<PAGE> 1
As Filed With the Securities and Exchange Commission on March 29, 1995
================================================================================
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, 1994
/ / 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 $6,733,379,250 as of March 6, 1995.
86,901,145
Number of shares of common stock outstanding as of March 6, 1995
DOCUMENTS INCORPORATED BY REFERENCE
Portions of The Chubb Corporation 1994 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
25, 1995 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 11,200 persons on December 31, 1994.
Revenues, income from operations before income tax and identifiable assets for
each industry segment for the three years ended December 31, 1994 are included
in Note (16) of the notes to consolidated financial statements incorporated by
reference from the Corporation's 1994 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, 1994 are included in Note (17) of the notes to consolidated
financial statements incorporated by reference from the Corporation's 1994
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), Chubb Indemnity Insurance Company (Chubb Indemnity),
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
---- ---------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1992........................ $3,983,239 $376,776 $1,117,509 $3,242,506
1993........................ 4,268,104 565,140 1,186,949 3,646,295
1994........................ 4,578,061 681,316 1,308,168 3,951,209
</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 16 of the
Corporation's 1994 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
1994, approximately 87% 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
2
<PAGE> 3
accounting for the largest amounts of direct premiums written were New York
with 14%, California with 12%, 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.
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 loss and expense 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>
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
1994......................... 3,951,209 3,776,283 67.0 32.5 99.5
----------- ----------- ---- ---- -----
Total for five years ended
December 31, 1994......... $16,871,937 $16,317,712 69.5% 33.7% 103.2%
=========== =========== ==== ==== =====
</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 65.8%, 33.9% and
99.7%, respectively, for the five years ended December 31, 1994.
The combined loss and expense ratios during the last five years for major
classes of the Group's business are incorporated by reference from page 16 of
the Corporation's 1994 Annual Report to Shareholders.
Another frequently used measurement in the property and casualty insurance
industry is the ratio of statutory net premiums written to policyholders'
surplus. At December 31, 1994 and 1993, such ratio for the Group was 2.11 and
1.97, respectively.
Producing and Servicing of Business
In the United States and Canada, the Group is represented by approximately
3,300 independent agents and accepts business on a regular basis from an
estimated 400 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 6 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
3
<PAGE> 4
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
reduces the risks relating to currency fluctuations by maintaining investments
in those foreign currencies in which the Group transacts business, with
characteristics similar to the liabilities in those currencies. The net asset
or liability exposure to the various foreign currencies is regularly
reviewed.
Business for the Group is also produced through participation in a number
of underwriting pools and syndicates including, among others, Associated
Aviation Underwriters, Industrial Risk Insurers, London Accident Reinsurance
Group, American Disability Reinsurance Underwriters Syndicate, 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 and other services.
Reinsurance
In accordance with the normal practice of the insurance industry, the Group
assumes and cedes reinsurance with other insurers or reinsurers. These
reinsurance arrangements provide greater diversification of business and
minimize the Group's maximum net loss arising from large risks or from hazards
of 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, which is rated A++ by
A.M. Best. Additional information related to the Group's ceded reinsurance with
the subsidiary of the Sun Group is included in Note (12) of the notes to
consolidated financial statements incorporated by reference from the
Corporation's 1994 Annual Report to Shareholders. Most of the Group's remaining
treaty reinsurance arrangements consist of excess of loss and catastrophe
contracts with other insurers or reinsurers which protect against a specified
part or all of certain types of losses over stipulated amounts arising from any
one occurrence or event. In certain circumstances, reinsurance is also effected
by negotiation on individual risks. The amount of each risk retained by the
Group is subject to maximum limits which vary by line of business and type of
coverage. Retention limits are continually reviewed and are revised periodically
as the Group's capacity to underwrite risks changes. 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 catastrophe reinsurance market suffered large losses in recent years,
particularly in 1992. As a result, the catastrophe reinsurance market's capacity
was substantially reduced in 1993 and the cost of available coverage rose
significantly. In response, effective May 1, 1993, the Group changed its
principal catastrophe reinsurance coverage for individual catastrophic events
from approximately 87% of losses between $40 million and $160 million to
approximately 40% of losses between $85 million and $210 million. Effective May
1, 1994, the Group increased its coverage to approximately 50% of losses between
$85 million and $290 million. The effect of the coverage changes on the Group's
future results of operations will depend on the severity of future catastrophic
events.
The severity of recent catastrophes, particularly Hurricane Andrew in 1992
and the California earthquake in 1994, has demonstrated to insurers, including
the Group, that most 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
4
<PAGE> 5
assesses its concentration of underwriting exposures in catastrophe prone
areas and develops strategies to manage its exposure to catastrophic events.
Unpaid Claims and Claim Adjustment Expenses and Related Amounts Recoverable
from Reinsurers
Insurance companies are required to establish a liability in their accounts
for the ultimate costs (including claim adjustment expenses) of claims which
have been reported but not settled and of claims which have been incurred but
not reported. Insurance companies are also required to report as assets the
portion of such liability that will be recovered from reinsurers.
The process of establishing the liability for unpaid claims and claim
adjustment expenses is an imprecise science subject to variables that are
influenced by both internal and external factors. This is true because claim
settlements to be made in the future will be impacted by changing rates of
inflation (particularly medical cost inflation) and other economic conditions,
changing legislative, judicial and social environments and changes in the
Group's claim handling procedures. In many liability cases, significant periods
of time, ranging up to several years or more, may elapse between the occurrence
of an insured loss, the reporting of the loss to the Group and the settlement of
the loss. Approximately 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 estimation process is monitored through comparison with ultimate
settlements.
The Group's estimates of losses for unreported claims are principally
derived from analyses of historical patterns of the development of paid and
reported losses by accident year for each class of business. This process relies
on the basic assumption that past experience, adjusted for the effects of
current developments and likely trends, is an appropriate basis for predicting
future 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 where judgment indicates such
action is appropriate.
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, 1994,
1993 and 1992.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------
1994 1993 1992
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Net liability, beginning of year....................... $6,450.0 $5,267.6 $4,743.9
-------- -------- --------
Net incurred claim and claim adjustment expenses
Provision for claims occurring in the current year... 2,549.1 2,214.3 2,125.7
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....................................... (29.7) (10.2) (27.6)
-------- -------- --------
2,519.4 2,879.1 2,098.1
-------- -------- --------
Net payments for claims occurring in
Current year......................................... 764.5 656.8 643.2
Prior years.......................................... 1,272.0 1,039.9 931.2
-------- -------- --------
2,036.5 1,696.7 1,574.4
-------- -------- --------
Net liability, end of year............................. 6,932.9 6,450.0 5,267.6
Reinsurance recoverable, end of year................... 1,980.3 1,785.4 1,953.3
-------- -------- --------
Gross liability, end of year........................... $8,913.2 $8,235.4 $7,220.9
======== ======== ========
</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. 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.
In 1994, the estimated liability for unpaid claims and claim adjustment
expenses, net of reinsurance recoverable, as established at the previous
year-end was redundant by $29.7 million. This compares with unfavorable
development of $664.8 million during 1993 and favorable development of $27.6
million during 1992. Such redundancies and deficiency were reflected in the
Group's operating results in these respective years. Excluding the $675 million
increase in unpaid claims related to the Fibreboard settlement, 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 claims and claim adjustment expenses relating to asbestos and toxic
waste claims.
Unpaid claims and claim adjustment expenses, net of reinsurance
recoverable, increased 7% in 1994, after increases of 22% and 11% in 1993 and
1992, respectively. The significant increase in 1993 was primarily due to the
$675 million increase related to the Fibreboard settlement. Excluding this $675
million, unpaid claims and claim adjustment expenses increased by 10% in 1993.
Substantial reserve growth has occurred each year in those liability coverages,
primarily excess liability and executive protection, that are characterized by
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 1994 was approximately 9% higher than the
number at year-end 1993, due in part to a shift in the Group's book of business
toward one with more frequent claims.
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 26.
6
<PAGE> 7
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, 1994, 1993 and 1992. Reinsurance recoveries related to asbestos and
toxic waste claims are not significant.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
-------- -------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Net liability, beginning of year............................. $1,432.9 $ 435.4 $370.6
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(a)................. -- 300.0 --
Other(b)................................................... 115.2 100.7 119.9
Net payments for claims...................................... 257.8 78.2 55.1
-------- -------- ------
Net liability, end of year(c)................................ $1,290.3 $1,432.9 $435.4
======== ======== ======
</TABLE>
---------------
(a) Prior to the Fibreboard settlement in 1993, such reserves were not
classified as specific reserves for asbestos claims since it was
management's belief that doing so would increase the demands of
plaintiffs' attorneys. The $300 million of IBNR reserves were provided
as follows: $40 million in 1992, $160 million in 1991, $50 million in
1990, $25 million in 1989 and $25 million in 1988.
(b) Includes $35.1 million, $33.0 million and $76.5 million in 1994, 1993
and 1992, respectively, related to Fibreboard.
(c) Includes $1,049.4 million, $1,218.5 million and $220.5 million at
December 31, 1994, 1993 and 1992, respectively, related to Fibreboard.
The 1992 amount, adjusted to include the $300 million of IBNR reserves
not classified as specific reserves for asbestos claims, was $520.5
million.
There were approximately 3,400 asbestos claims outstanding at December
31, 1994, 1993 and 1992. In 1994, approximately 1,800 claims were opened and the
same number were closed. In 1993, approximately 1,000 claims were opened and the
same number were closed. In 1992, approximately 1,500 claims were opened while
2,700 were closed. Generally, an asbestos claim is established for each lawsuit
against an insured where potential liability has been determined to exist under
a policy issued by a member of the Group. However, when multiple insurers
respond to one or more lawsuits involving an insured and a member of the Group
is not the principal insurer in directing the litigation, generally, all
asbestos litigation involving that insured is counted as one claim. Therefore,
a counted claim can have from one to thousands of claimants. As a result,
management does not believe the above claim count data is meaningful for
analysis purposes. Indemnity payments per claim have varied over time due
primarily to wide variations in insureds, policy terms and types of claims.
Management cannot predict whether indemnity payments per claim will increase,
decrease or remain the same.
There were approximately 600 toxic waste claims outstanding at December 31,
1994, 1993 and 1992. Approximately 300 claims were opened in 1994, 1993 and
1992. There were approximately 300 claims closed in 1994 and 1993 and 200 claims
closed in 1992. Generally, a toxic waste claim is established for each lawsuit,
or alleged equivalent, against an insured where potential liability has been
determined to exist under a policy issued by a member of the Group. Because
indemnity payments to date for toxic waste claims have not been significant in
the aggregate and have varied from claim to claim, management cannot determine
whether past claims experience will prove to be representative of future claims
experience.
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 cost of this reinsurance was $173.5 million. Since the
7
<PAGE> 8
effective date of this agreement, the Group has paid an aggregate of $259.4
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 nine years ago.
The reinsurance agreement includes a commutation provision under which the
Group has an option to reassume the remaining liability of the reinsurer as of
December 31, 1995 and receive payment at that time of an amount determined by a
formula based on experience under the agreement. In 1993, as a result of the
favorable loss experience, the medical malpractice gross liability for unpaid
claims and claim adjustment expenses and the related reinsurance recoverable
under this agreement were each reduced by approximately $125 million. At the
same time, the Group announced its intention to exercise the commutation option
under the agreement which will result in a payment by the reinsurer to the Group
of approximately $190 million at year-end 1995 and a concurrent reduction in
reinsurance recoverable from the reinsurer of approximately $65 million. The
difference of $125 million represents a return premium to the Group and was
recognized as such in 1993.
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 1994. The top line of the
table shows the estimated liability for unpaid claims and claim adjustment
expenses recorded at the balance sheet date for each of the indicated years.
This liability represents the estimated amount of losses and loss adjustment
expenses for claims arising in all prior years that are unpaid at the balance
sheet date, including losses that had been incurred but not yet reported to the
Group.
The upper section of the table shows the reestimated amount of the
previously recorded net liability based on experience as of the end of each
succeeding year. The estimate is increased or decreased as more information
becomes known about the frequency and severity of claims for each individual
year. The increase or decrease is reflected in the current year's operating
results. The "cumulative deficiency (redundancy)" as shown in the table
represents the aggregate change in the reserve estimates from the original
balance sheet dates through December 31, 1994. 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, 1984, such as that related to the Fibreboard settlement, would be included
in the cumulative deficiency amount for each year in the period 1984 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 1984 through 1992 relates to additional provisions for asbestos and toxic
waste claims, particularly the Fibreboard settlement. The cumulative
deficiencies in the 1984 and 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 1984 column, as of December 31, 1994 the Group had paid
$2,210.6 million of the currently estimated $3,569.3 million of claims and claim
adjustment expenses that were unpaid at the end of 1984; thus, an estimated
$1,358.7 million of losses incurred through 1984 remain unpaid as of December
31, 1994, most of which relates to the Fibreboard settlement.
8
<PAGE> 9
ANALYSIS OF CLAIM AND CLAIM ADJUSTMENT EXPENSE DEVELOPMENT
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------------------------------
YEAR ENDED 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Liability for Unpaid Claims
and Claim Adjustment Expenses.. $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 $6,932.9
Net Liability Reestimated as of:
One year later................ 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 6,420.3
Two years later............... 1,660.6 1,989.3 2,313.9 2,835.9 3,336.0 3,854.2 4,244.7 5,368.5 5,904.1
Three years later............. 1,817.6 2,108.5 2,433.2 2,831.0 3,359.8 3,839.8 4,933.0 5,336.5
Four years later.............. 1,901.4 2,231.2 2,493.3 2,891.7 3,385.1 4,567.4 4,941.7
Five years later.............. 2,005.6 2,353.4 2,585.8 2,961.0 4,203.9 4,602.5
Six years later............... 2,093.6 2,433.5 2,687.2 3,897.2 4,265.2
Seven years later............. 2,176.6 2,569.0 3,745.2 3,993.7
Eight years later............. 2,322.5 3,673.4 3,865.7
Nine years later.............. 3,441.6 3,797.5
Ten years later............... 3,569.3
Cumulative Net Deficiency
(Redundancy)................... 2,262.4 2,195.3 1,724.4 1,175.1 890.9 722.4 640.6 592.6 636.5 (29.7)
Cumulative Net Deficiency
Related to Asbestos and Toxic
Waste Claims.................. 1,774.9 1,758.0 1,729.6 1,663.6 1,572.6 1,443.6 1,298.6 1,050.8 890.9 115.2
Cumulative Amount of
Net Liability Paid as of:
One year later................ 585.7 658.4 651.3 694.7 761.6 880.4 919.1 931.2 1,039.9 1,272.0
Two years later............... 941.1 1,058.1 1,061.6 1,108.3 1,226.3 1,383.9 1,407.2 1,479.9 1,858.5
Three years later............. 1,207.0 1,356.7 1,362.9 1,419.1 1,555.1 1,715.9 1,808.7 2,083.0
Four years later.............. 1,397.3 1,568.5 1,595.7 1,651.6 1,778.8 1,958.6 2,292.0
Five years later.............. 1,544.1 1,730.0 1,775.3 1,818.2 1,966.1 2,346.9
Six years later............... 1,646.7 1,867.6 1,907.1 1,961.9 2,307.9
Seven years later............. 1,756.4 1,971.4 2,032.9 2,281.0
Eight years later............. 1,841.8 2,085.5 2,333.6
Nine years later.............. 1,937.1 2,378.5
Ten years later............... 2,210.6
Gross Liability, End of Year.... $7,220.9 $8,235.4 $8,913.2
Reinsurance Recoverable......... 1,953.3 1,785.4 1,980.3
-------- -------- --------
Net Liability, End of Year...... $5,267.6 $6,450.0 $6,932.9
======== ======== ========
Reestimated Gross Liability..... $7,817.2 $8,273.6
Reestimated Reinsurance
Recoverable................... 1,913.1 1,853.3
-------- --------
Reestimated Net Liability....... $5,904.1 $6,420.3
======== ========
Cumulative Gross Deficiency..... $ 596.3 $ 38.2
======== ========
</TABLE>
---------------
The cumulative deficiencies for the years 1984 through 1992 include the effect
of the $675 million increase in claims and claim adjustment expenses related to
the Fibreboard settlement.
9
<PAGE> 10
Members of the Group are required to file annual statements with insurance
regulatory authorities prepared on an accounting basis prescribed or permitted
by such authorities (statutory basis). The differences between the liability for
unpaid claims and claim adjustment expenses, net of reinsurance recoverable,
reported in the accompanying consolidated financial statements in accordance
with generally accepted accounting principles (GAAP) and that reported in the
annual statutory statements of the U.S. subsidiaries are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1994 1993
-------- --------
(IN MILLIONS)
<S> <C> <C>
Net liability reported on a statutory basis -- U.S. subsidiaries............. $6,661.0 $6,234.4
Additions (reductions):
Unpaid claims and claim adjustment expenses of foreign subsidiaries........ 375.8 305.5
Medical malpractice stop loss reinsurance and other reserve differences.... (103.9) (89.9)
-------- --------
Net liability reported on a GAAP basis....................................... $6,932.9 $6,450.0
======== ========
</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 comprised 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 1994, the Group invested new cash in taxable bonds and, to a lesser
extent, tax-exempt bonds while reducing its equity security portfolio. In 1993,
the Group invested new cash primarily in tax-exempt bonds and reduced its
taxable bond portfolio. In each year the Group tried to achieve the appropriate
mix in its portfolio to balance both investment and tax strategies. At December
31, 1994, 71% of the Group's fixed maturity portfolio was invested in tax-exempt
bonds compared with 75% at the previous year-end.
In 1993 and again in 1994, the Group increased its short term investments
so that funds would be readily available to pay amounts related to the
Fibreboard settlement. Such levels of liquidity will be somewhat lower in 1995
as the payout period of Fibreboard related amounts has been extended.
The investment results of the Group for each of the past three years are
shown in the following table.
<TABLE>
<CAPTION>
AVERAGE PERCENT EARNED
INVESTED INVESTMENT -----------------------
YEAR ASSETS(a) INCOME(b) BEFORE TAX AFTER TAX
---- ---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1992............................ $7,427,017 $490,183 6.6% 5.7%
1993............................ 8,085,302 529,591 6.6 5.6
1994............................ 8,715,877 560,481 6.4 5.4
</TABLE>
---------------
(a) Average of amounts at beginning and end of year with fixed maturity
securities at amortized cost and equity securities at market value.
(b) Investment income after deduction of investment expenses, but before
applicable income tax, excluding income from rental of real estate and
fixed assets.
10
w
<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, Chubb National and Chubb Indemnity. 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.
Chubb & Son Inc. also acts as the manager for the United States branch of
an unaffiliated South Korean insurance company, Samsung Fire & Marine Insurance
Company, Ltd.
LIFE AND HEALTH INSURANCE GROUP
The Life and Health Insurance Group (Life Group) includes Chubb Life
Insurance Company of America (Chubb Life), its wholly-owned subsidiaries, The
Colonial Life Insurance Company of America (Colonial) and Chubb Sovereign Life
Insurance Company (Sovereign), and ChubbHealth, Inc. (ChubbHealth), a joint
venture with Healthsource, Inc.
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. In addition, managed care services are provided
through ChubbHealth, a health maintenance organization (HMO) operating in the
New York City metropolitan area. 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 of the United States, the District of
Columbia, Puerto Rico, Guam and the Virgin Islands. Personal life and health
insurance is marketed primarily through approximately 1,600 personal producing
general agents and 20,000 brokers. Group life and traditional health insurance
is marketed through approximately 9,000 brokers and managed care products are
marketed primarily through approximately 250 brokers in the New York City
metropolitan area.
The executive, accounting, actuarial and administrative activities of the
Life Group are located at the Chubb Life headquarters in Concord, New Hampshire.
The group insurance operations are mainly located in Parsippany, New Jersey. The
personal insurance operations are in Concord, Santa Barbara, California and
Chattanooga, Tennessee. ChubbHealth's network management and medical review
activities are located in New York, New York.
11
<PAGE> 12
The following tables present highlights of the Life Group.
LIFE INSURANCE IN-FORCE*
<TABLE>
<CAPTION>
PERSONAL
----------------------------------------
NON-PARTICIPATING PARTICIPATING GROUP TOTAL
-------------------- ----------------- ------------------- --------------------
YEAR AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---- ----------- ------- ------- ------- ---------- ------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992........ $39,950,972 86.0% $88,001 .2% $6,415,545 13.8% $46,454,518 100%
1993........ 47,740,633 88.0 81,278 .1 6,460,954 11.9 54,282,865 100
1994........ 55,933,398 90.7 77,990 .1 5,688,639 9.2 61,700,027 100
</TABLE>
---------------
* Before deduction for reinsurance ceded.
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
---- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
1994.... 248,850 29.8 19,426 2.3 3,670 .4 44,301 5.3 520,046 62.2
</TABLE>
REVENUES, ASSETS AND CAPITAL AND SURPLUS
<TABLE>
<CAPTION>
TOTAL
PREMIUMS GROSS CAPITAL
AND POLICY INVESTMENT AND
YEAR CHARGES INCOME ASSETS SURPLUS
---- ---------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1992..................................... $689,173 $192,748 $3,150,630 $736,801
1993..................................... 801,236 205,891 3,529,802 758,419
1994..................................... 836,293 208,745 3,760,079 731,810
</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
primarily comprised of mortgage-backed securities and corporate bonds. The Life
Group invests predominantly in investment grade current coupon fixed-income
securities with stable cash flows and maturities which are consistent with life
insurance liability characteristics. 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>
AVERAGE
INVESTED INVESTMENT PERCENT
YEAR ASSETS(a) INCOME(b) EARNED
---- --------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
1992................................ $2,136,161 $189,500 8.9%
1993................................ 2,341,028 202,771 8.7
1994................................ 2,544,945 205,451 8.1
</TABLE>
---------------
(a) Average of amounts at beginning and end of year with fixed maturity
securities at amortized cost and equity securities at market value.
(b) Investment income after deduction of investment expenses, but before
applicable income tax, excluding income from real estate.
Reinsurance
The companies in the Life Group, in accordance with common industry
practice, reinsure portions of the life insurance risks they underwrite with
12
<PAGE> 13
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. 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 1994 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 centered 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 4,037,000 square feet of office and industrial
space, of which 91% is leased. The Real Estate Group has varying interests in an
additional 6,373,000 square feet of office and industrial space which is 94%
leased.
Residential development activities of the Real Estate Group are primarily
in central Florida and northern New Jersey.
The Real Estate Group currently has undeveloped land holdings of
approximately 4,450 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
13
<PAGE> 14
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.
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.
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.
In December 1993, the National Association of Insurance Commissioners
adopted a risk-based capital formula for property and casualty insurance
companies. This formula is used by state regulatory authorities to identify
insurance companies which may be undercapitalized and which merit further
regulatory attention. The formula prescribes a series of risk measurements to
determine a minimum capital amount for an insurance company, based on the
profile of the individual company. The ratio of a company's actual
policyholders' surplus to its minimum capital requirement will determine whether
any state regulatory action is required. The risk-based capital requirement is
applicable to property and casualty insurance companies for the first time as of
year-end 1994. Each member of the Group has more than sufficient capital at
December 31, 1994 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
14
<PAGE> 15
assumptions, by the willingness of insurance regulators to approve changes in
those rates which they control and by such other matters as underwriting
selectivity and expense control.
The property and casualty insurance industry is highly competitive both as
to price and service. Members of the Group compete not only with other stock
companies but also with mutual companies, other underwriting organizations and
alternative risk sharing mechanisms. Some competitors obtain their business at a
lower cost through the use of salaried personnel rather than independent agents
and brokers. Rates are not uniform for all insurers and vary according to the
types of insurers and methods of operation. The Group competes for business not
only on the basis of price, but also on the basis of availability of coverage
desired by customers and quality of service, including claim adjustment service.
The Group's products and services are generally designed to serve specific
customer groups or needs and to offer a degree of customization that is of value
to the insured.
There are 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 1993 net premiums written.
The relatively large size and underwriting capacity of the Group provide
opportunities not available to smaller companies.
The property and casualty insurance industry 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 1994, particularly in the commercial classes. In 1993, property related
business experienced some rate firming in the wake of the unprecedented
catastrophes of 1992; such prices remained stable in 1994 despite significant
catastrophe losses early in the year. Price increases in casualty classes
continue to be difficult to achieve. The Group continues to be selective in the
writing of new business and to reinforce the sound relationships with customers
who appreciate the stability, expertise and added value the Group provides. In
the personal lines, the regulatory climate for obtaining rate increases
continues to be difficult, particularly in the automobile class.
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 1994, such assessments to
the members of the Group amounted to approximately $6 million. The amount of
future assessments cannot be reasonably estimated.
State insurance regulation requires insurers to participate in assigned
risk plans, reinsurance facilities and joint underwriting associations, which
are mechanisms that generally provide 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.
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.
15
<PAGE> 16
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,
1994 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 indemnity products with comprehensive benefits, and a full line of
ancillary products including group dental, life and long term disability. The
Life Group has accelerated its involvement in managed health care through the
development of ChubbHealth.
Members of the Life Group also participate in insolvency funds. In 1994,
insolvency fund assessments to the members of the Life Group amounted to
approximately $2 million.
There are approximately 1,800 legal reserve life insurance companies in the
United States. According to the National Underwriter, a trade publication, as of
January 1, 1994, Chubb Life, Sovereign and Colonial ranked 63rd, 149th and
168th, 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 tort
reform, toxic waste removal and liability measures, health care reform
initiatives, containment of medical care costs, limitations on health insurance
premiums, employee benefits regulation, automobile safety regulation, financial
services deregulation including the removal of barriers preventing banks from
engaging in the insurance business, the taxation of insurance companies and the
tax treatment of insurance products.
Enacted and contemplated health care reform on both a national and state
level are reshaping the health insurance industry. Although federal legislation
on health insurance did not pass Congress in 1994, the Clinton Administration
and certain members of Congress may pursue some form of health care reform.
Significant changes, if they occur, 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.
Legislative and judicial developments pertaining to asbestos and toxic
waste exposures are discussed in Item 7 of this report on pages 23 through 26.
In 1988, voters in California approved Ballot Proposition 103, an insurance
reform initiative, which is discussed in Item 7 of this report on pages 22 and
23.
In 1990, New Jersey adopted legislation imposing controls over automobile
insurance risk selection, pricing, coverage and termination. The New Jersey
16
<PAGE> 17
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. During its two year existence, the MTF generated a deficit of
approximately $1.3 billion which was required to be allocated to automobile
insurers, including members of the Group, based on market share. In June 1994,
legislation was enacted which limited the liability of automobile insurers for
the MTF deficit to $436 million. The Group's share of that amount is
approximately $5 million which was satisfied by the combination of a payment
made in 1994 and a credit for a payment made in 1993 under a previous
agreement entered into with the Insurance Commissioner.
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 and challenges on additional provisions
are pending. Approximately 80% of the Life Group's group health business is in
the New York and New Jersey traditional indemnity markets. In response to the
changes in the traditional indemnity markets, the Life Group has taken a number
of actions, including redesigning products and restructuring rates, as well as
accelerating its involvement in managed health care.
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 1994 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, 1994.
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<PAGE> 18
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
YEAR OF
AGE(a) ELECTION(b)
------ -----------
<S> <C> <C>
Dean R. O'Hare, Chairman and President of the Corporation................... 52 1972
Percy Chubb, III, Vice Chairman of the Corporation.......................... 60 1971
Randell G. Craig, Executive Vice President of Chubb Life.................... 49 1994
Robert P. Crawford, Jr., Executive Vice President of the Corporation........ 53 1994
John J. Degnan, Senior Vice President of the Corporation.................... 50 1994
Gail E. Devlin, Senior Vice President of the Corporation.................... 56 1981
Edward Dunlop, Senior Vice President of the Corporation..................... 54 1995
David S. Fowler, Senior Vice President of the Corporation................... 49 1989
Henry G. Gulick, Vice President and Secretary of the Corporation............ 51 1975
Brian W. Nocco, Senior Vice President of the Corporation.................... 43 1994
Donn H. Norton, Executive Vice President of the Corporation................. 53 1985
Michael O'Reilly, Senior Vice President of the Corporation.................. 51 1976
Robert Rusis, Senior Vice President and General Counsel of the Corporation.. 61 1990
Henry B. Schram, Senior Vice President of the Corporation................... 48 1985
Theresa M. Stone, Executive Vice President of the Corporation............... 50 1990
George T. Van Gilder, Senior Vice President of the Corporation.............. 51 1994
</TABLE>
---------------
(a) Ages listed above are as of April 25, 1995.
(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, Brian W. Nocco 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. Mr. Nocco,
who joined the Corporation in 1994, was previously Treasurer of Continental Bank
Corp. Ms. Stone, who joined the Corporation in 1990, was previously a principal
with Morgan Stanley & Co. Incorporated.
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<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 1994 Annual Report to
Shareholders, page 72.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended December 31, 1994 are
incorporated by reference from the Corporation's 1994 Annual Report to
Shareholders, pages 44 and 45.
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 1994 Annual Report to Shareholders, pages
15, 16 and 46 through 67.
Net income amounted to $528 million in 1994 compared with $324 million in
1993 and $617 million in 1992. Net income in 1993 reflected a net charge of $357
million after taxes related to an agreement for the settlement of
asbestos-related litigation as well as the Corporation's intention to exercise
its option to commute an unrelated existing medical malpractice reinsurance
agreement. Net income in 1993 also reflected 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 $41 million,
$152 million and $124 million in 1994, 1993 and 1992, 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 higher in 1994 compared with
1993; such 1993 income was significantly lower than that in 1992. Results in
1993 were adversely affected by 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 $467 million in 1994 compared
with $118 million in 1993 and $407 million in 1992. 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. Earnings in 1994 were adversely
affected by higher catastrophe losses, resulting from the earthquake in
California and the winter storms in the eastern and midwestern parts of the
United States in the first quarter. Earnings in 1994 benefited from an increase
in investment income compared with the prior year. Results for 1993 benefited
from lower catastrophe losses and an increase in investment income compared with
1992. Earnings in 1992 were adversely affected by substantial catastrophe
losses, including those from Hurricane Andrew. Catastrophe losses were $169
million in 1994 compared with $89 million in 1993 and $175 million in 1992. The
1992 amount was net of recoveries under catastrophe reinsurance contracts of
$106 million relating to Hurricane Andrew. There were no recoveries in 1994 and
1993 under such reinsurance contracts.
Net premiums written amounted to $4.0 billion in 1994. This represented an
increase of 12% compared with 1993, after excluding the $125 million return
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<PAGE> 20
premium from the 1993 amount. Net premiums written in 1993, excluding
the $125 million return premium, were 9% higher than 1992. Personal coverages
accounted for $814 million or 21% of 1994 premiums written, standard commercial
coverages for $1,338 million or 34%, specialty commercial coverages for $1,476
million or 37% and reinsurance assumed for $323 million or 8%. The marketplace
continued to be competitive, particularly in the commercial classes. Price
increases in the casualty classes have been difficult to achieve for several
years. Property related prices remained stable in 1994 despite the significant
catastrophe losses early in the year. Such prices had experienced some firming
in 1993 in the wake of the unprecedented catastrophes of 1992. Premium growth
in 1994 and 1993 was due primarily to the selective writing of new business,
improved renewal retention of customers who appreciate the stability, expertise
and added value we provide, and exposure growth on existing business. A
significant portion of premium growth in both years was achieved outside the
United States, from both our expanding foreign branch network and our increased
participation in the business of the Sun Alliance Group plc.
The combined loss and expense ratio, the common measure of underwriting
profitability, was 99.5% in 1994 compared with 114.8% in 1993 and 101.1% in
1992. Underwriting results were extremely unprofitable in 1993 due to the
adverse effect of the $675 million charge. 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 67.0% in 1994 compared with 82.5% in 1993 and 66.7% in
1992. Excluding the effects of the $675 million charge and the $125 million
return premium, the loss ratio was 65.5% in 1993. The loss ratios continue to
reflect the favorable experience resulting from the consistent application of
our underwriting standards. Losses from catastrophes represented 4.5, 2.5 and
5.6 percentage points of the loss ratio in 1994, 1993 and 1992, respectively.
Our expense ratio was 32.5% in 1994 compared with 32.3% in 1993 and 34.4%
in 1992. Excluding the effect of the $125 million return premium, the expense
ratio was 33.5% in 1993. The expense ratio benefited in 1994 and 1993 from
written premiums growing at a greater rate than overhead expenses. The expense
ratio in 1993 also benefited from lower commissions. Expenses were reduced by
contingent profit sharing accruals of $11 million in 1994 and $9 million in both
1993 and 1992 relating to the medical malpractice reinsurance agreement. There
will be no further profit sharing allowance under this agreement.
The catastrophe reinsurance market suffered large losses in recent years,
particularly in 1992. As a result, the catastrophe reinsurance market's capacity
was substantially reduced in 1993 and the cost of available coverage rose
significantly. We responded by increasing the initial retention level for
individual catastrophe losses from $40 million to $85 million. We experienced
two significant catastrophe losses in 1994; however, there were no recoveries
from our catastrophe reinsurance coverage due to the higher retention level. The
effect of the higher retention on our future results of operations will depend
on the severity of future catastrophic events.
Personal Insurance
Premiums from personal insurance were virtually unchanged in 1994 compared
with a 2% increase in 1993. Our disciplined approach to pricing continues to
make it difficult to write new homeowners and other non-automobile business.
Personal automobile premiums have remained level over the past three years,
which was consistent with our plan to control our exposure in this class.
Our personal insurance business produced breakeven underwriting results in
1994 compared with an underwriting profit in 1993 and an underwriting loss in
1992. The combined loss and expense ratio was 100.3% in 1994 compared with 95.8%
in 1993 and 104.6% in 1992. Underwriting results in each of these years were
adversely affected by significant catastrophe losses in the homeowners class,
particularly the winter storms and, to a lesser extent, the California
earthquake in 1994 and Hurricane Andrew in 1992.
20
<PAGE> 21
Excluding the impact of catastrophes, homeowners results benefited in each
of the last three years from disciplined pricing and stable loss frequency and
severity. Catastrophe losses represented 19.6 percentage points of the loss
ratio for this class in 1994 compared with 13.4 percentage points in 1993 and
25.0 percentage points in 1992. Other personal coverages, which include
insurance for personal valuables and excess liability, were increasingly
profitable in 1993 and 1994. Personal excess liability results improved in both
years due to favorable loss experience. Our automobile business was profitable
in 1994 and 1993 compared with breakeven results in 1992. Results improved
modestly in 1993 and 1994 due primarily to stable loss frequency and severity.
Automobile results were adversely affected each year by significant losses from
the mandated business that we are required by law to accept for those
individuals who cannot obtain coverage in the voluntary market.
Standard Commercial Insurance
Premiums from standard commercial insurance, which includes coverages for
multiple peril, casualty and workers' compensation, increased 11% in 1994
compared with 1993, after excluding the $125 million return premium discussed
below from the 1993 premium amounts. Premiums in 1993, excluding the $125
million return premium, were 6% higher than 1992. The competitive market has
continued to place significant pressure on prices. Premium growth in both years
was due primarily to a combination of the selective writing of new accounts,
improved renewal retention and exposure growth on existing business. Premium
growth in 1994 for multiple peril was particularly strong outside the United
States.
Medical malpractice business, which we stopped writing in 1984, was
reinsured effective year-end 1985. The reinsurance agreement includes a
commutation provision under which the property and casualty insurance
subsidiaries have an option to reassume the remaining liability of the reinsurer
as of December 31, 1995 and receive payment at that time of an amount determined
by a formula based on experience under the agreement. In 1993, as a result of
favorable loss experience, medical malpractice gross unpaid claims and the
related reinsurance recoverable under this agreement were each reduced. At the
same time, the Corporation announced its intention to exercise the commutation
option under the agreement, which will result in a payment by the reinsurer to
the property and casualty insurance subsidiaries of approximately $190 million
at year-end 1995 and a concurrent reduction in reinsurance recoverable from the
reinsurer of approximately $65 million. The difference of $125 million
represents a return premium to the property and casualty insurance subsidiaries
and was recognized as such in 1993.
Our standard commercial 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
107.6% in 1994 compared with 149.7% in 1993 and 105.7% in 1992. 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 in 1993 included the effects of the $675 million charge
and the $125 million return premium. Excluding the effects of these items,
casualty results deteriorated in 1993 and 1994 primarily due to a decrease in
the profitability of the excess liability component resulting from more
competitive prices. Excess liability has remained profitable due to favorable
loss experience in this class. In each of the past three years, casualty results
have been adversely affected to varying degrees 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 profitable in each of the last three years.
Multiple peril results were similarly unprofitable in each of the last
three years. The intensely competitive market for this business has resulted in
inadequate prices for these coverages. Results in the property component of this
business were adversely affected by significant catastrophe losses in 1994,
primarily from the earthquake in California, and in 1992, primarily from
Hurricane Andrew and the civil disorder in Los Angeles. Catastrophe losses
represented 8.4 percentage points of the loss ratio for this class for 1994
compared with 3.6 percentage points in 1993 and 10.1 percentage points in 1992.
21
<PAGE> 22
The liability component of this business was particularly unprofitable in 1993
due to an increased frequency and severity of losses.
Workers' compensation results improved substantially in 1994, but remained
unprofitable. Results in our voluntary business have benefited from rate
increases and the impact of medical cost containment and disability management
activities. Results in this class were aggravated in 1992 and 1993 by our share
of the 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 16% in 1994 compared
with 10% in 1993. Premium increases for our executive protection and financial
fidelity coverages were due primarily to new business opportunities and exposure
increases as significant competition has made price increases difficult to
achieve for most of these coverages. Our strategy of working closely with our
customers and our ability to differentiate our products have enabled us to renew
a large percentage of our business. We have been able to obtain price increases
in several of our smaller specialty classes.
The specialty commercial business produced substantial underwriting profits
in each of the past three years with combined loss and expense ratios of 91.7%
in 1994, 91.0% in 1993 and 90.5% in 1992. Our executive protection, financial
fidelity and surety results were highly profitable in each year due to favorable
loss experience. The non-fidelity portion of our financial institutions business
deteriorated in 1994 due in part to several large losses.
Marine results were unprofitable in 1994 compared with profitable results
in 1993 and 1992. The deterioration was mostly due to significant catastrophe
losses, resulting primarily from the earthquake in California. Results in our
smaller specialty classes improved in 1994, particularly outside the United
States. Results in these classes had deteriorated in 1993 due primarily to an
increased frequency of large losses.
Reinsurance Assumed
Premiums from reinsurance assumed, which is primarily treaty reinsurance
assumed from Sun Alliance, increased 37% in 1994 compared with 46% in 1993. The
growth in both years was primarily 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 were near breakeven in 1994 compared
with unprofitable results in 1993 and 1992. Results improved substantially in
each of the last two years. The combined loss and expense ratio was 100.2% in
1994 compared with 111.8% in 1993 and 126.9% in 1992. The improvement in 1994
was due to risk selection and rating measures taken as well as to favorable
weather conditions in the United Kingdom. Results in 1992 were adversely
affected by our share of the substantial mortgage indemnity insurance losses
experienced by Sun Alliance 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. 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.
Approximately 14% of the direct business of the Corporation's property and
casualty subsidiaries during the rollback period was written in California. 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.
Since the approval of Proposition 103, the California Insurance Department has
established regulations to implement its provisions. These regulations were
challenged in the California courts by numerous insurers.
22
<PAGE> 23
In August 1994, the California Supreme Court issued a decision upholding
rollback regulations issued by the California Insurance Commissioner which had
previously been ruled invalid by a lower court. These regulations limit the
allowable rate of return which an insurer could earn on California business for
the rollback period to a rate determined by the Insurance Commissioner and limit
the amount of surplus on which an insurer could earn profit during that period.
It is not clear what implications, if any, this decision will have on future
property and casualty insurance rates in California. A petition for review of
the California Supreme Court's decision has been denied by the United States
Supreme Court.
In November 1994, the property and casualty subsidiaries were ordered by
the Insurance Commissioner to refund premiums for the rollback period in the
amount of $86 million, plus interest of $53 million. The property and casualty
subsidiaries have notified the Insurance Department of their objection to the
rollback amount. Based on our analysis of the operating results of our property
and casualty subsidiaries in the State of California during the rollback period,
as well as the regulations governing Proposition 103 rollbacks, we have not
reflected the rollback amount in our financial statements. It is management's
belief that it is probable that the final resolution of this matter 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 1994, gross loss reserves totaled $8.9 billion compared
with $8.2 billion and $7.2 billion at year-end 1993 and 1992, respectively.
Reinsurance recoverable on such loss reserves was $2.0 billion at the end of
1994 compared with $1.8 billion and $2.0 billion at year-end 1993 and 1992,
respectively. Loss reserves, net of reinsurance recoverable, increased 7% in
1994, after increases of 22% and 11% in 1993 and 1992, 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. Loss and expense payments
related to this settlement aggregated $204 million in 1994. Substantial reserve
growth has occurred each year in those liability coverages, primarily excess
liability and executive protection, that are characterized by delayed loss
reporting and extended periods of settlement.
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, 1994
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
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<PAGE> 24
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, 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 this agreement has been
challenged, management is optimistic that the courts will approve the
settlement. The period of judicial review is now expected to extend at least
into 1996.
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, of which Pacific Indemnity had paid $132
million through December 31, 1994. A February 1995 amendment to the agreement
has extended for several years the period over which Pacific Indemnity will pay
its remaining obligation, plus interest, under the agreement. 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.
Prior to the settlement, the Corporation's property and casualty
subsidiaries 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
peripheral defendants, principally distributors, premises owners and
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<PAGE> 25
manufacturers that used asbestos in certain products. Generally, these insureds
are named defendants on a regional rather than a nationwide basis. We continue
to receive notices of new asbestos claims and new exposures on existing claims
as more peripheral parties are drawn into litigation to replace the now defunct
mines and bankrupt manufacturers. 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 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, which has
generated far more litigation than it has provided clean-up. The taxes
supporting Superfund will end in 1995. The new Congress is expected to address
Superfund reform during 1995. It is currently not possible to predict the
direction that any reforms may take or the effect that any changes may have on
the insurance industry. It is important to note that the Superfund law 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 primary 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. We have established case reserves and
reserves for costs of related litigation where sufficient information has been
developed to indicate the involvement of a specific insurance policy. In
addition, IBNR reserves have been established to cover additional exposures on
both known and unasserted claims. These reserves are continually reviewed and
updated. Loss reserve increases relating to asbestos and toxic waste claims were
$115 million in 1994, $1,076 million in 1993 and $120 million in 1992. Excluding
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. Further increases in
such reserves in 1995 and future years are possible as legal and factual issues
concerning these claims are clarified, although the amounts cannot be reasonably
estimated.
During 1994, we experienced overall favorable development of $30 million on
loss reserves established as of the previous year-end. This compares with
unfavorable development of $665 million in 1993 and favorable development of $28
million in 1992. Such redundancies and deficiency 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
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<PAGE> 26
favorable development of $10 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
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, 1994 were adequate to cover claims for
losses which had occurred, including both those known to us and those yet to be
reported. In establishing such reserves, management considers facts currently
known and the present state of the law and coverage litigation. However, given
the expansion of coverage and liability by the courts and the legislatures in
the past and the possibilities of similar interpretations in the future,
particularly as they relate to asbestos and toxic waste claims, as well as the
uncertainty in determining what scientific standards will be deemed acceptable
for measuring hazardous waste site clean-up, additional increases in loss
reserves may emerge which may adversely affect results in future periods. This
emergence cannot reasonably be estimated.
Investments and Liquidity
Investment income after taxes increased 4% in 1994 compared with 8% in
1993. Growth was primarily due to increases in invested assets, which reflected
strong cash flow from operations over the period. Such growth in 1994 was
tempered by the $538 million paid in December 1993 into an escrow account
related to the Fibreboard settlement. The effective tax rate on our investment
income was 15.3% in 1994 compared with 14.7% in 1993 and 14.3% in 1992. In 1994,
the effective tax rate increased due to holding a larger proportion of our
investment portfolio in taxable securities. 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 our investment
portfolio in tax-exempt securities.
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, cash receipts from operations, consisting
of insurance premiums and investment income, have provided more than sufficient
funds to pay losses, operating expenses and dividends to the Corporation.
Cash available for investment was approximately $725 million in 1994
compared with $480 million in 1993 and $655 million in 1992. The lower amount in
1993 was due to the $538 million paid in December 1993 into an escrow account.
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 1994, we invested new cash in taxable bonds and, to a lesser extent,
tax-exempt bonds while reducing our equity security portfolio. In 1993, we
invested new cash primarily in tax-exempt bonds and we reduced our taxable bond
portfolio. In each year we tried to achieve the appropriate mix in our portfolio
to balance both investment and tax strategies. In 1993 and again in 1994, we
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 85% of
these 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 between 8 and 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 have quality and maturity characteristics similar to our
domestic portfolio. We reduce the risks relating to currency fluctuations by
26
<PAGE> 27
maintaining investments in those foreign currencies in which we transact
business, with characteristics similar to the liabilities in those currencies.
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 1994 and 1993, such investments were at higher than normal
levels so that funds would be readily available to pay amounts related to the
Fibreboard settlement. Such levels of liquidity will be somewhat lower in 1995
as the payout period of Fibreboard related amounts has been extended. 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 $14 million in 1994
compared with $62 million in 1993 and $56 million in 1992. Premiums and policy
charges were $836 million in 1994 compared with $801 million in 1993 and $689
million in 1992.
Personal Insurance
Earnings from personal insurance were $33 million in 1994 compared with $37
million in 1993 and $34 million in 1992. The earnings fluctuations were
primarily due to changes in the spread between interest earned on our invested
assets and interest credited to policyholders on interest-sensitive products. As
the result of various adjustments, the tax rate on personal insurance earnings
was 30%, 26% and 18% in 1994, 1993 and 1992, respectively.
Premiums and policy charges amounted to $272 million in 1994 compared with
$240 million in 1993 and $214 million in 1992. New sales of personal insurance
as measured by annualized premiums were $97 million in 1994 compared with $88
million in 1993 and $71 million in 1992. Marketing initiatives conducted with
our property and casualty distribution system together with the increasing
popularity of variable universal life products continue to contribute to our
growth.
Group Insurance
Group insurance operations resulted in a loss of $19 million in 1994
compared with earnings of $25 million in 1993 and $22 million in 1992. Group
health rate levels, which had kept pace with medical costs during 1993 and 1992,
proved inadequate during 1994 in New York, which is our major market. Group life
and dental insurance, which are primarily marketed as ancillary products to
group health insurance, contributed modest earnings in each of the last three
years.
Premiums were $564 million in 1994 compared with $561 million in 1993 and
$475 million in 1992. New group sales as measured by annualized premiums were
$52 million in 1994 compared with $323 million in 1993 and $118 million in 1992.
Approximately 80% of our group health business is in the New York and New
Jersey traditional indemnity markets. 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 a result, several insurers reduced their market share in the
small group health segment in New York in 1993. We offered a competitive product
and thus substantially increased our sales in that market during 1993. The
growth in premium revenue in 1993 and the first six months of 1994 reflected the
effect of the significant increase in sales of new policies during the last
three quarters of 1993. Due to increased levels of competition in the small
group market in 1994 as well as our significant rate increases, many of the new
policies written in 1993, which became eligible for renewal beginning in April
1994, were not renewed. The decline in premium revenue in the last six months of
1994 was primarily due to this increase in non-renewals.
Given these changes in our marketplace and the continuation of the shift
away from traditional indemnity products to managed care alternatives, we
anticipate that we will experience a reduction of premiums in 1995.
27
<PAGE> 28
Group health insurance results deteriorated in 1994 due to significantly
higher claims than were anticipated when new rates were developed in 1993 and to
higher non-renewals. The higher claims resulted from the increased cost of
medical services and the increased utilization of those services. The increased
utilization was largely due to the attractiveness of traditional indemnity plans
to individuals and groups who are more likely to require and use medical
services. In response to these factors, we increased rates substantially during
1994.
We continue to 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. We have accelerated our efforts to lessen our dependence on
traditional indemnity medical premium. We are offering managed care products
through ChubbHealth, Inc., a health maintenance organization (HMO), which
commenced business in the New York City metropolitan area during the second
quarter of 1994.
Initial results of ChubbHealth have been encouraging. Our approach has been
to provide small business owners with managed care plans which have
comprehensive and flexible coverages and an excellent doctor and hospital
network.
We also continue to increase our emphasis on managed care outside New York
by offering preferred provider organizations which are networks of health care
providers that offer cost savings compared with traditional indemnity plans.
Enacted and contemplated health care reform on both a national and state
level are reshaping the health insurance industry. Although federal legislation
on health insurance did not pass Congress in 1994, the Clinton Administration
and certain members of Congress may pursue some form of health care reform.
Significant changes, if they occur, 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.
Investments and Liquidity
Gross investment income increased 1% in 1994 compared with 7% in 1993.
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 $140 million in 1994 compared with $225 million in 1993
and $120 million in 1992. The decrease in new cash in 1994 was due to the
reduced cash flows from group insurance operations. The increase in 1993 was due
to the significant increase in group health premiums and to new single premium
sales.
In 1994, new cash was invested primarily in mortgage-backed securities. In
1993, new cash was invested in mortgage-backed securities and corporate bonds.
We invest predominantly in investment grade current coupon fixed-income
securities with stable cash flows and maturities which are consistent with life
insurance liability characteristics. Approximately 95% are investment grade and
more than half are rated AAA. We maintain sufficient funds in short-term
securities to meet unusual needs for cash.
Mortgage-backed securities comprised 47% and 41% of the fixed maturity
portfolio of the life and health subsidiaries at December 31, 1994 and 1993,
respectively. Our mortgage-backed securities portfolio consists of government
agency pass-through securities, government agency collateralized mortgage
obligations (CMO's) and AAA rated non-agency CMO's backed by either government
agency collateral or single family home mortgages. The majority of the CMO's in
the portfolio are actively traded in liquid markets and market value information
is readily available from broker/dealers. The notion of impairment typically
associated with corporate bonds (default in paying principal) is less applicable
to CMO's. Other risks, most notably prepayment and extension risks, are
monitored regularly. Changes in prepayment patterns can either lengthen or
shorten the expected timing of the principal repayments and thus the average
life and the effective yield of the security. We primarily invest in those
classes of CMO instruments that are subject to less prepayment and extension
risk and are therefore less volatile than other CMO instruments.
28
<PAGE> 29
REAL ESTATE
Real estate operations resulted in a loss after taxes of $2 million in both
1994 and 1993 and income of $10 million in 1992. Results continue to be
adversely affected by progressively higher portions of interest being charged
directly to expense rather than being capitalized and by provisions for possible
uncollectible receivables related to mortgages. In addition, 1994 results were
adversely affected by higher interest rates. Results in 1993 were adversely
affected by a $3 million tax charge related to the federal corporate tax rate
increase. Revenues were $205 million in 1994 compared with $161 million in 1993
and $150 million in 1992. Revenue growth in 1994 was primarily due to higher
levels of rental income on owned properties.
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. Corporate restructurings and
downsizings have 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 continue to cause downward pressure on
the earnings of the real estate development industry.
In light of the current real estate market conditions, we have curtailed
our construction of new office buildings in recent years. We have focused on
completing and leasing newly constructed facilities and maintaining established
properties at high occupancy levels. We completed one new building in 1994 but
curtailed construction on two previously planned buildings. 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 1994, a total of 2,420,000 square feet was leased compared with 1,710,000
square feet in 1993 and 1,790,000 square feet in 1992. At December 31, 1994, we
owned or had interests in 10,840,000 square feet of office and industrial space.
Our vacancy rate was 7% at year-end 1994 compared with 10% at year-end 1993 and
14% at year-end 1992. The decreases in the vacancy rate during these years were
due to our ability to market a significant amount of the new space which became
available in 1991 when several multi-year projects were completed in a difficult
leasing market.
In certain markets, renewing leases in established buildings has been
difficult as newly constructed space is available nearby at similar rates. While
29
<PAGE> 30
we have experienced significant leasing activitiy over the past three 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 1995 a larger portion of interest costs will be
charged directly to expense as a result of 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.
We analyze both individual buildings and development sites on a continuing
basis. Estimates are made of both additional costs to be incurred to complete
development where necessary and the 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, which were 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. We continuously evaluate the ultimate collectibility of such
loans, of which no significant amounts are due in the near term, and establish
appropriate reserves. 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. The reserve for possible
uncollectible receivables was increased by charges against income of $29 million
in 1994 and $22 million in both 1993 and 1992, principally related to loans on
selected properties with operating income at levels which may not fully meet
debt service requirements. During 1994, such reserve was reduced by writedowns
aggregating $10 million related to specific loans that are uncollectible.
Management believes the reserve of $74 million at December 31, 1994 adequately
reflects the current condition of the portfolio based on current accounting
guidance. If conditions in the real estate market do not improve, however,
additional reserves may be required.
The Corporation will adopt Statement of Financial Accounting Standards
(SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, in the first
quarter of 1995. SFAS No. 114 establishes new criteria for measuring impairment
of a loan. The implementation of SFAS No. 114 will result in an increase to the
reserve for possible uncollectible receivables. However, the impact on the
Corporation's net income in 1995 will not be significant. This pronouncement is
discussed further in Note (1)(o) of the Notes to Consolidated Financial
Statements on page 53.
The fair value of these loans receivable is estimated through the use of
valuation techniques which consider current yield factors applied to 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 $354 million and the carrying
value of $395 million at December 31, 1994 is not expected to be realized as we
intend to hold the loan portfolio to maturity.
Our Florida residential development activities continued during 1994.
Construction of a 171 unit oceanfront high rise condominium project commenced
during 1994 with 114 units already under contract. Phased construction of a 214
unit mid-rise condominium project continued during 1994. At year-end, 58 units
were sold and 35 units were under contract.
30
<PAGE> 31
We have also begun development of residential projects in northern New
Jersey. Our first project is a 178 unit townhome project. At year-end, 45 units
were sold and 45 were under contract.
Real estate activities are funded with short-term credit instruments,
primarily commercial paper, and debt issued by Chubb Capital Corporation as well
as term loans and mortgages. The weighted average interest cost on short-term
credit instruments approximated 4.6% in 1994 compared with 3.3% in 1993 and 4.6%
in 1992. In 1994, the range of interest rates for term loans was 4.1% to 10.1%
and for mortgages the range was 5.0% to 11.9%.
We expect to refinance, under similar terms, most of the term loans and
mortgages which become due in 1995. Cash from operations combined with the
ability to utilize the Corporation's commercial paper facility will provide
sufficient funds for 1995.
CORPORATE
In February 1994, the Board of Directors authorized the repurchase of up to
5,000,000 shares of common stock. During 1994, the Corporation repurchased
approximately 1,000,000 shares in open-market transactions at a cost of $72
million.
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 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 unsecured and 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.
Chubb Capital also had outstanding $100 million of unsecured 8 5/8% notes,
the proceeds of which were loaned to our real estate subsidiaries. The notes
became due and were redeemed in January 1995. The $100 million loan to the real
estate subsidiaries from Chubb Capital was renewed.
In July 1994, the Corporation entered into a revolving credit agreement
with a group of banks that provides for unsecured borrowings of up to $300
million. The agreement replaced a similar agreement which was to terminate on
November 30, 1994. The new agreement terminates on July 15, 1997 at which time
any loans then outstanding become payable. There have been no borrowings under
these agreements.
In November 1994, the Corporation acquired Personal Lines Insurance
Brokerage, Inc. (PLI), a multi-state agency that specializes in personal lines
insurance products. PLI then acquired the personal lines business of Alexander &
Alexander Inc. PLI will operate as an independent agency and will continue to
place business with a number of insurance companies including the property and
casualty subsidiaries of the Corporation. The total of the cash and common stock
issued for these acquisitions was $32 million.
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. During 1994, the Corporation
further reduced its investment in Sun Alliance, with proceeds from the sales
amounting to approximately $53 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 and
other expenses not allocable to the operating subsidiaries are reflected in the
corporate segment. Corporate income after taxes was $8 million in 1994, $14
million in 1993 and $20 million in 1992.
31
<PAGE> 32
INVESTMENT GAINS AND LOSSES
Investment gains were realized by the Corporation and its insurance
subsidiaries in 1994, 1993 and 1992. Such gains before taxes consisted of the
following:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Equity securities............................................. $125 $ 60 $133
Fixed maturities.............................................. (62) 173 54
---- ---- ----
$ 63 $233 $187
==== ==== ====
</TABLE>
A restructuring of the equity security portfolio begun in 1992 resulted in
significant realized investment gains in 1992 and 1993. In 1994, a
redistribution of invested assets from equity securities to fixed maturities
resulted in significant realized investment gains. In addition, approximately
$30 million and $75 million of investment gains were realized in 1994 and 1992,
respectively, from the Corporation's partial sales of its investment in Sun
Alliance.
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. The higher gains
realized 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 income
related to the Fibreboard settlement.
Equity securities are reported in our financial statements at market value.
Fixed maturities which the Corporation and its insurance subsidiaries have
the ability and intent to hold to maturity are classified as held-to-maturity.
The remaining fixed maturities, which may be sold prior to maturity to support
our investment strategies, such as in response to changes in interest rates and
the yield curve or to maximize after-tax returns, are classified as
available-for-sale.
Effective January 1, 1994, the Corporation adopted SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities. SFAS No. 115 established
more stringent criteria for classifying fixed maturity securities as
held-to-maturity. Thus, upon adopting SFAS No. 115, the Corporation reclassified
$4.2 billion of fixed maturities as available-for-sale which were previously
classified as held-to-maturity. At December 31, 1994, 35% of our fixed maturity
portfolio was classified as held-to-maturity compared with 79% at year-ends 1993
and 1992.
SFAS No. 115 also requires that fixed maturities classified as
available-for-sale be carried at market value. Prior to 1994, these securities
were carried at the lower of the aggregate amortized cost or market value. At
December 31, 1994, fixed maturities classified as held-to-maturity were carried
at amortized cost while fixed maturities classified as available-for-sale were
carried at market value. At December 31, 1993 and 1992, all fixed maturities
were carried at amortized cost.
The unrealized appreciation or depreciation of equity securities and fixed
maturities carried at market value is reflected in a separate component of
shareholders' equity, net of applicable deferred income tax.
The unrealized market appreciation of those fixed maturities carried at
amortized cost was $13 million, $736 million and $523 million at December 31,
1994, 1993 and 1992, respectively. Such unrealized appreciation was not
reflected in the consolidated financial statements. The decrease in unrealized
market appreciation of fixed maturities in 1994 was due to rising interest
rates.
FEDERAL INCOME TAXES
The Omnibus Budget Reconciliation Act of 1993, enacted in August 1993,
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,
32
<PAGE> 33
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)
-------------
(IN MILLIONS)
<S> <C>
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 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 $6 million in 1992. There was no
similar benefit in 1993 or 1994 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.
CHANGES IN ACCOUNTING PRINCIPLES
In 1994, the Corporation adopted SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. In 1993, the Corporation adopted SFAS
No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions,
and SFAS No. 109, Accounting for Income Taxes. These pronouncements and their
effect on the consolidated financial statements are discussed in Note (2) of the
Notes to Consolidated Financial Statements on page 53.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of the Corporation at December 31, 1994
and 1993 and for each of the three years in the period ended December 31, 1994
and the Report of Independent Auditors thereon and the Corporation's unaudited
quarterly financial data for the two-year period ended December 31, 1994 are
incorporated by reference from the Corporation's 1994 Annual Report to
Shareholders, pages 46 through 69.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
<PAGE> 34
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 25, 1995, 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 25, 1995, pages 14 through 28
other than the Performance Graph and the Organization and Compensation Committee
Report appearing on pages 18 through 24.
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 25, 1995, 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 25, 1995, pages 28 through 30.
34
<PAGE> 35
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.
35
<PAGE> 36
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 3, 1995
By /s/ DEAN R. O'HARE
------------------------------
(DEAN R. O'HARE, CHAIRMAN,
PRESIDENT AND CHIEF
EXECUTIVE OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DEAN R. O'HARE Chairman, President, Chief March 3, 1995
--------------------------------------- Executive Officer and
(DEAN R. O'HARE) Director
/s/ JOHN C. BECK Director March 3, 1995
---------------------------------------
(JOHN C. BECK)
/s/ PERCY CHUBB, III Vice Chairman, Chief Financial March 3, 1995
--------------------------------------- Officer and Director
(PERCY CHUBB, III)
/s/ JOEL J. COHEN Director March 3, 1995
---------------------------------------
(JOEL J. COHEN)
/s/ HENRY U. HARDER Director March 3, 1995
---------------------------------------
(HENRY U. HARDER)
/s/ DAVID H. HOAG Director March 3, 1995
---------------------------------------
(DAVID H. HOAG)
/s/ ROBERT V. LINDSAY Director March 3, 1995
---------------------------------------
(ROBERT V. LINDSAY)
/s/ THOMAS C. MACAVOY Director March 3, 1995
---------------------------------------
(THOMAS C. MACAVOY)
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GERTRUDE G. MICHELSON Director March 3, 1995
---------------------------------------
(GERTRUDE G. MICHELSON)
/s/ ERNESTA G. PROCOPE Director March 3, 1995
-------------------------------------
(ERNESTA G. PROCOPE)
/s/ WARREN B. RUDMAN Director March 3, 1995
-------------------------------------
(WARREN B. RUDMAN)
/s/ DAVID G. SCHOLEY Director March 3, 1995
-------------------------------------
(DAVID G. SCHOLEY)
/s/ RAYMOND G.H. SEITZ Director March 3, 1995
-------------------------------------
(RAYMOND G.H. SEITZ)
/s/ LAWRENCE M. SMALL Director March 3, 1995
-------------------------------------
(LAWRENCE M. SMALL)
/s/ ROBERT G. STONE, JR. Director March 3, 1995
-------------------------------------
(ROBERT G. STONE, JR.)
/s/ RICHARD D. WOOD Director March 3, 1995
-------------------------------------
(RICHARD D. WOOD)
/s/ HENRY B. SCHRAM Senior Vice President and March 3, 1995
------------------------------------- Chief Accounting Officer
(HENRY B. SCHRAM)
</TABLE>
37
<PAGE> 38
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 68 --
Consolidated Balance Sheets at December 31, 1994 and 1993 47 --
Consolidated Statements of Income for the Years Ended
December 31, 1994, 1993 and 1992 46 --
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1994, 1993 and 1992 48 --
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1993 and 1992 49 --
Notes to Consolidated Financial Statements 50 --
Supplementary Information (unaudited)
Quarterly Financial Data 69 --
Schedules:
I -- Consolidated Summary of Investments -- Other
than Investments in Related Parties at
December 31, 1994 -- 40
II -- Condensed Financial Information of Registrant at
December 31, 1994 and 1993 and for the Years
Ended December 31, 1994, 1993 and 1992 -- 41
III -- Consolidated Supplementary Insurance Information
at and for the Years Ended December 31, 1994,
1993 and 1992 -- 44
IV -- Consolidated Reinsurance at and for the Years
Ended December 31, 1994, 1993 and 1992 -- 45
VI -- Consolidated Supplementary Property and Casualty
Insurance Information for the Years Ended
December 31, 1994, 1993 and 1992 -- 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, 1994, are hereby
incorporated by reference.
38
<PAGE> 39
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 24, 1995, included
in the 1994 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 24, 1995, 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 LLP
New York, New York
March 27, 1995
39
<PAGE> 40
THE CHUBB CORPORATION
SCHEDULE I
CONSOLIDATED SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
(IN THOUSANDS)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
AMOUNT
COST OR AT WHICH
AMORTIZED MARKET SHOWN IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
------------------ ----------- ----------- -------------
<S> <C> <C> <C>
Short term investments......................... $ 810,873 $ 810,873 $ 810,873
----------- ----------- -----------
Fixed maturities
Bonds
United States Government and government
agencies and authorities................ 2,408,917 2,300,070 2,321,006
States, municipalities and political
subdivisions............................ 5,620,097 5,654,720 5,626,195
Foreign................................... 981,049 945,390 945,373
Public utilities.......................... 163,320 160,945 160,400
All other corporate bonds................. 1,705,792 1,655,793 1,651,344
----------- ----------- -----------
Total bonds..................... 10,879,175 10,716,918 10,704,318
Redeemable preferred stocks.................. 18,027 18,388 18,388
----------- ----------- -----------
Total fixed maturities.......... 10,897,202 10,735,306 10,722,706
----------- ----------- -----------
Equity securities
Common stocks
Public utilities.......................... 10,140 10,667 10,667
Banks, trusts and insurance companies..... 76,933 89,780 89,780
Industrial, miscellaneous and other....... 509,659 529,526 529,526
----------- ----------- -----------
Total common stocks............. 596,732 629,973 629,973
Non-redeemable preferred stocks.............. 12,803 12,180 12,180
----------- ----------- -----------
Total equity securities......... 609,535 642,153 642,153
----------- ----------- -----------
Policy and mortgage loans...................... 202,679 202,679 202,679
----------- ----------- -----------
Total invested assets........... $12,520,289 $12,391,011 $12,378,411
=========== =========== ===========
</TABLE>
40
<PAGE> 41
THE CHUBB CORPORATION
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS -- PARENT COMPANY ONLY
(IN THOUSANDS)
DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Assets
Invested Assets
Short Term Investments..................................... $ 61,430 $ 62,805
Taxable Fixed Maturities -- Available-for-Sale
(1994 cost $289,319 and 1993 market $340,131)............ 275,373 342,534
Equity Securities (cost $42,817 and $19,682)............... 52,731 34,987
---------- ----------
TOTAL INVESTED ASSETS................................. 389,534 440,326
Cash.......................................................... 132 180
Investment in Consolidated Subsidiaries....................... 4,041,551 3,941,408
Other Assets.................................................. 149,900 117,563
---------- ----------
TOTAL ASSETS.......................................... $4,581,117 $4,499,477
========== ==========
Liabilities
Dividend Payable to Shareholders.............................. $ 40,035 $ 37,715
Payable to Chubb Capital Corporation.......................... 74,340 77,290
Long Term Debt................................................ 150,000 150,000
Accrued Expenses and Other Liabilities........................ 69,713 38,343
---------- ----------
TOTAL LIABILITIES..................................... 334,088 303,348
---------- ----------
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 87,798,286 and 87,709,465 Shares...... 87,798 87,709
Paid-In Surplus............................................... 786,596 782,186
Retained Earnings............................................. 3,680,554 3,313,140
Foreign Currency Translation Gains, Net of Income Tax......... 9,766 327
Unrealized Appreciation (Depreciation) of Investments, Net.... (124,339) 143,093
Receivable from Employee Stock Ownership Plan................. (122,999) (130,326)
Treasury Stock, at Cost -- 977,580 Shares in 1994............. (70,347) --
---------- ----------
TOTAL SHAREHOLDERS' EQUITY............................ 4,247,029 4,196,129
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ $4,581,117 $4,499,477
========== ==========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in the Corporation's 1994
Annual Report to Shareholders.
41
<PAGE> 42
THE CHUBB CORPORATION
SCHEDULE II
(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME -- PARENT COMPANY ONLY
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Investment Income...................................... $ 25,031 $ 28,015 $ 49,550
Realized Investment Gains (Losses)..................... (13,145) 21,076 10,926
Investment Expenses.................................... (1,307) (917) (689)
Corporate Expenses..................................... (34,850) (24,220) (23,150)
-------- -------- --------
(24,271) 23,954 36,637
Federal and Foreign Income Tax (Credit)................ (4,578) (9,050) 16,753
-------- -------- --------
(19,693) 33,004 19,884
Equity in Income Before Cumulative Effect of Changes in
Accounting Principles of Consolidated Subsidiaries... 548,162 311,213 597,215
-------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES........................... 528,469 344,217 617,099
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........................................ $528,469 $324,217 $617,099
======== ======== ========
</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 1994
Annual Report to Shareholders.
42
<PAGE> 43
THE CHUBB CORPORATION
SCHEDULE II
(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income................................................ $ 528,469 $ 324,217 $ 617,099
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).......................................... (548,162) (222,613) (597,215)
Realized Investment (Gains) Losses..................... 13,145 (21,076) (10,926)
Cumulative Effect of Changes in Accounting Principles.. -- (68,600) --
Other, Net............................................. 16,886 30,305 (1,335)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............ 10,338 42,233 7,623
--------- --------- ---------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities................... 234,132 463,625 228,855
Proceeds from Maturities of Fixed Maturities.............. 21,632 6,760 2,490
Proceeds from Sales of Equity Securities.................. 5,333 4,957 15,875
Purchases of Fixed Maturities............................. (218,380) (421,876) (367,824)
Purchases of Equity Securities............................ (26,004) (6,191) (7,923)
Decrease (Increase) in Short Term Investments, Net........ 1,375 (22,258) 15,188
Dividends Received from Consolidated Subsidiaries......... 244,008 148,008 224,008
Capital Contributions to Consolidated Subsidiaries........ (40,000) (10,280) --
Other, Net................................................ (9,353) (91,175) 952
--------- --------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES............ 212,743 71,570 111,621
--------- --------- ---------
Cash Flows from Financing Activities
Increase (Decrease) in Payable to Chubb Capital
Corporation............................................ (2,950) 22,290 (7,800)
Dividends Paid to Shareholders............................ (158,735) (148,070) (136,772)
Repurchase of Shares...................................... (72,052) -- --
Other, Net................................................ 10,608 11,793 25,664
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES................ (223,129) (113,987) (118,908)
--------- --------- ---------
Net Increase (Decrease) in Cash............................. (48) (184) 336
Cash at Beginning of Year................................... 180 364 28
--------- --------- ---------
CASH AT END OF YEAR.................................. $ 132 $ 180 $ 364
========= ========= =========
</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. This noncash transaction has been excluded from the statement of
cash flows.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in the Corporation's 1994
Annual Report to Shareholders.
43
<PAGE> 44
THE CHUBB CORPORATION
SCHEDULE III
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------
OTHER
DEFERRED UNPAID POLICY
POLICY CLAIMS CLAIMS AND
ACQUISITION AND POLICY UNEARNED BENEFITS
SEGMENT COSTS LIABILITIES PREMIUMS PAYABLE
------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
1994
Property and Casualty Insurance
Personal............................. $ 131,306 $ 675,520 $ 510,869
Standard Commercial.................. 168,962 4,330,870 788,771
Specialty Commercial................. 179,310 3,521,176 923,969
Reinsurance Assumed.................. 49,875 385,654 158,936
Investments..........................
---------- ----------- ----------
529,453 8,913,220 2,382,545
Life and Health Insurance.............. 606,493 2,594,995 $64,588
---------- ----------- ---------- -------
$1,135,946 $11,508,215 $2,382,545 $64,588
========== =========== ========== =======
1993
Property and Casualty Insurance
Personal............................. $ 133,565 $ 654,617 $ 503,350
Standard Commercial.................. 157,347 4,182,997 720,487
Specialty Commercial................. 162,461 3,086,515 839,835
Reinsurance Assumed.................. 36,329 311,313 116,191
Investments..........................
---------- ----------- ----------
489,702 8,235,442 2,179,863
Life and Health Insurance.............. 522,544 2,384,936 $61,684
---------- ----------- ---------- -------
$1,012,246 $10,620,378 $2,179,863 $61,684
========== =========== ========== =======
1992
Property and Casualty Insurance
Personal............................. $ 133,300 $ 677,488 $ 493,532
Standard Commercial.................. 149,515 3,474,206 678,327
Specialty Commercial................. 147,608 2,839,297 733,336
Reinsurance Assumed.................. 24,553 229,928 75,244
Investments..........................
---------- ----------- ----------
454,976 7,220,919 1,980,439
Life and Health Insurance.............. 474,293 2,139,548 $53,938
---------- ----------- ---------- -------
$ 929,269 $ 9,360,467 $1,980,439 $53,938
========== =========== ========== =======
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------
PREMIUMS INSURANCE AMORTIZATION OTHER
EARNED CLAIMS OF DEFERRED INSURANCE
AND NET AND POLICY OPERATING
POLICY INVESTMENT POLICYHOLDERS' ACQUISITION COSTS AND PREMIUMS
SEGMENT CHARGES INCOME BENEFITS COSTS EXPENSES WRITTEN
------- ----------- ---------- -------------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1994
Property and Casualty Insurance
Personal............................. $ 812,033 $ 522,158 $ 253,203 $ 44,147 $ 813,736
Standard Commercial.................. 1,279,069 970,764 336,877 77,554 1,338,554
Specialty Commercial................. 1,404,793 834,926 361,021 102,289 1,475,761
Reinsurance Assumed.................. 280,388 191,511 90,144 323,158
Investments.......................... $560,481*
---------- -------- ---------- ---------- -------- ----------
3,776,283 560,481 2,519,359 1,041,245 223,990 $3,951,209
836,293 206,315 752,205 72,250 199,399 ==========
Life and Health Insurance.............. ---------- -------- ---------- ---------- --------
$4,612,576 $766,796 $3,271,564 $1,113,495 $423,389
========== ======== ========== ========== ========
1993
Property and Casualty Insurance $ 807,550 $ 474,786 $ 256,968 $ 45,260 $ 814,486
Personal............................. 1,294,182 1,547,400 313,892 75,637 1,326,811
Standard Commercial.................. 1,208,672 700,868 315,252 90,968 1,269,492
Specialty Commercial................. 194,434 156,044 62,855 235,506
Reinsurance Assumed.................. $533,709*
Investments.......................... ---------- -------- ---------- ---------- -------- ----------
3,504,838 533,709 2,879,098 948,967 211,865 $3,646,295
801,236 203,793 669,422 63,138 183,740 ==========
---------- -------- ---------- ---------- --------
Life and Health Insurance.............. $4,306,074 $737,502 $3,548,520 $1,012,105 $395,605
========== ======== ========== ========== ========
1992 $ 789,923 $ 526,809 $ 254,693 $ 44,579 $ 796,358
Property and Casualty Insurance 1,113,654 800,067 308,880 75,583 1,133,474
Personal............................. 1,108,913 629,443 298,754 83,822 1,151,708
Standard Commercial.................. 150,798 141,810 49,500 160,966
Specialty Commercial................. $493,455*
Reinsurance Assumed.................. ---------- -------- ---------- ---------- -------- ----------
Investments.......................... 3,163,288 493,455 2,098,129 911,827 203,984 $3,242,506
689,173 190,449 591,009 56,784 157,328 ==========
---------- -------- ---------- ---------- --------
$3,852,461 $683,904 $2,689,138 $ 968,611 $361,312
Life and Health Insurance.............. ========== ======== ========== ========== ========
</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.
44
<PAGE> 45
THE CHUBB CORPORATION
SCHEDULE IV
CONSOLIDATED REINSURANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENTAGE
CEDED ASSUMED OF AMOUNT
DIRECT TO OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
1994
Life Insurance In Force at Year-End..... $61,618,417 $12,169,589 $ 81,610 $49,530,438 .2%
=========== =========== ======== ===========
Premiums Earned and Policy
Charges for the Year:
Life Insurance....................... $ 313,913 $ 19,068 $ 1,976 $ 296,821 .7
Accident and Health Insurance........ 548,172 8,780 80 539,472 --
Property and Casualty Insurance...... 4,415,080 1,280,412 641,615 3,776,283 17.0
----------- ----------- -------- -----------
Total Premiums and Policy Charges.. $ 5,277,165 $ 1,308,260 $643,671 $ 4,612,576
=========== =========== ======== ===========
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
=========== =========== ======== ===========
</TABLE>
45
<PAGE> 46
THE CHUBB CORPORATION
SCHEDULE VI
CONSOLIDATED SUPPLEMENTARY PROPERTY AND CASUALTY INSURANCE INFORMATION
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
CLAIMS AND CLAIM
ADJUSTMENT PAID
EXPENSES INCURRED CLAIMS
RELATED TO AND
------------------------ CLAIM
CURRENT PRIOR ADJUSTMENT
YEAR YEARS EXPENSES
---------- -------- ----------
<S> <C> <C> <C>
1994............................................. $2,549,100 $(29,741) $2,036,525
========== ======== ==========
1993............................................. $2,214,300 $664,798 $1,696,666
========== ======== ==========
1992............................................. $2,125,700 $(27,571) $1,574,379
========== ======== ==========
</TABLE>
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. Filed herewith.
(4) -- The registrant is not filing any instruments evidencing any indebtedness
since the total amount of securities authorized under any single
instrument does not exceed 10% of the total assets of the registrant
and its subsidiaries on a consolidated basis. Copies of such
instruments will be furnished to the Securities and Exchange
Commission upon request.
(10) -- Material contracts
Global Settlement Agreement among Fibreboard Corporation, Continental
Casualty Company, CNA Casualty Company of California, Columbia
Casualty Company, Pacific Indemnity Company, and the Settlement Class
and together with Exhibits A through D incorporated by reference to
Exhibit (10) of the registrant's Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31, 1993.
Settlement Agreement with Fibreboard Corporation, Continental Casualty
Company, CNA Casualty Company of California and Columbia Casualty
Company incorporated by reference to Exhibit (10) of the registrant's
Report to the Securities and Exchange Commission on Form 10-Q for the
nine months ended September 30, 1993.
Continental-Pacific Agreement with Continental Casualty Company 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.
Amendment to the Continental-Pacific Agreement with Continental Casualty
Company filed herewith.
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 (1994) incor-
porated by reference to Exhibit A of the registrant's definitive
proxy statement for the Annual Meeting of Shareholders held on
April 26, 1994.
The Chubb Corporation Stock Option Plan (1984) filed herewith.
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 incorporated by reference to Exhibit
(10) of the registrant's Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31, 1993.
</TABLE>
47
<PAGE> 48
<TABLE>
<CAPTION>
DESCRIPTION
-----------
<S> <C>
Executive Severance Agreements and their amendments filed herewith.
Aggregate Excess of Loss Reinsurance Agreement with Phoenix Assurance
Public Limited Company of London, incorporated by reference to Ex-
hibit (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 15, 16, 44 through 69 and 72 of the 1994 Annual Report to
Shareholders.
(21) -- Subsidiaries of the registrant filed herewith.
(23) -- Consent of Independent Auditors (see page 39 of this report).
(27) -- Financial Data Schedule
(28) -- Information from reports furnished to state insurance regulatory
authorities.
</TABLE>
48
<PAGE> 1
Exhibit 3
===============================================================================
BY-LAWS
OF
THE CHUBB CORPORATION
Incorporated under the Laws of the State of New Jersey
ADMINISTRATIVE OFFICES
15 Mountain View Road, P.O. Box 1615
Warren, N.J. 07061-1615
===============================================================================
REVISED TO JUNE 2, 1989
<PAGE> 2
BY-LAWS
OF
THE CHUBB CORPORATION
_____________
ARTICLE I
OFFICES
SECTION 1. The Corporation shall maintain a registered office in the
State of New Jersey as required by law. The Corporation may also have offices
in such other places as the Board of Directors may from time to time appoint or
as the business of the Corporation may require.
ARTICLE II
SEAL
SECTION 1. The seal of the Corporation shall be circular in form and
shall have the name of the Corporation on the circumference and the words and
numerals "Corporate Seal 1967 New Jersey" in the center.
ARTICLE III
MEETINGS OF STOCKHOLDERS
SECTION 1. Meetings of the stockholders of the Corporation shall be
held at such places in the State of New Jersey or in the City of New York,
State of New York, as may from time to time be designated by the Board of
Directors and stated in the Notice of Meeting.
SECTION 2. The Annual Meeting of the Stockholders of the Corporation
shall be held on such day in the month of April of each year, as shall be
designated by the Board of Directors and as stated in the notice of meeting,
for the election of Directors and for the transaction of such other business as
may be brought before the meeting. Any business which may properly be brought
before a meeting of the stockholders may be considered and transacted at the
Annual Meeting.
SECTION 3. Special meetings of the stockholders may be called on the
order of the Chairman, of the Chairman of the Executive Committee, if any, of a
majority of the Board of Directors or of the holder or holders of fifty percent
or more of the issued and outstanding Common Stock of the Corporation.
1.
<PAGE> 3
SECTION 4. Written notice of all meetings of the stockholders shall
be mailed to or delivered to each stockholder at least ten days prior to the
meeting. Notice of any special meeting shall state in general terms the
purposes for which the meeting is to be held.
SECTION 5. The holders of a majority of the issued and outstanding
shares of the Common Stock of the Corporation entitled to vote thereat, present
in person or represented by proxy, shall constitute a quorum for the
transaction of business at all meetings of the stockholders; but, if there be
less than a quorum, the holders of a majority of the stock so present or
represented may adjourn the meeting from time to time.
SECTION 6. At all meetings of the stockholders, every registered
owner of shares entitled to vote may vote in person or proxy and shall have one
vote for each such share standing in his name on the books of the Corporation.
Elections of directors need not be by ballot.
SECTION 7. The Chairman, or in his absence, the Vice-Chairman, or in
his absence, the President, or in his absence, the Chairman of the Executive
Committee, if any, shall preside at all meetings of the stockholders; and, in
the absence of all the foregoing officers, the stockholders present shall elect
a chairman by a plurality vote. The Chairman presiding at any meeting of
stockholders shall have the power to appoint two or more persons to act as
inspectors or tellers to receive, canvass and report the votes cast by the
stockholders at such meeting; but no candidate for the office of director shall
be appointed as inspector or teller at any meeting for the election of
directors.
SECTION 8. The Secretary of the Corporation shall act as secretary of
all meetings of the stockholders; and in his absence, the Chairman shall
appoint a person to act as secretary of the meeting.
ARTICLE IV
BOARD OF DIRECTORS
SECTION 1. The property, business and affairs of the Corporation shall
be managed and controlled by its Board of Directors. The number of directors
shall be such number, not less than seven nor more than thirty, as shall be
fixed from time to time by the Board of Directors. At each Annual Meeting the
stockholders shall elect the number of directors as fixed by the Board of
Directors (not less than seven nor more than thirty) and such directors shall
hold office until the next Annual Meeting, and until their successors are
elected and qualify. Any director may be removed from office at any time, with
or without cause, by the affirmative vote of the holders of a majority of the
stock present in person or represented by proxy at any meeting at which a
quorum is present.
2.
<PAGE> 4
Directors need not be residents of the State of New Jersey, but each
director shall at the time of his election be a stockholder of the Corporation
or of a corporation holding twenty-five per cent (25%) or more of the Common
Stock of the Corporation.
SECTION 2. Whenever any vacancy shall occur in the Board of
Directors, by reason of death, resignation or increase in the number of
directors or otherwise, it may be filled by a majority of the remaining
directors, though less than a quorum, for the balance of the term.
SECTION 3. The Board of Directors may hold meetings and keep the
books of the Corporation (except the stock transfer books) outside of the State
of New Jersey.
SECTION 4. Regular meetings of the Board of Directors, shall be held
quarterly on the second Thursday of March, June, September and December (or if
such Thursday be a legal holiday, then on the next succeeding business day) at
the offices of the Corporation in New Jersey or at the offices of the
Corporation in the City of New York unless in the judgment of the Board or the
Executive Committee a regular meeting should be held on a different date or at
a different place. Written notice of regular meetings of the Board shall be
given to each director at least one full day in advance of the meeting.
SECTION 5. Special meetings of the Board of Directors may be called
by order of the Chairman, of the Chairman of the Executive Committee, if any,
or by two directors at the time in office. The Secretary shall give notice of
each special meeting by mailing the same at least two days before the meeting
or by telephoning or telegraphing the same at least one day before the meeting
to each director.
SECTION 6. At meetings of the Board of Directors the Chairman or
President, or in their absence, the Chairman of the Executive Committee, if
any, shall preside. The attendance of seven directors in office shall be
necessary to constitute a quorum for the transaction of business, but less than
a quorum may adjourn any meeting from time to time until a quorum shall be
present, whereupon the meeting may be held, as adjourned, without further
notice.
SECTION 7. The directors shall receive such compensation for their
services as directors as may be prescribed by the Board of Directors and shall
be reimbursed by the Corporation for ordinary and reasonable expense incurred
in the performance of their duties.
3.
<PAGE> 5
ARTICLE V
COMMITTEES
SECTION 1. There shall be an Executive Committee consisting of the
Chairman, the Chairman of the Executive Committee, if any, and not less than
two nor more than six other directors, to be appointed by the Board of
Directors which committee shall meet at the call of its Chairman or of any
member thereof and shall have authority to exercise, so far as may be permitted
by law, all the powers of the Board of Directors in the management of the
business, property and affairs of the Corporation during the intervals between
the meetings of the Board of Directors. A majority of the members of such
committee shall constitute a quorum. The Executive Committee or a quorum
thereof may act from time to time on the basis of written approval of proposals
without formal meeting.
SECTION 2. There shall be a Finance Committee consisting of the
Chairman, the Chairman of the Executive Committee, if any, and not less than
two nor more than seven other directors to be appointed by the Board of
Directors, which committee shall have authority to direct and control the
investment of funds and the purchase and sale of securities by the Corporation.
A majority of the members of such committee shall constitute a quorum. The
Finance Committee or a quorum thereof may act from time to time on the basis of
written approval of proposals without formal meeting. Regular meetings of the
Committee shall be held quarterly at dates set by vote of the Committee.
Special meetings may be called at any time at the request of any member.
SECTION 3. There shall be an Audit Committee consisting of not less
than three, nor more than seven directors, to be appointed annually by the
Board of Directors who shall appoint one of the members of such Committee as
Chairman.
The Committee shall review the accounting principles and practices
employed by the Corporation, and, to the extent it deems appropriate, of its
subsidiaries. It shall have authority to order interim and surprise audits and
to perform such other duties as may from time to time be assigned to it by the
Board.
The Committee shall meet with the Corporation's Independent Public
Accountants to review their report on their examination of the Corporation's
accounts, their comments on the internal accounting controls and audit
procedures of the Corporation, and the action taken by Management with regard
to such comments. The Committee shall also, to the extent it deems
appropriate, review the independent and internal audits, and the accounting
procedures and controls of the Corporation's subsidiaries. The Committee shall
report to the Board of Directors the results of its reviews and such
recommendations as it may deem appropriate.
Meetings may be held at the call of the Chairman, and may be initiated
by any member of the Committee or by the Independent Public Accountants or an
appropriate officer of the Corporation, to deal with additional matters as they
may arise.
4.
<PAGE> 6
The Committee shall recommend annually to the Board of Directors the
appointment of the Corporation's Independent Public Accountants, which
appointment shall be submitted to the shareholders for ratification.
The Committee shall have authority to confer with the appropriate
officers of the corporation, or its subsidiaries, regarding the accounting
principles and practices employed by the Corporation and its subsidiaries. Any
reports issued by the Independent Public Accountants of the Corporation, or by
the Corporation, or by any of its subsidiaries, and any reports by Audit
Committees of its subsidiaries shall, at its request, be made available to the
Committee. The Committee may request the attendance of appropriate officers of
the Corporation or its subsidiaries, at its meetings.
No officer of the Corporation or any of its subsidiaries may serve on
the Audit Committee.
A majority of the members of such Committee shall constitute a quorum.
SECTION 4. The Board of Directors may appoint other committees which
shall have such powers and perform such duties as from time to time may be
prescribed by the Board.
SECTION 5. The Board shall have the power to fill vacancies in, to
change the membership of, or to dissolve any committee, and to appoint
alternate members of any committee, but in no event may an officer of the
Corporation or any of its subsidiaries serve as a member or as an alternate
member of the Audit Committee or of any committee which has powers or duties
with respect to compensation of the Corporation's officers. Directors
appointed as alternate members of a committee shall act in the absence or
disability of members of that committee with all of the powers of such absence
or disabled members and shall serve on such committee in the order established
by resolution adopted by a majority of the Board of Directors. Action taken by
any committee shall be reported at the meeting of the Board next succeeding
such action, except that, when such meeting of the Board is held within two
days after such action, such report, if not made at the first meeting, shall be
made to the Board at its second meeting following such committee action.
ARTICLE VI
OFFICERS
SECTION 1. Elected Officers. The elected officers of the Corporation
shall be a Chairman, a President, one or more Vice Presidents, a Treasurer and
a Secretary. The Board of Directors may also elect a Vice Chairman, a Chairman
of the Executive Committee and may designate Vice Presidents as Executive or
5.
<PAGE> 7
Senior Vice Presidents and may elect from time to time, such other officers as
it considers necessary, each of whom shall hold office for such period, have
such authority, and perform such duties as the Board may from time to time
determine. Any person may hold two, but no more than two, offices. The
Chairman, the Vice Chairman, if any, the President, and the Chairman of the
Executive Committee, if any, shall be chosen from among the directors.
SECTION 2. Appointed Officers. The Chairman may appoint as officers
of the Corporation such Assistant, Associate, Regional or Resident Officers and
such other subordinate officers as he may deem proper, and shall specify the
authority of and the duties to be performed by such officers, and may remove
them at any time with or without cause.
SECTION 3. Term of Office. The principal officers shall be chosen
annually by the Board of Directors at the first meeting of the Board following
the stockholders' annual meeting, or as soon thereafter as is conveniently
possible. Additional Vice Presidents may be elected from time to time. The
term of office of all Executive Officers shall be for one year and until their
respective successors are duly chosen and qualified, but any Executive Officer
may be removed, with or without cause, at any time by the Board.
SECTION 4. Vacancies. Any vacancy in an office from any cause may be
filled for the unexpired portion of the term by the Board of Directors.
SECTION 5. Duties and Responsibilities.
(a) The Chairman shall be the chief executive officer of the
Corporation and shall exercise general supervision of the management of its
business and shall be responsible for the development of its policies and their
execution. He shall, in general, perform all duties incident to the office of
Chairman and such other duties as may be assigned to him by the Board of
Directors.
(b) The Vice Chairman, if any, shall have such powers and perform
such duties as the Chairman may delegate to him and, in the absence of the
Chairman, shall exercise the functions and duties of the Chairman.
(c) The President shall have such powers and perform such duties as
the Chairman may delegate to him and, in the absence of the Chairman and the
Vice Chairman, if any, shall exercise the functions and duties of the Chairman.
(d) The Chairman of the Executive Committee, if any, shall perform
such functions as may be assigned to him by the Board of Directors, the
committees of which he is Chairman, or the Chairman of the Corporation.
6.
<PAGE> 8
(e) Each Vice President shall have such powers and perform such
duties as the Board of Directors or the Chairman, may from time to time
prescribe. The Vice Presidents in the order of priority designated by the
Chairman or the Board of Directors shall exercise the functions of the
President in his absence.
(f) The Treasurer shall have the custody and care of all the funds
and securities of the Corporation, and shall deposit all funds to the credit of
the Corporation in such institution or institutions as the Board of Directors
may designate; he or an Assistant Treasurer or such other officer or officers
or appointee or appointees as may be authorized by the Board of Directors shall
endorse all instruments or documents requiring endorsement for or on behalf of
the Corporation; he shall perform all acts incident to the position of
Treasurer, subject to the control of the Board; he shall have such other powers
and perform such other duties as the Board of Directors or the President may
from time to time prescribe; and he may be required by the Board of Directors
to give security for the faithful discharge of his duties. He shall have
custody of the stock registers and transfer books of the Corporation.
(g) The Secretary shall keep the minutes of all meetings of the Board
of Directors and of the Stockholders, and shall attend to the giving of proper
notices to Directors and stockholders; he may sign, with the President or a
Senior Vice President, all authorized contracts, instruments or documents in
the name of the Corporation; he shall be the custodian of the seal of the
Corporation and shall attest such seal when required; he shall perform all the
duties incident to the office of Secretary, subject to the control of the Board
of Directors; he shall have such other powers and perform such other duties as
the Board of Directors or the President may from time to time prescribe or as
may be prescribed by these By-Laws.
(h) In case of the absence or disability of any officer of the
Corporation and of any person hereby authorized to act in his place during such
period of absence or disability, the Board of Directors may from time to time
delegate the powers and duties of such officer to any other officer, or any
director, or any other person whom it may select.
ARTICLE VII
CAPITAL STOCK
SECTION 1. Certificates for stock of the Corporation shall be in such
form as the Board of Directors may from time to time prescribe and shall be
signed by the Chairman or the Vice Chairman or the President or a
Vice-President and by the Treasurer or an Assistant Treasurer.
7.
<PAGE> 9
SECTION 2. Shares of capital stock of the Corporation shall be
transferable on the books of the Corporation only by the holder of record
thereof in person or by duly authorized attorney, upon surrender and
cancellation of certificates for a like number of shares.
SECTION 3. In case any certificate for the capital stock of the
Corporation shall be lost, stolen or destroyed, the Corporation as a condition
precedent to the issuance of a new certificate in place thereof, may require
such proof of the fact and such indemnity to be given to it as shall be deemed
necessary or advisable by it.
SECTION 4. The Corporation shall be entitled to treat the holder of
record of any share or shares of stock as the holder thereof in fact and shall
not be bound to recognize any equitable or other claim to or interest in such
shares on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by law.
SECTION 5. The Board of Directors shall have the power to close the
stock transfer books of the Corporation for a period not exceeding fifty (50)
days preceding the date of any meeting of stockholders or the date for payment
of any dividend or the date for the allotment of rights or the date when any
change or conversion or exchange of capital stock shall go into effect;
provided, that in lieu of closing the stock transfer books as aforesaid, the
Board of Directors may fix in advance a date, not exceeding fifty (50) days
preceding the date of any meeting of stockholders, or the date for the payment
of any dividend or the date for the allotment or rights, or the date when any
change or conversion or exchange of capital stock shall go into effect, as a
record date for the determination of the stockholders entitled to notice of and
to vote at any such meetings or entitled to receive payment of any such
dividends, or any such allotment or rights, or to exercise the rights in
respect to any such change, conversion or exchange of capital stock, and, in
such case, only, stockholders of record on the date so fixed shall be entitled
to such notice of and to vote at such meetings, or to receive payment of such
dividends or any such allotment of rights, or to exercise such rights, in
respect to any such change, conversion or exchange of the capital stock as the
case may be, and notwithstanding any transfer of any stock on the books of the
Corporation after any such record date as fixed as aforesaid.
ARTICLE VIII
MISCELLANEOUS
SECTION 1. The Board of Directors shall have power to fix, and from
time to time change, the fiscal year of the Corporation. Unless otherwise
fixed by the Board, the calendar year shall be the fiscal year.
8.
<PAGE> 10
SECTION 2. Any notice required to be given under the provisions of
these By-Laws or otherwise may be waived by the stockholder, director or
officer to whom such notice is required to be given, either before or after the
meeting or action of which notice is waived.
SECTION 3. Any notice required to be given to any stockholder,
director or officer under the provisions of these By-Laws or otherwise shall
(subject to the provisions of law and of the Certificate of Incorporation of
the Corporation) be deemed to be sufficiently given if such notice be written
or printed and be deposited in the post office addressed to such stockholder,
director of officer at his address as the name appears on the books or records
of the Corporation, or such notice may be sent by telegram or delivered in
person to such stockholder, director or officer and the mailing of such notice
or posting of such telegram or delivery of such notice, as the case may be,
shall constitute due and sufficient notice.
SECTION 4. The Corporation may lend money to, guarantee any
obligation of, or otherwise assist, any officer or other employee of the
Corporation or of any subsidiary, including an officer or other employee who is
a director of the Corporation, whenever, in the judgment of the Board of
Directors, such loan, guarantee or assistance may reasonably be expected to
benefit the Corporation, provided, however, that any such loan, guarantee or
assistance to an officer or other employee who is also a director of the
Corporation shall be authorized by a majority of the entire Board of Directors.
The loan, guarantee or other assistance may be made with or without interest,
and may be unsecured, or secured in such manner as the Board of Directors shall
approve, and may be made upon such other terms and conditions as the Board of
Directors may determine.
ARTICLE IX
INVESTMENTS AND MONEYS
Investment of the funds of the Corporation and the purchase and sale
of securities by the Corporation shall be made only as authorized or approved
by the Board of Directors or the Executive Committee or the Finance Committee
or by some other committee appointed by the Board of Directors and charged with
the duty of supervising or making such investments, purchases and sales.
Securities representing the invested funds of the Corporation shall be
placed for safekeeping in safe deposit vaults in the name of the Corporation,
or pursuant to a custodian account, in such Banks, Trust or Safe Deposit
Companies as shall be approved by the Board of Directors or the Executive
Committee. Access to the vaults shall be in accordance with procedure approved
by resolution of the Board of Directors or the Executive Committee and such
resolution shall be effective upon a copy thereof being lodged with the Bank,
9.
<PAGE> 11
Trust or Safe Deposit Company in which the securities are lodged. In the event
that the Board of Directors shall determine to establish a custodian account
with a Bank or Trust Company and shall provide that all or any part of the
securities now or hereafter representing the invested funds of the Corporation
shall be delivered to such Bank or Trust Company approved by the Board of
Directors or the Executive Committee, then and in that event such Bank or Trust
Company shall hold such securities so delivered in the custodian account in
accordance with the procedure and under the authority of the resolution
approved by the Board of Directors or the Executive Committee.
Any two of the following: The Chairman, the Vice Chairman, if any, the
President, the Chairman of the Executive Committee, if any, or any Vice
President, acting jointly, or any one of them acting jointly with any Vice
President or the Secretary or the Treasurer or an Assistant Secretary or an
Assistant Treasurer, is authorized and empowered to sell, assign, exchange and
transfer any and all shares of stock, bonds and other securities owned by or
standing in the name of the Corporation, and to make, execute and deliver in
the name and as the act of the Corporation under its corporate seal any and all
instruments in writing necessary or proper to carry such sales, assignments,
exchanges and transfers into effect.
Moneys received by the Corporation may be deposited to its credit in
such Trust Companies or Banks as the Board of Directors may designate.
The Chairman, or the Vice Chairman, if any, or the President, or the
Chairman of the Executive Committee, if any, or any Vice President shall have
authority to vote in person or by proxy any of the stock of any other
corporation which the Corporation may hold and to execute any and all consents
or other documents relating to such stocks.
ARTICLE X
AMENDMENT
The Board of Directors shall have power to make, alter and repeal
By-Laws of the Corporation by a vote of a majority of all of the directors at
any regular or special meeting of the Board, provided that notice of the
proposed action shall have been given in the notice or waiver of notice of such
meeting of the Board. The By-Laws may be altered or repealed by the
stockholders by the vote of a majority of all of the stockholders at any
meeting, provided that notice of the proposed alteration or repeal shall have
been given in the notice or waiver of notice of such meeting of stockholders.
Certified to be a true copy.
March 24, 1989 /s/ Henry G. Gulick
----------------------------- ------------------------------
Date Secretary
10.
<PAGE> 1
Exhibit 10
AMENDMENT TO CONTINENTAL-PACIFIC AGREEMENT
Continental Casualty Company ("Continental") and Pacific Indemnity Company
("Pacific"), having previously entered into an Agreement between them dated
October 12, 1993 ("the Continental-Pacific Agreement"), hereby amend said
Agreement in the following respect only, all other terms of the
Continental-Pacific Agreement remaining in full force and effect.
Section 3.2 of the Continental-Pacific Agreement is deleted, and the
following is substituted therefor:
Section 3.2. On or before 30 days from the execution of
this Agreement, Pacific shall make available to Continental
$635,220,000 as Pacific's share of all Unsettled Present
Claims and Presently Settled Claims, excluding amounts paid
prior to August 22, 1993 (which amounts are to be shared
pursuant to Section 2.1-2.4). Continental may, upon
presentation to Pacific of a billing statement, draw down
portions of this amount as the need arises to pay
approximately 35.29% of the indemnity costs expended to
resolve Unsettled Present Claims and Presently Settled
Claims. Pacific shall make payment to Continental promptly
upon receipt of such billing statement. Interest shall
accrue to Continental's benefit on the undrawn balance of
the $635,200,000 commencing on October 30, 1993 and running
through February 28, 1995 at the rate of interest paid on
United States one-year Treasury Bills on October 29, 1993,
and commencing on March 1, 1995 at the rate of interest of
100 basis points above the rate of interest paid on United
States five-year Treasury Notes on March 1, 1995 according
to the Bloomberg Generic Pricing Source as quoted by
Bloomberg L.P., Select Current Five Year U.S. Treasury, New
York Close, Mid Price, Historical Yield Table. Interest on
the undrawn balance shall be payable quarterly beginning on
June 1, 1995 and shall be computed based on the actual
number of days elapsed since the date of the last quarterly
interest payment divided by the actual number of days in the
calendar year in which the
<PAGE> 2
interest is paid. Interest shall be paid on the amounts
listed in the billing statement from the date of the last
quarterly interest payment through and including the day
prior to the business day that immediately available funds
for such amounts are received by Continental. If Pacific
notifies Continental by 10:00 a.m. CST by confirmed telecopy
to (312) 822-4175, Attention: Short Term Money Desk that
Continental will receive payment that business day for the
amounts listed in the billing statement, and such interest
is in fact paid that day, interest will cease accruing on
such amounts as of that business day. If Pacific notifies
Continental after 10:00 a.m. CST by confirmed telecopy to
(312) 822-4175, Attention: Short Term Money Desk that
Continental will receive payment that day for the amounts
listed in the billing statement, and such interest is in
fact paid that day, interest will cease accruing on such
amounts as of the next business day. Pacific may at its
option pre-pay the undrawn balance of the $635,220,000, plus
accrued interest thereon, to Continental at any time with no
pre-payment penalty. Subject to Section 3.5, Pacific's
payment of the $635,220,000, plus accrued interest, is fixed
and not dependent upon the amount necessary for Continental
to resolve the Unsettled Present Claims and Presently
Settled Claims. On March 1, 2000 Pacific shall pay to
Continental any undrawn balance remaining on that date
together with accrued interest thereon.
IN WITNESS WHEREOF, this amendment has been executed as of the date set
forth below by the parties hereto, thereunder duly authorized.
Dated: February 27, 1995
CONTINENTAL CASUALTY COMPANY
BY: /s/ Laurens F. Terry
------------------------
Vice President
PACIFIC INDEMNITY COMPANY
BY: /s/ John J. Degnan
------------------------
Sr. Vice President
<PAGE> 1
Exhibit 10
================================================================================
THE CHUBB CORPORATION
STOCK OPTION PLAN (1984)
------------------
LOGO
================================================================================
As Amended to September 9, 1988
<PAGE> 2
THE CHUBB CORPORATION
STOCK OPTION PLAN (1984)
1. PURPOSE
The purpose of the Stock Option Plan (1984) (the "Plan") is to provide a
method whereby selected key employees of The Chubb Corporation (the
"Corporation") and its subsidiaries may have the opportunity to invest in shares
of Common Stock (the "Stock") of the Corporation, thereby giving them a
proprietary and vested interest in the growth and performance of the
Corporation, and, in general, generating an increased incentive to contribute to
the Corporation's future success and prosperity, thus enhancing the value of the
Corporation for the benefit of shareholders. Further, the Plan is designed to
enhance the Corporation's ability to attract and retain individuals of
exceptional managerial talent upon whom, in large measure, the sustained
progress, growth, and profitability of the Corporation depends.
2. ADMINISTRATION
The Plan shall be administered by the Compensation Committee (the
"Committee") of the Corporation's Board of Directors (the "Board"), composed of
not less than three directors who are not eligible, and for at least one year
prior to their appointment were not eligible, for selection as a person to whom
stock or other equity of the Corporation may be allocated, or to whom stock
options or stock appreciation rights may be granted, pursuant to any plan of the
Corporation or any of its affiliates entitling the participants therein to
acquire stock or other equity securities of the Corporation or its affiliates.
From time to time the Committee may grant stock options and related stock
appreciation rights to such eligible employees and for such number of shares as
it in its sole discretion may determine. A grant in any year to an eligible
employee shall neither guarantee nor preclude a grant to such employee in
subsequent years. Subject to the provisions of the Plan, the Committee shall be
authorized to interpret the Plan, to establish, amend, and rescind any rules and
regulations relating to the Plan, to determine the terms and provisions of the
option agreements described in Section 5(h) hereof and of the stock appreciation
rights described in Section 6 hereof, and to make all other determinations
necessary or advisable for the administration of the Plan. The Committee may
correct any defect, supply any omission or reconcile any inconsistency in the
Plan or in any option or stock appreciation right in the manner and to the
extent it shall deem desirable. The determinations of the Committee in the
administration of the Plan, as described herein, shall be final and conclusive.
The validity, construction, and effect of the Plan and any rules and regulations
relating to the Plan shall be determined in accordance with the laws of the
State of New York.
3. ELIGIBILITY
The class of employees eligible to participate under the Plan (the
"Employees") shall be key employees of the Corporation or its subsidiaries (but
excluding any director who is not an employee). Subsidiaries shall mean any
business entity in which the Corporation owns, directly or indirectly, 50
percent or more of the total combined voting power of all classes of stock.
Nothing in the Plan or in any agreement thereunder shall confer any right on an
Employee to continue in the employ of the Corporation or its subsidiaries or
shall interfere in any way with the right of the Corporation or its
subsidiaries, as the case may be, to terminate his employment at any time.
4. SHARES SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 7, an aggregate of 562,500
shares of Stock shall be available for issuance upon the exercise of options and
related stock appreciation rights granted under the Plan. The Shares of Stock
deliverable upon the exercise of options and stock appreciation rights may be
made available from authorized but unissued shares or shares reacquired by the
Corporation, including shares purchased in the open market or in private
transactions. If any option granted under the Plan shall terminate for any
1
<PAGE> 3
reason without having been exercised or settled in Stock or in cash pursuant
to related stock appreciation rights, the shares subject to, but not delivered
under, such option shall be available for other options or related stock
appreciation rights.
5. GRANT, TERM AND CONDITIONS OF OPTIONS
The Committee may from time to time after consultation with management
select employees to whom stock options shall be granted. The options granted may
be "incentive stock options" within the meaning of Section 422A of the Internal
Revenue Code of 1954, as amended (the "Code"), or nonstatutory stock options
whichever the Committee shall determine, subject to the following terms and
conditions:
(a) Price. The purchase price per share of Stock deliverable upon the
exercise of each option shall not be less than 100 percent of the Fair
Market Value of the Stock on the date the option is granted. For purposes
of this Plan, Fair Market Value shall be: (i) if the Stock is not listed on
a national securities exchange, the average of the highest and lowest sales
prices for the Stock on the date in question as reported in the NASDAQ
System and printed in the Wall Street Journal or, if there are no such
sales prices for the Stock on such date, the average of such highest and
lowest sales prices on the first day prior thereto on which such prices
appear, or (ii) if the Stock is listed for trading on one or more national
securities exchanges, the average of the highest and lowest sales prices on
the principal such exchange (or, if applicable, the average of the highest
and lowest sales prices as reported for consolidated trading of issues
listed on the New York Stock Exchange) on the date in question, or, if the
Stock shall not have been traded on such date, the average of the highest
and lowest sales prices on the first day prior thereto on which the Stock
was so traded.
(b) Payment. Options may be exercised only upon payment of the
purchase price thereof in full. Such payment shall be made in cash or, in
the discretion of the Committee, in Stock, which shall have a Fair Market
Value (determined in accordance with the rules of paragraph (a), above) at
least equal to the aggregate exercise price of the shares being purchased,
or a combination of cash and Stock. An Employee may, in the discretion of
the Committee, receive upon exercise of an option shares of Stock subject
to transfer restrictions.
(c) Term of Options. The term during which each option may be
exercised shall be determined by the Committee, provided that (i) a
nonstatutory option shall not be exercisable in whole or in part more than
10 years from the date it is granted except as provided in paragraph (e),
below, with respect to the death of the Employee, and (ii) an incentive
stock option shall not be exercisable in whole or in part more than 10
years from the date it is granted. All rights to purchase Stock pursuant to
an option shall, unless sooner terminated, expire at the date designated by
the Committee.
The Committee shall determine the date on which each option shall
become exercisable and may provide that an option shall become exercisable
in installments. The shares comprising each installment may be purchased in
whole or in part at any time after such installment becomes purchasable,
except that the exercise of incentive stock options shall be further
restricted as set forth herein. The Committee may, in its sole discretion,
accelerate the time at which any option may be exercised in whole or in
part, provided that no option shall be exercisable until one year after
grant.
No option which is an incentive stock option shall be exercisable
while there is "outstanding" (within the meaning of section 422A(c)(7) of
the Code) any incentive stock option to purchase stock of the Corporation,
a corporation which (at the time of granting of such option) is a parent or
subsidiary of the Corporation or a predecessor of any such corporation,
which was granted (whether or not under this Plan) before the granting of
such option to the Employee. The foregoing sentence shall not apply to any
incentive stock option granted on or after January 1, 1987.
2
<PAGE> 4
(d) Limitations on Grants. Subject to such rules and regulations as
the Committee may establish, the aggregate Fair Market Value (determined as
of the time the option is granted) of the stock for which all incentive
stock options granted on or after January 1, 1987 under this Plan and any
other plan of the Corporation (and any parent or subsidiary corporation of
the Corporation within the meaning of Section 425 of the Code) to an
Employee first become exercisable in any calendar year shall not exceed
$100,000.
(e) Termination of Employment. (i) Except as provided in subparagraph
(ii) of this paragraph (e), all outstanding options shall be automatically
cancelled upon termination of employment.
(ii) Upon termination of an Employee's employment for retirement on or
after the Employee's Normal Retirement Date under the Corporation's Pension
Plan, or by reason of the disability (as defined in such Pension Plan) of
the Employee, or for any other reason with the consent of the Committee,
all outstanding options granted more than one year prior to the date of
such termination shall be fully exercisable by the Employee for a period of
thirty-six months after the date of such termination (but in no event later
than the expiration date of the option specified in accordance with
paragraph (c), above). In the event of the death of an optionee (whether
before or after termination of employment), all options outstanding (and
not previously cancelled) on the date of death which were granted more than
one year prior to such date shall be fully exercisable by the Employee's
legal representative within one year after the date of death, but in no
event later than thirty-six months after termination of employment and in
the case of an incentive stock option, in no event after the expiration
date of the option specified in accordance with paragraph (c), above.
(iii) Transfer from the Corporation to a subsidiary, from a subsidiary
to the Corporation, or from one subsidiary to another shall not be
considered a termination of employment. Nor shall it be considered a
termination of employment if an Employee is placed on a military or sick
leave or such other leave of absence which is considered as continuing
intact the employment relationship; in such a case, the employment
relationship shall be continued until the later of the date when the leave
equals ninety days or the date when an Employee's right to reemployment
shall no longer be guaranteed either by law or by contract.
(f) Nontransferability of Options. No option shall be transferable by
an Employee otherwise than by will or the laws of descent and distribution,
and during the lifetime of the Employee to whom an option is granted it may
be exercised only by the Employer or by the Employee's guardian or legal
representative if permitted by Section 422A and related sections of the
Code and any regulations promulgated thereunder.
(g) Listing and Registration. Each option shall be subject to the
requirement that if at any time the Committee shall determine, in its
discretion, the listing, registration or qualification of the Stock subject
to such option upon any securities exchange or under any state or federal
law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition of, or in connection with, the
granting of such option or the issue or purchase of shares thereunder, no
such option may be exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been effected
or obtained free of any conditions not acceptable to the Committee.
(h) Option Agreement. Each Employee to whom an option is granted
shall enter into an agreement with the Corporation which shall contain such
provisions, consistent with the provisions of the Plan, as may be
established by the Committee.
(i) Withholding. Prior to the delivery of certificates for shares of
Stock, the Corporation or a subsidiary shall have the right to require a
payment from an Employee to cover any applicable withholding or other
employment taxes due upon the exercise of an option or stock appreciation
right. Pursuant to rules and regulations adopted by the Committee, the
Committee may permit, in its sole discretion, any such payment of required
3
<PAGE> 5
withholding taxes by an Employee to be satisfied by (x) an Employee
delivering certificates for Stock to the Corporation or a subsidiary, or
(y) an Employee electing to have the Corporation or a subsidiary reduce
the number of shares for which certificates shall be delivered to the
Employee in connection with such exercise, in either case for the number
of shares being equal in value on the date withholding is required to the
amount of such required withholding payment.
6. STOCK APPRECIATION RIGHTS
The Committee may, in its sole discretion, grant stock appreciation rights
("SARs") to the holders of options granted under the Plan. SARs shall be subject
to the following terms and conditions.
(a) Each SAR shall relate to a specific option and may be granted at
the same time the option is granted or at any time thereafter prior to six
months before the last day of the term of the option specified in
accordance with Section 5(c). Each SAR shall be exercisable only to the
extent the related option is exercisable; provided, however, that no SAR
shall be exercisable until six months after grant. SARs shall be subject to
such other terms and conditions as the Committee may specify.
(b) A SAR shall entitle an Employee, upon surrender of an unexpired
option, or a portion thereof, to receive from the Corporation an amount
equal to the Fair Market Value on the surrender date of Stock which the
Employee would have been entitled to purchase on that date pursuant to the
option or portion thereof surrendered, less the amount which the Employee
would have been required to pay to purchase such Stock, provided that the
Committee may for administrative convenience determine that, for any SAR
relating to an option which is not an incentive stock option which SAR can
only be exercised during limited periods of time in order to satisfy the
conditions of certain rules of the Securities and Exchange Commission, the
exercise of any such SAR for cash during such limited period shall be
deemed to occur for all purposes hereunder in the day during such limited
period on which the Fair Market Value of the Stock is the highest. The
Committee shall determine whether the SAR shall be settled in cash, Stock
or a combination of cash and Stock. No fractional shares shall be issued as
a result of the exercise of a SAR under this Section 6.
7. ADJUSTMENT OF AND CHANGES IN STOCK
In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, merger, consolidation, distribution of assets,
or any other changes in the corporate structure or shares of the Corporation,
the Committee shall make such adjustments as it deems appropriate in the number
and kind of shares authorized by the Plan, in the number and kind of shares
covered by the options and SARs granted and in the purchase price of outstanding
options.
8. MERGERS, SALES AND CHANGE OF CONTROL
In the case of (i) any merger, consolidation or combination of the
Corporation with or into another corporation (other than a merger, consolidation
or combination in which the Corporation is the continuing corporation and which
does not result in its outstanding stock being converted into or exchanged for
different securities, cash or other property, or any combination thereof) or a
sale of all or substantially all of the business or assets of the Corporation or
(ii) a Change in Control (as defined below) of the Corporation, each option then
outstanding for one year or more shall (unless the Committee determines
otherwise) become exercisable in full and any Employee holding an option shall
have the right (unless the Committee determines otherwise), to receive upon
exercise of such option an amount equal to the excess of the Fair Market Value
on the date of such exercise of (a) the securities, cash or other property, or
combination thereof, receivable upon such merger, consolidation or combination
in respect of a share of Stock, in the cases covered by clause (i) above, or (b)
the final tender offer price in the case of a tender offer resulting in a Change
in Control or (c) the value of the Stock covered by the option as determined by
4
<PAGE> 6
the Committee, in the case of a Change in Control by reason of any other event,
over the exercise price of such option, multiplied by the number of shares of
Stock with respect to which such option or SAR shall have been exercised
provided that in each such event the amount payable in the case of an incentive
stock option shall be limited to the maximum permissible amount necessary to
preserve the option's incentive stock option status. Such amount may be payable
fully in cash, fully in one or more of the kind or kinds of property payable
in such merger, consolidation or combination, or partly in cash and partly in
one or more of such kind or kinds of property, all in the discretion of the
Committee.
Any determination by the Committee made pursuant to this Section 8 may be
made as to all outstanding options or only as to certain options specified by
the Committee and any such determination shall be made (a) in cases covered by
clause (i) above, prior to the occurrence of such event, (b) in the event of a
tender or exchange offer, prior to the purchase of any Stock pursuant thereto by
the offeror and (c) in the case of a Change in Control by reason of any other
event, just prior to or as soon as practicable after such Change in Control.
"A Change in Control" shall be deemed to have occurred if (a) any person,
or any two or more persons acting as a group, and all affiliates of such person
or persons, shall own beneficially 25% or more of the Stock outstanding, or (b)
if following (i) a tender or exchange offer for voting securities of the
Corporation, or (ii) a proxy contest for the election of directors of the
Corporation, the persons who were directors of the Corporation immediately
before the initiation of such event cease to constitute a majority of the Board
of Directors of the Corporation upon the completion of such tender or exchange
offer or proxy contest or within one year after such completion.
9. NO RIGHTS OF SHAREHOLDERS
Neither an Employee nor the Employee's legal representative shall be, or
have any of the rights and privileges of, a shareholder of the Corporation in
respect of any shares purchasable upon the exercise of any option, or otherwise
receivable upon exercise of any SAR, in whole or in part, unless and until
certificates for such shares shall have been issued.
10. PLAN AMENDMENTS
The Plan may be amended by the Board, as it shall deem advisable or to
conform to any change in any law or regulation applicable thereto; provided,
that the Board may not, without the authorization and approval of shareholders:
(i) increase the aggregate number of shares available for options or SARs except
as permitted by Section 7, (ii) change the requirement of Section 5(a) that
option grants and SARs be priced at Fair Market Value, (iii) extend the maximum
period during which an option or SAR may be exercised, or (iv) change the Plan's
eligibility requirements.
11. TERM OF PLAN
The Plan shall become effective upon its approval by the Corporation's
shareholders. No options shall be granted under the Plan after the date which is
five years after the date on which the Plan was approved by the Corporation's
shareholders.
5
<PAGE> 1
[THE CHUBB CORPORATION LETTERHEAD]
February 19, 1982
Mr. Dean R. O'Hare
71 Carriage Hill Drive
Colts Neck, New Jersey 07722
Dear Mr. O'Hare:
In order to induce you to remain in the employ of The Chubb
Corporation (the "Company") and in consideration of your continuing in the
Company's employ, the Company agrees to provide the severance benefits
specified below on the terms and subject to the conditions stated. However,
in the absence of a Change in Control of the Company, as defined below, nothing
in this agreement shall affect the Company's normal right to terminate your
employment or your right to leave its employ.
1. Change in Control. For purposes of this agreement a Change
in Control will be deemed to have occurred
(A) if following (i) a tender or exchange offer for voting
securities of the Company, (ii) a proxy contest for the election of
directors of the Company or (iii) a merger or consolidation or sale of
all or substantially all of the business or assets of the Company, the
directors of the Company immediately prior to the initiation of such
event cease to constitute a majority of the board of directors of the
Company upon the occurrence of such event or within one year after
such event, or
(B) if any "person" or "group" (as defined under the
beneficial ownership rules of Sections 13(d)(3) and 14(d)(2) of the
Securities Exchange Act of 1934 and Rule 13d3 thereunder) acquires
ownership or control, or power to control, 25% or more of the
outstanding voting securities of the Company without prior approval or
ratification by a majority of the Company's directors in office at the
time of such event.
<PAGE> 2
2. Conditions to Severance Benefits. The benefits provided
for in Section 5 shall be payable or accrue to you if (a) a Change in Control
has occurred and (b) your employment with the Company has terminated within two
years after the Change in Control, other than termination by reason of (i) your
death, (ii) your retirement at normal retirement age ("Retirement") under the
Company's pension plan as in effect immediately prior to the Change in Control,
(iii) your voluntary termination other than for Good Reason, (iv) your
retirement for Disability or (v) your discharge for Cause.
Termination by you of your employment for "Good Reason" shall
mean termination by you of your employment, subsequent to a Change in Control,
because of:
(A) the assignment to you, without your express written
consent, of any duties inconsistent with your positions, duties,
responsibilities, authority and status with the Company and its
principal subsidiaries immediately prior to such Change in Control, or
a change in your reporting responsibilities, titles or offices as in
effect immediately prior to the Change in Control, or any removal of
you from or any failure to re-elect you to any of such positions,
except in connection with the termination of your employment for Cause,
Disability, Retirement, an a result of your death or by you without
Good Reason;
(B) a reduction by the Company in your base salary as in
effect at the time of such Change in Control;
(C) a failure by the Company to continue (or to replace with
equivalent plans) the Incentive Compensation Plan or any other bonus
plan in which you participated for the year immediately preceding such
Change in Control (the "Bonus Plans") which are in effect at the time
of such Change in Control or a failure by the Company to continue you
as a participant in such Bonus Plans (or equivalent plans) on a basis
which would entitle you to receive under such Bonus Plans (or
equivalent plans) amounts at least equal to the average amounts you
received pursuant to such Bonus Plans for the three years preceding
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<PAGE> 3
such Change in Control;
(D) the Company's requiring you to maintain your principal
office or conduct your principal activities anywhere other than at the
Company's principal executive offices in the New York Metropolitan
area, including Warren County, New Jersey.
(E) the failure by the Company to continue in effect (or to
replace with equivalent plans) the Company's Profit Sharing Plan or
any other compensation plan, any stock ownership plan, stock purchase
plan, stock option plan, life insurance plan, health and accident
plan, financial services plan, hospital-medical plan, dental plan, or
disability plan in which you are participating or eligible to
participate at the time of such Change in Control, or the taking of
any action by the Company which would adversely affect your
participation in or materially reduce your benefits under any such
plans (or equivalent plans) or deprive you of any material fringe
benefit enjoyed or to be enjoyed by you at the time of such Change in
Control;
(F) the failure by the Company to obtain the assumption of the
agreement to perform this Agreement by any successor as contemplated
in Section 7 hereof;
(G) any purported termination of your employment which is not
effected pursuant to a Notice of Termination satisfying the applicable
requirements with respect to such Notice; or
(H) a determination made by you in good faith, whether before
or after the date you are eligible for early retirement under the
Company's pension plan, that as a result of such Change in Control you
are not able to discharge your duties effectively; or
(I) any termination of this Agreement pursuant to Section 6
prior to the expiration of two years from the occurrence of the Change
in Control.
Termination of your employment for "Cause" shall mean
termination because of (A) the willful and continued failure by you
-3-
<PAGE> 4
substantially to perform your duties with the Company and its principal
subsidiaries (other than any such failure resulting from your incapacity due to
physical or mental illness), after a demand for substantial performance is
delivered to you by the Chief Executive Officer of the Company, which
specifically identifies the manner in which such executive believes that
you have not substantially performed your duties, or (B) the willful engaging
by you in misconduct which is materially injurious to the Company, monetarily
or otherwise. For purposes of this paragraph, no act, or failure to act, on
your part shall be considered "willful" unless done, or omitted to be done, by
you not in good faith and without reasonable belief that your action or
omission was in or not opposed to the best interests of the Company.
Notwithstanding the foregoing, you shall not be deemed to have been terminated
for Cause unless and until there shall have been delivered to you a copy of a
Notice of Termination from the Chief Executive Officer of the Company after
reasonable notice to you and an opportunity for you, together with your
counsel, to be heard before the Board of Directors, and a finding that in the
good faith opinion of the Board you were guilty of conduct set forth above in
clauses (A) or (B) of the first sentence of this paragraph and specifying the
particulars thereof in detail.
Termination of your employment for Disability shall mean
termination in accordance with the provisions of the Company's Long Term
Disability Plan as in effect immediately preceding the Change in Control.
3. Notice of Termination. Any purported termination of your
employment shall be communicated by written Notice of Termination to the other
party hereto. For purposes of this Agreement, a "Notice of Termination" shall
mean a notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of your employment
under the provision so indicated. No purported termination of your employment
by the Company shall be effective if it is not effected pursuant to a Notice of
Termination satisfying the requirements of this Section 3.
4. Date of Termination. "Date of Termination" shall mean (A)
if your employment is terminated for Disability, 30 days after Notice of
Termination is given (provided that you shall not have returned to the
performance of your duties on a full-time basis during such 30-day period) and
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<PAGE> 5
(B) if your employment is terminated for any other reason, the date on
which a Notice of Termination is given.
5. Severance Benefits. Subject to the conditions in Section
2, on termination of your employment you shall be entitled to the following
benefits:
(A) You shall be entitled to an amount (the "Severance
Compensation") equal to 2 times the sum of (i) one year's salary at
the annual rate in effect at the time of the Change in Control and (ii)
the average for the three years preceding such Change in Control of
your bonuses under the Annual Segment of the Company's Incentive
Compensation Plan, provided, however, that your Severance Compensation
shall not be greater than the amount you would have received as salary
and Annual Segment bonuses from the Company had you remained in the
employ of the Company from the Date of Termination until your normal
retirement date under the Company's pension plan (on the assumption
that your salary would remain at the same annual rate as in effect at
the time of Change in Control and that your Annual Segment bonuses
would be the average for the three years preceding such Change in
Control of your Annual Segment bonuses). The Severance Compensation
will be payable in full on the Date of Termination.
(B) In addition to the amount payable pursuant to (A) above,
you shall also be paid in full on the Date of Termination an amount in
cash equal to 100% of the outstanding and then unearned Units credited
for payment to you under the Growth Segment of the Company's Incentive
Compensation Plan. The amount of such payment shall be based on the
number of such Units multiplied by the higher of (x) the closing bid
price of a share of Common Stock of the Corporation in the
over-the-counter market on the business day prior to the Date of
Termination, as reported by the National Association of Securities
Dealers Automated Quotations, and (y) the weighted average price per
share paid in connection with the event giving rise to the Change in
Control. No payment pursuant to this paragraph B shall be taken into
account in determining any benefit under any pension, retirement, group
insurance or other benefit plan of the Company, including its
subsidiaries. Any such payment pursuant to this paragraph B shall not
be deemed to have been made pursuant to the incentive Compensation
-5-
<PAGE> 6
Plan, and, for purposes of such Plan, the Units in respect of which
any payment is made hereunder shall be deemed to have not been earned.
(C) The Company shall also pay to you an amount equal to all
legal fees and expenses incurred by you as a result of such
termination (including all such fees and expenses, if any, incurred in
contesting or disputing any such termination or in seeking to obtain
or enforce or retain any right or benefit provided by this Agreement);
(D) The Company shall maintain in full force and effect, for
your continued benefit until the earlier of (a) two years after the
Date of Termination or, (b) your commencement of full time employment
with a new employer, all life insurance, hospital-medical, dental,
health and accident, and disability plans in which you were entitled to
participate immediately prior to such Change in Control, provided that
your continued participation is possible under the general terms and
provisions of such plans and programs. In the event that your
participation in any such plan or program is barred for any reason
whatsoever, the Company shall arrange to provide you with benefits
substantially similar to those which you are entitled to receive under
such plan or program;
(E) You shall not be required to mitigate the amount of any
payment provided for in this Section 5 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this
Section 5 be reduced by any compensation earned by you as the result
of employment by another employer after the Date of Termination or
otherwise.
6. Term of Agreement. This Agreement shall have an initial
term of two (2) years from the date hereof and shall be automatically extended
at the expiration of said two-year period for successive two (2) year periods
unless the Company gives you one year's prior written notice that it is
terminating this Agreement at the expiration of the then current two year
period.
7. Successors; Binding Agreement.
(A) The Company will require any purchaser of all or
substantially all of the business or assets of the Company, by
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<PAGE> 7
agreement in form and substance satisfactory to you to assume and
agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such
purchase had taken place. As used in this Agreement, "Company" shall
mean the Company as hereinbefore defined and any successor to its
business or assets as aforesaid which executes and delivers the
agreement provided for in this Section 7A or which otherwise becomes
bound by all the terms and provisions of this Agreement by operation
of law.
(B) This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees. If you should die while any amount would still be payable
to you hereunder if you had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your devisee, legatee or other designee or,
if there be no such designee, to your estate.
8. Notices. For the purposes of this Agreement, notices and
all other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by certified
or registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, provided
that all notices to the Company shall be directed to the attention of the
Chairman of the Company, with a copy to the Secretary of the Company, or to
such other address as either party may have furnished to the other in writing
in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
9. Miscellaneous. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing signed by you and such officer as may be specifically
designated by the Board of Directors of the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
-7-
<PAGE> 8
subject matter hereof have been made by either party which are not expressly
set forth in this Agreement; provided, however, that this Agreement shall not
supersede or in any way affect the rights, duties or obligations you may have
under any other written agreement with the Company. This Agreement shall be
governed by, and construed in accordance with, the laws (other than principles
of conflicts of laws) of the State of New York.
10. Validity. The invalidity or unenforceability of any
provision of this Agreement in any respect shall not affect the validity or
enforceability of such provision in any other respect or of any other provision
of this Agreement, all of which shall remain in full force and effect.
If the foregoing correctly sets forth our understanding on
the subject matter hereof, kindly sign and return to the Company the enclosed
copy hereof, which will thereupon become our binding agreement.
Sincerely,
THE CHUBB CORPORATION
By /s/ HENRY U. HARDER
------------------------
Henry U. Harder
President and Chairman
Agreed to this 25th day
of February, 1982
/s/ DEAN R. O'HARE
------------------
Dean R. O'Hare
-8-
<PAGE> 9
[THE CHUBB CORPORATION LETTERHEAD]
December 6, 1985
Dear Mr. O'Hare:
We wish, subject to your acceptance, to amend the Executive Severance
Agreement set forth in the letter to you from The Chubb Corporation (the
"Company") dated February 19, 1982, in order to conform that Agreement to
changes subsequently made in our compensation plans.
Accordingly paragraphs (C) and (E) of Section 2 (Conditions to
Severance Benefits) of that Agreement are hereby amended to read as follows:
(C) a failure by the Company to continue (or to replace with
equivalent plans) the Performance Share Plan, the Annual Incentive
Compensation Plan or any other bonus plan in which you participated
for the year immediately preceding such Change in Control (the "Bonus
Plans") which are in effect at the time of such Change in Control or a
failure by the Company to continue you as a participant in such Bonus
Plans (or equivalent plans) on a basis which would entitle you to
receive under such Bonus Plans (or equivalent plans) amounts at least
equal to the average amounts you received pursuant to such Bonus Plans
for the three years preceding such Change in Control;
(E) the failure by the Company to continue in effect (or to
replace with equivalent plans) the Company's Capital Accumulation Plan
or any other compensation plan, any stock ownership plan, stock
purchase plan, stock option plan, life insurance plan, health and
accident plan, financial services plan, hosptital-medical plan, dental
plan, or disability plan in which you are participating or eligible to
participate at the time of such Change in Control, or the taking of
any action by the Company which would adversely affect your
participation in or materially reduce your benefits under any such
plans (or equivalent plans) or deprive you of any material fringe
benefit enjoyed or to be enjoyed by you at the time of such Change in
Control;
<PAGE> 10
- 2 -
Paragraph (A) of Section 5 (Severance Benefits) of that Agreement is
hereby amended to read as follows:
(A) You shall be entitled to an amount (the "Severance
Compensation") equal to 2 times the sum of (i) one year's salary at
the annual rate in effect at the time of the Change in Control and
(ii) the average for the three calendar years preceding such Change in
Control of your annual bonuses under the Annual Segment of the
Company's Incentive Compensation Plan (1971) and Annual Incentive
Compensation Plan (1984), provided, however, that your Severance
Compensation shall not be greater than the amount you would have
received as salary and such bonuses from the Company had you remained
in the employ of the Company from the Date of Termination until your
normal retirement date under the Company's pension plan (on the
assumption that your salary would remain at the same annual rate as in
effect at the time of Change in Control and that your annual bonuses
would be the average for the three calendar years preceding such
Change in Control of such bonuses). The Severance Compensation will
be payable in full on the Date of Termination.
Effective February 15, 1986, Section 5 of that Agreement is hereby
amended to eliminate paragraph (B) and to re-letter paragraphs (C), (D) and (E)
respectively as (B), (C) and (D).
All other terms and conditions of that Agreement remain
unchanged.
Please indicate your acceptance of these amendments by signing and
returning to the Company the enclosed copy of this letter.
Very truly yours,
THE CHUBB CORPORATION
By: /s/ HENRY G. GULICK
----------------------
Agreed to this 10th day
of December, 1985
/s/ DEAN R. O'HARE
---------------------
<PAGE> 11
[THE CHUBB CORPORATION LETTERHEAD]
December 1, 1988
Mr. Dean R. O'Hare
71 Carriage Hill Drive
Colts Neck, NJ 07722
Dear Mr. O'Hare:
We wish, subject to your acceptance, to amend the Executive Severance
Agreement set forth in the letter to you from The Chubb Corporation (the
"Company") dated February 19, 1982 and the amendment thereto set forth in the
letter to you dated December 6, 1985, in order to increase the multiplier
contained in Section 5. (Severance Benefits) Paragraph (A) from 2 to 4.
Accordingly, Paragraph (A) of Section 5. (Severance Benefits) of that
Agreement is hereby amended to read as follows:
(A) You shall be entitled to an amount (the "Severance
Compensation") equal to 4 times the sum of (i) one year's salary at
the annual rate in effect at the time of the Change in Control and
(ii) the average for the three calendar years preceding such Change in
Control of your annual bonuses under the Annual Incentive Compensation
Plan (1984), provided, however, that your Severance Compensation shall
not be greater than the amount you would have received as salary and
such bonuses from the Company had you remained in the employ of the
Company from the Date of Termination until your normal retirement date
under the Company's pension plan (on the assumption that your salary
would remain at the same annual rate as in effect at the time of
Change in Control and that your annual bonuses would be the average
for the three calendar years preceding such Change in Control of such
bonuses). The Severance Compensation will be payable in full on the
Date of Termination.
<PAGE> 12
- 2 -
All other terms and conditions of that Agreement remain unchanged.
Please indicate your acceptance of these amendments by signing and
returning to the Company the enclosed copy of this letter.
Very truly yours,
THE CHUBB CORPORATION
By: /s/ HENRY G. GULICK
------------------------
Henry G. Gulick
Vice President and Secretary
Agreed to this 2nd day
of Dec., 1988
/s/ DEAN R. O'HARE
------------------------
Dean R. O'Hare
<PAGE> 13
[THE CHUBB CORPORATION LETTERHEAD]
February 19, 1982
Mr. Percy Chubb, III
Claremont Road
Bernardsville, New Jersey 07924
Dear Mr. Chubb:
In order to induce you to remain in the employ of The Chubb
Corporation (the "Company") and in consideration of your continuing in the
Company's employ, the Company agrees to provide the severance benefits
specified below on the terms and subject to the conditions stated. However, in
the absence of a Change in Control of the Company, as defined below, nothing in
this agreement shall affect the Company's normal right to terminate your
employment or your right to leave its employ.
1. Change in Control. For purposes of this agreement a
Change in Control will be deemed to have occurred
(A) if following (i) a tender or exchange offer for voting
securities of the Company, (ii) a proxy contest for the election of
directors of the Company or (iii) a merger or consolidation or sale of
all or substantially all of the business or assets of the Company, the
directors of the Company immediately prior to the initiation of such
event cease to constitute a majority of the board of directors of the
Company upon the occurrence of such event or within one year after
such event, or
(B) if any "person" or "group" (as defined under the
beneficial ownership rules of Sections 13(d)(3) and 14(d)(2) of the
Securities Exchange Act of 1934 and Rule 13d3 thereunder) acquires
ownership or control, or power to control, 25% or more of the
outstanding voting securities of the Company without prior approval or
ratification by a majority of the Company's directors in office at the
time of such event.
<PAGE> 14
2. Conditions to Severance Benefits. The benefits provided
for in Section 5 shall be payable or accrue to you if (a) a Change in Control
has occurred and (b) your employment with the Company has terminated within two
years after the Change in Control, other than termination by reason of (i) your
death, (ii) your retirement at normal retirement age ("Retirement") under the
Company's pension plan as in effect immediately prior to the Change in Control,
(iii) your voluntary termination other than for Good Reason, (iv) your
retirement for Disability or (v) your discharge for Cause.
Termination by you of your employment for "Good Reason" shall
mean termination by you of your employment, subsequent to a Change in Control,
because of:
(A) the assignment to you, without your express written
consent, of any duties inconsistent with your positions, duties,
responsibilities, authority and status with the Company and its
principal subsidiaries immediately prior to such Change in Control, or
a change in your reporting responsibilities, titles or offices as in
effect immediately prior to the Change in Control, or any removal of
you from or any failure to re-elect you to any of such positions,
except in connection with the termination of your employment for
Cause, Disability, Retirement, as a result of your death or by you
without Good Reason;
(B) a reduction by the Company in your base salary as in
effect at the time of such Change in Control;
(C) a failure by the Company to continue (or to replace with
equivalent plans) the Incentive Compensation Plan or any other bonus
plan in which you participated for the year immediately preceding such
Change in Control (the "Bonus Plans") which are in effect at the time
of such Change in Control or a failure by the Company to continue you
as a participant in such Bonus Plans (or equivalent plans) on a basis
which would entitle you to receive under such Bonus Plans (or
equivalent plans) amounts at least equal to the average amounts you
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<PAGE> 15
received pursuant to such Bonus Plans for the three years preceding
such Change in Control;
(D) the Company's requiring you to maintain your principal
office or conduct your principal activities anywhere other than at the
Company's principal executive offices in the New York Metropolitan
area, including Warren County, New Jersey.
(E) the failure by the Company to continue in effect (or to
replace with equivalent plans) the Company's Profit Sharing Plan or
any other compensation plan, any stock ownership plan, stock purchase
plan, stock option plan, life insurance plan, health and accident
plan, financial services plan, hospital-medical plan, dental plan, or
disability plan in which you are participating or eligible to
participate at the time of such Change in Control, or the taking of
any action by the Company which would adversely affect your
participation in or materially reduce your benefits under any such
plans (or equivalent plans) or deprive you of any material fringe
benefit enjoyed or to be enjoyed by you at the time of such Change in
Control;
(F) the failure by the Company to obtain the assumption of the
agreement to perform this Agreement by any successor as contemplated
in Section 7 hereof;
(G) any purported termination of your employment which is not
effected pursuant to a Notice of Termination satisfying the applicable
requirements with respect to such Notice; or
(H) a determination made by you in good faith, whether before
or after the date you are eligible for early retirement under the
Company's pension plan, that as a result of such Change in Control you
are not able to discharge your duties effectively; or
(I) any termination of this Agreement pursuant to Section 6
prior to the expiration of two years from the occurrence of the Change
in Control.
Termination of your employment for "Cause" shall mean
termination because of (A) the willful and continued failure by you
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<PAGE> 16
substantially to perform your duties with the Company and its principal
subsidiaries (other than any such failure resulting from your incapacity due to
physical or mental illness), after a demand for substantial performance is
delivered to you by the Chief Executive Officer of the Company, which
specifically identifies the manner in which such executive believes that you
have not substantially performed your duties, or (B) the willful engaging by
you in misconduct which is materially injurious to the Company, monetarily or
otherwise. For purposes of this paragraph, no act, or failure to act, on your
part shall be considered "willful" unless done, or omitted to be done, by you
not in good faith and without reasonable belief that your action or omission
was in or not opposed to the best interests of the Company. Notwithstanding the
foregoing, you shall not be deemed to have been terminated for Cause unless and
until there shall have been delivered to you a copy of a Notice of Termination
from the Chief Executive Officer of the Company after reasonable notice to you
and an opportunity for you, together with your counsel, to be heard before the
Board of Directors, and a finding that in the good faith opinion of the Board
you were guilty of conduct set forth above in clauses (A) or (B) of the first
sentence of this paragraph and specifying the particulars thereof in detail.
Termination of your employment for Disability shall mean
termination in accordance with the provisions of the Company's Long Term
Disability Plan as in effect immediately preceding the Change in Control.
3. Notice of Termination. Any purported termination of your
employment shall be communicated by written Notice of Termination to the other
party hereto. For purposes of this Agreement, a "Notice of Termination" shall
mean a notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of your employment
under the provision so indicated. No purported termination of your employment
by the Company shall be effective if it is not effected pursuant to a Notice of
Termination satisfying the requirements of this Section 3.
4. Date of Termination. "Date of Termination" shall mean
(A) if your employment is terminated for Disability, 30 days after Notice of
Termination is given (provided that you shall not have returned to the
performance of your duties on a full-time basis during such 30-day period) and
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<PAGE> 17
(B) if your employment is terminated for any other reason, the date on which a
Notice of Termination is given.
5. Severance Benefits. Subject to the conditions in
Section 2, on termination of your employment you shall be entitled to the
following benefits:
(A) You shall be entitled to an amount (the "Severance
Compensation") equal to 2 times the sum of (i) one year's salary at
the annual rate in effect at the time of the Change in Control and
(ii) the average for the three years preceding such Change in Control
of your bonuses under the Annual Segment of the Company's Incentive
Compensation Plan, provided, however, that your Severance Compensation
shall not be greater than the amount you would have received as salary
and Annual Segment bonuses from the Company had you remained in the
employ of the Company from the Date of Termination until your normal
retirement date under the Company's pension plan (on the assumption
that your salary would remain at the same annual rate as in effect at
the time of Change in Control and that your Annual Segment bonuses
would be the average for the three years preceding such Change in
Control of your Annual Segment bonuses). The Severance Compensation
will be payable in full on the Date of Termination.
(B) In addition to the amount payable pursuant to (A) above,
you shall also be paid in full on the Date of Termination an amount in
cash equal to 100% of the outstanding and then unearned Units credited
for payment to you under the Growth Segment of the Company's Incentive
Compensation Plan. The amount of such payment shall be based on the
number of such Units multiplied by the higher of (x) the closing bid
price of a share of Common Stock of the Corporation in the
over-the-counter market on the business day prior to the Date of
Termination, as reported by the National Association of Securities
Dealers Automated Quotations, and (y) the weighted average price per
share paid in connection with the event giving rise to the Change in
Control. No payment pursuant to this paragraph B shall be taken into
account in determining any benefit under any pension, retirement,
group insurance or other benefit plan of the Company, including its
subsidiaries. Any such payment pursuant to this paragraph B shall not
be deemed to have been made pursuant to the Incentive Compensation
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<PAGE> 18
Plan, and, for purposes of such Plan, the Units in respect of which
any payment is made hereunder shall be deemed to have not been earned.
(C) The Company shall also pay to you an amount equal to all
legal fees and expenses incurred by you as a result of such
termination (including all such fees and expenses, if any, incurred in
contesting or disputing any such termination or in seeking to obtain
or enforce or retain any right or benefit provided by this Agreement);
(D) The Company shall maintain in full force and effect, for
your continued benefit until the earlier of (a) two years after the
Date of Termination or, (b) your commencement of full time employment
with a new employer, all life insurance, hospital-medical, dental,
health and accident, and disability plans in which you were entitled
to participate immediately prior to such Change in Control, provided
that your continued participation is possible under the general terms
and provisions of such plans and programs. In the event that your
participation in any such plan or program is barred for any reason
whatsoever, the Company shall arrange to provide you with benefits
substantially similar to those which you are entitled to receive under
such plan or program;
(E) You shall not be required to mitigate the amount of any
payment provided for in this Section 5 by seeking other employment or
otherwise, nor shall the amount of any payment provided for in this
Section 5 be reduced by any compensation earned by you as the result
of employment by another employer after the Date of Termination or
otherwise.
6. Term of Agreement. This Agreement shall have an initial
term of two (2) years from the date hereof and shall be automatically extended
at the expiration of said two-year period for successive two (2) year periods
unless the Company gives you one year's prior written notice that it is
terminating this Agreement at the expiration of the then current two year
period.
7. Successors; Binding Agreement.
(A) The Company will require any purchaser of all or
substantially all of the business or assets of the Company, by
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<PAGE> 19
agreement in form and substance satisfactory to you to assume and
agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such
purchase had taken place. As used in this Agreement, "Company" shall
mean the Company as hereinbefore defined and any successor to its
business or assets as aforesaid which executes and delivers the
agreement provided for in this Section 7A or which otherwise becomes
bound by all the terms and provisions of this Agreement by operation
of law.
(B) This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and
legatees. If you should die while any amount would still be payable to
you hereunder if you had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms
of this Agreement to your devisee, legatee or other designee or, if
there be no such designee, to your estate.
8. Notices. For the purposes of this Agreement, notices and
all other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by certified
or registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, provided
that all notices to the Company shall be directed to the attention of the
Chairman of the Company, with a copy to the Secretary of the Company, or to
such other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon receipt.
9. Miscellaneous. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing signed by you and such officer as may be specifically
designated by the Board of Directors of the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
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<PAGE> 20
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not expressly
set forth in this Agreement; provided, however, that this Agreement shall not
supersede or in any way affect the rights, duties or obligations you may have
under any other written agreement with the Company. This Agreement shall be
governed by, and construed in accordance with, the laws (other than principles
of conflicts of laws) of the State of New York.
10. Validity. The invalidity or unenforceability of any
provision of this Agreement in any respect shall not affect the validity or
enforceability of such provision in any other respect or of any other provision
of this Agreement, all of which shall remain in full force and effect.
If the foregoing correctly sets forth our understanding on the
subject matter hereof, kindly sign and return to the Company the enclosed copy
hereof, which will thereupon become our binding agreement.
Sincerely,
THE CHUBB CORPORATION
By /s/ HENRY U. HARDER
---------------------------
Henry U. Harder
President and Chairman
Agreed to this 24th day
of February, 1982.
/s/ PERCY CHUBB, III
-------------------------
Percy Chubb, III
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<PAGE> 21
[THE CHUBB CORPORATION LETTERHEAD]
December 6, 1985
Dear Mr. Chubb:
We wish, subject to your acceptance, to amend the Executive
Severance Agreement set forth in the letter to you from The Chubb Corporation
(the "Company") dated February 19, 1982, in order to conform that Agreement to
changes subsequently made in our compensation plans.
Accordingly paragraphs (C) and (E) of Section 2 (Conditions to
Severance Benefits) of that Agreement are hereby amended to read as follows:
(C) a failure by the Company to continue (or to
replace with equivalent plans) the Performance Share Plan, the
Annual Incentive Compensation Plan or any other bonus plan in
which you participated for the year immediately preceding such
Change in Control (the "Bonus Plans") which are in effect at
the time of such Change in Control or a failure by the Company
to continue you as a participant in such Bonus Plans (or
equivalent plans) on a basis which would entitle you to
receive under such Bonus Plans (or equivalent plans) amounts
at least equal to the average amounts you received pursuant to
such Bonus Plans for the three years preceding such Change in
Control;
(E) the failure by the Company to continue in
effect (or to replace with equivalent plans) the Company's
Capital Accumulation Plan or any other compensation plan, any
stock ownership plan, stock purchase plan, stock option plan,
life insurance plan, health and accident plan, financial
services plan, hosptital-medical plan, dental plan, or
disability plan in which you are participating or eligible to
participate at the time of such Change in Control, or the
taking of any action by the Company which would adversely
affect your participation in or materially reduce your
benefits under any such plans (or equivalent plans) or deprive
you of any material fringe benefit enjoyed or to be enjoyed by
you at the time of such Change in Control;
<PAGE> 22
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Paragraph (A) of Section 5 (Severance Benefits) of that
Agreement is hereby amended to read as follows:
(A) You shall be entitled to an amount (the
"Severance Compensation") equal to 2 times the sum of (i) one
year's salary at the annual rate in effect at the time of the
Change in Control and (ii) the average for the three calendar
years preceding such Change in Control of your annual bonuses
under the Annual Segment of the Company's Incentive
Compensation Plan (1971) and Annual Incentive Compensation
Plan (1984), provided, however, that your Severance
Compensation shall not be greater than the amount you would
have received as salary and such bonuses from the Company had
you remained in the employ of the Company from the Date of
Termination until your normal retirement date under the
Company's pension plan (on the assumption that your salary
would remain at the same annual rate as in effect at the time
of Change in Control and that your annual bonuses would be the
average for the three calendar years preceding such Change in
Control of such bonuses). The Severance Compensation will be
payable in full on the Date of Termination.
Effective February 15, 1986, Section 5 of that Agreement is
hereby amended to eliminate paragraph (B) and to re-letter paragraphs (C), (D)
and (E) respectively as (B), (C) and (D).
All other terms and conditions of that Agreement remain
unchanged.
Please indicate your acceptance of these amendments by signing
and returning to the Company the enclosed copy of this letter.
Very truly yours,
THE CHUBB CORPORATION
By: /s/ HENRY G. GULICK
----------------------
Agreed to this 9th day
of December, 1985
/s/ PERCY CHUBB, III
------------------------
<PAGE> 23
[THE CHUBB CORPORATION LETTERHEAD]
December 1, 1988
Mr. Donn H. Norton
5 Lenate Drive
Roseland, NJ 07068
Dear Mr. Norton:
In order to induce you to remain in the employ of The Chubb
Corporation (the "Company") and in consideration of your continuing in the
Company's employ, the Company agrees to provide the severance benefits
specified below on the terms and subject to the conditions stated. However, in
the absence of a Change in Control of the Company, as defined below, nothing in
this agreement shall affect the Company's normal right to terminate your
employment or your right to leave its employ.
1. Change in Control. For purposes of this agreement a
Change in Control will be deemed to have occurred
(A) if following (i) a tender or exchange offer for
voting securities of the Company, (ii) a proxy contest for the
election of directors of the Company or (iii) a merger or
consolidation or sale of all or substantially all of the
business or assets of the Company, the directors of the
Company immediately prior to the initiation of such event
cease to constitute a majority of the board of directors of
the Company upon the occurrence of such event or within one
year after such event, or
(B) if any "person" or "group" (as defined under
the beneficial ownership rules of Sections 13(d)(3) and
14(d)(2) of the Securities Exchange Act of 1934 and Rule 13d3
thereunder) acquires ownership or control, or power to
control, 25% or more of the outstanding voting securities of
the Company without prior approval or ratification by a
majority of the Company's directors in office at the time of
such event.
<PAGE> 24
2. Conditions to Severance Benefits. The benefits provided
for in Section 5 shall be payable or accrue to you if (a) a Change in Control
has occurred and (b) your employment with the Company has terminated within two
years after the Change in Control, other than termination by reason of (i) your
death, (ii) your retirement at normal retirement age ("Retirement") under the
Company's pension plan as in effect immediately prior to the Change in Control,
(iii) your voluntary termination other than for Good Reason, (iv) your
retirement for Disability or (v) your discharge for Cause.
Termination by you of your employment for "Good Reason" shall
mean termination by you of your employment, subsequent to a Change in Control,
because of:
(A) the assignment to you, without your express
written consent, of any duties inconsistent with your
positions, duties, responsibilities, authority and status with
the Company and its principal subsidiaries immediately prior
to such Change in Control, or a change in your reporting
responsibilities, titles or offices as in effect immediately
prior to the Change in Control, or any removal of you from or
any failure to re-elect you to any of such positions, except
in connection with the termination of your employment for
Cause, Disability, Retirement, as a result of your death or by
you without Good Reason;
(B) a reduction by the Company in your base salary
as in effect at the time of such Change in Control;
(C) a failure by the Company to continue (or to
replace with equivalent plans) the Performance Share Plan, the
Bellemead Incentive Plan or any other bonus plan in which you
participated for the year immediately preceding such Change in
Control (the "Bonus Plans") which are in effect at the time of
such Change in Control or a failure by the Company to continue
you as a participant in such Bonus Plans (or equivalent plans)
on a basis which would entitle you to receive under such Bonus
Plans (or equivalent plans) amounts at least equal to the
average amounts you received pursuant to such Bonus Plans for
the three years preceding such Change in Control;
(D) the Company's requiring you to maintain your
principal office or conduct your principal activities anywhere
other than at the principal executive offices of Bellemead
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<PAGE> 25
Development Corporation ("Bellemead") in the New York
Metropolitan area, including Essex County, New Jersey.
(E) the failure by the Company to continue in
effect (or to replace with equivalent plans) the Bellemead
Profit Sharing Plan or any other compensation plan, any stock
ownership plan, stock purchase plan, stock option plan, life
insurance plan, health and accident plan, financial services
plan, hospital-medical plan, dental plan, or disability plan
in which you are participating or eligible to participate at
the time of such Change in Control, or the taking of any
action by the Company which would adversely affect your
participation in or materially reduce your benefits under any
such plans (or equivalent plans) or deprive you of any
material fringe benefit enjoyed or to be enjoyed by you at the
time of such Change in Control;
(F) the failure by the Company to obtain the
assumption of the agreement to perform this Agreement by any
successor as contemplated in Section 7 hereof;
(G) any purported termination of your employment
which is not effected pursuant to a Notice of Termination
satisfying the applicable requirements with respect to such
Notice; or
(H) a determination made by you in good faith,
whether before or after the date you are eligible for early
retirement under the Company's pension plan, that as a result
of such Change in Control you are not able to discharge your
duties effectively; or
(I) any termination of this Agreement pursuant to
Section 6 prior to the expiration of two years from the
occurrence of the Change in Control.
Termination of your employment for "Cause" shall mean
termination because of (A) the willful and continued failure by you
substantially to perform your duties with the Company and its principal
subsidiaries (other than any such failure resulting from your incapacity due to
physical or mental illness), after a demand for substantial performance is
delivered to you by the Chief Executive Officer of the Company, which
specifically identifies the manner in which such executive believes that you
have not substantially performed your duties, or (B) the willful engaging by
you in misconduct which is materially injurious to the Company, monetarily or
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<PAGE> 26
otherwise. For purposes of this paragraph, no act, or failure to act, on your
part shall be considered "willful" unless done, or omitted to be done, by you
not in good faith and without reasonable belief that your action or omission
was in or not opposed to the best interests of the Company. Notwithstanding
the foregoing, you shall not be deemed to have been terminated for Cause unless
and until there shall have been delivered to you a copy of a Notice of
Termination from the Chief Executive Officer of the Company after reasonable
notice to you and an opportunity for you, together with your counsel, to be
heard before the Board of Directors, and a finding that in the good faith
opinion of the Board you were guilty of conduct set forth above in clauses (A)
or (B) of the first sentence of this paragraph and specifying the particulars
thereof in detail.
Termination of your employment for Disability shall mean
termination in accordance with the provisions of the Company's Long Term
Disability Plan as in effect immediately preceding the Change in Control.
3. Notice of Termination. Any purported termination of
your employment shall be communicated by written Notice of Termination to the
other party hereto. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of your employment
under the provision so indicated. No purported termination of your employment
by the Company shall be effective if it is not effected pursuant to a Notice of
Termination satisfying the requirements of this Section 3.
4. Date of Termination. "Date of Termination" shall
mean (A) if your employment is terminated for Disability, 30 days after Notice
of Termination is given (provided that you shall not have returned to the
performance of your duties on a full-time basis during such 30-day period) and
(B) if your employment is terminated for any other reason, the date on which a
Notice of Termination is given.
5. Severance Benefits. Subject to the conditions in
Section 2, on termination of your employment you shall be entitled to the
following benefits:
(A) You shall be entitled to an amount (the
"Severance Compensation") equal to 2 times the sum of (i) one
year's salary at the annual rate in effect at the time of the
Change in Control and (ii) the average for the three calendar
years preceding such Change in Control of your annual bonuses
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<PAGE> 27
under the Bellemead Incentive Plan, provided, however, that
your Severance Compensation shall not be greater than the
amount you would have received as salary and such bonuses from
the Company had you remained in the employ of the Company from
the Date of Termination until your normal retirement date
under the Company's pension plan (on the assumption that your
salary would remain at the same annual rate as in effect at
the time of Change in Control and that your annual bonuses
would be the average for the three calendar years preceding
such Change in Control of such bonuses). The Severance
Compensation will be payable in full on the Date of
Termination.
(B) The Company shall also pay to you an amount
equal to all legal fees and expenses incurred by you as a
result of such termination (including all such fees and
expenses, if any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce or retain any
right or benefit provided by this Agreement);
(C) The Company shall maintain in full force and
effect, for your continued benefit until the earlier of (a)
two years after the Date of Termination or, (b) your
commencement of full time employment with a new employer, all
life insurance, hospital-medical, dental, health and accident,
and disability plans in which you were entitled to participate
immediately prior to such Change in Control, provided that
your continued participation is possible under the general
terms and provisions of such plans and programs. In the event
that your participation in any such plan or program is barred
for any reason whatsoever, the Company shall arrange to
provide you with benefits substantially similar to those which
you are entitled to receive under such plan or program;
(D) You shall not be required to mitigate the amount
of any payment provided for in this Section 5 by seeking other
employment or otherwise, nor shall the amount of any payment
provided for in this Section 5 be reduced by any compensation
earned by you as the result of employment by another employer
after the Date of Termination or otherwise.
6. Term of Agreement. This Agreement shall have an
initial term of two (2) years from the date hereof and shall be automatically
extended at the expiration of said two-year period for successive two (2) year
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<PAGE> 28
periods unless the Company gives you one year's prior written notice that it is
terminating this Agreement at the expiration of the then current two year
period.
7. Successors; Binding Agreement.
(A) The Company will require any purchaser of all
or substantially all of the business or assets of the Company,
by agreement in form and substance satisfactory to you to
assume and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to
perform it if no such purchase had taken place. As used in
this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business or
assets as aforesaid which executes and delivers the agreement
provided for in this Section 7A or which otherwise becomes
bound by all the terms and provisions of this Agreement by
operation of law.
(B) This Agreement shall inure to the benefit of
and be enforceable by your personal or legal representatives,
executors, administrators, successors, heirs, distributees,
devisees and legatees. If you should die which any amount
would still be payable to you hereunder if you had continued
to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement
to your devisee, legatee or other designee or, if there be no
such designee, to your estate.
8. Notices. For the purposes of this Agreement,
notices and all other communications provided for in the Agreement shall be in
writing and shall be deemed to have been duly given when delivered or mailed by
certified or registered mail, return receipt requested, postage prepaid,
addresseed to the respective addresses set forth on the first page of this
Agreement, provided that all notices to the Company shall be directed to the
attention of the Chairman of the Company, with a copy to the Secretary of the
Company, or to such other address as either party may have furnished to the
other in writing in accordance herewith, except that notice of change of
address shall be effective only upon receipt.
9. Miscellaneous. No provisions of this Agreement
may be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing signed by you and such officer as may be
specifically designated by the Board of Directors of the Company. No waiver
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<PAGE> 29
be either party hereto at any time of any breach by the other party hereto of,
or compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time. No
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party which are
not expressly set forth in this Agreement; provided, however, that this
Agreement shall not supersede or in any way affect the rights, duties or
obligations you may have under any other written agreement with the Company.
This Agreement shall be governed by, and construed in accordance with, the laws
(other than principles of conflicts of laws) of the State of New York.
10. Validity. The invalidity or unenforceability of
any provision of this Agreement in any respect shall not affect the validity or
enforceability of such provision in any other respect or of any other provision
of this Agreement, all of which shall remain in full force and effect.
If the foregoing correctly sets forth our
understanding on the subject matter hereof, kindly sign and return to the
Company the enclosed copy hereof, which will thereupon become our binding
agreement.
Sincerely,
THE CHUBB CORPORATION
By /s/ DEAN R. O'HARE
----------------------
Dean R. O'Hare
Chairman
Agreed to this 1st day
of December, 1988.
/s/ DONN H. NORTON
---------------------
Donn H. Norton
- 7 -
<PAGE> 30
[THE CHUBB CORPORATION LETTERHEAD]
November 16, 1994
Mr. Robert P. Crawford, Jr.
55 Silver Lake Drive
Summit, NJ 07901
Dear Mr. Crawford:
In order to induce you to remain in the employ of The Chubb
Corporation (the "Company") and in consideration of your continuing in the
Company's employ, the Company agrees to provide the severance benefits
specified below on the terms and subject to the conditions stated. However, in
the absence of a Change in Control of the Company, as defined below, nothing in
this agreement shall affect the Company's normal right to terminate your
employment or your right to leave its employ.
1. Change in Control. For purposes of this agreement a
Change in Control will be deemed to have occurred
(A) if following (i) a tender or exchange offer for
voting securities of the Company, (ii) a proxy contest for the
election of directors of the Company or (iii) a merger or
consolidation or sale of all or substantially all of the
business or assets of the Company, the directors of the
Company immediately prior to the initiation of such event
cease to constitute a majority of the board of directors of
the Company upon the occurrence of such event or within one
year after such event, or
(B) if any "person" or "group" (as defined under
the beneficial ownership rules of Sections 13(d)(3) and
14(d)(2) of the Securities Exchange Act of 1934 and Rule 13d3
thereunder) acquires ownership or control, or power to
control, 25% or more of the outstanding voting securities of
the Company without prior approval or ratification by a
majority of the Company's directors in office at the time of
such event.
2. Conditions to Severance Benefits. The benefits provided
for in Section 5 shall be payable or accrue to you if (a) a Change in Control
has occurred and (b) your employment with the Company has terminated within two
years after the Change in Control, other than termination by reason of (i) your
<PAGE> 31
Mr. Robert P. Crawford, Jr.
November 16, 1994
Page 2
death, (ii) your retirement at normal retirement age ("Retirement") under the
Company's pension plan as in effect immediately prior to the Change in Control,
(iii) your voluntary termination other than for Good Reason, (iv) your
retirement for Disability or (v) your discharge for Cause.
Termination by you of your employment for "Good Reason" shall
mean termination by you of your employment, subsequent to a Change in Control,
because of:
(A) the assignment to you, without your express
written consent, of any duties inconsistent with your
positions, duties, responsibilities, authority and status with
the Company and its principal subsidiaries immediately prior
to such Change in Control, or a change in your reporting
responsibilities, titles or offices as in effect immediately
prior to the Change in Control, or any removal of you from or
any failure to re-elect you to any of such positions, except
in connection with the termination of your employment for
Cause, Disability, Retirement, as a result of your death or by
you without Good Reason;
(B) a reduction by the Company in your base salary
as in effect at the time of such Change in Control;
(C) a failure by the Company to continue (or to
replace with equivalent plans) the Performance Share Plan, the
Annual Incentive Compensation Plan or any other bonus plan in
which you participated for the year immediately preceding such
Change in Control (the "Bonus Plans") which are in effect at
the time of such Change in Control or a failure by the Company
to continue you as a participant in such Bonus Plans (or
equivalent plans) on a basis which would entitle you to
receive under such Bonus Plans (or equivalent plans) amounts
at least equal to the average amounts you received pursuant to
such Bonus Plans for the three years preceding such Change in
Control;
(D) the Company's requiring you to maintain your
principal office or conduct your principal activities anywhere
other than at the Company's principal executive offices in the
New York Metropolitan area, including Somerset County, New
Jersey.
(E) the failure by the Company to continue in
effect (or to replace with equivalent plans) the Company's
<PAGE> 32
Mr. Robert P. Crawford, Jr.
November 16, 1994
Page 3
Capital Accumulation Plan or any other compensation plan, any
stock ownership plan, stock purchase plan, stock option plan,
life insurance plan, health and accident plan, financial
services plan, hospital-medical plan, dental plan, or
disability plan in which you are participating or eligible to
participate at the time of such Change in Control, or the
taking of any action by the Company which would adversely
affect your participation in or materially reduce your
benefits under any such plans (or equivalent plans) or deprive
you of any material fringe benefit enjoyed or to be enjoyed by
you at the time of such Change in Control;
(F) the failure by the Company to obtain the
assumption of the agreement to perform this Agreement by any
successor as contemplated in Section 7 hereof;
(G) any purported termination of your employment
which is not effected pursuant to a Notice of Termination
satisfying the applicable requirements with respect to such
Notice; or
(H) a determination made by you in good faith,
whether before or after the date you are eligible for early
retirement under the Company's pension plan, that as a result
of such Change in Control you are not able to discharge your
duties effectively; or
(I) any termination of this Agreement pursuant to
Section 6 prior to the expiration of two years from the
occurrence of the Change in Control.
Termination of your employment for "Cause" shall mean
termination because of (A) the willful and continued failure by you
substantially to perform your duties with the Company and its principal
subsidiaries (other than any such failure resulting from your incapacity due to
physical or mental illness), after a demand for substantial performance is
delivered to you by the Chief Executive Officer of the Company, which
specifically identifies the manner in which such executive believes that you
have not substantially performed your duties, or (B) the willful engaging by
you in misconduct which is materially injurious to the Company, monetarily or
otherwise. For purposes of this paragraph, no act, or failure to act, on you
part shall be considered "willful" unless done, or omitted to be done, by you
not in good faith and without reasonable belief that your action or omission
was in or not opposed to the best interests of the Company. Notwithstanding
the foregoing, you shall not be deemed to have been terminated for Cause unless
<PAGE> 33
Mr. Robert P. Crawford, Jr.
November 16, 1994
Page 4
and until there shall have been delivered to you a copy of a Notice of
Termination from the Chief Executive Officer of the Company after reasonable
notice to you and an opportunity for you, together with your counsel, to be
heard before the Board of Directors, and a finding that in the good faith
opinion of the Board you were guilty of conduct set forth above in clauses (A)
or (B) of the first sentence of this paragraph and specifying the particulars
thereof in detail.
Termination of your employment for Disability shall mean
termination in accordance with the provisions of the Company's Long Term
Disability Plan as in effect immediately preceding the Change in Control.
3. Notice of Termination. Any purported termination of your
employment shall be communicated by written Notice of Termination to the other
party hereto. For purposes of this Agreement, a "Notice of Termination" shall
mean a notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of your employment
under the provision so indicated. No purported termination of your employment
by the Company shall be effective if it is not effected pursuant to a Notice of
Termination satisfying the requirements of this Section 3.
4. Date of Termination. "Date of Termination" shall mean (A)
if your employment is terminated for Disability, 30 days after Notice of
Termination is given (provided that you shall not have returned to the
performance of your duties on a full-time basis during such 30-day period) and
(B) if your employment is terminated for any other reason, the date on which a
Notice of Termination is given.
5. Severance Benefits. Subject to the conditions in Section
2, on termination of your employment you shall be entitled to the following
benefits:
(A) You shall be entitled to an amount (the
"Severance Compensation") equal to 2 times the sum of (i) one
year's salary at the annual rate in effect at the time of the
Change in Control and (ii) the average for the three calendar
years preceding such Change in Control of your bonuses under
the Annual Incentive Compensation Plan (1984) (or successor
plan), provided, however, that your Severance Compensation
shall not be greater than the amount you would have received
as salary and such bonuses from the Company had you remained
in the employ of the Company from the Date of Termination
until your normal retirement date under the Company's pension
<PAGE> 34
Mr. Robert P. Crawford, Jr.
November 16, 1994
Page 5
plan (on the assumption that your salary would remain at the
same annual rate as in effect at the time of Change in Control
and that your annual bonuses would be the average for the
three calendar years preceding such Change in Control of such
bonuses). The Severance Compensation will be payable in full
on the Date of Termination.
(B) The Company shall also pay to you an amount
equal to all legal fees and expenses incurred by you as a
result of such termination (including all such fees and
expenses, if any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce or retain any
right or benefit provided by this Agreement);
(C) The Company shall maintain in full force and
effect, for your continued benefit until the earlier of (a)
two years after the Date of Termination or, (b) your
commencement of full time employment with a new employer, all
life insurance, hospital-medical, dental, health and accident,
and disability plans in which you were entitled to participate
immediately prior to such Change in Control, provided that
your continued participation is possible under the general
terms and provisions of such plans and programs. In the event
that your participation in any such plan or program is barred
for any reason whatsoever, the Company shall arrange to
provide you with benefits substantially similar to those which
you are entitled to receive under such plan or program;
(D) You shall not be required to mitigate the
amount of any payment provided for in this Section 5 by
seeking other employment or otherwise, nor shall the amount of
any payment provided for in this Section 5 be reduced by any
compensation earned by you as the result of employment by
another employer after the Date of Termination or otherwise.
6. Term of Agreement. This Agreement shall have an initial
term of two (2) years from the date hereof and shall be automatically extended
at the expiration of said two-year period for successive two (2) year periods
unless the Company gives you one year's prior written notice that it is
terminating this Agreement at the expiration of the then current two year
period.
7. Successors; Binding Agreement.
(A) The Company will require any purchaser of all
<PAGE> 35
Mr. Robert P. Crawford, Jr.
November 16, 1994
Page 6
or substantially all of the business or assets of the Company,
by agreement in form and substance satisfactory to you to
assume and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to
perform it if no such purchase had taken place. As used in
this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business or
assets as aforesaid which executes and delivers the agreement
provided for in this Section 7A or which otherwise becomes
bound by all the terms and provisions of this Agreement by
operation of law.
(B) This Agreement shall inure to the benefit of
and be enforceable by your personal or legal representatives,
executors, administrators, successors, heirs, distributees,
devisees and legatees. If you should die while any amount
would still be payable to you hereunder if you had continued
to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement
to your devisee, legatee or other designee or, if there be no
such designee, to your estate.
8. Notices. For the purposes of this Agreement, notices and
all other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by certified
or registered mail, return receipt requested, postage prepaid, addresseed to the
respective addresses set forth on the first page of this Agreement, provided
that all notices to the Company shall be directed to the attention of the
Chairman of the Company, with a copy to the Secretary of the Company, or to
such other address as either party may have furnished to the other in writing
in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
9. Miscellaneous. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing signed by you and such officer as may be specifically
designated by the Board of Directors of the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not expressly
set forth in this Agreement; provided, however, that this Agreement shall not
<PAGE> 36
Mr. Robert P. Crawford, Jr.
November 16, 1994
Page 7
supersede or in any way affect the rights, duties or obligations you may have
under any other written agreement with the Company. This Agreement shall be
governed by, and construed in accordance with, the laws (other than principles
of conflicts of laws) of the State of New York.
10. Validity. The invalidity or unenforceability of any
provision of this Agreement in any respect shall not affect the validity or
enforceability of such provision in any other respect or of any other provision
of this Agreement, all of which shall remain in full force and effect.
If the foregoing correctly sets forth our understanding on the
subject matter hereof, kindly sign and return to the Company the enclosed copy
hereof, which will thereupon become our binding agreement.
Sincerely,
THE CHUBB CORPORATION
By /s/ DEAN R. O'HARE
-----------------------
Dean R. O'Hare
Chairman
Agreed to this 16th day
of November, 1994.
/s/ ROBERT P. CRAWFORD, JR.
-----------------------------
Robert P. Crawford, Jr.
<PAGE> 1
THE CHUBB CORPORATION
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Net income........................................... $528,469 $324,217 $617,099
After-tax interest expense on 6% guaranteed
exchangeable subordinated notes.................... 9,750 9,750 9,900
-------- -------- --------
Net income for computing earnings per share.......... $538,219 $333,967 $626,999
======== ======== ========
Average number of common shares outstanding.......... 87,543 87,642 87,187
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 2,907
-------- -------- --------
Average number of common and common equivalent
shares assumed outstanding for computing earnings
per share.......................................... 90,450 90,549 90,094
======== ======== ========
Net income per share................................. $ 5.95 $ 3.69 $ 6.96
</TABLE>
49
<PAGE> 1
Exhibit 13
SUPPLEMENTARY FINANCIAL DATA
<TABLE>
<CAPTION>
IN THOUSANDS
YEARS ENDED DECEMBER 31
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
PROPERTY AND CASUALTY INSURANCE
UNDERWRITING
Net Premiums Written............................. $3,951,209 $3,521,295 $3,242,506
Increase in Unearned Premiums.................... (174,926) (141,457) (79,218)
---------- ---------- ----------
Premiums Earned.................................. 3,776,283 3,379,838 3,163,288
---------- ---------- ----------
Claims and Claim Expenses........................ 2,519,359 2,204,098 2,098,129
Operating Costs and Expenses..................... 1,288,692 1,181,316 1,115,007
Increase in Deferred Policy Acquisition Costs.... (39,751) (34,726) (14,951)
Dividends to Policyholders....................... 16,294 14,242 15,755
---------- ---------- ----------
Underwriting Income (Loss) Before Increase in
Unpaid Claims for Asbestos-Related Settlement
and Return Premium for Medical Malpractice
Commutation.................................... (8,311) 14,908 (50,652)
Increase in Unpaid Claims for Asbestos-Related
Settlement..................................... -- (675,000) --
Return Premium for Medical Malpractice
Commutation.................................... -- 125,000 --
---------- ---------- ----------
Underwriting Loss Before Income Tax.............. (8,311) (535,092) (50,652)
Federal and Foreign Income Tax Credit............ (500) (197,600) (35,300)
---------- ---------- ----------
UNDERWRITING LOSS................................ (7,811) (337,492) (15,352)
---------- ---------- ----------
INVESTMENTS
Investment Income Before Expenses and Income Tax. 570,531 541,749 501,140
Investment Expenses.............................. 10,050 8,040 7,685
---------- ---------- ----------
Investment Income Before Income Tax.............. 560,481 533,709 493,455
Federal and Foreign Income Tax................... 85,500 78,300 70,700
---------- ---------- ----------
INVESTMENT INCOME................................ 474,981 455,409 422,755
---------- ---------- ----------
PROPERTY AND CASUALTY INCOME........................ $ 467,170 $ 117,917 $ 407,403
========== ========== ==========
LIFE AND HEALTH INSURANCE
Premiums and Policy Charges......................... $ 836,293 $ 801,236 $ 689,173
Investment Income................................... 208,745 205,891 192,748
---------- ---------- ----------
Total Revenues...................................... 1,045,038 1,007,127 881,921
---------- ---------- ----------
Benefits............................................ 752,205 669,422 591,009
Operating Costs and Expenses........................ 274,079 248,976 216,411
---------- ---------- ----------
Life and Health Income Before Income Tax............ 18,754 88,729 74,501
Federal Income Tax.................................. 4,251 26,212 18,280
---------- ---------- ----------
LIFE AND HEALTH INCOME.............................. $ 14,503 $ 62,517 $ 56,221
========== ========== ==========
REAL ESTATE
Revenues............................................ $ 204,849 $ 160,650 $ 149,945
Cost of Sales and Expenses.......................... 210,799 158,599 134,851
---------- ---------- ----------
Real Estate Income (Loss) Before Income Tax......... (5,950) 2,051 15,094
Federal Income Tax (Credit)......................... (3,913) 4,244 5,044
---------- ---------- ----------
REAL ESTATE INCOME (LOSS)........................... $ (2,037) $ (2,193) $ 10,050
========== ========== ==========
CORPORATE, NET OF TAX................................. $ 7,661 $ 14,357 $ 19,794
========== ========== ==========
REALIZED INVESTMENT GAINS, NET OF TAX................. $ 41,172 $ 151,619 $ 123,631
========== ========== ==========
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES............... $ 528,469 $ 344,217 $ 617,099
========== ========== ==========
</TABLE>
The above federal and foreign income tax provisions represent allocations of the
consolidated provision.
15
<PAGE> 2
PROPERTY AND CASUALTY UNDERWRITING RESULTS
NET PREMIUMS WRITTEN (In Millions of Dollars)
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Personal Insurance
Automobile....................... $ 187.7 $ 191.7 $ 190.9 $ 189.5 $ 192.0
Homeowners....................... 429.7 428.4 416.9 432.2 408.7
Other............................ 196.3 194.4 188.6 193.0 187.8
-------- -------- -------- -------- --------
813.7 814.5 796.4 814.7 788.5
-------- -------- -------- -------- --------
Standard Commercial Insurance
Multiple Peril................... 604.0 528.8 483.2 482.6 466.7
Casualty......................... 544.3 626.0(a) 481.7 456.1 427.7
Workers' Compensation............ 190.2 172.0 168.6 177.1 151.4
-------- -------- -------- -------- --------
1,338.5 1,326.8(a) 1,133.5 1,115.8 1,045.8
-------- -------- -------- -------- --------
Specialty Commercial Insurance
Fidelity and Surety.............. 706.7 618.7 585.1 538.0 514.2
Other............................ 769.1 650.8 566.6 496.7 443.9
-------- -------- -------- -------- --------
1,475.8 1,269.5 1,151.7 1,034.7 958.1
-------- -------- -------- -------- --------
Reinsurance Assumed................ 323.1 235.5 160.9 147.1 127.3
-------- -------- -------- -------- --------
Total....................... $3,951.1 $3,646.3(a) $3,242.5 $3,112.3 $2,919.7
======== ======== ======== ======== ========
</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........................ 96.5% 97.6% 100.2% 106.2% 106.1%
Homeowners........................ 110.7 100.2 113.3 106.0 104.1
Other............................. 81.3 84.2 89.9 93.5 95.6
-------- -------- -------- -------- --------
100.3 95.8 104.6 103.1 102.5
-------- -------- -------- -------- --------
Standard Commercial Insurance
Multiple Peril.................... 109.6 110.6 112.8 109.0 107.9
Casualty.......................... 106.2 190.6(b) 94.2 86.2 99.1
Workers' Compensation............. 104.5 117.9 118.7 130.6 138.5
-------- -------- -------- -------- --------
107.6 149.7(b) 105.7 102.6 108.2
-------- -------- -------- -------- --------
Specialty Commercial Insurance
Fidelity and Surety............... 79.2 78.1 81.3 82.4 78.9
Other............................. 103.4 103.4 100.2 98.9 97.3
-------- -------- -------- -------- --------
91.7 91.0 90.5 90.3 87.3
-------- -------- -------- -------- --------
Reinsurance Assumed................. 100.2 111.8 126.9 119.3 109.2
-------- -------- -------- -------- --------
Total........................ 99.5% 114.8%(b) 101.1% 99.5% 99.7%
======== ======== ======== ======== ========
</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.
16
<PAGE> 3
TEN YEAR FINANCIAL SUMMARY
(in thousands except for per share amounts)
<TABLE>
<CAPTION>
FOR THE YEAR 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
REVENUES
Property and Casualty Insurance
Premiums Earned................... $ 3,776,283 $ 3,504,838 (a) $ 3,163,288 $ 3,037,168 $ 2,836,135
Investment Income................. 570,531 541,749 501,140 476,984 463,413
Life and Health Insurance
Premiums and Policy Charges....... 836,293 801,236 689,173 634,016 561,961
Investment Income................. 208,745 205,891 192,748 177,654 171,570
Real Estate........................ 204,849 160,650 149,945 140,957 174,846
Corporate Investment Income........ 49,405 52,706 57,176 46,400 39,555
Realized Investment Gains (Losses). 63,429 232,638 187,349 65,718 46,317
TOTAL REVENUES.................. 5,709,535 5,499,708 4,940,819 4,578,897 4,293,797
COMPONENTS OF NET INCOME*
Property and Casualty Insurance
Underwriting Income (Loss) (b).... (7,811) (337,492)(c) (15,352) 18,594 20,709 (e)
Investment Income................. 474,981 455,409 422,755 397,595 371,351
Life and Health Insurance.......... 14,503 62,517 56,221 51,119 45,081
Real Estate Income (Loss).......... (2,037) (2,193) 10,050 25,007 40,015
Corporate.......................... 7,661 14,357 19,794 16,325 14,760
Realized Investment Gains (Losses). 41,172 151,619 123,631 43,344 30,193
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING
PRINCIPLES..................... 528,469 344,217 617,099 551,984 522,109
Per Share (b)................... 5.95 3.91 (c) 6.96 6.32 6.07 (e)
NET INCOME...................... 528,469 324,217 (d) 617,099 551,984 522,109
Per Share....................... 5.95 3.69 (d) 6.96 6.32 6.07
DIVIDENDS DECLARED ON COMMON STOCK... 161,055 150,784 139,612 127,757 109,136
Per Share....................... 1.84 1.72 1.60 1.48 1.32
CHANGE IN UNREALIZED APPRECIATION OR
DEPRECIATION OF INVESTMENTS, NET... (487,951) 46,534 (82,082) 12,163 (19,425)
AT YEAR END
TOTAL ASSETS......................... 20,723,055 19,436,870 17,559,182 16,163,605 14,510,750
INVESTED ASSETS
Property and Casualty Insurance.... 8,938,752 8,403,141 7,767,462 7,086,572 6,297,825
Life and Health Insurance.......... 2,560,184 2,473,253 2,208,803 2,063,518 1,928,687
Corporate.......................... 879,475 965,715 955,828 840,291 688,380
PROPERTY AND CASUALTY UNPAID CLAIMS.. 8,913,220 8,235,442 7,220,919 6,591,305 6,016,396
LIFE AND HEALTH POLICY LIABILITIES... 2,659,583 2,446,620 2,193,486 2,072,727 1,959,568
LONG TERM DEBT....................... 1,285,614 1,273,830 1,072,841 1,053,550 820,825
SHAREHOLDERS' EQUITY................. 4,247,029 4,196,129 3,954,402 3,541,605 2,882,639
Per Common Share................ 48.92 47.84 45.18 40.74 35.19
</TABLE>
* The federal and foreign income tax provided for each component of net income
represents its allocated portion of the consolidated provision.
Amounts for 1994 reflect the accounting changes prescribed by Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Restatement of prior year amounts was not
permitted. The change during the year in unrealized appreciation or
depreciation of investments excludes the increase in unrealized appreciation,
as of January 1, 1994, of $220,519,000 resulting from the change in
accounting principle.
44
<PAGE> 4
<TABLE>
<CAPTION>
FOR THE YEAR 1989 1988 1987 1986 1985
<S> <C> <C> <C> <C> <C>
REVENUES
Property and Casualty Insurance
Premiums Earned................... $ 2,693,553 $ 2,705,560 $ 2,615,866 $2,250,758 $1,507,127
Investment Income................. 426,267 364,126 266,230 216,558 190,609
Life and Health Insurance
Premiums and Policy Charges....... 496,405 426,992 384,108 323,293 302,711
Investment Income................. 159,828 144,264 124,640 104,934 96,786
Real Estate........................ 221,338 155,170 143,381 181,184 194,758
Corporate Investment Income........ 25,167 17,806 17,531 18,329 6,929
Realized Investment Gains (Losses). 46,942 (17,987) (22,561) 97,710 109,666
TOTAL REVENUES.................. 4,069,500 3,795,931 3,529,195 3,192,766 2,408,586
COMPONENTS OF NET INCOME*
Property and Casualty Insurance
Underwriting Income (Loss) (b).... (25,040) 15,818 62,394 (29,837) (188,045)
Investment Income................. 330,096 290,647 226,546 177,146 137,047
Life and Health Insurance.......... 42,103 31,458 23,889 36,573 34,340
Real Estate Income (Loss).......... 42,021 40,018 36,079 32,756 29,502
Corporate.......................... 705 (5,357) (4,229) (2,203) (1,905)
Realized Investment Gains (Losses). 30,932 (12,959) (14,619) 53,506 59,601
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING
PRINCIPLES..................... 420,817 359,625 330,060 267,941 70,540
Per Share (b)................... 4.91 4.27 3.97 3.53 .96
NET INCOME...................... 420,817 359,625 330,060 267,941 70,540
Per Share....................... 4.91 4.27 3.97 3.53 .96
DIVIDENDS DECLARED ON COMMON STOCK... 96,515 87,766 71,443 60,485 47,710
Per Share....................... 1.16 1.08 .89 .80 .76
CHANGE IN UNREALIZED APPRECIATION OR
DEPRECIATION OF INVESTMENTS, NET... 70,330 29,815 12,294 12,878 50,650
AT YEAR END
TOTAL ASSETS......................... 13,384,850 11,507,145 10,167,250 8,486,643 6,801,928
INVESTED ASSETS
Property and Casualty Insurance.... 5,793,656 5,153,027 4,519,268 3,574,360 2,832,286
Life and Health Insurance.......... 1,752,532 1,582,962 1,401,553 1,127,695 1,012,820
Corporate.......................... 647,817 366,237 256,397 295,617 76,272
PROPERTY AND CASUALTY UNPAID CLAIMS.. 5,605,006 4,585,848 3,888,485 3,069,083 2,345,527
LIFE AND HEALTH POLICY LIABILITIES... 1,806,325 1,645,195 1,430,119 1,067,290 939,937
LONG TERM DEBT....................... 612,874 362,779 325,049 391,801 388,121
SHAREHOLDERS' EQUITY................. 2,603,739 2,238,447 1,937,033 1,559,138 1,088,400
Per Common Share................ 30.84 27.54 23.85 20.06 14.88
</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.
45
<PAGE> 5
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
IN THOUSANDS
YEARS ENDED DECEMBER 31
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Premiums Earned and Policy Charges (Notes 12 and 13) $4,612,576 $4,306,074 $3,852,461
Investment Income (Note 3)......................... 828,681 800,346 751,064
Real Estate........................................ 204,849 160,650 149,945
Realized Investment Gains (Note 3)................. 63,429 232,638 187,349
---------- ---------- ----------
TOTAL REVENUES................................ 5,709,535 5,499,708 4,940,819
---------- ---------- ----------
BENEFITS, CLAIMS AND EXPENSES
Insurance Claims and Policyholders' Benefits
(Notes 13 and 14)................................ 3,271,564 3,548,520 2,689,138
Amortization of Deferred Policy Acquisition Costs
(Note 4)......................................... 1,113,495 1,012,105 968,611
Other Insurance Operating Costs and Expenses....... 423,389 395,605 361,312
Real Estate Cost of Sales and Expenses............. 210,799 158,599 134,851
Investment Expenses................................ 14,047 11,091 10,679
Corporate Expenses................................. 36,877 29,296 27,787
---------- ---------- ----------
TOTAL BENEFITS, CLAIMS AND EXPENSES........... 5,070,171 5,155,216 4,192,378
---------- ---------- ----------
INCOME BEFORE FEDERAL AND FOREIGN INCOME TAX.. 639,364 344,492 748,441
FEDERAL AND FOREIGN INCOME TAX (NOTE 8)................. 110,895 275 131,342
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES....................... 528,469 344,217 617,099
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES,
NET OF TAX (NOTE 2)................................... -- (20,000) --
---------- ---------- ----------
NET INCOME.................................... $ 528,469 $ 324,217 $ 617,099
========== ========== ==========
PER SHARE DATA (NOTE 1)
Income Before Cumulative Effect of Changes in
Accounting Principles............................ $ 5.95 $ 3.91 $ 6.96
Cumulative Effect of Changes in Accounting
Principles....................................... -- (.22) --
---------- ---------- ----------
Net Income.................................... $ 5.95 $ 3.69 $ 6.96
========== ========== ==========
</TABLE>
See accompanying notes.
46
<PAGE> 6
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
IN THOUSANDS
DECEMBER 31
1994 1993
ASSETS ----------- -----------
<S> <C> <C>
Invested Assets (Note 3)
Short Term Investments.......................................... $ 810,873 $ 531,282
Fixed Maturities
Held-to-Maturity
Tax Exempt (market $3,177,097 and $6,048,421).............. 3,149,479 5,528,880
Taxable (market $604,077 and $2,726,032)................... 619,095 2,528,907
Available-for-Sale
Tax Exempt (1994 cost $2,524,446).......................... 2,530,186 --
Taxable (1994 cost $4,604,182 and 1993 market $2,148,500).. 4,423,946 2,128,677
Equity Securities (cost $609,535 and $709,905).................. 642,153 930,047
Policy and Mortgage Loans....................................... 202,679 194,316
----------- -----------
TOTAL INVESTED ASSETS......................................... 12,378,411 11,842,109
Cash (Note 7)...................................................... 5,599 4,586
Accrued Investment Income.......................................... 215,703 204,961
Premiums Receivable................................................ 787,177 720,122
Reinsurance Recoverable on Property and Casualty Unpaid Claims
(Note 12) ...................................................... 1,980,340 1,785,396
Prepaid Reinsurance Premiums....................................... 455,051 427,295
Funds in Escrow -- Asbestos-Related Settlement (Note 14)........... 558,141 538,172
Deferred Policy Acquisition Costs (Note 4)
Property and Casualty Insurance................................. 529,453 489,702
Life and Health Insurance....................................... 606,493 522,544
Real Estate Assets (Notes 5 and 7)................................. 1,740,287 1,708,981
Deferred Income Tax (Note 8)....................................... 314,720 228,971
Other Assets (Note 6).............................................. 1,151,680 964,031
----------- -----------
TOTAL ASSETS.................................................. $20,723,055 $19,436,870
=========== ===========
LIABILITIES
Property and Casualty Unpaid Claims (Note 14)...................... $ 8,913,220 $ 8,235,442
Life and Health Policy Liabilities................................. 2,659,583 2,446,620
Unearned Premiums.................................................. 2,382,545 2,179,863
Short Term Debt (Note 7)........................................... 153,340 94,840
Long Term Debt (Note 7)............................................ 1,285,614 1,273,830
Dividend Payable to Shareholders................................... 40,035 37,715
Accrued Expenses and Other Liabilities (Note 9).................... 1,041,689 972,431
----------- -----------
TOTAL LIABILITIES............................................. 16,476,026 15,240,741
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 11, 14 AND 15)
SHAREHOLDERS' EQUITY (NOTES 10 AND 18)
Preferred Stock -- Authorized 4,000,000 Shares;
$1 Par Value; Issued -- None.................................... -- --
Common Stock -- Authorized 300,000,000 Shares;
$1 Par Value; Issued 87,798,286 and 87,709,465 Shares........... 87,798 87,709
Paid-In Surplus.................................................... 786,596 782,186
Retained Earnings.................................................. 3,680,554 3,313,140
Foreign Currency Translation Gains, Net of Income Tax.............. 9,766 327
Unrealized Appreciation (Depreciation) of Investments, Net (Note 3) (124,339) 143,093
Receivable from Employee Stock Ownership Plan (Note 10)............ (122,999) (130,326)
Treasury Stock, at Cost -- 977,580 Shares in 1994 (Note 18)........ (70,347) --
----------- -----------
TOTAL SHAREHOLDERS' EQUITY.................................... 4,247,029 4,196,129
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $20,723,055 $19,436,870
=========== ===========
</TABLE>
See accompanying notes.
47
<PAGE> 7
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
IN THOUSANDS
YEARS ENDED DECEMBER 31
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
PREFERRED STOCK
Balance, Beginning and End of Year..................... $ -- $ -- $ --
---------- ---------- ----------
COMMON STOCK
Balance, Beginning of Year............................. 87,709 87,520 86,938
Shares Issued under Stock Option and Purchase Plans.... 62 126 515
Shares Awarded under Incentive Plans................... 27 63 67
---------- ---------- ----------
Balance, End of Year.............................. 87,798 87,709 87,520
---------- ---------- ----------
PAID-IN SURPLUS
Balance, Beginning of Year............................. 782,186 772,815 749,742
Additions Resulting from Shares Issued under Stock
Option and Purchase Plans............................ 1,871 4,944 19,068
Additions Resulting from Shares Awarded under
Incentive Plans...................................... 2,539 4,427 4,005
---------- ---------- ----------
Balance, End of Year.............................. 786,596 782,186 772,815
---------- ---------- ----------
RETAINED EARNINGS
Balance, Beginning of Year............................. 3,313,140 3,139,707 2,662,220
Net Income............................................. 528,469 324,217 617,099
Dividends Declared (per share $1.84, $1.72 and $1.60).. (161,055) (150,784) (139,612)
---------- ---------- ----------
Balance, End of Year.............................. 3,680,554 3,313,140 3,139,707
---------- ---------- ----------
FOREIGN CURRENCY TRANSLATION GAINS (LOSSES)
Balance, Beginning of Year............................. 327 (5,164) 7,243
Change During Year, Net of Income Tax (Note 17)........ 9,439 5,491 (12,407)
---------- ---------- ----------
Balance, End of Year.............................. 9,766 327 (5,164)
---------- ---------- ----------
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS
Balance, Beginning of Year............................. 143,093 96,559 178,641
Cumulative Effect, as of January 1, 1994, of Change in
Accounting Principle, Net (Note 2)................... 220,519 -- --
Change During Year, Net (Note 3)....................... (487,951) 46,534 (82,082)
---------- ---------- ----------
Balance, End of Year.............................. (124,339) 143,093 96,559
---------- ---------- ----------
RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN
Balance, Beginning of Year............................. (130,326) (137,035) (143,179)
Principal Repayments................................... 7,327 6,709 6,144
---------- ---------- ----------
Balance, End of Year.............................. (122,999) (130,326) (137,035)
---------- ---------- ----------
TREASURY STOCK, AT COST
Balance, Beginning of Year............................. -- -- --
Repurchase of Shares................................... (72,052) -- --
Shares Issued.......................................... 1,705 -- --
---------- ---------- ----------
Balance, End of Year.............................. (70,347) -- --
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY........................ $4,247,029 $4,196,129 $3,954,402
========== ========== ==========
</TABLE>
See accompanying notes.
48
<PAGE> 8
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
IN THOUSANDS
YEARS ENDED DECEMBER 31
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.......................................... $ 528,469 $ 324,217 $ 617,099
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Property and Casualty Unpaid Claims,
Net............................................ 482,834 1,182,432 523,750
Increase (Decrease) in Life and Health Policy
Liabilities, Net............................... (10,769) 55,841 (14,372)
Increase in Unearned Premiums, Net............... 174,926 141,457 79,218
Increase in Premiums Receivable.................. (67,055) (49,329) (1,241)
Increase in Funds in Escrow -- Asbestos-Related
Settlement..................................... (19,969) (538,172) --
Medical Malpractice Reinsurance Premium
Receivable .................................... -- (125,000) --
Increase in Deferred Policy Acquisition Costs.... (96,718) (82,977) (43,739)
Deferred Income Tax Credit....................... (18,588) (116,720) (55,303)
Realized Investment Gains........................ (63,429) (232,638) (187,349)
Cumulative Effect of Changes in Accounting
Principles..................................... -- 20,000 --
Other, Net....................................... (13,026) 116,410 (60,207)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES...... 896,675 695,521 857,856
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturities............. 2,906,535 4,051,247 2,509,625
Proceeds from Maturities of Fixed Maturities........ 577,131 671,229 560,752
Proceeds from Sales of Equity Securities............ 623,482 298,790 810,438
Purchases of Fixed Maturities....................... (4,265,835) (5,005,539) (4,378,183)
Purchases of Equity Securities...................... (397,749) (357,254) (396,045)
Decrease (Increase) in Short Term Investments, Net.. (279,591) (268,077) 4,327
Increase (Decrease) in Net Payable from Security
Transactions Not Settled......................... 5,124 (19,092) 41,858
Additions to Real Estate Assets, Net................ (43,216) (69,552) (83,703)
Purchases of Fixed Assets........................... (71,778) (47,332) (33,075)
Other, Net.......................................... (14,133) (8,344) 7,706
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES.......... (960,030) (753,924) (956,300)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits Credited to Policyholder Funds............. 336,765 295,189 232,032
Withdrawals from Policyholder Funds................. (122,502) (108,116) (106,592)
Proceeds from Issuance of Long Term Debt............ 33,225 255,045 58,217
Repayment of Long Term Debt......................... (21,441) (55,928) (38,926)
Increase (Decrease) in Short Term Debt, Net......... 58,500 (193,668) 61,808
Dividends Paid to Shareholders...................... (158,735) (148,070) (136,772)
Repurchase of Shares................................ (72,052) -- --
Other, Net.......................................... 10,608 11,793 25,664
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES...... 64,368 56,245 95,431
----------- ----------- -----------
Net Increase (Decrease) in Cash....................... 1,013 (2,158) (3,013)
Cash at Beginning of Year............................. 4,586 6,744 9,757
----------- ----------- -----------
CASH AT END OF YEAR............................ $ 5,599 $ 4,586 $ 6,744
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Year for
Interest (Net of Amounts Capitalized)............ $ 78,272 $ 56,156 $ 53,898
Federal and Foreign Income Taxes................. 135,187 126,955 202,431
</TABLE>
See accompanying notes.
49
<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 1994, the Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities. SFAS No. 115 may not be retroactively applied to prior years'
financial statements; accordingly, the 1993 and 1992 consolidated financial
statements have not been restated for this change in accounting policy. This
accounting change and the accounting changes adopted in 1993 are further
described in Note (2).
Certain amounts in the financial statements for prior years have been
reclassified to conform with the 1994 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 positive intent to hold to maturity
are classified as held-to-maturity (previously referred to as 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 classified as available-for-sale and carried at
market value as of the balance sheet date. Prior to 1994, fixed maturities
considered available-for-sale were carried at the lower of the aggregate
amortized cost or market value as of the balance sheet date.
Equity securities, which include common stocks and non-redeemable preferred
stocks, are carried at market value as of the balance sheet date.
Policy and mortgage 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 investments carried at
market value, 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.
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. Beginning
in 1994, deferred policy acquisition costs related to such contracts are also
adjusted to reflect the effects that unrealized gains or losses on investments
classified as available-for-sale would have had on the present value of
estimated gross profits had such gains or losses actually been realized. This
adjustment is excluded from income and charged or credited directly to the
unrealized appreciation or depreciation of investments component of
shareholders' equity, net of applicable deferred income tax. 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.
50
<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 8 1/2%.
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 ceded 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.
(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 $72,041,000 and $69,755,000 at December
31, 1994 and 1993, respectively.
51
<PAGE> 11
(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.
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 estimated amounts and timing of future cash
flows. Accordingly, the derived fair value estimates cannot be substantiated by
comparison to independent markets and are not necessarily indicative of the
amounts that could be realized in immediate settlement of the instrument.
Certain financial instruments, particularly insurance contracts, are excluded
from fair value disclosure requirements.
The methods and assumptions used to estimate the fair value of financial
instruments are as follows:
(i) The carrying value of short term investments approximates fair value due
to the short maturities of these investments.
(ii) Fair values of fixed maturities with active markets are based on quoted
market prices. For fixed maturities that trade in less active markets, fair
values are obtained from independent pricing services. Fair values of fixed
maturities are principally a function of current interest rates. Care should
be used in evaluating the significance of these estimated market values.
(iii) Fair values of equity securities are based on quoted market prices.
(iv) Fair values of policy and mortgage loans of the insurance subsidiaries
are estimated using discounted cash flow analyses and approximate the 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) Long term debt consists of term loans, mortgages payable and long term
notes. Fair values of term loans approximate the carrying values because such
loans consist primarily of variable-rate debt that reprices frequently. Fair
values of mortgages payable are estimated using discounted cash flow analyses.
Fair values of long term notes are based on prices quoted by dealers.
The carrying values and fair values of financial instruments were as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------------
1994 1993
---------------------- ----------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
ASSETS
Invested assets
Short term investments.... $ 810,873 $ 810,873 $ 531,282 $ 531,282
Fixed maturities (Note 3)
Held-to-maturity........ 3,768,574 3,781,174 8,057,787 8,774,453
Available-for-sale...... 6,954,132 6,954,132 2,128,677 2,148,500
Equity securities......... 642,153 642,153 930,047 930,047
Policy and mortgage loans. 202,679 202,679 194,316 194,316
Real estate mortgages and
notes receivable (Note 5). 395,490 353,800 424,679 393,600
LIABILITIES
Short term debt (Note 7).... 153,340 153,340 94,840 94,840
Long term debt (Note 7)..... 1,285,614 1,255,892 1,273,830 1,321,831
</TABLE>
52
<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
90,449,577, 90,548,534 and 90,093,741 in 1994, 1993 and 1992, respectively. The
6% guaranteed exchangeable subordinated notes are considered to be common
equivalent shares. The computation assumes the addition to income of the
after-tax interest expense applicable to such notes. The allocated and
unallocated shares held by the Corporation's Employee Stock Ownership Plan are
included in the common shares outstanding.
(n) Cash Flow Information
In the statement of cash flows, short term investments are not considered to
be cash equivalents. The effect of changes in foreign exchange rates on cash
balances was immaterial.
(o) Accounting Pronouncements Not Yet Adopted
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114,
Accounting by Creditors for Impairment of a Loan. Under SFAS No. 114, a loan is
considered impaired and a valuation allowance is established when it is probable
that a creditor will be unable to collect all principal and interest amounts due
according to the contractual terms of the loan agreement. SFAS No. 114 requires
creditors to measure impairment of a loan based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, based on the market price of the loan or the fair value of
the collateral if the loan is collateral dependent. Currently, the Corporation
measures impairment of a loan based on undiscounted expected future cash flows.
SFAS No. 114 is effective for fiscal years beginning after December 15, 1994.
Restatement of prior years' financial statements is not permitted. The
Corporation will adopt SFAS No. 114 in the first quarter of 1995. The
implementation of SFAS No. 114 will result in an increase to the allowance for
uncollectible amounts; however, the impact on net income in 1995 will not be
significant.
(2) CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1994, the Corporation adopted SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities. Similar to the Corpora-
tion's previous 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
(previously referred to as held for investment), available-for-sale or trading.
However, SFAS No. 115 establishes more stringent criteria for classifying fixed
maturities as held-to-maturity. Therefore, the adoption of SFAS No. 115
resulted 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. Prior to 1994, such fixed
maturities were carried at the lower of the aggregate amortized cost or market
value. In conjunction with the Corporation's adoption of SFAS No. 115, deferred
policy acquisition costs related to universal life and other interest-sensitive
life insurance contracts were adjusted to reflect the effects that would have
been recognized had the unrealized gains relating to investments classified as
available-for-sale actually been realized, with a corresponding charge directly
to the separate component of shareholders' equity. SFAS No. 115 may not be
retroactively applied to prior years' financial statements. The cumulative
effect on shareholders' equity, as of January 1, 1994, of the change in
accounting principle was as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Unrealized appreciation of fixed maturities
considered available-for-sale.................... $399,980
Adjustment to deferred policy acquisition costs ... (60,720)
--------
339,260
Deferred income tax................................ 118,741
--------
Increase in shareholders' equity............... $220,519
========
</TABLE>
Adoption of the Statement did not have an impact on net income in 1994 nor will
it in future years.
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. 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.
53
<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. 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.
Excluding the cumulative effect adjustments in 1993, the adoption of SFAS No.
106 and SFAS No. 109 did not have a significant effect on net income in 1994 or
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
--------------------------------
1994 1993 1992
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Fixed maturities.............. $740,871 $734,353 $682,466
Equity securities............. 27,066 23,709 43,141
Short term investments........ 28,925 22,169 12,121
Other......................... 31,819 20,115 13,336
-------- -------- --------
Gross investment income..... 828,681 800,346 751,064
Investment expenses........... 14,047 11,091 10,679
-------- -------- --------
$814,634 $789,255 $740,385
======== ======== ========
</TABLE>
(b) Realized investment gains and losses were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1994 1993 1992
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Gross realized investment gains
Fixed maturities............ $ 68,613 $193,738 $ 74,253
Equity securities........... 138,432 62,274 157,356
-------- -------- --------
207,045 256,012 231,609
-------- -------- --------
Gross realized investment losses
Fixed maturities............ 130,547 20,627 20,538
Equity securities........... 13,069 2,747 23,722
-------- -------- --------
143,616 23,374 44,260
-------- -------- --------
Realized investment gains....... 63,429 232,638 187,349
Income tax...................... 22,257 81,019 63,718
-------- -------- --------
$ 41,172 $151,619 $123,631
======== ======== ========
</TABLE>
Proceeds from sales of fixed maturities considered available-for-sale were
$2,894,475,000, $3,471,404,000 and $2,114,707,000 in 1994, 1993 and 1992,
respectively. Gross gains of $68,553,000, $152,483,000 and $57,191,000 and gross
losses of $130,547,000, $12,542,000 and $15,508,000 were realized on such sales
in 1994, 1993 and 1992, respectively.
(c) The components of unrealized appreciation (depreciation) of investments
carried at market value were as follows:
<TABLE>
<CAPTION>
December 31
------------------------
1994 1993
--------- --------
(in thousands)
<S> <C> <C>
Equity securities
Gross unrealized appreciation............ $ 58,680 $228,765
Gross unrealized depreciation............ 26,062 8,623
--------- --------
32,618 220,142
--------- --------
Fixed maturities
Gross unrealized appreciation............ 89,999 --
Gross unrealized depreciation............ 264,495 --
--------- --------
(174,496) --
--------- --------
(141,878) 220,142
Deferred policy acquisition cost adjustment.. 26,982 --
--------- --------
(114,896) 220,142
Deferred income tax liability, net of
valuation allowance of $49,657 in 1994..... 9,443 77,049
--------- --------
$(124,339) $143,093
========= ========
</TABLE>
The change in unrealized appreciation or depreciation of investments carried
at market value was as follows:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1994 1993 1992
--------- ------- ---------
(in thousands)
<S> <C> <C> <C>
Change in unrealized appreciation of equity securities......... $(187,524) $73,841 $(124,361)
Change in unrealized appreciation of fixed maturities.......... (574,476) -- --
Change in deferred policy acquisition cost adjustment.......... 87,702 -- --
--------- ------- ---------
(674,298) 73,841 (124,361)
Deferred income tax (credit), net of valuation allowance
of $49,657 in 1994........................................... (186,347) 27,307 (42,279)
--------- ------- ---------
(487,951) 46,534 (82,082)
Cumulative effect, as of January 1, 1994, of change
in accounting principle, net................................. 220,519 -- --
--------- ------- ---------
$(267,432) $46,534 $ (82,082)
========= ======= =========
</TABLE>
54
<PAGE> 14
(d) The amortized cost and estimated market value of fixed maturities were
as follows:
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------------------------------------------
1994 1993
------------------------------------------------- --------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Appreciation Depreciation Value Cost Appreciation Depreciation Value
----------- ------------ ------------ ----------- ----------- ------------ ------------ -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity
Tax exempt............. $ 3,149,479 $ 72,939 $ 45,321 $ 3,177,097 $ 5,528,880 $519,989 $ 448 $ 6,048,421
----------- -------- -------- ----------- ----------- -------- ------- -----------
Taxable
U.S. Government and
government agency
and authority
obligations........ 17,256 -- 163 17,093 -- -- -- --
Corporate bonds...... 235,056 8,809 1,976 241,889 1,323,642 125,355 3,119 1,445,878
Foreign bonds........ 149 17 -- 166 325,059 34,114 161 359,012
Mortgage-backed
securities......... 366,634 2,316 24,021 344,929 876,847 41,942 1,813 916,976
Redeemable preferred
stocks............. -- -- -- -- 3,359 807 -- 4,166
----------- -------- -------- ----------- ----------- -------- ------- -----------
619,095 11,142 26,160 604,077 2,528,907 202,218 5,093 2,726,032
----------- -------- -------- ----------- ----------- -------- ------- -----------
Total held-
to-maturity...... 3,768,574 84,081 71,481 3,781,174 8,057,787 722,207 5,541 8,774,453
----------- -------- -------- ----------- ----------- -------- ------- -----------
Available-for-sale
Tax exempt............. 2,524,446 64,309 58,569 2,530,186 -- -- -- --
----------- -------- -------- ----------- ----------- -------- ------- -----------
Taxable
U.S. Government and
government agency
and authority
obligations........ 1,000,325 1,221 59,891 941,655 951,739 13,530 19,198 946,071
Corporate bonds...... 1,269,054 14,083 46,099 1,237,038 47,934 149 648 47,435
Foreign bonds........ 980,900 3,016 38,692 945,224 451,864 21,310 12 473,162
Mortgage-backed
securities......... 1,335,876 6,951 61,186 1,281,641 677,140 13,814 9,122 681,832
Redeemable preferred
stocks............. 18,027 419 58 18,388 -- -- -- --
----------- -------- -------- ----------- ----------- -------- ------- -----------
4,604,182 25,690 205,926 4,423,946 2,128,677 48,803 28,980 2,148,500
----------- -------- -------- ----------- ----------- -------- ------- -----------
Total available-
for-sale......... 7,128,628 89,999 264,495 6,954,132 2,128,677 48,803 28,980 2,148,500
----------- -------- -------- ----------- ----------- -------- ------- -----------
Total fixed
maturities....... $10,897,202 $174,080 $335,976 $10,735,306 $10,186,464 $771,010 $34,521 $10,922,953
=========== ======== ======== =========== =========== ======== ======= ===========
</TABLE>
At December 31, 1994, fixed maturities classified as held-to-maturity were
carried at amortized cost, while fixed maturities classified as
available-for-sale were carried at market value. In prior years, all fixed
maturities were carried at amortized cost. The unrealized appreciation or
depreciation of fixed maturities carried at amortized cost is not reflected in
the financial statements. The change in unrealized appreciation of fixed
maturities carried at amortized cost was a decrease of $723,889,000, an increase
of $213,959,000 and an increase of $32,059,000 for the years ended December 31,
1994, 1993 and 1992, respectively. The decrease in 1994 includes the effect of
the reclassification of a portion of fixed maturities as available-for-sale
which was previously classified as held-to-maturity, resulting from the adoption
of SFAS No. 115.
The amortized cost and estimated market value of fixed maturities at
December 31, 1994 by contractual maturity were as follows:
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
----------------------- ------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Due in one year or less............................ $ 166,573 $ 168,168 $ 55,486 $ 55,421
Due after one year through five years.............. 738,152 758,696 1,552,877 1,543,272
Due after five years through ten years............. 1,158,371 1,188,411 1,548,820 1,509,375
Due after ten years................................ 1,338,844 1,320,970 2,635,569 2,564,423
---------- ---------- ---------- ----------
3,401,940 3,436,245 5,792,752 5,672,491
Mortgage-backed securities......................... 366,634 344,929 1,335,876 1,281,641
---------- ---------- ---------- ----------
$3,768,574 $3,781,174 $7,128,628 $6,954,132
========== ========== ========== ==========
</TABLE>
Actual maturities could differ from contractual maturities because borrowers may
have the right to call or prepay obligations.
55
<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
-------------------------------------
1994 1993 1992
----------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Property and Casualty Insurance
Balance, beginning of year.......................................................... $ 489,702 $ 454,976 $ 440,025
----------- --------- ---------
Costs deferred during year
Commissions and brokerage......................................................... 544,733 463,977 432,608
Premium taxes and assessments..................................................... 108,008 103,928 103,776
Salaries and overhead............................................................. 428,255 415,788 390,394
----------- --------- ---------
1,080,996 983,693 926,778
Amortization during year............................................................ (1,041,245) (948,967) (911,827)
----------- --------- ---------
Balance, end of year................................................................ $ 529,453 $ 489,702 $ 454,976
=========== ========= =========
Life and Health Insurance
Balance, beginning of year.......................................................... $ 522,544 $ 474,293 $ 445,505
Cumulative effect, as of January 1, 1994, of change in accounting principle......... (60,720) -- --
Costs deferred during year.......................................................... 129,217 111,389 85,572
Amortization during year............................................................ (72,250) (63,138) (56,784)
Change in adjustment to reflect the effects of unrealized losses on investments..... 87,702 -- --
----------- --------- ---------
Balance, end of year................................................................ $ 606,493 $ 522,544 $ 474,293
=========== ========= =========
</TABLE>
(5) REAL ESTATE ASSETS
The components of real estate assets were as follows:
<TABLE>
<CAPTION>
December 31
----------------------
1994 1993
---------- ----------
(in thousands)
<S> <C> <C>
Mortgages and notes receivable (net of allowance for uncollectible amounts of $73,863 and $54,948)... $ 395,490 $ 424,679
Income producing properties (net of accumulated depreciation of $36,069 and $23,983)................. 826,768 795,205
Construction in progress............................................................................. 86,125 67,087
Land under development and unimproved land........................................................... 431,904 422,010
---------- ----------
$1,740,287 $1,708,981
========== ==========
</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 $353,800,000 and $393,600,000 at
December 31, 1994 and 1993, 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 the carrying value at December 31, 1994 is not expected to be realized as
the real estate subsidiaries intend to hold the mortgages and notes to maturity.
Depreciation expense related to income producing properties was $12,086,000,
$8,671,000 and $6,668,000 for 1994, 1993 and 1992, respectively.
(6) PROPERTY AND EQUIPMENT
Property and equipment included in other assets were as follows:
<TABLE>
<CAPTION>
December 31
-------------------
1994 1993
-------- --------
(in thousands)
<S> <C> <C>
Cost.................................. $385,610 $329,876
Less accumulated depreciation......... 168,128 140,718
-------- --------
$217,482 $189,158
======== ========
</TABLE>
Depreciation expense related to property and equipment was $40,839,000,
$31,280,000 and $29,992,000 for 1994, 1993 and 1992, respectively.
(7) DEBT AND CREDIT ARRANGEMENTS
(a) Short term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
------------------
1994 1993
-------- -------
(in thousands)
<S> <C> <C>
Commercial paper....................... $143,340 $89,540
Notes.................................. 10,000 5,300
-------- -------
$153,340 $94,840
======== =======
</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. The weighted average interest rate
on short term debt approximated 6% and 3 1/2% at December 31, 1994 and 1993,
respectively.
(b) Long term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
-------------------------------------------------
1994 1993
----------------------- -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Term loans....... $ 324,413 $ 324,413 $ 306,236 $ 306,236
Mortgages........ 211,201 196,104 217,594 217,594
8 3/4% notes..... 150,000 151,125 150,000 171,188
8 5/8% notes..... 100,000 100,000 100,000 103,500
6% notes......... 150,000 141,000 150,000 153,188
6 7/8% notes..... 100,000 90,750 100,000 103,875
6% exchangeable
subordinated
notes.......... 250,000 252,500 250,000 266,250
---------- ---------- ---------- ----------
$1,285,614 $1,255,892 $1,273,830 $1,321,831
========== ========== ========== ==========
</TABLE>
The term loans and mortgages are obligations of the real estate subsidiaries,
except for a $5,965,000 mortgage loan of the life and health insurance
subsidiaries. The term loans mature in varying amounts through 1999.
Substantially all term loans are at an interest rate equivalent to the lower of
the prime rate or a rate associated with the lender's cost of funds. The
mortgages payable are due in varying amounts monthly through 2013. At
December 31, 1994, the range of interest rates for term loans was 6% to 9 1/4%
and for mortgages payable the range was 5% to 12%. The term loans and mortgages
payable are secured by real estate assets with a net book value of $911,175,000
at December 31, 1994.
56
<PAGE> 16
The life and health insurance subsidiaries' mortgage loan, 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 8 5/8% notes due January 15,
1995, $150,000,000 of 6% notes due February 1, 1998 and $100,000,000 of 6 7/8%
notes due February 1, 2003. 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 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, 1994 are as follows:
<TABLE>
<CAPTION>
Term Loans
Years Ending and
December 31 Mortgages Notes Total
-------------------------- ---------- -------- --------
(in thousands)
<S> <C> <C> <C>
1995.................. $138,982 $130,000 $268,982
1996.................. 179,040 30,000 209,040
1997.................. 47,497 30,000 77,497
1998.................. 54,503 430,000 484,503
1999.................. 100,182 30,000 130,182
</TABLE>
(c) Interest costs of $98,685,000, $92,905,000 and $94,824,000 were incurred
in 1994, 1993 and 1992, respectively, of which $19,407,000, $28,685,000 and
$40,284,000 were capitalized.
(d) In July 1994, the Corporation entered into a revolving credit agreement
with a group of banks that provides for unsecured borrowings of up to
$300,000,000, which replaced a similar agreement that would have terminated on
November 30, 1994. The new agreement terminates on July 15, 1997 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 1/10% per annum. As of December 31, 1994,
there were no borrowings under this agreement. The Corporation and its
subsidiaries had additional unused lines of credit of approximately $179,000,000
at December 31, 1994. 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
------------------------------------
1994 1993 1992
-------- --------- --------
(in thousands)
<S> <C> <C> <C>
Current tax
United States.................................. $ 97,848 $ 105,293 $159,193
Foreign........................................ 31,635 11,702 27,452
Deferred tax credit, principally United States... (18,588) (116,720) (55,303)
-------- --------- --------
$110,895 $ 275 $131,342
======== ========= ========
</TABLE>
57
<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
---------------------------------------------------------------
1994 1993 1992
------------------ ----------------- -----------------
% 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................... $ 639,364 $ 344,492 $748,441
========= ========= ========
Tax at statutory federal income tax rate....................... $ 223,777 35.0% $ 120,572 35.0% $254,470 34.0%
Tax exempt interest income..................................... (109,980) (17.2) (110,297) (32.0) (96,420) (12.9)
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)
Other, net..................................................... (2,902) (.5) (737) (.2) (5,138) (.7)
--------- ------- --------- ------- -------- -------
Actual tax............................................. $ 110,895 17.3% $ 275 .1% $131,342 17.5%
========= ======= ========= ======= ======== =======
</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. There were no tax
benefits in years subsequent to 1992 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)).
(c) The tax effects of temporary differences that gave rise to deferred
income tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31
-------------------------
1994 1993
-------- --------
(in thousands)
<S> <C> <C>
Deferred income tax assets
Property and casualty unpaid claims................................................ $478,166 $461,879
Unearned premiums.................................................................. 121,269 111,164
Life and health policy liabilities................................................. 127,867 115,347
Unrealized depreciation of investments............................................. 49,657 --
Postretirement benefits............................................................ 50,015 49,524
-------- --------
826,974 737,914
Valuation allowance................................................................ (49,657) --
-------- --------
Total............................................................................ 777,317 737,914
-------- --------
Deferred income tax liabilities
Deferred policy acquisition costs.................................................. 338,897 296,642
Real estate assets................................................................. 116,056 118,386
Unrealized appreciation of investments............................................. -- 77,049
Other, net......................................................................... 7,644 16,866
-------- --------
Total............................................................................ 462,597 508,943
-------- --------
Net deferred income tax asset........................................................ $314,720 $228,971
======== ========
</TABLE>
The valuation allowance relates to future tax benefits on unrealized
depreciation of investments at December 31, 1994, the realization of which is
uncertain.
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 for the year ended December 31,
1992 were as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Discount on property and casualty unpaid claims.... $(39,044)
Unearned premium reserve phase-in.................. (12,955)
Real estate assets................................. 13,059
Other, net......................................... (16,363)
--------
$(55,303)
========
</TABLE>
58
<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
--------------------------------
1994 1993 1992
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Service cost of current period........................................ $ 19,702 $ 17,877 $ 15,188
Interest cost on projected benefit obligation......................... 21,232 19,598 16,962
Actual return on plan assets.......................................... (523) (30,767) (19,361)
Net amortization and deferral......................................... (23,420) 10,706 1,996
-------- -------- --------
Net pension cost...................................................... $ 16,991 $ 17,414 $ 14,785
======== ======== ========
</TABLE>
The following table sets forth the plans' funded status and amounts recognized
in the balance sheets:
<TABLE>
<CAPTION>
December 31
-------------------
1994 1993
-------- --------
(in thousands)
<S> <C> <C>
Actuarial present value of benefit obligation for service rendered to date:
Accumulated benefit obligation based on current salary levels, including vested
benefits of $180,407 and $168,702................................................. $190,100 $178,439
Additional amount related to projected future salary increases...................... 118,283 117,084
-------- --------
Projected benefit obligation for service rendered to date........................... 308,383 295,523
Plan assets at fair value............................................................... 269,349 265,453
-------- --------
Projected benefit obligation in excess of plan assets................................... 39,034 30,070
Unrecognized net gain from past experience different from that assumed.................. 10,209 13,438
Unrecognized prior service costs........................................................ (5,625) (5,196)
Unrecognized net asset at January 1, 1985, being recognized principally over 19 years... 9,647 11,034
-------- --------
Pension liability included in other liabilities......................................... $ 53,265 $ 49,346
======== ========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation at December 31, 1994 and 1993 was
7 3/4% and 7 1/2%, 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 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 non-contributory.
The components of net postretirement benefit cost were as follows:
<TABLE>
<CAPTION>
Years Ended
December 31
-----------------
1994 1993
------- -------
(in thousands)
<S> <C> <C>
Service cost of current period.......................................................... $ 5,153 $ 4,384
Interest cost on accumulated benefit obligation......................................... 7,420 6,864
------- ------
Net postretirement benefit cost......................................................... $12,573 $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 were as
follows:
<TABLE>
<CAPTION>
Years Ended
December 31
-------------------
1994 1993
-------- --------
(in thousands)
<S> <C> <C>
Retirees................................................................................ $ 38,713 $ 39,316
Fully eligible active plan participants................................................. 4,371 6,072
Other active plan participants.......................................................... 61,207 59,198
-------- --------
Accumulated postretirement benefit obligation........................................... 104,291 104,586
Unrecognized net gain (loss) from past experience different from that assumed........... 3,909 (5,729)
-------- --------
Postretirement benefit liability included in other liabilities.......................... $108,200 $ 98,857
======== ========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the accumulated postretirement benefit obligation at December 31, 1994
and 1993 was 7 3/4% and 7 1/2%, respectively. At December 31, 1994, the health
care cost trend rate used to measure the accumulated postretirement cost for
medical benefits was 14% for 1995 and was 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, 1994 by $13,238,000 and the aggregate of the service and interest
cost components of net postretirement benefit cost for the year ended December
31, 1994 by $1,798,000.
59
<PAGE> 19
(10) OPTION AND INCENTIVE PLANS
(a) The Long-Term Stock Incentive Plan provides for the granting of stock
options, performance shares, restricted stock, 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, 1994, 2,298,659 shares were available for grant under the Long-Term
Stock Incentive Plan.
Stock options are granted at exercise prices not less than the fair market
value of the Corporation's common stock on the date of grant. The terms and
conditions upon which options become exercisable may vary among grants. Options
expire no later than ten years from the date of grant.
Information concerning stock options granted under the Long-Term Stock
Incentive Plan and the prior plan is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------------------------- ----------------------------- -----------------------------
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............. 2,083,758 $13.23-92.63 1,558,484 $13.23-74.06 1,228,979 $13.23-72.06
Granted............... 754,525 81.94 678,461 83.56-92.63 554,900 66.75-74.06
Exercised............. (76,034) 13.23-72.06 (136,888) 13.23-72.06 (210,220) 13.23-72.06
Cancelled............. (37,440) 47.75-83.56 (16,299) 24.50-83.56 (15,175) 47.75-72.06
--------- --------- ---------
Outstanding, end of
year................ 2,724,809 24.50-92.63 2,083,758 13.23-92.63 1,558,484 13.23-74.06
========= ========= =========
Exercisable, end of
year................ 1,665,228 24.50-92.63 1,147,272 13.23-92.63 847,809 13.23-72.06
</TABLE>
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
$5,213,000, $4,219,000 and $5,100,000 in 1994, 1993 and 1992, 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, 1994, 248,000 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>
1994 1993 1992
--------------------------- --------------------------- ---------------------------
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.. 124,000 $26.84-86.94 100,000 $26.84-69.19 96,000 $26.84-69.19
Granted......................... 24,000 77.50 28,000 86.94 28,000 65.19
Exercised....................... (2,000) 34.22 (4,000) 26.84-44.19 (24,000) 26.84-69.19
------- ------- -------
Outstanding and exercisable, end
of year....................... 146,000 26.84-86.94 124,000 26.84-86.94 100,000 26.84-69.19
======= ======= =======
</TABLE>
60
<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
1994, 1993 and 1992, cash contributions to the ESOP of $12,146,000, $12,172,000
and $11,995,000, respectively, were charged against income. Dividends on
unallocated shares used for debt service by the ESOP were $4,615,000, $4,711,000
and $4,709,000 in 1994, 1993 and 1992, respectively.
The number of allocated and unallocated shares held by the ESOP at December
31, 1994 were 1,298,700 and 2,597,402, respectively.
(d) The Corporation has a savings plan, the Capital Accumulation Plan, in
which substantially all employees are eligible to participate. Under this plan,
the employer makes a matching contribution equal to 100% of each eligible
employee's pre-tax elective contributions, up to 4% of the employee's
compensation. Contributions are invested at the election of the employee in the
Corporation's common stock or in various other investment funds. Employer
contributions of $13,026,000, $12,564,000 and $12,182,000 were charged against
income in 1994, 1993 and 1992, 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, 1994, there were 489,338 subscribed shares at
a price of $70.69.
(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
-------------------------------
1994 1993 1992
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Office facilities........... $69,679 $68,805 $65,678
Equipment................... 16,240 20,794 24,404
------- ------- -------
$85,919 $89,599 $90,082
======= ======= =======
</TABLE>
At December 31, 1994, future minimum rental payments required under
non-cancellable operating leases were as follows:
<TABLE>
<CAPTION>
Years Ending December 31 (in thousands)
<S> <C>
1995..................................... $ 77,543
1996..................................... 70,507
1997..................................... 59,202
1998..................................... 52,603
1999..................................... 44,411
After 1999............................... 94,118
--------
$398,384
========
</TABLE>
(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 5.2% 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 $489,727,000, $457,321,000 and $438,939,000 in 1994, 1993
and 1992, respectively. Reinsurance recoverable on property and casualty unpaid
claims included approximately $845,000,000 and $840,000,000 at December 31, 1994
and 1993, respectively, from the Sun Group.
A property and casualty insurance subsidiary of the Corporation 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 $264,343,000, $170,131,000 and $125,731,000 in 1994, 1993 and 1992,
respectively.
61
<PAGE> 21
The property and casualty insurance subsidiaries of the Corporation 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 $259,384,000 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 $11,062,000, $9,000,000 and $9,479,000 in
1994, 1993 and 1992, respectively. These amounts were reflected as reductions of
other insurance operating costs and expenses.
The agreement also includes a commutation provision under which the property
and casualty insurance subsidiaries have an option to reassume the remaining
liability of the Sun Group as of December 31, 1995 and receive payment at that
time of an amount determined by a formula based on experience under the
agreement. In 1993, as a result of favorable loss experience, medical
malpractice unpaid claims and the related reinsurance recoverable under this
agreement were each reduced. At the same time, the Corporation announced its
intention to exercise the commutation option under the agreement, which will
result in a payment by the Sun Group to the property and casualty insurance
subsidiaries of approximately $190,000,000 at year end 1995 and a concurrent
reduction in reinsurance recoverable on unpaid claims from the Sun Group of
approximately $65,000,000. The difference of $125,000,000 represents a return
premium to the property and casualty insurance subsidiaries and was recognized
as such 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
---------------------------------------
1994 1993 1992
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Direct................. $ 4,415,080 $ 4,155,356 $ 3,824,520
Reinsurance assumed.... 641,615 478,464 429,147
Reinsurance ceded...... (1,280,412) (1,128,982) (1,090,379)
----------- ----------- -----------
Premiums earned........ $ 3,776,283 $ 3,504,838 $ 3,163,288
=========== =========== ===========
</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 $962,332,000 and $590,502,000 in 1994
and 1993, respectively.
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
------------------------------
1994 1993 1992
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Direct.......................... $862,085 $831,849 $721,785
Reinsurance assumed............. 2,056 2,784 2,751
Reinsurance ceded............... (27,848) (33,397) (35,363)
-------- -------- --------
Premiums and policy charges..... $836,293 $801,236 $689,173
======== ======== ========
</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 $53,141,000 and $42,005,000 in 1994 and
1993, respectively.
(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.
62
<PAGE> 22
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, 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 this agreement has been
challenged, management is optimistic that the courts will approve the
settlement. The period of judicial review is now expected to extend at least
into 1996.
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.
Other than Fibreboard, remaining asbestos exposures are mostly limited to
peripheral defendants, principally distributors, premises owners and
manufacturers that used asbestos in certain products. Generally, these insureds
are named defendants on a regional rather than a nationwide basis. Notices of
new asbestos claims and new exposures on existing claims continue to be received
as more peripheral parties are drawn into litigation to replace the now defunct
mines and bankrupt manufacturers. 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. Under the
existing "Superfund" law and similar state statutes, when potentially
responsible parties (PRPs) fail to handle the clean-up, regulators have the
work done and then attempt to establish legal liability against the PRPs. The
PRPs disposed of toxic materials at a waste dump site or transported the
materials to the site. 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.
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.
63
<PAGE> 23
Uncertainties also remain as to the Superfund law itself. The taxes supporting
Superfund will end in 1995. It is currently not possible to predict the
direction that any changes to the Superfund law may take or the effect that any
such changes may have on the insurance industry.
Reserves for asbestos and toxic waste claims cannot be estimated with
traditional loss reserving techniques. Case reserves and reserves for costs of
related litigation have been established where sufficient information has been
developed to indicate the involvement of a specific insurance policy. In
addition, incurred but not reported reserves have been established to cover
additional exposures on both known and unasserted claims. These reserves are
continually reviewed and updated.
A reconciliation of the beginning and ending liability for property and
casualty unpaid claims, net of reinsurance recoverable, and a reconciliation of
the net liability to the corresponding liability on a gross basis is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Gross liability, beginning of year .................. $8,235,442 $7,220,919 $6,591,305
Reinsurance recoverable, beginning of year........... 1,785,396 1,953,305 1,847,441
---------- ---------- ----------
Net liability, beginning of year..................... 6,450,046 5,267,614 4,743,864
---------- ---------- ----------
Net incurred claims and claim expenses related to:
Current year..................................... 2,549,100 2,214,300 2,125,700
Prior years...................................... (29,741) 664,798 (27,571)
---------- ---------- ----------
2,519,359 2,879,098 2,098,129
---------- ---------- ----------
Net payments for claims and claim expenses related to:
Current year..................................... 764,525 656,766 643,179
Prior years...................................... 1,272,000 1,039,900 931,200
---------- ---------- ----------
2,036,525 1,696,666 1,574,379
---------- ---------- ----------
Net liability, end of year........................... 6,932,880 6,450,046 5,267,614
Reinsurance recoverable, end of year................. 1,980,340 1,785,396 1,953,305
---------- ---------- ----------
Gross liability, end of year......................... $8,913,220 $8,235,442 $7,220,919
========== ========== ==========
</TABLE>
During 1994, the property and casualty insurance subsidiaries experienced
overall favorable development of $29,741,000 on net unpaid claims established as
of the previous year-end. This compares with unfavorable development of
$664,798,000 in 1993 and favorable development of $27,571,000 in 1992. Such
redundancies and deficiency were reflected in operating results in these
respective years. Excluding the effect of the $675,000,000 increase in unpaid
claims related to the Fibreboard settlement, the property and casualty insurance
subsidiaries experienced favorable development of $10,202,000 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 relating to asbestos and toxic waste
claims.
Management believes that the aggregate loss reserves of the property and
casualty insurance subsidiaries at December 31, 1994 were adequate to cover
claims for losses which had occurred, including both those known and those yet
to be reported. In establishing such reserves, management considers facts
currently known and the present state of the law and coverage litigation.
However, given the expansion of coverage and liability by the courts and the
legislatures in the past and the possibilities of similar interpretations in the
future, particularly as they relate to asbestos and toxic waste claims, as well
as the uncertainty in determining what scientific standards will be deemed
acceptable for measuring hazardous waste site clean-up, additional increases in
loss reserves may emerge which 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. 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.
Approximately 14% of the direct business of the Corporation's property and
casualty insurance subsidiaries during the rollback period was written in
California. 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. Since the approval of Proposition 103, the California Insurance
Department has established regulations to implement its provisions. These
regulations were challenged in the California courts by numerous insurers.
In August 1994, the California Supreme Court issued a decision upholding
rollback regulations issued by the California Insurance Commissioner which had
previously been ruled invalid by a lower court. These regulations limit the
allowable rate of return which an insurer could earn on California business for
the rollback period to a rate determined by the Insurance Commissioner and limit
the amount of surplus on which an insurer could earn profit during that period.
A petition for review of the California Supreme Court's decision has been denied
by the United States Supreme Court.
In November 1994, the property and casualty insurance subsidiaries were
ordered by the Insurance Commissioner to refund premiums for the rollback period
in the amount of $86,012,000, plus interest of $52,903,000. The property and
casualty insurance subsidiaries have notified the Insurance Department of their
objection to the rollback amount. 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, as well as the regulations governing
Proposition 103 rollbacks, the rollback amount has not been reflected in the
financial statements. It is management's belief that it is probable that the
final resolution of this matter will not result in premium refunds of a material
amount by the Corporation's property and casualty insurance subsidiaries.
64
<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
-----------------------------------------
1994 1993 1992
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Revenues
Property and Casualty Insurance
Premiums earned............................................................. $ 3,776,283 $ 3,504,838 $ 3,163,288
Investment income........................................................... 570,531 541,749 501,140
Life and Health Insurance
Premiums and policy charges................................................. 836,293 801,236 689,173
Investment income........................................................... 208,745 205,891 192,748
Real Estate..................................................................... 204,849 160,650 149,945
----------- ----------- -----------
5,596,701 5,214,364 4,696,294
Corporate investment income..................................................... 49,405 52,706 57,176
Realized investment gains (losses)
Property and Casualty Insurance............................................. 55,203 172,925 96,704
Life and Health Insurance................................................... 9,304 22,056 13,288
Corporate................................................................... (1,078) 37,657 77,357
----------- ----------- -----------
Total revenues.......................................................... $ 5,709,535 $ 5,499,708 $ 4,940,819
=========== =========== ===========
Income (loss) from operations before income tax
Property and Casualty Insurance................................................. $ 552,170 $ (1,383) $ 442,803
Life and Health Insurance....................................................... 18,754 88,729 74,501
Real Estate..................................................................... (5,950) 2,051 15,094
----------- ----------- -----------
564,974 89,397 532,398
Corporate....................................................................... 10,961 22,457 28,694
Realized investment gains (losses)
Property and Casualty Insurance............................................. 55,203 172,925 96,704
Life and Health Insurance................................................... 9,304 22,056 13,288
Corporate................................................................... (1,078) 37,657 77,357
----------- ----------- -----------
Income before federal and foreign income tax............................ $ 639,364 $ 344,492 $ 748,441
=========== =========== ===========
<CAPTION>
December 31
-----------------------------------------
<S> <C> <C> <C>
Identifiable assets
Property and Casualty Insurance................................................. $14,435,933 $13,372,599 $11,999,538
Life and Health Insurance....................................................... 3,760,079 3,529,802 3,150,630
Real Estate..................................................................... 1,796,706 1,745,212 1,679,138
----------- ----------- -----------
Total identifiable assets............................................... 19,992,718 18,647,613 16,829,306
Corporate....................................................................... 945,397 1,047,606 1,009,257
Adjustments and eliminations.................................................... (215,060) (258,349) (279,381)
----------- ----------- -----------
Total assets............................................................ $20,723,055 $19,436,870 $17,559,182
=========== =========== ===========
</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
-----------------------------------------
1994 1993 1992
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Premiums earned
Personal........................................................................ $ 812,033 $ 807,550 $ 789,923
Standard Commercial............................................................. 1,279,069 1,294,182 1,113,654
Specialty Commercial............................................................ 1,404,793 1,208,672 1,108,913
Reinsurance Assumed............................................................. 280,388 194,434 150,798
----------- ----------- -----------
Total premiums earned....................................................... $ 3,776,283 $ 3,504,838 $ 3,163,288
=========== =========== ===========
Income (loss) from operations before income tax
Personal........................................................................ $ (7,475) $ 30,536 $ (36,158)
Standard Commercial............................................................. (106,126) (642,747) (70,876)
Specialty Commercial............................................................ 106,557 101,584 96,894
Reinsurance Assumed............................................................. (1,267) (24,465) (40,512)
----------- ----------- -----------
Underwriting loss........................................................... (8,311) (535,092) (50,652)
Net investment income........................................................... 560,481 533,709 493,455
----------- ----------- -----------
Income (loss) from operations before income tax............................. $ 552,170 $ (1,383) $ 442,803
=========== =========== ===========
</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.
65
<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
-----------------------------------------
1994 1993 1992
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Revenues
United States..................................................... $ 3,508,243 $ 3,397,825 $ 3,089,635
International..................................................... 838,571 648,762 574,793
----------- ----------- -----------
Total....................................................... $ 4,346,814 $ 4,046,587 $ 3,664,428
=========== =========== ===========
Income (loss) from operations before income tax
United States..................................................... $ 479,153 $ 8,311 $ 472,359
International..................................................... 73,017 (9,694) (29,556)
----------- ----------- -----------
Total....................................................... $ 552,170 $ (1,383) $ 442,803
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31
-----------------------------------------
<S> <C> <C> <C>
Identifiable assets
United States..................................................... $12,937,447 $12,189,556 $10,993,111
International..................................................... 1,498,486 1,183,043 1,006,427
----------- ----------- -----------
Total....................................................... $14,435,933 $13,372,599 $11,999,538
=========== =========== ===========
</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
--------------------------------
1994 1993 1992
------- ------- --------
(in thousands)
<S> <C> <C> <C>
Gains (losses) on translation of foreign currencies........................... $14,517 $ 8,492 $(18,801)
Income tax (credit)
Current................................................................... 4,633 8,546 (1,534)
Deferred.................................................................. 445 (5,545) (4,860)
------- ------- --------
$ 9,439 $ 5,491 $(12,407)
======= ======= ========
</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
--------------------------------------
1994 1993 1992
---------- ---------- ----------
(number of shares)
<S> <C> <C> <C>
Common stock issued
Balance, beginning of year........................................... 87,709,465 87,519,560 86,937,565
Shares issued under stock option and purchase plans.................. 62,117 126,355 515,301
Shares awarded under incentive plans................................. 26,704 63,550 66,694
---------- ---------- ----------
Balance, end of year............................................. 87,798,286 87,709,465 87,519,560
---------- ---------- ----------
Treasury stock
Balance, beginning of year........................................... -- -- --
Repurchase of shares................................................. 1,001,500 -- --
Shares issued........................................................ (23,920) -- --
---------- ---------- ----------
Balance, end of year............................................. 977,580 -- --
---------- ---------- ----------
Common stock outstanding, end of year............................ 86,820,706 87,709,465 87,519,560
========== ========== ==========
</TABLE>
66
<PAGE> 26
(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.
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 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
----------------------------------------------------
1994 1993
------------------------ ------------------------
GAAP Statutory GAAP Statutory
---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Property and casualty insurance subsidiaries*.. $2,862,278 $1,923,465 $2,683,264 $1,794,101
Life and health insurance subsidiaries......... 731,810 301,084 758,419 305,609
---------- ---------- ---------- ----------
3,594,088 $2,224,549 3,441,683 $2,099,710
========== ==========
Corporate and eliminations..................... 652,941 754,446
---------- ----------
$4,247,029 $4,196,129
========== ==========
</TABLE>
A comparison of GAAP and statutory net income (loss) is as follows:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------------------------------------------------
1994 1993 1992
---------------------- ---------------------- ----------------------
GAAP Statutory GAAP Statutory GAAP Statutory
-------- --------- -------- --------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Property and casualty insurance subsidiaries*.. $506,825 $468,861 $210,204** $ 96,965 $483,896 $396,952
Life and health insurance subsidiaries......... 20,551 (4,264) 76,853** 31,890 64,991 32,501
-------- -------- -------- -------- -------- --------
527,376 $464,597 287,057 $128,855 548,887 $429,453
======== ======== ========
Corporate and eliminations..................... 1,093 57,160** 68,212
Cumulative effect of changes in accounting
principles, net of tax....................... -- (20,000) --
-------- -------- --------
$528,469 $324,217 $617,099
======== ======== ========
</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 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 1994, these subsidiaries paid
dividends to the Corporation totaling $244,008,000.
The maximum dividend distribution that may be made by insurance
subsidiaries to the Corporation during 1995 without prior approval is
approximately $513,000,000.
67
<PAGE> 27
REPORT OF INDEPENDENT AUDITORS
ERNST & YOUNG LLP
787 Seventh Avenue
New York, New York 10019
The Board of Directors and Shareholders
The Chubb Corporation
We have audited the accompanying consolidated balance sheets of The Chubb
Corporation as of December 31, 1994 and 1993, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1994. 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, 1994 and 1993 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1994 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 investments in certain debt and equity
securities in 1994 and for income taxes and postretirement benefits other than
pensions in 1993.
/s/ Ernst & Young LLP
February 24, 1995
68
<PAGE> 28
QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data (in millions except per share
data) for 1994 and 1993 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
-------------------- -------------------- -------------------- --------------------
1994 1993 1994 1993 1994 1993 1994 1993
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues....................... $1,396.0 $1,237.5 $1,414.6 $1,283.6 $1,428.9 $1,570.3 $1,470.0 $1,408.1
Benefits and expenses.......... 1,326.3 1,057.6 1,232.1 1,072.3 1,236.6 1,815.6 1,275.1 1,209.6
Federal and foreign income
tax (credit).................. (3.5) 34.1 35.8 42.8 39.6 (114.7) 39.0 38.0
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
cumulative effect of changes
in accounting principles..... 73.2 145.8 146.7 168.5 152.7 (130.6) 155.9 160.5
Cumulative effect of changes
in accounting principles,
net of tax................... -- (20.0) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss).............. $ 73.2 $ 125.8 $ 146.7 $ 168.5 $ 152.7 $ (130.6) $ 155.9 $ 160.5
======== ======== ======== ======== ======== ======== ======== ========
Per share data
Income (loss) before
cumulative effect of changes
in accounting principles.... $ .83 $ 1.64 $ 1.65 $ 1.89 $ 1.71 $ (1.42) $ 1.76 $ 1.80
Cumulative effect of changes
in accounting principles.... -- (.22) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)............ $ .83 $ 1.42 $ 1.65 $ 1.89 $ 1.71 $ (1.42) $ 1.76 $ 1.80
======== ======== ======== ======== ======== ======== ======== ========
Underwriting ratios
Losses to premiums earned..... 76.6% 65.1% 63.8% 64.6% 63.8% 125.9% 64.2% 66.9%
Expenses to premiums written.. 33.3 34.7 32.5 33.4 32.1 29.0 32.3 33.0
-------- -------- -------- -------- -------- -------- -------- --------
Combined...................... 109.9% 99.8% 96.3% 98.0% 95.9% 154.9% 96.5% 99.9%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Net income in the first quarter of 1994 was adversely affected by
catastrophe losses of $147.4 million, resulting primarily from the earthquake in
California and the winter storms in the eastern and midwestern parts of the
United States, which represented 16.3 percentage points of the combined ratio.
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 loss for the quarter includes 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%.
69
<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 1994 and 1993.
<TABLE>
<CAPTION>
1994
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Common stock prices
High...................................................... $83.13 $82.63 $78.63 $78.50
Low....................................................... 70.75 72.00 69.50 68.63
Dividends declared............................................ .46 .46 .46 .46
</TABLE>
<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>
At March 1, 1995, there were approximately 8,775 common shareholders of
record.
72
<PAGE> 1
THE CHUBB CORPORATION
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Principal subsidiaries at December 31, 1994 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
Chubb Indemnity Insurance Company..................... New York 100
CC Canada Holdings Ltd................................ Canada 100
Chubb Insurance Company of Canada................ Canada 100
Chubb Insurance Company of Europe, S.A................ Belgium 100
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
ChubbHealth Holdings, Inc............................. New Hampshire 85
ChubbHealth, Inc................................. New York 100
Chubb & Son Inc............................................ New York 100
Chubb Capital Corporation.................................. New Jersey 100
</TABLE>
---------------
Certain other subsidiaries of the Corporation and its consolidated
subsidiaries have been omitted since, in the aggregate, they would not
constitute a significant subsidiary.
50
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE CHUBB CORPORATION
Financial Data Schedule(*)
(*) This schedule contains summary financial information extracted from the
Consolidated Balance Sheets and the Consolidated Statements of Income and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<DEBT-HELD-FOR-SALE> 6,954<F1>
<DEBT-CARRYING-VALUE> 3,769<F2>
<DEBT-MARKET-VALUE> 3,781<F3>
<EQUITIES> 642
<MORTGAGE> 12
<REAL-ESTATE> 0
<TOTAL-INVEST> 12,378
<CASH> 6
<RECOVER-REINSURE> 36<F4>
<DEFERRED-ACQUISITION> 1,136
<TOTAL-ASSETS> 20,723
<POLICY-LOSSES> 11,573<F5>
<UNEARNED-PREMIUMS> 2,383<F6>
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,439<F7>
<COMMON> 88
0
0
<OTHER-SE> 4,159<F8>
<TOTAL-LIABILITY-AND-EQUITY> 20,723
4,613
<INVESTMENT-INCOME> 829
<INVESTMENT-GAINS> 63
<OTHER-INCOME> 205<F9>
<BENEFITS> 3,272
<UNDERWRITING-AMORTIZATION> 1,113
<UNDERWRITING-OTHER> 423
<INCOME-PRETAX> 639
<INCOME-TAX> 111
<INCOME-CONTINUING> 528
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 528
<EPS-PRIMARY> 5.95
<EPS-DILUTED> 0
<RESERVE-OPEN> 6,450
<PROVISION-CURRENT> 2,549
<PROVISION-PRIOR> (30)
<PAYMENTS-CURRENT> 764
<PAYMENTS-PRIOR> 1,272
<RESERVE-CLOSE> 6,933
<CUMULATIVE-DEFICIENCY> (30)
<FN>
<F1>DEBT-HELD-FOR-SALE REPRESENTS FIXED MATURITY INVESTMENTS CLASSIFIED AS
AVAILABLE-FOR-SALE AND CARRIED AT MARKET VALUE AS PRESCRIBED BY SFAS NO.
115.
<F2>DEBT-CARRYING-VALUE REPRESENTS FIXED MATURITY INVESTMENTS CLASSIFIED AS
HELD-TO-MATURITY AND CARRIED AT AMORTIZED COST AS PRESCRIBED BY SFAS NO.
115.
<F3>DEBT-MARKET-VALUE REPRESENTS THE RELATED MARKET VALUE OF FIXED MATURITIES
CLASSIFIED AS HELD-TO-MATURITY.
<F4>RECOVER-REINSURE REPRESENTS REINSURANCE RECOVERABLE ON PAID CLAIMS.
<F5>POLICY-LOSSES EXCLUDE THE REDUCTIONS FOR REINSURANCE RECOVERABLES ON
UNPAID CLAIMS ($1,980) AND POLICY LIABILITIES ($191), AS PRESCRIBED BY
SFAS NO. 113. SUCH AMOUNTS ARE INCLUDED IN TOTAL ASSETS.
<F6>UNEARNED-PREMIUMS EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUMS
($455), AS PRESCRIBED BY SFAS NO. 113. THIS PREPAID AMOUNT IS INCLUDED IN
TOTAL ASSETS.
<F7>NOTES-PAYABLE INCLUDES SHORT-TERM DEBT OF $153 AND LONG-TERM DEBT OF $1,286.
<F8>OTHER-SE INCLUDES PAID-IN SURPLUS; RETAINED EARNINGS; FOREIGN CURRENCY
TRANSLATION GAINS, NET OF INCOME TAX; UNREALIZED DEPRECIATION OF
INVESTMENTS, NET; RECEIVABLE FROM ESOP AND TREASURY STOCK.
<F9>OTHER-INCOME REPRESENTS REVENUES FROM REAL ESTATE OPERATIONS.
</FN>
</TABLE>
