CHAIRMAN)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DEAN R. O'HARE Chairman, Chief Executive March 4, 1994
---------------------------- Officer and Director
(DEAN R. O'HARE)
/s/ JOHN C. BECK Director March 4, 1994
----------------------------
(JOHN C. BECK)
/s/ PERCY CHUBB, III Vice Chairman, Chief Financial March 4, 1994
---------------------------- Officer and Director
(PERCY CHUBB, III)
/s/ JOEL J. COHEN Director March 4, 1994
----------------------------
(JOEL J. COHEN)
/s/ HENRY U. HARDER Director March 4, 1994
----------------------------
(HENRY U. HARDER)
/s/ ROBERT V. LINDSAY Director March 4, 1994
----------------------------
(ROBERT V. LINDSAY)
Director March , 1994
-----------------------------
(THOMAS C. MACAVOY)
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GERTRUDE G. MICHELSON Director March 4, 1994
----------------------------
(GERTRUDE G. MICHELSON)
/s/ EMIL MOSBACHER, JR. Director March 4, 1994
----------------------------
(EMIL MOSBACHER, JR.)
/s/ ERNESTA G. PROCOPE Director March 4, 1994
----------------------------
(ERNESTA G. PROCOPE)
/s/ FREDERIC L. ROCKEFELLER Director March 4, 1994
----------------------------
(FREDERIC L. ROCKEFELLER)
/s/ WARREN B. RUDMAN Director March 4, 1994
----------------------------
(WARREN B. RUDMAN)
/s/ DAVID G. SCHOLEY Director March 4, 1994
----------------------------
(DAVID G. SCHOLEY)
/s/ LAWRENCE M. SMALL Director March 4, 1994
----------------------------
(LAWRENCE M. SMALL)
/s/ RICHARD D. SMITH President and Director March 4, 1994
----------------------------
(RICHARD D. SMITH)
/s/ ROBERT G. STONE, JR. Director March 4, 1994
----------------------------
(ROBERT G. STONE, JR.)
/s/ RICHARD D. WOOD Director March 4, 1994
----------------------------
(RICHARD D. WOOD)
/s/ HENRY B. SCHRAM Senior Vice President and March 4, 1994
---------------------------- Chief Accounting Officer
(HENRY B. SCHRAM)
</TABLE>
36
<PAGE> 37
THE CHUBB CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
COVERED BY REPORT OF INDEPENDENT AUDITORS
(ITEM 14(A))
<TABLE>
<CAPTION>
ANNUAL REPORT TO
SHAREHOLDERS FORM 10-K
PAGE PAGE
---------------- ------------
<S> <C> <C>
Report of Independent Auditors 62 --
Consolidated Balance Sheets at December 31, 1993 and 1992 41 --
Consolidated Statements of Income for the Years Ended Decem-
ber 31, 1993, 1992 and 1991 40 --
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1993, 1992 and 1991 42 --
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1993, 1992 and 1991 43 --
Notes to Consolidated Financial Statements 44 --
Supplementary Information (unaudited)
Quarterly Financial Data 63 --
Schedules:
I -- Consolidated Summary of Investments -- Other
than Investments in Related Parties at
December 31, 1993 -- 39
III -- Condensed Financial Information of Registrant at
December 31, 1993 and 1992 and for the Years
Ended December 31, 1993, 1992 and 1991 -- 40
V -- Consolidated Supplementary Insurance Information
at and for the Years Ended December 31, 1993,
1992 and 1991 -- 43
VI -- Consolidated Reinsurance at and for the Years
Ended December 31, 1993, 1992 and 1991 -- 44
IX -- Consolidated Short Term Borrowings at and for
the Years Ended December 31, 1993, 1992 and
1991 -- 45
X -- Consolidated Supplementary Property and Casualty
Insurance Information for the Years Ended
December 31, 1993, 1992 and 1991 -- 46
</TABLE>
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements and notes thereto.
The consolidated financial statements and supplementary information listed
in the above index, which are included in the Annual Report to Shareholders of
The Chubb Corporation for the year ended December 31, 1993, are hereby
incorporated by reference.
37
<PAGE> 38
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of The Chubb Corporation of our report dated February 25, 1994, included
in the 1993 Annual Report to Shareholders of The Chubb Corporation.
Our audits also included the financial statement schedules of The Chubb
Corporation listed in Item 14(a). These schedules are the responsibility of the
Corporation's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8: No. 33-12208, No. 33-29185, No. 33-30020, No. 33-49230 and
No. 33-49232) of our report dated February 25, 1994, with respect to the
consolidated financial statements incorporated herein by reference, and our
report included in the preceding paragraph with respect to the financial
statement schedules included in this Annual Report (Form 10-K) of The Chubb
Corporation.
/s/ ERNST & YOUNG
New York, New York
March 28, 1994
38
<PAGE> 39
THE CHUBB CORPORATION
SCHEDULE I
CONSOLIDATED SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
(IN THOUSANDS)
DECEMBER 31, 1993
<TABLE>
<CAPTION>
AMOUNT
AT WHICH
COST OR SHOWN IN
AMORTIZED MARKET THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
------------------ ---------- --------- -------------
<S> <C> <C> <C>
Short term investments......................... $ 531,282 $ 531,282 $ 531,282
----------- ----------- -----------
Fixed maturities
Bonds
United States Government and government
agencies and authorities................ 2,363,772 2,397,981 2,363,772
States, municipalities and political
subdivisions............................ 5,469,480 5,986,244 5,469,480
Foreign................................... 776,923 832,174 776,923
Public utilities.......................... 117,646 128,763 117,646
All other corporate bonds................. 1,455,284 1,573,625 1,455,284
----------- ----------- -----------
Total bonds..................... 10,183,105 10,918,787 10,183,105
Redeemable preferred stocks.................. 3,359 4,166 3,359
----------- ----------- -----------
Total fixed maturities.......... 10,186,464 10,922,953 10,186,464
----------- ----------- -----------
Equity securities
Common stocks
Public utilities.......................... 19,798 25,393 25,393
Banks, trusts and insurance companies..... 97,931 166,230 166,230
Industrial, miscellaneous and other....... 544,989 688,703 688,703
----------- ----------- -----------
Total common stocks............. 662,718 880,326 880,326
Non-redeemable preferred stocks.............. 47,187 49,721 49,721
----------- ----------- -----------
Total equity securities......... 709,905 930,047 930,047
----------- ----------- -----------
Mortgage loans................................. 15,121 15,121 15,121
Policy loans................................... 179,195 179,195 179,195
----------- ----------- -----------
Total invested assets........... $11,621,967 $12,578,598 $11,842,109
=========== =========== ===========
</TABLE>
39
<PAGE> 40
THE CHUBB CORPORATION
SCHEDULE III
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS -- PARENT COMPANY ONLY
(IN THOUSANDS)
DECEMBER 31, 1993 AND 1992
<TABLE>
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
Assets
Invested Assets
Short Term Investments..................................... $ 62,805 $ 40,547
Taxable Fixed Maturities -- Available-for-Sale
(market $340,131 and $386,123)........................... 342,534 373,842
Equity Securities (cost $19,682 and $17,335)............... 34,987 24,785
---------- ----------
TOTAL INVESTED ASSETS................................. 440,326 439,174
Cash.......................................................... 180 364
Investment in Consolidated Subsidiaries....................... 3,941,408 3,809,542
Other Assets.................................................. 117,563 49,505
---------- ----------
TOTAL ASSETS.......................................... $4,499,477 $4,298,585
========== ==========
Liabilities
Dividend Payable to Shareholders.............................. $ 37,715 $ 35,001
Payable to Chubb Capital Corporation.......................... 77,290 55,000
Long Term Debt................................................ 150,000 150,000
Accrued Expenses and Other Liabilities........................ 38,343 104,182
---------- ----------
TOTAL LIABILITIES..................................... 303,348 344,183
---------- ----------
Shareholders' Equity
Preferred Stock -- Authorized 4,000,000 Shares;
$1 Par Value; Issued -- None............................... -- --
Common Stock -- Authorized 300,000,000 Shares;
$1 Par Value; Issued 87,709,465 and 87,519,560 Shares...... 87,709 87,520
Paid-In Surplus............................................... 782,186 772,815
Retained Earnings............................................. 3,313,140 3,139,707
Foreign Currency Translation Gains (Losses), Net of Income Tax 327 (5,164)
Unrealized Appreciation of Equity Securities,
Net of Deferred Income Tax................................. 143,093 96,559
Receivable from Employee Stock Ownership Plan................. (130,326) (137,035)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY............................ 4,196,129 3,954,402
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ $4,499,477 $4,298,585
========== ==========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in the Corporation's 1993
Annual Report to Shareholders.
40
<PAGE> 41
THE CHUBB CORPORATION
SCHEDULE III
(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME -- PARENT COMPANY ONLY
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Investment Income...................................... $ 28,015 $ 49,550 $ 47,081
Realized Investment Gains.............................. 21,076 10,926 10,433
Investment Expenses.................................... (917) (689) (780)
Corporate Expenses..................................... (24,220) (23,150) (13,900)
-------- -------- --------
23,954 36,637 42,834
Federal and Foreign Income Tax (Credit)................ (9,050) 16,753 12,349
-------- -------- --------
33,004 19,884 30,485
Equity in Income Before Cumulative Effect of Changes in
Accounting Principles of Consolidated Subsidiaries... 311,213 597,215 521,499
-------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES........................... 344,217 617,099 551,984
Cumulative Effect of Changes in Accounting
Principles, Net of Tax............................... 68,600 -- --
Equity in Cumulative Effect of Changes in
Accounting Principles of Consolidated Subsidiaries... (88,600) -- --
-------- -------- --------
NET INCOME........................................ $324,217 $617,099 $551,984
======== ======== ========
</TABLE>
The Corporation and its domestic subsidiaries file a consolidated federal
income tax return. The Corporation's federal income tax represents its share of
the consolidated federal income tax under the Corporation's tax allocation
agreements with its subsidiaries.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in the Corporation's 1993
Annual Report to Shareholders.
41
<PAGE> 42
THE CHUBB CORPORATION
SCHEDULE III
(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income........................................... $ 324,217 $ 617,099 $ 551,984
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Equity in Net Income of Consolidated Subsidiaries
(after reduction of $88,600 in 1993 due to
cumulative effect of changes in accounting
principles)..................................... (222,613) (597,215) (521,499)
Realized Investment Gains......................... (21,076) (10,926) (10,433)
Cumulative Effect of Changes in Accounting
Principles...................................... (68,600) -- --
Other, Net........................................ 30,305 (1,335) 28,818
--------- --------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES......................... 42,233 7,623 48,870
--------- --------- ---------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities.............. 463,625 228,855 181,256
Proceeds from Maturities of Fixed Maturities......... 6,760 2,490 18,945
Proceeds from Sales of Equity Securities............. 4,957 15,875 13,485
Purchases of Fixed Maturities........................ (421,876) (367,824) (491,894)
Purchases of Equity Securities....................... (6,191) (7,923) (16,062)
Decrease (Increase) in Short Term Investments, Net... (22,258) 15,188 76,969
Dividends Received from Consolidated Subsidiaries.... 148,008 224,008 204,005
Capital Contributions to Consolidated Subsidiaries... (10,280) -- (25,600)
Other, Net........................................... (91,175) 952 1,304
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES......................... 71,570 111,621 (37,592)
--------- --------- ---------
Cash Flows from Financing Activities
Increase (Decrease) in Payable to Chubb
Capital Corporation............................... 22,290 (7,800) 62,800
Dividends Paid to Shareholders....................... (148,070) (136,772) (122,625)
Other, Net........................................... 11,793 25,664 48,556
--------- --------- ---------
NET CASH USED IN
FINANCING ACTIVITIES......................... (113,987) (118,908) (11,269)
--------- --------- ---------
Net Increase (Decrease) in Cash........................ (184) 336 9
Cash at Beginning of Year.............................. 364 28 19
--------- --------- ---------
CASH AT END OF YEAR............................. $ 180 $ 364 $ 28
--------- --------- ---------
--------- --------- ---------
</TABLE>
In 1992, $401,634,000 of fixed maturities and equity securities was
contributed at cost to a consolidated investment company subsidiary of the
Corporation. In 1991, $199,915,000 of long term debt was converted into
4,687,123 shares of common stock of the Corporation. These noncash transactions
have been excluded from the statements of cash flows.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in the Corporation's 1993
Annual Report to Shareholders.
42
<PAGE> 43
THE CHUBB CORPORATION
SCHEDULE V
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------
FUTURE OTHER
POLICY POLICY
DEFERRED BENEFITS, CLAIMS
POLICY CLAIMS AND AND
ACQUISITION CLAIM UNEARNED BENEFITS
SEGMENT COSTS EXPENSES PREMIUMS PAYABLE
------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
1993
Property and Casualty Insurance
Personal................................. $ 133,565 $ 527,316 $ 423,575
Standard Commercial...................... 157,347 3,464,535 588,697
Specialty Commercial..................... 162,461 2,158,605 624,166
Reinsurance Assumed...................... 36,329 299,590 116,130
Investments..............................
---------- ---------- ----------
489,702 6,450,046 1,752,568
Life and Health Insurance.................. 522,544 2,185,759 $79,260
---------- ---------- ---------- -------
$1,012,246 $8,635,805 $1,752,568 $79,260
========== ========== ========== =======
1992
Property and Casualty Insurance
Personal................................. $ 133,300 $ 521,429 $ 416,639
Standard Commercial...................... 149,515 2,581,948 556,068
Specialty Commercial..................... 147,608 1,946,307 563,346
Reinsurance Assumed...................... 24,553 217,930 75,058
Investments..............................
---------- ---------- ----------
454,976 5,267,614 1,611,111
Life and Health Insurance.................. 474,293 1,950,397 $71,708
---------- ---------- ---------- -------
$ 929,269 $7,218,011 $1,611,111 $71,708
========== ========== ========== =======
1991
Property and Casualty Insurance
Personal................................. $ 129,638 $ 518,045 $ 410,204
Standard Commercial...................... 149,360 2,361,657 536,248
Specialty Commercial..................... 140,072 1,677,240 520,551
Reinsurance Assumed...................... 20,955 186,922 64,890
Investments..............................
---------- ---------- ----------
440,025 4,743,864 1,531,893
Life and Health Insurance.................. 445,505 1,845,655 $65,382
---------- ---------- ---------- -------
$ 885,530 $6,589,519 $1,531,893 $65,382
========== ========== ========== =======
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------
PREMIUMS BENEFITS, AMORTIZATION
EARNED CLAIMS, OF DEFERRED
AND NET LOSSES AND POLICY OTHER
POLICY INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS
SEGMENT CHARGES INCOME EXPENSES COSTS EXPENSES WRITTEN
------- ---------- ---------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1993
Property and Casualty Insurance
Personal................................. $ 807,550 $ 474,786 $ 256,968 $ 45,260 $ 814,486
Standard Commercial...................... 1,294,182 1,547,400 313,892 75,637 1,326,811
Specialty Commercial..................... 1,208,672 700,868 315,252 90,968 1,269,492
Reinsurance Assumed...................... 194,434 156,044 62,855 235,506
Investments.............................. $533,709*
---------- -------- ---------- ---------- -------- ----------
3,504,838 533,709 2,879,098 948,967 211,865 $3,646,295
==========
Life and Health Insurance.................. 801,236 203,793 669,422 63,138 183,740
---------- -------- ---------- ---------- --------
$4,306,074 $737,502 $3,548,520 $1,012,105 $395,605
========== ======== ========== ========== ========
1992
Property and Casualty Insurance
Personal................................. $ 789,923 $ 526,809 $ 254,693 $ 44,579 $ 796,358
Standard Commercial...................... 1,113,654 800,067 308,880 75,583 1,133,474
Specialty Commercial..................... 1,108,913 629,443 298,754 83,822 1,151,708
Reinsurance Assumed...................... 150,798 141,810 49,500 160,966
Investments.............................. $493,455*
---------- -------- ---------- ---------- -------- ----------
3,163,288 493,455 2,098,129 911,827 203,984 $3,242,506
==========
Life and Health Insurance.................. 689,173 190,449 591,009 56,784 157,328
---------- -------- ---------- ---------- --------
$3,852,461 $683,904 $2,689,138 $ 968,611 $361,312
========== ======== ========== ========== ========
1991
Property and Casualty Insurance
Personal................................. $ 804,410 $ 527,670 $ 258,799 $ 45,332 $ 814,690
Standard Commercial...................... 1,088,635 734,891 305,698 77,644 1,115,751
Specialty Commercial..................... 1,000,078 554,048 266,385 80,280 1,034,749
Reinsurance Assumed...................... 144,045 124,744 45,783 147,074
Investments.............................. $469,495* 266,385 80,280 1,034,74
---------- -------- ---------- ---------- -------- ----------
3,037,168 469,495 1,941,353 876,665 203,256 $3,112,264
==========
Life and Health Insurance.................. 634,016 175,512 527,551 59,525 149,196
---------- -------- ---------- ---------- --------
$3,671,184 $645,007 $2,468,904 $ 936,190 $352,452
========== ======== ========== ========== ========
</TABLE>
* Property and casualty assets are available for payment of claims and
expenses for all classes of business; therefore, such assets and the related
investment income have not been identified with specific groupings of classes of
business.
Information as of December 31, 1993, 1992 and 1991 and for the years then
ended is presented net of related reinsurance amounts.
43
<PAGE> 44
THE CHUBB CORPORATION
SCHEDULE VI
CONSOLIDATED REINSURANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENTAGE OF
CEDED ASSUMED AMOUNT
DIRECT TO OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------ --------- ---------- ------ -------------
<S> <C> <C> <C> <C> <C>
1993
Life Insurance In Force at Year-End. $54,219,990 $8,584,856 $ 62,875 $45,698,009 .1%
=========== ========== ========= ===========
Premiums Earned and Policy
Charges for the Year:
Life Insurance................... $ 289,391 $ 23,759 $ 2,294 $ 267,926 .9
Accident and Health Insurance.... 542,458 9,638 490 533,310 .1
Property and Casualty Insurance.. 4,155,356 1,128,982 478,464 3,504,838 13.7
----------- ---------- --------- -----------
Total Premiums and Policy
Charges..................... $ 4,987,205 $1,162,379 $ 481,248 $ 4,306,074
=========== ========== ========= ===========
1992
Life Insurance In Force at Year-End. $46,363,886 $7,555,070 $ 90,632 $38,899,448 .2
=========== ========== ========= ===========
Premiums Earned and Policy
Charges for the Year:
Life Insurance................... $ 261,334 $ 23,901 $ 2,096 $ 239,529 .9
Accident and Health Insurance.... 460,451 11,462 655 449,644 .1
Property and Casualty Insurance.. 3,824,520 1,090,379 429,147 3,163,288 13.6
----------- ---------- --------- -----------
Total Premiums and Policy
Charges..................... $ 4,546,305 $1,125,742 $ 431,898 $ 3,852,461
=========== ========== ========= ===========
1991
Life Insurance In Force at Year-End. $41,386,464 $7,123,174 $ 116,004 $34,379,294 .3
=========== ========== ========= ===========
Premiums Earned and Policy
Charges for the Year:
Life Insurance................... $ 238,307 $ 21,171 $ 1,997 $ 219,133 .9
Accident and Health Insurance.... 425,503 11,717 1,097 414,883 .3
Property and Casualty Insurance.. 3,579,774 1,019,458 476,852 3,037,168 15.7
----------- ---------- --------- -----------
Total Premiums and Policy
Charges..................... $ 4,243,584 $1,052,346 $ 479,946 $ 3,671,184
=========== ========== ========= ===========
</TABLE>
44
<PAGE> 45
THE CHUBB CORPORATION
SCHEDULE IX
CONSOLIDATED SHORT TERM BORROWINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31 YEAR ENDED DECEMBER 31
--------------------- --------------------------------------------------------
WEIGHTED MAXIMUM AVERAGE AMOUNT WEIGHTED
BALANCE AVERAGE AMOUNT OUTSTANDING AVERAGE
CATEGORY OF AGGREGATE AT END INTEREST OUTSTANDING DURING INTEREST RATE
SHORT TERM BORROWINGS OF PERIOD RATE DURING PERIOD(a) PERIOD(a) DURING PERIOD(b)
- --------------------------- --------- -------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
1993
Commercial Paper......... $ 89,540 3.4% $207,333 $ 98,243 3.2%
Notes Payable to Banks... 5,300 4.0 39,400 12,231 5.1
1992
Commercial Paper......... 223,108 3.7 252,200 193,224 3.9
Notes Payable to Banks... 65,400 6.0 95,000 78,546 6.4
1991
Commercial Paper......... 121,700 5.0 171,509 137,751 6.0
Notes Payable to Banks... 105,000 7.3 105,000 95,346 8.6
</TABLE>
- ------------------
(a) The maximum and average amounts outstanding during the period were based on
month end balances.
(b) The weighted average interest rate during the period was computed by
dividing the actual interest cost by the average amount outstanding during
the period.
Notes payable to banks are obligations under revolving credit arrangements.
Commercial paper and notes payable generally have terms ranging from thirty days
to one year and are at interest rates generally extended to prime borrowers.
45
<PAGE> 46
THE CHUBB CORPORATION
SCHEDULE X
CONSOLIDATED SUPPLEMENTARY PROPERTY AND CASUALTY INSURANCE INFORMATION
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES INCURRED
RELATED TO
--------------------------- PAID CLAIMS
AND CLAIM
CURRENT PRIOR ADJUSTMENT
YEAR YEARS EXPENSES
---------- --------- -----------
<S> <C> <C> <C>
1993........................................... $2,214,300 $664,798 $1,696,666
========== ======== ==========
1992........................................... $2,125,700 $(27,571) $1,574,379
========== ======== ==========
1991........................................... $1,970,200 $(28,847) $1,498,626
========== ======== ==========
</TABLE>
Information for the years ended December 31, 1993, 1992 and 1991 is
presented net of related reinsurance amounts.
46
<PAGE> 47
THE CHUBB CORPORATION
EXHIBITS
(ITEM 14(A))
<TABLE>
<CAPTION>
DESCRIPTION
-----------
<S> <C>
(3) -- Articles of Incorporation and By-Laws
Restated Certificate of Incorporation. Incorporated by reference to
Exhibit (3) of the registrant's Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31, 1990.
By-Laws. Incorporated by reference to Exhibit (3) of the registrant's
Report to the Securities and Exchange Commission on Form 10-K for the
year ended December 31, 1989.
(4) -- The registrant is not filing any instruments evidencing any indebtedness
since the total amount of securities authorized under any single
instrument does not exceed 10% of the total assets of the registrant
and its subsidiaries on a consolidated basis. Copies of such
instruments will be furnished to the Securities and Exchange
Commission upon request.
(10) -- Material contracts
Global Settlement Agreement among Fibreboard Corporation, Continental
Casualty Company, CNA Casualty Company of California, Columbia
Casualty Company, Pacific Indemnity Company, and the Settlement Class
and together with Exhibits A through D filed herewith.
Settlement Agreement with Fibreboard Corporation, Continental Casualty
Company, CNA Casualty Company of California and Columbia Casualty
Company incorporated by reference to Exhibit (10) of the registrant's
Report to the Securities and Exchange Commission on Form 10-Q for the
nine months ended September 30, 1993.
Continental-Pacific Agreement with Continental Casualty Company incorpo-
rated by reference to Exhibit (10) of the registrant's Report to the
Securities and Exchange Commission on Form 10-Q for the nine months
ended September 30, 1993.
Executive Compensation Plans and Arrangements.
The Chubb Corporation Long-Term Stock Incentive Plan (1992)
incorporated by reference to Exhibit (10) of the registrant's
Report to the Securities and Exchange Commission on Form 10-K for
the year ended December 31, 1992.
The Chubb Corporation Annual Incentive Compensation Plan (1984) incor-
porated by reference to Exhibit (10) of the registrant's Report to
the Securities and Exchange Commission on Form 10-K for the year
ended December 31, 1989.
The Chubb Corporation Stock Option Plan (1984) incorporated by
reference to Exhibit (10) of the registrant's Report to the
Securities and Exchange Commission on Form 10-K for the year ended
December 31, 1989.
The Chubb Corporation Stock Option Plan for Non-Employee Directors
(1992) incorporated by reference to Exhibit (10) of the
registrant's Report to the Securities and Exchange Commission on
Form 10-K for the year ended December 31, 1992.
Description of the Chubb LifeAmerica Incentive Compensation Plan
incorporated by reference to Exhibit (10) of the registrant's
Report to the Securities and Exchange Commission on Form 10-K for
the year ended December 31, 1992.
The Chubb Corporation Investment Department/Chubb Asset Managers, Inc.
Incentive Compensation Plan filed herewith.
</TABLE>
47
<PAGE> 48
<TABLE>
<CAPTION>
DESCRIPTION
<S> <C>
Executive Severance Agreements and their amendments incorporated by
reference to Exhibit (10) of the registrant's Report to the
Securities and Exchange Commission on Form 10-K for the year ended
December 31, 1989.
Aggregate Excess of Loss Reinsurance Agreement with Phoenix Assurance
Public Limited Company of London, incorporated by reference to Exhibit
(10) of the registrant's Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31, 1990.
(11) -- Computation of earnings per share filed herewith.
(13) -- Pages 11, 12, 38 through 63 and 67 of the 1993 Annual Report to
Shareholders.
(21) -- Subsidiaries of the registrant filed herewith.
(23) -- Consent of Independent Auditors (see page 38 of this report).
(28) -- Information from reports furnished to state insurance regulatory
authorities.
</TABLE>
48
<PAGE> 1
GLOBAL SETTLEMENT AGREEMENT
AMONG
FIBREBOARD CORPORATION,
CONTINENTAL CASUALTY COMPANY,
CNA CASUALTY COMPANY OF CALIFORNIA,
COLUMBIA CASUALTY COMPANY,
PACIFIC INDEMNITY COMPANY,
AND
THE SETTLEMENT CLASS
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 1.1 Certain Defined Terms . . . . . . . . . . . . . . . . 8
ARTICLE 2 SETTLEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2.1 Settlement . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2.2 Exclusive Rights Against the Trust . . . . . . . . . 8
SECTION 2.3 Payments . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 2.4 Additional Fibreboard Obligations . . . . . . . . . . 11
SECTION 2.5 Releases . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 2.6 Final Settlement of the Insurance Policies . . . . . 16
SECTION 2.7 Indemnity Obligation of the Trust after Global
Approval Judgment . . . . . . . . . . . . . . . . . . 17
SECTION 2.8 Fibreboard Corporation's Indemnity and Related
Obligations . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE 3 ACTIONS TO BE TAKEN TO IMPLEMENT THIS AGREEMENT . . . . . . . . . 19
SECTION 3.1 Applications for Initial Court Orders, Settlement Class
Order, Defendant Class Order and Global Approval
Judgment . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 3.2 Effect of Class Certification . . . . . . . . . . . . 19
SECTION 3.3 Execution and Delivery of Escrow Instructions . . . . 20
ARTICLE 4 TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 4.1 Termination . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE 5 SETTLEMENT TRUST . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 5.1 Trust Agreement . . . . . . . . . . . . . . . . . . . 24
SECTION 5.2 Continuing Jurisdiction of the Court . . . . . . . . 24
SECTION 5.3 Preservation of Funds . . . . . . . . . . . . . . . . 25
ARTICLE 6 THIRD PARTY CLAIMS . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 6.1 Bar Orders . . . . . . . . . . . . . . . . . . . . . 25
SECTION 6.2 Judgment Reduction and Subrogation Rights . . . . . . 25
SECTION 6.3 Actions Necessary to Obtain Discharges and
Bar Orders . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 7 INTERIM CLAIM LIQUIDATION PROCEDURES . . . . . . . . . . . . . . 28
SECTION 7.1 Interim Claims . . . . . . . . . . . . . . . . . . . 28
SECTION 7.2 Processing Interim Claims . . . . . . . . . . . . . . 29
SECTION 7.3 Payment of Exigent and Extreme Hardship Claims . . . 32
SECTION 7.4 Payment of Interim Claims Other Than Exigent Health
Claims and Extreme Hardship Claims . . . . . . . . . 32
SECTION 7.5 Sources of Payment of Liquidated Amounts for Interim
Claims . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 7.6 Miscellaneous Interim Claim Provisions . . . . . . . 35
ARTICLE 8 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 8.1 Designated or Qualified Settlement Fund . . . . . . . 36
SECTION 8.2 Counsel . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 8.3 No Oral Representations . . . . . . . . . . . . . . . 38
SECTION 8.4 Payment of Costs . . . . . . . . . . . . . . . . . . 38
SECTION 8.5 Modification and Waiver . . . . . . . . . . . . . . . 39
SECTION 8.6 Further Actions . . . . . . . . . . . . . . . . . . . 39
SECTION 8.7 Effectiveness of Agreement Notwithstanding
Developments . . . . . . . . . . . . . . . . . . . . 40
SECTION 8.8 No Admission or Use . . . . . . . . . . . . . . . . . 40
SECTION 8.9 No Breach of Other Obligations . . . . . . . . . . . 41
SECTION 8.10 Third Party Beneficiaries . . . . . . . . . . . . . . 41
SECTION 8.11 Rights and Obligations of Fibreboard Corporation and
the Insurers Under the Settlement Agreement and
Related Agreements . . . . . . . . . . . . . . . . . 42
SECTION 8.12 Headings . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 8.13 Notices . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 8.14 Counterparts . . . . . . . . . . . . . . . . . . . . 47
</TABLE>
-ii-
<PAGE> 4
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF TEXAS
TYLER DIVISION
GERALD AHEARN, JAMES DENNIS and )
CHARLES W. JEEP, On Behalf of )
Themselves and Others Similarly Situated, )
)
Plaintiffs, )
)
vs. )
) Civil Action No. 6:93 cv 526
FIBREBOARD CORPORATION, )
)
Defendant, )
)
CONTINENTAL CASUALTY COMPANY )
)
and )
)
PACIFIC INDEMNITY COMPANY, )
)
Intervenors. )
)
- ------------------------------------------
GLOBAL SETTLEMENT AGREEMENT
This Agreement is made and entered into as of August 27, 1993, by
and among the Representative plaintiffs as representatives of the Settlement
Class, acting by and through Class Counsel; Fibreboard Corporation, a Delaware
corporation; Continental Casualty Company, an Illinois corporation; CNA
Casualty Company of California, a California corporation; Columbia Casualty
Company, an Illinois corporation; and Pacific Indemnity Company, a California
corporation, together the "Parties."
<PAGE> 5
RECITALS
A. The Representative Plaintiffs have filed a class action
complaint in the Class Action on behalf of the Settlement Class against
Fibreboard Corporation in the Global Court, and the Court has provisionally
certified that class under Rule 23(b)(1)(B) of the Federal Rules of Civil
Procedure for settlement purposes only. Continental and Pacific have been
allowed to intervene as parties to the Class Action.
B. For more than fifteen years, thousands of individuals exposed
to asbestos or asbestos-containing products have filed lawsuits alleging
personal injury and damage in the state and federal courts against Fibreboard
Corporation and against many other defendants.
C. These lawsuits have resulted in extensive discovery concerning
the potential liability of Fibreboard Corporation and other defendants, as well
as full consideration of the legal and factual bases, including medical issues,
underlying each individual asbestos plaintiff's personal injury lawsuit.
D. The vast majority of the asbestos personal injury lawsuits
brought against Fibreboard Corporation and others in the past fifteen years
have been settled without trial, although a small percentage have been tried to
verdict, with plaintiffs prevailing in some cases and Fibreboard Corporation
and other defendants prevailing in other cases.
E. Despite significant success in reducing litigation costs
through a variety of mechanisms, plaintiffs and defendants have spent, and
continue to spend,
-2-
<PAGE> 6
enormous resources contesting both liability and damages, allocating
responsibility among the parties, and litigating issues of insurance coverage.
F. Continental, CNA Casualty, Columbia and Pacific issued certain
Insurance Policies to Fibreboard.
G. Fibreboard Corporation and certain of the Insurers have been
and are engaged in litigation in several actions involving disputed questions
of insurance coverage, the first of which was filed in 1979 in the Superior
Court of the State of California in and for the City and County of San
Francisco entitled Fireman's Fund Insurance Company v. Fibreboard Corporation
et al., No. 753885, and is an included action in the Coverage Case.
H. In the Coverage Case, Fibreboard Corporation contends that
certain of the Insurers are obligated to defend and indemnify Fibreboard
Corporation against certain of Fibreboard Corporation's liabilities for claims
for asbestos personal injury or death and for related claims. These Insurers
contend that they have no further obligation to defend or indemnify Fibreboard
Corporation for any such claims. A judgment in favor of Fibreboard Corporation
was rendered by Judge Ira Brown in the Coverage Case on January 24, 1990, and
that judgment is currently on appeal. The Parties' contentions are, inter alia,
set forth in the pleadings in the Coverage Case and in the briefs before the
Court of Appeal.
I. In addition to the tens of thousands of claims for asbestos
personal injury or death that have been filed and resolved against Fibreboard
Corporation and other defendants in jurisdictions throughout the United States,
tens of thousands of filed claims remain pending and thousands more are
expected to be
-3-
<PAGE> 7
filed in the future. Litigating the asbestos-related personal injury lawsuits
is depleting Fibreboard Corporation's resources, including insurance resources,
available to compensate claimants. Absent substantial insurance resources,
Fibreboard Corporation could not satisfy the claims for asbestos personal
injury pending against it.
J. The expenditures necessary to process and resolve asbestos
lawsuits have contributed to more than ten major asbestos defendants filing for
bankruptcy reorganization. Because some of these defendants represent a
significant portion of the traditional liability share for asbestos personal
injury cases, and many jurisdictions apply the principle of joint and several
liability, these bankruptcy filings have increased costs substantially, caused
significant delays to plaintiffs and created financial pressures on the
remaining defendants.
K. Continental and Fibreboard Corporation entered into an
agreement, dated April 9, 1993, pursuant to which Continental and Fibreboard
Corporation agreed, among other things, upon terms and conditions set forth
therein, to use their best efforts jointly to negotiate and finalize a global
class action settlement with personal injury claimants, and Continental agreed,
whether or not a global settlement was reached, to pay certain defense and
other costs of certain asbestos-related claims on an interim basis.
L. On or about August 22, 1993 and August 29, 1993, Continental
and Pacific entered into agreements, which agreements have been superseded by
the Continental-Pacific Agreement, dated as of October 12, 1993, whereby
Continental
-4-
<PAGE> 8
and Pacific settled the dispute between them and agreed upon terms for the
sharing of liabilities of each of them with respect to certain asbestos-related
claims.
M. Fibreboard Corporation, Continental, CNA Casualty, Columbia
and Pacific entered into the Settlement Agreement, dated October 12, 1993,
pursuant to which they agreed, among other things, to settle and compromise all
claims and potential claims against the Insurers under the Insurance Policies.
N. Fibreboard Corporation has invested substantial sums in
pursuing its insurance coverage for certain asbestos-related personal injury
claims asserted against Fibreboard Corporation. Although Fibreboard Corporation
has been successful in this litigation to date, it is still subject to risks
and uncertainties. These include the risks associated with the Coverage Case
and the continuing effect on Fibreboard Corporation's corporate operations
created by asbestos-related personal injury claims and Fibreboard Corporation's
unresolved insurance coverage with respect thereto. The Settlement Class
Members are also subject to the risks associated with the Coverage Case since
their ability to collect upon any judgments they may obtain against Fibreboard
Corporation is largely dependent upon the existence and extent of Fibreboard
Corporation's insurance coverage. Continental and Pacific are similarly
subjected to the risks and uncertainties presented by the Coverage Case and the
potential liabilities Continental and Pacific may have with respect to
asbestos-related personal injury claims. Absent this Agreement, the results in
the Coverage Case likely would be severely prejudicial to either Continental
and Pacific, on the one hand, or Fibreboard Corporation and the Settlement
Class Members, on the other hand.
-5-
<PAGE> 9
O. Counsel for the Representative Plaintiffs each has a decade or
more of experience in the litigation of asbestos-related personal injury
cases. They have conducted a thorough investigation into the law and facts
relating to matters set forth in the class action complaint.
P. In light of the uncertainties associated with the pending,
unresolved issues enumerated above, there are substantial risks that
adjudications with respect to certain asbestos-related personal injury claims
by Settlement Class Members will, as a practical matter, be dispositive of the
claims and interests of certain other Settlement Class Members not yet
adjudicated or will substantially impair or impede the ability of such other
Settlement Class Members to protect their interests.
Q. The primary purpose of this Agreement is to create a fund to
compensate the Settlement Class Members, free of the risks of the pending
Coverage Case litigation between Fibreboard Corporation and the Insurers, and
to apply the fund thus created to an equitable settlement of the claims of the
Settlement Class Members. The mechanism for accomplishing this purpose is
creation of the Trust, to which the claims of all Settlement Class Members
against Fibreboard Corporation or the Insurers shall be directed.
R. The settlement contemplated by this Agreement would provide a
fair, flexible, speedy, cost-effective and assured method of compensating
claimants who have been exposed to asbestos or asbestos-containing products for
which Fibreboard Corporation may bear legal liability and who have contracted
or will in the future contract an asbestos-related conditions. Thus, this
Agreement provides
-6-
<PAGE> 10
considerable benefit to the Settlement Class, while avoiding costly litigation
of difficult and contentious issues.
S. Based on extensive analysis of the law and facts at issue in
the Class Action, the other factors and considerations enumerated above
concerning asbestos litigation, and the fair, flexible, speedy, cost-effective
and assured procedures set forth in this Agreement and its exhibits for
compensating the Settlement Class, each Party has determined that settlement on
the terms set forth below would be fair, adequate and reasonable, and thus in
its best interests.
T. Third Party Claims are litigated infrequently in asbestos
litigation. The vast majority of asbestos personal injury, death and related
cases are settled before trial. In those cases where trials result in judgments
against nonsettling defendants, the law in most jurisdictions protects settling
defendants against claims for contribution by judgement debtors. Nevertheless,
because the potential for Third Party Claims would remain, absent provision for
them, this Agreement sets forth a fair, flexible, speedy, cost-effective and
assured procedure for resolving Third Party Claims.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the Parties hereby agree as follows:
-7-
<PAGE> 11
ARTICLE 1
DEFINITIONS
SECTION 1.1 Certain Defined Terms.
Capitalized terms used herein and not defined herein shall have
the definitions for such terms set forth in the Glossary annexed as Exhibit A
hereto and incorporated herein.
ARTICLE 2
SETTLEMENT
SECTION 2.1 Settlement.
Effective upon Global Approval Judgment, Representative
Plaintiffs, on their own behalf and on behalf of all Settlement Class Members,
hereby compromise and settle, finally and fully, all of the Class Member Claims
with Fibreboard Corporation, Continental, CNA Casualty, Columbia and Pacific
on the terms and conditions set forth herein; provided, however, that nothing
in this Agreement or in any exhibit hereto shall discharge the Insurers from
liability predicated on policies other than the Insurance Policies.
SECTION 2.2 Exclusive Rights Against the Trust.
A. Effective upon Global Approval Judgment, all Class Member
Claims are finally and fully settled by this Agreement, and none of such claims
or any Third Party Claim shall be prosecuted in any way against any of the
Fibreboard, Continental or Pacific Releasees. All Class Member Claims, except
claims for punitive or exemplary damages (which are dismissed and shall not be
enforceable), are hereby directed to the Trust for disposition pursuant to the
Trust Agreement and
-8-
<PAGE> 12
Trust Distribution Process. Third Party Claims shall be treated as provided in
Article 6 of this Agreement. The Court shall retain jurisdiction over this
Agreement and shall use its equitable powers to enforce this Section.
B. The claims of Persons providing workers compensation
benefits to Settlement Class Members shall be directed to the Trust, instead of
Fibreboard Corporation or the Insurers, and disposed of pursuant to the Trust
Agreement and the Trust Distribution Process. Such Persons providing workers
compensation benefits shall have existing remedies, whether by way of lien
rights against a Settlement Class Member's Claim against the Trust,
subrogation, direct action, or otherwise, against the Trust (instead of
Fibreboard Corporation or the Insurers), subject only to the provisions of the
Trust Agreement and Trust Distribution Process. Only payment of funds pursuant
to a Settlement Class Member's individual settlement with the Trust, and not
this Agreement (or the resulting Global Approval Judgment, dismissal and
release), shall trigger the notice, approval and forfeiture provisions of the
Longshore and Harbor Workers Compensation Act (33 USC Section 933) and other
similar state and federal workers compensation provisions.
SECTION 2.3 Payments.
A. After execution of this Agreement, Continental and Pacific
shall (1) pay, on December 30, 1993, an aggregate amount of $1,525,000,000
into an escrow account (the "Escrow Fund") and (2) pay the class notice costs,
court costs and other incidental expenses associated with obtaining Global
Approval Judgment and Settlement Agreement Approval Judgment. Of the foregoing
amounts, Continental shall pay 64.71% and Pacific shall pay 35.29%. Such
payment
-9-
<PAGE> 13
obligations of Continental and Pacific shall be several and not joint. The
Escrow Fund shall be held in the manner provided in the Escrow Agreement that
is substantially in the form of Exhibit D to this Agreement.
B. Upon Global Approval Judgment:
(1) The amount in the Escrow Fund shall be transferred to the
Trust.
(2) Fibreboard Corporation shall pay $10,000,000 into the
Trust, plus simple interest at the rate of 3.085% from
August 27, 1993; provided that, with respect to interest
owed on the sum of $9,892,223 (of the $10,000,000 referred
to above) from September 23, 1993, Fibreboard
Corporation's obligation shall be fully discharged and
satisfied by delivery of an assignment (in the form
attached hereto as Exhibit E) from Fibreboard Corporation
to the Trust of Fibreboard Corporation's rights against
Home Insurance Company to payment of such interest and to
damages arising from bad faith or other tortious conduct
for failure to pay the $9,892,223 in a timely fashion and
to pay such interest. Before Global Approval Judgment
Fibreboard Corporation will pay the costs of its exercise
of reasonable diligence in cooperation with Class Counsel
in pursuing such assigned claims on its own behalf and on
behalf of the Settlement Class. After Global Approval
Judgment Fibreboard will pay the reasonable costs of
pursuing such assigned claims.
-10-
<PAGE> 14
(3) Continental shall pay 64.71% and Pacific shall pay 35.29%
of (i) the fees of Class Counsel as determined and
approved by the Court up to a maximum of 3% of the sum
set forth in Section 2.3(A) and (ii) the reasonable
expenses of Class Counsel as determined and approved by
the Court. The payment obligations of Continental and
Pacific under this subsection (B)(3) shall be several
and not joint.
SECTION 2.4 Additional Fibreboard Obligations.
A. Fibreboard Corporation shall provide for intake,
maintenance and processing (but not evaluation) of Class Member Claims for a
period of five years from August 27, 1993 or one year from Global Approval
Judgment, whichever occurs later (unless the obligation is earlier terminated,
at the election of the Trustees). The Parties anticipate that Fibreboard
Corporation and the Trust will subsequently refine the scope of Fibreboard
Corporation's obligation under this paragraph.
B. At the end of the period referred to in subsection (A)
above, Fibreboard Corporation shall transfer without charge the data and (to
the extent transferrable) software with respect to its case management system
(including a perpetual, non-exclusive license to use the case management system
software exclusively for the purpose of processing Class Member Claims and
Third Party Claims), but not including equipment or other hard assets
associated therewith, to the Trust. Thereafter, Fibreboard Corporation shall
have no further responsibility with respect to Class Member and Third Party
Claims. The Trust shall allow
-11-
<PAGE> 15
Trustors access to and use of the case management system thereafter for use in
connection with Settled Claims and Unsettled Claims. The Trust shall establish
any necessary procedures to be followed by the Trustors to facilitate this
arrangement and shall be reimbursed for the actual cost of providing
information or data to the Trustors. The Trust shall not disclose any
information it may obtain relating to Settled Claims or Unsettled Claims except
as required by court order. The Trust shall promptly advise the Trustors of any
request for such information and afford them an opportunity to object to
disclosure of any such information.
C. Fibreboard Corporation shall cooperate by providing
existing information and evidence to the Trust as is reasonably necessary to
evaluate, defend and resolve Class Member Claims and Third Party Claims,
including, but not limited to, information and evidence concerning Fibreboard's
products and their distribution, the history of the conduct of Fibreboard's
business, Fibreboard's defenses and the history of Fibreboard's settlements in
asbestos-related personal injury lawsuits. All such information and evidence
shall be used only for such purposes. Fibreboard Corporation shall not withhold
such information or evidence from the Trust on any grounds, including attorney-
client, work product or any other privilege; provided, however, that Fibreboard
Corporation shall provide information and evidence which is subject to an
express claim of privilege to the Trust only on the basis that such information
and evidence remain privileged and confidential, and that the Trust shall keep
all such information and evidence privileged and confidential and shall not
waive the privileged and confidential status of such information and evidence
without Fibreboard Corporation's written consent. With respect to Trust requests
-12-
<PAGE> 16
for information or evidence possessed by Fibreboard Corporation which is
subject to a shared ownership, shared work product or shared attorney-client
privilege with a Defendant Class Member, the Trust shall be deemed the
successor-in-interest to Fibreboard Corporation, but any such Defendant Class
Member affected by the proposed transfer of information shall receive
reasonable notice of, and may object to, any proposed transfer of such shared
information or evidence.
D. Effective upon Global Approval Judgment, Fibreboard
Corporation, except as provided in Section H of the Trust Distribution Process,
transfers to the Trust its rights, if any, to all claims for contribution or
indemnity against other joint tortfeasors arising from (i) Class Member Claims,
(ii) Personal Injury Asbestos Claims that were settled against Fibreboard
Corporation before August 27, 1993 and remain settled thereafter and (iii)
judgments against Fibreboard Corporation that became final before August 27,
1993. Effective upon Global Approval Judgment, to the extent that Continental,
CNA Casualty, Columbia or Pacific has been subrogated to the foregoing rights
of Fibreboard to contribution or indemnity claims, each such subrogee transfers
these rights to the Trust; provided, however, that such transfer shall not
include the rights of any of the Insurers to any contribution, indemnity or
reinsurance claims against other insurance, reinsurance or indemnity entities
or syndicates.
E. Fibreboard Corporation agrees that to the extent
Fibreboard obtains insurance proceeds from companies other than the Insurers
for asbestos-related personal injury claims that are not applied to
asbestos-related
-13-
<PAGE> 17
indemnity or defense costs and are no longer needed by Fibreboard for such
purposes, such residual proceeds shall be made available to the Trust.
SECTION 2.5 Releases.
Effective upon Global Approval Judgment:
A. The Representative Plaintiffs, on behalf of themselves and
as representatives of the Settlement Class, release each of the Fibreboard,
Continental and Pacific Releasees from each and every Class Member Claim.
B. Fibreboard Corporation, on behalf of itself and its
Subsidiaries, releases Continental, CNA Casualty and Columbia, their parents,
Subsidiaries, Affiliates, directors, employees, officers, agents and attorneys
(the "Continental Releases") from any and all claims of whatsoever description
by Fibreboard Corporation and its Subsidiaries, including bad faith claims,
except that such release shall not include any claims arising out of this
Agreement, the Settlement Agreement (or the related agreements referred to
therein) or any obligation of a Party pursuant to an agreement or agreements
entered into after this Agreement is executed. Notwithstanding the foregoing
exceptions, such release shall include any and all claims arising from
paragraphs 1 and 2 of the April 9 Agreement. Nothing herein shall affect the
validity or effectiveness of the releases provided for in the April 9
Agreement, all of which are hereby ratified by Fibreboard Corporation,
Continental, CNA Casualty and Columbia.
C. Fibreboard Corporation, on behalf of itself and its
Subsidiaries, releases Pacific, its parents, Subsidiaries, Affiliates,
directors, employees, officers, agents and attorneys (the "Pacific Releasees")
from any and all claims of whatsoever
-14-
<PAGE> 18
description by Fibreboard Corporation and its Subsidiaries, including bad faith
claims, except that such release shall not include any claims arising out of
this Agreement, the Settlement Agreement (or the related agreements referred to
therein) or any obligation of a Party pursuant to an agreement or agreements
entered into after this Agreement is executed. Nothing herein shall affect the
validity or effectiveness of the releases provided for in the Pacific Indemnity
Agreement, all of which are hereby ratified by Fibreboard Corporation and
Pacific.
D. Continental, CNA Casualty and Columbia, on behalf of
themselves and their Subsidiaries, release Fibreboard Corporation, its parents,
Subsidiaries, Affiliates, directors, employees, officers, agents and attorneys
from any and all claims of whatsoever description by Continental, CNA Casualty
and Columbia and their Subsidiaries, except that such release (i) shall not
include any claims arising out of this Agreement, the Settlement Agreement (or
the related agreements referred to therein) or any obligation of a Party
pursuant to an agreement or agreements entered into after this Agreement is
executed, and (ii) shall not prevent Continental, CNA Casualty or Columbia from
raising any defenses to claims brought against them by any person or entity
claiming an interest in the Insurance Policies, including, without limitation,
defenses against the validity or enforceability of assignments or settlements
to which Continental, CNA Casualty or Columbia is not a party. Notwithstanding
the foregoing exceptions, such release shall include any and all claims arising
from paragraphs 1 and 2 of the April 9 Agreement. Nothing herein shall affect
the validity or effectiveness of the releases
-15-
<PAGE> 19
provided for in the April 9 Agreement, all of which are hereby ratified by
Fibreboard Corporation, Continental, CNA Casualty and Columbia.
E. Pacific, on behalf of itself and its Subsidiaries,
releases Fibreboard Corporation, its parents, Subsidiaries, Affiliates,
directors, employees, officers, agents and attorneys from any and all claims of
whatsoever description by Pacific and its Subsidiaries, except that such
release (i) shall not include any claims arising out this Agreement, the
Settlement Agreement (or the related agreements referred to therein) or any
obligation of a Party pursuant to an agreement or agreements entered into after
this Agreement is executed, and (ii) shall not prevent Pacific from raising any
defenses to claims brought against Pacific by any person or entity claiming an
interest in the Insurance Policies. Nothing herein shall affect the validity
or effectiveness of the releases provided for in the Pacific Indemnity
Agreement, all of which are hereby ratified by Fibreboard Corporation and
Pacific.
F. The releases required by Sections 2.5(A)-(E) above shall
be effective as a bar to each and every claim, demand and cause of action
encompassed thereby and shall include, as necessary to effectuate that purpose,
waivers by the Parties of any and all benefits conferred on any of them by
Section 1542 of the California Civil Code or similar provisions in other
jurisdictions.
SECTION 2.6 Final Settlement of the Insurance Policies.
Fibreboard Corporation and the Insurers agree that upon Global
Approval Judgment, except for obligations that an Insurer has specifically
assumed or preserved under this Agreement, or under the Settlement Agreement
(or the related agreements referred to therein), the Insurers shall be
discharged from any
-16-
<PAGE> 20
and all of their obligations (whether direct or indirect) under or in
connection with the Insurance Policies, including any obligations imposed by
judgment, decree, statute, regulation or common law. Upon Global Approval
Judgment, Fibreboard Corporation shall execute and deliver a stipulation for
the dismissal with prejudice of the Coverage Case as to Continental, CNA
Casualty, Columbia and Pacific.
SECTION 2.7 Indemnity Obligation of the Trust after Global
Approval Judgment.
A. Except as provided in Section 2.4(A) as to Fibreboard
Corporation, the Trust shall defend and indemnify the Fibreboard, Continental
and Pacific Releasees against, and hold them harmless from, any costs, fees,
claims, liabilities, settlements or judgments incurred or occurring after
Global Approval Judgment and resulting, directly or indirectly, from the
assertion against any of them of any Class Member Claim or Third Party Claim.
This obligation shall include, without limitation, any such claim to the extent
that, after Global Approval Judgment, that claim attacks the validity or
enforceability of the Global Approval Judgment. Fibreboard Corporation and the
Insurers may, at their own expense, elect to participate with the Trust in the
defense of any such action or claim.
B. The Trust shall reimburse any Person entitled to
reimbursement out of the Escrow Fund pursuant to Section 3.3(A) to the extent
that such Person did not receive reimbursement from the Escrow Fund.
SECTION 2.8 Fibreboard Corporation's Indemnity and Related
Obligations.
Upon Global Approval Judgment, the Continental and Pacific
Releasees shall not have any liability for, and Fibreboard Corporation shall
-17-
<PAGE> 21
indemnify the Continental and Pacific Releasees against, and hold them harmless
from, any and all costs, fees, claims or liabilities relating to Personal
Injury Asbestos Claims and Additional Policy Claims of whatsoever kind,
including those attacking the validity or enforceability of the Global Approval
Judgment, (a) except for costs, claims or liabilities that the Insurers have
specifically undertaken to pay under this Agreement, the Settlement Agreement
(or the related agreements referred to therein), and (b) except for Defense
Costs directly attributable to an actual or threatened attack on the validity
or enforceability of the Global Approval Judgment ("Collateral Attack"). As to
claims asserted against Fibreboard Corporation that (a) would not be covered by
the foregoing indemnity (e.g., claims unrelated to asbestos) and (b) could be
claimed to give rise to a direct action against any of the Insurers, Fibreboard
Corporation agrees to reasonably and diligently defend and promptly pay or bond
judgments so as to preclude any such direct action claims. In the event of a
Collateral Attack, Continental and Pacific shall pay Fibreboard Corporation the
reasonable costs incurred by Fibreboard Corporation in defending against a
Collateral Attack to the extent not paid by the Trust (provided that
Continental's and Pacific's obligation shall extend only to those costs
directly attributable to litigation with respect to the validity and
enforceability of the Global Approval Judgment, not to those attributable to
litigation with respect to any underlying claims). Continental, Pacific and
Fibreboard Corporation shall jointly defend against a Collateral Attack and
will cooperate reasonably with one another in this regard.
-18-
<PAGE> 22
ARTICLE 3
ACTIONS TO BE TAKEN TO IMPLEMENT THIS AGREEMENT
SECTION 3.1 Applications for Initial Court Orders,
Settlement Class Order, Defendant Class Order
and Global Approval Judgment.
Promptly upon the execution of this Agreement, the Parties
shall, by joint motions, in form and substance satisfactory to counsel for each
of the Parties:
A. request entry of an order (i) preliminarily approving
this Agreement and the settlement contemplated by this Agreement for the
purpose of the Rule 23 Notice and settlement hearing contemplated therein, (ii)
preliminarily approving the Defendant Class Settlement Agreement and the
settlement contemplated by that agreement, and (iii) approving the contents and
methods for the dissemination of the Rule 23 Notice (which notice shall be in
form and substance satisfactory to the above counsel; and
B. request (i) entry of the Settlement Class Order and
the Defendant Class Order and (ii) entry of Global Approval Judgment.
SECTION 3.2 Effect of Class Certification.
The certification of the Settlement Class pursuant to this
Agreement shall be binding if Global Approval Judgment is entered. In the
event this Agreement is terminated prior to Global Approval Judgment,
Fibreboard Corporation and the Insurers shall retain their right to object to
the continued prosecution of the Class Action as a class action under Rule 23.
Neither this
-19-
<PAGE> 23
Agreement, nor its exhibits, nor the settlement negotiations, nor the
proceedings seeking approval of the settlement, may be used (i) in support of
any application for a determination that the Class Action or any other action
shall proceed as a class action except for the purposes of the settlement in
accordance with this Agreement or (ii) as evidence in any litigation (other
than an action to enforce the terms of this Agreement or any of its exhibits)
or proceeding against Fibreboard Corporation, Continental, CNA Casualty,
Columbia or Pacific in any court at any time.
SECTION 3.3 Execution and Delivery of Escrow Instructions.
A. Class Counsel (or, after appointment of the Trustees,
the Trustees), Fibreboard Corporation, Continental and Pacific shall each
execute and deliver from time to time to the Escrow Agent instructions
sufficient to order the disbursement from the Escrow Fund of funds needed to
pay the following obligations:
(1) To pay sums payable out of the Escrow Fund pursuant
to Article 7 of this Agreement.
(2) To reimburse monthly to any of the Fibreboard,
Continental or Pacific Releasees amounts, if any,
paid by any of them for costs, fees, claims,
liabilities, settlements, arbitration awards or
judgments with respect to (i) Class Member Claims or
Third Party Claims which receive approval from the
Court during the Interim Period to proceed to trial
or (ii) Interim Claims.
(3) To reimburse monthly any cost or expenses of the
Trust incurred during the Interim Period, including
the fees and expenses of the Interim Trustee, the
Trustees or Class Counsel's
-20-
<PAGE> 24
designee to the Interim Committee and other
reasonable expenditures.
(4) To reimburse monthly any cost or expense of the SCB
(in their capacity as such, and not in their capacity
as Class Counsel) incurred during the Interim Period
and determined by the Court or agreed by the Trustees
to be reasonable.
B. Notwithstanding the provisions of Section 3.3(A)(2),
(i) the cost of compliance with Fibreboard Corporation's obligations under
Section 2.4(A), the cost of any in-house employees of Fibreboard or the
Insurers, and the use of more outside personnel than are reasonably necessary
in connection with the economical defense or settlement of a claim shall not be
reimbursed, and (ii) any non-indemnity fees or costs subject to reimbursement
shall be reasonably necessary for the resolution of an Interim Claim, Class
Member Claim or Third Party Claim as determined by the Court or agreed by the
Trustees or their designee. Until the third anniversary after Global Approval
Judgment, the Trust may seek reimbursement from any Person to whom amounts were
disbursed from the Escrow Fund pursuant to Section 3.3(A)(2) which the Trust
alleges, based on the actual experience of the Trust in processing and
resolving claims, were in fact unreasonable and thus improperly paid from the
Escrow Fund. After a hearing on notice to all of the Parties, the Court shall
finally determine the eligibility of any contested expenditure for
reimbursement under Section 3.3(A)(2).
C. Fibreboard Corporation, the Insurers and the SCB
agree to keep separate billing accounts for all fees and expenses subject to
reimbursement
-21-
<PAGE> 25
pursuant to Section 3.3(A)(2) or 3.3(A)(4) and, if requested by the Trustees or
Class Counsel's designee to the Interim Committee, submit them to the Court for
a determination as to the reasonableness and eligibility for reimbursement.
D. Class Counsel, Fibreboard Corporation, Continental
and Pacific shall each execute and deliver a written notice of termination of
the Escrow Agreement and execute and deliver escrow instructions to the Escrow
Agent sufficient to order distribution of the balance of the Escrow Fund to the
following persons upon occurrence of the following events:
(1) to the Trust upon occurrence of Global Approval
Judgment (including Global Approval Judgment as to
which an effective waiver of one or more elements has
been given);
(2) to the trust or other entity described in Section
2.3(c) of the Settlement Agreement if (i) Settlement
Agreement Approval Judgment occurs and Global Court
Disapproval occurs, and (ii) the conditions to the
establishment of such trust or other entity set forth
in Section 2.3(c) of the Settlement Agreement are
satisfied in the opinion of counsel for Fibreboard
Corporation, Continental and Pacific;
(3) to Continental and Pacific in the percentages of
64.71% and 35.29%, respectively, if (i) Settlement
Agreement Approval Judgment occurs and Global Court
Disapproval occurs, and (ii) the conditions to the
establishment of such trust or other entity set forth
of Section 2.3(c) of the Settlement Agreement are not
-22-
<PAGE> 26
satisfied in the opinion of counsel for Fibreboard
Corporation, Continental and Pacific; or
(4) to Continental and Pacific in the percentages of
64.71% and 35.29%, respectively, if both Settlement
Agreement Court Disapproval and Global Court
Disapproval occur.
ARTICLE 4
TERMINATION
SECTION 4.1 Termination.
This Agreement shall automatically terminate without any
further action by any of the Parties, upon Global Court Disapproval or upon a
stipulation terminating this Agreement signed by all parties and filed with
this Court. Upon such termination, the Settlement Class Members and the other
Parties shall, as far as may be practicable, be restored to their respective
positions, rights and obligations that existed as if this Agreement had not
been entered into. Notwithstanding the foregoing, the following provisions of
this Agreement and the Trust Distribution Process, and the rights, obligations,
and liabilities created therewith shall survive such termination: Sections
3.2, 3.3, 4.1, 8.2, 8.3, 8.4, 8.5, 8.8, 8.9, 8.10, 8.11, 8.13 and Article 7 of
this Agreement and section D.2.f(i) of the Trust Distribution Process.
-23-
<PAGE> 27
ARTICLE 5
SETTLEMENT TRUST
SECTION 5.1 Trust Agreement.
A Trust shall be created in accordance with the provisions of
the Trust Agreement attached as Exhibit B hereto. The funds in the Trust shall
be invested and expended in accordance with the terms of the Trust Agreement
and Trust Distribution Process. The Trust shall be separate and independent
from Fibreboard Corporation. Neither the Trust nor Fibreboard Corporation
shall be bound by any adjudications rendered in any litigation (other than the
Class Action, the related class action respecting the Defendant Class and any
future litigation to which both the Trust and Fibreboard Corporation are
parties) to which one, but not the other, has been a party or privy. Neither
Fibreboard Corporation nor the Trust shall be bound by any stipulations or
agreements entered into by the other.
SECTION 5.2 Continuing Jurisdiction of the Court.
The Court shall retain continuing jurisdiction over the
maintenance, administration and distribution of the Trust and the funds
contained therein, subject to and in accordance with the provisions of the
Trust Agreement, the Trust Distribution Process, and the Defendant Class
Settlement Agreement. However, the Court shall not have such continuing
jurisdiction of Settlement Class Members, Defendant Class Members, Fibreboard
Corporation or the Insurers beyond that necessary to enforce this Agreement,
the Trust Agreement, the Trust Distribution Process, and the Defendant Class
Settlement Agreement.
-24-
<PAGE> 28
SECTION 5.3 Preservation of Funds.
To ensure that adequate Trust funds remain available to pay
claims of all Settlement Class Members, the Parties agree that they will
support the goals and purposes of the Trust and that they will cooperate in
taking such steps as may be appropriate from time to time to require the
Trustees to comply with the spending limitations, budgeting requirements,
financial reporting, accounting and audit requirements set forth in the Trust
Agreement and Trust Distribution Process.
ARTICLE 6
THIRD PARTY CLAIMS
SECTION 6.1 Bar Orders.
All Third Party Claims shall be barred and permanently
enjoined from prosecution against any of the Fibreboard, Continental and Pacific
Releasees in any proceeding or court. Third Party Claims against the Trust in
its own capacity or in Fibreboard Corporation's stead shall be governed by
section H of the Trust Distribution Process and the Defendant Class Settlement
Agreement.
SECTION 6.2 Judgment Reduction and Subrogation Rights.
Defendant Class Members shall have such rights to obtain
credits, set-offs, judgment reductions and subrogation to claims of Settlement
Class Members as are provided for in the Defendant Class Settlement Agreement
and the Trust Distribution Process.
-25-
<PAGE> 29
SECTION 6.3 Actions Necessary to Obtain Discharges and
Bar Orders.
A. In exchange for the subrogation and the credit and
set-off rights accorded them under the Trust Distribution Process, the
Defendant Class Members in the Defendant Class Settlement Agreement are
releasing all Third Party Claims against the Fibreboard, Continental and
Pacific Releasees and have agreed that those releases be enforced by the Global
Approval Judgment. Notwithstanding the provisions of the Defendant Class
Settlement Agreement, and except as set forth in Section 6.3(C) below, in the
event that Global Approval Judgment cannot be obtained because of failure to
obtain the discharge of, or an injunction against, one or more Express
Indemnity or Additional Policy Claims, then each and every such Express
Indemnity or Additional Policy Claim against the Fibreboard, Continental and
Pacific Releasees shall (as a sole and exclusive remedy, in lieu of any claims
or remedies at law or in equity against the Fibreboard, Continental and Pacific
Releasees, which claims or remedies are and will be forever barred and
enjoined) be resolved with and compensated by the Trust as Residual Claims
under the provisions of the Trust Distribution Process.
B. Except as set forth in Section 6.3(C) below, in the
event the Parties receive notice that notwithstanding the right to compensation
under the provisions of Section 6.3(A) above, Global Approval Judgment cannot
be obtained because of failure to obtain the discharges of, or injunctions
against, any Third Party Claim against the Fibreboard, Continental and Pacific
Releasees, Settlement Class Members agree to reduce judgments in their favor
against Defendant Class Members
-26-
<PAGE> 30
in such amounts as may be necessary to obtain the discharges of and injunctions
against Third Party Claims as against the Fibreboard, Continental and Pacific
Releasees which are required for the entry of Global Approval Judgment. Any
such reduction of judgment may be up to (but may not exceed) the full amount
that a Defendant Class Member would have been entitled to recover from any of
the Fibreboard, Continental and/or Pacific Releasees in the event that a valid
Third Party Claim arising from the judgment or payment thereof could have been
brought against any of them in the absence of Global Approval Judgment.
C. The Parties believe that there are no valid Express
Indemnity Claims or Additional Policy Claims arising from the distribution of
asbestos or asbestos-containing materials or products manufactured by
Fibreboard and sold or distributed under a label, trade name or brand name of a
Person unaffiliated with Fibreboard pursuant to an agreement with Fibreboard.
Fibreboard Corporation represents that, except as disclosed to the Insurers and
to Class Counsel in writing, it knows of no Persons unaffiliated with
Fibreboard who sold or distributed such materials or products. In the event
the Parties receive notice that Global Approval Judgment cannot be obtained
because of failure to obtain the discharge of, or an injunction against, any
Express Indemnity Claim or Additional Policy Claim asserted by any Person
listed in the writing referred to in the second sentence of this Section
6.3(C), then (i) the obligations imposed on Settlement Class Members set forth
in Section 6.3(B) do not apply to those claims, (ii) Continental, Pacific and
Fibreboard Corporation may advise Class Counsel within seven days of receipt of
such notice that they have waived such failure to obtain the discharge of, or
-27-
<PAGE> 31
injunction against, such claim or claims, and (iii) in the event that
Continental, Pacific and Fibreboard Corporation have not so advised Class
Counsel, then the Attorney Ad Litem shall for 14 days following expiration of
the seven-day period have the option, but not the obligation, to elect to have
Section 6.3(B) apply to such claim or claims. If Continental and Pacific elect
pursuant to the foregoing sentence to waive failure to obtain the discharge of,
or an injunction against, any of the Express Indemnity Claims or Additional
Policy Claims described in the preceding sentence, Fibreboard Corporation shall
be deemed to have waived such failure if Continental and Pacific agree to
indemnify and hold harmless Fibreboard Corporation against any cost or
liability resulting from the assertion of any such claims against Fibreboard
Corporation.
ARTICLE 7
INTERIM CLAIM LIQUIDATION PROCEDURES
SECTION 7.1 Interim Claims.
The provisions of this Article 7 specify the procedures to be
followed in handling certain Class Member Claims presented during the "Interim
Period," which is the period commencing at the later of January 1, 1994 or the
execution of this Global Settlement Agreement, and ending at Global Approval
Judgment or Global Court Disapproval. Third Party Claims of Defendant Class
Members arising out of Interim Claims shall be resolved in accordance with the
terms of the Defendant Class Settlement Agreement. An "Interim Committee,"
consisting of a designee of Class Counsel, a designee of Fibreboard
Corporation, and a designee of
-28-
<PAGE> 32
the Insurers, shall perform the functions specified for it in this Article
in connection with Liquidation of Interim Claims.
An "Interim Claim" is a Class Member Claim which a Settlement
Class Member seeks to Liquidate during the Interim Period and which meets one
of the following criteria:
A. it is an Exigent Health Claim;
B. it is an Extreme Hardship Claim; or
C. the Settlement Class Member establishes to the
satisfaction of the Interim Committee that his or her asbestos-related personal
injury claim in the tort system against a Defendant Class Member will be tried
to judgment during the Interim Period and that the trial will adjudicate issues
unique to that Settlement Class Member (e.g., damages, legal causation), as
distinguished from issues common to a number of plaintiffs (e.g., negligence,
strict liability, punitive damages).
SECTION 7.2 Processing Interim Claims.
A. Any Settlement Class Member electing to submit an
Interim Claim shall forward a notice of Interim Claim and a proof of claim to
the Interim Committee, on forms to be prescribed by the Interim Committee.
B. Interim Claims shall be processed in accordance with
the claims procedures set forth in the Trust Distribution Process, except as
follows:
(1) Negotiations and any arbitration with respect to any
Interim Claim shall be between the Interim Claimant,
on the one hand, and Fibreboard Corporation and the
Insurers (and not the Trust), on the other hand.
-29-
<PAGE> 33
(2) Each Interim Claimant asserting an Exigent Health
Claim or Extreme Hardship Claim shall present a
written demand within seven days of submitting the
notice of Interim Claim and properly completed proof
of claim. Fibreboard Corporation and the Insurers
shall evaluate such Interim Claim. Fibreboard
Corporation and the Insurers shall jointly respond
with a written offer in no more than seven days from
receipt of the written demand. If settlement
negotiations fail to produce a settlement within 14
days from receipt of the initial offer, such Interim
Claimant may proceed to binding arbitration. The
arbitration shall be held within 30 days after
arbitration is requested by such Interim Claimant.
(3) Each Interim Claimant asserting an Interim Claim
other than an Exigent Health Claim or Extreme
Hardship Claim shall within seven days of receipt of
a trial date submit a properly completed proof of
claim form and a notice of the date that trial is
scheduled to commence. A settlement demand shall
also be submitted by such Interim Claimant at that
time. Fibreboard Corporation and the Insurers shall
evaluate such Interim Claim. Fibreboard Corporation
and the Insurers shall jointly respond with a
written offer in no more than 28 days from receipt
of the written demand. The parties shall negotiate
in good faith, and, if a settlement is not reached
by 14 days prior to trial, such
-30-
<PAGE> 34
Interim Claim shall be set for binding arbitration
to be conducted and concluded prior to entry of
judgment in the trial court; provided, however,
that such Interim Claimant may, as early as 30 days
prior to the scheduled trial date, request binding
arbitration.
(4) The arbitration shall consist of an abbreviated
hearing which may be conducted by conference call,
with the award based upon the oral presentations,
and any written submissions, of the parties'
respective settlement positions. Neither party may
submit any evidence in the arbitration that was not
submitted to the other party at least seven days
prior to the earlier of the commencement of the
arbitration or the submission of its final offer or
demand. The written demands and offers required by
subsections (B)(1) and (B)(3) above shall be
included in such submissions.
(5) The Interim Committee shall establish and maintain a
list of Qualified Arbitrators. An arbitrator shall
be told the amount of the final offer and the amount
of the Interim Claimant's final demand at the
commencement of arbitration. The arbitrator shall
only have discretion to award one of those two
amounts.
C. Any settlement of an Interim Claimant shall be with
the consent of Class Counsel's designee, which consent shall not be
unreasonably withheld.
-31-
<PAGE> 35
SECTION 7.3 Payment of Exigent and Extreme Hardship
Claims.
Interim Claims that are Exigent Health Claims or Extreme
Hardship Claims shall be paid as follows:
A. 50% of the amount for which such Interim Claim has
been Liquidated shall be paid 30 days after the Interim Claim is Liquidated.
B. The remaining 50% of such amount shall be paid 60
days after the first to occur of (i) Global Approval Judgment, (ii) Settlement
Agreement Approval Judgment or (iii) entry of the Final Decision in the
Coverage Case; provided that (x) any amount to be paid under this Section
7.3(B) by reason of the fact that the Final Decision is the first to occur of
the foregoing triggering events shall be paid 60 days after that event only to
the extent of the Insurer's coverage obligations as determined by the Final
Decision and (y) any portion of such amount that remains unpaid after that time
shall be paid 60 days after the first to occur of (a) any of other triggering
events or (b) both Global Court Disapproval and Settlement Agreement Court
Disapproval.
SECTION 7.4 Payment of Interim Claims Other Than Exigent
Health Claims and Extreme Hardship Claims.
Interim Claims other than Exigent Health Claims or Extreme
Hardship Claims shall be paid as follows:
A. If Global Approval Judgement is entered on or before
June 30, 1996, these Interim Claims shall be paid in accordance with the Trust
Distribution Process in the same manner as other Class Member Claims.
-32-
<PAGE> 36
B. If Global Approval Judgment has not been entered on
or before June 30, 1996,
(1) 50% of the amount for which such Interim Claim has
been Liquidated shall be paid upon the later of (i)
the first to occur of November 30, 1996 or 30 days
after Settlement Agreement Approval Judgment, or
(ii) 60 days after receipt by the Insurers and
Fibreboard Corporation of a declaration or affidavit
stating that the case against a Defendant Class
Member has been tried to judgment or has been
settled against all non-bankrupt defendants in such
case, unless both Global Court Disapproval and
Settlement Agreement Court Disapproval have occurred
by such time.
(2) Any unpaid balance of such amount shall be paid 60
days after the first to occur of (i) Global Approval
Judgment, (ii) Settlement Agreement Approval
Judgment or (iii) entry of the Final Decision in the
Coverage Case; provided that (x) any amount to be
paid under this Section 7.4(B)(2) by reason of the
fact that the Final Decision is the first to occur
of the foregoing triggering events shall be paid 60
days after that event only to the extent of the
Insurer's coverage obligations as determined by the
Final Decision and (y) any portion of such amount
that remains unpaid after that time shall be paid 60
days after the first to occur of (a) any of the
other triggering events or
-33-
<PAGE> 37
(b) both Global Court Disapproval and Settlement
Court Agreement Disapproval.
(3) Notwithstanding the provisions of subsections B(1)
and B(2) above, if an Interim Claim against one or
more Defendant Class Members is consolidated for
trial with the claims of more than 50 other
Settlement Class Members, (i) the Interim Committee,
at the request of the Trustees, shall pay amounts
payable out of the Escrow Fund with respect to such
Interim Claims in such manner and over such a longer
time period (not to exceed 10 years) as the Trustees
shall determine is in the best interests of the
Trust and the Beneficiaries and (ii) the Trustees
shall have discretion to pay amounts payable by the
Trust with Respect to such Interim Claims in such
manner and over such a longer time period (not to
exceed 10 years) as the Trustees shall determine is
in the best interests of the Trust and the
Beneficiaries.
SECTION 7.5 Sources of Payment of liquidated amounts for
Interim Claims.
The amounts due for payment under Sections 7.3 and 7.4 shall be
paid:
A. by the Trust if Global Approval Judgment has been
entered by the date payment is due;
B. by Fibreboard Corporation if both Settlement
Agreement Approval Judgment and Global Court Disapproval have occurred by the
date payment is due;
-34-
<PAGE> 38
C. by the Insurers to the extent of their coverage
obligations as determined by the Final Decision in the Coverage Case, with any
remaining balance paid by Fibreboard Corporation, if each of Global Court
Disapproval, Settlement Agreement Court Disapproval and the Final Decision has
occurred by the date payment is due; and
D. out of the Escrow Fund if neither (A), (B), nor (C)
is applicable by the date a payment is due.
SECTION 7.6 Miscellaneous Interim Claim Provisions.
Any Interim Committee decision shall require the unanimous
approval of all members of the Interim Committee. In the event that unanimity
cannot be achieved, disputes over the handling of Interim Claims shall be
submitted to the Court for resolution. Class Counsel's designee shall not
disclose any privileged or confidential information supplied to such designee
by Fibreboard Corporation or the Insurers except as required by court order and
shall promptly notify the Party which designated such information as privileged
or confidential upon receipt of any subpoena or other formal request for such
information. The members of the Interim Committee shall not disclose any
settlement information with respect to Interim Claims to anyone other than
Fibreboard Corporation, Continental, Pacific or the Trust, except as required
by court order and upon reasonable prior notice to Fibreboard Corporation,
Continental, Pacific and the Trust.
-35-
<PAGE> 39
ARTICLE 8
MISCELLANEOUS
SECTION 8.1 Designated or Qualified Settlement Fund.
Fibreboard Corporation's, Continental's, CNA Casualty's,
Columbia's and Pacific's obligation to proceed with this Agreement are
expressly conditioned upon the receipt by Fibreboard Corporation and the
Insurers of a letter ruling from the Internal Revenue Service pursuant to which
the Internal Revenue Service confirms that the Trust will be treated either (i)
as a Designated Settlement Fund or (ii) as a Qualified Settlement Fund. In the
event that the Internal Revenue Service has not issued such a ruling within
twelve months after execution of this Agreement and has not expressed
substantial concerns about the merits of the ruling request, then Fibreboard
Corporation's and the Insurers' obligations to proceed are expressly
conditioned upon receipt of a written opinion reasonably satisfactory to
Fibreboard Corporation no later than twelve months after the date of this
Agreement from an independent and distinguished professional tax advisor that
either (i) the Trust will be treated either as a Designated Settlement Fund or
as a Qualified Settlement Fund or (ii) Fibreboard Corporation will not
recognize any net taxable income as a result of the Global Approval Judgment
and the transactions contemplated thereby, establishment of the Trust, or any
payments (other than those paid to Fibreboard Corporation) made by the Trust for
Trust Expenses, Class Member Claims or Third Party Claims. Fibreboard
Corporation and the Insurers shall use good faith efforts to obtain such a
ruling or advice, as the case may be, as promptly as practicable after
-36-
<PAGE> 40
the date of this Agreement. Class Counsel shall be kept fully informed about,
and may participate in, the efforts to obtain such a ruling.
The tax advisor will be selected in the following manner.
Fibreboard Corporation shall name three tax advisors. Within 5 days of receipt
of such names, Class Counsel or the Insurers may notify Fibreboard Corporation
that either of them objects to any such person on the ground that he or she is
not an independent and distinguished professional tax advisor. Fibreboard
Corporation shall select the final tax advisor from those persons remaining.
If no persons remain, Fibreboard Corporation may name a substitute or
substitutes, or may apply to Judge Patrick H. Higginbotham for (i) his binding
determination that any of the persons objected to is an independent and
distinguished professional tax advisor, and if he determines that any of the
persons selected is an independent and distinguished tax advisor Fibreboard
Corporation shall select the final tax advisor, from those persons remaining,
and (ii) if he determines that none of the persons remaining is an independent
and distinguished tax advisor, he will give his determination how any future
naming of candidates by Fibreboard Corporation and objections by Class Counsel
and the Insurers will proceed. If Fibreboard Corporation names a substitute or
substitutes, within five days of receipt of such name(s), Class Counsel or the
Insurers may notify Fibreboard Corporation that either of them objects to any
such person on the ground that he or she is not an independent and
distinguished professional tax advisor. Objections to any such substitute may
be brought to Judge Higginbotham as described above.
-37-
<PAGE> 41
SECTION 8.2 Counsel.
Any act or consent required by or which may be given by Representative
Plaintiffs pursuant to this Agreement may be accomplished by Class Counsel
acting on behalf of all Representative Plaintiffs. Class Counsel may act or
give their consent with the approval of any three or more of the Class Counsel
and, in such event, the Representative Plaintiffs shall be deemed to have so
acted or consented. Continental, Pacific, CNA Casualty, Columbia and Fibreboard
Corporation shall be entitled to rely upon such act or consent by Class Counsel
in any case where the act or consent is evidenced in a writing reflecting the
approval of any three of Class Counsel.
SECTION 8.3 No Oral Representations.
This Agreement, together with its accompanying exhibits, supersedes
and renders unenforceable all earlier oral representations, warranties or
promises made by any Party to any other Party with respect to the subject
matter of this Agreement.
SECTION 8.4 Payment of Costs.
Except as otherwise agreed, each of Fibreboard Corporation,
Continental, CNA Casualty, Columbia and Pacific shall pay its own legal and
other costs and expenses incurred in connection with the preparation,
negotiation, execution and delivery of this Agreement and the consummation of
the settlement contemplated hereby.
-38-
<PAGE> 42
SECTION 8.5 Modification and Waiver.
A. Subject to any necessary court approvals, this Agreement
and any of the exhibits hereto may be amended, supplemented or modified from
time to time by a writing executed by each of the Parties or, in the case of
Representative Plaintiffs, by Class Counsel (prior to Global Approval Judgment)
or the SCB (after Global Approval Judgment); provided, however, that the Trust
Agreement and the exhibits thereto, including the Trust Distribution Process,
may be amended only in accordance with the requirements and procedures
contained therein.
B. Fibreboard Corporation, Continental, CNA Casualty, Columbia,
Pacific or the Representative Plaintiffs (on behalf of the Settlement Class),
as the case may be, may from time to time by written instrument waive any
provision of this Agreement or any of the exhibits hereto which inures to its
or their benefit; provided, however, that the provisions of the Trust Agreement
and exhibits thereto, including the Trust Distribution Process, may be waived
only in accordance with the requirements and procedures contained therein. Any
such waiver or consent shall be effective only in the specific instance, for
the specific provision of this Agreement or exhibit hereto and for the specific
purpose for which it is given.
SECTION 8.6 Further Actions.
Each of Fibreboard Corporation, Continental, CNA Casualty, Columbia,
Pacific and the Representative Plaintiffs and their respective counsel shall
take such actions and execute such additional documents as may be reasonably
necessary or appropriate to consummate or implement the settlement contemplated
by this Agreement.
-39-
<PAGE> 43
SECTION 8.7 Effectiveness of Agreement Notwithstanding Developments.
The Parties understand and contemplate that during the period
necessary to obtain Global Approval Judgment there will almost certainly be
developments that bear on the issues being resolved and compromised by this
Agreement, including but not limited to, decisions on issues common to other
parties in the Coverage Case, controlling decisions by the California Supreme
Court issued in other cases, changes in estimates as to volume and severity of
future asbestos personal injury claims, procedural rulings or legislative
actions that may make it easier or more difficult successfully to prosecute
claims against asbestos defendants or their insurers and changes in the
financial condition of other asbestos defendants, any of which may appear to
have a bearing on the settlement of issues resolved herein. The Parties have
carefully weighed potential developments of this nature and have taken them
into account in reaching the compromise recited on the record on August 27,
1993 and reflected in this Agreement and no such event subsequent to that date
shall be the basis for modifying this Agreement or relieving any of the Parties
from any of its terms. The fairness and reasonableness of this Agreement shall
be assessed as of August 27, 1993.
SECTION 8.8 No Admission or Use.
This Agreement and the provisions thereof, whether or not Global
Approval Judgment is entered, shall in no event be offered as or be deemed to
be evidence or an admission or a concession on the part of any of the Parties
of or with respect to any claim or any fault, liability or damages
whatsoever. This Agreement
-40-
<PAGE> 44
and the settlement provided for herein, whether or not consummated, and any
actions or proceedings taken to enter into or pursuant to this Agreement or
otherwise, are not, and shall not in any event be construed, interpreted or
used as evidence of a presumption, concession or admission by any Party of the
truth of any fact alleged or the validity of any claim or defense which has,
could have been or could be asserted in any litigation, or of any deficiency in
any claim or defense which was, could have been or could be asserted in any
litigation, or of any liability, fault or dereliction of duty or breach of
contract of any Party. Notwithstanding the foregoing, any Party shall be
entitled to introduce this Agreement in evidence for the purpose of enforcing
its terms. Nothing herein is intended to suggest that any asbestos-related
personal injury claim may be asserted against Fibreboard, the Settlement Trust
or the Insurers by a person who cannot prove exposure to asbestos-containing
materials manufactured by Fibreboard.
SECTION 8.9 No Breach of Other Obligations.
Neither this Agreement nor any acts, statements or omissions of the
Parties in connection with the negotiation, execution or performance thereof
shall be claimed to constitute a breach of any contract, policy of insurance or
law or the basis for any claim of bad faith. Nothing in this Agreement calls
for or obligates any of the Parties in any way to violate or breach its
obligations under any agreement and no term or provision of this Agreement
shall be so construed.
SECTION 8.10 Third Party Beneficiaries.
There shall be no third party beneficiaries of this Agreement other
than the non-Party Releasees hereunder. No Person other than the Parties hereto,
-41-
<PAGE> 45
the Settlement Class Members and the Releasees hereunder, shall have any right
or claim under or in respect of this Agreement.
SECTION 8.11 Rights and Obligations of Fibreboard Corporation
and the Insurers Under the Settlement Agreement
and Related Agreements.
This Agreement shall not abridge or in any way modify or affect the
rights or obligations of Fibreboard Corporation, Pacific, Continental, CNA
Casualty or Columbia in relation to each other under the Settlement Agreement
or related agreements referred to therein. All such rights and obligations
shall be in addition to those created by this Agreement even where they pertain
to the same subject matter. The definitions contained in the Glossary and in
the provisions of this Global Settlement Agreement and its exhibits shall have
no application to the Settlement Agreement or the related agreements referred
to therein unless incorporated explicitly by written addendum to such
agreements.
SECTION 8.12 Headings.
The section headings contained in this Agreement and its exhibits are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement or its exhibits.
SECTION 8.13 Notices.
All notices, requests, demands, claims and other communications
hereunder shall be in writing. Any notice, request, demand, claim or other
communication hereunder shall be deemed duly given if it is sent by registered
or certified mail, postage prepaid, or sent by prepaid overnight courier or
confirmed telecopier, and addressed to the intended recipient as set forth
below:
-42-
<PAGE> 46
If to Fibreboard Corporation, addressed to:
Fibreboard Corporation
2121 North California Blvd.
Walnut Creek, CA 94596
Attention: Michael R. Douglas
Senior Vice President and
General Counsel
Telecopier: (510) 274-0714
and
BROBECK, PHLEGER & HARRISON
Spear Street Tower
One Market Plaza
San Francisco, California 94105
Attention: Stephen M. Snyder, Esq.
Telecopier: (415) 442-1020
If to Continental, addressed to:
Continental Casualty Co.
Specialty Claims Office, 12th Floor
50 Fremont Street
San Francisco, CA 94105
Attention: Claim Manager
Telecopier: (415) 512-4899
and
WACHTELL, LIPTON, ROSEN & KATZ
51 West 52nd St.
New York, New York 10019
Attention: Herbert M. Wachtell, Esq.
Telecopier: (212) 403-2000
and
CARROLL, BURDICK & McDONOUGH
44 Montgomery St., Suite 400
San Francisco, CA 94104
Attention: Rodney L. Eshelman, Esq.
Telecopier: (415) 989-0932
-43-
<PAGE> 47
If to Columbia, addressed to:
Columbia Casualty Company
c/o Continental Casualty Co.
Specialty Claims Office, 12th Floor
50 Fremont Street
San Francisco, CA 94105
Attention: Claim Manager
Telecopier: (415) 512-4899
and
WACHTELL, LIPTON, ROSEN & KATZ
51 West 52nd St.
New York, New York 10019
Attention: Herbert M. Wachtell, Esq.
Telecopier: (212) 403-2000
and
CARROLL, BURDICK & McDONOUGH
44 Montgomery St., Suite 400
San Francisco, CA 94104
Attention: Rodney L. Eshelman, Esq.
Telecopier: (415) 989-0932
If to CNA Casualty, addressed to:
CNA Casualty Company of California
c/o Continental Casualty Co.
Specialty Claims Office, 12th Floor
50 Fremont Street
San Francisco, CA 94105
Attention: Claim Manager
Telecopier: (415) 512-4899
and
WACHTELL, LIPTON, ROSEN & KATZ
51 West 52nd St.
New York, New York 10019
Attention: Herbert M. Wachtell, Esq.
Telecopier: (212) 403-2000
-44-
<PAGE> 48
and
CARROLL, BURDICK & McDONOUGH
44 Montgomery St., Suite 400
San Francisco, CA 94104
Attention: Rodney L. Eshelman, Esq.
Telecopier: (415) 989-0932
If to Pacific, addressed to:
Pacific Indemnity Company
Chubb & Son Inc.
15 Mountain View Road
P.O. Box 1615
Warren, NJ 07061-1615
Attention: Malcolm B. Burton
Telecopier: (908) 580-3030
and
WHITE & CASE
1155 Avenue of the Americas
New York, NY 10036
Attention: Paul J. Bschorr, Esq.
Telecopier: (212) 354-8113
If to the Representative Plaintiffs, addressed to:
NESS, MOTLEY, LOADHOLT,
RICHARDSON & POOLE
151 Meeting Street, Suite 600
P.O. Box 1137
Charleston, South Carolina 29402
Attention: Joseph F. Rice, Esq.
Joseph B. Cox, Jr., Esq.
Telecopier: (803) 577-7513
CARTWRIGHT, SLOBODIN, BOKELMAN, BOROWSKY,
WATNICK, MOORE & HARRIS, INC.
101 California Street, Suite 2600
San Francisco, California 94111
Attention: Harry F. Wartnick, Esq.
Telecopier: (415) 391-5845
-45-
<PAGE> 49
KAZAN, McCLAIN, EDISES & SIMON
171 Twelfth Street, Suite 300
Oakland, California 94607
Attention: Steven Kazan, Esq.
Telecopier: (510) 835-4913
and
CAPLIN & DRYSDALE, CHARTERED
399 Park Avenue
New York, New York 10022
Attention: Elihu Inselbuch, Esq.
Telecopier: (212) 644-6755
Such communications shall be effective when they are received by the addressee
thereof. Any party may change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered by giving the
other party notice in the manner herein set forth.
-46-
<PAGE> 50
SECTION 8.14 Counterparts.
This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together will constitute
one and the same instrument.
IN WITNESS WHEREOF, this Agreement has been executed on December
23, 1993 by the undersigned, thereunto duly authorized.
On behalf of the
Representative Plaintiffs
By: /S/ JOSEPH RICE, ESQ.
--------------------------------------------------------------------
Joseph Rice, Esq.
By: /S/ JOSEPH B. COX, JR., ESQ.
--------------------------------------------------------------------
Joseph B. Cox, Jr., Esq.
By: /S/ HARRY F. WARTNICK, ESQ.
--------------------------------------------------------------------
Harry F. Wartnick, Esq.
By: /S/ STEVEN KAZAN, ESQ.
--------------------------------------------------------------------
Steven Kazan, Esq.
By: /S/ ELIHU INSELBUCH, ESQ.
--------------------------------------------------------------------
Elihu Inselbuch, Esq.
-47-
<PAGE> 51
FIBREBOARD CORPORATION
By: /S/ MICHAEL R. DOUGLAS
----------------------------------------------------------------------
Title Senior Vice President & General Counsel
--------------------------------------------------------------------
CONTINENTAL CASUALTY COMPANY
By: /S/ LAURENS F. TERRY
----------------------------------------------------------------------
Title Vice President
-------------------------------------------------------------------
CNA CASUALTY COMPANY OF CALIFORNIA
By: /S/ LAURENS F. TERRY
----------------------------------------------------------------------
Title Vice President
--------------------------------------------------------------------
COLUMBIA CASUALTY COMPANY
By: /S/ LAURENS F. TERRY
----------------------------------------------------------------------
Title Vice President Columbia Casualty Co.
--------------------------------------------------------------------
-48-
<PAGE> 52
PACIFIC INDEMNITY COMPANY
By: /S/ JOHN J. DEGNAN
---------------------------------------------------------------------
Title Senior Vice President
-------------------------------------------------------------------
-49-
<PAGE> 53
EXHIBIT A
GLOSSARY OF TERMS
IN
GLOBAL SETTLEMENT AGREEMENT,
TRUST AGREEMENT,
TRUST DISTRIBUTION PROCESS,
AND
DEFENDANT CLASS SETTLEMENT AGREEMENT
<PAGE> 54
TABLE OF CONTENTS
<TABLE>
<S> <C>
Additional Policy Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
April 9 Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Asbestos Lung Disease I or ALD-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Asbestos Lung Disease II or ALD-2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Attorney Ad Litem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
B-reader Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Claimant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Claims Resolution Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Class Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Class Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Class Member Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
CNA Casualty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Columbia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Continental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Continental-Pacific Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Continental Releasees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Court . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Coverage Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Defendant Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Defendant Class Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Defendant Class Member . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Defendant Class Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Defendant Class Settlement Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Defense Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Designated Settlement Fund or DSF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Distributable Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Distribution Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Earnings Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Escrow Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Escrow Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Escrow Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Exigent Health Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Expedited Review Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Exposed Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Express Indemnity Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Extreme Hardship Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Fibreboard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Fibreboard Releasees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
FIFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Final Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
-i-
<PAGE> 55
<TABLE>
<S> <C>
Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Fund I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Fund II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Fund III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Global Approval Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Global Court . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Global Court Disapproval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Global Settlement Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Increased Principal Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Initial Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Insurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Interim Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Interim Claimant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Interim Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Interim Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Judgment Forum Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Lung Cancer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Malignancy Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Medical Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Mesothelioma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Non-Malignancy Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Other Cancer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Other Claims Resolution Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Pacific Indemnity Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Pacific Releasees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Permitted Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Personal Injury Asbestos Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PFT Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Principal Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Qualified Arbitrator and Qualified Mediator . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Qualified Settlement Fund or QSF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Released Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Representative Defendant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Representative Plaintiffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Reserve Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Residual Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Rule 23 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Select Counsel for the Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Schedule Category . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
-ii-
<PAGE> 56
<TABLE>
<S> <C>
Scheduled Disease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Second Injury Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Settled Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Settlement Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Settlement Agreement Approval Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Settlement Agreement Court Disapproval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Settlement Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Settlement Class Member . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Settlement Class Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Settlement Conference Designee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Termination Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Third Party Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Third Party Claimant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Trust Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Trust Distribution Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Trust Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Trustors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Unreimbursed Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Unsettled Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>
-iii-
<PAGE> 57
1. "Additional Policy Claim" means each and every claim,
demand, action or suit of any kind (i) which arises under, pursuant to or
related to the Insurance Policies by any person or entity, whether directly or
indirectly asserted against the Insurers or any third party, or arising under
any term or terms or alleged coverage provided by the Insurance Policies and
(ii) which arises directly or indirectly from personal injury resulting from
exposure to asbestos or asbestos-containing materials for which Fibreboard may
bear legal liability.
2. "Affiliate" of a Person means (i) a Subsidiary of such
Person, (ii) a Person which owns, either alone or with or through one or more
Affiliates, directly or indirectly, securities or other ownership interests
having ordinary voting power to elect a majority of the board of directors or
other persons performing similar functions of such Person, and (iii) a
Subsidiary of any Affiliate of such Person.
3. "April 9 Agreement" means the agreement between Continental
and Fibreboard Corporation dated April 9, 1993, as it has been amended,
pursuant to which Continental and Fibreboard Corporation agreed, among other
things, upon terms and conditions set forth therein, to use their best efforts
jointly to negotiate and finalize a global class action settlement with
personal injury claimants and Continental agreed, whether or not a global
settlement was reached, to pay certain defense and other costs of certain
asbestos-related claims on an interim basis.
-1-
<PAGE> 58
4. "Asbestos Lung Disease I" or "ALD-1" means either:
(1) a diagnosis of pulmonary asbestosis by a
board-certified internist or pulmonary specialist based on the following
minimum objective criteria:
(i) Chest X-rays for which a B-reader report
is furnished showing small irregular opacities of ILO Grade 1/0
and pulmonary function testing and physical examination that
shows either:
a. FVC <80% of predicted with
FEV-1/FVC > or = to 75% (actual value);
or
b. TLC <80% of predicted, with either
DLCO < or = to 76% of predicted or bilateral
basilar crackles, and also the absence of any
probable explanation for this DLCO result or
bilateral basilar crackles finding other than the
presence of asbestos lung disease; or
(ii) Chest X-rays for which B-reader report is
furnished showing small irregular opacities of ILO Grade 1/1 or
greater; and pulmonary function testing that shows either:
-2-
<PAGE> 59
a. FVC <80% of predicted with FEV-1/FVC
> or = to 72% (actual value) or, if the individual
tested is at least 68 years old at the time of the
testing, with FEV-1/FVC > or = to 65% (actual
value);
or
b. TLC <80% of predicted.
or
(2) A statement by a board-certified pathologist that
more than one representative section of lung tissue otherwise
uninvolved with any other process (e.g., cancer or emphysema)
demonstrates a pattern of peribronchiolar or parenchymal scarring
in the presence of characteristic asbestos bodies, and also that
there is no other more likely explanation for the presence of the
fibrosis.
5. "Asbestos Lung Disease II" or "ALD-2" means a diagnosis by
a qualified physician that indicates other abnormalities of the parenchyma or
pleura attributed to prior asbestos exposure, including pleural plaques,
pleural thickening, pleural encasement and mild parenchymal fibrosis not
meeting the definition of ALD-1.
-3-
<PAGE> 60
6. "Attorney Ad Litem" means Professor Eric Green of Boston
University Law School or such successor as may be appointed by the Court.
7. "Beneficiary" means any Settlement Class Member who asserts
a Class Member Claim, now or at any time in the future.
8. "B-reader Report" means a report of a B-reader certified at
the time the report is prepared (or of an individual who at one time was a
certified B-reader and who has not subsequently failed the examination for
certification or recertification as a B-reader) based on chest x-rays of an
Exposed Person.
9. "Claimant" means any Person, or legal representative of a
Person, who seeks recovery from the Trust for a Personal Injury Asbestos Claim
of any kind.
10. "Claims Resolution Facility" means a facility that
establishes a method for the liquidation and resolution of claims that is
administered by the Trust.
11. "Class Action" means Ahearn et al. v. Fibreboard Corp. et
al., 6:93 cv 526 (E.D. Tex.), filed by Representative Plaintiffs in the Global
Court on behalf of themselves and the Settlement Class Against Fibreboard
Corporation on September 9, 1993.
-4-
<PAGE> 61
12. "Class Counsel" means Joseph F. Rice and Joseph B. Cox,
Jr., of the firm of Ness, Motley, Loadholt, Richardson & Poole, P.C.; Harry F.
Wartnick, of the firm of Cartwright, Slobodin, Bokelman, Borowsky, Wartnick,
Moore & Harris, Inc.; and Steven Kazan, of the firm of Kazan, McClain, Edises &
Simon; or successors of the foregoing individuals.
13. "Class Member Claim" means any Personal Injury Asbestos
Claim of a Settlement Class Member.
14. "CNA Casualty" means CNA Casualty Company of California, a
California corporation.
15. "Columbia" means Columbia Casualty Company, an Illinois
Corporation.
16. "Continental" means Continental Casualty Company, an
Illinois Corporation.
17. "Continental-Pacific Agreement" means the agreement between
Continental and Pacific dated as of October 12, 1993 pursuant to which
Continental and Pacific settled the dispute between them and agreed upon terms
for the sharing of liabilities of each of them with respect to ceratin
asbestos-related claims.
-5-
<PAGE> 62
18. "Continental Releases" are as defined in Section 2.5(B) of
the Global Settlement Agreement.
19. "Court" means the Honorable Robert M. Parker, now the Chief
Judge for the United States District Court for the Eastern District of Texas.
In the event that for any reason Judge Parker ceases to be a Judge of the
United States as defined in Article III of the United States Constitution or
otherwise cannot fulfill the responsibilities of the Court, the term "Court"
shall mean any United States Circuit or District Judge designated by the Chief
Judge of the United States Court of Appeals of the Fifth Circuit to exercise
continuing jurisdiction over the Trust and the Global Settlement Agreement.
20. "Coverage Case" means the action bearing the caption
Asbestos Insurance Coverage Cases, Judicial Council Coordination Proceeding No.
1072, which was pending as of the date of the Global Settlement Agreement in
the Court of Appeal of the State of California, First Appellate District,
Division One, Nos. A049419 et al.
21. "Defendant Class" means all Persons with Third Party Claims.
22. "Defendant Class Counsel" means Richard Josephson of Baker
& Botts and R. Bruce Shaw of Nelson, Mullins, Riley & Scarborough or their
successors.
-6-
<PAGE> 63
23. "Defendant Class Member" means any Person who or which is a
member of the Defendant Class.
24. "Defendant Class Order" means an order of the Court finally
certifying the Defendant Class as a class for settlement purposes under Rule
23(b)(1) and/or (b)(2) of the Federal Rules of Civil Procedure.
25. "Defendant Class Settlement Agreement" means the agreement
annexed to the Global Settlement Agreement as Exhibit C.
26. "Defense Costs" mean Fibreboard Corporation's defense fees
and costs, including case management system fees and costs, as more fully
defined in the Settlement Agreement.
27. "Designated Settlement Fund" or "DSF" is as defined in
Section 468B of the Internal Revenue Code of 1986.
28. "Distributable Amount" means, with respect to Fund I, Fund
II or Fund III, for any Fiscal Year, the sum of the Earnings Amount for that
Fund for that Fiscal Year plus (i) the Principal Amount or (ii) in the event
that the provisions of Appendix 1 to the Trust Distribution Process apply, the
Increased Principal Amount, for that Fiscal Year.
-7-
<PAGE> 64
29. "Distribution Date" is as defined in paragraph E.4 of the
Trust Distribution Process.
30. "Earnings Amount" means, with respect to Fund I, Fund II or
Fund III, as the case may be, all elements of current periodic income from such
Fund (other than any such income on the amounts in the Reserve Account),
including interest, periodic dividends (but not special, liquidating or wasting
dividends), rent, royalty and other similar payments which represent earnings
or profit on an asset, and do not represent elements of appreciation or gain or
depreciation or loss (whether realized or unrealized) on an asset, all
determined on an accrual basis in accordance with generally accepted accounting
principles.
31. "Escrow Agent" means the Person acting as escrow agent
pursuant to the Escrow Agreement.
32. "Escrow Agreement" means an Escrow Agreement substantially
in the form attached to the Global Settlement Agreement as Exhibit D.
33. "Escrow Fund" means the escrow account established pursuant
to Section 2.3(A) of the Global Settlement Agreement.
34. "Exigent Health Claim" means a Class Member Claim that is
supported by an affidavit or declaration made under penalty of perjury from a
physician who has examined the Settlement Class Member within 120 days of the
-8-
<PAGE> 65
date of the affidavit or declaration, which states that the physician believes
that because of asbestos-related disease there is substantial medical doubt
that the Settlement Class Member will survive beyond six months from the date
of the declaration or affidavit.
35. "Expedited Review Claim" is as defined in Section B.2 of
the Trust Distribution Process.
36. "Exposed Person" means the individual whose exposure to
asbestos results in a Personal Injury Asbestos Claim.
37. "Express Indemnity Claim" means a Third Party Claim (i)
which asserts that Fibreboard is liable to indemnify or reimburse the holder
of such claim for payments made or liabilities, expenses or costs incurred by
such claim holder on account of an asbestos-related personal injury claim
asserted against such claim holder by a Settlement Class Member and (ii) which
would not be barred under applicable law by a court determination that a
settlement between Fibreboard (or the Trust) and the Settlement Class Member
asserting such asbestos-related personal injury claim was made in good faith.
38. "Extreme Hardship Claim" means a Class Member Claim as to
which the Interim Committee (if the Class Member Claim is submitted during the
Interim Period) or the Trust (if the Class Member Claim is submitted after
entry of
-9-
<PAGE> 66
Global Approval Judgment), in its sole discretion, determines that because of
an asbestos-related disease the Settlement Class Member is suffering a severe
financial hardship.
39. "Fibreboard" means Fibreboard Corporation; Fibreboard Paper
Product Corporation; Fibreboard Products, Incorporated; Paraffine Companies,
Incorporated; Plant Rubber & Asbestos Works; Pabco Products, Incorporated; and
Pabco Insulation Corporation; and each of their respective predecessors,
Subsidiaries and divisions, and with regard to Fibreboard Corporation's
liability only, each of their respective successors in interest.
40. "Fiberboard Releasees" mean the following entities, each of
their respective predecessors, Subsidiaries, divisions, current and former
attorneys, officers, directors and employees, and, with regard to Fiberboard
Corporation's liability only, each of their respective successors in interest:
(i) Fibreboard Corporation; Fibreboard Paper Products
Corporation; Fibreboard Products, Incorporated; Paraffine
Companies, Incorporated; Plant Rubber & Asbestos Works;
Pabco Products, Incorporated; and Pabco Insulation
Corporation;
-10-
<PAGE> 67
(ii) Louisiana-Pacific Corporation (other than for
asbestos-related claims against Louisiana-Pacific
which (a) state a basis for liability by
Louisiana-Pacific wholly independent of any
relationship between Louisiana-Pacific and
Fibreboard Corporation or any act or omission in
connection with such a relationship, and (b) as
to which there is no basis for any claim against
Fibreboard Corporation by the claimant or by
Louisiana-Pacific).
41. "FIFO" means first in, first out.
42. "Final Decision" means the final decision or
decisions obtained when all the issues that are pending in the Coverage Case by
Fibreboard Corporation against certain of the Insurers have been finally
resolved and no further appellate review or remand proceedings are possible
with respect to such claims.
43. "Fiscal Year" means the calendar year, except
that the first Fiscal Year shall be that portion of a calendar year commencing
with the date of execution of the Trust Agreement and ending on the last day of
the calendar year in which such execution occurs, and references to a number of
Fiscal Years after Global Approval Judgment shall be determined based on the
assumption that the first Fiscal Year after Global Approval Judgment shall be
the Fiscal Year during which Global Approval Judgment occurs.
-11-
<PAGE> 68
44. "Fund I" is as defined in paragraph E of the Trust
Distribution Process.
45. "Fund II" is as defined in paragraph E of the
Trust Distribution Process.
46. "Fund III" is as defined in paragraph E of the
Trust Distribution Process.
47. "Global Approval Judgment" means a judgment,
order or other decree issued and entered by the Global Court in an action in
which Fibreboard Corporation, Continental, CNA Casualty, Columbia, Pacific, the
Settlement Class and all persons having or who may have Third Party Claims
have been made parties, either directly or in a representative capacity, as to
which judgment, order or decree any appeal (and subsequent remand, if any) has
been finally decided and no further appeal or petition for certiorari can be
taken or granted and which judgment, order or decree:
(a) approves the terms and provisions of the Global
Settlement Agreement, including the releases and
indemnities contained therein;
(b) approves the Trust Agreement and the Trust
Distribution Process incorporated in the
Global Settlement Agreement;
-12-
<PAGE> 69
(c) orders the parties to implement the Global
Settlement Agreement;
(d) determines and awards the fees and expenses of
Class Counsel;
(e) declares that the settlement reflected by the
Global Settlement Agreement, with respect to both
Class Member Claims and Third Party Claims, is
fair, reasonable and adequate and was entered into
in good faith;
(f) declares that the Settlement Class Members and the
Defendant Class Members have received adequate
notice of the settlement contemplated by the
Global Settlement Agreement and Rule 23 of the
Federal Rules of Civil Procedure;
(g) declares that the Settlement Class Members have
been adequately, professionally and ethically
represented by Class Counsel;
(h) orders all Class Member Claims, except for claims
for punitive or exemplary damages, directed to the
Trust for disposition pursuant to the Trust
Agreement and Trust Disposition Process;
-13-
<PAGE> 70
(i) declares that, as provided in Section 2.2(B) of
the Global Settlement Agreement, only payment of
funds pursuant to the Settlement Class Members'
individual settlements with the Trust shall
trigger the notice, approval and forfeiture
provisions of the Longshore and Harbor Workers
Compensation Act and other similar state and
federal workers compensation provisions;
(j) orders dismissal on the merits, without costs and
with prejudice, of the Class Action and all of the
Class Member Claims (including all punitive and
exemplary damage claims) against the Fibreboard,
Continental and Pacific Releasees;
(k) declares the provision contained in the Global
Settlement Agreement whereby Fibreboard
Corporation and the Insurers agree that the
Insurers shall be discharged from any further
obligation under or in connection with the
Insurance Policies, except as an Insurer has
specifically assumed under the Global Settlement
Agreement or has preserved under the Settlement
Agreement (and the related agreements referred to
therein), to be fair, reasonable and non-collusive;
-14-
<PAGE> 71
(l) discharges the Fibreboard, Continental and Pacific
Releasees from any further liability with respect
to any Class Member Claim or Third Party Claim;
(m) permanently enjoins Fibreboard Corporation from
asserting any claim released or discharged under
the Global Settlement Agreement against any
Continental or Pacific Releasee;
(n) permanently enjoins any Settlement Class Member
or Third Party Claimant from asserting any claim
released or discharged under the Global Settlement
Agreement against any Fibreboard, Continental or
Pacific Releasee;
(o) approves the provisions set forth in the Global
Settlement Agreement and the Trust Distribution
Process for the resolution of Third Party Claims;
and
(p) retains exclusive jurisdiction in the Court
rendering such judgment, order or decree (1) to
enforce the provisions of such judgment, order
or decree, (2) to resolve any disputes as to the
performance or interpretation of the Global
Settlement Agreement, or such judgment, order or
decree, (3) to adjudicate any attempt by any
person to challenge such judgment, order or
-15-
<PAGE> 72
decree in any respect, and (4) over the
maintenance, administration and distribution of
the Trust and the funds contained therein, subject
to and in accordance with the provisions of the
Trust Agreement and the Trust Distribution
Process incorporated therein;
provided that Global Approval Judgment shall not be deemed to have been entered
unless and until either Settlement Agreement Approval Judgment has been entered
or Settlement Agreement Court Disapproval occurs.
48. "Global Court" means the United States District
Court for the Eastern District of Texas.
49. "Global Court Disapproval" means a judgment, order
or other decree of the Global Court or other court of competent jurisdiction
in an action in which Fibreboard Corporation, Continental, CNA Casualty,
Columbia, Pacific and the Settlement Class have been made parties, as to which
judgment, order or decree any appeal (and subsequent remand, if any) has been
finally decided and no further appeal or petition for certiorari can be taken
or granted and which judgment, order or decree disapproves or declines to
approve the Global Settlement Agreement.
50. "Global Settlement Agreement" means the settlement
agreement as of August 27, 1993 among Continental, CNA Casualty, Columbia,
Pacific,
-16-
<PAGE> 73
Fibreboard Corporation and the Representative Plaintiffs as representatives of
the Settlement Class.
51. "Glossary" means this Exhibit A to the Global
Settlement Agreement.
52. "Increased Principal Amount" (i) for any of the
third through the twelfth Fiscal Years after Global Approval Judgment, means
125% of the Principal Amount for such Fiscal Year and (ii) for any of the
sixteenth through the twentieth Fiscal Years after Global Approval Judgment,
means 112.5% of the Principal Amount for such Fiscal Year.
53. "Initial Trustee" is as defined in Section 7.18 of
the Trust Agreement.
54. "Insurance Policies" mean policy number CLP
3197650 issued by Continental effective May 4, 1957, in favor of Fibreboard
Corporation under its former name, Fibreboard Paper Products Corporation,
policy number RD 951 90 81 issued by Continental, policy number RDU 975 65 87
issued by CNA Casualty and an endorsement thereto issued by Continental, policy
number RDU 186 27 82 issued by Columbia, policy number RDU 186 30 62 issued by
Columbia, policy number RDU 365 32 19 issued by Columbia, the policy that was
alleged by Fibreboard Corporation to have been issued by Continental in the
period 1954-1956, and policy number LAC 88700 found to have been issued by
Pacific to Fibreboard Corporation
-17-
<PAGE> 74
effective May 4, 1956, and any other policies that were, or may be alleged to
have been, issued to Fibreboard Corporation by any of the Insurers, including
those set forth in the Pacific Indemnity Agreement.
55. "Insurers" mean (i) Continental, CNA Casualty,
Columbia and all insurance or indemnity companies controlling, controlled by or
under common control with any of them and (ii) Pacific and all insurance or
indemnity companies controlling, controlled by or under common control with it.
56. "Interim Claim" is as defined in Section 7.1 of the
Global Settlement Agreement.
57. "Interim Claimant" is a Person asserting an Interim
Claim.
58. "Interim Committee" is as defined in Section 7.1 of
the Global Settlement Agreement.
59. "Interim Period" is as defined in Section 7.1 of the
Global Settlement Agreement.
60. "Judgment Forum Law" is as defined in Section H.1.a
of the Trust Distribution Process.
61. "Liquidation" occurs with respect to any Class Member
Claim or Third Party Claim on the date on which the validity and amount thereof
is finally
-18-
<PAGE> 75
determined pursuant to the Trust Distribution Process or the date on which a
final, nonappealable judgment is entered against the Trust with respect to such
Class Member Claim or Third Party Claim.
62. "Lung Cancer" means a diagnosis by a qualified
physician of a malignant primary tumor of any cell type, originating within the
lung, caused or contributed to by exposure to asbestos.
63. "Malignancy Claim" means a claim for Mesothelioma,
Lung Cancer, or Other Cancer as defined in this Glossary.
64. "Medical Report" means a written narrative report by
a physician confirming that (i) an Exposed Person has an asbestos-related
personal injury or disease, based on a physical examination (as reflected in
medical records or performed by the physician preparing the narrative report)
of the Exposed Person, or (ii) following review of pertinent medical records
and information, that an asbestos-related personal injury or disease caused or
substantially contributed to the death of an Exposed Person.
65. "Mesothelioma" means a diagnosis by a board certified
pathologist of a malignant tumor caused or contributed to by exposure to
asbestos originating in the mesothelial cells of the pleura, peritoneum or like
tissue, or
-19-
<PAGE> 76
reasonable equivalent clinical diagnosis in the absence of adequate tissue for
pathological diagnosis.
66. "Non-Malignancy Claim" means a claim for ALD-1 or
ALD-2 as defined in this Glossary.
67. "Other Cancer" means a diagnosis by a qualified
physician that indicates a malignant tumor originating in the larynx, pharynx,
stomach, esophagus, colon or rectum, caused or contributed to by exposure to
asbestos.
68. "Other Claims Resolution Facility" means a facility
that establishes a method for the liquidation and resolution of
asbestos-related personal injury claims administered by a Person other than the
Trust.
69. "Pacific" means Pacific Indemnity Company, a
California corporation.
70. "Pacific Indemnity Agreement" collectively means the
Agreement and a Rescission of Insurance Policies, both dated March 27, 1992,
between Fibreboard Corporation and Pacific, pursuant to which Pacific and
Fibreboard Corporation agreed to settle their insurance coverage dispute.
71. "Pacific Releasees" are as defined in Section 2.5(C)
of the Global Settlement Agreement.
-20-
<PAGE> 77
72. "Permitted Investments" are as defined in Section 4.3
of the Trust Agreement.
73. "Person" means any individual, corporation,
partnership or association, whether or not incorporated, and any federal, state
or local government or agency thereof, or any other entity and his, her or its
legal representative.
74. "Personal Injury Asbestos Claim" means:
(i) each and every claim, demand, action or suit of any kind
for personal injury arising, directly or indirectly, from
exposure to asbestos-containing products (including, without
limitation, any direct action claim, wrongful death claim,
punitive or exemplary damages claim, loss of consortium claim,
fear of disease claim, bad faith claim, or surviving personal
injury claim) and whether such injury manifested itself
heretofore or hereafter, or (ii) any claim, demand, action or
suit of any kind arising, directly or indirectly, from any
such claim, demand, action or suit referred to in (i) above
(including without limitation any bad faith claim,
contribution claim, indemnity claim, warranty claim, direct
action claim or Additional Policy Claim)
against Fibreboard, against the Insurance Policies or against the Insurers in
any way predicated on obligations created by the Insurance Policies; provided,
however, that
-21-
<PAGE> 78
a Personal Injury Asbestos Claim shall not include any claim for benefits
brought by an employee or his or her personal representative under any federal
or state workers compensation statute (including, but not limited to, the
United States Longshore and Harbor Workers Compensation Act and the Federal
Employees Compensation Act), but shall include any subrogation, contribution or
indemnity claim arising from such claim for benefits.
75. "PFT Report" means a report by a pulmonary specialist
or a board-certified internist interpreting the results of pulmonary function
testing of an Exposed Person.
76. "Principal Amount" means, for any Fiscal Year after
Global Approval Judgment:
(i) (a) (x) the aggregate fair market value of all of the
investment assets contained in the Fund for which the
Distributable Amount is being determined (excluding the then
outstanding balance of the Reserve Account) at the close of
business on the last business day of the Fiscal Year for which
the calculation is made, minus (y) the Earnings Amount for
such Fiscal Year, plus (z) all amounts, if any, paid during
such Fiscal Year for Trust Expenses, Class Member Claims,
Third Party Claims and payments made pursuant to Section 7.16
of the Trust Agreement, in each case for such Fiscal Year
(other than any such payments made out of the Reserve
Account), minus
(b) for any Fiscal Year prior to the 21st Fiscal Year after
Global Approval Judgment, the greater of (i) Zero and (ii) the
lesser of (Y) the aggregate Surplus for all prior Fiscal Years
and (Z) Zero minus Unreimbursed Borrowings; multiplied by
(ii) a fraction, the numerator of which is one and the denominator
of which is the number of Fiscal Years that will occur from
the beginning
-22-
<PAGE> 79
of the Fiscal Year for which the calculation is made through
and including the end of the 25th Fiscal Year after Global
Approval Judgment in the case of Fund I, the 20th Fiscal Year
after the end of Fund I (or, if the Trustees have determined
to delay the transfer of the remaining balance in Fund II
beyond the twentieth Fiscal Year after the end of Fund I
pursuant to Section E.2.c(ii) of the Trust Distribution
Process, the end of Fund II so determined by the Trustees) in
the case of Fund II and the 15th Fiscal Year after the end of
Fund II in the case of Fund III (so that, for example, for the
Principal Amount applicable to the tenth Fiscal Year after
Global Approval Judgment, such denominator would be 16);
provided, however, that
(1) for the first Fiscal Year after Global Approval Judgment (a) the
numerator in the fraction stated in clause (ii) above shall be a
fraction in which the numerator is the number of full weeks in such
Fiscal Year (but not less than one) and the denominator is 52 (to
adjust for the length of such Fiscal Year) and (b) the Principal
Amount determined as provided above, including as set forth in clause
(1)(a) of this proviso shall be multiplied by 0.4;
(2) for the second Fiscal Year after Global Approval Judgment the
Principal Amount shall be the sum of (A) the Principal Amount
otherwise determined as provided in this definition of Principal
Amount multiplied by 0.4, plus (B) the Principal Amount with respect
to the first Fiscal Year after Global Approval Judgment as determined
in clause (1) above multiplied by 0.75; and
-23-
<PAGE> 80
(3) for each of the twenty-first through the twenty-fifth Fiscal Years
after Global Approval Judgment, the Distributable Amount may be
increased by the Trustees up to an amount not in excess of the
Principal Amount and the Earnings Amount that was in effect for the
twentieth Fiscal Year after Global Approval Judgment.
77. "Qualified Arbitrator" and "Qualified Mediator" shall
each be an impartial, neutral person. No person shall serve as an arbitrator
or mediator if he/she has any financial or personal interest in the proceedings
or, except when otherwise agreed by the parties, in any asbestos-related
matters. Prior to accepting an appointment, the prospective arbitrator or
mediator shall disclose any circumstances likely to create a reasonable
inference of bias or prevent a prompt hearing or conference with the parties.
78. "Qualified Settlement Fund" or "QSF" is as defined in
the Treasury Regulations under Section 468.B of the Internal Revenue Code of
1986.
79. "Released Parties" collectively, and "Released Party"
individually, mean the Fibreboard, Continental and Pacific Releasees.
80. "Representative Defendant" means Owens-Illinois,
Inc., a Delaware corporation, or such other Person or Persons as may be
certified by the Global Court, in the capacity as representative(s) of the
Defendant Class Members.
-24-
<PAGE> 81
81. "Representative Plaintiffs" mean Gerald Ahearn, James
Dennis and Charles W. Jeep, the named plaintiffs in the Class Action, or such
other, lesser or greater number of Representative Plaintiffs as may be
certified by the Global Court, in their capacities as representatives of the
interests of the Settlement Class Members.
82. "Reserve Account" means the reserve (which shall be
part of Fund I) in the original principal amount described on Appendix I to the
Trust Distribution Process as such amount may be increased or decreased from
time to time in accordance with the provisions described on Appendix 1 to the
Trust Distribution Process and by earnings, capital gains or losses or other
similar items.
83. "Residual Claim" means any Express Indemnity Claim or
Additional Policy Claim, the disposition of which becomes the responsibility of
the Trust pursuant to the Global Approval Judgment.
84. "Rule 23 Notice" means the notice to be given to the
Settlement Class Members and Defendant Class Members pursuant to Rule 23 of the
Federal Rules of Civil Procedure.
85. "Select Counsel for the Beneficiaries" or "SCB" means
four lawyers, initially: Joseph B. Cox, Jr., Steven Kazan, Joseph F. Rice and
Harry F.
-25-
<PAGE> 82
Wartnick, and a fifth to be selected unanimously by the other four lawyers as
provided in Section 6.1 of the Trust Agreement.
86. "Schedule Category" means: 1) Mesothelioma and Lung
Cancer; 2) ALD-1 and Other Cancer; 3) ALD-2; and 4) Residual Claims.
87. "Scheduled Disease" means Mesothelioma, Lung Cancer, Other
Cancer, Asbestos Lung Disease I and Asbestos Lung Disease II.
88. "Second Injury Claim" is a Malignancy Claim by a Claimant
who settled a Non-Malignancy Claim in exchange for a limited release which
allowed subsequent Malignancy Claims.
89. "Settled Claims" means claims of individuals for
asbestos-related personal injuries (a) that are not Class Member Claims and
(b) that as of August 27, 1993 had been settled (by Fibreboard Corporation or
by Fibreboard Corporation and Continental) or were the subject of a verdict or
judgment.
For the purposes of this definition, a claim included within the
terms of a settlement agreement (whether written, oral or placed on a court
record) prior to August 27, 1993 shall be deemed to have been settled before
August 27, 1993 even if (i) an opt-out right with respect to that claim has
been or is exercised, or (ii) the settlement is subsequently repudiated by the
Plaintiff; provided, however, that no claim which was included within the terms
of a settlement agreement and
-26-
<PAGE> 83
which was not filed prior to August 27, 1993 shall be deemed settled unless it
was eligible to be processed and liquidated prior to August 27, 1993.
90. "Settlement Agreement" means the agreement among
Fibreboard Corporation, Continental, CNA Casualty, Columbia and Pacific dated
as of October 12, 1993 pursuant to which they agreed, among other things, to
settle and compromise all claims and potential claims against the Insurers
under the Insurance Policies.
91. "Settlement Agreement Approval Judgment" is as defined in
the Settlement Agreement.
92. "Settlement Agreement Court Disapproval" is as defined in
the Settlement Agreement.
93. "Settlement Class" means:
(a) All persons (or their legal representatives) who prior to
August 27, 1993 were exposed, directly or indirectly
(including but not limited to exposure through the
exposure of a spouse, household member or any other
person), to asbestos or to asbestos-containing products
for which Fibreboard may bear legal liability and who have
not, before August 27, 1993, (i) filed a lawsuit for any
asbestos related personal injury, or damage, or
-27-
<PAGE> 84
death arising from such exposure in any court against
Fibreboard or persons or entities for whose actions or
omissions Fibreboard bears legal liability; or (ii)
settled a claim for any asbestos-related personal injury,
or damage, or death arising from such exposure with
Fibreboard or with persons or entities for whose actions
or omissions Fibreboard bears legal liability;
(b) All persons (or their legal representatives) exposed to
asbestos or to asbestos-containing products, directly or
indirectly (including but not limited to exposure through
the exposure of a spouse, household member or any other
person), who dismissed an action prior to August 27, 1993
without prejudice against Fibreboard, and who retain the
right to sue Fibreboard upon development of a nonmalignant
disease process or a malignancy; provided, however, that
the Settlement Class does not include persons who filed
and, for cash payment or some other negotiated value,
dismissed claims against Fibreboard, and whose only
retained right is to sue Fibreboard upon development of an
asbestos-related malignancy; and
(c) All past, present and future spouses, parents, children
and other relatives (or their legal representatives) of
the class members
-28-
<PAGE> 85
described in paragraphs (a) and (b) above, except for any
such person who has, before August 27, 1993, (i) filed a
lawsuit for the asbestos-related personal injury, or
damage, or death of a class member described in paragraph
(a) or (b) above in any court against Fibreboard (or
against entities for whose actions or omissions Fibreboard
bears legal liability), or (ii) settled a claim for the
asbestos-related personal injury, or damage, or death of a
class member described in (a) or (b) above with Fibreboard
(or with entities for whose actions or omissions
Fibreboard bears legal liability).
For the purposes of this definition, a claim included within the
terms of a settlement agreement (whether written, oral, or placed on a court
record) prior to August 27, 1993 shall be deemed to have been settled before
August 27, 1993 even if (i) an opt-out right with respect to that claim has
been or is exercised, or (ii) the settlement is subsequently repudiated by the
Plaintiff; provided, however that no claim which was included within the terms
of a settlement agreement and which claim was not filed prior to August 27,
1993 shall be deemed settled unless it was eligible to be processed and
liquidated prior to August 27, 1993.
94. "Settlement Class Member" means any Person who is a member
of the Settlement Class.
-29-
<PAGE> 86
95. "Settlement Class Order" means an order of the Court finally
certifying the Settlement Class as a class under Rule 23(b)(1)(B) of the
Federal Rules of Civil Procedure for settlement purposes.
96. "Settlement Conference Designee" is as defined in paragraph
D.1 of the Trust Distribution Process.
97. "Subsidiary" means, with respect to any Person, any
corporation or other entity in which that Person owns, directly or indirectly,
securities or other ownership interest having ordinary voting power to elect a
majority of the board of directors or other Persons performing similar
functions.
98. "Surplus" means, as of any Distribution Date:
(i) the Distributable Amount for the prior Fiscal Year,
minus
(ii) the aggregate amounts (other than payments from the
Reserve Account) actually paid by the Trust for Trust Expenses, Class Member
Claims, Third Party Claims and payments made pursuant to Section 7.16 of the
Trust Agreement, in each case for such prior Fiscal Year.
99. "Termination Date" is as defined in Section 7.2 of the
Trust Agreement.
-30-
<PAGE> 87
100. "Third Party Claim" shall mean any Personal Injury Asbestos
Claim that is not a Class Member Claim, except for Settled Claims, Unsettled
Claims or any claims arising directly or indirectly from any such Settled
Claims or Unsettled Claims.
101. "Third Party Claimant" shall mean any Person having a Third
Party Claim.
102. "Trust" means the trust referred to in Article V of the
Global Settlement Agreement.
103. "Trust Agreement" means the Fibreboard Asbestos
Compensation Trust Agreement among Continental, CNA Casualty, Columbia,
Pacific, Fibreboard Corporation and the Trustees attached as Exhibit B to the
Global Settlement Agreement.
104. "Trust Distribution Process" means Annex A to the Trust
Agreement.
105. "Trust Estate" at any time means all assets of the Trust at
such time.
106. "Trust Expenses" means all expenses of the Trust
(including, without limitation, compensation, legal, accounting and other
professional fees,
-31-
<PAGE> 88
expenses relating to the operation of a Claims Resolution Facility, an Other
Claims Resolution Facility, disbursements and related expenses, administrative
expenses, taxes and related expenses, the cost of liability insurance and
reimbursement and indemnification payments), other than payments in respect of
Class Member Claims and Third Party Claims and payments made pursuant to
Section 7.16 of the Trust Agreement.
107. "Trustees" are as defined in Section 7.18 of the Trust
Agreement.
108. "Trustors" mean Continental, CNA Casualty, Columbia,
Pacific and Fibreboard Corporation.
109. "Unreimbursed Borrowings" means, as of any Distribution
Date:
(a) the aggregate of the Principal Amounts (not including any
Increased Principal Amounts) and Earnings Amounts for all Fiscal Years prior to
the Fiscal Year to which such Distribution Date relates, minus
(b) the aggregate amounts (other than payments from the Reserve
Account) actually paid by the Trust for Trust Expenses, Class Member Claims and
Third Party Claims for all such prior Fiscal Years.
-32-
<PAGE> 89
110. "Unsettled Claims" shall mean claims of individuals for
asbestos-related personal injuries brought against Fibreboard in lawsuits filed
prior to August 27, 1993 and that are not Settled Claims. For purposes of this
definition, "Unsettled Claims" shall include claims of persons who filed and
for cash payment or some other negotiated value dismissed claims against
Fibreboard and whose only retained right is to sue Fibreboard upon development
of an asbestos-related malignancy.
-33-
<PAGE> 90
EXHIBIT B
-----------------------------------------------------------------------
FIBREBOARD ASBESTOS COMPENSATION
TRUST AGREEMENT
-----------------------------------------------------------------------
<PAGE> 91
TABLE OF CONTENTS
PAGE
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II DECLARATION OF TRUST . . . . . . . . . . . . . . . . . . . . . . 1
2.1 Name . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 Purposes . . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 Transfer of Assets . . . . . . . . . . . . . . . . . . . 2
2.4 Acceptance of Assets and Assumption of
Liabilities . . . . . . . . . . . . . . . . . . . . . . . 2
2.5 Maintenance of Trustor Privileges and
Confidences . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE III POWERS; TRUST ADMINISTRATION . . . . . . . . . . . . . . . . . . 3
3.1 Powers . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.2 Administration . . . . . . . . . . . . . . . . . . . . . 10
3.3 Actions by Trustors . . . . . . . . . . . . . . . . . . . 14
3.4 Protection of Confidential Information from
Disclosure to the Beneficiaries . . . . . . . . . . . . . 14
ARTICLE IV FUNDS, PAYMENTS AND INVESTMENTS . . . . . . . . . . . . . . . . 14
4.1 Funds . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.2 Payments . . . . . . . . . . . . . . . . . . . . . . . . 16
4.3 Investments . . . . . . . . . . . . . . . . . . . . . . . 16
4.4 Source of Payments . . . . . . . . . . . . . . . . . . . 20
ARTICLE V TRUSTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.1 Number . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.2 Term of Service . . . . . . . . . . . . . . . . . . . . . 21
5.3 Appointment of Successor Trustees . . . . . . . . . . . . 22
5.4 Liability of Trustees, Officers and Employees . . . . . . 23
5.5 Compensation and Expenses of Trustees . . . . . . . . . . 23
5.6 Indemnification of Trustees, Officers and
Employees . . . . . . . . . . . . . . . . . . . . . . . . 24
5.7 Trustees' Employment of Experts . . . . . . . . . . . . . 24
ARTICLE VI SELECT COUNSEL FOR THE BENEFICIARIES . . . . . . . . . . . . . . 25
6.1 Formation; Duties . . . . . . . . . . . . . . . . . . . . 25
6.2 Term of Office . . . . . . . . . . . . . . . . . . . . . 26
6.3 Appointment of Successor . . . . . . . . . . . . . . . . 26
-i-
<PAGE> 92
6.4 Compensation, Expenses and Liability of SCB
Members . . . . . . . . . . . . . . . . . . . . . . . . 27
6.5 Resolution of Disputes Involving Approval of
the Select Counsel for the Beneficiaries . . . . . . . 28
ARTICLE VII GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . 29
7.1 Irrevocability . . . . . . . . . . . . . . . . . . . . 29
7.2 Termination . . . . . . . . . . . . . . . . . . . . . . 29
7.3 Amendments . . . . . . . . . . . . . . . . . . . . . . 30
7.4 Severability . . . . . . . . . . . . . . . . . . . . . 30
7.5 Notices . . . . . . . . . . . . . . . . . . . . . . . . 31
7.6 Counterparts . . . . . . . . . . . . . . . . . . . . . 31
7.7 Successors and Assigns . . . . . . . . . . . . . . . . 31
7.8 No Waiver . . . . . . . . . . . . . . . . . . . . . . . 32
7.9 Headings; Section References . . . . . . . . . . . . . 32
7.10 Governing Law . . . . . . . . . . . . . . . . . . . . . 32
7.11 Dispute Resolution . . . . . . . . . . . . . . . . . . 33
7.12 Enforcement and Administration . . . . . . . . . . . . 33
7.13 Settlement of Trustees' Accounts . . . . . . . . . . . 33
7.14 No Bond Required . . . . . . . . . . . . . . . . . . . 33
7.15 Service of Process . . . . . . . . . . . . . . . . . . 34
7.16 Lawsuits Against Trustors . . . . . . . . . . . . . . . 34
7.17 No Disqualification of SCB . . . . . . . . . . . . . . 35
7.18 Initial Trustee; Powers . . . . . . . . . . . . . . . . 35
-ii-
<PAGE> 93
FIBREBOARD ASBESTOS COMPENSATION
TRUST AGREEMENT
Trust Agreement ("Trust Agreement") dated as of December 23,
1993, among Continental, CNA Casualty, Columbia, Pacific, and Fibreboard
Corporation, as Trustors and Francis McGovern, as Initial Trustee as provided
in Section 7.18.
NOW, THEREFORE, THIS TRUST AGREEMENT WITNESSETH AND IT IS HEREBY
DECLARED as follows:
ARTICLE I
DEFINITIONS
1.1 Capitalized terms used in this Trust Agreement are defined
herein or in the Glossary.
ARTICLE II
DECLARATION OF TRUST
2.1 Name. The Trust shall be known as the "Fibreboard Asbestos
Compensation Trust," and the Trustees may transact the business and affairs of
the Trust in that name.
2.2 Purposes. The purposes of the Trust are:
(a) to use the assets in the Trust Estate efficiently to
deliver fair and equitable compensation to all qualified Beneficiaries
consistent with Trust resources, without overpaying or underpaying any
Beneficiary and with settlement to be preferred
-1-
<PAGE> 94
over mediation, mediation to be preferred over arbitration, and arbitration to
be preferred over resort to the tort system, all pursuant to the provisions of
this Trust Agreement and the Trust Distribution Process;
(b) to enhance and preserve the Trust Estate;
(c) otherwise to carry out the provisions of this Trust
Agreement and the Trust Distribution Process.
2.3 Transfer of Assets. On the date of Global Approval
Judgment, the Trustors shall transfer and assign to the Trust the amounts
provided for in Section 2.3(B) of the Global Settlement Agreement, having
heretofore taken any and all steps necessary and prerequisite to such transfer.
2.4 Acceptance of Assets and Assumption of Liabilities. In
connection with and in furtherance of its purposes, and subject to Section 5.4,
the Trustees hereby agree to accept on behalf of the Trust the transfer of the
assets described in Section 2.3 above and hereby further expressly agree on
behalf of the Trust to assume liability or undertake responsibility for all
Class Member Claims and those Third Party Claims for which the Trust is
responsible under the Global Settlement Agreement and Trust Distribution
Process. Except as otherwise provided in the Trust Distribution Process, the
Trust shall have all defenses, cross claims, and rights to liens, offsets and
recoupment that Fibreboard or any other Trustor would have had under applicable
law with respect to the Class Member Claims and Third Party Claims to be
assumed by the Trust.
2.5 Maintenance of Trustor Privileges and Confidences. The
Trust shall maintain as privileged and confidential all information expressly
designated as such
-2-
<PAGE> 95
which is provided to it by or on behalf of Fibreboard Corporation or any other
Trustor, including without limitation information relating to Fibreboard's
products and their distribution, the history of the conduct of Fibreboard's or
any other Trustor's business, and Fibreboard's or any other Trustor's defenses
and the history of Fibreboard's settlements in asbestos-related personal injury
lawsuits. The Trust will not waive the privileged and confidential status of
such information without the prior written consent of the Trustor which
designated such information privileged and confidential. The Trust shall
promptly upon receipt of any subpoena or other formal request for such
information notify the Trustor which designated such information as privileged
or confidential.
ARTICLE III
POWERS; TRUST ADMINISTRATION
3.1 Powers.
(a) Subject to the limitations set forth in this Trust
Agreement and the Trust Distribution Process, the Trustees shall have the
powers to take any and all actions as in the judgment of the Trustees are
necessary or convenient to effectuate the purposes of the Trust, including,
without limitation, each power expressly granted in Subsection (b) below and
any power reasonably incidental thereto. Unless otherwise specified in this
Trust Agreement or the Trust Distribution Process, the Trustees may act by the
vote of a majority. All actions by the Trustees shall be taken at a meeting
(which may be by conference telephone call at which all participants may hear,
and be heard by,
-3-
<PAGE> 96
each other) of all Trustees or by unanimous written consent that a particular
action may be taken without a meeting; provided, however, that any such meeting
at which at least two Trustees are present shall be deemed to satisfy the
requirement of this sentence if notice of such meeting was given to all
Trustees not less than five business days' prior thereto, or if all Trustees
have executed, at or prior to such meeting, a waiver of such notice, and all
Trustees are given the opportunity to participate in person or by such a
conference telephone call.
(1) The following actions may be taken only with the
unanimous consent of the Trustees:
(i) Joining in, engaging in or disengaging from
an Other Claims Resolution Facility pursuant to Section
3.1(b)(iii), except that this action shall also require SCB
approval.
(ii) Appointment or removal of the chief executive
officer, chief financial officer or general counsel pursuant to
Section 3.1(b)(ix).
(iii) Taking of structural or other actions to
minimize tax on the Trust Estate pursuant to Section 3.2(b)(iv),
except that this action shall also require SCB approval.
(iv) Approval of annual and quarterly financial
statements of the Trust pursuant to Sections 3.2(c)(i) and (ii);
provided, however, that after a good faith effort to act
unanimously, a majority of the Trustees may grant approval in a
writing that shall include either comments of the Trustee who did
not join in the approval reflecting the reasons for his or
-4-
<PAGE> 97
her failure to join in the approval or, if such Trustee is not
willing to provide such comments, comments from the other Trustee
or Trustees reflecting their understanding as to such reasons.
(v) Approval of reports of claims dispositions
pursuant to Section 3.2(c)(iii); provided, however, that after a
good faith effort to act unanimously, a majority of the Trustees
may grant approval in a writing that shall include either comments
of the Trustee who did not join in the approval reflecting the
reasons for his or her failure to join in the approval or, if such
Trustee is not willing to provide such comments, comments from the
other Trustee or Trustees reflecting their understanding as to
such reasons.
(vi) Approval of budgets and cash flow projections
pursuant to Section 3.2(d); provided, however, that after a good
faith effort to act unanimously, a majority of the Trustees may
grant approval in a writing that shall include either comments of
the Trustee who did not join in the approval reflecting the
reasons for his or her failure to join in the approval or, if such
Trustee is not willing to provide such comments, comments from the
other Trustee or Trustees reflecting their understanding as to
such reasons.
(vii) Amendment or waiver of the Trust Agreement
other than Sections 2.2, 2.3, 2.4, 2.5, 3.1, 3.2, 3.3, 4.1, 4.2,
4.3, 4.4, 5.1, 5.2, 5.3, 5.4, 5.6, 5.7, 7.1, 7.2, 7.3, 7.4, 7.7,
7.8, 7.11, 7.12, 7.13, 7.16, 7.17 and 7.18, except
-5-
<PAGE> 98
that any amendment or waiver of any provision of Article VI shall
also require SCB approval.
(viii) Approval of the fixed cash payment for
Expedited Review Claims pursuant to Trust Distribution Process
Section B.2.
(ix) Approval of additional categories of
Expedited Review Claims pursuant to Trust Distribution Process
Section B.2, except that this action shall also require SCB
approval.
(x) Elimination or suspension of the Expedited
Review Option for one or more categories of Class Member Claims
pursuant to Trust Distribution Process Section B.2.
(xi) Increase in the amount distributable in any
Fiscal Year from the Principal Amount to the Increased Principal
Amount in accordance with Appendix 1 to the Trust Distribution
Process.
(xii) Amendment or waiver of Section B.6 of the
Trust Distribution Process (but only as to the amounts referred to
therein, and except that any such amendment or waiver shall also
require SCB approval) or Section F.3.a of the Trust Distribution
Process (provided that no such amendment or waiver can advance
the time for any payments referred to therein for any Fiscal Year
in which any of the Increased Principal Amount was utilized).
-6-
<PAGE> 99
(xiii) Permitting another Person to join in any
claims resolution facility established pursuant to Section
3.1(b)(ii), except that this action shall also require SCB
approval.
(2) The following actions shall require the approval of a
majority of the Trustees and, unless the unanimous approval of the
Trustees has been obtained, shall also require the approval of the
SCB pursuant to Section 6.1:
(i) Approval of the claim forms pursuant to Trust
Distribution Process Section B.1.
(ii) Approval of the Expedited Review Claim form
pursuant to Trust Distribution Process Section B.2.
(iii) Approval of form of release pursuant to Trust
Distribution Process Section B.4.
(iv) Requirement that Beneficiaries submit
additional kinds of medical evidence in support of Class Member
Claims pursuant to Trust Distribution Process Section B.4.
(v) Selection of locations for mediations and
arbitrations pursuant to Trust Distribution Process Section
C.3.
(3) Any provision of the Trust Agreement, the Trust
Distribution Process, or the Glossary not expressly described above
in Sections 3.1(a)(1) and (2) may be amended or waived with the
unanimous approval of each of the Trustors and the Trustees, the
approval of a majority of the SCB, and the approval of the Court,
and not otherwise.
-7-
<PAGE> 100
(b) Without limiting the generality of Subsection (a)
above, the Trustees shall have the power to:
(i) receive and hold the Trust Estate, and invest
monies held from time to time therein;
(ii) establish, supervise and administer a Claims
Resolution Facility;
(iii) join in or with or engage an Other Claims
Resolution Facility to reduce the costs of liquidating Class
Member Claims and Third Party Claims;
(iv) pay Trust Expenses, Class Member Claims and
Third Party Claims Liquidated in accordance with the Trust
Distribution Process;
(v) borrow money and issue notes and other
evidences of indebtedness (which notes or other evidences of
indebtedness may exonerate the Trustees from personal liability
with respect thereto) in the ordinary course of operations in
order to finance the acquisition of equipment or to pay Trust
Expenses; provided, however, that no such borrowing shall be for a
term in excess of five years or for an amount in excess of $2
million outstanding at any time;
(vi) take all actions contemplated hereunder with
respect to the Funds of the Trust and establish such reserves and
accounts within such Funds as may be useful in carrying out the
purposes of the Trust;
-8-
<PAGE> 101
(vii) sue and be sued and participate, as a party
or otherwise, in any judicial, administrative, arbitration or
other proceeding, including, without limitation, in connection
with any Claims Resolution Facility administered by or for the
Trust;
(viii) adopt and amend bylaws to govern the affairs
of the Trust which are consistent with this Trust Agreement, the
Trust Distribution Process and the Global Settlement Agreement;
(ix) appoint such officers, including a chief
executive officer, chief financial officer and general counsel,
hire such employees and engage such legal, financial and other
advisors and agents as the business of the Trust requires, pay the
Trustees and the SCB subject to Sections 5.5 and 6.4 and pay such
officers, employees, advisors and agents reasonable compensation;
(x) enter into such other arrangements with third
parties as are deemed by the Trustees to be useful in carrying out
the purposes of the Trust (including, without limitation, engaging
a Person to act as paying agent, depositary or custodian and pay
such third parties reasonable compensation);
(xi) enter into the indemnification agreements
referred to in Sections 5.6, 6.4(c) and 7.16;
(xii) enter into any contract or otherwise engage
in any transaction with any Trustee or any Person affiliated with
any Trustee,
-9-
<PAGE> 102
provided that such contract or such transaction is approved by the
unanimous vote of the Trustees who are not parties to or otherwise
involved in, and do not have an interest in, such contract or
transaction; it being understood that the usual rules prohibiting
fiduciaries from dealing with themselves as individuals or from
dealing with respect to any matter in which they have a personal
interest shall apply to the Trustees; and
(xiii) make such elections and determinations with
respect to taxes as are deemed by the Trustees to be useful in
carrying out the purposes of the Trust.
(c) The Trustees shall not have the power to guarantee or
assume, directly or indirectly, any debt or borrowings of other Persons.
3.2 Administration.
(a) The accounting period for the Trust shall be the
Fiscal Year. The first Fiscal Year shall begin on the date of this Agreement
and end on December 31 of the same year. The Trust shall use the accrual
method of accounting under generally accepted accounting principles.
(b) (i) The Trustees shall timely file such income
tax and other returns and statements, and shall provide for and
pay such Trust taxes, as are required to comply with applicable
provisions of the Internal Revenue Code and of any state or local
law and the regulations promulgated thereunder.
-10-
<PAGE> 103
(ii) For federal income tax purposes, the Trustees
and the Trustors intend that the Trust will be taxable either as a
Qualified Settlement Fund or a Designated Settlement Fund.
Trustors agree to cooperate in providing such information or
documents as the Trustees determine are useful for the preparation
and filing of tax returns by the Trust. Each of the Trustors
agrees to do such other and further things as may be reasonably
requested by the Trustees in connection with the tax affairs of
the Trust which shall not result in any tax liability or other
material liability to any of the Trustors.
(iii) The Trustees are hereby designated as the
"administrator" of the Qualified Settlement Fund or Designated
Settlement Fund for federal income tax purposes within the meaning
of Treasury Regulations section 1.468B-2(k)(3). For federal
income tax purposes, the taxable year of the Trust shall be the
calendar year and the Trust shall use an accrual method of
accounting.
(iv) The Trustees are authorized to take such
structural changes or other actions, as the Trustees deem prudent
and appropriate in reducing or minimizing the effect of taxes on
the Trust Estate, provided that such changes or actions do not
result in any additional tax liability or other material liability
to any of the Trustors or directly or indirectly amend any
provision of this Agreement or the Trust Distribution Process that
cannot be amended except pursuant to Section 3.1(a)(3).
-11-
<PAGE> 104
(c) (i) The Trustees shall cause to be prepared, and
file with the Court, as soon as available and in any event within
90 days following the end of each Fiscal Year, an annual report
containing financial statements of the Trust (including, without
limitation, a balance sheet of the Trust as of the end of such
Fiscal Year and a statement of operations for such Fiscal Year)
audited by a nationally recognized firm of independent public
accountants selected by the Trustees and certified by such firm.
(ii) The Trustees shall cause to be prepared and
file with the Court as soon as available and in any event within
45 days following the end of each of the first three quarters of
each Fiscal Year, a quarterly report containing financial
statements of the Trust (including, without limitation, an
unaudited balance sheet of the Trust as of the end of such quarter
and a statement of operations for such quarter), certified,
subject to normal year-end adjustments (including without
limitation as to consistency with the prior Fiscal Year's audited
financial statements), by an appropriate officer of the Trust.
(iii) Simultaneously with delivery of each set of
financial statements referred to in Subsections (i) and (ii)
above, the Trustees shall cause to be prepared, approve and file
with the Court a report containing a summary (in reasonable
detail) of the following information with respect to the period
covered by the financial statement:
-12-
<PAGE> 105
(1) the number of Class Member Claims Liquidated;
(2) the amount of investment income earned by the
Trust and the fair market value of the assets of the Trust as of
the last business day of the applicable accounting period;
(3) the amount of Trust Expenses incurred by the
Trust; and
(4) a certification as to compliance with the
Trust Agreement and Trust Distribution Process, specifically
identifying any lack of compliance.
(d) The Trustees shall cause to be prepared
and approve not later than 30 days nor more than 60 days prior to the
commencement of each Fiscal Year annual budgets and cash flow
projections for the next five years of the Trust and budgets and cash
flow projections for the remaining life of the Trust. The budgets and
cash flow projections shall be based on the actual number and type of
claims filed against the Trust, the income, expense and claims payment
history of the Trust to date as well as projected trends in such items.
(e) A copy of all financial statements, reports,
budgets and cash flow projections (including any general historical
information upon which such budgets and projections are based) prepared
by the Trustees pursuant to this Section 3.2 shall be delivered to the
SCB and each of the Trustors or their successors and assigns at the
time of filing with the Court or, if not filed with the Court, at the
time such documents are prepared. The Trustees shall petition the Court
each year for approval of the annual
-13-
<PAGE> 106
financial statements and reports required by Section 3.2(c). The SCB and any
of the Trustors shall have standing to object to and be heard on such financial
statements and reports. The Trust will provide to any of the Insurers
information which it may need in order to pursue any reinsurance claim.
3.3 Actions by Trustors. All actions by the Trustors shall be
taken by unanimous vote, unless otherwise provided to the contrary in this
Trust Agreement or the Trust Distribution Process.
3.4 Protection of Confidential Information from Disclosure to
the Beneficiaries. Consistent with the purposes of the Trust, the Trustees
have the authority and power to keep confidential from the Beneficiaries such
information as the Trust may determine should be protected from disclosure in
order to avoid prejudicing the Trust's position in negotiation, mediation,
arbitration or litigation of claims presented to the Trust. Nothing contained
in this Section 3.4 shall affect the right of the SCB, the Trustees or the
Trustors to receive any such confidential information, provided that they shall
only use such confidential information for the purpose of conducting their
activities in such capacities.
ARTICLE IV
FUNDS, PAYMENTS AND INVESTMENTS
4.1 Funds.
(a) There are hereby created within the Trust Estate
three Funds, Fund I, Fund II and Fund III.
-14-
<PAGE> 107
(b) Fund I shall consist of all of the assets transferred
to the Trust (including all accrued interest) less $210,000,000 which will be
segregated and allocated to Funds II and III. The Trust shall invest the
amounts in Fund I subject to the limitations set forth in Section 4.3.
(c) Fund II shall consist of $200,000,000 segregated from
the assets transferred to the Trust. The Trust shall invest the $200,000,000
subject to the limitations set forth in Section 4.3. No payments of any kind
may be made from Fund II until at least 21 years after Global Approval
Judgment.
(d) Fund III shall consist of $10,000,000 segregated from
the assets transferred to the Trust. The Trust shall invest the $10,000,000,
subject to the limitations set forth in Section 4.3. No payments of any kind
may be made from Fund III until at least 41 years after Global Approval
Judgment.
(e) Subject to Section 2.2 hereof, the Trustees may, from
time to time, create additional reserves and accounts (all of which shall
remain part of the Fund from which such amounts were created) within the Trust
Estate as they may deem necessary, prudent or useful in order to provide for
the payment of Trust Expenses, Class Member Claims and Third Party Claims
assumed by the Trust, and may, with respect to any such reserve or account,
restrict the use of monies therein.
(f) Any investment earnings received with respect to, or
other proceeds of, any asset held within any Fund (including any reserve or
account which is a part thereof) created hereby or pursuant hereto shall be
credited to, and shall be a part of, such Fund.
-15-
<PAGE> 108
4.2 Payments. Payments of Trust Expenses, Class Member Claims
and Third Party Claims shall be made from Funds I, II and III and such other
reserves or accounts as the Trustees may from time to time establish pursuant
to Section 4.1(e). The maximum annual payments which may be made from such
Funds for such Trust Expenses, Class Member Claims and Third Party Claims are
set forth in Section E of the Trust Distribution Process.
4.3 Investments. Investment of monies held in the Trust Estate
shall be administered in the manner in which individuals of ordinary prudence,
discretion and judgment would act in the management of their own affairs with
the goal of constructing a reasonably conservative portfolio which minimizes
volatility. The Trust shall retain at least two nationally recognized,
independent, professional investment advisers or managers to assist in
investing the Trust Estate subject to the limitations contained in this Section
4.3. The Trust's investments shall be subject to each and every one of the
following limitations and provisions, and, notwithstanding anything to the
contrary in this Trust Agreement, the Trust shall not purchase or otherwise
acquire the equity, debt obligations or other securities of, assets of, or any
interest in any Person, or otherwise extend any credit to or make any
investments in any Person other than the investments described below
("Permitted Investments"):
(a) The Trust shall not (i) acquire, directly or
indirectly, any equity interest in any Person if, immediately following such
acquisition, the Trust would hold more than 5% of the equity in such Person or
business enterprise, or (ii) hold, directly or indirectly, more than 10% of the
equity interest in any Person.
-16-
<PAGE> 109
(b) The Trust may acquire and hold commercial paper if
such commercial paper is rated "Prime-1" or higher by Moody's Investors
Service, Inc. ("Moody's"), "A-1" or higher by Standard and Poor's Corporation
("S&P") or has been given an equivalent rating by another nationally recognized
statistical rating agency.
(c) The Trust may acquire and hold other corporate debt
securities if such securities are rated "A1" or higher by Moody's, "A+" or
higher by S&P, or have been given an equivalent investment grade rating by
another nationally recognized statistical rating agency.
(d) The Trust may acquire and hold equity securities
constituting preferred stock if such preferred stock is rated "a1" or higher by
Moody's, "A+" or higher by S&P or has been given an equivalent investment grade
rating by another nationally recognized statistical rating agency.
(e) The Trust shall not acquire or hold any equity
securities of any Person unless such equity is in the form of securities which
are traded on a national securities exchange in the United States or over the
National Association of Securities Dealers Automated Quotation System.
(f) The Trust may acquire and hold any equity securities
constituting common stock if the long-term debt securities of the issuer are
rated "A1" or higher by Moody's, or "A+" or higher by S&P or have been given an
equivalent rating by another nationally recognized statistical rating agency.
(g) The Trust may acquire and hold certificates of
deposit issued by and bankers' acceptances of and interest bearing deposits
with any U.S. commercial
-17-
<PAGE> 110
bank or any branch or agency of a non-U.S. bank licensed to conduct business in
the U.S. having combined capital and surplus of not less than $1,000,000,000, if
all publicly held long-term debt securities, if any, of such bank and the
holding company, if any, of which such bank is a Subsidiary meet the standards
set forth in Section 4.3(c).
(h) The Trust may acquire and hold repurchase obligations
if (1) in the opinion of the Trustees, they are adequately collateralized, (2)
the collateral constitutes investment instruments that would otherwise
constitute Permitted Investments hereunder and (3) such obligations are entered
into with either a nationally recognized investment banking firm or a
commercial bank meeting the requirements set forth in Section 4.3(g).
(i) The Trust may acquire and hold marketable direct
obligations issued or unconditionally guaranteed by the United States
government or issued by any agency or instrumentality thereof.
(j) The Trust may acquire and hold marketable direct
obligations issued by any state of the United States or any political
subdivision of any such state or any public instrumentality thereof if such
securities are rated "A1" or higher by Moody's, "A+" or higher S&P, or have
been given an equivalent rating by another nationally recognized statistical
rating agency.
(k) The Trust may acquire and hold equity, bond, money
market and other funds organized under the laws of the United States or any
state thereof that invest solely in any of the foregoing investments permitted
under Sections 4.3(b) through (j).
-18-
<PAGE> 111
(l) The Trust may enter into futures and options
arrangements, and interest rate and currency swap agreements, cap, floor and
collar agreements, interest rate insurance, currency spot and forward contracts
and other agreements or arrangements solely for the purposes or protecting
against fluctuations in the principal of, or interest or currency exchange
rates on, the Trust's investments, provided that the net obligations of the
Trust in respect thereof shall not exceed 5% of the Trust Estate at any time.
(m) The Trust shall not acquire or hold any obligations
or securities denominated in a currency other than U.S. Dollars without
substantially hedging against fluctuations in such currency, provided that the
net obligations of the Trust in respect thereof shall not exceed 5% of the
Trust Estate at any time.
(n) The Trust shall not acquire or hold any equity, debt
securities or other instruments or obligations of any Person (other than debt
securities or other debt instruments described in Section 4.3(i) or any fund
described in Section 4.3(k) investing solely in the foregoing) if the aggregate
market value of all equity, debt securities and other instruments and
obligations of such Person held by the Trust would exceed 5% of the aggregate
value of the Trust Estate.
(o) The Trust shall not (i) acquire any equity securities
of any Person if, following such acquisition, the aggregate market value of all
equity securities held by the Trust would exceed 50% of the aggregate value of
the Trust Estate, or (ii) hold any equity securities to the extent that the
aggregate market value of all equity
-19-
<PAGE> 112
securities held by the Trust would exceed 60% of the aggregate value of the
Trust Estate.
(p) The Trust may acquire and hold mutual funds investing
in "baskets" of securities designed to track the performance of the S&P 500
stock index or the Lehman Brothers Aggregate Bond Index, provided that the
aggregate obligations of the Trust in respect thereof, together with the
aggregate market value of all equity securities held by the Trust, shall not
exceed 60% of the aggregate value of the Trust Estate at any time.
(q) The Trust may acquire and hold investments of a type
not permitted under Subsections (b)-(l) or (p) above in an aggregate amount not
to exceed 5% of the aggregate value of the Trust Estate at any time.
4.4 Source of Payments. All Trust Expenses and payments in
respect of Class Member Claims and Third Party Claims shall be payable solely
out of the Trust Estate. Neither the Trustees nor any officer, agent or
employee of the Trust nor any of the Trustors nor any of their Subsidiaries nor
any Affiliate, director, officer, employee or agent of the Trustors or any of
their Subsidiaries nor any member of the SCB shall be liable for the payment of
any Trust Expense, Class Member Claim or Third Party Claim or other liability
of or on account of the Trust, and no Person shall look to any of the foregoing
Persons for payment of any such expense or liability.
-20-
<PAGE> 113
ARTICLE V
TRUSTEES
5.1 Number. Prior to the appointment of the Trustees
hereunder, the provisions of Section 7.18 shall govern. Thereafter, there
shall be three Trustees at all times (other than during the period contemplated
by Section 5.3(b)), described as the Class A, B and C Trustees. Each Trustee
shall be an individual who has substantial professional experience related to
one or more of the purposes of the Trust and who is able to devote the
necessary time and resources to his or her duties hereunder, it being
understood that whenever possible any person named to serve as a Trustee will
have experience concerning asbestos litigation, although failure to have such
experience will not in and of itself disqualify any Person from service as a
Trustee. No Trustee may simultaneously hold another office or position in the
Trust.
5.2 Term of Service.
(a) The initial term of the Class A, B and C Trustees are
four, five and six years, respectively. Thereafter, each Trustee shall serve a
five-year term. In each case the term of the Trustee shall be terminated upon
death, resignation pursuant to Subsection (b) below or removal pursuant to
Subsection (c) below.
(b) Any Trustee may resign at any time by written notice
to each of the remaining Trustees. Such notice shall specify a date when such
resignation shall take effect, which shall not be less than 90 days after the
date such notice is given unless all of the Persons entitled to appoint the
resigning Trustee's successor under Section 5.3(a) consent to a different date.
-21-
<PAGE> 114
(c) Any Trustee may be removed for cause by the Court
upon application of any of the Trustors or a majority of the SCB.
(d) Any Trustee may be reappointed for additional terms.
(e) Any successor Trustee filling an unexpired term shall
serve until the end of such term.
5.3 Appointment of Successor Trustees.
(a) In the event of a vacancy in the position of a
Trustee, the vacancy shall be filled by the SCB in the case of a Class A or
Class B Trustee or by the Trustors in the case of the Class C Trustee.
(b) If the SCB or the Trustors, as the case may be, fail
to appoint a successor Trustee pursuant to Subsection (a) above who accepts
such appointment in writing within 90 days after the occurrence of the vacancy
in the position of a Trustee, the remaining Trustees shall apply to the Court,
which shall appoint a successor Trustee or successor Trustees. For a period of
10 days after the occurrence of the vacancy in the position of a Trustee, no
vote on any action requiring the unanimous consent of the Trustees shall be
permitted to occur.
(c) Immediately upon the appointment of any successor
Trustee, all rights, titles, duties, powers and authority of the predecessor
Trustee hereunder shall be vested in and undertaken by the successor Trustee
without any further act. No successor Trustee shall be liable personally for
any act or omission of his or her predecessor, or for any Trust act or omission
which occurred prior to his or her
-22-
<PAGE> 115
appointment, unless such act or omission is expressly ratified by the successor
Trustee after his or her appointment.
5.4 Liability of Trustees, Officers and Employees. No Trustee,
officer or employee of the Trust shall be liable to the Trust, any Beneficiary
or any other Person except for his own gross negligence or willful misconduct.
No Trustee, officer or employee of the Trust shall be liable for any act or
omission of any other officer, agent or employee of the Trust unless the
Trustee, officer or employee acted with gross negligence or willful misconduct
in the selection or retention of such officer, agent or employee.
5.5 Compensation and Expenses of Trustees.
(a) Each of the Trustees shall receive compensation from
the Trust for his or her services as Trustee in the amount of $100,000 per
annum plus, after the first 12 days during which the Trustee has performed the
services described below in this sentence, $1,000 per diem for each meeting of
the Trustees or any committee or subcommittee thereof attended by such Trustee,
reduced proportionately to account for any fraction of a day spent on such
duties in the case of any such meeting not attended in person, or for special
duties performed by such Trustee on behalf of the Trust, reduced
proportionately to account for any fraction of a day spent on such duties, and
$500 for each day of substantial travel in connection with attendance at any
such meeting or performance of any such special duties. Such compensation
amounts shall be increased or decreased annually at the rate of the Consumer
Price Index for urban wage earners and clerical workers (U.S. City Average)
unadjusted for seasonal variation,
-23-
<PAGE> 116
published by the Bureau of Labor Statistics of the United States Department of
Labor, or otherwise by the Trustees with the approval of the Court. In the
event that at any time the Trustees determine that the amount of time required
to perform their duties as Trustees has substantially decreased, they shall in
good faith determine whether a reduction in their compensation is warranted.
(b) All reasonable out-of-pocket costs and expenses
incurred by the Trustees in connection with the performance of their duties
hereunder shall be paid by the Trust or, if paid by a Trustee, shall be
promptly reimbursed to such Trustee by the Trust.
5.6 Indemnification of Trustees, Officers and Employees. The
Trustees, officers and employees of the Trust shall be indemnified by the Trust
to the fullest extent permitted under applicable law against any and all
liabilities, expenses, claims, damages or losses incurred by them in the
performance of their duties hereunder, except any liability, expense, claim,
damage or loss as to which they are liable under Section 5.4. The Trustees,
officers and employees of the Trust shall be entitled to advancement of
attorneys' fees and expenses from the Trust for the purposes set forth in this
Section 5.6 to the fullest extent permitted under applicable law.
5.7 Trustees' Employment of Experts. The Trustees may, but
shall not be required to, consult with independent, outside counsel,
accountants, appraisers, investment bankers and other parties reasonably
selected and determined in good faith by the Trustees to be qualified as
experts on the matters submitted to them, except as otherwise expressly
provided in this Trust Agreement, and the opinion of any such
-24-
<PAGE> 117
parties on any matters submitted to them by the Trustees shall be full and
complete justification for any action taken or not taken by the Trustees
hereunder in good faith and in reasonable reliance upon the written opinion of
any such expert.
ARTICLE VI
SELECT COUNSEL FOR THE BENEFICIARIES
6.1 Formation: Duties. The SCB shall consist of five lawyers
chosen to represent the interests of the Beneficiaries, and the initial four
SCB lawyers shall be Joseph Rice; Joseph Cox; Harry Wartnick; and Steven Kazan.
The fifth SCB lawyer shall be selected unanimously by the initial four lawyers
on or before January 14, 1994. If the initial four SCB members are unable to
reach unanimous agreement on the identity of the fifth SCB member, the four SCB
members shall appear in Court on January 17, 1994, and with the assistance of
the Court, work day to day until agreement is reached. In giving their
approval or in acting pursuant to this Agreement the members of the SCB shall
act in the best interests of the Beneficiaries and consistent with the purposes
of the Trust. The SCB shall hold an annual meeting to which all lawyers who
have submitted a Class Member Claim to the Trust during the past five years
shall be invited and be entitled to be present. The SCB shall give a report to
the annual meeting describing the activities of the Trust for the prior year,
including any approvals given by the SCB pursuant to this Agreement and/or the
Trust Distribution Process and all matters on which the Trustees have indicated
that they intend to seek the approval of the SCB during the following year. In
giving approval to the Trustees, the SCB shall
-25-
<PAGE> 118
consider in good faith all recommendations made at such annual meeting. The
Trustees shall consult with the SCB on the implementation and administration of
the Trust Distribution Process. The Trustees may consult with the SCB on any
matter affecting the Trust, and, as provided in Section 3.1(a), certain actions
by the Trustees shall require the prior approval of the SCB. All approvals of
the SCB shall be by majority vote.
6.2 Term of Office.
(a) Each member of the SCB shall serve for the duration
of the Trust, subject to the earlier of his or her death, resignation, or
removal.
(b) Subject to section 6.3(a) hereof, any member of the
SCB may resign at any time by written notice to each of the remaining members
specifying the date when such resignation shall become effective.
(c) Any member of the SCB may be removed for cause by the
Court upon joint application of all of the other SCB members.
6.3 Appointment of Successor.
(a) A vacancy in the SCB caused by the resignation of an
SCB member shall be filled with an individual nominated by the resigning SCB
member and approved by the unanimous vote of all SCB members. The resigning
SCB member's resignation shall not be effective until such approval is obtained
and the successor SCB member has accepted the appointment.
(b) In the event of a vacancy in the membership of the
SCB other than one caused by resignation as aforesaid, the vacancy shall be
filled by the unanimous vote of the remaining member(s) of the SCB.
-26-
<PAGE> 119
6.4 Compensation Expenses and Liability of SCB Members.
(a) Each member of the SCB shall receive compensation
from the Trust for his or her services in the amount of $1,000 per diem for
travel related to and attendance at the SCB meetings attended in person by such
member, and $1,000 per diem (adjusted proportionately to account for any
fraction of a day spent on, or in travel in connection with, such duties) for
work done by the members of the SCB (other than attending SCB meetings in
person) in carrying out their duties and responsibilities under the Trust
Agreement. Such compensation shall be payable as determined the Trustees, but
not less frequently than quarterly. Such per diem amount shall be increased or
decreased annually pro rata with the amount that the per diem for meetings paid
to the Trustees is increased or decreased pursuant to Section 5.5.
(b) The reasonable out-of-pocket costs and expenses
incurred by SCB members in connection with the performance of their duties
hereunder, together with the reasonable fees and expenses of their counsel,
shall be paid by the Trust or, if paid by a member of the SCB, shall be
promptly reimbursed to such member by the Trust.
(c) Liability of SCB. No present or former member of the
SCB shall be liable to the Trust, any Beneficiary or any other Person except
for his own gross negligence or willful misconduct. All present or former
members of the SCB shall be indemnified by the Trust to the fullest extent
permitted under applicable law against any and all liabilities, expenses,
claims, damages or losses incurred by them in the performance of their duties
hereunder or in serving as Class Counsel, except any liability,
-27-
<PAGE> 120
expense, claim, damage or loss as to which they are liable under this Section.
No present or former member of the SCB shall be liable personally for any act
or omission of his or her predecessor, or for any act or omission of the SCB
which occurred prior to his or her appointment, unless such act or omission is
expressly ratified by such person after his or her appointment. The present
and former members of the SCB shall be entitled to advancement of attorneys'
fees and expenses from the Trust for the purposes set forth in this subsection
(c) to the fullest extent permitted under applicable law.
6.5 Resolution of Disputes Involving Approval of the Select
Counsel for the Beneficiaries.
(a) Approval Procedures. In any circumstance arising
under this Trust Agreement or the Trust Distribution Process where the Trust
makes a decision with respect to matters which require the approval of the SCB,
the Trust shall:
(i) provide the SCB with reasonable access to
experts retained by the Trust and to Trust staff during such time
as the decision is being made;
(ii) bring the proposed decision to the attention
of the SCB; and
(iii) unless the circumstances prevent, provide the
SCB no fewer than 10 days to comment with respect to such proposed
decision.
In the event the SCB disagree with the Trust's decision, they
shall express their view as fully as possible to the Trust and make such
counterproposal as may be appropriate. The Trust and the SCB shall thereupon
consult in an effort to reach agreement.
-28-
<PAGE> 121
(b) Approval in Writing. The approval of the SCB, when
required under the Trust Agreement or the Trust Distribution Process, must be
in writing to be effective; provided, however, that in the event the SCB fails
to approve or disapprove an action requiring SCB approval pursuant to Section
3.1(a) within 30 days of notice of proposed action by the Trust, the SCB shall
be deemed to have approved such action.
(c) Access to Financial Information. Subject to entry
into an appropriate confidentiality agreement where applicable, the Trust shall
make available to the SCB any investment banking or other financial, accounting
or statistical information available to the Trust relating to issues to be
discussed and/or as to which the approval of the SCB is required.
ARTICLE VII
GENERAL PROVISIONS
7.1 Irrevocability. The Trust is irrevocable.
7.2 Termination.
(a) The Trust shall terminate on the date (the
"Termination Date") which is the earlier of (1) the first date on which all
Class Member Claims and Third Party Claims filed with or against the Trust have
been resolved, 24 consecutive months have elapsed during which no such claim
has been filed with the Trust and approval of such termination by the Court has
been obtained upon joint application of all of the Trustees and a majority of
the SCB; or (2) 21 years less 91 days pass after the
-29-
<PAGE> 122
death of the last survivor of any of the descendants of Joseph P. Kennedy
living on the date hereof.
(b) On the Termination Date, after payment of all
liabilities of the Trust have been provided for, the Trust shall be dissolved,
and all of the Trust's assets shall be applied to such charitable purposes as
the Trustees in their reasonable discretion, after consultation with the SCB,
shall determine, which charitable purposes, if practicable, shall relate to
occupational health.
7.3 Amendments.
(a) This Trust Agreement may only be amended or waived as
provided in Section 3.1(a). Thirty days' advance written notice of any
proposed amendment or waiver shall be given to the SCB and the Trustors.
(b) The Trust Distribution Process may only be amended or
waived as provided in Section 3.1(a) of this Trust Agreement and, where
applicable, Section H.7 of the Trust Distribution Process. Thirty days' advance
written notice of any proposed amendment or waiver of the Trust Distribution
Process shall be given to the SCB, the Trustors and, where appropriate,the
Representative Defendant.
(c) The definitions used in this Trust Agreement or in
the Trust Distribution Process and contained in the Glossary may be amended or
waived only if and in the same manner as the Section of this Trust Agreement or
the Trust Distribution Process in which such definition is used may be amended
or waived.
7.4 Severability. Should any provision of this Trust Agreement
or the Trust Distribution Process be determined to be unenforceable, such
determination shall
-30-
<PAGE> 123
in no way limit or affect the enforceability and operative effect of any and
all other provisions of this Trust Agreement or the Trust Distribution Process.
7.5 Notices. Notices to Persons asserting claims shall be
given at the address of such Person, or, where applicable, such Person's legal
representative, in each case as provided on such Person's proof of claim. Any
notices or other communications required or permitted hereunder shall be in
writing and (a) delivered at, or sent by telex or telecopy to, the addresses
designated in Section 8.13 of the Global Settlement Agreement or, in the case
of the Trustees, the addresses provided by the Trustees to the Trust, the SCB
and the Trustors, or (b) mailed by registered or certified mail, return receipt
requested, postage prepaid, addressed as aforesaid, or to such other address or
addresses as may hereafter be furnished by any of the Trustors, the Trust or
the Trustees or the SCB to the others.
All such notices and communications shall be effective when
delivered at the designated addresses or when the telex or telecopy
communication is received at the designated addresses and confirmed by the
recipient by return telex or telecopy in conformity with the provisions hereof.
7.6 Counterparts. This Trust Agreement may be executed in any
number of counterparts, each of which shall constitute an original, but such
counterparts shall together constitute but one and the same instrument.
7.7 Successors and Assigns. The provisions of this Trust
Agreement shall be binding upon and inure to the benefit of the Trustors, the
Trust, the Trustees, the SCB and their respective successors and assigns,
except that neither the Trustors nor
-31-
<PAGE> 124
the Trust nor any Trustee, nor the SCB members may assign or otherwise transfer
any of its, his or her rights or obligations under this Trust Agreement except,
in the case of the Trust and the Trustees, as contemplated by Section 7.2.
7.8 No Waiver. No failure to exercise or delay in exercising
any right, power or privilege hereunder or under the Trust Distribution Process
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right, power or privilege hereunder or under the Trust Distribution Process
preclude any further exercise thereof or any other right, power or privilege.
The rights and remedies provided herein or in the Trust Distribution Process
are cumulative and are not exclusive of rights under law or in equity.
7.9 Headings: Section References. The headings used in this
Trust Agreement and in the Trust Distribution Process are inserted for
convenience only and neither constitute a portion of this Trust Agreement or
the Trust Distribution Process nor in any manner affect the construction of the
provisions of this Trust Agreement or the Trust Distribution Process. All
references in this Trust Agreement or in the Trust Distribution Process to
"Sections," unless otherwise expressly indicated, shall be deemed to refer to
sections of the document in which such reference appears.
7.10 Governing Law. This Trust Agreement and the Trust
Distribution Process shall be governed by, administered under and construed in
accordance with, the laws of the State of Texas.
-32-
<PAGE> 125
7.11 Dispute Resolution. Any disputes which arise under this
Trust Agreement or the Trust Distribution Process shall be resolved by the
Court, except as otherwise provided herein or in the Trust Distribution Process.
7.12 Enforcement and Administration. The provisions of this
Trust Agreement and the Trust Distribution Process shall be enforced and
administered by the Court.
7.13 Settlement of Trustees' Accounts. Notwithstanding any
state law to the contrary, the Court shall have exclusive jurisdiction over the
settlement of the accounts of the Trustees, whether such account is rendered by
the Trustees themselves or is sought by any Beneficiary or other Person. The
Trustees shall render successive accounts covering periods of not more than one
Fiscal Year, commencing on the first completed Fiscal Year of the Trust or the
last day of the prior accounting period, as the case may be, except that an
account shall be rendered for the period ending on the date of the death,
resignation, removal or retirement of any Trustee. Upon the acceptance of any
such account by the Court after hearing on notice to the SCB, the Trustors and
such other parties as the Court shall designate, the Trustees shall be
discharged from any further liability or responsibility to any Beneficiary or
other Person as to all matters embraced in such account.
7.14 No Bond Required. Notwithstanding any state law to the
contrary, each Trustee (including any successor Trustee) shall be exempt from
giving any bond or other security in any jurisdiction.
-33-
<PAGE> 126
7.15 Service of Process. Service of process upon any of the
Trustees in an action or proceeding under Sections 7.11, 7.12 or 7.13 shall be
effective upon delivery to the address set forth in Section 7.5. Successor
Trustees, by acceptance of their appointment as such, shall be deemed to have
approved this method of service.
7.16 Lawsuits Against Trustors. Except as provided in Section
2.4(a) of the Global Settlement Agreement as to Fibreboard Corporation, the
Trust shall defend and indemnify the Fibreboard, Continental and Pacific
Releases against and hold them harmless from any costs, fees, claims,
liabilities, settlements or judgements incurred or occurring after Global
Approval Judgement and resulting, directly or indirectly, from the assertion
against any of them of any Class Member Claim or Third Party Claim. This
obligation shall include without limitation any such claim to the extent that,
after Global Approval Judgment, that claim attacks the validity or
enforceability of the Global Approval Judgment, but shall exclude any
Additional Policy Claims or Express Indemnity Claims that are the subject of a
waiver by the Insurers or Fibreboard under Section 6.3(C) of the Global
Settlement Agreement. The defense of any such lawsuit will be tendered to the
Trust and any defense costs or indemnity obligation will be paid by the Trust
for so long as funds remain in Funds I, II and III. The Trustors may, at their
own expense, elect to participate with the Trust in the defense of any such
action or claim. Amounts paid to or on behalf of the Fibreboard, Continental
and Pacific Releasees pursuant to this Section shall not be limited in any
manner, including by the provisions of Section E of the Trust Distribution
Process. The provisions of this
-34-
<PAGE> 127
Section 7.16 shall only be applicable after Global Approval Judgment, subject
to Section 2.7(B) of the Global Settlement Agreement.
7.17 No Disqualification of SCB. No member of the SCB shall be
disqualified solely by reason of his or her service as an SCB member from
serving as counsel for any Class Member in connection with submission of any
Class Member Claim to the Trust, nor shall service as such counsel be deemed to
create a conflict of interest with respect to service to the Trust as an SCB
member. No SCB member shall take any action in his or her capacity as such
that would prefer the interests of his or her clients over the interests of
similarly situated Beneficiaries generally.
7.18 Initial Trustee; Powers. In the event that as of the date
of execution of the Global Settlement Agreement, the Trustees have not been
selected, then:
(a) On that date, the Trustors shall contribute $100 to
the Trust. Francis McGovern shall be the sole initial trustee ("Initial
Trustee"). The Initial Trustee shall have only the power to take those
ministerial and administrative actions necessary or desirable to apply for a
letter ruling from the Internal Revenue Service pursuant to Section 8.1 of the
Global Settlement Agreement and preserve the existence of the Trust until
Trustees are appointed hereunder. The Initial Trustee shall not have authority
to make any discretionary decisions, waivers or amendments to the Trust
Agreement.
(b) No later than January 14, 1994, the Trustors and the
Class Counsel (as defined in the Global Settlement Agreement) shall select
three trustees, who shall be the original Class A, Class B and Class C Trustees
(such persons, and their successors appointed pursuant to Section 5.3, being
referred to as the "Trustees").
-35-
<PAGE> 128
Trustors and Class Counsel have agreed to confer to attempt to reach joint
agreement as to the selection of all three original Trustees. If Trustors and
Class Counsel cannot agree, Class Counsel will unanimously select the Class A
and B Trustees and Trustors will unanimously select the Class C Trustee.
Absent agreement among Class Counsel as to the selection of the Class A and B
Trustees, or among Trustors as to the selection of the Class C Trustee, all
Class Counsel and/or all Trustors agree to appear in Court on January 17, 1994,
and with the assistance of the Court, to work from day to day until agreement
on the selection of the Trustee(s) for whom they are responsible is reached.
Upon acceptance of this Trust Agreement by the original Class A, Class B and
Class C Trustees, the Initial Trustee shall resign.
IN WITNESS WHEREOF, the parties have executed this Trust Agreement
on this 23rd day of December, 1993.
TRUSTORS:
FIBREBOARD CORPORATION
By: /s/ MICHAEL R. DOUGLAS
----------------------------------------
Title: Senior Vice President & General Counsel
----------------------------------------
COLUMBIA CASUALTY COMPANY
By: /s/ LAURENS F. TERRY
----------------------------------------
Title: Vice President
----------------------------------------
CONTINENTAL CASUALTY COMPANY
By: /s/ LAURENS F. TERRY
----------------------------------------
Title: Vice President
----------------------------------------
-36-
<PAGE> 129
CNA CASUALTY COMPANY OF
CALIFORNIA
By: /s/ LAURENS F. TERRY
----------------------------------------
Title: Vice President
----------------------------------------
PACIFIC INDEMNITY COMPANY
By: /s/ JOHN J. DEGNAN
----------------------------------------
Title: Senior Vice President
----------------------------------------
INITIAL TRUSTEE:
/s/ M. IWEN
-------------------------------------------------
-37-
<PAGE> 130
TRUST DISTRIBUTION PROCESS
ANNEX A TO THE TRUST AGREEMENT
<PAGE> 131
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
A. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
B. The Claim Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1. Submitting a Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. Expedited Review Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3. Ordering of Claims for Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4. Initial Evaluation of Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5. Further Claims Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6. Second (Malignant) Injury Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
7. Audit Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
8. Exigent Health and Extreme Hardship Claims . . . . . . . . . . . . . . . . . . . . . . . . 9
9. Withdrawal of Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
C. ADR Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1. Mediation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2. Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3. Location for ADR Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
D. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1. Mandatory Settlement Conference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2. Procedural Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
E. Funds for Payment of Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1. Fund I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
a. Commencement of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
b. Distributable Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
c. Distribution of Remaining Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2. Fund II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
a. Commencement of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
b. Distributable Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
c. Distribution of Remaining Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3. Fund III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
a. Commencement of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
b. Distributable Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
c. Distribution of Remaining Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4. Determination of Distributable Amount for Each Fund . . . . . . . . . . . . . . . . . . . 22
F. Order, Timing and Limitations on Payments of Claims . . . . . . . . . . . . . . . . . . . . . 22
1. Eligibility for Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2. Order of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
-i-
<PAGE> 132
<TABLE>
<CAPTION>
<S> <C>
3. Terms of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
a. Claims Resolved Outside the Tort System . . . . . . . . . . . . . . . . . . . . . . . 25
b. Claims Resolved in the Tort System . . . . . . . . . . . . . . . . . . . . . . . . . 25
4. Deferral of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5. Limitation on Payment of Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
G. All Claims Resolved Pursuant to the Trust Distribution Process . . . . . . . . . . . . . . . 27
H. Defendant Class Member Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
1. Claims Liquidated Before Judgment Against Defendant Class Members . . . . . . . . . . . . 29
a. Calculation of Set-Off Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
b. Status of the Trust at Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
c. Discovery and Informational Issues . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2. Claims Not Liquidated When Verdict or Judgment Obtained Against Defendant Class Members . 31
a. Effect of Verdict or Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
b. Retention of Several Liability Claim . . . . . . . . . . . . . . . . . . . . . . . . . 32
c. Payment of Verdict or Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
3. Tort System Claims Against the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4. Litigation Between Defendant Class Members and Settlement Class Members . . . . . . . . . 34
5. Pursuit of Third Party Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
a. Defendant Class Member to Stand in Settlement Class Members' Stead . . . . . . . . . . 35
b. Resolution of Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
c. Processing and Payment of Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
d. Multiple Claims or Multiple Third Party Claims . . . . . . . . . . . . . . . . . . . . 37
6. Cooperation for Court Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
7. No Modification Without Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
I. Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
J. Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
APPENDIX 1 TO THE TRUST DISTRIBUTION PROCESS . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
SCHEDULE A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>
-ii-
<PAGE> 133
TRUST DISTRIBUTION PROCESS
ANNEX A TO THE TRUST AGREEMENT
This Trust Distribution Process creates the procedures for
submitting, processing and paying Class Member Claims and Third Party Claims.
Capitalized terms used in this Trust Distribution Process are defined herein or
in the Glossary.
A. OVERVIEW.
The primary goal of the Trust is fair and equitable treatment for
all Beneficiaries consistent with Trust resources. This Trust Distribution
Process furthers that goal by establishing procedures that are intended to
process and evaluate Class Member Claims of Beneficiaries impartially, pay all
Class Member Claims over time, and maintain reasonable reserves for any Class
Member Claims in excess of projections. The Trustees shall implement and
administer this Trust Distribution Process in accordance with their duties
under the Trust Agreement.
The claims resolution process begins with a proof of claim. The
Trust then makes a determination whether the claim meets the criteria for any
of the five Scheduled Diseases: Mesothelioma, Lung Cancer, Other Cancer,
Asbestos Lung Disease I ("ALD-1") and Asbestos Lung Disease II ("ALD-2"). If
the claim meets the criteria for a Scheduled Disease, it will be evaluated
based on factors that have significance in the resolution of similar claims by
settlement or trial, including but not limited to the factors set forth in
Schedule A hereto. If the claim does not meet the criteria for one of the
-1-
<PAGE> 134
Scheduled Diseases, the Trust will evaluate whether it nonetheless asserts a
compensable claim for an asbestos-related injury.
After evaluation, the Trust will make a good faith settlement offer
or advise the Beneficiary of the reasons for rejecting the claim. The
Beneficiary may either accept or reject that offer or negotiate further with
the Trust. If the Beneficiary rejects the Trust's offer, he or she may submit
supplemental information to the Trust and have his or her claim reevaluated by
the Trust and/or negotiate further with the Trust. If negotiation with the
Trust fails, the Beneficiary shall, if he or she wishes to pursue the claim,
proceed to mediation and then to binding or nonbinding arbitration.
Beneficiaries may bring an action against the Trust in the tort system only
after they have participated in good faith in both mediation and nonbinding
arbitration and have rejected the award in a nonbinding arbitration.
Beneficiaries must also appear at a mandatory settlement conference
under the auspices of the Court before proceeding to the tort system. If a
Beneficiary rejects settlement following the settlement conference, he or she
may elect immediate binding arbitration or exit to the tort system. No
punitive damages, pre-judgment or post-judgement interest, damages for risk of
cancer, or compensatory damages beyond Fibreboard's own share will be allowable
in the tort system. Judgments may be collected only as provided in this Trust
Distribution Process.
Similar claims-handling procedures (described in Section H below)
apply to certain Third Party Claims including those of Defendant Class Members
who succeed to Class Member Claims.
-2-
<PAGE> 135
Class Member Claims and Third Party Claims will be eligible for
payment once they are Liquidated, whether by settlement, arbitration, or
judgment. Judgments or claims settled after exit to the tort system will
normally be paid out over a five-year period, while claims resolved without
resort to the tort system will normally be paid out over a three-year period.
Total payments from the Trust in each year for Trust Expenses, Class Member
Claims and Third Party Claims are limited to the amounts set forth in Section
E. While the Trust is expected to be able to pay all claims as Liquidated
yearly, if amounts available are insufficient to make all payments due on
Liquidated claims in any year, claims for Mesothelioma and Lung Cancer will be
paid first, then Other Cancer and ALD-1 claims, then ALD-2 claims, and then
Residual Claims, whether any such claims have been Liquidated by settlement,
arbitration or judgment. Within each of those categories, claims will be paid
in the order of the date on which a release is received by the Trust (for
settled claims), an arbitration ruling is rendered (for claims resolved through
arbitration) or a judgment becomes final (for claims resolved in the tort
system). Class Member Claims and Third Party Claims which cannot be paid
because the amount available for that year is insufficient to make all payments
due on such claims will be deferred for payment (FIFO within their payment
categories) until the following year.
B. THE CLAIM PROCEDURE.
1. SUBMITTING A CLAIM. Other than Interim Claims submitted pursuant
to Article 7 of the Global Settlement Agreement, commencing on February 14,
1994, any Beneficiary may submit a claim to the Trust. To do so, the
Beneficiary shall provide to
-3-
<PAGE> 136
the Trust, on forms approved by the Trustees and the SCB, a proof of claim
including at least the following information concerning the Exposed Person:
name, address, social security number, date of birth, date of death (if
applicable), marital status and number and age of dependents, spouse's name and
social security number, occupation, smoking history, year of first exposure to
any asbestos or asbestos-containing products, identification and source of
identification of asbestos-containing products manufactured or supplied by
Fibreboard to which the Exposed Person was exposed, the work sites where the
Exposed Person was exposed to asbestos or to Fibreboard asbestos, the years of
such exposures including specific descriptive comments concerning the duration
and intensity of such exposure, the status of related workers compensation or
civil litigation regarding asbestos exposure, and the Scheduled Disease, if
any, for which the Beneficiary believes the claim qualifies or a statement of
the disease or injury the Beneficiary asserts he or she has if he or she does
not believe he or she qualifies for a Scheduled Disease. In addition, the
Beneficiary shall provide the Trust with a Medical Report, a PFT Report and a
B-reader Report, and, in Malignancy Claims, a pathology report (where
available).
2. EXPEDITED REVIEW OPTION. The Trust may establish a process for
expedited review of ALD-2 claims by persons desiring an accelerated settlement
of their claim at a fixed amount ("Expedited Review Claims"). A Beneficiary
seeking such expedited review shall submit an abbreviated proof of claim for
expedited review by the Trust. The abbreviated proof of claim shall provide
the following information concerning the Exposed Person: name, address, social
security number, date of birth, date of death (if applicable), marital status,
spouse's name and social security number, occupation, the
-4-
<PAGE> 137
Scheduled Disease for which the Beneficiary believes the claim qualifies, the
work sites where the Exposed Person was exposed to asbestos or to Fibreboard
asbestos and such information requested by the Trust that adequately
demonstrates exposure to asbestos or asbestos-containing products and to
Fibreboard asbestos or asbestos-containing products. In addition, the
Beneficiary shall supply the Trust with a Medical Report. The Trust will
expeditiously review the abbreviated proof of claim and may, but is not
required to, offer to settle such Expedited Review Claims for a single fixed
cash payment of an amount and on a time schedule established from time to time
by the Trust. If the Trust determines not to offer to settle an Expedited
Review Claim, the Beneficiary may submit a proof of claim as set forth in
Section B.1.
The Trust may establish additional categories of Expedited Review
Claims with differing fixed cash payments and differing information
requirements. In addition, the Trust may eliminate or suspend the Expedited
Review Claim option for one or more categories of Class Member Claims if it
determines that such option is encouraging the filing of claims that would not
otherwise be eligible for payment under these procedures or is using a
disproportionate share of the Trust's assets.
3. ORDERING OF CLAIMS FOR PROCESSING. Claims shall be ordered for
processing by the Trust in the manner described in this Section. As a general
practice, the Trust shall review its claims files on a regular basis and notify
all Beneficiaries whose claims are likely to be processed in the near future.
A Beneficiary's position in the FIFO queue for processing will be determined by
the date of receipt by the Trust of a properly completed proof of claim form,
and among claims received the same day, by the date of
-5-
<PAGE> 138
diagnosis of the disease on which the claim is based. Where the Beneficiary
has filed an incomplete proof of claim, the Trust shall notify the Beneficiary
of the need for additional information and shall not process the claim until
the file is complete. A Beneficiary shall not receive a position in the FIFO
processing queue until his or her proof of claim is properly completed.
4. INITIAL EVALUATION OF CLAIMS. As a proof of claim is reached in
the FIFO queue, the Trust shall evaluate it to determine whether the claim
qualifies as one of the five Scheduled Diseases. A Beneficiary's right to
assert a valid claim for an asbestos-related injury or disease is in no way
prejudiced by failure of his or her asbestos-related injury or disease to
qualify as one of the Scheduled Diseases. If a Scheduled Disease is determined
to exist, the Trust shall evaluate the Beneficiary's claim using factors
relevant to the resolution of asbestos claims for that Scheduled Disease by
settlement or trial, including the factors set forth in Schedule A hereto. If
the Trust concludes that the Beneficiary's injury or disease does not meet the
criteria for a Scheduled Disease, it shall determine whether the Beneficiary
nonetheless asserts a meritorious claim for an asbestos-related injury or
disease and shall evaluate the claim using factors relevant to the resolution
of similar claims by settlement or trial. If the Trust accepts for disposition
a claim with respect to a disease which is not a Scheduled Disease, the Trust
shall place it in a Schedule Category based on which Scheduled Disease it most
closely resembles.
In addition to the medical evidence which Beneficiaries are
required to submit with initial proof of claim or submit as part of any
supplemental information
-6-
<PAGE> 139
provided to the Trust, the Trust may require that additional kinds of medical
evidence be provided. The Trust may obtain additional medical evidence which
it believes necessary to evaluate any claim.
Once its evaluation is completed, the Trust shall make a written
good faith offer of settlement based upon such evaluation or advise the
Beneficiary of the reasons for rejecting the claim. Such responses shall be
sent to the Beneficiary's counsel or representative, if any, or to the
Beneficiary. The claim shall not be processed further until the Trust receives
a response from the Beneficiary. The Beneficiary and the Trust shall then
negotiate in good faith toward a resolution of the claim. Once the Trust
receives confirmation of resolution of the claim, it shall forward an
appropriate form of release approved by the Trust to the Beneficiary's counsel
or representative, or to the Beneficiary. The claim's eligibility for payment
under Section F shall be based on the date the executed release with respect to
a resolved claim is received by the Trust.
5. FURTHER CLAIMS PROCESSING. If the Beneficiary rejects the Trust's
initial offer, he or she may elect to negotiate further with the Trust and may
submit additional information to the Trust in support of the claim.
Alternatively, he or she may proceed to mediation as set forth below. The
Trust shall evaluate claims based on the medical evidence submitted to the
Trust as part of the Beneficiary's proof of claim. A Beneficiary may, but need
not, supplement this information from time to time with additional medical
evidence. If he or she does so, the Beneficiary's legal representative or, if
he or she has no legal representative, the Beneficiary shall submit an
affidavit or declaration under penalty of perjury, in a form acceptable to the
Trust, stating that he or
-7-
<PAGE> 140
she has submitted to the Trust all medical reports relating to any alleged
asbestos-related condition other than those subject to attorney work product
privilege. If the Beneficiary submits supplemental information to the Trust,
the Trust shall reevaluate the claim and either make a written good faith
settlement offer or reject the claim. The Beneficiary shall then reject or
accept any offer based on reevaluation using the procedures outlined above for
rejection or acceptance of the Trust's initial offer. If the Beneficiary
rejects such offer, he or she may elect to negotiate further with the Trust or
shall proceed to mediation.
6. SECOND (MALIGNANT) INJURY CLAIMS. The Trust shall offer to settle
Non-Malignancy Claims on two alternative bases: 1) in exchange for a general
release; or 2) in exchange for a limited release covering all asbestos-related
personal injury claims other than subsequent Malignancy Claims. The Trust's
settlement offer for a limited release shall be for the amount of its offer for
the general release minus the lesser of: 1) half of its settlement offer for
the general release; and 2) $1,750. If a Beneficiary accepts the Trust's offer
of a limited release, the Trust shall account for the monetary difference
between its settlement offer for the general release and its settlement offer
for the limited release in a separate account. A Second Injury Claim shall be
ordered in the FIFO queue for processing based upon the date of receipt by the
Trust of the Second Injury Claim, and shall be treated as a new claim under
this Trust Distribution Process.
7. AUDIT PROCEDURES. In all cases, the Trust may require that medical
x-rays, tests, laboratory examinations and other medical evidence comply with
recognized medical standards regarding equipment, testing methods, and
procedures to assure that
-8-
<PAGE> 141
such evidence is reliable. The Trust may develop methods for auditing the
reliability of all data submitted in support of claims, including product
identification and medical evidence, and may require independent interpretation
of CT scans, X-rays, pathology specimens or other physical evidence. If its
audits show an unacceptable level of reliability for evidence submitted from
specific individuals or institutions, the Trust may refuse to accept evidence
from them. In addition, the Trust may develop methods for auditing other types
of evidence necessary to support a claim.
8. EXIGENT HEALTH AND EXTREME HARDSHIP CLAIMS. Notwithstanding the
FIFO order processing rules described in Sections B.2 through B.4, the Trust
may process and Liquidate Extreme Hardship Claims and Exigent Health Claims at
any time.
The Trust shall establish procedures to expedite its processing,
evaluation and negotiation of Exigent Health Claims and Extreme Hardship Claims
as well as the ADR procedures the Beneficiary asserting such a claim shall be
required to follow under Section C. Such expedited procedures shall be
designed to allow all Exigent Health Claims to be Liquidated within six months
of presentation of a properly completed proof of claim to the Trust, and to
ensure, to the maximum extent practicable, that in jurisdictions in which
Beneficiaries can obtain accelerated trial dates for Exigent Health Claims, the
Trust's negotiation process and the ADR procedures can be completed before a
trial of an Exigent Health claimant's case against Defendant Class Members.
If the Trust determines, in its sole discretion, that a Beneficiary
asserting an Extreme Hardship Claim needs greater financial assistance than
would be afforded by the payout scheme set forth in Section F.3, the Trust may
accelerate payment to the
-9-
<PAGE> 142
Beneficiary of part or all of the amount for which that claim has been
Liquidated as the Trust deems appropriate. Payments with respect to Exigent
Health Claims shall be made only in accordance with the payout scheme set forth
in Section F.3.
9. WITHDRAWAL OF CLAIMS. If the Beneficiary does not respond to the
Trust's offer on initial evaluation or reevaluation within 30 days, the Trust's
offer and the claim shall be deemed to be withdrawn without prejudice unless
the Beneficiary has requested in writing one or more extensions of time, not to
exceed six months in the aggregate, within which to respond to the offer. If
the Beneficiary still has not responded to the Trust's offer at the end of the
extension period, the Trust's offer and the claim shall then be deemed to be
withdrawn without prejudice. A Beneficiary may also elect to withdraw a claim
at any time without prejudice. A claim that is withdrawn or deemed to have
been withdrawn may be resubmitted at any time, and shall be reordered in the
FIFO queue for processing based on the date of receipt by the Trust of a
properly completed proof of claim with respect to the refiled claim.
C. ADR PROCEDURES.
1. MEDIATION. If the Beneficiary chooses not to submit supplemental
information or rejects the Trust's offer based on its evaluation of such
supplemental information and elects not to negotiate further with the Trust,
the Beneficiary's claim shall be referred to mediation. The Trust shall
establish and maintain a list of Qualified Mediators, compensated by the Trust.
The Trust shall refer claims to Qualified Mediators from the list in rotation
as soon as practicable after being notified by the claimant that he wishes to
proceed to mediation.
-10-
<PAGE> 143
Claims shall be handled by each mediator in the order received by
him or her, to the extent practicable. Any party may be represented by legal
counsel. The mediator shall confer with the parties and/or their legal
representatives, individually and jointly. Such conference may be in person
or by telephone, at the claimant's election. The Beneficiary and a
representative of the Trust with settlement authority must personally
participate in the conference unless, in the judgment of the mediator, the
Beneficiary's physical or psychological condition precludes such participation.
Such conference shall be in the nature of a settlement conference. The
mediator shall review the claim and the positions of the parties, the prior
negotiations between the parties, the offer(s) and demand(s), such information
as the parties may wish to submit as to a fair and equitable settlement, and
all documents and medical reports relevant to the claim. At least five days
prior to the mediation conference, Beneficiary and the Trust shall each submit
to the mediator a concise, confidential statement outlining the Beneficiary's
medical condition, exposure to Fibreboard products and each party's position on
settlement value. The mediator shall work with both sides toward reaching an
acceptable, reasonable settlement. The mediator does not have the authority to
impose a settlement on the parties.
2. ARBITRATION. If the Beneficiary is unable to settle his or her
claim with the Trust within 30 days of the mediation conference, the
Beneficiary shall, if he or she wishes to pursue the claim, proceed to
arbitration of the claim. The arbitration shall be commenced by a written
demand for arbitration by the Beneficiary served on the Trust within 45 days of
the mediation conference. Such arbitration shall be binding or
-11-
<PAGE> 144
nonbinding at the election of the Beneficiary, which election must be made in
the Beneficiary's written demand for arbitration. The Trust and the
Beneficiary shall bear their own fees and costs, except that the Trust shall
pay the administrative fees and costs of conducting the arbitration unless the
arbitrator in his or her sole discretion assesses such administrative fees and
costs against any Beneficiary for delaying or abusing the arbitration
procedures.
The Trust shall maintain a list of Qualified Arbitrators.
Arbitrations shall be conducted by a single Qualified Arbitrator. The
Beneficiary and the Trust shall attempt to agree on a Qualified Arbitrator who
will preferably, but not necessarily, be selected from the list maintained by
the Trust. If the parties cannot agree on a Qualified Arbitrator, a Qualified
Arbitrator shall be selected pursuant to the procedures of an independent
arbitration facility to be selected by the Trust or by such other procedures as
may be adopted by the Trust. The parties shall provide the Qualified
Arbitrator and each other with copies of all relevant materials concerning the
claim and any supplementary information they wish the Qualified Arbitrator to
consider not less than 30 days prior to the date of the arbitration hearing.
The Qualified Arbitrator may require the parties to submit such additional
information as he or she deems necessary. The Qualified Arbitrator shall
conduct a hearing on the claim at which testimony may be offered, unless both
parties agree to waive such hearing. In nonbinding arbitrations, the
Beneficiary must attend the hearing in person, unless in the judgment of the
Qualified Arbitrator his or her physical or psychological condition makes such
attendance impossible. The Qualified Arbitrator shall issue an award promptly
but in no event later
-12-
<PAGE> 145
than 120 days from the date on which he or she receives the last submission of
information from either of the parties relevant to the claim, unless the
parties agree to extend such time. The Award shall be based on the same
factors used by the Trust in evaluating claims.
If the Beneficiary elected binding arbitration at the time of the
demand, neither party shall have the right to appeal the award other than on
grounds set forth in the Federal Arbitration Act. If the Beneficiary elected
nonbinding arbitration at the time of the demand, the award shall become final
and binding if the Beneficiary does not reject the award by so notifying the
Trust in writing within 30 days after receipt of the award. If the Beneficiary
does not reject the award as provided above, he or she shall be deemed to have
accepted it. If the Beneficiary rejects the award, the award shall not be
binding on either party and the Beneficiary may proceed to the tort system
under the procedures set forth below.
3. LOCATION FOR ADR PROCEDURES. The Trust shall establish procedures
to conduct mediations and arbitrations at scheduled intervals at such locations
around the United States as the Trust determines will be convenient to the
largest numbers of claimants and will not impose undue burden on the Trust.
D. LITIGATION.
A Beneficiary may not proceed to litigate his or her claim against
the Trust in the tort system unless he or she has in good faith: (1) submitted
a proof of claim and rejected the resulting settlement offer from the Trust;
(2) participated in a mediation conference and failed to settle his or her
claim; (3) participated in nonbinding arbitration
-13-
<PAGE> 146
and rejected the resulting arbitration award; and (4) participated in a
mandatory settlement conference as described below. The following procedures
shall govern any Beneficiary who elects to litigate in the tort system his or
her claim against the Trust.
1. MANDATORY SETTLEMENT CONFERENCE. Before any Beneficiary may proceed
to the tort system, the Beneficiary must request the Court to conduct a
mandatory settlement conference with respect to the claim. This mandatory
settlement conference may be conducted by the Court, or by another judge or a
neutral special master designated by the Court, or, if both the Beneficiary and
the Trust agree, by a mutually selected, neutral third party other than the
Court (the "Settlement Conference Designee"). The settlement conference may be
conducted by telephone unless the Court or the Settlement Conference Designee
determines, on application by the Trust or the Beneficiary, that the conference
should be conducted in person. If the Court or the Settlement Conference
Designee so determines, the settlement conference must be attended in person by
the Beneficiary, unless in the judgement of the Court or the Settlement
Conference Designee his or her physical or psychological condition makes such
attendance impossible, and by a representative of the Trust with settlement
authority at such location as the Court or the Settlement Conference Designee
shall determine. If no settlement is reached within 30 days of the mandatory
settlement conference, the Beneficiary and the Trust shall submit to each other
on that date a written settlement offer that will remain in effect for an
additional 30 days. If neither party accepts the other party's settlement
offer during this period, then the Beneficiary may, upon certification from the
Court or the Settlement Conference Designee that the
-14-
<PAGE> 147
Beneficiary has completed the settlement conference process and otherwise has
complied with the requirements of the preceding paragraph of this Section D,
commence a lawsuit against the Trust in the tort system or elect binding
arbitration.
2. PROCEDURAL RULES.
a. Any Beneficiary who elects binding arbitration following the
mandatory settlement conference shall follow the procedures set forth in
Section C.2 above. Payment of any resulting award shall, however, be governed
by Section F of this Trust Distribution Process.
b. Any Beneficiary who elects to resolve a claim through the
tort system may pursue the claim in any appropriate forum, subject to the
procedures set forth herein. Payment of any resulting judgment shall, however,
be governed by Section F of this Trust Distribution Process.
c. The Trust may assert any and all defenses available to it or
which would have been available to any Trustor against which the claim could
have been asserted absent Global Approval Judgment with respect to
Beneficiaries who elect to resolve their claims through the tort system.
d. In no event shall a Beneficiary be permitted to seek or
recover from the Trust in a lawsuit in the tort system any punitive or
exemplary damages of any sort. Nor may any claimant seek or recover
compensatory damages in excess of Fibreboard's actual share of responsibility
or for the actual percentage risk of contracting cancer. Finally, no
Beneficiary may seek or recover pre-judgement interest in a suit in the tort
-15-
<PAGE> 148
system. Any other damages available under the applicable law shall remain
recoverable except as provided in Section D.2.e below.
e. In no event shall the Trust or any other Person be
required to post a bond to stay collection of a judgment in the tort system.
Judgments shall be paid by the Trust in the order set forth in Section F below,
and no Beneficiary shall be permitted to take any steps to collect a judgment
from the Trust except as set forth in this Trust Distribution Process. The
Trust shall not be responsible to pay post-judgment interest; in lieu thereof,
the procedures set forth in the last sentence of Section F.1 shall apply.
f. (i) The death of a Beneficiary after he or she has filed a
proof of claim with the Trust shall not eliminate compensable elements of his
or her claim accruing prior to the date of death, by, for example, eliminating
any claim for damages for pain and suffering occurring prior to the date of
death or by creating an offset to a lost earnings award for personal
consumption occurring prior to the date of death, notwithstanding applicable
state law to the contrary. (ii) However, such compensable elements may not be
recovered after exit to the tort system unless the Beneficiary shows that he or
she could have recovered such damages absent compliance with the requirements
of the Trust Distribution Process.
g. At trial the defendant shall be the Trust and the Trust and
Beneficiary shall jointly request that the Trust be introduced to the trier of
fact (judge or jury as the case may be) in the following fashion or in another
substantially similar fashion as the trial court may direct, in addition to any
other evidence permitted by the Court about the Trust's identity, goals and
operations:
-16-
<PAGE> 149
Members of the jury, this is an action for damages for
[personal injury/wrongful death] brought by the plaintiff[s]
against [various defendants, including] the Fibreboard Asbestos
Compensation Trust.
The Fibreboard Asbestos Compensation Trust was created by
Order of a United States District Court to provide fair and
equitable treatment for persons with asbestos injury for which
Fibreboard Corporation might bear legal liability. The Trust has a
fixed amount of money with which to compensate all persons with an
asbestos injury to whom Fibreboard is found to be legally liable.
This sum of money must cover all victims, past and future. Under
no circumstances may you award any sum designed or intended to
punish or make an example of Fibreboard or the Trust.
If you should find that Fibreboard or products manufactured
by Fibreboard were a legal cause of injury to plaintiff[s], any
payment of damages awarded with respect to Fibreboard's products
will be made by the Trust, not by Fibreboard itself. The fact that
a trust exists is in no way an indication that you should impose
any liability on the Trust. No sum you might award will be paid by
either Fibreboard or by insurance; any award will be paid only by
the Trust.
h. Any Beneficiary who elects to resolve a claim through the
tort system shall provide the Trust (without cost to the Trust) with copies of
all pleadings, discovery materials, evaluations, and other similar
nonprivileged documentation requested by the Trust in connection with its
defense of the claim in the tort system, so that the Trust may effectively and
economically prepare for trial.
E. FUNDS FOR PAYMENT OF CLAIMS.
As set forth in the Trust Agreement, the Trust shall administer
three funds, for payment of Trust Expenses, Class Member Claims and Third Party
Claims, to be known as "Fund I," "Fund II," and "Fund III." Fund I is
primarily intended to pay expenses of, and claims against, the Trust during the
first 25 years after Global Approval
-17-
<PAGE> 150
Judgment. Fund II is primarily intended to pay expenses of, and claims
against, the Trust commencing 26 years after Global Approval Judgment,
although it is available to pay expenses and claims commencing 21 years after
Global Approval Judgment, if Fund I is insufficient for that purpose. Fund III
is primarily intended to pay any expenses and claims not paid from Fund I or
Fund II, commencing 46 years after Global Approval Judgment, although it is
available to pay expenses and claims commencing 41 years after Global Approval
Judgment if Fund II is exhausted prior to 46 years after Global Approval
Judgment.
In order to assure that, to the maximum extent feasible, Trust
resources are preserved and fairly allocated among all Beneficiaries (i.e.,
those who now will have claims in the future as well as those who have claims
now) Appendix 1 describes in detail how Trust surpluses realized in any Fiscal
Year are to be preserved and limits amounts that can be spent in any Fiscal
Year to pay claims from Funds I, II or III. In general, Appendix 1 specifies
that payments for Trust Expenses, Class Member Claims and Third Party Claims
may not exceed annual earnings on the assets within the relevant Fund plus a
portion of the remaining principal (calculated by allocating remaining Fund
principal equally over the years remaining in the Fund then in use). If any
Surplus remains after payment of all Trust Expenses, Class Member Claims and
Third Party Claims and certain indemnity expenses for a Fiscal Year (and after
restoration of any increases in Principal Amount used in prior years as
described below), such Surplus will either increase the Reserve Account or
build Trust principal. This Reserve Account will be used to pay expenses or
claims for any later year before Trustees may access any
-18-
<PAGE> 151
Increased Principal Amount to be used in that year. If, however, in any of the
Fiscal Years 3 through 12 or 16 through 20 after Global Approval Judgment, the
Earnings Amount and Principal Amount together with the funds contained in the
Reserve Account in excess of $10,000,000 are not sufficient to pay Trust
Expenses and to make all payments with respect to Class Member Claims or Third
Party Claims for the first two Schedule Categories that are due or all payments
with respect to Class Member Claims or Third Party Claims for the third
Schedule Category that were due and unpaid on four consecutive prior
Distribution Dates, the Trust may increase the usable portion of the Fund
principal by up to 25% for any of Fiscal Years 3 through 12 after Global
Approval Judgment or 12.5% for any of Fiscal Years 16 through 20 after Global
Approval Judgment.
1. FUND I.
a. COMMENCEMENT OF PAYMENTS. The Trust shall not pay any Class
Member Claim or Third Party Claim (other than Extreme Hardship Claims and
Expedited Review Claims) from Fund I until the Distribution Date first
occurring after the end of the first Fiscal Year after Global Approval
Judgment.
b. DISTRIBUTABLE AMOUNT. Total payments for Trust Expenses,
Class Member Claims and Third Party Claims made from Fund I for any Fiscal Year
(i.e., payments for Trust Expenses, Extreme Hardship Claims and Expedited
Review Claims made during that Fiscal Year, together with payments for Class
Member Claims and Third Party Claims for that Fiscal Year made on the
Distribution Date immediately following that Fiscal Year)(other than any
payments made from the Reserve Account)
-19-
<PAGE> 152
shall not exceed the Distributable Amount for the Fiscal Year. For the first
Fiscal Year after Global Approval Judgment the Earnings Amount for Fund I shall
be calculated from the date of Global Approval Judgment.
c. DISTRIBUTION OF REMAINING BALANCE. The transfer from Fund I to
Fund II of any remaining balance in Fund I shall occur on the earlier of (i)
the day after the Distribution Date for the twenty-fifth Fiscal Year after
Global Approval Judgment, or (ii) the day before the Distribution Date for the
first Fiscal Year occurring after the twentieth Fiscal Year after Global
Approval Judgment in which the maximum possible Distributable Amount is less
than the Earnings Amount and the Principal Amount that were in effect for Fund
I for the twentieth Fiscal Year after Global Approval Judgment, the Trust shall
transfer such remaining balance and the remaining balance of the Reserve
Account to Fund II, at which time payments out of Fund II shall commence as
provided in Section E.2.
2. FUND II.
a. COMMENCEMENT OF PAYMENTS. No payments shall be made from
Fund II until the Distribution Date for the twenty-first Fiscal Year after
Global Approval Judgment. If at that time Fund I still has money left to pay
Trust Expenses, Class Member Claims or Third Party Claims, no payments shall be
made from Fund II until the earlier of: (1) the day after the Distribution
Date for the twenty-fifth Fiscal Year after Global Approval Judgment; or (2)
the Fiscal Year in which the Distribution Date referred to in section
E.1.c.(ii) occurs.
-20-
<PAGE> 153
b. DISTRIBUTABLE AMOUNT. The total amount of payments for Trust
Expenses, Class Member Claims and Third Party Claims made from Fund II for any
Fiscal Year is limited to the Distributable Amount for the Fiscal Year.
c. DISTRIBUTION OF REMAINING BALANCE. The transfer from Fund II
to Fund III of any remaining balance in Fund II shall occur on (i) the day
after the Distribution Date for the twentieth Fiscal Year after the transfer of
the balance in Fund I to Fund II pursuant to Section E.1.c, or (ii) such later
date as the Trustees determine would be in the best interests of all
Beneficiaries, both present and future (but in no event later than the day
after the Distribution Date for the forty-fifth Fiscal Year after Global
Approval Judgment); at which time payments out of Fund III shall commence as
provided in Section E.3.
3. FUND III
a. COMMENCEMENT OF PAYMENTS. No payments shall be made from
Fund III until the Distribution Date for the forty-first Fiscal Year after
Global Approval Judgment. If at that time Fund II still has money left to pay
Trust Expenses, Class Member Claims or Third Party Claims, no payments shall be
made from Fund III until the date Fund II is exhausted or the balance of Fund
II has been transferred into Fund III pursuant to Section E.2.c.
b. DISTRIBUTABLE AMOUNT. The total amount of payments for Trust
Expenses, Class Member Claims and Third Party Claims made from Fund III for any
Fiscal Year is limited to the Distributable Amount for the Fiscal Year.
-21-
<PAGE> 154
c. DISTRIBUTION OF REMAINING BALANCE. If there is a remaining
balance in Fund III on the day after the Distribution Date for the sixty-first
Fiscal Year after Global Approval Judgment, and there are then, or are
anticipated by the Trustees to be in the future, any Trust Expenses, Class
Member Claims, Third Party Claims and other obligations of the Trust which have
not yet been liquidated and/or fully paid, the Trust shall use the remaining
balance of Fund III to pay such Trust Expenses, Class Member Claims, Third Party
Claims and other obligations of the Trust. Upon the occurrence of the
Termination Date, the Trust shall apply any remaining balance of Fund III to
such charitable purposes as the Trustees in their reasonable discretion, after
consultation with the SCB, shall determine, which charitable purposes, if
practicable, shall be related to occupational health.
4. DETERMINATION OF DISTRIBUTABLE AMOUNT FOR EACH FUND. Within 90
days following the end of each Fiscal Year after Global Approval Judgment, the
Trust shall determine the Distributable Amount for such Fiscal Year, which
Distributable Amount (after payment of Trust Expenses, Extreme Hardship Claims
and Expedited Review Claims for such Fiscal Year) shall be distributed to pay
Class Member Claims and Third Party Claims, in the order set forth in Section
F.2, on a date, no later than 120 days following the end of each such Fiscal
Year, chosen by the Trust (the "Distribution Date").
F. ORDER, TIMING AND LIMITATIONS ON PAYMENTS OF CLAIMS.
1. ELIGIBILITY FOR PAYMENT. All Class Member Claims and Third Party
Claims become eligible to begin receiving payments from the Trust on the
Distribution Date
-22-
<PAGE> 155
immediately following the Fiscal Year in which such Class Member Claims or
Third Party Claims are Liquidated, provided that in the case of settled Class
Member Claims the Trust has received the release required by Section B.4.
Judgments obtained in the tort system shall be eligible for payment in the same
order as Claims Liquidated by settlement or arbitration, except as provided in
Section F.3.b, and shall be treated as having been Liquidated on the date the
claimant obtains a final, nonappealable judgment, except that upon an
unsuccessful appeal by the Trust, the date of Liquidation shall be the date of
the trial court judgment.
2. ORDER OF PAYMENT. On each Distribution Date, the Trust shall make
payments on Liquidated Class Member Claims and Third Party Claims in the
following order: (1) claims for Mesothelioma and Lung Cancer; (2) claims for
Other Cancer and Asbestos Lung Disease I; (3) the first payment on claims for
Asbestos Lung Disease II which was due and unpaid on four or more consecutive
prior Distribution Dates, (4) the second payment on claims for Asbestos Lung
Disease II which was originally due and unpaid on four or more consecutive
prior Distribution Dates; (5) the third payment for claims on Asbestos Lung
Disease II which was originally due and unpaid on four or more consecutive
prior Distribution Dates; (6) any other payments on claims for Asbestos Lung
Disease II; and (7) Residual Claims. While it is anticipated that the Trust
will be able to pay all Liquidated Class Member Claims and Third Party Claims
on each Distribution Date, all payments due on Liquidated claims for
Mesothelioma and Lung Cancer must be made before any payments due on Liquidated
claims for Asbestos Lung Disease I and Other Cancer may be made, all payments
due on Liquidated claims
-23-
<PAGE> 156
for Asbestos Lung Disease I and Other Cancer must be made before any payments
due on Liquidated claims for Asbestos Lung Disease II may be made, the first
payment on Liquidated claims for Asbestos Lung Disease II which was due and
unpaid on four or more consecutive prior Distribution Dates must be made before
any other payments for other Liquidated claims for Asbestos Lung Disease II may
be made, the second payment on Liquidated claims for Asbestos Lung Disease II
which was originally due and unpaid on four or more consecutive prior
Distribution Dates must be made before any other payments for other Liquidated
claims for Asbestos Lung Disease II may be made, the third payment on
Liquidated claims for Asbestos Lung Disease II which was originally due and
unpaid on four or more consecutive prior Distribution Dates must be made before
any other payments for other Liquidated claims for Asbestos Lung Disease II
and all other payments due on Liquidated claims for Asbestos Lung Disease II
must be made before any payments due on Liquidated Residual Claims may be made.
Within each of the seven categories, payments due on Class Member Claims and
Third Party Claims shall be made in FIFO order based on when the Class Member
Claims and Third Party Claims were Liquidated, whether by settlement,
arbitration or judgment, except that settled Class Member Claims shall be
ordered within each such category according to when the release required by
Section B.4 is received by the Trust. Other than by virtue of subrogation to a
Class Member Claim pursuant to Section H.5.a, no contribution claim brought by
a Defendant Class Member shall be paid inasmuch as resolution of a Class Member
Claim against the Trust gives rise to a right of set-off or reduction under
-24-
<PAGE> 157
Section H.1.a of the Trust Distribution Process sufficient to satisfy, and bar
the assertion of, any such contribution claim against the Trust.
3. TERMS OF PAYMENT
a. CLAIMS RESOLVED OUTSIDE THE TORT SYSTEM. Class Member Claims
resolved without filing an action against the Trust in the tort system and all
Third Party Claims shall be eligible for payment over a three-year period, 40%
due on the Distribution Date immediately following the Fiscal Year in which
such claim was Liquidated and 30% due on each of the next two Distribution
Dates, except for Expedited Review Claims paid pursuant to Section B.2 and
Extreme Hardship Claims paid pursuant to Section B.8 of this Trust Distribution
Process.
b. CLAIMS RESOLVED IN THE TORT SYSTEM.
(i) Class Member Claims resolved after the filing of an
action against the Trust in the tort system shall be eligible for payment on
the following schedule. On the Distribution Date following the Fiscal Year in
which such claim was Liquidated, the Beneficiary shall be eligible to receive
the lesser of: (1) 100% of the last settlement offer made by the Trust before
the Beneficiary filed an action against the Trust in the tort system, or 100%
of the proposed Award in nonbinding arbitration with the Trust pursuant to
Section C, whichever is greater; and (2) 40% of the amount of the judgment or
settlement after the action was filed. The remaining balance of the judgment
or settlement shall be eligible for payment on the Distribution Dates following
the next four Fiscal Years in equal installments so long as each such
installment does not exceed $50,000. In the event that each such installment
would exceed $50,000, the
-25-
<PAGE> 158
Beneficiary shall be eligible to receive $50,000 per year until the Class
Member Claim is fully paid. In the event that any resulting judgment is less
that the proposed Award in nonbinding arbitration with the Trust pursuant to
Section C, the Trust shall be entitled to recover as a cost of litigation and
deduct from the judgment its cost of mediation and arbitration pursuant to the
procedures set forth in Section C.
(ii) Notwithstanding the foregoing, in order to prevent
evasion or abuse of the ADR provisions of this Trust Distribution Process, to
conserve the assets of the Trust for the benefit of all Beneficiaries, and to
manage prudently the cash flow of the Trust in a manner consistent with Section
E of this Trust Distribution Process, the Trustees shall have the discretion,
in any instance in which the Beneficiaries' judgments against the Trust result
from a trial of the claims of more than 15 such Beneficiaries, to pay such
judgments in such manner and over such a longer time period (not to exceed 10
years) as the Trustees shall determine is in the best interests of the Trust
and of all Beneficiaries.
4. DEFERRAL OF PAYMENTS. All Class Member Claims or Third Party
Claims eligible for a payment on a Distribution Date which do not receive that
payment on that Date because the Distributable Amount for the Fiscal Year has
been exhausted shall have that payment deferred until the following
Distribution Date. Any payment obligation so deferred shall retain its
position in the FIFO queue as set forth in Section F.2 and shall be accorded
priority as set forth in Section F.2. Deferrals may continue from year to year
until the Distributable Amount is sufficient to make the payments due on
deferred obligations.
-26-
<PAGE> 159
5. LIMITATION ON PAYMENT CLAIMS. Aggregate payments on account of Class
Member Claims and Third Party Claims arising from any one individual's exposure
to asbestos shall not total more than $500,000, whether the Class Member Claim
or Third Party Claim is Liquidated through settlement, mediation, arbitration
or in the tort system. Any individual with asbestos-related disease shall be
deemed to be a separate exposure for purposes of this section.
G. ALL CLAIMS RESOLVED PURSUANT TO THE TRUST DISTRIBUTION PROCESS.
In order to conserve the assets of the Trust, all Claimants are
enjoined from filing future litigation based on or arising out of a Class
Member Claim or Third Party Claim against the Fibreboard, Continental or
Pacific Releasees. Any such claim may only be pursued against the Trust as
provided in this Trust Distribution Process.
H. DEFENDANT CLASS MEMBER PROCEDURES.
Pursuant to the Defendant Class Settlement Agreement, and except as
otherwise provided herein, (a) Defendant Class Members are releasing Third
Party Claims against the Trust, Fibreboard Releasees, Continental Releasees and
Pacific Releasees (except that nothing in this Trust Distribution Process or
the Defendant Class Settlement Agreement shall be read as releasing, or be
deemed to release, any claims whatsoever Defendant Class Members may have
against the Continental Releasees and Pacific Releasees other than those
arising out of, or in any way predicated upon obligations created by, the
Insurance Policies); (b) Fibreboard Corporation and the Trust are releasing
contribution and indemnity claims arising out of Class Member Claims; and (c)
the Continental Releasees and Pacific Releasees are releasing any claims
(except for
- 27 -
<PAGE> 160
reinsurance claims) arising out of Class Member Claims they may have against
Defendant Class Members; provided, however, that Defendant Class Members shall
have rights against the Trust and the Trust shall succeed to Fibreboard's rights
against Defendant Class Members to the extent provided for under them by this
Trust Distribution Process. Without enlarging any substantive rights accorded
them by this Trust Distribution Process, Defendant Class Members shall have
such procedural rights (relating to procedural issues not expressly dealt with
by this Trust Distribution Process) reasonably necessary to pursue or defend
rights accorded them by this Trust Distribution Process. Class Member Claims
against the Trust to which Defendant Class Members succeed shall be governed by
this Section H of the Trust Distribution Process. Settlement Class Members,
Fibreboard Corporation, Continental, Pacific and the Trust are bound by the
terms of this Section and must abide by the following procedures in connection
with suits by Settlement Class Members for asbestos-related injury or disease
against Defendant Class Members.
1. CLAIMS LIQUIDATED BEFORE JUDGMENT AGAINST DEFENDANT CLASS MEMBERS.
a. CALCULATION OF SET-OFF AMOUNT. If a Settlement Class Member
Liquidates his or her Class Member Claim against the Trust before judgment is
rendered in litigation between the Settlement Class Member and Defendant Class
Member(s), the Trust (itself or in Fibreboard Corporation's stead) shall be
deemed, in such ongoing litigation, to be (i) a settled defendant within the
meaning of the law which governs the judgment entered by the trial court (or
any underlying verdict) (the "Judgment Forum Law") and (ii) a legally
responsible joint tortfeasor under Judgment Forum Law, without
- 28 -
<PAGE> 161
introduction of further proof. Any judgment obtained by a Settlement Class
Member against Defendant Class Member(s) shall be reduced or set off to reflect
the Settlement Class Member's settlement with the Trust in the manner (whether
pro tanto, pro rata, jury allocation or apportionment or otherwise), and in the
amount provided for under Judgment Forum Law. Where the dollar amount of the
settlement between the Trust and the Settlement Class Member is relevant to the
calculation of any such reduction or set off, that dollar amount shall be the
total amount agreed to by the Settlement Class Member and the Trust in
settlement of the Class Member Claim, including all sums paid and agreed to be
paid, without any reduction to present value for claims paid or to be paid
within three years of Liquidation. For that portion of any claim not to be paid
within three years of Liquidation, the amount of reduction or set off will be
calculated at present value as of the end of that three year period. Trust
estimates as to the length of time likely to elapse before future payments will
be made will be binding on Defendant Class Members and Settlement Class Members
alike. Where the judgment against the Defendant Class Member(s) resolves only
a portion of the Class Member Claim or potential Class Member Claim that the
Class Member has settled with the Trust (for example, personal injury as
distinct from wrongful death claims), the dollar amount of the settlement
between the Trust and the Settlement Class Member used in calculation of any
reduction or set off shall reflect any apportionment made by the Trust and the
Settlement Class Member reasonably and in good faith with regard to rights of
the Defendant Class Members under this Trust Distribution Process, provided (i)
that Defendant Class Members shall retain any rights available to them under
Judgment
- 29 -
<PAGE> 162
death of the last survivor of any of the descendants of Joseph P. Kennedy
living on the date hereof.
(b) On the Termination Date, after payment of all
liabilities of the Trust have been provided for, the Trust shall be dissolved,
and all of the Trust's assets shall be applied to such charitable purposes as
the Trustees in their reasonable discretion, after consultation with the SCB,
shall determine, which charitable purposes, if practicable, shall relate to
occupational health.
7.3 Amendments.
(a) This Trust Agreement may only be amended or waived as
provided in Section 3.1(a). Thirty days' advance written notice of any
proposed amendment or waiver shall be given to the SCB and the Trustors.
(b) The Trust Distribution Process may only be amended or
waived as provided in Section 3.1(a) of this Trust Agreement and, where
applicable, Section H.7 of the Trust Distribution Process. Thirty days'
advance written notice of any proposed amendment or waiver of the Trust
Distribution Process shall be given to the SCB, the Trustors and, where
appropriate, the Representative Defendant.
(c) The definitions used in this Trust Agreement or in the
Trust Distribution Process and contained in the Glossary may be amended or
waived only if and in the same manner as the Section of this Trust Agreement or
the Trust Distribution Process in which such definition is used may be amended
or waived.
7.4 Severability. Should any provision of this Trust Agreement or
the Trust Distribution Process be determined to be unenforceable, such
determination shall
- 30 -
<PAGE> 163
to such Class Member Claim. In response to a Defendant Class Member request,
the Trust and the Settlement Class Member shall promptly verify, no later than
the start of jury selection in the trial of an action by the Settlement Class
Member against the Defendant Class Member, the fact of the settlement; and in
accordance with Judgment Forum Law, also shall provide information regarding
the amount and terms of any such settlement of a Class Member Claim. Without
waiver by the Trust or Settlement Class Members of their rights to object to
discovery of such information, neither product exposure nor disease information
provided pursuant to this Subsection H.1.c shall be considered inadmissible at
trial based on Rule 408 of the Federal Rules of Evidence or any of its state
law counterparts.
2. CLAIMS NOT LIQUIDATED WHEN VERDICT OR JUDGMENT OBTAINED AGAINST DEFENDANT
CLASS MEMBERS.
a. EFFECT OF VERDICT OR JUDGMENT. Except as provided in Section
H.2.b and Section H.3, if a Settlement Class Member goes to judgment or verdict
against one or more Defendant Class Members without having Liquidated his or
her Class Member Claim against the Trust, the Settlement Class Member forever
waives and releases that portion of his or her Class Member Claim against the
Trust which would have been determined (under principles of Judgment Forum Law
unaffected by Global Approval Judgment) by the verdict or judgment had the
Trust for itself or in Fibreboard Corporation's stead been a judgment
defendant.
b. RETENTION OF SEVERAL LIABILITY CLAIM. Notwithstanding any other
provision of Section H.2, where (under principles of Judgment Forum Law
unaffected by Global Approval Judgment) the Trust's liability to a Settlement
Class Member would be
- 31 -
<PAGE> 164
several only, or where the Trust's liability as to a particular category of
damages (for example, non-economic damages) would be several only, a Settlement
Class Member shall retain that several-only aspect of his or her claim against
the Trust, even if the Settlement Class Member goes to judgment or verdict
against a Defendant Class Member without having Liquidated his or her Class
Member Claim. However, no aspect of the Class Member Claim to which principles
of joint or joint and several liability would apply shall be so retained.
Should the Trust thereafter settle with the Settlement Class Member based only
on the Trust's several liability, the release shall state that Third Party
Claims based on joint, or joint and several, liability are not barred by virtue
of the several liability settlement and may be pursued in accordance with the
provisions of this Trust Distribution Process.
c. PAYMENT OF VERDICT OR JUDGMENT. Upon payment of a verdict or
judgment returned prior to Liquidation of the underlying Class Member Claim,
the Defendant Class Member(s) shall succeed in all respects to that portion of
the Class Member Claim against the Trust which would have been determined
(under principles of Judgment Forum Law unaffected by Global Approval Judgment)
by the judgment in the action against the Defendant Class Member had the Trust
for itself or Fibreboard Corporation's stead been a judgment defendant, except
to the extent provided in Sections H.2.b and H.5 hereof, and may pursue such
Class Member Claim in accordance with this Trust Distribution Process.
Notwithstanding any contrary provisions of Judgment Forum Law, a Class Member
Claim to which a Defendant Class Member may succeed under this subsection upon
payment of a verdict or judgment shall not be lost or extinguished
- 32 -
<PAGE> 165
7.11 Dispute Resolution. Any disputes which arise under this Trust
Agreement or the Trust Distribution Process shall be resolved by the Court,
except as otherwise provided herein or in the Trust Distribution Process.
7.12 Enforcement and Administration. The provisions of this Trust
Agreement and the Trust Distribution Process shall be enforced and
administered by the Court.
7.13 Settlement of Trustees' Accounts. Notwithstanding any state
law to the contrary, the Court shall have exclusive jurisdiction over the
settlement of the accounts of the Trustees, whether such account is rendered by
the Trustees themselves or is sought by any Beneficiary or other Person. The
Trustees shall render successive accounts covering periods of not more than one
Fiscal Year, commencing on the first completed Fiscal Year of the Trust or the
last day of the prior accounting period, as the case may be, except that an
account shall be rendered for the period ending on the date of the death,
resignation, removal or retirement of any Trustee. Upon the acceptance of any
such account by the Court after hearing on notice to the SCB, the Trustors and
such other parties as the Court shall designate, the Trustees shall be
discharged from any further liability or responsibility to any Beneficiary or
other Person as to all matters embraced in such account.
7.14 No Bond Required. Notwithstanding any state law to the
contrary, each Trustee (including any successor Trustee) shall be exempt from
giving any bond or other security in any jurisdiction.
- 33 -
<PAGE> 166
or indemnity against Fibreboard or the Trust. Nothing in this Section H.3 or
in Section H.2.a shall prevent the Settlement Class Member from liquidating and
collection pursuant to other provisions of Section D of this Trust Distribution
Process his or her claim against the Trust based on the verdict or judgment
referred to in this Section H.3.
4. LITIGATION BETWEEN DEFENDANT CLASS MEMBERS AND SETTLEMENT CLASS MEMBERS.
In any litigation between Defendant Class Members and Settlement Class
Members each shall retain their respective rights under Judgment Forum Law to
introduce evidence at trial.
Under no circumstances (other than the commencement by the Trust of
formal bankruptcy or insolvency proceedings) shall the Trust (or Fibreboard
Corporation) be treated as a bankrupt or insolvent defendant, nor shall the
Trust (or Fibreboard Corporation) be considered, for purposes of litigation
between Defendant Class Members and Settlement Class Members only, a Person who
cannot be made a party for lack of personal jurisdiction, or otherwise a party
over whom a Settlement Class Member is unable to obtain jurisdiction.
5. PURSUIT OF THIRD PARTY CLAIMS.
a. DEFENDANT CLASS MEMBER TO STAND IN SETTLEMENT CLASS MEMBERS' STEAD.
In pursuing any Class Member Claim against the Trust to which a
Defendant Class Member has succeeded under subsection H.2.c above, (i) the
Defendant Class Member shall stand in the stead of the Settlement Class Member
in respect of whose Class Member Claim the Defendant Class Member has
succeeded, (ii) such Class
- 34 -
<PAGE> 167
Member Claim shall be resolved by Defendant Class Members under this Trust
Distribution Process in the same manner as such Class Member Claim would have
been resolved had it been asserted by the Settlement Class Member, and (iii) it
shall be evaluated on the same basis as if the Settlement Class Member directly
presented his or her Class Member Claim to the Trust, without any enhancement,
discount or limitation because it is asserted by a Defendant Class Member.
Defendant Class Members must present evidence of such Class Member Claims in
the same manner as Settlement Class Members; provided, however, that Defendant
Class Members are not required to provide information unavailable to them
because such information is solely within the control of the Settlement Class
Member. In any event, however, Defendant Class Member Claims are to be
evaluated by the same standards as Class Member Claims. For the limited
purpose of pursuing Class Member Claims, or otherwise in respect of assertion
of other rights specifically granted under this Trust Distribution Process,
Defendant Class Members shall be treated as beneficiaries of the Trust;
provided, however, that under no circumstances shall Section H.6 below apply to
Class Member Claims to which Defendant Class Members have succeeded.
b. RESOLUTION OF CLAIMS. Notwithstanding any other provision of this
subsection, Class Member Claims to which Defendant Class Members have succeeded
under Section H.2.c hereof or Residual Claims shall be decided by binding
arbitration under Section C.2 of this Trust Distribution Process, if not
settled previously, and may not exit to the tort system. In such arbitrations
and in its negotiations with Defendant Class Members, the Trust shall not
assert any Fibreboard Corporation defenses based on
- 35 -
<PAGE> 168
the state of the art, or failure to show negligence or product defect (whether
based upon design, manufacture or failure to warn), except in those
circumstances under which the Trust would also have asserted those defenses
against the Settlement Class Member to whose Class Member Claim the Defendant
Class Member has succeeded. Moreover, the Trust shall not assert failure to
show negligence or product defect as a defense where a Class Member Claim to
which the Defendant Class Member has succeeded is brought by a former
manufacturer and/or distributor of asbestos-containing high-temperature pipe
and block insulation, if the issues of product defect or negligence (as the
case may be) covering such pipe and block insulation were fully litigated to an
adverse result against that Defendant Class Member at trial of the underlying
asbestos-related personal injury action. Under no other circumstances shall
the results of such trial be given preclusive effect in any such arbitration.
Any arbitration under this subsection shall be confidential, and no statement
made, or contention advanced, at such arbitration shall be introduced as
evidence or otherwise used against the maker or proponent of such statement or
contention in the course of any proceeding other than arbitrations under this
Trust Distribution Process.
c. PROCESSING AND PAYMENT OF CLAIMS. Class Member Claims to which
Defendant Class Members have succeeded shall be included in the FIFO queue
established pursuant to this Trust Distribution Process. For purposes of
processing, the position of a Class Member Claim to which a Defendant Class
Member has succeeded in the FIFO queue shall be determined by the earlier of
(a) the date the Settlement Class Member filed within the Trust the underlying
Class Member Claim or (b) the date on
- 36 -
<PAGE> 169
which the Defendant Class Member paid the Settlement Class Member with respect
to the judgment or verdict. For purposes of payment, a Class Member Claim to
which a Defendant Class Member has succeeded will be placed within the
appropriate Schedule Category set forth in Section F.2 and, within such
category, in FIFO order, based on the date on which the Defendant Class Member
paid the Settlement Class Member in respect to the judgment or verdict. Class
Member Claims to which Defendant Class Members have succeeded, shall be paid
under the terms set forth in Section F.3.a. Prior to receiving payment the
Defendant Class Member shall have provided a release as described in Section
B.4.
d. MULTIPLE CLAIMS OR MULTIPLE THIRD PARTY CLAIMS. Where Defendant
Class Members succeed to a portion of a Class Member Claim by virtue of payment
with respect to any verdict or judgment where a Beneficiary retains an interest
in the several liability aspect of the same Class Member Claim (regardless of
the number of Defendant Class Members who may have succeeded to portions of the
Class Member Claim) ("Partial Claims"), Settlement Class Members and Defendant
Class Members shall comply with procedures established by the Trust to ensure
that all persons with rights under this Trust Distribution Process in respect
of the same Class Member Claim coordinate their effort so that all such Partial
Claims can be processed and Liquidated in a single proceeding, designed to
resolve all the elements of such claims, whether malignancy or non-malignancy,
and all causes of action, whether for personal injury, death, loss of
consortium, or otherwise against the Trust; provided, however, that nothing in
the foregoing shall prevent the Trust, a Settlement Class Member or a Defendant
Class
- 37 -
<PAGE> 170
Member, as the case may be, from electing to give or take a limited,
non-malignancy release under this Trust Distribution Process. In evaluating
Partial Claims in the course of such a single proceeding, the Trust shall not
differentiate among the aspects of such claims based on whether the right to
payment is asserted by a Settlement Class Member or Defendant Class Member. In
those circumstances where different parties (whether Settlement Class Member
and Defendant Class Member(s), or more than one Defendant Class Member) assert
rights under this Trust Distribution Process in respect of the same Class
Member Claim, any disputes regarding such Class Member Claim shall be presented
in a single arbitration. Should more than one Defendant Class Member be
entitled to payment from a single settlement or award by the Trust, the
Defendant Class Members shall share such amount in the same proportion that
each made payments to the Settlement Class Member. Notwithstanding the above
or any other provision of this Trust Distribution Process, (i) a Settlement
Class Member shall not be entitled to take to the tort system a Class Member
Claim if any portion of that claim was resolved as to a Defendant Class Member
by settlement or in binding arbitration pursuant to Section H.5.b of this Trust
Distribution Process; and (ii) Settlement Class Members retain all rights to
resolve their Partial Claims with the Trust after the verdict or judgment
against the Defendant Class Member and before one or more Defendant Class
Member's related Partial Claim(s) is submitted to the Trust in writing for
resolution; provided, however, that the Settlement Class Member's resolution of
his or her Partial Claim shall not bind any Defendant Class Members or the
Trust with respect to any Defendant Class
- 38 -
<PAGE> 171
Member's related Partial Claim. The Trust shall settle Partial Claims only in
accordance with Section H.5.d-g.
e. If a Settlement Class Member resolves his or her Partial Claim
pursuant to Section H.5.d, the Trust or arbitrator will apportion the
settlement or award among all elements of the claims that are being resolved
(for example, personal injury, wrongful death, loss of consortium, etc.).
Until such time as the Partial Claim of a Defendant Class Member has been
Liquidated and paid or denied, the related Partial Claim of a Settlement Class
Member Liquidated under Section H.5.d(ii) shall only be entitled to payment of
(i) that portion of the Settlement Class Member's Partial Claim
allocated to resolved claims which were not included in the verdict or judgment
against the Defendant Class Member, plus
(ii) $500,000 minus the amount in (i) above, multiplied by the
ratio of (x) the several liability portion of the verdict or judgment against
the Defendant Class Member. Any award of punitive or exemplary damages will be
excluded from the verdict or judgment against the Defendant Class Member when
calculating (x) or (y).
f. The provisions of Section H.5.e shall not apply if the underlying
total verdict or judgment in favor of a Settlement Class Member against one or
more Defendant Class Members (excluding any award for punitive or exemplary
damages) is $500,000 or less.
- 39 -
<PAGE> 172
g. The provisions of Section H.5.e will cease to apply if the Partial
Claim of a Settlement Class Member plus the related Partial Claims of all
Defendant Class Members are Liquidated for a total of $500,000 or less.
h. The provisions of Section H.5.e will cease to apply as to any
Partial Claim of a Defendant Class Member which is not submitted to the Trust
and served on the Settlement Class Member, or his attorney, if any, within
three months of the date on which the underlying judgment against the Defendant
Class Member becomes final.
6. COOPERATION FOR COURT APPROVALS. Upon liquidation of his or her Class
Member Claim, each Beneficiary shall cooperate with the Trust in seeking any
needed trial court approval under Judgment Forum Law of the settlement.
7. NO MODIFICATION WITHOUT CONSENT. Neither the terms of this
Section H nor as they apply to Defendant Class Members the provisions of this
Trust Distribution Process as to arbitration may be modified without the
written concurrence of the Representative Defendant. Other provisions of the
First Distribution Process may be modified (after prior notice to the
Representative Defendant) without the concurrence of the Representative
Defendant unless the modification (i) has an adverse effect on Defendant Class
Members and (ii) discriminates against them vis-a-vis Settlement Class Members,
in which case the modification shall require the written concurrence of the
Representative Defendant.
I. ATTORNEYS' FEES.
Attorneys' fees payable in connection with Class Member Claims
Liquidated and paid through this Trust Distribution Process, whether as a
result of
- 40 -
<PAGE> 173
settlement, an arbitration award, or a judgment obtained in the tort system,
and whether or not calculated as a percentage of recovery, shall be the lower
of the fee provided in the contract between the Beneficiary and counsel and
25%. Costs related to the prosecution of the claim shall be subtracted from
the recovery before calculating the attorney's fee. Legal fees shall be paid
pro rata from the payments due to the Beneficiaries as such payments are made
by the Trust.
J. AMENDMENT.
No amendments or waivers of this Trust Distribution Process will be
permitted except as set forth in Section 3.1 of the Trust Agreement.
- 41 -
<PAGE> 174
APPENDIX 1 TO THE
TRUST DISTRIBUTION PROCESS
1. INCREASED PRINCIPAL AMOUNT. The Trustees may increase the Principal
Amount for any of the third Fiscal Year through the twelfth Fiscal Year after
Global Approval Judgment or the sixteenth Fiscal Year through the twentieth
Fiscal Year after Global Approval Judgment up to the Increased Principal Amount
for that year, if
(i) the Distributable Amount (if not increased as provided in this
sentence) for that Fiscal Year, plus the amount, if any, by which the balance
(on the last business day of that Fiscal Year) of the Reserve Account exceeds
$10 million, is insufficient to pay all Trust Expenses for such Fiscal Year
plus all Class Member Claims and Third Party Claims included in any of the
first two Schedule Categories due and payable on the Distribution Date
immediately following that Fiscal Year, or any payments with respect to Class
Member Claims or Third Party Claims included in the third Schedule Category
that were due and unpaid on four or more consecutive Distribution Dates prior
to the Distribution Date immediately following that Fiscal Year, and
(ii) the Trustees conclude that increasing the Principal Amount
would be in the best interests of all Beneficiaries, both present and future,
and that the sum of the Earnings Amount for Fund I, such amount in the Reserve
Account in excess of $10 million and the amount of the Increased Principal
Amount does not exceed the amount required to pay all such Trust Expenses and
Class Member Claims and Third Party Claims included in the first two Schedule
Categories and any payments with respect to
- A-1 -
<PAGE> 175
Class Member Claims or Third Party Claims included in the third Schedule
Category that were due and unpaid on four or more consecutive Distribution
Dates prior to such Distribution Date.
2. RESERVE ACCOUNT. The Reserve Account shall initially be credited with
the full amount transferred to the Trust pursuant to Section 2.3(B) of the
Global Settlement Agreement, minus the sum of
(a) $1.340 billion of the starting balance of Fund I,
(b) $200 million, the starting balance of Fund II, and
(c) $10 million, the starting balance of Fund III.
The Reserve Account is part of Fund I.
The Reserve Account shall be increased on each Distribution Date by
(x) 100%, until the balance of the Reserve Account equals $25 million,
(y) 50%, after the balance of the Reserve Account equals $25 million
and until the balance of the Reserve Account equals the sum of the
Principal Amount and Earnings Amount for the prior Fiscal Year,
and
(z) 0%, after the balance of the Reserve Account equals the sum of the
Principal Amount and Earnings Amount for the prior Fiscal Year,
of either
(i) if the Unreimbursed Borrowings as of such date is zero or a
positive number, then the Surplus as of such date, or
- A-2 -
<PAGE> 176
(ii) if the Unreimbursed Borrowings as of such date is a negative
number, but such Unreimbursed Borrowings plus the Surplus as
of such date is a positive number, then such positive
number, or
(iii) if Unreimbursed Borrowings as of such date plus the Surplus
as of such date is zero or a negative number, then zero (so
that this calculation shall not result in a decrease in the
Reserve Account).
The Reserve Account shall be used to pay all Trust Expenses, Class
Member Claims, Third Party Claims, and payments made pursuant to Section 7.16
of the Trust Agreement (it being understood that such payments pursuant to
Section 7.16 shall not be limited by the amounts in the Reserve Account) for
any Fiscal Year in which the Principal Amount and the Earnings Amount is
insufficient for such purpose; provided, that the provisions of this sentence
shall not be applied to require the reduction of the balance of the Reserve
Account below $10 million. Notwithstanding the foregoing, during the Fiscal
Year after Global Approval Judgment, the Trustees shall create and thereafter
maintain an appropriate reserve (to be taken out of the amounts otherwise
included in the Reserve Account) for required payments in later Fiscal Years
for Class Member Claims and Third Party Claims presented in such first Fiscal
Year or before, which reserve shall not be otherwise available for the purposes
of the immediately preceding sentence. The Trustees shall have the discretion
to utilize any
- A-3 -
<PAGE> 177
and all amounts in the Reserve Account to pay Trust Expenses, Class Member
Claims, Third Party Claims and payments pursuant to Section 7.16 of the Trust
Agreement.
- A-4 -
<PAGE> 178
SCHEDULE A
<TABLE>
<CAPTION>
INJURY FACTOR
<S> <C>
Mesothelioma Fibreboard share
age at diagnosis of mesothelioma
venue and status of litigation
amount of lost income
claimant alive or deceased
number of dependents
Lung Cancer Fibreboard share
year of diagnosis
venue and status of litigation
degree of functional impairment
industry of most significant exposure
amount of lost income
number of dependents
current or former smoker
ILO x-ray reading
Other Cancer Fibreboard share
age at diagnosis of cancer
venue and status of litigation
degree of functional impairment
time since first exposure
prior claim of less severe injury
employment status
number of minor dependents
Asbestos Lung
Disease I Fibreboard share
venue and status of litigation
degree of functional impairment
industry of most significant exposure
disputed claim
claimant alive or deceased
claimant housebound and sedentary
claim for lost wages
ILO x-ray reading
Asbestos Lung
Disease II Fibreboard share
venue and status of litigation
degree of functional impairment
ILO x-ray reading
</TABLE>
- B-1 -
<PAGE> 179
EXHIBIT C
DEFENDANT CLASS
SETTLEMENT AGREEMENT
This Defendant Class Settlement Agreement is made and entered into as
of December 22, 1993, by and among Owens-Illinois, Inc., a Delaware corporation
("Representative Defendant"), as representative of the Defendant Class, acting
by and through Defendant Class Counsel; Fibreboard Corporation, a Delaware
corporation; the Representative Plaintiffs as representatives of the Settlement
Class, acting by and through Class Counsel; Continental Casualty Company, an
Illinois corporation ("Continental"); CNA Casualty Company of California, a
California corporation ("CNA Casualty"); Columbia Casualty Company, an Illinois
corporation ("Columbia"); and Pacific Indemnity Company, a California
corporation ("Pacific"), together the "Parties."
RECITALS
A. On August 27, 1993, Class Counsel, Fibreboard Corporation,
Continental, CNA Casualty, Columbia, and Pacific announced an agreement in
principle to settle all future asbestos-related personal injury claims against
Fibreboard (the "Global Settlement"). The Global Settlement is set forth in
the transcript of a hearing before the Honorable Robert Parker, Chief Judge,
United States District Court for the Eastern District of Texas (the "Global
Court"). The Global Settlement, as announced, was subject to the execution of
definitive agreements and final court approval, among other conditions.
B. In connection with implementing the Global Settlement,
Representative Plaintiffs, on behalf of themselves and the Settlement Class,
filed the Class Action on
-1-
<PAGE> 180
September 9, 1993. On September 9, 1993, the Court provisionally certified the
Settlement Class as a mandatory, non-opt out class under Federal Rules of Civil
Procedure, Rule 23(b)(1)(B), and entered a temporary restraining order
preventing any member of the Settlement Class from initiating any
asbestos-related claims against Fibreboard. The relief afforded by the
temporary restraining order was extended by the entry of a preliminary
injunction on September 27, 1993, which shall remain in effect pending notice
to the Settlement Class and the hearing and determination of the fairness,
reasonableness, and adequacy of the proposed settlement of the Class Action.
C. In December, 1993 Representative Plaintiffs on behalf of
themselves and as representatives of the Settlement Class, Fibreboard
Corporation, Continental, CNA Casualty, Columbia, and Pacific, entered into a
definitive agreement to implement the Global Settlement (the "Global Settlement
Agreement"). A copy of the Global Settlement Agreement (including exhibits
thereto) is attached as Exhibit A hereto.
D. The expenditures necessary to process and resolve asbestos
lawsuits have contributed to more than ten major asbestos defendants filing for
bankruptcy reorganization. Because some of these defendants represented a
significant portion of the traditional liability share for asbestos personal
injury cases, and since many jurisdictions apply the principle of joint and
several liability, these bankruptcy filings have increased costs substantially
and have caused significant delays to plaintiffs. E. Claims for contribution
and/or indemnification are infrequently litigated in asbestos personal injury
cases. The vast majority of asbestos-related personal injury cases are settled
by all defendants before trial. In those cases where trials result in
- 2 -
<PAGE> 181
judgments against non-settling defendants, the law in most jurisdictions
protects settling defendants against claims for contribution and/or indemnity
by judgment debtors. Nevertheless, the potential remains for litigation of
contribution and/or indemnity claims. The parties to the Global Settlement
Agreement and the members of the Defendant Class all have strong and common
interests in preventing a Fibreboard Corporation insolvency, in Fibreboard
Corporation funding a Global Settlement, in Fibreboard Corporation paying its
unfunded settlement obligations and in resolving potential Third Party Claims
by Defendant Class Members without the delay, expense, and uncertainty of
litigating such claims. Although Defendant Class Members are numerous and
include, among others, manufacturers, distributors, shipowners, premises owners
and/or occupiers, and so-called "peripheral" defendants, any differing
interests that may exist among Defendant Class Members are outweighed by the
benefits to the Defendant Class as a whole afforded by the funds to be provided
by the success of the Global Settlement Agreement.
F. Fibreboard Corporation has been engaged in insurance coverage
litigation with Continental and Pacific for a number of years. Although
Fibreboard Corporation was awarded coverage under a trial court judgment, the
insurers appealed that judgment and the outcome of the appeal remains
uncertain. The interests of the Defendant Class are served by the Global
Settlement Agreement, which provides over $1.5 billion to compensate Settlement
Class members for asbestos-related personal injuries for which Fibreboard
Corporation may bear legal liability, while eliminating the risk that
Fibreboard Corporation may lose insurance coverage, and which also may enable
Fibreboard Corporation to fund existing unfunded settlement obligations
totalling over $1.0 billion.
- 3 -
<PAGE> 182
Absent the funds that will be made available by and as a result of the Global
Settlement Agreement, Defendant Class Members could bear a proportionately
greater share of the overall liability for asbestos-related personal injuries.
G. Representative Defendant adequately represents the interests of
the Defendant Class, in that Representative Defendant is a publicly held
corporation that has been sued in thousands of asbestos-related personal injury
lawsuits in jurisdictions throughout the country.
H. Defendant Class Counsel have extensive experience in
asbestos-related litigation. Defendant Class Counsel have reviewed the Global
Settlement Agreement (including the exhibits thereto) and have been advised of
the record to date in the Class Action, and have otherwise conducted a thorough
investigation of the facts and law relevant to the matters set forth herein.
Based upon this experience and investigation, Defendant Class Counsel have
determined that this Agreement is in the best interests of the Defendant Class.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the Parties hereby agree as follows:
I. DEFINITIONS
Capitalized terms used, and not otherwise defined, herein are defined
in the Glossary of Terms attached as Exhibit A to the Global Settlement
Agreement.
II. RESOLUTION OF DEFENDANT CLASS CLAIMS
A. Defendant Class Members hereby release the Released Parties from
any and all Third Party Claims and agree that the Global Approval Judgment
shall bar and
- 4 -
<PAGE> 183
enjoin permanently Defendant Class Members from prosecution of any Third Party
Claims against any of the Released Parties in any proceeding or court.
B. Fibreboard Corporation, Continental, CNA Casualty, Columbia,
Pacific and the Trust release contribution and\or indemnity claims against
Defendant Class Members set forth in the Trust Distribution Process.
C. Defendant Class Members shall have the rights described in Section
H of the Trust Distribution Process.
III. ACTIONS TO IMPLEMENT THIS AGREEMENT
A. Fibreboard Corporation shall commence, as a third-party claim or
other appropriate pleading in the Class Action, a mandatory, non-opt out class
action against the Defendant Class pursuant to Federal Rules of Civil
Procedure, Rule 23(b)(1) and (2) (the "Defendant Class Action").
B. The Parties shall join in motions, in form and substance
satisfactory to counsel for each of the Parties, to certify provisionally the
Defendant Class for settlement purposes only, to preliminarily enjoin the
prosecution of any Third Party Claim during the pendency of the Defendant Class
Action and for entry of the Defendant Class Order and Global Approval
Judgement. Should the motions to certify provisionally the Defendant Class for
settlement purposes only and to preliminarily enjoin the prosecution of any
Third Party Claims be granted, while the orders granting those motions are in
effect before entry of Global Approval Judgment, Section H of the Trust
Distribution Process and this Defendant Class Settlement Agreement shall govern
- -- as if they were fully operative -- the rights and liabilities of the Parties
with respect to claims of Defendant Class Members arising out of
- 5 -
<PAGE> 184
Interim Claims resolved under Section 7 of the Global Settlement Agreement;
provided that during the Interim Period Fibreboard, the Insurers, the Interim
Committee and the Escrow Fund shall have (as appropriate and consistent with
Section 7 of the Global Settlement Agreement) the rights and responsibilities
assigned to the Trust in Section H of the Trust Distribution Process. Should
Global Court Disapproval occur, Defendant Class Members shall be restored to
any rights they may have under applicable law to pursue claims otherwise
released under this Defendant Class Settlement Agreement.
C. Notice shall be given to the Defendant Class in form and substance
satisfactory to counsel for each of the Parties and approved by the Court.
Pursuant to such notice, a hearing shall be held pursuant to Federal Rules of
Civil Procedure, Rule 23(e), to determine the fairness and reasonableness of
the settlement contemplated by this Defendant Class Settlement Agreement.
D. The certification of the Defendant Class pursuant to this
Defendant Class Settlement Agreement shall be binding if Global Approval
Judgment is entered.
E. In the event either (i) Global Court Disapproval occurs; (ii)
Class Counsel move to convert the Class Action or the Defendant Class Action to
a litigation class action; (iii) either the Court or the Global Court enters an
order over objection by the Representative Defendant converting the Class
Action or the Defendant Class Action to a litigation class action; or (iv)
before Global Approval Judgment or Global Court Disapproval, the Trust
Distribution Process is amended without complying with Section H.7 of the Trust
Distribution Process, then the order certifying the Defendant Class shall be
vacated, and Fibreboard Corporation and Representative Defendant shall
stipulate to the
- 6 -
<PAGE> 185
dismissal of the Defendant Class Action without prejudice, and the Parties
shall return in all respects to the status quo ante, including, but not limited
to, the revocation of any releases given in this document or in the Trust
Distribution Process. The Defendant Class shall retain any and all rights to
object to the continued prosecution of such action as a litigation class action
under Rule 23. Neither this Defendant Class Settlement Agreement, nor its
exhibits, nor the settlement negotiations, nor the proceedings seeking
approval of the settlement, may be used in support of any application for a
determination that such action or any other action shall proceed as a class
action except for the purposes of the settlement in accordance with this
Defendant Class Settlement Agreement, or as evidence in any litigation or
proceeding against any of the Parties other than an action or proceeding to
enforce the provisions of this Defendant Class Settlement Agreement.
IV. MISCELLANEOUS
A. Amendments. No amendment of any provision of this Defendant Class
Settlement Agreement (or to Section H of the Trust Distribution Process) shall
be valid unless the same shall be in writing and signed by all Parties hereto
and, upon the request of any of them, approved by the Court.
B. Counterparts. This Defendant Class Settlement Agreement may be
executed in one or more counterparts, each of which shall be deemed an original
but all of which together will constitute one and the same instrument.
C. Further Actions. The parties shall take such reasonable actions
as may be necessary or appropriate to consummate or implement this Defendant
Class Settlement Agreement.
- 7 -
<PAGE> 186
D. The Representative Defendant shall not be responsible for any cost
or expenses (including the expense of any class notice) associated with
obtaining any necessary Court approvals of this Defendant Class Settlement
Agreement. In the event of Global Approval Judgment, Representative Defendant
may apply to the Court for approval of reimbursement of its own reasonable
costs and expenses, including the reasonable cost and expenses of its counsel,
in an amount not to exceed $250,000, incurred in connection with negotiating
and obtaining any necessary approvals of this Defendant Class Settlement
Agreement. In the event of Global Court Disapproval, Fibreboard and the
Insurers will negotiate in good faith with the Representative Defendant
regarding whether, and to what extent, reimbursement of Representative
Defendant's expenses is appropriate.
E. Defendant Class shall not change the identity of Representative
Defendant without consent of Class Counsel, Fibreboard Corporation, Continental
and Pacific without approval of the Court.
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written by the Parties hereto, thereunto duly authorized.
ON BEHALF OF DEFENDANT CLASS
By /s/ PHILIP MCWEENY
-----------------------------
Philip McWeeny
FIBREBOARD CORPORATION
By /s/ MICHAEL R. DOUGLAS
-----------------------------
Title: Sr. Vice President and
General Counsel
- 8 -
<PAGE> 187
CONTINENTAL CASUALTY COMPANY
By /s/ LAURENS F. TERRY
--------------------------------
Title: Vice President
CNA CASUALTY COMPANY OF CALIFORNIA
By /s/ LAURENS F. TERRY
--------------------------------
Title: Vice President
COLUMBIA CASUALTY COMPANY
By /s/ LAURENS F. TERRY
--------------------------------
Title: Vice President Continental
Casualty Company
PACIFIC INDEMNITY COMPANY
By /s/ JOHN J. DEGNAN
--------------------------------
Title:
ON BEHALF OF SETTLEMENT CLASS
By /s/ JOSEPH F. RICE
--------------------------------
Joseph F. Rice, Esq.
By /s/ JOSEPH B. COX
--------------------------------
Joseph B. Cox, Jr., Esq.
By /s/ STEVEN KAZAN
--------------------------------
Steven Kazan, Esq.
By /s/ HARRY F. WARTNICK
--------------------------------
Harry F. Wartnick, Esq.
- 9 -
<PAGE> 188
EXHIBIT D
ESCROW AGREEMENT
ESCROW AGREEMENT made this 23rd day of December, 1993, by and among
Continental Casualty Company, an Illinois corporation ("Continental"), Pacific
Indemnity Company, a California corporation ("Pacific"), and The First National
Bank of Chicago (the "Escrow Agent").
WHEREAS, Continental, Pacific and Fibreboard Corporation, a Delaware
corporation, have entered into an Agreement dated as of October 12, 1993 (as
the same may be amended from time to time, the "Settlement Agreement") relating
to the settlement of lawsuits relating to questions of insurance coverage, all
as described in the Settlement Agreement;
WHEREAS, Fibreboard Corporation, Continental, Pacific, the
Representative Plaintiffs (acting by and through Class Counsel) (as such terms
are defined in the Glossary to the Global Settlement Agreement (as defined
below) as Exhibit A (the "Glossary")) entered into a Global Settlement
Agreement as of August 27, 1993 (as the same may be amended from time to time,
the "Global Settlement Agreement"), relating to the settlement, inter alia, of
personal injury lawsuits and lawsuits relating to questions of insurance
coverage, all as described in the Global Settlement Agreement;
- 1 -
<PAGE> 189
WHEREAS, the Global Settlement Agreement provides for payment of an
aggregate amount of $1,525,000,000 by Continental and Pacific into an escrow
account pending further distribution of such funds; and
WHEREAS, the parties desire to arrange for such escrow and appoint
Escrow Agent as the escrow agent in accordance with the terms hereof.
NOW, THEREFORE, in consideration of the mutual promises contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and intending to be legally bound,
the parties agree as follows:
1. INTERPRETATION AND DEFINITIONS. This Escrow Agreement is being
executed and delivered pursuant to Section 2.3 of the Global Settlement
Agreement and the Escrow Account created pursuant to this Escrow Agreement is
the Escrow Fund referred to therein. The provisions of this Escrow Agreement
shall not in any event be construed so as to enlarge or diminish the rights of
any party under the Global Settlement Agreement. Capitalized terms used and
not defined herein have the meanings given to them in the Glossary.
2. APPOINTMENT AND COMPENSATION OF ESCROW AGENT. Escrow Agent is
hereby appointed to act as escrow agent in accordance with the terms hereof,
and
- 2 -
<PAGE> 190
Escrow Agent hereby accepts such appointment. Escrow Agent shall have all the
rights, powers, duties and obligations provided herein. All persons dealing
with the Escrow Agent are released from inquiry into the decision or authority
of the Escrow Agent and from seeing to the application of any monies,
securities or other property paid or delivered to the Escrow Fund. Escrow
Agent shall be entitled to charge the Escrow Account for its fees, as
determined in accordance with the fee letter attached hereto as Exhibit A, and
for reimbursement of reasonable costs and expenses suffered or incurred by
Escrow Agent in connection with the performance of its duties and obligations
hereunder including, but not limited to, any suit in interpleader brought by
Escrow Agent.
3. DEPOSIT AND INVESTMENT OF FUNDS. (a) On December 30, 1993,
Continental shall deliver $986,827,500, and Pacific shall deliver $538,172,500,
for an aggregate amount of $1,525,000,000 (collectively, the "Funds") to Escrow
Agent, by wire transfer of immediately available funds to such account of
Escrow Agent that Escrow Agent identifies in a writing delivered to Continental
and Pacific.
(b) On or before the date hereof, Escrow Agent shall establish at the
office of its corporate trust department in Chicago, Illinois and, at all times
thereafter until the escrow created by this Escrow Agreement shall have
terminated pursuant to Section 6 hereof (the "Escrow Termination Date"), shall
maintain a separate account entitled the "Fibreboard Asbestos Claimants Escrow
Account" (the "Escrow Account").
- 3 -
<PAGE> 191
All funds, securities and other property held by the Escrow Agent
(collectively, the "Escrow Assets") at any time pursuant to this Escrow
Agreement, including the Funds and all investments, interest, earnings and
proceeds thereof and thereon, shall be held in the Escrow Account. No property
other than the Escrow Assets shall be held in the Escrow Account. Escrow Agent
shall make and maintain, at all times until the Escrow Termination Date,
appropriate entries in its books and records to reflect that all of the Escrow
Assets existing from time to time are held in the Escrow Account.
(c) During the term of this Escrow Agreement, Escrow Agent shall
invest and reinvest the Escrow Assets from time to time in obligations backed
by the full faith and credit of the United States of America which have a
maturity date which is not more than three months from the date of acquisition
("Eligible Treasury Securities"); provided, however, that pending investment or
prompt distribution Escrow Agent may invest funds in an aggregate amount at any
time not exceeding the lesser of $10,000,000 or 5% of the amount of the Escrow
Assets in (i) a money market fund or funds sponsored by an Eligible Institution
(as defined below) or (ii) repurchase agreements with an Eligible Institution
with a term of not more than one day for Eligible Treasury Securities, with
respect to which such Eligible Treasury Securities are held by Escrow Agent in
its account with a Federal Reserve Bank and maintained on its books and records
in the Escrow Account. An Eligible Institution shall mean a commercial bank
having a combined capital and surplus of at least Five Hundred Million Dollars
- 4 -
<PAGE> 192
($500,000,000) and which is well capitalized or adequately capitalized (as such
terms are defined in applicable federal regulations).
The Escrow Agent shall liquidate investments in order to comply with
the provisions of this Escrow Agreement without liability for any resulting
losses. Any losses incurred from an investment shall be borne by the Escrow
Account.
4. ACCRUED INTEREST ON THE ESCROW ASSETS. All interest and earnings
of the Escrow Assets shall be added to and become part of the Escrow Assets,
and shall be held by Escrow Agent under this Escrow Agreement.
5. PAYMENTS OF AMOUNTS HELD IN ESCROW ACCOUNT. (a) Subject to
Sections 5(b) and 5(c) hereof, upon termination of the Escrow Agreement
pursuant to Section 6 hereof, Escrow Agent shall distribute all amounts held in
the Escrow Account pursuant to (i) written payment instructions executed by
each of Continental, Pacific, Fibreboard Corporation, Class Counsel (acting on
behalf of the Settlement Class), and, after appointment of the Trustees, the
Trustees or (ii) an order obtained after a hearing held on notice to each of
Continental, Pacific, Fibreboard Corporation and Class Counsel (a "Court
Order") of the United States District Court for the Eastern District of Texas.
- 5 -
<PAGE> 193
(b) At any time and from time to time during the term of this Escrow
Agreement, Escrow Agent shall (i) at the written direction of each of
Continental, Pacific, Fibreboard Corporation, Class Counsel, and, after
appointment of the Trustees, the Trustees distribute such amount or amounts to
such person or persons and at such time or times as each of Continental,
Pacific, Fibreboard Corporation, Class Counsel, and, after appointment of the
Trustees, the Trustees shall direct in an Interim Payment Direction or (ii) in
accordance with a Court Order, distribute such amount or amounts to such person
or persons and at such time or times as is specified in the Court Order. Any
payment instructions to the Escrow Agent shall include the mailing address and
taxpayer identification number of the person or persons receiving the
distribution hereunder.
(c) Notwithstanding any contrary provision of this Escrow Agreement,
within the 30-day period following the end of each calendar quarter, Escrow
Agent shall pay to Continental 64.71% and to Pacific 35.29% of 5% of the income
earned by the Escrow Account during such calendar quarter.
6. TERMINATION. Escrow Agent shall maintain the escrow Account and
hold the Escrow Assets in escrow pursuant to this Escrow Agreement until
receipt of written notice of termination from each of Continental, Pacific,
Fibreboard Corporation, Class Counsel, and, after appointment of the Trustees,
the Trustees.
- 6 -
<PAGE> 194
7. ESCROW AGENT QUALIFICATIONS. Escrow Agent shall at all times be
(i) a bank, savings and loan association or trust company in good standing,
organized and doing business under the laws of the United States or a state of
the United States or a United States branch of a foreign bank, (ii) have
combined capital and surplus of not less than Five Hundred Million Dollars
($500,000,000) and be well capitalized or adequately capitalized (as such terms
are defined in applicable federal regulations) and (iii) be authorized under
the laws governing its organization to exercise corporate trust powers and be
authorized under such laws to enter into and perform this Escrow Agreement. If
Escrow Agent shall at any time cease to have the foregoing qualifications,
Escrow Agent shall give notice of resignation to Continental and Pacific as
provided in Section 10 hereof and Continental and Pacific agree to thereupon
promptly appoint a qualified successor escrow agent in accordance with Section
11.
8. LIMITATIONS ON LIABILITY OF ESCROW AGENT.
(a) Escrow Agent may act upon any written notice, certificate,
instrument, request, waiver, consent, paper or other document that Escrow Agent
in good faith reasonably believes to be genuine and to have been made, sent,
signed, prescribed, or presented by the proper person or persons acting on
behalf of the parties named in paragraph 5(a) and 5(b). Escrow Agent shall not
be liable for any action taken or omitted by it in connection with the
performance of its duties and obligations hereunder, except for its own gross
negligence or willful misconduct. Escrow Agent shall be under no obligation to
institute or defend any action, suit or legal proceeding in connection
- 7 -
<PAGE> 195
with this escrow or this Escrow Agreement unless it is indemnified to its
satisfaction by the party or parties who desire that it undertake such action.
(b) Escrow Agent shall be under no obligation or liability for
failure to inform Continental, Pacific, Fibreboard Corporation or Class Counsel
regarding any transaction or facts within Escrow Agent's knowledge, even though
the same may concern the matters described herein, provided they do not prevent
or interfere with Escrow Agent's compliance with this Escrow Agreement, nor
shall Escrow Agent be liable for the sufficiency, correctness or genuineness as
to form, manner of execution or validity of any instrument deposited, nor as
to identity, authority, or rights of any person executing the same, except as
above provided.
(c) Should Escrow Agent during or after the term of the escrow
receive or become aware of any conflicting demands or claims with respect to
the Escrow Account, Escrow Assets or the rights of any of the parties hereto,
Fibreboard Corporation or Class Counsel, Escrow Agent shall have the right to
discontinue any or all further acts on its part until such conflict is resolved
to its satisfaction, and Escrow Agent shall have the further right to commence
or defend any action or proceeding for the determination of such conflict. In
the event Escrow Agent should file suit in interpleader and deposit the Escrow
Assets in dispute in a court of competent jurisdiction, it shall be fully
released and discharged from all further obligations under this Escrow
- 8 -
<PAGE> 196
Agreement with respect to such Escrow Assets (but such release and discharge
shall not relieve Escrow Agent from any liability incurred prior to such
event).
(d) Escrow Agent may consult with legal counsel satisfactory to it in
connection with any dispute, the construction of any provision of this Escrow
Agreement or the duties and obligations of Escrow Agent under this Escrow
Agreement.
9. ACCOUNT AND RELEASE OF ESCROW AGENT. (a) The retention and
distribution of the Escrow Assets in accordance with the terms and provisions
of this Escrow Agreement shall fully and completely release Escrow Agent from
any obligations or liabilities assumed under this Escrow Agreement with respect
to the Escrow Assets. Nothing in this Escrow Agreement shall be interpreted as
depriving the Escrow Agent, Continental, Pacific, Fibreboard Corporation or
Class Counsel of the right to have judicial settlement of the Escrow Agent's
accounts, and upon any proceeding for a judicial settlement of the Escrow
Agent's accounts or for instructions the only necessary parties thereto will be
the Escrow Agent, Continental, Pacific, Fibreboard Corporation and Class
Counsel.
(b) The Escrow Agent shall keep accurate and detailed records of all
investments, receipts, disbursements, and all other transactions required to be
done, including such specific records as shall be agreed upon in writing
between Continental, Pacific and the Escrow Agent. Within ten (10) days
following the close of each calendar
- 9 -
<PAGE> 197
month, the Escrow Agent shall deliver to Continental, Pacific, Fibreboard
Corporation and Class Counsel a written account of its administration of the
escrow during such month and cumulatively for the period from the date hereof
through the end of such month, setting forth all investments, receipts,
disbursements and other transactions effected by it, including a description of
all investments purchased and sold with the cost or net proceeds of such
purchases or sales (accrued interest paid or received being shown separately),
showing all cash, securities and other property held in the Escrow Account at
the end of such month and the book and fair market value of all Escrow Assets.
(c) All accounts, books and records maintained pursuant to this
Section shall be opened to inspection and audit at all reasonable times by
Continental, Pacific, Fibreboard Corporation and Class Counsel and their
respective representatives.
(d) The fair market value of the Escrow Assets shall be determined by
the Escrow Agent whenever required pursuant to the Escrow Agreement, but in any
event not less than monthly. The Escrow Agent may base such determination upon
such sources of information as it may deem reliable including, but not limited
to, information reported in (i) newspapers of general circulation, (ii)
standard financial periodicals or publications, (iii) statistical and valuation
services, (iv) the records of securities exchanges or brokerage firms deemed by
the Escrow Agent to be reliable, or any combination thereof. The Escrow Agent
shall promptly inform Continental, Pacific,
- 10 -
<PAGE> 198
Fibreboard Corporation and Class Counsel of any such valuation and provide them
with complete copies thereof.
10. RESIGNATION AND REMOVAL OF ESCROW AGENT. Escrow Agent may be
removed by the joint action of Continental and Pacific, with or without cause,
at any time upon 15 days' prior written notice to Escrow Agent, which notice
may be waived by Escrow Agent. Escrow Agent may resign at any time upon 60
days' prior written notice to Continental, Pacific, Fibreboard Corporation and
Class Counsel.
Notwithstanding any resignation or removal of Escrow Agent pursuant to
Section 7 hereof or this Section 10, such resignation or removal shall not be
effective and Escrow Agent shall continue to serve in its capacity as Escrow
Agent until (i) a successor escrow agent is appointed in accordance with the
provisions of Section 11 hereof and has accepted such appointment and (ii) the
Escrow Assets together with such records and documents as may be reasonably
required to enable the successor escrow agent to properly administer the Escrow
Fund have been transferred to and received by such successor escrow agent.
Continental and Pacific shall promptly take the necessary action to appoint a
successor escrow agent in accordance with the provisions of Section 11 hereof.
11. APPOINTMENT OF SUCCESSOR ESCROW AGENT. If at any time Escrow
Agent shall resign, be removed or otherwise become incapable of acting as
Escrow Agent
- 11 -
<PAGE> 199
pursuant to this Escrow Agreement, or if at any time a vacancy shall occur in
the office of Escrow Agent for any other cause, a successor Escrow Agent that
meets the qualifications set forth in Section 7 shall be appointed jointly by
Continental and Pacific by a written instrument delivered to the successor
Escrow Agent with a copy delivered to the Escrow Agent. If no successor Escrow
Agent is appointed (i) within 30 days after the time Escrow Agent becomes
incapable of acting or a vacancy occurred in the office of Escrow Agent or (ii)
within 60 days of Escrow Agent's giving notice of resignation, any party hereto
may petition a court of competent jurisdiction for an appointment of a
successor Escrow Agent. Upon the appointment and acceptance of any successor
Escrow Agent hereunder, Escrow Agent shall transfer the Escrow Assets to its
successor. Upon receipt by the successor Escrow Agent of the Escrow Assets,
Escrow Agent shall be discharged from any continuing duties or obligations
under this Escrow Agreement, but such discharge shall not relieve Escrow Agent
from any liability incurred prior to such event, and the successor Escrow Agent
shall be vested with all rights, powers, duties and obligations of Escrow Agent
under this Agreement.
12. IRS FILINGS AND EXAMINATIONS. (a) For federal income tax
purposes, the parties expect that Continental will be allocated 64.71% of the
income, gains and deductions of the Escrow Fund and that Pacific will be
allocated 35.29% of the income, gains and deductions of the Escrow Fund and
that Continental and Pacific will each be required to include those items of
taxable income, gains and deductions of the Escrow Fund which are attributable
to them in computing their separate taxable income and this
- 12 -
<PAGE> 200
Escrow Agreement shall be construed accordingly. Notwithstanding the
foregoing, Escrow Agent shall timely file such tax and other returns and
statements for the Escrow Account (collectively "Returns"), and shall provide
for and pay such taxes, as are required to comply with applicable provisions of
the Internal Revenue Code of 1986, as amended, and of any state or local law
and the regulations promulgated thereunder. The Escrow Agent shall provide all
completed Returns to Continental and Pacific at least 10 days in advance of the
due date for such Returns and shall obtain the consent of Continental and
Pacific to all Returns before they are filed. The Escrow Agent is authorized
to employ such agents and independent contractors as it deems necessary in its
best judgment in order to perform the federal and state tax reporting required
by this paragraph. Continental and Pacific will advise the Escrow Agent of the
party who will sign any required federal and state tax returns on behalf of the
Escrow Account.
(b) The Escrow Agent agrees that Continental and Pacific shall have
the sole and exclusive responsibility for handling any income tax examinations
relating to the Escrow Fund. All costs and expenses of any income tax
examination relating to potential tax liability of the Escrow Fund, including
the expense of defending any adjustments or proposed adjustments, shall be
charged to the Escrow Fund.
(c) Escrow Agent agrees that it will inform Continental and Pacific
promptly of all questions raised by agents conducting an income tax examination
of the Escrow Account and shall cooperate with accountants, tax advisers and
counsel retained
- 13 -
<PAGE> 201
by Continental and Pacific in working with the income tax agents and in
responding to any questions and proposed tax adjustments.
13. NOTICES. Any notice or other communication hereunder must be
given in writing and either (a) delivered in person, (b) transmitted by telex,
telefax or other telecopy mechanism, provided that any notice so given is also
mailed as provided in clause (c), or (c) mailed, postage prepaid, receipt
requested, as follows:
If to Continental, addressed to:
Continental Casualty Co.
Specialty Claims Office, 12th Floor
50 Fremont Street
San Francisco, CA 94105
Attention: Claim Manager
Telecopier: (415) 512-4899
and
WACHTELL, LIPTON, ROSEN & KATZ
51 West 52nd Street
New York, New York 10019
Attention: Herbert M. Wachtell, Esq.
Telecopier: (212) 403-2000
and
CARROLL, BURDICK & McDONOUGH
44 Montgomery Street, Suite 400
San Francisco, CA 94104
Attention: Rodney L. Eshelman, Esq.
Telecopier: (415) 989-0932
- 14 -
<PAGE> 202
If to Pacific, addressed to:
Pacific Indemnity Company
Chubb & Son Inc.
15 Mountain View Road
P.O. Box 1615
Warren, NJ 07061-1615
Attention: Malcolm B. Burton
Telecopier: (908) 580-3030
and
WHITE & CASE
1155 Avenue of the Americas
New York, NY 10036
Attention: Paul J. Bschorr, Esq.
Telecopier: (212) 354-8113
If to Fibreboard, addressed to:
FIBREBOARD CORPORATION
2121 North California Blvd.
Walnut Creek, CA 94596
Attention: Michael R. Douglas
Senior Vice President and
General Counsel
Telecopier: (510) 274-0714
and
BROBECK, PHLEGER & HARRISON
Spear Street Tower
One Market Plaza
San Francisco, CA 94105
Attention: Stephen M. Snyder, Esq.
Telecopier: (415) 442-1020
If to the Class Counsel, addressed to:
CAPLIN & DRYSDALE, CHARTERED
399 Park Avenue
New York, NY 10022
Attention: Elihu Inselbuch
- 15 -
<PAGE> 203
Telecopier: (212) 644-6755
If to Escrow Agent, addressed to:
The First National Bank of Chicago
One Federal National Plaza, Suite 0126
Chicago, IL 60670-0126
Attention: Joseph Cahill
Telecopier: (312) 407-1708
or to such other address or to such other person as either party shall have
last designated by such notice to the other party. Each such notice or other
communication shall be effective (i) if given by telecommunication, when
transmitted to the applicable number so specified in (or pursuant to) this
Section 13 and an appropriate answer back is received, (ii) if given by mail,
three business days after such communication is deposited in the mails with
first class postage prepaid, addressed as aforesaid or (iii) if given by any
other means, when actually delivered at such address.
14. AMENDMENTS; WAIVERS. This Escrow Agreement may be amended only
by (i) and agreement in writing executed by Escrow Agent, Continental, Pacific,
Fibreboard Corporation and Class Counsel, or (ii) pursuant to a Court Order.
No waiver of any provisions nor consent to any exception to the terms of this
Escrow Agreement shall be effective unless in writing and signed by the party
to be bound, and then only to the specific purpose, extent and instance as so
provided.
15. COUNTERPARTS. This Escrow Agreement and any other agreement (or
document) delivered pursuant hereto may be executed in one or more counterparts
and
- 16 -
<PAGE> 204
by different parties in separate counterparts. All such counterparts shall
constitute one and the same agreement and shall become effective when one or
more counterparts of this Escrow Agreement have been signed by each party, and
delivered to the other parties.
16. ASSIGNMENT. Neither this Escrow Agreement nor any rights or
obligations under it are assignable.
17. GOVERNING LAW. This Escrow Agreement and the legal relations
among the parties shall be governed by and construed in accordance with the
laws of the State of Illinois applicable to contracts made and performed in
such state without regard to conflicts of law doctrines, except to the extent
that certain matters are preempted by federal law or are governed by the law of
the jurisdiction of organization of the respective parties.
18. INTEGRATION. This Escrow Agreement constitutes the entire
agreement and understanding of Continental, Pacific, Fibreboard Corporation and
Class Counsel on the one hand and Escrow Agent on the other with respect to the
subject matter of this Escrow Agreement and supersedes all prior agreements and
understandings with respect thereto.
- 17 -
<PAGE> 205
19. SEVERABILITY. If any provision of this Escrow Agreement is held
invalid by any court, governmental agency or regulatory body, the other
provisions shall remain in full force and effect.
20. PARTIES IN INTEREST. This Escrow Agreement shall be binding upon
and inure to the benefit of each party, Fibreboard Corporation and Class
Counsel, and nothing in this Escrow Agreement, express or implied, is intended
to confer upon any other person any rights or remedies of any nature whatsoever
by, under or by reason of this Escrow Agreement. Nothing in this Escrow
Agreement is intended to relieve or discharge the obligation of any third
person to, or to confer any right of subrogation or action over against, any
party to this Escrow Agreement or Fibreboard Corporation or Class Counsel or
Class Counsel.
21. HEADINGS. The descriptive headings of the Sections of this Escrow
Agreement are for convenience only and do not constitute a part of this Escrow
Agreement.
- 18 -
<PAGE> 206
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed on the day and year first above written.
CONTINENTAL CASUALTY COMPANY
By /s/ LAURENS F. TERRY
----------------------------
Title Vice President
-----------------------
PACIFIC INDEMNITY CORPORATION
By /s/ JOHN J. DEGNAN
----------------------------
Title Senior Vice President
-----------------------
THE FIRST NATIONAL BANK OF CHICAGO
By /s/ R.D. MANELLA
----------------------------
Title Vice President
-----------------------
AGREED TO:
FIBREBOARD CORPORATION
By /s/ MICHAEL R. DOUGLAS
---------------------------------------------
Title Sr. Vice President and General Counsel
----------------------------------------
CLASS COUNSEL
By /s/ JOSEPH RICE
------------------------
Joseph Rice
By /s/ JOSEPH COX
------------------------
Joseph Cox
By /s/ HARRY WARTNICK
------------------------
Harry Wartnick
By /s/ STEVEN KAZAN
------------------------
Steven Kazan
- 19 -
<PAGE> 1
THE CHUBB CORPORATION
INVESTMENT DEPARTMENT/
CHUBB ASSET MANAGERS, INC.
INCENTIVE COMPENSATION PLAN
1. PURPOSE. The purpose of The Chubb Corporation Investment
Department/Chubb Asset Managers, Inc. Incentive Compensation Plan
(the "Plan") is to provide annual and long-term cash incentives to key
employees of The Chubb Corporation Investment Department and Chubb
Asset Managers, Inc. (the "Company") which are competitive with
similar financial institutions in order to attract, retain and
motivate superior quality investment professionals.
2. EFFECTIVE DATE OF THE PLAN. The Plan shall become effective for the
fiscal year commencing January 1, 1987.
3. ADMINISTRATION. The Plan shall be administered by the Chief Financial
Officer and the Compensation Committee of The Chubb Corporation's
Board of Directors ("Compensation Committee") as set forth in the
Plan. Subject to the provisions of the Plan, the Compensation
Committee shall be authorized to interpret the Plan, to establish,
amend and rescind any rules and regulations relating to the Plan and
make all other determinations necessary or advisable for the
administration of the Plan. The determination of the Compensation
Committee in the administration of the Plan, as described herein,
shall be final and conclusive. The Compensation Committee may, in its
discretion, delegate its administrative authority as it deems proper
to the Chief Financial Officer, except that it may not delegate its
authority to approve target awards or to approve Award Determinations
which shall in all cases be made by the Compensation Committee.
<PAGE> 2
4. COVERED EMPLOYEES. Awards under the Plan for any fiscal year of the
Company may be granted to those key employees of the Company
("Participants") who shall be selected by the Chief Financial Officer
of the Company. The Chief Financial Officer will have absolute
discretionary authority to select Participants.
5. TARGET INCENTIVE DETERMINATION. As soon as practicable after the
beginning of each plan year, the Chief Financial Officer shall
designate a list of Participants for such plan year and designate
target awards by salary grade or such other standard as determined by
the Chief Financial Officer. Target Awards shall include an Annual
Segment and a Long-Term Segment which will be determined respectively
by measuring one-year and five-year performance of the Participants
and Company against certain indices which the Chief Financial Officer,
in his sole discretion, shall select. The Target Awards shall be
presented to the Compensation Committee at its March meeting by the
Chief Financial Officer for approval, or such other time during the
fiscal year as deemed appropriate.
6. INDIVIDUAL AWARD DETERMINATION. The Chief Financial Officer, in his
discretion, will recommend individual awards through a comparison of
the individual Participant's and Company's results against the
applicable indices. The individual award recommendations will be
presented to the Compensation Committee at its March meeting for the
preceding one year and five year periods.
a) Annual Award Segment - The Annual Award Segment will be
determined each year by measuring Participant's and Company's
results for the immediately preceding plan year.
<PAGE> 3
b) Long-Term Award Segment - The Long-Term Award Segment will be
determined each year based upon a comparison of the
Participant's and Company's cumulative results for each
preceding five-year period commencing with the five-year
period ending December 31, 1987. For the five-year periods
ending December 31, 1987, 1988 and 1989, the Long-Term Award
Segment will be phased in over a three-year period. As
measured against the applicable indices and subject to the
Chief Financial Officer's discretion, one-third of the
calculated Long-Term Segment will be recommended to the
Compensation Committee for the five-year period ending
December 31, 1987, two-thirds of the calculated Long-Term
Segment will be recommended to the Compensation Committee for
the five-year period ending December 31, 1988 and one hundred
percent of the calculated Long-Term Segment will be
recommended to the Compensation Committee for the five-year
period ending December 31, 1989.
7. AWARD PAYMENT. Annual award payments and Long-Term Award Payments
shall be made as follows:
a) Annual Award Payment. Individual Annual Award
Payments shall be paid in cash as soon as practicable
after approval by the Compensation Committee.
b) Long-Term Award Payment. Individual Long-Term Award
Payments shall be paid in cash three years following
approval by the Compensation Committee.
<PAGE> 4
provided, Participants meet all other eligibility requirements set forth in
this Plan.
8. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are
applicable to this Plan:
a) Except in the event of the death of a Participant, the rights
and interests of a Participant under the Plan may not be
assigned, encumbered or transferred.
b) No Participant, employee or other person shall have any claim
or right to be granted an Award under the Plan. Neither the
Plan nor any action taken thereunder shall be construed as
giving any employee or other person any right to continued
employment by the Company or any of its subsidiaries.
c) Payment values shall be treated as compensation under the
Excess Benefit Plan of The Chubb Corporation, Chubb & Son
Inc., and Participating Affiliates, but shall not be deemed
compensation in determining the amount of any entitlement
under any other employee benefit plan of the Company, unless
so provided under the terms of such plan.
d) The Company shall have the right to deduct from all Payments
made under the Plan any taxes required by law to be withheld
with respect to such Payments.
<PAGE> 5
e) The Plan shall be construed in accordance with and governed by
the laws of the state of New York.
f) Each Participant shall designate in a manner determined by the
Compensation Committee a beneficiary to receive Payments due
hereunder in the event of such Participant's death. If no
designated beneficiary survives the Participant, it shall be
the surviving spouse of the Participant or, if there is no
surviving spouse, it shall be the estate of the Participant.
g) Participants must be employed by the Company or one of its
subsidiaries as of the payment date to be eligible for Award
Payments, provided that if the Participant's employment is
terminated prior to the payment date by reason of death,
retirement on or after the Participant's normal retirement
date under the Company's Pension Plan, disability (as defined
in such Pension Plan), or any other reason with the consent of
the Compensation Committee, the Compensation Committee, in its
sole discretion, may provide for an Award Payment to that
Participant or the Participant's designated beneficiary, if
applicable.
h) For purposes of the Long-Term Segment, termination of
employment for any reason prior to the end of the first year
of a respective five-year period shall result in forfeiture of
all Payments to the terminated Participant for such five-year
period. If prior to the end of an applicable five-year period
but after the end of the first year of the period, a
Participant dies or ceases to be an employee by
<PAGE> 6
reason of retirement on or after the Participant's Normal Retirement Date under
the Company's Pension Plan, disability (as defined in such Pension Plan), or
for any other reason with the consent of the Compensation Committee, the
Participant, or in the case of death, the Participant's designated beneficiary,
shall be entitled to the Payment in an amount which would have been paid had
the Participant continued to be employed until the payment date for the
applicable five-year period multiplied by a fraction, (1) the numerator of
which shall be the number of full calendar months from the start of the
performance cycle, through the date of such death or termination of employment,
as the case may be, and (2) the denominator of which shall be 60; provided that
the Compensation Committee is authorized to declare that a Participant, or
designated beneficiary, is entitled to receive a greater amount, up to but not
exceeding the payment values which would have been paid had the Participant
continued to be employed for the applicable five-year period and through to the
applicable payment date. An accelerated payment of an Award under this
subsection (h) may be made at such time as the Compensation Committee deems
appropriate.
<PAGE> 1
THE CHUBB CORPORATION
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Net income......................................... $324,217 $617,099 $551,984
After-tax interest expense:
6% guaranteed exchangeable subordinated notes. 9,750 9,900 6,188
5 1/2% convertible subordinated notes......... -- -- 1,636
-------- -------- --------
Net income for computing earnings per share........ $333,967 $626,999 $559,808
======== ======== ========
Average number of common shares outstanding........ 87,642 87,187 85,786
Additional shares from assumed conversion of:
6% guaranteed exchangeable subordinated notes
as if each $1,000 of principal amount had
been converted at issuance into 11.628
shares of common stock...................... 2,907 2,907 1,817
5 1/2% convertible subordinated notes as if
each $1,000 of principal amount had been
converted at issuance into 23.446 shares of
common stock................................ -- -- 1,035
-------- -------- --------
Average number of common and common equivalent
shares assumed outstanding for computing earnings
per share........................................ 90,549 90,094 88,638
======== ======== ========
Net income per share............................... $ 3.69 $ 6.96 $ 6.32
</TABLE>
<PAGE> 1
SUPPLEMENTARY FINANCIAL DATA
<TABLE>
<CAPTION>
IN THOUSANDS
YEARS ENDED DECEMBER 31
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
PROPERTY AND CASUALTY INSURANCE
UNDERWRITING
Net Premiums Written............................. $3,521,295 $3,242,506 $3,112,264
Increase in Unearned Premiums.................... (141,457) (79,218) (75,096)
---------- ---------- ----------
Premiums Earned.................................. 3,379,838 3,163,288 3,037,168
---------- ---------- ----------
Claims and Claim Expenses........................ 2,204,098 2,098,129 1,941,353
Operating Costs and Expenses..................... 1,181,316 1,115,007 1,087,365
Increase in Deferred Policy Acquisition Costs.... (34,726) (14,951) (27,597)
Dividends to Policyholders....................... 14,242 15,755 20,153
---------- ---------- ----------
Underwriting Income (Loss) Before Increase in
Unpaid Claims for Asbestos-Related Settlement
and Return Premium for Medical Malpractice
Commutation.................................... 14,908 (50,652) 15,894
Increase in Unpaid Claims for Asbestos-Related
Settlement..................................... (675,000) -- --
Return Premium for Medical Malpractice
Commutation.................................... 125,000 -- --
---------- ---------- ----------
Underwriting Income (Loss) Before Income Tax..... (535,092) (50,652) 15,894
Federal and Foreign Income Tax Credit............ (197,600) (35,300)(a) (2,700)
---------- ---------- ----------
UNDERWRITING INCOME (LOSS)....................... (337,492) (15,352) 18,594
---------- ---------- ----------
INVESTMENTS
Investment Income Before Expenses and Income Tax 541,749 501,140 476,984
Investment Expenses.............................. 8,040 7,685 7,489
---------- ---------- ----------
Investment Income Before Income Tax.............. 533,709 493,455 469,495
Federal and Foreign Income Tax................... 78,300 70,700 71,900
---------- ---------- ----------
INVESTMENT INCOME................................ 455,409 422,755 397,595
---------- ---------- ----------
PROPERTY AND CASUALTY INCOME........................ $ 117,917 $ 407,403 $ 416,189
========== ========== ==========
LIFE AND HEALTH INSURANCE
Premiums and Policy Charges......................... $ 801,236 $ 689,173 $ 634,016
Investment Income................................... 205,891 192,748 177,654
---------- ---------- ----------
Total Revenues...................................... 1,007,127 881,921 811,670
---------- ---------- ----------
Benefits............................................ 669,422 591,009 527,551
Operating Costs and Expenses........................ 248,976 216,411 210,863
---------- ---------- ----------
Life and Health Income Before Income Tax............ 88,729 74,501 73,256
Federal Income Tax.................................. 26,212 18,280 22,137
---------- ---------- ----------
LIFE AND HEALTH INCOME.............................. $ 62,517 $ 56,221 $ 51,119
========== ========== ==========
REAL ESTATE
Revenues............................................ $ 160,650 $ 149,945 $ 140,957
Cost of Sales and Expenses.......................... 158,599 134,851 106,169
---------- ---------- ----------
Real Estate Income Before Income Tax................ 2,051 15,094 34,788
Federal Income Tax.................................. 4,244 5,044 9,781
---------- ---------- ----------
REAL ESTATE INCOME (LOSS)........................... $ (2,193) $ 10,050 $ 25,007
========== ========== ==========
CORPORATE, NET OF TAX................................. $ 14,357 $ 19,794 $ 16,325
========== ========== ==========
REALIZED INVESTMENT GAINS, NET OF TAX................. $ 151,619 $ 123,631 $ 43,344
========== ========== ==========
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES............... $ 344,217 $ 617,099 $ 551,984
========== ========== ==========
</TABLE>
(a) Reflects a benefit of $12,000,000 resulting from a reversal of income tax
reserves based on a settlement of prior years' taxes.
The above federal and foreign income tax provisions represent allocations of the
consolidated provision.
11
<PAGE> 2
PROPERTY AND CASUALTY UNDERWRITING RESULTS
NET PREMIUMS WRITTEN (In Millions of Dollars)
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Personal Insurance
Automobile........................ $ 191.7 $ 190.9 $ 189.5 $ 192.0 $ 188.6
Homeowners........................ 428.4 416.9 432.2 408.7 373.6
Other............................. 194.4 188.6 193.0 187.8 177.8
-------- -------- -------- -------- --------
814.5 796.4 814.7 788.5 740.0
-------- -------- -------- -------- --------
Standard Commercial Insurance
Multiple Peril.................... 528.8 483.2 482.6 466.7 437.7
Casualty.......................... 626.0(a) 481.7 456.1 427.7 404.8
Workers' Compensation............. 172.0 168.6 177.1 151.4 137.9
-------- -------- -------- -------- --------
1,326.8(a) 1,133.5 1,115.8 1,045.8 980.4
-------- -------- -------- -------- --------
Specialty Commercial Insurance
Fidelity and Surety............... 618.7 585.1 538.0 514.2 483.5
Other............................. 650.8 566.6 496.7 443.9 408.5
-------- -------- -------- -------- --------
1,269.5 1,151.7 1,034.7 958.1 892.0
-------- -------- -------- -------- --------
Reinsurance Assumed................. 235.5 160.9 147.1 127.3 122.5
-------- -------- -------- -------- --------
Total........................ $3,646.3(a) $3,242.5 $3,112.3 $2,919.7 $2,734.9
======== ======== ======== ======== ========
</TABLE>
(a) Includes a $125 million return premium to the Corporation's property and
casualty insurance subsidiaries related to the commutation of a medical
malpractice reinsurance agreement. Excluding this return premium, net
premiums written were $501.0 million for Casualty, $1,201.8 million for
Standard Commercial and $3,521.3 million in Total.
COMBINED LOSS AND EXPENSE RATIOS
<TABLE>
<S> <C> <C> <C> <C> <C>
Personal Insurance
Automobile........................ 97.6% 100.2% 106.2% 106.1% 102.8%
Homeowners........................ 100.2 113.3 106.0 104.1 108.2
Other............................. 84.2 89.9 93.5 95.6 100.5
-------- -------- -------- -------- --------
95.8 104.6 103.1 102.5 104.9
-------- -------- -------- -------- --------
Standard Commercial Insurance
Multiple Peril.................... 110.6 112.8 109.0 107.9 107.3
Casualty.......................... 190.6(b) 94.2 86.2 99.1 106.9
Workers' Compensation............. 117.9 118.7 130.6 138.5 149.2
-------- -------- -------- -------- --------
149.7(b) 105.7 102.6 108.2 112.2
-------- -------- -------- -------- --------
Specialty Commercial Insurance
Fidelity and Surety............... 78.1 81.3 82.4 78.9 76.9
Other............................. 103.4 100.2 98.9 97.3 100.5
-------- -------- -------- -------- --------
91.0 90.5 90.3 87.3 87.7
-------- -------- -------- -------- --------
Reinsurance Assumed................. 111.8 126.9 119.3 109.2 97.2
-------- -------- -------- -------- --------
Total........................ 114.8%(b) 101.1% 99.5% 99.7% 101.5%
======== ======== ======== ======== ========
</TABLE>
(b) Includes the effects of a $675 million increase in unpaid claims related to
an agreement for the settlement of asbestos-related litigation and the $125
million return premium related to the commutation of a medical malpractice
reinsurance agreement. Excluding the effects of these items, the combined
loss and expense ratio was 100.7% for Casualty, 107.6% for Standard
Commercial and 99.0% in Total.
The combined loss and expense ratio, expressed as a percentage, is the key
measure of underwriting profitability traditionally used in the property and
casualty insurance business. It is the sum of the ratio of losses to premiums
earned plus the ratio of underwriting expenses to premiums written after
reducing both premium amounts by dividends to policyholders.
12
<PAGE> 3
TEN YEAR FINANCIAL SUMMARY
(in thousands except for per share amounts)
<TABLE>
<CAPTION>
FOR THE YEAR 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
REVENUES
Property and Casualty Insurance
Premiums Earned.................... $ 3,504,838(a) $ 3,163,288 $ 3,037,168 $ 2,836,135 $ 2,693,553
Investment Income.................. 541,749 501,140 476,984 463,413 426,267
Life and Health Insurance
Premiums and Policy Charges........ 801,236 689,173 634,016 561,961 496,405
Investment Income.................. 205,891 192,748 177,654 171,570 159,828
Real Estate......................... 160,650 149,945 140,957 174,846 221,338
Corporate Investment Income......... 52,706 57,176 46,400 39,555 25,167
Realized Investment Gains (Losses).. 232,638 187,349 65,718 46,317 46,942
TOTAL REVENUES................... 5,499,708 4,940,819 4,578,897 4,293,797 4,069,500
COMPONENTS OF NET INCOME*
Property and Casualty Insurance
Underwriting Income (Loss) (b)..... (337,492)(c) (15,352) 18,594 20,709(e) (25,040)
Investment Income.................. 455,409 422,755 397,595 371,351 330,096
Life and Health Insurance........... 62,517 56,221 51,119 45,081 42,103
Real Estate Income (Loss)........... (2,193) 10,050 25,007 40,015 42,021
Corporate........................... 14,357 19,794 16,325 14,760 705
Realized Investment Gains (Losses).. 151,619 123,631 43,344 30,193 30,932
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING
PRINCIPLES...................... 344,217 617,099 551,984 522,109 420,817
Per Share (b).................... 3.91(c) 6.96 6.32 6.07(e) 4.91
NET INCOME....................... 324,217(d) 617,099 551,984 522,109 420,817
Per Share........................ 3.69(d) 6.96 6.32 6.07 4.91
DIVIDENDS DECLARED ON COMMON STOCK.... 150,784 139,612 127,757 109,136 96,515
Per Share........................ 1.72 1.60 1.48 1.32 1.16
CHANGE IN UNREALIZED APPRECIATION OF
EQUITY SECURITIES, NET OF
DEFERRED INCOME TAX................. 46,534 (82,082) 12,163 (19,425) 70,330
AT YEAR END
TOTAL ASSETS.......................... 19,436,870 17,559,182 16,163,605 14,510,750 13,384,850
INVESTED ASSETS
Property and Casualty Insurance..... 8,403,141 7,767,462 7,086,572 6,297,825 5,793,656
Life and Health Insurance........... 2,473,253 2,208,803 2,063,518 1,928,687 1,752,532
Corporate........................... 965,715 955,828 840,291 688,380 647,817
PROPERTY AND CASUALTY UNPAID CLAIMS... 8,235,442 7,220,919 6,591,305 6,016,396 5,605,006
LIFE AND HEALTH POLICY LIABILITIES.... 2,446,620 2,193,486 2,072,727 1,959,568 1,806,325
LONG TERM DEBT........................ 1,273,830 1,072,841 1,053,550 820,825 612,874
SHAREHOLDERS' EQUITY.................. 4,196,129 3,954,402 3,541,605 2,882,639 2,603,739
Per Common Share................. 47.84 45.18 40.74 35.19 30.84
</TABLE>
* The federal and foreign income tax provided for each component of net income
represents its allocated portion of the consolidated provision.
Prior year amounts have been restated to reflect the accounting changes
prescribed by Statement of Financial Accounting Standards No. 113, Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts.
38
<PAGE> 4
<TABLE>
<CAPTION>
FOR THE YEAR 1988 1987 1986 1985 1984
<S> <C> <C> <C> <C> <C>
REVENUES
Property and Casualty Insurance
Premiums Earned.................... $ 2,705,560 $ 2,615,866 $2,250,758 $1,507,127 $1,331,112
Investment Income.................. 364,126 266,230 216,558 190,609 160,644
Life and Health Insurance
Premiums and Policy Charges........ 426,992 384,108 323,293 302,711 263,690
Investment Income.................. 144,264 124,640 104,934 96,786 74,277
Real Estate......................... 155,170 143,381 181,184 194,758 133,787
Corporate Investment Income......... 17,806 17,531 18,329 6,929 3,984
Realized Investment Gains (Losses).. (17,987) (22,561) 97,710 109,666 25,405
TOTAL REVENUES................... 3,795,931 3,529,195 3,192,766 2,408,586 1,992,899
COMPONENTS OF NET INCOME*
Property and Casualty Insurance
Underwriting Income (Loss) (b)..... 15,818 62,394 (29,837) (188,045) (115,262)
Investment Income.................. 290,647 226,546 177,146 137,047 115,291
Life and Health Insurance........... 31,458 23,889 36,573 34,340 46,531(f)
Real Estate Income (Loss)........... 40,018 36,079 32,756 29,502 24,490
Corporate........................... (5,357) (4,229) (2,203) (1,905) (2,456)
Realized Investment Gains (Losses).. (12,959) (14,619) 53,506 59,601 14,405
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING
PRINCIPLES...................... 359,625 330,060 267,941 70,540 82,999
Per Share (b).................... 4.27 3.97 3.53 .96 1.42(f)
NET INCOME....................... 359,625 330,060 267,941 70,540 82,999
Per Share........................ 4.27 3.97 3.53 .96 1.42
DIVIDENDS DECLARED ON COMMON STOCK.... 87,766 71,443 60,485 47,710 42,992
Per Share........................ 1.08 .89 .80 .76 .73
CHANGE IN UNREALIZED APPRECIATION OF
EQUITY SECURITIES, NET OF
DEFERRED INCOME TAX................. 29,815 12,294 12,878 50,650 (27,082)
AT YEAR END
TOTAL ASSETS.......................... 11,507,145 10,167,250 8,486,643 6,801,928 4,987,202
INVESTED ASSETS
Property and Casualty Insurance..... 5,153,027 4,519,268 3,574,360 2,832,286 1,979,917
Life and Health Insurance........... 1,582,962 1,401,553 1,127,695 1,012,820 927,613
Corporate........................... 366,237 256,397 295,617 76,272 50,677
PROPERTY AND CASUALTY UNPAID CLAIMS... 4,585,848 3,888,485 3,069,083 2,345,527 1,698,584
LIFE AND HEALTH POLICY LIABILITIES.... 1,645,195 1,430,119 1,067,290 939,937 867,690
LONG TERM DEBT........................ 362,779 325,049 391,801 388,121 201,120
SHAREHOLDERS' EQUITY.................. 2,238,447 1,937,033 1,559,138 1,088,400 878,417
Per Common Share................. 27.54 23.85 20.06 14.88 13.94
</TABLE>
(a) Premiums earned have been increased by a $125,000,000 return premium to
the Corporation's property and casualty insurance subsidiaries related
to the commutation of a medical malpractice reinsurance agreement.
(b) Net income has been increased by tax benefits of $6,400,000 or $.07 per
share in 1992, $7,200,000 or $.08 per share in 1991, $10,800,000 or $.12
per share in 1990, $19,200,000 or $.22 per share in 1989, $20,400,000 or
$.24 per share in 1988 and $28,800,000 or $.34 per share in 1987
relating to the exclusion from taxable income of a portion of the "fresh
start" discount on property and casualty unpaid claims as a result of
the Tax Reform Act of 1986.
(c) Net income has been reduced by a net charge of $357,500,000 or $3.95 per
share for the after-tax effects of a $675,000,000 increase in unpaid
claims related to an agreement for the settlement of asbestos-related
litigation and the $125,000,000 return premium related to the
commutation of a medical malpractice reinsurance agreement.
(d) Net income has been reduced by a one-time charge of $20,000,000 or $.22
per share for the cumulative effect of changes in accounting principles
resulting from the Corporation's adoption of Statements of Financial
Accounting Standards No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions, and No. 109, Accounting for Income Taxes.
(e) Net income has been increased by the one-time benefit of a
$14,000,000 or $.16 per share elimination of deferred income taxes
relating to estimated property and casualty salvage and subrogation
recoverable as a result of the Revenue Reconciliation Act of 1990.
(f) Net income has been increased by the one-time benefit of a $20,000,000
or $.34 per share elimination of deferred income taxes relating to life
insurance policy reserves as a result of the Tax Reform Act of 1984.
39
<PAGE> 5
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
IN THOUSANDS
YEARS ENDED DECEMBER 31
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Premiums Earned and Policy Charges (Notes 12
and 13).......................................... $4,306,074 $3,852,461 $3,671,184
Investment Income (Note 3)......................... 800,346 751,064 701,038
Real Estate........................................ 160,650 149,945 140,957
Realized Investment Gains (Note 3)................. 232,638 187,349 65,718
---------- ---------- ----------
TOTAL REVENUES................................ 5,499,708 4,940,819 4,578,897
---------- ---------- ----------
BENEFITS, CLAIMS AND EXPENSES
Insurance Claims and Policyholders' Benefits
(Notes 13 and 14)................................ 3,548,520 2,689,138 2,468,904
Amortization of Deferred Policy Acquisition Costs
(Note 4)......................................... 1,012,105 968,611 936,190
Other Insurance Operating Costs and Expenses....... 395,605 361,312 352,452
Real Estate Cost of Sales and Expenses............. 158,599 134,851 106,169
Investment Expenses................................ 11,091 10,679 10,416
Corporate Expenses................................. 29,296 27,787 21,090
---------- ---------- ----------
TOTAL BENEFITS, CLAIMS AND EXPENSES........... 5,155,216 4,192,378 3,895,221
---------- ---------- ----------
INCOME BEFORE FEDERAL AND FOREIGN
INCOME TAX.................................. 344,492 748,441 683,676
FEDERAL AND FOREIGN INCOME TAX (NOTE 8)................. 275 131,342 131,692
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES....................... 344,217 617,099 551,984
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES,
NET OF TAX (NOTE 2)................................... (20,000) -- --
---------- ---------- ----------
NET INCOME.................................... $ 324,217 $ 617,099 $ 551,984
========== ========== ==========
PER SHARE DATA (NOTE 1)
Income Before Cumulative Effect of Changes in
Accounting Principles............................ $ 3.91 $ 6.96 $ 6.32
Cumulative Effect of Changes in Accounting
Principles....................................... (.22) -- --
---------- ---------- ----------
Net Income.................................... $ 3.69 $ 6.96 $ 6.32
========== ========== ==========
</TABLE>
See accompanying notes.
40
<PAGE> 6
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
IN THOUSANDS
DECEMBER 31
1993 1992
----------- -----------
<S> <C> <C>
ASSETS
Invested Assets (Note 3)
Short Term Investments.......................................... $ 531,282 $ 263,205
Fixed Maturities
Held for Investment
Tax Exempt (market $6,048,421 and $5,401,783).............. 5,528,880 5,080,706
Taxable (market $2,726,032 and $2,810,898)................. 2,528,907 2,658,857
Available-for-Sale -- Taxable (market $2,148,500 and
$2,047,602).................................................. 2,128,677 1,998,190
Equity Securities (cost $709,905 and $591,914).................. 930,047 738,215
Mortgage Loans.................................................. 15,121 27,618
Policy Loans.................................................... 179,195 165,302
----------- -----------
TOTAL INVESTED ASSETS......................................... 11,842,109 10,932,093
Cash (Note 7)...................................................... 4,586 6,744
Accrued Investment Income.......................................... 204,961 200,497
Premiums Receivable................................................ 720,122 670,793
Reinsurance Recoverable on Property and Casualty Unpaid Claims
(Note 12)....................................................... 1,785,396 1,953,305
Prepaid Reinsurance Premiums....................................... 427,295 369,328
Funds in Escrow -- Asbestos-Related Settlement (Note 14)........... 538,172 --
Deferred Policy Acquisition Costs (Note 4)
Property and Casualty Insurance................................. 489,702 454,976
Life and Health Insurance....................................... 522,544 474,293
Real Estate Assets (Notes 5 and 7)................................. 1,708,981 1,642,774
Deferred Income Tax (Note 8)....................................... 228,971 64,613
Other Assets (Note 6).............................................. 964,031 789,766
----------- -----------
TOTAL ASSETS.................................................. $19,436,870 $17,559,182
=========== ===========
LIABILITIES
Property and Casualty Unpaid Claims (Note 14)...................... $ 8,235,442 $ 7,220,919
Life and Health Policy Liabilities................................. 2,446,620 2,193,486
Unearned Premiums.................................................. 2,179,863 1,980,439
Short Term Debt (Note 7)........................................... 94,840 288,508
Long Term Debt (Note 7)............................................ 1,273,830 1,072,841
Dividend Payable to Shareholders................................... 37,715 35,001
Accrued Expenses and Other Liabilities (Note 9).................... 972,431 813,586
----------- -----------
TOTAL LIABILITIES............................................. 15,240,741 13,604,780
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 11, 14 AND 15)
SHAREHOLDERS' EQUITY (NOTE 18)
Preferred Stock -- Authorized 4,000,000 Shares;
$1 Par Value; Issued -- None.................................... -- --
Common Stock -- Authorized 300,000,000 Shares;
$1 Par Value; Issued 87,709,465 and 87,519,560 Shares........... 87,709 87,520
Paid-In Surplus.................................................... 782,186 772,815
Retained Earnings.................................................. 3,313,140 3,139,707
Foreign Currency Translation Gains (Losses), Net of Income Tax..... 327 (5,164)
Unrealized Appreciation of Equity Securities,
Net of Deferred Income Tax (Note 3)............................. 143,093 96,559
Receivable from Employee Stock Ownership Plan (Note 10)............ (130,326) (137,035)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY.................................... 4,196,129 3,954,402
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $19,436,870 $17,559,182
=========== ===========
</TABLE>
See accompanying notes.
41
<PAGE> 7
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
IN THOUSANDS
YEARS ENDED DECEMBER 31
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
PREFERRED STOCK
Balance, Beginning and End of Year.................... $ -- $ -- $ --
---------- ---------- ----------
COMMON STOCK
Balance, Beginning of Year............................ 87,520 86,938 81,912
Shares Issued upon Conversion of Long Term Debt....... -- -- 4,687
Shares Issued under Stock Option and Purchase Plans... 126 515 276
Shares Awarded under Incentive Plans.................. 63 67 63
---------- ---------- ----------
Balance, End of Year............................. 87,709 87,520 86,938
---------- ---------- ----------
PAID-IN SURPLUS
Balance, Beginning of Year............................ 772,815 749,742 542,331
Conversion of Long Term Debt.......................... -- -- 196,040
Additions Resulting from Shares Issued under Stock
Option and Purchase Plans........................... 4,944 19,068 7,804
Additions Resulting from Shares Awarded under
Incentive Plans..................................... 4,427 4,005 3,567
---------- ---------- ----------
Balance, End of Year............................. 782,186 772,815 749,742
---------- ---------- ----------
RETAINED EARNINGS
Balance, Beginning of Year............................ 3,139,707 2,662,220 2,237,993
Net Income............................................ 324,217 617,099 551,984
Dividends Declared (per share $1.72, $1.60 and $1.48). (150,784) (139,612) (127,757)
---------- ---------- ----------
Balance, End of Year............................. 3,313,140 3,139,707 2,662,220
---------- ---------- ----------
FOREIGN CURRENCY TRANSLATION GAINS (LOSSES)
Balance, Beginning of Year............................ (5,164) 7,243 2,730
Change, Net of Income Tax (Note 17)................... 5,491 (12,407) 4,513
---------- ---------- ----------
Balance, End of Year............................. 327 (5,164) 7,243
---------- ---------- ----------
UNREALIZED APPRECIATION OF EQUITY SECURITIES
Balance, Beginning of Year............................ 96,559 178,641 166,478
Change, Net of Deferred Income Tax.................... 46,534 (82,082) 12,163
---------- ---------- ----------
Balance, End of Year............................. 143,093 96,559 178,641
---------- ---------- ----------
RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN
Balance, Beginning of Year............................ (137,035) (143,179) (148,805)
Principal Repayments.................................. 6,709 6,144 5,626
---------- ---------- ----------
Balance, End of Year............................. (130,326) (137,035) (143,179)
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY....................... $4,196,129 $3,954,402 $3,541,605
========== ========== ==========
</TABLE>
See accompanying notes.
42
<PAGE> 8
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
IN THOUSANDS
YEARS ENDED DECEMBER 31
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.......................................... $ 324,217 $ 617,099 $ 551,984
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Property and Casualty
Unpaid Claims, Net............................. 1,182,432 523,750 442,727
Increase (Decrease) in Life and Health Policy
Liabilities, Net............................... 55,841 (14,372) (5,907)
Increase in Unearned Premiums, Net............... 141,457 79,218 75,096
Increase in Premiums Receivable.................. (49,329) (1,241) (4,541)
Funds in Escrow -- Asbestos-Related Settlement... (538,172) -- --
Medical Malpractice Reinsurance Premium
Receivable..................................... (125,000) -- --
Increase in Deferred Policy Acquisition Costs.... (82,977) (43,739) (54,397)
Deferred Income Tax Credit....................... (116,720) (55,303) (48,159)
Realized Investment Gains........................ (232,638) (187,349) (65,718)
Cumulative Effect of Changes in Accounting
Principles..................................... 20,000 -- --
Other, Net....................................... 116,410 (60,207) (16,591)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES................................... 695,521 857,856 874,494
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturities............. 4,051,247 2,509,625 3,478,051
Proceeds from Maturities of Fixed Maturities........ 671,229 560,752 405,181
Proceeds from Sales of Equity Securities............ 298,790 810,438 340,375
Purchases of Fixed Maturities....................... (5,005,539) (4,378,183) (5,003,046)
Purchases of Equity Securities...................... (357,254) (396,045) (604,710)
Decrease (Increase) in Short Term Investments, Net.. (268,077) 4,327 398,505
Increase (Decrease) in Net Payable from Security
Transactions Not Settled......................... (19,092) 41,858 29,696
Additions to Real Estate Properties, Net............ (69,552) (83,703) (160,037)
Purchases of Fixed Assets........................... (47,332) (33,075) (46,336)
Other, Net.......................................... (8,344) 7,706 (3,455)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES.......... (753,924) (956,300) (1,165,776)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits Credited to Policyholder Funds............. 295,189 232,032 213,368
Withdrawals from Policyholder Funds................. (108,116) (106,592) (99,113)
Proceeds from Issuance of Long Term Debt............ 255,045 58,217 315,908
Repayment of Long Term Debt......................... (55,928) (38,926) (3,118)
Increase (Decrease) in Short Term Debt, Net......... (193,668) 61,808 (28,109)
Dividends Paid to Shareholders...................... (148,070) (136,772) (122,625)
Other, Net.......................................... 11,793 25,664 13,058
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES...... 56,245 95,431 289,369
----------- ----------- -----------
Net Decrease in Cash.................................. (2,158) (3,013) (1,913)
Cash at Beginning of Year............................. 6,744 9,757 11,670
----------- ----------- -----------
CASH AT END OF YEAR............................ $ 4,586 $ 6,744 $ 9,757
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Year for
Interest (Net of Amounts Capitalized)............ $ 56,156 $ 53,898 $ 42,692
Federal and Foreign Income Taxes................. 126,955 202,431 180,659
</TABLE>
See accompanying notes.
43
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include the
accounts of The Chubb Corporation (Corporation) and its property and casualty
insurance, life and health insurance and real estate development subsidiaries.
Significant intercompany transactions have been eliminated in consolidation.
In 1993, the Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 106, Employers Accounting for Postretirement Benefits Other Than
Pensions, SFAS No. 109, Accounting for Income Taxes, and SFAS No. 113,
Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts. The accounting changes for SFAS No. 106 and SFAS No. 109 have not
been retroactively applied; accordingly, the 1992 and 1991 consolidated
financial statements have not been restated for these changes in accounting
policies. The accounting changes for SFAS No. 113 have been retroactively
applied; however, there was no effect on prior years' net income. These
accounting changes are further described in Note (2).
Certain other amounts in the financial statements for prior years have been
reclassified to conform with the 1993 presentation.
(b) Investments
Short term investments, which have an original maturity of one year or less,
are carried at amortized cost.
Fixed maturities, which include bonds and redeemable preferred stocks, are
purchased to support the investment strategies of the Corporation and its
insurance subsidiaries. These strategies are developed based on many factors
including rate of return, maturity, credit risk, tax considerations and
regulatory requirements. Those fixed maturities which the Corporation and its
insurance subsidiaries have the ability and intent to hold to maturity are
considered held for investment and carried at amortized cost. Fixed maturities
which may be sold prior to maturity to support the investment strategies of the
Corporation and its insurance subsidiaries are considered available for sale and
carried at the lower of the aggregate amortized cost or market value as of the
balance sheet dates.
Equity securities, which include common stocks and non-redeemable preferred
stocks, are carried at market values as of the balance sheet dates.
Mortgage loans and policy loans of the insurance subsidiaries are carried at
unpaid principal balances.
Realized gains and losses on the sale of investments are determined on the
basis of the cost of the specific investments sold and are credited or charged
to income. Unrealized appreciation or depreciation of equity securities, net of
applicable deferred income tax, is excluded from income and credited or charged
directly to a separate component of shareholders' equity.
(c) Premium Revenues and Related Expenses
Property and casualty insurance premiums are earned on a monthly pro rata
basis over the terms of the policies. Revenues include estimates of audit
premiums and premiums on retrospectively rated policies. Unearned premiums
represent the portion of premiums written applicable to the unexpired terms
of policies in force. Acquisition costs, consisting of commissions, premium
taxes and other costs that vary with and are primarily related to the
production of business, are deferred by major product groups and amortized
over the period in which the related premiums are earned.
Premium receipts from universal life and other interest-sensitive life
insurance contracts are not reported as revenues, but established as
policyholder account balances. Revenues for these contracts consist of policy
charges assessed against the policyholder account balances for the cost of
insurance, policy administration and surrenders. Benefits include claims
incurred in excess of the related policyholder account balances and interest
credited to the policyholder account balances.
Premiums for traditional life insurance contracts under which the premiums and
benefits are fixed and guaranteed are recognized as revenues when due. Benefits
and expenses are provided against such revenues so as to recognize profits over
the estimated lives of the contracts. This is accomplished by means of the
provision for future policy benefits and the deferral and subsequent
amortization of acquisition costs.
Health insurance premiums are earned on a monthly pro rata basis over the
terms of the policies.
Certain costs of acquiring life insurance contracts, principally commissions,
underwriting costs and certain variable agency costs, are deferred. Deferred
policy acquisition costs for universal life and other interest-sensitive life
insurance contracts are amortized over the lives of the contracts in relation to
the present value of estimated gross profits expected to be realized. Deferred
policy acquisition costs for traditional life insurance contracts are amortized
over the premium payment period of the related contracts using assumptions
consistent with those used in computing policy liabilities.
Deferred policy acquisition costs for all insurance operations are reviewed to
determine that they do not exceed recoverable amounts, after considering
anticipated investment income.
44
<PAGE> 10
(d) Property and Casualty Unpaid Claims
Liabilities for unpaid claims include the accumulation of individual case
estimates for claims reported and estimates of unreported claims and claim
settlement expenses less estimates of anticipated salvage and subrogation
recoveries. Estimates are based upon past claim experience modified for
current trends as well as prevailing economic, legal and social conditions.
Such estimates are continually reviewed and updated. Any resulting adjustments
are reflected in current operating results.
(e) Life and Health Policy Liabilities
Liabilities for universal life and other interest-sensitive life insurance
contracts represent the policyholder account balances before surrender charges.
Interest crediting rates ranged from 4% to 7 5/8%.
Liabilities for traditional life insurance contracts consist of future policy
benefits which are computed by the net level premium method based upon estimated
future investment yield, expected mortality and estimated withdrawals.
Assumptions generally vary by plan, age at issue and year of issue. Interest
rate assumptions ranged from 3% to 9%. Mortality is calculated principally on an
experience multiple applied to select and ultimate tables in common usage in the
industry. Estimated withdrawals are determined principally based on industry
tables.
Liabilities for health insurance include estimates for claims reported and for
claims incurred but not reported.
(f) Reinsurance
In the ordinary course of business, the Corporation's insurance subsidiaries
assume and cede reinsurance with other insurance companies and are members of
various pools and associations. These arrangements provide greater
diversification of business and minimize the maximum net loss potential arising
from large risks. A large portion of the reinsurance is effected under contracts
known as treaties and in some instances by negotiation on individual risks.
Certain of these arrangements consist of excess of loss and catastrophe
contracts which protect against losses over stipulated amounts arising from any
one occurrence or event. Reinsurance contracts do not relieve the Corporation's
insurance subsidiaries of their obligation to the policyholders.
Prepaid reinsurance premiums represent the portion of property and casualty
insurance premiums ceded to reinsurers applicable to the unexpired terms of the
reinsurance contracts in force.
Commissions received related to reinsurance premiums are considered in
determining net acquisition costs eligible for deferral.
Reinsurance recoverable on unpaid claims and policy liabilities represent
estimates of the portion of such liabilities that will be recovered from
reinsurers, determined in a manner consistent with the liabilities associated
with the reinsured policies.
(g) Real Estate
Real estate properties are carried at cost and include real estate taxes,
interest and other carrying costs incurred prior to completion of the assets for
their intended use. Costs incurred during the initial leasing of income
producing properties are capitalized until the project is substantially
complete, subject to a maximum time period subsequent to completion of major
construction activity.
The carrying value of real estate properties does not exceed their ultimate
net realizable value. Impairment would be recognized to the extent ultimate net
realizable value were less than the carrying value. Ultimate net realizable
value is determined based on the ability to fully recover costs through a future
revenue stream supported principally by rental revenues, after consideration of
related costs. The time value of money is not considered in assessing revenues
versus costs.
Depreciation of real estate properties is calculated using the straight-line
method over the estimated useful lives of the properties.
Real estate mortgages and notes receivable are carried at unpaid principal
balances less an allowance for uncollectible amounts.
The equity method of accounting is used for joint ventures in which the real
estate subsidiaries own an interest of less than 50%.
Profits on land and building sales are recognized at closing, subject to
receipt of down payments and other requirements in accordance with applicable
accounting guidelines. Profits on construction contracts are recognized using
the percentage of completion method. Profits on condominium unit sales are
recognized using the percentage of completion method, subject to achievement of
a minimum level of unit sales.
45
<PAGE> 11
(h) Property and Equipment
Property and equipment used in operations are carried at cost less accumulated
depreciation. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets.
(i) Goodwill
Goodwill, which represents the excess of the purchase price over the fair
value of net assets of subsidiaries acquired, is amortized using the
straight-line method over periods not exceeding 40 years. Total unamortized
goodwill included in other assets was $69,755,000 and $71,941,000 at December
31, 1993 and 1992, respectively.
(j) Income Taxes
The Corporation and its domestic subsidiaries file a consolidated federal
income tax return.
Deferred income tax assets and liabilities are recognized for the expected
future tax effects attributable to temporary differences between the financial
reporting and tax bases of assets and liabilities, based on enacted tax rates
and other provisions of tax law. Prior to 1993, deferred income taxes were
provided to recognize timing differences, which resulted from reporting certain
revenues and expenses in different periods for financial reporting purposes than
for income tax purposes.
Deferred income taxes provided for unrealized appreciation of equity
securities and foreign currency translation gains and losses are recorded as a
charge or credit directly to the applicable component of shareholders' equity.
U. S. federal income taxes are accrued on undistributed earnings of foreign
subsidiaries.
(k) Foreign Exchange
Assets and liabilities relating to foreign operations are translated into
U.S. dollars using current exchange rates; revenues and expenses are translated
into U. S. dollars using the average exchange rates for each year.
The functional currency of most foreign operations is the currency of the
local operating environment since their business is primarily transacted in such
local currencies. Translation gains and losses, net of applicable income tax,
are excluded from income and accumulated in a separate component of
shareholders' equity.
(l) Fair Values of Financial Instruments
Fair values of financial instruments are based on quoted market prices where
available. Fair values of financial instruments for which quoted market prices
are not available are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rates and the estimates of future cash flows.
Accordingly, the derived fair value estimates cannot be substantiated by
comparison to independent markets and are not necessarily indicative of the
amounts that could be realized in immediate settlement of the instrument.
Certain financial instruments, particularly insurance contracts, are excluded
from fair value disclosure requirements.
The methods and assumptions used to estimate the fair value of financial
instruments are as follows:
(i) The carrying value of short term investments approximates fair value due
to the short maturities of these investments.
(ii) Fair values of fixed maturities with active markets are based on quoted
market prices. For fixed maturities that trade in less active markets, fair
values are obtained from independent pricing services. Fair values of fixed
maturities are principally a function of current interest rates. Care should
be used in evaluating the significance of these estimated market values.
(iii) Fair values of equity securities are based on quoted market prices.
(iv) Fair values of mortgage loans and policy loans of the insurance
subsidiaries are estimated using discounted cash flow analyses and approximate
carrying values.
(v) Fair values of real estate mortgages and notes receivable are estimated
individually as the lesser of (1) the capitalization value of the
non-discounted cash flow of the property serving as the collateral for the
loan or (2) the value of the discounted cash flow required by the loan. The
capitalization value is determined for each loan by applying the yield,
adjusted for credit risk, of a U.S. Treasury security with a maturity similar
to the loan to the estimated net cash flow from the property's underlying
leases. A similar yield is used for the discounted cash flow analysis.
(vi) The carrying value of short term debt approximates fair value due to
the short maturities of this debt.
(vii) Fair values of term loans and mortgages payable approximate carrying
values because such loans and mortgages consist primarily of variable-rate
debt that reprices frequently and recently issued debt with interest rates
which approximate the current incremental borrowing rates of the issuing
subsidiaries. Fair values of long term notes are based on prices quoted by
dealers.
46
<PAGE> 12
(m) Earnings Per Share
Earnings per share amounts are based on the weighted average number of common
and common equivalent shares outstanding during each year, which were
90,548,534, 90,093,741 and 88,637,522 in 1993, 1992 and 1991, respectively. The
5 1/2% convertible subordinated notes, which were converted or redeemed during
1991, and the 6% guaranteed exchangeable subordinated notes are both considered
to be common equivalent shares during the period they were outstanding. The
computation assumes the addition to income of the after-tax interest expense
applicable to such notes.
(n) Cash Flow Information
In the statements of cash flows, short term investments are not considered to
be cash equivalents. The effect of changes in foreign exchange rates on cash
balances was immaterial.
In 1991, $199,915,000 of the 5 1/2% convertible subordinated notes was
converted into 4,687,123 shares of common stock of the Corporation and a real
estate development subsidiary assumed a $113,500,000 mortgage in connection with
a property acquisition. These noncash transactions have been excluded from the
statements of cash flows.
(o) Accounting Pronouncements Not Yet Adopted
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No.
114, Accounting by Creditors for Impairment of a Loan. SFAS No. 114 requires
creditors to evaluate the collectibility of both contractual interest and
contractual principal payments when assessing impairment. Currently, the
Corporation assesses impairment based solely on the recoverability of the
principal balance. SFAS No. 114 also requires creditors to measure impairment of
a loan based on the present value of the loan's expected cash flows discounted
at the loan's effective interest rate or, if more practical, based on the loan's
market price or the fair value of the underlying collateral. SFAS No. 114 is
effective for fiscal years beginning after December 15, 1994. Restatement of
prior year financial statements is not permitted. Management has not yet
determined in what year it intends to adopt SFAS No. 114. The impact of the
Statement on the Corporation's financial position and future operating results
has not yet been quantified.
In May 1993, the FASB also issued SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Similar to the Corporation's current
accounting policy for investments in fixed maturities and equity securities,
SFAS No. 115 provides that the accounting for such securities depends on their
classification as either held-to-maturity (currently referred to as held for
investment), available-for-sale or trading. However, SFAS No. 115 establishes
more stringent criteria to classify fixed maturities as held-to-maturity.
Therefore, SFAS No. 115, when adopted, will result in an increase in the portion
of the Corporation's fixed maturities classified as available-for-sale and a
similar decrease in those classified as held-to-maturity. SFAS No. 115 also
requires that fixed maturities classified as available-for-sale be carried at
market value, with unrealized appreciation or depreciation excluded from income
and credited or charged directly to a separate component of shareholders'
equity. Currently, such fixed maturities are carried at the lower of the
aggregate amortized cost or market value. Upon the Corporation's adoption of
SFAS No. 115, deferred policy acquisition costs related to interest-sensitive
life insurance contracts will be adjusted to reflect the effects that would have
been recognized had the unrealized gains and losses relating to investments
classified as available-for-sale actually been realized, with a corresponding
charge or credit directly to the separate component of shareholders' equity.
SFAS No. 115 is effective for fiscal years beginning after December 15, 1993 and
may not be retroactively applied to prior years' financial statements. The
Corporation will adopt the Statement in the first quarter of 1994. SFAS No. 115,
when adopted, will increase shareholders' equity by an amount which has not yet
been quantified. Adoption of the Statement will not have an impact on net income
in the year of adoption or in future years.
(2) CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1993, the Corporation adopted SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions. SFAS No. 106
requires the Corporation to accrue the expected cost of providing postretirement
benefits, principally health care and life insurance, to employees and their
beneficiaries and covered dependents during the years that the employees render
the necessary service. Prior to 1993, the Corporation used the pay-as-you-go, or
cash, method to recognize the cost of these benefits. The transition obligation
of $89,400,000, which represents the unfunded and unrecognized accumulated
postretirement benefit obligation as of January 1, 1993, was recognized in the
first quarter of 1993 as the cumulative effect of a change in accounting
principle. The cumulative effect, net of related income tax benefits of
$30,400,000, was a decrease in net income of $59,000,000 or $.65 per share.
47
<PAGE> 13
Effective January 1, 1993, the Corporation also adopted SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 prescribes an asset and liability
method of accounting for income taxes, the objective of which is to recognize an
asset or liability for the expected future tax effects attributable to temporary
differences between the financial reporting and tax bases of assets and
liabilities. Under the asset and liability method, deferred tax assets and
liabilities are adjusted to reflect changes in tax rates and other provisions of
tax law in the period in which such changes are enacted. (Prior to 1993, the
Corporation used the deferred method, the objective of which was to match income
tax expense with pre-tax accounting income. Under the deferred method, deferred
tax assets and liabilities were not adjusted for changes in the provisions of
the tax law.) Under SFAS No. 109, deferred tax assets are to be recognized
unless it is more likely than not that some portion or all of the deferred tax
assets will not be realized. SFAS No. 109 was implemented by including the
cumulative effect of the change in accounting principle in net income in the
first quarter of 1993. Such cumulative effect was an increase in net income of
$39,000,000 or $.43 per share, due principally to the recognition of the tax
benefit relating to the remaining "fresh start" discount on property and
casualty unpaid claims as a result of the Tax Reform Act of 1986.
In 1993, the Corporation adopted SFAS No. 113, Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts. SFAS No. 113
establishes the conditions required for a contract with a reinsurer to be
accounted for as reinsurance and prescribes accounting and reporting standards
for those contracts. SFAS No. 113 requires that reinsurance recoverables and
prepaid reinsurance premiums be reported separately as assets on the balance
sheet rather than the previous practice of reducing the related insurance
liabilities by such amounts. The change has been retroactively applied.
Accordingly, the 1992 balance sheet amounts have been restated. The adoption of
SFAS No. 113 had no effect on prior years' net income.
Excluding the cumulative effect adjustments, the adoption of these statements
did not have a significant effect on net income in 1993. Their impact on net
income in future years is also not expected to be significant.
(3) INVESTED ASSETS AND RELATED INCOME
(a) The sources of net investment income were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1993 1992 1991
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Fixed maturities.............. $734,353 $682,466 $614,667
Equity securities............. 23,709 43,141 47,091
Short term investments........ 22,169 12,121 30,390
Other......................... 20,115 13,336 8,890
-------- -------- --------
Gross investment income..... 800,346 751,064 701,038
Investment expenses........... 11,091 10,679 10,416
-------- -------- --------
$789,255 $740,385 $690,622
======== ======== ========
</TABLE>
(b) Realized investment gains and losses were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1993 1992 1991
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Gross realized investment gains
Fixed maturities............ $193,738 $ 74,253 $ 70,465
Equity securities........... 62,274 157,356 41,393
-------- -------- --------
256,012 231,609 111,858
-------- -------- --------
Gross realized investment losses
Fixed maturities............ 20,627 20,538 7,738
Equity securities........... 2,747 23,722 38,402
-------- -------- --------
23,374 44,260 46,140
-------- -------- --------
Realized investment gains....... 232,638 187,349 65,718
Income tax...................... 81,019 63,718 22,374
-------- -------- --------
$151,619 $123,631 $ 43,344
======== ======== ========
</TABLE>
Proceeds from sales of fixed maturities considered available for sale were
$3,471,404,000 and $2,114,707,000 in 1993 and 1992, respectively. Gross gains of
$152,483,000 and $57,191,000 and gross losses of $12,542,000 and $15,508,000
were realized on such sales in 1993 and 1992, respectively.
(c) The components of unrealized appreciation of equity securities were as
follows:
<TABLE>
<CAPTION>
December 31
-----------------------
1993 1992
-------- --------
(in thousands)
<S> <C> <C>
Gross unrealized appreciation... $228,765 $151,262
Gross unrealized depreciation... 8,623 4,961
-------- --------
220,142 146,301
Deferred income tax............. 77,049 49,742
-------- --------
$143,093 $ 96,559
======== ========
</TABLE>
The change in unrealized appreciation of equity securities was as follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------
1993 1992 1991
------- --------- -------
(in thousands)
<S> <C> <C> <C>
Change in unrealized appreciation
of equity securities........... $73,841 $(124,361) $18,298
Deferred income tax (credit)..... 27,307 (42,279) 6,135
------- --------- -------
$46,534 $ (82,082) $12,163
======= ========== =======
</TABLE>
48
<PAGE> 14
(d) The amortized cost and estimated market value of fixed maturities were
as follows:
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------------------------------
1993 1992
---------------------------------------------- ------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held for investment
Tax exempt............. $ 5,528,880 $519,989 $ 448 $ 6,048,421 $5,080,706 $322,575 $ 1,498 $ 5,401,783
----------- -------- ------- ----------- ---------- -------- ------- -----------
Taxable
Corporate bonds...... 1,323,642 125,355 3,119 1,445,878 1,431,808 92,161 7,498 1,516,471
Foreign bonds........ 325,059 34,114 161 359,012 505,560 19,110 805 523,865
Mortgage-backed
securities......... 876,847 41,942 1,813 916,976 716,626 49,619 1,300 764,945
Redeemable preferred
stocks............. 3,359 807 -- 4,166 4,863 810 56 5,617
----------- -------- ------- ----------- ---------- -------- ------- -----------
2,528,907 202,218 5,093 2,726,032 2,658,857 161,700 9,659 2,810,898
----------- -------- ------- ----------- ---------- -------- ------- -----------
Total held for
investment....... 8,057,787 722,207 5,541 8,774,453 7,739,563 484,275 11,157 8,212,681
----------- -------- ------- ----------- ---------- -------- ------- -----------
Available for sale
Taxable
U.S. Government and
government agency
and authority
obligations........ 951,739 13,530 19,198 946,071 1,076,497 45,110 436 1,121,171
Corporate bonds...... 47,934 149 648 47,435 221,049 394 2,006 219,437
Foreign bonds........ 451,864 21,310 12 473,162 184,952 1,685 1,520 185,117
Mortgage-backed
securities......... 677,140 13,814 9,122 681,832 515,692 11,988 5,803 521,877
----------- -------- ------- ----------- ---------- -------- ------- -----------
Total available for
sale............. 2,128,677 48,803 28,980 2,148,500 1,998,190 59,177 9,765 2,047,602
----------- -------- ------- ----------- ---------- -------- ------- -----------
Total fixed
maturities....... $10,186,464 $771,010 $34,521 $10,922,953 $9,737,753 $543,452 $20,922 $10,260,283
=========== ======== ======= =========== ========== ======== ======= ===========
</TABLE>
The increase in unrealized appreciation of fixed maturities was
$213,959,000, $32,059,000 and $411,120,000 for the years ended December 31,
1993, 1992 and 1991, respectively.
The amortized cost and estimated market value of fixed maturities at
December 31, 1993 by contractual maturity were as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
----------- -----------
(in thousands)
<S> <C> <C>
Due in one year or less.................................... $ 259,188 $ 264,183
Due after one year through five years...................... 1,586,837 1,694,341
Due after five years through ten years..................... 2,657,578 2,894,833
Due after ten years........................................ 4,128,874 4,470,788
----------- -----------
8,632,477 9,324,145
Mortgage-backed securities................................. 1,553,987 1,598,808
----------- -----------
$10,186,464 $10,922,953
=========== ===========
</TABLE>
Actual maturities could differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
49
<PAGE> 15
(4) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs deferred and the related amortization charged to
income were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------
1993 1992 1991
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Property and Casualty Insurance
Balance, beginning of year...... $ 454,976 $ 440,025 $ 412,428
--------- --------- ---------
Costs deferred during year
Commissions and brokerage..... 463,977 432,608 437,426
Premium taxes and assessments. 103,928 103,776 94,152
Salaries and overhead......... 415,788 390,394 372,684
--------- --------- ---------
983,693 926,778 904,262
Amortization during year........ (948,967) (911,827) (876,665)
--------- --------- ---------
Balance, end of year............ $ 489,702 $ 454,976 $ 440,025
========= ========= =========
Life and Health Insurance
Balance, beginning of year...... $ 474,293 $ 445,505 $ 418,705
Costs deferred during year...... 111,389 85,572 86,325
Amortization during year........ (63,138) (56,784) (59,525)
--------- --------- ---------
Balance, end of year............ $ 522,544 $ 474,293 $ 445,505
========= ========= =========
</TABLE>
(5) REAL ESTATE ASSETS
The components of real estate assets were as follows:
<TABLE>
<CAPTION>
December 31
-----------------------
1993 1992
---------- ----------
(in thousands)
<S> <C> <C>
Mortgages and notes receivable (net of
allowance for uncollectible amounts of
$54,948 and $33,234)................................ $ 424,679 $ 430,350
Income producing properties (net of
accumulated depreciation of $23,983 and $15,626).... 795,205 461,238
Construction in progress.............................. 67,087 229,657
Land under development and unimproved land............ 422,010 521,529
---------- ----------
$1,708,981 $1,642,774
========== ==========
</TABLE>
Substantially all mortgages and notes receivable are secured by buildings and
land. The ultimate collectibility of the receivables, of which no significant
amounts are due in the near term, is evaluated continuously and an appropriate
allowance for uncollectible amounts established. Mortgages and notes receivable
had an aggregate fair value of approximately $394,000,000 and $406,000,000 at
December 31, 1993 and 1992, respectively. The fair value amounts represent
point-in-time estimates that are not relevant in predicting future earnings or
cash flows related to such receivables. The difference between the fair value
and carrying value at December 31, 1993 is not expected to be realized as the
real estate subsidiaries intend to hold the mortgages and notes to maturity.
(6) PROPERTY AND EQUIPMENT
Property and equipment included in other assets were as follows:
<TABLE>
<CAPTION>
December 31
-------------------
1993 1992
-------- --------
(in thousands)
<S> <C> <C>
Cost.................................. $329,876 $302,952
Less accumulated depreciation......... 140,718 122,454
-------- --------
$189,158 $180,498
======== ========
</TABLE>
Depreciation expense was $39,951,000, $36,660,000 and $31,700,000 for 1993,
1992 and 1991, respectively.
(7) DEBT AND CREDIT ARRANGEMENTS
(a) Short term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
------------------
1993 1992
------- --------
(in thousands)
<S> <C> <C>
Commercial paper....................... $89,540 $223,108
Notes.................................. 5,300 65,400
------- --------
$94,840 $288,508
======= ========
</TABLE>
Short term debt is used primarily to support the real estate operations. The
commercial paper is issued by Chubb Capital Corporation (Chubb Capital), a
subsidiary of the Corporation, and is guaranteed by the Corporation. The notes
are current obligations under revolving credit arrangements. Borrowings under
these short term instruments are unsecured and are on terms and at interest
rates generally extended to prime borrowers.
(b) Long term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
-------------------------------------------------
1993 1992
----------------------- -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Term loans...... $ 306,236 $ 306,236 $ 352,475 $ 352,475
Mortgages....... 217,594 217,594 220,366 220,366
8 3/4% notes.... 150,000 171,188 150,000 163,388
8 5/8% notes.... 100,000 103,500 100,000 106,665
6% notes........ 150,000 153,188 -- --
6 7/8% notes.... 100,000 103,875 -- --
6% exchangeable
subordinated
notes......... 250,000 266,250 250,000 303,125
---------- ---------- ---------- ----------
$1,273,830 $1,321,831 $1,072,841 $1,146,019
========== ========== ========== ==========
</TABLE>
The term loans and mortgages are obligations of the real estate subsidiaries,
except for a $6,637,000 mortgage loan of the life and health insurance
subsidiaries. The term loans mature in varying amounts through 1997.
Substantially all term loans are at an interest rate equivalent to
the lower of the prime rate or a rate associated with the lender's cost of
funds. At December 31, 1993, the interest rates related to these borrowings
ranged from 4 1/4% to 10%. The real estate subsidiaries' mortgages payable are
due in varying amounts monthly through 2013 with interest rates ranging from 5%
to 12%. The term loans and mortgages payable are secured by real estate assets
with a net book value of $860,097,000 at December 31, 1993.
50
<PAGE> 16
The life and health insurance subsidiaries' mortgage, which is secured by a
portion of their home office complex, bears interest at 11 3/8% and is payable
monthly through December 2000.
The Corporation has outstanding $150,000,000 of unsecured 8 3/4% notes due
November 15, 1999. In each of the years 1995 through 1998, the Corporation will
pay as a mandatory sinking fund an amount sufficient to redeem $30,000,000 of
principal. The notes will be redeemed on a pro rata basis on November 15 of each
of these years at a redemption price of 100% of their principal amount.
Chubb Capital has outstanding $100,000,000 of unsecured 8 5/8% notes due
January 15, 1995 which are guaranteed by the Corporation.
In February 1993, Chubb Capital sold $150,000,000 of 6% notes due February 1,
1998 and $100,000,000 of 6 7/8% notes due February 1, 2003, the aggregate net
proceeds from which were $248,128,000. These notes are unsecured and are
guaranteed by the Corporation.
Chubb Capital has outstanding in the Eurodollar market $250,000,000 of 6%
exchangeable subordinated notes due May 15, 1998, which are guaranteed by the
Corporation. The notes are exchangeable at the option of the holder into 11.628
shares of common stock of the Corporation for each $1,000 of principal amount,
equivalent to a conversion price of $86.00 per share. The notes are redeemable,
in whole or in part, at the option of Chubb Capital, at any time on or after May
15, 1994, at redemption prices declining annually from 103.4% of the principal
amount if redeemed before May 15, 1995 to 100.9% of the principal amount if
redeemed on or after May 15, 1997.
The amounts of long term debt due annually during the five years subsequent to
December 31, 1993 are as follows:
<TABLE>
<CAPTION>
Term Loans
Years Ending and
December 31 Mortgages Notes Total
------------------ ---------- -------- --------
(in thousands)
<S> <C> <C> <C>
1994.................. $107,136 $ -- $107,136
1995.................. 139,447 130,000 269,447
1996.................. 219,854 30,000 249,854
1997.................. 42,579 30,000 72,579
1998.................. 2,881 430,000 432,881
</TABLE>
(c) Interest costs of $92,905,000, $94,824,000 and $90,911,000 were incurred
in 1993, 1992 and 1991, respectively, of which $28,685,000, $40,284,000 and
$46,369,000 were capitalized.
(d) The Corporation has a revolving credit agreement with a group of banks
that provides for unsecured borrowings of up to $300,000,000. The agreement
terminates on November 30, 1994 at which time any loans then outstanding become
payable. Borrowings will, at the Corporation's option, bear interest at various
rates, all of which are based on market rates. The Corporation pays a facility
fee of 1/4% per annum. As of December 31, 1993, there were no borrowings under
this agreement. The Corporation and its subsidiaries had additional unused
lines of credit of approximately $186,000,000 at December 31, 1993. These lines
of credit generally have terms ranging from thirty days to one year and are
paid for with a combination of fees and compensating bank balances. Unused
credit facilities are available to support the commercial paper borrowing
arrangement.
(8) FEDERAL AND FOREIGN INCOME TAX
(a) Income tax expense consisted of the following components:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------
1993 1992 1991
--------- -------- --------
(in thousands)
<S> <C> <C> <C>
Current tax
United States............................................ $ 105,293 $159,193 $148,913
Foreign.................................................. 11,702 27,452 30,938
Deferred tax credit, principally United States............. (116,720) (55,303) (48,159)
--------- -------- --------
$ 275 $131,342 $131,692
========= ======== ========
</TABLE>
The Tax Reform Act of 1986 requires property and casualty insurance
companies to discount unpaid claims for tax purposes as of January 1, 1987 and
provides that the initial discount on such unpaid claims be excluded from
taxable income. Until 1993, the tax benefit of this exclusion was included in
income as the "fresh start" was recognized on the tax return. The federal income
tax provisions in 1992 and 1991 reflect tax benefits of $6,400,000 and
$7,200,000, respectively, relating to the exclusion from taxable income of a
portion of the "fresh start" discount. There was no tax benefit in 1993 since,
for accounting purposes, the remaining "fresh start" benefit was recognized,
effective January 1, 1993, as part of the cumulative effect of the change in
accounting principle upon the adoption by the Corporation of SFAS No. 109 (see
Note (2)).
51
<PAGE> 17
(b) The provision for federal and foreign income tax gives effect to
permanent differences between income for financial reporting purposes and
taxable income. Accordingly, the effective income tax rate is less than the
statutory federal corporate tax rate. The reasons for the lower effective tax
rate were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------------------------------------
1993 1992 1991
--------------------- -------------------- --------------------
% of % of % of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
--------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Income before federal and foreign income tax............ $ 344,492 $748,441 $683,676
========= ======== ========
Tax at statutory federal income tax rate................ $ 120,572 35.0% $254,470 34.0% $232,450 34.0%
Tax exempt interest income.............................. (110,297) (32.0) (96,420) (12.9) (86,719) (12.7)
Deferred income tax benefit due to increase in tax rate. (4,661) (1.4) -- -- -- --
Settlement of prior years' taxes........................ (4,602) (1.3) (15,170) (2.0) -- --
"Fresh start" discount on property and casualty unpaid
claims................................................ -- -- (6,400) (.9) (7,200) (1.0)
Other, net.............................................. (737) (.2) (5,138) (.7) (6,839) (1.0)
--------- ------- -------- ------- -------- -------
Actual tax...................................... $ 275 .1% $131,342 17.5% $131,692 19.3%
========= ======= ======== ======= ======== =======
</TABLE>
(c) The tax effects of temporary differences that gave rise to deferred tax
assets and liabilities at December 31, 1993 were as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Deferred tax assets
Property and casualty unpaid claims...................................................... $461,879
Unearned premiums........................................................................ 111,164
Life and health policy liabilities....................................................... 115,347
Postretirement benefits.................................................................. 49,524
--------
Total.................................................................................. 737,914
--------
Deferred tax liabilities
Deferred policy acquisition costs........................................................ 296,642
Real estate assets....................................................................... 118,386
Unrealized appreciation of equity securities............................................. 77,049
Other, net............................................................................... 16,866
--------
Total.................................................................................. 508,943
--------
Net deferred tax asset..................................................................... $228,971
========
</TABLE>
Management believes that it is more likely than not that the net deferred
tax asset at December 31, 1993 will be fully realized.
Prior to the adoption of SFAS No. 109, deferred income tax expense
represented the tax effect of timing differences in the recognition of revenues
and expenses for financial reporting and income tax purposes. The sources of
these differences and the tax effect of each were as follows:
<TABLE>
<CAPTION>
Years Ended
December 31
-----------------------
1992 1991
-------- --------
(in thousands)
<S> <C> <C>
Discount on property and casualty unpaid claims.................................... $(39,044) $(45,647)
Unearned premium reserve phase-in.................................................. (12,955) (12,955)
Real estate assets................................................................. 13,059 10,591
Other, net......................................................................... (16,363) (148)
-------- --------
$(55,303) $(48,159)
======== ========
</TABLE>
52
<PAGE> 18
(9) PENSIONS AND OTHER POSTRETIREMENT BENEFITS
(a) The Corporation and its subsidiaries have several non-contributory defined
benefit pension plans covering substantially all employees. The benefits are
generally based on an employee's years of service and average compensation
during the last five years of employment. Pension costs are determined using the
projected unit credit method. The Corporation's policy is to make annual
contributions that meet the minimum funding requirements of the Employee
Retirement Income Security Act of 1974. Contributions are intended to provide
not only for benefits attributed to service to date but also for those expected
to be earned in the future.
The components of net pension cost were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1993 1992 1991
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Service cost of current period............................... $ 17,877 $ 15,188 $ 13,039
Interest cost on projected benefit obligation................ 19,598 16,962 14,362
Actual return on plan assets................................. (30,767) (19,361) (42,536)
Net amortization and deferral................................ 10,706 1,996 28,925
-------- -------- --------
Net pension cost............................................. $ 17,414 $ 14,785 $ 13,790
======== ======== ========
</TABLE>
The following table sets forth the plans' funded status and amounts recognized
in the balance sheets:
<TABLE>
<CAPTION>
December 31
-------------------
1993 1992
-------- --------
(in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations
for service rendered to date:
Accumulated benefit obligation based on current salary
levels, including vested benefits of $168,702 and $142,861.. $178,439 $151,172
Additional amount related to projected future
salary increases............................................ 117,084 96,969
-------- --------
Projected benefit obligation for service rendered to date..... 295,523 248,141
Plan assets at fair value......................................... 265,453 227,674
-------- --------
Projected benefit obligation in excess of plan assets............. 30,070 20,467
Unrecognized net gain from past experience different
from that assumed............................................... 13,438 21,613
Unrecognized prior service costs.................................. (5,196) (5,884)
Unrecognized net asset at January 1, 1985, being recognized
principally over 19 years....................................... 11,034 12,424
-------- --------
Pension liability included in other liabilities................... $ 49,346 $ 48,620
======== ========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligations at December 31, 1993 and 1992 was
7 1/2% and 7 3/4%, respectively, and the rate of increase in future compensation
levels was 6% for both years. The expected long term rate of return on assets
was 9% for both years.
Plan assets are principally invested in publicly traded stocks and bonds.
(b) The Corporation and its subsidiaries provide certain other postretirement
benefits, principally health care and life insurance, to retired employees and
their beneficiaries and covered dependents. Substantially all U.S. employees may
become eligible for these benefits upon retirement if they meet minimum age and
years of service requirements.
The Corporation does not fund these benefits in advance. Benefits are paid as
covered expenses are incurred. Health care coverage is contributory. Retiree
contributions vary based upon a retiree's age, type of coverage and years of
service with the Corporation. Life insurance coverage is noncontributory.
The components of net postretirement benefit cost for the year ended December
31, 1993 were as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Service cost of current period.............................. $ 4,384
Interest cost on accumulated benefit obligation............. 6,864
--------
Net postretirement benefit cost............................. $ 11,248
========
</TABLE>
Prior to the adoption of SFAS No. 106, the cost of other postretirement
benefits was recognized when the annual insurance premiums, which were
immaterial, were paid.
The components of the accumulated postretirement benefit obligation at
December 31, 1993 were as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Retirees.................................................... $ 39,316
Fully eligible active plan participants..................... 6,072
Other active plan participants.............................. 59,198
--------
Accumulated postretirement benefit obligation............... 104,586
Unrecognized net loss from past experience
different from that assumed............................... (5,729)
--------
Postretirement benefit liability included in other
liabilities............................................... $ 98,857
========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the accumulated postretirement benefit obligation at December 31, 1993
was 7 1/2%. The health care cost trend rate used to measure the accumulated
postretirement cost for medical benefits was 15% for 1993. The rate is assumed
to decrease gradually to 7 1/2% for the year 2005 and remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amount of the accumulated postretirement benefit obligation and the net
postretirement benefit cost reported. To illustrate, a one percent increase in
the trend rate for each year would increase the accumulated postretirement
benefit obligation at December 31, 1993 by $11,565,000 and the aggregate of the
service and interest cost components of net postretirement benefit cost for the
year ended December 31, 1993 by $1,395,000.
53
<PAGE> 19
(10) OPTION AND INCENTIVE PLANS
(a) The Long-Term Stock Incentive Plan provides for the granting of stock
options, stock appreciation rights, performance shares, restricted stock,
restricted stock units, convertible debentures and other stock based awards to
key employees. The Long-Term Stock Incentive Plan succeeds a prior stock option
plan which continues to govern awards made pursuant to it. The maximum number of
shares of the Corporation's common stock in respect to which stock based awards
may be granted under the plan is 4,400,000 shares. At December 31, 1993,
3,064,635 shares were available for grant under the Long-Term Stock Incentive
Plan.
Stock options are rights to purchase shares of the Corporation's common
stock. Stock appreciation rights are rights to receive an amount equal to the
excess of the fair market value of a share over the grant price of such right in
cash, in shares of the Corporation's common stock or in a combination of both.
Stock appreciation rights may be granted in tandem with or unrelated to options.
Stock options and stock appreciation rights are granted at exercise prices not
less than the fair market value of the Corporation's common stock on the date of
grant. The terms and conditions upon which options and stock appreciation rights
become exercisable may vary among grants. However, stock appreciation rights are
not exercisable earlier than six months after grant. Options and stock
appreciation rights expire no later than ten years from the date of grant.
Information concerning stock options granted under the Long-Term Stock
Incentive Plan and the prior plan is as follows:
<TABLE>
<CAPTION>
1993 1992 1991
------------------------- ----------------------------- -----------------------------
Option Option Option
Number Price Number Price Number Price
of Shares Per Share of Shares Per Share of Shares Per Share
--------- ------------ --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year............... 1,558,484 $13.23-74.06 1,228,979 $13.23-72.06 1,144,363 $13.23-47.75
Granted............... 678,461 83.56-92.63 554,900 66.75-74.06 344,350 64.63-72.06
Exercised............. (136,888) 13.23-72.06 (210,220) 13.23-72.06 (245,484) 13.23-47.75
Cancelled............. (16,299) 24.50-83.56 (15,175) 47.75-72.06 (14,250) 35.00-72.06
--------- --------- ---------
Outstanding, end of
year................ 2,083,758 13.23-92.63 1,558,484 13.23-74.06 1,228,979 13.23-72.06
========= ========= =========
Exercisable, end of
year................ 1,147,272 13.23-92.63 847,809 13.23-72.06 737,979 13.23-47.75
</TABLE>
No stock appreciation rights unrelated to stock options have been granted.
Of the stock options outstanding at December 31, 1993, 1992 and 1991, 136,962,
157,769 and 238,382, respectively, had stock appreciation rights granted in
tandem with the options. Stock appreciation rights have not been granted since
1990.
Performance share awards are based on the achievement of various goals over
performance cycle periods. The cost of such awards is expensed over the
performance cycle. Such awards are payable in cash, in shares of the
Corporation's common stock or in a combination of both. Restricted stock awards
consist of shares of common stock of the Corporation granted at no cost. Shares
of restricted stock become outstanding when granted, receive dividends and have
voting rights. The shares are subject to forfeiture and to restrictions which
limit the sale or transfer during the restriction period. An amount equal to the
fair market value of the shares at the date of grant is expensed over the
restriction period. Convertible debenture awards are convertible into shares of
common stock of the Corporation. The debentures and any shares of common stock
issued upon conversion are subject to forfeiture and to restrictions which limit
the sale or transfer during the restriction period. The cost of the debenture
awards is expensed during the period the related service is performed. The
aggregate amount charged against income with respect to these awards was
$4,219,000, $5,100,000 and $8,214,000 in 1993, 1992 and 1991, respectively.
(b) The Stock Option Plan for Non-Employee Directors provides for the
granting of options to eligible directors to purchase shares of the
Corporation's common stock. Options are granted at exercise prices equal to the
fair market value of the Corporation's common stock on the date of grant.
Options become exercisable immediately and expire no later than five years from
the date of termination as an eligible director. The maximum number of shares in
respect to which options may be granted under the plan is 300,000 shares. At
December 31, 1993, 272,000 shares were available for grant under the Stock
Option Plan for Non-Employee Directors.
Information concerning stock options granted under the Stock Option Plan
for Non-Employee Directors is as follows:
<TABLE>
<CAPTION>
1993 1992 1991
--------------------------- --------------------------- ---------------------------
Option Option Option
Number Price Number Price Number Price
of Shares Per Share of Shares Per Share of Shares Per Share
--------- ------------ --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year.. 100,000 $26.84-69.19 96,000 $26.84-69.19 68,000 $26.84-44.19
Granted......................... 28,000 86.94 28,000 65.19 30,000 69.19
Exercised....................... (4,000) 26.84-44.19 (24,000) 26.84-69.19 (2,000) 69.19
------- ------- ------
Outstanding and exercisable, end
of year....................... 124,000 26.84-86.94 100,000 26.84-69.19 96,000 26.84-69.19
======= ======= ======
</TABLE>
54
<PAGE> 20
(c) The Corporation has a leveraged Employee Stock Ownership Plan (ESOP) in
which substantially all employees are eligible to participate. At its inception
in 1989, the ESOP used the proceeds of a $150,000,000 loan from the Corporation
to purchase 3,896,102 newly issued shares of the Corporation's common stock. The
loan is due in September 2004 and bears interest at 9%. The Corporation has
recorded the receivable from the ESOP as a separate reduction of shareholders'
equity on the consolidated balance sheets. This balance is reduced as repayments
are made on the loan principal.
The Corporation and its participating subsidiaries make semi-annual
contributions to the ESOP in amounts determined at the discretion of the
Corporation's Board of Directors. The contributions, together with the dividends
on the unallocated shares of common stock in the ESOP, are used by the ESOP to
make loan interest and principal payments to the Corporation. As interest and
principal are paid, a portion of the common stock is allocated to eligible
employees.
The Corporation uses the cash payment method of recognizing ESOP expense. In
1993, 1992 and 1991, contributions to the ESOP were $12,172,000, $11,995,000 and
$11,841,000, respectively, and dividends on unallocated shares used for debt
service by the ESOP were $4,711,000, $4,709,000 and $4,623,000, respectively.
(d) The Corporation has a savings plan, the Capital Accumulation Plan.
Effective in 1992, participation in the plan was extended to employees of the
life and health insurance and real estate development subsidiaries. Under this
plan, the employer makes a matching contribution equal to 100% of each eligible
employee's pre-tax elective contributions, up to 4% of the employee's
compensation. Contributions are invested at the election of the employee in the
Corporation's common stock or in various other investment funds. Employer
contributions of $12,564,000, $12,182,000 and $9,154,000 were charged against
income in 1993, 1992 and 1991, respectively.
(e) The Corporation has a Stock Purchase Plan under which substantially all
employees are eligible to purchase shares of the Corporation's common stock.
Shares are purchased at a price not less than 95% of the fair market value on
the date of grant. At December 31, 1993, there were 237,412 subscribed shares at
a price of $86.06.
(11) LEASES
The Corporation and its subsidiaries occupy office facilities under lease
agreements which expire at various dates through 2009; such leases are generally
renewed or replaced by other leases. In addition, the Corporation's subsidiaries
lease data processing, office and transportation equipment.
Most leases contain renewal options for increments ranging from two to ten
years; certain lease agreements provide for rent increases based on price-level
factors. All leases are operating leases.
Rent expense was as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------
1993 1992 1991
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Office facilities............. $68,805 $65,678 $60,030
Equipment..................... 20,794 24,404 24,207
------- ------- -------
$89,599 $90,082 $84,237
======= ======= =======
</TABLE>
At December 31, 1993, future minimum rental payments required under
non-cancellable operating leases were as follows:
<TABLE>
<CAPTION>
Years Ending December 31 (in thousands)
<S> <C>
1994..................................... $ 79,095
1995..................................... 72,576
1996..................................... 62,984
1997..................................... 52,038
1998..................................... 43,698
After 1998............................... 101,367
--------
$411,758
========
</TABLE>
55
<PAGE> 21
(12) RELATED PARTY TRANSACTIONS
Sun Alliance Group plc (Sun Group), an insurance holding company organized
under the laws of England, is the beneficial owner of 5.1% of the Corporation's
common stock, acquired solely for the purpose of investment.
Approximately 14% of the U.S. insurance business written by the Corporation's
property and casualty insurance subsidiaries is reinsured on a quota share basis
with a subsidiary of the Sun Group. The Sun Group's premiums earned arising from
such reinsurance were $457,321,000, $438,939,000 and $423,055,000 in 1993, 1992
and 1991, respectively. Reinsurance recoverable on property and casualty unpaid
claims included approximately $840,000,000 and $1,000,000,000 at December 31,
1993 and 1992, respectively, from the Sun Group.
A property and casualty insurance subsidiary assumes a portion of the Sun
Group's property and casualty insurance business on a quota share basis. The
assumed reinsurance premiums earned arising from this business were
$170,131,000, $125,731,000 and $120,913,000 in 1993, 1992 and 1991,
respectively.
The property and casualty insurance subsidiaries entered into a stop loss
reinsurance agreement with a subsidiary of the Sun Group, effective year end
1985, relating to medical malpractice unpaid claims. The agreement provides that
the Sun Group will pay up to $285,000,000 of losses and loss adjustment expenses
for this discontinued class of business in excess of the initial $225,000,000 to
be paid by the property and casualty insurance subsidiaries subsequent to
December 31, 1985. Since the effective date of this agreement, the property and
casualty insurance subsidiaries have paid an aggregate of $249,877,000 of
medical malpractice losses and loss adjustment expenses and, under the
agreement, have recovered the amount in excess of $225,000,000 from the Sun
Group.
The agreement includes a provision for contingent profit sharing payments to
the property and casualty insurance subsidiaries based on calculations at
specified dates during the period of the reinsurance agreement. Profit sharing
accruals related to the agreement were $9,000,000, $9,479,000 and $9,000,000 in
1993, 1992 and 1991, respectively. These amounts were reflected as reductions of
other insurance operating costs and expenses.
The agreement also provides that the property and casualty insurance
subsidiaries may elect to commute the remaining liability as of December 31,
1995. In 1993, the Corporation announced its intention to exercise this
election. The commutation will result in a return premium to the property and
casualty insurance subsidiaries of approximately $125,000,000, which was
recognized in 1993.
The reinsurance amounts described in Note (13) include the effects of these
transactions with the Sun Group.
(13) REINSURANCE
The effect of reinsurance on the premiums earned of the property and casualty
insurance subsidiaries was as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------
1993 1992 1991
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Direct................... $ 4,155,356 $ 3,824,520 $ 3,579,774
Reinsurance assumed...... 478,464 429,147 476,852
Reinsurance ceded........ (1,128,982) (1,090,379) (1,019,458)
----------- ----------- -----------
Premiums earned.......... $ 3,504,838 $ 3,163,288 $ 3,037,168
=========== =========== ===========
</TABLE>
Reinsurance recoveries by the property and casualty insurance subsidiaries
which have been deducted from insurance claims and policyholders' benefits in
the consolidated statements of income were $568,847,000 in 1993.
The effect of reinsurance on the premiums and policy charges of the life and
health insurance subsidiaries was as follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------
1993 1992 1991
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Direct.......................... $831,849 $721,785 $663,810
Reinsurance assumed............. 2,784 2,751 3,094
Reinsurance ceded............... (33,397) (35,363) (32,888)
-------- -------- --------
Premiums and policy charges..... $801,236 $689,173 $634,016
======== ======== ========
</TABLE>
The maximum amount of individual life insurance retained on any one life,
including accidental death benefits, amounted to $1,400,000.
Reinsurance recoveries by the life and health insurance subsidiaries which
have been deducted from insurance claims and policyholders' benefits in the
consolidated statements of income were $42,005,000 in 1993.
56
<PAGE> 22
(14) PROPERTY AND CASUALTY UNPAID CLAIMS
The process of establishing loss reserves is an imprecise science and reflects
significant judgmental factors. In many liability cases, significant periods of
time, ranging up to several years or more, may elapse between the occurrence of
an insured loss, the reporting of the loss and the settlement of the loss.
Judicial decisions and legislative actions continue to broaden liability and
policy definitions and to increase the severity of claim payments. As a result
of this and other societal and economic developments, the uncertainties inherent
in estimating ultimate claim costs on the basis of past experience have
increased significantly, further complicating the already difficult loss
reserving process.
The uncertainties relating to asbestos and toxic waste claims on insurance
policies written many years ago are exacerbated by judicial and legislative
interpretations of coverage that in some cases have tended to erode the clear
and express intent of such policies and in others have expanded theories of
liability. The industry is engaged in extensive litigation over these coverage
and liability issues and is thus confronted with a continuing uncertainty in its
effort to quantify these exposures.
In 1993, Pacific Indemnity Company, a subsidiary of the Corporation, entered
into a global settlement agreement with Continental Casualty Company (a
subsidiary of CNA Financial Corporation), Fibreboard Corporation, and attorneys
representing claimants against Fibreboard for all future asbestos-related bodily
injury claims against Fibreboard. This agreement is subject to court approval.
Pursuant to the global settlement agreement, a $1,525,000,000 trust fund will be
established to pay future claims, which are claims that were not filed in court
before August 27, 1993. Pacific Indemnity will contribute $538,172,000 to the
trust fund and Continental Casualty will contribute the remaining amount. In
December 1993, upon execution of the global settlement agreement, Pacific
Indemnity and Continental Casualty paid their respective shares into an escrow
account. Upon final court approval of the settlement, which could take up to two
years or more, the amount in the escrow account, including interest earned
thereon, will be transferred to the trust fund.
All of the parties have agreed to use their best efforts to seek court
approval of the global settlement agreement. Although it is likely that this
agreement will be challenged, management is optimistic that the courts will
approve the settlement.
Pacific Indemnity and Continental Casualty have reached a separate agreement
for the handling of all pending asbestos-related bodily injury claims against
Fibreboard. Pacific Indemnity's obligation under this agreement is not expected
to exceed $635,000,000. The agreement further provides that the total
responsibility of both insurers with respect to pending and future asbestos-
related bodily injury claims against Fibreboard will be shared between Pacific
Indemnity and Continental Casualty on an approximate 35% and 65% basis,
respectively.
Pacific Indemnity, Continental Casualty and Fibreboard have entered into a
trilateral agreement, subject to court approval, to settle all present and
future asbestos-related bodily injury claims resulting from insurance policies
that were, or may have been, issued to Fibreboard by the two insurers. The
trilateral agreement will be triggered if the global settlement agreement is
disapproved. Pacific Indemnity's obligation under the trilateral agreement is
therefore similar to, and not duplicative of, that under those agreements
described above.
The trilateral agreement reaffirms portions of an agreement reached in March
1992 between Pacific Indemnity and Fibreboard. Among other matters, that 1992
agreement eliminates any Pacific Indemnity liability to Fibreboard for
asbestos-related property damage claims.
Pacific Indemnity, Continental Casualty and Fibreboard have requested a
California Court of Appeal to delay its decisions regarding asbestos-related
insurance coverage issues, which are currently before it and involve the three
parties exclusively, while the approval of the global settlement is pending in
court. Continental Casualty and Pacific Indemnity have dismissed disputes
against each other which involved Fibreboard and were in litigation.
Additional loss reserves of $675,000,000 were provided in 1993 at the time the
settlement was negotiated.
Management believes that, as a result of the global settlement agreement and
the trilateral agreement, the uncertainty of Pacific Indemnity's exposure with
respect to asbestos-related bodily injury claims against Fibreboard has been
greatly reduced. However, if both the global settlement agreement and the
trilateral agreement are disapproved, there can be no assurance that the loss
reserves established for future claims would be sufficient to pay all amounts
which ultimately could become payable in respect of future asbestos-related
bodily injury claims against Fibreboard.
57
<PAGE> 23
Other than Fibreboard, remaining asbestos exposures are mostly limited to
peripheral regional defendants, principally distributors. New asbestos claims
and new exposures on existing claims continue to be received as more peripheral
parties are drawn into litigation to replace the now defunct mines and bankrupt
manufacturers. The recent claims are complex in that they include significant
and yet unresolved liability issues. Further, the universe of potential claims
is still not known.
Hazardous waste sites are another significant potential exposure. As the cost
of environmental clean-up continues to grow, potentially responsible parties
(PRPs) and others continue to file claims with their insurance carriers.
Insurance policies issued to PRPs were not intended to cover the clean-up costs
of pollution and, in many cases, did not intend to cover the pollution itself.
Ensuing litigation extends to issues of liability, coverage and other policy
provisions. There is great uncertainty involved in estimating the property and
casualty insurance subsidiaries' liabilities related to these claims. First, the
underlying liabilities of the claimants are extremely difficult to estimate. At
any given clean-up site, the allocation of financial responsibility among the
governmental authorities and PRPs varies greatly. Second, various courts have
addressed liability and coverage issues regarding pollution claims and have
reached inconsistent conclusions in their interpretation of several issues.
These significant uncertainties are not likely to be resolved in the near
future.
Reserves for asbestos and toxic waste claims cannot be estimated with
traditional loss reserving techniques. Case reserves and costs of related
litigation have been established where sufficient information has been developed
to indicate the involvement of a specific insurance policy. In addition,
incurred but not reported reserves have been established to cover additional
exposures on both known and unasserted claims. These reserves are continually
reviewed and updated.
Management believes that the aggregate loss reserves of the property and
casualty insurance subsidiaries at December 31, 1993 were adequate to cover
claims for losses which had occurred, including both those known and those yet
to be reported. In establishing such reserves, management considers facts
currently known and the present state of the law and coverage litigation.
However, given the expansion of coverage and liability by the courts and the
legislatures in the past and the possibilities of similar interpretations in the
future, particularly as they relate to asbestos and toxic waste claims, as well
as the uncertainty in determining what scientific standards will be acceptable
for measuring hazardous waste site clean-up, additional increases in loss
reserves may emerge which may adversely affect results in future periods. This
emergence cannot reasonably be estimated.
(15) CONTINGENCIES
In 1988, voters in California approved Ballot Proposition 103, an insurance
reform initiative which affects most property and casualty insurers writing
business in the state. Approximately 14% of the direct business of the
Corporation's property and casualty insurance subsidiaries is written in
California. Provisions of Proposition 103 would have required insurers to roll
back property and casualty insurance rates for certain lines of business to 20
percent below November 1987 levels and would have required an additional 20
percent reduction in automobile rates by November 1989. In 1989, the California
Supreme Court, ruling on the constitutional challenge to Proposition 103, ruled
that an insurer is entitled to a fair rate of return.
The regulations implementing the rate determination and premium rollback
provisions of Proposition 103 continue to evolve. A California Superior Court
decision declared invalid and void the rollback and rate review regulations
proposed by the elected Insurance Commissioner. The Court decision prohibits the
Commissioner from enforcing the regulations as well. The Commissioner has
appealed the Superior Court decision to the California Supreme Court and the
outcome of that appeal is uncertain. In a separate action, a California Court of
Appeal has ruled that Proposition 103 regulations need not be submitted for
approval to the California Office of Administrative Law. A petition for review
has been filed with the California Supreme Court. There are at present no
regulations in force or proposed which establish a final rollback formula.
None of the Corporation's property and casualty insurance subsidiaries have
been among the companies thus far ordered to refund premiums for the rollback
period. Based on an analysis of the operating results of the Corporation's
property and casualty insurance subsidiaries in the State of California during
the rollback period, it is management's belief that it is probable that any
final court decision will not result in premium refunds of a material amount by
the Corporation's property and casualty insurance subsidiaries.
58
<PAGE> 24
(16) BUSINESS SEGMENTS
The Corporation is a holding company and is principally engaged, through
subsidiaries, in three industries: property and casualty insurance, life and
health insurance and real estate development. Revenues, income from operations
before income tax and identifiable assets for each industry segment were as
follows:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------
1993 1992 1991
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
REVENUES
Property and Casualty Insurance
Premiums earned............................................................. $ 3,504,838 $ 3,163,288 $ 3,037,168
Investment income........................................................... 541,749 501,140 476,984
Life and Health Insurance
Premiums and policy charges................................................. 801,236 689,173 634,016
Investment income........................................................... 205,891 192,748 177,654
Real Estate..................................................................... 160,650 149,945 140,957
----------- ----------- -----------
5,214,364 4,696,294 4,466,779
Corporate investment income..................................................... 52,706 57,176 46,400
Realized investment gains....................................................... 232,638 187,349 65,718
----------- ----------- -----------
Total revenues.......................................................... $ 5,499,708 $ 4,940,819 $ 4,578,897
=========== =========== ===========
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAX
Property and Casualty Insurance................................................. $ (1,383) $ 442,803 $ 485,389
Life and Health Insurance....................................................... 88,729 74,501 73,256
Real Estate..................................................................... 2,051 15,094 34,788
----------- ----------- -----------
89,397 532,398 593,433
Corporate....................................................................... 22,457 28,694 24,525
Realized investment gains....................................................... 232,638 187,349 65,718
----------- ----------- -----------
Income before federal and foreign income tax............................ $ 344,492 $ 748,441 $ 683,676
=========== =========== ===========
December 31
-----------------------------------------
IDENTIFIABLE ASSETS
Property and Casualty Insurance................................................. $13,372,599 $11,999,538 $10,991,559
Life and Health Insurance....................................................... 3,529,802 3,150,630 2,951,704
Real Estate..................................................................... 1,745,212 1,679,138 1,587,511
----------- ----------- -----------
Total identifiable assets............................................... 18,647,613 16,829,306 15,530,774
Corporate....................................................................... 1,047,606 1,009,257 899,474
Adjustments and eliminations.................................................... (258,349) (279,381) (266,643)
----------- ----------- -----------
Total assets............................................................ $19,436,870 $17,559,182 $16,163,605
=========== =========== ===========
</TABLE>
The following additional information is with respect to the more
significant groupings of classes of business for the property and casualty
operations:
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------
1993 1992 1991
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
PREMIUMS EARNED
Personal........................................................................ $ 807,550 $ 789,923 $ 804,410
Standard Commercial............................................................. 1,294,182 1,113,654 1,088,635
Specialty Commercial............................................................ 1,208,672 1,108,913 1,000,078
Reinsurance Assumed............................................................. 194,434 150,798 144,045
---------- ---------- ----------
Total premiums earned....................................................... $3,504,838 $3,163,288 $3,037,168
========== ========== ==========
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAX
Personal........................................................................ $ 30,536 $ (36,158) $ (27,391)
Standard Commercial............................................................. (642,747) (70,876) (29,598)
Specialty Commercial............................................................ 101,584 96,894 99,365
Reinsurance Assumed............................................................. (24,465) (40,512) (26,482)
---------- ---------- ----------
Underwriting income (loss).................................................. (535,092) (50,652) 15,894
Net investment income........................................................... 533,709 493,455 469,495
---------- ---------- ----------
Income (loss) from operations before income tax............................. $ (1,383) $ 442,803 $ 485,389
========== ========== ==========
</TABLE>
Standard Commercial premiums earned for 1993 include a $125,000,000 return
premium to the property and casualty insurance subsidiaries related to the
commutation of a medical malpractice reinsurance agreement. Standard Commercial
underwriting loss in 1993 reflects a $675,000,000 increase in unpaid claims
related to an agreement for the settlement of asbestos-related litigation and
the $125,000,000 return premium, resulting in a net charge of $550,000,000.
59
<PAGE> 25
The underwriting income or loss by class of business reflects allocations
of certain significant underwriting expenses using allocation methods deemed
reasonable. Other acceptable allocation methods could produce different results
by groupings of classes of business. Property and casualty assets are available
for payment of claims and expenses for all classes of business; therefore, such
assets and the related investment income have not been identified with specific
groupings of classes of business.
(17) INTERNATIONAL OPERATIONS
Several of the property and casualty insurance subsidiaries provide
international insurance coverages on a direct and assumed basis, principally in
Canada, Europe, Australia and the Far East. The life and health insurance and
real estate subsidiaries have no international operations.
Shown below is a summary of revenues, income from operations before income
tax and identifiable assets of the property and casualty insurance subsidiaries
by geographic area.
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------
1993 1992 1991
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Revenues
United States........................................................ $3,397,825 $3,089,635 $2,981,312
International........................................................ 648,762 574,793 532,840
---------- ---------- ----------
Total.......................................................... $4,046,587 $3,664,428 $3,514,152
========== ========== ==========
Income (loss) from operations before income tax
United States........................................................ $ 8,311 $ 472,359 $ 455,706
International........................................................ (9,694) (29,556) 29,683
---------- ---------- ----------
Total.......................................................... $ (1,383) $ 442,803 $ 485,389
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31
---------------------------------------
1993 1992 1991
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Identifiable assets
United States....................................................... $12,189,556 $10,993,111 $10,130,473
International....................................................... 1,183,043 1,006,427 861,086
----------- ----------- -----------
Total......................................................... $13,372,599 $11,999,538 $10,991,559
=========== =========== ===========
</TABLE>
Foreign currency translation gains or losses credited or charged directly
to the separate component of shareholders' equity were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------
1993 1992 1991
------- -------- ------
(in thousands)
<S> <C> <C> <C>
Gains (losses) on translation of foreign currencies............................ $ 8,492 $(18,801) $6,611
Income tax (credit)
Current.................................................................... 8,546 (1,534) 2,165
Deferred................................................................... (5,545) (4,860) (67)
------- -------- ------
$ 5,491 $(12,407) $4,513
======= ======== ======
</TABLE>
(18) SHAREHOLDERS' EQUITY
(a) The authorized but unissued preferred shares may be issued in one
or more series and the shares of each series shall have such rights as
fixed by the Board of Directors.
(b) The activity of the Corporation's common stock was as follows:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------
1993 1992 1991
---------- ---------- ----------
(number of shares)
<S> <C> <C> <C>
Common stock issued
Balance, beginning of year........................................... 87,519,560 86,937,565 81,911,530
Shares issued upon conversion of long term debt...................... -- -- 4,687,123
Shares issued under stock option and purchase plans.................. 126,355 515,301 276,054
Shares awarded under incentive plans................................. 63,550 66,694 62,858
---------- ---------- ----------
Common stock outstanding, end of year............................ 87,709,465 87,519,560 86,937,565
========== ========== ==========
</TABLE>
(c) The Corporation has a Shareholder Rights Plan under which each
shareholder has one-half of a right for each share of common stock of the
Corporation held. Each right entitles the holder to purchase from the
Corporation one one-hundredth of a share of Series A Participating Cumulative
Preferred Stock at an exercise price of $225. The rights attach to all
outstanding shares of common stock and trade with the common stock until the
rights become exercisable. The rights are subject to adjustment to prevent
dilution.
60
<PAGE> 26
The rights will become exercisable and will detach from the common stock
ten days after a person or group either acquires 25% or more of the outstanding
shares of the Corporation's common stock or announces a tender or exchange offer
which, if consummated, would result in that person or group owning 25% or more
of the outstanding shares of the Corporation's common stock.
In the event that any person or group acquires 25% or more of the
outstanding shares of the Corporation's common stock, each right will entitle
the holder, other than such person or group, to purchase that number of shares
of the Corporation's common stock having a market value of two times the
exercise price of the right. In the event that, following the acquisition of 25%
or more of the Corporation's outstanding common stock by a person or group, the
Corporation is acquired in a merger or other business combination transaction or
50% or more of the Corporation's assets or earning power is sold, each right
will entitle the holder to purchase common stock of the acquiring company having
a value equal to two times the exercise price of the right.
The rights do not have the right to vote or to receive dividends. The
rights may be redeemed in whole, but not in part, at a price of $.01 per right
by the Corporation at any time until the tenth day after the acquisition of 25%
or more of the Corporation's outstanding common stock by a person or group. The
rights will expire at the close of business on June 12, 1999, unless previously
redeemed by the Corporation.
(d) The Corporation's insurance subsidiaries are required to file annual
statements with state insurance regulatory authorities prepared on an accounting
basis prescribed or permitted by such authorities (statutory basis). For such
subsidiaries, generally accepted accounting principles (GAAP) differ in certain
respects from statutory accounting practices.
A comparison of shareholders' equity on a GAAP basis and policyholders'
surplus on a statutory basis is as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------------------
1993 1992
------------------------ ------------------------
GAAP Statutory GAAP Statutory
---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Property and casualty insurance subsidiaries* $2,683,264 $1,794,101 $2,600,163 $1,787,176
Life and health insurance subsidiaries...... 758,419 305,609 736,801 321,035
---------- ---------- ---------- ----------
3,441,683 $2,099,710 3,336,964 $2,108,211
========== ==========
Corporate and eliminations.................. 754,446 617,438
---------- ----------
$4,196,129 $3,954,402
========== ==========
</TABLE>
A comparison of GAAP and statutory net income is as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------------------------------------------------
1993 1992 1991
--------------------- --------------------- ---------------------
GAAP Statutory GAAP Statutory GAAP Statutory
-------- --------- -------- --------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Property and casualty insurance
subsidiaries*.............................. $210,204** $ 96,965 $483,896 $396,952 $475,201 $394,373
Life and health insurance subsidiaries....... 76,853** 31,890 64,991 32,501 54,174 39,565
-------- -------- -------- -------- -------- --------
287,057 $128,855 548,887 $429,453 529,375 $433,938
======== ======== ========
Corporate and eliminations................... 57,160** 68,212 22,609
Cumulative effect of changes in accounting
principles, net of tax.................... (20,000) -- --
-------- -------- --------
$324,217 $617,099 $551,984
======== ======== ========
</TABLE>
* A property and casualty subsidiary owns the real estate subsidiaries.
** Before cumulative effect of changes in accounting principles.
(e) The Corporation's ability to continue to pay dividends to shareholders
and interest on debt obligations is affected by the availability of liquid
assets held by the Corporation and by the dividend paying ability of its
insurance subsidiaries. Various state insurance laws restrict the Corporation's
insurance subsidiaries as to the amount of dividends they may pay to the
Corporation without the prior approval of regulatory authorities. The
restrictions are generally based on net investment income and on certain levels
of policyholders' surplus as determined in accordance with statutory accounting
practices. Dividends in excess of such thresholds are considered "extraordinary"
and require prior regulatory approval. During 1993, these subsidiaries paid
dividends to the Corporation totaling $148,008,000.
For 1994, the Corporation's principal property and casualty insurance
subsidiary, an Indiana corporation, requested and received approval to pay an
amount which constitutes an "extraordinary" dividend. The maximum dividend
distribution that may be made by insurance subsidiaries to the Corporation
during 1994, including the "extraordinary" dividend, is approximately
$271,000,000.
61
<PAGE> 27
REPORT OF INDEPENDENT AUDITORS
ERNST & YOUNG
787 Seventh Avenue
New York, New York 10019
The Board of Directors and Shareholders
The Chubb Corporation
We have audited the accompanying consolidated balance sheets of The Chubb
Corporation as of December 31, 1993 and 1992, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1993. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Chubb
Corporation at December 31, 1993 and 1992 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1993 in conformity with generally accepted accounting principles.
As described in Note (2) to the financial statements, The Chubb Corporation
changed its methods of accounting for postretirement benefits other than
pensions, income taxes and reinsurance of short-duration and long-duration
contracts in 1993.
/s/ Ernst & Young
February 25, 1994
62
<PAGE> 28
QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data (in millions except per share
data) for 1993 and 1992 are shown below. In management's opinion, the interim
financial data contain all adjustments, consisting of normal recurring items,
necessary to present fairly the results of operations for the interim periods.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------------- -------------------- -------------------- --------------------
1993 1992 1993 1992 1993 1992 1993 1992
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $1,237.5 $1,175.6 $1,283.6 $1,179.0 $1,570.3 $1,243.7 $1,408.1 $1,342.5
Benefits and expenses......... 1,057.6 997.9 1,072.3 1,025.5 1,815.6 1,062.9 1,209.6 1,106.0
Federal and foreign income tax
(credit).................... 34.1 34.6 42.8 23.1 (114.7) 34.7 38.0 39.0
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
cumulative effect of changes
in accounting principles.... 145.8 143.1 168.5 130.4 (130.6) 146.1 160.5 197.5
Cumulative effect of changes
in accounting principles,
net of tax.................. (20.0) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)............. $ 125.8 $ 143.1 $ 168.5 $ 130.4 $ (130.6) $ 146.1 $ 160.5 $ 197.5
======== ======== ======== ======== ======== ======== ======== ========
Per share data
Income (loss) before
cumulative effect of
changes in accounting
principles................ $ 1.64 $ 1.62 $ 1.89 $ 1.48 $ (1.42) $ 1.65 $ 1.80 $ 2.21
Cumulative effect of changes
in accounting principles.. (.22) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)........... $ 1.42 $ 1.62 $ 1.89 $ 1.48 $ (1.42) $ 1.65 $ 1.80 $ 2.21
======== ======== ======== ======== ======== ======== ======== ========
Underwriting ratios
Losses to premiums earned... 65.1% 62.7% 64.6% 65.6% 125.9% 67.6% 66.9% 70.5%
Expenses to premiums
written................... 34.7 35.4 33.4 34.1 29.0 34.2 33.0 34.2
-------- -------- -------- -------- -------- -------- -------- --------
Combined.................... 99.8% 98.1% 98.0% 99.7% 154.9% 101.8% 99.9% 104.7%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Revenues for the third quarter of 1993 include a $125 million return
premium to the Corporation's property and casualty insurance subsidiaries
related to the commutation of a medical malpractice reinsurance agreement.
Benefits and expenses for the same period include a $675 million increase in
unpaid claims related to an agreement for the settlement of asbestos-related
litigation. Net income for the quarter was reduced by a net charge of $357.5
million or $3.95 per share for the after-tax effect of these items. Excluding
the effects of these items, the losses to premiums earned ratio for the quarter
was 65.2%, the expenses to premiums written ratio was 33.0% and the combined
ratio was 98.2%.
The income tax provision for the fourth quarter of 1992 reflects a benefit
of $12.0 million resulting from a reversal of income tax reserves based on a
settlement of prior years' taxes. The effect was to increase net income by $.13
per share for the quarter.
63
<PAGE> 29
COMMON STOCK DATA
The common stock of the Corporation is listed and principally traded on the
New York Stock Exchange (NYSE). The following are the high and low closing sale
prices as reported on the NYSE Composite Tape and the quarterly dividends
declared for each quarter of 1993 and 1992.
<TABLE>
<CAPTION>
1993
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Common stock prices
High...................................................... $95.75 $95.63 $92.75 $83.75
Low....................................................... 84.38 80.75 84.13 76.63
Dividends declared............................................ .43 .43 .43 .43
</TABLE>
<TABLE>
<CAPTION>
1992
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Common stock prices
High...................................................... $75.63 $72.63 $85.50 $91.00
Low....................................................... 63.63 63.38 72.75 82.25
Dividends declared............................................ .40 .40 .40 .40
</TABLE>
At March 1, 1994, there were approximately 9,025 common shareholders of
record.
67
<PAGE> 1
THE CHUBB CORPORATION
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Principal subsidiaries at December 31, 1993 of the The Chubb Corporation, a
New Jersey Corporation, and their subsidiaries (indented), together with the
percentages of ownership, are set forth below.
<TABLE>
<CAPTION>
PERCENTAGE
OF
PLACE OF SECURITIES
COMPANY INCORPORATION OWNED*
------- ------------- -----------
<S> <C> <C>
Federal Insurance Company.................................. Indiana 100%
Vigilant Insurance Company............................ New York 100
Chubb Insurance Company of Australia, Limited.... Australia 100
Pacific Indemnity Company............................. California 100
Texas Pacific Indemnity Company.................. Texas 100
Northwestern Pacific Indemnity Company........... Oregon 100
Great Northern Insurance Company...................... Minnesota 100
Chubb Insurance Company of New Jersey................. New Jersey 100
Chubb Custom Insurance Company........................ Delaware 100
Chubb National Insurance Company...................... Indiana 100
CC Canada Holdings Ltd................................ Canada 100
Chubb Insurance Company of Canada................ Canada 100
Chubb Insurance Company of Europe, S.A................ Belgium 100
Bellemead Development Corporation..................... Delaware 100
Chubb Atlantic Indemnity Ltd. ............................. Bermuda 100
Chubb Life Insurance Company of America.................... New Hampshire 100
The Colonial Life Insurance Company of America........ New Jersey 100
Chubb Sovereign Life Insurance Company................ California 100
Chubb America Service Corporation..................... New Hampshire 100
Chubb & Son Inc............................................ New York 100
Chubb Capital Corporation.................................. New Jersey 100
</TABLE>
- ---------------
* Includes directors' qualifying shares.
Certain other subsidiaries of the Corporation and its consolidated
subsidiaries have been omitted since, in the aggregate, they would not
constitute a significant subsidiary.
