<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 1996
===============================================================================
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, 1995
/ / 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. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant was $8,787,867,670 as of March 4, 1996.
87,311,778
Number of shares of common stock outstanding as of March 4, 1996
DOCUMENTS INCORPORATED BY REFERENCE
Portions of The Chubb Corporation 1995 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
23, 1996 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. The Corporation and its subsidiaries employed
approximately 10,900 persons on December 31, 1995. Revenues, income from
operations before income tax and identifiable assets for each industry segment
for the three years ended December 31, 1995 are included in Note (15) of the
notes to consolidated financial statements incorporated by reference from the
Corporation's 1995 Annual Report to Shareholders.
The property and casualty insurance subsidiaries provide insurance
coverages principally in the United States, Canada, Europe, Australia and the
Far East. The life and health insurance and real estate subsidiaries have no
international operations. Revenues, income from operations before income tax and
identifiable assets of the property and casualty insurance subsidiaries by
geographic area for the three years ended December 31, 1995 are included in Note
(16) of the notes to consolidated financial statements incorporated by reference
from the Corporation's 1995 Annual Report to Shareholders.
PROPERTY AND CASUALTY INSURANCE GROUP
The Property and Casualty Insurance Group (the Group) is composed of
Federal Insurance Company (Federal), Pacific Indemnity Company (Pacific
Indemnity), Vigilant Insurance Company (Vigilant), Great Northern Insurance
Company (Great Northern), Chubb Custom Insurance Company (Chubb Custom), Chubb
National Insurance Company (Chubb National), Chubb Indemnity Insurance Company
(Chubb Indemnity), Chubb Insurance Company of New Jersey (Chubb New Jersey),
Texas Pacific Indemnity Company, Northwestern Pacific Indemnity Company, Chubb
Insurance Company of Canada, Chubb Insurance Company of Europe, S.A., Chubb
Insurance Company of Australia, Limited 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>
1993........................ $4,268,104 $565,140 $1,186,949 $3,646,295
1994........................ 4,578,061 681,316 1,308,168 3,951,209
1995........................ 4,907,320 747,320 1,348,648 4,305,992
</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 1995 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, Australia and parts of Europe and the Far East. In
1995, approximately 86% of the Group's direct business was produced in the
United States, where the Group's businesses enjoy broad geographic distribution
with a particularly strong market presence in the Northeast. The four states
accounting for the largest amounts of direct premiums written were New York
2
<PAGE> 3
with 14%, California with 11%, 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 was produced in Canada.
Underwriting Results
A frequently used industry measurement of property and casualty insurance
underwriting results is the combined loss and expense ratio. This ratio is the
sum of the ratio of incurred losses and related loss adjustment expenses to
premiums earned (loss ratio) plus the ratio of underwriting expenses to premiums
written (expense ratio) after reducing both premium amounts by dividends to
policyholders. When the combined ratio is under 100%, underwriting results are
generally considered profitable; when the combined ratio is over 100%,
underwriting results are generally considered unprofitable. Investment income,
other non-underwriting income or expense and income taxes are not reflected in
the combined ratio. The profitability of property and casualty insurance
companies depends on income from both underwriting operations and investments.
The net premiums and the loss, expense and combined loss and expense ratios
of the Group for the last five years are shown in the following table.
<TABLE>
<CAPTION>
NET PREMIUMS COMBINED
(IN THOUSANDS) LOSS AND
------------------------- LOSS EXPENSE EXPENSE
YEAR WRITTEN EARNED RATIOS RATIOS RATIOS
- ---- ------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
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
1995......................... 4,305,992 4,147,162 64.7 32.1 96.8
----------- ----------- ---- ---- -----
Total for five years ended
December 31, 1995......... $18,258,266 $17,628,739 69.0% 33.2% 102.2%
=========== =========== ==== ==== =====
</TABLE>
Results for 1993 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 65.6%, 33.4% and
99.0%, respectively, for the five years ended December 31, 1995.
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 1995 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, 1995 and 1994, such ratio for the Group was 1.89 and
2.11, respectively.
Producing and Servicing of Business
In the United States and Canada, the Group is represented by approximately
3,500 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 5 zone administrative
offices and 60 branch and service offices in the United States and Canada.
The Group's overseas business is developed by its foreign agents and
brokers through local branch offices of the Group and by its United States and
Canadian agents and brokers. Overseas business is also obtained from treaty
3
<PAGE> 4
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, Cargo Reinsurance Association, American Cargo War Risk
Reinsurance Exchange and American Excess Insurance Association. Such pools and
syndicates provide underwriting capacity for risks which an individual insurer
cannot prudently underwrite because of the magnitude of the risk assumed or
which can be more effectively handled by one organization due to the need for
specialized loss control and other services.
Reinsurance
In accordance with the normal practice of the insurance industry, the Group
assumes and cedes reinsurance with other insurers or reinsurers. These
reinsurance arrangements provide greater diversification of business and
minimize the Group's maximum net loss arising from large risks or from hazards
of potential catastrophic events.
A large portion of the Group's reinsurance is effected under contracts
known as treaties under which all risks meeting prescribed criteria are
automatically covered. 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 1995 Annual Report to Shareholders and in Item 7 of this report on
page 20. 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 severity of catastrophes in recent years 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 assesses its concentration of underwriting
exposures in catastrophe prone areas and develops strategies to manage its
exposure to catastrophic events, subject to regulatory constraints.
The catastrophe reinsurance market suffered large losses in recent years,
particularly in 1992. As a result, the catastrophe reinsurance market's capacity
was reduced and the cost of available coverage increased. In response, the Group
increased its initial retention limit for each catastrophic event. The Group
also raised its reinsurance coverage limits for each event. The Group's current
principal catastrophe reinsurance program provides coverage for individual
catastrophic events of approximately 60% of losses between $85 million and $300
million.
4
<PAGE> 5
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 at December 31, 1995 were for IBNR--claims which had not yet been
reported to the Group, some of which were not yet known to the insured, and
future development on reported claims. In spite of this imprecision, financial
reporting requirements dictate that insurance companies report a single amount
as the estimate of unpaid claims and claim adjustment expenses as of each
evaluation date. These estimates are continually reviewed and updated. Any
resulting adjustments are reflected in current operating results.
The Group's estimates of losses for reported claims are established
judgmentally on an individual case basis. Such estimates are based on the
Group's particular experience with the type of risk involved and its knowledge
of the circumstances surrounding each individual claim. These estimates are
reviewed on a regular basis or as additional facts become known. The reliability
of the estimation process is monitored through comparison with ultimate
settlements.
The Group's estimates of losses for unreported claims are principally
derived from analyses of historical patterns of the development of paid and
reported losses by accident year for each class of business. This process relies
on the basic assumption that past experience, adjusted for the effects of
current developments and likely trends, is an appropriate basis for predicting
future outcomes. For certain classes of business where anticipated loss
experience is less predictable because of the small number of claims and/or
erratic claim severity patterns, the Group's estimates are based on both
expected and actual reported losses. Salvage and subrogation estimates are
developed from patterns of actual recoveries.
The Group's estimates of unpaid claim adjustment expenses are based on
analyses of the relationship of projected ultimate claim adjustment expenses to
projected ultimate losses for each class of business. Claim staff has discretion
to override these expense formulas where judgment indicates such action is
appropriate.
The Group's estimates of reinsurance recoverable related to reported and
unreported claims and claim adjustment expenses, 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 the
development of paid losses, which reflect actual inflation. Inflation is also
reflected in the case estimates established on reported open claims which, when
combined with paid losses, form another basis to derive estimates of reserves
for all unpaid claims. There is no precise method for subsequently evaluating
the adequacy of the consideration given to inflation, since claim settlements
are affected by many factors.
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, 1995,
1994 and 1993.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------
1995 1994 1993
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Net liability, beginning of year....................... $6,932.9 $6,450.0 $5,267.6
-------- -------- --------
Net incurred claim and claim adjustment expenses
Provision for claims occurring in the current year... 2,705.8 2,549.1 2,214.3
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....................................... (35.8) (29.7) (10.2)
-------- -------- --------
2,670.0 2,519.4 2,879.1
-------- -------- --------
Net payments for claims occurring in
Current year......................................... 737.7 764.5 656.8
Prior years.......................................... 1,250.7 1,272.0 1,039.9
-------- -------- --------
1,988.4 2,036.5 1,696.7
-------- -------- --------
Net liability, end of year............................. 7,614.5 6,932.9 6,450.0
Reinsurance recoverable, end of year................... 1,973.7 1,980.3 1,785.4
-------- -------- --------
Gross liability, end of year........................... $9,588.2 $8,913.2 $8,235.4
======== ======== ========
</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 through 25.
As reestimated at December 31, 1995, the liability for unpaid claims and
claim adjustment expenses, net of reinsurance recoverable, as established at the
previous year-end was redundant by $35.8 million. This compares with favorable
development of $29.7 million during 1994 and unfavorable development of $664.8
million during 1993. 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 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 10% in 1995, after increases of 7% and 22% in 1994 and
1993, 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
represent a significant portion of the Group's business. The Group continues to
emphasize early and accurate reserving, inventory management of claims and
suits, and control of the dollar value of settlements. The number of outstanding
claims at year-end 1995 was approximately 11% higher than the number at year-end
1994, which was in turn 9% higher than that at year-end 1993. Such increases
were due in part to a shift for certain classes toward a book of business with
more frequent claims.
6
<PAGE> 7
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.
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, 1995, 1994 and 1993. Reinsurance recoveries related to such claims
are not significant.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------------------------------------------
1995 1994 1993
-------------------------- -------------------------- --------------------------
FIBREBOARD ALL FIBREBOARD ALL FIBREBOARD ALL
RELATED OTHER TOTAL RELATED OTHER TOTAL RELATED OTHER TOTAL
---------- ----- ----- ---------- ----- ----- ---------- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability, beginning of year.... $1,049.4 $240.9 $1,290.3 $1,218.5 $214.4 $1,432.9 $ 220.5 $214.9 $ 435.4
Net incurred claim and claim
adjustment expenses............... 10.0 171.8 181.8 35.1 80.1 115.2 1,008.0(a) 67.7 1,075.7
Net payments for claims............. 60.2 68.9 129.1 204.2 53.6 257.8 10.0 68.2 78.2
---------- ------ -------- --------- ------ -------- -------- ------ --------
Net liability, end of year.......... $ 999.2 $343.8 $1,343.0 $1,049.4 $240.9 $1,290.3 $1,218.5 $214.4 $1,432.9
========== ====== ======== ======== ====== ======== ========= ====== ========
</TABLE>
- ---------------
(a) Includes an increase in reserves of $675 million related to the Fibreboard
settlement and a reclassification of $300 million of IBNR reserves 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. The $300 million of IBNR reserves had been provided as follows:
$40 million in 1992, $160 million in 1991, $50 million in 1990, $25 million
in 1989 and $25 million in 1988.
There were approximately 4,700 asbestos claims outstanding at December 31,
1995 compared with 3,400 asbestos claims outstanding at December 31, 1994 and
1993. In 1995, approximately 2,600 claims were opened and 1,300 claims were
closed. 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. 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 700 toxic waste claims outstanding at December 31,
1995 compared with 600 toxic waste claims outstanding at December 31, 1994 and
1993. Approximately 300 claims were opened in each of 1995, 1994 and 1993. There
were approximately 200 claims closed in 1995 and 300 claims closed in each of
1994 and 1993. 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.
The Group discontinued writing medical malpractice business in 1984 and
entered into a stop loss reinsurance agreement effective year-end 1985 relating
to such discontinued class of business. In 1993, as a result of 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. The reinsurance agreement
included a commutation provision under which the Group had an option to reassume
the remaining liability of the reinsurer as of December 31, 1995 and receive
payment of an amount determined by a formula based on experience under the
agreement. The Group exercised this option, which resulted in an amount due from
7
<PAGE> 8
the reinsurer of $191.2 million and a reduction in reinsurance recoverable from
the reinsurer of $66.2 million. The difference of $125 million represents a
return premium to the Group, which was recognized in 1993 at the time the
Corporation announced the Group's intention to exercise the commutation option.
The amount due from the reinsurer was received in January 1996.
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 1995. 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, 1995. 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, 1985, such as that related to the Fibreboard settlement, would be included
in the cumulative deficiency amount for each year in the period 1985 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.
The cumulative deficiencies in liability estimates from 1985 through 1992
relate primarily to additional provisions for asbestos and toxic waste claims,
particularly the Fibreboard settlement. The cumulative deficiency in the 1985
column was 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 middle section of the table on page 9 shows the cumulative amount paid
with respect to the reestimated liability as of the end of each succeeding year.
For example, in the 1985 column, as of December 31, 1995 the Group had paid
$2,456.9 million of the currently estimated $4,036.0 million of claims and claim
adjustment expenses that were unpaid at the end of 1985; thus, an estimated
$1,579.1 million of losses incurred through 1985 remain unpaid as of December
31, 1995, more than half of which relates to the Fibreboard settlement.
The lower section of the table shows the gross liability, reinsurance
recoverable and net liability recorded at each year-end beginning with 1992 and
the reestimation of these amounts as of December 31, 1995. Amounts for years
prior to the implementation of Statement of Financial Accounting Standards No.
113, Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts, have not been presented.
8
<PAGE> 9
ANALYSIS OF CLAIM AND CLAIM ADJUSTMENT EXPENSE DEVELOPMENT
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------------------------------
YEAR ENDED 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS)
Net Liability for Unpaid Claims
and Claim Adjustment
Expenses...................... $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 $7,614.5
Net Liability Reestimated as
of:
One year later............... 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 6,897.1
Two years later.............. 1,989.3 2,313.9 2,835.9 3,336.0 3,854.2 4,244.7 5,368.5 5,904.1 6,363.1
Three years later............ 2,108.5 2,433.2 2,831.0 3,359.8 3,839.8 4,933.0 5,336.5 5,843.5
Four years later............. 2,231.2 2,493.3 2,891.7 3,385.1 4,567.4 4,941.7 5,302.6
Five years later............. 2,353.4 2,585.8 2,961.0 4,203.9 4,602.5 4,969.5
Six years later.............. 2,433.5 2,687.2 3,897.2 4,265.2 4,686.3
Seven years later............ 2,569.0 3,745.2 3,993.7 4,387.6
Eight years later............ 3,673.4 3,865.7 4,157.1
Nine years later............. 3,797.5 4,067.8
Ten years later.............. 4,036.0
Cumulative Net Deficiency
(Redundancy).................. 2,433.8 1,926.5 1,338.5 1,013.3 806.2 668.4 558.7 575.9 (86.9) (35.8)
Cumulative Net Deficiency
Related to Asbestos and Toxic
Waste Claims................. 1,939.8 1,911.4 1,845.4 1,754.4 1,625.4 1,480.4 1,232.6 1,072.7 297.0 181.8
Cumulative Amount of
Net Liability Paid as of:
One year later............... 658.4 651.3 694.7 761.6 880.4 919.1 931.2 1,039.9 1,272.0 1,250.7
Two years later.............. 1,058.1 1,061.6 1,108.3 1,226.3 1,383.9 1,407.2 1,479.9 1,858.5 1,985.7
Three years later............ 1,356.7 1,362.9 1,419.1 1,555.1 1,715.9 1,808.7 2,083.0 2,332.3
Four years later............. 1,568.5 1,595.7 1,651.6 1,778.8 1,958.6 2,292.0 2,386.9
Five years later............. 1,730.0 1,775.3 1,818.2 1,966.1 2,346.9 2,490.2
Six years later.............. 1,867.6 1,907.1 1,961.9 2,307.9 2,500.9
Seven years later............ 1,971.4 2,032.9 2,281.0 2,422.7
Eight years later............ 2,085.5 2,333.6 2,370.5
Nine years later............. 2,378.5 2,412.6
Ten years later.............. 2,456.9
Gross Liability, End of Year... $7,220.9 $8,235.4 $8,913.2 $9,588.2
Reinsurance Recoverable, End of
Year......................... 1,953.3 1,785.4 1,980.3 1,973.7
------- ------- ------- -------
Net Liability, End of Year..... $5,267.6 $6,450.0 $6,932.9 $7,614.5
======== ======== ======== ========
Reestimated Gross Liability.... $7,785.9 $8,279.3 $8,971.7
Reestimated Reinsurance
Recoverable.................. 1,942.4 1,916.2 2,074.6
------- ------- -------
Reestimated Net Liability...... $5,843.5 $6,363.1 $6,897.1
======= ======= =======
Cumulative Gross Deficiency.... $ 565.0 $ 43.9 $ 58.5
======= ======= =======
</TABLE>
- ---------------
The cumulative deficiencies for the years 1985 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
--------------------
1995 1994
---- ----
<S> <C> <C>
(IN MILLIONS)
Net liability reported on a statutory basis -- U.S.
subsidiaries................................................. $7,235.9 $6,661.0
Additions (reductions):
Unpaid claims and claim adjustment expenses of foreign
subsidiaries.............................................. 433.0 375.8
Medical malpractice stop loss reinsurance and other reserve
differences............................................... (54.4) (103.9)
--------- ---------
Net liability reported on a GAAP basis......................... $7,614.5 $6,932.9
========= =========
</TABLE>
Investments
For each member of the Group, current investment policy is implemented by
management which reports to its Board of Directors.
The main objectives of the investment portfolio of the Group are to
maximize after-tax investment income and total investment returns while
minimizing credit risks as well as to provide maximum support to the insurance
underwriting operations. To accomplish this, the investment function must be
highly integrated with the operating functions and capable of responding to the
changing conditions in the marketplace. Investment strategies are developed
based on many factors including underwriting results and the Group's resulting
tax position, 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 1995, the Group invested new cash primarily in tax-exempt bonds. In
1994, the Group invested new cash primarily in taxable bonds and, to a lesser
extent, tax-exempt bonds while reducing its equity security portfolio. At
December 31, 1995, 73% of the Group's fixed maturity portfolio was invested in
tax-exempt bonds compared with 71% at the previous year-end.
The investment results of the Group for each of the past three years are
shown in the following table.
<TABLE>
<CAPTION>
AVERAGE PERCENT EARNED
INVESTED INVESTMENT -----------------------
YEAR ASSETS(a) INCOME(b) BEFORE TAX AFTER TAX
---- ---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1993............................ $8,085,302 $529,591 6.6% 5.6%
1994............................ 8,715,877 560,481 6.4 5.4
1995............................ 9,342,295 602,987 6.5 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
<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 Custom, Chubb National,
Chubb Indemnity and Chubb New Jersey. 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. Effective March 1, 1996, Colonial changed its
name to Chubb Colonial Life Insurance Company.
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 life, 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. Managed care services are provided
through ChubbHealth, a health maintenance organization (HMO) operating in New
York and New Jersey. The target market of the Life Group is small- to
medium-sized business establishments and those individuals, often the
proprietors of such businesses, interested in estate planning and wealth
creation.
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 produced primarily through approximately 1,600 personal producing
general agents. Group life and traditional health insurance is produced through
approximately 4,500 brokers. Managed care products are produced primarily
through approximately 1,500 brokers.
The executive, accounting, actuarial and administrative activities of the
Life Group are located at the Chubb Life headquarters in Concord, New Hampshire.
The personal insurance operations are in Concord and Chattanooga, Tennessee. The
group insurance operations are mainly located in Parsippany, New Jersey.
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
- ---- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
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
1995........ 63,646,653 95.5 72,155 .1 2,942,956 4.4 66,661,764 100
</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
- ---- ------ ------- ------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
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
1995.... 285,323 45.8 20,207 3.2 5,745 .9 22,925 3.7 288,737 46.4
</TABLE>
REVENUES, ASSETS AND CAPITAL AND SURPLUS
<TABLE>
<CAPTION>
TOTAL
PREMIUMS GROSS CAPITAL
AND POLICY INVESTMENT AND
YEAR CHARGES INCOME ASSETS SURPLUS
- ---- ---------- ---------- ------ --------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
1993..................................... $801,236 $205,891 $3,529,802 $758,419
1994..................................... 836,293 208,745 3,760,079 731,810
1995..................................... 622,937 232,950 4,275,365 844,645
</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 fixed-income securities with
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
---- --------- ---------- ------
<S> <C> <C> <C>
(IN THOUSANDS)
1993................................ $2,341,028 $202,771 8.7%
1994................................ 2,544,945 205,451 8.1
1995................................ 2,740,921 229,181 8.4
</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 real estate.
Reinsurance
The Life Group, in accordance with common industry practice, reinsures with
other companies portions of the life insurance risks it underwrites. At the
present time, the maximum amount of life insurance retained on any one life by
12
<PAGE> 13
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 1995 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 anticipated medical inflation
and changes in claim backlog.
REAL ESTATE GROUP
The 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
commercial 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 commercial 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 traditionally
centered around acquiring suburban, multi-site land parcels in locations
considered prime for office development and then developing the land in
progressive stages. In the late 1980s, the Real Estate Group expanded its
activities to 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, Kansas, Maryland,
Michigan, Pennsylvania, Texas and the District of Columbia.
The Real Estate Group owns 4,436,000 square feet of office and industrial
space, of which 92% is leased. The Real Estate Group has varying interests in an
additional 6,014,000 square feet of office and industrial space which is 96%
leased.
Residential development activities of the Real Estate Group consist of the
development and sale of condominiums and townhomes in central Florida and
northern New Jersey.
The Real Estate Group currently has undeveloped land holdings of
approximately 4,250 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, through
subsidiaries, in the insurance business and is therefore subject to regulation
by certain states as an insurance holding company. All states have enacted
legislation which regulates insurance holding company systems such as the
13
<PAGE> 14
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. 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 which was applied for the first time as of year-end 1994. This formula
is used by state regulatory authorities to identify insurance companies which
may be undercapitalized and which merit further regulatory attention. The
formula prescribes a series of risk measurements to determine a minimum capital
amount for an insurance company, based on the profile of the individual company.
The ratio of a company's actual policyholders' surplus to its minimum capital
requirement will determine whether any state regulatory action is required. At
December 31, 1995, each member of the Group had more than sufficient capital to
meet the risk-based capital requirement.
Regulatory requirements applying to premium rates vary from state to state,
but generally provide that rates not be "excessive, inadequate or unfairly
discriminatory." Rates for many lines of business, including automobile and
homeowners insurance, are subject to prior regulatory approval in many states.
However, in certain states, prior regulatory approval of rates is not required
for most lines of insurance which the Group underwrites. Ocean marine insurance
rates are exempt from regulation.
Subject to regulatory requirements, the Group's management determines the
prices charged for its policies based on a variety of factors including claim
and claim adjustment expense experience, inflation, tax law and rate changes,
and anticipated changes in the legal environment, both judicial and legislative.
Methods for arriving at rates vary by type of business, exposure assumed and
size of risk. Underwriting profitability is affected by the accuracy of these
assumptions, by the willingness of insurance regulators to approve changes in
those rates which they control and by such other matters as underwriting
selectivity and expense control.
14
<PAGE> 15
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 12th largest United
States property and casualty insurance group based on 1994 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 1995, 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 and 1995 despite the
significant catastrophe losses experienced by the industry. 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.
In all states, insurers authorized to transact certain classes of property
and casualty insurance are required to become members of an insolvency fund. In
the event of the insolvency of a licensed insurer writing a class of insurance
covered by the fund in the state, all members are assessed to pay certain claims
against the insolvent insurer. Fund assessments are proportionately based on the
members' written premiums for the classes of insurance written by the insolvent
insurer. A portion of these assessments is recovered in certain states through
premium tax offsets and policyholder surcharges. In 1995, such assessments to
the members of the Group amounted to approximately $1 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 paragraph 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, 1995 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 continues to operate in the small group health insurance
market, principally in New York and New Jersey, by offering managed care
services through ChubbHealth as well as traditional indemnity products. In 1993,
New York and New Jersey adopted legislation which significantly affected the
manner in which the Life Group and other small group health indemnity insurers
conduct business. In general, the laws eliminated health insurance underwriting,
created community based rating and limited pre-existing condition exclusions for
insured groups with fewer than 50 covered lives. Because of the continuing
adverse effects of the legislative changes and other health industry factors on
the Life Group's group health results, management is evaluating the Life Group's
future role in the traditional indemnity and managed care markets.
Members of the Life Group also participate in insolvency funds. In 1995,
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, 1995, Chubb Life, Sovereign and Colonial ranked 60th, 155th and
190th, 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
securities litigation reform, 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 1995, 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.
16
<PAGE> 17
Legislative and judicial developments pertaining to asbestos and toxic
waste exposures are discussed in Item 7 of this report on pages 23 through 26.
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 and
Chattanooga, Tennessee. The Real Estate Group's corporate headquarters is
located in Roseland, New Jersey. The insurance subsidiaries maintain zone
administrative 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, the Far East and Latin America. Office facilities are
leased with the exception of buildings in Branchburg, New Jersey and
Chattanooga, 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 1995 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 through 25.
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, 1995.
17
<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................... 53 1972
Douglas A. Batting, Executive Vice President of Chubb & Son Inc. ........... 53 1996
John P. Cavoores, Executive Vice President of Chubb & Son Inc............... 38 1996
Percy Chubb, III, Vice Chairman of the Corporation.......................... 61 1971
Randell G. Craig, Executive Vice President of Chubb Life.................... 50 1994
Robert P. Crawford, Jr., Executive Vice President of the Corporation........ 54 1994
John J. Degnan, Senior Vice President of the Corporation.................... 51 1994
Gail E. Devlin, Senior Vice President of the Corporation.................... 57 1981
Edward Dunlop, Senior Vice President of the Corporation..................... 55 1995
David S. Fowler, Senior Vice President of the Corporation................... 50 1989
Henry G. Gulick, Vice President and Secretary of the Corporation............ 52 1975
Charles M. Luchs, Executive Vice President of Chubb & Son Inc. ............. 56 1996
Brian W. Nocco, Senior Vice President of the Corporation.................... 44 1994
Donn H. Norton, Executive Vice President of the Corporation................. 54 1985
Michael O'Reilly, Senior Vice President of the Corporation.................. 52 1976
Robert Rusis, Senior Vice President and General Counsel of the Corporation.. 62 1990
Henry B. Schram, Senior Vice President of the Corporation................... 49 1985
Theresa M. Stone, Executive Vice President of the Corporation............... 51 1990
</TABLE>
- ---------------
(a) Ages listed above are as of April 23, 1996.
(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 Brian W. Nocco. Mr. Nocco, who joined the Corporation in 1994, was
previously Treasurer of Continental Bank Corp.
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PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Incorporated by reference from the Corporation's 1995 Annual Report to
Shareholders, page 69.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended December 31, 1995 are
incorporated by reference from the Corporation's 1995 Annual Report to
Shareholders, pages 42 and 43.
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 1995 Annual Report to Shareholders, pages
15, 16 and 44 through 66.
Net income amounted to $697 million in 1995 compared with $528 million in
1994 and $324 million in 1993. 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 decision to exercise
its option to commute an unrelated 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 $85 million,
$41 million and $152 million in 1995, 1994 and 1993, 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 1995 than in 1994;
such 1994 income was significantly higher than that in 1993. 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. The $675
million charge was partially offset by a $125 million return premium to our
property and casualty insurance subsidiaries related to the Corporation's
decision to exercise its option to commute a medical malpractice reinsurance
agreement (the "$125 million return premium").
Property and casualty income after taxes was $563 million in 1995 compared
with $467 million in 1994 and $118 million in 1993. 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 1995 benefited from
highly profitable underwriting results and an increase in investment income
compared with 1994. 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. Investment income increased modestly in 1994 compared with the prior
year.
Catastrophe losses were $64 million in 1995 compared with $169 million in
1994 and $89 million in 1993. Our initial retention level for each catastrophic
event is approximately $85 million. We did not have any recoveries from our
catastrophe reinsurance coverage during the past three years since there were no
individual catastrophes for which our losses exceeded the initial retention.
Net premiums written amounted to $4.3 billion in 1995, an increase of 9%
compared with 1994. Net premiums written in 1994 increased 12% compared with
1993, after excluding the $125 million return premium from the 1993 amount.
Personal coverages accounted for $852 million or 20% of 1995 premiums written,
standard commercial coverages for $1,456 million or 34%, specialty commercial
coverages for $1,627 million or 38% and reinsurance assumed for $371 million or
8%. The marketplace continued to be competitive, particularly in the commercial
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<PAGE> 20
classes. Price increases in the casualty classes have been difficult to achieve
for several years. Prices for property classes have remained stable in the past
two years, despite the significant catastrophe losses experienced by the
industry. Premium growth in 1995 and 1994 was due primarily to the selective
writing of new business and exposure growth on existing business. A significant
portion of premium growth in both years was achieved outside the United States,
from our expanding international branch network and our participation in the
business of the Sun Alliance Group plc.
Underwriting results were highly profitable in 1995 compared with near
breakeven results in 1994. Underwriting results were extremely unprofitable in
1993 due to the adverse effect of the $675 million charge. The combined loss and
expense ratio, the common measure of underwriting profitability, was 96.8% in
1995 compared with 99.5% in 1994 and 114.8% in 1993. 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 64.7% in 1995 compared with 67.0% in 1994 and 82.5% in
1993. 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 disciplined underwriting standards. Losses from catastrophes represented
1.5, 4.5 and 2.5 percentage points of the loss ratio in 1995, 1994 and 1993,
respectively.
Our expense ratio was 32.1% in 1995 compared with 32.5% in 1994 and 32.3%
in 1993. Excluding the effect of the $125 million return premium, the expense
ratio was 33.5% in 1993. The expense ratio in 1995 and 1994 benefited from
growth in written premiums at a greater rate than the increase in overhead
expenses. Expenses were reduced by contingent profit sharing accruals of $11
million in 1994 and $9 million in 1993 relating to the medical malpractice
reinsurance agreement.
After a review of the cost of our casualty excess of loss reinsurance, we
modified the program, principally for excess liability and executive protection
coverages, effective January 1, 1996. The changes include an increase in the
initial retention for each loss from $5 million to $10 million and an increase
in the initial aggregate amount of losses that we will retain for each year
before reinsurance becomes available. These changes in our casualty reinsurance
program are expected to increase net premiums written in 1996 by approximately
$100 million.
For many years, a portion of the U.S. insurance business written by the
Corporation's property and casualty subsidiaries has been reinsured on a quota
share basis with a subsidiary of Sun Alliance. Similarly, a subsidiary of the
Corporation has assumed a portion of Sun Alliance's property and casualty
business on a quota share basis, such participation having increased in recent
years. Effective January 1, 1996, the agreements pertaining to the exchange of
reinsurance were amended to reduce the portion of each company's business that
is reinsured with the other. As a result, our property and casualty subsidiaries
will retain a greater portion of the business they write directly and will
reduce the amount of reinsurance they assume from Sun Alliance. As a result of
the changes to the agreements with Sun Alliance, our net premiums written are
expected to increase by approximately $100 million in 1996. The terms of the
reinsurance agreements with Sun Alliance will be reviewed annually, at which
time further reductions in the portion of each company's business that is
reinsured with the other may occur.
The impact on underwriting results in 1996 of the changes to our casualty
reinsurance program and to the agreements with Sun Alliance is not expected to
be significant.
PERSONAL INSURANCE
Premiums from personal insurance increased 5% in 1995 compared with 1994;
such premiums in 1994 were virtually unchanged from 1993. Our disciplined
approach to pricing and risk selection, together with our efforts to control
exposure in catastrophe prone areas, made it difficult to increase homeowners
and other non-automobile business. However, gradual progress was made in 1995 to
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<PAGE> 21
increase premiums written in non-catastrophe prone areas. Personal automobile
premiums increased modestly in 1995 as the result of our marketing efforts to
provide coverage for high value automobiles.
Our personal insurance business produced a substantial underwriting profit
in 1995 compared with breakeven results in 1994 and an underwriting profit in
1993. The combined loss and expense ratio was 87.5% in 1995 compared with 100.3%
in 1994 and 95.8% in 1993. Results in each of our personal classes of business
improved significantly in 1995.
Homeowners results were profitable in 1995, benefiting from lower
catastrophe losses, fewer large losses and a reduction in non-catastrophe loss
frequency. Results were adversely affected by significant catastrophe losses in
each of the past three years, but particularly in 1994 due to the winter storms
and, to a lesser extent, the California earthquake. Catastrophe losses
represented 10.4 percentage points of the loss ratio for this class in 1995
compared with 19.6 percentage points in 1994 and 13.4 percentage points in 1993.
Other personal coverages, which include insurance for personal valuables and
excess liability, were increasingly profitable in 1994 and 1995. Personal excess
liability results improved in both years due to favorable loss experience. Our
automobile business produced profitable results in each of the last three years.
Results in 1995 were particularly strong due to lower loss frequency and
severity. Automobile results were adversely affected each year by losses from
the mandated business that we are required by law to accept for those
individuals who cannot obtain coverage in the voluntary market.
STANDARD COMMERCIAL INSURANCE
Premiums from standard commercial insurance, which include coverages for
multiple peril, casualty and workers' compensation, increased 9% in 1995
compared with 1994. Premiums in 1994 were 11% higher than in 1993, after
excluding the $125 million return premium discussed below from the 1993 premium
amounts. Market competition has continued to place significant pressure on
prices. Premium growth in both years was due primarily to the selective writing
of new accounts and exposure growth on existing business. Premium growth in 1994
and 1995 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 included a
commutation provision under which our property and casualty subsidiaries had an
option to reassume the remaining liability of the reinsurer as of December 31,
1995 and receive payment of an amount determined by a formula based on
experience under the agreement. The property and casualty subsidiaries exercised
this option, which resulted in an amount due from the reinsurer of $191 million
and a reduction in reinsurance recoverable from the reinsurer of $66 million.
The difference of $125 million represents a return premium to our property and
casualty subsidiaries, which was recognized in 1993 at the time the Corporation
announced its intention to exercise the commutation option. The amount due from
the reinsurer was received in January 1996.
Our standard commercial results were unprofitable in each of the past three
years. The combined loss and expense ratio was 108.8% in 1995 compared with
107.6% in 1994 and 149.7% in 1993. Results were extremely unprofitable in 1993
due to the adverse effect of the $675 million charge. Excluding the effects of
that 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 1994. Casualty results deteriorated further in
1995. In each of the past three years, casualty results have been adversely
affected in varying degrees by increases in loss reserves for asbestos-related
and toxic waste claims. The substantial deterioration in 1995 was due to a
larger increase in such reserves compared with the prior year. The excess
liability component of our casualty coverages has remained profitable due to
favorable loss experience in this class. Results in the automobile component
were also profitable in each of the last three years.
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<PAGE> 22
Multiple peril results improved in 1995 but remained unprofitable. Results
in the property component of this business improved in 1995 due to an absence of
catastrophe losses. Results in 1994 were adversely affected by significant
catastrophe losses, primarily from the earthquake in California. Catastrophe
losses for this class represented 0.9 of a percentage point of the loss ratio
for 1995 compared with 8.4 percentage points in 1994 and 3.6 percentage points
in 1993. 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 and 1995.
Results were profitable in 1995 compared with unprofitable results in the prior
two years. Results in our voluntary business have benefited from rate increases,
reform of the benefit provisions of workers' compensation laws in many states,
and the impact of medical cost containment and disability management activities.
Results from our share of the involuntary pools and mandatory business in which
we must participate by law also benefited from these positive factors.
SPECIALTY COMMERCIAL INSURANCE
Premiums from specialty commercial business increased by 10% in 1995
compared with 16% in 1994. Premium increases for our executive protection and
financial fidelity coverages were due primarily to new business opportunities.
Our strategy of working closely with our customers and our ability to
differentiate our products have enabled us to renew a large percentage of this
business. Growth in several of our specialty classes was particularly strong
outside the United States in both years.
Our specialty commercial business produced substantial underwriting profits
in each of the past three years with combined loss and expense ratios of 90.4%
in 1995, 91.7% in 1994 and 91.0% in 1993. Our executive protection and financial
fidelity results were highly profitable in each year due to favorable loss
experience. Results in the non-fidelity portion of our financial institutions
business improved in 1995; results for these coverages had deteriorated in 1994
due in part to several large losses. Surety results were unprofitable in 1995
due to several large losses compared with profitable results in 1994 and 1993.
Marine results were profitable in 1995 compared with unprofitable results
in 1994 and profitable results in 1993. Results in 1994 were adversely affected
by significant catastrophe losses, resulting primarily from the earthquake in
California. Results in our smaller specialty classes were near breakeven in 1995
and 1994. These classes were unprofitable 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 15% in 1995 compared with 37% in 1994. The
growth in both years was primarily due to an increase in our participation in
the business of Sun Alliance. Premium growth in 1994 also benefited from a
firming of rates, primarily in the United Kingdom.
Underwriting results for this segment were near breakeven in 1995 and 1994
compared with unprofitable results in 1993. The combined loss and expense ratio
was 99.1% in 1995 compared with 100.2% in 1994 and 111.8% in 1993. Results in
1995 and 1994 benefited from rating measures taken by Sun Alliance as well as
favorable weather conditions in the United Kingdom.
REGULATORY INITIATIVES
In 1988, voters in California approved Ballot Proposition 103, an insurance
reform initiative affecting most property and casualty insurers writing business
in the state. Provisions of Proposition 103 would have required insurers to roll
back property and casualty rates for certain lines of business to 20 percent
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<PAGE> 23
below November 1987 levels and would have required an additional 20 percent
reduction in automobile rates by November 1989.
In May 1995, our property and casualty subsidiaries reached an agreement
with the California Insurance Department to refund premiums, with interest,
totaling $6.7 million related to business written during the rollback period.
The agreement settles all rollback refund obligations of the property and
casualty subsidiaries related to Proposition 103. A consumer group challenged
the rollback settlement. In December 1995, an administrative law judge affirmed
the rollback settlement. The California Insurance Commissioner has adopted the
judge's decision and the period during which the Commissioner's action could be
appealed has expired.
LOSS RESERVES
Loss reserves are our property and casualty subsidiaries' largest
liability. At the end of 1995, gross loss reserves totaled $9.6 billion compared
with $8.9 billion and $8.2 billion at year-end 1994 and 1993, respectively.
Reinsurance recoverable on such loss reserves was $2.0 billion at year-end 1995
and 1994 compared with $1.8 billion at the end of 1993. Loss reserves, net of
reinsurance recoverable, increased 10% in 1995 compared with 7% in 1994. Loss
reserves included $1.0 billion, $1.05 billion and $1.2 billion at year-end 1995,
1994 and 1993, respectively, related to the settlement of asbestos-related
claims against Fibreboard Corporation, which is discussed below. Excluding such
reserves, loss reserves, net of reinsurance recoverable, increased 12% in both
1995 and 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.
During 1995, we experienced overall favorable development of $36 million on
loss reserves established as of the previous year-end. This compares with
favorable development of $30 million in 1994 and unfavorable development of $665
million in 1993. 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
favorable development of $10 million in 1993. Each of the past three years
benefited from favorable claim severity trends for certain liability classes;
this was offset each year in varying degrees by increases in loss reserves
relating to asbestos and toxic waste claims.
The process of establishing loss reserves is an imprecise science and
reflects significant judgmental factors. In many liability cases, significant
periods of time, ranging up to several years or more, may elapse between the
occurrence of an insured loss, the reporting of the loss and the settlement of
the loss. In fact, approximately 50% of our loss reserves at December 31, 1995
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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claimants against Fibreboard for all future asbestos-related bodily injury
claims against Fibreboard. This agreement is subject to final appellate court
approval. Pursuant to the global settlement agreement, a $1.525 billion trust
fund will be established to pay future claims, which are claims that were not
filed in court before August 27, 1993. Pacific Indemnity will contribute
approximately $538 million to the trust fund and Continental Casualty will
contribute the remaining amount. In December 1993, upon execution of the global
settlement agreement, Pacific Indemnity and Continental Casualty paid their
respective shares into an escrow account. Upon final court approval of the
settlement, the amount in the escrow account, including interest earned thereon,
will be transferred to the trust fund. All of the parties have agreed to use
their best efforts to seek final court approval of the global settlement
agreement.
Pacific Indemnity and Continental Casualty have reached a separate
agreement for the handling of all asbestos-related bodily injury claims pending
on August 26, 1993 against Fibreboard. In February 1995, the agreement was
amended to extend for several years the period over which Pacific Indemnity will
pay its remaining obligation, plus interest, under this agreement. Pacific
Indemnity's obligation under this agreement is not expected to exceed $635
million, of which approximately $450 million remained unpaid at December 31,
1995. 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 final appellate 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 by an appellate court. Pacific Indemnity's obligation
under the trilateral agreement is therefore similar to, and not duplicative of,
that under those agreements described above.
The trilateral agreement reaffirms portions of an agreement reached in
March 1992 between Pacific Indemnity and Fibreboard. Among other matters, that
1992 agreement eliminates any Pacific Indemnity liability to Fibreboard for
asbestos-related property damage claims.
In July 1995, the United States District Court of the Eastern District of
Texas approved the global settlement agreement and the trilateral agreement. The
judgments approving these agreements have been appealed to the United States
Court of Appeal for the Fifth Circuit. The appeals were argued in early March
1996. The period of ultimate judicial review continues to lengthen and may well
extend into 1997.
Management is optimistic that the approval of the settlement will be
upheld. However, if both the global settlement agreement and the trilateral
agreement are disapproved by an appellate court, there can then 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.
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. Loss and expense
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payments related to the settlement aggregated $60 million and $204 million in
1995 and 1994, respectively.
We have additional potential asbestos exposure on insureds for which we
wrote excess liability coverages. Such exposure has increased due to the erosion
of much of the underlying limits. The number of claims against such insureds and
the value of such claims have increased in recent years due in part to the
non-viability of other defendants.
Our other remaining asbestos exposures are mostly peripheral defendants,
including a mix of manufacturers and distributors of certain products that
contain asbestos as well as premises owners. Generally, these insureds are named
defendants on a regional rather than a nationwide basis. We continue to 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 courts have been engaged in developing guidelines regarding coverage
for asbestos claims and have begun to articulate more consistent standards
regarding the extent of the obligation of insurers to provide coverage and the
method of allocation of costs among insurers. However, we still do not know the
universe of potential claims. Therefore, uncertainty remains as to our ultimate
liability for asbestos-related claims.
Hazardous waste sites are another significant potential exposure. Under the
"Superfund" law and similar state statutes, when potentially responsible parties
(PRPs) fail to handle the clean-up, regulators have the work done and then
attempt to establish legal liability against the PRPs. The PRPs, with proper
government authorization in many instances, disposed of toxic materials at a
waste dump site or transported the materials to the site. Most sites have
multiple PRPs.
Insurance policies issued to PRPs were not intended to cover the clean-up
costs of pollution and, in many cases, did not intend to cover the pollution
itself. Pollution was not a recognized hazard at the time many of these policies
were written. In more recent cases, however, policies specifically excluded such
exposures.
As the cost of environmental clean-up continues to grow, PRPs and others
have increasingly filed claims with their insurance carriers. 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
remediation costs among governmental authorities and the PRPs varies greatly.
Second, different courts have addressed liability and coverage issues regarding
pollution claims and have reached inconsistent conclusions in their
interpretation of several issues. These significant uncertainties are not likely
to be resolved in the near future.
Uncertainties also remain as to the Superfund law itself, which has
generated far more litigation than it has brought about the cleanup of hazardous
waste sites. Superfund's taxing authority expired on December 31, 1995.
Notwithstanding continued pressure by the insurance industry and other
interested parties to achieve a legislative solution to rewrite this law, the
Superfund issue may not be addressed until after the 1996 elections. It is
currently not possible to predict the direction that any reforms may take, when
they may occur or the effect that any changes may have on the insurance
industry. In addition, the Superfund law does not address non-Superfund toxic
sites. For that reason, it does not cover all existing toxic waste exposures,
such as those involving sites that are subject to state law only. Such sites
could prove even more numerous and thus more costly than Superfund sites.
Litigation costs continue to escalate, particularly for toxic waste claims.
A substantial portion of the funds expended to date by us has been for legal
fees incurred in the prolonged litigation of coverage issues. Primary policies
provide a limit on indemnity payments but many do not on defense costs. This
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language in the policy sometimes leads to the payment of defense costs in
multiples of the policy limits.
Reserves for asbestos and toxic waste claims cannot be estimated with
traditional loss reserving techniques. We have established case reserves and
expense reserves for costs of related litigation where sufficient information
has been developed to indicate the involvement of a specific insurance policy.
In addition, IBNR reserves have been established to cover additional exposures
on both known and unasserted claims. These reserves are continually reviewed and
updated. Loss reserve increases relating to asbestos and toxic waste claims were
$182 million in 1995, $115 million in 1994 and $1,076 million in 1993. 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 1996 and future years are possible as legal and factual issues
concerning these claims are clarified, although the amounts cannot be reasonably
estimated.
Management believes that the aggregate loss reserves of the property and
casualty subsidiaries at December 31, 1995 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 would adversely affect results in future periods. The
amount cannot reasonably be estimated at the present time.
INVESTMENTS AND LIQUIDITY
Investment income after taxes increased 7% in 1995 compared with 4% in
1994. Growth was primarily due to increases in invested assets, which reflected
strong cash flow from operations over the period. Growth was tempered in 1994 by
the $538 million paid in December 1993 into an escrow account related to the
Fibreboard settlement. Similarly, 1995 growth was tempered as a result of the
February 1995 amendment to the 1993 agreement between Pacific Indemnity and
Continental Casualty, whereby an additional $480 million of the Corporation's
assets were designated as funds held for asbestos-related settlement. These
assets accrue income for the benefit of participants in the class settlement of
asbestos-related bodily injury claims against Fibreboard.
The effective tax rate on our investment income was 15.9% in 1995 compared
with 15.3% in 1994 and 14.7% in 1993. The effective tax rate increased in 1995
and 1994 as the percentage of our investment income subject to tax has
increased.
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.
The main objectives of the investment portfolio of the property and
casualty subsidiaries are to maximize after-tax investment income and total
investment returns while minimizing credit risks as well as 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.
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New cash available for investment was approximately $495 million in 1995
compared with $725 million in 1994 and $480 million in 1993. The lower amount in
1995 was due to the designation of $480 million of new cash as funds held for
asbestos-related settlement. The lower amount in 1993 was due to the $538
million paid in December into an escrow account. In 1995, we invested new cash
primarily in tax-exempt bonds. In 1994, we invested new cash in taxable bonds
and, to a lesser extent, tax-exempt bonds while reducing our equity security
portfolio. In each year we tried to achieve the appropriate mix in our portfolio
to balance both investment and tax strategies.
The property and casualty subsidiaries have consistently invested in high
quality marketable securities. Taxable bonds in our domestic portfolio comprise
U.S. Treasury, government agency and corporate issues. Approximately 90% of
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. Taxable bonds have an average
maturity of 7 1/2 years while tax-exempt bonds mature on average in 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.
At December 31, 1995, the property and casualty subsidiaries held foreign
investments of $1.4 billion supporting their international operations. Such
foreign investments have quality and maturity characteristics similar to our
domestic portfolio. We reduce the risks relating to currency fluctuations by
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, such investments were at a higher than normal level so
that funds would be readily available to pay amounts related to the Fibreboard
settlement. Short-term securities were reduced to a more normal level in 1995 as
the expected payout period for 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 $28 million in 1995
compared with $14 million in 1994 and $62 million in 1993. Premiums and policy
charges were $623 million in 1995 compared with $836 million in 1994 and $801
million in 1993.
PERSONAL INSURANCE
Earnings from personal insurance were $37 million in 1995 compared with $33
million in 1994 and $37 million in 1993. Earnings in 1995 benefited from
favorable mortality. The earnings decrease in 1994 was primarily due to a
decrease in the spread between interest earned on our invested assets and
interest credited to policyholders on interest-sensitive products.
Premiums and policy charges amounted to $311 million in 1995 compared with
$272 million in 1994 and $240 million in 1993. New sales of personal insurance
as measured by annualized premiums were $112 million in 1995 compared with $97
million in 1994 and $88 million in 1993.
Our strategy is to focus on the affluent individual interested in estate
planning and wealth creation utilizing equity-linked products as well as on
financial planning for business owners. Our ability to increase revenues has
been enhanced through marketing initiatives conducted with our property and
casualty producers.
We have taken a number of steps to increase operating efficiencies in order
to improve the competitive position of our personal insurance business. We
reduced field office staffing levels 55% by consolidating the 40 offices as of
the beginning of 1993 into 14 as of year-end 1995 and also consolidated three
service centers into two. In addition, we streamlined our producer network and
raised their minimum production requirements.
27
<PAGE> 28
GROUP INSURANCE
Group insurance operations resulted in losses of $9 million in 1995 and $19
million in 1994 compared with earnings of $25 million in 1993. Group health
insurance results in 1995 and 1994 were adversely affected by a high level of
claims resulting from the increased cost of medical services and the increased
utilization of those services. Results in 1995 benefited from significant rate
increases; this was offset in part by the adverse effect of premium revenue
decreasing at a greater rate than the decrease in expenses.
Premiums were $312 million in 1995 compared with $564 million in 1994 and
$561 million in 1993. New group sales as measured by annualized premiums were
$21 million in 1995 compared with $52 million in 1994 and $323 million in 1993.
Our group health business is concentrated in the New York and New Jersey
markets. In 1993, both states adopted legislation which eliminated health
insurance underwriting, created community based rating and limited 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 high level of
premium revenue in 1993 and the first six months of 1994 reflected the effect of
the significant increase in sales of new policies during 1993. Due to the
increased availability of alternative small group markets in 1994 as well as our
significant rate increases in 1994 and 1995, many of the new policies written in
1993, which became eligible for renewal in 1994, were not renewed. Due to this
increase in non-renewals, we expected the decline in premium revenue which
occurred in 1995. In response, we took a number of steps to reduce our costs
including the closing of field offices and regional claim offices, reducing
staffing levels by 65%.
Given the changes in our marketplace and the continuation of the shift away
from traditional indemnity products to managed care alternatives, we anticipate
that traditional indemnity premium revenue will continue to decline. In response
to this shift, we are offering managed care products through ChubbHealth, Inc.,
a health maintenance organization.
Because of the continuing adverse effects of the legislative changes and
other health industry factors on our group health results, we are evaluating our
future role in the traditional indemnity and managed care markets.
INVESTMENTS AND LIQUIDITY
Gross investment income increased 12% in 1995 compared with 1% in 1994.
Growth in 1995 was primarily due to an increase in invested assets. Premium
receipts in excess of payments for benefits and expenses, together with
investment income, continue to provide new cash for investment. New cash
amounted to $225 million in 1995 compared with $140 million in 1994 and $225
million in 1993. The increase in new cash in 1995 was primarily due to increases
in deposits credited to policyholder funds. The decrease in new cash in 1994 was
due to the reduced cash flow from group insurance operations.
In 1995, new cash was invested in mortgage-backed securities and, to a
lesser extent, corporate bonds and U.S. Treasury securities. In 1994, new cash
was invested primarily in mortgage-backed securities. We invest predominantly in
fixed-income securities with 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.
The life and health subsidiaries held fixed maturity securities with a
carrying value of $2.7 billion and $2.2 billion at December 31, 1995 and 1994,
respectively. Corporate bonds comprised 39% and 47% of the portfolio at year-end
1995 and 1994, respectively, and mortgage-backed securities comprised 47% of the
portfolio at both year-ends. More than 90% of our mortgage-backed securities
holdings at December 31, 1995 and 1994 related to residential mortgages
consisting of government agency pass-through securities, government agency
collateralized mortgage obligations (CMOs) and AAA rated
28
<PAGE> 29
by government agency collateral or single family home mortgages. The majority
of the CMOs are actively traded in liquid markets and market value information
is readily available from broker/dealers. The notion of impairment associated
with default in paying principal is less applicable to residential CMOs. 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 invest primarily in those classes of residential CMO
instruments that are subject to less prepayment and extension risk and are
therefore less volatile than other CMO instruments.
REAL ESTATE
Real estate earnings after taxes were $6 million in 1995 compared with a
loss of $2 million in both 1994 and 1993. Results continue to be adversely
affected by progressively higher portions of interest cost being charged
directly to expense rather than being capitalized and by provisions for possible
uncollectible receivables related to mortgages. Results for 1995 benefited from
an increase in earnings from rental operations, residential sales and a land
sale as well as from a decrease in the provision for uncollectible receivables.
The provision for uncollectible receivables was lower in 1995 than in the prior
year despite an increase of $10 million to the allowance for uncollectible
receivables resulting from the initial application of Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a
Loan, which established new criteria for measuring impairment of a loan.
Revenues were $288 million in 1995 compared with $205 million in 1994 and
$161 million in 1993. Revenues in 1995 and 1994 included higher levels of rental
revenues on owned properties. Revenues in 1995 also included increased revenues
from residential development and the land sale.
Our commercial real estate activities traditionally centered around
acquiring suburban, multi-site land parcels in locations considered prime for
office development and then developing the land in progressive stages. In the
late 1980s, 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 joint venture 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 commercial real estate industry continues to suffer from a 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 low rental rates will continue to cause pressure on the
earnings of the real estate development industry.
In consideration of the difficult environment in most real estate markets,
we have curtailed our construction of new office buildings in recent years. We
have focused instead on leasing newly constructed facilities and maintaining
established properties at high occupancy levels. Current development activities
consist almost exclusively of preconstruction type efforts such as site
planning, zoning and similar activities. As a consequence, we expect revenues
from our commercial real estate activities for the next several years to come
from ongoing income from owned properties and from management and financing
29
<PAGE> 30
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 1995, a total of 2,320,000 square feet was leased compared with 2,420,000
square feet in 1994 and 1,710,000 square feet in 1993. At December 31, 1995, we
owned or had interests in 10,450,000 square feet of office and industrial space.
Our vacancy rate was 6% at year-end 1995 compared with 7% at year-end 1994 and
10% at year-end 1993. The lower vacancy rates in 1995 and 1994 were due to our
ability to market space as it became available despite the difficult leasing
market.
In certain markets, renewing leases in established buildings has been
difficult as newly constructed space is available nearby at competitive rates.
While we have experienced significant leasing activity in recent years, we have
had to enter into multiple year leases at low 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.
Ultimate realizable value for real estate properties is determined based on
our ability to fully recover costs through a future revenue stream. 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 Corporation will adopt SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, in the first
quarter of 1996. SFAS No. 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets. The adoption of SFAS No. 121 is not expected to have a
significant impact on net income in 1996. This pronouncement is discussed
further in Note (1) (p) of the Notes to Consolidated Financial Statements on
page 51.
Loans receivable, which were issued in connection with our joint venture
activities and other property sales, are 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 joint venture 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 $18 million in 1995, $29 million in 1994 and $22
million in 1993, principally related to loans on selected properties with
operating income at levels which may not fully meet debt service requirements.
The 1995 charge includes the $10 million from the initial application of SFAS
No. 114. During 1995 and 1994, such reserve was reduced by writedowns
aggregating $4 million and $10 million, respectively, related to specific loans
that are uncollectible. Management believes the reserve of $88 million at
30
<PAGE> 31
December 31, 1995 adequately reflects the current condition of the portfolio.
If conditions in the real estate market do not improve, however, additional
reserves may be required.
The fair value of these loans receivable is estimated through the use of
valuation techniques which consider current yield factors applied to the lesser
of the value of the discounted future cash flows of the loan or the discounted
future net cash flows from the properties serving as the underlying collateral
for the loan. 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. At December 31, 1995, the aggregate fair value of the loans was $405
million and the carrying value was $410 million.
Our Florida residential development activities continued during 1995.
Construction of a 171 unit oceanfront high-rise condominium project, commenced
during 1994, is expected to be completed in 1996. At year-end 1995, 156 units
were under contract. During 1995, construction of a 214 unit mid-rise
condominium project was completed. At year-end, 123 units were sold and 22 units
were under contract.
During 1994, we began development of residential projects in northern New
Jersey. Our first project is a 178 unit townhome project which we expect to
complete in 1996. At year-end 1995, 131 units were sold and 19 units were under
contract. During 1995, we entered into a joint venture for the construction of
84 townhomes.
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 6% in 1995 compared with 4 1/2% in 1994 and
3 1/4% in 1993. In 1995, the range of interest rates for term loans was 6% to
9 1/2% and for mortgages the range was 5% to 12%.
We expect to refinance, under similar terms, most of the term loans and
mortgages which become due in 1996. Cash from operations combined with the
ability to utilize the Corporation's borrowing facilities will provide
sufficient funds for 1996.
CORPORATE
The Corporation filed a shelf registration statement which the Securities
and Exchange Commission declared effective in June 1995, under which up to $400
million of various types of securities may be issued by the Corporation or Chubb
Capital. No securities have been issued under this registration.
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 $120 million of unsecured 8 3/4% notes due
in 1999. In each of the years 1996 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. The proceeds have been used to support our
real estate operations.
Chubb Capital has outstanding $150 million of 6% notes due in 1998 and $100
million of 6 7/8% notes due in 2003. The notes are unsecured and are guaranteed
by the Corporation. A substantial portion of the proceeds has been used to
support our real estate operations.
The Corporation has a revolving credit agreement with a group of banks that
provides for unsecured borrowings of up to $300 million. The agreement
terminates on July 15, 1997 at which time any loans then outstanding become
payable. There have been no borrowings under this agreement. The Corporation had
additional unused lines of credit of approximately $178 million at December 31,
1995.
31
<PAGE> 32
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 $15 million in 1995, $8
million in 1994 and $14 million in 1993.
INVESTMENT GAINS AND LOSSES
Net investment gains were realized by the Corporation and its insurance
subsidiaries in 1995, 1994 and 1993. Such gains before taxes consisted of the
following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Equity securities............................... $100 $125 $ 60
Fixed maturities................................ 31 (62) 173
---- ---- ----
$131 $ 63 $233
==== ==== ====
</TABLE>
In 1995 and 1994, a redistribution of invested assets from equity
securities to fixed maturities resulted in significant realized investment
gains. A restructuring of the equity security portfolio begun in 1992 resulted
in significant realized investment gains in 1993.
A primary reason for the sale of fixed maturities in each of the last three
years has been to improve our after-tax portfolio return without sacrificing
quality, where market opportunities have existed to do so. The substantial 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 in statutory surplus
of our property and casualty subsidiaries resulting from the decrease in income
related to the Fibreboard settlement.
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, 1995, 27% of our fixed maturity
portfolio was classified as held-to-maturity compared with 35% at December 31,
1994 and 79% at December 31, 1993.
At December 31, 1995 and 1994, in accordance with the requirements of SFAS
No. 115, 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, all fixed maturities were carried
at amortized cost.
The unrealized appreciation or depreciation of investments carried at
market value, which includes equity securities and fixed maturities classified
as available-for-sale, is reflected in a separate component of shareholders'
equity, net of applicable deferred income tax.
The unrealized market appreciation before tax of those fixed maturities
carried at amortized cost was $209 million, $13 million and $736 million at
December 31, 1995, 1994 and 1993, respectively. Such unrealized appreciation was
not reflected in the consolidated financial statements. The changes in
unrealized market appreciation of fixed maturities were due to fluctuations in
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 1993, life and health insurance income after taxes included a benefit of
$5 million resulting from a reversal of income tax reserves based on a
settlement of prior years' taxes.
CHANGES IN ACCOUNTING PRINCIPLES
In 1995, the Corporation adopted SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. 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
51.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of the Corporation at December 31, 1995
and 1994 and for each of the three years in the period ended December 31, 1995
and the Report of Independent Auditors thereon and the Corporation's unaudited
quarterly financial data for the two-year period ended December 31, 1995 are
incorporated by reference from the Corporation's 1995 Annual Report to
Shareholders, pages 44 through 68.
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 23, 1996, pages 2, 3 and 6. 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 23, 1996, pages 8 through 20
other than the Performance Graph and the Organization and Compensation Committee
Report appearing on pages 13 through 18.
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 23, 1996, pages 4 through 7.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Corporation's definitive Proxy Statement
for the Annual Meeting of Shareholders on April 23, 1996, pages 20 and 21.
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), 33-30020
(filed July 18, 1989), 33-49230 (filed July 2, 1992) and 33-49232 (filed July 2,
1992):
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 REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
THE CHUBB CORPORATION
(REGISTRANT)
March 1, 1996
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 1, 1996
---------------------------- Executive Officer and
(DEAN R. O'HARE) Director
/s/ JOHN C. BECK Director March 1, 1996
----------------------------
(JOHN C. BECK)
/s/ PERCY CHUBB, III Vice Chairman, Chief Financial March 1, 1996
---------------------------- Officer and Director
(PERCY CHUBB, III)
/s/ JOEL J. COHEN Director March 1, 1996
----------------------------
(JOEL J. COHEN)
/s/ HENRY U. HARDER Director March 1, 1996
----------------------------
(HENRY U. HARDER)
/s/ DAVID H. HOAG Director March 1, 1996
----------------------------
(DAVID H. HOAG)
/s/ ROBERT V. LINDSAY Director March 1, 1996
----------------------------
(ROBERT V. LINDSAY)
/s/ THOMAS C. MACAVOY Director March 1, 1996
----------------------------
(THOMAS C. MACAVOY)
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GERTRUDE G. MICHELSON Director March 1, 1996
- --------------------------------------
(GERTRUDE G. MICHELSON)
Director March 1, 1996
- --------------------------------------
(WARREN B. RUDMAN)
/s/ DAVID G. SCHOLEY Director March 1, 1996
- --------------------------------------
(DAVID G. SCHOLEY)
/s/ RAYMOND G.H. SEITZ Director March 1, 1996
- --------------------------------------
(RAYMOND G.H. SEITZ)
/s/ LAWRENCE M. SMALL Director March 1, 1996
- --------------------------------------
(LAWRENCE M. SMALL)
/s/ RICHARD D. WOOD Director March 1, 1996
- --------------------------------------
(RICHARD D. WOOD)
/s/ HENRY B. SCHRAM Senior Vice President March 1, 1996
- -------------------------------------- and Chief Accounting
(HENRY B. SCHRAM) Officer
</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 67 --
Consolidated Balance Sheets at December 31, 1995 and 1994 45 --
Consolidated Statements of Income for the Years Ended Decem-
ber 31, 1995, 1994 and 1993 44 --
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1995, 1994 and 1993 46 --
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 47 --
Notes to Consolidated Financial Statements 48 --
Supplementary Information (unaudited)
Quarterly Financial Data 68 --
Schedules:
I -- Consolidated Summary of Investments -- Other
than Investments in Related Parties at
December 31, 1995 -- 40
II -- Condensed Financial Information of Registrant at
December 31, 1995 and 1994 and for the Years
Ended December 31, 1995, 1994 and 1993 -- 41
III -- Consolidated Supplementary Insurance Information
at and for the Years Ended December 31, 1995,
1994 and 1993 -- 44
IV -- Consolidated Reinsurance at and for the Years
Ended December 31, 1995, 1994 and 1993 -- 45
VI -- Consolidated Supplementary Property and Casualty
Insurance Information for the Years Ended
December 31, 1995, 1994 and 1993 -- 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, 1995, 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 23, 1996 (except for
Note 18, as to which the date is March 1, 1996), included in the 1995 Annual
Report to Shareholders of The Chubb Corporation.
Our audits also included the financial statement schedules of The Chubb
Corporation listed in Item 14(a). These schedules are the responsibility of the
Corporation's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-3: No. 33-5911 and Form S-8: No. 33-12208, No. 33-29185, No.
33-30020, No. 33-49230 and No. 33-49232) of our report dated February 23, 1996
(except for Note 18, as to which the date is March 1, 1996), 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 26, 1996
39
<PAGE> 40
THE CHUBB CORPORATION
SCHEDULE I
CONSOLIDATED SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
(IN THOUSANDS)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
AMOUNT
AT WHICH
COST OR SHOWN IN
AMORTIZED MARKET THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
------------------ --------- ------- -------------
<S> <C> <C> <C>
Short term investments......................... $ 484,439 $ 484,439 $ 484,439
----------- ----------- -----------
Fixed maturities
Bonds
United States Government and government
agencies and authorities................ 2,460,192 2,555,083 2,545,627
States, municipalities and political
subdivisions............................ 6,385,830 6,815,369 6,639,808
Foreign................................... 1,466,281 1,526,787 1,524,528
Public utilities.......................... 111,576 116,447 115,527
All other corporate bonds................. 1,668,242 1,770,847 1,749,610
----------- ----------- -----------
Total bonds..................... 12,092,121 12,784,533 12,575,100
Redeemable preferred stocks.................. 27,704 27,710 27,710
----------- ----------- -----------
Total fixed maturities.......... 12,119,825 12,812,243 12,602,810
----------- ----------- -----------
Equity securities
Common stocks
Public utilities.......................... 11,222 11,994 11,994
Banks, trusts and insurance companies..... 13,985 23,885 23,885
Industrial, miscellaneous and other....... 467,178 550,942 550,942
----------- ----------- -----------
Total common stocks............. 492,385 586,821 586,821
Non-redeemable preferred stocks.............. 1,031 1,004 1,004
----------- ----------- -----------
Total equity securities......... 493,416 587,825 587,825
----------- ----------- -----------
Policy and mortgage loans...................... 212,339 212,339 212,339
----------- ----------- -----------
Total invested assets........... $13,310,019 $14,096,846 $13,887,413
=========== =========== ===========
</TABLE>
40
<PAGE> 41
THE CHUBB CORPORATION
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS -- PARENT COMPANY ONLY
(IN THOUSANDS)
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Assets
Invested Assets
Short Term Investments..................................... $ 62,727 $ 61,430
Taxable Fixed Maturities -- Available-for-Sale
(cost $207,053 and $289,319)............................. 216,048 275,373
Equity Securities (cost $48,640 and $42,817)............... 75,837 52,731
---------- ----------
TOTAL INVESTED ASSETS................................. 354,612 389,534
Cash.......................................................... 59 132
Investment in Consolidated Subsidiaries....................... 4,969,988 4,041,551
Other Assets.................................................. 145,264 149,900
---------- ----------
TOTAL ASSETS.......................................... $5,469,923 $4,581,117
========== ==========
Liabilities
Dividend Payable to Shareholders.............................. $ 42,741 $ 40,035
Payable to Chubb Capital Corporation.......................... -- 74,340
Long Term Debt................................................ 120,000 150,000
Accrued Expenses and Other Liabilities........................ 44,453 69,713
---------- ----------
TOTAL LIABILITIES..................................... 207,194 334,088
---------- ----------
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 87,819,355 and 87,798,286 Shares...... 87,819 87,798
Paid-In Surplus............................................... 778,239 786,596
Retained Earnings............................................. 4,206,517 3,680,554
Foreign Currency Translation Gains (Losses), Net of Income
Tax........................................................ (3,433) 9,766
Unrealized Appreciation (Depreciation) of Investments, Net.... 345,894 (124,339)
Receivable from Employee Stock Ownership Plan................. (114,998) (122,999)
Treasury Stock, at Cost -- 518,468 and 977,580 Shares......... (37,309) (70,347)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY............................ 5,262,729 4,247,029
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ $5,469,923 $4,581,117
========== ==========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in the Corporation's 1995
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, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Investment Income...................................... $ 19,982 $ 25,031 $ 28,015
Realized Investment Gains (Losses)..................... (505) (13,145) 21,076
Investment Expenses.................................... (1,132) (1,307) (917)
Corporate Expenses..................................... (33,355) (34,850) (24,220)
-------- -------- --------
(15,010) (24,271) 23,954
Federal and Foreign Income Tax (Credit)................ 2,639 (4,578) (9,050)
-------- -------- --------
(17,649) (19,693) 33,004
Equity in Income Before Cumulative Effect of Changes in
Accounting Principles of Consolidated Subsidiaries... 714,277 548,162 311,213
-------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES........................... 696,628 528,469 344,217
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........................................ $696,628 $528,469 $324,217
======== ======== ========
</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 1995
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, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income........................................... $ 696,628 $ 528,469 $ 324,217
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)..................................... (714,277) (548,162) (222,613)
Realized Investment (Gains) Losses................ 505 13,145 (21,076)
Cumulative Effect of Changes in Accounting
Principles...................................... -- -- (68,600)
Other, Net........................................ 5,024 16,886 30,305
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES......................... (12,120) 10,338 42,233
--------- --------- ---------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities.............. 110,234 234,132 463,625
Proceeds from Maturities of Fixed Maturities......... 13,369 21,632 6,760
Proceeds from Sales of Equity Securities............. 2,479 5,333 4,957
Purchases of Fixed Maturities........................ (39,585) (218,380) (421,876)
Purchases of Equity Securities....................... (8,683) (26,004) (6,191)
Decrease (Increase) in Short Term Investments, Net... (1,297) 1,375 (22,258)
Dividends Received from Consolidated Subsidiaries.... 244,008 244,008 148,008
Capital Contributions to Consolidated Subsidiaries... (24,000) (40,000) (10,280)
Other, Net........................................... (40,123) (9,353) (91,175)
--------- --------- ---------
NET CASH PROVIDED BY
INVESTING ACTIVITIES......................... 256,402 212,743 71,570
--------- --------- ---------
Cash Flows from Financing Activities
Increase (Decrease) in Payable to Chubb
Capital Corporation............................... (74,340) (2,950) 22,290
Repayment of Long Term Debt.......................... (30,000) -- --
Dividends Paid to Shareholders....................... (167,959) (158,735) (148,070)
Repurchase of Shares................................. -- (72,052) --
Other, Net........................................... 27,944 10,608 11,793
--------- --------- ---------
NET CASH USED IN
FINANCING ACTIVITIES......................... (244,355) (223,129) (113,987)
--------- --------- ---------
Net Decrease in Cash................................... (73) (48) (184)
Cash at Beginning of Year.............................. 132 180 364
--------- --------- ---------
CASH AT END OF YEAR............................. $ 59 $ 132 $ 180
========= ========= =========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in the Corporation's 1995
Annual Report to Shareholders.
43
<PAGE> 44
THE CHUBB CORPORATION
SCHEDULE III
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------
OTHER
POLICY
DEFERRED UNPAID CLAIMS
POLICY CLAIMS AND
ACQUISITION AND POLICY UNEARNED BENEFITS
SEGMENT COSTS LIABILITIES PREMIUMS PAYABLE
------- ----------- ----------- -------- --------
<S> <C> <C> <C> <C>
1995
Property and Casualty Insurance
Personal................................. $ 129,789 $ 659,138 $ 539,454
Standard Commercial...................... 177,842 4,701,321 854,374
Specialty Commercial..................... 191,351 3,806,386 996,473
Reinsurance Assumed...................... 59,694 421,296 180,381
Investments..............................
---------- ----------- ----------
558,676 9,588,141 2,570,682
Life and Health Insurance.................. 612,709 2,844,415 $ 98,723
---------- ----------- ---------- --------
$1,171,385 $12,432,556 $2,570,682 $ 98,723
========== =========== ========== ========
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
========== =========== ========== ========
<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>
1995
Property and Casualty Insurance
Personal................................. $ 832,423 $ 436,562 $ 250,174 $ 53,001 $ 851,582
Standard Commercial...................... 1,408,811 1,083,851 363,304 96,751 1,456,466
Specialty Commercial..................... 1,556,473 920,521 391,433 112,332 1,627,032
Reinsurance Assumed...................... 349,455 229,047 116,032 370,912
Investments.............................. $602,987*
---------- -------- ---------- ---------- -------- ----------
4,147,162 602,987 2,669,981 1,120,943 262,084 $4,305,992
==========
Life and Health Insurance.................. 622,937 230,090 549,219 77,457 185,086
---------- -------- ---------- ---------- --------
$4,770,099 $833,077 $3,219,200 $1,198,400 $447,170
========== ======== ========== ========== ========
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
==========
Life and Health Insurance.................. 836,293 206,315 752,205 72,250 199,399
---------- -------- ---------- ---------- --------
$4,612,576 $766,796 $3,271,564 $1,113,495 $423,389
========== ======== ========== ========== ========
1993
Property and Casualty Insurance
Personal................................. $ 807,550 $ 474,786 $ 256,968 $ 45,260 $ 814,486
Standard Commercial...................... 1,294,182 1,547,400 313,892 75,637 1,326,811
Specialty Commercial..................... 1,208,672 700,868 315,252 90,968 1,269,492
Reinsurance Assumed...................... 194,434 156,044 62,855 235,506
Investments.............................. $533,709*
---------- -------- ---------- ---------- -------- ----------
3,504,838 533,709 2,879,098 948,967 211,865 $3,646,295
==========
Life and Health Insurance.................. 801,236 203,793 669,422 63,138 183,740
---------- -------- ---------- ---------- --------
$4,306,074 $737,502 $3,548,520 $1,012,105 $395,605
========== ======== ========== ========== ========
<FN>
- ---------------
* 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.
</TABLE>
44
<PAGE> 45
THE CHUBB CORPORATION
SCHEDULE IV
CONSOLIDATED REINSURANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENTAGE OF
CEDED ASSUMED AMOUNT
DIRECT TO OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------ --------- ---------- ------ -------------
<S> <C> <C> <C> <C> <C>
1995
Life Insurance In Force at
Year-End....................... $66,612,412 $12,533,816 $ 49,352 $54,127,948 .1%
=========== =========== ======== ===========
Premiums Earned and Policy
Charges for the Year:
Life Insurance.................. $ 332,967 $ 20,740 $ 1,766 $ 313,993 .6
Accident and Health Insurance... 319,068 10,124 -- 308,944 --
Property and Casualty
Insurance..................... 4,754,423 1,319,341 712,080 4,147,162 17.2
----------- ----------- -------- -----------
Total Premiums and Policy
Charges.................... $ 5,406,458 $ 1,350,205 $713,846 $ 4,770,099
=========== =========== ======== ===========
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
========== =========== ======== ===========
</TABLE>
45
<PAGE> 46
THE CHUBB CORPORATION
SCHEDULE VI
CONSOLIDATED SUPPLEMENTARY PROPERTY AND CASUALTY INSURANCE INFORMATION
(in thousands)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
CLAIMS AND CLAIM
ADJUSTMENT PAID
EXPENSES INCURRED CLAIMS
RELATED TO AND
------------------------ CLAIM
CURRENT PRIOR ADJUSTMENT
YEAR YEARS EXPENSES
---------- -------- ----------
<S> <C> <C> <C>
1995............................................. $2,705,800 $(35,819) $1,988,386
========== ======== ==========
1994............................................. $2,549,100 $(29,741) $2,036,525
========== ======== ==========
1993............................................. $2,214,300 $664,798 $1,696,666
========== ======== ==========
</TABLE>
46
<PAGE> 47
THE CHUBB CORPORATION
EXHIBITS
(ITEM 14(a))
<TABLE>
<CAPTION>
DESCRIPTION
-----------
<C> <S>
(3) -- Articles of Incorporation and By-Laws
Restated Certificate of Incorporation. Incorporated by reference to
Exhibit (3) of the registrant's Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31, 1990.
By-Laws. Incorporated by reference to Exhibit (3) of the registrant's
Report to the Securities and Exchange Commission on Form 10-K for the
year ended December 31, 1994.
(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 incorporated by reference to Exhibit (10) of the registrant's
Report to the Securities and Exchange Commission on Form 10-K for the
year ended December 31, 1994.
Executive Compensation Plans and Arrangements.
The Chubb Corporation 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) incorporated by
reference to Exhibit (10) of the registrant's Report to the
Securities and Exchange Commission on Form 10-K for the year ended
December 31, 1994.
The Chubb Corporation Stock Option Plan for Non-Employee Directors
(1992) incorporated by reference to Exhibit (10) of the
registrant's Report to the Securities and Exchange Commission on
Form 10-K for the year ended December 31, 1992.
The Chubb Corporation Deferred Compensation Plan for Directors filed
herewith.
</TABLE>
47
<PAGE> 48
<TABLE>
<CAPTION>
DESCRIPTION
-----------
<C> <S>
Executive Severance Agreements and their amendments incorporated by
reference to Exhibit (10) of the registrant's Report to the
Securities and Exchange Commission on Form 10-K for the year ended
December 31, 1994.
Executive Severance Agreements 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, and 42 through 69 of the 1995 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. Filed concurrently herewith under cover of Form SE.
</TABLE>
48
<PAGE> 1
As of 1/1/92
THE CHUBB CORPORATION
DEFERRED COMPENSATION PLAN
FOR DIRECTORS
-----------------
SECTION 1. EFFECTIVE DATE
- -------------------------
The effective date of the Plan is July 1, 1987.
SECTION 2. ELIGIBILITY
- ----------------------
Any Director of The Chubb Corporation (the "Company") or any Director of a
participating subsidiary of the Company who is also a Director of the Company,
who is not an officer or employee of the Company or a subsidiary thereof is
eligible to participate in the Plan. A subsidiary shall become a participating
subsidiary upon adoption of this Plan by the Board of Directors and by obtaining
the consent to such adoption from the Board of Directors of the Company.
SECTION 3. DEFERRED COMPENSATION ACCOUNTS
- -----------------------------------------
There shall be established for each participant a deferred compensation account
or accounts in the participant's name.
SECTION 4. AMOUNT OF DEFERRAL
- -----------------------------
A participant may elect to defer receipt for any Plan Year of all compensation
payable to the participant in the form of stipends and/or meeting fees for
serving on the Board of Directors of the Company and Committees of the Board of
Directors as well as compensation payable to the participant in the form of
stipends and/or meeting fees for serving on the Board of Directors and
Committees of the Board of Directors of participating subsidiaries of the
Company.
SECTION 5. INVESTMENT OF DEFERRED AMOUNTS
- -----------------------------------------
(a) GENERAL. A participant may designate, in increments of 10%, what part of the
compensation to be deferred or compensation already deferred that should be
allocated to a cash account, a market value account and a shareholder's
equity value account or any combination of such accounts. With the exception
of allocations to a shareholder's equity account (which must be made in
accordance with Section 5(d)), any change in such designation may be made no
later than the 15th day of each March, June, September and December during
the deferral period to be effective on the date next following such
notification that compensation would have been paid in accordance with the
Company's normal practice, or as applicable, the participating subsidiary's
normal practice, but for the election to defer.
<PAGE> 2
-2-
(b) CASH ACCOUNT. The amount, if any, allocated to the participant's
------------
deferred compensation cash account shall be credited with interest, to
be compounded quarterly, calculated prospectively at a rate equal to the
prime rate of Citibank, N.A. in effect on the first day of each January,
April, July and October during the deferral period.
(c) MARKET VALUE ACCOUNT. The amount, if any, allocated to the
--------------------
participant's deferred compensation market value account on each date
compensation would have been paid in accordance with the Company's
normal practice, or as applicable, the participating subsidiary's normal
practice, but for the election to defer shall be expressed in units, the
number of which shall be equal to such amount divided by the closing
price of shares of the Company's Common Stock on the New York Stock
Exchange (hereinafter referred to as "Market Value") on such date or on
the trading day next preceding such date if such date is not a trading
day. On each date that the Company pays a regular cash dividend on
shares of its Common Stock outstanding, the participant's account shall
be credited with a number of units equal to the amount of such dividend
per share multiplied by the number of units in the participant's account
on such date divided by the Market Value on such dividend date or on the
trading day next preceding such date if the dividend payment date is not
a trading day. The value of the units in the participant's market value
account on any given date shall be determined by reference to the Market
Value on such date.
(d) SHAREHOLDER'S EQUITY ACCOUNT. Beginning January 1, 1988, at any time
----------------------------
during the period commencing January 1 and ending March 15 of any
calendar year, the participant may elect to allocate on April 1 of such
year to a deferred compensation shareholder's equity account
compensation payable on April 1 of such year which he has previously
elected to defer, amounts in the participant's cash and market value
accounts on such date, or any combination (in increments of 10%) of such
compensation or cash account or market value account balance. The
amounts so allocated shall be expressed in units, the number of which
shall be equal to such amount divided by the shareholder's equity per
share as reported in the Company's Annual Report to Shareholders for the
year just ended. Any amount allocated to a shareholder's equity account
may not thereafter be reallocated to any other account.
On each date that the Company pays a regular cash dividend on shares of
its Common Share outstanding, the participant's shareholder's equity
account shall be credited with a number of units equal to the amount of
such a dividend per share multiplied by the number of units in the
participant's shareholder's equity account on such date divided by the
Market Value on such dividend date or on the trading day next preceding
such date if the dividend payment date is not a trading day. The value
of the units in the participant's shareholder's equity account on any
given date shall be determined by reference to the shareholder's equity
at the close of the most recent fiscal year.
(e) RECAPITALIZATION. The number of units in the participant's market value
----------------
and shareholder's equity accounts shall be proportionally adjusted for
any increase or decrease in the number of issued shares of Common Stock
of the Company resulting from a subdivision or consolidation of shares
or other capital adjustment, or the payment of a stock dividend or other
<PAGE> 3
-3-
increase or decrease in such shares effected without receipt of
consideration by the Company, or any distribution or spin-off of
assets (other than cash) to the shareholders of the Company.
SECTION 6. PERIOD OF DEFERRAL
- -----------------------------
A participant may elect to defer receipt of compensation either (a) until a
specified year in the future or (b) until the participant's termination of
service as a Director of the Company. If alternative (a) is elected, actual
payment will be made or will commence within ninety days after the beginning of
the year specified. If alternative (b) is elected, payment will be made or will
commence within ninety days after termination of services as a Director of the
Company.
SECTION 7. FORM OF PAYMENT
- --------------------------
A participant may elect to receive the compensation deferred under the plan in
either (a) a lump sum or (b) a number of annual installments as specified by
the participants. All amounts shall be paid in cash.
SECTION 8. DEATH OR DISABILITY PRIOR TO RECEIPT
- -----------------------------------------------
In the event that a participant dies or becomes totally and permanently
disabled prior to receipt of any or all of the amounts payable to the
participant pursuant to the Plan, any amounts remaining in the participant's
deferred compensation account shall be paid to his estate or personal
representative in a lump sum within ninety (90) days following the Company's
notification of the participant's death or disability.
SECTION 9. TIME OF ELECTION OF DEFERRAL
- ---------------------------------------
The Plan Year shall be the period from July 1, 1987 to December 31, 1987 and
effective January 1, 1988, the period commencing January 1 and ending December
31 of each year.
All election to defer compensation may be made by a nominee for election as a
Director prior to, or concurrently with the nominee's election for, the term for
which the nominee is being elected, and may be made by a person then currently
serving as a Director for the next succeeding Plan Year no later than the
preceding December 15th (or June 15, 1987 for the Plan Year beginning July 1,
1987).
SECTION 10. MANNER OF ELECTING DEFERRAL
- ---------------------------------------
A participant may elect to defer stipend and/or meeting fee compensation by
giving written notice to the Secretary of the Company on a form provided by the
Company, which notice shall include the accounts to which such deferred amounts
are to be allocated and the percentage (in increments of 10%) of such amounts
to be allocated to each account, the period of deferral, and the form of
payment, including the number of installments.
<PAGE> 4
-4-
SECTION 11. EFFECT OF ELECTION
- ------------------------------
An election to defer compensation shall be irrevocable once the Plan Year to
which it applies has commenced. An election covering more than one Plan Year
may be revoked or modified with respect to Plan Years not yet begun by
notifying the Secretary of the Company in writing at least fifteen (15) days
prior to the commencement of such Plan Year.
SECTION 12. PARTICIPANT'S RIGHTS UNSECURED
- ------------------------------------------
The right of any participant to receive future payments under the provisions of
the Plan shall be an unsecured claim against the general assets of the Company,
or as applicable, the participating subsidiary.
SECTION 13. STATEMENT OF ACCOUNTS
- ---------------------------------
Statements will be sent to each participant by April 1st of each year as to the
value of the participant's deferred compensation accounts as of the end of the
preceding December.
SECTION 14. ASSIGNABILITY
- -------------------------
No right to receive payments hereunder shall be transferable or assignable by a
participant, except by will or by the laws of descent and distribution. The
participant may not sell, assign, transfer, pledge or otherwise encumber any
interest in the participant's deferred compensation account and any attempt to
do so shall be void against, and shall not be recognized by, the Company or
participating subsidiaries.
SECTION 15. ADMINISTRATION
- --------------------------
The Plan shall be administered by the Secretary and the General Counsel of the
Company, who together shall have the authority to adopt rules and regulations
for carrying out the Plan and interpret, construe and implement the provisions
of the Plan.
SECTION 16. AMENDMENT
- ---------------------
The Plan may at any time or from time to time be amended, modified or
terminated by the Company. No amendment, modification or termination shall,
without the consent of the participant, adversely effect accruals in such
participant's deferred compensation account or accounts at the time of such
amendment, modification or termination.
<PAGE> 1
[THE CHUBB CORPORATION LETTERHEAD]
December 6, 1995
Mr. John J. Degnan
945 Old Chester Road
Far Hills, NJ 07931
Dear Mr. Degnan:
In order to induce you to remain in the employ of The Chubb Corporation
(the "Company") and in consideration of your continuing in the Company's employ,
the Company agrees to provide the severance benefits specified below on the
terms and subject to the conditions stated. However, in the absence of a Change
in Control of the Company, as defined below, nothing in this Agreement shall
affect the Company's normal right to terminate your employment or your right to
leave its employ.
1. Change in Control. For purposes of this Agreement a Change in
-----------------
Control will be deemed to have occurred
(A) if following (i) a tender or exchange offer for voting
securities of the Company, (ii) a proxy contest for the election of
Directors of the Company or (iii) a merger or consolidation or sale of
all or substantially all of the business or assets of the Company, the
Directors of the Company immediately prior to the initiation of such
event cease to constitute a majority of the Board of Directors of the
Company upon the occurrence of such event or within one year after such
event, or
(B) if any "person" or "group" (as defined under the beneficial
ownership rules of Sections 12(d)(3) and 14(d)(2) of the Securities
Exchange Act of 1934 and Rule 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
<PAGE> 2
Mr. John J. Degnan
December 6, 1995
Page 2
(i) your death, (ii) your retirement at normal retirement age ("Retirement")
under the Company's pension plan as in effect immediately prior to the Change in
Control, (iii) your voluntary termination other than for Good Reason, (iv) your
retirement for Disability or (v) your discharge for cause.
Termination by you of your employment for "Good Reason" shall mean
termination by you of your employment, subsequent to a Change in Control,
because of:
(A) the assignment to you, without your express written consent, of
any duties inconsistent with your positions, duties, responsibilities,
authority and status with the Company and its principal subsidiaries
immediately prior to such Change in Control, or a change in your
reporting responsibilities, titles or offices as in effect immediately
prior to the Change in Control, or any removal of you from or any
failure to re-elect you to any of such positions, except in connection
with the termination of your employment for Cause, Disability,
Retirement, as a result of your death or by you without Good Reason;
(B) a reduction by the Company in your base salary as in effect at
the time of such Change in Control;
(C) a failure by the Company to continue (or to replace with
equivalent plans) the Performance Share Plan, the Annual Incentive
Compensation Plan or any other Bonus Plan in which you participated for
the year immediately preceding such Change in Control (the "Bonus
Plans") which are in effect at the time of such Change in Control or a
failure by the Company to continue you as a participant in such Bonus
Plans (or equivalent plans) on a basis which would entitle you to
receive under such Bonus Plans (or equivalent plans) amounts at least
equal to the average amounts you received pursuant to such Bonus Plans
for the three years preceding such Change in Control;
(D) the Company's requiring you to maintain your principal office or
conduct your principal activities anywhere other than at the Company's
principal executive offices in the New York Metropolitan area, including
Somerset County, New Jersey;
(E) the failure by the Company to continue in effect (or to replace
with equivalent plans) the Company's Capital Accumulation Plan
<PAGE> 3
Mr. John J. Degnan
December 6, 1995
Page 3
or any other compensation plan, any stock ownership plan, stock purchase
plan, stock option plan, life insurance plan, health and accident plan,
financial services plan, hospital-medical plan, dental plan, or
disability plan in which you are participating or eligible to
participate at the time of such Change in Control, or the taking of any
action by the Company which would adversely affect your participation in
or materially reduce your benefits under any such plans (or equivalent
plans) or deprive you of any material fringe benefit enjoyed or to be
enjoyed by you at the time of such Change in Control;
(F) the failure by the Company to obtain the assumption of the
agreement to perform this Agreement by any successor as contemplated in
Section 7 hereof;
(G) any purported termination of your employment which is not
effected pursuant to a Notice of Termination satisfying the applicable
requirements with respect to such Notice; or
(H) a determination made by you in good faith, whether before or
after the date you are eligible for early retirement under the Company's
pension plan, that as a result of such Change in Control you are not
able to discharge your duties effectively; or
(I) any termination of this Agreement pursuant to Section 6 prior to
the expiration of two years from the occurrence of the Change in
Control.
Termination of your employment for "Cause" shall mean termination
because of (A) the willful and continued failure by you substantially to perform
your duties with the Company and its principal subsidiaries (other than any such
failure resulting from your incapacity due to physical or mental illness), after
a demand for substantial performance is delivered to you by the Chief Executive
Officer of the Company, which specifically identifies the manner in which such
executive believes that you have not substantially performed your duties, or (B)
the willful engaging by you in misconduct which is materially injurious to the
Company, monetarily or otherwise. For purposes of this paragraph, no act, or
failure to act, on your part shall be considered "willful" unless done, or
omitted to be done, by you not in good faith and without reasonable belief that
your action or omission was in or not opposed to the best interests of the
Company. Notwithstanding the foregoing, you shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to you a
<PAGE> 4
Mr. John J. Degnan
December 6, 1995
Page 4
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 plan (on the assumption that your salary
<PAGE> 5
Mr. John J. Degnan
December 6, 1995
Page 5
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 or substantially
<PAGE> 6
Mr. John J. Degnan
December 6, 1995
Page 6
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, divisees and legatees. If you should
die while any amount would still be payable to you hereunder if you had
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to your
devisee, legatee or other designee or, if there be no such designee, to
your estate.
8. Notices. For the purposes of this Agreement, notices and all other
-------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, provided
that all notices to the Company shall be directed to the attention of the
Chairman of the Company, with a copy to the Secretary of the Company, or to
such other address as either party may have furnished to the other in writing
in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
9. Miscellaneous. No provisions of this Agreement may be modified,
-------------
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by you and such officer as may be specifically designated by
the Board of Directors of the Company. No waiver by either party hereto at any
time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter
hereof have been made by either party which are not expressly set forth in this
Agreement; provided, however, that this Agreement shall not supersede or in
-------- -------
<PAGE> 7
Mr. John J. Degnan
December 6, 1995
Page 7
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 8th day
of December, 1995.
/s/ JOHN J. DEGNAN
- -------------------
John J. Degnan
<PAGE> 8
[CHUBB CORPORATION LETTERHEAD]
December 6, 1995
Ms. Theresa M. Stone
1185 Hopkinton Road
Hopkinton, NH 03229
Dear Ms. Stone:
In order to induce you to remain in the employ of The Chubb Corporation
(the "Company") and in consideration of your continuing in the Company's employ,
the Company agrees to provide the severance benefits specified below on the
terms and subject to the conditions stated. However, in the absence of a Change
in Control of the Company, as defined below, nothing in this Agreement shall
affect the Company's normal right to terminate your employment or your right to
leave its employ.
1. Change in Control. For purposes of this Agreement a Change in Control
-----------------
will be deemed to have occurred
(A) if following (i) a tender or exchange offer for voting
securities of the Company, (ii) a proxy contest for the election of
Directors of the Company or (iii) a merger or consolidation or sale of
all or substantially all of the business or assets of the Company, the
Directors of the Company immediately prior to the initiation of such
event cease to constitute a majority of the Board of Directors of the
Company upon the occurrence of such event or within one year after such
event, or
(B) if any "person" or "group" (as defined under the beneficial
ownership rules of Sections 12(d) (3) and 14(d) (2) of the Securities
Exchange Act of 1934 and Rule 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 death, (ii) your
retirement at normal retirement age ("Retirement") under the Company's pension
<PAGE> 9
Ms. Theresa M. Stone
December 6, 1995
Page 2
plan as in effect immediately prior to the Change in Control, (iii) your
voluntary termination other than for Good Reason, (iv) your retirement for
Disability or (v) your discharge for cause.
Termination by you of your employment for "Good Reason" shall mean
termination by you of your employment, subsequent to a Change in Control,
because of:
(A) the assignment to you, without your express written consent, of
any duties inconsistent with your positions, duties, responsibilities,
authority and status with the Company and its principal subsidiaries
immediately prior to such Change in Control, or a change in your
reporting responsibilities, titles or offices as in effect immediately
prior to the Change in Control, or any removal of you from or any
failure to re-elect you to any of such positions, except in connection
with the termination of your employment for Cause, Disability,
Retirement, as a result of your death or by you without Good Reason;
(B) a reduction by the Company in your base salary as in effect at
the time of such Change in Control;
(C) a failure by the Company to continue (or to replace with
equivalent plans) the Performance Share Plan, the Annual Incentive
Compensation Plan or any other Bonus Plan in which you participated for
the year immediately preceding such Change in Control (the "Bonus
Plans") which are in effect at the time of such Change in Control or a
failure by the Company to continue you as a participant in such Bonus
Plans (or equivalent plans) on a basis which would entitle you to
receive under such Bonus Plans (or equivalent plans) amounts at least
equal to the average amounts you received pursuant to such Bonus Plans
for the three years preceding such Change in Control;
(D) the Company's requiring you to maintain your principal office
or conduct your principal activities anywhere other than at the
Company's principal executive offices in the New York Metropolitan area,
including Somerset County, New Jersey;
(E) the failure by the Company to continue in effect (or to replace
with equivalent plans) the Company's Capital Accumulation Plan or any
other compensation plan, any stock ownership plan, stock purchase plan,
stock option plan, life insurance plan, health and accident plan,
financial services plan, hospital-medical plan, dental plan, or
<PAGE> 10
Ms. Theresa M. Stone
December 6, 1995
Page 3
disability plan in which you are participating or eligible to
participate at the time of such Change in Control, or the taking of any
action by the Company which would adversely affect your participation in
or materially reduce your benefits under any such plans (or equivalent
plans) or deprive you of any material fringe benefit enjoyed or to be
enjoyed by you at the time of such Change in Control;
(F) the failure by the Company to obtain the assumption of the
agreement to perform this Agreement by any successor as contemplated in
Section 7 hereof;
(G) any purported termination of your employment which is not
effected pursuant to a Notice of Termination satisfying the applicable
requirements with respect to such Notice; or
(H) a determination made by you in good faith, whether before or
after the date you are eligible for early retirement under the Company's
pension plan, that as a result of such Change in Control you are not
able to discharge your duties effectively; or
(I) any termination of this Agreement pursuant to Section 6 prior to
the expiration of two years from the occurrence of the Change in
Control.
Termination of your employment for "Cause" shall mean termination
because of (A) the willful and continued failure by you substantially to perform
your duties with the Company and its principal subsidiaries (other than any such
failure resulting from your incapacity due to physical or mental illness), after
a demand for substantial performance is delivered to you by the Chief Executive
Officer of the Company, which specifically identifies the manner in which such
executive believes that you have not substantially performed your duties, or (B)
the willful engaging by you in misconduct which is materially injurious to the
Company, monetarily or otherwise. For purposes of this paragraph, no act, or
failure to act, on your part shall be considered "willful" unless done, or
omitted to be done, by you not in good faith and without reasonable belief that
your action or omission was in or not opposed to the best interests of the
Company. Notwithstanding the foregoing, you shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to you a
<PAGE> 11
Ms. Theresa M. Stone
December 6, 1995
Page 4
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
<PAGE> 12
Ms. Theresa M. Stone
December 6, 1995
Page 5
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 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
<PAGE> 13
Ms. Theresa M. Stone
December 6, 1995
Page 6
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, divisees and legatees. If you should
die while any amount would still be payable to you hereunder if you had
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to your
devisee, legatee or other designee or, if there be no such designee, to
your estate.
8. Notices. For the purposes of this Agreement, notices and all other
-------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, provided
that all notices to the Company shall be directed to the attention of the
Chairman of the Company, with a copy to the Secretary of the Company, or to such
other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon receipt.
9. Miscellaneous. No provisions of this Agreement may be modified,
-------------
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by you and such officer as may be specifically designated by
the Board of Directors of the Company. No waiver by either party hereto at any
time of any breach by the other party hereto, of or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
<PAGE> 14
Mrs. Theresa M. Stone
December 6, 1995
Page 7
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 8th day
of December, 1995.
/s/ THERESA M. STONE
- ------------------------
Theresa M. Stone
<PAGE> 1
THE CHUBB CORPORATION
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net income......................................... $696,628 $528,469 $324,217
After-tax interest expense on 6% guaranteed
exchangeable subordinated notes.................. 9,750 9,750 9,750
-------- -------- --------
Net income for computing earnings per share........ $706,378 $538,219 $333,967
======== ======== ========
Average number of common shares outstanding........ 87,035 87,543 87,642
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........................................ 89,942 90,450 90,549
======== ======== ========
Net income per share............................... $ 7.85 $ 5.95 $ 3.69
</TABLE>
<PAGE> 1
EXHIBIT 13
SUPPLEMENTARY FINANCIAL DATA
<TABLE>
<CAPTION>
IN THOUSANDS
YEARS ENDED DECEMBER 31
<S> <C> <C> <C>
1995 1994 1993
--------- --------- ---------
PROPERTY AND CASUALTY INSURANCE
UNDERWRITING
Net Premiums Written............................. $4,305,992 $3,951,209 $3,521,295
Increase in Unearned Premiums.................... (158,830) (174,926) (141,457)
---------- ---------- ----------
Premiums Earned.................................. 4,147,162 3,776,283 3,379,838
---------- ---------- ----------
Claims and Claim Expenses........................ 2,669,981 2,519,359 2,204,098
Operating Costs and Expenses..................... 1,393,373 1,288,692 1,181,316
Increase in Deferred Policy Acquisition Costs.... (29,223) (39,751) (34,726)
Dividends to Policyholders....................... 18,877 16,294 14,242
---------- ---------- ----------
Underwriting Income (Loss) Before Increase in
Unpaid Claims for Asbestos-Related Settlement
and Return Premium for Medical Malpractice
Commutation.................................... 94,154 (8,311) 14,908
Increase in Unpaid Claims for Asbestos-Related
Settlement..................................... -- -- (675,000)
Return Premium for Medical Malpractice
Commutation.................................... -- -- 125,000
---------- ---------- ----------
Underwriting Income (Loss) Before Income Tax..... 94,154 (8,311) (535,092)
Federal and Foreign Income Tax (Credit).......... 38,500 (500) (197,600)
---------- ---------- ----------
UNDERWRITING INCOME (LOSS)....................... 55,654 (7,811) (337,492)
---------- ---------- ----------
INVESTMENTS
Investment Income Before Expenses and Income Tax. 613,242 570,531 541,749
Investment Expenses.............................. 10,255 10,050 8,040
---------- ---------- ----------
Investment Income Before Income Tax.............. 602,987 560,481 533,709
Federal and Foreign Income Tax................... 95,800 85,500 78,300
---------- ---------- ----------
INVESTMENT INCOME................................ 507,187 474,981 455,409
---------- ---------- ----------
PROPERTY AND CASUALTY INCOME........................ $ 562,841 $ 467,170 $ 117,917
========== ========== ==========
LIFE AND HEALTH INSURANCE
Premiums and Policy Charges......................... $ 622,937 $ 836,293 $ 801,236
Investment Income................................... 232,950 208,745 205,891
---------- ---------- ----------
Total Revenues...................................... 855,887 1,045,038 1,007,127
---------- ---------- ----------
Benefits............................................ 549,219 752,205 669,422
Operating Costs and Expenses........................ 265,403 274,079 248,976
---------- ---------- ----------
Life and Health Income Before Income Tax............ 41,265 18,754 88,729
Federal Income Tax.................................. 13,225 4,251 26,212
---------- ---------- ----------
LIFE AND HEALTH INCOME.............................. $ 28,040 $ 14,503 $ 62,517
========== ========== ==========
REAL ESTATE
Revenues............................................ $ 287,795 $ 204,849 $ 160,650
Cost of Sales and Expenses.......................... 280,099(a) 210,799 158,599
---------- ---------- ----------
Real Estate Income (Loss) Before Income Tax......... 7,696 (5,950) 2,051
Federal Income Tax (Credit)......................... 1,686 (3,913) 4,244
---------- ---------- ----------
REAL ESTATE INCOME (LOSS)........................... $ 6,010 $ (2,037) $ (2,193)
========== ========== ==========
CORPORATE, NET OF TAX................................. $ 14,809 $ 7,661 $ 14,357
========== ========== ==========
REALIZED INVESTMENT GAINS, NET OF TAX................. $ 84,928 $ 41,172 $ 151,619
========== ========== ==========
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES............... $ 696,628 $ 528,469 $ 344,217
========== ========== ==========
</TABLE>
(a) Includes an increase of $10,000,000 to the allowance for uncollectible
receivables resulting from the initial application of Statement of Financial
Accounting Standards No. 114, Accounting by Creditors for Impairment of a
Loan.
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>
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Personal Insurance
Automobile........................ $ 199.7 $ 187.7 $ 191.7 $ 190.9 $ 189.5
Homeowners........................ 449.8 429.7 428.4 416.9 432.2
Other............................. 202.1 196.3 194.4 188.6 193.0
-------- -------- -------- -------- --------
851.6 813.7 814.5 796.4 814.7
-------- -------- -------- -------- --------
Standard Commercial Insurance
Multiple Peril.................... 678.5 604.0 528.8 483.2 482.6
Casualty.......................... 565.9 544.3 626.0(a) 481.7 456.1
Workers' Compensation............. 212.1 190.2 172.0 168.6 177.1
-------- -------- -------- -------- --------
1,456.5 1,338.5 1,326.8(a) 1,133.5 1,115.8
-------- -------- -------- -------- --------
Specialty Commercial Insurance
Fidelity and Surety............... 757.4 706.7 618.7 585.1 538.0
Other............................. 869.6 769.1 650.8 566.6 496.7
-------- -------- -------- -------- --------
1,627.0 1,475.8 1,269.5 1,151.7 1,034.7
-------- -------- -------- -------- --------
Reinsurance Assumed................. 370.9 323.1 235.5 160.9 147.1
-------- -------- -------- -------- --------
Total........................ $4,306.0 $3,951.1 $3,646.3(a) $3,242.5 $3,112.3
======== ======== ======== ======== ========
<FN>
(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
Personal Insurance
Automobile........................ 87.5% 96.5% 97.6% 100.2% 106.2%
Homeowners........................ 93.7 110.7 100.2 113.3 106.0
Other............................. 73.6 81.3 84.2 89.9 93.5
-------- -------- -------- -------- --------
87.5 100.3 95.8 104.6 103.1
-------- -------- -------- -------- --------
Standard Commercial Insurance
Multiple Peril.................... 104.3 109.6 110.6 112.8 109.0
Casualty.......................... 118.7 106.2 190.6(b) 94.2 86.2
Workers' Compensation............. 95.0 104.5 117.9 118.7 130.6
-------- -------- -------- -------- --------
108.8 107.6 149.7(b) 105.7 102.6
-------- -------- -------- -------- --------
Specialty Commercial Insurance
Fidelity and Surety............... 82.9 79.2 78.1 81.3 82.4
Other............................. 97.0 103.4 103.4 100.2 98.9
-------- -------- -------- -------- --------
90.4 91.7 91.0 90.5 90.3
-------- -------- -------- -------- --------
Reinsurance Assumed................. 99.1 100.2 111.8 126.9 119.3
-------- -------- -------- -------- --------
Total........................ 96.8% 99.5% 114.8%(b) 101.1% 99.5%
======== ======== ======== ======== ========
<FN>
(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.
</TABLE>
16
<PAGE> 3
TEN YEAR FINANCIAL SUMMARY
(in thousands except for per share amounts)
<TABLE>
<CAPTION>
FOR THE YEAR 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
REVENUES
Property and Casualty Insurance
Premiums Earned................... $4,147,162 $3,776,283 $3,504,838(a) $3,163,288 $ 3,037,168
Investment Income................. 613,242 570,531 541,749 501,140 476,984
Life and Health Insurance
Premiums and Policy Charges....... 622,937 836,293 801,236 689,173 634,016
Investment Income................. 232,950 208,745 205,891 192,748 177,654
Real Estate........................ 287,795 204,849 160,650 149,945 140,957
Corporate Investment Income........ 54,445 49,405 52,706 57,176 45,400
Realized Investment Gains (Losses)... 130,660 63,429 232,638 187,349 65,718
TOTAL REVENUES.................. 6,089,191 5,709,535 5,499,708 4,940,819 4,578,897
COMPONENTS OF NET INCOME*
Property and Casualty Insurance
Underwriting Income (Loss) (b).... 55,654 (7,811) (337,492)(c) (15,352) 18,594
Investment Income................. 507,187 474,981 455,409 422,755 397,595
Life and Health Insurance.......... 28,040 14,503 62,517 56,221 51,119
Real Estate Income (Loss).......... 6,010(e) (2,037) (2,193) 10,050 25,007
Corporate.......................... 14,809 7,661 14,357 19,794 16,325
Realized Investment Gains (Losses)... 84,928 41,172 151,619 123,631 43,344
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING
PRINCIPLES..................... 696,628 528,469 344,217 617,099 551,984
Per Share (b)................... 7.85(e) 5.95 3.91(c) 6.96 6.32
NET INCOME...................... 696,628 528,469 324,217(f) 617,099 551,984
Per Share....................... 7.85 5.95 3.69(f) 6.96 6.32
DIVIDENDS DECLARED ON COMMON STOCK... 170,665 161,055 150,784 139,612 127,757
Per Share....................... 1.96 1.84 1.72 1.60 1,48
CHANGE IN UNREALIZED APPRECIATION OR
DEPRECIATION OF INVESTMENTS, NET... 470,233 (487,951) 46,534 (82,082) 12,163
AT YEAR END
TOTAL ASSETS......................... 22,996,525 20,723,055 19,436,870 17,559,182 16,163,605
INVESTED ASSETS
Property and Casualty Insurance.... 10,013,557 8,938,752 8,403,141 7,767,462 7,086,572
Life and Health Insurance.......... 2,967,259 2,560,184 2,473,253 2,208,803 2,063,518
Corporate.......................... 906,597 879,475 965,715 955,828 840,291
PROPERTY AND CASUALTY UNPAID CLAIMS.. 9,588,141 8,913,220 8,235,442 7,220,919 6,591,305
LIFE AND HEALTH POLICY LIABILITIES... 2,943,138 2,659,583 2,446,620 2,193,486 2,072,727
LONG TERM DEBT....................... 1,156,044 1,285,614 1,273,830 1,072,841 1,053,550
SHAREHOLDERS' EQUITY................. 5,262,729 4,247,029 4,196,129 3,954,402 3,541,605
Per Common Share................ 60.28 48.92 47.84 45.18 40.74
<FN>
* The federal and foreign income tax provided for each component of net income
represents its allocated portion of the consolidated provision.
Amounts for 1995 and 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 in unrealized appreciation or depreciation of
investments for 1994 excludes the increase in unrealized appreciation, as of
January 1, 1994, of $220,519,000 resulting from the change in accounting
principle.
</TABLE>
42
<PAGE> 4
<TABLE>
<CAPTION>
FOR THE YEAR 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C>
REVENUES
Property and Casualty Insurance
Premiums Earned................... $ 2,836,135 $ 2,693,553 $ 2,705,560 $ 2,615,866 $ 2,250,758
Investment Income................. 463,413 426,267 364,126 266,230 216,558
Life and Health Insurance
Premiums and Policy Charges....... 561,961 496,405 426,992 384,108 323,293
Investment Income................. 171,570 159,828 144,264 124,640 104,934
Real Estate........................ 174,846 221,338 155,170 143,381 181,184
Corporate Investment Income........ 39,555 25,167 17,806 17,531 18,329
Realized Investment Gains (Losses)... 46,317 46,942 (17,987) (22,561) 97,710
TOTAL REVENUES.................. 4,293,797 4,069,500 3,795,931 3,529,195 3,192,766
COMPONENTS OF NET INCOME*
Property and Casualty Insurance
Underwriting Income (Loss) (b).... 20,709(d) (25,040) 15,818 62,394 (29,837)
Investment Income................. 371,351 330,096 290,647 226,546 177,146
Life and Health Insurance.......... 45,081 42,103 31,458 23,889 36,573
Real Estate Income (Loss).......... 40,015 42,021 40,018 36,079 32,756
Corporate.......................... 14,760 705 (5,357) (4,229) (2,203)
Realized Investment Gains (Losses)... 30,193 30,932 (12,959) (14,619) 53,506
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING
PRINCIPLES..................... 522,109 420,817 359,625 330,060 267,941
Per Share (b)................... 6.07(d) 4.91 4.27 3.97 3.53
NET INCOME...................... 522,109 420,817 359,625 330,060 267,941
Per Share....................... 6.07 4.91 4.27 3.97 3.53
DIVIDENDS DECLARED ON COMMON STOCK... 109,136 96,515 87,766 71,443 60,485
Per Share....................... 1.32 1.16 1.08 .89 .80
CHANGE IN UNREALIZED APPRECIATION OR
DEPRECIATION OF INVESTMENTS, NET... (19,425) 70,330 29,815 12,294 12,878
AT YEAR END
TOTAL ASSETS......................... 14,510,750 13,384,850 11,507,145 10,167,250 8,486,643
INVESTED ASSETS
Property and Casualty Insurance.... 6,297,825 5,793,656 5,153,027 4,519,268 3,574,360
Life and Health Insurance.......... 1,928,687 1,752,532 1,582,962 1,401,553 1,127,695
Corporate.......................... 688,380 647,817 366,237 256,397 295,617
PROPERTY AND CASUALTY UNPAID CLAIMS.. 6,016,396 5,605,006 4,585,848 3,888,485 3,069,083
LIFE AND HEALTH POLICY LIABILITIES... 1,959,568 1,806,325 1,645,195 1,430,119 1,067,290
LONG TERM DEBT....................... 820,825 612,874 362,779 325,049 391,801
SHAREHOLDERS' EQUITY................. 2,882,639 2,603,739 2,238,447 1,937,033 1,559,138
Per Common Share................ 35.19 30.84 27.54 23.85 20.06
<FN>
(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 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.
(e) Net income has been reduced by a charge of $6,500,000 or $.07 per share for the after-tax effect of a $10,000,000 increase
to the allowance for uncollectible receivables resulting from the initial application of Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan.
(f) 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.
</TABLE>
43
<PAGE> 5
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
IN THOUSANDS
YEARS ENDED DECEMBER 31
<S> <C> <C> <C>
REVENUES 1995 1994 1993
---------- ---------- ----------
Premiums Earned and Policy Charges (Notes 12 and 13).. $4,770,099 $4,612,576 $4,306,074
Investment Income (Note 3)............................ 900,637 828,681 800,346
Real Estate........................................... 287,795 204,849 160,650
Realized Investment Gains (Note 3).................... 130,660 63,429 232,638
---------- ---------- ----------
TOTAL REVENUES................................... 6,089,191 5,709,535 5,499,708
---------- ---------- ----------
BENEFITS, CLAIMS AND EXPENSES
Insurance Claims and Policyholders' Benefits (Notes
13 and 14).......................................... 3,219,200 3,271,564 3,548,520
Amortization of Deferred Policy Acquisition Costs
(Note 4)............................................ 1,198,400 1,113,495 1,012,105
Other Insurance Operating Costs and Expenses.......... 447,170 423,389 395,605
Real Estate Cost of Sales and Expenses................ 280,099 210,799 158,599
Investment Expenses................................... 14,747 14,047 11,091
Corporate Expenses.................................... 29,504 36,877 29,296
---------- ---------- ----------
TOTAL BENEFITS, CLAIMS AND EXPENSES.............. 5,189,120 5,070,171 5,155,216
---------- ---------- ----------
INCOME BEFORE FEDERAL AND FOREIGN
INCOME TAX..................................... 900,071 639,364 344,492
FEDERAL AND FOREIGN INCOME TAX (NOTE 8).................... 203,443 110,895 275
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES.......................... 696,628 528,469 344,217
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES,
NET OF TAX (NOTE 2)...................................... -- -- (20,000)
---------- ---------- ----------
NET INCOME....................................... $ 696,628 $ 528,469 $ 324,217
========== ========== ==========
PER SHARE DATA (NOTES 1 AND 18)
Income Before Cumulative Effect of Changes in
Accounting Principles............................... $ 7.85 $ 5.95 $ 3.91
Cumulative Effect of Changes in Accounting
Principles.......................................... -- -- (.22)
---------- ---------- ----------
Net Income....................................... $ 7.85 $ 5.95 $ 3.69
========== ========== ==========
<FN>
See accompanying notes.
</TABLE>
44
<PAGE> 6
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
IN THOUSANDS
DECEMBER 31
<S> <C> <C>
1995 1994
----------- -----------
ASSETS
Invested Assets (Note 3)
Short Term Investments.......................................... $ 484,439 $ 810,873
Fixed Maturities
Held-to-Maturity
Tax Exempt (market $3,004,775 and $3,177,097).............. 2,826,737 3,149,479
Taxable (market $433,883 and $604,077)..................... 402,488 619,095
Available-for-Sale
Tax Exempt (cost $3,607,925 and $2,524,446)................ 3,860,630 2,530,186
Taxable (cost $5,282,675 and $4,604,182)................... 5,512,955 4,423,946
Equity Securities (cost $493,416 and $609,535).................. 587,825 642,153
Policy and Mortgage Loans....................................... 212,339 202,679
----------- -----------
TOTAL INVESTED ASSETS......................................... 13,887,413 12,378,411
Cash (Note 7)...................................................... 11,950 5,599
Accrued Investment Income.......................................... 245,319 215,703
Premiums Receivable................................................ 872,912 787,177
Reinsurance Recoverable on Property and Casualty Unpaid Claims
(Note 12)....................................................... 1,973,666 1,980,340
Prepaid Reinsurance Premiums....................................... 484,358 455,051
Funds Held for Asbestos-Related Settlement (Note 14)............... 1,038,149 558,141
Deferred Policy Acquisition Costs (Note 4)
Property and Casualty Insurance................................. 558,676 529,453
Life and Health Insurance....................................... 612,709 606,493
Real Estate Assets (Notes 5 and 7)................................. 1,742,580 1,740,287
Deferred Income Tax (Note 8)....................................... 159,674 314,720
Other Assets....................................................... 1,409,119 1,151,680
----------- -----------
TOTAL ASSETS.................................................. $22,996,525 $20,723,055
=========== ===========
LIABILITIES
Property and Casualty Unpaid Claims (Note 14)...................... $ 9,588,141 $ 8,913,220
Life and Health Policy Liabilities................................. 2,943,138 2,659,583
Unearned Premiums.................................................. 2,570,682 2,382,545
Short Term Debt (Note 7)........................................... 187,600 153,340
Long Term Debt (Note 7)............................................ 1,156,044 1,285,614
Dividend Payable to Shareholders................................... 42,741 40,035
Accrued Expenses and Other Liabilities............................. 1,245,450 1,041,689
----------- -----------
TOTAL LIABILITIES............................................. 17,733,796 16,476,026
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 11 AND 14)
SHAREHOLDERS' EQUITY (NOTES 10, 17 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 87,819,355 and 87,798,286 Shares........... 87,819 87,798
Paid-In Surplus.................................................... 778,239 786,596
Retained Earnings.................................................. 4,206,517 3,680,554
Foreign Currency Translation Gains (Losses), Net of Income Tax..... (3,433) 9,766
Unrealized Appreciation (Depreciation) of Investments, Net (Note 3) 345,894 (124,339)
Receivable from Employee Stock Ownership Plan...................... (114,998) (122,999)
Treasury Stock, at Cost -- 518,468 and 977,580 Shares.............. (37,309) (70,347)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY.................................... 5,262,729 4,247,029
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $22,996,525 $20,723,055
=========== ===========
</TABLE>
See accompanying notes.
45
<PAGE> 7
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
IN THOUSANDS
YEARS ENDED DECEMBER 31
<S> <C> <C> <C>
1995 1994 1993
---------- ---------- ----------
PREFERRED STOCK
Balance, Beginning and End of Year.................... $ -- $ -- $ --
---------- ---------- ----------
COMMON STOCK
Balance, Beginning of Year............................ 87,798 87,709 87,520
Shares Issued under Option and Incentive Plans........ 21 89 189
---------- ---------- ----------
Balance, End of Year............................. 87,819 87,798 87,709
---------- ---------- ----------
PAID-IN SURPLUS
Balance, Beginning of Year............................ 786,596 782,186 772,815
Additions (Reductions) Resulting from Shares Issued
under Option and Incentive Plans.................... (8,357) 4,410 9,371
---------- ---------- ----------
Balance, End of Year............................. 778,239 786,596 782,186
---------- ---------- ----------
RETAINED EARNINGS
Balance, Beginning of Year............................ 3,680,554 3,313,140 3,139,707
Net Income............................................ 696,628 528,469 324,217
Dividends Declared (per share $1.96, $1.84 and
$1.72).............................................. (170,665) (161,055) (150,784)
---------- ---------- ----------
Balance, End of Year............................. 4,206,517 3,680,554 3,313,140
---------- ---------- ----------
FOREIGN CURRENCY TRANSLATION GAINS (LOSSES)
Balance, Beginning of Year............................ 9,766 327 (5,164)
Change During Year, Net of Income Tax (Note 16)....... (13,199) 9,439 5,491
---------- ---------- ----------
Balance, End of Year............................. (3,433) 9,766 327
---------- ---------- ----------
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS
Balance, Beginning of Year............................ (124,339) 143,093 96,559
Cumulative Effect, as of January 1, 1994, of Change in
Accounting Principle, Net (Note 2).................. -- 220,519 --
Change During Year, Net (Note 3)...................... 470,233 (487,951) 46,534
---------- ---------- ----------
Balance, End of Year............................. 345,894 (124,339) 143,093
---------- ---------- ----------
RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN
Balance, Beginning of Year............................ (122,999) (130,326) (137,035)
Principal Repayments.................................. 8,001 7,327 6,709
---------- ---------- ----------
Balance, End of Year............................. (114,998) (122,999) (130,326)
---------- ---------- ----------
TREASURY STOCK, AT COST
Balance, Beginning of Year............................ (70,347) -- --
Repurchase of Shares.................................. -- (72,052) --
Shares Issued under Option and Incentive Plans........ 33,038 -- --
Shares Issued -- Other................................ -- 1,705 --
--------- ---------- ----------
Balance, End of Year............................. (37,309) (70,347) --
--------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY....................... $5,262,729 $4,247,029 $4,196,129
========== ========== ==========
</TABLE>
See accompanying notes.
46
<PAGE> 8
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
IN THOUSANDS
YEARS ENDED DECEMBER 31
<S> <C> <C> <C>
1995 1994 1993
----------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.......................................... $ 696,628 $ 528,469 $ 324,217
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Property and Casualty Unpaid Claims,
Net............................................ 681,595 482,834 1,182,432
Increase (Decrease) in Life and Health Policy
Liabilities, Net............................... (24,163) (10,769) 55,841
Increase in Unearned Premiums, Net............... 158,830 174,926 141,457
Increase in Premiums Receivable.................. (85,735) (67,055) (49,329)
Increase in Funds Held for Asbestos-Related
Settlement..................................... (480,008) (19,969) (538,172)
Increase in Medical Malpractice Reinsurance
Related Receivable............................. (66,194) -- (125,000)
Increase in Deferred Policy Acquisition Costs.... (107,671) (96,718) (82,977)
Deferred Income Tax Credit....................... (25,023) (18,588) (116,720)
Realized Investment Gains........................ (130,660) (63,429) (232,638)
Cumulative Effect of Changes in Accounting
Principles..................................... -- -- 20,000
Other, Net....................................... 96,693 (13,026) 116,410
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES................................... 714,292 896,675 695,521
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturities............. 4,552,855 2,906,535 4,051,247
Proceeds from Maturities of Fixed Maturities........ 782,566 577,131 671,229
Proceeds from Sales of Equity Securities............ 411,993 623,482 298,790
Purchases of Fixed Maturities....................... (6,524,918) (4,265,835) (5,005,539)
Purchases of Equity Securities...................... (195,950) (397,749) (357,254)
Decrease (Increase) in Short Term Investments,
Net.............................................. 326,434 (279,591) (268,077)
Additions to Real Estate Assets, Net................ (34,305) (43,216) (69,552)
Purchases of Fixed Assets........................... (75,388) (71,778) (47,332)
Other, Net.......................................... (20,766) (9,009) (27,436)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES.......... (777,479) (960,030) (753,924)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits Credited to Policyholder Funds............. 442,934 336,765 295,189
Withdrawals from Policyholder Funds................. (138,071) (122,502) (108,116)
Proceeds from Issuance of Long Term Debt............ 173,900 33,225 255,045
Repayment of Long Term Debt......................... (303,470) (21,441) (55,928)
Increase (Decrease) in Short Term Debt, Net......... 34,260 58,500 (193,668)
Dividends Paid to Shareholders...................... (167,959) (158,735) (148,070)
Repurchase of Shares................................ -- (72,052) --
Other, Net.......................................... 27,944 10,608 11,793
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES................................... 69,538 64,368 56,245
----------- ----------- -----------
Net Increase (Decrease) in Cash....................... 6,351 1,013 (2,158)
Cash at Beginning of Year............................. 5,599 4,586 6,744
----------- ----------- -----------
CASH AT END OF YEAR............................ $ 11,950 $ 5,599 $ 4,586
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Year for
Interest (Net of Amounts Capitalized)............ $ 86,041 $ 78,272 $ 56,156
Federal and Foreign Income Taxes................. 218,446 135,187 126,955
</TABLE>
See accompanying notes.
47
<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 subsidiaries. Significant
intercompany transactions have been eliminated in consolidation.
The consolidated financial statements reflect estimates and judgments made by
management which affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In 1995, the Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 114, Accounting by Creditors for Impairment of a Loan. SFAS No. 114
may not be retroactively applied to prior years' financial statements;
accordingly, the 1994 and 1993 consolidated financial statements have not been
restated for this accounting change. This accounting change and the accounting
changes adopted in 1994 and 1993 are further described in Note (2).
Certain amounts in the financial statements for prior years have been
reclassified to conform with the 1995 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 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.
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
48
<PAGE> 10
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.
(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 3 1/2% to 8% in 1995.
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% in 1995. 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) Funds Held for Asbestos-Related Settlement
Funds held for asbestos-related settlement are assets of the Corporation's
property and casualty insurance subsidiaries that accrue income for the benefit
of participants in the class settlement of asbestos-related bodily injury claims
against Fibreboard Corporation (see Note (14)).
(h) 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
realizable value. Impairment would be recognized to the extent ultimate
realizable value for a property was less than its carrying value. Ultimate
realizable value is the undiscounted expected future net cash flows from the
property.
Depreciation of real estate properties is calculated using the straight-line
method over the estimated useful lives of the properties.
Real estate mortgages and notes receivable are carried at unpaid principal
balances less an allowance for uncollectible amounts.
The equity method of accounting is used for joint ventures in which the
Corporation's real estate subsidiaries own an interest of less than 50%.
Rental revenues are recognized on a straight-line basis over the term of the
lease. Profits on land, townhome and commercial building sales are recognized at
closing, subject to compliance with applicable accounting guidelines. Profits on
high-rise condominium unit sales are recognized using the percentage of
completion method, subject to achievement of a minimum level of unit sales.
Profits on construction contracts are recognized using the percentage of
completion method.
49
<PAGE> 11
(i) 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.
(j) 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 $74,591,000 and $72,041,000 at December
31, 1995 and 1994, respectively.
(k) Income Taxes
The Corporation and its domestic subsidiaries file a consolidated federal
income tax return.
Deferred income tax assets and liabilities are recognized for the expected
future tax effects attributable to temporary differences between the financial
reporting and tax bases of assets and liabilities, based on enacted tax rates
and other provisions of tax law. The effect of a change in tax laws or rates is
recognized in income in the period in which such change is enacted.
U. S. federal income taxes are accrued on undistributed earnings of foreign
subsidiaries.
(l) 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.
(m) 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 value of the discounted future cash
flows of the loan or (2) the estimated value of the collateral, which is based
on the discounted future net cash flows from such collateral. The cash flows
are discounted at rates based on a U.S. Treasury security with a maturity
similar to the loan, adjusted for credit risk.
(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
------------------------------------------
1995 1994
------------------- ------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
(in thousands)
ASSETS
Invested assets
Short term investments.... $ 484,439 $ 484,439 $ 810,873 $ 810,873
Fixed maturities (Note 3)
Held-to-maturity........ 3,229,225 3,438,658 3,768,574 3,781,174
Available-for-sale...... 9,373,585 9,373,585 6,954,132 6,954,132
Equity securities......... 587,825 587,825 642,153 642,153
Policy and mortgage
loans................... 212,339 212,339 202,679 202,679
Real estate mortgages and
notes receivable (Note
5)........................ 409,564 405,400 395,490 353,800
LIABILITIES
Short term debt (Note 7).... 187,600 187,600 153,340 153,340
Long term debt (Note 7)..... 1,156,044 1,219,634 1,285,614 1,255,892
</TABLE>
50
<PAGE> 12
(n) 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
89,942,341, 90,449,577 and 90,548,534 in 1995, 1994 and 1993, 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
considered common shares outstanding.
(o) 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.
(p) Accounting Pronouncements Not Yet Adopted
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The Statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets. Under SFAS No. 121, an impairment loss is recognized if
the sum of the undiscounted expected future cash flows is less than the carrying
amount of the asset. Measurement of impairment should be based on the fair value
of the asset. SFAS No. 121 is effective for years beginning after December 15,
1995. Restatement of prior years' financial statements is not permitted. The
Corporation will adopt SFAS No. 121 in the first quarter of 1996. The adoption
of SFAS No. 121 is not expected to have a significant impact on net income in
1996.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 encourages but does not require entities to adopt the
fair value based method of accounting for all employee stock compensation plans,
under which compensation cost is measured based on the fair value of the award
at the grant date and recognized over the service period. Entities may continue
to account for these plans using the intrinsic value based method of accounting,
under which compensation cost is measured as the excess, if any, of the quoted
market price of the stock at the grant date over the amount an employee must pay
to acquire the stock. Entities not adopting the fair value based method must
present pro forma disclosures of net income and earnings per share as if this
method had been applied. SFAS No. 123 is effective for years beginning after
December 15, 1995. The Corporation plans to continue to use the intrinsic value
based method to measure compensation cost for these plans.
(2) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1995, the Corporation adopted 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. Prior to 1995, the
Corporation measured impairment of a loan based on undiscounted expected future
cash flows. SFAS No. 114 may not be retroactively applied to prior years'
financial statements. The initial application of SFAS No. 114 resulted in an
increase of $10,000,000 to the allowance for uncollectible receivables.
Effective January 1, 1994, the Corporation adopted SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities. Similar to the
Corporation'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 or 1995
nor will it in future years.
51
<PAGE> 13
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.
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 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.
(3) INVESTED ASSETS AND RELATED INCOME
(a) The sources of net investment income were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Fixed maturities.............. $812,910 $740,871 $734,353
Equity securities............. 15,836 27,066 23,709
Short term investments........ 39,581 28,925 22,169
Other......................... 32,310 31,819 20,115
-------- -------- --------
Gross investment income..... 900,637 828,681 800,346
Investment expenses........... 14,747 14,047 11,091
-------- -------- --------
$885,890 $814,634 $789,255
======== ======== ========
</TABLE>
(b) Realized investment gains and losses were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Gross realized investment gains
Fixed maturities.......... $ 81,665 $ 68,613 $193,738
Equity securities......... 108,430 138,432 62,274
-------- -------- --------
190,095 207,045 256,012
-------- -------- --------
Gross realized investment losses
Fixed maturities.......... 50,929 130,547 20,627
Equity securities......... 8,506 13,069 2,747
-------- -------- --------
59,435 143,616 23,374
-------- -------- --------
Realized investment gains..... 130,660 63,429 232,638
Income tax.................... 45,732 22,257 81,019
-------- -------- --------
$ 84,928 $ 41,172 $151,619
======== ======== ========
</TABLE>
Proceeds from sales of fixed maturities considered available-for-sale were
$4,552,855,000, $2,894,475,000 and $3,471,404,000 in 1995, 1994 and 1993,
respectively. Gross gains of $81,665,000, $68,553,000 and $152,483,000 and gross
losses of $50,929,000, $130,547,000 and $12,542,000 were realized on such sales
in 1995, 1994 and 1993, respectively.
(c) The components of unrealized appreciation (depreciation) of investments
carried at market value were as follows:
<TABLE>
<CAPTION>
December 31
-----------
1995 1994
---- ----
<S> <C> <C>
(in thousands)
Equity securities
Gross unrealized appreciation..... $105,495 $ 58,680
Gross unrealized depreciation..... 11,086 26,062
-------- ---------
94,409 32,618
-------- ---------
Fixed maturities
Gross unrealized appreciation..... 504,812 89,999
Gross unrealized depreciation..... 21,827 264,495
-------- ---------
482,985 (174,496)
-------- ---------
577,394 (141,878)
Deferred policy acquisition cost
adjustment.......................... (45,250) 26,982
-------- ---------
532,144 (114,896)
Deferred income tax liability, net of
valuation allowance of $49,657 in
1994................................ 186,250 9,443
-------- ---------
$345,894 $(124,339)
======== =========
</TABLE>
The change in unrealized appreciation or depreciation of investments carried
at market value was as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Change in unrealized
appreciation of equity
securities................... $ 61,791 $(187,524) $73,841
Change in unrealized
appreciation or depreciation
of fixed maturities.......... 657,481 (574,476) --
Change in deferred policy
acquisition cost adjustment.. (72,232) 87,702 --
-------- --------- -------
647,040 (674,298) 73,841
Deferred income tax (credit)... 226,464 (236,004) 27,307
Increase (decrease) in
valuation allowance.......... (49,657) 49,657 --
-------- --------- -------
470,233 (487,951) 46,534
Cumulative effect, as of
January 1, 1994, of change
in accounting principle,
net.......................... -- 220,519 --
-------- --------- -------
$470,233 $(267,432) $46,534
======== ========= =======
</TABLE>
52
<PAGE> 14
At December 31, 1995 and 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 an increase of $196,833,000, a decrease
of $723,889,000 and an increase of $213,959,000 for the years ended December 31,
1995, 1994 and 1993, respectively.
(d) The amortized cost and estimated market value of fixed maturities were
as follows:
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------------------------------------------------
1995 1994
-------------------------------------------------- ---------------------------------------------------
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........ $ 2,826,737 $178,997 $ 959 $ 3,004,775 $ 3,149,479 $ 72,939 $ 45,321 $ 3,177,097
----------- -------- -------- ----------- ----------- -------- -------- -----------
Taxable
U.S. Government
and government
agency and
authority
obligations... 17,946 2,350 -- 20,296 17,256 -- 163 17,093
Corporate
bonds......... 191,127 21,621 -- 212,748 235,056 8,809 1,976 241,889
Foreign bonds... 15,119 2,259 -- 17,378 149 17 -- 166
Mortgage-backed
securities.... 178,296 5,211 46 183,461 366,634 2,316 24,021 344,929
----------- -------- -------- ----------- ----------- -------- -------- -----------
402,488 31,441 46 433,883 619,095 11,142 26,160 604,077
----------- -------- -------- ----------- ----------- -------- -------- -----------
Total held-
to-maturity... 3,229,225 210,438 1,005 3,438,658 3,768,574 84,081 71,481 3,781,174
----------- -------- -------- ----------- ----------- -------- -------- -----------
Available-for-sale
Tax exempt........ 3,607,925 253,814 1,109 3,860,630 2,524,446 64,309 58,569 2,530,186
----------- -------- -------- ----------- ----------- -------- -------- -----------
Taxable
U.S. Government
and government
agency and
authority
obligations... 976,411 38,763 27 1,015,147 1,000,325 1,221 59,891 941,655
Corporate
bonds......... 1,106,876 67,734 7,213 1,167,397 1,269,054 14,083 46,099 1,237,038
Foreign bonds... 1,451,162 68,598 10,351 1,509,409 980,900 3,016 38,692 945,224
Mortgage-backed
securities.... 1,720,522 75,694 2,924 1,793,292 1,335,876 6,951 61,186 1,281,641
Redeemable
preferred
stocks........ 27,704 209 203 27,710 18,027 419 58 18,388
----------- -------- -------- ----------- ----------- -------- -------- -----------
5,282,675 250,998 20,718 5,512,955 4,604,182 25,690 205,926 4,423,946
----------- -------- -------- ----------- ----------- -------- -------- -----------
Total
available-for-
sale.......... 8,890,600 504,812 21,827 9,373,585 7,128,628 89,999 264,495 6,954,132
----------- -------- -------- ----------- ----------- -------- -------- -----------
Total fixed
maturities... $12,119,825 $715,250 $ 22,832 $12,812,243 $10,897,202 $174,080 $335,976 $10,735,306
=========== ======== ======== =========== =========== ======== ======== ===========
</TABLE>
In December 1995, fixed maturities classified as held-to-maturity with an
aggregate amortized cost of $232,167,000 and unrealized appreciation of
$4,019,000 were reclassified as available-for-sale. Such reclassifications
resulted from the Corporation's reassessment of its classifications of fixed
maturities as permitted under SFAS No. 115 implementation guidance issued by the
FASB in November 1995.
The amortized cost and estimated market value of fixed maturities at
December 31, 1995 by contractual maturity were as follows:
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
---------------------- ----------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(in thousands)
Due in one year or less............................. $ 131,301 $ 133,083 $ 93,793 $ 96,013
Due after one year through five years............... 761,773 810,495 1,283,827 1,349,230
Due after five years through ten years.............. 1,036,461 1,117,958 2,351,732 2,494,389
Due after ten years................................. 1,121,394 1,193,661 3,440,726 3,640,661
---------- ---------- ---------- ----------
3,050,929 3,255,197 7,170,078 7,580,293
Mortgage-backed securities.......................... 178,296 183,461 1,720,522 1,793,292
---------- ---------- ---------- ----------
$3,229,225 $3,438,658 $8,890,600 $9,373,585
========== ========== ========== ==========
</TABLE>
Actual maturities could differ from contractual maturities because borrowers may
have the right to call or prepay obligations.
53
<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
---------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Property and Casualty
Insurance
Balance, beginning
of year ............... $ 529,453 $ 489,702 $ 454,976
----------- ----------- ---------
Costs deferred
during year
Commissions and
brokerage............ 592,687 544,733 463,977
Premium taxes and
assessments.......... 108,002 108,008 103,928
Salaries and
overhead............. 449,477 428,255 415,788
----------- ----------- ---------
1,150,166 1,080,996 983,693
Amortization
during year .......... (1,120,943) (1,041,245) (948,967)
----------- ----------- ---------
Balance, end of year..... $ 558,676 $ 529,453 $ 489,702
=========== =========== =========
Life and Health Insurance
Balance, beginning of
year .................... $ 606,493 $ 522,544 $ 474,293
Cumulative effect, as of
January 1, 1994, of
change in accounting
principle.............. -- (60,720) --
Costs deferred during
year .................. 155,905 129,217 111,389
Amortization during
year.................... (77,457) (72,250) (63,138)
Change in adjustment to
reflect the effects
of unrealized (gains)
losses on investments.. (72,232) 87,702 --
----------- ----------- ---------
Balance, end of year..... $ 612,709 $ 606,493 $ 522,544
=========== =========== =========
</TABLE>
(5) REAL ESTATE ASSETS
The components of real estate assets were as follows:
<TABLE>
<CAPTION>
December 31
-----------------
1995 1994
---- ----
<S> <C> <C>
(in thousands)
Mortgages and notes receivable (net of
allowance for uncollectible amounts
of $87,617 and $73,863)............. $ 409,564 $ 395,490
Income producing properties (net of
accumulated depreciation of $50,192
and $36,069)........................ 864,449 826,768
Construction in progress.............. 87,870 86,125
Land under development and unimproved
land................................ 380,697 431,904
---------- ----------
$1,742,580 $1,740,287
========== ==========
</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 $405,400,000 and $353,800,000 at
December 31, 1995 and 1994, respectively. The fair value amounts represent
point-in-time estimates that are not relevant in predicting future earnings or
cash flows related to such receivables.
Depreciation expense related to income producing properties was $14,123,000,
$12,086,000 and $8,671,000 for 1995, 1994 and 1993, respectively.
(6) PROPERTY AND EQUIPMENT
Property and equipment included in other assets were as follows:
<TABLE>
<CAPTION>
December 31
---------------
1995 1994
---- ----
<S> <C> <C>
(in thousands)
Cost.................................. $437,073 $385,610
Less accumulated depreciation......... 193,546 168,128
-------- --------
$243,527 $217,482
======== ========
</TABLE>
Depreciation expense related to property and equipment was $48,279,000,
$40,839,000 and $31,280,000 for 1995, 1994 and 1993, respectively.
(7) DEBT AND CREDIT ARRANGEMENTS
(a) Short term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
---------------
1995 1994
---- ----
<S> <C> <C>
(in thousands)
Commercial paper...................... $177,600 $143,340
Notes................................. 10,000 10,000
-------- --------
$187,600 $153,340
======== ========
</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 5 3/4% and 6% at December 31, 1995 and 1994,
respectively.
54
<PAGE> 16
(b) Long term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
---------------------------------------------
1995 1994
------------------- -------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
(in thousands)
Term loans....... $ 331,023 $ 331,023 $ 324,413 $ 324,413
Mortgages........ 205,021 205,607 211,201 196,104
8 3/4% notes..... 120,000 133,104 150,000 151,125
8 5/8% notes..... -- -- 100,000 100,000
6% notes......... 150,000 151,365 150,000 141,000
6 7/8% notes..... 100,000 105,410 100,000 90,750
6% exchangeable
subordinated
notes.......... 250,000 293,125 250,000 252,500
---------- ---------- ---------- ----------
$1,156,044 $1,219,634 $1,285,614 $1,255,892
========== ========== ========== ==========
</TABLE>
The term loans and mortgages are obligations of the real estate subsidiaries,
except for a $5,212,000 mortgage loan of the life and health insurance
subsidiaries. The term loans mature in varying amounts through 2000.
Substantially all term loans are at an interest rate equivalent to the lower of
the prime rate or a rate associated with the lender's cost of funds. The
mortgages payable are due in varying amounts monthly through 2013. At December
31, 1995, the range of interest rates for term loans was 6% to 9 1/2% 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 $1,009,821,000 at
December 31, 1995.
The Corporation has outstanding $120,000,000 of unsecured 8 3/4% notes due
November 15, 1999. The notes are subject to mandatory sinking fund payments in
amounts sufficient to redeem $30,000,000 of principal in each of the years 1996
through 1998. The notes are to 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 $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 102.6% of the principal amount if redeemed before
May 15, 1996 to 100.9% of the principal amount if redeemed on or after May 15,
1997.
The Corporation filed a shelf registration statement which the Securities and
Exchange Commission declared effective in June 1995, under which up to
$400,000,000 of various types of securities may be issued by the Corporation or
Chubb Capital. No securities have been issued under this registration.
The amounts of long term debt due annually during the five years subsequent to
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Term Loans
Years Ending and
December 31 Mortgages Notes Total
- ------------ ---------- ----- -----
<S> <C> <C> <C>
(in thousands)
1996.................. $167,737 $ 30,000 $197,737
1997.................. 52,026 30,000 82,026
1998.................. 46,875 430,000 476,875
1999.................. 85,760 30,000 115,760
2000.................. 149,917 -- 149,917
</TABLE>
(c) Interest costs of $101,526,000, $98,685,000 and $92,905,000 were incurred
in 1995, 1994 and 1993, respectively, of which $16,352,000, $19,407,000 and
$28,685,000 were capitalized.
(d) The Corporation has a revolving credit agreement with a group of banks
that provides for unsecured borrowings of up to $300,000,000. The agreement
terminates on July 15, 1997 at which time any loans then outstanding become
payable. Various interest rate options are available to the Corporation, all of
which are based on market rates. The Corporation pays a facility fee of 1/10%
per annum. There have been no borrowings under this agreement. The Corporation
and its subsidiaries had additional unused lines of credit of approximately
$178,000,000 at December 31, 1995. 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.
55
<PAGE> 17
(8) FEDERAL AND FOREIGN INCOME TAX
(a) Income tax expense consisted of the following components:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Current tax
United States............................................................. $207,004 $ 97,848 $ 105,293
Foreign................................................................... 21,462 31,635 11,702
Deferred tax credit, principally United States.............................. (25,023) (18,588) (116,720)
-------- -------- ---------
$203,443 $110,895 $ 275
======== ======== =========
</TABLE>
(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
-------------------------------------------------------------------
1995 1994 1993
------------------- ------------------- -------------------
% of % of % of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Income before federal and foreign income tax.... $ 900,071 $ 639,364 $ 344,492
========= ========= =========
Tax at statutory federal income tax rate........ $ 315,025 35.0% $ 223,777 35.0% $ 120,572 35.0%
Tax exempt interest income...................... (115,165) (12.8) (109,980) (17.2) (110,297) (32.0)
Other, net...................................... 3,583 .4 (2,902) (.5) (10,000) (2.9)
--------- ------ --------- ------ --------- ------
Actual tax.............................. $ 203,443 22.6% $ 110,895 17.3% $ 275 .1%
========= ====== ========= ====== ========= ======
</TABLE>
(c) The tax effects of temporary differences that gave rise to deferred
income tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31
---------------------
1995 1994
---- ----
<S> <C> <C>
(in thousands)
Deferred income tax assets
Property and casualty unpaid claims................................................ $523,535 $478,166
Unearned premiums.................................................................. 130,226 121,269
Life and health policy liabilities................................................. 147,284 127,867
Unrealized depreciation of investments............................................. -- 49,657
Postretirement benefits............................................................ 54,997 50,015
-------- --------
856,042 826,974
Valuation allowance................................................................ -- (49,657)
-------- --------
Total............................................................................ 856,042 777,317
-------- --------
Deferred income tax liabilities
Deferred policy acquisition costs.................................................. 338,313 338,897
Real estate assets................................................................. 118,225 116,056
Unrealized appreciation of investments............................................. 202,088 --
Other, net......................................................................... 37,742 7,644
-------- --------
Total............................................................................ 696,368 462,597
-------- --------
Net deferred income tax asset........................................................ $159,674 $314,720
======== ========
</TABLE>
The valuation allowance at December 31, 1994 was related to future tax
benefits on unrealized depreciation of investments, the realization of which was
uncertain. The valuation allowance had no impact on net income.
56
<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
----------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Service cost of current
period.................... $ 20,422 $ 19,702 $ 17,877
Interest cost on projected
benefit
obligation................ 23,822 21,232 19,598
Actual return on plan
assets.................... (68,542) (523) (30,767)
Net amortization and
deferral.................. 42,730 (23,420) 10,706
-------- -------- --------
Net pension cost............ $ 18,432 $ 16,991 $ 17,414
======== ======== ========
</TABLE>
The following table sets forth the plans' funded status and amounts recognized
in the balance sheets:
<TABLE>
<CAPTION>
December 31
--------------
1995 1994
---- ----
<S> <C> <C>
(in thousands)
Actuarial present value of benefit
obligation
for service rendered to date:
Accumulated benefit obligation based
on current salary levels,
including vested benefits of
$212,752 and $180,407............. $224,821 $190,100
Additional amount related to
projected future salary
increases......................... 131,473 118,283
-------- --------
Projected benefit obligation for
service rendered to date.......... 356,294 308,383
Plan assets at fair value............... 341,112 269,349
-------- --------
Projected benefit obligation in excess
of plan assets........................ 15,182 39,034
Unrecognized net gain from past
experience different from that
assumed............................... 36,196 10,209
Unrecognized prior service costs........ (5,208) (5,625)
Unrecognized net asset at January 1,
1985, being recognized principally
over 19 years......................... 8,297 9,647
-------- --------
Pension liability included in other
liabilities........................... $ 54,467 $ 53,265
======== ========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation at December 31, 1995 and 1994 was
7 1/2% and 7 3/4%, respectively, and the rate of increase in future compensation
levels was 6% for both years. The expected long term rate of return on assets
was 9% for both years.
Plan assets are principally invested in publicly traded stocks and bonds.
(b) The Corporation and its subsidiaries provide certain other postretirement
benefits, principally health care and life insurance, to retired employees and
their beneficiaries and covered dependents. Substantially all 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
----------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Service cost of current period... $ 5,687 $ 5,153 $ 4,384
Interest cost on accumulated
benefit obligation............. 7,949 7,420 6,864
------- ------- -------
Net postretirement benefit
cost........................... $13,636 $12,573 $11,248
======= ======= =======
</TABLE>
The components of the accumulated postretirement benefit obligation were as
follows:
<TABLE>
<CAPTION>
December 31
---------------
1995 1994
---- ----
<S> <C> <C>
(in thousands)
Retirees.................................. $ 38,735 $ 38,713
Fully eligible active plan participants... 5,103 4,371
Other active plan participants............ 74,572 61,207
-------- --------
Accumulated postretirement benefit
obligation.............................. 118,410 104,291
Unrecognized net gain (loss) from past
experience different from that
assumed................................. (933) 3,909
-------- --------
Postretirement benefit liability
included in other liabilities........... $117,477 $108,200
======== ========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the accumulated postretirement benefit obligation at December 31, 1995
and 1994 was 7 1/2% and 7 3/4%, respectively. At December 31, 1995, the weighted
average health care cost trend rate used to measure the accumulated
postretirement cost for medical benefits was 11 3/4% for 1996 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, 1995 by $15,674,000 and the aggregate of the
service and interest cost components of net postretirement benefit cost for the
year ended December 31, 1995 by $2,017,000.
57
<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, 1995, 1,220,273 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>
1995 1994 1993
--------------------------- --------------------------- ----------
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................... 2,724,809 $24.50-92.63 2,083,758 $13.23-92.63 1,558,484 $13.23-74.06
Granted..................... 997,115 82.06-98.75 754,525 81.94 678,461 83.56-92.63
Exercised................... (369,166) 24.50-83.56 (76,034) 13.23-72.06 (136,888) 13.23-72.06
Cancelled................... (70,241) 66.75-88.69 (37,440) 47.75-83.56 (16,299) 24.50-83.56
---------- ---------- ---------- -----------
Outstanding, end of year.... 3,282,517 27.93-98.75 2,724,809 24.50-92.63 2,083,758 13.23-92.63
========== =========== ========== ===========
Exercisable, end of year.... 1,980,793 27.93-98.75 1,665,228 24.50-92.63 1,147,272 13.23-92.63
</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
$8,626,000, $5,213,000 and $4,219,000 in 1995, 1994 and 1993, 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, 1995, 224,000 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>
1995 1994 1993
-------------------------- -------------------------- -------------------------
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....... 146,000 $26.84-86.94 124,000 $26.84-86.94 100,000 $26.84-69.19
Granted.............................. 24,000 78.75 24,000 77.50 28,000 86.94
Exercised............................ (11,000) 26.84-69.19 (2,000) 34.22 (4,000) 26.84-44.19
------- ------- -------
Outstanding and exercisable, end of
year............................... 159,000 26.84-86.94 146,000 26.84-86.94 124,000 26.84-86.94
======= ======= =======
</TABLE>
58
<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
1995, 1994 and 1993, cash contributions to the ESOP of $12,307,000, $12,146,000
and $12,172,000, respectively, were charged against income. Dividends on
unallocated shares used for debt service by the ESOP were $4,468,000, $4,615,000
and $4,711,000 in 1995, 1994 and 1993, respectively.
The number of allocated and unallocated shares held by the ESOP at December
31, 1995 were 1,392,527 and 2,337,662, 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 $13,443,000, $13,026,000 and $12,564,000 were charged against
income in 1995, 1994 and 1993, 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
based on compensation. Shares are purchased at a price not less than 95% of the
fair market value on the date of grant. At December 31, 1995, there were 369,365
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
----------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Office facilities............. $70,748 $69,679 $68,805
Equipment..................... 14,596 16,240 20,794
------- ------- -------
$85,344 $85,919 $89,599
======= ======= =======
</TABLE>
At December 31, 1995, future minimum rental payments required under
non-cancellable operating leases were as follows:
<TABLE>
<CAPTION>
Years Ending December 31 (in thousands)
<S> <C>
1996..................................... $ 73,825
1997..................................... 67,970
1998..................................... 61,279
1999..................................... 52,364
2000..................................... 37,770
After 2000............................... 108,757
--------
$401,965
========
</TABLE>
59
<PAGE> 21
(12) RELATED PARTY TRANSACTIONS
Sun Alliance Group plc (Sun Group), an insurance holding company organized
under the laws of England, is the beneficial owner of 5.2% of the Corporation's
common stock.
A portion 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 $520,528,000, $489,727,000 and $457,321,000 in 1995, 1994 and
1993, respectively. Reinsurance recoverable on property and casualty unpaid
claims included approximately $775,000,000 and $845,000,000 at December 31, 1995
and 1994, 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 $340,767,000, $264,343,000 and $170,131,000 in 1995, 1994 and 1993,
respectively.
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 included a commutation provision under which the property and casualty
insurance subsidiaries had an option to reassume the remaining liability of the
Sun Group as of December 31, 1995 and receive payment of an amount determined by
a formula based on experience under the agreement. The property and casualty
insurance subsidiaries exercised this option, which resulted in an amount due
from the Sun Group of $191,194,000 and a reduction in reinsurance recoverable on
unpaid claims from the Sun Group of $66,194,000. The difference of $125,000,000
represents a return premium to the property and casualty insurance subsidiaries,
which was recognized in 1993 at the time the Corporation announced its intention
to exercise the commutation option. The amount due from the Sun Group was
received in January 1996.
The agreement also included 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 and $9,000,000 in 1994 and
1993, respectively. These amounts were reflected as reductions of other
insurance operating costs and expenses.
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
-------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Direct.................... $ 4,754,423 $ 4,415,080 $ 4,155,356
Reinsurance assumed....... 712,080 641,615 478,464
Reinsurance ceded......... (1,319,341) (1,280,412) (1,128,982)
----------- ----------- -----------
Premiums earned........... $ 4,147,162 $ 3,776,283 $ 3,504,838
=========== =========== ===========
</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 $936,080,000, $962,332,000 and
$590,502,000 in 1995, 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
-----------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Direct.......................... $652,035 $862,085 $831,849
Reinsurance assumed............. 1,766 2,056 2,784
Reinsurance ceded............... (30,864) (27,848) (33,397)
-------- -------- --------
Premiums and policy charges..... $622,937 $836,293 $801,236
======== ======== ========
</TABLE>
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 $50,537,000, $53,141,000 and $42,005,000
in 1995, 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.
60
<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 final appellate
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. Pacific Indemnity's share is included in funds
held for asbestos-related settlement. Upon final court approval of the
settlement, the amount in the escrow account, including interest earned thereon,
will be transferred to the trust fund. All of the parties have agreed to use
their best efforts to seek final court approval of the global settlement
agreement.
Pacific Indemnity and Continental Casualty have reached a separate agreement
for the handling of all asbestos-related bodily injury claims pending on August
26, 1993 against Fibreboard. In February 1995, the agreement was amended to
extend for several years the period over which Pacific Indemnity will pay its
remaining obligation, plus interest, under this agreement. Pacific Indemnity's
obligation under this agreement is not expected to exceed $635,000,000, of which
approximately $450,000,000 remained unpaid at December 31, 1995. Assets to be
used for the payment of this obligation have been designated as funds held for
asbestos-related settlement. 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 final appellate 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 by an appellate court. 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.
Additional loss reserves of $675,000,000 were provided in 1993 at the time the
settlement was negotiated.
In July 1995, the United States District Court of the Eastern District of
Texas approved the global settlement agreement and the trilateral agreement. The
judgments approving these agreements have been appealed to the United States
Court of Appeal for the Fifth Circuit. The appeals are scheduled to be argued in
early March 1996. The period of ultimate judicial review continues to lengthen
and may well extend into 1997.
Management is optimistic that the approval of the settlement will be upheld.
However, if both the global settlement agreement and the trilateral agreement
are disapproved by an appellate court, there can then 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.
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.
The property and casualty insurance subsidiaries have additional potential
asbestos exposure on insureds for which excess liability coverages were written.
Such exposure has increased due to the erosion of much of the underlying limits.
The number of claims against such insureds and the value of such claims have
increased in recent years due in part to the non-viability of other defendants.
Other remaining asbestos exposures are mostly peripheral defendants, including
a mix of manufacturers and distributors of certain products that contain
asbestos as well as premises owners. Generally, these insureds are named
defendants on a regional rather than a nationwide basis. Notices of new asbestos
claims and new exposures on existing claims continue to be received as more
peripheral parties are drawn into litigation to replace the now defunct mines
and bankrupt manufacturers.
61
<PAGE> 23
The courts have been engaged in developing guidelines regarding coverage for
asbestos claims and have begun to articulate more consistent standards regarding
the extent of the obligation of insurers to provide coverage and the method of
allocation of costs among insurers. However, the universe of potential claims is
still unknown. Therefore, uncertainty remains as to the property and casualty
insurance subsidiaries' ultimate liability for asbestos-related claims.
Hazardous waste sites are another significant potential exposure. Under the
"Superfund" law and similar state statutes, when potentially responsible parties
(PRPs) fail to handle the clean-up, regulators have the work done and then
attempt to establish legal liability against the PRPs. The PRPs disposed of
toxic materials at a waste dump site or transported the materials to the site.
Insurance policies issued to PRPs were not intended to cover the clean-up costs
of pollution and, in many cases, did not intend to cover the pollution itself.
As the cost of environmental clean-up continues to grow, PRPs and others have
increasingly filed claims with their insurance carriers. 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 remediation costs among governmental
authorities and the PRPs varies greatly. Second, different courts have addressed
liability and coverage issues regarding pollution claims and have reached
inconsistent conclusions in their interpretation of several issues. These
significant uncertainties are not likely to be resolved in the near future.
Uncertainties also remain as to the Superfund law itself. Superfund's taxing
authority expired on December 31, 1995. It is currently not possible to predict
the direction that any reforms may take, when they may occur or the effect that
any changes may have on the insurance industry.
Reserves for asbestos and toxic waste claims cannot be estimated with
traditional loss reserving techniques. Case reserves and expense reserves for
costs of related litigation have been established where sufficient information
has been developed to indicate the involvement of a specific insurance policy.
In addition, incurred but not reported reserves have been established to cover
additional exposures on both known and unasserted claims. These reserves are
continually reviewed and updated.
A reconciliation of the beginning and ending liability for 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>
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Gross liability, beginning
of year.................... $8,913,220 $8,235,442 $7,220,919
Reinsurance recoverable,
beginning of year.......... 1,980,340 1,785,396 1,953,305
---------- ---------- ----------
Net liability, beginning of
year....................... 6,932,880 6,450,046 5,267,614
---------- ---------- ----------
Net incurred claims and claim
expenses related to:
Current year............. 2,705,800 2,549,100 2,214,300
Prior years.............. (35,819) (29,741) 664,798
---------- ---------- ----------
2,669,981 2,519,359 2,879,098
---------- ---------- ----------
Net payments for claims and
claim expenses related to:
Current year............. 737,686 764,525 656,766
Prior years.............. 1,250,700 1,272,000 1,039,900
---------- ---------- ----------
1,988,386 2,036,525 1,696,666
---------- ---------- ----------
Net liability, end of year... 7,614,475 6,932,880 6,450,046
Reinsurance recoverable,
end of year................ 1,973,666 1,980,340 1,785,396
---------- ---------- ----------
Gross liability, end of year. $9,588,141 $8,913,220 $8,235,442
========== ========== ==========
</TABLE>
During 1995, the property and casualty insurance subsidiaries experienced
overall favorable development of $35,819,000 on net unpaid claims established as
of the previous year-end. This compares with favorable development of
$29,741,000 in 1994 and unfavorable development of $664,798,000 in 1993. 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 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, 1995 were adequate to cover
claims for losses which had occurred, including both those known and those yet
to be reported. In establishing such reserves, management considers facts
currently known and the present state of the law and coverage litigation.
However, given the expansion of coverage and liability by the courts and the
legislatures in the past and the possibilities of similar interpretations in the
future, particularly as they relate to asbestos and toxic waste claims, as well
as the uncertainty in determining what scientific standards will be deemed
acceptable for measuring hazardous waste site clean-up, additional increases in
loss reserves may emerge which would adversely affect results in future periods.
The amount cannot reasonably be estimated at the present time.
62
<PAGE> 24
(15) 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. The property and casualty insurance
subsidiaries underwrite most forms of property and casualty insurance in the
United States, Canada, Europe, Australia and the Far East. The geographic
distribution of property and casualty business in the United States is broad
with a particularly strong market presence in the Northeast. The life and health
insurance subsidiaries, which market a wide variety of insurance and investment
products throughout the United States, are principally engaged in the sale of
personal and group life and health insurance as well as annuity contracts. The
real estate subsidiary is involved in commercial development activities
primarily in New Jersey with additional operations in several other states as
well as residential development activities in central Florida and northern New
Jersey.
Revenues, income from operations before income tax and identifiable assets
for each industry segment were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues (in thousands)
Property and Casualty Insurance
Premiums earned............................................................. $ 4,147,162 $ 3,776,283 $ 3,504,838
Investment income........................................................... 613,242 570,531 541,749
Life and Health Insurance
Premiums and policy charges................................................. 622,937 836,293 801,236
Investment income........................................................... 232,950 208,745 205,891
Real Estate..................................................................... 287,795 204,849 160,650
----------- ----------- -----------
5,904,086 5,596,701 5,214,364
Corporate investment income..................................................... 54,445 49,405 52,706
Realized investment gains (losses)
Property and Casualty Insurance............................................. 95,030 55,203 172,925
Life and Health Insurance................................................... 21,808 9,304 22,056
Corporate................................................................... 13,822 (1,078) 37,657
----------- ----------- -----------
Total revenues.......................................................... $ 6,089,191 $ 5,709,535 $ 5,499,708
=========== =========== ===========
Income (loss) from operations before income tax
Property and Casualty Insurance................................................. $ 697,141 $ 552,170 $ (1,383)
Life and Health Insurance....................................................... 41,265 18,754 88,729
Real Estate..................................................................... 7,696 (5,950) 2,051
----------- ----------- -----------
746,102 564,974 89,397
Corporate....................................................................... 23,309 10,961 22,457
Realized investment gains (losses)
Property and Casualty Insurance............................................. 95,030 55,203 172,925
Life and Health Insurance................................................... 21,808 9,304 22,056
Corporate................................................................... 13,822 (1,078) 37,657
----------- ----------- -----------
Income before federal and foreign income tax............................ $ 900,071 $ 639,364 $ 344,492
=========== =========== ===========
December 31
-------------------------------------------
Identifiable assets
Property and Casualty Insurance................................................. $16,157,688 $14,435,933 $13,372,599
Life and Health Insurance....................................................... 4,275,365 3,760,079 3,529,802
Real Estate..................................................................... 1,842,831 1,796,706 1,745,212
----------- ----------- -----------
Total identifiable assets............................................... 22,275,884 19,992,718 18,647,613
Corporate....................................................................... 959,384 945,397 1,047,606
Adjustments and eliminations.................................................... (238,743) (215,060) (258,349)
----------- ----------- -----------
Total assets............................................................ $22,996,525 $20,723,055 $19,436,870
=========== =========== ===========
</TABLE>
63
<PAGE> 25
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
----------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Premiums earned
Personal........................................................................ $ 832,423 $ 812,033 $ 807,550
Standard Commercial............................................................. 1,408,811 1,279,069 1,294,182
Specialty Commercial............................................................ 1,556,473 1,404,793 1,208,672
Reinsurance Assumed............................................................. 349,455 280,388 194,434
---------- ---------- ----------
Total premiums earned....................................................... $4,147,162 $3,776,283 $3,504,838
========== ========== ==========
Income (loss) from operations before income tax
Personal........................................................................ $ 92,686 $ (7,475) $ 30,536
Standard Commercial............................................................. (135,095) (106,126) (642,747)
Specialty Commercial............................................................ 132,187 106,557 101,584
Reinsurance Assumed............................................................. 4,376 (1,267) (24,465)
---------- ---------- ----------
Underwriting income (loss).................................................. 94,154 (8,311) (535,092)
Net investment income........................................................... 602,987 560,481 533,709
---------- ---------- ----------
Income (loss) from operations before income tax............................. $ 697,141 $ 552,170 $ (1,383)
========== ========== ==========
</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.
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.
(16) INTERNATIONAL OPERATIONS
The international business of the property and casualty insurance segment
is conducted through subsidiaries that operate solely outside of the United
States and branch offices of domestic subsidiaries. The assets and liabilities
related to such operations are located primarily in the countries in which the
insurance risks are written. International business is also obtained from treaty
reinsurance assumed, principally from the Sun Group.
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
------------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Revenues
United States..................................................... $ 3,715,023 $ 3,508,243 $ 3,397,825
International..................................................... 1,045,381 838,571 648,762
----------- ----------- -----------
Total....................................................... $ 4,760,404 $ 4,346,814 $ 4,046,587
=========== =========== ===========
Income (loss) from operations before income tax
United States..................................................... $ 592,684 $ 479,153 $ 8,311
International..................................................... 104,457 73,017 (9,694)
----------- ----------- -----------
Total....................................................... $ 697,141 $ 552,170 $ (1,383)
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31
-------------------------------------------
<S> <C> <C> <C>
Identifiable assets
United States..................................................... $14,055,334 $12,937,447 $12,189,556
International..................................................... 2,102,354 1,498,486 1,183,043
----------- ----------- -----------
Total....................................................... $16,157,688 $14,435,933 $13,372,599
=========== =========== ===========
</TABLE>
64
<PAGE> 26
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
----------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Gains (losses) on translation of foreign currencies........................... $(15,931) $14,517 $ 8,492
Income tax (credit)
Current................................................................... (5,994) 4,633 8,546
Deferred.................................................................. 3,262 445 (5,545)
-------- ------- -------
$(13,199) $ 9,439 $ 5,491
======== ======= =======
</TABLE>
(17) 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
----------------------------------
1995 1994 1993
---- ---- ----
(number of shares)
<S> <C> <C> <C>
Common stock issued
Balance, beginning of year........................................... 87,798,286 87,709,465 87,519,560
Shares issued under option and incentive plans....................... 21,069 88,821 189,905
---------- ---------- ----------
Balance, end of year............................................. 87,819,355 87,798,286 87,709,465
---------- ---------- ----------
Treasury stock
Balance, beginning of year........................................... 977,580 -- --
Repurchase of shares................................................. -- 1,001,500 --
Shares issued under option and incentive plans....................... (459,112) -- --
Shares issued -- other............................................... -- (23,920) --
---------- ---------- ----------
Balance, end of year............................................. 518,468 977,580 --
---------- ---------- ----------
Common stock outstanding, end of year............................ 87,300,887 86,820,706 87,709,465
========== ========== ==========
</TABLE>
(c) The Corporation has a Shareholder Rights Plan under which each
shareholder has one-half of a right for each share of common stock of the
Corporation held. Each right entitles the holder to purchase from the
Corporation one one-hundredth of a share of Series A Participating Cumulative
Preferred Stock at an exercise price of $225. The rights attach to all
outstanding shares of common stock and trade with the common stock until the
rights become exercisable. The rights are subject to adjustment to prevent
dilution of the interests represented by each right.
The rights will become exercisable and will detach from the common stock
ten days after a person or group either acquires 25% or more of the outstanding
shares of the Corporation's common stock or announces a tender or exchange offer
which, if consummated, would result in that person or group owning 25% or more
of the outstanding shares of the Corporation's common stock.
In the event that any person or group acquires 25% or more of the
outstanding shares of the Corporation's common stock, each right will entitle
the holder, other than such person or group, to purchase that number of shares
of the Corporation's common stock having a market value of two times the
exercise price of the right. In the event that, following the acquisition of 25%
or more of the Corporation's outstanding common stock by a person or group, the
Corporation is acquired in a merger or other business combination transaction or
50% or more of the Corporation's assets or earning power is sold, each right
will entitle the holder to purchase common stock of the acquiring company having
a value equal to two times the exercise price of the right.
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.
65
<PAGE> 27
(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
---------------------------------------------------
1995 1994
----------------------- -----------------------
GAAP Statutory GAAP Statutory
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(in thousands)
Property and casualty insurance subsidiaries*. $3,617,144 $2,314,720 $2,862,278 $1,923,465
Life and health insurance subsidiaries........ 844,645 317,624 731,810 301,084
---------- ---------- ---------- ----------
4,461,789 $2,632,344 3,594,088 $2,224,549
========== ==========
Corporate and eliminations.................. 800,940 652,941
---------- ----------
$5,262,729 $4,247,029
========== ==========
</TABLE>
A comparison of GAAP and statutory net income (loss) is as follows:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------------------------------------------------
1995 1994 1993
---------------------- ---------------------- ----------------------
GAAP Statutory GAAP Statutory GAAP Statutory
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Property and casualty insurance subsidiaries*. $640,834 $571,199 $506,825 $468,861 $210,204** $ 96,965
Life and health insurance subsidiaries....... 42,216 26,828 20,551 (4,264) 76,853** 31,890
-------- -------- -------- -------- ------- --------
683,050 $598,027 527,376 $464,597 287,057 $128,855
======== ======== ========
Corporate and eliminations................... 13,578 1,093 57,160**
Cumulative effect of changes in accounting
principles, net of tax..................... -- -- (20,000)
-------- -------- --------
$696,628 $528,469 $324,217
======== ======== ========
</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 1995, 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 1996 without prior approval is
approximately $465,000,000.
(18) SUBSEQUENT EVENT
On March 1, 1996, the Board of Directors approved a two-for-one stock split
payable to shareholders of record on April 19, 1996. The share and per share
amounts in the consolidated financial statements have not been adjusted to
reflect the stock split. Net income per share and the weighted average number of
common and common equivalent shares outstanding on a pro forma basis to reflect
the stock split were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Net income per share............................ $3.93 $2.98 $1.84
Average common and common equivalent
shares outstanding............................ 179,884,682 180,899,154 181,097,068
</TABLE>
At the same time, the Board of Directors approved an increase in the number of
authorized shares of common stock of the Corporation from 300,000,000 shares to
600,000,000 shares.
66
<PAGE> 28
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, 1995 and 1994, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. 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, 1995 and 1994 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 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 loan impairment in 1995, 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 23, 1996,
except for Note 18, as to which
the date is March 1, 1996
67
<PAGE> 29
QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data (in millions except per share
data) for 1995 and 1994 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
---------------- ---------------- ---------------- ----------------
1995 1994 1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $1,464.1 $1,396.0 $1,525.8 $1,414.6 $1,533.3 $1,428.9 $1,566.0 $1,470.0
Benefits and expenses......... 1,280.1 1,326.3 1,285.2 1,232.1 1,312.0 1,236.6 1,311.8 1,275.1
Federal and foreign
income tax (credit) ........ 37.3 (3.5) 55.6 35.8 49.9 39.6 60.7 39.0
-------- -------- -------- -------- -------- -------- -------- --------
Net income.................... $ 146.7 $ 73.2 $ 185.0 $ 146.7 $ 171.4 $ 152.7 $ 193.5 $ 155.9
======== ======== ======== ======== ======== ======== ======== ========
Net income per share.......... $ 1.66 $ .83 $ 2.09 $ 1.65 $ 1.93 $ 1.71 $ 2.17 $ 1.76
Underwriting ratios
Losses to premiums earned... 63.3% 76.6% 64.5% 63.8% 65.4% 63.8% 65.5% 64.2%
Expenses to premiums
written................... 33.0 33.3 31.9 32.5 31.5 32.1 32.1 32.3
-------- -------- -------- -------- -------- -------- -------- --------
Combined.................... 96.3% 109.9% 96.4% 96.3% 96.9% 95.9% 97.6% 96.5%
======== ======== ======== ======== ======== ======== ======== ========
</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.
68
<PAGE> 30
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 1995 and 1994.
<TABLE>
<CAPTION>
1995
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Common stock prices
High...................................................... $81.00 $85.13 $96.88 $100.50
Low....................................................... 76.50 77.50 78.25 90.13
Dividends declared............................................ .49 .49 .49 .49
</TABLE>
<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>
At March 1, 1996, there were approximately 8,375 common shareholders of
record.
69
<PAGE> 1
THE CHUBB CORPORATION
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Principal subsidiaries at December 31, 1995 of 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
Northwestern Pacific Indemnity Company........... Oregon 100
Texas Pacific Indemnity Company.................. Texas 100
Great Northern Insurance Company...................... Minnesota 100
Chubb Insurance Company of New Jersey................. New Jersey 100
Chubb Custom Insurance Company........................ Delaware 100
Chubb National Insurance Company...................... Indiana 100
Chubb Indemnity Insurance Company..................... New York 100
CC Canada Holdings Ltd................................ Canada 100
Chubb Insurance Company of Canada................ Canada 100
Chubb Insurance Company of Europe, S.A................ Belgium 100
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.
<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-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 9,374<F1>
<DEBT-CARRYING-VALUE> 3,229<F2>
<DEBT-MARKET-VALUE> 3,439<F3>
<EQUITIES> 588
<MORTGAGE> 10
<REAL-ESTATE> 0
<TOTAL-INVEST> 13,887
<CASH> 12
<RECOVER-REINSURE> 42<F4>
<DEFERRED-ACQUISITION> 1,171
<TOTAL-ASSETS> 22,997
<POLICY-LOSSES> 12,531<F5>
<UNEARNED-PREMIUMS> 2,571<F6>
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,344<F7>
<COMMON> 88
0
0
<OTHER-SE> 5,175<F8>
<TOTAL-LIABILITY-AND-EQUITY> 22,997
4,770
<INVESTMENT-INCOME> 901
<INVESTMENT-GAINS> 131
<OTHER-INCOME> 288<F9>
<BENEFITS> 3,219
<UNDERWRITING-AMORTIZATION> 1,198
<UNDERWRITING-OTHER> 447
<INCOME-PRETAX> 900
<INCOME-TAX> 203
<INCOME-CONTINUING> 697
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 697
<EPS-PRIMARY> 7.85
<EPS-DILUTED> 0
<RESERVE-OPEN> 6,933
<PROVISION-CURRENT> 2,706
<PROVISION-PRIOR> (36)
<PAYMENTS-CURRENT> 738
<PAYMENTS-PRIOR> 1,251
<RESERVE-CLOSE> 7,614
<CUMULATIVE-DEFICIENCY> (36)
<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 ($1,974) AND POLICY LIABILITIES ($194), AS PRESCRIBED BY
SFAS NO. 113. SUCH AMOUNTS ARE INCLUDED IN TOTAL ASSETS.
<F6>UNEARNED-PREMIUMS EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUMS
($485), AS PRESCRIBED BY SFAS NO. 113. THIS PREPAID AMOUNT IS INCLUDED IN
TOTAL ASSETS.
<F7>NOTES-PAYABLE INCLUDES SHORT-TERM DEBT OF $188 AND LONG-TERM DEBT OF $1,156.
<F8>OTHER-SE INCLUDES PAID-IN SURPLUS; RETAINED EARNINGS; FOREIGN CURRENCY
TRANSLATION LOSSES, NET OF INCOME TAX; UNREALIZED APPRECIATION OF
INVESTMENTS, NET; RECEIVABLE FROM ESOP AND TREASURY STOCK.
<F9>OTHER-INCOME REPRESENTS REVENUES FROM REAL ESTATE OPERATIONS.
</FN>
</TABLE>
