<PAGE> 1
As Filed with the Securities and Exchange Commission on March 28, 1997
================================================================================
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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO________
Commission File No. 1-8661
</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 $10,155,793,133 as of March 3, 1997.
172,956,346
Number of shares of common stock outstanding as of March 3, 1997
DOCUMENTS INCORPORATED BY REFERENCE
Portions of The Chubb Corporation 1996 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
22, 1997 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 with subsidiaries principally engaged in two
industries: property and casualty insurance and real estate. On February 23,
1997, the Corporation entered into a definitive agreement to sell its life and
health insurance subsidiaries to Jefferson-Pilot Corporation. Accordingly, the
life and health insurance subsidiaries have been classified as discontinued
operations in the consolidated financial statements. The Corporation and its
subsidiaries employed approximately 11,600 persons on December 31, 1996,
including approximately 1,100 persons employed by the life and health insurance
subsidiaries.
Revenues, income from continuing operations before income tax and
identifiable assets for each industry segment for the three years ended December
31, 1996 are included in Note (15) of the notes to consolidated financial
statements incorporated by reference from the Corporation's 1996 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 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, 1996 are included in Note (16) of the notes to
consolidated financial statements incorporated by reference from the
Corporation's 1996 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>
1994........................ $4,578,061 $681,316 $1,308,168 $3,951,209
1995........................ 4,907,320 747,320 1,348,648 4,305,992
1996........................ 5,166,471 436,840 829,558 4,773,753
</TABLE>
- ---------------
(a) Intercompany items eliminated.
The net premiums written during the last five years for major classes of
the Group's business are incorporated by reference from page 22 of the
Corporation's 1996 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
1996, approximately 85% of the Group's direct business was produced in the
United States, where the Group's businesses enjoy broad geographic distribution
with a particu-
2
<PAGE> 3
larly strong market presence in the Northeast. The four states accounting for
the largest amounts of direct premiums written were New York 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>
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
1996......................... 4,773,753 4,569,256 66.2 32.1 98.3
---------- ---------- ----- ----- ---------
Total for five years ended
December 31, 1996......... $19,919,755 $19,160,827 69.1% 32.6% 101.7%
========== ========== ========== ========== =========
</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 66.0%, 32.8% and
98.8%, respectively, for the five years ended December 31, 1996.
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 22 of
the Corporation's 1996 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, 1996 and 1995, such ratio for the Group was 1.81 and
1.89, respectively.
Producing and Servicing of Business
In the United States and Canada, the Group is represented by approximately
3,600 independent agents and accepts business on a regular basis from an
estimated 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 61 branch and service offices in the United States and Canada.
The Group's overseas business is developed by its foreign agents and
brokers through local branch offices of the Group and by its United States and
Canadian agents and brokers. Overseas business has also been obtained from
reinsurance assumed on a quota share basis from certain subsidiaries of the
Royal & Sun Alliance Insurance Group plc (Sun Alliance). Effective January 1,
1997, this reinsurance
3
<PAGE> 4
agreement was terminated. In conducting its overseas business, the Group reduces
the risks relating to currency fluctuations by maintaining investments in those
foreign currencies in which the Group transacts business, with characteristics
similar to the liabilities in those currencies. The net asset or liability
exposure to the various foreign currencies is regularly reviewed.
Business for the Group is also produced through participation in a number
of underwriting pools and syndicates including, among others, Associated
Aviation Underwriters, Cargo Reinsurance Association, American Cargo War Risk
Reinsurance Exchange and American Accident Reinsurance Group. Such pools and
syndicates provide underwriting capacity for risks which an individual insurer
cannot prudently underwrite because of the magnitude of the risk assumed or
which can be more effectively handled by one organization due to the need for
specialized loss control and other services.
Reinsurance
In accordance with the normal practice of the insurance industry, the Group
assumes and cedes reinsurance with other insurers or reinsurers. These
reinsurance arrangements provide greater diversification of business and
minimize the Group's maximum net loss arising from large risks or from hazards
of potential catastrophic events.
A large portion of the Group's reinsurance is effected under contracts
known as treaties under which all risks meeting prescribed criteria are
automatically covered. A portion of the Group's ceded reinsurance has been on a
quota share basis with a subsidiary of Sun Alliance, which is rated A by A.M.
Best. Effective January 1, 1997, this reinsurance agreement was terminated.
Additional information related to the Group's ceded reinsurance with the
subsidiary of Sun Alliance is included in Note (13) of the notes to consolidated
financial statements incorporated by reference from the Corporation's 1996
Annual Report to Shareholders and in Item 7 on pages 18 and 19 of this report.
Most of the Group's remaining treaty reinsurance arrangements consist of excess
of loss and catastrophe contracts with other insurers or reinsurers which
protect against a specified part or all of certain types of losses over
stipulated amounts arising from any one occurrence or event. In certain
circumstances, reinsurance is also effected by negotiation on individual risks.
The amount of each risk retained by the Group is subject to maximum limits which
vary by line of business and type of coverage. Retention limits are continually
reviewed and are revised periodically as the Group's capacity to underwrite
risks changes. Additional information related to the Group's reinsurance
programs is included in Item 7 of this report on pages 18 and 19. 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 were 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. In recent
years, the Group has increased its initial retention limit for each catastrophic
event. The Group has also raised its reinsurance coverage limits for each event.
The Group's current principal catastrophe reinsurance program provides coverage
for individual catastrophic events of approximately 73% of losses between $100
million and $450 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 60% of the Group's unpaid claims and claim adjustment
expenses at December 31, 1996 were for IBNR--claims which had not yet been
reported to the Group, some of which were not yet known to the insured, and
future development on reported claims. In spite of this imprecision, financial
reporting requirements dictate that insurance companies report a single amount
as the estimate of unpaid claims and claim adjustment expenses as of each
evaluation date. These estimates are continually reviewed and updated. Any
resulting adjustments are reflected in current operating results.
The Group's estimates of losses for reported claims are established
judgmentally on an individual case basis. Such estimates are based on the
Group's particular experience with the type of risk involved and its knowledge
of the circumstances surrounding each individual claim. These estimates are
reviewed on a regular basis or as additional facts become known. The reliability
of the estimation process is monitored through comparison with ultimate
settlements.
The Group's estimates of losses for unreported claims are principally
derived from analyses of historical patterns of the development of paid and
reported losses by accident year for each class of business. This process relies
on the basic assumption that past experience, adjusted for the effects of
current developments and likely trends, is an appropriate basis for predicting
future outcomes. For certain classes of business where anticipated loss
experience is less predictable because of the small number of claims and/or
erratic claim severity patterns, the Group's estimates are based on both
expected and actual reported losses. Salvage and subrogation estimates are
developed from patterns of actual recoveries.
The Group's estimates of unpaid claim adjustment expenses are based on
analyses of the relationship of projected ultimate claim adjustment expenses to
projected ultimate losses for each class of business. Claim staff has discretion
to override these expense formulas where judgment indicates such action is
appropriate.
The Group's estimates of reinsurance recoverable related to reported and
unreported claims and claim adjustment expenses represent the portion of such
liabilities that will be recovered from reinsurers. Amounts recoverable from
reinsurers are recognized as assets at the same time and in a manner consistent
with the liabilities associated with the reinsured policies.
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, 1996,
1995 and 1994.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------
1996 1995 1994
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Net liability, beginning of year....................... $7,614.5 $6,932.9 $6,450.0
------- ------- -------
Net incurred claim and claim adjustment expenses
Provision for claims occurring in the current year... 3,053.6 2,705.8 2,549.1
Decrease in estimates for claims occurring in prior
years............................................. (42.8) (35.8) (29.7)
------- ------- -------
3,010.8 2,670.0 2,519.4
------- ------- -------
Net payments for claims occurring in
Current year......................................... 980.0 737.7 764.5
Prior years.......................................... 1,889.4 1,250.7 1,272.0
------- ------- -------
2,869.4 1,988.4 2,036.5
------- ------- -------
Net liability, end of year............................. 7,755.9 7,614.5 6,932.9
Reinsurance recoverable, end of year................... 1,767.8 1,973.7 1,980.3
------- ------- -------
Gross liability, end of year........................... $9,523.7 $9,588.2 $8,913.2
======= ======= =======
</TABLE>
As reestimated at December 31, 1996, the liability for unpaid claims and
claim adjustment expenses, net of reinsurance recoverable, as established at the
previous year-end was redundant by $42.8 million. This compares with favorable
development of $35.8 million and $29.7 million during 1995 and 1994,
respectively. Such redundancies were reflected in the Group's operating results
in these respective years. Each of the past three years benefited from favorable
claim severity trends for certain liability classes; this was offset each year
in varying degrees by increases in claims and claim adjustment expenses relating
to asbestos and toxic waste claims.
Unpaid claims and claim adjustment expenses, net of reinsurance
recoverable, increased 2% in 1996, after increases of 10% and 7% in 1995 and
1994, respectively. The 1996 increase would have been greater except that loss
reserves were reduced as the result of significant payments during the year
related to the settlement of asbestos-related claims against Fibreboard
Corporation. Excluding the Fibreboard reserves, loss reserves increased 9% in
1996 and 12% in both 1995 and 1994. The Fibreboard reserves and related loss
payments are presented in the table on page 7. The Fibreboard settlement is
further discussed in Item 7 of this report on pages 21 through 23. 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 1996 was approximately 7% higher than the number at year-end 1995,
which was in turn 11% higher than that at year-end 1994. Such increases were due
in part to a shift for certain classes toward a book of business with more
frequent and less severe claims.
The uncertainties relating to unpaid claims, particularly for asbestos and
toxic waste claims on insurance policies written many years ago, are discussed
in Item 7 of this report on pages 21 through 24.
6
<PAGE> 7
The following table provides a reconciliation of the beginning and ending
liability for unpaid claims and claim adjustment expenses, net of reinsurance
recoverable, related to asbestos and toxic waste claims for the years ended
December 31, 1996, 1995 and 1994. Reinsurance recoveries related to such claims
are not significant.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
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.... $999.2 $343.8 $1,343.0 $1,049.4 $240.9 $1,290.3 $1,218.5 $214.4 $1,432.9
Net incurred claim and claim
adjustment expenses............... 5.0 145.7 150.7 10.0 171.8 181.8 35.1 80.1 115.2
Net payments for claims............. 461.5 73.6 535.1 60.2 68.9 129.1 204.2 53.6 257.8
---------- ------ -------- ---------- ------ -------- ---------- ------ --------
Net liability, end of year.......... $542.7 $415.9 $ 958.6 $ 999.2 $343.8 $1,343.0 $1,049.4 $240.9 $1,290.3
========== ====== ======= ========== ====== ======= ========== ====== =======
</TABLE>
There were approximately 3,900 asbestos claims outstanding at December 31,
1996 compared with 4,700 asbestos claims outstanding at December 31, 1995 and
3,400 at December 31, 1994. In 1996, approximately 1,800 claims were opened and
2,600 claims were closed. In 1995, approximately 2,600 claims were opened and
1,300 claims were closed. In 1994, approximately 1,800 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 800 toxic waste claims outstanding at December 31,
1996 compared with 700 toxic waste claims outstanding at December 31, 1995 and
600 toxic waste claims outstanding at December 31, 1994. Approximately 400
claims were opened in 1996 and 300 claims were opened in both 1995 and 1994.
There were approximately 300 claims closed in 1996, 200 claims closed in 1995
and 300 claims closed in 1994. 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 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 1996. 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, 1996. The amounts noted are cumulative
in nature; that is, an increase in a loss estimate that related to a prior
period
7
<PAGE> 8
occurrence generates a deficiency in each intermediate year. For example, a
deficiency recognized in 1993 relating to losses incurred prior to December 31,
1986, such as the $675 million increase in loss reserves related to the
Fibreboard settlement, would be included in the cumulative deficiency amount for
each year in the period 1986 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 net deficiencies in liability estimates from 1986 through
1992 relate primarily to additional provisions for asbestos and toxic waste
claims, particularly the Fibreboard settlement. The cumulative net 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. The cumulative net deficiencies
(redundancies) from 1987 through 1995 reflect, to varying degrees, decreases in
reserves for certain liability classes as the result of favorable claim severity
trends.
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 1986 column, as of December 31, 1996 the Group had paid
$2,993.0 million of the currently estimated $4,264.8 million of claims and claim
adjustment expenses that were unpaid at the end of 1986; thus, an estimated
$1,271.8 million of losses incurred through 1986 remain unpaid as of December
31, 1996, approximately 40% 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, 1996. 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 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- ------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Liability for Unpaid Claims
and Claim Adjustment
Expenses......................$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 $7,755.9
Net Liability Reestimated as
of:
One year later............... 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 7,571.7
Two years later.............. 2,313.9 2,835.9 3,336.0 3,854.2 4,244.7 5,368.5 5,904.1 6,363.1 6,874.5
Three years later............ 2,433.2 2,831.0 3,359.8 3,839.8 4,933.0 5,336.5 5,843.5 6,380.4
Four years later............. 2,493.3 2,891.7 3,385.1 4,567.4 4,941.7 5,302.6 5,894.6
Five years later............. 2,585.8 2,961.0 4,203.9 4,602.5 4,969.5 5,389.5
Six years later.............. 2,687.2 3,897.2 4,265.2 4,686.3 5,079.3
Seven years later............ 3,745.2 3,993.7 4,387.6 4,800.4
Eight years later............ 3,865.7 4,157.1 4,522.5
Nine years later............. 4,067.8 4,304.9
Ten years later.............. 4,264.8
Cumulative Net Deficiency
(Redundancy).................. 2,123.5 1,486.3 1,148.2 920.3 778.2 645.6 627.0 (69.6) (58.4) (42.8)
Cumulative Net Deficiency
Related to Asbestos and Toxic
Waste Claims................. 2,062.1 1,996.1 1,905.1 1,776.1 1,631.1 1,383.3 1,223.4 447.7 332.5 150.7
Cumulative Amount of
Net Liability Paid as of:
One year later............... 651.3 694.7 761.6 880.4 919.1 931.2 1,039.9 1,272.0 1,250.7 1,889.4
Two years later.............. 1,061.6 1,108.3 1,226.3 1,383.9 1,407.2 1,479.9 1,858.5 1,985.7 2,550.7
Three years later............ 1,362.9 1,419.1 1,555.1 1,715.9 1,808.7 2,083.0 2,332.3 3,015.8
Four years later............. 1,595.7 1,651.6 1,778.8 1,958.6 2,292.0 2,386.9 3,181.4
Five years later............. 1,775.3 1,818.2 1,966.1 2,346.9 2,490.2 3,125.8
Six years later.............. 1,907.1 1,961.9 2,307.9 2,500.9 3,174.7
Seven years later............ 2,032.9 2,281.0 2,422.7 3,120.6
Eight years later............ 2,333.6 2,370.5 3,009.5
Nine years later............. 2,412.6 2,952.4
Ten years later.............. 2,993.0
Gross Liability, End of Year... $7,220.9 $8,235.4 $8,913.2 $9,588.2 $9,523.7
Reinsurance Recoverable, End of
Year......................... 1,953.3 1,785.4 1,980.3 1,973.7 1,767.8
------- ------- ------- ------- -------
Net Liability, End of Year..... $5,267.6 $6,450.0 $6,932.9 $7,614.5 $7,755.9
======= ======= ======= ======= =======
Reestimated Gross Liability.... $7,883.5 $8,346.6 $9,011.7 $9,611.8
Reestimated Reinsurance
Recoverable.................. 1,988.9 1,966.2 2,137.2 2,040.1
------- ------- ------- -------
Reestimated Net Liability...... $5,894.6 $6,380.4 $6,874.5 $7,571.7
======= ======= ======= =======
Cumulative Gross Deficiency.... $ 662.6 $ 111.2 $ 98.5 $ 23.6
======= ======= ======= =======
</TABLE>
- ---------------
The cumulative deficiencies for the years 1986 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
--------------------
1996 1995
------- -------
(IN MILLIONS)
<S> <C> <C>
Net liability reported on a statutory basis -- U.S.
subsidiaries................................................. $7,305.2 $7,235.9
Additions (reductions):
Unpaid claims and claim adjustment expenses of foreign
subsidiaries.............................................. 528.8 433.0
Other reserve differences.................................... (78.1) (54.4)
-------- --------
Net liability reported on a GAAP basis......................... $7,755.9 $7,614.5
======== ========
</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,
mortgage-backed securities and corporate issues. In addition, the portfolio
includes equity securities held primarily with the objective of capital
appreciation.
In 1996, the Group invested new cash primarily in mortgage-backed
securities and tax-exempt bonds. In 1995, the Group invested new cash primarily
in tax-exempt bonds. In each year, the Group tried to achieve the appropriate
mix in its portfolio to balance both investment and tax strategies. At December
31, 1996, 68% of the Group's fixed maturity portfolio was invested in tax-exempt
bonds compared with 73% 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>
1994........................... $ 8,715,877 $560,481 6.4% 5.4%
1995........................... 9,342,295 602,987 6.5 5.4
1996........................... 10,333,819 646,056 6.3 5.3
</TABLE>
- ---------------
(a) Average of amounts for the years presented with fixed maturity
securities at amortized cost and equity securities at market value.
(b) Investment income after deduction of investment expenses, but before
applicable income tax.
10
<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.
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.
In October 1996, the Corporation announced it was exploring the possible
sale of all or a significant portion of its real estate assets. During February
1997, indications of interest in purchasing substantially all of the commercial
properties were received from several parties. In March 1997, the Corporation
announced that it had entered into an agreement with a prospective purchaser to
perform due diligence in anticipation of executing a contract for the sale of
these properties. In addition, the Corporation is continuing to explore the sale
of its residential and retail properties. The Corporation plans to retain
approximately $380 million of undeveloped land, which is expected to be
developed in the future, as well as certain commercial properties and land
parcels under lease. Additional information related to the potential sale of
real estate assets is included in Item 7 of this report on pages 25 through 27.
Over the past several years, revenues from commercial real estate
activities have come primarily from ongoing income from owned properties and
from management and financing activities related to previously sold properties
or properties held in joint ventures. 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 4,521,000 square feet of office and industrial
space, of which 90% is leased. The Real Estate Group has varying interests in an
additional 5,570,000 square feet of office and industrial space which is 97%
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 has undeveloped land holdings of approximately 4,050
acres, with primary holdings in New Jersey and Florida and lesser holdings in 5
additional states.
DISCONTINUED OPERATIONS
The Life and Health Insurance Group (Life Group) includes Chubb Life
Insurance Company of America (Chubb Life) and its wholly-owned subsidiaries,
Chubb Colonial Life Insurance Company (Colonial) and Chubb Sovereign Life
Insurance Company (Sovereign).
11
<PAGE> 12
In October 1996, the Corporation announced it was reviewing strategic
alternatives for the Life Group. The Life Group operates in a highly competitive
industry in which it does not hold a significant market share. The consolidation
now taking place in the life insurance sector is resulting in an industry
dominated by large, efficient companies. As a result, the Life Group faced a
growing competitive disadvantage against these competitors. These changing
fundamentals in the life insurance industry led to the Corporation's decision to
sell the Life Group. The Corporation entered into a definitive agreement, dated
February 23, 1997, to sell Chubb Life Insurance Company of America for
$875,000,000 in cash, subject to various closing adjustments and other customary
conditions. The sale is subject to regulatory approvals and is expected to be
completed by the end of the second quarter of 1997. The sale of the Life Group
is further discussed in Item 7 of this report on pages 28 and 29.
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 and whole life, as well as fixed premium
interest-sensitive life, universal life and variable universal life insurance
and mutual funds.
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 2,500 brokers.
The executive, accounting, actuarial and administrative activities of the
Life Group are primarily 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.
The following table presents revenues by class of the Life Group for each
of the past three years.
PREMIUM AND POLICY CHARGE REVENUES BY CLASS
<TABLE>
<CAPTION>
PERSONAL GROUP
------------------------------------------------------ ------------------------------------
ACCIDENT AND ACCIDENT AND
ORDINARY LIFE HEALTH ANNUITIES LIFE HEALTH
----------------- ---------------- --------------- ---------------- -----------------
YEAR AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- --------------- -------- ------- ------- ------- ------ ------- ------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
1996........... 313,894 55.8 19,617 3.5 4,271 .8 11,848 2.1 212,428 37.8
</TABLE>
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
results of the Life Group for each of the past three years are shown in the
following table.
<TABLE>
<CAPTION>
AVERAGE
INVESTED INVESTMENT PERCENT
YEAR ASSETS(A) INCOME(B) EARNED
------------------------------------- --------- ---------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
1994................................. $2,544,945 $205,451 8.1%
1995................................. 2,740,921 229,181 8.4
1996................................. 2,992,820 239,665 8.0
</TABLE>
- ---------------
(a) Average of amounts for the years presented with fixed maturity
securities at amortized cost and equity securities at market value.
(b) Investment income after deduction of investment expenses, but before
applicable income tax, excluding income from real estate.
12
<PAGE> 13
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
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 (3)(b) of the notes to consolidated financial
statements incorporated by reference from the Corporation's 1996 Annual Report
to Shareholders.
REGULATION, PREMIUM RATES AND COMPETITION
The Corporation is a holding company with subsidiaries primarily engaged 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 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.
13
<PAGE> 14
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, 1996, 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.
The property and casualty insurance industry is highly competitive both as
to price and service. Members of the Group compete not only with other stock
companies but also with mutual companies, other underwriting organizations and
alternative risk sharing mechanisms. Some competitors obtain their business at a
lower cost through the use of salaried personnel rather than independent agents
and brokers. Rates are not uniform for all insurers and vary according to the
types of insurers and methods of operation. The Group competes for business not
only on the basis of price, but also on the basis of availability of coverage
desired by customers and quality of service, including claim adjustment service.
The Group's products and services are generally designed to serve specific
customer groups or needs and to offer a degree of customization that is of value
to the insured.
There are more than 3,000 property and casualty insurance companies in the
United States operating independently or in groups and no single company or
group is dominant. According to A.M. Best, the Group is the 13th largest United
States property and casualty insurance group based on 1995 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.
Price competition increased in the property and casualty marketplace during 1987
and has continued through 1996, particularly in the commercial classes. The
Group continues to be selective in the writing of new business and to reinforce
the sound relationships with customers who appreciate the stability, expertise
and added value the Group provides.
In all states, insurers authorized to transact certain classes of property
and casualty insurance are required to become members of an insolvency fund. In
the event of the insolvency of a licensed insurer writing a class of insurance
covered by the fund in the state, all members are assessed to pay certain claims
against the insolvent insurer. Fund assessments are proportionately based on the
members' written premiums for the classes of insurance written by the insolvent
insurer. A portion of these assessments is recovered in certain states through
premium tax offsets and policyholder surcharges. In 1996, such assessments to
the members of the Group amounted to approximately $3 million. The amount of
future assessments cannot be reasonably estimated.
State insurance regulation requires insurers to participate in assigned
risk plans, reinsurance facilities and joint underwriting associations, which
are mechanisms that generally provide applicants with various basic insurance
coverages when they are not available in voluntary markets. Such
14
<PAGE> 15
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.
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, 1996 to meet the
risk-based capital requirement.
There are more than 1,700 legal reserve life insurance companies in the
United States. According to the National Underwriter, a trade publication, as of
January 1, 1996, Chubb Life, Sovereign and Colonial ranked 59th, 163rd and
203rd, 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, containment of medical costs, employee benefits regulation, automobile
safety regulation, financial services deregulation including the removal of
barriers preventing banks from engaging in the insurance business and the
taxation of insurance companies.
Insurance companies are also affected by a variety of state and federal
legislative and regulatory measures as well as by decisions of their courts that
define and extend the risks and benefits for which insurance is provided. These
include redefinitions of risk exposure in areas such as product liability and
commercial general liability as well as extension and protection of employee
benefits, including pension, workers' compensation and disability benefits.
Legislative and judicial developments pertaining to asbestos and toxic
waste exposures are discussed in Item 7 of this report on pages 21 through 24.
ITEM 2. PROPERTIES
The executive offices of the Corporation and the administrative offices of
the Property and Casualty Group are in Warren, New Jersey. The Real Estate
Group's corporate headquarters is located in Roseland, New Jersey. The Life
Group has its administrative offices in Concord, New Hampshire; Parsippany, New
Jersey and Chattanooga, Tennessee. 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 (12) of the notes to consolidated financial
statements incorporated by reference from the Corporation's 1996 Annual Report
to Shareholders.
15
<PAGE> 16
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are defendants in various lawsuits
arising out of their businesses. It is the opinion of management that the final
outcome of these matters will not materially affect the consolidated financial
position of the registrant.
Information regarding certain litigation to which property and casualty
insurance subsidiaries of the Corporation are a party is included in Item 7 of
this report on pages 21 through 24.
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, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
YEAR OF
AGE(A) ELECTION(B)
------ ----------
<S> <C> <C>
Dean R. O'Hare, Chairman of the Corporation................................. 54 1972
Douglas A. Batting, Executive Vice President of Chubb & Son Inc. ........... 54 1996
John P. Cavoores, Executive Vice President of Chubb & Son Inc............... 39 1996
Robert P. Crawford, Jr., Executive Vice President of the Corporation........ 55 1994
John J. Degnan, President of the Corporation................................ 52 1994
Gail E. Devlin, Senior Vice President of the Corporation.................... 58 1981
Edward Dunlop, Senior Vice President of the Corporation..................... 56 1995
David S. Fowler, Senior Vice President of the Corporation................... 51 1989
Henry G. Gulick, Vice President and Secretary of the Corporation............ 53 1975
David B. Kelso, Executive Vice President of the Corporation................. 44 1996
Charles M. Luchs, Executive Vice President of Chubb & Son Inc. ............. 57 1996
Brian W. Nocco, Senior Vice President of the Corporation.................... 45 1994
Donn H. Norton, Executive Vice President of the Corporation................. 55 1985
Michael O'Reilly, Senior Vice President of the Corporation.................. 53 1976
Robert Rusis, Senior Vice President and General Counsel of the
Corporation............................................................... 63 1990
Henry B. Schram, Senior Vice President of the Corporation................... 50 1985
Theresa M. Stone, Executive Vice President of the Corporation............... 52 1990
</TABLE>
- ---------------
(a) Ages listed above are as of April 22, 1997.
(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 and David B. Kelso. Mr. Nocco, who joined the Corporation in
1994, was previously Treasurer of Continental Bank Corp. Prior to joining Chubb
in 1996, Mr. Kelso was Executive Vice President of First Commerce Corporation in
New Orleans, where he has also served as Chief Financial Officer. Mr. Kelso was
previously a partner and head of the North American Banking Practice for The MAC
Group (now known as Gemini Consulting), an international general management
consulting firm.
16
<PAGE> 17
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Incorporated by reference from the Corporation's 1996 Annual Report to
Shareholders, page 67.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended December 31, 1996 are
incorporated by reference from the Corporation's 1996 Annual Report to
Shareholders, pages 40 and 41.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion presents our past results and our expectations for
the near term future. The supplementary financial information and the
consolidated financial statements and related notes, all of which are integral
parts of the following analysis of our results and our financial position, are
incorporated by reference from the Corporation's 1996 Annual Report to
Shareholders, pages 21, 22 and 42 through 64.
Certain statements in this document, as well as certain statements
incorporated by reference herein, may be considered to be "forward looking
statements" as that term is defined in the Private Securities Litigation Reform
Act of 1995, such as statements that include the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project" or similar expressions. In particular, this report includes forward
looking statements relating, but not limited to, the Corporation's recent sale
activities, reinsurance programs, and future premium and investment income
growth. Such statements are subject to certain risks and uncertainties. The
factors which could cause actual results to differ materially from those
suggested by any such statements include, but are not limited to, those
discussed or identified from time to time in the Corporation's public filings
with the Securities & Exchange Commission and specifically to: risks or
uncertainties associated with the Corporation's announced sale activities
relating to portions of its non-property and casualty business, or associated
with its expectations of proceeds deployment, asset valuations, or premium and
investment income growth projections, product initiatives, and new cash
available for investment, and, more generally, to: general economic conditions
including changes in interest rates and the performance of the financial
markets, changes in domestic and foreign laws, regulations and taxes, changes in
competition and pricing environments, regional or general changes in asset
valuation, the occurrence of significant natural disasters, the inability to
reinsure certain risks economically, the adequacy of loss reserves, as well as
general market conditions, competition, pricing and restructurings.
Net income amounted to $513 million in 1996 compared with $697 million in
1995 and $528 million in 1994. Net income in 1996 reflects a fourth quarter
charge of $160 million after taxes related to the write-down of the carrying
value of certain real estate assets.
The Corporation entered into a definitive agreement, dated February 23,
1997, to sell its life and health insurance operations to Jefferson-Pilot
Corporation for $875 million in cash, subject to various closing adjustments and
other customary conditions. The sale is subject to regulatory approvals and is
expected to be completed by the end of the second quarter of 1997. In light of
the decision to sell, the life and health insurance operations have been
classified as discontinued operations. For a further discussion of the
discontinued life and health insurance operations, see page 29.
Income from continuing operations, which includes realized investment gains
and losses related to such operations, was $486 million in 1996 compared with
$655 million in 1995 and $508 million in 1994. 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.
Operating income from continuing operations, which excludes realized
investment gains and losses, was $434 million in 1996 compared with $584 million
in 1995 and $473 million in 1994.
17
<PAGE> 18
PROPERTY AND CASUALTY INSURANCE
Property and casualty income in 1996 was similar to that in 1995, which was
significantly higher than 1994 income. Property and casualty income after taxes
was $561 million in 1996 compared with $563 million in 1995 and $467 million in
1994. Earnings in 1996 reflect lower underwriting income compared with 1995 due
to substantially higher catastrophe losses, resulting primarily from the winter
storms in the eastern part of the United States in the first quarter. Investment
income increased in 1996 compared with the prior year. Earnings in 1995
benefited from highly profitable underwriting results 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.
Catastrophe losses were $142 million in 1996, $64 million in 1995 and $169
million in 1994. Our initial retention level for each catastrophic event is
approximately $100 million. We did not have any recoveries from our catastrophe
reinsurance coverage during the past three years since there were no individual
catastrophes for which our losses exceeded the initial retention.
Net premiums written amounted to $4.8 billion in 1996, an increase of 11%
compared with 1995. Net premiums written increased 9% in 1995 compared with
1994. Personal coverages accounted for $1,039 million or 22% of 1996 premiums
written, commercial coverages for $3,532 million or 74% and reinsurance assumed
for $203 million or 4%. More than half of the 1996 premium growth was due to
changes in certain reinsurance agreements, which are discussed below.
The marketplace remained competitive, particularly in the commercial
classes, in all our markets worldwide. Competitors continued to place
significant pressure on pricing as they attempted to maintain or increase market
share. As a result, price increases have been difficult to achieve. In this
environment, we have focused on our specialty lines where we emphasize the added
value we provide to our customers. Premium growth in 1996 and 1995 was due to
exposure growth on existing business, the purchase of additional coverages by
current customers and the selective writing of new business. Substantial premium
growth in both years was achieved outside the United States from our expanding
international branch network.
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 the Sun Alliance Group plc. Similarly, a
subsidiary of the Corporation has assumed a portion of Sun Alliance's property
and casualty business on a quota share basis. Effective January 1, 1996, the
agreements pertaining to the exchange of reinsurance were amended to reduce the
portion of each company's business reinsured with the other. Consequently,
during 1996, the Corporation's property and casualty subsidiaries retained a
greater portion of the business they wrote directly and assumed less reinsurance
from Sun Alliance. As a result of these changes in retention, net premiums
written in 1996 increased by $64 million for the personal classes and $138
million for the commercial classes and decreased by $88 million for reinsurance
assumed. There was an additional impact on net premiums written in the first
quarter of 1996 due to the effect of the portfolio transfers of unearned
premiums as of January 1, 1996 resulting from these changes. The effect of these
portfolio transfers was an increase in net premiums written of $31 million for
the personal classes and $61 million for the commercial classes and a decrease
of $65 million for reinsurance assumed.
Also, effective January 1, 1996, our casualty excess of loss reinsurance
program was modified, principally for excess liability and executive protection
coverages. The changes included an increase in the initial retention for each
loss from $5 million to $10 million and an increase in the initial aggregate
amount of losses retained for each year before reinsurance becomes available.
These changes in our casualty reinsurance program increased net premiums written
in 1996 by approximately $130 million.
Underwriting results were profitable in 1996 and 1995 compared with near
breakeven results in 1994. The combined loss and expense ratio, the common
measure of underwriting profitability, was 98.3% in 1996 compared with 96.8% in
1995 and 99.5% in 1994.
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The loss ratio was 66.2% in 1996 compared with 64.7% in 1995 and 67.0% in
1994. The loss ratios continue to reflect the favorable experience resulting
from the consistent application of our disciplined underwriting standards.
Losses from catastrophes represented 3.1, 1.5 and 4.5 percentage points of the
loss ratio in 1996, 1995, and 1994, respectively.
Our expense ratio was 32.1% in 1996 and 1995 and 32.5% in 1994. Expenses
were reduced in 1994 by a contingent profit sharing accrual of $11 million
related to a medical malpractice reinsurance agreement.
As a result of the 1996 merger of Sun Alliance with Royal Insurance
Holdings plc, the unwinding of our reinsurance agreements with Sun Alliance was
accelerated. Effective January 1, 1997, the agreements pertaining to the
exchange of reinsurance on a quota share basis were terminated. As a result of
the termination of these agreements, our net premiums written are expected to
increase in 1997 by approximately $125 million for the personal classes and
approximately $250 million for the commercial classes. Personal and commercial
net premiums written will also include approximately $65 million and $110
million, respectively, in the first quarter of 1997 due to the effect of the
portfolio transfer of unearned premiums as of January 1, 1997 resulting from the
termination of the agreements. Net premiums written for reinsurance assumed,
which were $203 million in 1996, are expected to be negligible in 1997 as the
reduction in premiums related to the portfolio transfer of unearned premiums to
Sun Alliance as of January 1, 1997 will be offset by the effect of the lag in
our reporting of the business we assumed from Sun Alliance for the second half
of 1996.
During 1996, we continued to evaluate the relative costs and benefits of
our casualty excess of loss reinsurance program. As a result, effective January
1, 1997, we again modified the program, increasing the initial retention for
each loss from $10 million to $25 million. The increase in net premiums written
in 1997 resulting from this change in our casualty reinsurance program is not
expected to be significant.
The impact on underwriting results in 1997 of the termination of the
reinsurance agreements with Sun Alliance and the changes to our casualty
reinsurance program is not expected to be significant. Management believes that
the retention of a greater portion of the business underwritten by the property
and casualty subsidiaries will have a positive impact on net income in the
future.
The following discussion of underwriting results reflects certain
reclassifications to present results in a manner more consistent with the way
the property and casualty business is now managed. Prior period amounts have
been restated to conform with the new presentation.
PERSONAL INSURANCE
Premiums from personal insurance increased 20% in 1996 compared with a 5%
increase in 1995. More than half of the growth in 1996 was due to the changes in
the reinsurance agreement with Sun Alliance which resulted in both the portfolio
transfer of unearned premiums as of January 1, 1996 and an increase in our
retention percentage for these classes.
Excluding the effects of the changes in the reinsurance agreement, personal
lines premiums increased 9% in 1996, our best growth rate in many years. We
continued to grow our homeowners and other non-automobile business in
non-catastrophe prone areas while maintaining our disciplined approach to
pricing and risk selection. Personal automobile premiums increased as a result
of an increase in the number of in-force policies for high-value automobiles.
Our personal insurance business produced substantial underwriting profits
in 1996 and 1995 compared with breakeven results in 1994. The combined loss and
expense ratio was 91.7% in 1996 compared with 87.1% in 1995 and 99.8% in 1994.
The profitability of our homeowners business each year is affected
substantially by the extent of catastrophe losses experienced. Homeowners
results were unprofitable in 1996 as catastrophe losses, particularly the winter
storms, adversely affected results. Homeowners results were profitable in 1995,
benefiting from lower catastrophe losses, fewer large losses and a reduction in
loss frequency. The
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unprofitable results in 1994 reflect the adverse effect of significant
catastrophe losses, particularly the winter storms and, to a lesser extent, the
California earthquake. Catastrophe losses represented 16.7 percentage points of
the loss ratio for this class in 1996 compared with 10.3 percentage points in
1995 and 19.4 percentage points in 1994.
Other personal coverages, which include insurance for personal valuables
and excess liability, were highly profitable in each of the past three years.
Personal excess liability results improved in 1995 and 1996 due to favorable
loss experience. Our automobile business produced profitable results in each of
the last three years. Results in 1996 and 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.
COMMERCIAL INSURANCE
Premiums from commercial insurance increased 15% in 1996 compared with 9%
in 1995. Approximately 40% of the 1996 growth in premiums was due to the changes
in the reinsurance agreement with Sun Alliance which resulted in both the
portfolio transfer of unearned premiums as of January 1, 1996 and an increase in
our retention percentage for these classes. In addition, premium growth in 1996
for the excess liability component of our casualty coverages and for our
executive protection coverages benefited from the changes in our casualty excess
of loss reinsurance program. Excluding the effects of these changes in our
reinsurance agreements, premium growth in 1996 and 1995 was due primarily to the
selective writing of new accounts, exposure growth on existing business and the
purchase of additional coverages by current customers. Premium growth was
particularly strong outside the United States. The competitive market worldwide
has continued to place significant pressure on prices and has made price
increases difficult to achieve for most coverages. Our strategy of working
closely with our customers and our ability to differentiate our products have
enabled us to renew a large percentage of our business.
Our commercial insurance business produced near breakeven underwriting
results in each of the past three years. The combined loss and expense ratio was
99.7% in 1996 compared with 99.3% in 1995 and 99.4% in 1994.
Multiple peril results were unprofitable in each of the past three years
due, in large part, to inadequate prices. Results deteriorated in 1996 due
primarily to higher catastrophe losses and an increase in the frequency of large
losses. Results for this class benefited in 1995 from an absence of catastrophe
losses. Results in 1994 were adversely affected by significant catastrophe
losses, primarily from the earthquake in California. Catastrophe losses
represented 4.8 percentage points of the loss ratio for this class in 1996
compared with 1.0 percentage point in 1995 and 9.7 percentage points in 1994.
Results for our casualty business were similarly unprofitable in 1996 and
1995 compared with near breakeven results in 1994. In each of the past three
years, but more so in 1996 and 1995, casualty results have been adversely
affected by increases in loss reserves for asbestos-related and toxic waste
claims. 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 breakeven in 1996 compared with profitable results in
1995 and 1994.
Workers' compensation results were slightly unprofitable in 1996 compared
with profitable results in 1995 and unprofitable results in 1994. Results
deteriorated in 1996 due in part to an increase in claim frequency and the
impact of price reductions. Results in 1995 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 have also benefited from these positive factors.
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Property and marine results were profitable in 1996 and 1995 compared with
unprofitable results in 1994. Results in 1996 deteriorated somewhat due to an
increase in catastrophe losses which were insignificant in 1995. Both years
benefited from stable loss frequency. Results for this class in 1994 were
adversely affected by significant catastrophe losses, resulting primarily from
the earthquake in California. Catastrophe losses represented 4.5 percentage
points of the loss ratio for this class in 1996 compared with 0.8 of a
percentage point in 1995 and 6.8 percentage points in 1994.
Our executive protection results were highly profitable in each of the past
three years due to favorable loss experience. Our financial institutions
business produced increasingly profitable results in 1995 and 1996. The
financial fidelity portion of this business was highly profitable in each of the
past three years. Results in the non-fidelity portion of this business were
unprofitable in 1994 due in part to several large losses.
Results in our other commercial classes were slightly profitable in 1996
compared with unprofitable results in 1995 and 1994. The improvement was
attributable to our surety business which had highly profitable results in 1996.
Results for this class were unprofitable in 1995 due to several large losses.
REINSURANCE ASSUMED
Reinsurance assumed is treaty reinsurance assumed primarily from Sun
Alliance. The growth in premiums in 1995 was primarily due to an increase in our
participation in the business of Sun Alliance. The substantial decrease in
premiums in 1996 was due to the effects of the changes in the reinsurance
agreement with Sun Alliance whereby we assumed less reinsurance from them. The
decrease in premiums included the first quarter effect of the $65 million
portfolio transfer of unearned premiums to Sun Alliance as of January 1, 1996.
The reinsurance agreement with Sun Alliance was terminated effective January 1,
1997. Underwriting results for this segment were near breakeven in each of the
past three years.
LOSS RESERVES
Loss reserves are our property and casualty subsidiaries' largest
liability. At the end of 1996, gross loss reserves totaled $9.5 billion compared
with $9.6 billion and $8.9 billion at year-end 1995 and 1994, respectively.
Reinsurance recoverable on such loss reserves was $1.8 billion at year-end 1996
compared with $2.0 billion at the end of 1995 and 1994. As a result of the
changes in the reinsurance agreements with Sun Alliance, there were portfolio
transfers of gross loss reserves and reinsurance recoverable as of January 1,
1996. The effect of these portfolio transfers was a decrease in gross loss
reserves of $209 million and a decrease in reinsurance recoverable of $244
million.
Loss reserves, net of reinsurance recoverable, increased 2% in 1996
compared with 10% in 1995. The 1996 increase would have been greater except that
loss reserves were reduced as the result of significant payments during the year
related to the settlement of asbestos-related claims against Fibreboard
Corporation, which is discussed below. Loss reserves included $543 million, $999
million and $1,049 million at year-end 1996, 1995 and 1994, respectively,
related to the Fibreboard settlement. Loss and expense payments related to the
settlement aggregated $462 million, $60 million and $204 million in 1996, 1995
and 1994, respectively. Excluding the Fibreboard reserves, loss reserves, net of
reinsurance recoverable, increased 9% in 1996 and 12% in 1995. 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 1996, we experienced overall favorable development of $43 million on
loss reserves established as of the previous year-end. This compares with
favorable development of $36 million in 1995 and $30 million in 1994. Such
redundancies were reflected in operating results in these respective years. Each
of the past three years benefited from favorable claim severity trends for
certain liability classes; this was offset each year in varying degrees by
increases in loss reserves relating to asbestos and toxic waste claims.
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The process of establishing loss reserves is an imprecise science and
reflects significant judgmental factors. In many liability cases, significant
periods of time, ranging up to several years or more, may elapse between the
occurrence of an insured loss, the reporting of the loss and the settlement of
the loss. In fact, approximately 60% of our loss reserves at December 31, 1996
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 complex loss reserving
process.
The uncertainties relating to asbestos and toxic waste claims on insurance
policies written many years ago are exacerbated by judicial and legislative
interpretations of coverage that in some cases have tended to erode the clear
and express intent of such policies and in others have expanded theories of
liability. The industry is engaged in extensive litigation over these coverage
and liability issues and is thus confronted with a continuing uncertainty in its
efforts to quantify these exposures.
Our most costly asbestos exposure relates to an insurance policy issued to
Fibreboard Corporation by Pacific Indemnity Company in 1956. In 1993, Pacific
Indemnity Company, a subsidiary of the Corporation, entered into a global
settlement agreement with Continental Casualty Company (a subsidiary of CNA
Financial Corporation), Fibreboard Corporation, and attorneys representing
claimants against Fibreboard for all future asbestos-related bodily injury
claims against Fibreboard. This agreement is subject to final appellate court
approval. Pursuant to the global settlement agreement, a $1.525 billion trust
fund will be established to pay future claims, which are claims that were not
filed in court before August 27, 1993. Pacific Indemnity will contribute
approximately $538 million to the trust fund and Continental Casualty will
contribute the remaining amount. In December 1993, upon execution of the global
settlement agreement, Pacific Indemnity and Continental Casualty paid their
respective shares into an escrow account. Upon final court approval of the
settlement, the amount in the escrow account, including interest earned thereon,
will be transferred to the trust fund. All of the parties have agreed to use
their best efforts to seek final court approval of the global settlement
agreement.
Pacific Indemnity and Continental Casualty reached a separate agreement for
the handling of all asbestos-related bodily injury claims pending on August 26,
1993 against Fibreboard. Pacific Indemnity's obligation under this agreement
with respect to such pending claims is approximately $635 million, the final
$450 million of which was paid during 1996. The agreement further provides that
the total responsibility of both insurers with respect to pending and future
asbestos-related bodily injury claims against Fibreboard will be shared between
Pacific Indemnity and Continental Casualty on an approximate 35% and 65% basis,
respectively.
Pacific Indemnity, Continental Casualty and Fibreboard entered into a
trilateral agreement to settle all present and future asbestos-related bodily
injury claims resulting from insurance policies that were, or may have been,
issued to Fibreboard by the two insurers. The trilateral agreement will be
triggered if the global settlement agreement is disapproved by the United States
Supreme 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 1995, the United States District Court of the Eastern District of Texas
approved the global settlement agreement and the trilateral agreement. The
judgments approving these agreements were appealed to the United States Court of
Appeals for the Fifth Circuit. In July 1996, the Fifth Circuit
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Court affirmed the 1995 judgments of the District Court. The affirmation of
these agreements had no effect on the amount of loss reserves provided for the
settlement. A petition for re-hearing the global settlement agreement before the
entire Fifth Circuit Court was denied. An appeal to the United States Supreme
Court by the objectors to the global settlement has been filed and the Supreme
Court will decide whether to hear this matter. The trilateral agreement,
however, was not appealed to the United States Supreme Court and is now final.
As a result, management believes that the uncertainty of Pacific Indemnity's
exposure with respect to asbestos-related bodily injury claims against
Fibreboard has been eliminated.
Since 1993, a California Court of Appeal has agreed, in response to a
request by Pacific Indemnity, Continental Casualty and Fibreboard, to delay its
decisions regarding asbestos-related insurance coverage issues 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.
We have additional potential asbestos exposure, primarily on insureds for
which we wrote excess liability coverages. Such exposure has increased due to
the erosion of much of the underlying limits. The number of claims against such
insureds and the value of such claims have increased in recent years due in part
to the non-viability of other defendants.
Our 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
federal "Superfund" law and similar state statutes, when potentially responsible
parties (PRPs) fail to handle the clean-up, regulators have the work done and
then attempt to establish legal liability against the PRPs. The PRPs, with
proper government authorization in many instances, disposed of toxic materials
at a waste dump site or transported the materials to the site. Most sites have
multiple PRPs.
Insurance policies issued to PRPs were not intended to cover the clean-up
costs of pollution and, in many cases, did not intend to cover the pollution
itself. Pollution was not a recognized hazard at the time many of these policies
were written. In more recent years, however, policies specifically exclude such
exposures.
As the cost of environmental clean-up continues to grow, PRPs and others
have increasingly filed claims with their insurance carriers. Litigation against
insurers extends to issues of liability, coverage and other policy provisions.
There is great uncertainty involved in estimating our liabilities 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
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December 31, 1995. Notwithstanding continued pressure by the insurance industry
and other interested parties to achieve a legislative solution which would
reform the liability provisions of the law, Congress did not address Superfund
in 1996. 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. Because of the large number of state sites, such sites could prove even
more costly in the aggregate than Superfund sites.
Litigation costs remain substantial, particularly for 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 limit defense costs. This
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. Increases in loss reserves relating to asbestos and toxic waste claims
were $151 million in 1996, $182 million in 1995 and $115 million in 1994.
Further increases in such reserves in 1997 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, 1996 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 both 1996 and 1995. Growth
was primarily due to increases in invested assets, which reflected strong cash
flow from operations over the period, offset somewhat in 1996 by lower yields on
new investments.
The effective tax rate on our investment income was 15.8% in 1996, 15.9% in
1995 and 15.3% in 1994. The effective tax rate increased in 1995 as the
percentage of our investment income subject to tax increased.
Generally, premiums are received by our property and casualty subsidiaries
months or even years before losses are paid under the policies purchased by such
premiums. These funds are used first to make current claim and expense payments.
The balance is invested to augment the investment income 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
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are developed based on many factors including underwriting results and our
resulting tax position, fluctuations in interest rates and regulatory
requirements.
New cash available for investment was approximately $1,215 million in 1996
compared with $495 million and $725 million in 1995 and 1994, respectively. New
cash in 1996 included $191 million received in January as a result of the
commutation of a stop loss reinsurance agreement related to medical malpractice
unpaid claims arising from business written prior to 1985. The lower amount in
1995 was due to the designation of $480 million of new cash as funds held for
asbestos-related settlement. Income on these assets accrued for the benefit of
participants in the class settlement of asbestos-related bodily injury claims
against Fibreboard.
In 1997, the property and casualty subsidiaries will receive approximately
$300 million as the net result of the portfolio transfers of unearned premiums
and loss reserves as of January 1, 1997 related to the termination of the
reinsurance agreements with Sun Alliance.
In 1996, we invested new cash primarily in mortgage-backed securities and
tax-exempt bonds. In 1995, we invested new cash primarily in tax-exempt bonds.
In 1994, we invested new cash primarily in taxable bonds and, to a lesser
extent, tax-exempt bonds. In each year, we tried to achieve the appropriate mix
in our portfolio to balance both investment and tax strategies.
The property and casualty subsidiaries 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 the
taxable bonds are either backed by the U.S. Government or rated AA or better by
Moody's or Standard & Poor's. Of the tax-exempt bonds, practically all are rated
A or better, with more than half rated AAA. Both taxable and tax-exempt bonds
have an average maturity of approximately 9 years. Actual maturities could
differ from contractual maturities because borrowers may have the right to call
or prepay obligations. Equity securities are high quality and readily
marketable.
At December 31, 1996, the property and casualty subsidiaries held foreign
investments of $1.3 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 and the Corporation maintains bank credit facilities that are available to
respond to unexpected cash demands.
REAL ESTATE
In October 1996, the Corporation announced that it was exploring the
possible sale of all or a significant portion of its real estate assets. During
February 1997, indications of interest in purchasing substantially all of our
commercial properties were received from several parties. In March 1997, the
Corporation announced that it had entered into an agreement with a prospective
purchaser to perform due diligence in anticipation of executing a contract for
the sale of these properties. In addition, we are continuing to explore the sale
of our residential and retail properties.
Because the plan to pursue the sale of these assets in the near term
represented a change in circumstances relating to the manner in which these
assets are expected to be used, we reassessed the recoverability of their
carrying value. As a result, we recorded an impairment loss of $255 million, or
$160 million after tax, in the fourth quarter of 1996 to reduce the carrying
value of these assets to their estimated fair value.
We plan to retain approximately $380 million of undeveloped land which we
expect will be developed in the future. In addition, we plan to retain certain
commercial properties and land parcels under lease.
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Real estate operations resulted in a loss after taxes of $147 million in
1996 compared with income of $6 million in 1995 and a loss of $2 million in
1994. The loss in 1996 reflects the $160 million after tax impairment charge.
Excluding this charge, real estate income after taxes was $13 million. Results
in 1996 benefited from the sale of several rental properties and a decrease in
interest expense caused by lower average interest rates. Results in 1995
benefited from a land sale. Results in both years benefited from increases in
earnings from residential sales as well as from lower provisions for possible
uncollectible mortgages receivable. In each of the last three years, results
were adversely affected by a high proportion of interest costs being charged
directly to expense rather than being capitalized.
Revenues were $320 million in 1996, $288 million in 1995 and $205 million
in 1994. Revenues in 1996 and 1995 included higher levels of revenues from
residential development. Revenues in 1996 also included the sale of rental
properties while 1995 revenues included the land sale. Over the past several
years, revenues from our commercial real estate activities have come primarily
from ongoing income from owned properties and from management and financing
activities related to previously sold properties or properties held in joint
ventures.
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 developed real estate properties ourselves rather than
through third party developers. We are distinguished from most other real estate
developers in that we coordinated all phases of the development process from
concept to completion. Upon completion of development, the properties were
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 investment interests in joint ventures generally consist of the
ownership and lease of the underlying land and the management and operation of
the buildings. We have agreements with joint ventures to manage all aspects of
the joint venture properties, including debt structures, tenant leasing, and
building improvements and maintenance.
Our occupancy rate has been strong in substantially all markets in which we
operate. We have been successful in both retaining existing tenants and securing
new ones and we do not have a significant credit problem with tenants. During
1996, a total of 2,280,000 square feet was leased compared with 2,320,000 square
feet in 1995 and 2,420,000 square feet in 1994. At December 31, 1996, we owned
or had interest in 10,091,000 square feet of office and industrial space. Our
vacancy rate was 6% at year-end 1996 and 1995 and 7% at year-end 1994.
In certain markets, renewing leases in established buildings has been
difficult as demand for commercial office space diminished due to an overbuilt
market and corporate downsizing. While we have experienced significant leasing
activity in recent years and have achieved improved rental rates on many of
these buildings, a significant portion of our existing leases are at low market
rental rates.
Our entry into the New Jersey residential development market met with
initial success. In 1996, we completed our first townhome project containing 178
units. Our second project, a joint venture, is an 84 unit townhome project which
we expect to complete in 1997. At year-end 1996, 41 units were sold. In Florida,
sales continued to be strong in two existing condominium projects which total
385 units. At year-end 1996, all but 41 units were sold.
The Corporation adopted Statement of Financial Accounting Standards (SFAS)
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, in the first quarter of 1996. SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets.
SFAS No. 121 requires that we analyze our individual buildings, leased land
and development sites on a continuing basis to determine if an impairment loss
has occurred. Estimates are made of the revenues and operating costs, as well as
any additional costs to be incurred to complete development,
26
<PAGE> 27
of the property in the future through an assumed holding period, based on our
intended use of the property. The time value of money is not considered in
assessing whether impairment has occurred. If it is determined that impairment
has occurred, measurement of such impairment is based on the fair value of the
assets. The $255 million write-down of real estate assets in 1996 was made in
accordance with the provisions of SFAS No. 121. No similar write-down was
recorded in 1995 or 1994.
Loans receivable, which were issued in connection with our joint venture
activities and other property sales, are primarily purchase money mortgages.
Such loans are generally collateralized by buildings and, in some cases, land.
We continually evaluate the ultimate collectibility of such loans and establish
appropriate reserves. Our valuation approach is similar to that utilized under
SFAS No. 121, except that future cash flows are discounted at the receivable
interest rates. 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 $2 million
in 1996, $18 million in 1995 and $29 million in 1994, principally related to
loans on selected properties with operating income at levels which may not fully
meet debt service requirements. The 1995 charge included $10 million from the
initial application of SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, which established new criteria for measuring impairment of a loan. The
reserve was reduced by write-downs aggregating $4 million in both 1996 and 1995
and $10 million in 1994 related to specific loans that are uncollectible.
Management believes the reserve of $86 million at December 31, 1996 adequately
reflects the current condition of the portfolio. However, if conditions in the
real estate market do not improve, additional reserves may be required.
In accordance with SFAS No. 107, Disclosures About Fair Value of Financial
Instruments, the fair value of loans receivable is estimated individually as the
value of the discounted cash flows of the loan, subject to the estimated fair
value of the underlying collateral. 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, 1996, the aggregate fair value
of the loans was $487 million and the carrying value was $502 million.
The write-downs related to the real estate assets we plan to dispose of in
the near term are based on the estimated fair value of these assets, which
reflects the amounts we expect to realize from the sales. The recoverability of
the carrying value of the remaining real estate assets is assessed based on our
ability to fully recover costs through a future revenue stream. The process by
which SFAS No. 121 is applied and necessary write-downs are calculated assumes
that these properties will be developed and disposed of over a period of time.
The assumptions reflect a continued improvement in demand for office space, an
increase in rental rates and the ability and intent to obtain financing in order
to hold and develop the remaining properties and protect our interests over the
long term. Management believes that the carrying values of both the assets to be
disposed of and the remaining assets are recoverable. However, if the
assumptions related to these assets are modified in the future, it is possible
that additional losses may be recognized.
Real estate activities have been funded with short-term credit instruments,
primarily commercial paper, and debt issued by Chubb Capital Corporation as well
as term loans and mortgages. The weighted average interest cost on short-term
credit instruments approximated 5 1/2% in 1996 compared with 6% in 1995 and
4 1/2% in 1994. In 1996, the range of interest rates for term loans was 7% to
9 1/2% and for mortgages the range was 5% to 12%.
It is expected that funds received from any real estate asset sales will be
used substantially to reduce debt currently supporting the real estate business.
Cash from operations combined with the ability to utilize the Corporation's
borrowing facilities would provide sufficient funds to repay any debt due in
1997 not otherwise repaid.
27
<PAGE> 28
CORPORATE
Investment income earned on corporate invested assets and interest and
other expenses not allocable to the operating subsidiaries are reflected in the
corporate segment. Corporate income after taxes was $20 million in 1996, $15
million in 1995 and $8 million in 1994.
INVESTMENT GAINS AND LOSSES
Net investment gains (losses) realized by the Corporation and its property
and casualty insurance subsidiaries were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Equity securities....................................... $69 $ 89 $118
Fixed maturities........................................ 11 20 (64)
---- ---- ----
Realized investment gains before tax.................... $80 109 $ 54
==== ==== ====
Realized investment gains after tax..................... $52 $ 71 $ 35
==== ==== ====
</TABLE>
Sales of equity securities in each of the last three years resulted in
realized investment gains due primarily to the significant appreciation in the
United States equity markets. In 1995 and 1994, sales of equity securities were
in part the result of the redistribution of invested assets from equity
securities to fixed maturities. A primary reason for the sale of fixed
maturities in each of the last three years has been to improve our after-tax
portfolio return without sacrificing quality where market opportunities have
existed to do so.
Fixed maturities which the Corporation and its insurance subsidiaries have
the ability and intent to hold to maturity are classified as held-to-maturity.
The remaining fixed maturities, which may be sold prior to maturity to support
our investment strategies, such as in response to changes in interest rates and
the yield curve or to maximize after-tax returns, are classified as
available-for-sale. Fixed maturities classified as held-to-maturity are carried
at amortized cost while fixed maturities classified as available-for-sale are
carried at market value. At December 31, 1996, 22% of the fixed maturity
portfolio of our continuing operations was classified as held-to-maturity
compared with 30% at December 31, 1995 and 36% at December 31, 1994.
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 of
the Corporation and its property and casualty insurance companies carried at
amortized cost was $130 million, $178 million and $28 million at December 31,
1996, 1995 and 1994, respectively. Such unrealized appreciation was not
reflected in the consolidated financial statements.
Changes in unrealized market appreciation or depreciation of fixed
maturities were due to fluctuations in interest rates.
DISCONTINUED OPERATIONS -- LIFE AND HEALTH INSURANCE
The Corporation entered into a definitive agreement, dated February 23,
1997, to sell Chubb Life Insurance Company of America to Jefferson-Pilot
Corporation for $875 million in cash, subject to various closing adjustments and
other customary conditions. The sale is subject to regulatory approvals and is
expected to be completed by the end of the second quarter of 1997.
The estimated loss on the sale of the life and health insurance operations
is $22 million, consisting of a loss before tax of $5 million and a tax of $17
million on the sale. The tax on the sale is due to the tax
28
<PAGE> 29
carrying value of these operations being lower than their carrying value for
financial statement purposes. The purchase price will not be adjusted to reflect
results of operations subsequent to December 31, 1996. Therefore, it is expected
that the discontinued life and health insurance operations will not affect the
Corporation's net income in the future.
The results of the life and health insurance operations for the three years
ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- -----
(IN MILLIONS)
<S> <C> <C> <C>
Premiums and policy charges............................ $562 $623 $ 836
Investment income...................................... 242 233 209
---- ---- -----
Total revenues.................................... 804 856 1,045
---- ---- -----
Benefits............................................... 492 549 752
Operating costs and expenses........................... 251 266 274
---- ---- -----
Income before income tax.......................... 61 41 19
Federal income tax..................................... 20 13 5
---- ---- -----
Income before realized investment gains........... 41 28 14
Realized investment gains, net of tax.................. 8 14 6
---- ---- -----
Income from operations............................ 49 42 20
Loss on disposal....................................... (22) -- --
---- ---- -----
Income from discontinued operations............... $ 27 $ 42 $ 20
==== ==== =====
</TABLE>
Earnings from personal insurance were $42 million in 1996 compared with $37
million in 1995 and $33 million in 1994. The earnings increase in 1996 was
primarily due to lower expense levels. Earnings in 1995 benefited from favorable
mortality. Premiums and policy charges amounted to $338 million in 1996 compared
with $311 million in 1995 and $272 million in 1994. New sales of personal
insurance as measured by annualized premiums were $104 million in 1996 compared
with $112 million in 1995 and $97 million in 1994.
Group insurance operations resulted in losses of $1 million in 1996, $9
million in 1995 and $19 million in 1994. Premiums were $224 million in 1996
compared with $312 million in 1995 and $564 million in 1994.
Gross investment income increased 4% in 1996 compared with 12% in 1995.
Growth was primarily due to an increase in invested assets, tempered in 1996 by
lower yields on new investments. New cash available for investment amounted to
$265 million in 1996 compared with $225 million in 1995 and $140 million in
1994. The new cash was primarily due to increases in deposits credited to
policyholder funds.
In 1996, we reduced the portfolio of mortgage-backed securities by
approximately $100 million. Proceeds from the sale of these securities and new
cash were invested primarily in corporate bonds. In 1995, new cash was invested
primarily 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.
The life and health subsidiaries held fixed maturity securities with a
carrying value of $2.9 billion and $2.7 billion at December 31, 1996 and 1995,
respectively. Corporate bonds comprised 48% and 39% of the portfolio at year-end
1996 and 1995, respectively, and mortgage-backed securities comprised 38% and
47% of the portfolio at year-end 1996 and 1995, respectively. Approximately 90%
of the
29
<PAGE> 30
mortgage-backed securities holdings at December 31, 1996 and 1995 related to
residential mortgages consisting of government agency pass-through securities,
government agency collateralized mortgage obligations (CMOs) and AAA rated
non-agency CMOs backed by government agency collateral or single family home
mortgages. The majority of the CMOs are actively traded in liquid markets and
market value information is readily available from broker-dealers. 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.
Net investment gains realized by the life and health insurance operations
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Equity securities....................................... $ 5 $11 $ 7
Fixed maturities........................................ 7 11 2
---- ---- ----
Realized investment gains before tax.................... $12 $22 $ 9
==== ==== ====
Realized investment gains after tax..................... $ 8 $14 $ 6
==== ==== ====
</TABLE>
CAPITAL RESOURCES
On March 1, 1996, the Board of Directors approved an increase in the number
of authorized shares of common stock of the Corporation from 300 million shares
to 600 million shares. At the same time, the Board of Directors approved a
two-for-one stock split payable to shareholders of record as of April 19, 1996.
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
10,000,000 shares of common stock. During 1994, the Corporation repurchased
approximately 2,000,000 shares in open-market transactions at a cost of $72
million. During 1996, the Corporation repurchased an additional 1,700,000 shares
at a cost of $83 million. In March 1997, the Board of Directors replaced the
1994 program with a new share repurchase program, which authorizes the
repurchase of up to 17,500,000 shares of common stock. It is expected that the
Corporation will use a substantial portion of the proceeds from the sale of the
life and health insurance operations to repurchase shares.
The Corporation has outstanding $90 million of unsecured 8 3/4% notes due
in 1999. In 1997 and 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 $229 million of 6%
exchangeable 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. During 1996, the holders of $21 million
of exchangeable notes elected the available option to exchange such notes into
shares of common stock of the Corporation, resulting in the issuance of 480,464
shares of common stock.
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 have been used to
support our real estate operations.
30
<PAGE> 31
The Corporation has a revolving credit agreement with a group of banks that
provides for unsecured borrowings of up to $300 million. There have been no
borrowings under this agreement. The agreement terminates on July 15, 1997 at
which time any loans then outstanding become payable. Management anticipates
that a similar credit agreement will replace this agreement. The Corporation had
additional unused lines of credit of approximately $140 million at December 31,
1996.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of the Corporation at December 31, 1996
and 1995 and for each of the three years in the period ended December 31, 1996
and the Report of Independent Auditors thereon and the Corporation's unaudited
quarterly financial data for the two-year period ended December 31, 1996 are
incorporated by reference from the Corporation's 1996 Annual Report to
Shareholders, pages 42 through 66.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
31
<PAGE> 32
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 22, 1997, pages 2, 3 and 4. Information
regarding the executive officers is included in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Corporation's definitive Proxy Statement
for the Annual Meeting of Shareholders on April 22, 1997, pages 8 through 21
other than the Performance Graph and the Organization and Compensation Committee
Report appearing on pages 14 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 22, 1997, pages 5 through 7.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Corporation's definitive Proxy Statement
for the Annual Meeting of Shareholders on April 22, 1997, pages 21 through 23.
32
<PAGE> 33
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS AND 2. SCHEDULES
The financial statements and schedules listed in the accompanying
index to financial statements and financial statement schedules are filed
as part of this report.
3. EXHIBITS
The exhibits listed in the accompanying index to exhibits are filed as
part of this report.
(b) REPORTS ON FORM 8-K
The Registrant filed a current report on Form 8-K dated October 29,
1996 with respect to the announcement on October 29, 1996 that the
Registrant (1) retained Goldman, Sachs & Co. to assist it in the process of
evaluating its strategic alternatives with respect to the Registrant's life
insurance companies and (2) was considering its strategic alternatives with
respect to its real estate subsidiary, Bellemead Development Corporation.
The Registrant filed a current report on Form 8-K dated February 6,
1997 with respect to the announcement on February 6, 1997 of its
preliminary financial results for the quarter and year ended December 31,
1996.
The Registrant filed a current report on Form 8-K dated February 24,
1997 with respect to the announcement on February 24, 1997 that the
Registrant signed a definitive purchase agreement under which the
Registrant will sell Chubb Life Insurance Company of America to
Jefferson-Pilot Corporation for $875 million in cash.
The Registrant filed a current report on Form 8-K dated March 7, 1997
with respect to the announcement on March 7, 1997 that (1) the Board of
Directors of the Registrant declared a regular quarterly dividend in the
amount of $.29 per share, (2) the Board of Directors of the Registrant
approved a new share repurchase program and (3) the Registrant was
restating its preliminary 1996 financial results to reflect the
classification of its life insurance business as a discontinued operation
and to recognize a charge related to the write-down of certain real estate
assets.
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which undertaking shall be
incorporated by reference into registrant's Registration Statements on Form S-8
Nos. 2-90826 (filed May 1, 1984), 33-29185 (filed June 7, 1989), 33-30020 (filed
July 18, 1989), 33-49230 (filed July 2, 1992), 33-49232 (filed July 2, 1992),
333-09273 (filed July 31, 1996) and 333-09275 (filed July 31, 1996):
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
33
<PAGE> 34
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 7, 1997
By /s/ DEAN R. O'HARE
----------------------------------
(DEAN R. O'HARE, CHAIRMAN AND
CHIEF EXECUTIVE OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<C> <S> <C>
/s/ DEAN R. O'HARE Chairman, Chief March 7, 1997
- ------------------------------------------ Executive Officer and
(DEAN R. O'HARE) Director
/s/ JOHN C. BECK Director March 7, 1997
- ------------------------------------------
(JOHN C. BECK)
Director March 7, 1997
- ------------------------------------------
(SHEILA P. BURKE)
/s/ JAMES I. CASH, JR. Director March 7, 1997
- ------------------------------------------
(JAMES I. CASH, JR.)
/s/ PERCY CHUBB, III Director March 7, 1997
- ------------------------------------------
(PERCY CHUBB, III)
/s/ JOEL J. COHEN Director March 7, 1997
- ------------------------------------------
(JOEL J. COHEN)
/s/ DAVID H. HOAG Director March 7, 1997
- ------------------------------------------
(DAVID H. HOAG)
/s/ ROBERT V. LINDSAY Director March 7, 1997
- ------------------------------------------
(ROBERT V. LINDSAY)
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<C> <S> <C>
Director March 7, 1997
- ------------------------------------------
(THOMAS C. MACAVOY)
/s/ GERTRUDE G. MICHELSON Director March 7, 1997
- ------------------------------------------
(GERTRUDE G. MICHELSON)
/s/ WARREN B. RUDMAN Director March 7, 1997
- ------------------------------------------
(WARREN B. RUDMAN)
/s/ DAVID G. SCHOLEY Director March 7, 1997
- ------------------------------------------
(DAVID G. SCHOLEY)
/s/ RAYMOND G.H. SEITZ Director March 7, 1997
- ------------------------------------------
(RAYMOND G.H. SEITZ)
/s/ LAWRENCE M. SMALL Director March 7, 1997
- ------------------------------------------
(LAWRENCE M. SMALL)
/s/ RICHARD D. WOOD Director March 7, 1997
- ------------------------------------------
(RICHARD D. WOOD)
/s/ DAVID B. KELSO Executive Vice President and March 7, 1997
- ------------------------------------------ Chief Financial Officer
(DAVID B. KELSO)
/s/ HENRY B. SCHRAM Senior Vice President and March 7, 1997
- ------------------------------------------ Chief Accounting Officer
(HENRY B. SCHRAM)
</TABLE>
35
<PAGE> 36
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
------------ ------------
<C> <S> <C> <C>
Report of Independent Auditors 65 --
Consolidated Balance Sheets at December 31, 1996 and 1995 43 --
Consolidated Statements of Income for the Years Ended Decem-
ber 31, 1996, 1995 and 1994 42 --
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994 44 --
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 45 --
Notes to Consolidated Financial Statements 46 --
Supplementary Information (unaudited)
Quarterly Financial Data 66 --
Schedules:
I -- Consolidated Summary of Investments -- Other
than Investments in Related Parties at
December 31, 1996 -- 38
II -- Condensed Financial Information of Registrant at
December 31, 1996 and 1995 and for the Years
Ended December 31, 1996, 1995 and 1994 -- 39
III -- Consolidated Supplementary Insurance Information
at and for the Years Ended December 31, 1996,
1995 and 1994 -- 42
IV -- Consolidated Reinsurance for the Years
Ended December 31, 1996, 1995 and 1994 -- 43
VI -- Consolidated Supplementary Property and Casualty
Insurance Information for the Years Ended
December 31, 1996, 1995 and 1994 -- 44
</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, 1996, are hereby
incorporated by reference.
36
<PAGE> 37
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 March 5, 1997 included in the
1996 Annual Report to Shareholders of The Chubb Corporation.
Our audits also included the financial statement schedules of The Chubb
Corporation listed in Item 14(a). These schedules are the responsibility of the
Corporation's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-3: No. 33-59111 and Form S-8: No. 2-90826, No. 33-29185, No.
33-30020, No. 33-49230, No. 33-49232, No. 333-09273 and No. 333-09275) of our
report dated March 5, 1997, 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, 1997
37
<PAGE> 38
THE CHUBB CORPORATION
SCHEDULE I
CONSOLIDATED SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
(IN THOUSANDS)
DECEMBER 31, 1996
<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......................... $ 275,909 $ 275,909 $ 275,909
---------- ---------- -------------
Fixed maturities
Bonds
United States Government and government
agencies and authorities................ 2,176,366 2,176,122 2,174,095
States, municipalities and political
subdivisions............................ 6,806,811 7,142,001 7,014,267
Foreign................................... 1,169,238 1,216,450 1,216,450
Public utilities.......................... 50,119 51,671 51,671
All other corporate bonds................. 679,910 687,215 687,215
---------- ---------- -------------
Total bonds..................... 10,882,444 11,273,459 11,143,698
Redeemable preferred stocks.................. 15,000 15,150 15,150
---------- ---------- -------------
Total fixed maturities.......... 10,897,444 11,288,609 11,158,848
---------- ---------- -------------
Equity securities
Common stocks
Banks, trusts and insurance companies..... 11,697 19,912 19,912
Industrial, miscellaneous and other....... 432,979 528,774 528,774
---------- ---------- -------------
Total common stocks............. 444,676 548,686 548,686
Non-redeemable preferred stocks.............. 95,846 97,617 97,617
---------- ---------- -------------
Total equity securities......... 540,522 646,303 646,303
---------- ---------- -------------
Total invested assets........... $11,713,875 $12,210,821 $12,081,060
========== ========== =============
</TABLE>
38
<PAGE> 39
THE CHUBB CORPORATION
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS -- PARENT COMPANY ONLY
(IN THOUSANDS)
DECEMBER 31
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Assets
Invested Assets
Short Term Investments..................................... $ 9,703 $ 62,727
Taxable Fixed Maturities -- Available-for-Sale
(cost $792,919 and $207,053)............................. 786,837 216,048
Equity Securities (cost $52,036 and $48,640)............... 86,857 75,837
---------- ----------
TOTAL INVESTED ASSETS................................. 883,397 354,612
Cash.......................................................... 6 59
Investment in Consolidated Subsidiaries
Continuing Operations...................................... 3,714,685 4,125,343
Discontinued Operations.................................... 843,408 844,645
Other Assets.................................................. 212,565 145,264
---------- ----------
TOTAL ASSETS.......................................... $5,654,061 $5,469,923
========= =========
Liabilities
Dividend Payable to Shareholders.............................. $ 47,210 $ 42,741
Long Term Debt................................................ 90,000 120,000
Accrued Expenses and Other Liabilities........................ 53,977 44,453
---------- ----------
TOTAL LIABILITIES..................................... 191,187 207,194
---------- ----------
Shareholders' Equity
Preferred Stock -- Authorized 4,000,000 Shares;
$1 Par Value; Issued -- None............................... -- --
Common Stock -- Authorized 600,000,000 Shares;
$1 Par Value; Issued 176,084,173 and 87,819,355 Shares..... 176,084 87,819
Paid-In Surplus............................................... 695,762 778,239
Retained Earnings............................................. 4,530,512 4,206,517
Foreign Currency Translation Losses, Net of Income Tax........ (15,678) (3,433)
Unrealized Appreciation of Investments, Net................... 238,669 345,894
Receivable from Employee Stock Ownership Plan................. (106,261) (114,998)
Treasury Stock, at Cost -- 1,223,182 and 518,468 Shares....... (56,214) (37,309)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY............................ 5,462,874 5,262,729
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ $5,654,061 $5,469,923
========= =========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in the Corporation's 1996
Annual Report to Shareholders.
39
<PAGE> 40
THE CHUBB CORPORATION
SCHEDULE II
(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME -- PARENT COMPANY ONLY
(IN THOUSANDS)
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Investment Income...................................... $ 41,464 $ 19,982 $ 25,031
Realized Investment Gains (Losses)..................... 12,799 (505) (13,145)
Investment Expenses.................................... (2,110) (1,132) (1,307)
Corporate Expenses..................................... (33,384) (33,355) (34,850)
-------- -------- --------
18,769 (15,010) (24,271)
Federal and Foreign Income Tax (Credit)................ (28) 2,639 (4,578)
-------- -------- --------
18,797 (17,649) (19,693)
Equity in Income from Continuing Operations of Consoli-
dated Subsidiaries................................... 467,396 672,061 527,611
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS................. 486,193 654,412 507,918
Equity in Income from Discontinued Operations.......... 26,491 42,216 20,551
-------- -------- --------
NET INCOME........................................ $512,684 $696,628 $528,469
======== ======== ========
</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 1996
Annual Report to Shareholders.
40
<PAGE> 41
THE CHUBB CORPORATION
SCHEDULE II
(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY
(IN THOUSANDS)
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income........................................... $ 512,684 $ 696,628 $ 528,469
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Equity in Income of Continuing Operations of
Consolidated Subsidiaries....................... (467,396) (672,061) (527,611)
Equity in Income from Discontinued Operations..... (26,491) (42,216) (20,551)
Realized Investment (Gains) Losses................ (12,799) 505 13,145
Other, Net........................................ (12,734) 5,024 16,886
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES......................... (6,736) (12,120) 10,338
--------- --------- ---------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities.............. 237,675 110,234 234,132
Proceeds from Maturities of Fixed Maturities......... 104,928 13,369 21,632
Proceeds from Sales of Equity Securities............. 17,269 2,479 5,333
Purchases of Fixed Maturities........................ (397,959) (39,585) (218,380)
Purchases of Equity Securities....................... (16,078) (8,683) (26,004)
Decrease (Increase) in Short Term Investments, Net... 53,024 (1,297) 1,375
Dividends Received from Consolidated Subsidiaries.... 275,202 244,008 244,008
Capital Contributions to Consolidated Subsidiaries... -- (24,000) (40,000)
Other, Net........................................... (23,379) (40,123) (9,353)
--------- --------- ---------
NET CASH PROVIDED BY
INVESTING ACTIVITIES......................... 250,682 256,402 212,743
--------- --------- ---------
Cash Flows from Financing Activities
Decrease in Payable to Chubb Capital Corporation..... -- (74,340) (2,950)
Repayment of Long Term Debt.......................... (30,000) (30,000) --
Dividends Paid to Shareholders....................... (184,220) (167,959) (158,735)
Repurchase of Shares................................. (82,528) -- (72,052)
Other, Net........................................... 52,749 27,944 10,608
--------- --------- ---------
NET CASH USED IN
FINANCING ACTIVITIES......................... (243,999) (244,355) (223,129)
--------- --------- ---------
Net Decrease in Cash................................... (53) (73) (48)
Cash at Beginning of Year.............................. 59 132 180
--------- --------- ---------
CASH AT END OF YEAR............................. $ 6 $ 59 $ 132
========= ========= =========
</TABLE>
In 1996, $520,270,000 of fixed maturity securities were received as a
dividend from a consolidated investment company subsidiary of the Corporation.
This noncash transaction has been excluded from the statements of cash flows.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in the Corporation's 1996
Annual Report to Shareholders.
41
<PAGE> 42
THE CHUBB CORPORATION
SCHEDULE III
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31 YEAR ENDED DECEMBER 31
------------------------------------ ------------------------
DEFERRED
POLICY NET
ACQUISITION UNPAID UNEARNED PREMIUMS INVESTMENT
SEGMENT COSTS CLAIMS PREMIUMS EARNED INCOME
- -------------------------------------------------------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1996
Property and Casualty Insurance
Personal............................................ $146,096 $ 688,483 $ 591,875 $ 969,710
Commercial.......................................... 425,230 8,652,843 1,926,845 3,315,526
Reinsurance Assumed................................. 29,872 182,383 98,783 284,020
Investments......................................... $ 646,056*
-------- ---------- ---------- ---------- ----------
$601,198 $9,523,709 $2,617,503 $4,569,256 $ 646,056
======== ========= ========= ========= ========
1995
Property and Casualty Insurance
Personal............................................ $131,542 $ 691,991 $ 548,094 $ 847,474
Commercial.......................................... 367,146 8,498,498 1,842,332 2,952,751
Reinsurance Assumed................................. 59,988 397,652 180,256 346,937
Investments......................................... $ 602,987*
-------- ---------- ---------- ---------- ----------
$558,676 $9,588,141 $2,570,682 $4,147,162 $ 602,987
======== ========= ========= ========= ========
1994
Property and Casualty Insurance
Personal............................................ $133,021 $ 704,233 $ 519,298 $ 826,068
Commercial.......................................... 346,118 7,876,836 1,704,512 2,677,914
Reinsurance Assumed................................. 50,314 332,151 158,735 272,301
Investments......................................... $ 560,481*
-------- ---------- ---------- ---------- ----------
$529,453 $8,913,220 $2,382,545 $3,776,283 $ 560,481
======== ========= ========= ========= ========
<CAPTION> YEAR ENDED DECEMBER 31
------------------------------------------------
AMORTIZATION
OF OTHER
DEFERRED INSURANCE
POLICY OPERATING
INSURANCE ACQUISITION COSTS AND PREMIUMS
SEGMENT CLAIMS COSTS EXPENSES WRITTEN
- -------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1996
Property and Casualty Insurance
Personal............................................ $ 570,465 $ 273,470 $ 58,531 $1,039,134
Commercial.......................................... 2,252,564 849,464 231,660 3,532,072
Reinsurance Assumed................................. 187,726 115,034 202,547
Investments.........................................
---------- ---------- ---------- ----------
$3,010,755 $1,237,968 $ 290,191 $4,773,753
========= ========= ======== =========
1995
Property and Casualty Insurance
Personal............................................ $ 442,462 $ 254,020 $ 53,691 $ 866,782
Commercial.......................................... 2,000,774 750,541 208,393 3,070,752
Reinsurance Assumed................................. 226,745 116,382 368,458
Investments.........................................
---------- ---------- ---------- ----------
$2,669,981 $1,120,943 $ 262,084 $4,305,992
========= ========= ======== =========
1994
Property and Casualty Insurance
Personal............................................ $ 527,856 $ 256,604 $ 44,855 $ 828,803
Commercial.......................................... 1,806,464 695,861 179,135 2,807,185
Reinsurance Assumed................................. 185,039 88,780 315,221
Investments.........................................
---------- ---------- ---------- ----------
$2,519,359 $1,041,245 $ 223,990 $3,951,209
========= ========= ======== =========
</TABLE>
- ---------------
* Property and casualty assets are available for payment of claims and expenses
for all classes of business; therefore, such assets and the related
investment income have not been identified with specific groupings of classes
of business.
The Consolidated Supplementary Insurance Information amounts for 1995 and
1994 include certain reclassifications to conform with the 1996 presentation,
which more closely reflects the way the property and casualty business is now
managed. The total amounts are not affected.
42
<PAGE> 43
THE CHUBB CORPORATION
SCHEDULE IV
CONSOLIDATED REINSURANCE
(IN THOUSANDS)
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
PROPERTY AND CASUALTY INSURANCE PREMIUMS
EARNED
---------------------------------------------- PERCENTAGE OF
CEDED ASSUMED AMOUNT
DIRECT TO OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
--------- ---------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
1996.................................... $5,023,489 $ 987,235 $533,002 $4,569,256 11.7%
========== ========== ======== ==========
1995.................................... $4,754,423 $1,319,341 $712,080 $4,147,162 17.2
========== ========== ======== ==========
1994.................................... $4,415,080 $1,280,412 $641,615 $3,776,283 17.0
========== ========== ======== ==========
</TABLE>
43
<PAGE> 44
THE CHUBB CORPORATION
SCHEDULE VI
CONSOLIDATED SUPPLEMENTARY PROPERTY AND CASUALTY INSURANCE INFORMATION
(IN THOUSANDS)
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
CLAIMS AND CLAIM
ADJUSTMENT PAID
EXPENSES INCURRED CLAIMS
RELATED TO AND
------------------------ CLAIM
CURRENT PRIOR ADJUSTMENT
YEAR YEARS EXPENSES
--------- -------- ---------
<S> <C> <C> <C>
1996............................................. $3,053,600 $(42,845) $2,869,406
========== ========= ==========
1995............................................. $2,705,800 $(35,819) $1,988,386
========== ========= ==========
1994............................................. $2,549,100 $(29,741) $2,036,525
========== ========= ==========
</TABLE>
44
<PAGE> 45
THE CHUBB CORPORATION
EXHIBITS
(ITEM 14(A))
<TABLE>
<CAPTION>
DESCRIPTION
<C> <S>
(2) -- Stock Purchase Agreement dated as of February 23, 1997 between
Jefferson-Pilot Corporation and the registrant, filed herewith.
(Confidential treatment requested with respect to certain portions
thereof. Exhibits and schedules included in the Stock Purchase
Agreement have been omitted and will be provided to the Securities and
Exchange Commission upon request.)
(3) -- Articles of Incorporation and By-Laws
Restated Certificate of Incorporation. Incorporated by reference to
Exhibit (3) of the registrant's Report to the Securities and Exchange
Commission on Form 10-Q for the six months ended June 30, 1996.
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 Annual Incentive Compensation Plan (1996) incor-
porated by reference to Exhibit A of the registrant's definitive
proxy statement for the Annual Meeting of Shareholders held on
April 23, 1996.
The Chubb Corporation Long-Term Stock Incentive Plan (1996), as
amended, incorporated by reference to Exhibit (10) of the
registrant's Report to the Securities and Exchange Commission on
Form 10-Q for the six months ended June 30, 1996.
The Chubb Corporation Stock Option Plan for Non-Employee Directors
(1996) incorporated by reference to Exhibit C of the registrant's
definitive proxy statement for the Annual Meeting of Shareholders
held on April 23, 1996.
</TABLE>
45
<PAGE> 46
<TABLE>
<CAPTION>
DESCRIPTION
<C> <S>
The Chubb Corporation Long-Term Stock Incentive Plan (1992)
incorporated by reference to Exhibit (10) of the registrant's
Report to the Securities and Exchange Commission on Form 10-K for
the year ended December 31, 1992.
The Chubb Corporation Stock Option Plan (1984) incorporated by
reference to Exhibit (10) of the registrant's Report to the
Securities and Exchange Commission on Form 10-K for the year ended
December 31, 1994.
The Chubb Corporation Stock Option Plan for Non-Employee Directors
(1992) incorporated by reference to Exhibit (10) of the
registrant's Report to the Securities and Exchange Commission on
Form 10-K for the year ended December 31, 1992.
The Chubb Corporation Deferred Compensation Plan for Directors
incorporated by reference to Exhibit (10) of the registrant's
Report to the Securities and Exchange Commission on Form 10-K for
the year ended December 31, 1995.
Executive Severance Agreements and their amendments incorporated by
reference to Exhibit (10) of the registrant's Report to the
Securities and Exchange Commission on Form 10-K for the year ended
December 31, 1994.
Executive Severance Agreements incorporated by reference to Exhibit
(10) of the registrant's Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31, 1995.
Contract for consulting and advisory services with Percy Chubb III, a
director of the registrant, filed herewith.
(11) -- Computation of earnings per share filed herewith.
(13) -- Pages 21, 22, and 40 through 67 of the 1996 Annual Report to
Shareholders.
(21) -- Subsidiaries of the registrant filed herewith.
(23) -- Consent of Independent Auditors (see page 37 of this report).
(27) -- Financial Data Schedule
</TABLE>
46
<PAGE> 1
CONFORMED COPY
(With Certain Provisions Redacted)
STOCK PURCHASE AGREEMENT
dated as of
February 23, 1997
between
JEFFERSON-PILOT CORPORATION
and
THE CHUBB CORPORATION
relating to the purchase and sale
of
100% of the Common Stock
of
Chubb Life Insurance Company of America
[CONFIDENTIAL TREATMENT REQUESTED] INDICATES THE PORTIONS OF THIS AGREEMENT THAT
HAVE BEEN OMITTED PURSUANT TO A REQUEST BY THE CHUBB CORPORATION FOR
CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC").
SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE SEC.
<PAGE> 2
TABLE OF CONTENTS
----------------------
PAGE
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions...................................................1
ARTICLE 2
PURCHASE AND SALE
SECTION 2.01. Purchase and Sale.............................................7
SECTION 2.02 Closing.......................................................7
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
SECTION 3.01. Corporate Existence and Power.................................8
SECTION 3.02. Corporate Authorization.......................................9
SECTION 3.03. Governmental Authorization...................................10
SECTION 3.04. Non-Contravention............................................10
SECTION 3.05. Capitalization...............................................10
SECTION 3.06. Ownership of Shares..........................................11
SECTION 3.07. Subsidiaries.................................................11
SECTION 3.08. Financial Statements.........................................11
SECTION 3.09. Absence of Certain Changes...................................12
SECTION 3.10. No Undisclosed Material Liabilities..........................15
SECTION 3.11. Material Contracts...........................................15
SECTION 3.12. Litigation...................................................16
SECTION 3.13. Compliance with Laws and Court Orders........................16
SECTION 3.14. Finders' Fees................................................17
SECTION 3.15. Insurance Filings............................................17
SECTION 3.16. Insurance Business...........................................19
SECTION 3.17. ERISA Representations........................................20
SECTION 3.18. Property.....................................................21
SECTION 3.19. Environmental Matters........................................21
SECTION 3.20. Guaranty Fund Assessments....................................22
SECTION 3.21. Actuarial Analysis...........................................22
SECTION 3.22. Investments; Defaults........................................22
SECTION 3.23. Separate Accounts............................................23
SECTION 3.24. Funds........................................................23
SECTION 3.25. Employees and Compensation...................................23
<PAGE> 3
PAGE
SECTION 3.26. Producers for the Company and the Insurance Subsidiaries.....24
SECTION 3.27. Insurance....................................................25
SECTION 3.28. Full Disclosure..............................................25
SECTION 3.29. Company Trademarks; Software.................................25
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
SECTION 4.01. Corporate Existence and Power................................26
SECTION 4.02. Corporate Authorization......................................26
SECTION 4.03. Governmental Authorization...................................26
SECTION 4.04. Non-Contravention............................................26
SECTION 4.05. Purchase for Investment......................................27
SECTION 4.06. Litigation...................................................27
SECTION 4.07. Finders' Fees................................................27
SECTION 4.08. Financing....................................................27
ARTICLE 5
COVENANTS OF SELLER
SECTION 5.01. Conduct of the Company.......................................27
SECTION 5.02. Access to Information........................................28
SECTION 5.03. Notices of Certain Events....................................28
SECTION 5.04. Other Offers.................................................29
SECTION 5.05. Non-Solicitation.............................................29
SECTION 5.06. Computer Services and Software...............................29
SECTION 5.07. Minimum Statutory Net Worth..................................30
SECTION 5.08. Special Dividend.............................................30
SECTION 5.09. Noncompetition Agreement.....................................31
SECTION 5.10. Other Agreements.............................................32
SECTION 5.11. Cross-Defaults...............................................32
SECTION 5.12. Portfolio Management.........................................32
ARTICLE 6
COVENANTS OF BUYER
SECTION 6.01. Confidentiality..............................................32
SECTION 6.02. Access.......................................................33
SECTION 6.03. Compliance with Section 15 of the 1940 Act...................33
<PAGE> 4
PAGE
ARTICLE 7
COVENANTS OF BUYER AND SELLER
SECTION 7.01. Reasonable Efforts...........................................34
SECTION 7.02. Further Assurances...........................................34
SECTION 7.03. Public Announcements.........................................34
SECTION 7.04. Intercompany Accounts........................................34
SECTION 7.05. Service Marks, Trademarks and Trade Names....................35
SECTION 7.06. Purchase of Mainframe Computer...............................35
SECTION 7.07. Reports......................................................36
SECTION 7.08. Joint Marketing Arrangements.................................36
SECTION 7.09. Post-Closing Review of Minimum Statutory Equity Amount.......36
SECTION 7.10. Certain Transition Arrangements..............................38
ARTICLE 8
TAX MATTERS
SECTION 8.01. Definitions..................................................38
SECTION 8.02. Tax Representations..........................................40
SECTION 8.03. Tax Covenants................................................41
SECTION 8.04. Termination of Existing Tax Sharing Agreements...............44
SECTION 8.05. Tax Sharing..................................................44
SECTION 8.06. Cooperation on Tax Matters...................................44
SECTION 8.07. Indemnification by Seller....................................45
SECTION 8.08. Survival.....................................................47
ARTICLE 9
EMPLOYEES AND EMPLOYEE BENEFITS
SECTION 9.01. Pension Plans................................................47
SECTION 9.02. Individual Account Plans.....................................47
SECTION 9.03. Other Employee Plans and Benefit Arrangements................48
SECTION 9.04. Plans Following the Closing..................................49
SECTION 9.05. Third Party Beneficiaries....................................50
ARTICLE 10
CONDITIONS TO CLOSING
SECTION 10.01. Conditions to Obligations of Buyer and Seller................50
SECTION 10.02. Conditions to Obligation of Buyer............................51
SECTION 10.03. Conditions to Obligation of Seller...........................52
<PAGE> 5
PAGE
ARTICLE 11
SURVIVAL; INDEMNIFICATION
SECTION 11.01. Survival....................................................52
SECTION 11.02. Indemnification.............................................53
SECTION 11.03. Procedures; Exclusivity.....................................55
SECTION 11.04. [CONFIDENTIAL TREATMENT REQUESTED]...........................56
SECTION 11.05. Procedures for Certain Litigation...........................57
SECTION 11.06. Limitation of Indemnification...............................58
ARTICLE 12
TERMINATION
SECTION 12.01. Grounds for Termination.....................................59
SECTION 12.02. Effect of Termination.......................................60
ARTICLE 13
MISCELLANEOUS
SECTION 13.01. Notices.....................................................60
SECTION 13.02. Amendments and Waivers......................................61
SECTION 13.03. Expenses....................................................61
SECTION 13.04. Successors and Assigns......................................61
SECTION 13.05. Governing Law...............................................62
SECTION 13.06. Jurisdiction................................................62
SECTION 13.07. WAIVER OF JURY TRIAL........................................62
SECTION 13.08. Counterparts; Third Party Beneficiaries.....................62
SECTION 13.09. Entire Agreement............................................62
EXHIBITS AND SCHEDULES
Exhibit I Form of Opinion of Robert Rusis, Esq., General Counsel for Seller
Exhibit II Form of Opinion of Shanley & Fisher, P.C., New Jersey Counsel
for Seller
Exhibit III Form of Opinion of Davis Polk & Wardwell, Special Counsel for
Seller
Exhibit IV Form of Opinion of King & Spalding, Special Counsel for Buyer
<PAGE> 6
Schedule 3.01(a) Corporate Existence and Power
Schedule 3.01(b) Certificates of Authority
Schedule 3.01(c) Pending Licenses
Schedule 3.03 Governmental Authorizations of Seller
Schedule 3.04 Non-Contravention
Schedule 3.07 Subsidiaries
Schedule 3.09 Certain Changes
Schedule 3.11 Material Contracts
Schedule 3.12 Litigation
Schedule 3.13 Violations
Schedule 3.15(a) Holding Company Reports
Schedule 3.15(b) Statutory Insurance Statements
Schedule 3.15(b)(iii) Fines and Penalties
Schedule 3.15(d) Reports of Examination
Schedule 3.16 Insurance Business
Schedule 3.17 Employee Plans and Benefit Arrangements
Schedule 3.19 Environmental Matters
Schedule 3.22 Investments; Defaults
Schedule 3.23 Separate Accounts
Schedule 3.24 Funds
Schedule 4.03 Governmental Authorizations of Buyer
Schedule 5.06(a) Computer Services Agreement
Schedule 5.06(b) Form of List of Software Contracts
Schedule 5.09 Noncompetition
Schedule 7.04 Intercompany Accounts
Schedule 7.05 Certain Company Trademarks
Schedule 8.02 Tax Representations
<PAGE> 7
STOCK PURCHASE AGREEMENT
AGREEMENT dated as of February 23, 1997 between Jefferson-Pilot
Corporation, a North Carolina corporation ("Buyer"), and The Chubb
Corporation, a New Jersey corporation ("Seller").
W I T N E S S E T H :
WHEREAS, Seller is the record and beneficial owner of the Shares and
desires to sell the Shares to Buyer, and Buyer desires to purchase the Shares
from Seller, upon the terms and subject to the conditions hereinafter set forth;
The parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions. (a) The following terms, as used herein,
have the following meanings:
"Affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under common control with,
such Person; provided that neither the Company nor any Subsidiary shall be
considered an Affiliate of Seller.
"Balance Sheet" means the unaudited consolidated balance sheet of the
Company and its Subsidiaries as of September 30, 1996 prepared in conformity
with generally accepted accounting principles applied on a consistent basis.
"Balance Sheet Date" means September 30, 1996.
"Benefit Arrangement" means any written employment, severance or
similar contract, arrangement or policy, or any written plan or arrangement
providing for severance benefits, insurance coverage (including any self-insured
arrangements), workers' compensation, disability benefits, supplemental
unemployment benefits, vacation benefits, retirement benefits, deferred
compensation, profit-sharing, bonuses, stock options, equity-based pay, stock
appreciation rights or other forms of incentive compensation or post-retirement
insurance, compensation or benefits that (i) is not an Employee Plan, (ii) is
entered
<PAGE> 8
into or maintained, as the case may be, by Seller or any of its ERISA Affiliates
and (iii) covers any employee or former employee of the Company or any
Subsidiary.
"Capital Accumulation Plan" means the Capital Accumulation Plan of The
Chubb Corporation, Chubb & Son Inc. and Participating Affiliates.
"CASC" means Chubb America Service Corporation, a New Hampshire
corporation.
"Chubb Colonial" means Chubb Colonial Life Insurance Company, a New
Jersey corporation.
"Chubb Life America" is a service mark for the Company, Chubb Colonial
and Chubb Sovereign.
"The Chubb Life Companies" is a service mark for the Company, Chubb
Colonial and Chubb Securities Corporation.
"Chubb Securities Material Adverse Effect" means an event, occurrence
or condition which would prevent Chubb Securities Corporation, a wholly-owned
subsidiary of the Company, from operating its business in the ordinary course.
"Chubb Sovereign" means Chubb Sovereign Life Insurance Company, a
New Hampshire corporation.
"CIAC" means Chubb Investment Advisory Corporation, a Tennessee
corporation.
"Closing Date" means the date of the Closing.
"Company" means Chubb Life Insurance Company of America, a New
Hampshire corporation.
"Defined Contribution Excess Plan" means the Defined Contribution
Excess Benefit Plan of The Chubb Corporation, Federal Insurance Company,
Vigilant Insurance Company and Chubb Life Insurance Company of America.
"Employee Plan" means any "employee benefit plan", as defined in
Section 3(3) of ERISA, that (i) is subject to any provision of ERISA, (ii) is
maintained, administered or contributed to by Seller or any of its ERISA
Affiliates and (iii) covers any employee or former employee of the Company or
any Subsidiary.
<PAGE> 9
"Environmental Laws" shall mean all federal, state, local and foreign
laws, statutes, ordinances, rules, regulations, principles of common law,
orders, decrees, judgments and injunctions relating to pollution, the
environment, natural resources, nuclear power production or Hazardous
Substances.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and any successor statue thereto, and the rules and regulations
promulgated thereunder.
"ERISA Affiliate" of any entity means any other entity which, together
with such entity, would be treated as a single employer under Section 414 of the
Code.
"Excess Pension Plan" means the Pension Excess Benefit Plan of The
Chubb Corporation, Chubb & Son Inc. and Participating Affiliates.
"Hazardous Substances" means any waste, pollutant, hazardous substance,
toxic substance, hazardous waste, special waste, nuclear substance or waste,
radioactive substance or waste, petroleum and petroleum-derived substance or
waste, with respect to any of such items to the extent regulated under, or
defined by, any Environmental Laws.
"HSR Act" means the Hart-Scott Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations promulgated thereunder.
"Individual Account Plans" means the Capital Accumulation Plan and The
Chubb Corporation Employee Stock Ownership Plan.
"Insurance Subsidiaries" means Chubb Colonial and Chubb Sovereign.
"Investment Company" has the meaning assigned to it in the Investment
Company Act of 1940, as amended.
"Investment Contracts" means each contract or agreement, as in effect
on the date hereof, relating to the rendering by CIAC of investment advisory or
management services, including without limitation all sub-advisory services.
"Lien" means, with respect to any property or asset, any mortgage,
lien, pledge, charge, security interest, encumbrance or other adverse claim of
any kind in respect of such property or asset other than (i) Liens arising by
operation of law and in the ordinary course of business, such as mechanics',
carriers' or materialmen's liens (none of which would materially impair or
interfere with the use or operation of such property or asset); (ii) Liens for
Taxes which are either
<PAGE> 10
not delinquent or are being contested in good faith; and (iii) Liens which
secure indebtedness for borrowed money reflected on the Balance Sheet. For the
purposes of this Agreement, a Person shall be deemed to own subject to a Lien
any property or asset which it has acquired or holds subject to the interest of
a vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement relating to such property or asset.
"Material Adverse Effect" means a material adverse effect on the
condition (financial or otherwise), business, assets or results of operations of
the Company and the Subsidiaries, taken as whole.
"Multiemployer Plan" means each Employee Plan that is a multiemployer
plan, as defined in Section 3(37) of ERISA.
"NASD" means the National Association of Securities Dealers.
"NOLHGA" means National Organization of Life and Health Guaranty
Associations.
"PBGC" means the Pension Benefit Guaranty Corporation.
"PLI" means Personal Lines Insurance Brokerage, Inc., a wholly-owned
subsidiary of Seller.
"Pension Plan" means the Pension Plan of The Chubb Corporation, Chubb
& Son Inc. and Participating Affiliates 1985.
"Person" means an individual, corporation, partnership, association,
trust or other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
"Reference Rate" means a rate per annum equal to the prime rate
announced from time to time by Morgan Guaranty Trust Company of New York.
"Release" means any release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leeching or migration into
the indoor or outdoor environment or into or out of any property, including the
movement of Hazardous Substances through or in the air, soil, surface water,
ground water or property.
"Required Jurisdictions" means the jurisdictions set forth on Schedule
3.03 hereto.
<PAGE> 11
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means all of the issued and outstanding shares of the capital
stock of the Company.
"Subsidiary" means each Insurance Subsidiary, CIAC, and each of the
other Subsidiaries listed on Schedule 3.07 hereto.
"Title IV Plan" means an Employee Plan, other than a Multiemployer
Plan, subject to Title IV of ERISA.
"Transferred Employee" means each individual who, as of the Closing
Date, is employed (including persons absent from active service by reason of
illness, short-term disability or leave of absence, whether paid or unpaid) by
the Company or any Subsidiary; provided, that an individual who is employed as
of the Closing Date by the Company or any Subsidiary, but on such date is absent
from active service by reason of short-term disability and subsequently begins
to receive long-term disability benefits under the Seller's long-term disability
plan shall not be considered a Transferred Employee for the period commencing on
the date such individual begins to receive long-term disability benefits under
Seller's long-term disability plan.
(b) Each of the following terms is defined in the Section set forth
opposite such term:
Term Section
- ---- -------
Accounting Referee 8.01
Acquisition Proposal 5.04
Applicable Tax Rate 8.01
Arbiter 7.09(e)
Basket 8.01
Buyer Recitals
Buyer Plan 9.02
Claim Indemnified Parties 11.02(a)
Chubb Trademarks 7.05
Claims 11.05(a)
[CONFIDENTIAL TREATMENT REQUESTED] 11.02(a)(iii)(A)
Closing 2.02
Closing Date Statutory Statements 7.09(a)
Code 8.01
<PAGE> 12
Company Securities 3.05(b)
Company Trademarks 3.29(a)
Computer Services Agreement 5.06(a)
Conversion Date 5.06(a)
Damages 11.02(a)
Direct Rollover 9.02
Disputed Amounts 7.09(e)
Dispute Notice 7.09(e)
Dispute Notice Date 7.09(e)
Employees 8.03(d)
Federal Tax 8.01
Final Arbiter 7.09(e)
Funds 3.24
Geographic Area 5.09(c)
Holding Company Reports 3.15(a)
Indemnifiable Tax 8.01
Indemnified Party 11.03(a)
Indemnifying Party 11.03(a)
Life Insurance Companies 5.09(a)
Loss 8.07(a)
M&R Analysis 3.21
Minimum Statutory Equity Amount 5.07
1940 Act 3.23
Post-Closing Tax Period 8.01
Potential Claim 11.04
Pre-Closing Tax Period 8.01
Price Allocation Schedule 8.03(f)
Producer Plans 3.26(a)
Producers 3.26(a)
Purchase Price 2.01
Referee 11.05(e)
Reinsurance Association Agreement Schedule 3.04
Required Disposition 5.09(a)
Returns 8.02(a)
Scheduled Products 5.09(c)
Section 338 Benefit 8.03(f)
Section 338 Cost 8.03(f)
Section 338(h)(10) Election 8.03(f)
Seller Recitals
Seller Group 8.01
Seller Stock Option 8.03(d)
Separate Accounts 3.23
Software 3.29(b)
<PAGE> 13
Statutory Insurance Statements 3.15(b)
Statutory Financial Statements 3.15(c)
Straddle Period 8.01
Subsidiary Securities 3.07(b)
Tax 8.01
Tax Asset 8.01
Tax Sharing Agreement 8.01
Taxing Authority 8.01
Temporary Difference 8.07(b)
Trademark License Agreement 7.05
Transition Period 5.06
ARTICLE 2
PURCHASE AND SALE
SECTION 2.01. Purchase and Sale. Upon the terms and subject to the
conditions of this Agreement, Seller agrees to sell to Buyer and Buyer agrees to
purchase from Seller, the Shares at the Closing. The purchase price for the
Shares (the "Purchase Price") is $875,000,000 in cash, less any amounts paid by
the Company to Seller in accordance with Section 5.08. If the Closing shall not
have occurred on or before June 30, 1997, interest shall accrue on the Purchase
Price at the Reference Rate from and including July 1, 1997 to, but excluding,
the Closing Date. Such interest shall be calculated daily on the basis of a year
of 365 days and the actual number of days elapsed. The Purchase Price, together
with any accrued interest thereon, shall be paid as provided in Section 2.02.
SECTION 2.02. Closing. The closing (the "Closing") of the purchase and
sale of the Shares hereunder shall take place at the offices of Davis Polk &
Wardwell, 450 Lexington Avenue, New York, New York on the last business day of
the month in which the conditions set forth in Article 10 are satisfied, or at
such other time or place as Buyer and Seller may agree. At the Closing:
(a) Buyer shall deliver to Seller:
(i) the Purchase Price, together with any accrued interest thereon, in
immediately available funds by wire transfer to an account of Seller with a bank
in New York City designated by Seller, by notice to Buyer, not later than two
business days prior to the Closing Date (or if not
<PAGE> 14
so designated, then by certified or official bank check payable in
immediately available funds to the order of Seller in such amount); and
(ii) the opinion, certificates and other documents set forth in
Section 10.03 of this Agreement.
(b) Seller shall deliver to Buyer:
(i) certificates for the Shares duly endorsed or accompanied by stock
powers duly endorsed in blank, with any required transfer stamps
affixed thereto;
(ii) true copies of the articles of incorporation and by-laws of each
of Seller, the Company and the Subsidiaries;
(iii) the complete stock books, stock ledgers, minute books and
corporate seals of the Company and the Subsidiaries and the stock
certificates evidencing ownership of the Subsidiaries;
(iv) the opinions, certificates and other documents set forth in
Section 10.02 of this Agreement; and
(v) resignations of such directors and officers (from their offices
as such) of the Company and the Subsidiaries as Buyer may
request.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer as of the date hereof that:
SECTION 3.01. Corporate Existence and Power. (a) Each of Seller and the
Company is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as now conducted. Except as disclosed on Schedule
3.01(a), the Company is duly qualified to do business as a foreign corporation
and is in good standing in each jurisdiction where such qualification is
necessary, except for those jurisdictions where failure to be so qualified would
not reasonably be expected to have a Material Adverse Effect. Seller has
heretofore made available to Buyer true and complete copies of the certificate
of incorporation and bylaws of Seller and the Company as currently in effect.
The minutes of the Board of Directors', any
<PAGE> 15
investment committees' and stockholders' meetings and the stock books of the
Company and the Subsidiaries, all of which have been previously made available
to Buyer, are the complete and correct records of such Board of Directors',
investment committee's and stockholders' meetings and stock issuances from, in
the case of such minutes, December 31, 1993 through and including the date
hereof and reflect all transactions through and including the date hereof
required to be contained in such records, and all such meetings were duly
called.
(b) Attached hereto as Schedule 3.01(b) is a complete and accurate list
of all jurisdictions where the Company and each of the Insurance Subsidiaries
has written or is qualified to write insurance; a list of all licenses and
permits held by the Company and each of the Insurance Subsidiaries issued by any
insurance authority of any such jurisdiction; and a description of the classes
and lines of businesses the Company and each of the Insurance Subsidiaries is
authorized to write in each jurisdiction. The Company's and each of the
Insurance Subsidiaries' authority to write the classes and lines of insurance
business reflected on said schedule is not restricted in any material respect,
and neither the Company nor any of the Insurance Subsidiaries is a party to any
agreement with any state insurance regulatory official limiting the Company's or
such Insurance Subsidiary's ability to make full use of the licenses or permits
which have been issued to it or requiring the Company and the Insurance
Subsidiaries to comply with regulatory standards, procedures or requirements
different from those applicable to companies with licenses or permits identical
to those issued to the Company or such Insurance Subsidiary. The licenses and
permits listed on Schedule 3.01(b) constitute all licenses and permits material
to the conduct of their business, as it is now conducted and will be conducted
prior to the Closing. Excluding the Company's license in Taiwan, all such
licenses and permits are in full force and effect, and there are no reasonable
grounds to believe that any such license or permit will not, in the ordinary
course, be renewed upon its expiration.
(c) Attached hereto as Schedule 3.01(c) is a complete and accurate list
of all jurisdictions in which the Company or any Insurance Subsidiary currently
has applications for licenses, permits or certificates of authority pending.
Schedule 3.01(c) also sets forth the current status of all such applications.
SECTION 3.02. Corporate Authorization. The execution, delivery and
performance by Seller of this Agreement are within Seller's corporate powers and
have been duly authorized by all necessary corporate action on the part of
Seller. This Agreement constitutes a valid and binding agreement of Seller
enforceable in accordance with its terms, except as (i) the enforceability
hereof may be limited by bankruptcy, insolvency, moratorium or other similar
laws affecting the enforcement of creditors' rights generally and (ii) the
availability of equitable remedies may be limited by equitable principles of
general applicability.
<PAGE> 16
SECTION 3.03. Governmental Authorization. The execution, delivery and
performance by Seller of this Agreement require no action by or in respect of,
or filing with, any governmental body, agency, or official other than (i)
compliance with any applicable requirements of the HSR Act, (ii) the approvals
or non-disapprovals of the Required Jurisdictions, and (iii) any such action or
filing as to which the failure to make or obtain would not reasonably be
expected to have a Material Adverse Effect or a Chubb Securities Material
Adverse Effect.
SECTION 3.04. Non-Contravention. The execution, delivery and
performance by Seller of this Agreement do not and will not (i) violate the
certificate of incorporation or bylaws of Seller or the Company or any
Subsidiary, (ii) assuming compliance with the matters referred to in Section
3.03, violate any applicable law, rule, regulation, judgment, injunction, order
or decree or alter or, except as set forth on Schedule 3.04, impair any license,
franchise, permit or other similar authorization held by Seller or the Company
or any Subsidiary, (iii) except as disclosed on Schedule 3.04, require any
consent or other action by any Person under, constitute a default under, or give
rise to any right of termination, cancellation or acceleration of any right or
obligation of Seller or the Company or any Subsidiary or to a loss of any
benefit to which the Company or any Subsidiary is entitled under, any agreement
or other instrument binding upon Seller or the Company or any Subsidiary or
their properties or assets or (iv) result in the creation or imposition of any
Lien on any asset of the Company or any Subsidiary, except, in the case of
clauses (iii) and (iv), to the extent that any such violation, failure to obtain
any such consent or other action, default, right, loss or Lien would not
reasonably be expected to have a Material Adverse Effect.
SECTION 3.05. Capitalization. (a) The authorized capital stock of the
Company consists of 600,000 shares of common stock, par value $5.00 per share.
As of the date hereof, there are 600,000 shares outstanding.
(b) The Shares have been duly authorized and validly issued and are
fully paid and non-assessable. Except as set forth in this Section 3.05, there
are no outstanding (i) shares of capital stock or voting securities of the
Company, (ii) securities of the Company convertible into or exchangeable for
shares of capital stock or voting securities of the Company or (iii) options or
other rights to acquire from the Company, or other obligation of the Company to
issue, any capital stock, voting securities or securities convertible into or
exchangeable for capital stock or voting securities of the Company (the items in
clauses (i), (ii) and (iii) being referred to collectively as the "Company
Securities"). There are no outstanding obligations of the Company or any
Subsidiary to repurchase, redeem or otherwise acquire any Company Securities.
<PAGE> 17
SECTION 3.06. Ownership of Shares. Seller is the record and beneficial
owner of the Shares, free and clear of any Lien and any other limitation or
restriction (including any restriction on the right to vote, sell or otherwise
dispose of the Shares), and will transfer and deliver to Buyer at the Closing
valid title to the Shares free and clear of any Lien and any such limitation or
restriction.
SECTION 3.07. Subsidiaries. (a) Each Subsidiary is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation, has all corporate power and authority to own,
lease and operate its properties and to carry on its business as now conducted.
Each Subsidiary is duly qualified to do business as a foreign corporation and is
in good standing in each jurisdiction where such qualification is necessary,
except for those jurisdictions where failure to be so qualified would not
reasonably be expected to have a Material Adverse Effect. All Subsidiaries and
their respective jurisdictions of incorporation are identified on Schedule 3.07.
No later than 10 days after the date hereof, Seller shall deliver to Buyer an
amendment to Schedule 3.07 which shall set forth the authorized and outstanding
shares of capital stock of each Subsidiary.
(b) All of the outstanding capital stock of, or other voting securities
or ownership interests in, each Subsidiary, is owned by the Company, directly or
indirectly, free and clear of any Lien and free of any other limitation or
restriction (including any restriction on the right to vote, sell or otherwise
dispose of such capital stock or other voting securities or ownership
interests). There are no outstanding (i) securities of the Company or any
Subsidiary convertible into or exchangeable for shares of capital stock or other
voting securities or ownership interests in any Subsidiary or (ii) options or
other rights to acquire from the Company or any Subsidiary, or other obligation
of the Company or any Subsidiary to issue, any capital stock or other voting
securities or ownership interests in, or any securities convertible into or
exchangeable for any capital stock or other voting securities or ownership
interests in, any Subsidiary (the items in clauses (i) and (ii) being referred
to collectively as the "Subsidiary Securities"). There are no outstanding
obligations of the Company or any Subsidiary to repurchase, redeem or otherwise
acquire any outstanding Subsidiary Securities.
SECTION 3.08. Financial Statements. The audited consolidated balance
sheets of the Company and its Subsidiaries as of December 31, 1994 and December
31, 1995 and the related consolidated statements of income and cash flows for
each of the years ended December 31, 1994 and December 31, 1995 and the Balance
Sheet and the related unaudited consolidated statements of income and cash flows
in the nine months ended September 30, 1996 present fairly, in all material
respects, the consolidated financial position of the Company or any Subsidiary
as of the dates thereof and their consolidated results of operations and
<PAGE> 18
changes in the consolidated financial position for the periods then
ended in conformity with generally accepted accounting principles applied on a
consistent basis, except as set forth in the notes, exhibits or schedules
thereto (subject, in the case of any unaudited statements, to normal year-end
adjustments). Promptly after they become available, but in no event later than
May 15, 1997, Seller will deliver to Buyer audited consolidated balance sheets
of the Company and its Subsidiaries at December 31, 1996 and consolidated
statements of income, cash flows and changes in stockholder's equity for the
year then ended, and the notes thereto, and will deliver as soon as they are
available interim financial statements of the Company and its Subsidiaries as of
the end of each subsequent quarter and for the quarter and year then ended, in
each case prepared in accordance with generally accepted accounting principles
applied on a consistent basis.
SECTION 3.09. Absence of Certain Changes. Since the Balance Sheet Date,
except (i) as disclosed on Schedule 3.09 and (ii) for the transactions
contemplated hereby, the business of the Company and each Subsidiary has been
conducted in the ordinary course consistent with past practices and there has
not been:
(i) any event, occurrence, development or state of circumstances or
facts which has had a Material Adverse Effect or a Chubb
Securities Material Adverse Effect, other than those resulting
from changes in general conditions (including laws and
regulations) applicable to the industry, or general economic
conditions;
(ii) any declaration, setting aside or payment of any dividend or
other distribution with respect to any shares of capital stock of
the Company, or any repurchase, redemption or other acquisition
by the Company or any Subsidiary of any outstanding shares of
capital stock or other securities of, or other material ownership
interests in, the Company or any Subsidiary, or the issuance by
the Company or any Subsidiary of any capital stock or the
issuance or grant by the Company or any Subsidiary of any option,
warrant, call, commitment, subscription, right to purchase or
contract of any character relating to its authorized or issued
capital stock or any securities convertible into, relating to or
based on its capital stock;
(iii) any amendment of the articles of incorporation or by-laws or
similar governing instruments or outstanding security of the
Company or any Subsidiary;
(iv) any incurrence, assumption or guarantee by the Company or any
Subsidiary of any indebtedness for borrowed money in excess of
$100,000;
<PAGE> 19
(v) any creation or assumption by the Company or any Subsidiary of
any Lien on any asset other than in the ordinary course of
business;
(vi) any making of any loan, advance or capital contributions to or
investment of any nature in any Person other than loans, advances
or capital contributions to or investments in wholly-owned
Subsidiaries and portfolio transactions made, in each case, in
the ordinary course of business;
(vii) any reported damage, destruction or other casualty loss affecting
the business or assets of the Company or any Subsidiary which
after giving effect to any applicable insurance payment has had a
Material Adverse Effect;
(viii) any transaction or commitment made, or any contract or agreement
entered into, by the Company or any Subsidiary relating to its
material assets or business (including the acquisition or
disposition of any assets) or any relinquishment by the Company
or any Subsidiary of any contract or other right, in either case,
involving more than $1,000,000 over its noncancellable term,
other than transactions and commitments contemplated by this
Agreement;
(ix) any change in any method of accounting or accounting practice by
the Company or any Subsidiary, except for any such change after
the date hereof required by law or by reason of a concurrent
change in generally accepted accounting principles, or any change
in any actuarial or reserving standard or any change in
depreciation or amortization policies or rates adopted by it;
(x) any (A) employment, deferred compensation, severance, retirement
or other similar agreement entered into with any director or
officer of the Company or any Subsidiary (or any amendment to any
such existing agreement), (B) grant of any severance or
termination pay to any director or officer of the Company or any
Subsidiary, or (C) change in compensation or other benefits
payable to any director or officer of the Company or any
Subsidiary pursuant to any severance or retirement plans or
policies thereof, except for enhanced vesting, if any, relating
to awards outstanding under Seller's Long-Term Stock Incentive
Plans and under the Pension Plan and Individual Account Plans;
provided that no such enhanced vesting shall result in any
liability or obligation to the Company, any Subsidiary or Buyer;
<PAGE> 20
(xi) any labor dispute, other than routine individual grievances, or,
to the knowledge of Seller, any activity or proceeding by a
labor union or representative thereof to organize any employees
of the Company or any Subsidiary, or any lockouts, strikes,
slowdowns, work stoppages or, to the knowledge of Seller, any
threats thereof by or with respect to any employees of the
Company or any Subsidiary;
(xii) except as referenced in subsection (x) of this Section 3.09 and
except for customary wage or salary increases for employees and
customary compensation increases for agents, any increase in the
compensation payable or to become payable to any employee or
agent or any increase in any bonus, insurance, severance,
pension or other Benefit Arrangement or Employee Plan for such
employees or agents or any employment, consulting, severance or
other similar contract entered into, except for (a) at will
employment arrangements and (b) contracts with agents, in each
case entered into in the ordinary course of business consistent
with past practice;
(xiii) any change in its underwriting standards, retention limits or
administrative practices with respect to additions to (new
business) or deletions from (policy terminations) any policy
master files;
(xiv) any change in interest rates credited on life insurance or
annuity policies, except for such changes that the Company deems
reasonably necessary consistent with past practice to respond to
competitive factors;
(xv) any change in systems of internal accounting controls that could
reasonably be expected to increase the risk of a Material
Adverse Effect;
(xvi) any amendment to any form of the contracts with Producers or
Producer Plans referred to in Section 3.26(a);
(xvii) any transaction or commitment made to acquire or dispose of any
real property; or
(xviii) any agreement, understanding or commitment to take any action
described in this Section 3.09.
SECTION 3.10. No Undisclosed Material Liabilities. There are no
liabilities of the Company or any Subsidiary of any kind whatsoever, whether
accrued, contingent, absolute, determined, determinable or otherwise, other
than:
<PAGE> 21
(a) liabilities provided for on the consolidated balance sheet of the
Company and its Subsidiaries dated December 31, 1995, or disclosed in the notes
thereto;
(b) liabilities incurred in the ordinary course of business since
December 31, 1995 that have not had and are not reasonably expected to have a
Material Adverse Effect; and
(c) liabilities or other obligations disclosed in, or related to,
contracts or other matters disclosed in this Agreement or any Schedule to this
Agreement.
SECTION 3.11. Material Contracts. (a) Except as disclosed on Schedule
3.11, and except, in the case of Section 3.11(a)(i), (ii) and (vii), for any
agreements that are terminable on not more than 60 days notice and without the
payment of any penalty by, or any other material consequence to, the Company or
any Subsidiary, neither the Company nor any Subsidiary, to the best of their
knowledge, is a party to or bound by:
(i) any lease not made in the ordinary course of business which
involves payments of more than $150,000 per year or extends
beyond December 31, 1999;
(ii) any agreement for the purchase of materials, supplies, goods,
services, equipment or other assets not made in the ordinary
course of business which individually does not exceed $250,000;
(iii) any agreement relating to indebtedness for borrowed money or the
deferred purchase price of property (in either case, whether
incurred, assumed, guaranteed or secured by any asset), except
any such agreement entered into in the ordinary course of
business with an aggregate outstanding principal amount not
exceeding $25,000;
(iv) any material partnership, joint venture or other similar
agreement or arrangement;
(v) any material agency, dealer, sales representative, marketing or
other similar agreement not made in the ordinary course of
business;
(vi) any material agreement or arrangement with Seller or any of its
Affiliates; or
<PAGE> 22
(vii) any other agreement not made in the ordinary course of business
that is material to the Company and the Subsidiaries taken as a
whole.
(b) Except for agreements which are disclosed as terminable on Schedule
3.11, each agreement disclosed in any Schedule to this Agreement to which the
Company or any Subsidiary is a party is a valid and binding agreement of the
Company or a Subsidiary, as the case may be, and is in full force and effect,
and neither the Company nor any Subsidiary is, nor to the knowledge of Seller is
any other party thereto, in default or breach in any material respect under the
terms of any such agreement, except for such defaults or breaches which would
not reasonably be expected to have a Material Adverse Effect or a Chubb
Securities Material Adverse Effect.
SECTION 3.12. Litigation. Except as set forth on Schedule 3.12, there
is no action, suit, investigation or proceeding pending against, or to the
knowledge of Seller threatened against or affecting, Seller, the Company or any
Subsidiary before any court or arbitrator or any governmental or regulatory
body, agency or official which would reasonably be expected to result in costs
or losses in excess of $100,000 in any single instance against or on behalf of
the Company or any Subsidiary, or any officer, employee or director thereof in
such individual's capacity as officer, employee or director of the Company or
any Subsidiary or involving any of their properties or businesses, whether at
law or in equity. [
CONFIDENTIAL TREATMENT REQUESTED
] Further, except as set forth on Schedule
3.12, there are no outstanding judgments, orders, decrees, stipulations or
awards (whether rendered by a court, administrative agency, or by arbitration,
pursuant to a grievance or other procedures) against or relating to the Company
or any Subsidiary which contain any remaining restrictions or obligations to
perform. There is no pending or, to the best knowledge of the Seller, the
Company and the Subsidiaries, any threatened action, proceeding or investigation
with respect to the Company, any Subsidiary or any other Person which questions
the validity of this Agreement or the transactions contemplated hereby, could
prevent or materially adversely affect any action taken to be taken pursuant
hereto or which could reasonably be expected to result in any revocation,
suspension or limitation of any regulatory authority of the Company or any
Subsidiary.
SECTION 3.13. Compliance with Laws and Court Orders. Except as
disclosed on Schedule 3.13 and 3.15(b)(iii), since December 31, 1993, the
Company and each Subsidiary has complied in all material respects with its
obligation to make all required filings or reports with governmental or
regulatory bodies and has complied in all material respects with all laws,
rules, regulations,
<PAGE> 23
licensing requirements and orders applicable to the Company or such Subsidiary
or the operation of their respective businesses, and there has been no written
assertion received, and no elected officer has received any oral notice, from
any party responsible for the administration or enforcement thereof that the
Company or any Subsidiary has violated any such laws, rules, regulations,
requirements or orders. All filings and reports to governmental or regulatory
authorities have been true, complete and accurate in all material respects. This
Section does not cover any environmental matters, for which Section 3.19 is
solely applicable.
SECTION 3.14. Finders' Fees. Except for Goldman, Sachs & Co., whose
fees will be paid by Seller, there is no investment banker, broker, finder or
other intermediary which has been retained by or is authorized to act on behalf
of Seller or the Company or any Subsidiary who might be entitled to any finder's
fee or commission in connection with the transactions contemplated by this
Agreement.
SECTION 3.15. Insurance Filings. (a) Holding Company Reports. Schedule
3.15(a) contains a true and complete list of all annual holding company reports
("Holding Company Reports") which the Company and each Insurance Subsidiary has
filed with or submitted to the insurance regulatory authorities of New Jersey,
New Hampshire and California (and certain other jurisdictions) since December
31, 1993.
(b) Statutory Insurance Statements. Schedule 3.15(b) contains a true
and complete list of all annual and quarterly statements ("Statutory Insurance
Statements") which the Company and each Insurance Subsidiary has filed (or
caused to be filed) with or submitted to the insurance regulatory authorities of
New Jersey, New Hampshire and California and in each other jurisdiction in which
such company is an admitted insurer since December 31, 1993. Except as indicated
therein or in the reports of examination referred to Section 3.15(d), (i) no
material deficiencies have been asserted to the Company or any such Insurance
Subsidiary by any such regulatory authority with respect to such filings or
submissions; (ii) neither the Company nor any such Insurance Subsidiary has
submitted any response with respect to material comments from such insurance
regulatory authorities concerning such filings, submissions or reports of
examination; (iii) since December 31, 1993 and except as disclosed on Schedule
3.15(b)(iii), no fine or penalty in excess of $500 has been imposed on the
Company or any Insurance Subsidiary by any such insurance regulatory authority;
and (iv) no deposits have been made by the Company or any Insurance Subsidiary
with any such insurance regulatory authority which were not shown in the most
recent annual Statutory Insurance Statement of the Company and each of the
Insurance Subsidiaries. The Company has delivered to Buyer true and complete
copies of the Statutory Insurance Statements.
<PAGE> 24
(c) Statutory Financial Statements. The statutory financial statements
("Statutory Financial Statements") of the Company and of each Insurance
Subsidiary which are included in the Statutory Insurance Statements present
fairly, in all material respects, the statutory financial condition of the
Company and of each Insurance Subsidiary as of the dates thereof and the
statutory results of its operations and other data contained therein for each of
the years then ended in conformity with required or permitted statutory
insurance accounting requirements and practices which have been applied on a
consistent basis, except as set forth in the notes, exhibits or schedules
thereto.
Seller shall deliver to Buyer as soon as they are filed such interim or
annual Statutory Financial Statements that may be required to be filed with any
state departments of insurance on behalf of the Company or any Insurance
Subsidiary, and such Statutory Financial Statements to be delivered hereafter
will present fairly, in all material respects, the statutory financial condition
of the Company and each Insurance Subsidiary as of such date and the statutory
results of operations of the Company and each Insurance Subsidiary for the
period then ended, in accordance with required or permitted statutory insurance
accounting requirements and practices which have been applied on a consistent
basis, except as set forth in the notes, exhibits or schedules thereto.
(d) Reports of Examination. Schedule 3.15(d) contains a true and
complete list of the Reports of Examination as to Condition for the Company and
each Insurance Subsidiary, constituting the most recent National Association of
Insurance Commissioners Zone Examination for the Company and any such Insurance
Subsidiary under applicable insurance laws, true and complete copies of which
have been delivered to Buyer.
(e) Reserves, etc. The amounts shown in the Statutory Insurance
Statements as reserves and liabilities for past and future insurance policy
benefits, losses, claims and expenses under insurance policies as of the end of
each such year were computed in accordance with commonly accepted actuarial
standards consistently applied, were fairly stated in accordance with sound
actuarial principles, were based on actuarial assumptions which were in
accordance with those called for in policy provisions and met the requirements
of the insurance laws of New Jersey, New Hampshire, New York and California, as
applicable, and such amounts shown on the Statutory Insurance Statements filed
after the date hereof and on or prior to the Closing Date will be so computed
and based and will meet all such requirements. No other state has objected to
such Statutory Insurance Statements as filed.
SECTION 3.16. Insurance Business. (a) Reinsurance. All material
contracts, arrangements, treaties and agreements to which the Company or any
<PAGE> 25
Insurance Subsidiary is a party with respect to reinsurance applicable to
insurance in force (including grace periods and other extensions) on the date of
this Agreement, a list of which is included on Schedule 3.16, and all such
material contracts, arrangements, treaties and agreements under which the
Company or any such Insurance Subsidiary has any obligation to cede insurance,
are valid, binding and in full force and effect in accordance with their terms.
To the best knowledge of Seller, the Company is generally in good standing under
its reinsurance agreements with respect to the reporting of business to be ceded
and the timely payment of premiums. Neither the Company nor any Insurance
Subsidiary is, and, to the best knowledge of Seller, no other party thereto is,
in material default of any provision thereof and, except as set forth on
Schedule 3.16, no such material agreement contains any provision providing that
the other party thereto may terminate the same by reason of the transactions
contemplated by this Agreement or any other provision which would be altered or
otherwise become applicable by reason of such transactions.
Except as provided for in the Statutory Financial Statements as of and
for the year ended December 31, 1995, or as set forth on Schedule 3.16, all
reinsurance represented by reinsurance treaties to which the Company or any
Insurance Subsidiary is a party represents an admitted asset or reduction of
loss reserves of the Company or the Insurance Subsidiary in the respective
Statutory Financial Statements and their carrying values have been described in
conformity with statutory accounting principles in accordance with values
described by the National Association of Insurance Commissioners, when
appropriate, consistent with the prior reporting practices of the Company and
the Insurance Subsidiaries. Except as set forth on Schedule 3.16, (i) no consent
from any assuming reinsurer under any of such reinsurance treaties is required
in order for Seller to validly and effectively sell the Shares to Buyer as
provided hereunder, and (ii) the termination of any reinsurance treaty between
or among the Company and any Insurance Subsidiary will not result in adverse tax
consequences to the Company or any Insurance Subsidiary.
(b) Insurance Policy Forms and Rates. Except as set forth on Schedule
3.16, each insurance policy or certificate form, as well as any related
application form, written advertising material and rate or rule currently
marketed by the Company and each Insurance Subsidiary, the use or issuance of
which requires filing or approval, has been appropriately filed, and if
required, approved by the insurance regulatory authorities of New Jersey and New
Hampshire (and any other state in which such policies and forms are required to
be filed). To the knowledge of the Company, all such policies and certificates,
forms, applications, advertising materials and rates or rules are in compliance
in all material respects with all applicable laws and regulations.
<PAGE> 26
(c) No Policy Dividends. Except as set forth on Schedule 3.16, no
provision in any policy in force gives policyholders the right to receive
dividends or distributions on their policies (other than accruals of interest on
cash values or as claim benefits) or otherwise share in the benefits, revenue or
profits of the Company or any Insurance Subsidiary, provided that the practice
in certain instances of making premium refunds based upon group policyholder
loss experience shall not violate the representation contained in this sentence.
Except as set forth on Schedule 3.16, and except as paid in the ordinary course
of business, none of the Insurance Subsidiaries or the Company is liable to pay
commissions upon the renewal of any insurance policy nor is it a party to any
agreement providing for the collection of insurance premiums payable to the
Company or any such Insurance Subsidiary by any other person.
(d) Threats of Cancellation. Except as set forth on Schedule 3.16,
since December 31, 1995, no policyholder or related group of policyholders or
persons or entities producing insurance business which accounted for five
percent or more of the gross income of the Company and the Insurance
Subsidiaries for the year ended December 31, 1995 has or have, at its or their
initiative, terminated or threatened to terminate in writing its or their
relationship with the Company or any such Insurance Subsidiary.
(e) Underwriting Standards. Each of the Company and the Insurance
Subsidiaries have complied in all material respects with its respective
underwriting standards and, with respect to insurance contracts reinsured in
whole or in part, such insurance contracts conform in all material respects to
the standards agreed to with the reinsurer in the related reinsurance,
coinsurance or other similar contracts.
SECTION 3.17. ERISA Representations. (a) Schedule 3.17 identifies each
Employee Plan. Seller has furnished or made available to Buyer copies of the
Employee Plans and all amendments thereto together with (i) the most recent
annual report prepared in connection with any Employee Plan (Form 5500
including, if applicable, Schedule B thereto) and (ii) the most recent actuarial
valuation report prepared in connection with any Employee Plan.
(b) Neither the Seller nor any ERISA Affiliate of Seller has incurred,
or reasonably expects to incur prior to the Closing Date, any liability under
Title IV of ERISA arising in connection with the complete or partial termination
of, or complete or partial withdrawal from, any plan covered or previously
covered by Title IV of ERISA that could become a liability of the Buyer or any
of its ERISA Affiliates after the Closing Date.
(c) Each Employee Plan that is intended to be qualified under Section
401(a) of the Code has received a favorable determination letter from the
Internal
<PAGE> 27
Revenue Service. Each Employee Plan which is not a Multiemployer Plan has been
maintained in substantial compliance with its terms and with the requirements
prescribed by any and all applicable statutes, orders, rules and regulations,
including but not limited to ERISA and the Code. No Employee Plan is a
Multiemployer Plan.
(d) Schedule 3.17 identifies each Benefit Arrangement. Seller has
furnished or made available to Buyer copies or descriptions of each Benefit
Arrangement. Each Benefit Arrangement has been maintained in substantial
compliance with its terms and with the requirements prescribed by any and all
applicable statutes, orders, rules and regulations.
SECTION 3.18. Property. (a) All of the real property owned by the
Company and its Subsidiaries is shown on its Balance Sheet, except with respect
to any acquisitions or dispositions of property since the Balance Sheet Date
that are disclosed on Schedule 3.09, and each of the Company and its
Subsidiaries has good and marketable title to all such real property, and to
such personal property (other than leased property referred to in Section
3.18(b)) as is necessary to conduct its business as presently conducted, free
and clear of any Lien, covenant or other restriction which would materially and
adversely affect the Company's or any of its Subsidiaries' ability to conduct
their respective business as such business is currently conducted.
(b) Each of the Company and its Subsidiaries has the right to use and
possess all property currently leased to it, with such rights being evidenced by
valid and enforceable leases.
(c) Except for the equipment described in Section 7.06 and the
computer software referred to in Section 5.06(b), all of the personal property
necessary for the Company and each of the Subsidiaries to conduct its business
as presently conducted is under the possession or control of the Company or such
Subsidiary.
SECTION 3.19. Environmental Matters. Except as set forth on Schedule
3.19:
(a) The Company and the Subsidiaries are in compliance in all material
respects with all Environmental Laws.
(b) With respect to any properties owned, leased or operated by the
Company or any Subsidiary, to the knowledge of the Seller, the Company and the
Subsidiaries there has been no Release or threatened Release of Hazardous
Substances in violation of Environmental Laws that would reasonably be expected
to result in a Material Adverse Effect.
<PAGE> 28
(c) Neither the Company nor any Subsidiary has received any claim,
notice or advice from a Person (i) asserting that the Company or the
Subsidiaries are or may be liable for (A) personal injury, (B) property damage
or (C) cleaning up Hazardous Substances on, under, in or migrating from such
properties, in each case arising under Environmental Laws or (ii) that (A)
Hazardous Substances are or may be migrating onto or under such properties or
(B) such properties are or may be subject to any environmental investigation or
evaluation by any Person.
SECTION 3.20. Guaranty Fund Assessments. Each of the Company and the
Insurance Subsidiaries has fully reserved in its respective Statutory Financial
Statements as of and for the nine months ended September 30, 1996 for any
present or future guaranty fund assessments, up to the amount reserved for in
accordance with the calculations of NOLHGA, relating to any rehabilitation,
conservatorship or insolvency known to exist as of the date hereof, as reported
by the most recent NOLHGA survey dated April 1, 1996.
SECTION 3.21. Actuarial Analysis. Seller has delivered to Buyer a true
and complete copy of the Actuarial Evaluation Report of Milliman & Robertson,
Inc. as of September 30, 1996, the Roll Forward Analysis as of February 10,
1997, and any other information prepared by Milliman & Robertson and generally
made available to prospective purchasers of the Company (the "M&R Analysis").
The information furnished to Milliman & Robertson, Inc. in connection with the
preparation of the M&R Analysis was accurate in all material respects; provided
that no representation or warranty is made with respect to projections of future
economic events, future expenses, new business production levels or future
management actions. The assumptions utilized in making such projections were
arrived at in good faith and Seller believes that they were reasonable when
made.
SECTION 3.22. Investments; Defaults. Seller has previously delivered to
Buyer a complete list of all investments owned, directly or indirectly, by the
Company and the Subsidiaries as of December 31, 1996. Schedule 3.22 also
contains a list of all bankruptcies, restructured assets, nonperforming assets,
foreclosures and defaults known to the Seller, the Company or any of the
Subsidiaries with respect to the investments as of December 31, 1996. Except as
set forth on Schedule 3.22, no liability will inure to the Company or any
Subsidiary under any ISDA Master Swap Agreement to which the Company or any
Subsidiary is a party as a result of the transactions contemplated by this
Agreement.
SECTION 3.23. Separate Accounts. Each separate account maintained by
the Company or an Insurance Subsidiary is listed on Schedule 3.23 (collectively,
the "Separate Accounts"). Each Separate Account is duly and validly established
<PAGE> 29
and maintained under the laws of its state of formation and is either excluded
from the definition of an investment company pursuant to Section 3(c)(11) of the
Investment Company Act of 1940, as amended (the "1940 Act") or is duly
registered as an investment company under the 1940 Act. Each such Separate
Account, if registered, is operated in compliance in all material respects with
the 1940 Act, has filed all reports and amendments of its registration statement
required to be filed, has filed all annual reports on Form N-SAR with the SEC,
has filed all notices, including Form 24f-2, and paid all fees in connection
with shares or units sold, and has been granted all exemptive relief necessary
for its operations as presently conducted. The insurance contracts under which
the Separate Account assets are held are duly and validly issued and are either
exempt from registration under the Securities Act pursuant to Section 3(a)(2) of
the Securities Act or were sold pursuant to an effective registration statement
under the Securities Act, and any such registration statement is currently in
effect to the extent necessary to allow the appropriate Company or Insurance
Subsidiary to receive contributions under such policies.
SECTION 3.24. Funds. Each of the mutual funds presently sponsored or
intended to be sponsored by the Company or an Insurance Subsidiary is listed on
Schedule 3.24 (the "Funds"). Except as listed on Schedule 3.24, (i) each Fund is
or will be duly registered with the SEC as an open-end management investment
company under the 1940 Act, (ii) each Fund is or will be in material compliance
with the 1940 Act and the SEC regulations promulgated thereunder, including the
requirements to file semi-annual or annual reports on N-SAR with the SEC, (iii)
all shares of the Funds are or will be duly registered under the Securities Act
and any applicable state securities law, and (iv) each of the Funds is or will
be duly incorporated and in good standing under the laws of the state of its
incorporation or is or will be a validly existing business trust under the laws
of the jurisdiction in which it was formed.
SECTION 3.25. Employees and Compensation. (a) Each of the Company and
the Subsidiaries has complied in all material respects with all applicable
rules, laws and regulations concerning wages, bonuses, discrimination in
employment, disabilities, family and medical leave, immigration, wrongful
termination, worker's compensation for injury or sickness, collective
bargaining, OSHA and other employment matters and made, in a timely manner,
true, complete and accurate filings (in all material respects) required in
connection therewith by any federal, state or local governmental unit or agency.
Except for items 9, 12 and 13 of Schedule 3.09, there are no employment
contracts with any employee of the Company or any Subsidiary and the employment
of each employee of the Company and the Subsidiaries is terminable at will by
the Company and the Subsidiaries without restriction, penalty or payment of any
kind, other than payments with respect to liabilities reflected on the financial
statements of the
<PAGE> 30
Company and the Subsidiaries as of and for the year ended December 31, 1995 and
for services actually performed, non-material payments for accrued benefits and
the severance plan referred to on Schedule 3.17 or as may be provided for under
federal, state or local laws, rules or regulations.
(b) The employees of the Company and the Subsidiaries are not
represented by a labor organization, none of the Company or the Subsidiaries is
a signatory to a collective bargaining agreement with any labor organization, no
union claims to represent any such employees and, to the best knowledge of
Seller, no union organizing effort is or within the last three years has been
underway involving employees of the Company or any Subsidiary.
SECTION 3.26. Producers for the Company and the Insurance Subsidiaries.
(a) Seller has provided to Buyer true, accurate and complete copies of the forms
of all agreements, including all amendments or modifications thereof since
December 31, 1993, with agents, brokers or others that have the authority to
generate business for the Company or any of the Insurance Subsidiaries,
including the authority to bind the Company or a Subsidiary to a contract for
insurance (the "Producers"). Items 28-32, 34, 37-42 and 49 of Schedule 3.11
constitute a list of all other plans, programs and practices, whether written or
oral, maintained or contributed to by the Company or any Insurance Subsidiary in
effect as of the date hereof which presently provide or are reasonably likely to
provide in the future benefits or compensation in excess of $25,000 individually
to or on behalf of Producers or former Producers of the Company or any Insurance
Subsidiary (excluding any promotional contests for Producers as to which the
aggregate amounts payable thereunder do not exceed $100,000) ("Producer Plans"),
copies of which have previously been furnished to Buyer. Except as set forth in
the forms and in the items referred to in the preceding sentence, each such
Producer Plan may be terminated within 90 days of the giving of notice without
any liability whatsoever to any person whomsoever except payment to or on behalf
of any Producers or former Producers (other than commissions accrued prior to
such termination and vested renewals) of an amount less than or equal to $25,000
or, in the aggregate for all such Producers or former Producers, of an amount
less than or equal to $250,000.
(b) To the best knowledge of Seller, the Company and the Subsidiaries
there is no, and since the Balance Sheet Date there has not been any, condition
or state of fact (excluding the transactions contemplated by this Agreement and
external political and economic conditions) which is reasonably likely to affect
the Company's and the Subsidiaries' relations with the Producers in a manner
which would have a Material Adverse Effect, and no Producer or group of
Producers, the loss of whom would have a Material Adverse Effect, has notified
the Company or any Subsidiary since the Balance Sheet Date of his or their
intent to (i) terminate
<PAGE> 31
his or their relationship with the Company or any Subsidiary or (ii) make any
demand for material payments or modifications of his or their arrangements with
the Company or any Insurance Subsidiary.
SECTION 3.27. Insurance. The Company and the Subsidiaries have been and
are insured by licensed insurers with respect to their properties and the
conduct of their business in such amounts and against such risks as are
reasonable in relation to their business, and the Company will use commercially
reasonable efforts to maintain such insurance in force at least through the
Closing Date.
SECTION 3.28. Full Disclosure. There is no fact or condition known to
senior management of Seller, the Company or any Subsidiary which has not been
disclosed to Buyer in writing which has had a Material Adverse Effect or to the
knowledge of senior management of Seller, the Company or any Subsidiary could
reasonably be expected to have a Material Adverse Effect.
SECTION 3.29. Company Trademarks; Software. (a) Schedule 7.05 sets
forth a complete and accurate list of all material trademarks, trade names and
applications therefor, other than the Chubb Trademarks (as defined in Section
7.05), owned by the Company or any Subsidiary (collectively, the "Company
Trademarks"). The Company Trademarks are free of any Liens and are all those
which are necessary to the conduct of the business of the Company as now
conducted other than the Chubb Trademarks. None of the Company Trademarks are
licensed to the Company by a third party. The Company Trademarks and the Chubb
Trademarks are not the subject of any pending or, to the knowledge of Seller,
threatened litigation. The consummation of the transactions contemplated by this
Agreement will not result in the loss or impairment of any of the Company
Trademarks or result in any requirement of new or additional royalties,
licensing fees, relicensing fees or other expenses. Neither the Seller, the
Company nor any Subsidiary knows of any use by others of the Company Trademarks.
(b) The Company and its Subsidiaries have valid and enforceable rights
to use all the computer software necessary for the operation of their business
as currently conducted (the "Software"). The transfer of ownership of the
Company and the Subsidiaries contemplated by this Agreement will not limit or
impair the rights of the Company and its Subsidiaries to use material Software
owned or directly licensed by the Company and its Subsidiaries.
.
<PAGE> 32
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as of the date hereof that:
SECTION 4.01. Corporate Existence and Power. Buyer is a corporation
duly incorporated, validly existing and in good standing under the laws of North
Carolina and has all corporate powers and all material governmental licenses,
authorizations, permits, consents and approvals required to carry on its
business as now conducted, except for those licenses, authorizations, permits,
consents and approvals the absence of which would not, individually or in the
aggregate, have an adverse effect on Buyer's ability to consummate the
transactions contemplated hereby.
SECTION 4.02. Corporate Authorization. The execution, delivery and
performance by Buyer of this Agreement are within the corporate powers of Buyer
and, except for any required approval by Buyer's stockholders, have been duly
authorized by all necessary corporate action on the part of Buyer. This
Agreement constitutes a valid and binding agreement of Buyer enforceable in
accordance with its terms, except as (i) the enforceability hereof may be
limited by bankruptcy, insolvency, moratorium or other similar laws affecting
the enforcement of creditors' rights generally and (ii) the availability of
equitable remedies may be limited by equitable principles of general
applicability.
SECTION 4.03. Governmental Authorization. The execution, delivery and
performance by Buyer of this Agreement require no action by or in respect of, or
filing with, any governmental body, agency or official other than (i) compliance
with any applicable requirements of the HSR Act, (ii) the approvals or non-
disapprovals set forth on Schedule 4.03, and (iii) any such action or filing as
to which the failure to make or obtain would not, individually or in the
aggregate, have an adverse effect on Buyer's ability to consummate the
transactions contemplated hereby.
SECTION 4.04. Non-Contravention. The execution, delivery and
performance by Buyer of this Agreement do not and will not (i) violate the
certificate of incorporation or bylaws of Buyer, (ii) assuming compliance with
the matters referred to in Section 4.03, violate any applicable law, rule,
regulation, judgment, injunction, order or decree or any license, franchise,
permit or other similar authorization held by Buyer or (iii) require any consent
or other action by any Person under, constitute a default under, or give rise to
any right of termination, cancellation or acceleration of any right or
obligation of Buyer under, any agreement or other instrument binding upon Buyer
or its properties or assets, except, in the case of clauses (ii) and (iii), to
the extent that any such violation,
<PAGE> 33
failure to obtain any such consent or other action, default, right or loss would
not reasonably be expected to have an adverse effect on Buyer's ability to
consummate the transactions contemplated hereby.
SECTION 4.05. Purchase for Investment. Buyer is purchasing the Shares
for investment for its own account and not with a view to, or for sale in
connection with, any distribution thereof. Buyer (either alone or together with
its advisors) has sufficient knowledge and experience in financial and business
matters so as to be capable of evaluating the merits and risks of its
investments in the Shares and is capable of bearing the economic risks of such
investment.
SECTION 4.06. Litigation. There is no action, suit, investigation or
proceeding pending against, or to the knowledge of Buyer threatened against or
affecting, Buyer before any court or arbitrator or any governmental body, agency
or official which in any manner challenges or seeks to prevent, enjoin, alter or
materially delay the transactions contemplated by this Agreement.
SECTION 4.07. Finders' Fees. Except for Morgan Stanley & Co.
Incorporated whose fees will be paid by Buyer, there is no investment banker,
broker, finder or other intermediary which has been retained by or is authorized
to act on behalf of Buyer who might be entitled to any fee or commission from
Seller or any of its Affiliates upon consummation of the transactions
contemplated by this Agreement.
SECTION 4.08. Financing. Buyer has, or will have prior to the Closing,
sufficient cash, available lines of credit or other sources of immediately
available funds to enable it to make payment of the Purchase Price and any other
amounts to be paid by it hereunder.
ARTICLE 5
COVENANTS OF SELLER
Seller agrees that:
SECTION 5.01. Conduct of the Company. From the date hereof until the
Closing Date, except for the transactions contemplated hereby, Seller shall
cause the Company and each of its Subsidiaries to conduct their business in the
ordinary course and to use commercially reasonable efforts to preserve intact
their business organizations and relationships with third parties and to keep
available the services of its present officers and employees. Without limiting
the generality of the foregoing, from the date hereof until the Closing Date,
Seller will not permit the
<PAGE> 34
Company or any Subsidiary to adopt or propose any change to its certificate of
incorporation or bylaws. Except as otherwise agreed to by Buyer, Seller will
not, and will not permit the Company or any Subsidiary to, take any action the
effect of which would prevent any representation and warranty of Seller
hereunder from being accurate in any material respect at the Closing Date.
SECTION 5.02. Access to Information. From the date hereof until the
Closing Date, Seller will (i) give, and will cause the Company and each
Subsidiary to give, Buyer, its counsel, financial advisors, auditors and other
authorized representatives access during normal working hours to the offices,
properties, books and records of the Company and each Subsidiary, (ii) furnish,
and will cause the Company and each Subsidiary to furnish, to Buyer, its
counsel, financial advisors, auditors and other authorized representatives such
available financial and operating data and other information relating to the
Company or any Subsidiary as such Persons may reasonably request and (iii)
instruct the employees, counsel and financial advisors of Seller, Company and
the Subsidiaries to cooperate with Buyer in its investigation of the Company or
any Subsidiary. Notwithstanding the foregoing, Buyer shall not have access to
personnel records of the Company or any Subsidiary relating to: individual
performance or evaluation records, medical histories or other information, in
each such case which in Seller's good faith opinion is sensitive or the
disclosure of which could subject Seller to risk of liability.
SECTION 5.03. Notices of Certain Events. Seller shall promptly notify
Buyer of:
(i) any notice or other communication from any Person alleging that
the consent of such Person is or may be required in connection
with the transactions contemplated by this Agreement;
(ii) any notice or other communication from any governmental or
regulatory agency or authority in connection with the
transactions contemplated by this Agreement;
(iii) any actions, suits, claims, investigations or proceedings
commenced or, to its knowledge, threatened against, relating to
or involving or otherwise affecting Seller, the Company or any
Subsidiary that, if pending on the date of this Agreement would
have been required to have been disclosed pursuant to Section
3.12 or that relate to the consummation of the transactions
contemplated by this Agreement; and
<PAGE> 35
(iv) notices of investigations, proceedings or regulatory actions
instituted or to be instituted against the Company or any
Subsidiary by governmental or regulatory agencies or
authorities.
SECTION 5.04. Other Offers. From the date hereof until the termination
of this Agreement or the Closing Date, whichever first occurs, Seller will not,
will cause the Company and the Subsidiaries not to, and will use its best
efforts to cause the officers, directors, employees or other agents of the
Seller, the Company and the Subsidiaries not to, directly or indirectly, (i)
take any action to solicit or initiate any offer or indication of interest from
any person with respect to any Acquisition Proposal (as hereinafter defined) or
(ii) engage in negotiations with or disclose any nonpublic information relating
to the Company or the Subsidiaries or afford access to the properties, books or
records of the Company or the Subsidiaries to any person that may be considering
making, or has made, an offer with respect to an Acquisition Proposal. For
purposes hereof, "Acquisition Proposal" means any proposal for a merger or other
business combination involving the Company or the Subsidiaries or the
acquisition of any equity interest in, or a substantial portion of the assets
of, the Company or any Subsidiary, other than the transactions contemplated by
this Agreement. Seller will, and will cause the Company to, terminate any
existing discussions or negotiations with any person (other than Buyer) relating
to any Acquisition Proposal.
SECTION 5.05. Non-Solicitation. Until [CONFIDENTIAL TREATMENT
REQUESTED], Seller agrees that, without the prior written consent of Buyer,
neither Seller nor any of its Affiliates will hire, or solicit to hire, any
Producers (only with respect to the Scheduled Products), officers, directors or
other employees of the Company or any Subsidiary; provided that Seller shall not
be prohibited from hiring or soliciting to hire (i) individuals whose employment
is terminated by the Company or any Subsidiary after the Closing Date and (ii)
any clerical or other individuals who are not officers and who respond to any
general solicitation.
SECTION 5.06. Computer Services and Software. (a) On or before the
Closing Date, Seller, for itself and on behalf of its Affiliates, shall enter
into a computer services agreement with the Company (the "Computer Services
Agreement") for the services and on the terms set forth on Schedule 5.06(a). The
Computer Services Agreement shall have a term of 12 months from the Closing Date
(subject to earlier termination at the sole option of Buyer upon 90 days prior
written notice, with the termination date of the Computer Services Agreement
being deemed the "Conversion Date").
(b) During the period beginning on the Closing Date and ending on the
Conversion Date (the "Transition Period"), Seller shall make available for use
by the Company and its Subsidiaries any Software not owned or directly licensed
by
<PAGE> 36
the Company and its Subsidiaries (other than the Software licensed pursuant to
the contract (x) with SunGard Corporation listed on Schedule 3.11 and (y)
referred to in Item 35 of Schedule 3.04). Seller shall (i)(A) obtain the
necessary consents to make such Software available in accordance with the
preceding sentence and (B) assign the licenses for such Software, or otherwise
obtain the benefit of use of such Software, for the Company and its Subsidiaries
following the Conversion Date (or, in each case, provide alternative software
which will permit the Company and its Subsidiaries to continue to operate their
business as currently conducted), and (ii) pay any costs, fees and expenses
incurred in connection therewith; provided, however, that any on-going,
periodic, or usage fees or royalties payable in connection with the use of such
Software by the Company or its Subsidiaries shall be paid by the Company or its
Subsidiaries. In the event that any Software licensed by the Company would
terminate as a result of the transactions contemplated by this Agreement, Seller
shall cause the Company to obtain any consents necessary to make such Software
available for use by the Company and its Subsidiaries during the Transition
Period or otherwise provide alternative Software which will permit the Company
and its Subsidiaries to continue to operate their business as currently
conducted.
(c) Seller shall deliver to Buyer, no later than sixty days following
the date hereof, a complete and accurate list, in the form of Schedule 5.06(b),
of all Software, which list shall indicate whether such Software is owned or
licensed directly by the Company or its Subsidiaries, together with copies of
all contracts relating thereto.
SECTION 5.07. Minimum Statutory Net Worth. Seller shall cause the sum
of the amount of the aggregate capital and surplus of the Company and the
aggregate asset valuation reserves and interest maintenance reserves of the
Company and the Insurance Subsidiaries at the Closing Date to be not less than
the sum of [CONFIDENTIAL TREATMENT REQUESTED], minus the amount of any special
dividend paid to Seller as contemplated by Section 5.08 (the "Minimum Statutory
Equity Amount").
SECTION 5.08. Special Dividend. Seller shall use commercially
reasonable efforts to cause the Company to declare and pay the maximum approved
special dividend to Seller, in an amount not exceeding $100,000,000, immediately
prior to Closing. Seller and Buyer shall cooperate (i) to seek any regulatory
approval which may be required for the payment of any such dividend (including
the payment of any dividend from the Insurance Subsidiaries), and (ii) to
identify mutually agreed upon U.S. government obligations which the Company or
its Subsidiaries shall sell in order to facilitate the payment of the special
dividend described in this Section 5.08. The Purchase Price (calculated prior to
the accrual
<PAGE> 37
of any interest thereon) shall be reduced by the amount of any dividend paid to
Seller pursuant to this Section 5.08.
SECTION 5.09. Noncompetition Agreement. [
CONFIDENTIAL TREATMENT REQUESTED
.
]
<PAGE> 38
[
CONFIDENTIAL TREATMENT REQUESTED
]
SECTION 5.10. Other Agreements. Except as otherwise provided in this
Agreement, Seller hereby agrees to assume and be responsible for any obligation
or liability relating to, arising under, or based upon (a) any contract or
agreement that Schedule 3.11 to this Agreement indicates may be terminated (or
amended to exclude the Company and the Subsidiaries) by Seller or its Affiliates
which is in fact terminated or so amended and (b) the agreements identified in
Item 19 of Schedule 3.11 to this Agreement.
SECTION 5.11. Cross-Defaults. Seller shall cause any contract or other
arrangement of the Company or any of its Subsidiaries which is subject to a
cross- default arising from any performance obligation of Seller or any of its
Affiliates (not including the Company or any of the Subsidiaries) to be
terminated or amended to remove any such cross-default provision prior to the
Closing Date, and Seller shall protect the Company and each Subsidiary from any
cost or charge to the Company or any Subsidiary resulting from such termination
or amendment.
SECTION 5.12. Portfolio Management. Seller agrees that with respect to
the investment portfolios of the Company and each Subsidiary it will cause the
Company and each Subsidiary to attempt to minimize the incurrence of capital
gains and, to the extent reasonably practicable, if capital gains are incurred,
to offset such gains with capital losses, it being understood that the
responsibility for management of the investment portfolios shall reside with the
Company and each Subsidiary.
ARTICLE 6
COVENANTS OF BUYER
Buyer agrees that:
SECTION 6.01. Confidentiality. Prior to the Closing Date and after any
termination of this Agreement, Buyer and its Affiliates will hold, and will use
their best efforts to cause their respective officers, directors, employees,
accountants, counsel, consultants, advisors and agents to hold, in confidence,
unless compelled to disclose by judicial or administrative process or by other
requirements of law, all confidential documents and information concerning the
Company or any Affiliate or Subsidiary furnished to Buyer or its Affiliates in
connection with the transactions contemplated by this Agreement, except to the
extent that
<PAGE> 39
such information can be shown to have been (i) previously known on a
nonconfidential basis by Buyer, provided that such information is not known by
Buyer to be subject to another confidentiality agreement with or other
obligation of secrecy to the Seller or the Company or any Subsidiary or any
other party, or (ii) becomes generally available to the public other than as a
result of a disclosure by Buyer or its directors, officers, employees, agents or
advisors, or (iii) becomes available to Buyer on a non-confidential basis from a
source other than the Seller or the Company or any Subsidiary or their advisors,
provided that such source is not known by Buyer to be bound by a confidentiality
agreement with or other obligation of secrecy to the Seller or the Company or
any Subsidiary or any other party. Buyer shall be responsible for any breach of
this Section 6.01 by any Persons to whom Buyer discloses any of the confidential
information which is subject to this Section. If this Agreement is terminated,
Buyer and its Affiliates will, and will use their best efforts to cause their
respective officers, directors, employees, accountants, counsel, consultants,
advisors and agents to, destroy or deliver to Seller, upon request, all
documents and other materials, and all copies thereof, obtained by Buyer or its
Affiliates or on their behalf from Seller or the Company or any Subsidiary in
connection with this Agreement that are subject to such confidence.
SECTION 6.02. Access. Buyer will cause the Company and each Subsidiary,
on and after the Closing Date, to afford promptly to Seller and its agents
reasonable access to their properties, books, records, employees and auditors to
the extent necessary to permit Seller to determine any matter relating to its
rights and obligations hereunder or to any period ending on or before the
Closing Date. To the extent necessary or helpful in connection with any tax or
other matters relating to any period ending on or before the Closing Date, Buyer
will furnish to Seller or permit the Seller and its agents to inspect and copy
all books and records of the Company and its Subsidiaries which relate to any
period prior to the Closing Date. Seller will hold, and will use its best
efforts to cause its officers, directors, employees, accountants, counsel,
consultants, advisors and agents to hold, in confidence, unless compelled to
disclose by an order of a court of final jurisdiction, all confidential
documents and information concerning the Company or any Subsidiary provided to
it pursuant to this Section.
SECTION 6.03. Compliance with Section 15 of the 1940 Act. Buyer
acknowledges that the Seller has entered into this Agreement in reliance upon
the benefits and protections provided by Section 15(f) of the 1940 Act. Buyer
agrees that Buyer (including its Affiliates) (i) shall not take any action that
would have the effect of causing Section 15(f) of the 1940 Act not to be met in
respect of this Agreement and the transactions contemplated hereby, and (ii)
shall not fail to take any action if the failure to take such action would have
the effect of causing
<PAGE> 40
Section 15(f) of the 1940 Act not to be met in respect of this Agreement and the
transactions contemplated hereby.
ARTICLE 7
COVENANTS OF BUYER AND SELLER
Buyer and Seller agree that:
SECTION 7.01. Reasonable Efforts. Subject to the terms and conditions
of this Agreement, Buyer and Seller will use commercially reasonable efforts to
take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary or desirable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement including, without
limitation, (i) the obtaining of the approval or non-disapproval of the
Insurance Departments of the Required Jurisdictions and those set forth on
Schedule 4.03, (ii) the obtaining of the consents required under Items 1, 2 and
3 of Schedule 3.04 and, in connection therewith, consents to the election of
designees of Buyer as directors of the Funds or, with respect to Item 1 of such
Schedule, new Investment Contracts substantially in the form of CIAC's existing
Investment Contracts, with each Investment Company to which CIAC currently
provides investment advisory or management services and (iii) the compliance
with the filing and waiting period requirements of the HSR Act.
SECTION 7.02. Further Assurances. Seller and Buyer agree, and Seller,
prior to the Closing, and Buyer, after the Closing, agree to cause the Company
and each Subsidiary, to execute and deliver such other documents, certificates,
agreements and other writings and to take such other actions as may be necessary
or desirable in order to consummate or implement expeditiously the transactions
contemplated by this Agreement.
SECTION 7.03. Public Announcements. The parties agree to consult with
each other before issuing any press release or making any public statement with
respect to this Agreement or the transactions contemplated hereby and, except as
may be required by applicable law or any listing agreement with any national
securities exchange, will not issue any such press release or make any such
public statement prior to such consultation.
SECTION 7.04. Intercompany Accounts. All intercompany accounts between
the Seller or its Affiliates, on the one hand, and the Company or any
Subsidiary, on the other hand, as of the Closing shall be settled in accordance
with their terms or in the ordinary course consistent with past practice, as the
case may
<PAGE> 41
be, in the categories listed on Schedule 7.04 (which represent estimates of any
amounts outstanding as of December 31, 1996). From the date hereof through the
Closing Date, any changes in such accounts shall only be made in the ordinary
course of business consistent with past practice.
SECTION 7.05. Service Marks, Trademarks and Trade Names. On or prior to
the Closing Date, Seller shall cause the Company to take such action as is
necessary to cause all rights, including ownership and registration of any
trademark, trade name, service mark, logo design or other identifying mark or
symbol utilizing the stylized letter "C" or the name "Chubb" (collectively the
"Chubb Trademarks") to be conveyed and assigned to Seller, and Seller shall take
such action as is necessary to ensure that the ownership of and rights relating
to the trademarks listed on Schedule 7.05 shall remain with the Company and that
such trademarks shall be available for use by Buyer, the Company and its
Subsidiaries following the Closing Date. On or prior to the Closing Date, Seller
shall execute a royalty-free license (the "Trademark License Agreement") with
the Company to permit the Company and the Subsidiaries to continue to use any of
the Chubb Trademarks currently in use in the conduct of their businesses,
including but not limited to, the use of any contract materials, signs or policy
forms which contain any Chubb Trademarks, for a period of up to one year
following the Closing Date. As promptly as practicable following the Closing
Date, Buyer shall cause the Company and the Subsidiaries to take such action as
is necessary, including seeking all requisite regulatory and shareholder
approvals, to change, by deleting the name "Chubb" or the stylized letter "C"
therefrom, the product names, marketing materials, policy forms and materials
that utilize such name or stylized letter, and to cause the name "Chubb" to be
deleted from its name, from the name of each Subsidiary and from the name Chubb
America Fund, Inc. and Chubb Investment Funds, Inc.
SECTION 7.06. Purchase of Mainframe Computer. On the Closing Date,
Buyer shall purchase from Seller or its Affiliate, the mainframe computer and
all peripheral equipment (including without limitation tape and disk storage
units and all communications hardware) that is currently being utilized in
connection with the business of the Company and the Subsidiaries located in
Branchburg, New Jersey, which serves as the sole mainframe computer supporting
the Company's insurance operations, at a purchase price in an amount equal to
the average between its depreciated book value and its fair market value at the
Closing Date. The fair market value as of the Closing Date of the computer and
related equipment hereunder shall be agreed upon by Buyer and Seller as of a
date not later than the fifth business day preceding the Closing Date. If Buyer
and Seller do not reach such agreement, then Buyer and Seller shall jointly
select a third party expert to promptly make such fair market value
determination, which will be binding upon the parties. The purchase price of the
computer and the related
<PAGE> 42
equipment shall be paid on the Closing Date by wire transfer of immediately
available funds to an account designated in writing by Seller or its Affiliate.
Promptly after the Conversion Date, Buyer shall provide for the removal of the
mainframe computer from the Branchburg location.
SECTION 7.07. Reports. The Company shall from time to time furnish to
Buyer, promptly following the receipt by senior management of the Company or any
Subsidiaries (i) copies of all monthly management reports prepared for senior
management of the Company or any Subsidiary, (ii) copies of all monthly
financial statements and reports, and (iii) a copy of any report filed with any
insurance regulatory authority, which in each such case, shall be prepared in a
manner consistent with past practice.
SECTION 7.08. Joint Marketing Arrangements. Seller and Buyer each agree
that it will negotiate in good faith to develop and enter into a mutually
beneficial marketing arrangement that will make available to Buyer, the Company
and the Insurance Subsidiaries after the Closing Date, the property and casualty
agency distribution and bank distribution channels of Seller, including without
limitation the continued marketing of life insurance products through the
general agencies recruited by Seller prior to the date hereof.
SECTION 7.09. Post-Closing Review of Minimum Statutory Equity Amount.
(a) As soon as practicable, but in any event within 90 calendar days following
the Closing Date, the Company shall prepare and deliver to Seller and Buyer the
statements of assets, liabilities, surplus and other funds and summary of
operations and cash flows of the Company and each of the Insurance Subsidiaries
as of, and for the period beginning January 1, 1997 and ending on, the Closing
Date (or the most recent end of a month if the Closing Date is not the last
business day of a month) (the "Closing Date Statutory Statements"), which shall
be prepared in conformity with statutory insurance accounting requirements and
practices, consistently applied. The Closing Date Statutory Statements shall
present fairly, in all material respects, in accordance with statutory
accounting principles and practices consistently applied the financial position
of the Company and the Insurance Subsidiaries as of the Closing Date, and the
results of their operations for the period specified and ending on the Closing
Date (or the most recent end of a month if the Closing Date is not the last
business day of a month).
(b) Subsequent to the delivery of the Closing Date Statutory
Statements, Buyer shall give Seller and its accountants, actuaries, counsel and
other representatives reasonable access to the books and records of the Company
and the Insurance Subsidiaries in order to make such investigations as Seller
shall desire in conjunction with the evaluation by it of the Closing Date
Statutory Statements. During such period, Buyer shall permit Seller and its
representatives to
<PAGE> 43
consult with the respective employees, auditors, actuaries, attorneys and agents
of the Company and the Insurance Subsidiaries.
(c) The Closing Date Statutory Statements shall be deemed final upon
the earliest to occur of the date on which Seller and Buyer jointly agree that
the Closing Date Statutory Statements are final, the 31st day following the
delivery of the Closing Date Statutory Statements, if neither Seller nor Buyer
has notified the other of a dispute in amounts shown on the Closing Date
Statutory Statements, and the date on which all disputes relating to such
statements and calculations between Buyer and Seller are resolved in accordance
with Section 7.09(e).
(d) On the fifth business day following the date on which the Closing
Date Statutory Statements are deemed final, if the sum of the aggregate amount
of the capital and surplus of the Company plus the aggregate asset valuation
reserves and interest maintenance reserves of the Company and the Insurance
Subsidiaries, each as set forth in the Closing Date Statutory Statements, is
less than the Minimum Statutory Equity Amount, Seller shall pay to the Company,
by wire transfer, the amount of such difference, together with interest on any
such amount at the Reference Rate (based upon a 365-day year) from the Closing
Date to (but not including) the date of such payment.
(e) In the event that the Seller and Buyer do not agree to the
determination of the calculation set forth in Section 7.09(d) (the "Disputed
Amounts"), the disputing Party shall provide notice of such disagreement to the
other Party hereto (the "Dispute Notice", and the date of its delivery, the
"Dispute Notice Date"). The chief financial officer of Buyer and the chief
financial officer of Seller shall meet (by conference telephone call or in
person at a mutually agreeable site) within one week after notice of a
disagreement is given as provided above. The chief financial officers shall
attempt to make a final determination of the Disputed Amounts, and if the chief
financial officers reach agreement, any payments shall be made within five days
in accordance with such agreement. If the chief financial officers do not reach
agreement within a reasonable time, either or both of such chief financial
officers shall give notice of an impasse, in which case the chief executive
officer of Buyer and the chief executive officer of Seller shall meet (by
conference telephone call or in person at a mutually agreeable site) within one
week after notice of an impasse is given by the chief financial officers. If the
chief executive officers have hereto not reached agreement as to the Disputed
Amounts within a reasonable time, either chief executive officer may give notice
of an impasse, and such determination shall be promptly submitted to a
nationally recognized independent public accounting firm or a nationally
recognized actuarial firm (an "Arbiter") jointly selected by Seller and Buyer.
If Seller or Buyer do not agree upon the joint selection of an Arbiter within
five (5) business days following the notice of such impasse by the chief
executive officers, either Seller or Buyer
<PAGE> 44
may designate a proposed qualified Arbiter to the other by written notice.
Within five (5) business days such other Party shall either agree to the
proposed qualified Arbiter or propose a different Arbiter (failure to propose a
different Arbiter within such five business day period shall be deemed such
Party's agreement to the other Party's proposed Arbiter), and in the case in
which such Party has proposed a different Arbiter the two Arbiters so proposed
shall within five (5) business days thereafter select an Arbiter to make a final
determination of the Disputed Amounts. The Arbiter so selected by either Seller
and Buyer jointly or by the Arbiters (the "Final Arbiter") shall make its
determination of the Disputed Amounts solely in accordance with the terms of
this Agreement. The Parties shall cooperate fully in assisting the Final Arbiter
in calculating the Disputed Amounts and shall take such actions as necessary to
expedite and to cause the Final Arbiter to expedite such calculation. Each of
Seller and Buyer shall pay one-half of the total fees and expenses of the Final
Arbiter.
SECTION 7.10. Certain Transition Arrangements. Buyer and Seller will
cooperate to facilitate the transition to Buyer of the asset management services
and mortgage servicing currently provided to the Company and its Subsidiaries by
Affiliates of Seller.
ARTICLE 8
TAX MATTERS
SECTION 8.01. Definitions. The following terms, as used herein, have
the following meanings:
"Accounting Referee" means a nationally recognized accounting firm with
no material relationship with Buyer, Seller or their Affiliates, mutually
acceptable to both Buyer and Seller and chosen within five days of the date on
which the need to choose the Accounting Referee arises.
"Applicable Tax Rate" means (i) the maximum combined effective federal
and state corporate tax rate in effect at the time such adjustment is made by a
Taxing Authority, or (ii) in the case of a credit 100%.
"Basket" means the amount at any time equal to (a) $100,000 plus the
liability for Taxes excluding any amount attributable to deferred Taxes, if any,
provided for on the books and records of the Company and the Subsidiaries, minus
(b) any reductions (in the aggregate) made pursuant to Section 8.07 hereof.
"Code" means the United States Internal Revenue Code of 1986, as
amended.
<PAGE> 45
"Federal Tax" means any income Tax imposed under the Code.
"Indemnifiable Tax" means (i) any Tax related to a Pre-Closing Tax
Period and (ii) any liability for the payment of any amount of the type
described in the immediately preceding clause (i) as a result of the Company
being a member of the Seller Group.
"Post-Closing Tax Period" means any Tax period commencing after the
close of business on the Closing Date or the post-Closing portion of a Straddle
Period.
"Pre-Closing Tax Period" means any Tax period ending on or before the
Closing Date or the pre-Closing portion of a Straddle Period.
"Seller Group" means, with respect to federal income Taxes, the
affiliated group of corporations (as defined in Section 1504(a) of the Code) of
which Seller is a member and, with respect to state income or franchise Taxes,
the consolidated, combined or unitary group of which Seller or any of its
Affiliates is a member.
"Straddle Period" means any taxable period that includes the Closing
Date, but which does not terminate on such date.
"Tax" means (i) any tax imposed under Subtitle A of the Code and any
net income, alternative or add-on minimum tax, gross income, gross receipts,
sales, use, ad valorem, value added, transfer, franchise, profits, license,
withholding on amounts paid to or by the Company or any Subsidiary, payroll,
employment, excise, severance, stamp, capital stock, occupation, property,
environmental or windfall profit tax, premium, custom, duty or other tax,
governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest, penalty (including any payment made to any Taxing
Authority in connection with the failure to properly report any payment or
distribution of income to any recipient), addition to tax or additional amount
imposed by any governmental authority (a "Taxing Authority") responsible for the
imposition of any such tax (domestic or foreign), (ii) liability of the Company
or its Subsidiary for the payment of any amounts of the type described in (i) as
a result of being a member of an affiliated, consolidated, combined or unitary
group with any other corporation at any time on or prior to the Closing Date,
(iii) any payment paid to any Taxing Authority to secure any closing agreement,
or similar agreement, related to any violations of Sections 72, 817, 7702 or
7702A and (iv) liability of the Company or any Subsidiary for the payment of any
amounts as a result of being a party to any Tax Sharing Agreement or with
respect to the payment of any amounts of the type described in (i) or (ii) as a
result of any express or implied obligation to indemnify any other Person.
<PAGE> 46
"Tax Asset" means any net operating loss, net capital loss, investment
tax credit, foreign tax credit, charitable deduction or any other credit or tax
attribute which could reduce Taxes (including, without limitation, deductions
and credits related to alternative minimum Taxes).
"Tax Sharing Agreements" means all existing Tax sharing agreements or
arrangements (whether or not written) binding the Company or its Subsidiary
(including without limitation the Tax Sharing Agreement between and among the
Seller and the Company effective May 1, 1992 (the "Tax Sharing Agreement") and
any agreements or arrangements which afford any other person the benefit of any
Tax Asset of the Company or its Subsidiary, afford the Company or its Subsidiary
the benefit of any Tax Asset of any other person or require or permit the
transfer or assignment of income, revenues, receipts, or gains).
SECTION 8.02. Tax Representations. (a) Seller represents and warrants
to Buyer as of the date hereof and as of the Closing Date that, except as set
forth in the Balance Sheet (including the notes thereto) or on Annex 3.09 (ix)
or Schedule 8.02, (i) all Tax returns, statements, reports and forms
(collectively, the "Returns") required to be filed with any Taxing Authority on
or before the Closing Date with respect to any Pre-Closing Tax Period by, or
with respect to, the Company or any Subsidiary have been or will be timely filed
in accordance with all applicable laws; (ii) with respect to the Company and the
Subsidiaries, all such Returns for Pre-Closing Periods are or will be true and
complete in all material respects, (iii) the Company and the Subsidiaries have
timely paid all Taxes shown as due and payable on the Returns that have been
filed; (iv) the Company and the Subsidiaries have made or will on or before the
Closing Date make provision for all Taxes payable by the Company and the
Subsidiaries for any Pre-Closing Tax Period for which no Return has yet been
filed; (v) the charges, accruals and reserves for Taxes with respect to the
Company and the Subsidiaries reflected on the Balance Sheet are adequate to
cover the Tax liabilities accruing through the date thereof; and (vi) there is
no action, suit, proceeding, investigation, audit or claim now proposed or
pending against or with respect to the Company or any Subsidiary in respect of
any Tax.
(b) The Company and the Subsidiaries are not in violation of any
material applicable tax information reporting and tax withholding obligations
(or with notice or lapse of time, or both, would be in violation). Except as
disclosed on Schedule 8.02, the Company and the Subsidiaries have timely
withheld from, and paid over to the appropriate Taxing Authorities, and have
properly reported all salaries, wages, and other compensation. Each life
insurance and annuity product issued, sold or administered by, or on behalf of,
the Company and the Subsidiaries has been, and is, in compliance in all material
respects with Sections 72, 817, 7702 and/or 7702A of the Code.
<PAGE> 47
SECTION 8.03. Tax Covenants. (a) Buyer covenants that, other than in
the ordinary course of business, it will not cause or permit the Company, any
Subsidiary or any Affiliate of Buyer (i) to take any action on the Closing Date,
including but not limited to the distribution of any dividend or the
effectuation of any redemption that could give rise to any Tax liability of the
Seller Group or any loss of the Seller or the Seller Group under this Agreement
or (ii) without the prior written consent of the Seller, which shall not be
unreasonably withheld, to make or change any Tax election (other than the
Section 338 (h)(10) Election), amend any Return or take any Tax position on any
Return, take any action, omit to take any action or enter into any transaction
that results in any increased Tax liability or reduction of any Tax Asset of
Seller in respect of any Pre-Closing Tax Period. Buyer agrees that Seller is to
have no liability for any Tax resulting from any action, referred to in the
preceding sentence, of the Company, Buyer or any Affiliate of Buyer on the
Closing Date, and agrees to indemnify and hold harmless Seller and its
Affiliates against any such Tax. Each of Seller and Buyer agrees to give prompt
notice to the other party of the assertion of any claim, or the commencement of
any action or proceeding, in respect of which indemnity may be sought under this
Section 8.03(a). Buyer may participate in and assume the defense of any such
suit, action or proceeding at its own expense. If Buyer assumes such defense,
Seller shall have the right (but not the duty) to participate in the defense
thereof and to employ counsel, at its own expense, separate from the counsel
employed by Buyer. Whether or not Seller chooses to defend or prosecute any
claim, the parties hereto shall cooperate in the defense or prosecution thereof.
(b) Buyer agrees to cause the Company and the Subsidiaries to elect,
where permitted by law, to carry forward any net operating loss, net capital
loss, charitable contribution or other item arising after the Closing Date that
would, absent such election, be carried back to a Pre-Closing Tax Period of the
Company or the Subsidiaries in which the Company or the Subsidiaries filed a
consolidated, combined or unitary Return with Seller or an Affiliate of Seller.
(c) The Buyer will cause the Company and any Subsidiary to timely file
any separate Returns required to be filed by the Company or any such Subsidiary
after the Closing Date.
(d) Buyer shall claim a compensation deduction with respect to the
exercise by employees and retired or former employees of the Company or any of
its Subsidiaries ("Employees") of options to purchase shares of common stock of
Seller which were granted to Employees pursuant to an employee benefit
arrangement maintained by Seller (a "Seller Stock Option"). Seller will notify
Buyer of the amount of such compensation deductions. Buyer covenants that it
will remit to Seller within fifteen days after the filing of its Federal Tax
Return for
<PAGE> 48
each taxable year the amount of any deduction multiplied by the maximum federal
corporate tax rate applicable to the tax year in which the deduction is claimed;
provided that if any such deduction is disallowed by any Taxing Authority,
Seller shall make appropriate adjustments to Buyer. Simultaneously with the
reporting of income in connection with the exercise of the Seller Stock Options,
Seller shall pay to Buyer an amount equal to the sum of (i) all Taxes required
to be withheld in respect of such income and (ii) the employer portion of all
FICA Taxes in respect of such income.
(e) All transfer, documentary, sales, use, stamp, registration and
other such Taxes and fees (including any penalties and interest) incurred in
connection with this Agreement (including any New York State Transfer Tax, New
York City Transfer Tax and any similar tax imposed in other states or
subdivisions) shall be borne and paid by Buyer, and Buyer will, at its own
expense, file all necessary Returns and other documentation with respect to all
such Taxes and fees, and, if required by applicable law, Seller will, and will
cause its Affiliates to, join in the execution of any such Returns and other
documentation.
(f) Seller shall, upon the request of Buyer, make a timely, effective
and irrevocable joint election under Section 338(g) and Section 338(h)(10) of
the Code and any comparable elections under state and local tax law (together,
the "Section 338(h)(10) Election") with respect to the Company and each
Subsidiary. Except as otherwise provided in this Section 8.03(f), Buyer, on the
one side, and Seller, on the other side, shall bear their respective
administrative, legal, accounting, and similar expenses resulting from the
making of the Section 338(h)(10) Election. Seller and Buyer agree to cooperate
fully with respect to the making of the Section 338(h)(10) Election. Such
cooperation shall include, but not be limited to, the following:
(i) the treatment of the transaction as an assumption reinsurance
transaction;
(ii) the determination of the fair market value of the assets of the
Company and each Subsidiary, and the calculation of the adjusted
gross-up basis, within the meaning of Treasury Regulation
Section 1.338(b)-1;
(iii) the allocation of the deemed purchase price among the acquired
assets in accordance with all applicable rules and regulations
under Section 338 of the Code; and
(iv) the preparation and timely filing of all Tax Returns, including
all forms or schedules necessary or appropriate to the Section
338(h)(10) Election.
<PAGE> 49
No later than December 31, 1997, Buyer shall prepare and deliver to
Seller a schedule (the "Price Allocation Schedule") allocating the modified ADSP
(as such term is defined in Treasury Regulations Section 1.338(h)(10)-1) among
the assets of the Company and the Subsidiaries in accordance with the Treasury
regulations promulgated under Section 338(h)(10). Any objections by Seller to
the Price Allocation Schedule prepared by Buyer shall be raised within 60
business days after the receipt by Buyer of the Price Allocation Schedule. If
Buyer and Seller are unable to resolve any differences within 60 business days
thereafter, such dispute shall be resolved by the Accounting Referee, and, if
necessary, a revised Price Allocation Schedule consistent with the determination
made by the Accounting Referee shall be prepared by Buyer as soon as possible
thereafter. In all events, the Price Allocation Schedule shall be finally
prepared and agreed upon prior to August 15, 1998. Buyer and Seller shall each
pay one-half of the costs, fees and expenses of the Accounting Referee. The
Price Allocation Schedule shall be binding on the parties hereto, and Seller and
Buyer agree to act in accordance with such Schedule in the preparation, filing
and audit of any Tax return.
Buyer agrees to pay Seller for the "Section 338 Cost". The Section 338
Cost shall be equal to fifty percent of the excess, if any, of (a) the Tax
payable by Seller taking into account the Section 338(h)(10) Election and the
deemed liquidation of the Company and its Subsidiaries and giving effect to the
price allocation contained in the Price Allocation Schedule (including any Tax
payable as a consequence of the triggering of the policyholder surplus account
upon the deemed liquidation) over (b) the amount of Tax that would have been
payable if the Seller had reported the sale of the Shares for the Purchase Price
hereunder on the Closing Date, such Tax being computed in each case using the
maximum applicable statutory rate, provided, however, that the Section 338 Cost
shall in no event exceed $3,500,000.
Seller agrees to pay Buyer for the "Section 338 Benefit". The Section
338 Benefit shall be equal to fifty percent of the excess, if any, of (a) the
amount of Tax that would have been payable if the Seller had reported the sale
of the Shares for the Purchase Price hereunder on the Closing Date, such Tax
being computed in each case using the maximum applicable statutory rate, over
(b) the Tax payable by Seller taking into account the Section 338(h)(10)
Election and the deemed liquidation of the Company and its Subsidiaries and
giving effect to the price allocation contained in the Price Allocation Schedule
(including any Tax payable as a consequence of the triggering of the
policyholder surplus account upon the deemed liquidation) provided, however,
that the Section 338 Benefit shall in no event exceed $3,500,000.
<PAGE> 50
The amount of the Section 338 Cost or the Section 338 Benefit, as
applicable, shall be calculated in each case by Seller, and shall be determined
without regard to the Tax consequences of the payment required by this Section
8.03(f). Any objection by Buyer to the legal or factual basis for the
calculation by Seller of the Section 338 Cost or Section 338 Benefit, as
applicable, shall be settled by the Accounting Referee. Buyer and Seller shall
each pay one-half of the costs, fees and expenses of the Accounting Referee.
SECTION 8.04. Termination of Existing Tax Sharing Agreements. Any and
all existing Tax Sharing Agreements between the Company or any Subsidiary and
any member of the Seller Group shall be terminated as of the Closing Date. After
such date neither the Company, any Subsidiary, Seller nor any Affiliate of
Seller shall have any further rights or liabilities thereunder, and this
Agreement shall be the sole Tax sharing agreement relating to the Company or any
Subsidiary for all Pre-Closing Tax Periods.
SECTION 8.05. Tax Sharing. Immediately preceding the Closing, the
Company shall pay Seller, based on Seller's good faith estimate, an amount equal
to the Federal Taxes of the Company and the Subsidiaries with respect to all
Pre-Closing Tax Periods for which no Federal Tax Return has yet been filed,
exclusive of any Taxes resulting from the Section 338(h)(10) Election. Promptly
after the filing of Federal Tax Returns for the Pre-Closing Tax Periods, the
Company and Seller shall settle any difference between the provision for Federal
Taxes calculated in accordance with the Tax Sharing Agreement, exclusive of any
Federal Taxes resulting from the Section 338(h)(10) Election, and the payments
made pursuant to this Section 8.05.
SECTION 8.06. Cooperation on Tax Matters. (a) Seller will cause the
Company and each Subsidiary to retain all books, records or other information
that reflect, as of the last date on which such information is available (but
not prior to December 31, 1996), (i) the original tax cost, (ii) the adjusted
tax basis of all assets (including but not limited to all investment assets, all
depreciable real or personal property, and all amortizable and non-amortizable
intangible assets), and a schedule of all depreciation or amortization claimed
on such assets. Buyer and Seller agree to furnish or cause to be furnished to
each other, upon request, as promptly as practicable, such information
(including access to books and records) and assistance relating to the Company
as is reasonably necessary for the filing of any return, for the preparation for
any audit, and for the prosecution or defense of any claim, suit or proceeding
relating to any proposed adjustment. Buyer and Seller agree to retain or cause
to be retained all books and records pertinent to the Company and the
Subsidiaries until the applicable period for assessment under applicable law
(giving effect to any and all extensions or waivers) has expired, and to abide
by or cause the abidance with all record retention agreements entered into
<PAGE> 51
with any Taxing Authority. The Company agrees to give Seller reasonable notice
prior to transferring, discarding or destroying any such books and records
relating to Tax matters and, if Seller so requests, the Company shall allow
Seller to take possession of such books and records. Buyer and Seller shall
cooperate with each other in the conduct of any audit or other proceedings
involving the Company for any Tax purposes and each shall execute and deliver
such powers of attorney and other documents as are necessary to carry out the
intent of this subsection.
(b) Buyer and Seller further agree, upon request, to provide the other
party with all information that either party may be required to report pursuant
to Section 6043 of the Code and all Treasury Department Regulations promulgated
thereunder.
SECTION 8.07. Indemnification by Seller. (a) Seller hereby indemnifies
Buyer against and agrees to hold it harmless from any (i) Indemnifiable Tax of
the Company or any Subsidiary, and (ii) liabilities, costs, expenses (including,
without limitation, reasonable expenses of investigation and attorneys' fees and
expenses), arising out of or incident to the imposition, assessment or assertion
of any Indemnifiable Tax, including those incurred in the contest in good faith
in appropriate proceedings relating to the imposition, assessment or assertion
of any Indemnifiable Tax, in each case incurred or suffered by Buyer, any of its
Affiliates or, effective upon the Closing, the Company, or any Subsidiary (the
sum of (i) and (ii) being referred to as a "Loss"); provided, however, that
Seller shall have no liability for the payment of any loss attributable to or
resulting from any action described in Section 8.03(a) hereof; and provided,
further, that Seller shall have no obligation to make any payment to Buyer
pursuant to this Section 8.07 until the amount of all claims arising pursuant
hereto in the aggregate (minus any Temporary Difference attributable thereto
multiplied by the Applicable Tax Rate, each as defined in Section 8.07(b)
hereof) exceeds the Basket, in which case Buyer shall be entitled to indemnity
calculated in accordance with Section 8.07(b) for the full amount of all claims
in excess of the Basket.
(b) If Seller's indemnification obligation under Section 8.07(a)
arises in respect of an adjustment which makes allowable to Buyer, any of its
Affiliates, the Company or any Subsidiary, for any Post-Closing Tax Period, any
deduction, amortization, exclusion from income, credit or other allowance (a
"Temporary Difference") which would not, but for such adjustment, be allowable,
then any payment by Seller to Buyer under Section 8.07(a) shall be an amount
equal to (x) the amount otherwise due but for this subsection (b), minus (y) the
present value of the Temporary Difference (determined as if the Buyer and its
Affiliates have sufficient taxable income or other tax attributes to permit the
utilization of the Temporary Difference at the earliest time permissible under
applicable law) discounted at a rate of 10%, multiplied by the Applicable Tax
Rate plus (z) the
<PAGE> 52
present value of the Temporary Difference, if any, allowable to Seller as a
consequence of the adjustment giving rise to such payment, discounted at a rate
of 10%, multiplied by the Applicable Tax Rate.
(c) If as a result of an adjustment Seller makes a payment to any
Taxing Authority in respect of an Indemnifiable Tax of the Company with respect
to any Pre-Closing Tax Period, then Buyer shall promptly pay to Seller an amount
equal to such payment made by Seller, provided, however, that any such payment
by Buyer shall not exceed an amount equal to (x) the positive balance, if any,
in the Basket plus (y) the present value of the Temporary Difference, if any,
allowable to Buyer, any of its Affiliates or, effective upon the Closing, the
Company or any Subsidiary as a consequence of the adjustment giving rise to such
payment, discounted at a rate of 10%, multiplied by the Applicable Tax Rate
minus (z) the present value of the Temporary Difference, if any, allowable to
Seller as a consequence of the adjustment giving rise to such payment,
discounted at a rate of 10%, multiplied by the Applicable Tax Rate.
(d) The Basket shall be reduced by (i) the amount of any claim of
Buyer under Section 8.07(a) hereof that is not paid in whole or part by Seller
solely by reason of there being a positive balance in the Basket, minus any
Temporary Difference attributable thereto multiplied by the Applicable Tax Rate,
and (ii) the amount of any payment of Buyer to Seller under Section 8.07(c)
hereof, minus any Temporary Difference attributable thereto multiplied by the
Applicable Tax Rate.
(e) If any claim or demand for Indemnifiable Taxes is asserted in
writing against Buyer, any of its Affiliates or, effective upon the Closing, the
Company or any Subsidiary, Buyer shall notify Seller of such claim or demand
within 20 days of receipt thereof, or such earlier time that would allow Seller
to timely respond to such claim or demand, and shall give Seller such
information with respect thereto as Seller may reasonably request. Seller may
discharge, at any time, its indemnification obligation under this Section 8.07
by paying to Buyer the amount of the applicable Loss, calculated on the date of
such payment. Seller may, at its own expense, participate in and, upon notice to
Buyer, assume the defense of any such claim, suit, action, litigation or
proceeding (including any Tax audit). If Seller assumes such defense, Buyer
shall have the right (but not the duty) to participate in the defense thereof
and to employ counsel, at its own expense, separate from the counsel employed by
Seller. Whether or not Seller chooses to defend or prosecute any claim, all of
the parties hereto shall cooperate in the defense or prosecution thereof.
(f) Any payment by Seller pursuant to this Section 8.07 shall be made
not later than 30 days after receipt by Seller of written notice from Buyer
stating that any Loss has been paid by Buyer, any of its Affiliates or,
effective upon the
<PAGE> 53
Closing, the Company or any Subsidiary and the amount thereof and of the
indemnity payment requested.
(g) Seller shall not be liable under this Section 8.07 for (i) any
Indemnifiable Tax the payment of which was made without Seller's prior written
consent or (ii) any settlements effected without the consent of Seller, or
resulting from any claim, suit, action, litigation or proceeding in which Seller
was not permitted an opportunity to participate.
SECTION 8.08. Survival. Notwithstanding anything in this Agreement to
the contrary, the provisions of this Article 8 shall survive for the full period
of all statutes of limitations (giving effect to any waiver, mitigation or
extension thereof).
ARTICLE 9
EMPLOYEES AND EMPLOYEE BENEFITS
SECTION 9.01. Pension Plans. Seller and its Affiliates shall retain all
liabilities and obligations in respect of benefits accrued by Transferred
Employees under the Pension Plan and the Excess Pension Plan. Benefit accruals
in respect of Transferred Employees under the Pension Plan shall cease as of the
Closing Date and Transferred Employees participating therein shall be considered
to have terminated employment for purposes of such Plan. No Pension Plan assets
shall be transferred to Buyer or any of its Affiliates or to any plan of Buyer
or its Affiliates.
SECTION 9.02. Individual Account Plans. (a) The Seller shall retain all
liabilities and obligations in respect to benefits accrued by Transferred
Employees under the Individual Account Plans and the Defined Contribution Excess
Plan. On the Closing Date, the Seller shall take such action as may be
necessary, if any, to permit each Transferred Employee to exercise his rights
under the Individual Account Plans to effect an immediate distribution of such
Transferred Employee's vested account balances under the Individual Account
Plans or to effect a tax-free rollover of the taxable portion of the account
balances into an eligible retirement plan (within the meaning of Section
401(a)(31) of the Code, a "Direct Rollover") maintained by the Buyer or a
Subsidiary of the Buyer (the "Buyer Plan") or to an individual retirement
account. The Seller and the Buyer shall work together in order to facilitate any
such distribution or rollover and to effect a Direct Rollover for those
participants who elect to roll over their account balances directly into the
Buyer Plan; provided that, except as provided in Section 9.02(c) below, nothing
contained herein shall obligate the Buyer Plan to accept a Direct Rollover in a
form other than cash.
<PAGE> 54
(b) On the Closing Date, or as soon as practicable thereafter, the
Buyer shall establish or designate the Buyer Plan in order to accommodate the
Direct Rollovers described above and shall take all action necessary, if any, to
qualify the Buyer Plan under the applicable provisions of the Code and shall
make any and all filings and submissions to the appropriate governmental
authorities required to be made by it in connection with any Direct Rollover.
(c) On the Closing Date, for each Transferred Employee who has an
outstanding loan under the Capital Accumulation Plan and who elects a Direct
Rollover to the Buyer Plan, the Direct Rollover shall include the note related
to such outstanding loan provided that Buyer with respect to the Buyer Plan and
Seller with respect to the Capital Accumulation Plan conclude that such Direct
Rollover complies with the applicable rules under Section 401 of the Code and
such note is enforceable under applicable law by the trustees of Buyer Plan. In
the event either Buyer or Seller is unable to so conclude, Buyer and Seller
agree to take such steps as may be necessary to amend the eligibility rules and
permit such Transferred Employee to secure a loan under the Buyer Plan (to the
extent of the loan permitted under the loan rules of the Buyer Plan) in order to
make a further rollover to the Buyer Plan of the amount of the distribution from
the Capital Accumulation Plan represented by such Transferred Employee's loan
balance under the Capital Accumulation Plan.
SECTION 9.03. Other Employee Plans and Benefit Arrangements.
(a) Buyer shall be liable for, and, where appropriate, shall cause the
Company to perform:
(i) all obligations to any Transferred Employee under Seller's
short-term disability and wage continuation programs;
(ii) all obligations to any Transferred Employee in respect of the
continuation of coverage rules under Section 601 through 608
of ERISA and Section 4980B of the Code;
(iii) all obligations relating to any Transferred Employee in
connection with applicable Worker's Compensation laws,
including any such obligations relating to events that occur
prior to the Closing Date;
(iv) all obligations relating to severance benefits with respect to
any Transferred Employee whose employment by the Company or a
Subsidiary terminates on or after the Closing Date with such
severance benefits for any Transferred Employee whose
employment terminates in the six month period beginning on the
Closing Date being at least equal to the
<PAGE> 55
benefit such Transferred Employee would have received
under the Company's severance policy in effect on the
Closing Date;
(v) all obligations relating to bonus and profit sharing to
which each Transferred Employee is entitled for the
period from January 1, 1997 through the Closing Date
and vacation and personal holidays (including personal
time off (PTO) days) to which each Transferred Employee
is entitled as of the Closing Date; and
(vi) subject to Buyer's annual discretionary review, a
payroll deduction function to continue and facilitate
the purchase of insurance and the payment of premiums
for such coverages for personal insurance products made
available through Affiliates of the Seller to employees
of the Company and its Subsidiaries as described in
Benefit Arrangement Item 22 on Schedule 3.17.
(b) Seller shall retain all obligations and liabilities under the
Employee Plans and Benefit Arrangements in respect of any employee or former
employee or any independent contractor (including any beneficiary or dependent
thereof) who is not a Transferred Employee (other than Items 23 and 24 on
Schedule 3.17, which shall be the liability of the Company).
(c) With respect to Transferred Employees, Seller shall have no
obligation or liability relating to or arising under the Employee Plans or
Benefit Arrangements except as otherwise provided in Sections 9.01 or 9.02 and
except for any liability arising under the Employee Plans or Benefit
Arrangements which are attributable to events occurring on or prior to the
Closing Date, which Seller hereby assumes, provided, however, that with respect
to any Transferred Employee who, on the Closing Date, is absent by reason of
short-term disability or wage continuation, Buyer shall assume and be liable for
any payment attributable to the period beginning on the Closing Date.
SECTION 9.04. Plans Following the Closing. Buyer will, or will cause
the Company to, give Transferred Employees full credit for purposes of
eligibility and vesting under any plans or arrangements maintained by Buyer or
the Company for such Transferred Employees' service recognized for such purposes
under the Employee Plans and Benefit Arrangements. Buyer shall cause all health
and welfare plans in which Transferred Employees become participants on or after
the Closing Date to waive any and all pre-existing condition exclusions and
waiting period requirements to the extent necessary to provide a Transferred
Employee with the same status as such Transferred Employee had under the
Employee Plans as of the date of this Agreement, and to recognize, to the extent
such participation commences other than at the beginning of a plan year,
expenses previously
<PAGE> 56
incurred for purpose of applicable deductible and co-payment rules to the extent
such expenses would have been recognized under the applicable Seller plan as in
effect immediately prior to the Closing Date.
SECTION 9.05. Third Party Beneficiaries. No provision of this Article 9
shall create any third party beneficiary rights in any employee or former
employee of the Company or any Subsidiary (including any beneficiary or
dependent thereof) in respect of continued employment or resumed employment, and
no provision of this Article 9 shall create any rights in any such persons in
respect of any benefits that may be provided, directly or indirectly, under any
employee benefit plan or arrangement. Except as otherwise provided in this
Article 9, Buyer makes no representations, warranties or covenants with respect
to any compensation or benefits to be offered or provided to Transferred
Employees or former employees of the Company or any Subsidiary after the Closing
Date.
ARTICLE 10
CONDITIONS TO CLOSING
SECTION 10.01. Conditions to Obligations of Buyer and Seller. The
obligations of Buyer and Seller to consummate the Closing are subject to the
satisfaction of the following conditions:
(i) Any applicable waiting period under the HSR Act relating to the
transactions contemplated hereby shall have expired or been
terminated.
(ii) No provision of any applicable law or regulation and no
judgment, injunction, order or decree shall prohibit the
consummation of the Closing. There shall not be pending or
threatened any claim, suit, action or proceeding by any
governmental agency before any court or governmental agency,
seeking to prohibit or restrain the transactions contemplated by
this Agreement or seeking material damages in connection
therewith.
(iii) This Agreement and the consummation of the transactions
contemplated hereby shall have been approved by the Insurance
Departments of the Required Jurisdictions and the jurisdictions
set forth on Schedule 4.03 or shall not have been disapproved by
such Departments and the period of time during which such
Departments and jurisdictions may, under applicable law,
disapprove this Agreement and the consummation of
<PAGE> 57
such transactions shall have lapsed, and the parties shall have
received reasonably satisfactory evidence of such approvals or
non-disapprovals.
SECTION 10.02. Conditions to Obligation of Buyer. The obligation of
Buyer to consummate the Closing is subject to the satisfaction of the following
further conditions:
(i) (A) Seller shall have performed in all material respects all of
its obligations hereunder required to be performed by it on or
prior to the Closing Date and (B) the representations and
warranties of Seller contained in this Agreement and in any
certificate or other writing delivered by Seller pursuant hereto
shall be true in all material respects at and as of the Closing
Date, as if made at and as of such date, except for those
representations and warranties made as of a specified date, and
(C) Buyer shall have received a certificate signed by an
executive officer of Seller to the foregoing effect.
(ii) Buyer shall have received an opinion of Robert Rusis, Esq.,
General Counsel of Seller, and an opinion of Davis Polk &
Wardwell, counsel to Seller, dated the Closing Date in the forms
attached as Exhibits I and III hereto. In rendering such
opinions, such counsel may rely: (x) upon certificates of public
officers, (y) as to matters governed by the laws of jurisdictions
other than New York and the corporate laws of Delaware or the
federal laws of the United States of America, upon the opinions
of Shanley & Fisher, P.C. (as to the laws of New Jersey),
Frederick Condon, General Counsel to the Company (as to the laws
of New Hampshire), and any other counsel reasonably satisfactory
to Buyer and (z) as to matters of fact, upon certificates of
officers of Seller, the Company or any Subsidiary, copies of
which opinions and certificates shall be contemporaneously
delivered to Buyer.
(iii) The Company shall have obtained the consents required under Item
1 of Schedule 3.04 or new Investment Contracts, substantially in
the form of CIAC's existing Investment Contracts, with each
Investment Company to which CIAC currently provides investment
advisory or management services.
(iv) Buyer shall have received all documents it may reasonably request
relating to the existence of Seller, the Company and Subsidiary
and the authority of Seller for this Agreement, all in form and
substance reasonably satisfactory to Buyer.
<PAGE> 58
SECTION 10.03. Conditions to Obligation of Seller. The obligation of
Seller to consummate the Closing is subject to the satisfaction of the following
further conditions:
(i) (A) Buyer shall have performed in all material respects all of
its obligations hereunder required to be performed by it at or
prior to the Closing Date and (B) the representations and
warranties of Buyer contained in this Agreement and in any
certificate or other writing delivered by Buyer pursuant hereto
shall be true at and as of the Closing Date, as if made at and as
of such date, except for those representations and warranties
made as of an earlier date, and (C) Seller shall have received a
certificate signed by an executive officer of Buyer to the
foregoing effect.
(ii) Seller shall have received an opinion of King & Spalding, counsel
to Buyer, dated the Closing Date in the form attached as Exhibit
IV hereto. In rendering such opinion, such counsel may rely upon
certificates of public officers, as to matters governed by the
laws of jurisdictions other than New York or the federal laws of
the United States of America, upon opinions of counsel reasonably
satisfactory to Seller and, as to matters of fact, upon
certificates of officers of Buyer, copies of which opinions and
certificates shall be contemporaneously delivered to Seller.
(iii) Seller shall have received all documents it may reasonably
request relating to the existence of Buyer and the authority of
Buyer for this Agreement, all in form and substance reasonably
satisfactory to Seller.
ARTICLE 11
SURVIVAL; INDEMNIFICATION
SECTION 11.01. Survival. The representations and warranties of the
parties hereto contained in this Agreement or in any certificate or other
writing delivered pursuant hereto or in connection herewith shall survive the
Closing until 18 months after the Closing Date; provided that (i) the
representations and warranties contained in Sections 3.02, 3.05, 3.06 and
3.07(b) and the covenants and agreements contained in Sections 5.10, 5.11, 6.02,
7.02, 7.04 and 13.03 and Article 11 shall survive indefinitely, (ii) the
covenants and agreements set forth in Sections 5.05, 5.06, 5.09, 6.03, 7.05,
7.06, 7.08 and 7.09 shall survive for the respective periods set forth therein
and (iii) the covenants, agreements, representations and warranties contained in
Articles 8 and 9 shall survive until
<PAGE> 59
expiration of the statute of limitations applicable to the matters covered
thereby (giving effect to any waiver, mitigation or extension thereof), if
later. No covenant, agreement, representation or warranty contained in this
Agreement shall survive after the time at which it would otherwise terminate
pursuant to the preceding sentence unless written notice of the inaccuracy or
breach thereof shall have been given to the party against whom such indemnity
may be sought prior to such time.
SECTION 11.02. Indemnification. (a) Seller hereby indemnifies Buyer
and, effective at the Closing, without duplication, the Company or any
Subsidiary and their officers, directors, employees, agents, successors and
assigns (the "Claim Indemnified Parties") against and agrees to hold them
harmless from any and all damage, loss, liability and expense (including without
limitation reasonable expenses of investigation and reasonable attorneys' fees
and expenses in connection with any claim, action, suit or proceeding)
("Damages") relating to or arising out of:
(i) any inaccuracy in or breach of any representation or warranty
made by Seller pursuant to this Agreement (other than pursuant to
Section 3.19 or Article 8); provided that (x) Seller shall not be
liable under this Section 11.02(a)(i) unless the aggregate amount
of Damages with respect to all matters referred to in this
Section 11.02(a)(i) exceeds $12,000,000 and then only to the
amount of such excess, provided that this limitation shall not
apply to the breach of any representation or warranty contained
in Sections 3.02, 3.05, 3.06 and 3.07(b), and (y) Seller's
maximum liability under this Section 11.02(a)(i) shall not exceed
an amount equal to the Purchase Price;
(ii) Seller's breach of or failure to perform any of its covenants or
agreements contained in or made pursuant to this Agreement (other
than Article 8);
(iii) [
CONFIDENTIAL TREATMENT REQUESTED
]
<PAGE> 60
[
CONFIDENTIAL TREATMENT REQUESTED
]
(iv) any obligation or liability of the Company or any Subsidiary that
is payable after December 31, 1996 under any acquisition,
disposition or joint venture agreement involving a significant
amount of assets owned or previously owned by the Company or any
Subsidiary, to the extent such obligation or liability is not
fully reflected in the Statutory Financial Statements of the
Company and the Insurance Subsidiaries as of and for the year
ended December 31, 1996; and
(v) any cause of action, claim, suit or proceeding relating to or
arising out of the Company's or any Subsidiary's violation of, or
liability under, any Environmental Laws which arises out of facts
or circumstances occurring prior to the Closing Date; provided
that (x) Seller shall not be liable under this Section
11.02(a)(v) unless the aggregate amount of Damages with respect
to all matters referred to in this Section 11.02(a)(v) exceeds
$250,000 and then only to the amount of such excess, and (y)
Seller's maximum liability under this Section 11.02(a)(v) shall
not exceed $3,000,000.
(b) Buyer hereby indemnifies Seller and its officers, directors,
employees, agents, successors and assigns against and agrees to hold them
harmless from any and all Damages relating to or arising out of (i) any
inaccuracy or breach of any representation or warranty made by Buyer pursuant to
this Agreement (other than pursuant to Article 8); provided that Buyer shall not
be liable under this Section
<PAGE> 61
11.02(b) unless the aggregate amount of Damages with respect to all matters
referred to in this Section 11.02(b) exceeds an amount equal to $12,000,000 and
then only to the extent of such excess, (ii) Buyer's breach of or failure to
perform any of its covenants and agreements pursuant to this Agreement (other
than Article 8) and (iii) any Damages resulting from the use, after the Closing
Date, of any policy forms and materials or marketing materials containing the
Chubb Trademarks or the "Chubb" name or the use of the Chubb Trademarks.
SECTION 11.03. Procedures; Exclusivity. (a) The party seeking
indemnification under Section 11.02 (the "Indemnified Party") agrees to give
prompt written notice to the party against whom indemnity is sought (the
"Indemnifying Party") of the assertion of any claim, or the commencement of any
suit, action or proceeding in respect of which indemnity may be sought under
such Section. The Indemnifying Party may, and at its election shall, participate
in and control the defense of any such suit, action or proceeding at its own
expense. Except as otherwise provided in this Article 11, the Indemnifying Party
shall not be liable under Section 11.02 for any settlement effected without its
consent of any claim, litigation or proceeding in respect of which indemnity may
be sought hereunder.
(b) The Indemnified Party shall have the right to employ separate
counsel in any action or claim and to participate in the defense thereof at the
expense of the Indemnifying Party (i) if the retention of such counsel has been
specifically authorized by the Indemnifying Party, or (ii) if the counsel is
retained because the Indemnifying Party does not notify the Indemnified Party
within twenty (20) days after receipt of a claim notice that it elects to
undertake the defense thereof. The Indemnified Person shall have the right to
employ counsel at the Indemnified Party's own expense and participate in such
action or claim, including settlement or trial.
(c) Except as otherwise provided in Section 11.05, the Indemnifying
Party shall obtain the prior written approval of the Indemnified Party before
entering into any settlement, adjustment, or compromise of such claim or ceasing
to defend against such claim that provides for any relief (i) other than the
payment of monetary damages by the Indemnifying Party or (ii) which might
adversely affect the Indemnified Party or its business or operations, and the
determination of whether and under what conditions such approval may be given
shall be in the sole discretion of the Indemnified Party.
(d) If the Indemnifying Party does not assume control over the defense
of such claim as provided in Section 11.03(a) within 30 days of receipt of
notice thereof, the Indemnified Party shall have the right to defend the claim
in such
<PAGE> 62
manner as it may deem appropriate at the cost and expense of the Indemnifying
Party, including the right to settle, adjust or compromise such claim.
(e) Except as otherwise specifically set forth in this Agreement,
Buyer and its Affiliates (including, effective at the Closing without
duplication, the Company or any Subsidiary) hereby waive all rights for
contribution or other rights of recovery with respect to Damages arising under
or relating to Environmental Laws that Buyer or any of the Affiliates may have
by statute or otherwise against Seller or any of its Affiliates.
(f) After the Closing, Section 11.02 will provide the exclusive remedy
for any breach of representation or warranty (other than those contained in
Article 8) or other claim arising under this Agreement.
SECTION 11.04. [
CONFIDENTIAL TREATMENT REQUESTED
]
<PAGE> 63
[
CONFIDENTIAL TREATMENT REQUESTED
]
SECTION 11.05. Procedures for Certain Litigation. (a) For the purposes
of this Section 11.05, "Claims" shall mean [CONFIDENTIAL TREATMENT REQUESTED]
and any cause of action, claim, suit or proceeding described in Sections
11.02(a)(iii)(B)-(D).
(b) The Claim Indemnified Parties shall take no action with respect to
any Claim without Seller's express written consent. Seller shall control the
defense of the Claims at its own expense and with counsel of its choosing;
provided that Seller shall keep the Buyer apprised of all material developments
relating to the conduct of the litigation relating to the Claims.
(c) Seller shall have the right to consent to a settlement of, or the
entry of any judgment arising from any Claim, without the consent of the Buyer;
provided, that Seller (i) shall pay or cause to be paid all amounts arising out
of such settlement or judgment concurrently with the effectiveness thereof; (ii)
shall not encumber any assets of the Claim Indemnified Parties or agree to any
condition or restriction that would apply to the Claim Indemnified Parties or to
the conduct of their respective businesses; and (iii) shall obtain an
unconditional release of the Claim Indemnified Parties, as applicable, from such
Claim. Seller shall not be liable under this Section 11.05 for any settlement of
a Claim effected without its consent.
<PAGE> 64
(d) The Claim Indemnified Parties and their Affiliates shall cooperate
fully with Seller and its counsel in the investigation, trial and defense of any
Claim (including the filing by the Company of any cross-claim, counter-claim or
other proceeding deemed reasonably appropriate by Seller) and any appeal arising
therefrom. Such cooperation shall include, but shall not be limited to, the
Claim Indemnified Parties' giving prompt written notice to Seller of any notice,
request, pleading or similar matter it shall receive relating to any Claim,
making available, without charge, to Seller and its counsel such of the books,
records, documents and other data of the Company and its Subsidiaries, and such
employees and representatives of the Company and its Subsidiaries as Seller, in
its sole discretion, shall deem necessary. The Claim Indemnified Parties hereby
agree to retain all such books, records, documents and other data until the
final resolution of the Claims.
(e) If Seller and Buyer are unable to agree with respect to any matter
arising under this Section 11.05, Seller and Buyer, shall, within five days
after notice of disagreement given by either party, present their differences in
writing (each party simultaneously providing to the other a copy of all
documents submitted) to the Judicial Arbitration and Mediation Service, New
York, New York (the "Referee"), who shall promptly review and resolve the
disputed matter. The decision of the Referee shall be final and binding unless
both the Seller and the Buyer agree otherwise. Seller and Buyer shall equally
share all costs and fees of the Referee. It is the express understanding of the
parties hereto that a failure of cooperation could be materially prejudicial to
the interests of the Seller and that the procedure described in this paragraph
(e) shall resolve any dispute in as timely a manner as possible, such that any
such dispute has no affect on the underlying Claim. It is the further
understanding of the parties hereto that the decision of the Referee with
respect to any matter may be specifically enforced through injunctive and other
equitable relief.
SECTION 11.06. Limitation of Indemnification. Notwithstanding the
foregoing provisions of this Article 11, an Indemnifying Party's obligation to
indemnify an Indemnified Party shall be subject to the following limitations:
(i) No indemnification shall be required to be made by Buyer or
Seller with respect to any claim for indemnity which when
aggregated with any similar claims is less than $1,000.
(ii) The Damages required to be paid by the Indemnifying Party
pursuant to this Article 11 shall be reduced to the extent of any
amounts actually received by the Indemnified Party after the
Closing Date pursuant to the terms of any insurance policies
covering such Damages.
<PAGE> 65
(iii) Each of the parties agrees that to the extent the other party
indemnifies it from any claim for Damages, the Indemnified Party
shall assign its rights to such claim to the Indemnifying Party
to the extent of any amounts actually received by the Indemnified
Party from the Indemnifying Party.
ARTICLE 12
TERMINATION
SECTION 12.01. Grounds for Termination. This Agreement may be
terminated at any time prior to the Closing:
(i) by mutual written agreement of Seller and Buyer;
(ii) by either Seller or Buyer if the Closing shall not have been
consummated on or before September 30, 1997;
(iii) by either Seller or Buyer if there shall be any law or regulation
that makes consummation of the transactions contemplated hereby
illegal or otherwise prohibited or if consummation of the
transactions contemplated hereby would violate any nonappealable
final order, decree or judgment of any court or governmental body
having competent jurisdiction;
(iv) by Seller if events occur which render impossible compliance with
one or more conditions set forth in Section 10.01 and Section
10.03 hereof and such conditions are not waived by Seller;
provided that such events did result from any action or omission
by Seller, the Company or the Subsidiaries which were within the
control of such entity and which such entity was not expressly
permitted to take or omit by the terms of this Agreement; or
(v) by Buyer if events occur which render impossible compliance with
one or more conditions set forth in Section 10.01 and 10.02
hereof, and such conditions are not waived by Buyer; provided
that such events did not result from any action or omission by
Buyer which was within its control and which Buyer was not
expressly permitted to take or omit by the terms of this
Agreement;
The party desiring to terminate this Agreement shall give notice of
such termination to the other party.
<PAGE> 66
SECTION 12.02. Effect of Termination. If this Agreement is terminated
as permitted by Section 12.01, termination shall be without liability of either
party (or any stockholder, director, officer, employee, agent, consultant or
representative of such party) to the other party to this Agreement; provided
that if such termination shall result from the willful failure of either party
to fulfill a condition to the performance of the obligations of the other party
or to perform a covenant of this Agreement or from a willful breach by either
party to this Agreement, such party shall be fully liable for any and all
Damages incurred or suffered by the other party as a result of such failure or
breach. The provisions of Sections 6.01, 6.02 and 13.03 shall survive any
termination hereof pursuant to Section 12.01.
ARTICLE 13
MISCELLANEOUS
SECTION 13.01. Notices. All notices, requests and other communications
to any party hereunder shall be in writing (including facsimile transmission)
and shall be given,
if to Buyer, to:
Jefferson-Pilot Corporation
100 N. Greene Street
Greensboro, NC 27401
Attention: General Counsel
Fax: 910-691-3639
with a copy to:
King & Spalding
120 West 45th Street
New York, NY 10036
Attention: E. William Bates, II
Fax: 212-556-2222
<PAGE> 67
if to Seller, to:
The Chubb Corporation
15 Mountain View Road
Warren, New Jersey 07061-1625
Attention: General Counsel
Fax: (908) 903-3607
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: Dennis S. Hersch, Esq.
Fax: (212) 450-4800
All such notices, requests and other communications shall be deemed received on
the date of receipt by the recipient thereof if received prior to 5 p.m. in the
place of receipt and such day is a business day in the place of receipt.
Otherwise, any such notice, request or communication shall be deemed not to have
been received until the next succeeding business day in the place of receipt.
SECTION 13.02. Amendments and Waivers. (a) Any provision of this
Agreement may be amended or waived prior to the Closing Date if, but only if,
such amendment or waiver is in writing and is signed, in the case of an
amendment, by each party to this Agreement, or in the case of a waiver, by the
party against whom the waiver is to be effective.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
SECTION 13.03. Expenses. All costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby shall be paid by
the party incurring such cost and expense and neither the Company nor any
Subsidiary shall be responsible for or pay any such cost or expense.
SECTION 13.04. Successors and Assigns. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns. No party shall assign, delegate or otherwise
transfer any of its rights or obligations under this Agreement without the prior
written consent of each other party hereto. Notwithstanding the foregoing,
<PAGE> 68
Buyer may assign all or any portion of its rights, interest or obligations
hereunder to any Affiliate of Buyer without the prior written consent of Seller,
provided that such assignment shall not release Buyer from or in any manner
limit Buyer's obligations hereunder.
SECTION 13.05. Governing Law. This Agreement shall be governed by
and construed in accordance with the law of the State of New York, without
regard to the conflicts of law rules of such state.
SECTION 13.06. Jurisdiction. Except as otherwise expressly provided in
this Agreement, any suit, action or proceeding seeking to enforce any provision
of, or based on any matter arising out of or in connection with, this Agreement
or the transactions contemplated hereby may be brought in the United States
District Court for the Southern District of New York or any other New York State
court sitting in New York City, and each of the parties hereby consents to the
jurisdiction of such courts (and of the appropriate appellate courts therefrom)
in any such suit, action or proceeding and irrevocably waives, to the fullest
extent permitted by law, any objection which it may now or hereafter have to the
laying of the venue of any such suit, action or proceeding in any such court or
that any such suit, action or proceeding which is brought in any such court has
been brought in an inconvenient form. Process in any such suit, action or
proceeding may be served on any party anywhere in the world, whether within or
without the jurisdiction of any such court. Without limiting the foregoing, each
party agrees that service of process on such party as provided in Section 13.01
shall be deemed effective service of process on such party.
SECTION 13.07. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
SECTION 13.08. Counterparts; Third Party Beneficiaries. This Agreement
may be signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. No provision of this Agreement is intended to confer upon any Person
other than the parties hereto any rights or remedies hereunder.
SECTION 13.09. Entire Agreement. This Agreement and the Confidentiality
Agreement between Buyer and Seller dated October 16, 1996 constitute the entire
agreement between the parties with respect to the subject matter of this
Agreement and supersedes all prior agreements and understandings, both oral and
written, between the parties with respect to the subject matter of this
<PAGE> 69
Agreement. No representation, inducement, promise, understanding, condition or
warranty not set forth herein has been made or relied upon by either party
hereto. Neither this Agreement nor any provision hereof is intended to confer
upon any Person other than the parties hereto any rights or remedies hereunder.
<PAGE> 70
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
JEFFERSON-PILOT CORPORATION
By: /s/ David A. Stonecipher
--------------------------------------
Title: President and Chief Executive Officer
THE CHUBB CORPORATION
By: /s/ Dean R. O'Hare
-------------------------------------
Title: Chairman and Chief Executive Officer
<PAGE> 1
THE CHUBB CORPORATION
DEAN R. O'HARE
Chairman and
Chief Executive Officer
October 1, 1996
Mr. Percy Chubb III
431 Claremont Road
Bernardsville, NJ 07924
Dear Pi:
I am pleased that, effective February 1, 1997, you have agreed to serve
as a senior advisor to Chubb & Son Inc. for a term of twelve (12) months. You
will report directly to me and your duties as senior advisor will be specified
by me from time to time. Chubb will indemnify and hold you harmless for
liability which may arise out of your performing duties under this agreement.
During the term of your consulting agreement, you will receive an
annual fee of $100,000 for your services plus reimbursement of all your
necessary expenses. Payments will be made in $25,000 installments during the
last week of each calendar quarter. Please submit to me for approval all
necessary travel and other expenses incurred by you as a consultant for Chubb &
Son Inc.
As of February 1, 1997, you no longer will be an employee of Chubb &
Son Inc. You will be an independent contractor and no withholding for taxes or
benefit deductions will be taken from your quarterly payments. Payments of any
local, state or federal taxes, including payments pursuant to the
Self-Employment Contribution Act "SECA" shall be your responsibility.
15 Mountain View Road, Warren, NJ 07059 * Phone: (908) 903-3565
<PAGE> 2
-2-
It is understood that you will receive all of the benefits normally
provided to a retiree of Chubb & Son Inc.
By mutual consent, this consulting agreement may be extended or
modified effective February 1 of each subsequent calendar year. The agreement
can be canceled by either party as of the end of any month, provided written
notice is given by the 15th of that month.
Should you find the above terms acceptable, kindly sign where
indicated, retain a copy and return the original to me.
Sincerely,
/s/ Dean R. O'Hare
------------------
Dean R. O'Hare
Chairman
/s/ Percy Chubb III
- -------------------
Percy Chubb III
2 October 1996
- --------------
Date
<PAGE> 1
THE CHUBB CORPORATION
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS)
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net income......................................... $512,684 $696,628 $528,469
After-tax interest expense on 6% guaranteed
exchangeable subordinated notes.................. 9,735 9,750 9,750
-------- -------- --------
Net income for computing earnings per share........ $522,419 $706,378 $538,219
======== ======== ========
Weighted average number of common shares
outstanding...................................... 174,402 174,071 175,085
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 23.256 shares of
common stock..................................... 5,793 5,814 5,814
-------- -------- --------
Weighted average number of common and common
equivalent shares assumed outstanding for
computing earnings per share..................... 180,195 179,885 180,899
======== ======== ========
Net income per share............................... $ 2.90 $ 3.93 $ 2.98
</TABLE>
Share and per share amounts have been retroactively adjusted to reflect the
two-for-one stock split effective April 19, 1996.
47
<PAGE> 1
Supplementary Financial Data
<TABLE>
<CAPTION>
IN THOUSANDS
YEARS ENDED DECEMBER 31
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
PROPERTY AND CASUALTY INSURANCE
UNDERWRITING
Net Premiums Written............................. $4,773,753 $4,305,992 $3,951,209
Increase in Unearned Premiums.................... (204,497) (158,830) (174,926)
---------- ---------- ----------
Premiums Earned.................................. 4,569,256 4,147,162 3,776,283
---------- ---------- ----------
Claims and Claim Expenses........................ 3,010,755 2,669,981 2,519,359
Operating Costs and Expenses..................... 1,547,402 1,393,373 1,288,692
Increase in Deferred Policy Acquisition Costs.... (42,522) (29,223) (39,751)
Dividends to Policyholders....................... 23,279 18,877 16,294
---------- ---------- ----------
Underwriting Income (Loss) Before Income Tax..... 30,342 94,154 (8,311)
Federal and Foreign Income Tax (Credit).......... 13,200 38,500 (500)
---------- ---------- ----------
UNDERWRITING INCOME (LOSS)....................... 17,142 55,654 (7,811)
---------- ---------- ----------
INVESTMENTS
Investment Income Before Expenses and Income
Tax............................................ 656,135 613,242 570,531
Investment Expenses.............................. 10,079 10,255 10,050
---------- ---------- ----------
Investment Income Before Income Tax.............. 646,056 602,987 560,481
Federal and Foreign Income Tax................... 101,900 95,800 85,500
---------- ---------- ----------
INVESTMENT INCOME................................ 544,156 507,187 474,981
---------- ---------- ----------
PROPERTY AND CASUALTY INCOME........................ 561,298 562,841 467,170
---------- ---------- ----------
REAL ESTATE
Revenues............................................ 319,787 287,795 204,849
Cost of Sales and Expenses.......................... 555,642(a) 280,099(b) 210,799
---------- ---------- ----------
Real Estate Income (Loss) Before Income Tax......... (235,855) 7,696 (5,950)
Federal Income Tax (Credit)......................... (89,069) 1,686 (3,913)
---------- ---------- ----------
REAL ESTATE INCOME (LOSS)........................... (146,786) 6,010 (2,037)
---------- ---------- ----------
CORPORATE, NET OF TAX................................. 19,652 14,809 7,661
---------- ---------- ----------
CONSOLIDATED OPERATING INCOME FROM CONTINUING
OPERATIONS..................................... 434,164 583,660 472,794
REALIZED INVESTMENT GAINS FROM CONTINUING OPERATIONS,
NET OF TAX.......................................... 52,029 70,752 35,124
---------- ---------- ----------
CONSOLIDATED INCOME FROM CONTINUING OPERATIONS... 486,193 654,412 507,918
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX (c)... 26,491 42,216 20,551
---------- ---------- ----------
CONSOLIDATED NET INCOME.......................... $ 512,684 $ 696,628 $ 528,469
========== ========== ==========
</TABLE>
(a) Includes a $255,000,000 write-down of the carrying value of certain real
estate assets to their estimated fair value.
(b) 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.
(c) In February 1997, the Corporation entered into a definitive agreement to
sell its life and health insurance operations. As a result, these operations
have been classified as discontinued operations.
The above federal and foreign income tax provisions represent allocations of the
consolidated provision.
21
<PAGE> 2
Property and Casualty Underwriting Results
NET PREMIUMS WRITTEN (In Millions of Dollars)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Personal Insurance
Automobile......................... $ 243.1 $ 200.3 $ 188.0 $ 192.1 $ 191.3
Homeowners......................... 546.1 455.6 436.5 434.1 420.6
Other.............................. 250.0 210.9 204.3 201.6 195.4
-------- -------- -------- -------- --------
Total Personal................ 1,039.2 866.8 828.8 827.8 807.3
-------- -------- -------- -------- --------
Commercial Insurance
Multiple Peril..................... 671.0 575.7 522.6 480.8 432.9
Casualty........................... 818.0 717.3 667.8 728.9(a) 569.9
Workers' Compensation.............. 243.7 223.4 201.6 181.1 175.5
Property and Marine................ 495.0 426.3 360.0 277.5 236.0
Executive Protection............... 775.7 647.0 596.4 515.2 496.8
Other.............................. 528.7 481.0 458.8 415.1 379.0
-------- -------- -------- -------- --------
Total Commercial.............. 3,532.1 3,070.7 2,807.2 2,598.6(a) 2,290.1
-------- -------- -------- -------- --------
Reinsurance Assumed.................. 202.5 368.5 315.2 219.9 145.1
-------- -------- -------- -------- --------
Total......................... $4,773.8 $4,306.0 $3,951.2 $3,646.3(a) $3,242.5
======== ======== ======== ======== ========
</TABLE>
(a) Includes a $125 million return premium to the Corporation's property and
casualty insurance subsidiaries related to the commutation of a medical
malpractice reinsurance agreement. Excluding this return premium, net
premiums written were $603.9 million for Casualty, $2,473.6 million for
Commercial and $3,521.3 million in Total.
Effective January 1, 1996, the reinsurance agreements with the Royal & Sun
Alliance Insurance Group plc were changed. This resulted in the Corporation's
property and casualty insurance subsidiaries retaining a greater portion of the
business written directly and assuming less reinsurance from Royal & Sun
Alliance.
COMBINED LOSS AND EXPENSE RATIOS
<TABLE>
<S> <C> <C> <C> <C> <C>
Personal Insurance
Automobile......................... 86.5% 87.4% 96.3% 97.5% 100.2%
Homeowners......................... 104.3 93.8 110.2 100.1 113.1
Other.............................. 69.3 72.6 80.7 84.2 89.2
-------- -------- -------- -------- --------
Total Personal................ 91.7 87.1 99.8 95.6 104.3
-------- -------- -------- -------- --------
Commercial Insurance
Multiple Peril..................... 118.1 110.0 112.4 117.2 116.0
Casualty........................... 113.3 113.8 101.9 175.8(b) 91.3
Workers' Compensation.............. 101.8 95.1 103.9 117.3 117.7
Property and Marine................ 97.8 92.9 102.5 98.7 99.1
Executive Protection............... 76.5 82.1 81.4 78.4 83.1
Other.............................. 89.3 95.1 100.2 99.1 98.9
-------- -------- -------- -------- --------
Total Commercial.............. 99.7 99.3 99.4 121.4(b) 98.2
-------- -------- -------- -------- --------
Reinsurance Assumed.................. N/M 99.2 100.1 112.4 129.9
-------- -------- -------- -------- --------
Total......................... 98.3% 96.8% 99.5% 114.8%(b) 101.1%
======== ======== ======== ======== ========
</TABLE>
(b) Includes the effects of a $675 million increase in unpaid claims related to
an agreement for the settlement of asbestos-related litigation and the $125
million return premium related to the commutation of a medical malpractice
reinsurance agreement. Excluding the effects of these items, the combined
loss and expense ratio was 97.4% for Casualty, 99.2% for 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.
The underwriting results for prior years include certain reclassifications to
conform with the 1996 presentation, which more closely reflects the way the
property and casualty business is now managed. The total net premiums written
and combined loss and expense ratio are not affected.
22
<PAGE> 3
Ten Year Financial Summary
(in thousands except for per share amounts)
<TABLE>
<CAPTION>
FOR THE YEAR 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
REVENUES
Property and Casualty Insurance
Premiums Earned................... $4,569,256 $4,147,162 $3,776,283 $3,504,838(a) $3,163,288
Investment Income................. 656,135 613,242 570,531 541,749 501,140
Real Estate........................ 319,787 287,795 204,849 160,650 149,945
Corporate Investment Income........ 55,425 54,445 49,405 52,706 57,176
Realized Investment Gains (Losses). 79,929 108,852 54,125 210,582 174,061
TOTAL REVENUES................... 5,680,532 5,211,496 4,655,193 4,470,525 4,045,610
COMPONENTS OF NET INCOME*
Property and Casualty Insurance
Underwriting Income (Loss) (b).... 17,142 55,654 (7,811) (337,492)(c) (15,352)
Investment Income................. 544,156 507,187 474,981 455,409 422,755
Real Estate Income (Loss).......... (146,786)(e) 6,010(f) (2,037) (2,193) 10,050
Corporate Income (Loss)............ 19,652 14,809 7,661 14,357 19,794
OPERATING INCOME FROM CONTINUING
OPERATIONS..................... 434,164 583,660 472,794 130,081 437,247
Realized Investment Gains (Losses)
from Continuing Operations....... 52,029 70,752 35,124 137,283 114,861
INCOME FROM CONTINUING OPERATIONS 486,193 654,412 507,918 267,364 552,108
Income from Discontinued Operations 26,491 42,216 20,551 76,853 64,991
NET INCOME....................... 512,684 696,628 528,469 324,217(g) 617,099
DIVIDENDS DECLARED ON COMMON STOCK... 188,689 170,665 161,055 150,784 139,612
CHANGE IN UNREALIZED APPRECIATION OR
DEPRECIATION OF INVESTMENTS, NET... (107,225) 470,233 (487,951) 46,534 (82,082)
PER SHARE DATA**
Operating Income from Continuing
Operations....................... $2.46 $3.30 $2.67 $ .77 $2.48
Income from Continuing Operations.. 2.75 3.70 2.87 1.53 3.12
Income from Discontinued Operations .15 .23 .11 .42 .36
Net Income(b)...................... 2.90(e) 3.93(f) 2.98 1.84(c)(g) 3.48
Dividends Declared................. 1.08 .98 .92 .86 .80
AT YEAR END
TOTAL ASSETS......................... $19,938,866 $19,636,277 $17,760,969 $16,729,505 $15,197,641
INVESTED ASSETS
Property and Casualty Insurance.... 11,190,619 10,013,557 8,938,752 8,403,141 7,767,462
Corporate.......................... 890,441 906,597 879,475 965,715 955,828
UNPAID CLAIMS........................ 9,523,709 9,588,141 8,913,220 8,235,442 7,220,919
LONG TERM DEBT....................... 1,070,532 1,150,832 1,279,649 1,267,193 1,065,604
TOTAL SHAREHOLDERS' EQUITY........... 5,462,874 5,262,729 4,247,029 4,196,129 3,954,402
Per Common Share**............... 31.24 30.14 24.46 23.92 22.59
</TABLE>
* The federal and foreign income tax provided for each component of income
represents its allocated portion of the consolidated provision.
** Per share amounts have been retroactively adjusted to reflect the two-for-one
stock split effective April 19, 1996.
In February 1997, the Corporation entered into a definitive agreement to sell
its life and health insurance operations. As a result, these operations have
been classified as discontinued operations.
Amounts prior to 1994 do not reflect the accounting changes prescribed by
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, as restatement of prior year
amounts was not permitted. The change in unrealized appreciation or
depreciation of investments for 1994 excludes the increase in unrealized
appreciation, as of January 1, 1994, of $220,519,000 resulting from the
change in accounting principle.
40
<PAGE> 4
<TABLE>
<CAPTION>
FOR THE YEAR 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C>
REVENUES
Property and Casualty Insurance
Premiums Earned........................ $3,037,168 $2,836,135 $2,693,553 $2,705,560 $2,615,866
Investment Income...................... 476,984 463,413 426,267 364,126 266,230
Real Estate............................. 140,957 174,846 221,338 155,170 143,381
Corporate Investment Income............. 46,400 39,555 25,167 17,806 17,531
Realized Investment Gains (Losses)...... 61,089 39,619 40,147 (19,647) (16,088)
TOTAL REVENUES........................ 3,762,598 3,553,568 3,406,472 3,223,015 3,026,920
COMPONENTS OF NET INCOME*
Property and Casualty Insurance
Underwriting Income (Loss) (b)......... 18,594 20,709(d) (25,040) 15,818 62,394
Investment Income...................... 397,595 371,351 330,096 290,647 226,546
Real Estate Income (Loss)............... 25,007 40,015 42,021 40,018 36,079
Corporate Income (Loss)................. 16,325 14,760 705 (5,357) (4,229)
OPERATING INCOME FROM CONTINUING
OPERATIONS.......................... 457,521 446,835 347,782 341,126 320,790
Realized Investment Gains (Losses) from
Continuing Operations................. 40,289 25,819 26,447 (14,048) (9,388)
INCOME FROM CONTINUING OPERATIONS..... 497,810 472,654 374,229 327,078 311,402
Income from Discontinued Operations..... 54,174 49,455 46,588 32,547 18,658
NET INCOME............................ 551,984 522,109 420,817 359,625 330,060
DIVIDENDS DECLARED ON COMMON STOCK........ 127,757 109,136 96,515 87,766 71,443
CHANGE IN UNREALIZED APPRECIATION OR
DEPRECIATION OF INVESTMENTS, NET........ 12,163 (19,425) 70,330 29,815 12,294
PER SHARE DATA**
Operating Income from Continuing
Operations............................ $2.62 $2.60 $2.04 $2.03 $1.93
Income from Continuing Operations....... 2.85 2.75 2.19 1.95 1.88
Income from Discontinued Operations..... .31 .28 .27 .19 .11
Net Income(b)........................... 3.16 3.03(d) 2.46 2.14 1.99
Dividends Declared...................... .74 .66 .58 .54 .44 1/2
AT YEAR END
TOTAL ASSETS.............................. $13,885,882 $12,347,786 $11,390,374 $9,699,414 $8,615,658
INVESTED ASSETS
Property and Casualty Insurance......... 7,086,572 6,297,825 5,793,656 5,153,027 4,519,268
Corporate............................... 840,291 688,380 647,817 366,237 256,397
UNPAID CLAIMS............................. 6,591,305 6,016,396 5,605,006 4,585,848 3,888,485
LONG TERM DEBT............................ 1,045,776 812,573 604,156 353,684 315,620
TOTAL SHAREHOLDERS' EQUITY................ 3,541,605 2,882,639 2,603,739 2,238,447 1,937,033
Per Common Share**.................... 20.37 17.60 15.42 13.77 11.93
</TABLE>
(a) Premiums earned have been increased by a $125,000,000 return premium to the
Corporation's property and casualty insurance subsidiaries related to the
commutation of a medical malpractice reinsurance agreement.
(b) Net income has been increased by tax benefits of $6,400,000 or $.04 per
share in 1992, $7,200,000 or $.04 per share in 1991, $10,800,000 or $.06 per
share in 1990, $19,200,000 or $.11 per share in 1989, $20,400,000 or $.12
per share in 1988 and $28,800,000 or $.17 per share in 1987 related to the
exclusion from taxable income of a portion of the "fresh start" discount on
property and casualty unpaid claims as a result of the Tax Reform Act of
1986.
(c) Net income has been reduced by a net charge of $357,500,000 or $1.97 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
$.08 per share elimination of deferred income taxes related to estimated
property and casualty salvage and subrogation recoverable as a result of the
Revenue Reconciliation Act of 1990.
(e) Net income has been reduced by a net charge of $160,000,000 or $.89 per
share for the after-tax effect of a $255,000,000 write-down of the carrying
value of certain real estate assets to their estimated fair value.
(f) Net income has been reduced by a charge of $6,500,000 or $.04 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.
(g) Net income has been reduced by a one-time charge of $20,000,000 or $.11 per
share for the cumulative effect of changes in accounting principles
resulting from the Corporation's adoption of Statements of Financial
Accounting Standards No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions, and No. 109, Accounting for Income Taxes.
Income before the cumulative effect of changes in accounting principles was
$344,217,000 or $1.95 per share.
41
<PAGE> 5
The Chubb Corporation
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
IN THOUSANDS
YEARS ENDED DECEMBER 31
REVENUES 1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Premiums Earned (Note 13)............................... $4,569,256 $4,147,162 $3,776,283
Investment Income (Note 4).............................. 711,560 667,687 619,936
Real Estate............................................. 319,787 287,795 204,849
Realized Investment Gains (Note 4)...................... 79,929 108,852 54,125
---------- ---------- ----------
TOTAL REVENUES..................................... 5,680,532 5,211,496 4,655,193
---------- ---------- ----------
CLAIMS AND EXPENSES
Insurance Claims (Notes 13 and 14)...................... 3,010,755 2,669,981 2,519,359
Amortization of Deferred Policy Acquisition
Costs (Note 6).......................................... 1,237,968 1,120,943 1,041,245
Other Insurance Operating Costs and Expenses............ 290,191 262,084 223,990
Real Estate Cost of Sales and Expenses (Note 5)......... 555,642 280,099 210,799
Investment Expenses..................................... 12,436 11,887 11,617
Corporate Expenses...................................... 26,616 29,504 36,877
---------- ---------- ----------
TOTAL CLAIMS AND EXPENSES.......................... 5,133,608 4,374,498 4,043,887
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE FEDERAL
AND FOREIGN INCOME TAX........................... 546,924 836,998 611,306
FEDERAL AND FOREIGN INCOME TAX (NOTE 9)...................... 60,731 182,586 103,388
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS.................. 486,193 654,412 507,918
DISCONTINUED OPERATIONS, NET OF TAX (NOTE 3)
Income from Operations.................................. 48,491 42,216 20,551
Loss on Disposal........................................ (22,000) -- --
---------- ---------- ----------
INCOME FROM DISCONTINUED OPERATIONS................ 26,491 42,216 20,551
---------- ---------- ----------
NET INCOME......................................... $ 512,684 $ 696,628 $ 528,469
========= ========= =========
PER SHARE DATA (NOTES 1 AND 10)
Income from Continuing Operations....................... $ 2.75 $ 3.70 $ 2.87
Income from Discontinued Operations..................... .15 .23 .11
---------- ---------- ----------
Net Income......................................... $ 2.90 $ 3.93 $ 2.98
========= ========= =========
</TABLE>
See accompanying notes.
42
<PAGE> 6
The Chubb Corporation
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
IN THOUSANDS
DECEMBER 31
ASSETS 1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Invested Assets (Note 4)
Short Term Investments.......................................... $ 275,909 $ 429,217
Fixed Maturities
Held-to-Maturity -- Tax Exempt (market $2,573,356 and
$3,003,686)................................................ 2,443,595 2,825,686
Available-for-Sale
Tax Exempt (cost $4,415,101 and $3,607,925)................ 4,622,556 3,860,630
Taxable (cost $4,038,748 and $3,128,739)................... 4,092,697 3,257,004
Equity Securities (cost $540,522 and $459,087).................. 646,303 547,617
----------- -----------
TOTAL INVESTED ASSETS......................................... 12,081,060 10,920,154
Cash............................................................... 4,657 11,950
Accrued Investment Income.......................................... 195,346 199,228
Premiums Receivable................................................ 984,906 860,390
Reinsurance Recoverable on Unpaid Claims (Note 13)................. 1,767,885 1,973,666
Prepaid Reinsurance Premiums....................................... 326,682 484,358
Funds Held for Asbestos-Related Settlement (Note 14)............... 599,859 1,038,149
Deferred Policy Acquisition Costs (Note 6)......................... 601,198 558,676
Real Estate Assets (Notes 5 and 8)................................. 1,603,975 1,742,580
Deferred Income Tax (Note 9)....................................... 365,591 230,146
Other Assets....................................................... 564,299 772,335
Net Assets of Discontinued Operations (Note 3)..................... 843,408 844,645
----------- -----------
TOTAL ASSETS.................................................. $19,938,866 $19,636,277
========== ==========
LIABILITIES
Unpaid Claims (Note 14)............................................ $ 9,523,709 $ 9,588,141
Unearned Premiums.................................................. 2,617,503 2,570,682
Short Term Debt (Note 8)........................................... 189,450 151,600
Long Term Debt (Note 8)............................................ 1,070,532 1,150,832
Dividend Payable to Shareholders................................... 47,210 42,741
Accrued Expenses and Other Liabilities............................. 1,027,588 869,552
----------- -----------
TOTAL LIABILITIES............................................. 14,475,992 14,373,548
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 12 AND 14)
SHAREHOLDERS' EQUITY (NOTES 10 AND 17)
Preferred Stock -- Authorized 4,000,000 Shares;
$1 Par Value; Issued -- None.................................... -- --
Common Stock -- Authorized 600,000,000 Shares;
$1 Par Value; Issued 176,084,173 and 87,819,355 Shares.......... 176,084 87,819
Paid-In Surplus.................................................... 695,762 778,239
Retained Earnings.................................................. 4,530,512 4,206,517
Foreign Currency Translation Losses, Net of Income Tax............. (15,678) (3,433)
Unrealized Appreciation of Investments, Net (Note 4)............... 238,669 345,894
Receivable from Employee Stock Ownership Plan...................... (106,261) (114,998)
Treasury Stock, at Cost -- 1,223,182 and 518,468 Shares............ (56,214) (37,309)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY.................................... 5,462,874 5,262,729
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $19,938,866 $19,636,277
========== ==========
</TABLE>
See accompanying notes.
43
<PAGE> 7
The Chubb Corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
IN THOUSANDS
YEARS ENDED DECEMBER 31
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
PREFERRED STOCK
Balance, Beginning and End of Year.................... $ -- $ -- $ --
---------- ---------- ----------
COMMON STOCK
Balance, Beginning of Year............................ 87,819 87,798 87,709
Two-for-One Stock Split............................... 87,819 -- --
Shares Issued upon Exchange of Long Term Debt......... 481 -- --
Share Activity under Option and Incentive Plans....... (35) 21 89
---------- ---------- ----------
Balance, End of Year............................. 176,084 87,819 87,798
---------- ---------- ----------
PAID-IN SURPLUS
Balance, Beginning of Year............................ 778,239 786,596 782,186
Two-for-One Stock Split............................... (87,819) -- --
Exchange of Long Term Debt............................ 20,844 -- --
Additions (Reductions) Resulting from Share Activity
under Option and Incentive Plans.................... (15,502) (8,357) 4,410
---------- ---------- ----------
Balance, End of Year............................. 695,762 778,239 786,596
---------- ---------- ----------
RETAINED EARNINGS
Balance, Beginning of Year............................ 4,206,517 3,680,554 3,313,140
Net Income............................................ 512,684 696,628 528,469
Dividends Declared (per share $1.08, $.98 and $.92)... (188,689) (170,665) (161,055)
---------- ---------- ----------
Balance, End of Year............................. 4,530,512 4,206,517 3,680,554
---------- ---------- ----------
FOREIGN CURRENCY TRANSLATION GAINS (LOSSES)
Balance, Beginning of Year............................ (3,433) 9,766 327
Change During Year, Net of Income Tax (Note 16)....... (12,245) (13,199) 9,439
---------- ---------- ----------
Balance, End of Year............................. (15,678) (3,433) 9,766
---------- ---------- ----------
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS
Balance, Beginning of Year............................ 345,894 (124,339) 143,093
Cumulative Effect, as of January 1, 1994, of Change in
Accounting Principle, Net (Note 2).................. -- -- 220,519
Change During Year, Net (Note 4)...................... (107,225) 470,233 (487,951)
---------- ---------- ----------
Balance, End of Year............................. 238,669 345,894 (124,339)
---------- ---------- ----------
RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN
Balance, Beginning of Year............................ (114,998) (122,999) (130,326)
Principal Repayments.................................. 8,737 8,001 7,327
---------- ---------- ----------
Balance, End of Year............................. (106,261) (114,998) (122,999)
---------- ---------- ----------
TREASURY STOCK, AT COST
Balance, Beginning of Year............................ (37,309) (70,347) --
Repurchase of Shares.................................. (82,528) -- (72,052)
Share Activity under Option and Incentive Plans....... 63,623 33,038 --
Shares Issued -- Other................................ -- -- 1,705
---------- ---------- ----------
Balance, End of Year............................. (56,214) (37,309) (70,347)
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY....................... $5,462,874 $5,262,729 $4,247,029
========== ========== ==========
</TABLE>
See accompanying notes.
44
<PAGE> 8
The Chubb Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
IN THOUSANDS
YEARS ENDED DECEMBER 31
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.......................................... $ 512,684 $ 696,628 $ 528,469
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Claims, Net................... 141,349 681,595 482,834
Increase in Unearned Premiums, Net............... 204,497 158,830 174,926
Increase in Premiums Receivable.................. (124,516) (96,258) (72,196)
Decrease (Increase) in Funds Held for
Asbestos-Related Settlement.................... 438,290 (480,008) (19,969)
Decrease (Increase) in Medical Malpractice
Reinsurance Related Receivable................. 191,194 (66,194) --
Increase in Deferred Policy Acquisition Costs.... (42,522) (29,223) (39,751)
Deferred Income Tax Credit....................... (117,573) (16,830) (16,287)
Write-down of Real Estate Assets................. 255,000 -- --
Depreciation..................................... 58,991 53,535 44,157
Realized Investment Gains........................ (79,929) (108,852) (54,125)
Other, Net....................................... 193,376 46,808 (29,576)
Discontinued Operations, Net..................... (79,451) (125,739) (101,807)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES................................... 1,551,390 714,292 896,675
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturities --
Available-for-Sale................................. 3,430,532 3,953,901 2,723,317
Proceeds from Maturities of Fixed Maturities........ 762,885 651,385 401,469
Proceeds from Sales of Equity Securities............ 382,917 302,311 567,170
Purchases of Fixed Maturities....................... (5,520,511) (5,466,024) (3,814,935)
Purchases of Equity Securities...................... (395,198) (145,056) (358,734)
Decrease (Increase) in Short Term Investments, Net.. 153,308 269,263 (221,941)
Additions to Real Estate Assets, Net................ (81,963) (34,305) (43,216)
Purchases of Fixed Assets........................... (58,686) (68,435) (62,830)
Other, Net.......................................... (53,147) (23,940) (17,303)
Discontinued Operations, Net........................ (249,152) (216,579) (133,027)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES.......... (1,629,015) (777,479) (960,030)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Long Term Debt............ 85,989 173,900 33,225
Repayment of Long Term Debt......................... (145,629) (302,717) (20,769)
Increase in Short Term Debt, Net.................... 37,850 34,260 53,800
Dividends Paid to Shareholders...................... (184,220) (167,959) (158,735)
Repurchase of Shares................................ (82,528) -- (72,052)
Other, Net.......................................... 52,749 27,944 10,608
Discontinued Operations, Net........................ 306,121 304,110 218,291
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES................................... 70,332 69,538 64,368
----------- ----------- -----------
Net Increase (Decrease) in Cash....................... (7,293) 6,351 1,013
Cash at Beginning of Year............................. 11,950 5,599 4,586
----------- ----------- -----------
CASH AT END OF YEAR............................ $ 4,657 $ 11,950 $ 5,599
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Year from Continuing Operations for
Interest (Net of Amounts Capitalized)............ $ 77,728 $ 83,461 $ 75,840
Federal and Foreign Income Taxes................. 163,265 191,989 121,610
</TABLE>
See accompanying notes.
45
<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 subsidiaries.
Significant intercompany transactions have been eliminated in consolidation.
The consolidated financial statements reflect estimates and judgments made by
management that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Corporation is a holding company with subsidiaries principally engaged in
two industries: property and casualty insurance and real estate.
On February 23, 1997, the Corporation entered into a definitive agreement to
sell its life and health insurance subsidiaries. Accordingly, the life and
health insurance subsidiaries have been classified as discontinued operations in
the consolidated financial statements (see Note (3)).
Certain other amounts in the consolidated financial statements for prior years
have been reclassified to conform with the 1996 presentation. Also, share and
per share amounts have been retroactively adjusted to reflect the two-for-one
stock split paid to shareholders of record as of April 19, 1996.
(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.
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.
Deferred policy acquisition costs are reviewed to determine that they do not
exceed recoverable amounts, after considering anticipated investment income.
(d) Unpaid Claims
Liabilities for unpaid claims include the accumulation of individual case
estimates for claims reported 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) Reinsurance
In the ordinary course of business, the Corporation's insurance subsidiaries
assume and cede reinsurance with other insurance companies and are members of
various pools and associations. These arrangements provide greater
diversification of business and minimize the maximum net loss potential arising
from large risks. A large portion of the reinsurance is effected under contracts
known as treaties and in some instances by negotiation on individual risks.
Certain of these arrangements consist of excess of loss and catastrophe
contracts which protect against losses over stipulated amounts arising from any
one occurrence or event. Ceded reinsurance contracts do not relieve the
Corporation's insurance subsidiaries of their obligation to the policyholders.
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.
46
<PAGE> 10
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. Amounts recoverable from reinsurers are recognized as assets at the
same time and in a manner consistent with the liabilities associated with the
reinsured policies.
(f) Funds Held for Asbestos-Related Settlement
Funds held for asbestos-related settlement are assets of the Corporation's
property and casualty insurance subsidiaries that accrue income for the benefit
of participants in the class settlement of asbestos-related bodily injury claims
against Fibreboard Corporation (see Note (14)).
(g) Real Estate
Real estate properties are carried at cost, net of write-downs for impairment.
Real estate taxes, interest and other carrying costs incurred prior to
completion of the assets for their intended use are capitalized. Also, costs
incurred during the initial leasing of income producing properties are
capitalized until the project is substantially complete, subject to a maximum
time period subsequent to completion of major construction activity.
Effective January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets. Under SFAS No.
121, real estate properties are reviewed for impairment whenever events or
circumstances indicate that the carrying value of such properties may not be
recoverable. In performing the review for recoverability of carrying value,
estimates are made of the future undiscounted cash flows from each of the
properties during the period the property will be held and upon its eventual
disposition. If the expected future undiscounted cash flows are less than the
carrying value of such properties, an impairment loss is recognized, resulting
in a write-down of the carrying value of the property to an amount based on its
fair value.
Depreciation of real estate properties is calculated using the straight-line
method over the estimated useful lives of the properties.
Real estate mortgages and notes receivable are carried at unpaid principal
balances less an allowance for uncollectible amounts. A loan is considered
impaired when it is probable that all principal and interest amounts will not be
collected according to the contractual terms of the loan agreement. An allowance
for uncollectible amounts is established to the extent that the unpaid principal
balance is greater than the discounted future cash flows of the loan, subject to
the estimated fair value of the underlying collateral. These cash flows are
discounted at the loan's effective interest rate.
Rental revenues are recognized on a straight-line basis over the term of the
lease. Profits on land, townhome unit and commercial building sales are
recognized at closing, subject to compliance with applicable accounting
guidelines. Profits on high-rise condominium unit sales are recognized using the
percentage of completion method, subject to achievement of a minimum level of
unit sales. Profits on construction contracts are recognized using the
percentage of completion method.
(h) Property and Equipment
Property and equipment used in operations are carried at cost less accumulated
depreciation. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets.
(i) Stock-based Compensation
The intrinsic value method of accounting is used for stock-based compensation
plans. Under the intrinsic value method, compensation cost is measured as the
excess, if any, of the quoted market price of the stock at the grant date over
the amount an employee must pay to acquire the stock.
(j) Income Taxes
The Corporation and its domestic subsidiaries file a consolidated federal
income tax return.
Deferred income tax assets and liabilities are recognized for the expected
future tax effects attributable to temporary differences between the financial
reporting and tax bases of assets and liabilities, based on enacted tax rates
and other provisions of tax law. The effect of a change in tax laws or rates is
recognized in income in the period in which such change is enacted.
U. S. federal income taxes are accrued on undistributed earnings of foreign
subsidiaries.
(k) Foreign Exchange
Assets and liabilities relating to foreign operations are translated into U.
S. dollars using current exchange rates; revenues and expenses are translated
into U. S. dollars using the average exchange rates for each year.
The functional currency of 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.
47
<PAGE> 11
(l) 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
180,195,310, 179,884,682 and 180,899,154 in 1996, 1995 and 1994, 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.
(m) Cash Flow Information
In the statement of cash flows, short term investments are not considered to
be cash equivalents. The effect of changes in foreign exchange rates on cash
balances was immaterial.
In 1996, $20,660,000 of the 6% exchangeable subordinated notes were exchanged
for 480,464 shares of common stock of the Corporation. This noncash transaction
has been excluded from the consolidated statements of cash flows.
(n) 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 real estate mortgages and notes receivable are estimated
individually as the value of the discounted future cash flows of the loan,
subject to the estimated fair value of the underlying collateral. The cash
flows are discounted at rates based on a U.S. Treasury security with a
maturity similar to the loan, adjusted for credit risk.
(v) The carrying value of short term debt approximates fair value due to the
short maturities of this debt.
(vi) Long term debt consists of term loans, mortgages payable and long term
notes. Fair values of term loans approximate the carrying values because such
loans consist primarily of variable-rate debt that reprices frequently. Fair
values of mortgages payable are estimated using discounted cash flow analyses.
Fair values of long term notes are based on prices quoted by dealers.
The carrying values and fair values of financial instruments of continuing
operations were as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------------
1996 1995
---------------------- ----------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Assets
Invested assets
Short term investments.... $ 275,909 $ 275,909 $ 429,217 $ 429,217
Fixed maturities (Note 4)
Held-to-maturity........ 2,443,595 2,573,356 2,825,686 3,003,686
Available-for-sale...... 8,715,253 8,715,253 7,117,634 7,117,634
Equity securities......... 646,303 646,303 547,617 547,617
Real estate mortgages and
notes receivable
(Note 5).................. 502,374 487,200 409,564 405,400
Liabilities
Short term debt (Note 8).... 189,450 189,450 151,600 151,600
Long term debt (Note 8)..... 1,070,532 1,128,500 1,150,832 1,214,422
</TABLE>
(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.
48
<PAGE> 12
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, available-for-sale
or trading. However, SFAS No. 115 establishes more stringent criteria for
classifying fixed maturities 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 SFAS No. 115 has not had an impact on net income nor will it in
future years.
(3) DISCONTINUED OPERATIONS
The Corporation entered into a definitive agreement, dated February 23, 1997,
to sell Chubb Life Insurance Company of America and its subsidiaries to
Jefferson-Pilot Corporation for $875,000,000 in cash, subject to various closing
adjustments and other customary conditions. The sale is subject to regulatory
approvals and is expected to be completed by the end of the second quarter of
1997.
The estimated loss on the sale of the life and health insurance subsidiaries
is $22,000,000 consisting of a loss before tax of $5,000,000 and a tax of
$17,000,000 on the sale. The tax on the sale is due to the tax carrying value of
these subsidiaries being lower than their carrying value for financial statement
purposes. The purchase price will not be adjusted to reflect results of
operations subsequent to December 31, 1996. Therefore, it is expected that the
discontinued life and health insurance operations will not affect the
Corporation's net income in the future.
The results of the discontinued operations were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------
1996 1995 1994
-------- -------- ----------
(in thousands)
<S> <C> <C> <C>
Revenues
Premiums earned and policy
charges...................... $562,058 $622,937 $ 836,293
Investment income.............. 242,226 232,950 208,745
Realized investment gains...... 12,587 21,808 9,304
-------- -------- ----------
Total revenues............. 816,871 877,695 1,054,342
-------- -------- ----------
Benefits, claims and expenses
Insurance claims and
policyholder benefits........ 492,467 549,219 752,205
Amortization of deferred policy
acquisition costs............ 97,127 77,457 72,250
Other insurance costs and
expenses..................... 152,042 185,086 199,399
Investment expenses............ 2,301 2,860 2,430
-------- -------- ----------
Total benefits, claims and
expenses................. 743,937 814,622 1,026,284
-------- -------- ----------
Income before federal
income tax............... 72,934 63,073 28,058
Federal income tax (credit)
Current........................ 30,415 29,050 9,808
Deferred....................... (5,972) (8,193) (2,301)
-------- -------- ----------
24,443 20,857 7,507
-------- -------- ----------
Income from operations..... $ 48,491 $ 42,216 $ 20,551
======== ======== ==========
</TABLE>
The assets and liabilities of the discontinued operations were as follows:
<TABLE>
<CAPTION>
December 31
-----------------------
1996 1995
---------- ----------
(in thousands)
<S> <C> <C>
Assets
Invested assets
Short term investments............. $ 48,333 $ 55,222
Fixed maturities
Held-to-maturity................. 381,230 403,539
Available-for-sale............... 2,498,281 2,255,951
Equity securities.................. 30,681 40,208
Policy and mortgage loans.......... 226,802 212,339
---------- ----------
3,185,327 2,967,259
Accrued investment income............ 52,473 46,091
Deferred policy acquisition costs.... 679,113 612,709
Other assets......................... 814,906 649,306
---------- ----------
Total assets..................... 4,731,819 4,275,365
---------- ----------
Liabilities
Life and health policy liabilities... 3,230,656 2,943,138
Short term debt...................... 50,500 36,000
Deferred income tax.................. 44,095 70,472
Accrued expenses and other
liabilities........................ 563,160 381,110
---------- ----------
Total liabilities................ 3,888,411 3,430,720
---------- ----------
Net assets of discontinued
operations..................... $ 843,408 $ 844,645
========== ==========
</TABLE>
In addition to the applicable accounting policies for continuing operations
disclosed in Note (1), the following accounting policies relate to discontinued
operations:
(a) Premium Revenues and Related Expenses
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 charged against income include claims
incurred in excess of the related policyholder account balances and interest
credited to the policyholder account balances.
49
<PAGE> 13
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.
Certain costs of acquiring life insurance contracts, principally commissions,
underwriting costs and certain variable agency costs, are deferred. Deferred
policy acquisition costs for universal life and other interest-sensitive life
insurance contracts are amortized over the lives of the contracts in relation to
the present value of estimated gross profits expected to be realized. Deferred
policy acquisition costs related to such contracts are adjusted to reflect the
effects that unrealized gains or losses on investments classified as
available-for-sale would have had on the present value of estimated gross
profits had such gains or losses actually been realized. This adjustment is
excluded from income and charged or credited directly to the unrealized
appreciation or depreciation of investments component of shareholders' equity,
net of applicable deferred income tax. Deferred policy acquisition costs for
traditional life insurance contracts are amortized over the premium payment
period of the related contracts using assumptions consistent with those used in
computing policy liabilities.
(b) Policy Liabilities
Liabilities for universal life and other interest-sensitive life insurance
contracts represent the policyholder account balances before surrender charges.
Interest crediting rates ranged from 4% to 6 7/8% in 1996.
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 1996. 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.
(c) 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 of the discontinued operations was $63,196,000
and $65,382,000 at December 31, 1996 and 1995, respectively.
(4) INVESTED ASSETS AND RELATED INCOME
(a) The sources of net investment income from continuing operations were as
follows:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Fixed maturities................ $669,715 $604,312 $555,278
Equity securities............... 9,977 12,292 22,070
Short term investments.......... 23,889 35,045 25,992
Other........................... 7,979 16,038 16,596
-------- -------- --------
Gross investment income........ 711,560 667,687 619,936
Investment expenses............. 12,436 11,887 11,617
-------- -------- --------
Net investment income from
continuing operations...... $699,124 $655,800 $608,319
======== ======== ========
</TABLE>
(b) Realized investment gains and losses from continuing operations were as
follows:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Gross realized investment gains
Fixed maturities............... $ 56,492 $ 66,763 $ 62,636
Equity securities.............. 75,566 95,379 130,129
-------- -------- --------
132,058 162,142 192,765
-------- -------- --------
Gross realized investment losses
Fixed maturities............... 45,717 46,520 126,965
Equity securities.............. 6,412 6,770 11,675
-------- -------- --------
52,129 53,290 138,640
-------- -------- --------
Realized investment gains....... 79,929 108,852 54,125
Income tax...................... 27,900 38,100 19,001
-------- -------- --------
Realized investment gains from
continuing operations........ $ 52,029 $ 70,752 $ 35,124
======== ======== ========
</TABLE>
(c) The components of unrealized appreciation of investments carried at market
value were as follows:
<TABLE>
<CAPTION>
December 31
---------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Continuing operations
Equity securities
Gross unrealized appreciation........ $114,940 $ 99,481
Gross unrealized depreciation........ 9,159 10,951
-------- --------
105,781 88,530
-------- --------
Fixed maturities
Gross unrealized appreciation........ 297,045 393,521
Gross unrealized depreciation........ 35,641 12,551
-------- --------
261,404 380,970
-------- --------
367,185 469,500
Deferred income tax liability.......... 128,516 164,326
-------- --------
238,669 305,174
Discontinued operations, net............. -- 40,720
-------- --------
$238,669 $345,894
======== ========
</TABLE>
50
<PAGE> 14
The change in unrealized appreciation or depreciation of investments carried
at market value was as follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------
1996 1995 1994
--------- -------- ---------
(in thousands)
<S> <C> <C> <C>
Continuing operations
Change in unrealized appreciation of equity securities............................. $ 17,251 $ 60,878 $(178,267)
Change in unrealized appreciation or depreciation of fixed maturities.............. (119,566) 499,053 (418,668)
--------- -------- ---------
(102,315) 559,931 (596,935)
Deferred income tax (credit)....................................................... (35,810) 195,976 (208,927)
Increase (decrease) in valuation allowance......................................... -- (31,651) 31,651
--------- -------- ---------
Change in unrealized appreciation or depreciation.................................. (66,505) 395,606 (419,659)
Discontinued operations, net......................................................... (40,720) 74,627 (68,292)
--------- -------- ---------
(107,225) 470,233 (487,951)
Cumulative effect, as of January 1, 1994, of change in accounting principle, net..... -- -- 220,519
--------- -------- ---------
$(107,225) $470,233 $(267,432)
========= ======== =========
</TABLE>
The unrealized appreciation or depreciation of fixed maturities carried at
amortized cost is not reflected in the financial statements. The change in
unrealized appreciation of fixed maturities of continuing operations carried at
amortized cost was a decrease of $48,239,000, an increase of $150,427,000 and a
decrease of $557,123,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
(d) The amortized cost and estimated market value of fixed maturities were as
follows:
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------------------------------------------
1996 1995
---------------------------------------------------- ----------------------------------------------------
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>
Continuing operations
Held-to-maturity --
Tax exempt....... $ 2,443,595 $131,147 $ 1,386 $ 2,573,356 $2,825,686 $178,959 $ 959 $3,003,686
----------- -------- ------- ----------- ---------- -------- ------- -----------
Available-for-sale
Tax exempt....... 4,415,101 210,136 2,681 4,622,556 3,607,925 253,814 1,109 3,860,630
----------- -------- ------- ----------- ---------- -------- ------- -----------
Taxable
U.S. Government
and
government
agency and
authority
obligations 1,092,269 5,756 8,345 1,089,680 784,394 32,051 25 816,420
Corporate
bonds........ 317,735 7,460 1,845 323,350 301,108 17,982 419 318,671
Foreign
bonds........ 1,169,238 58,500 11,288 1,216,450 1,316,938 61,750 10,280 1,368,408
Mortgage-backed
securities... 1,444,506 15,043 11,482 1,448,067 701,299 27,924 535 728,688
Redeemable
preferred
stocks....... 15,000 150 -- 15,150 25,000 -- 183 24,817
----------- -------- ------- ----------- ---------- -------- ------- -----------
4,038,748 86,909 32,960 4,092,697 3,128,739 139,707 11,442 3,257,004
----------- -------- ------- ----------- ---------- -------- ------- -----------
Total avail-
able for sale 8,453,849 297,045 35,641 8,715,253 6,736,664 393,521 12,551 7,117,634
----------- -------- ------- ----------- ---------- -------- ------- -----------
Total fixed
maturities... $10,897,444 $428,192 $37,027 $11,288,609 $9,562,350 $572,480 $13,510 $10,121,320
=========== ======== ======= =========== ========== ======== ======= ===========
Discontinued
operations
Held-to-maturity... $ 381,230 $ 20,022 $ 2,343 $ 398,909 $ 403,539 $ 31,479 $ 46 $ 434,972
Available-for-sale... 2,443,448 71,332 16,499 2,498,281 2,153,936 111,291 9,276 2,255,951
----------- -------- ------- ----------- ---------- -------- ------- -----------
Total fixed
maturities... $ 2,824,678 $ 91,354 $18,842 $ 2,897,190 $2,557,475 $142,770 $ 9,322 $ 2,690,923
=========== ======== ======= =========== ========== ======== ======= ===========
</TABLE>
The amortized cost and estimated market value of fixed maturities at December
31, 1996 by contractual maturity were as follows:
<TABLE>
<CAPTION>
Continuing Operations Discontinued Operations
------------------------------------------------- -------------------------
Held-to-Maturity Available-for-Sale Held-to-Maturity
----------------------- ----------------------- ---------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---------- ---------- ---------- ---------- --------- ---------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less............. $ 105,859 $ 107,145 $ 80,671 $ 81,629 $ 10,026 $ 10,207
Due after one year through five
years............................. 684,380 720,503 1,306,804 1,330,143 63,785 68,892
Due after five years through ten
years............................. 924,995 979,145 2,307,112 2,402,009 75,743 81,875
Due after ten years................. 728,361 766,563 3,314,756 3,453,405 58,656 65,043
---------- ---------- ---------- ---------- -------- --------
2,443,595 2,573,356 7,009,343 7,267,186 208,210 226,017
Mortgage-backed securities.......... -- -- 1,444,506 1,448,067 173,020 172,892
---------- ---------- ---------- ---------- -------- --------
$2,443,595 $2,573,356 $8,453,849 $8,715,253 $381,230 $398,909
========== ========== ========== ========== ======== ========
<CAPTION>
Discontinued Operations
----------------------------------------
Available-for-Sale Available-for-Sale
------------------ ------------------
Estimated
Amortized Market
Cost Value
---------- ----------
<S> <C> <C>
Due in one year or less............. $ 10,240 $ 10,266
Due after one year through five
years............................. 257,205 266,921
Due after five years through ten
years............................. 445,479 456,299
Due after ten years................. 819,276 830,643
---------- ----------
1,532,200 1,564,129
Mortgage-backed securities.......... 911,248 934,152
---------- ----------
$2,443,448 $2,498,281
========== ==========
</TABLE>
Actual maturities could differ from contractual maturities because borrowers may
have the right to call or prepay obligations.
51
<PAGE> 15
(5) REAL ESTATE
In October 1996, the Corporation announced that it was exploring the possible
sale of all or a portion of its real estate assets. During February 1997,
indications of interest in purchasing a substantial portion of the commercial
properties were received from several parties. In March 1997, the Corporation
announced that it had entered into an agreement with a prospective purchaser to
perform due diligence in anticipation of executing a contract for the sale of
these properties. In addition, the Corporation is continuing to explore the sale
of its residential and retail properties.
Because the plan to pursue the sale of these assets in the near term
represented a change in circumstances relating to the manner in which these
assets are expected to be used, the recoverability of their carrying value was
reassessed. As a result, an impairment loss of $255,000,000 was recognized in
1996 to reduce the carrying value of these assets to their estimated fair value.
This charge is included in real estate cost of sales and expenses in the
consolidated statements of income.
The components of real estate assets were as follows:
<TABLE>
<CAPTION>
December 31
-----------------------
1996 1995
---------- ----------
(in thousands)
<S> <C> <C>
Mortgages and notes receivable (net of
allowance for uncollectible amounts
of $85,669 and $87,617).............. $ 502,374 $ 409,564
Income producing properties............ 584,496 864,449
Construction in progress............... 135,030 87,870
Land under development and unimproved
land................................. 382,075 380,697
---------- ----------
$1,603,975 $1,742,580
========== ==========
</TABLE>
Substantially all mortgages and notes receivable are secured by buildings and
land. The ultimate collectibility of the receivables is evaluated continuously
and an appropriate allowance for uncollectible amounts established. Mortgages
and notes receivable had an aggregate fair value of approximately $487,200,000
and $405,400,000 at December 31, 1996 and 1995, 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 $10,978,000,
$14,123,000 and $12,086,000 for 1996, 1995 and 1994, respectively.
(6) DEFERRED POLICY ACQUISITION COSTS
Property and casualty insurance policy acquisition costs deferred and the
related amortization charged against income were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of
year.................. $ 558,676 $ 529,453 $ 489,702
----------- ----------- -----------
Costs deferred during
year
Commissions and
brokerage........... 653,534 592,687 544,733
Premium taxes and
assessments......... 114,666 108,002 108,008
Salaries and
overhead............ 512,290 449,477 428,255
----------- ----------- -----------
1,280,490 1,150,166 1,080,996
Amortization during
year.................. (1,237,968) (1,120,943) (1,041,245)
----------- ----------- -----------
Balance, end of year.... $ 601,198 $ 558,676 $ 529,453
=========== =========== ===========
</TABLE>
(7) PROPERTY AND EQUIPMENT
Property and equipment of continuing operations included in other assets were
as follows:
<TABLE>
<CAPTION>
December 31
-------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Cost...................................... $363,079 $329,728
Less accumulated depreciation............. 155,502 131,218
-------- --------
$207,577 $198,510
======== ========
</TABLE>
Depreciation expense related to property and equipment from continuing
operations was $48,013,000, $39,412,000 and $32,071,000 for 1996, 1995 and 1994,
respectively.
(8) DEBT AND CREDIT ARRANGEMENTS
(a) Short term debt consists of commercial paper used 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. Borrowings 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 1/2% and 5 3/4% at December 31, 1996 and 1995,
respectively.
52
<PAGE> 16
(b) Long term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
-------------------------------------------------
1996 1995
----------------------- -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Term loans....... $ 311,351 $ 313,648 $ 331,023 $ 331,023
Mortgages........ 189,841 191,630 199,809 200,395
8 3/4% notes..... 90,000 93,879 120,000 133,104
6% notes......... 150,000 149,685 150,000 151,365
6 7/8% notes..... 100,000 101,010 100,000 105,410
6% exchangeable
subordinated
notes.......... 229,340 278,648 250,000 293,125
---------- ---------- ---------- ----------
$1,070,532 $1,128,500 $1,150,832 $1,214,422
========== ========== ========== ==========
</TABLE>
The term loans and mortgages are obligations of the real estate subsidiaries.
The term loans mature in varying amounts through 2001. Substantially all term
loans are at an interest rate equivalent to the lower of the prime rate or a
rate associated with the lender's cost of funds. The mortgages payable are due
in varying amounts monthly through 2010. At December 31, 1996, the range of
interest rates for term loans was 7% 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 $880,410,000 at December 31, 1996.
The Corporation has outstanding $90,000,000 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 1997 and 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 $229,340,000 of 6%
exchangeable subordinated notes due May 15, 1998, which are guaranteed by the
Corporation. The notes are redeemable, in whole or in part, at the option of
Chubb Capital at redemption prices declining from 101.7% of the principal amount
if redeemed before May 15, 1997 to 100.9% of the principal amount if redeemed
thereafter. The notes are exchangeable at the option of the holder into 23.256
shares of common stock of the Corporation for each $1,000 of principal amount,
equivalent to a conversion price of $43.00 per share. In 1996, the holders of
$20,660,000 of notes elected this option, resulting in the issuance of 480,464
shares of common stock.
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, 1996 are as follows:
<TABLE>
<CAPTION>
Years Ending Term Loans
December 31 and Mortgages Notes Total
- ------------------------- ------------- -------- --------
(in thousands)
<S> <C> <C> <C>
1997................... $ 78,790 $ 30,000 $108,790
1998................... 49,187 409,340 458,527
1999................... 61,999 30,000 91,999
2000................... 114,839 -- 114,839
2001................... 178,890 -- 178,890
</TABLE>
(c) Interest costs for continuing operations of $89,482,000, $98,644,000 and
$96,488,000 were incurred in 1996, 1995 and 1994, respectively, of which
$12,764,000, $16,352,000 and $19,407,000 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
$140,000,000 at December 31, 1996. 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.
53
<PAGE> 17
(9) FEDERAL AND FOREIGN INCOME TAX
(a) Income tax expense for continuing operations consisted of the following
components:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------
1996 1995 1994
--------- -------- --------
(in thousands)
<S> <C> <C> <C>
Current tax
United States................................................................... $ 152,061 $177,954 $ 88,040
Foreign......................................................................... 26,243 21,462 31,635
Deferred tax credit, principally United States.................................... (117,573) (16,830) (16,287)
--------- -------- --------
$ 60,731 $182,586 $103,388
========= ======== ========
</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
--------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
% of % of % of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
--------- ------- --------- ------- --------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations before federal and
foreign income tax.................................. $ 546,924 $ 836,998 $ 611,306
========= ========= =========
Tax at statutory federal income tax rate.............. $ 191,423 35.0% $ 292,949 35.0% $ 213,957 35.0%
Tax exempt interest income............................ (118,961) (21.8) (114,113) (13.6) (108,859) (17.8)
Other, net............................................ (11,731) (2.1) 3,750 .4 (1,710) (.3)
--------- ----- --------- ----- --------- -----
Actual tax for continuing operations............ $ 60,731 11.1% $ 182,586 21.8% $ 103,388 16.9%
========= ===== ========= ===== ========= =====
</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
-------------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Deferred income tax assets
Unpaid claims............................................................................ $521,952 $523,535
Unearned premiums........................................................................ 142,153 130,226
Postretirement benefits.................................................................. 52,921 46,851
Other, net............................................................................... 25,150 9,567
-------- --------
Total.................................................................................. 742,176 710,179
-------- --------
Deferred income tax liabilities
Deferred policy acquisition costs........................................................ 185,805 173,936
Real estate assets....................................................................... 45,264 141,771
Unrealized appreciation of investments................................................... 128,516 164,326
Tax on the sale of discontinued operations............................................... 17,000 --
-------- --------
Total.................................................................................. 376,585 480,033
-------- --------
Net deferred income tax asset for continuing operations.............................. $365,591 $230,146
======== ========
</TABLE>
54
<PAGE> 18
(10) STOCK-BASED COMPENSATION PLANS
(a) In 1996, the Corporation adopted the Long-Term Stock Incentive Plan
(1996), which succeeded the Long-Term Stock Incentive Plan (1992). The Long-Term
Stock Incentive Plan (1996) provides for the granting of stock options,
performance shares, restricted stock and other stock-based awards to key
employees. The maximum number of shares of the Corporation's common stock in
respect to which stock-based awards may be granted under the 1996 plan is
10,230,000 shares plus up to an additional 3,770,000 shares to the extent shares
are reacquired by the Corporation subsequent to December 31, 1996. At December
31, 1996, 10,178,354 shares were available for grant under the 1996 Plan.
Stock options are granted at exercise prices not less than the fair market
value of the Corporation's common stock on the date of grant. The terms and
conditions upon which options become exercisable may vary among grants. Options
expire no later than ten years from the date of grant.
Information concerning stock options granted under the Long-Term Stock
Incentive Plans and a prior stock option plan is as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------- -------------------------------------
Number Weighted Average Number Weighted Average
of Shares Exercise Price of Shares Exercise Price
---------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year....... 6,565,034 $37.59 5,449,618 $35.11
Granted.............................. 2,504,048 48.82 1,994,230 41.12
Exercised............................ (782,403) 31.77 (738,332) 28.13
Forfeited............................ (227,850) 43.26 (140,482) 40.93
---------- ----------
Outstanding, end of year............. 8,058,829 41.48 6,565,034 37.59
========== ==========
Exercisable, end of year............. 4,852,845 38.10 3,961,586 35.35
<CAPTION>
1994
-------------------------------------
Number Weighted Average
of Shares Exercise Price
---------------- ----------------
<S> <C> <C>
Outstanding, beginning of year....... 4,167,516 $32.58
Granted.............................. 1,509,050 40.97
Exercised............................ (152,068) 20.62
Forfeited............................ (74,880) 39.91
----------
Outstanding, end of year............. 5,449,618 35.11
==========
Exercisable, end of year............. 3,330,456 31.23
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------------------------------------------
Options Outstanding
----------------------------------------------------- Options Exercisable
Weighted Average --------------------------------
Range of Number Weighted Average Remaining Number Weighted Average
Option Exercise Price Outstanding Exercise Price Contractual Life Exercisable Exercise Price
- ------------------------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$14.31 - $36.03.................... 1,511,685 $30.51 4.4 years 1,511,685 $30.51
40.97 - 55.19.................... 6,547,144 44.02 8.1 years 3,341,160 41.53
----------- -----------
8,058,829 41.48 7.4 years 4,852,845 38.10
========== ==========
</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.
The Corporation uses the intrinsic value based method of accounting for
stock-based compensation, under which compensation cost is measured as the
excess, if any, of the quoted market price of the stock at the grant date over
the amount an employee must pay to acquire the stock. Since the exercise price
of stock options granted under the Long-Term Stock Incentive Plans is not less
than the market price of the underlying stock on the date of grant, no
compensation cost has been recognized for such grants. The aggregate amount
charged against income with respect to performance share and restricted stock
awards was $10,156,000, $8,626,000 and $5,213,000 in 1996, 1995 and 1994,
respectively.
The following pro forma net income and earnings per share information has
been determined as if the Corporation had accounted for stock-based compensation
awarded under the Long-Term Stock Incentive Plans using the fair value based
method. Under the fair value method, the estimated fair value of awards would be
charged against income on a straight-line basis over the vesting period. The pro
forma effect on net income for 1995 and 1996 is not representative of the pro
forma effect on net income in future years because, as required by SFAS No. 123,
Accounting for Stock Based Compensation, no consideration has been given to
awards granted prior to 1995.
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
As Pro As Pro
Reported Forma Reported Forma
-------- -------- -------- --------
(in thousands except for earnings per share)
<S> <C> <C> <C> <C>
Net Income........................................ $512,684 $496,640 $696,628 $692,360
Earnings Per Share................................ 2.90 2.81 3.93 3.90
</TABLE>
55
<PAGE> 19
The weighted average fair value of options granted under the Long-Term
Stock Incentive Plans during 1996 and 1995 were $11.04 and $10.18, respectively.
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes Model with the following weighted average assumptions. The
risk-free interest rates for 1996 and 1995 were 5.9% and 6.3%, respectively. The
expected volatility of the market price of the Corporation's common stock for
1996 and 1995 grants was 18.3% and 19.3%, respectively. The expected average
term of the granted options was 5 1/2 years and the dividend yield was 2.1% for
both years.
(b) The Corporation has a leveraged Employee Stock Ownership Plan (ESOP) in
which substantially all employees are eligible to participate. At its inception
in 1989, the ESOP used the proceeds of a $150,000,000 loan from the Corporation
to purchase 7,792,204 newly issued shares of the Corporation's common stock. The
loan is due in September 2004 and bears interest at 9%. The Corporation has
recorded the receivable from the ESOP as a separate reduction of shareholders'
equity on the consolidated balance sheets. This balance is reduced as repayments
are made on the loan principal.
The Corporation and its participating subsidiaries make semi-annual
contributions to the ESOP in amounts determined at the discretion of the
Corporation's Board of Directors. The contributions, together with the dividends
on the 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 1996, 1995 and 1994, cash contributions to the ESOP of $12,707,000,
$12,307,000 and $12,146,000, respectively, were charged against income.
Dividends on unallocated shares used for debt service by the ESOP were
$4,571,000, $4,468,000 and $4,615,000 in 1996, 1995 and 1994, respectively.
The number of allocated and unallocated shares held by the ESOP at December
31, 1996 were 3,093,619 and 4,155,844, respectively.
(c) The Corporation has a Stock Purchase Plan under which substantially all
employees are eligible to purchase shares of the Corporation's common stock
based on compensation. Shares are purchased at a price not less than 95% of the
fair market value on the date of grant. At December 31, 1996, there were 566,309
subscribed shares at a price of $52.81. The right to purchase such shares
expires in December 1998. No compensation cost has been recognized for such
rights. Had the fair value method been used, the cost under this method would
have been immaterial.
(11) EMPLOYEE BENEFITS
(a) The Corporation and its subsidiaries have several non-contributory
defined benefit pension plans covering substantially all employees. The benefits
are generally based on an employee's years of service and average compensation
during the last five years of employment. Pension costs are determined using the
projected unit credit method. The Corporation's policy is to make annual
contributions that meet the minimum funding requirements of the Employee
Retirement Income Security Act of 1974. Contributions are intended to provide
not only for benefits attributed to service to date but also for those expected
to be earned in the future.
The components of net pension cost were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Service cost of current
period.................... $ 20,633 $ 20,422 $ 19,702
Interest cost on projected
benefit obligation........ 26,022 23,822 21,232
Actual return on plan
assets.................... (49,075) (68,542) (523)
Net amortization and
deferral.................. 17,468 42,730 (23,420)
-------- -------- --------
Net pension cost........ $ 15,048 $ 18,432 $ 16,991
======== ======== ========
</TABLE>
56
<PAGE> 20
The following table sets forth the plans' funded status and amounts recognized
in the balance sheets:
<TABLE>
<CAPTION>
December 31
------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Actuarial present value of benefit
obligation
for service rendered to date:
Accumulated benefit obligation based
on current salary levels,
including vested benefits of
$241,392 and $212,752............. $253,893 $224,821
Additional amount related to
projected future salary
increases......................... 107,004 131,473
-------- --------
Projected benefit obligation for
service rendered to date.......... 360,897 356,294
Plan assets at fair value............... 406,876 341,112
-------- --------
Projected benefit obligation in excess
of (less than) plan assets............ (45,979) 15,182
Unrecognized net gain from past
experience different from that
assumed............................... 98,567 36,196
Unrecognized prior service costs........ (4,648) (5,208)
Unrecognized net asset at January 1,
1985, being recognized principally over
19 years............................... 6,874 8,297
-------- --------
Pension liability included in other
liabilities......................... $ 54,814 $ 54,467
======== ========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation at December 31, 1996 and 1995 was
7 3/4% and 7 1/2%, respectively, and the rate of increase in future compensation
levels was 5% for 1996 and 6% for 1995. The expected long term rate of return on
assets was 9% for both years.
The decrease in net pension cost in 1996 was due primarily to the reduction,
effective January 1, 1996, in the assumed rate of increase in future
compensation levels. Such reduction also resulted in a decrease in the portion
of the projected benefit obligation related to future salary increases.
Plan assets are principally invested in publicly traded stocks and bonds.
(b) The Corporation and its subsidiaries have a savings plan, the Capital
Accumulation Plan, in which substantially all employees are eligible to
participate. Under this plan, the employer makes a matching contribution equal
to 100% of each eligible employee's pre-tax elective contributions, up to 4% of
the employee's compensation. Contributions are invested at the election of the
employee in the Corporation's common stock or in various other investment funds.
Employer contributions of $14,519,000, $13,443,000 and $13,026,000 were charged
against income in 1996, 1995 and 1994, respectively.
(c) 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
-------------------------------
1996 1995 1994
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Service cost of current
period...................... $ 6,016 $ 5,687 $ 5,153
Interest cost on accumulated
benefit obligation.......... 8,601 7,949 7,420
------- ------- -------
Net postretirement benefit
cost...................... $14,617 $13,636 $12,573
======= ======= =======
</TABLE>
The components of the accumulated postretirement benefit obligation were as
follows:
<TABLE>
<CAPTION>
December 31
-------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Retirees................................ $ 42,770 $ 38,735
Fully eligible active plan
participants.......................... 8,389 5,103
Other active plan participants.......... 63,448 74,572
-------- --------
Accumulated postretirement benefit
obligation............................ 114,607 118,410
Unrecognized net gain (loss) from past
experience different from that
assumed............................... 13,203 (933)
-------- --------
Postretirement benefit liability
included in other liabilities....... $127,810 $117,477
======== ========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the accumulated postretirement benefit obligation at December 31, 1996
and 1995 was 7 3/4% and 7 1/2%, respectively. At December 31, 1996, the weighted
average health care cost trend rate used to measure the accumulated
postretirement cost for medical benefits was 11 1/4% for 1997 and was assumed to
decrease gradually to 6% for the year 2008 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, 1996 by $19,040,000 and the aggregate of the
service and interest cost components of net postretirement benefit cost for the
year ended December 31, 1996 by $2,834,000.
57
<PAGE> 21
(12) LEASES
The Corporation and its subsidiaries occupy office facilities under lease
agreements which expire at various dates through 2019; such leases are generally
renewed or replaced by other leases. In addition, the Corporation's subsidiaries
lease data processing, office and transportation equipment.
Most leases contain renewal options for increments ranging from two to ten
years; certain lease agreements provide for rent increases based on price-level
factors. All leases are operating leases.
Rent expense for continuing operations was as follows:
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------
1996 1995 1994
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Office facilities.................... $67,587 $66,996 $66,188
Equipment............................ 11,823 12,788 14,632
------- ------- -------
$79,410 $79,784 $80,820
======= ======= =======
</TABLE>
At December 31, 1996, future minimum rental payments required under
non-cancellable operating leases of continuing operations were as follows:
<TABLE>
<CAPTION>
Years Ending
December 31 (in thousands)
- ------------
<S> <C>
1997..................................... $ 68,957
1998..................................... 67,417
1999..................................... 65,283
2000..................................... 62,614
2001..................................... 55,752
After 2001............................... 328,366
--------
$648,389
========
</TABLE>
(13) REINSURANCE
Premiums earned and claims incurred are reported net of reinsurance in the
consolidated statements of income.
The effect of reinsurance on the premiums earned of the property and casualty
insurance subsidiaries was as follows:
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------
1996 1995 1994
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Direct.................... $ 5,023,489 $ 4,754,423 $ 4,415,080
Reinsurance assumed....... 533,002 712,080 641,615
Reinsurance ceded......... (987,235) (1,319,341) (1,280,412)
----------- ----------- -----------
Premiums earned......... $ 4,569,256 $ 4,147,162 $ 3,776,283
=========== =========== ===========
</TABLE>
The Royal & Sun Alliance Insurance Group plc is the beneficial owner of 5.2%
of the Corporation's common stock. A property and casualty insurance subsidiary
of the Corporation has assumed on a quota share basis a portion of the property
and casualty insurance business written by certain subsidiaries of Royal & Sun
Alliance. The assumed reinsurance premiums earned of the property and casualty
insurance subsidiaries include $282,905,000, $340,767,000 and $264,343,000 in
1996, 1995 and 1994, respectively, from such business.
A portion of the U.S. insurance business written by the Corporation's property
and casualty insurance subsidiaries has been reinsured on a quota share basis
with a subsidiary of Royal & Sun Alliance. The ceded reinsurance premiums earned
of the property and casualty insurance subsidiaries include $348,024,000,
$520,528,000 and $489,727,000 in 1996, 1995 and 1994, respectively, from such
reinsurance.
Reinsurance recoveries by the property and casualty insurance subsidiaries
which have been deducted from insurance claims were $651,889,000, $936,080,000
and $962,332,000 in 1996, 1995 and 1994, respectively. Such amounts included
recoveries of $251,361,000, $333,759,000 and $337,077,000 in 1996, 1995 and
1994, respectively, from the subsidiary of Royal & Sun Alliance.
Reinsurance recoverable on property and casualty unpaid claims included
approximately $471,000,000 and $681,000,000 at December 31, 1996 and 1995,
respectively, from the subsidiary of Royal & Sun Alliance.
Effective January 1, 1997, the reinsurance agreements with Royal & Sun
Alliance have been terminated.
The property and casualty insurance subsidiaries of the Corporation entered
into a stop loss reinsurance agreement with a subsidiary of Royal & Sun
Alliance, effective year end 1985, relating to medical malpractice unpaid
claims. On December 31, 1995, the property and casualty insurance subsidiaries
exercised a commutation provision under this agreement, which resulted in an
amount due from the Royal & Sun Alliance subsidiary of $191,194,000. The amount
due was received in January 1996.
58
<PAGE> 22
(14) UNPAID CLAIMS
The process of establishing loss reserves is an imprecise science and reflects
significant judgmental factors. In many liability cases, significant periods of
time, ranging up to several years or more, may elapse between the occurrence of
an insured loss, the reporting of the loss and the settlement of the loss.
Judicial decisions and legislative actions continue to broaden liability and
policy definitions and to increase the severity of claim payments. As a result
of this and other societal and economic developments, the uncertainties inherent
in estimating ultimate claim costs on the basis of past experience have
increased significantly, further complicating the already complex loss reserving
process.
The uncertainties relating to asbestos and toxic waste claims on insurance
policies written many years ago are exacerbated by judicial and legislative
interpretations of coverage that in some cases have tended to erode the clear
and express intent of such policies and in others have expanded theories of
liability. The industry is engaged in extensive litigation over these coverage
and liability issues and is thus confronted with a continuing uncertainty in its
effort to quantify these exposures.
In 1993, Pacific Indemnity Company, a subsidiary of the Corporation, entered
into a global settlement agreement with Continental Casualty Company (a
subsidiary of CNA Financial Corporation), Fibreboard Corporation, and attorneys
representing claimants against Fibreboard for all future asbestos-related bodily
injury claims against Fibreboard. This agreement is subject to final appellate
court approval. Pursuant to the global settlement agreement, a $1,525,000,000
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 reached a separate agreement for
the handling of all asbestos-related bodily injury claims pending on August 26,
1993 against Fibreboard. Pacific Indemnity's obligation under this agreement
with respect to such pending claims is approximately $635,000,000, the final
$450,000,000 of which was paid during 1996. Assets designated as funds held for
asbestos-related settlement were used to pay this obligation. The agreement
further provides that the total responsibility of both insurers with respect to
pending and future asbestos-related bodily injury claims against Fibreboard will
be shared between Pacific Indemnity and Continental Casualty on an approximate
35% and 65% basis, respectively.
Pacific Indemnity, Continental Casualty and Fibreboard entered into a
trilateral agreement to settle all present and future asbestos-related bodily
injury claims resulting from insurance policies that were, or may have been,
issued to Fibreboard by the two insurers. The trilateral agreement will be
triggered if the global settlement agreement is disapproved by the United States
Supreme 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 1995, the United States District Court of the Eastern District of Texas
approved the global settlement agreement and the trilateral agreement. The
judgments approving these agreements were appealed to the United States Court of
Appeals for the Fifth Circuit. In July 1996, the Fifth Circuit Court affirmed
the 1995 judgments of the District Court. The affirmation of these agreements
had no effect on the amount of loss reserves provided for the settlement. A
petition for re-hearing the global settlement agreement before the entire Fifth
Circuit Court was denied. An appeal to the United States Supreme Court by the
objectors to the global settlement has been filed and the Supreme Court will
decide whether to hear this matter. The trilateral agreement, however, was not
appealed to the United States Supreme Court and is now final. As a result,
management believes that the uncertainty of Pacific Indemnity's exposure with
respect to asbestos-related bodily injury claims against Fibreboard has been
eliminated.
Since 1993, a California Court of Appeal has agreed, in response to a request
by Pacific Indemnity, Continental Casualty and Fibreboard, to delay its
decisions regarding asbestos-related insurance coverage issues 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.
59
<PAGE> 23
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.
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
federal "Superfund" law and similar state statutes, when potentially responsible
parties (PRPs) fail to handle the clean-up, regulators have the work done and
then attempt to establish legal liability against the PRPs. The PRPs disposed of
toxic materials at a waste dump site or transported the materials to the site.
Insurance policies issued to PRPs were not intended to cover the clean-up costs
of pollution and, in many cases, did not intend to cover the pollution itself.
As the cost of environmental clean-up continues to grow, PRPs and others have
increasingly filed claims with their insurance carriers. Litigation against
insurers extends to issues of liability, coverage and other policy provisions.
There is great uncertainty involved in estimating the property and casualty
insurance subsidiaries' liabilities 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 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>
1996 1995 1994
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Gross liability, beginning
of year.................. $9,588,141 $8,913,220 $8,235,442
Reinsurance recoverable,
beginning of year........ 1,973,666 1,980,340 1,785,396
---------- ---------- ----------
Net liability, beginning of
year..................... 7,614,475 6,932,880 6,450,046
---------- ---------- ----------
Net incurred claims and
claim expenses related to
Current year........... 3,053,600 2,705,800 2,549,100
Prior years............ (42,845) (35,819) (29,741)
---------- ---------- ----------
3,010,755 2,669,981 2,519,359
---------- ---------- ----------
Net payments for claims and
claim expenses related to
Current year........... 980,006 737,686 764,525
Prior years............ 1,889,400 1,250,700 1,272,000
---------- ---------- ----------
2,869,406 1,988,386 2,036,525
---------- ---------- ----------
Net liability, end of
year..................... 7,755,824 7,614,475 6,932,880
Reinsurance recoverable,
end of year.............. 1,767,885 1,973,666 1,980,340
---------- ---------- ----------
Gross liability, end of
year..................... $9,523,709 $9,588,141 $8,913,220
========== ========== ==========
</TABLE>
During 1996, the property and casualty insurance subsidiaries experienced
overall favorable development of $42,845,000 on net unpaid claims established as
of the previous year-end. This compares with favorable development of
$35,819,000 and $29,741,000 in 1995 and 1994, respectively. Such redundancies
were reflected in operating results in these respective years. Each of the past
three years benefited from favorable claim severity trends for certain liability
classes; this was offset each year in varying degrees by increases in unpaid
claims relating to asbestos and toxic waste claims.
Management believes that the aggregate loss reserves of the property and
casualty insurance subsidiaries at December 31, 1996 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.
60
<PAGE> 24
(15) BUSINESS SEGMENTS
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 real estate subsidiary has been 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 continuing operations before income tax and
identifiable assets of each industry segment were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
Revenues (in thousands)
<S> <C> <C> <C>
Property and Casualty Insurance
Premiums earned............................................................... $ 4,569,256 $ 4,147,162 $ 3,776,283
Investment income............................................................. 656,135 613,242 570,531
Real Estate....................................................................... 319,787 287,795 204,849
----------- ----------- -----------
5,545,178 5,048,199 4,551,663
Corporate investment income....................................................... 55,425 54,445 49,405
Realized investment gains (losses)
Property and Casualty Insurance............................................... 65,275 95,030 55,203
Corporate..................................................................... 14,654 13,822 (1,078)
----------- ----------- -----------
Total revenues.............................................................. $ 5,680,532 $ 5,211,496 $ 4,655,193
=========== =========== ===========
Income (loss) from continuing operations before income tax
Property and Casualty Insurance................................................... $ 676,398 $ 697,141 $ 552,170
Real Estate....................................................................... (235,855) 7,696 (5,950)
----------- ----------- -----------
440,543 704,837 546,220
Corporate......................................................................... 26,452 23,309 10,961
Realized investment gains (losses)
Property and Casualty Insurance............................................... 65,275 95,030 55,203
Corporate..................................................................... 14,654 13,822 (1,078)
----------- ----------- -----------
Income from continuing operations before federal and foreign income tax..... $ 546,924 $ 836,998 $ 611,306
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Identifiable assets
Property and Casualty Insurance................................................... $16,577,935 $16,157,688 $14,435,933
Real Estate....................................................................... 1,641,231 1,842,831 1,796,706
----------- ----------- -----------
Total identifiable assets................................................... 18,219,166 18,000,519 16,232,639
Corporate......................................................................... 959,953 959,384 945,397
Adjustments and eliminations...................................................... (83,661) (168,271) (148,877)
Net assets of discontinued operations............................................. 843,408 844,645 731,810
----------- ----------- -----------
Total assets................................................................ $19,938,866 $19,636,277 $17,760,969
=========== =========== ===========
</TABLE>
The following additional information is with respect to the more
significant groupings of classes of business for the property and casualty
operations:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------
1996 1995 1994
---------- ---------- ----------
(in thousands)
Premiums earned
<S> <C> <C> <C>
Personal........................................................................ $ 969,710 $ 847,474 $ 826,068
Commercial...................................................................... 3,315,526 2,952,751 2,677,914
Reinsurance Assumed............................................................. 284,020 346,937 272,301
---------- ---------- ----------
Total premiums earned..................................................... $4,569,256 $4,147,162 $3,776,283
========== ========== ==========
Income (loss) from operations before income tax
Personal........................................................................ $ 67,244 $ 97,301 $ (3,247)
Commercial...................................................................... (18,162) (6,957) (3,546)
Reinsurance Assumed............................................................. (18,740) 3,810 (1,518)
---------- ---------- ----------
Underwriting income (loss)................................................ 30,342 94,154 (8,311)
Net investment income........................................................... 646,056 602,987 560,481
---------- ---------- ----------
Income from operations before income tax.................................. $ 676,398 $ 697,141 $ 552,170
========== ========== ==========
</TABLE>
61
<PAGE> 25
The premiums earned and underwriting income or loss by groupings of classes
of business for prior years include certain reclassifications to conform with
the 1996 presentation, which more closely reflects the way the property and
casualty business is now managed.
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 has also been obtained from
treaty reinsurance assumed, principally from Royal & Sun Alliance.
Shown below is a summary of revenues, income from operations before income
tax and identifiable assets of the property and casualty insurance subsidiaries
by geographic area.
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Revenues
United States................................................................... $ 4,145,638 $ 3,715,023 $ 3,508,243
International................................................................... 1,079,753 1,045,381 838,571
----------- ----------- -----------
Total......................................................................... $ 5,225,391 $ 4,760,404 $ 4,346,814
=========== =========== ===========
Income from operations before income tax
United States................................................................... $ 571,575 $ 592,684 $ 479,153
International................................................................... 104,823 104,457 73,017
----------- ----------- -----------
Total......................................................................... $ 676,398 $ 697,141 $ 552,170
=========== =========== ===========
<CAPTION>
December 31
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Identifiable assets
United States................................................................... $14,573,417 $14,055,334 $12,937,447
International................................................................... 2,004,518 2,102,354 1,498,486
----------- ----------- -----------
Total......................................................................... $16,577,935 $16,157,688 $14,435,933
=========== =========== ===========
</TABLE>
Foreign currency translation gains or losses credited or charged directly
to the separate component of shareholders' equity were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------
1996 1995 1994
-------- -------- -------
(in thousands)
<S> <C> <C> <C>
Gains (losses) on translation of foreign currencies............................................ $(15,129) $(15,931) $14,517
Income tax (credit)
Current.................................................................................... (3,822) (5,994) 4,633
Deferred................................................................................... 938 3,262 445
-------- -------- -------
$(12,245) $(13,199) $ 9,439
======== ======== =======
</TABLE>
62
<PAGE> 26
(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) On March 1, 1996, 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. At the same time, the Board of Directors approved
a two-for-one stock split payable to shareholders of record as of April 19,
1996.
The activity of the Corporation's common stock was as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------
1996 1995 1994
----------- ---------- ----------
(number of shares)
<S> <C> <C> <C>
Common stock issued
Balance, beginning of year........................................................ 87,819,355 87,798,286 87,709,465
Two-for-one stock split........................................................... 87,819,355 -- --
Shares issued upon exchange of long term debt..................................... 480,464 -- --
Share activity under option and incentive plans................................... (35,001) 21,069 88,821
----------- ---------- ----------
Balance, end of year.......................................................... 176,084,173 87,819,355 87,798,286
----------- ---------- ----------
Treasury stock
Balance, beginning of year........................................................ 518,468 977,580 --
Two-for-one stock split........................................................... 518,468 -- --
Repurchase of shares.............................................................. 1,700,000 -- 1,001,500
Share activity under option and incentive plans................................... (1,513,754) (459,112) --
Shares issued -- other............................................................ -- -- (23,920)
----------- ---------- ----------
Balance, end of year.......................................................... 1,223,182 518,468 977,580
----------- ---------- ----------
Common stock outstanding, end of year......................................... 174,860,991 87,300,887 86,820,706
=========== ========== ==========
</TABLE>
(c) The Corporation has a Shareholder Rights Plan under which each
shareholder has one-quarter of a right for each share of common stock of the
Corporation held. Each right entitles the holder to purchase from the
Corporation one one-hundredth of a share of Series A Participating Cumulative
Preferred Stock at an exercise price of $225. The rights attach to all
outstanding shares of common stock and trade with the common stock until the
rights become exercisable. The rights are subject to adjustment to prevent
dilution of the interests represented by each right.
The rights will become exercisable and will detach from the common stock
ten days after a person or group either acquires 25% or more of the outstanding
shares of the Corporation's common stock or announces a tender or exchange offer
which, if consummated, would result in that person or group owning 25% or more
of the outstanding shares of the Corporation's common stock.
In the event that any person or group acquires 25% or more of the
outstanding shares of the Corporation's common stock, each right will entitle
the holder, other than such person or group, to purchase that number of shares
of the Corporation's common stock having a market value of two times the
exercise price of the right. In the event that, following the acquisition of 25%
or more of the Corporation's outstanding common stock by a person or group, the
Corporation is acquired in a merger or other business combination transaction or
50% or more of the Corporation's assets or earning power is sold, each right
will entitle the holder to purchase common stock of the acquiring company having
a value equal to two times the exercise price of the right.
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.
63
<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
---------------------------------------------------------
1996 1995
------------------------- -------------------------
GAAP Statutory GAAP Statutory
---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Property and casualty insurance subsidiaries*....................... $3,788,655 $2,514,203 $3,617,144 $2,314,720
Discontinued life and health insurance operations................... 843,408 328,327 844,645 317,624
---------- ---------- ---------- ----------
4,632,063 $2,842,530 4,461,789 $2,632,344
========== ==========
Corporate and eliminations.......................................... 830,811 800,940
---------- ----------
$5,462,874 $5,262,729
========== ==========
</TABLE>
A comparison of GAAP and statutory net income (loss) is as follows:
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------------------------------------
1996 1995 1994
---------------------- ----------------------- -----------------------
GAAP Statutory GAAP Statutory GAAP Statutory
-------- --------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Property and casualty insurance
subsidiaries*............................ $453,300 $560,193 $ 640,834 $571,199 $ 506,825 $468,861
Discontinued life and health insurance
operations............................... 26,491** 33,988 42,216 26,828 20,551 (4,264)
-------- -------- --------- -------- --------- --------
479,791 $594,181 683,050 $598,027 527,376 $464,597
======== ======== ========
Corporate and eliminations................. 32,893 13,578 1,093
-------- --------- ---------
$512,684 $ 696,628 $ 528,469
======== ========= =========
</TABLE>
* A property and casualty subsidiary owns the real estate subsidiaries.
** Includes the $22,000,000 after tax loss on disposal.
(e) The Corporation's ability to continue to pay dividends to shareholders
and interest on debt obligations is affected by the availability of liquid
assets held by the Corporation and by the dividend paying ability of its
property and casualty insurance subsidiaries. Various state insurance laws
restrict the Corporation's property and casualty insurance subsidiaries as to
the amount of dividends they may pay to the Corporation without the prior
approval of regulatory authorities. The restrictions are generally based on net
income and on certain levels of policyholders' surplus as determined in
accordance with statutory accounting practices. Dividends in excess of such
thresholds are considered "extraordinary" and require prior regulatory approval.
During 1996, these subsidiaries paid dividends to the Corporation totaling
$250,000,000.
The maximum dividend distribution that may be made by the property and
casualty insurance subsidiaries to the Corporation during 1997 without prior
approval is approximately $438,000,000.
64
<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, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. 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, 1996 and 1995 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
As described in Notes (1)(g) and (2) to the financial statements, The Chubb
Corporation changed its methods of accounting for impairment of long-lived
assets in 1996 and for investments in certain debt and equity securities in
1994.
March 5, 1997 /s/ ERNST & YOUNG LLP
65
<PAGE> 29
Quarterly Financial Data
Summarized unaudited quarterly financial data for 1996 and 1995 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
------------------- ------------------- ------------------- -------------------
1996 1995 1996 1995 1996 1995 1996 1995
-------- -------- -------- -------- -------- -------- -------- --------
(in millions except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................ $1,481.6 $1,226.0 $1,382.0 $1,299.4 $1,357.0 $1,325.7 $1,459.9 $1,360.4
Claims and expenses................. 1,311.2 1,051.9 1,174.3 1,080.2 1,168.3 1,124.6 1,479.8 1,117.8
Federal and foreign income tax
(credit).......................... 30.0 34.0 42.9 48.5 34.4 43.1 (46.6) 57.0
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations...................... 140.4 140.1 164.8 170.7 154.3 158.0 26.7 185.6
Income (loss) from discontinued
operations, net of tax.......... 11.0 6.6 9.5 14.3 10.9 13.4 (4.9) 7.9
-------- -------- -------- -------- -------- -------- -------- --------
Net income.................... $ 151.4 $ 146.7 $ 174.3 $ 185.0 $ 165.2 $ 171.4 $ 21.8 $ 193.5
======== ======== ======== ======== ======== ======== ======== ========
Per share data
Income from continuing
operations...................... $ .79 $ .79 $ .93 $ .96 $ .87 $ .90 $ .16 $ 1.05
Income (loss) from discontinued
operations...................... .06 .04 .05 .08 .06 .07 (.02) .04
-------- -------- -------- -------- -------- -------- -------- --------
Net income.................... $ .85 $ .83 $ .98 $ 1.04 $ .93 $ .97 $ .14 $ 1.09
======== ======== ======== ======== ======== ======== ======== ========
Underwriting ratios
Losses to premiums earned......... 68.8% 63.3% 64.3% 64.5% 65.4% 65.4% 66.4% 65.5%
Expenses to premiums written...... 32.5 33.0 32.0 31.9 31.8 31.5 32.0 32.1
-------- -------- -------- -------- -------- -------- -------- --------
Combined...................... 101.3% 96.3% 96.3% 96.4% 97.2% 96.9% 98.4% 97.6%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
In February 1997, the Corporation entered into a definitive agreement to
sell its life and health insurance operations. As a result, these operations
have been classified as discontinued operations. Loss from discontinued
operations for the fourth quarter of 1996 reflects a charge of $22.0 million or
$.12 per share for the after-tax loss on the sale.
Claims and expenses for the fourth quarter of 1996 include a $255.0 million
write-down of the carrying value of certain real estate assets to their
estimated fair value. Income from continuing operations for the quarter has been
reduced by a charge of $160.0 million or $.89 per share for the after-tax effect
of the write-down.
Per share amounts have been retroactively adjusted to reflect the
two-for-one stock split effective April 19, 1996.
66
<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 1996 and 1995.
<TABLE>
<CAPTION>
1996
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Common stock prices
High.................................................................... $52.13 $49.88 $50.00 $55.50
Low..................................................................... 46.94 44.13 41.38 45.50
Dividends declared.......................................................... .27 .27 .27 .27
<CAPTION>
1995
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Common stock prices
High.................................................................... $40.50 $42.56 $48.44 $50.25
Low..................................................................... 38.25 38.75 39.13 45.06
Dividends declared.......................................................... .24 1/2 .24 1/2 .24 1/2 .24 1/2
</TABLE>
The per share amounts have been retroactively adjusted to reflect the
two-for-one stock split effective April 19, 1996.
At March 1, 1997, there were approximately 8,425 common shareholders of
record.
67
<PAGE> 1
THE CHUBB CORPORATION
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Principal subsidiaries at December 31, 1996 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 & Son Inc............................................ New York 100
Chubb Capital Corporation.................................. New Jersey 100
Chubb Life Insurance Company of America.................... New Hampshire 100
Chubb Colonial Life Insurance Company................. New Jersey 100
Chubb Sovereign Life Insurance Company................ California 100
Chubb America Service Corporation..................... New Hampshire 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.
48
<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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 8,715<F1>
<DEBT-CARRYING-VALUE> 2,444<F2>
<DEBT-MARKET-VALUE> 2,573<F3>
<EQUITIES> 646
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 12,081
<CASH> 5
<RECOVER-REINSURE> 57<F4>
<DEFERRED-ACQUISITION> 601
<TOTAL-ASSETS> 19,939
<POLICY-LOSSES> 9,524<F5>
<UNEARNED-PREMIUMS> 2,618<F6>
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,260<F7>
<COMMON> 176
0
0
<OTHER-SE> 5,287<F8>
<TOTAL-LIABILITY-AND-EQUITY> 19,939
4,569
<INVESTMENT-INCOME> 712
<INVESTMENT-GAINS> 80
<OTHER-INCOME> 320<F9>
<BENEFITS> 3,011
<UNDERWRITING-AMORTIZATION> 1,238
<UNDERWRITING-OTHER> 290
<INCOME-PRETAX> 547
<INCOME-TAX> 61
<INCOME-CONTINUING> 486
<DISCONTINUED> 27
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 513
<EPS-PRIMARY> 2.90
<EPS-DILUTED> 0
<RESERVE-OPEN> 7,614
<PROVISION-CURRENT> 3,054
<PROVISION-PRIOR> (43)
<PAYMENTS-CURRENT> 980
<PAYMENTS-PRIOR> 1,889
<RESERVE-CLOSE> 7,756
<CUMULATIVE-DEFICIENCY> (43)
<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 ($1,768), AS PRESCRIBED BY SFAS NO. 113. SUCH AMOUNTS ARE
INCLUDED IN TOTAL ASSETS.
<F6>UNEARNED-PREMIUMS EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUMS
($327) AS PRESCRIBED BY SFAS NO. 113. THIS PREPAID AMOUNT IS INCLUDED IN
TOTAL ASSETS.
<F7>NOTES-PAYABLE INCLUDES SHORT-TERM DEBT OF $189 AND LONG-TERM DEBT OF
$1,071.
<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>
