<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1998
[ ] 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 $9,734,295,897 as of March 8, 1999.
161,361,903
Number of shares of common stock outstanding as of March 8, 1999
DOCUMENTS INCORPORATED BY REFERENCE
Portions of The Chubb Corporation 1998 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
27, 1999 are incorporated by reference in Part III of this Form 10-K.
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<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 the
property and casualty insurance business. The Corporation and its subsidiaries
employed approximately 10,700 persons worldwide on December 31, 1998.
Revenues, income from continuing operations before income tax and assets
for each operating segment for the three years ended December 31, 1998 are
included in Note (16) of the notes to consolidated financial statements
incorporated by reference from the Corporation's 1998 Annual Report to
Shareholders.
The property and casualty insurance subsidiaries provide insurance
coverages principally in the United States, Canada, Europe and parts of
Australia, Latin America and the Far East. Revenues of the property and casualty
insurance subsidiaries by geographic area for the three years ended December 31,
1998 are included in Note (16) of the notes to consolidated financial statements
incorporated by reference from the Corporation's 1998 Annual Report to
Shareholders.
PROPERTY AND CASUALTY INSURANCE
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, Chubb do Brasil Companhia de Seguros and
Chubb Atlantic Indemnity Ltd.
Federal is the manager of Vigilant, Pacific Indemnity, Great Northern,
Chubb National, Chubb Indemnity and Chubb New Jersey. Federal also provides
certain services to other members of the Group. Acting subject to the
supervision and control of the Boards of Directors of the members of the Group,
the Chubb & Son division of Federal 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.
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
WRITTEN ASSUMED(A) CEDED(A) WRITTEN
YEAR -------- ----------- ----------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
1996............................. $5,166.5 $436.8 $ 829.5 $4,773.8
1997............................. 5,524.4 162.9 239.3 5,448.0
1998............................. 5,842.0 141.9 480.4 5,503.5
</TABLE>
- ---------------
(a) Intercompany items eliminated.
Reinsurance premiums assumed and ceded have been affected by changes in
reinsurance agreements with the Royal & Sun Alliance Insurance Group plc (Sun
Alliance). These changes are described in Note (13) of the notes to consolidated
financial statements incorporated by reference from the Corporation's 1998
Annual Report to Shareholders.
2
<PAGE> 3
The net premiums written during the last five years for major classes of
the Group's business are incorporated by reference from page 16 of the
Corporation's 1998 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, Europe and parts of Australia, Latin America and the
Far East. In 1998, approximately 83% of the Group's direct business was produced
in the United States, where the Group's businesses enjoy broad geographic
distribution with a particularly strong market presence in the Northeast. The
five states accounting for the largest amounts of direct premiums written were
New York with 13%, California with 10%, New Jersey with 6% and Pennsylvania and
Texas each with 5%. No other state accounted for 5% or more of such premiums.
Approximately 10% of the Group's direct premiums written was produced in Europe
and 4% 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 MILLIONS) LOSS AND
---------------------- EXPENSE EXPENSE
LOSS RATIOS RATIOS
YEAR WRITTEN EARNED RATIOS ------- --------
<S> <C> <C> <C> <C> <C>
1994............................. $ 3,951.2 $ 3,776.3 67.0% 32.5% 99.5%
1995............................. 4,306.0 4,147.2 64.7 32.1 96.8
1996............................. 4,773.8 4,569.3 66.2 32.1 98.3
1997............................. 5,448.0 5,157.4 64.5 32.4 96.9
1998............................. 5,503.5 5,303.8 66.3 33.5 99.8
--------- --------- ------- ------- ---------
Total for five years ended
December 31, 1998............. $23,982.5 $22,954.0 65.7% 32.6% 98.3%
========= ========= ======= ======= =========
</TABLE>
The combined loss and expense ratios during the last five years for major
classes of the Group's business are incorporated by reference from page 16 of
the Corporation's 1998 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, 1998 and 1997, such ratio for the Group was 1.95 and
2.13, respectively.
Producing and Servicing of Business
In the United States and Canada, the Group is represented by approximately
4,000 independent agents and accepts business on a regular basis from an
estimated 525 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 in
Warren, New Jersey, the Group operates 5 zone offices and branch and service
offices throughout 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. In conducting its
3
<PAGE> 4
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. Reinsurance is
ceded to 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. Most of the Group's 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 16 and 17.
Reinsurance contracts do not relieve the Group of its primary 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 Group has an exposure to insured losses caused by hurricanes,
earthquakes, winter storms, windstorms and other catastrophic events. The
frequency and severity of catastrophes are unpredictable. The extent of losses
from a catastrophe is a function of both the total amount of insured exposure in
an area affected by the event and the severity of the event. The Group
continually assesses its concentration of underwriting exposures in catastrophe
prone areas and develops strategies to manage this exposure through individual
risk selection, subject to regulatory constraints, and through the purchase of
catastrophe reinsurance. The Group has invested in modeling techniques that
allow it to better monitor catastrophe exposures. In addition, the Group
maintains records showing concentrations of risk in catastrophe prone areas such
as California (earthquake and brush fires) and the Southeast coast of the United
States (hurricanes). The Group's current catastrophe reinsurance program
provides coverage for individual catastrophic events of approximately 73% of
losses between $100 million and $450 million in the United States and
approximately 88% of losses between $25 million and $125 million outside the
United States.
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.
4
<PAGE> 5
The process of establishing the liability for unpaid claims and claim
adjustment expenses is a complex and imprecise science that reflects significant
judgmental factors. This is true because claim settlements to be made in the
future will be impacted by changing rates of 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 net unpaid claims and
claim adjustment expenses at December 31, 1998 were for IBNR--claims which had
not yet been reported to the Group, some of which were not yet known to the
insured, and for 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, 1998,
1997 and 1996:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------
1998 1997 1996
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Net liability, beginning of year.................... $ 8,564.6 $7,755.9 $7,614.5
--------- -------- --------
Net incurred claims and claim adjustment expenses
Provision for claims occurring in the current
year........................................... 3,712.1 3,372.3 3,053.6
Decrease in estimates for claims occurring in
prior years.................................... (218.4) (65.3) (42.8)
--------- -------- --------
3,493.7 3,307.0 3,010.8
--------- -------- --------
Net payments for claims and claim expenses related
to
Current year...................................... 1,210.7 1,080.0 980.0
Prior years....................................... 1,797.7 1,418.3 1,889.4
--------- -------- --------
3,008.4 2,498.3 2,869.4
--------- -------- --------
Net liability, end of year.......................... 9,049.9 8,564.6 7,755.9
Reinsurance recoverable, end of year................ 1,306.6 1,207.9 1,767.8
--------- -------- --------
Gross liability, end of year........................ $10,356.5 $9,772.5 $9,523.7
========= ======== ========
</TABLE>
As reestimated at December 31, 1998, the liability for unpaid claims and
claim adjustment expenses, net of reinsurance recoverable, as established at the
previous year-end was redundant by $218.4 million. This compares with favorable
development of $65.3 million and $42.8 million during 1997 and 1996,
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 incurred losses relating to asbestos and toxic waste
claims. The higher favorable development in 1998 compared with the prior years
was due to substantially lower incurred losses related to asbestos and toxic
waste claims, the continued favorable loss experience for executive protection
coverages and favorable development on certain excess liability case reserves
set up several years ago.
As a result of the changes to the reinsurance agreements with Sun Alliance,
there were portfolio transfers of gross loss reserves and reinsurance
recoverable as of January 1, 1996 and 1997. The effect of these portfolio
transfers was a decrease in gross loss reserves of $183.8 million and $209.3
million and a decrease in reinsurance recoverable of $470.0 million and $244.3
million in 1997 and 1996, respectively.
Unpaid claims and claim adjustment expenses, net of reinsurance
recoverable, increased by $485.3 million in 1998 compared with $808.7 million
and $141.4 million in 1997 and 1996, respectively. The increases in 1997 and
1996 include the effect of the portfolio transfers with Sun Alliance. The 1996
increase would have been greater except that loss reserves were reduced as the
result of payments of $461.5 million during the year related to the settlement
of asbestos-related claims against Fibreboard Corporation. 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
and 22.
Excluding the Fibreboard reserves and the effect of the portfolio
transfers, loss reserves, net of reinsurance recoverable, increased by $485.3
million or 6% in 1998, $516.5 million or 7% in 1997, and $562.9 million or 9% in
1996. Substantial reserve growth has occurred each year in those liability
classes, 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 1998 was approximately 4% higher than the
number at year-end 1997, which was in turn 3% higher than that at year-end 1996.
6
<PAGE> 7
The uncertainties relating to unpaid claims, particularly for asbestos and
toxic waste claims on insurance policies written many years ago, are discussed
in Item 7 of this report on pages 20 through 23.
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, 1998, 1997 and 1996. Reinsurance recoveries related to such claims
are not significant.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ -------------------------------- ------------------------------
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................. $548.7 $543.7 $1,092.4 $542.7 $415.9 $ 958.6 $999.2 $343.8 $1,343.0
Net incurred claims and
claim adjustment
expenses................ -- 67.8 67.8 6.0 119.2 125.2 5.0 145.7 150.7
Net payments for claims... -- 84.5 84.5 -- (8.6)(a) (8.6) 461.5 73.6 535.1
------ ------ -------- ------ ------ -------- ------ ------ --------
Net liability, end of
year.................... $548.7 $527.0 $1,075.7 $548.7 $543.7 $1,092.4 $542.7 $415.9 $ 958.6
====== ====== ======== ====== ====== ======== ====== ====== ========
</TABLE>
(a) As a result of the termination of the reinsurance agreements with Sun
Alliance, there was a portfolio transfer of asbestos and toxic waste loss
reserves as of January 1, 1997. The effect of the portfolio transfer was to
increase loss reserves by $55.6 million and decrease paid losses by the same
amount. The loss portfolio transfer had no effect on incurred claims and
claim adjustment expenses.
The method by which asbestos claims are established by the Group's claim
staff was changed in 1998. Previously, claims were generally established for
each lawsuit. Since the change was implemented in 1998, one master claim is
generally established for all similar claims and lawsuits involving an insured.
Prior year claim counts were not adjusted to conform to the new methodology. A
counted claim can have from one to thousands of claimants. Management does not
believe the following claim count data is meaningful for analysis purposes.
There were approximately 2,000 asbestos claims outstanding at December 31,
1998 compared with 3,700 asbestos claims outstanding at December 31, 1997 and
3,900 asbestos claims outstanding at December 31, 1996. In 1998, approximately
500 claims were opened and 2,200 claims were closed, including claims "closed"
to adjust the data base to the new methodology. In 1997, approximately 1,300
claims were opened and 1,500 claims were closed. In 1996, approximately 1,800
claims were opened and 2,600 claims were closed. Indemnity payments per claim
have varied over time due primarily to 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 650 toxic waste claims outstanding at December 31,
1998 compared with 800 toxic waste claims outstanding at December 31, 1997 and
1996. Approximately 250 claims were opened in 1998, 300 claims were opened in
1997 and 400 claims were opened in 1996. There were approximately 400 claims
closed in 1998 and 300 claims closed in 1997 and 1996. 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 1998. 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.
7
<PAGE> 8
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, 1998. The amounts noted are cumulative
in nature; that is, an increase in a loss estimate that related to a prior
period occurrence generates a deficiency in each intermediate year. For example,
a deficiency recognized in 1993 relating to losses incurred prior to December
31, 1988, such as the $675.0 million increase in loss reserves related to the
Fibreboard settlement, would be included in the cumulative deficiency amount for
each year in the period 1988 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.
In each of the years 1988 through 1997, there was favorable development for
certain liability classes as the result of favorable claim severity trends. In
each of these years, this favorable development was offset, in varying degrees,
by unfavorable development related to asbestos and toxic waste claims. The years
1988 through 1992 in particular reflect the effects of the $675.0 million
increase in loss reserves related to the Fibreboard settlement. The cumulative
net deficiencies experienced relating to asbestos and toxic waste claims were
also, to varying degrees, the result of: (1) an increase in the actual number of
claims filed; (2) an increase in the number of unasserted claims estimated; (3)
an increase in the severity of actual and unasserted claims; and (4) an increase
in litigation costs associated with such claims.
Conditions and trends that have affected development of the liability for
unpaid claims and claim adjustment expenses in the past will not necessarily
recur in the future. Accordingly, it is not appropriate to extrapolate future
redundancies or deficiencies based on the data in this table.
The middle section of the table on page 9 shows the cumulative amount paid
with respect to the reestimated liability as of the end of each succeeding year.
For example, in the 1988 column, as of December 31, 1998 the Group had paid
$3,159.3 million of the currently estimated $4,601.9 million of claims and claim
adjustment expenses that were unpaid at the end of 1988; thus, an estimated
$1,442.6 million of losses incurred through 1988 remain unpaid as of December
31, 1998, approximately 75% of which relates to asbestos and toxic waste claims.
The lower section of the table on page 9 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, 1998. 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 1988 1989 1990 1991 1992 1993 1994 1995
---------- ---- ---- ---- ---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Liability for Unpaid Claims and
Claim Adjustment Expenses........... $3,374.3 $3,880.1 $4,301.1 $4,743.9 $5,267.6 $6,450.0 $6,932.9 $7,614.5
Net Liability Reestimated as of:
One year later..................... 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.................... 3,336.0 3,854.2 4,244.7 5,368.5 5,904.1 6,363.1 6,874.5 7,520.9
Three years later.................. 3,359.8 3,839.8 4,933.0 5,336.5 5,843.5 6,380.4 6,829.8 7,256.8
Four years later................... 3,385.1 4,567.4 4,941.7 5,302.6 5,894.6 6,338.1 6,605.4
Five years later................... 4,203.9 4,602.5 4,969.5 5,389.5 5,863.3 6,150.1
Six years later.................... 4,265.2 4,686.3 5,079.3 5,375.3 5,738.4
Seven years later.................. 4,387.6 4,800.4 5,094.2 5,303.9
Eight years later.................. 4,522.5 4,817.2 5,058.8
Nine years later................... 4,550.7 4,810.6
Ten years later.................... 4,601.9
Cumulative Net Deficiency
(Redundancy)........................ 1,227.6 930.5 757.7 560.0 470.8 (299.9) (327.5) (357.7)
Cumulative Net Deficiency Related to
Asbestos and Toxic Waste Claims..... 2,098.1 1,969.1 1,824.1 1,576.3 1,416.4 640.7 525.5 343.7
Cumulative Amount of
Net Liability Paid as of:
One year later..................... 761.6 880.4 919.1 931.2 1,039.9 1,272.0 1,250.7 1,889.4
Two years later.................... 1,226.3 1,383.9 1,407.2 1,479.9 1,858.5 1,985.7 2,550.7 2,678.2
Three years later.................. 1,555.1 1,715.9 1,808.7 2,083.0 2,332.3 3,015.8 3,073.7 3,438.8
Four years later................... 1,778.8 1,958.6 2,292.0 2,386.9 3,181.4 3,264.5 3,589.8
Five years later................... 1,966.1 2,346.9 2,490.2 3,125.8 3,323.0 3,624.2
Six years later.................... 2,307.9 2,500.9 3,174.7 3,200.4 3,603.5
Seven years later.................. 2,422.7 3,120.6 3,200.4 3,412.7
Eight years later.................. 3,009.5 3,126.5 3,380.5
Nine years later................... 3,014.2 3,278.2
Ten years later.................... 3,159.3
Gross Liability, End of Year......... $7,220.9 $8,235.4 $8,913.2 $9,588.2
Reinsurance Recoverable, End of
Year............................... 1,953.3 1,785.4 1,980.3 1,973.7
-------- -------- -------- --------
Net Liability, End of Year........... $5,267.6 $6,450.0 $6,932.9 $7,614.5
======== ======== ======== ========
Reestimated Gross Liability.......... $7,753.4 $8,152.3 $8,797.5 $9,395.8
Reestimated Reinsurance Recoverable.. 2,015.0 2,002.2 2,192.1 2,139.0
-------- -------- -------- --------
Reestimated Net Liability............ $5,738.4 $6,150.1 $6,605.4 $7,256.8
======== ======== ======== ========
Cumulative Gross Deficiency
(Redundancy)....................... $ 532.5 $ (83.1) $ (115.7) $ (192.4)
======== ======== ======== ========
<CAPTION>
DECEMBER 31
-------------------------------
YEAR ENDED 1996 1997 1998
---------- ---- ---- ----
<S> <C> <C> <C>
Net Liability for Unpaid Claims and
Claim Adjustment Expenses........... $7,755.9 $8,564.6 $ 9,049.9
Net Liability Reestimated as of:
One year later..................... 7,690.6 8,346.2
Two years later.................... 7,419.6
Three years later..................
Four years later...................
Five years later...................
Six years later....................
Seven years later..................
Eight years later..................
Nine years later...................
Ten years later....................
Cumulative Net Deficiency
(Redundancy)........................ (336.3) (218.4)
Cumulative Net Deficiency Related to
Asbestos and Toxic Waste Claims..... 193.0 67.8
Cumulative Amount of
Net Liability Paid as of:
One year later..................... 1,418.3 1,797.7
Two years later.................... 2,488.2
Three years later..................
Four years later...................
Five years later...................
Six years later....................
Seven years later..................
Eight years later..................
Nine years later...................
Ten years later....................
Gross Liability, End of Year......... $9,523.7 $9,772.5 $10,356.5
Reinsurance Recoverable, End of
Year............................... 1,767.8 1,207.9 1,306.6
-------- -------- ---------
Net Liability, End of Year........... $7,755.9 $8,564.6 $ 9,049.9
======== ======== =========
Reestimated Gross Liability.......... $9,278.3 $9,605.2
Reestimated Reinsurance Recoverable.. 1,858.7 1,259.0
-------- --------
Reestimated Net Liability............ $7,419.6 $8,346.2
======== ========
Cumulative Gross Deficiency
(Redundancy)....................... $ (245.4) $ (167.3)
======== ========
</TABLE>
- ---------------
The cumulative deficiencies for the years 1988 through 1992 include the effect
of the $675.0 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
--------------------
1998 1997
---- ----
(IN MILLIONS)
<S> <C> <C>
Net liability reported on a statutory basis -- U.S.
subsidiaries.............................................. $8,470.4 $8,086.3
Additions (reductions):
Unpaid claims and claim adjustment expenses of foreign
subsidiaries........................................... 659.7 553.9
Other reserve differences................................. (80.2) (75.6)
-------- --------
Net liability reported on a GAAP basis...................... $9,049.9 $8,564.6
======== ========
</TABLE>
Investments
Investment decisions are centrally managed by investment professionals
based on guidelines established by management and approved by the board of
directors for each member of the Group.
The main objectives in managing the investment portfolio of the Group are
to maximize after-tax investment income and total investment returns while
minimizing credit risks in order 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, regulatory requirements, fluctuations in interest rates and
consideration of other market risks.
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 1998, the Group invested new cash primarily in tax-exempt bonds and, to
a lesser extent, equity securities. In 1997, the Group invested new cash
primarily in tax-exempt bonds and, to a lesser extent, corporate bonds and
mortgage-backed securities. In 1996, the Group invested new cash primarily in
mortgage-backed securities and 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, 1998, 71% of the Group's fixed maturity
portfolio was invested in tax-exempt bonds compared with 68% at December 31,
1997 and 1996.
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 ----------------------
ASSETS(A) INCOME(B) BEFORE TAX AFTER TAX
YEAR --------- ---------- ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
1996............................. $10,333.8 $646.1 6.25% 5.27%
1997............................. 11,725.9 711.2 6.07 5.05
1998............................. 12,795.7 748.9 5.85 4.96
</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
REAL ESTATE GROUP
The Real Estate Group is composed of Bellemead Development Corporation and
its subsidiaries. The Real Estate Group is involved in commercial development
activities primarily in New Jersey and residential development activities
primarily in central Florida.
In October 1996, the Corporation announced that the Real Estate Group was
exploring the possible sale of all or a portion of its real estate assets. In
March 1997, Bellemead entered into an agreement with a prospective purchaser to
perform due diligence in anticipation of executing a contract for the sale of
substantially all of its commercial properties. In June 1997, a definitive
agreement was reached with the purchaser. In November 1997, the sale of almost
all of the properties covered by the agreement reached in June was closed for
$736.9 million. The buyer is a joint venture formed by Paine Webber Real Estate
Securities Inc., Morgan Stanley Real Estate Fund II, L.P. and Gale & Wentworth,
L.L.C. Closing on the one remaining property under the agreement is expected to
occur in 1999. In addition to the sale to the joint venture in November 1997,
several other commercial properties as well as residential properties were sold
in 1997 and 1998. The Real Estate Group is continuing to explore the sale of
certain of its remaining properties. The Real Estate Group has retained
approximately $365 million of land, which is expected to be developed in the
future, and approximately $165 million of commercial properties and land parcels
under lease. Additional information related to the Corporation's real estate
operations is included in Item 7 of this report on pages 24 through 26.
DISCONTINUED OPERATIONS
In May 1997, the Corporation completed the sale of Chubb Life Insurance
Company of America and its subsidiaries, Chubb Colonial Life Insurance Company
and Chubb Sovereign Life Insurance Company, to Jefferson-Pilot Corporation for
$875.0 million in cash, subject to various closing adjustments, none of which
were material.
In 1996, the Corporation recognized a loss of $22.0 million relating to the
sale of the life and health insurance subsidiaries. The purchase price was not
adjusted to reflect results of operations subsequent to December 31, 1996. The
discontinued life and health insurance operations did not affect the
Corporation's net income in 1997 and 1998 and will not affect net income in
future periods. Earnings in 1996 from the discontinued life and health insurance
operations were $48.5 million, including realized investment gains of $8.2
million.
REGULATION, PREMIUM RATES AND COMPETITION
The Corporation is a holding company with subsidiaries primarily engaged in
the property and casualty 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.
The 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
11
<PAGE> 12
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.
The National Association of Insurance Commissioners has a risk-based
capital requirement for property and casualty insurance companies. The
risk-based capital 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, 1998, 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 prices 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 approximately 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 12th largest United
States property and casualty insurance group based on 1997 net premiums written.
The relatively large size and underwriting capacity of the Group provide
opportunities not available to smaller companies.
Price competition increased in the property and casualty marketplace during
1987 and has continued through 1998, particularly in the commercial classes. The
Group continues to be selective
12
<PAGE> 13
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, members are assessed to pay certain claims
against the insolvent insurer. Generally, fund assessments are proportionately
based on the members' written premiums for the classes of insurance written by
the insolvent insurer. In certain states, a portion of these assessments is
recovered through premium tax offsets and policyholder surcharges. In 1998,
assessments to the members of the Group amounted to approximately $8.2 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 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 and crime 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.
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
limitation of Year 2000 liability, tort reform, natural disaster reinsurance,
hazardous waste removal and liability measures, containment of medical costs,
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 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 20 through 23.
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 Property and
Casualty Insurance Group maintains zone administrative and branch offices in
major cities throughout the United States and also has offices in Canada,
Europe, Australia, the Far East and Latin America. Office facilities are leased
with the exception of a building in Branchburg, New Jersey. Management considers
its office facilities suitable and adequate for the current level of operations.
See Note (14) of the notes to consolidated financial statements incorporated by
reference from the Corporation's 1998 Annual Report to Shareholders.
13
<PAGE> 14
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 20 through 23.
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, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
YEAR OF
AGE(A) ELECTION(B)
------ -----------
<S> <C> <C>
Dean R. O'Hare, Chairman of the Corporation................. 56 1972
Douglas A. Batting, Executive Vice President of Chubb & Son,
a division of Federal..................................... 56 1996
John J. Degnan, President of the Corporation................ 54 1994
Gail E. Devlin, Senior Vice President of the Corporation.... 60 1981
George R. Fay, Executive Vice President of Chubb & Son, a
division of Federal....................................... 50 1999
David S. Fowler, Senior Vice President of the Corporation... 53 1989
Sylvester Green, Executive Vice President of Chubb & Son, a
division of Federal....................................... 58 1998
Henry G. Gulick, Vice President and Secretary of the
Corporation............................................... 55 1975
David B. Kelso, Executive Vice President of the
Corporation............................................... 46 1996
Charles M. Luchs, Executive Vice President of Chubb & Son, a
division of Federal....................................... 59 1996
Andrew A. McElwee, Jr., Senior Vice President of the
Corporation............................................... 44 1997
Glenn A. Montgomery, Senior Vice President of the
Corporation............................................... 46 1997
Thomas F. Motamed, Executive Vice President of the
Corporation............................................... 50 1997
Donn H. Norton, Executive Vice President of the Corporation
(c)....................................................... 57 1985
Michael J. O'Neill, Jr., Senior Vice President and Counsel
of the Corporation........................................ 50 1999
Michael O'Reilly, Executive Vice President of the
Corporation............................................... 55 1976
Robert Rusis, Senior Vice President and General Counsel of
the Corporation........................................... 65 1990
Henry B. Schram, Senior Vice President of the Corporation... 52 1985
</TABLE>
- ---------------
(a) Ages listed above are as of April 27, 1999.
(b) Date indicates year first elected or designated as an executive
officer.
(c) Mr. Norton retired as an executive officer of the registrant effective
February 1999.
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 David B. Kelso. Prior to joining Chubb in 1996, Mr. Kelso was Executive Vice
President of First Commerce Corporation in New Orleans, where he had 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.
14
<PAGE> 15
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Incorporated by reference from the Corporation's 1998 Annual Report to
Shareholders, page 65.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended December 31, 1998 are
incorporated by reference from the Corporation's 1998 Annual Report to
Shareholders, pages 38 and 39.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion presents our past results and our expectations for
the near term future. The supplementary financial information and 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 1998 Annual Report to
Shareholders, pages 15, 16 and 40 through 62.
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. Such statements are subject to certain risks
and uncertainties. The factors which could cause actual results to differ
materially from those suggested by any such statements include, but are not
limited to, those discussed or identified from time to time in the Corporation's
public filings with the Securities and Exchange Commission and specifically to:
risks or uncertainties associated with the Corporation's expectations with
respect to premium price increases, the non-renewal of underpriced insurance
accounts, business profitability or growth estimates, as well as with respect to
its activity value analysis program, investment income or cash flow projections,
its announced real estate plans, or the timing or earnings impact of the
announced Executive Risk transaction, and more generally, to: general economic
conditions including changes in interest rates and the performance of the
financial markets, changes in domestic and foreign laws, regulations and taxes,
changes in competition and pricing environments, regional or general changes in
asset valuations, the occurrence of significant natural disasters, the
development of major Year 2000 liabilities, the inability to reinsure certain
risks economically, the adequacy of loss reserves, Euro or currency conversion
transactions, as well as general market conditions, competition, pricing and
restructurings.
Operating income from continuing operations, which excludes realized
investment gains and losses, was $615 million in 1998 compared with $701 million
in 1997 and $434 million in 1996. Operating income in 1998 reflects a first
quarter restructuring charge of $26 million after taxes related to the
implementation of a cost control initiative. Operating 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.
Income from continuing operations, which includes realized investment gains
and losses related to such operations, was $707 million in 1998 compared with
$770 million in 1997 and $486 million in 1996.
In May 1997, the Corporation completed the sale of its life and health
insurance operations. The life and health insurance operations have been
classified as discontinued operations.
Net income, which includes the results of the discontinued operations,
amounted to $707 million in 1998 compared with $770 million in 1997 and $513
million in 1996.
15
<PAGE> 16
PROPERTY AND CASUALTY INSURANCE
Property and casualty earnings were lower in 1998 compared with 1997. Such
earnings in 1997 were substantially higher than in 1996. Property and casualty
income after taxes was $620 million in 1998 compared with $670 million in 1997
and $561 million in 1996. The decrease in earnings in 1998 was due to a decline
in underwriting results caused in large part by substantially higher catastrophe
losses. Investment income increased in 1998 compared with the prior year. The
increase in earnings in 1997 was due to highly profitable underwriting results
as well as strong growth in investment income compared with 1996. Earnings in
1996 were adversely affected by higher catastrophe losses.
Catastrophe losses were $173 million in 1998, $57 million in 1997 and $142
million in 1996. The 1998 amount was net of reinsurance recoveries of
approximately $150 million relating to Hurricane Georges. We did not have any
recoveries from our catastrophe reinsurance program during 1997 or 1996 since
there were no individual catastrophes for which our losses exceeded the initial
retention. Our initial retention level for each catastrophic event is
approximately $100 million in the United States and generally $25 million
outside the United States.
Reported net premiums written amounted to $5.5 billion in 1998, an increase
of 1% compared with 1997. Reported net premiums written increased 14% in 1997
compared with 1996. Personal coverages accounted for $1.4 billion or 25% of 1998
premiums written and commercial coverages for $4.1 billion or 75%. The reported
growth in premiums written in 1998 and 1997 was affected by changes in certain
reinsurance agreements, which are discussed below.
For many years, a portion of the U.S. insurance business written by the
Corporation's property and casualty subsidiaries was reinsured on a quota share
basis with a subsidiary of the Sun Alliance Group plc. Similarly, a subsidiary
of the Corporation 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 the 1996 merger of Sun Alliance with Royal Insurance Holdings
plc, these agreements were terminated effective January 1, 1997. Therefore, in
1997, the property and casualty subsidiaries retained an even greater portion of
the business they wrote directly and assumed no reinsurance from Sun Alliance.
There was an additional impact on net premiums written in the first quarter of
1996 and 1997 due to the effect of the portfolio transfers of unearned premiums
as of January 1 of each year resulting from the changes in retention.
A comparison of reported net premiums written with net premiums written
adjusted to reflect the changes to the reinsurance agreements with Sun Alliance
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Reported net premiums written....................... $5,504 $5,448 $4,774
Premiums assumed from Sun Alliance.................. (4) 203
------ ------ ------
Net premiums written, excluding premiums assumed
from Sun Alliance................................. 5,504 5,452 4,571
Portfolio transfers of unearned premiums............ 175 92
------ ------ ------
Adjusted net premiums written
(1998 compared with 1997)......................... $5,504 5,277
======
Increase in retention -- 1997....................... 392
------ ------
Adjusted net premiums written
(1997 compared with 1996)......................... $4,885 $4,479
====== ======
</TABLE>
Net premiums written, as adjusted, increased 4% in 1998 compared with 1997.
Similarly, net premiums written, as adjusted, increased 9% in 1997 compared with
1996.
16
<PAGE> 17
After a review of the costs and benefits of our casualty excess of loss
reinsurance program, effective January 1, 1996, we modified the program,
principally for the excess liability and executive protection classes. 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 responds. These changes in our
casualty reinsurance program increased net premiums written in 1996 by
approximately $130 million compared with the prior year. During 1996, we
continued to evaluate the relative costs and benefits of the 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. This change in
our casualty reinsurance program increased net premiums written in 1997 by
approximately $65 million compared with 1996. These changes have had a positive
impact on the cash flows and resulting investment income of the property and
casualty subsidiaries.
Premium growth in personal lines was strong in both 1997 and 1998. In
commercial lines, intense competition in the worldwide marketplace has made
profitable premium growth difficult, particularly in the standard classes, which
include multiple peril, casualty and workers' compensation. In 1998, competitors
continued to place significant pressure on pricing as they attempted to maintain
or increase market share. In an environment where price increases have been
difficult to achieve, we have focused on our specialty lines where we emphasize
the added value we provide to our customers. Strong growth was achieved in both
years in premiums outside the United States, particularly in Europe, our largest
foreign market.
In view of the continuing unprofitability of the standard commercial
classes, we have accelerated actions to achieve price increases. Our priorities
for 1999 are to renew good business at adequate prices and not renew
underperforming accounts where we cannot attain price adequacy. This aggressive
pricing strategy could cause us to lose some business. Therefore, we expect
overall premium growth to be flat in 1999.
Underwriting results were near-breakeven in 1998 compared with profitable
results in 1997 and 1996. The combined loss and expense ratio, the common
measure of underwriting profitability, was 99.8% in 1998 compared with 96.9% in
1997 and 98.3% in 1996.
The loss ratio was 66.3% in 1998 compared with 64.5% in 1997 and 66.2% in
1996. The loss ratio continues to reflect the favorable experience resulting
from the consistent application of our disciplined underwriting standards.
Losses from catastrophes represented 3.3 percentage points of the loss ratio in
1998 compared with 1.1 percentage points in 1997 and 3.1 percentage points in
1996. The significant catastrophes affecting results in 1998 included the winter
ice storms in Canada in the first quarter, the wind and hail storms in the
United States in the second quarter and Hurricane Georges in Puerto Rico in the
third quarter. Catastrophe losses in 1996 resulted primarily from the winter
storms in the eastern part of the United States in the first quarter.
Our expense ratio was 33.5% in 1998 compared with 32.4% in 1997 and 32.1%
in 1996. The increase in the ratio in 1998 was due primarily to an increase in
commission expense caused in part by higher contingent payments and also to
written premiums growing at a somewhat lesser rate than overhead expenses.
During the fourth quarter of 1997, we began an activity value analysis
process to identify and eliminate low-value activities and to improve
operational efficiency in order to reduce expenses and redirect resources to
those current activities and new initiatives having the greatest potential to
contribute to the future results of the Corporation. Implementation began in the
first quarter of 1998 and is substantially completed. This cost control
initiative has resulted in approximately 500 job reductions in the home office
and the branch network through a combination of early retirements, terminations
and attrition. Other savings involve vendor management, consulting expenses and
other operating costs. The initiative is expected to result in annual cost
savings of approximately $150 million, beginning in 1999.
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<PAGE> 18
In the first quarter of 1998, we recorded a restructuring charge of $40
million, or $26 million after taxes, related to the implementation of the cost
control initiative. The restructuring charge relates primarily to costs
associated with providing enhanced pension benefits to employees who accepted an
early retirement incentive offer, severance costs and other costs.
PERSONAL INSURANCE
Reported premiums from personal insurance increased 5% in 1998 compared
with a 26% increase in 1997. The effect on net premiums written of the changes
to the reinsurance agreement with Sun Alliance was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Reported net premiums written............................... $1,365 $1,306 $1,039
Portfolio transfers of unearned premiums.................... 66 31
------ ------ ------
Adjusted net premiums written
(1998 compared with 1997)................................. $1,365 1,240
======
Increase in retention -- 1997............................... 139
------ ------
Adjusted net premiums written
(1997 compared with 1996)................................. $1,101 $1,008
====== ======
</TABLE>
Net premiums written, as adjusted, increased 10% in 1998 compared with 1997
and 9% in 1997 compared with 1996. 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
grew 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 each of the past three years. The combined loss and expense ratio was 85.6%
in 1998 compared with 83.1% in 1997 and 91.7% in 1996.
The profitability of our homeowners business each year is affected
substantially by the amount of catastrophe losses we incur. Homeowners results
were profitable by a similar margin in 1998 and 1997 as a reduction in the
frequency of non-catastrophe related losses in 1998 substantially offset an
increase in catastrophe losses. Results for this class were unprofitable in 1996
as catastrophe losses, particularly those caused by the winter storms, adversely
affected results. Catastrophe losses represented 8.5 percentage points of the
loss ratio for this class in 1998 compared with 2.9 percentage points in 1997
and 16.7 percentage points in 1996.
Our automobile business produced substantial profits in each of the last
three years. Results in each year benefited from stable loss frequency and
severity.
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 profitability increased in 1997 due to favorable loss
experience but decreased somewhat in 1998 due to an increase in the frequency of
large losses.
18
<PAGE> 19
COMMERCIAL INSURANCE
Reported premiums from commercial insurance were virtually unchanged in
1998 compared with 1997. Reported premiums in 1997 were 17% higher than in 1996.
The effect on net premiums written of the changes to the reinsurance agreement
with Sun Alliance was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Reported net premiums written............................... $4,139 $4,146 $3,532
Portfolio transfers of unearned premiums.................... 109 61
------ ------ ------
Adjusted net premiums written
(1998 compared with 1997)................................. $4,139 4,037
======
Increase in retention -- 1997............................... 253
------ ------
Adjusted net premiums written
(1997 compared with 1996)................................. $3,784 $3,471
====== ======
</TABLE>
Net premiums written, as adjusted, increased 3% in 1998 compared with 1997
and 9% in 1997 compared with 1996. 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. Growth was achieved in 1998 in our executive
protection business due to an emphasis on new products. Financial services
consolidation together with competition has constrained growth in our financial
institutions business. Premium growth in the standard commercial classes
continues to be hindered by the intense competition that has driven prices to
increasingly unprofitable levels. Premium growth in 1997 for the excess
liability component of our casualty coverages and for our executive protection
coverages benefited from the changes to our casualty excess of loss reinsurance
program. Premium growth in 1998 and 1997 was stronger outside the United States.
Our commercial insurance business produced unprofitable results in 1998
compared with near breakeven underwriting results in 1997 and 1996. The combined
loss and expense ratio was 104.5% in 1998 compared with 100.7% in 1997 and 99.7%
in 1996.
Multiple peril results were unprofitable in each of the past three years
due, in large part, to inadequate prices. Results for this class in 1998
deteriorated in the property component due to higher catastrophe losses. In the
liability component, there was an increase in the frequency of large losses in
1998. However, this was offset by negligible multiple peril incurred losses in
1998 relating to asbestos and toxic waste claims on insurance policies written
many years ago compared with the substantial incurred losses in 1997 relating to
such claims. Results for the multiple peril class were similar in 1997 and 1996
as an improvement in 1997 in the property component, due in part to an absence
of catastrophe losses, was offset by higher losses in the liability component
resulting from an increase in the frequency of large losses and higher incurred
losses relating to asbestos and toxic waste claims. Catastrophe losses
represented 8.6 percentage points of the loss ratio for this class in 1998
compared with 1.5 percentage points in 1997 and 4.8 percentage points in 1996.
Results for our casualty business were similarly unprofitable in each of
the past three years. In each year, casualty results were adversely affected by
incurred losses relating to asbestos and toxic waste claims, but more so in
1996. The excess liability component of our casualty coverages was slightly
unprofitable in 1998 compared with profitable results in 1997 and 1996 due to
declining prices and an increase in the frequency of losses. Excess liability
results in 1998 benefited from favorable development on certain case reserves
set up several years ago. Results for the primary liability component were
unprofitable in each of the past three years, but more so in 1997 and 1996 due
to a higher frequency of losses in those years. Results in the automobile
component were more unprofitable in 1998 than in 1997 compared with breakeven
results in 1996. The deterioration in 1997 and again in 1998 was due to an
increase in the frequency of large losses.
19
<PAGE> 20
Workers' compensation results were unprofitable in each of the past three
years. Results deteriorated in 1997 and again in 1998 due in large part to the
cumulative effect of price reductions over the past several years. Results were
also adversely affected in 1998 by several large losses.
Property and marine results were unprofitable in 1998 and 1997, but more so
in 1998, compared with profitable results in 1996. Results in 1998 and 1997 were
adversely affected by an increase in the frequency of large losses, including
several large overseas losses. Results in all three years were adversely
affected by catastrophe losses. Catastrophe losses for this class represented
5.7 percentage points of the loss ratio in 1998 compared with 4.9 percentage
points in 1997 and 4.5 percentage points in 1996.
Executive protection results were highly profitable in each of the past
three years due to favorable loss experience, particularly in the directors and
officers and fiduciary components. Our financial institutions business was also
profitable during the same period due to the favorable loss experience in the
fidelity component of this business. Such profitability was somewhat lower in
1997 due to several large losses in the non-fidelity portion of this business.
Our other commercial classes produced near breakeven results in 1998
compared with profitable results in 1997 and near breakeven results in 1996. The
deterioration in 1998 was attributable to our aviation business, which produced
highly unprofitable results. The improvement in 1997 was primarily attributable
to our surety and accident business.
REINSURANCE ASSUMED
Reinsurance assumed is treaty reinsurance that was assumed from Sun
Alliance. The reinsurance agreement with Sun Alliance was terminated effective
January 1, 1997. However, due to the lag in our reporting of such business, net
premiums written in the first quarter of 1997 included $90 million related to
business we assumed from Sun Alliance in the second half of 1996. Net premiums
written for this segment were reduced by $94 million and $65 million in the
first quarter of 1997 and 1996, respectively, due to the effect of the portfolio
transfers of unearned premiums back to Sun Alliance as of January 1 of each
year.
Underwriting results for this segment in 1997, which represent our share of
the Sun Alliance business for the last six months of 1996, were near breakeven.
Underwriting results were also near breakeven in 1996.
LOSS RESERVES
Loss reserves are our property and casualty subsidiaries' largest
liability. At the end of 1998, gross loss reserves totaled $10.4 billion
compared with $9.8 billion and $9.5 billion at year-end 1997 and 1996,
respectively. Reinsurance recoverable on such loss reserves was $1.3 billion at
year-end 1998 compared with $1.2 billion and $1.8 billion at the end of 1997 and
1996, respectively.
As a result of the changes to the reinsurance agreements with Sun Alliance,
there were portfolio transfers of gross loss reserves and reinsurance
recoverable as of January 1, 1997 and 1996. The effect of these portfolio
transfers was a decrease in gross loss reserves of $184 million and $209 million
and a decrease in reinsurance recoverable of $470 million and $244 million in
1997 and 1996, respectively.
Loss reserves, net of reinsurance recoverable, increased by $485 million or
6% in 1998 compared with $809 million or 10% in 1997. Excluding the effect of
the 1997 portfolio transfer, net loss reserves increased by $523 million or 7%
in 1997. Substantial reserve growth has occurred each year in those liability
classes, primarily excess liability and executive protection, that are
characterized by delayed loss reporting and extended periods of settlement.
During 1998, we experienced overall favorable development of $218 million
on loss reserves established as of the previous year-end. This compares with
favorable development of $65 million in 1997 and $43 million in 1996. Such
redundancies were reflected in operating results in these respective
20
<PAGE> 21
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 losses incurred relating to asbestos and toxic waste claims. The
higher favorable development in 1998 compared with the prior years was due to
substantially lower incurred losses related to asbestos and toxic waste claims,
the continued favorable loss experience for executive protection coverages and
favorable development on certain excess liability case reserves set up several
years ago.
The process of establishing loss reserves is a complex and imprecise
science that reflects significant judgmental factors. This is true because claim
settlements to be made in the future will be impacted by changing rates of
inflation and other economic conditions, changing legislative, judicial and
social environments and changes in our 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 and the settlement of the loss. In fact, approximately 60% of our net loss
reserves at December 31, 1998 were for IBNR -- 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
continue to further complicate 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 inconsistent court decisions
and 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 in
1993 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, all
of which has been paid. 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.
At the same time, 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 ultimately
disapproved. Pacific
21
<PAGE> 22
Indemnity's obligation under the trilateral agreement is therefore similar to,
and not duplicative of, that under those agreements described above.
The trilateral agreement reaffirms portions of an agreement reached in
March 1992 between Pacific Indemnity and Fibreboard. Among other matters, that
1992 agreement eliminates any Pacific Indemnity liability to Fibreboard for
asbestos-related property damage claims.
In July 1995, the United States District Court of the Eastern District of
Texas approved the global settlement agreement and the trilateral agreement. The
judgments approving these agreements 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 objectors to the global settlement
agreement appealed to the United States Supreme Court. In June 1997, the Supreme
Court set aside the ruling by the Fifth Circuit Court that had approved the
global settlement agreement and ordered the Fifth Circuit Court to reconsider
its approval. In January 1998, the Fifth Circuit Court again affirmed the global
settlement agreement. In April 1998, the objectors to the settlement petitioned
the Supreme Court to review the decision. In December 1998, argument was held
before the Supreme Court on the objectors' challenge. A decision is expected
during 1999.
The trilateral agreement was never appealed to the United States Supreme
Court and is final. As a result, management continues to believe 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 that 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 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.
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 costs of environmental clean-up have become substantial, 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 liabilities of the claimants are extremely difficult
to estimate. At any given 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
22
<PAGE> 23
inconsistent conclusions in their interpretation of several issues. These
significant uncertainties are not likely to be resolved definitively in the near
future.
Uncertainties also remain as to the Superfund law itself. Superfund's
taxing authority expired on December 31, 1995. Notwithstanding continued
pressure by the insurance industry and other interested parties to achieve a
legislative solution which would reform the liability provisions of the law,
Congress has not yet addressed the issue. 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.
The Superfund law does not address non-Superfund sites. For that reason, it
does not cover all existing hazardous waste exposures, such as those involving
sites that are subject to state law only. There remains significant uncertainty
as to the cost of remediating the state sites. 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 hazardous waste
claims. A substantial portion of the funds we have expended to date 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 unlimited defense provided in the policy sometimes leads to the
payment of defense costs in multiples of the indemnity exposure.
Reserves for asbestos and toxic waste claims cannot be estimated with
traditional loss reserving techniques that rely on historical accident year loss
development factors. 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. We have
evaluated ultimate incurred losses using newly emerging techniques for
estimating environmental liabilities and have expanded our claim data base. As a
result, we are more confident about the range of likely ultimate incurred losses
relating to asbestos and toxic waste claims. Therefore, the incurred losses
relating to asbestos and toxic waste claims were only $68 million in 1998,
substantially less than the $125 million in 1997 and the $151 million in 1996.
Further increases in such loss reserves in 1999 and future years are possible as
legal and factual issues concerning these claims continue to be clarified. The
amount cannot be reasonably estimated.
Management believes that the aggregate loss reserves of the property and
casualty subsidiaries at December 31, 1998 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.
CATASTROPHE EXPOSURE
The Corporation's property and casualty subsidiaries have an exposure to
insured losses caused by hurricanes, earthquakes, winter storms, windstorms and
other catastrophic events. The frequency and severity of catastrophes are
unpredictable. The extent of losses from a catastrophe is a function of both the
total amount of insured exposure in an area affected by the event and the
severity of the event. We continually assess our concentration of underwriting
exposures in catastrophe prone areas and develop strategies to manage this
exposure through individual risk selection, subject to regulatory constraints,
and through the purchase of catastrophe reinsurance. In recent years, we have
invested in modeling technologies that allow us to better monitor catastrophe
exposures. We also continue to explore and
23
<PAGE> 24
analyze credible scientific evidence, including the impact of global climate
change, that may affect our potential exposure under insurance policies.
INVESTMENTS AND LIQUIDITY
Investment income after taxes increased 7% in 1998 compared with 9% in
1997. Growth was primarily due to increases in invested assets, which reflected
strong cash flow from operations over the period, partially offset by lower
average yields on new investments.
The effective tax rate on our investment income was 15.3% in 1998 compared
with 16.7% in 1997 and 15.8% in 1996. The effective tax rate increased in 1997
and then decreased in 1998 due to changes in the percentage of our investment
income subject to tax.
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.
New cash available for investment by the property and casualty subsidiaries
was approximately $860 million in 1998 compared with $1,260 million in 1997 and
$1,150 million in 1996. New cash in 1997 and 1996 included approximately $330
million and $40 million, respectively, received as the net result of the
portfolio transfers of unearned premiums and loss reserves as of January 1 of
each year related to the changes to the reinsurance agreements with Sun
Alliance. New cash in 1996 also 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.
In 1998, new cash was invested primarily in tax-exempt bonds and, to a
lesser extent, equity securities. In 1997, new cash was invested in tax-exempt
bonds and, to a lesser extent, corporate bonds and mortgage-backed securities.
In addition, in the first quarter of 1997, $250 million of foreign denominated
bonds were sold due to the reduction in foreign liabilities resulting from the
termination of the reinsurance agreements with Sun Alliance, with the proceeds
invested in U.S. dollar denominated securities. In 1996, we invested new cash
primarily in mortgage-backed securities and 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 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.
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 $23 million in 1998 compared
with $36 million in 1997 and $20 million in 1996. The increase in corporate
income in 1997 was due primarily to a reduction in interest expense. The lower
corporate income in 1998 was due primarily to an increase in interest expense.
REAL ESTATE
In October 1996, we announced that we were exploring the possible sale of
all or a significant portion of our real estate assets. In March 1997, our real
estate subsidiary entered into an agreement with a prospective purchaser to
perform due diligence in anticipation of executing a contract for the sale of
substantially all of its commercial properties. Because the plan to pursue the
sale of these assets in the near term represented a significant change in
circumstances relating to the manner in which these assets would be used, we
reassessed the recoverability of their carrying value as of December 31,
24
<PAGE> 25
1996. As a result, we recorded an impairment loss of $255 million, or $160
million after taxes, in the fourth quarter of 1996 to reduce the carrying value
of these assets to their estimated fair value.
In June 1997, a definitive agreement was reached with the purchaser. In
November 1997, the sale of almost all of the properties covered by the agreement
reached in June was closed for $737 million, which included $628 million in cash
and the assumption of $109 million in debt. The buyer is a joint venture formed
by Paine Webber Real Estate Securities Inc., Morgan Stanley Real Estate Fund II,
L.P. and Gale & Wentworth, L.L.C. Closing on the one remaining property under
the agreement is expected to occur in 1999.
In addition to the sale to the joint venture in November 1997, we sold
several other commercial properties as well as residential properties in 1997
and 1998. We are continuing to explore the sale of certain of our remaining
properties.
We have retained approximately $365 million of land which we expect will be
developed in the future. In addition, we have retained approximately $165
million of commercial properties and land parcels under lease.
Real estate operations resulted in a loss after taxes of $2 million in 1998
compared with losses of $5 million in 1997 and $147 million in 1996. The loss in
1996 reflects the $160 million after tax impairment charge. Excluding the impact
of the impairment charge, results in 1996 benefited from the sale of several
rental properties.
Revenues were $82 million in 1998, $616 million in 1997 and $320 million in
1996. Revenues in 1998 reflect the reduced operating activity as a result of the
sale of a substantial portion of our real estate assets in 1997. Revenues in
1997 included $380 million from the November sale of real estate properties.
Proceeds received from that sale that related to mortgages receivable are not
classified as revenues. Revenues in 1996 included higher levels of revenues from
residential development and the sale of rental properties.
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,
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, plus any additional
costs to be incurred to complete development, 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 an 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 writedown
of real estate assets in 1996 was made in accordance with the provisions of SFAS
No. 121.
Loans receivable, which were issued in connection with our joint venture
activities and other property sales, are primarily purchase money mortgages.
Such loans, which amounted to $105 million at December 31, 1998, are generally
collateralized by buildings and, in some cases, land. We continually evaluate
the ultimate collectibility of such loans and establish appropriate reserves.
The carrying value of the real estate assets we plan to dispose of in the
near term is based on the estimated fair value of these assets. 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 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 such remaining properties and protect our
interests over the long term. Management believes that it has made adequate
provisions for impairment of real estate assets. However, if the assets are not
sold or developed as presently contemplated, it is possible that additional
impairment losses may be recognized.
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<PAGE> 26
Real estate activities were funded in the past with short-term credit
instruments, primarily commercial paper, and debt issued by Chubb Capital
Corporation as well as with term loans and mortgages. Proceeds from the November
1997 sale were used to repay the outstanding short-term debt and certain term
loans and mortgages as well as to reduce intercompany borrowings from Chubb
Capital. In February 1998, the remaining $300 million of intercompany borrowings
from Chubb Capital was converted into preferred stock of the real estate
subsidiary. In 1998, the interest rate on the remaining term loan approximated
7 1/2% and for mortgages the range of interest rates was 6% to 12%.
INVESTMENT GAINS AND LOSSES
Net investment gains realized by the Corporation and its property and
casualty subsidiaries were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Equity securities........................................... $100 $ 75 $69
Fixed maturities............................................ 42 30 11
---- ---- ---
Realized investment gains before tax........................ $142 $105 $80
==== ==== ===
Realized investment gains after tax......................... $ 92 $ 68 $52
==== ==== ===
</TABLE>
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.
Sales of equity securities in each of the last three years resulted in net
realized investment gains due primarily to the significant appreciation in the
United States equity markets. 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, 1998, 15% of the fixed maturity
portfolio was classified as held-to-maturity compared with 18% at December 31,
1997 and 22% at December 31, 1996.
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 other
comprehensive income, net of applicable deferred income tax.
The unrealized market appreciation before tax of those fixed maturities
carried at amortized cost was $138 million, $147 million and $130 million at
December 31, 1998, 1997 and 1996, respectively. Such unrealized appreciation was
not reflected in the consolidated financial statements.
Changes in unrealized market appreciation of fixed maturities were due to
fluctuations in interest rates.
DISCONTINUED OPERATIONS -- LIFE AND HEALTH INSURANCE
In May 1997, the Corporation completed the sale of Chubb Life Insurance
Company of America to Jefferson-Pilot Corporation for $875 million in cash,
subject to various closing adjustments, none of which were material.
26
<PAGE> 27
In 1996, the Corporation recognized a loss of $22 million relating to the
sale of the life and health insurance operations. The purchase price was not
adjusted to reflect results of operations subsequent to December 31, 1996. The
discontinued life and health insurance operations did not affect the
Corporation's net income in 1997 and 1998 and will not affect net income in
future periods. Earnings in 1996 from the discontinued life and health insurance
operations were $49 million, including realized investment gains of $8 million.
MARKET RISK
The main objectives in managing the investment portfolios of the
Corporation and its property and casualty subsidiaries are to maximize after-tax
investment income and total investment returns while minimizing credit risks in
order to provide maximum support to the insurance underwriting operations.
Investment strategies are developed based on many factors including underwriting
results and our resulting tax position, regulatory requirements, fluctuations in
interest rates and consideration of other market risks. Investment decisions are
centrally managed by investment professionals based on guidelines established by
management and approved by the boards of directors.
Market risk represents the potential for loss due to adverse changes in the
fair value of financial instruments. The market risks related to financial
instruments of the Corporation and its property and casualty subsidiaries
primarily relate to the investment portfolio, which exposes the Corporation to
risks related to interest rates and, to a lesser extent, credit quality,
prepayment, foreign currency exchange rates and equity prices. Analytical tools
and monitoring systems are in place to assess each of these elements of market
risk.
Interest rate risk is the price sensitivity of a fixed income security to
changes in interest rates. We view these potential changes in price within the
overall context of asset and liability management. Our actuaries estimate the
payout pattern of our liabilities, primarily our property and casualty loss
reserves, to determine their duration, which is the present value of the
weighted average payments expressed in years. We set duration targets for our
fixed income investment portfolios after consideration of the duration of these
liabilities and other factors, which we believe mitigates the overall effect of
interest rate risk for the Corporation and its property and casualty
subsidiaries.
The table on the following page provides information about all our fixed
maturity investments, which are sensitive to changes in interest rates. The
table presents cash flows of principal amounts and related weighted average
interest rates by expected maturity dates at December 31, 1998 and 1997. The
cash flows are based on the earlier of the call date or the maturity date or,
for mortgage-backed securities, expected payment patterns. Actual cash flows
could differ from the expected amounts.
27
<PAGE> 28
FIXED MATURITIES
EXPECTED CASH FLOWS OF PRINCIPAL AMOUNTS
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
----------------------------------------------------------------------------
TOTAL
----------------------
ESTIMATED
THERE- AMORTIZED MARKET
1999 2000 2001 2002 2003 AFTER COST VALUE
---- ---- ---- ---- ---- ------ --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-exempt........................... $462 $391 $578 $ 637 $ 575 $5,869 $ 8,512 $ 9,075
Average interest rate.............. 6.8% 6.7% 6.7% 6.1% 5.7% 5.5% -- --
Taxable-- other than mortgage-backed
securities......................... 201 139 175 209 389 1,451 2,564 2,704
Average interest rate.............. 6.5% 6.3% 6.9% 6.6% 6.6% 6.6% -- --
Mortgage-backed securities........... 196 189 208 163 117 822 1,695 1,678
Average interest rate.............. 7.1% 7.1% 7.1% 7.0% 7.0% 7.3% -- --
---- ---- ---- ------ ------ ------- ------- -------
Total................................ $859 $719 $961 $1,009 $1,081 $8,142 $12,771 $13,457
==== ==== ==== ====== ====== ====== ======= =======
AT DECEMBER 31, 1997
----------------------------------------------------------------------------
TOTAL
----------------------
ESTIMATED
THERE- AMORTIZED MARKET
1998 1999 2000 2001 2002 AFTER COST VALUE
---- ---- ---- ------ ------ ------ --------- ---------
(IN MILLIONS)
Tax-exempt........................... $387 $423 $384 $ 520 $ 563 $5,332 $ 7,609 $ 8,114
Average interest rate.............. 6.7% 6.9% 6.7% 6.7% 6.0% 5.7% -- --
Taxable-- other than mortgage-backed
securities......................... 158 308 146 258 140 1,578 2,588 2,675
Average interest rate.............. 7.7% 6.3% 6.7% 6.8% 7.3% 7.0% -- --
Mortgage-backed securities........... 231 162 167 180 177 861 1,778 1,811
Average interest rate.............. 7.1% 7.3% 7.4% 7.3% 7.4% 7.4% -- --
---- ---- ---- ------ ------ ------ ------- -------
Total................................ $776 $893 $697 $ 958 $ 880 $7,771 $11,975 $12,600
==== ==== ==== ====== ====== ====== ======= =======
</TABLE>
The Corporation and its property and casualty subsidiaries have
consistently invested in high quality marketable securities. As a result, we
believe that we have minimal credit quality risk. Taxable bonds in our domestic
portfolio comprise U.S. Treasury, government agency, mortgage-backed and
corporate securities. During 1998, to increase our investment returns, we
shifted a portion of the taxable portfolio from government agency
mortgage-backed securities and lower yielding U.S. Treasury securities to
commercial mortgage-backed securities and corporate bonds. Approximately 60% of
taxable bonds are issued by the U.S. Treasury or U.S. government agencies or
rated AA or better by Moody's or Standard and Poor's. Of the tax-exempt bonds,
approximately 90% are rated AA or better with more than half rated AAA. Only 1%
of our bond portfolio is below investment grade. Taxable bonds have an average
maturity of 7 years while tax-exempt bonds mature on average in 9 years.
Prepayment risk refers to the changes in prepayment patterns related to
decreases and increases in interest rates that can either shorten or lengthen
the expected timing of the principal repayments and thus the average life and
the effective yield of a security. Such risk exists primarily within our
portfolio of mortgage-backed securities. We monitor such risk regularly and
invest primarily in those classes of mortgage-backed securities that are less
subject to prepayment risk.
Mortgage-backed securities comprised 40% of our taxable bond portfolio at
both year-end 1998 and 1997. About 40% of our mortgage-backed securities
holdings at December 31, 1998 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
28
<PAGE> 29
liquid markets and market value information is readily available from
broker/dealers. An additional 40% of our mortgage-backed securities were call
protected AAA rated commercial securities. The remaining mortgage-backed
holdings were all investment grade commercial mortgage-backed securities.
Foreign currency risk is the sensitivity to foreign exchange rate
fluctuations of the market value and investment income related to foreign
currency denominated financial instruments. The functional currency of our
foreign operations is generally the currency of the local operating environment
since their business is primarily transacted in such local currency. We reduce
the risks relating to currency fluctuations by maintaining investments in those
foreign currencies in which we have unpaid claims and other liabilities. Such
investments have characteristics similar to our liabilities in those currencies.
At December 31, 1998, the property and casualty subsidiaries held foreign
investments of $1.2 billion supporting their international operations. Such
foreign investments have quality and maturity characteristics similar to our
domestic portfolio. The principal currencies creating foreign exchange rate risk
for the property and casualty subsidiaries are the Canadian dollar and the
British pound sterling. The table below provides information about those fixed
maturity investments included in the table on page 28 that are denominated in
these two currencies. The table presents cash flows of principal amounts in U.S.
dollar equivalents by expected maturity dates at December 31, 1998 and 1997.
Actual cash flows could differ from the expected amounts.
FOREIGN CURRENCY DENOMINATED FIXED MATURITIES
EXPECTED CASH FLOWS OF PRINCIPAL AMOUNTS
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
-----------------------------------------------------------------
TOTAL
---------------------
ESTIMATED
THERE- AMORTIZED MARKET
1999 2000 2001 2002 2003 AFTER COST VALUE
---- ---- ---- ---- ---- ------ --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Canadian dollar........................ $5 $31 $39 $40 $46 $151 $312 $343
British pound sterling................. -- 24 21 39 32 140 256 284
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-----------------------------------------------------------------
TOTAL
---------------------
ESTIMATED
THERE- AMORTIZED MARKET
1998 1999 2000 2001 2002 AFTER COST VALUE
---- ---- ---- ---- ---- ------ --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Canadian dollar........................ $-- $ 6 $16 $47 $43 $195 $307 $337
British pound sterling................. -- -- 19 23 5 175 222 229
</TABLE>
Equity price risk is the potential loss arising from changes in the value
of equity securities. In general, equities have more year-to-year price
variability than intermediate term high grade bonds. However, returns over
longer time frames have been consistently higher. Our equity securities are high
quality and readily marketable.
All of the above risks are monitored on an ongoing basis. A combination of
in-house systems and proprietary models and externally licensed software are
used to analyze individual securities as well as each portfolio. These tools
provide the portfolio managers with information to assist them in the evaluation
of the market risks of the portfolio.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue relates to the inability of certain information
technology (IT) systems and applications as well as non-IT systems, such as
equipment with imbedded chips and microprocessors, to properly process data
containing dates beginning with the year 2000. The issue exists because many
29
<PAGE> 30
systems used two digits rather than four to define the applicable year. Such
systems may recognize the date "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing disruptions of
normal business activities or other unforeseen problems.
In 1995, we initiated a project to ensure Year 2000 readiness of the
Corporation's systems and applications. We put in place a team responsible for
bringing our systems and equipment into Year 2000 compliance.
The team performed an inventory and assessment of our mainframe systems to
determine which must be retired, renovated or rewritten as a result of Year 2000
issues. As of December 31, 1998, we completed remediation and testing procedures
on 95% of our mainframe IT systems, including all mission critical systems
except one. We expect to complete the remediation and testing of all remaining
systems by June 1999.
We have also completed an inventory and assessment of all our personal
computers, servers and other non-mainframe computers. We expect that all such
computers and related software will be Year 2000 ready by the third quarter of
1999. We have also assessed our non-IT systems and believe that the failure of
any of these systems would have minimal impact on our operations.
The Corporation and its subsidiaries have interaction with many third
parties, including producers, reinsurers, financial institutions, vendors,
suppliers and others. We have initiated contact with these parties regarding
their plans for Year 2000 readiness. We are in the process of evaluating the
responses and following up with those parties from whom we have received no
response. The information obtained will be used to develop business contingency
plans to address any mission critical operations that may be adversely impacted
by the noncompliance of a third party with whom we interact. We have electronic
data interchanges with some third parties. We are physically testing such
interchanges for Year 2000 compliance. We expect that such testing will be
completed by June 1999.
We have identified those third parties that are critical to our operations
and are assessing risks with respect to the potential failure of such parties to
be Year 2000 ready. However, we do not have control over these third parties and
are unable to determine whether all such third parties will address the Year
2000 issue successfully, including third parties located outside the United
States where it is believed that Year 2000 remediation efforts in general may be
less advanced. Management cannot determine the effect on the Corporation's
future operating results of the failure of third parties to be Year 2000 ready.
Our Year 2000 plans have been developed with the intention of minimizing
the need for actual implementation of contingency activities. We anticipate that
a substantial portion of 1999 will be used to monitor systems already remediated
for Year 2000 for any unidentified problems and to perform additional
remediation and testing as necessary. Nonetheless, in order to address any
unexpected difficulties that may arise, we will keep our core Year 2000
readiness team intact until June 2000. Additionally, we are studying the
development of contingency plans to continue business in the unlikely event that
one or more of our critical systems fail.
We believe that we are taking the necessary measures to address Year 2000
issues that may arise and that our internal systems will be compliant.
Notwithstanding such efforts, significant Year 2000 problems could arise. In
particular, the prolonged failure of power and telecommunications systems could
have a material adverse effect on our operations. Similarly, Year 2000 related
difficulties experienced by our producers or financial institutions have the
potential to materially disrupt our business. Given the uncertain nature of Year
2000 problems that may arise, management cannot determine at this time whether
the consequences of Year 2000 related problems will have a material impact on
the Corporation's financial position or results of operations.
The Year 2000 team has included employees of the Corporation and software
consultants. A portion of the remediation effort has been accomplished by
redirecting existing systems resources to the Year 2000 effort. However, we do
not believe that this has had a significant adverse effect on other systems
initiatives.
30
<PAGE> 31
We expect that the cost to address the Year 2000 IT systems issue,
including compensation of employees and the cost of consultants, will
approximate $36 million. Approximately $30 million was incurred as of December
31, 1998, of which $14 million was incurred in 1998. These amounts do not
include the cost of computer equipment purchased to replace equipment that would
have been upgraded in the normal course of business, but not necessarily prior
to January 2000.
An additional concern to the Corporation is the potential future impact of
the Year 2000 issue on insurance coverages written by our property and casualty
subsidiaries. The Year 2000 issue is a risk for some of our insureds and needs
to be considered during the underwriting process similar to any other risk to
which our customers may be exposed. It is possible that Year 2000 related losses
may emerge that would adversely affect operating results in future periods. At
this time, in the absence of any significant claims experience, management
cannot determine the nature and extent of any losses, the availability of
coverage for such losses or the likelihood of significant claims.
THE EURO
On January 1, 1999, eleven of the fifteen member countries of the European
Economic and Monetary Union adopted the euro as their common currency, at which
time the rates of conversion between the euro and the participating national
currencies were fixed. The euro will be introduced gradually over a period of
three years. During this transition period, business in the participating
countries will be conducted in the euro or the national currency. Once the
national currencies are phased out, the euro will be the sole legal currency in
these countries.
We have identified the systems and operational issues related to the impact
of the adoption of the euro on our European property and casualty operations. We
were prepared to transact euro denominated business as of January 1, 1999. We
will address additional systems issues over the three year transition period.
The adoption of the euro is not expected to have a material effect on the
Corporation's financial position or results of operations.
CAPITAL RESOURCES
In February 1994, the Board of Directors authorized the repurchase of up to
10,000,000 shares of common stock. Through March 1997, the Corporation had
repurchased 6,851,600 shares under the 1994 share repurchase authorization. In
March 1997, the Board of Directors replaced the 1994 authorization with a new
authorization to repurchase up to 17,500,000 shares of common stock. On July 24,
1998, the Board of Directors authorized the repurchase of up to an additional
12,500,000 shares. Through December 31, 1998, the Corporation had repurchased
17,994,900 shares under the 1997 and 1998 authorizations. As of December 31,
1998, 12,005,100 shares remained under the current share repurchase
authorizations. In the aggregate, the Corporation repurchased 8,203,000 shares
in open-market transactions in 1998 at a cost of $609 million, 12,940,500 shares
in 1997 at a cost of $828 million and 1,700,000 shares in 1996 at a cost of $83
million.
The Corporation filed a shelf registration statement which the Securities
and Exchange Commission declared effective in September 1998, under which up to
$600 million of various types of securities may be issued by the Corporation or
Chubb Capital. No securities have been issued under this registration statement.
In August 1998, the Corporation sold $300 million of unsecured 6.15% notes
due in 2005 and $100 million of unsecured 6.60% debentures due in 2018 under a
previously filed shelf registration. The proceeds were used for general
corporate purposes, which included the repurchase of shares of our common stock.
The Corporation also has outstanding $30 million of unsecured 8 3/4% notes
due in 1999. Chubb Capital has outstanding $100 million of 6 7/8% notes due in
2003. The Chubb Capital notes are unsecured and are guaranteed by the
Corporation.
31
<PAGE> 32
In July 1997, the Corporation entered into two credit agreements with a
group of banks that provide for unsecured borrowings of up to $500 million in
the aggregate. The $200 million short term revolving credit facility, which
terminated on July 10, 1998, was extended to July 7, 1999, and may be renewed or
replaced. The $300 million medium term revolving credit facility terminates on
July 11, 2002. On the respective termination dates, any loans then outstanding
become payable. There have been no borrowings under these agreements. These
facilities are available for general corporate purposes and to support Chubb
Capital's commercial paper borrowing arrangement.
PENDING TRANSACTIONS
On February 8, 1999, the Corporation announced that it entered into a
definitive merger agreement under which it would acquire Executive Risk Inc.
Executive Risk is a specialty insurance company offering directors and officers,
errors and omissions and professional liability coverages. Executive Risk's
gross and net written premiums for 1998 were approximately $500 million and $280
million, respectively.
The acquisition will be accounted for using the purchase method of
accounting. The agreement provides that Executive Risk shareholders will receive
1.235 shares of the Corporation's common stock for each outstanding common share
of Executive Risk. The agreement contemplates that approximately 13,730,000
shares of common stock of the Corporation will be issued to Executive Risk
shareholders and approximately 2,300,000 shares of common stock of the
Corporation will be reserved for issuance upon exercise of Executive Risk stock
options. The total value of the transaction is expected to be approximately $850
million. Completion of the acquisition is subject to approval by Executive Risk
shareholders and various regulatory authorities. Closing is expected in the
second quarter of 1999.
The Corporation has agreed to purchase a 27% interest in Hiscox plc, a
leading U.K. personal and commercial specialty insurer, for approximately $140
million. Closing of this transaction is subject to regulatory approvals which
are pending.
CHANGES IN ACCOUNTING PRINCIPLES
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This SOP requires that certain
costs incurred to develop or obtain computer software for internal use should be
capitalized and amortized over the software's expected useful life. Currently,
we expense all development costs of internal use computer software. SOP 98-1 is
effective for the Corporation on January 1, 1999 and is to be applied
prospectively. The adoption of SOP 98-1 will increase the Corporation's net
income in 1999 by an amount that has not yet been quantified. The effect on net
income will decrease in future years as the new method of accounting is phased
in.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are included in
Item 7, pages 27 through 29 of this report.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of the Corporation at December 31, 1998
and 1997 and for each of the three years in the period ended December 31, 1998
and the Report of Independent Auditors thereon and the Corporation's unaudited
quarterly financial data for the two-year period ended December 31, 1998 are
incorporated by reference from the Corporation's 1998 Annual Report to
Shareholders, pages 40 through 64.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
32
<PAGE> 33
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Corporation's Directors is incorporated by
reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Shareholders on April 27, 1999, pages 2 through 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 27, 1999, pages 8 through 19
other than the Performance Graphs and the Organization and Compensation
Committee Report appearing on pages 13 through 17.
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 27, 1999, pages 5 through 6.
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 27, 1999, page 20.
33
<PAGE> 34
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS AND 2. SCHEDULES
The financial statements and schedules listed in the accompanying
index to financial statements and financial statement schedules are filed
as part of this report.
3. EXHIBITS
The exhibits listed in the accompanying index to exhibits are filed as
part of this report.
(b) REPORTS ON FORM 8-K
The Registrant filed a current report on Form 8-K dated October 29,
1998 with respect to the announcement on October 29, 1998 of its financial
results for the third quarter and first nine months of 1998.
The Registrant filed a current report on Form 8-K dated December 17,
1998 with respect to the fact that on December 11, 1998 the Board of
Directors of the Registrant adopted amendments and additions to the by-laws
of the Registrant.
The Registrant filed a current report on Form 8-K dated January 19,
1999 with respect to the announcement on January 18, 1999 of its
preliminary financial results for the quarter and year ended December 31,
1998.
The Registrant filed a current report on Form 8-K dated February 6,
1999 with respect to the announcement on February 8, 1999 that the
Registrant entered into a definitive merger agreement under which the
Registrant will acquire Executive Risk Inc.
The Registrant filed a current report on Form 8-K dated March 12, 1999
with respect to the announcement on March 12, 1999 that the Registrant had
adopted a new shareholder rights plan, replacing the Registrant's existing
plan, which was due to expire on June 12, 1999.
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which undertaking shall be
incorporated by reference into registrant's Registration Statements on Form S-8
Nos. 33-29185 (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), 333-09275 (filed July 31, 1996), 333-58157 (filed June 30, 1998) and
333-67347 (filed November 16, 1998):
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
34
<PAGE> 35
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
THE CHUBB CORPORATION
(REGISTRANT)
March 12, 1999
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 12, 1999
- --------------------------------------------------- Executive Officer and
(DEAN R. O'HARE) Director
/s/ ZOE E. BAIRD Director March 12, 1999
- ---------------------------------------------------
(ZOE E. BAIRD)
/s/ JOHN C. BECK Director March 12, 1999
- ---------------------------------------------------
(JOHN C. BECK)
/s/ SHEILA P. BURKE Director March 12, 1999
- ---------------------------------------------------
(SHEILA P. BURKE)
Director March 12, 1999
- ---------------------------------------------------
(JAMES I. CASH, JR.)
/s/ PERCY CHUBB, III Director March 12, 1999
- ---------------------------------------------------
(PERCY CHUBB, III)
/s/ JOEL J. COHEN Director March 12, 1999
- ---------------------------------------------------
(JOEL J. COHEN)
/s/ JAMES M. CORNELIUS Director March 12, 1999
- ---------------------------------------------------
(JAMES M. CORNELIUS)
/s/ DAVID H. HOAG Director March 12, 1999
- ---------------------------------------------------
(DAVID H. HOAG)
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<C> <S> <C>
Director March 12, 1999
- ---------------------------------------------------
(THOMAS C. MACAVOY)
/s/ WARREN B. RUDMAN Director March 12, 1999
- ---------------------------------------------------
(WARREN B. RUDMAN)
/s/ DAVID G. SCHOLEY Director March 12, 1999
- ---------------------------------------------------
(DAVID G. SCHOLEY)
Director March 12, 1999
- ---------------------------------------------------
(RAYMOND G.H. SEITZ)
/s/ LAWRENCE M. SMALL Director March 12, 1999
- ---------------------------------------------------
(LAWRENCE M. SMALL)
/s/ JAMES M. ZIMMERMAN Director March 12, 1999
- ---------------------------------------------------
(JAMES M. ZIMMERMAN)
/s/ DAVID B. KELSO Executive Vice President and March 12, 1999
- --------------------------------------------------- Chief Financial Officer
(DAVID B. KELSO)
/s/ HENRY B. SCHRAM Senior Vice President and March 12, 1999
- --------------------------------------------------- Chief Accounting Officer
(HENRY B. SCHRAM)
</TABLE>
36
<PAGE> 37
THE CHUBB CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
COVERED BY REPORT OF INDEPENDENT AUDITORS
(ITEM 14(A))
<TABLE>
<CAPTION>
ANNUAL REPORT TO
SHAREHOLDERS FORM 10-K
PAGE PAGE
---------------- ---------
<C> <S> <C> <C>
Report of Independent Auditors 63 --
Consolidated Balance Sheets at December 31, 1998 and 1997 41 --
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996 40 --
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996 42 --
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 43 --
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1998, 1997, and 1996 43 --
Notes to Consolidated Financial Statements 44 --
Supplementary Information (unaudited)
Quarterly Financial Data 64 --
Schedules:
I -- Consolidated Summary of Investments -- Other
than Investments in Related Parties at
December 31, 1998 -- 39
II -- Condensed Financial Information of Registrant at
December 31, 1998 and 1997 and for the Years
Ended December 31, 1998, 1997 and 1996 -- 40
III -- Consolidated Supplementary Insurance Information
at and for the Years Ended December 31, 1998,
1997 and 1996 -- 43
IV -- Consolidated Reinsurance for the Years Ended
December 31, 1998, 1997 and 1996 -- 44
VI -- Consolidated Supplementary Property and Casualty
Insurance Information for the Years Ended
December 31, 1998, 1997 and 1996 -- 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, 1998, are hereby
incorporated by reference.
37
<PAGE> 38
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of The Chubb Corporation of our report dated February 24, 1999, except for
Note 20(c), as to which the date is March 12, 1999, included in the 1998 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. 333-63175, No. 333-67445 and Form S-8: No. 33-29185,
No. 33-30020, No. 33-49230, No. 33-49232, No. 333-09273, No. 333-09275, No.
333-58157 and No. 333-67347) of our report dated February 24, 1999, except for
Note 20(c), as to which the date is March 12, 1999, 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, 1999
38
<PAGE> 39
THE CHUBB CORPORATION
SCHEDULE I
CONSOLIDATED SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
(IN MILLIONS)
DECEMBER 31, 1998
<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................................ $ 344.2 $ 344.2 $ 344.2
--------- --------- ---------
Fixed maturities
Bonds
United States Government and government agencies
and authorities................................ 944.3 960.2 958.1
States, municipalities and political
subdivisions................................... 8,466.5 9,028.2 8,892.3
Foreign.......................................... 1,118.3 1,202.1 1,202.1
Public utilities................................. 340.9 357.7 357.7
All other corporate bonds........................ 1,830.2 1,835.5 1,835.5
--------- --------- ---------
Total bonds............................ 12,700.2 13,383.7 13,245.7
Redeemable preferred stocks......................... 70.3 73.2 73.2
--------- --------- ---------
Total fixed maturities................. 12,770.5 13,456.9 13,318.9
--------- --------- ---------
Equity securities
Common stocks
Public utilities................................. 18.5 24.3 24.3
Banks, trusts and insurance companies............ 68.6 82.1 82.1
Industrial, miscellaneous and other.............. 831.7 911.6 911.6
--------- --------- ---------
Total common stocks.................... 918.8 1,018.0 1,018.0
Non-redeemable preferred stocks..................... 83.8 74.2 74.2
--------- --------- ---------
Total equity securities................ 1,002.6 1,092.2 1,092.2
--------- --------- ---------
Total invested assets.................. $14,117.3 $14,893.3 $14,755.3
========= ========= =========
</TABLE>
39
<PAGE> 40
THE CHUBB CORPORATION
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS -- PARENT COMPANY ONLY
(IN MILLIONS)
DECEMBER 31
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Assets
Invested Assets
Short Term Investments................................. $ 98.2 $ 420.8
Taxable Fixed Maturities -- Available-for-Sale (cost
$377.3 and $330.8).................................... 357.9 334.9
Equity Securities (cost $114.2 and $66.4).............. 129.5 83.6
-------- --------
TOTAL INVESTED ASSETS............................. 585.6 839.3
Cash...................................................... -- .6
Investment in Consolidated Subsidiaries................... 5,191.9 4,779.6
Receivable from Consolidated Subsidiary................... 208.1 76.9
Other Assets.............................................. 189.3 154.5
-------- --------
TOTAL ASSETS...................................... $6,174.9 $5,850.9
======== ========
Liabilities
Long Term Debt............................................ $ 430.0 $ 60.0
Dividend Payable to Shareholders.......................... 50.3 49.0
Deferred Income Tax....................................... 6.6 39.5
Accrued Expenses and Other Liabilities.................... 43.9 45.3
-------- --------
TOTAL LIABILITIES................................. 530.8 193.8
-------- --------
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 175,989,202 and 176,037,850
Shares................................................. 176.0 176.0
Paid-In Surplus........................................... 546.7 593.0
Retained Earnings......................................... 5,604.0 5,101.7
Unrealized Appreciation of Investments, Net of Tax........ 414.7 400.1
Foreign Currency Translation Losses, Net of Tax........... (36.0) (25.7)
Receivable from Employee Stock Ownership Plan............. (86.3) (96.7)
Treasury Stock, at Cost -- 13,722,376 and 7,320,410
Shares................................................. (975.0) (491.3)
-------- --------
TOTAL SHAREHOLDERS' EQUITY........................ 5,644.1 5,657.1
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $6,174.9 $5,850.9
======== ========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in the Corporation's 1998
Annual Report to Shareholders.
40
<PAGE> 41
THE CHUBB CORPORATION
SCHEDULE II
(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME -- PARENT COMPANY ONLY
(IN MILLIONS)
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Investment Income........................................... $ 46.2 $ 71.8 $ 41.5
Realized Investment Gains................................... 23.0 13.2 12.8
Investment Expenses......................................... (2.1) (1.8) (2.0)
Corporate Expenses.......................................... (27.7) (34.9) (33.4)
------ ------ ------
39.4 48.3 18.9
Federal and Foreign Income Tax.............................. 3.9 44.0 .1
------ ------ ------
35.5 4.3 18.8
Equity in Income from Continuing Operations of Consolidated
Subsidiaries.............................................. 671.5 765.2 467.4
------ ------ ------
INCOME FROM CONTINUING OPERATIONS...................... 707.0 769.5 486.2
Equity in Income from Discontinued Operations............... -- -- 26.5
------ ------ ------
NET INCOME............................................. $707.0 $769.5 $512.7
====== ====== ======
</TABLE>
The Corporation and its domestic subsidiaries file a consolidated federal
income tax return. The Corporation's federal income tax represents its
allocation of 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 1998
Annual Report to Shareholders.
41
<PAGE> 42
THE CHUBB CORPORATION
SCHEDULE II
(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY
(IN MILLIONS)
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income................................................ $ 707.0 $ 769.5 $ 512.7
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Equity in Income of Continuing Operations of
Consolidated Subsidiaries............................ (671.5) (765.2) (467.4)
Equity in Income from Discontinued Operations.......... -- -- (26.5)
Realized Investment Gains.............................. (23.0) (13.2) (12.8)
Other, Net............................................. (31.6) 16.9 (12.7)
------- ------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES.............................. (19.1) 8.0 (6.7)
------- ------- -------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities................... 70.6 600.1 237.7
Proceeds from Maturities of Fixed Maturities.............. 94.5 49.1 104.9
Proceeds from Sales of Equity Securities.................. 97.9 89.7 17.3
Proceeds from Sale of Discontinued Operations, Net........ -- 861.2 --
Purchases of Fixed Maturities............................. (213.5) (606.3) (398.0)
Purchases of Equity Securities............................ (122.7) (84.0) (16.1)
Decrease (Increase) in Short Term Investments, Net........ 322.6 (411.1) 53.0
Dividends Received from Consolidated Subsidiaries......... 280.0 280.0 275.2
Other, Net................................................ (25.1) 19.6 (23.4)
------- ------- -------
NET CASH PROVIDED BY INVESTING ACTIVITIES............ 504.3 798.3 250.6
------- ------- -------
Cash Flows from Financing Activities
Proceeds from Exercise of Stock Option by Subsidiary...... -- 249.3(a) --
Proceeds from Issuance of Long Term Debt.................. 400.0 -- --
Repayment of Long Term Debt............................... (30.0) (30.0) (30.0)
Dividends Paid to Shareholders............................ (203.4) (196.5) (184.2)
Repurchase of Shares...................................... (608.5) (827.9) (82.5)
Increase in Receivable from Consolidated Subsidiary....... (131.2) (61.0) (1.8)
Other, Net................................................ 87.3 60.4 54.5
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES................ (485.8) (805.7) (244.0)
------- ------- -------
Net Increase (Decrease) in Cash............................. (.6) .6 (.1)
Cash at Beginning of Year................................... .6 -- .1
------- ------- -------
CASH AT END OF YEAR.................................. $ -- $ .6 $ --
======= ======= =======
</TABLE>
- ---------------
(a) In 1997 and 1996, Chubb Capital Corporation, a subsidiary of the
Corporation, exercised its option to obtain 5,316,565 shares and 480,464
shares, respectively, of the Corporation's common stock. Chubb Capital
exchanged such shares for $228.6 million and $20.7 million, respectively, of
its 6% exchangeable subordinated notes. In 1997, Chubb Capital paid the
Corporation for the cost of those shares.
In 1997, a $264.4 million investment in a real estate development
subsidiary was received as a dividend from a subsidiary of the Corporation. In
addition, $410.7 million of fixed maturity securities were contributed to an
investment company subsidiary of the Corporation. In 1996, $520.3 million of
fixed maturity securities were received as a dividend from the investment
company subsidiary. These noncash transactions have been excluded from the
statements of cash flows.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in the Corporation's 1998
Annual Report to Shareholders.
42
<PAGE> 43
THE CHUBB CORPORATION
SCHEDULE III
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31 YEAR ENDED DECEMBER 31
---------------------------------- ---------------------------------
DEFERRED
POLICY NET
ACQUISITION UNPAID UNEARNED PREMIUMS INVESTMENT INSURANCE
SEGMENT COSTS CLAIMS PREMIUMS EARNED INCOME CLAIMS
------- ----------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
1998
Property and Casualty Insurance
Personal........................................... $186.1 $ 688.9 $ 704.4 $1,304.3 $ 681.8
Standard Commercial................................ 258.5 5,686.4 1,011.6 1,980.6 1,631.7
Specialty Commercial............................... 284.1 3,981.2 1,199.7 2,018.9 1,180.2
Investments........................................ $748.9*
------ --------- -------- -------- ------ --------
$728.7 $10,356.5 $2,915.7 $5,303.8 $748.9 $3,493.7
====== ========= ======== ======== ====== ========
1997
Property and Casualty Insurance
Personal........................................... $174.5 $ 675.5 $ 644.7 $1,188.1 $ 595.5
Standard Commercial................................ 249.2 5,328.1 984.6 1,906.1 1,534.8
Specialty Commercial............................... 253.2 3,768.9 1,067.3 1,968.3 1,111.3
Reinsurance Assumed................................ 94.9 65.4
Investments........................................ $711.2*
------ --------- -------- -------- ------ --------
$676.9 $ 9,772.5 $2,696.6 $5,157.4 $711.2 $3,307.0
====== ========= ======== ======== ====== ========
1996
Property and Casualty Insurance
Personal........................................... $146.1 $ 688.5 $ 591.9 $ 969.7 $ 570.5
Standard Commercial................................ 209.5 4,950.7 933.7 1,642.5 1,329.7
Specialty Commercial............................... 215.7 3,702.1 993.1 1,673.1 922.9
Reinsurance Assumed................................ 29.9 182.4 98.8 284.0 187.7
Investments........................................ $646.1*
------ --------- -------- -------- ------ --------
$601.2 $ 9,523.7 $2,617.5 $4,569.3 $646.1 $3,010.8
====== ========= ======== ======== ====== ========
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
AMORTIZATION OTHER
OF DEFERRED INSURANCE
POLICY OPERATING
ACQUISITION COSTS AND PREMIUMS
SEGMENT COSTS EXPENSES WRITTEN
------- ------------ --------- --------
<S> <C> <C> <C>
1998
Property and Casualty Insurance
Personal........................................... $ 370.1 $ 77.0 $1,364.7
Standard Commercial................................ 554.0 151.9 2,005.8
Specialty Commercial............................... 540.2 140.9 2,133.0
Investments........................................
--------- ------ --------
$ 1,464.3 $369.8 $5,503.5
========= ====== ========
1997
Property and Casualty Insurance
Personal........................................... $ 340.3 $ 68.2 $1,306.4
Standard Commercial................................ 515.6 137.2 2,026.1
Specialty Commercial............................... 505.5 125.4 2,119.3
Reinsurance Assumed................................ 41.2 (3.8)
Investments........................................
--------- ------ --------
$ 1,402.6 $330.8 $5,448.0
========= ====== ========
1996
Property and Casualty Insurance
Personal........................................... $ 273.5 $ 58.5 $1,039.2
Standard Commercial................................ 412.5 130.9 1,732.7
Specialty Commercial............................... 437.0 100.8 1,799.4
Reinsurance Assumed................................ 115.0 202.5
Investments........................................
--------- ------ --------
$ 1,238.0 $290.2 $4,773.8
========= ====== ========
</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 allocated to the underwriting segments.
43
<PAGE> 44
THE CHUBB CORPORATION
SCHEDULE IV
CONSOLIDATED REINSURANCE
(IN MILLIONS)
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>
1998......................................... $5,624.7 $ 461.5 $140.6 $5,303.8 2.7
======== ======== ====== ========
1997......................................... $5,315.8 $ 450.8 $292.4 $5,157.4 5.7
======== ======== ====== ========
1996......................................... $5,023.5 $ 987.2 $533.0 $4,569.3 11.7
======== ======== ====== ========
</TABLE>
THE CHUBB CORPORATION
SCHEDULE VI
CONSOLIDATED SUPPLEMENTARY PROPERTY AND CASUALTY INSURANCE INFORMATION
(IN MILLIONS)
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
CLAIMS AND CLAIM
ADJUSTMENT
EXPENSES INCURRED
RELATED TO
---------------------- PAID CLAIMS AND
CURRENT PRIOR CLAIM ADJUSTMENT
YEAR YEARS EXPENSES
-------- -------- ----------------
<S> <C> <C> <C>
1998................................................. $3,712.1 $(218.4) $3,008.4
======== ======= ========
1997................................................. $3,372.3 $ (65.3) $2,498.3
======== ======= ========
1996................................................. $3,053.6 $ (42.8) $2,869.4
======== ======= ========
</TABLE>
44
<PAGE> 45
THE CHUBB CORPORATION
EXHIBITS
(ITEM 14(A))
<TABLE>
<CAPTION>
DESCRIPTION
<C> <S>
(2) -- Plan of acquisition, reorganization, arrangement,
liquidation or succession
Stock Purchase Agreement dated as of February 23, 1997
between Jefferson-Pilot Corporation and the registrant
incorporated by reference to Exhibit 2.1 of the
registrant's Report to the Securities and Exchange
Commission on Form 10-Q for the three months ended March
31, 1997. (Confidential treatment granted with respect to
certain portions thereof.)
Agreement and Plan of Merger dated as of February 6, 1999
among Executive Risk Inc., the registrant and Excalibur
Acquisition, Inc. incorporated by reference to Exhibit
(99.2) of the registrant's Report to the Securities and
Exchange Commission on Form 8-K dated February 6, 1999.
(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.
Certificate of Amendment to the Restated Certificate of
Incorporation filed herewith.
Certificate of Correction of Certificate of Amendment to the
Restated Certificate of Incorporation filed herewith.
Restated By-Laws. Incorporated by reference to Exhibit (1)
of the registrant's Report to the Securities and Exchange
Commission on Form 8-K dated December 17, 1998.
(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 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.
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.
</TABLE>
45
<PAGE> 46
<TABLE>
<CAPTION>
DESCRIPTION
<C> <S>
The Chubb Corporation Producer Stock Incentive Program
incorporated by reference to Exhibit (4.3) of the
registrant's Report to the Securities and Exchange
Commission on Amendment No. 2 to Form S-3 No. 333-67445
dated January 25, 1999.
Executive Compensation Plans and Arrangements.
The Chubb Corporation Annual Incentive Compensation Plan
(1996) incorporated 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, filed herewith.
The Chubb Corporation Stock Option Plan for Non-Employee
Directors (1996), as amended, filed herewith.
The Chubb Corporation Long-Term Stock Incentive Plan
(1992), as amended, filed herewith.
The Chubb Corporation Stock Option Plan for Non-Employee
Directors (1992), as amended, filed herewith.
The Chubb Corporation Deferred Compensation Plan for
Directors, as amended, filed herewith.
The Chubb Corporation Executive Deferred Compensation Plan
filed herewith.
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 Agreement 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 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, 1997.
Executive Severance Agreement filed herewith.
Contract for consulting and advisory services with Percy
Chubb III, a director of the registrant, 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, 1996.
(11) -- Computation of earnings per share incorporated by reference
from Note (17) of the notes to consolidated financial
statements of the 1998 Annual Report to Shareholders.
(13) -- Pages 15, 16, and 38 through 65 of the 1998 Annual Report to
Shareholders.
(21) -- Subsidiaries of the registrant filed herewith.
(23) -- Consent of Independent Auditors (see page 38 of this
report).
(27) -- Financial Data Schedule filed herewith.
</TABLE>
46
<PAGE> 1
CERTIFICATE OF AMENDMENT
TO THE RESTATED CERTIFICATE OF INCORPORATION
SERIES B PARTICIPATING CUMULATIVE PREFERRED STOCK
of
THE CHUBB CORPORATION
Pursuant to Section 14A:7-2(4) of the
New Jersey Business Corporation Act
The undersigned DOES HEREBY CERTIFY:
FIRST: That the name of the corporation is THE CHUBB CORPORATION.
SECOND: That the following resolution was duly adopted by the Board of
Directors of The Chubb Corporation, a New Jersey corporation (hereinafter called
the "CORPORATION"), at a meeting duly convened and held on March 12, 1999, at
which a quorum was present and acting throughout:
RESOLVED: That pursuant to the Restated Certificate of Incorporation of the
Corporation, as amended (hereinafter called the "CERTIFICATE OF INCORPORATION"),
the By-Laws of the Corporation and the New Jersey Business Corporation Act, the
Board of Directors hereby creates a series of authorized Preferred Stock of the
Corporation, designated as "Series B Participating Cumulative Preferred Stock",
and hereby amends the Certificate of Incorporation by deleting Section B-1
thereof and by adding the following Section B-1 immediately following Section B
of Article Fourth of the Certificate of Incorporation so that the designation
and the relative voting, dividend, liquidation, conversion and other rights,
preferences and limitations of such shares, in addition to those set forth in
Section B of the Certificate of Incorporation, are as follows:
<PAGE> 2
Section B-2. Provisions Relating to Series B Participating Cumulative
Preferred Stock.
1. Designation and Amount. The shares of such series shall be designated as
"SERIES B PARTICIPATING CUMULATIVE PREFERRED STOCK" and the number of shares
constituting such series shall be 300,000.
2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of any shares
of any series of Preferred Stock ranking prior and superior to the Series B
Participating Cumulative Preferred Stock with respect to dividends, the holders
of shares of Series B Participating Cumulative Preferred Stock, in preference to
the shares of Common Stock, par value $1 per share, of the Company (the "COMMON
STOCK"), and any other stock of the Company junior to the Series B Participating
Cumulative Preferred Stock with respect to dividends, shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds legally
available for the purpose, quarterly dividends payable in cash on March 15, June
15, September 15 and December 15 in each year (each such date being referred to
herein as a "QUARTERLY DIVIDEND PAYMENT DATE"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or fraction
of a share of Series B Participating Cumulative Preferred Stock, in an amount
per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b)
subject to the provision for adjustment hereinafter set forth, 100 times the
aggregate per share amount of all cash dividends, and 100 times the aggregate
per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date, or, with respect to the first Quarterly
Dividend Payment Date, since the first issuance of any share or fraction of a
share of Series B Participating Cumulative Preferred Stock. In the event the
Company shall at any time after March 12, 1999 (the "RIGHTS DECLARATION DATE")
(i) declare or pay any dividend on Common Stock payable in shares of Common
Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount to which holders of shares of Series B Participating Cumulative
Preferred Stock were entitled immediately prior to such event under clause (b)
of the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the
2
<PAGE> 3
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Subject to the provisions of paragraph 17 of Section B of this Article
Fourth, the Company shall declare a dividend or distribution on the Series B
Participating Cumulative Preferred Stock as provided in paragraph (A) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the
Series B Participating Cumulative Preferred Stock shall nevertheless be payable
on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding shares
of Series B Participating Cumulative Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series B
Participating Cumulative Preferred Stock, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of holders
of shares of Series B Participating Cumulative Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment Date, in
either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series B Participating
Cumulative Preferred Stock in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be allocated pro
rata on a share-by-share basis among all such shares at the time outstanding.
The Board of Directors may fix a record date for the determination of holders of
shares of Series B Participating Cumulative Preferred Stock entitled to receive
payment of a dividend or distribution declared thereon, which record date shall
be no more than 60 days prior to the date fixed for the payment thereof.
3. Voting Rights. In addition to any other voting rights required by law,
the holders of shares of Series B Participating Cumulative Preferred Stock shall
have only the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series B Participating Cumulative Preferred Stock shall entitle the
holder thereof to one vote on all matters submitted to a vote of the
shareholders of the Company, and each fractional share of Series B Participating
Cumulative
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Preferred Stock shall entitle the holder thereof to a pro rata fractional vote.
In the event the Company shall at any time after the Rights Declaration Date (i)
declare any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (iii) combine the outstanding Common
Stock into a smaller number of shares, then in each such case the number of
votes per share to which holders of shares of Series B Participating Cumulative
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of shares of
Series B Participating Cumulative Preferred Stock and the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a vote
of stockholders of the Company.
(C) (i) If at any time dividends on any Series B Participating Cumulative
Preferred Stock shall be in arrears in an amount equal to six quarterly
dividends thereon, the occurrence of such contingency shall mark the beginning
of a period (herein called a "DEFAULT PERIOD") which shall extend until such
time when all accrued and unpaid dividends for all previous quarterly dividend
periods and for the current quarterly dividend period on all shares of Series B
Participating Cumulative Preferred Stock then outstanding shall have been
declared and paid or set apart for payment. During each default period, all
holders of Preferred Stock (including holders of the Series B Participating
Cumulative Preferred Stock) with dividends in arrears in an amount equal to six
quarterly dividends thereon, voting as a class, irrespective of series, shall
have the right to elect two Directors.
(ii) During any default period, such voting right of the holders of Series
B Participating Cumulative Preferred Stock may be exercised initially at a
special meeting called pursuant to sub-paragraph (iii) of this paragraph 3(C) or
at any annual meeting of stockholders, and thereafter at annual meetings of
stockholders, provided that neither such voting right nor the right of the
holders of any other series of Preferred Stock, if any, to increase, in certain
cases, the authorized number of Directors shall be exercised unless the holders
of 33-1/3 percent in number of shares of Preferred Stock outstanding shall be
present in person or by proxy. The absence of a quorum of the holders of Common
Stock shall not affect the exercise by the holders of Preferred Stock of such
voting right. At any meeting at which the holders of Preferred Stock shall
exercise such voting right initially during an existing default period, they
shall have the right, voting as a class, to elect Directors to fill such
vacancies, if any, in the Board of Directors as may then exist up to two
Directors or, if such right is exercised at an annual
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<PAGE> 5
meeting, to elect two Directors. If the number which may be so elected at any
special meeting does not amount to the required number, the holders of the
Preferred Stock shall have the right to make such increase in the number of
Directors as shall be necessary to permit the election by them of the required
number. After the holders of the Preferred Stock shall have exercised their
right to elect Directors in any default period and during the continuance of
such period, the number of Directors shall not be increased or decreased except
by vote of the holders of Preferred Stock as herein provided or pursuant to the
rights of any equity securities ranking senior to or pari passu with the Series
B Participating Cumulative Preferred Stock.
(iii) Unless the holders of Preferred Stock shall, during an existing
default period, have previously exercised their right to elect Directors, the
Board of Directors may order, or any stockholder or stockholders owning in the
aggregate not less than ten percent of the total number of shares of Preferred
Stock outstanding, irrespective of series, may request, the calling of special
meeting of the holders of Preferred Stock, which meeting shall thereupon be
called by the President, a Vice-President or the Secretary of the Corporation.
Notice of such meeting and of any annual meeting at which holders of Preferred
Stock are entitled to vote pursuant to this sub-paragraph (C)(iii) shall be
given to each holder of record of Preferred Stock by mailing a copy of such
notice to him at his last address as the same appears on the books of the
Corporation. Such meeting shall be called for a time not earlier than 20 days
and not later than 60 days after such order or request or in default of the
calling of such meeting within 60 days after such order or request, such meeting
may be called on similar notice by any stockholder or stockholders owning in the
aggregate not less than ten percent of the total number of shares of Series B
Participating Cumulative Preferred Stock outstanding. Notwithstanding the
provisions of this sub-paragraph (C)(iii), no such special meeting shall be
called during the period within 90 days immediately preceding the date fixed for
the next annual meeting of the stockholders.
(iv) In any default period, the holders of Common Stock, and other classes
of stock of the Corporation if applicable, shall continue to be entitled to
elect the whole number of Directors until the holders of Preferred Stock shall
have exercised their right to elect two (2) Directors voting as a class, after
the exercise of which right (x) the Directors so elected by the holders of
Preferred Stock shall continue in office until their successors shall have been
elected by such holders or until the expiration of the default period, and (y)
any vacancy in the Board of Directors may (except as provided in sub-paragraph
(C)(ii) of this paragraph 3) be filled by vote of a majority of the remaining
Directors theretofore elected by the holders of the class of stock which elected
the Director whose office shall have become vacant.
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(v) Immediately upon the expiration of a default period, (x) the right of
the holders of Preferred Stock as a class to elect Directors shall cease, (y)
the term of any Directors elected by the holders of Preferred Stock as a class
shall terminate, and (z) the number of Directors shall be such number as may be
provided for in the certificate of incorporation or by-laws irrespective of any
increase made pursuant to the provisions of sub-paragraph (C)(ii) of this
paragraph 3 (such number being subject, however, to change thereafter in any
manner provided by law or in the certificate of incorporation or by-laws). Any
vacancies in the Board of Directors occurring after the expiration of a default
period shall be filled in the manner provided for in the certificate of
incorporation or by-laws.
(D) Except as set forth herein, holders of Series B Participating
Cumulative Preferred Stock shall have no special voting rights and their consent
shall not be required (except to the extent they are entitled to vote with
holders of Common Stock as set forth herein) for taking any corporate action.
4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series B Participating Cumulative Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares of Series B Participating
Cumulative Preferred Stock outstanding shall have been paid in full or set aside
for payment, the Company shall not:
declare or pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series B Participating Cumulative
Preferred Stock;
declare or pay dividends on or make any other distributions on any
shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series B Participating
Cumulative Preferred Stock, except dividends paid ratably on the Series B
Participating Cumulative Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled;
redeem or purchase or otherwise acquire for consideration shares of
any stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series B Participating Cumulative
Preferred Stock, provided that the Company may at any time
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redeem, purchase or otherwise acquire shares of any such parity stock in
exchange for shares of any stock of the Company ranking junior (either as
to dividends or upon dissolution, liquidation or winding up) to the Series
B Participating Cumulative Preferred Stock; or
purchase or otherwise acquire for consideration any shares of Series B
Participating Cumulative Preferred Stock, or any shares of stock ranking on
a parity with the Series B Participating Cumulative Preferred Stock, except
in accordance with a purchase offer made in writing or by publication (as
determined by the Board of Directors) to all holders of such shares upon
such terms as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of the
respective Series and classes, shall determine in good faith will result in
fair and equitable treatment among the respective series or classes.
(B) The Company shall not permit any subsidiary of the Company to purchase
or otherwise acquire for consideration any shares of stock of the Company unless
the Company could, under paragraph (A) of this Section 4, purchase or otherwise
acquire such shares at such time and in such manner.
5. Reacquired Shares. Any shares of Series B Participating Cumulative
Preferred Stock purchased or otherwise acquired by the Company in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth in
the Certificate of Incorporation.
6. Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Company, no distribution shall be made (1) to
the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series B Participating Cumulative
Preferred Stock unless, prior thereto, the holders of shares of Series B
Participating Cumulative Preferred Stock shall have received $100.00 per share,
plus an amount equal to accrued and unpaid dividends and distributions thereon,
whether or not declared, to the date of such payment, provided that the holders
of shares of Series B Participating Cumulative Preferred Stock shall be entitled
to receive an aggregate amount per share, subject to the provision for
adjustment hereinafter set forth, of not less than 1000 times the aggregate
amount to be distributed per share to holders of Common Stock, or (2) to the
holders of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or
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<PAGE> 8
winding up) with the Series B Participating Cumulative Preferred Stock, except
distributions made ratably on the Series B Participating Cumulative Preferred
Stock and all other such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event the Company shall at any time after the
Rights Declaration Date declare or pay any dividend on Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or otherwise than
by payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the aggregate amount to
which holders of shares of Series B Participating Cumulative Preferred Stock
were entitled immediately prior to such event under the proviso in clause (1) of
the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
7. Consolidation, Merger, etc. In case the Company shall enter into any
consolidation, merger, combination or other transaction in which the shares of
Common Stock are exchanged for or changed into other stock or securities, cash
and/or any other property, then in any such case the shares of Series B
Participating Cumulative Preferred Stock shall at the same time be similarly
exchanged or changed in an amount per share (subject to the provision for
adjustment hereinafter set forth) equal to 1000 times the aggregate amount of
stock, securities, cash and/or any other property (payable in kind), as the case
may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Company shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series B Participating Cumulative Preferred Stock shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
8. No Redemption. The shares of Series B Participating Cumulative Preferred
Stock shall not be redeemable.
9. Rank. The Series B Participating Cumulative Preferred Stock shall rank
junior with respect to payment of dividends and on liquidation to all other
series of the Company's preferred stock outstanding on the date hereof and to
all
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such other series that may be issued after the date hereof except to the extent
that any such other series specifically provides that it shall rank junior to
the Series B Participating Cumulative Preferred Stock.
10. Amendment. The Restated Certificate of Incorporation of the Corporation
shall not be amended in any manner which would materially alter or change the
powers, preferences or special rights of the Series B Participating Cumulative
Preferred Stock so as to affect them adversely without the affirmative vote of
the holders of at least a majority of the outstanding shares of Series B
Participating Cumulative Preferred Stock, voting separately as a class.
11. Fractional Shares. Series B Participating Cumulative Preferred Stock
may be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights, to
receive dividends thereon, and to participate in any distribution of assets and
to have the benefit of all other rights of holders of Series B Participating
Cumulative Preferred Stock.
THIRD: That the Restated Certificate of Incorporation of the Corporation,
as amended, is amended so that the designation and number of shares of Series B
Participating Cumulative Preferred Stock acted upon in the foregoing
resolutions, and the relative rights, preferences and limitations of such series
of authorized preferred stock, are as stated in said resolutions.
IN WITNESS WHEREOF, The Chubb Corporation has caused its corporate seal to
be hereunto affixed and this Amendment to be signed by its Chairman, Dean R.
O'Hare, and attested by its Secretary, Henry G. Gulick, this 12 day of March,
1999.
/s/ Dean R. O'Hare
-----------------------
Chairman
Attest:
/s/ Henry G. Gulick
- ----------------------
Secretary
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/x/ Title 14A:1-6 (5) New Jersey Business Corporation Act (File in DUPLICATE)
/ / Title 15A:1-7 (e) New Jersey Nonprofit Corporation Act (File in TRIPLICATE)
CERTIFICATE OF CORRECTION OF:
Corporation Name: The Chubb Corporation
Corporation Number: 13-2595722 (IRS Employer Identification No.)
(For use by Domestic, Foreign, Profit and Nonprofit Corporations)
The undersigned hereby submits for filing a Certificate of Correction
executed on behalf of the above name Corporation, pursuant to the provisions of
the appropriate Statute, checked above, of the New Jersey Statutes.
1. The Certificate to be corrected is:
Certificate of Amendment to Restated Certificate Date Filed: March 15, 1999
of Incorporation
2. The inaccuracy in the Certificate is (indicated inaccuracy or defect):
RESOLVED: That pursuant to the Restated Certificate of Incorporation of the
Corporation, as amended (hereinafter called the "CERTIFICATE OF
INCORPORATION"), the By-Laws of the Corporation and the New Jersey Business
Corporation Act, the Board of Directors hereby creates a series of
authorized Preferred Stock of the Corporation, designated as "Series B
Participating Cumulative Preferred Stock", and hereby amends the
Certificate of Incorporation by deleting Section B-1 thereof and by adding
the following Section B-1 immediately following Section B of Article Fourth
of the Certificate of Incorporation so that the designation and the
relative voting, dividend, liquidation, conversion and other rights,
preferences and limitations of such shares, in addition to those set forth
in Section B of the Certificate of Incorporation, are as follows:
3. The Certificate of Correction hereby reads as follows:
RESOLVED: That pursuant to the Restated Certificate of Incorporation of the
Corporation, as amended (hereinafter called the "CERTIFICATE OF
INCORPORATION"), the By-Laws of the Corporation and the New Jersey Business
Corporation Act, the Board of Directors hereby creates a series of
authorized Preferred Stock of the Corporation, designated as "Series B
Participating Cumulative Preferred Stock", and hereby amends, effective as
of March 31, 1999, the Certificate of Incorporation by deleting Section B-1
thereof and by adding the following Section B-1 immediately following
Section B of Article Fourth of the Certificate of Incorporation so that the
designation and the relative voting, dividend, liquidation, conversion and
other rights, preferences and limitations of such shares, in addition to
those set forth in Section B of the Certificate of Incorporation, are as
follows:
<PAGE> 11
IN WITNESS WHEREOF, the undersigned Corporation has caused this Certificate
to be executed on its behalf by its duly authorized officer on the 18th day of
March, 1999.
THE CHUBB CORPORATION
By: /s/ John E. Wisinger
-----------------------------------------
Name: JOHN E. WISINGER
Title: VICE PRESIDENT & ASSOCIATE COUNSEL
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<PAGE> 1
THE CHUBB CORPORATION
LONG-TERM STOCK INCENTIVE PLAN (1996)
SECTION 1. PURPOSE
The purposes of The Chubb Corporation Long-Term Stock Incentive Plan (the
"Plan") are to promote the interests of The Chubb Corporation and its
shareholders by (i) attracting and retaining executive personnel and other key
employees of outstanding ability; (ii) motivating executive personnel and other
key employees, by means of performance-related incentives, to achieve
longer-range performance goals; and (iii) enabling such employees to participate
in the long-term growth and financial success of The Chubb Corporation.
SECTION 2. DEFINITIONS
"Affiliate" shall mean any corporation or other entity which is not a
Subsidiary but as to which the Corporation possesses a direct or indirect
ownership interest and has representation on the board of directors or any
similar governing body.
"Award" shall mean a grant or award under Section 6 through 9, inclusive,
of the Plan, as evidenced in a written document delivered to a Participant as
provided on Section 10(b).
"Board of Directors" shall mean the Board of Directors of the Corporation.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
"Committee" shall mean the Organization & Compensation Committee of the
Board of Directors.
"Common Stock" or "Stock" shall mean the Common Stock, $1.00 par value, of
the Corporation.
"Corporation" shall mean The Chubb Corporation.
"Designated Beneficiary" shall mean the beneficiary designated by the
Participant, in a manner determined by the Committee, to receive amounts due the
Participant in the event of the Participant's death. In the absence of an
effective designation by the Participant, Designated Beneficiary shall mean the
Participant's estate.
"Employee" shall mean (i) an officer or employee of the Employer and (ii)
an advisor or consultant to the Employer. For purposes of this Plan, for persons
described in clause (ii) above, employment and termination of employment shall
mean the maintenance of, or termination of, as the case may be, such person's
relationship as an advisor or consultant to the Employer.
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"Employer" shall mean the Corporation and any Subsidiary or Affiliate.
"Fair Market Value" shall mean the average of the highest and lowest sales
prices reported for consolidated trading of issues listed on the New York Stock
Exchange on the date in question, or, if the Stock shall not have been traded on
such date, the average of such highest and lowest sales prices on the first day
prior thereto on which the Stock was so traded.
"Fiscal Year" shall mean the fiscal year of the Corporation.
"Incentive Stock Option" shall mean a stock option granted under Section 6
which is intended to meet the requirements of Section 422 of the Code.
"Nonstatutory Stock Option" shall mean a stock option granted under Section
6 which is not intended to be an Incentive Stock Option.
"Option" shall mean an Incentive Stock Option or a Nonstatutory Stock
Option and shall include a Restoration Option.
"Participant" shall mean an Employee who is selected by the Committee to
receive an Award under the Plan.
"Payment Value" shall mean the dollar amount assigned to a Performance
Share which shall be equal to the Fair Market Value of the Common Stock on the
day of the Committee's determination under Section 8(c)(1) with respect to the
applicable Performance Cycle.
"Performance Cycle" or "Cycle" shall mean the period of years selected by
the Committee during which the performance is measured for the purpose of
determining the extent to which an award of Performance Shares has been earned.
"Performance Goals" shall mean the objectives established by the Committee
for a Performance Cycle, for the purpose of determining the extent to which
Performance Shares which have been contingently awarded for such Cycle are
earned.
"Performance Share" shall mean an award granted pursuant to Section 8 of
the Plan expressed as a share of Common Stock.
"Prior Plans" shall mean The Chubb Corporation Long-Term Stock Incentive
Plan (1992), Long-Term Stock Incentive Plan (1989) and the Stock Option Plan
(1984).
"Restoration Option" shall mean a stock option granted pursuant to Section
6(d).
"Restricted Period" shall mean the period of years selected by the
Committee during which a grant of Restricted Stock or Restricted Stock Units may
be forfeited to the Corporation.
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<PAGE> 3
"Restricted Stock" shall mean shares of Common Stock contingently granted
to a Participant under Section 9 of the Plan.
"Restricted Stock Unit" shall mean a fixed or variable dollar denominated
unit contingently awarded under Section 9 of the Plan.
"Stock Appreciation Right" shall mean a right granted under Section 7.
"Subsidiary" shall mean any business entity in which the Corporation
possesses directly or indirectly fifty percent (50%) or more of the total
combined voting power.
SECTION 3. ADMINISTRATION
The Plan shall be administered by the Committee. The Committee shall have
sole and complete authority to adopt, alter and repeal such administrative
rules, guidelines and practices governing the operation of the Plan as it shall
from time to time deem advisable, and to interpret the terms and provisions of
the Plan. The Committee may delegate to one or more executive officers of the
Corporation the power to make Awards to Participants who are not executive
officers or directors of the Corporation provided the Committee shall fix the
maximum amount of such Awards for the group and a maximum for any one
Participant. The Committee's decisions shall be binding upon all persons,
including the Corporation, stockholders, an Employer, Employees, Participants
and Designated Beneficiaries.
SECTION 4. ELIGIBILITY
All Employees who, in the opinion of the Committee, have the capacity for
contributing in a substantial measure to the successful performance of the
Corporation are eligible to be Participants in the Plan.
SECTION 5. MAXIMUM AMOUNT AVAILABLE FOR AWARDS
(a) The maximum number of shares of Stock in respect of which Awards may be
made under the Plan shall be 4,365,000 shares of Common Stock plus up to an
additional 2,635,000 shares of Common Stock to the extent shares of Common Stock
are reacquired by the Corporation, including shares purchased in the open
market, after April 23, 1996. Not more than 1,750,000 shares may be awarded as
Restricted Stock, Restricted Stock Units or Performance Shares and not more than
4,365,000 shares may be awarded as incentive stock options. Subject to the
foregoing, Shares of Common Stock may be made available from the authorized but
unissued shares of the Corporation or from shares reacquired by the Corporation,
including shares purchased in the open market. In the event that (i) an Option
of Stock Appreciation Right under the Plan or the Prior Plans is settled for
cash or expires or is terminated unexercised as to any shares of Common Stock
covered thereby, or (ii) any Award under the Plan or the Prior Plans in respect
of shares is cancelled or forfeited for any reason without the delivery of
shares of Common Stock, such shares shall thereafter be again available for
award pursuant to the Plan. In the event that any Option or other Award granted
is exercised through the delivery of shares of Common Stock, the number of
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<PAGE> 4
shares of Common Stock available for Awards under the Plan shall be increased by
the number of shares so surrendered.
(b) No Employee may be granted under the Plan in any calendar year Options
or Stock Appreciation Rights on more than 150,000 shares of Common Stock and no
Employee may be granted in any calendar year more than 40,000 Performance Shares
of Restricted Stock or Restricted Stock Units.
(c) In the event that the Committee shall determine that any stock
dividend, extraordinary cash dividend, recapitalization, reorganization, merger,
consolidation, split-up, spin-off, combination, exchange of shares, warrants or
rights offering to purchase Common Stock at a price substantially below fair
market value, or other similar corporate event affects the Common Stock such
that an adjustment is required in order to preserve the benefits or potential
benefits intended to be made available under this Plan, then the Committee
shall, in its sole discretion, and in such manner as the Committee may deem
equitable, adjust any or all of (1) the number and kind of shares which
thereafter may be awarded or optioned and sold or made the subject of Stock
Appreciation Rights under the Plan, (2) the number and kind of shares subject to
outstanding Options and other Awards, and (3) the grant, exercise or conversion
price with respect to any of the foregoing and/or, if deemed appropriate, make
provision for a cash payment to a Participant or a person who has an outstanding
Option or other Award provided, however, that the number of shares subject to
any Option or other Award shall always be a whole number.
SECTION 6. STOCK OPTIONS
(a) Grants. Subject to the provisions of the Plan, the Committee shall have
sole and complete authority to determine the Employees to whom Options shall be
granted, the number of shares to be covered by each Option, the option price
therefor and the conditions and limitations applicable to the exercise of the
Option including but not limited to, whether, an to what extent and under what
circumstances amounts payable upon exercise of an Option shall be deferred at
the election of the holder of such Option. The Committee shall have the
authority to grant Incentive Stock Options, or to grant Nonstatutory Stock
Options, or to grant both types of options. In the case of Incentive Stock
Options, the terms and conditions of such grants shall be subject to and comply
with such rules as may be prescribed by Section 422 of the Code, as from time to
time amended, and any implementing regulations.
(b) Option Price. The Committee shall establish the option price at the
time each Option is granted, which price shall not be less than 100% of the Fair
Market Value of the Common Stock on the date of grant.
(c) Exercise. (1) Each Option shall be exercisable at such times and
subject to such terms and conditions as the Committee may, in its sole
discretion, specify in the applicable Award or thereafter; provided, however,
that in no event may any Option granted hereunder be exercisable after the
expiration of ten years from the date of such grant. The Committee may impose
such conditions with respect to the exercise of Options, including without
limitation, any relating to the application of federal or state securities laws,
as it may deem necessary or advisable.
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<PAGE> 5
(2) No shares shall be delivered pursuant to any exercise of an Option
until payment in full of the option price therefor is received by the
Corporation. Such payment may be made in cash, or its equivalent, or, if and to
the extent permitted by the Committee, by exchanging shares of Common Stock
owned for at least six months by the optionee (which are not the subject of any
pledge or other security interest), or by a combination of the foregoing,
provided that the combined value of all cash and cash equivalents and the Fair
Market Value of any such Common Stock so tendered to the Corporation, valued as
of the date of such tender, is at least equal to such option price.
(d) Restoration Options. In the event that any Participant delivers shares
of Common Stock in payment of the exercise price of any Option granted hereunder
in accordance with Section 6(c)(2), the Committee shall have the authority to
grant or provide for the automatic grant of a Restoration Option to such
Participant. The grant of a Restoration Option shall be subject to the
satisfaction of such conditions or criteria as the Committee in its sole
discretion shall establish from time to time. A Restoration Option shall entitle
the holder thereof to purchase a number of shares of Common Stock equal to the
number of such shares so delivered upon exercise of the original Option and, in
the discretion of the Committee, the number of shares, if any, tendered to the
Corporation to satisfy any withholding tax liability arising in connection with
the exercise of the original Option. A Restoration Option shall have a per share
exercise price of not less than 100% of the per share Fair Market Value of the
Common Stock on the date of grant of such Restoration Option, a term not longer
than the remaining term of the original Option at the time of exercise thereof,
and such other terms and conditions as the Committee in its sole discretion
shall determine.
SECTION 7. STOCK APPRECIATION RIGHTS
(a) The Committee may, with sole and complete authority, grant Stock
Appreciation Rights in tandem with an Option, in addition to an Option, or
freestanding and unrelated to an Option. Stock Appreciation Rights granted in
tandem with or in addition to an Option may be granted either at the same time
as the Option or at a later time. Stock Appreciation Rights shall not be
exercisable earlier than six months after grant, shall not be exercisable after
the expiration of ten years from the date of grant and shall have an exercise
price of not less than 100% of the Fair Market Value of the Common Stock on the
date of grant.
(b) A Stock Appreciation Right shall entitle the Participant to receive
from the Corporation an amount equal to the excess of the Fair Market Value of a
share of Common Stock on the exercise of the Stock Appreciation Right over the
grant price thereof, provided that the Committee may for administrative
convenience determine that, for any Stock Appreciation Right which is not
related to an Incentive Stock Option which Stock Appreciation Right can only be
exercised during limited periods of time in order to satisfy the conditions of
certain rules of the Securities and Exchange Commission, the exercise of any
such Stock Appreciation Right for cash during such limited period shall be
deemed to occur for all purposes hereunder on the day during such limited period
on which the Fair Market Value of the Stock is the highest. Any such
determination by the Committee may be changed by the Committee from time to time
and may govern the exercise of Stock Appreciation Rights granted prior to such
determination as well as Stock Appreciation Rights
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thereafter granted. The Committee shall determine upon the exercise of a Stock
Appreciation Right whether such Stock Appreciation Right shall be settled in
cash, shares of Common Stock or a combination of cash and shares of Common
Stock.
SECTION 8. PERFORMANCE SHARES
(a) The Committee shall have sole and complete authority to determine the
Employees who shall receive Performance Shares and the number of such shares for
each Performance Cycle, and to determine the duration of each Performance Cycle
and the value of each Performance Share. There may be more than one Performance
Cycle in existence at any one time, and the duration of Performance Cycles may
differ from each other.
(b) The Committee shall establish Performance Goals for each Cycle based on
any one or more of the following: the operating earnings, net earnings, return
on equity, income, market share, shareholder return, combined ratio, level of
expenses or growth in revenue. During any Cycle, the Committee may adjust the
Performance Goal for such Cycle as it deems equitable in recognition of unusual
or non-recurring events affecting the Corporation, changes in applicable tax
laws or accounting principles, or such other factors as the Committee may
determine.
(c) (1) As soon as practicable after the end of a Performance Cycle, the
Committee shall determine the number of Performance Shares which have been
earned on the basis of performance in relation to the established Performance
Goals.
(2) Payment Values of earned Performance Shares shall be distributed
to the Participant or, if the Participant has died, to the Participant's
Designated Beneficiary, as soon as practicable after the expiration of the
Performance Cycle and the Committee's determination under paragraph (1), above.
The Committee shall determine whether Payment Values are to be distributed in
the form of cash and/or shares of Common Stock.
SECTION 9. RESTRICTED STOCK AND RESTRICTED STOCK UNITS
(a) Subject to the provisions of the Plan, the Committee shall have sole
and complete authority to determine the Employees to whom shares of Restricted
Stock and Restricted Stock Units shall be granted, the number of shares of
Restricted Stock and the number of Restricted Stock Units to be granted to each
Participant, the duration of the Restricted Period during which, and the
conditions under which, the Restricted Stock and Restricted Stock Units may be
forfeited to the Corporation, and the other terms and conditions of such Awards.
The Restricted Period shall consist of at least one year (which may be shortened
or waived by the Committee at any time in its discretion) with respect to one or
more Participants or Awards outstanding. In its discretion, the Committee may
establish performance conditions with respect to awards of Restricted Stock and
Restricted Stock Units based on one or more of the same items listed in Section
8(b) in respect of Performance Shares during a performance period selected by
the Committee.
(b) Shares of Restricted Stock and Restricted Stock Units may not be sold,
assigned, transferred, pledged or otherwise encumbered, except as herein
provided, during the Restricted
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Period. Certificates issued in respect of shares of Restricted Stock shall be
registered in the name of the Participant and deposited by such Participant,
together with a stock power endorsed in blank, with the Corporation. At the
expiration of the Restricted Period, the Corporation shall deliver such
certificates to the Participant or the Participant's legal representative.
Payment for Restricted Stock Units shall be made to the Corporation in cash
and/or shares of Common Stock, as determined at the sole discretion of the
Committee.
SECTION 10. GENERAL PROVISIONS
(a) Withholding. The Employer shall have the right to deduct from all
amounts paid to a Participant in cash (whether under this Plan or otherwise) any
taxes required by law to be withheld in respect of Awards under this Plan. In
the case of payments of Awards in the form of Common Stock, at the Committee's
discretion the Participant may be required to pay to the Employer the amount of
any taxes required to be withheld with respect to such Common Stock or, in lieu
thereof, the Employer shall have the right to retain (or the Participant may be
offered the opportunity to elect to tender) the number of shares of Common Stock
whose Fair Market Value equals the amount required to be withheld.
(b) Awards. Each Award hereunder shall be evidenced in writing, delivered
to the Participant and shall specify the terms and conditions thereof and any
rules applicable thereto, including but not limited to the effect on such Award
of the death, retirement or other termination of employment of the Participant
and the effect thereon, if any, of a change in control of the Corporation.
(c) Nontransferability. (i) Except as provided in (ii) below, no Award
shall be assignable or transferable, and no right or interest of any Participant
shall be subject to any lien, obligation or liability of the Participant, except
by will or the laws of descent and distribution.
(ii) Notwithstanding subparagraph (i) above, the Committee may determine
that an Award may be transferred pursuant to a qualified domestic relations
order, as determined by the Committee or its designee or that an Option may be
transferred by an Employee to one or more members of the Employee's immediate
family, to a partnership of which the only partners are members of the
Employee's immediate family, or to a trust established by the Employee for the
benefit of one or more members of the Employee's immediate family. For this
purpose immediate family means the Employee's spouse, parents, children,
grandchildren and the spouses of such parents, children and grandchildren. A
transferee described in this subparagraph may not further transfer an Option. An
Option transferred pursuant to this subparagraph shall remain subject to all of
the applicable provisions of the Plan and the written option agreement.
(d) No Right to Employment. No person shall have any claim or right to be
granted an Award, and the grant of an Award shall not be construed as giving a
Participant the right to be retained in the employ of the Employer. Further, the
Employer expressly reserves the right at any time to dismiss a Participant free
from any liability, or any claim under the Plan, except as provided herein or in
any agreement entered into with respect to an Award.
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(e) No Rights as Stockholder. Subject to the provisions of the applicable
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed under
the Plan until he or she has become the holder thereof. Notwithstanding the
foregoing, in connection with each grant of Restricted Stock hereunder, the
applicable Award shall specify if and to what extent the Participant shall not
be entitled to the rights of a stockholder in respect of such Restricted Stock.
(f) Construction of the Plan. The validity, construction, interpretation,
administration and effect of the Plan and of its rules and regulations, and
rights relating to the Plan, shall be determined solely in accordance with the
laws of New York.
(g) Effective Date. Subject to the approval of the stockholders of the
Corporation, the Plan shall be effective on April 23, 1996. No Options or Awards
may be granted under the Plan after December 31, 2001; provided, however, that
the authority for grant of Restoration Options hereunder in accordance with
Section 6(d) shall continue, subject to the provisions of Section 5, as long as
any Option granted hereunder remains outstanding.
(h) Amendment of Plan. The Board of Directors may amend, suspend or
terminate the Plan or any portion thereof at any time, provided that no
amendment shall be made without stockholder approval if such approval is
necessary to comply with any tax or regulatory requirement, including for these
purposes any approval requirement which is a prerequisite for exemptive relief
under Section 16(b) of the Securities Exchange Act of 1934 with which the
Committee has determined it is necessary to desirable to have the Corporation
comply. Notwithstanding anything to the contrary contained herein, the Committee
may amend the Plan in such manner as may be necessary so as to have the Plan
conform with the local rules and regulations.
(i) Amendment of Award. The Committee may amend, modify or terminate any
outstanding Award with the Participant's consent at any time prior to payment or
exercise in any manner not inconsistent with the terms of the Plan, including
without limitation, (i) to change the date or dates as of which (A) an Option or
Stock Appreciation Right becomes exercisable; (B) a Performance Share is deemed
earned; (C) Restricted Stock becomes nonforfeitable; or (ii) to cancel and
reissue an Award under such different terms and conditions as it determines
appropriate, except that an outstanding stock option shall not be amended to
reduce its original exercise price other than in connection with a transaction
described in Section 5(c).
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THE CHUBB CORPORATION
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS (1996)
1. PURPOSE
The purpose of The Chubb Corporation Stock Option Plan for Non-Employee
Directors (1992) (the "Plan") is to increase the proprietary and vested interest
of the non-employee directors of The Chubb Corporation (the "Corporation") in
the growth and performance of the Corporation by granting such directors options
to purchase shares of Common Stock, $1.00 par value per share (the "Stock"), of
the Corporation.
2. ADMINISTRATION
The Plan shall be administered by the Corporation's Board of Directors (the
"Board"). Subject to the provisions of the Plan, the Board shall be authorized
to interpret the Plan, to establish, amend, and rescind any rules and
regulations relating to the Plan and to make all other determinations necessary
or advisable for the administration of the Plan; provided, however, that the
Board shall have no discretion with respect to the selection of directors to
receive options under the Plan, the number of shares of Stock subject to any
such options, the purchase price thereunder or the timing of grants of options
under the Plan. The determinations of the Board in the administration of the
Plan, as described herein, shall be final and conclusive. The Secretary of the
Corporation shall be authorized to implement the Plan in accordance with its
terms and to take such actions of a ministerial nature as shall be necessary to
effectuate the intent and purposes thereof. The validity, construction and
effect of the Plan and any rules and regulations relating to the Plan shall be
determined in accordance with the laws of the State of New York.
3. ELIGIBILITY
The class of individuals eligible for grant of options and Restoration
Options under the Plan shall be Eligible Directors, as defined below. Eligible
Director shall mean a director of the Corporation who is not an employee of the
Corporation or its subsidiaries and has not, within one year immediately
preceding the determination of such director's eligibility, received any award
under any plan of the Corporation or its subsidiaries that entitles the
participants therein to acquire stock, stock options or stock appreciation
rights of the Corporation or its subsidiaries (other than any other plan under
which participants' entitlements are governed by provisions meeting the
requirements of Rule 16b-3(c)(2)(ii) promulgated under the Securities Exchange
Act of 1934). Any holder of an option granted hereunder shall hereinafter be
referred to as a "Participant".
STOCK OPTION PLAN FOR AMENDED 9/11/98
NON-EMPLOYEE DIRECTORS-TCC
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4. SHARES SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 7, an aggregate of 300,000
shares of Stock shall be available for issuance upon the exercise of options and
Restoration Options, as described in Section 6, granted under the Plan. The
shares of Stock deliverable upon the exercise of options and Restoration Options
may be made available from authorized but unissued shares or shares reacquired
by the Corporation, including shares purchased in the open market or in private
transactions. If any option or Restoration Option granted under the Plan shall
terminate for any reason without having been exercised, the shares subject to,
but not delivered under, such option shall be available for other options and
Restoration Options.
5. GRANT, TERMS AND CONDITIONS OF OPTIONS
Each individual who is an Eligible Director will be granted an option to
purchase 2,000 shares of Stock as of the date of each Annual Shareholders
Meeting following the effectiveness of the Plan at which such individual is
elected or reelected to the office of director. The options granted will be
nonstatutory stock options not intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") and shall have the
following terms and conditions:
(a) Price. The purchase price per share of Stock deliverable upon the
exercise of each option shall be 100% of the Fair Market Value per share of
the Stock on the date the option is granted. For purposes of this Plan,
Fair Market Value shall be the average of the highest and lowest per share
sales prices as reported for consolidated trading of issues listed on the
New York Stock Exchange on the date in question, or, if the Stock shall not
have traded on such date, the average of the highest and lowest per share
sales prices on the first date prior thereto on which the Stock was so
traded.
(b) Payment. Options may be exercised only upon payment of the
purchase price thereof in full. Such payment shall be made in cash or in
Stock, which shall have a Fair Market Value (determined in accordance with
the rules of paragraph (a), above) at least equal to the aggregate exercise
price of the shares being purchased, or a combination of cash and Stock.
(c) Exercisability and Term of Options. Options shall be exercisable
in whole or in part at all times during the period beginning on the date of
grant until terminated, as provided in paragraph (d), below.
(d) Termination of Service as Eligible Director.
(i) Except as provided in subparagraph (ii) of this paragraph
(d), all outstanding options held by a Participant shall be
automatically cancelled upon such Participant's termination of service
as an Eligible Director.
STOCK OPTION PLAN FOR AMENDED 9/11/98
NON-EMPLOYEE DIRECTORS-TCC
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(ii) Upon termination of a Participant's service as an Eligible
Director by reason of such Participant's voluntary mid-term
resignation, declining to stand for reelection (whether as a result of
the Corporation's mandatory retirement program or otherwise), becoming
an employee of the Corporation or a subsidiary thereof or becoming
disabled (as defined in the Corporation's pension plan), all
out-standing options held by such Participate on the date of such
termination shall expire five years from the date upon which the
Participant ceases to be an Eligible Director. In the event of the
death of a Participant (whether before or after termination of service
as an Eligible Director), all outstanding options held by such
Participant (and not previously cancelled or expired) on the date of
such death shall be fully exercisable by the Participant's legal
representative within one year after the date of death (without regard
to the expiration date of the option specified in accordance with the
preceding sentence).
(e) Non-transferability.
(i) Except as provided in (ii) below, no option shall be
assignable or transferable, no right or interest of any Participant
shall be subject to any lien, obligation or liability of the
Participant, except by will or the laws of descent and distribution,
and during the lifetime of the Participant to whom an option is
granted, it may be exercised only by the Participant or by the
Participant's legal guardian or legal representative. Notwithstanding
the above, options may be transferred pursuant to a qualified domestic
relations order.
(ii) Notwithstanding subparagraph (i) above, the Board may
determine that an option may be transferred by a Participant to one or
more members of the Participant's immediate family, to a partnership
of which the only partners are members of the Participant's immediate
family, or to a trust established by the Participant for the benefit
of one or more members of the Participant's immediate family. For this
purpose immediate family means the Participant's spouse, parents,
children, grandchildren and the spouses of such parents, children and
grandchildren. A transferee described in this subparagraph may not
further transfer an option. Subject to such conditions that may be
determined by the Board or a person or persons designated by the
Board, an option transferred pursuant to this subparagraph shall
remain subject to all of the applicable provisions of the Plan and the
written option agreement.
(f) Listing and Registration. Each option and Restoration Option shall
be subject to the requirement that if at any time the Board shall
determine, in its discretion, that the listing, registration or
qualification of the Stock subject to such option upon any securities
exchange or under any state or federal law, or the consent or approval of
any governmental regulatory body, is necessary or desirable as a condition
of, or in connection with, the granting of such option or the issue or
purchase of shares thereunder, no such option may
STOCK OPTION PLAN FOR AMENDED 9/11/98
NON-EMPLOYEE DIRECTORS-TCC
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<PAGE> 12
be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained
free of any condition not acceptable to the Board.
(g) Option Agreement. Each option and Restoration Option granted
hereunder shall be evidenced by an agreement with the Corporation which
shall contain the terms and provisions set forth herein and shall otherwise
be consistent with the provisions of the Plan.
6. GRANT, TERMS AND CONDITIONS OF RESTORATION OPTIONS
In the event that, within seven years of the date of grant of an option
granted hereunder (the "original option"), an Eligible Director delivers shares
of the Stock in payment of the exercise price of the original option in
accordance with Section 5(b), such Eligible Director shall be granted a
Restoration Option, subject to the satisfaction of the conditions and criteria
set forth below. Restoration Options will be nonstatutory options not intended
to qualify under Section 422 of the Code and shall have the following terms and
provisions:
(a) Number of Shares. A Restoration Option shall entitle the holder
thereof to purchase a number of shares of Stock equal to the number of such
shares delivered upon exercise of the original option.
(b) Price. A Restoration Option shall have a per share exercise price
of 100% of the per share Fair Market Value, determined in accordance with
Section 5(a), of the Stock on the date of grant of such Restoration Option.
(c) Conditions. Notwithstanding any other provision of this Section 6,
no Restoration Option shall be granted if (i) the per share Fair Market
Value of the Stock is not at least 125% of the exercise price of the
original option, (ii) the original option is a Restoration Option or (iii)
the exercising Participant is not an Eligible Director on the date of
exercise.
(d) Other Provisions. Restoration Options shall be subject to all the
other terms and conditions set forth in Section 5, except as expressly set
forth and as modified in this Section 6.
7. ADJUSTMENT OF AND CHANGES IN STOCK
In the event of a stock split, stock dividend, subdivision or combination
of the Stock or other change in corporate structure affecting the Stock, the
number of shares of Stock authorized by the Plan shall be increased or decreased
proportionately, as the case may be, and the number of shares of Stock subject
to any outstanding option or Restoration Option shall be increased or decreased
proportionately, as the case may be, with appropriate corresponding adjustment
in the purchase price per share of Stock thereunder.
STOCK OPTION PLAN FOR AMENDED 9/11/98
NON-EMPLOYEE DIRECTORS-TCC
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8. MERGERS, SALES AND CHANGE OF CONTROL
In the case of (i) any merger, consolidation or combination of the
Corporation with or into another corporation (other than a merger, consolidation
or combination in which the Corporation is the continuing corporation and which
does not result in its outstanding Stock being converted into or exchanged for
different securities, cash or other property, or any combination thereof) or a
sale of all or substantially all of the assets of the Corporation or (ii) a
Change in Control (as defined below) of the Corporation, the holder of each
option (including for purposes of this Section any Restoration Option) then
outstanding immediately prior to such Change in Control shall (unless the Board
determines otherwise) have the right to receive on the date or effective date of
such event an amount equal to the excess of the Fair Market Value on such date
of (a) the securities, cash or other property, or combination thereof,
receivable upon such merger, consolidation or combination in respect of a share
of Stock, in the cases covered by clause (i) above, or in the case of a sale of
assets referred to in such clause (i), a share of Stock, or (b) the final tender
offer price in the case of a tender offer resulting in a Change in Control or
(c) the value of the Stock covered by the option as determined by the Board, in
the case of Change in Control by reason of any other event, over the exercise
price of such option, multiplied by the number of shares of Stock subject to
such option. Unless otherwise determined by the Board, such amount will be
payable fully in cash.
Any determination by the Board made pursuant to this Section 8 will be made
as to all outstanding options and shall be made (a) in cases covered by clause
(i) above, prior to the occurrence of such event, (b) in the event of a tender
or exchange offer, prior to the purchase of any Stock pursuant thereto by the
offeror and (c) in the case of a Change in Control by reason of any other event,
just prior to or as soon as practicable after such Change in Control.
A "Change in Control" shall be deemed to have occurred if (a) any person,
or any two or more persons acting as a group, and all affiliates of such person
or persons, shall own beneficially 25% or more of the Stock outstanding, or (b)
if following (i) a tender or exchange offer for voting securities of the
Corporation (other than any such offer made by the Corporation), or (ii) a proxy
contest for the election of directors of the Corporation, the persons who were
directors of the Corporation immediately before the initiation of such event (or
directors who were appointed by such directors) cease to constitute a majority
of the Board of Directors of the Corporation upon the completion of such tender
or exchange offer or proxy contest or within one year after such completion.
9. NO RIGHTS OF SHAREHOLDERS
Neither a Participant nor a Participant's legal representative shall be, or
have any of the rights and privileges of, a shareholder of the Corporation in
respect of any shares purchasable upon the exercise of any option or Restoration
Option, in whole or in part, unless and until certificates for such shares shall
have been issued.
STOCK OPTION PLAN FOR AMENDED 9/11/98
NON-EMPLOYEE DIRECTORS-TCC
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10. PLAN AMENDMENTS
The Plan may be amended by the Board, as it shall deem advisable or to
conform to any change in any law or regulation applicable thereto; provided,
that the Board may not, without the authorization and approval of shareholders:
(i) increase the number of shares which may be purchased pursuant to options or
Restoration Options hereunder, either individually or in the aggregate, except
as permitted by Section 7, (ii) change the requirements of Sections 5(a) and
6(b) that option grants be priced at Fair Market Value, except as permitted by
Section 7, (iii) modify in any respect the class of individuals who constitute
Eligible Directors; or (iv) materially increase the benefits accruing to
Participants hereunder. The provisions of Sections 3, 5 and 6 may not be amended
more often than once every six months, other than to comport with changes in the
Code, the Employee Retirement Income Security Act, or the rules under either
such statute.
11. EFFECTIVE DATE AND DURATION OF PLAN
The Plan shall become effective on the day after the Corporation's Annual
Shareholders Meeting at which the Plan is approved by Shareholders. The Plan
shall terminate on the day following the fifth Annual Shareholders Meeting at
which Directors are elected succeeding the Annual Shareholders Meeting at which
the Plan was approved by Shareholders, unless the Plan is extended or terminated
at an earlier date by Shareholders; provided, however, that grants of
Restoration Options pursuant to Section 6 shall continue until the seventh
anniversary of such fifth Annual Shareholders' Meeting.
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STOCK OPTION PLAN FOR
NON-EMPLOYEE DIRECTORS - TCC AMENDED 9/11/98
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THE CHUBB CORPORATION
LONG-TERM STOCK INCENTIVE PLAN (1992)
SECTION 1. PURPOSE
The purposes of The Chubb Corporation Long-Term Stock Incentive Plan (1992)
(the "Plan") are to promote the interests of The Chubb Corporation and its
shareholders by (i) attracting and retaining executive personnel and other key
employees of outstanding ability; (ii) motivating executive personnel and other
key employees, by means of performance-related incentives, to achieve
longer-range performance goals; and (iii) enabling such employees to participate
in the long-term growth and financial success of The Chubb Corporation.
SECTION 2. DEFINITIONS
"Affiliate" shall mean any corporation or other entity which is not a
Subsidiary but as to which the Corporation possesses a direct or indirect
ownership interest and has representation on the board of directors or any
similar governing body.
"Award" shall mean a grant or award under Section 6 through 11, inclusive,
of the Plan, as evidenced in a written document delivered to a Participant as
provided on Section 12(b).
"Board of Directors" shall mean the Board of Directors of the Corporation.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
"Committee" shall mean the Organization & Compensation Committee of the
Board of Directors.
"Common Stock" or "Stock" shall mean the Common Stock, $1.00 par value, of
the Corporation.
"Corporation" shall mean The Chubb Corporation.
"Debenture" shall mean a convertible debenture awarded under Section 10 of
the Plan.
"Designated Beneficiary" shall mean the beneficiary designated by the
Participant, in a manner determined by the Committee, to receive amounts due the
Participant in the event of the Participant's death. In the absence of an
effective designation by the Participant, Designated Beneficiary shall mean the
Participant's estate.
"Employee" shall mean any key employee of the Employer.
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LONG-TERM STOCK INCENTIVE PLAN - TCC AMEND. EFF. 11/10/98
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"Employer" shall mean the Corporation and any Subsidiary or Affiliate.
"Fair Market Value" shall mean the average of the highest and lowest sales
prices reported for consolidated trading of issues listed on the New York Stock
Exchange on the date in question, or, if the Stock shall not have been traded on
such date, the average of such highest and lowest sales prices on the first day
prior thereto on which the Stock was so traded.
"Fiscal Year" shall mean the fiscal year of the Corporation.
"Incentive Stock Option" shall mean a stock option granted under Section 6
which is intended to meet the requirements of Section 422 of the Code.
"Nonstatutory Stock Option" shall mean a stock option granted under Section
6 which is not intended to be an Incentive Stock Option.
"Option" shall mean an Incentive Stock Option or a Nonstatutory Stock
Option and shall include a Restoration Option.
"Participant" shall mean an Employee who is selected by the Committee to
receive an Award under the Plan.
"Payment Value" shall mean the dollar amount assigned to a Performance
Share which shall be equal to the Fair Market Value of the Common Stock on the
day of the Committee's determination under Section 8(c)(1) with respect to the
applicable Performance Cycle.
"Performance Cycle" or "Cycle" shall mean the period of years selected by
the Committee during which the performance is measured for the purpose of
determining the extent to which an award of Performance Shares has been earned.
"Performance Goals" shall mean the objectives established by the Committee
for a Performance Cycle, for the purpose of determining the extent to which
Performance Shares which have been contingently awarded for such Cycle are
earned.
"Performance Share" shall mean an award granted pursuant to Section 8 of
the Plan expressed as a share of Common Stock.
"Restricted Period" shall mean the period of years selected by the
Committee during which a grant of Restricted Stock or Restricted Stock Units may
be forfeited to the Corporation.
"Restricted Stock" shall mean shares of Common Stock contingently granted
to a Participant under Section 9 of the Plan.
"Restoration Option" shall mean a stock option granted pursuant to Section
6(d).
"Restricted Stock Unit" shall mean a fixed or variable dollar denominated
unit contingently
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LONG-TERM STOCK INCENTIVE PLAN - TCC AMEND. EFF. 11/10/98
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awarded under Section 9 of the Plan.
"Stock Appreciation Right" shall mean a right granted under Section 7.
"Stock Unit Award" shall mean an award of Common Stock or units granted
under Section 11.
"Subsidiary" shall mean any business entity in which the Corporation
possesses directly or indirectly fifty percent (50%) or more of the total
combined voting power.
SECTION 3. ADMINISTRATION
The Plan shall be administered by the Committee. The Committee shall have
sole and complete authority to adopt, alter and repeal such administrative
rules, guidelines and practices governing the operation of the Plan as it shall
from time to time deem advisable, and to interpret the terms and provisions of
the Plan. The Committee may delegate to one or more executive officers of the
Corporation the power to make Awards to Participants who are not executive
officers or directors of the Corporation provided the Committee shall fix the
maximum amount of such Awards for the group and a maximum for any one
Participant. The Committee's decisions shall be binding upon all persons,
including the Corporation, stockholders, an Employer, Employees, Participants
and Designated Beneficiaries.
SECTION 4. ELIGIBILITY
All Employees who, in the opinion of the Committee, have the capacity for
contributing in a substantial measure to the successful performance of the
Corporation are eligible to be Participants in the Plan.
SECTION 5. MAXIMUM AMOUNT AVAILABLE FOR AWARDS
(a) The maximum number of shares of Stock in respect of which Awards may be
made under the Plan shall be a total of 4,400,000 shares of Common Stock, of
which not more than 1,760,000 may be awarded as Restricted Stock. Shares of
Common Stock may be made available from the authorized but unissued shares of
the Corporation or from shares reacquired by the Corporation, including shares
purchased in the open market. In the event that (i) an Option or Stock
Appreciation Right is settled for cash or expires or is terminated unexercised
as to any shares of Common Stock covered thereby, or (ii) any Award in respect
of shares is cancelled or forfeited for any reason under the Plan without the
delivery of shares of Common Stock, such shares shall thereafter be again
available for award pursuant to the Plan. In the event that any Option or other
Award granted hereunder is exercised through the delivery of shares of Common
Stock, the number of shares of Common Stock available for Awards under the Plan
shall be increased by the number of shares so surrendered, to the extent
permissible under Rule 16b-3, as promulgated under the Securities Exchange Act
of 1934 and as interpreted from time to time by the Securities and Exchange
Commission or its staff.
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LONG-TERM STOCK INCENTIVE PLAN - TCC AMEND. EFF. 11/10/98
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(b) In the event that the Committee shall determine that any stock
dividend, extraordinary cash dividend, recapitalization, reorganization, merger,
consolidation, split-up, spin-off, combination, exchange of shares, warrants or
rights offering to purchase Common Stock at a price substantially below fair
market value, or other similar corporate event affects the Common Stock such
that an adjustment is required in order to preserve the benefits or potential
benefits intended to be made available under this Plan, then the Committee
shall, in its sole discretion, and in such manner as the Committee may deem
equitable, adjust any or all of (1) the number and kind of shares which
thereafter may be awarded or optioned and sold or made the subject of Stock
Appreciation Rights under the Plan, (2) the number and kind of shares subject to
outstanding Options and other Awards, and (3) the grant, exercise or conversion
price with respect to any of the foregoing and/or, if deemed appropriate, make
provision for a cash payment to a Participant or a person who has an outstanding
Option or other Award provided, however, that the number of shares subject to
any Option or other Award shall always be a whole number.
SECTION 6. STOCK OPTIONS
(a) Grant. Subject to the provisions of the Plan, the Committee shall have
sole and complete authority to determine the Employees to whom Options shall be
granted, the number of shares to be covered by each Option, the option price
therefor and the conditions and limitations applicable to the exercise of the
Option. The Committee shall have the authority to grant Incentive Stock Options,
or to grant Nonstatutory Stock Options, or to grant both types of options. In
the case of Incentive Stock Options, the terms and conditions of such grants
shall be subject to and comply with such rules as may be prescribed by Section
422 of the Code, as from time to time amended, and any implementing regulations.
(b) Option Price. The Committee shall establish the option price at the
time each Option is granted, which price shall not be less than 100% of the Fair
Market Value of the Common Stock on the date of grant.
(c) Exercise. (1) Each Option shall be exercisable at such times and
subject to such terms and conditions as the Committee may, in its sole
discretion, specify in the applicable Award or thereafter; provided, however,
that in no event may any Option granted hereunder be exercisable after the
expiration of ten years from the date of such grant. The Committee may impose
such conditions with respect to the exercise of Options, including without
limitation, any relating to the application of federal or state securities laws,
as it may deem necessary or advisable.
(2) No shares shall be delivered pursuant to any exercise of an Option
until payment in full of the option price therefor is received by the
Corporation. Such payment may be made in cash, or its equivalent, or, if and to
the extent permitted by the Committee, by exchanging shares of Common Stock
owned by the optionee (which are not the subject of any pledge or other security
interest), or by a combination of the foregoing, provided that the combined
value of all cash and cash equivalents and the Fair Market Value of any such
Common Stock so tendered to the Corporation, valued as of the date of such
tender, is at least equal to such option price.
(d) Restoration Options. In the event that any Participant delivers shares
of Common Stock
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in payment of the exercise price of any Option granted hereunder in accordance
with Section 6(c)(2), the Committee shall have the authority to grant or provide
for the automatic grant of a Restoration Option to such Participant. The grant
of a Restoration Option shall be subject to the satisfaction of such conditions
or criteria as the Committee in its sole discretion shall establish from time to
time. A Restoration Option shall entitle the holder thereof to purchase a number
of shares of Common Stock equal to the number of such shares so delivered upon
exercise of the original Option and, in the discretion of the Committee, the
number of shares, if any, tendered to the Corporation to satisfy any withholding
tax liability arising in connection with the exercise of the original Option. A
Restoration Option shall have a per share exercise price of not less than 100%
of the per share Fair Market Value of the Common Stock on the date of grant of
such Restoration Option, a term not longer than the remaining term of the
original Option at the time of exercise thereof, and such other terms and
conditions as the Committee in its sole discretion shall determine.
SECTION 7. STOCK APPRECIATION RIGHTS
(a) The Committee may, with sole and complete authority, grant Stock
Appreciation Rights in tandem with an Option, in addition to an Option, or
freestanding and unrelated to an Option. Stock Appreciation Rights granted in
tandem with or in addition to an Option may be granted either at the same time
as the Option or at a later time. Stock Appreciation Rights shall not be
exercisable earlier than six months after grant, shall not be exercisable after
the expiration of ten years from the date of grant and shall have an exercise
price of not less than 100% of the Fair Market Value of the Common Stock on the
date of grant.
(b) A Stock Appreciation Right shall entitle the Participant to receive
from the Corporation an amount equal to the excess of the Fair Market Value of a
share of Common Stock on the exercise of the Stock Appreciation Right over the
grant price thereof, provided that the Committee may for administrative
convenience determine that, for any Stock Appreciation Right which is not
related to an Incentive Stock Option which Stock Appreciation Right can only be
exercised during limited periods of time in order to satisfy the conditions of
certain rules of the Securities and Exchange Commission, the exercise of any
such Stock Appreciation Right for cash during such limited period shall be
deemed to occur for all purposes hereunder on the day during such limited period
on which the Fair Market Value of the Stock is the highest. Any such
determination by the Committee may be changed by the Committee from time to time
and may govern the exercise of Stock Appreciation Rights granted prior to such
determination as well as Stock Appreciation Rights thereafter granted. The
Committee shall determine upon the exercise of a Stock Appreciation Right
whether such Stock Appreciation Right shall be settled in cash, shares of Common
Stock or a combination of cash and shares of Common Stock.
SECTION 8. PERFORMANCE SHARES
(a) The Committee shall have sole and complete authority to determine the
Employees who shall receive Performance Shares and the number of such shares for
each Performance Cycle, and to determine the duration of each Performance Cycle
and the value of each Performance Share. There may be more than one Performance
Cycle in existence at any one time, and the duration of Performance Cycles may
differ from each other.
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(b) The Committee shall establish Performance Goals for each Cycle on the
basis of such criteria and to accomplish such objectives as the Committee may
from time to time select. During any Cycle, the Committee may adjust the
Performance Goals for such Cycle as it deems equitable in recognition of unusual
or non-recurring events affecting the Corporation, changes in applicable tax
laws or accounting principles, or such other factors as the Committee may
determine.
(c) (1) As soon as practicable after the end of a Performance Cycle, the
Committee shall determine the number of Performance Shares which have been
earned on the basis of performance in relation to the established Performance
Goals.
(2) Payment Values of earned Performance Shares shall be distributed
to the Participant or, if the Participant has died, to the Participant's
Designated Beneficiary, as soon as practicable after the expiration of the
Performance Cycle and the Committee's determination under paragraph (1), above.
The Committee shall determine whether Payment Values are to be distributed in
the form of cash and/or shares of Common Stock.
SECTION 9. RESTRICTED STOCK AND RESTRICTED STOCK UNITS
(a) Subject to the provisions of the Plan, the Committee shall have sole
and complete authority to determine the Employees to whom shares of Restricted
Stock and Restricted Stock Units shall be granted, the number of shares of
Restricted Stock and the number of Restricted Stock Units to be granted to each
Participant, the duration of the Restricted Period during which, and the
conditions under which, the Restricted Stock and Restricted Stock Units may be
forfeited to the Corporation, and the other terms and conditions of such Awards.
The Restricted Period shall consist of at least one year (which may be shortened
or waived by the Committee at any time in its discretion) with respect to one or
more Participants or Awards outstanding.
(b) Shares of Restricted Stock and Restricted Stock Units may not be sold,
assigned, transferred, pledged or otherwise encumbered, except as herein
provided, during the Restricted Period. Certificates issued in respect of shares
of Restricted Stock shall be registered in the name of the Participant and
deposited by such Participant, together with a stock power endorsed in blank,
with the Corporation. At the expiration of the Restricted Period, the
Corporation shall deliver such certificates to the Participant or the
Participant's legal representative. Payment for Restricted Stock Units shall be
made to the Corporation in cash and/or shares of Common Stock, as determined at
the sole discretion of the Committee.
SECTION 10. DEBENTURES
(a) The Committee may award, to any Participant, Debentures on such terms
and conditions as the Committee shall determine.
(b) The Debentures are to be issued pursuant to a signed written agreement
containing such terms and conditions as the Committee may determine.
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(c) (1) Each Debenture will have a maturity date of the earliest of (i)
such date as the Committee shall determine at the time of award, or (ii) such
date as the Corporation redeems a series of Debentures or pre-pays an individual
Debenture. The Debentures shall be issued in such denominations and will accrue
interest, from the date of issuance, at such rate, which may be fixed or
variable, as may be set by the Committee at the time of award.
(2) Debentures will be convertible into fully paid and non-assessable
shares of Common Stock or such other type of securities, which may immediately
be convertible into Common Stock, as the Committee shall determine at the time
of award, to the extent the terms and conditions of the award and the Plan are
met, but in no event later than the due date. Any such securities, including
Common Stock, into which the Debenture is convertible, may be subject to such
conditions and restrictions as the Committee shall determine. The conversion
rate of a Debenture shall be set by reference to the Fair Market Value of the
Common Stock, book value or such other value as the Committee determines.
SECTION 11. OTHER STOCK BASED AWARDS
(a) In addition to granting Options, Stock Appreciation Rights, Performance
Shares, Restricted Stock, Restricted Stock Units and Debentures, the Committee
shall have authority to grant to Participants Stock Unit Awards which can be in
the form of Common Stock or units, the value of which is based, in whole or in
part, on the value of Common Stock. Subject to the provisions of the Plan,
including Section 11(b) below, Stock Unit Awards shall be subject to such terms,
restrictions, conditions, vesting requirements and payment rules (all of which
are sometimes hereinafter collectively referred to as "rules") as the Committee
may determine in its sole and complete discretion at the time of grant. The
rules need not be identical for each Stock Unit Award.
(b) In the sole and complete discretion of the Committee, a Stock Unit
Award may be granted subject to the following rules:
(1) Any shares of Common Stock which are part of a Stock Unit Award
may not be assigned, sold, transferred, pledged or otherwise encumbered
prior to the date on which the shares are issued or, if later, the date
provided by the Committee at the time of grant of the Stock Unit Award.
(2) Stock Unit Awards may provide for the payment of cash
consideration by the person to whom such Award is granted or provide that
the Award, and any Common Stock to be issued in connection therewith, if
applicable, shall be delivered without the payment of cash consideration,
provided that for any Common Stock to be purchased in connection with a
Stock Unit Award the purchase price shall be not less than 100% of the Fair
Market Value of such Common Stock on the date such Award is granted.
(3) Stock Unit Awards may relate in whole or in part to certain
performance criteria established by the Committee at the time of grant.
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<PAGE> 22
(4) Stock Unit Awards may provide for deferred payment schedules
and/or vesting over a specified period of employment.
(5) In such circumstances as the Committee may deem advisable, the
Committee may waive or otherwise remove, in whole or in part, any
restriction or limitation to which a Stock Unit Award was made subject at
the time of grant.
(c) In the sole and complete discretion of the Committee, an Award, whether
made as a Stock Unit Award under this Section 11 or as an Award granted pursuant
to Sections 6 through 10, may provide the Participant with (i) dividends or
dividend equivalents (payable on a current or deferred basis) and (ii) cash
payments in lieu of or in addition to an Award.
SECTION 12. GENERAL PROVISIONS
(a) Withholding. The Employer shall have the right to deduct from all
amounts paid to a Participant in cash (whether under this Plan or otherwise) any
taxes required by law to be withheld in respect of Awards under this Plan. In
the case of payments of Awards in the form of Common Stock, at the Committee's
discretion the Participant may be required to pay to the Employer the amount of
any taxes required to be withheld with respect to such Common Stock or, in lieu
thereof, the Employer shall have the right to retain (or the Participant may be
offered the opportunity to elect to tender) the number of shares of Common Stock
whose Fair Market Value equals the amount required to be withheld.
(b) Awards. Each Award hereunder shall be evidenced in writing, delivered
to the Participant and shall specify the terms and conditions thereof and any
rules applicable thereto, including but not limited to the effect on such Award
of the death, retirement or other termination of employment of the Participant
and the effect thereon, if any, of a change in control of the Corporation.
(c) Nontransferability.
(1) Except as provided in (2) below, no Award shall be assignable or
transferable, and no right or interest of any Participant shall be subject
to any lien, obligation or liability of the Participant, except by will or
the laws of descent and distribution.
(2) Notwithstanding subparagraph (1) above, a Nonstatutory Option held
by an officer of The Chubb Corporation and Chubb & Son, a division of
Federal Insurance Company at or above the level of Executive Vice President
or such other key senior executives of the Corporation and its subsidiaries
as the Chairman may designate that is outstanding on November 10, 1998 may
be transferred by an Employee to one or more members of the Employee's
immediate family, to a partnership of which the only partners are members
of the Employee's immediate family, or to a trust established by the
Employee for the benefit of one or more members of the employee's immediate
family. For this purpose immediate family means the Employee's spouse,
parents, children, grandchildren
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<PAGE> 23
and the spouses of such parents, children and grandchildren. A transferee
described in this subparagraph may not further transfer an Option. An
Option transferred pursuant to this subparagraph shall remain subject to
all of the applicable provisions of the Plan and the written option
agreement.
(d) No Right to Employment. No person shall have any claim or right to be
granted an Award, and the grant of an Award shall not be construed as giving a
Participant the right to be retained in the employ of the Employer. Further, the
Employer expressly reserves the right at any time to dismiss a Participant free
from any liability, or any claim under the Plan, except as provided herein or in
any agreement entered into with respect to an Award.
(e) No Rights as Stockholder. Subject to the provisions of the applicable
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed under
the Plan until he or she has become the holder thereof. Notwithstanding the
foregoing, in connection with each grant of Restricted Stock hereunder, the
applicable Award shall specify if and to what extent the Participant shall not
be entitled to the rights of a stockholder in respect of such Restricted Stock.
(f) Construction of the Plan. The validity, construction, interpretation,
administration and effect of the Plan and of its rules and regulations, and
rights relating to the Plan, shall be determined solely in accordance with the
laws of New York.
(g) Effective Date. Subject to the approval of the stockholders of the
Corporation, the Plan shall be effective on April 28, 1992. No Options or Awards
may be granted under the Plan after December 31, 1996; provided, however, that
the authority for grant of Restoration Options hereunder in accordance with
Section 6(d) shall continue, subject to the provisions of Section 5, as long as
any Option granted hereunder remains outstanding.
(h) Amendment of Plan. The Board of Directors may amend, suspend or
terminate the Plan or any portion thereof at any time, provided that no
amendment shall be made without stockholder approval if such approval is
necessary to comply with any tax or regulatory requirement, including for these
purposes any approval requirement which is a prerequisite for exemptive relief
under Section 16(b) of the Securities Exchange Act of 1934. Notwithstanding
anything to the contrary contained herein, the Committee may amend the Plan in
such manner as may be necessary so as to have the Plan conform with the local
rules and regulations.
(i) Amendment of Award. The Committee may amend, modify or terminate any
outstanding Award with the Participant's consent at any time prior to payment or
exercise in any manner not inconsistent with the terms of the Plan, including
without limitation, (i) to change the date or dates as of which (A) an Option or
Stock Appreciation Right becomes exercisable; (B) a Performance Share is deemed
earned; (C) Restricted Stock becomes nonforfeitable; or (D) a Debenture becomes
convertible, or (ii) to cancel and reissue an Award under such different terms
and conditions as it determines appropriate.
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<PAGE> 24
THE CHUBB CORPORATION
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS (1992)
1. PURPOSE
The purpose of The Chubb Corporation Stock Option Plan for Non-Employee
Directors (1992) (the "Plan") is to increase the proprietary and vested interest
of the non-employee directors of The Chubb Corporation (the "Corporation") in
the growth and performance of the Corporation by granting such directors options
to purchase shares of Common Stock, $1.00 par value per share (the "Stock"), of
the Corporation.
2. ADMINISTRATION
The Plan shall be administered by the Corporation's Board of Directors
(the "Board"). Subject to the provisions of the Plan, the Board shall be
authorized to interpret the Plan, to establish, amend, and rescind any rules and
regulations relating to the Plan and to make all other determinations necessary
or advisable for the administration of the Plan; provided, however, that the
Board shall have no discretion with respect to the selection of directors to
receive options under the Plan, the number of shares of Stock subject to any
such options, the purchase price thereunder or the timing of grants of options
under the Plan. The determinations of the Board in the administration of the
Plan, as described herein, shall be final and conclusive. The Secretary of the
Corporation shall be authorized to implement the Plan in accordance with its
terms and to take such actions of a ministerial nature as shall be necessary to
effectuate the intent and purposes thereof. The validity, construction and
effect of the Plan and any rules and regulations relating to the Plan shall be
determined in accordance with the laws of the State of New York.
3. ELIGIBILITY
The class of individuals eligible for grant of options and Restoration
Options under the Plan shall be Eligible Directors, as defined below. Eligible
Director shall mean a director of the Corporation who is not an employee of the
Corporation or its subsidiaries and has not, within one year immediately
preceding the determination of such director's eligibility, received any award
under any plan of the Corporation or its subsidiaries that entitles the
participants therein to acquire stock, stock options or stock appreciation
rights of the Corporation or its subsidiaries (other than any other plan under
which participants' entitlements are governed by provisions meeting the
requirements of Rule 16b-3(c)(2)(ii) promulgated under the Securities Exchange
Act of 1934). Any holder of an option granted hereunder shall hereafter be
referred to as a "Participant".
4. SHARES SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 7, an aggregate of 300,000
shares of Stock shall be available for issuance upon the exercise of options and
Restoration Options, as described
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Stock Option Plan For Non-Employee Directors (1992) (Amended 11/10/98) Page 1
<PAGE> 25
in Section 6, granted under the Plan. The shares of Stock deliverable upon the
exercise of options and Restoration Options maybe made available from authorized
but unissued shares or shares reacquired by the Corporation, including shares
purchased in the open market or in private transactions. If any option or
Restoration Option granted under the Plan shall terminate for any reason without
having been exercised, the shares subject to, but not delivered under, such
option shall be available for other options and Restoration Options.
5. GRANT, TERMS AND CONDITIONS OF OPTIONS
Each individual who is an Eligible Director will be granted an option to
purchase 2,000 shares of Stock as of the date of each Annual Shareholders
Meeting following the effectiveness of the Plan at which such individual is
elected or reelected to the office of director. The options granted will be
nonstatutory stock options not intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") and shall have the
following terms and conditions.
(a) Price. The purchase price per share of Stock deliverable
upon the exercise of each option shall be 100% of the Fair Market Value
per share of the Stock on the date the option is granted. For purposes
of this Plan, Fair Market Value shall be the average of the highest and
lowest per share sales prices as reported for consolidated trading of
issues listed on the New York Stock Exchange on the date in question,
or, if the Stock shall not have traded on such date, the average of the
highest and lowest per share sales prices on the first date prior
thereto on which the Stock was so traded.
(b) Payment. Options may be exercised only upon payment of the
purchase price thereof in full. Such payment shall be made in cash or
in Stock, which shall have a Fair Market Value (determined in
accordance with the rules of paragraph (a) above) at least equal to the
aggregate exercise price of the shares being purchased, or a
combination of cash and Stock.
(c) Exercisability and Term of Options. Options shall be
exercisable in whole or in part at all times during the period
beginning on the date of grant until terminated, as provided in
paragraph (d), below.
(d) Termination of Service as Eligible Director.
(i) Except as provided in subparagraph (ii) of this
paragraph (d), all outstanding options held by a Participant
shall be automatically cancelled upon such Participant's
termination of service as an Eligible Director.
(ii) Upon termination of a Participant's service as
an Eligible Director by reason of such Participant's voluntary
mid-term resignation, declining to stand for reelection
(whether as a result of the Corporation's mandatory retirement
program or otherwise), becoming an employee of the Corporation
or a subsidiary thereof or becoming disabled (as defined in
the Corporation's pension plan), all outstanding options held
by such Participant on the date of such termination shall
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Stock Option Plan For Non-Employee Directors (1992) (Amended 11/10/98) Page 2
<PAGE> 26
expire five years from the date upon which the Participant
ceases to be an Eligible Director. In the event of the death
of a Participant (whether before or after termination of
service as an Eligible Director), all outstanding options held
by such Participant (and not previously cancelled or expired)
on the date of such death shall be fully exercisable by the
Participant's legal representative within one year after the
date of death (without regard to the expiration date of the
option specified in accordance with the preceding sentence).
(e) Non-transferability.
(i) Except as provided in (ii) below, no option shall
be assignable or transferable, no right or interest of any
Participant shall be subject to any lien, obligation or
liability of the Participant, except by will or the laws of
descent and distribution, and during the lifetime of the
Participant to whom an option is granted, it may be exercised
only by the Participant or by the Participant's legal guardian
or legal representative. Notwithstanding the above, options
may be transferred pursuant to a qualified domestic relations
order.
(ii) Notwithstanding subparagraph (i) above, the
Board may determine that an option may be transferred by a
Participant to one or more members of the Participant's
immediate family, to a partnership of which the only partners
are members of the Participant's immediate family, or to a
trust established by the Participant for the benefit of one or
more members of the Participant's immediate family. For this
purpose immediate family means the Participant's spouse,
parents, children, grandchildren and the spouses of such
parents, children and grandchildren. A transferee described in
this subparagraph may not further transfer an option. Subject
to such conditions that may be determined by the Board or a
person or persons designated by the Board, an option
transferred pursuant to this subparagraph shall remain subject
to all of the applicable provisions of the Plan and the
written option agreement.
(f) Listing and Registration. Each option and Restoration
Option shall be subject to the requirement that if at any time the
Board shall determine, in its discretion, that the listing,
registration or qualification of the Stock subject to such option upon
any securities exchange or under any state or federal law, or the
consent or approval of any governmental regulatory body, is necessary
or desirable as a condition of, or in connection with, the granting of
such option or the issue or purchase of shares thereunder, no such
option may be exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been
effected or obtained free of any condition not acceptable to the Board.
(g) Option Agreement. Each option and Restoration Option
granted hereunder shall be evidenced by an agreement with the
Corporation which shall contain the terms and provisions set forth
herein and shall otherwise be consistent with the provisions of the
Plan.
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Stock Option Plan For Non-Employee Directors (1992) (Amended 11/10/98) Page 3
<PAGE> 27
6. GRANT, TERMS AND CONDITIONS OF RESTORATION OPTIONS
In the event that, within seven years of the date of grant of an option granted
hereunder (the "original option"), an Eligible Director delivers shares of the
Stock in payment of the exercise price of the original option in accordance with
Section 5(b), such Eligible Director shall be granted a Restoration Option,
subject to the satisfaction of the conditions and criteria set forth below.
Restoration Options will be nonstatutory options not intended to qualify under
Section 422 of the code and shall have the following terms and provisions:
(a) Number of Shares. A Restoration Option shall entitle the
holder thereof to purchase a number of shares of Stock equal to the
number of such shares delivered upon exercise of the original option.
(b) Price. A Restoration Option shall have a per share
exercise price of 100% of the per share Fair Market Value, determined
in accordance with Section 5(a), of the Stock on the date of grant of
such Restoration Option.
(c) Conditions. Notwithstanding any other provision of this
Section 6, no Restoration Option shall be granted if (i) the per share
Fair Market Value of the Stock is not at least 125% of the exercise
price of the original option, (ii) the original option is a Restoration
Option or (iii) the exercising Participant is not an Eligible Director
on the date of exercise.
(d) Other Provisions. Restoration Options shall be subject to
all other terms and conditions set forth in Section 5, except as
expressly set forth and as modified in this Section 6.
7. ADJUSTMENT OF AND CHANGES IN STOCK
In the event of a stock split, stock dividend, subdivision or combination of the
Stock or other change in corporate structure affecting the Stock, the number of
shares of Stock authorized by the Plan shall be increased or decreased
proportionately, as the case may be, and the number of shares of Stock subject
to any outstanding option or Restoration Option shall be increased or decreased
proportionately, as the case may be, with appropriate corresponding adjustment
in the purchase price per share of Stock thereunder.
8. MERGERS, SALES AND CHANGE IN CONTROL
In the case of (i) any merger, consolidation or combination of the Corporation
with or into another corporation (other than a merger, consolidation or
combination in which the Corporation is the continuing corporation and which
does not result in its outstanding Stock being converted into or exchanged for
different securities, cash or other property, or any combination thereof) or a
sale of all or substantially all of the assets of the Corporation or (ii) a
Change in Control (as defined below) of the Corporation, the holder of each
option (including for purposes of this Section any Restoration Option) then
outstanding immediately prior to such Change in Control
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Stock Option Plan For Non-Employee Directors (1992) (Amended 11/10/98) Page 4
<PAGE> 28
shall (unless the Board determines otherwise) have the right to receive on the
date or effective date of such event an amount equal to the excess of the Fair
Market Value on such date of (a) the securities, cash or other property, or
combination thereof, receivable upon such merger, consolidation or combination
in respect of a share of Stock, in the cases covered by clause (i) above, or in
the case of a sale of assets referred to in such clause (i), a share of Stock,
or (b) the final tender offer price in the case of a tender offer resulting in a
Change in Control or (c) the value of the Stock covered by the option as
determined by the Board, in the case of Change in Control by reason of any other
event, over the exercise price of such option, multiplied by the number of
shares of Stock subject to such option. Such amount will be payable fully in
cash.
Any determination by the Board made pursuant to this Section 8 will be made as
to all outstanding options and shall be made (a) in cases covered by clause (i)
above, prior to the occurrence of such event, (b) in the event of a tender or
exchange offer, prior to the purchase of any Stock pursuant thereto by the
offeror and (c) in the case of a Change in Control by reason of any other event,
just prior to or as soon as practicable after such Change in Control.
A "Change in Control" shall be deemed to have occurred if (a) any person, or any
two or more persons acting as a group, and all affiliates of such person or
persons, shall own beneficially 25% or more of the Stock outstanding, or (b) if
following (i) a tender or exchange offer for voting securities of the
Corporation (other than any such offer made by the Corporation), or (ii) a proxy
contest for the election of directors of the Corporation, the persons who were
directors of the Corporation immediately before the initiation of such event (or
directors who were appointed by such directors) cease to constitute a majority
of the Board of Directors of the Corporation upon the completion of such tender
or exchange offer or proxy contest or within one year after such completion.
9. NO RIGHTS OF SHAREHOLDERS
Neither a Participant nor a Participant's legal representative shall be, or have
any of the rights and privileges of, a shareholder of the Corporation in respect
of any shares purchasable upon the exercise of any option or Restoration Option,
in whole or in part, unless and until certificates for such shares shall have
been issued.
10. PLAN AMENDMENTS
The Plan may be amended by the Board, as it shall deem advisable or to conform
to any change in any law or regulation applicable thereto; provided, that the
Board may not, without the authorization and approval of shareholders: (i)
increase the number of shares which may be purchased pursuant to options or
Restoration Options hereunder, either individually or in the aggregate, except
as permitted by Section 7, (ii) change the requirements of Sections 5(a) and
6(b) that option grants be priced at Fair Market Value, except as permitted by
Section 7, (iii) modify in any respect the class of individuals who constitute
Eligible Directors; or (iv) materially increase the benefits accruing to
Participants hereunder. The provisions of Sections 3, 5 and 6 may not be amended
more often than once every six months, other than to comport with changes
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Stock Option Plan For Non-Employee Directors (1992) (Amended 11/10/98) Page 5
<PAGE> 29
in the Code, the Employee Retirement Income Security Act, or the rules under
either such statute.
11. EFFECTIVE DATE AND DURATION OF PLAN
The Plan shall be come effective on the day after the Corporation's Annual
Shareholders Meeting at which the Plan is approved by Shareholders. The Plan
shall terminate on the day following the fifth Annual Shareholders Meeting at
which Directors are elected succeeding the Annual Shareholders Meeting at which
the Plan was approved by Shareholders, unless the Plan is extended or terminated
at an earlier date by Shareholders; provided, however, that grants of
Restoration Options pursuant to Section 6 shall continue until the seventh
anniversary of such fifth Annual Shareholders' meeting.
The Chubb Corporation
Stock Option Plan For Non-Employee Directors (1992) (Amended 11/10/98) Page 6
<PAGE> 30
THE CHUBB CORPORATION
DEFERRED COMPENSATION PLAN
FOR DIRECTORS
------------------------
Section 1. Effective Date
The effective date of the Plan is July 1, 1987.
Section 2. Eligibility
Any Director of The Chubb Corporation (the "Company") or any Director of a
participating subsidiary of the Company who is also a Director of the Company,
who is not an officer or employee of the Company or a subsidiary thereof is
eligible to participate in the Plan. A subsidiary shall become a participating
subsidiary upon adoption of this Plan by the Board of Directors and by obtaining
the consent to such adoption from the Board of Directors of the Company.
Section 3. Deferred Compensation Accounts
There shall be established for each participant a deferred compensation account
or accounts in the participant's name.
Section 4. Amount of Deferral
A participant may elect to defer receipt for any Plan Year of all compensation
payable to the participant in the form of stipends and/or meeting fees for
serving on the Board of Directors of the Company and Committees of the Board of
Directors as well as compensation payable to the participant in the form of
stipends and/or meeting fees for serving on the Board of Directors and
Committees of the Board of Directors of participating subsidiaries of the
Company.
Section 5. Investment of Deferred Amounts
a) General. A participant may designate, in increments of 10%, what part of
the compensation to be deferred or compensation already deferred that
should be allocated to a cash account, a market value account and a
shareholder's equity value account or any combination of such accounts.
With the exception of allocations to a shareholder's equity account (which
must be made in accordance with Section 5(d), any change in such
designation may be made no later than the 15th day of each March, June,
September and December during the deferral period to
Page 1 of 4 Amended Eff. November 10, 1998
<PAGE> 31
be effective on the date next following such notification that compensation
would have been paid in accordance with the Company's normal practice, or
as applicable, the participating subsidiary's normal practice, but for the
election to defer.
b) Cash Account. The amount, if any, allocated to the participant's deferred
compensation cash account shall be credited with interest, to be compounded
quarterly, calculated prospectively at a rate equal to the prime rate of
Citibank, N.A. in effect on the first day of each January, April, July and
October during the deferral period.
c) Market Value Account. The amount, if any, allocated to the participant's
deferred compensation market value account on each date compensation would
have been paid in accordance with the Company's normal practice, or as
applicable, the participating subsidiary's normal practice, but for the
election to defer shall be expressed in units, the number of which shall be
equal to such amount divided by the closing price of shares of the
Company's Common Stock on the New York Stock Exchange (hereinafter referred
to as "Market Value") on such date or on the trading day next preceding
such date if such date is not a trading day. On each date that the Company
pays a regular cash dividend on shares of its Common Stock outstanding, the
participant's account shall be credited with a number of units equal to the
amount of such dividend per share multiplied by the number of units in the
participant's account on such date divided by the Market Value on such
dividend date or on the trading day next preceding such date if the
dividend payment date is not a trading day. The value of the units in the
participant's market value account on any given date shall be determined by
reference to the Market Value on such date. Any amount allocated to a
market value account may not thereafter be reallocated to any other
account.
d) Shareholder's Equity Account. At any time during the period commencing
January 1 and ending March 15 of any calendar year, the participant may
elect to allocate on April 1 of such year to a deferred compensation
shareholder's equity account compensation payable on April 1 of such year
which he has previously elected to defer or amounts in the participant's
cash account on such date (in increments of 10%) of such compensation or
cash account balance. The amounts so allocated shall be expressed in units,
the number of which shall be equal to such amount divided by the
shareholder's equity per share as reported in the Company's Annual Report
to Shareholders for the year just ended. Any amount allocated to a
shareholder's equity account may not thereafter be reallocated to any other
account.
On each date that the Company pays a regular cash dividend on shares of its
Common Share outstanding, the participant's shareholder's equity account
shall be credited with a number of units equal to the amount of such
dividend per share multiplied by the number of units in the participant's
shareholder's equity account on such date divided by the Market Value on
such dividend date or on the trading day next preceding such date if the
dividend payment date is not a trading day. The value of the units in the
participant's shareholder's equity account on any given date shall be
determined by reference to the shareholder's equity at the close of the
most recent fiscal year.
e) Recapitalization. The number of units in the participant's market value and
shareholder's equity accounts shall be proportionally adjusted for any
increase or decrease in the number of
Page 2 of 4 Amended Eff. November 10, 1998
<PAGE> 32
issued shares of Common Stock of the Company resulting from a subdivision
or consolidation of shares or other capital adjustment, or the payment of a
stock dividend or other increase or decrease in such shares effected
without receipt of consideration by the Company, or any distribution or
spin-off of assets (other than cash) to the shareholders of the Company.
Section 6. Period of Deferral
A participant may elect to defer receipt of compensation either (a) until a
specified year I the future or (b) until the participant's termination of
service as a Director of the Company. If alternative (a) is elected, actual
payment will be made or will commence within ninety days after the beginning of
the year specified. If alternative (b) is elected, payment will be made or will
commence within ninety days after termination of services as a Director of the
Company.
Section 7. Form of Payment
A participant may elect to receive the compensation deferred under the plan in
either (a) a lump sum of (b) a number of annual installments as specified by the
participants. All amounts shall be paid in cash except that the market value
account shall be paid in shares of the Company's Common Stock (other than any
fractional share which shall be paid in cash).
Section 8. Death or Disability Prior to Receipt
In the event that a participant dies or becomes totally and permanently disabled
prior to receipt of any or all of the amounts payable to the participant
pursuant to the Plan, any amounts remaining in the participant's deferred
compensation account shall be paid to his estate or personal representative in a
lump sum within ninety (90) days following the Company's notification of the
participant's death or disability.
Section 9. Time of Election of Deferral
The Plan Year shall be the period from July 1, 1987 to December 31, 1987 and
effective January 1, 1988, the period commencing January 1 and ending December
31 of each year.
An election to defer compensation may be made by a nominee for election as a
Director prior to, or concurrently with the nominee's election for, the term for
which the nominee is being elected, and may be made by a person then currently
serving as a Director for the next succeeding Plan Year no later than the
preceding December 15th (or June 15, 1987 for the Plan Year beginning July 1,
1987).
Section 10. Manner of Electing Deferral
A participant may elect to defer stipend and/or meeting fee compensation by
giving written notice to the Secretary of the Company on a form provided by the
Company, which notice shall include the accounts to which such deferred amounts
are to be allocated and the percentage (in
Page 3 of 4 Amended Eff. November 10, 1998
<PAGE> 33
increments of 10%) of such amounts to be allocated to each account, the period
of deferral, and the form of payment, including the number of installments.
Section 11. Effect of Election
An election to defer compensation shall be irrevocable once the Plan Year to
which it applies has commenced. An election covering more than one Plan Year may
be revoked or modified with respect to Plan Years not yet begun by notifying the
Secretary of the Company in writing at least fifteen (15) days prior to the
commencement of such Plan Year. Notwithstanding anything in the Plan to the
contrary, a participant's deferred compensation accounts may be reduced from
time to time in connection with the purchase of life insurance on the life of
the participant pursuant to the Company's Estate Enhancement Program. Such
reduction shall be in accordance with rules promulgated from time to time by the
administrators identified in Section 15 and any such life insurance contract
shall contain such terms as such administrators shall determine.
Section 12. Participant's Rights Unsecured
The right of any participant to receive future payments under the provisions of
the Plan shall be an unsecured claim against the general assets of the Company,
or as applicable, the participant subsidiary.
Section 13. Statement of Accounts
Statements will be sent to each participant by April 1st of each year as to the
value of the participant's deferred compensation accounts as of the end of the
preceding December.
Section 14. Assignability
No right to receive payments hereunder shall be transferable or assignable by a
participant, except by will or by the laws of descent and distribution. The
participant may not sell, assign, transfer, pledge or otherwise encumber any
interest in the participant's deferred compensation account and any attempt to
do so shall be void against, and shall not be recognized by, the Company or
participating subsidiaries.
Section 15. Administration
The Plan shall be administered by the Secretary and the General Counsel of the
Company, who together shall have the authority to adopt rules and regulations
for carrying out the Plan and interpret, construe and implement the provisions
of the Plan.
Section 16. Amendment
The Plan may at any time or from time to time be amended, modified or terminated
by the Company. No amendment, modification or termination shall, without the
consent of the participant, adversely affect accruals in such participant's
deferred compensation account or accounts at the time of such amendment,
modification or termination.
Page 4 of 4 Amended Eff. November 10, 1998
<PAGE> 34
The Chubb Corporation
Executive Deferred Compensation Plan
1. STATEMENT OF PURPOSE
The purpose of The Chubb Corporation Executive Deferred Compensation Plan
(the "Plan") is to aid The Chubb Corporation and its subsidiaries in
attracting and retaining key employees by providing a non-qualified
compensation deferral vehicle.
2. DEFINITIONS
2.01 BENEFICIARY - "Beneficiary" means the person or persons designated as
such in accordance with Section 8.
2.02 BOARD OF DIRECTORS - "Board of Directors" means the Board of Directors
of The Chubb Corporation.
2.03 BOND INDEX ACCOUNT - "Bond Index Account" means an investment option
providing for a return based upon the hypothetical investment of the
Deferral Amount, or a portion thereof, in the Vanguard Bond Index
Fund-Total Bond Market Portfolio.
2.04 CALENDAR QUARTER - "Calendar Quarter" means any of the four calendar
quarters in a full calendar year (e.g. January, February & March
comprise the first calendar quarter).
2.05 COMMITTEE - "Committee" means the Organization & Compensation
Committee of the Board of Directors of The Chubb Corporation that will
administer the Plan pursuant to the provisions of Section 3 of the
Plan.
2.06 COMPANY - "Company" means The Chubb Corporation and, for purposes of
Section 2.27 and such other purposes as determined by the Committee,
shall include any subsidiary of The Chubb Corporation.
2.07 COMPENSATION - "Compensation" means the Participant's salary, annual
incentive bonus, or other items deemed Compensation by the Committee
for purposes of this Plan.
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The Chubb Corporation Executive Deferred Compensation Plan
2.08 CYCLE - "Cycle" means the twelve month pay-in period for each
deferral. The first Cycle shall begin on January 1, 1999 and end on
December 31, 1999. The following Cycles shall begin on January 1 of
each year and end on December 31 of such year.
2.09 DECLINING BALANCE INSTALLMENTS - "Declining Balance Installments"
means a series of annual payments such that each payment is determined
by taking that portion of the Participant's Deferred Compensation
Account in the Bond Index Account or the Equity Index Account as of
the Distribution Date and dividing by the number of years of
distributions remaining.
2.1 DEFERRAL AMOUNT - "Deferral Amount" means the total amount of Elective
Deferred Compensation and/or Non-Elective Deferred Compensation with
respect to a Participant.
2.2 DEFERRED COMPENSATION ACCOUNT - "Deferred Compensation Account" means
the account maintained on the books of account of the Company for a
Participant pursuant to Section 6.
2.3 DISABILITY - "Disability" means the Participant is eligible to receive
benefits under a long term disability plan maintained by the Company.
2.4 DISTRIBUTION DATE - "Distribution Date" means the date on which the
Company makes distributions from the Participant's Deferred
Compensation Account(s).
2.5 EFFECTIVE DATE - "Effective Date" means the date on which this Plan is
effective, November 10, 1998.
2.6 ELECTION FORM - "Election Form" means the form or forms attached to
this Plan and filed with the Committee by the Participant in order to
participate in the Plan. The terms and conditions specified in the
Election Form(s) are incorporated by reference herein and form a part
of the Plan.
2.7 ELECTIVE DEFERRED COMPENSATION - "Elective Deferred Compensation"
means the total amount elected to be deferred by an Eligible Employee
on his/her Election Form, subject to approval by the Committee.
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<PAGE> 36
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The Chubb Corporation Executive Deferred Compensation Plan
2.8 ELIGIBLE EMPLOYEE - "Eligible Employee" means any employee of The
Chubb Corporation or the Chubb & Son division of Federal Insurance
Company who is a Senior Vice President or higher assigned to pay band
7 or higher, or such other key executives of the Company as may be
designated by the Chairman of The Chubb Corporation.
2.9 EQUITY INDEX ACCOUNT - "Equity Index Account" means an investment
option providing for a return based upon the hypothetical investment
of the Deferral Amount, or a portion thereof, in the Fidelity Spartan
U.S. Equity Index Fund.
2.10 INVESTMENT ALLOCATION CHANGE FORM - "Investment Allocation Change
Form" means the form attached to this Plan and filed with the
Committee by the Participant in order to request a change in the
allocation of the Participant's Deferred Compensation Account(s) among
the Bond Index Account, Equity Index Account and the Stable Value
Account. The terms and conditions specified in the Investment
Allocation Change Form are incorporated by reference herein and form a
part of the Plan.
2.11 INVESTMENT FUNDS - "Investment Funds" means those mutual funds,
investment indexes or other measures of performance identified by the
Committee, which shall be used to determine the returns on the
Participants' Deferred Compensation Accounts. The initial investment
funds shall be the Bond Index Account, the Equity Index Account and
the Stable Value Account. The Investment Funds may be changed by the
Committee from time to time, at the sole discretion of the Committee.
2.12 NON-ELECTIVE DEFERRED COMPENSATION - "Non-Elective Deferred
Compensation" means the amount awarded to a Participant by the
Committee pursuant to Section 4.02.
2.13 PARTICIPANT - "Participant" means an Eligible Employee participating
in the Plan in accordance with the provisions of Section 4.
2.14 PLAN YEAR - "Plan Year" means the twelve month period beginning on the
first day of the first Cycle in which the Eligible Employee elects to
participate in the Plan. The initial Plan Year will commence on
January 1,
November 1998
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<PAGE> 37
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The Chubb Corporation Executive Deferred Compensation Plan
1999 and end on December 31, 1999. Each later Plan year will begin on
January 1 and end on December 31.
2.15 RELATED EMPLOYMENT - "Related Employment" means the employment of a
Participant by an employer that is not the Company provided (i) such
employment is undertaken by the Participant at the request of the
Company; (ii) immediately prior to undertaking such employment, the
Participant was an employee of the Company, or was engaged in Related
Employment as herein defined; and (iii) such employment is recognized
by the Committee, in its sole discretion, as Related Employment.
2.16 STABLE VALUE ACCOUNT - "Stable Value Account" means an investment
option providing for a return based on the hypothetical investment of
the Deferral Amount, or a portion thereof, in the Stable Value
Portfolio of the Chubb Capital Accumulation Plan.
2.17 SUBSTANTIALLY EQUAL INSTALLMENTS - "Substantially Equal Installments"
means a series of annual payments, such that equal payments over the
remaining payment period would exactly amortize the Participant's
Deferred Compensation Account balance in the Stable Value Account as
of the Distribution Date if the investment return remained constant at
the return credited as of the Valuation Date immediately preceding the
Distribution Date for the remainder of the payment period.
2.18 TERMINATION OF EMPLOYMENT - "Termination of Employment" means the end
of a Participant's employment with the Company for any reason other
than Disability, Related Employment, or the termination of a
Participant's Related Employment if the Participant returns to the
Company.
2.19 VALUATION DATE - "Valuation Date" means the date on which the value of
a Participant's Deferred Compensation Account is determined for each
Calendar Quarter as provided in Section 6 hereof. Unless and until
changed by the Committee, the Valuation Dates within each Cycle shall
be the last day of each of the four Calendar Quarters of the calendar
year. If a Participant requests a Liquidating Distribution under
Section 7.06, then, for such Participant's Deferred Compensation
Account, the Valuation Date for the Plan Year in which the Liquidating
November 1998
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<PAGE> 38
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The Chubb Corporation Executive Deferred Compensation Plan
Distribution is requested shall be the last day of the Calendar
Quarter in which the Participant submits the request.
2.20 VESTED PARTICIPANT - "Vested Participant" means a Participant who
would be eligible immediately for normal or early retirement under the
qualified pension plan maintained by the Company.
3. ADMINISTRATION OF THE PLAN
3.01 PLAN ADMINISTRATOR. The Committee, subject to Section 3.02, shall be
the sole administrator of the Plan, and will administer the Plan. The
Committee shall have the power to formulate additional details and
regulations for carrying out this Plan. The Committee also shall be
empowered to make any and all determinations not authorized
specifically herein that may be necessary or desirable for the
effective administration of the Plan. The Committee is authorized to
engage such accountants, consultants and other service providers
necessary to assist in the administration of the Plan. Any decision or
interpretation of any provision of this Plan adopted by the Committee
shall be final and conclusive.
3.02 DELEGATION OF DUTIES. The Committee may delegate any or all of its
duties as to the administration of this Plan to other individuals or
groups of individuals within the Company, as it deems appropriate.
4. PARTICIPATION
4.01 ELECTIVE PARTICIPATION
a. Any Eligible Employee may elect to participate in the Plan for a
given Cycle by filing a completed Election Form for the Cycle
with the Manager of Compensation and Benefits. With regard to an
election to participate:
i. The Election Form must be filed with the Manager of
Compensation and Benefits prior to the commencement of the
Cycle to which the Election Form pertains, or at such
earlier time as determined by the Committee. Provided,
however, with respect to a deferral of salary, the Committee
November 1998
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<PAGE> 39
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The Chubb Corporation Executive Deferred Compensation Plan
may allow an Election Form for a Cycle to be filed after the
commencement of the Cycle with respect to salary to be paid
after the Election Form is filed.
ii. The minimum deferral for a Cycle shall be $5,000.
iii. A Participant may elect to receive payment of amounts
deferred during a Cycle upon Termination of Employment, or
in a specified year which shall be no earlier than in the
third Plan Year following the Plan Year in which such
amounts are deferred. Further, a Participant may elect to
receive payment in a lump sum or in up to fifteen (15)
annual installments.
b. A Participant's election to defer future Compensation is
irrevocable upon the filing of his/her Election Form with the
Manager of Compensation and Benefits, provided, however, that an
election to defer salary may be terminated with respect to
amounts not yet earned by mutual agreement in writing between the
Participant and the Committee. Such termination, if approved,
shall be effective immediately.
4.02 NON-ELECTIVE PARTICIPATION. The Committee can, in its sole discretion,
award to an Eligible Employee Non-Elective Deferred Compensation.
Unless otherwise specified by the Committee, the Participant shall
determine the timing and form of payment of any Non-Elective Deferred
Compensation at the time it is awarded, provided that the Participant
may not elect to receive payment in a specific year which is prior to
the third Plan Year following the Plan Year during which the amount is
awarded.
5. VESTING OF DEFERRED COMPENSATION ACCOUNT
A Participant's interest in his/her Deferred Compensation Account shall
vest immediately.
November 1998
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The Chubb Corporation Executive Deferred Compensation Plan
6. ACCOUNTS AND VALUATIONS
6.01 DEFERRED COMPENSATION ACCOUNTS. A separate Deferred Compensation
Account shall be established and maintained for each Participant for
each Cycle. Deferred amounts will be credited to a Participant's
account on the first day of the month following the time at which the
amount would otherwise have been paid. Any Non-Elective Deferred
Compensation awarded to a Participant shall be credited to the
Participant's Deferred Compensation Account on such date as specified
by the Committee.
6.02 INVESTMENT ALLOCATION OF DEFERRED COMPENSATION ACCOUNT. The
Participant's Deferral Amount shall be deemed to be invested in the
Investment Funds in accordance with the Participant's election.
6.03 INVESTMENT RETURN CREDITED. That portion of the Participant's Deferred
Compensation Account in the Bond Index Account, Equity Index Account
or Stable Value Account shall be credited quarterly with an investment
return based on the investment return (gain or loss) of the fund in
which the Deferral Amount is deemed to be hypothetically invested.
6.04 TIMING OF CREDITING OF INVESTMENT RETURN. That portion of the
Participant's Deferred Compensation Account in the Bond Index Account,
Equity Index Account or Stable Value Account shall be revalued and
credited with investment return as of each Valuation Date. As of each
Valuation Date, the value of that portion of the Participant's
Deferred Compensation Account in any such account shall consist of the
balance of such account as of the immediately preceding Valuation
Date, plus the amount of any transfers from another account since the
preceding Valuation Date, minus the amount of all distributions and
transfers to another account, if any, made from such account since the
preceding Valuation Date. As of each Valuation Date, investment return
shall be credited on that portion of the Participant's Deferred
Compensation Account in the Bond Index Account, Equity Index Account
or Stable Value Account since the immediately preceding Valuation Date
after adjustment for any transfers thereto or distributions or
transfers therefrom. With respect to any Elective Deferred
Compensation or Non-Elective Deferred
November 1998
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<PAGE> 41
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The Chubb Corporation Executive Deferred Compensation Plan
Compensation deferred and credited to a Participant's account since
the immediately preceding Valuation Date, investment return (or loss)
credited on the Valuation Date shall be credited from the time the
amount is credited to the Participant's account pursuant to Section
6.01.
6.05 CHANGE OF INVESTMENT ALLOCATION BY A PARTICIPANT. A Participant may
make different investment allocations for each Cycle, and may change a
Cycle's investment allocation once a year. Any change will be
effective as of April 1 of the next year if the Participant submits an
Investment Allocation Change Form to the Manager of Compensation and
Benefits by December 1 of any Plan year.
6.06 CHANGE OF INVESTMENT FUNDS BY COMMITTEE. The Committee may change the
Investment Funds from time to time. In the event of any such change,
all Participants shall be given notice of the change at least thirty
(30) days before the change is to be effective. In addition, each
Participant shall be given the opportunity to change his or her
allocation of Investment Funds for his or her Deferred Compensation
Account as of the effective date for the change; this change shall be
in addition to any change permitted under 6.05.
The Committee's decision to change the Investment Funds shall not in
any manner alter the returns on the Participants' Deferred
Compensation Accounts prior to the effective date of the change.
6.07 NATURE OF ACCOUNT ENTRIES. The establishment and maintenance of
Participants' Deferred Compensation Accounts and the crediting of
gains and losses pursuant to this Section 6, shall be merely
bookkeeping entries and shall not be construed as giving any person
any interest in any specific assets of the Company or of any
subsidiary of the Company or any trust created by the Company,
including any mutual funds or other investment funds owned by the
Company or any such subsidiary or trust. The hypothetical investment
of the Participants' Deferred Compensation Accounts in the Investment
Funds shall be for bookkeeping purposes only, and shall not require
the establishment of actual corresponding
November 1998
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<PAGE> 42
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The Chubb Corporation Executive Deferred Compensation Plan
funds by the Committee or the Company. Benefits accrued under this
Plan shall constitute an unsecured general obligation of the Company.
7. BENEFITS
7.01 NORMAL BENEFIT
a. A Participant's Deferred Compensation Account shall be paid to
the Participant in accordance with the terms of the Participant's
Election Form, subject to the terms and conditions specified in
the Election Form. If a Participant elects to receive payment of
that portion of his/her Deferred Compensation Account in the
Stable Value Account in installments, subject to a maximum of
fifteen (15) installments, payments shall be made in
Substantially Equal Installments. If a Participant elects to
receive payment of that portion of his/her Deferred Compensation
Account in the Bond Index Account or Equity Index Account in
installments, subject to a maximum of fifteen (15) installments,
payments shall be made in Declining Balance Installments.
b. Notwithstanding the provisions of Section 7.01a, and
notwithstanding any contrary election made by the Participant on
his/her Election Form, if a Participant has a Termination of
Employment, and if the Participant does not qualify as a Vested
Participant at the time of his/her Termination of Employment, the
Participant's Deferred Compensation Account balance will be paid
to the Participant in a lump sum in the year following the
Participant's Termination of Employment. However, upon the
written request of the Participant, the Committee, in its sole
discretion, may allow payments to be made to the Participant in
up to five (5) annual installments.
c. In the event of a Participant's death prior to receiving any
payments with respect to a Deferral Amount for a Cycle, the
Participant's designated Beneficiary will receive an amount equal
to the Participant's Deferred Compensation Account for such
Cycle, and such amount shall be paid in a single sum or annual
November 1998
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The Chubb Corporation Executive Deferred Compensation Plan
installments (not to exceed 10) in accordance with the
Participant's election. However, the Committee may, in its sole
discretion, pay the Participant's remaining account balance in a
single sum if so requested by the Participant's Beneficiary. If
the Participant's designated Beneficiary survives the Participant
but dies before receiving a complete distribution of the
Participant's account, the remaining account balance shall be
paid to the estate of such Beneficiary in a lump sum.
d. If a Participant dies after beginning to receive payments with
respect to a Deferral Amount for a Cycle, the Participant's
designated Beneficiary will receive an amount equal to the
Participant's remaining account balance for such Cycle. Such
remaining account balance shall continue to be paid in accordance
with the Participant's election. However, the Committee may, in
its sole discretion, pay the Participant's remaining account
balance in a single sum if so requested by the Participant's
Beneficiary. If the Participant's designated Beneficiary survives
the Participant but dies before receiving a complete distribution
of the Participant's account, the remaining account balance shall
be paid to the estate of such Beneficiary in a lump sum.
7.02 HARDSHIP BENEFIT. In the event that the Committee, upon written
petition of the Participant, determines in its sole discretion, that
the Participant has suffered an unforeseeable financial emergency, the
Company may pay to the Participant, as soon as is practicable
following such determination, an amount necessary to meet the
emergency, not in excess of the Deferred Compensation Account credited
to the Participant. The Deferred Compensation Account of the
Participant thereafter shall be reduced to reflect the payment of a
Hardship Benefit.
7.03 REQUEST TO COMMITTEE FOR DELAY IN PAYMENT. A Participant shall have no
right to modify in any way the schedule for the distribution of
amounts from his/her Deferred Compensation Account that the
Participant has specified in his/her Election Form. However, upon a
written request submitted by the Participant to the Committee, the
Committee may, in its
November 1998
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The Chubb Corporation Executive Deferred Compensation Plan
sole discretion, with respect to the Deferred Compensation Account for
each Cycle:
a. Postpone one time the date on which payment shall commence; and
b. Increase one time the number of installments to a number not to
exceed fifteen (15).
Any such request(s) must be made at least ninety (90) days prior to
the earlier of (1) the beginning of the Plan Year in which the
Participant has elected for distributions to commence, or (2) the
Participant's Termination of Employment.
7.04 TAXES; WITHHOLDING. To the extent required by law, the Company shall
withhold from payments made hereunder an amount equal to at least the
minimum taxes required to be withheld by the federal, or any state or
local, government.
7.05 DATE OF PAYMENTS. Except as otherwise provided in this Plan, payments
under this Plan shall be made (or begin in the case of installments)
on or before the fifteenth (15th) day of February of the calendar year
following receipt of notice by the Committee of an event that entitles
a Participant (or Beneficiary) to payments under the Plan, or at such
other date as may be determined by the Committee. Amounts that become
payable to the estate of a Beneficiary under Sections 7.01c or 7.01d
or pursuant to Section 7.02 or Section 7.06 shall be paid within
fifteen (15) days following the end of the calendar quarter in which a
determination is made that an amount is payable, or at such other date
as may be determined by the Committee.
7.06 LIQUIDATING DISTRIBUTION. Notwithstanding any provisions of the Plan
or the Participant's Election Form to the contrary, following the
receipt of a written request from a Participant for a Liquidating
Distribution, the Company shall pay to the Participant the
Participant's Liquidating Distribution Account Balance in a lump sum.
"Liquidating Distribution" shall mean a distribution requested by the
Participant in writing directed
November 1998
-11-
<PAGE> 45
===============================================================================
The Chubb Corporation Executive Deferred Compensation Plan
to the Committee and specifically referencing this section.
"Liquidating Distribution Account Balance" shall mean all of the
Deferred Compensation Accounts under the Plan in which the Participant
has an undistributed balance, decreased by a forfeiture penalty equal
to ten percent (10%) of the value of the Participant's Deferred
Compensation Account(s). A Liquidating Distribution shall be paid to a
Participant on or before the fifteenth (15th) day of the month
following the end of the calendar quarter during which the Participant
requests the Liquidating Distribution.
Notwithstanding any provisions of the Plan or the Participant's
Election Form to the contrary, if the Participant requesting the
Liquidating Distribution is, at the time of the request, an active
employee of the Company, then the Participant, for a period of one (1)
Plan Year following the Plan Year during which the request for the
Liquidating Distribution is made, shall be ineligible to participate
in the Plan with respect to any Compensation not yet deferred.
7.07 ALLOCATION OF DISTRIBUTIONS. If a distribution of a portion of an
account for a Cycle is made to a Participant or Beneficiary, and the
amounts for such Cycle are invested in more than one Investment Fund,
then a portion of such distribution shall be deemed to have been made
from each Investment Fund on a prorata basis, based on the values of
the Investment Funds as of the Valuation Date immediately preceding
the distribution.
8. BENEFICIARY DESIGNATION
At any time prior to complete distribution of the benefits due to a
Participant under the Plan, he/she shall have the right to designate,
change, and/or cancel, any person(s) or entity as his/her Beneficiary
(either primary or contingent) to whom payment under this Plan shall be
made in the event of his/her death. Each Beneficiary designation shall
become effective only when filed in writing with the Committee during the
Participant's lifetime on a form provided by the Committee. The filing of a
new beneficiary designation form will cancel all previously filed
beneficiary designations relating to such Cycle or Cycles.
November 1998
-12-
<PAGE> 46
===============================================================================
The Chubb Corporation Executive Deferred Compensation Plan
Further, any finalized divorce of a Participant subsequent to the date of
filing of a beneficiary designation form in favor of Participant's spouse
shall revoke such designation.
If a Participant fails to designate a Beneficiary as provided above, or if
his/her beneficiary designation is revoked by divorce or otherwise without
execution of a new designation, or if all designated Beneficiaries
predecease the Participant, then the distribution of such benefits shall be
made to the Participant's estate in a lump sum. If the Participant's
designated Beneficiary survives the Participant but dies before receiving a
complete distribution of the Participant's account, the remaining account
balance shall be paid to the estate of such Beneficiary in a lump sum.
9. AMENDMENT AND TERMINATION OF PLAN
9.01 AMENDMENT. The Board of Directors may amend the Plan at any time in
whole or in part, provided, however, that, except as provided in 9.02,
no amendment shall be effective to decrease the benefits under the
Plan payable to any Participant or Beneficiary with respect to any
Elective or Non-Elective Deferred Compensation deferred prior to the
date of the amendment. Written notice of any amendments shall be given
to each Participant in the Plan.
9.02 TERMINATION OF PLAN
a. COMPANY'S RIGHT TO TERMINATE. The Board of Directors may
terminate the Plan at any time.
b. PAYMENTS UPON TERMINATION. Upon any termination of the Plan under
this section, Compensation shall cease to be deferred
prospectively, and, with respect to Compensation deferred
previously, the Company will pay to the Participant (or the
Participant's Beneficiary, if after the Participant's death), in
a lump-sum, the value of his/her Deferred Compensation Account.
November 1998
-13-
<PAGE> 47
===============================================================================
The Chubb Corporation Executive Deferred Compensation Plan
10. MISCELLANEOUS
10.01 UNSECURED GENERAL CREDITOR. Participants and their beneficiaries,
heirs, successors and assignees shall have no legal or equitable
rights, interests, or other claims in any property or assets of the
Company, nor shall they be beneficiaries of, or have any rights,
claims, or interests in any life insurance policies, annuity
contracts, or the policies therefrom owned or that may be acquired by
the Company ("policies"). Such policies or other assets of the Company
shall not be held in any way as collateral security for the fulfilling
of the obligations of the Company under this Plan. Any and all of the
Company's assets and policies shall be and will remain general,
unpledged, unrestricted assets of the Company. The Company's
obligation under the Plan shall be that of an unfunded and unsecured
promise of the Company to pay money in the future.
10.02 GRANTOR TRUST. Although the Company is responsible for the payment of
all benefits under the Plan, the Company, in its sole discretion, may
contribute funds as it deems appropriate to a grantor trust for the
purpose of paying benefits under this Plan. Such trust may be
irrevocable, but assets of the trust shall be subject to the claims of
creditors of the Company. To the extent any benefits provided under
the Plan actually are paid from the trust, the Company shall have no
further obligation with respect thereto, but to the extent not so
paid, such benefits shall remain the obligation of, and shall be paid
by, the Company. Participants shall have the status of unsecured
creditors on any legal claim for benefits under the Plan, and shall
have no security interest in any such grantor trust.
10.03 SUCCESSORS AND MERGERS, CONSOLIDATIONS OR CHANGE IN CONTROL. The
terms and conditions of this Plan shall inure to the benefit of the
Participants and shall bind the Company, its successors, assignees,
and personal representatives. If substantially all of the stock or
assets of the Company are acquired by another entity, or if the
Company is merged into, or consolidated with, another entity, then the
obligations created hereunder shall be obligations of the acquirer or
successor entity.
November 1998
-14-
<PAGE> 48
===============================================================================
The Chubb Corporation Executive Deferred Compensation Plan
10.04 NON-ASSIGNABILITY. Neither a Participant, nor any other person, shall
have any right to commute, sell, assign, transfer, pledge, anticipate,
mortgage or otherwise encumber, transfer, hypothecate, or convey in
advance of the actual receipt, any amounts payable hereunder, or any
part thereof. All rights to payments expressly are declared to be
unassignable and nontransferable. No part of the amounts payable,
prior to actual payment, shall be subject to seizure or sequestration
for the payment of any debts, judgments, alimony or separate
maintenance owed by a Participant, or any other person, nor shall they
be transferable by operation of law in the event of a Participant's,
or any other person's, bankruptcy or insolvency.
10.05 EMPLOYMENT OR FUTURE ELIGIBILITY TO PARTICIPATE NOT GUARANTEED.
Nothing contained in this Plan, nor any action taken hereunder, shall
be construed as a contract of employment, or as giving any Eligible
Employee any right to be retained in the employ of the Company.
Designation as an Eligible Employee may be revoked at any time by the
Board of Directors with respect to any Compensation not yet deferred.
10.06 PROTECTIVE PROVISIONS. A Participant will cooperate with the Company
by furnishing any and all information requested by the Company in
order to facilitate the payment of benefits hereunder, including
taking such physical examinations as the Company reasonably may deem
necessary and taking such other relevant action as may be requested by
the Company. If a Participant refuses to cooperate, the Participant's
election to defer any Compensation which has not yet been deferred
shall become null and void, and the Participant shall not be eligible
to make any further deferral elections under the Plan.
10.07 GENDER, SINGULAR AND PLURAL. All pronouns, and any variations
thereof, shall be deemed to refer to the masculine, feminine, or
neuter, as the identity of the person(s) or entity(s) may require. As
the context may require, the singular may be read as the plural and
the plural as the singular.
November 1998
-15-
<PAGE> 49
===============================================================================
The Chubb Corporation Executive Deferred Compensation Plan
10.08 CAPTIONS. The captions to the articles, sections, and paragraphs of
this Plan are for convenience only and shall not control or affect the
meaning or construction of any of its provisions.
10.09 APPLICABLE LAW. This Plan shall be governed and construed in
accordance with the laws of the State of New York.
10.10 VALIDITY. In the event any provision of this Plan is found to be
invalid, void, or unenforceable, the same shall not affect, in any
respect whatsoever, the validity of any other provision of this Plan.
10.11 NOTICE. Any notice or filing required or permitted to be given to the
Committee shall be sufficient if in writing and hand delivered, or
sent by registered or certified mail, to the principal office of the
Company at 15 Mountain View Road, Warren, NJ 07059, directed to the
attention of the Manager of Compensation and Benefits. Such notice
shall be deemed given as of the date of delivery or, if delivery is
made by mail, as of the date shown on the postmark on the receipt for
registration or certification. Any notice to the Participant shall be
addressed to the Participant at the Participant's residence address as
maintained in the Company's records. Any party may change the address
for such party here set forth by giving notice of such change to the
other parties pursuant to this Section.
November 1998
-16-
<PAGE> 50
[CHUBB CORPORATION LETTERHEAD]
November 11, 1998
Mr. Thomas F. Motamed
14 Timberline Road
Hohokus, New Jersey 07423
Dear Tom:
In order to induce you to remain in the employ of The Chubb Corporation
(the "Company") and in consideration of your continuing in the Company's employ,
the Company agrees to provide the severance benefits specified below on the
terms and subject to the conditions stated. However, in the absence of a Change
in Control of the Company, as defined below, nothing in this Agreement shall
affect the Company's normal right to terminate your employment or your right to
leave its employ.
1. Change in Control. For purposes of this Agreement a Change in Control
will be deemed to have occurred
(A) if following (i) a tender or exchange offer for voting securities
of the Company, (ii) a proxy contest for the election of Directors of the
Company or (iii) a merger or consolidation or sale of all or substantially
all of the business or assets of the Company, the Directors of the Company
immediately prior to the initiation of such event cease to constitute a
majority of the Board of Directors of the Company upon the occurrence of
such event or within one year after such event, or
(B) if any "person" or "group" (as defined under the beneficial
ownership rules of Sections 13(d)(3) and 14(d)(2) of the Securities
Exchange Act of 1934 and Rule 13d-3 thereunder) acquires ownership or
control, or power to control, 25% or more of the outstanding voting
securities of the Company without prior approval or ratification by a
majority of the Company's Directors in office at the time of such event.
2. Conditions to Severance Benefits. The benefits provided for in Section 5
shall be payable or accrue to you if (a) a Change in Control has occurred and
(b) your employment with the Company has terminated within two years after the
Change in Control, other than termination by reason of (i) your death, (ii) your
retirement at normal retirement age ("Retirement") under the Company's pension
plan as in effect immediately prior to the Change in Control, (iii) your
voluntary termination other than for Good Reason, (iv) your retirement for
Disability or (v) your discharge for Cause.
<PAGE> 51
Mr. Thomas F. Motamed
November 11, 1998
Page 2
Termination by you of your employment for "Good Reason" shall mean
termination by you of your employment, subsequent to a Change in Control,
because of:
(A) the assignment to you, without your express written consent, of
any duties inconsistent with your positions, duties, responsibilities,
authority and status with the Company and its principal subsidiaries
immediately prior to such Change in Control, or a change in your reporting
responsibilities, titles or offices as in effect immediately prior to the
Change in Control, or any removal of you from or any failure to re-elect
you to any of such positions, except in connection with the termination of
your employment for Cause, Disability, Retirement, as a result of your
death or by you without Good Reason;
(B) a reduction by the Company in your base salary as in effect at the
time of such Change in Control;
(C) a failure by the Company to continue (or to replace with
equivalent plans) the Performance Share Plan, the Annual Incentive
Compensation Plan or any other Bonus Plan in which you participated for the
year immediately preceding such Change in Control (the "Bonus Plans") which
are in effect at the time of such Change in Control or a failure by the
Company to continue you as a participant in such Bonus Plans (or equivalent
plans) on a basis which would entitle you to receive under such Bonus Plans
(or equivalent plans) amounts at least equal to the average amounts you
received pursuant to such Bonus Plans for the three years preceding such
Change in Control;
(D) the Company's requiring you to maintain your principal office or
conduct your principal activities anywhere other than at the Company's
principal executive offices in the New York Metropolitan area, including
Somerset County, New Jersey;
(E) the failure by the Company to continue in effect (or to replace
with equivalent plans) the Company's Capital Accumulation Plan or any other
compensation plan, any stock ownership plan, stock purchase plan, stock
option plan, life insurance plan, health and accident plan, financial
services plan, hospital-medical plan, dental plan, or disability plan in
which you are participating or eligible to participate at the time of such
Change in Control, or the taking of any action by the Company which would
adversely affect your participation in or materially reduce your benefits
under any such plans (or equivalent plans) or deprive you of any material
fringe benefit enjoyed or to be enjoyed by you at the time of such Change
in Control;
(F) the failure by the Company to obtain the assumption of the
agreement to perform this Agreement by any successor as contemplated in
Section 7 hereof;
(G) any purported termination of your employment which is not effected
pursuant to a Notice of Termination satisfying the applicable requirements
with respect to such Notice; or
<PAGE> 52
Mr. Thomas F. Motamed
November 11, 1998
Page 3
(H) a determination made by you in good faith, whether before or after
the date you are eligible for early retirement under the Company's pension
plan, that as a result of such Change in Control you are not able to
discharge your duties effectively; or
(I) any termination of this Agreement pursuant to Section 6 prior to
the expiration of two years from the occurrence of the Change in Control.
Termination of your employment for "Cause" shall mean termination because
of (A) the willful and continued failure by you substantially to perform your
duties with the Company and its principal subsidiaries (other than any such
failure resulting from your incapacity due to physical or mental illness), after
a demand for substantial performance is delivered to you by the Chief Executive
Officer of the Company, which specifically identifies the manner in which such
executive believes that you have not substantially performed your duties, or (B)
the willful engaging by you in misconduct which is materially injurious to the
Company, monetarily or otherwise. For purposes of this paragraph, no act, or
failure to act, on your part shall be considered "willful" unless done, or
omitted to be done, by you not in good faith and without reasonable belief that
your action or omission was in or not opposed to the best interests of the
Company. Notwithstanding the foregoing, you shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to you a
copy of a Notice of Termination from the Chief Executive Officer of the Company
after reasonable notice to you and an opportunity for you, together with your
counsel, to be heard before the Board of Directors, and a finding that in the
good faith opinion of the Board you were guilty of conduct set forth above in
clauses (A) or (B) of the first sentence of this paragraph and specifying the
particulars thereof in detail.
Termination of your employment for Disability shall mean termination in
accordance with the provisions of the Company's Long Term Disability Plan as in
effect immediately preceding the Change in Control.
3. Notice of Termination. Any purported termination of your employment
shall be communicated by written Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of your employment under the
provision so indicated. No purported termination of your employment by the
Company shall be effective if it is not effected pursuant to a Notice of
Termination satisfying the requirements of this Section 3.
4. Date of Termination. "Date of Termination" shall mean (A) if your
employment is terminated for Disability, 30 days after Notice of Termination is
given (provided that you shall not have returned to the performance of your
duties on a full-time basis during such 30-day period) and (B) if your
employment is terminated for any other reason, the date on which a Notice of
Termination is given.
<PAGE> 53
Mr. Thomas F. Motamed
November 11, 1998
Page 4
5. Severance Benefits. Subject to the conditions in Section 2, on
termination of your employment you shall be entitled to the following benefits:
(A) You shall be entitled to an amount (the "Severance Compensation")
equal to 2 times the sum of (i) one year's salary at the annual rate in
effect at the time of the Change in Control and (ii) the average for the
three calendar years preceding such Change in Control of your bonuses under
the Annual Incentive Compensation Plan (1984) (or successor plan),
provided, however, that your Severance Compensation shall not be greater
than the amount you would have received as salary and such bonuses from the
Company had you remained in the employ of the Company from the Date of
Termination until your normal retirement date under the Company's pension
plan (on the assumption that your salary would remain at the same annual
rate as in effect at the time of Change in Control and that your annual
bonuses would be the average for the three calendar years preceding such
Change in Control of such bonuses). The Severance Compensation will be
payable in full on the Date of Termination.
(B) The Company shall also pay to you an amount equal to all legal
fees and expenses incurred by you as a result of such termination
(including all such fees and expenses, if any, incurred in contesting or
disputing any such termination or in seeking to obtain or enforce or retain
any right or benefit provided by this Agreement);
(C) The Company shall maintain in full force and effect, for your
continued benefit until the earlier of (a) two years after the Date of
Termination or, (b) your commencement of full time employment with a new
employer, all life insurance, hospital-medical, dental, health and
accident, and disability plans in which you were entitled to participate
immediately prior to such Change in Control, provided that your continued
participation is possible under the general terms and provisions of such
plans and programs. In the event that your participation in any such plan
or program is barred for any reason whatsoever, the Company shall arrange
to provide you with benefits substantially similar to those which you are
entitled to receive under such plan or program;
(D) You shall not be required to mitigate the amount of any payment
provided for in this Section 5 by seeking other employment or otherwise,
nor shall the amount of any payment provided for in this Section 5 be
reduced by any compensation earned by you as the result of employment by
another employer after the Date of Termination or otherwise.
6. Term of Agreement. This Agreement shall have an initial term of two (2)
years from the date hereof and shall be automatically extended at the expiration
of said two-year period for successive two (2) year periods unless the Company
gives you one year's prior written notice that it is terminating this Agreement
at the expiration of the then current two year period.
<PAGE> 54
Mr. Thomas F. Motamed
November 11, 1998
Page 5
7. Successors; Binding Agreement.
(A) The Company will require any purchaser of all or substantially all
of the business or assets of the Company, by agreement in form and
substance satisfactory to you to assume and agree to perform this Agreement
in the same manner and to the same extent that the Company would be
required to perform it if no such purchase had taken place. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business or assets as aforesaid which executes and
delivers the agreement provided for in this Section 7(A) or which otherwise
becomes bound by all the terms and provisions of this Agreement by
operation of law.
(B) This Agreement shall inure to the benefit of and be enforceable by
your personal or legal representatives, executors, administrators,
successors, heirs, distributees, divisees and legatees. If you should die
while any amount would still be payable to you hereunder if you had
continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to your
devisee, legatee or other designee or, if there be no such designee, to
your estate.
8. Notices. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, provided
that all notices to the Company shall be directed to the attention of the
Chairman of the Company, with a copy to the Secretary of the Company, or to such
other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon receipt.
9. Miscellaneous. No provisions of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by you and such officer as may be specifically designated by the
Board of Directors of the Company. No waiver by either party hereto at any time
of any breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not expressly set forth in this Agreement; provided,
however, that this Agreement shall not supersede or in any way affect the
rights, duties or obligations you may have under any other written agreement
with the Company. This Agreement shall be governed by, and construed in
accordance with, the laws (other than principles of conflicts of laws) of the
State of New York.
10. Validity. The invalidity or unenforceability of any provision of this
Agreement in any respect shall not affect the validity or enforceability of such
provision in any other respect or of any other provision of this Agreement, all
of which shall remain in full force and effect.
<PAGE> 55
Mr. Thomas F. Motamed
November 11, 1998
Page 6
If the foregoing correctly sets forth our understanding on the subject
matter hereof, kindly sign and return to the Company the enclosed copy hereof,
which will thereupon become our binding agreement.
Sincerely,
THE CHUBB CORPORATION
By /s/ Dean R. O'Hare
--------------------------------------
Dean R. O'Hare
Chairman
Agreed to this 16th day
of November, 1998
/s/ Thomas F. Motamed
- --------------------------------------
Thomas F. Motamed
<PAGE> 1
Supplementary Financial Data
<TABLE>
<CAPTION>
IN MILLIONS
YEARS ENDED DECEMBER 31
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
PROPERTY AND CASUALTY INSURANCE
UNDERWRITING
Net Premiums Written................................... $5,503.5 $5,448.0 $4,773.8
Increase in Unearned Premiums.......................... (199.7) (290.6) (204.5)
-------- -------- --------
Premiums Earned........................................ 5,303.8 5,157.4 4,569.3
-------- -------- --------
Claims and Claim Expenses.............................. 3,493.7 3,307.0 3,010.8
Operating Costs and Expenses........................... 1,850.0 1,777.4 1,547.4
Increase in Deferred Policy Acquisition Costs.......... (51.8) (75.7) (42.5)
Dividends to Policyholders............................. 35.9 31.7 23.3
-------- -------- --------
Underwriting Income (Loss) Before Income Tax........... (24.0) 117.0 30.3
Federal and Foreign Income Tax (Credit)................ (9.9) 39.5 13.2
-------- -------- --------
UNDERWRITING INCOME (LOSS)............................. (14.1) 77.5 17.1
-------- -------- --------
INVESTMENTS
Investment Income Before Expenses and Income Tax....... 760.0 721.4 656.2
Investment Expenses.................................... 11.1 10.2 10.1
-------- -------- --------
Investment Income Before Income Tax.................... 748.9 711.2 646.1
Federal and Foreign Income Tax......................... 114.8 118.9 101.9
-------- -------- --------
INVESTMENT INCOME...................................... 634.1 592.3 544.2
-------- -------- --------
PROPERTY AND CASUALTY INCOME.............................. 620.0 669.8 561.3
-------- -------- --------
REAL ESTATE
Revenues.................................................. 82.2 616.1 319.8
Cost of Sales and Expenses................................ 85.7 624.7 555.7(a)
-------- -------- --------
Real Estate Loss Before Income Tax........................ (3.5) (8.6) (235.9)
Federal Income Tax Credit................................. (1.5) (3.5) (89.1)
-------- -------- --------
REAL ESTATE LOSS.......................................... (2.0) (5.1) (146.8)(a)
-------- -------- --------
CORPORATE, NET OF TAX....................................... 22.8 36.4 19.7
-------- -------- --------
CONSOLIDATED OPERATING INCOME FROM CONTINUING
OPERATIONS BEFORE RESTRUCTURING CHARGE............... 640.8 701.1 434.2
RESTRUCTURING CHARGE, NET OF TAX (B)........................ (26.0) -- --
-------- -------- --------
CONSOLIDATED OPERATING INCOME FROM CONTINUING
OPERATIONS AFTER RESTRUCTURING CHARGE................ 614.8 701.1 434.2
REALIZED INVESTMENT GAINS FROM CONTINUING OPERATIONS,
NET OF TAX................................................ 92.2 68.4 52.0
-------- -------- --------
CONSOLIDATED INCOME FROM CONTINUING OPERATIONS......... 707.0 769.5 486.2
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX (C)......... -- -- 26.5
-------- -------- --------
CONSOLIDATED NET INCOME................................ $ 707.0 $ 769.5 $ 512.7
======== ======== ========
</TABLE>
(a) The 1996 real estate loss reflects a net charge of $160.0 million for the
after-tax effect of a $255.0 million write-down of the carrying value of
certain real estate assets to their estimated fair value.
(b) In the first quarter of 1998, the Corporation recorded a net charge of $26.0
million for the after-tax effect of a $40.0 million restructuring charge.
(c) In May 1997, the Corporation sold its life and health insurance operations,
which have been classified as discontinued operations.
The above federal and foreign income tax provisions represent allocations of the
consolidated provision.
15
<PAGE> 2
Property and Casualty Underwriting Results
NET PREMIUMS WRITTEN (In Millions of Dollars)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Personal Insurance
Automobile........................... $ 309.4 $ 298.6 $ 243.1 $ 200.3 $ 188.0
Homeowners........................... 735.1 697.4 546.1 455.6 436.5
Other................................ 320.2 310.4 250.0 210.9 204.3
-------- -------- -------- -------- --------
Total Personal.................. 1,364.7 1,306.4 1,039.2 866.8 828.8
-------- -------- -------- -------- --------
Commercial Insurance
Multiple Peril....................... 784.5 813.6 671.0 575.7 522.6
Casualty............................. 900.5 915.8 818.0 717.3 667.8
Workers' Compensation................ 320.8 296.7 243.7 223.4 201.6
Property and Marine.................. 524.0 583.0 495.0 426.3 360.0
Executive Protection................. 949.8 891.4 775.7 647.0 596.4
Financial Institutions............... 391.6 384.3 340.4 285.5 260.0
Other................................ 267.6 260.6 188.3 195.5 198.8
-------- -------- -------- -------- --------
Total Commercial................ 4,138.8 4,145.4 3,532.1 3,070.7 2,807.2
-------- -------- -------- -------- --------
Total Before Reinsurance
Assumed...................... 5,503.5 5,451.8 4,571.3 3,937.5 3,636.0
Reinsurance Assumed.................... -- (3.8) 202.5 368.5 315.2
-------- -------- -------- -------- --------
Total........................... $5,503.5 $5,448.0 $4,773.8 $4,306.0 $3,951.2
======== ======== ======== ======== ========
</TABLE>
A portion of the increase in net premiums written in both 1996 and 1997 was due
to changes to the reinsurance agreements with the Royal & Sun Alliance Insurance
Group plc. Effective January 1, 1996, these agreements were amended to reduce
the portion of each company's business reinsured with the other. The agreements
were terminated effective January 1, 1997.
COMBINED LOSS AND EXPENSE RATIOS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Personal Insurance
Automobile........................... 89.2% 86.6% 86.5% 87.4% 96.3%
Homeowners........................... 90.8 88.9 104.3 93.8 110.2
Other................................ 70.2 66.9 69.3 72.6 80.7
-------- -------- -------- -------- --------
Total Personal.................. 85.6 83.1 91.7 87.1 99.8
-------- -------- -------- -------- --------
Commercial Insurance
Multiple Peril....................... 124.2 118.7 118.1 110.0 112.4
Casualty............................. 114.6 113.5 113.3 113.8 101.9
Workers' Compensation................ 111.5 105.0 101.8 95.1 103.9
Property and Marine.................. 116.5 105.5 97.8 92.9 102.5
Executive Protection................. 75.8 74.5 76.5 82.1 81.4
Financial Institutions............... 86.7 91.5 83.7 88.8 96.2
Other................................ 100.9 85.0 99.0 103.9 105.4
-------- -------- -------- -------- --------
Total Commercial................ 104.5 100.7 99.7 99.3 99.4
-------- -------- -------- -------- --------
Total Before Reinsurance
Assumed...................... 99.8 96.6 97.9 96.5 99.5
Reinsurance Assumed.................... -- N/M N/M 99.2 100.1
-------- -------- -------- -------- --------
Total........................... 99.8% 96.9% 98.3% 96.8% 99.5%
======== ======== ======== ======== ========
</TABLE>
The combined loss and expense ratio, expressed as a percentage, is the key
measure of underwriting profitability traditionally used in the property and
casualty insurance business. It is the sum of the ratio of losses to premiums
earned plus the ratio of underwriting expenses to premiums written after
reducing both premium amounts by dividends to policyholders.
16
<PAGE> 3
Ten Year Financial Summary
(in millions except for per share amounts)
<TABLE>
<CAPTION>
FOR THE YEAR 1998 1997 1996
<S> <C> <C> <C>
REVENUES
Property and Casualty Insurance
Premiums Earned............................................ $5,303.8 $5,157.4 $4,569.3
Investment Income.......................................... 760.0 721.4 656.2
Real Estate................................................. 82.2 616.1 319.8
Corporate Investment Income................................. 61.9 63.9 55.4
Realized Investment Gains................................... 141.9 105.2 79.8
TOTAL REVENUES........................................... 6,349.8 6,664.0 5,680.5
COMPONENTS OF NET INCOME*
Property and Casualty Insurance
Underwriting Income (Loss)(b).............................. (14.1) 77.5 17.1
Investment Income.......................................... 634.1 592.3 544.2
Property and Casualty Insurance Income...................... 594.0(e) 669.8 561.3
Real Estate Income (Loss)................................... (2.0) (5.1) (146.8)(f)
Corporate Income............................................ 22.8 36.4 19.7
OPERATING INCOME FROM CONTINUING OPERATIONS.............. 614.8 701.1 434.2
Realized Investment Gains from Continuing Operations........ 92.2 68.4 52.0
INCOME FROM CONTINUING OPERATIONS........................ 707.0 769.5 486.2
Income from Discontinued Operations......................... -- -- 26.5
NET INCOME............................................... 707.0 769.5 512.7
DILUTED EARNINGS PER SHARE
Operating Income from Continuing Operations(b).............. 3.65(e) 4.00 2.44(f)
Income from Continuing Operations........................... 4.19 4.39 2.73
Income from Discontinued Operations......................... -- -- .15
Net Income.................................................. 4.19 4.39 2.88
DIVIDENDS DECLARED ON COMMON STOCK............................ 204.7 198.3 188.7
Per Share................................................... 1.24 1.16 1.08
CHANGE IN UNREALIZED APPRECIATION OR DEPRECIATION OF
INVESTMENTS, NET............................................ 14.6 161.4 (107.2)
AT YEAR END
TOTAL ASSETS.................................................. $20,746.0 $19,615.6 $19,938.9
INVESTED ASSETS
Property and Casualty Insurance............................. 13,715.0 12,777.3 11,190.7
Corporate................................................... 1,040.3 1,272.3 890.4
UNPAID CLAIMS................................................. 10,356.5 9,772.5 9,523.7
LONG TERM DEBT................................................ 607.5 398.6 1,070.5
TOTAL SHAREHOLDERS' EQUITY.................................... 5,644.1 5,657.1 5,462.9
Per Common Share............................................ 34.78 33.53 31.24
</TABLE>
* The federal and foreign income tax provided for each component of income
represents its allocated portion of the consolidated provision.
In May 1997, the Corporation sold its life and health insurance operations,
which 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 $220.5 million resulting from the
change in accounting principle.
38
<PAGE> 4
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C>
$4,147.2 $3,776.3 $3,504.8(a) $3,163.3 $3,037.2 $2,836.1 $2,693.5
613.3 570.5 541.7 501.1 477.0 463.4 426.2
287.8 204.9 160.6 150.0 140.9 174.9 221.3
54.4 49.4 52.7 57.2 46.3 39.6 25.2
108.8 54.1 210.6 174.1 61.1 39.6 40.2
5,211.5 4,655.2 4,470.4 4,045.7 3,762.5 3,553.6 3,406.4
55.7 (7.8) (337.5)(c) (15.3) 18.6 20.7(d) (25.0)
507.2 475.0 455.4 422.8 397.6 371.4 330.1
562.9 467.2 117.9 407.5 416.2 392.1 305.1
6.0 (2.0) (2.2) 10.0 25.0 40.0 42.0
14.8 7.6 14.4 19.8 16.3 14.7 .7
583.7 472.8 130.1 437.3 457.5 446.8 347.8
70.7 35.1 137.3 114.8 40.3 25.8 26.4
654.4 507.9 267.4 552.1 497.8 472.6 374.2
42.2 20.6 76.8 65.0 54.2 49.5 46.6
696.6 528.5 324.2(g) 617.1 552.0 522.1 420.8
3.27 2.66 .77(c) 2.47 2.61 2.59(d) 2.03
3.67 2.85 1.52 3.10 2.84 2.74 2.18
.23 .11 .42 .36 .30 .28 .27
3.90 2.96 1.83(g) 3.46 3.14 3.02 2.45
170.6 161.1 150.8 139.6 127.8 109.1 96.5
.98 .92 .86 .80 .74 .66 .58
470.2 (487.9) 46.5 (82.1) 12.2 (19.4) 70.3
$19,636.3 $17,761.0 $16,729.5 $15,197.6 $13,885.9 $12,347.8 $11,390.4
10,013.6 8,938.8 8,403.1 7,767.5 7,086.6 6,297.8 5,793.7
906.6 879.5 965.7 955.8 840.3 688.4 647.8
9,588.2 8,913.2 8,235.4 7,220.9 6,591.3 6,016.4 5,605.0
1,150.8 1,279.6 1,267.2 1,065.6 1,045.8 812.6 604.2
5,262.7 4,247.0 4,196.1 3,954.4 3,541.6 2,882.6 2,603.7
30.14 24.46 23.92 22.59 20.37 17.60 15.42
</TABLE>
(a) Premiums earned have been increased by a $125.0 million return premium to
the Corporation's property and casualty insurance subsidiaries related to
the commutation of a medical malpractice reinsurance agreement.
(b) Underwriting income has been increased by tax benefits of $6.4 million or
$.04 per share in 1992, $7.2 million or $.04 per share in 1991, $10.8
million or $.06 per share in 1990, and $19.2 million or $.11 per share in
1989 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) Underwriting income has been reduced by a net charge of $357.5 million or
$1.96 per share for the after-tax effects of a $675.0 million increase in
unpaid claims related to an agreement for the settlement of asbestos-related
litigation and the $125.0 million return premium related to the commutation
of a medical malpractice reinsurance agreement.
(d) Underwriting income has been increased by the one-time benefit of a $14.0
million 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) Property and casualty insurance income has been reduced by a net charge of
$26.0 million or $.15 per share for the after-tax effect of a $40.0 million
restructuring charge.
(f) Real estate income has been reduced by a net charge of $160.0 million or
$.89 per share for the after-tax effect of a $255.0 million write-down of
the carrying value of certain real estate assets to their estimated fair
value.
(g) Net income has been reduced by a one-time charge of $20.0 million 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
$344.2 million or $1.94 per share.
39
<PAGE> 5
The Chubb Corporation
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
IN MILLIONS
YEARS ENDED DECEMBER 31
1998 1997 1996
REVENUES -------- -------- --------
<S> <C> <C> <C>
Premiums Earned (Note 13).............................. $5,303.8 $5,157.4 $4,569.3
Investment Income (Note 4)............................. 821.9 785.3 711.6
Real Estate............................................ 82.2 616.1 319.8
Realized Investment Gains (Note 4)..................... 141.9 105.2 79.8
-------- -------- --------
TOTAL REVENUES.................................... 6,349.8 6,664.0 5,680.5
-------- -------- --------
CLAIMS AND EXPENSES
Insurance Claims (Notes 13 and 15)..................... 3,493.7 3,307.0 3,010.8
Amortization of Deferred Policy Acquisition Costs (Note
6).................................................... 1,464.3 1,402.6 1,238.0
Other Insurance Operating Costs and Expenses........... 369.8 330.8 290.2
Real Estate Cost of Sales and Expenses (Note 5)........ 85.7 624.7 555.7
Investment Expenses.................................... 13.2 12.0 12.3
Corporate Expenses..................................... 33.4 12.8 26.6
Restructuring Charge (Note 12)......................... 40.0 -- --
-------- -------- --------
TOTAL CLAIMS AND EXPENSES......................... 5,500.1 5,689.9 5,133.6
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE FEDERAL
AND FOREIGN INCOME TAX.......................... 849.7 974.1 546.9
FEDERAL AND FOREIGN INCOME TAX (NOTE 9)..................... 142.7 204.6 60.7
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS................. 707.0 769.5 486.2
DISCONTINUED OPERATIONS, NET OF TAX (NOTE 3)
Income from Operations................................. -- -- 48.5
Loss on Disposal....................................... -- -- (22.0)
-------- -------- --------
INCOME FROM DISCONTINUED OPERATIONS............... -- -- 26.5
-------- -------- --------
NET INCOME........................................ $ 707.0 $ 769.5 $ 512.7
======== ======== ========
BASIC EARNINGS PER SHARE (NOTE 17)
Income from Continuing Operations...................... $ 4.27 $ 4.48 $ 2.79
Income from Discontinued Operations.................... -- -- .15
-------- -------- --------
Net Income........................................ $ 4.27 $ 4.48 $ 2.94
======== ======== ========
DILUTED EARNINGS PER SHARE (NOTE 17)
Income from Continuing Operations...................... $ 4.19 $ 4.39 $ 2.73
Income from Discontinued Operations.................... -- -- .15
-------- -------- --------
Net Income........................................ $ 4.19 $ 4.39 $ 2.88
======== ======== ========
</TABLE>
See accompanying notes.
40
<PAGE> 6
The Chubb Corporation
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
IN MILLIONS
DECEMBER 31
1998 1997
ASSETS --------- ---------
<S> <C> <C>
Invested Assets (Note 4)
Short Term Investments................................. $ 344.2 $ 725.1
Fixed Maturities
Held-to-Maturity -- Tax Exempt (market $2,140.2 and
$2,347.2)........................................... 2,002.2 2,200.6
Available-for-Sale
Tax Exempt (cost $6,509.3 and $5,408.4)........... 6,935.1 5,766.9
Taxable (cost $4,259.0 and $4,366.0).............. 4,381.6 4,485.9
Equity Securities (cost $1,002.6 and $733.9)........... 1,092.2 871.1
--------- ---------
TOTAL INVESTED ASSETS................................ 14,755.3 14,049.6
Cash...................................................... 8.3 11.5
Accrued Investment Income................................. 221.0 203.8
Premiums Receivable....................................... 1,199.3 1,144.4
Reinsurance Recoverable on Unpaid Claims.................. 1,306.6 1,207.9
Prepaid Reinsurance Premiums.............................. 134.6 115.2
Funds Held for Asbestos-Related Settlement (Note 15)...... 607.4 599.5
Deferred Policy Acquisition Costs (Note 6)................ 728.7 676.9
Real Estate Assets (Notes 5 and 8)........................ 746.0 790.0
Deferred Income Tax (Note 9).............................. 320.8 317.0
Other Assets.............................................. 718.0 499.8
--------- ---------
TOTAL ASSETS......................................... $20,746.0 $19,615.6
========= =========
LIABILITIES
Unpaid Claims (Note 15)................................... $10,356.5 $ 9,772.5
Unearned Premiums......................................... 2,915.7 2,696.6
Long Term Debt (Note 8)................................... 607.5 398.6
Dividend Payable to Shareholders.......................... 50.3 49.0
Accrued Expenses and Other Liabilities.................... 1,171.9 1,041.8
--------- ---------
TOTAL LIABILITIES.................................... 15,101.9 13,958.5
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 14, 15 AND 21)
SHAREHOLDERS' EQUITY (NOTES 10 AND 20)
Preferred Stock -- Authorized 4,000,000 Shares;
$1 Par Value; Issued -- None........................... -- --
Common Stock -- Authorized 600,000,000 Shares;
$1 Par Value; Issued 175,989,202 and 176,037,850
Shares................................................. 176.0 176.0
Paid-In Surplus........................................... 546.7 593.0
Retained Earnings......................................... 5,604.0 5,101.7
Accumulated Other Comprehensive Income
Unrealized Appreciation of Investments, Net of Tax
(Note 4).............................................. 414.7 400.1
Foreign Currency Translation Losses, Net of Tax........ (36.0) (25.7)
Receivable from Employee Stock Ownership Plan............. (86.3) (96.7)
Treasury Stock, at Cost -- 13,722,376 and 7,320,410
Shares................................................. (975.0) (491.3)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY........................... 5,644.1 5,657.1
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $20,746.0 $19,615.6
========= =========
</TABLE>
See accompanying notes.
41
<PAGE> 7
The Chubb Corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
IN MILLIONS
YEARS ENDED DECEMBER 31
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
PREFERRED STOCK
Balance, Beginning and End of Year..................... $ -- $ -- $ --
-------- -------- --------
COMMON STOCK
Balance, Beginning of Year............................. 176.0 176.1 87.8
Two-for-One Stock Split................................ -- -- 87.8
Shares Issued upon Exchange of Long Term Debt.......... -- -- .5
Share Activity under Option and Incentive Plans........ -- (.1) --
-------- -------- --------
Balance, End of Year.............................. 176.0 176.0 176.1
-------- -------- --------
PAID-IN SURPLUS
Balance, Beginning of Year............................. 593.0 695.7 778.2
Two-for-One Stock Split................................ -- -- (87.8)
Exchange of Long Term Debt............................. -- (68.4) 20.8
Share Activity under Option and Incentive Plans........ (46.3) (34.3) (15.5)
-------- -------- --------
Balance, End of Year.............................. 546.7 593.0 695.7
-------- -------- --------
RETAINED EARNINGS
Balance, Beginning of Year............................. 5,101.7 4,530.5 4,206.5
Net Income............................................. 707.0 769.5 512.7
Dividends Declared (per share $1.24, $1.16 and
$1.08)............................................... (204.7) (198.3) (188.7)
-------- -------- --------
Balance, End of Year.............................. 5,604.0 5,101.7 4,530.5
-------- -------- --------
UNREALIZED APPRECIATION OF INVESTMENTS
Balance, Beginning of Year............................. 400.1 238.7 345.9
Change During Year, Net (Note 4)....................... 14.6 161.4 (107.2)
-------- -------- --------
Balance, End of Year.............................. 414.7 400.1 238.7
-------- -------- --------
FOREIGN CURRENCY TRANSLATION LOSSES
Balance, Beginning of Year............................. (25.7) (15.6) (3.4)
Change During Year, Net of Tax......................... (10.3) (10.1) (12.2)
-------- -------- --------
Balance, End of Year.............................. (36.0) (25.7) (15.6)
-------- -------- --------
RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN
Balance, Beginning of Year............................. (96.7) (106.3) (115.0)
Principal Repayments................................... 10.4 9.6 8.7
-------- -------- --------
Balance, End of Year.............................. (86.3) (96.7) (106.3)
-------- -------- --------
TREASURY STOCK, AT COST
Balance, Beginning of Year............................. (491.3) (56.2) (37.3)
Repurchase of Shares................................... (608.5) (827.9) (82.5)
Shares Issued upon Exchange of Long Term Debt.......... -- 304.4 --
Share Activity under Option and Incentive Plans........ 124.8 88.4 63.6
-------- -------- --------
Balance, End of Year.............................. (975.0) (491.3) (56.2)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY........................ $5,644.1 $5,657.1 $5,462.9
======== ======== ========
</TABLE>
See accompanying notes.
42
<PAGE> 8
The Chubb Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
IN MILLIONS
YEARS ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................ $ 707.0 $ 769.5 $ 512.7
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Claims, Net......................... 485.3 808.7 141.4
Increase in Unearned Premiums, Net..................... 199.7 290.6 204.5
Increase in Premiums Receivable........................ (54.9) (159.5) (124.5)
Change in Funds Held for Asbestos-Related Settlement... (7.9) .4 438.2
Decrease in Medical Reinsurance Related Receivable..... -- -- 191.2
Increase in Deferred Policy Acquisition Costs.......... (51.8) (75.7) (42.5)
Deferred Income Tax Credit............................. (5.5) (33.3) (117.6)
Write-down of Real Estate Assets....................... -- -- 255.0
Depreciation........................................... 58.2 56.4 59.0
Realized Investment Gains.............................. (141.9) (105.2) (79.8)
Income from Discontinued Operations, Net............... -- -- (26.5)
Other, Net............................................. 25.8 13.2 188.2
--------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES......................................... 1,214.0 1,565.1 1,599.3
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturities -- Available-for-
Sale..................................................... 1,668.8 3,682.6 3,430.5
Proceeds from Maturities of Fixed Maturities.............. 784.2 658.5 762.9
Proceeds from Sales of Equity Securities.................. 366.7 401.3 383.0
Proceeds from Sale of Discontinued Operations, Net........ -- 861.2 --
Purchases of Fixed Maturities............................. (3,218.4) (5,394.8) (5,520.5)
Purchases of Equity Securities............................ (535.7) (519.3) (395.2)
Decrease (Increase) in Short Term Investments, Net........ 380.9 (449.2) 153.4
Proceeds from Sale of Real Estate Properties.............. 33.6 759.6 17.4
Additions to Real Estate Assets........................... (13.2) (40.1) (94.3)
Purchases of Fixed Assets, Net............................ (78.8) (71.0) (58.7)
Other, Net................................................ (75.5) 41.1 (53.2)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES................ (687.4) (70.1) (1,374.7)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Long Term Debt.................. 400.5 10.2 86.0
Repayment of Long Term Debt............................... (191.6) (344.9) (145.6)
Increase (Decrease) in Short Term Debt, Net............... -- (189.5) 37.8
Dividends Paid to Shareholders............................ (203.4) (196.5) (184.2)
Repurchase of Shares...................................... (608.5) (827.9) (82.5)
Other, Net................................................ 73.2 60.4 56.7
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES................ (529.8) (1,488.2) (231.8)
--------- --------- ---------
Net Increase (Decrease) in Cash............................. (3.2) 6.8 (7.2)
Cash at Beginning of Year................................... 11.5 4.7 11.9
--------- --------- ---------
CASH AT END OF YEAR.................................. $ 8.3 $ 11.5 $ 4.7
========= ========= =========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net Income.................................................. $ 707.0 $ 769.5 $ 512.7
Other Comprehensive Income (Loss)
Change in Unrealized Appreciation of Investments,
Net of Tax............................................. 14.6 161.4 (107.2)
Change in Foreign Currency Translation Losses,
Net of Tax............................................. (10.3) (10.1) (12.2)
--------- --------- ---------
4.3 151.3 (119.4)
--------- --------- ---------
COMPREHENSIVE INCOME................................. $ 711.3 $ 920.8 $ 393.3
========= ========= =========
</TABLE>
See accompanying notes.
43
<PAGE> 9
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include the
accounts of The Chubb Corporation (Corporation) and its subsidiaries.
Significant intercompany transactions have been eliminated in consolidation.
The consolidated financial statements reflect estimates and judgments made by
management for those transactions that are not yet complete or for which the
ultimate effects cannot be precisely determined. Such estimates and judgments
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
the property and casualty insurance business. The property and casualty
insurance subsidiaries underwrite most forms of property and casualty insurance
in the United States, Canada, Europe and parts of Australia, Latin America 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.
On May 13, 1997, the Corporation completed the sale of its life and health
insurance subsidiaries. The life and health insurance subsidiaries have been
classified as discontinued operations (see Note (3)). All footnote disclosures
reflect continuing operations only, unless otherwise noted.
Certain amounts in the consolidated financial statements for prior years have
been reclassified to conform with the 1998 presentation.
(b) Investments
Short term investments, which have an original maturity of one year or less,
are carried at amortized cost.
Fixed maturities, which include bonds and redeemable preferred stocks, are
purchased to support the investment strategies of the Corporation and its
insurance subsidiaries. These strategies are developed based on many factors
including rate of return, maturity, credit risk, tax considerations and
regulatory requirements. 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. 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.
Premiums and discounts arising from the purchase of mortgage-backed securities
are amortized using the interest method over the estimated remaining term of the
securities, adjusted for anticipated prepayments.
Equity securities, which include common stocks and non-redeemable preferred
stocks, are carried at market value as of the balance sheet date.
Unrealized appreciation or depreciation of investments carried at market value
is excluded from net income and credited or charged, net of applicable deferred
income tax, directly to other comprehensive income, which is a component of
shareholders' equity.
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 net income.
(c) Premium Revenues and Related Expenses
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 are deferred by major product groups and amortized over the
period in which the related premiums are earned. Such costs include commissions,
premium taxes and other costs that vary with and are primarily related to the
production of business. 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 as well as 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. Reinsurance is ceded to provide greater
diversification of business and to limit the maximum net loss potential arising
from large or concentrated 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 primary obligation to
the policyholders.
44
<PAGE> 10
Prepaid reinsurance premiums represent the portion of insurance premiums ceded
to reinsurers applicable to the unexpired terms of the reinsurance contracts in
force.
Commissions received related to reinsurance premiums ceded are considered in
determining net acquisition costs eligible for deferral.
Reinsurance recoverable on unpaid claims 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 (15)).
(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.
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 any such property, an impairment loss is recognized resulting
in a write-down of the carrying value of the property. Measurement of such
impairment is based on the fair value of the property.
Depreciation of real estate properties is calculated using the straight-line
method over the estimated useful lives of the properties.
Real estate mortgages and notes receivable are carried at unpaid principal
balances less an allowance for uncollectible amounts. 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 recognize any such impairment.
Measurement of impairment is based on 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 measurement 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 net 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 foreign operations is generally the currency of the
local operating environment since their business is primarily transacted in such
local currency. Translation gains and losses, net of applicable income tax, are
excluded from net income and are credited or charged directly to other
comprehensive income, which is a component of shareholders' equity.
45
<PAGE> 11
(l) 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 1997 and 1996, $228.6 million and $20.7 million of exchangeable
subordinated notes were exchanged for 5,316,565 shares and 480,464 shares,
respectively, of common stock of the Corporation. In 1997, $108.6 million of
long term debt was assumed by a joint venture as a part of the sale of real
estate properties. These noncash transactions have been excluded from the
consolidated statements of cash flows.
(m) Accounting Pronouncements Not Yet Adopted
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 requires that all derivatives be recognized as assets or liabilities and
be measured at fair value. The accounting for changes in the fair value of the
derivative depends on the intended use of the derivative. SFAS No. 133 is
effective for the Corporation on January 1, 2000. This Statement should not be
applied retroactively to financial statements of prior periods. Currently, the
Corporation's use of derivative instruments is not significant. Thus, the
adoption of SFAS No. 133 is not expected to have a significant effect on the
Corporation's financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This SOP requires that certain
costs incurred to develop or obtain computer software for internal use should be
capitalized and amortized over the software's expected useful life. Currently,
the Corporation expenses all development costs of internal use computer
software. SOP 98-1 is effective for the Corporation on January 1, 1999 and is to
be applied prospectively. The adoption of SOP 98-1 will increase the
Corporation's net income in 1999 by an amount that has not yet been quantified.
The effect on net income will decrease in future years as the new method of
accounting is phased in.
(2) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Corporation adopted SFAS No. 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, as amended by SFAS No. 127, Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125. SFAS No. 125 provides new
accounting and reporting standards for transfers of financial assets and
extinguishments of liabilities. The Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. Transactions covered by this Statement include
securitizations, repurchase agreements and securities lending. The Corporation
currently engages in securities lending. The Statement has been applied
prospectively. Adoption of SFAS No. 125 did not have a significant impact on the
Corporation's financial position or results of operations.
Effective January 1, 1998, the Corporation adopted SOP 97-3, Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments, which was
issued by the AICPA. The SOP provides guidance for determining when a liability
for guaranty fund and other insurance-related assessments should be recognized
and how such liability should be measured. The SOP requires that a liability be
recognized for insurance-related assessments when an assessment has been imposed
or it is probable that an assessment will be imposed, the event obligating an
entity to pay the imposed or probable assessment has occurred and the amount of
the assessment can be reasonably estimated. Restatement of prior years'
financial statements is not permitted. Since the Corporation's previous
accounting policy for insurance-related assessments was consistent with the
requirements of SOP 97-3, the adoption of SOP 97-3 did not have any impact on
the Corporation's financial position or results of operations.
(3) DISCONTINUED OPERATIONS
On May 13, 1997, the Corporation completed the sale of Chubb Life Insurance
Company of America and its subsidiaries to Jefferson-Pilot Corporation for
$875.0 million in cash, subject to various closing adjustments, none of which
were material.
In 1996, the Corporation recognized a loss of $22.0 million related to the
sale of the life and health insurance subsidiaries. The purchase price was not
adjusted to reflect results of operations subsequent to December 31, 1996.
Therefore, the discontinued life and health insurance operations did not affect
the Corporation's net income in 1997 and 1998 and will not affect net income in
future periods.
The results of the discontinued operations for the year ended December 31,
1996 were as follows:
<TABLE>
<CAPTION>
(in millions)
<S> <C>
Total revenues................................. $816.8
Total benefits, claims and expenses............ 743.9
------
Income before federal income tax............. 72.9
Federal income tax............................. 24.4
------
Income from operations....................... $ 48.5
======
</TABLE>
46
<PAGE> 12
(4) INVESTED ASSETS AND RELATED INCOME
(a) The amortized cost and estimated market value of fixed maturities were as
follows:
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------------
1998 1997
--------------------------------------------------- ------------------------
Gross Gross Estimated Gross
Amortized Unrealized Unrealized Market Amortized Unrealized
Cost Appreciation Depreciation Value Cost Appreciation
--------- ------------ ------------ --------- --------- ------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity -- Tax exempt....... $ 2,002.2 $138.0 $-- $ 2,140.2 $ 2,200.6 $146.7
--------- ------ ----- --------- --------- ------
Available-for-sale
Tax exempt......................... 6,509.3 427.9 2.1 6,935.1 5,408.4 358.6
--------- ------ ----- --------- --------- ------
Taxable
U.S. Government and government
agency and authority
obligations.................... 344.2 8.8 -- 353.0 594.3 9.9
Corporate bonds.................. 1,031.9 44.5 .6 1,075.8 819.9 27.0
Foreign bonds.................... 1,118.3 85.4 1.6 1,202.1 1,022.5 46.3
Mortgage-backed securities....... 1,694.3 22.1 38.9 1,677.5 1,778.2 35.8
Redeemable preferred stocks...... 70.3 2.9 -- 73.2 151.1 8.4
--------- ------ ----- --------- --------- ------
4,259.0 163.7 41.1 4,381.6 4,366.0 127.4
--------- ------ ----- --------- --------- ------
Total available-for-sale....... 10,768.3 591.6 43.2 11,316.7 9,774.4 486.0
--------- ------ ----- --------- --------- ------
Total fixed maturities......... $12,770.5 $729.6 $43.2 $13,456.9 $11,975.0 $632.7
========= ====== ===== ========= ========= ======
<CAPTION>
December 31
------------------------
1997
------------------------
Gross Estimated
Unrealized Market
Depreciation Value
------------ ---------
(in millions)
<S> <C> <C>
Held-to-maturity -- Tax exempt....... $ .1 $ 2,347.2
---- ---------
Available-for-sale
Tax exempt......................... .1 5,766.9
---- ---------
Taxable
U.S. Government and government
agency and authority
obligations.................... .1 604.1
Corporate bonds.................. 2.4 844.5
Foreign bonds.................... 2.4 1,066.4
Mortgage-backed securities....... 2.6 1,811.4
Redeemable preferred stocks...... -- 159.5
---- ---------
7.5 4,485.9
---- ---------
Total available-for-sale....... 7.6 10,252.8
---- ---------
Total fixed maturities......... $7.7 $12,600.0
==== =========
</TABLE>
The amortized cost and estimated market value of fixed maturities at December
31, 1998 by contractual maturity were as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
--------- ---------
(in millions)
<S> <C> <C>
Held-to-maturity
Due in one year or less.................................. $ 122.5 $ 124.4
Due after one year through five years.................... 612.4 644.4
Due after five years through ten years................... 851.6 918.5
Due after ten years...................................... 415.7 452.9
-------- --------
$2,002.2 $2,140.2
======== ========
</TABLE>
<TABLE>
<S> <C> <C>
Available-for-sale
Due in one year or less.................................. $ 248.7 $ 250.9
Due after one year through five years.................... 1,216.0 1,272.5
Due after five years through ten years................... 3,223.3 3,461.6
Due after ten years...................................... 4,386.0 4,654.2
--------- ---------
9,074.0 9,639.2
Mortgage-backed securities............................... 1,694.3 1,677.5
--------- ---------
$10,768.3 $11,316.7
========= =========
</TABLE>
Actual maturities could differ from contractual maturities because borrowers may
have the right to call or prepay obligations.
(b) The components of unrealized appreciation of investments carried at market
value were as follows:
<TABLE>
<CAPTION>
December 31
-------------------
1998 1997
---- ----
(in millions)
<S> <C> <C>
Equity securities
Gross unrealized appreciation........................... $164.6 $160.6
Gross unrealized depreciation........................... 75.0 23.4
------ ------
89.6 137.2
------ ------
Fixed maturities
Gross unrealized appreciation........................... 591.6 486.0
Gross unrealized depreciation........................... 43.2 7.6
------ ------
548.4 478.4
------ ------
638.0 615.6
Deferred income tax liability............................. 223.3 215.5
------ ------
$414.7 $400.1
====== ======
</TABLE>
47
<PAGE> 13
The change in unrealized appreciation of investments carried at market value
was as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Continuing operations
Change in unrealized appreciation
of equity securities............. $(47.6) $ 31.4 $ 17.3
Change in unrealized appreciation
of fixed maturities.............. 70.0 216.9 (119.6)
------ ------ -------
22.4 248.3 (102.3)
Deferred income tax (credit)....... 7.8 86.9 (35.8)
------ ------ -------
Change in unrealized
appreciation..................... 14.6 161.4 (66.5)
Discontinued operations, net........ -- -- (40.7)
------ ------ -------
$ 14.6 $161.4 $(107.2)
====== ====== =======
</TABLE>
The unrealized appreciation 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 $8.6 million, an increase of $16.8 million and a decrease of $48.2
million for the years ended December 31, 1998, 1997 and 1996, respectively.
(c) The sources of net investment income were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Fixed maturities..................... $761.1 $726.1 $669.7
Equity securities.................... 24.7 10.8 10.0
Short term investments............... 35.8 47.6 23.9
Other................................ .3 .8 8.0
------ ------ ------
Gross investment income............. 821.9 785.3 711.6
Investment expenses.................. 13.2 12.0 12.3
------ ------ ------
$808.7 $773.3 $699.3
====== ====== ======
</TABLE>
(d) Realized investment gains and losses were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Gross realized investment gains
Fixed maturities.................... $ 49.2 $ 56.3 $ 56.4
Equity securities................... 118.5 93.8 75.5
------ ------ ------
167.7 150.1 131.9
------ ------ ------
Gross realized investment losses
Fixed maturities.................... 7.0 26.5 45.7
Equity securities................... 18.8 18.4 6.4
------ ------ ------
25.8 44.9 52.1
------ ------ ------
Realized investment gains............ 141.9 105.2 79.8
Income tax........................... 49.7 36.8 27.8
------ ------ ------
$ 92.2 $ 68.4 $ 52.0
====== ====== ======
</TABLE>
(e) The Corporation engages in securities lending whereby certain securities
from its portfolio are loaned to other institutions for short periods of time.
Cash collateral from the borrower, equal to the market value of the loaned
securities plus accrued interest, is deposited with a lending agent and retained
and invested by the lending agent to generate additional income for the
Corporation. At December 31, 1998 and 1997, the Corporation had no securities
loaned to other institutions. Securities lending activity in 1998 was
insignificant. The maximum amount of loaned securities outstanding during 1997
was approximately $230 million.
(5) REAL ESTATE
In October 1996, the Corporation announced that its real estate subsidiary was
exploring the possible sale of all or a significant portion of its assets. In
March 1997, the real estate subsidiary entered into an agreement with a
prospective purchaser to perform due diligence in anticipation of executing a
contract for the sale of substantially all of its commercial properties. Because
the plan to pursue the sale of these assets in the near term represented a
significant change in circumstances relating to the manner in which these assets
would be used, the recoverability of their carrying value as of December 31,
1996 was reassessed. As a result, an impairment loss of $255.0 million was
recognized in 1996 to reduce the carrying value of these assets to their
estimated fair value. This charge was included in real estate cost of sales and
expenses in the consolidated statements of income.
In June 1997, a definitive agreement was reached with the purchaser. In
November 1997, the sale of almost all of the properties covered by the agreement
reached in June was closed for $736.9 million, which included $628.3 million in
cash and the assumption of $108.6 million in debt. Closing on the one remaining
property under the agreement is expected to occur in 1999. The real estate
subsidiary is continuing to explore the sale of certain of its remaining
properties.
The components of real estate assets were as follows:
<TABLE>
<CAPTION>
December 31
-------------------
1998 1997
---- ----
(in millions)
<S> <C> <C>
Mortgages and notes receivable (net of allowance
for uncollectible amounts of $16.8 and $24.0)..... $105.2 $123.8
Income producing properties........................ 166.5 163.8
Construction in progress........................... 109.2 95.8
Land under development and unimproved land......... 365.1 406.6
------ ------
$746.0 $790.0
====== ======
</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 estimated aggregate fair value of $106.9 million and
$121.0 million at December 31, 1998 and 1997, 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 $2.9 million,
$2.7 million and $11.0 million for 1998, 1997 and 1996, respectively.
48
<PAGE> 14
(6) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs deferred and the related amortization charged against
income were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Balance, beginning of year.... $ 676.9 $ 601.2 $ 558.7
--------- --------- ---------
Costs deferred during year
Commissions and brokerage... 768.0 775.0 653.5
Premium taxes and
assessments............... 128.5 124.9 114.7
Salaries and overhead....... 619.6 578.4 512.3
--------- --------- ---------
1,516.1 1,478.3 1,280.5
Amortization during year...... (1,464.3) (1,402.6) (1,238.0)
--------- --------- ---------
Balance, end of year.......... $ 728.7 $ 676.9 $ 601.2
========= ========= =========
</TABLE>
(7) PROPERTY AND EQUIPMENT
Property and equipment included in other assets were as follows:
<TABLE>
<CAPTION>
December 31
-------------------
1998 1997
---- ----
(in millions)
<S> <C> <C>
Cost.......................................... $428.3 $391.7
Accumulated depreciation...................... 196.3 178.2
------ ------
$232.0 $213.5
====== ======
</TABLE>
Depreciation expense related to property and equipment was $55.3 million,
$53.7 million and $48.0 million for 1998, 1997 and 1996, respectively.
(8) DEBT AND CREDIT ARRANGEMENTS
(a) Long term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
-------------------------------------
1998 1997
----------------- -----------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(in millions)
<S> <C> <C> <C> <C>
Term loan.................. $ 28.5 $ 28.5 $ 40.1 $ 40.3
Mortgages.................. 49.0 48.9 48.5 47.3
8 3/4% notes............... 30.0 30.8 60.0 62.7
6.15% notes................ 300.0 312.8 -- --
6.60% debentures........... 100.0 108.1 -- --
6 7/8% notes............... 100.0 106.1 100.0 102.5
6% notes................... -- -- 150.0 150.0
------ ------ ------ ------
$607.5 $635.2 $398.6 $402.8
====== ====== ====== ======
</TABLE>
The term loan and mortgages are obligations of the real estate subsidiaries.
The term loan matures in 2000. The term loan is 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, 1998, the interest rate on the term loan approximated 7 1/2% and
for the mortgages payable the range of interest rates was 6% to 12%. The term
loan and mortgages payable are secured by real estate assets with a net book
value of $192.3 million at December 31, 1998.
In August 1998, the Corporation sold $300.0 million of unsecured 6.15% notes
due August 15, 2005 and $100.0 million of unsecured 6.60% debentures due August
15, 2018, the aggregate net proceeds from which were $397.0 million.
The Corporation also has outstanding $30.0 million of unsecured 8 3/4% notes
due November 15, 1999.
Chubb Capital Corporation has outstanding $100.0 million of 6 7/8% notes due
February 1, 2003. These notes are unsecured and are guaranteed by the
Corporation.
The Corporation filed a shelf registration statement which the Securities and
Exchange Commission declared effective in September 1998, under which up to
$600.0 million of various types of securities may be issued by the Corporation
or Chubb Capital. No securities have been issued under this registration
statement.
The amounts of long term debt due annually during the five years subsequent to
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Years Ending Term Loan
December 31 and Mortgages Notes Total
------------ ------------- ----- -----
(in millions)
<S> <C> <C> <C>
1999.................. $44.1 $ 30.0 $ 74.1
2000.................. 28.8 -- 28.8
2001.................. .3 -- .3
2002.................. .4 -- .4
2003.................. .4 100.0 100.4
</TABLE>
(b) Interest costs of $28.9 million, $72.4 million and $89.5 million were
incurred in 1998, 1997 and 1996, respectively, of which $8.7 million and $12.8
million were capitalized in 1997 and 1996, respectively. Interest paid, net of
amounts capitalized, was $23.4 million, $60.4 million and $77.7 million in 1998,
1997 and 1996, respectively.
(c) In July 1997, the Corporation entered into two credit agreements with a
group of banks that provide for unsecured borrowings of up to $500.0 million in
the aggregate. The $200.0 million short term revolving credit facility, which
terminated on July 10, 1998, was extended to July 7, 1999, and may be renewed or
replaced. The $300.0 million medium term revolving credit facility terminates on
July 11, 2002. On the respective termination dates for these agreements, any
loans then outstanding become payable. There have been no borrowings under these
agreements. Various interest rate options are available to the Corporation, all
of which are based on market rates. The Corporation pays a fee to have these
credit facilities available. Unused credit facilities are available for general
corporate purposes and to support Chubb Capital's commercial paper borrowing
arrangement.
49
<PAGE> 15
(9) FEDERAL AND FOREIGN INCOME TAX
(a) Income tax expense consisted of the following components:
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Current tax
United States............................................. $124.7 $194.4 $ 152.1
Foreign................................................... 23.5 43.5 26.2
Deferred tax credit, principally United States.............. (5.5) (33.3) (117.6)
------ ------ -------
$142.7 $204.6 $ 60.7
====== ====== =======
</TABLE>
Federal and foreign income taxes paid were $177.9 million, $253.5 million
and $163.3 million in 1998, 1997 and 1996, respectively.
(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
---------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
% of % of % of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
------ ------- ------ ------- ------ -------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations before federal and
foreign income tax...................................... $849.7 $974.1 $546.9
======= ======= =======
Tax at statutory federal income tax rate.................. $297.3 35.0% $340.9 35.0% $191.4 35.0%
Tax exempt interest income................................ (137.5) (16.2) (126.4) (13.0) (119.0) (21.8)
Other, net................................................ (17.1) (2.0) (9.9) (1.0) (11.7) (2.1)
------- ----- ------- ----- ------- -----
Actual tax.......................................... $142.7 16.8% $204.6 21.0% $ 60.7 11.1%
======= ===== ======= ===== ======= =====
</TABLE>
(c) The tax effects of temporary differences that gave rise to deferred
income tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31
--------------------
1998 1997
---- ----
(in millions)
<S> <C> <C>
Deferred income tax assets
Unpaid claims............................................. $541.7 $572.6
Unearned premiums......................................... 172.7 160.8
Postretirement benefits................................... 73.1 62.9
Other, net................................................ 60.9 27.9
------ ------
Total................................................... 848.4 824.2
------ ------
Deferred income tax liabilities
Deferred policy acquisition costs......................... 225.0 210.4
Real estate assets........................................ 79.3 81.3
Unrealized appreciation of investments.................... 223.3 215.5
------ ------
Total................................................... 527.6 507.2
------ ------
Net deferred income tax asset......................... $320.8 $317.0
====== ======
</TABLE>
50
<PAGE> 16
(10) STOCK-BASED COMPENSATION PLANS
(a) 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
14,000,000. At December 31, 1998, 10,023,108 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>
1998 1997 1996
----------------------------- ----------------------------- ----------------------------
Number Weighted Average Number Weighted Average Number Weighted Average
of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price
--------- ---------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year....... 9,124,803 $47.67 8,058,829 $41.48 6,565,034 $37.59
Granted.............................. 2,168,804 78.75 2,753,007 61.05 2,504,048 48.82
Exercised............................ (1,320,504) 41.78 (1,486,812) 38.39 (782,403) 31.77
Forfeited............................ (208,013) 75.25 (200,221) 51.69 (227,850) 43.26
---------- ---------- ---------
Outstanding, end of year............. 9,765,090 54.78 9,124,803 47.67 8,058,829 41.48
========== ========== =========
Exercisable, end of year............. 6,879,061 47.26 5,932,905 42.54 4,852,845 38.10
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------------------------------------
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>
$17.50 - $41.81.................... 3,373,550 $39.14 4.8 3,373,550 $39.14
$42.13 - $87.34.................... 6,391,540 63.06 7.8 3,505,511 55.07
--------- ---------
9,765,090 54.78 6.8 6,879,061 47.26
========= =========
</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 measurement 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 (including continuing and discontinued operations) with
respect to performance share and restricted stock awards was $14.4 million in
1998 and 1997 and $10.2 million in 1996.
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 at the
grant date would be charged against income on a straight-line basis over the
vesting period.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- -------- -------- -------- -------- --------
(in millions except for per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Net income.......................... $707.0 $679.6 $769.5 $746.3 $512.7 $496.6
Diluted earnings per share.......... 4.19 4.03 4.39 4.26 2.88 2.79
</TABLE>
51
<PAGE> 17
The weighted average fair value of options granted under the Long-Term Stock
Incentive Plans during 1998, 1997 and 1996 was $19.08, $13.83 and $11.04,
respectively. The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions. The risk-free interest rates for 1998, 1997 and 1996 were
5.5%, 6.5% and 5.9%, respectively. The expected volatility of the market price
of the Corporation's common stock for 1998, 1997 and 1996 grants was 16.4%,
16.3% and 18.3%, respectively. The expected average term of the granted options
was 5 years for 1998 and 1997 and 5 1/2 years for 1996. The dividend yield was
1.6% for 1998, 1.9% for 1997 and 2.1% for 1996.
(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 $150.0 million 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 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
1998, 1997 and 1996, cash contributions to the ESOP of $11.0 million, $12.2
million and $12.7 million, respectively, were charged against income (including
continuing and discontinued operations). Dividends on shares of common stock in
the ESOP used for debt service were $7.8 million, $6.2 million and $4.6 million
in 1998, 1997 and 1996, respectively.
The number of allocated and unallocated shares held by the ESOP at December
31, 1998 were 2,947,830 and 3,116,884, respectively. All such shares are
considered outstanding for the computation of earnings per share.
(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. At December 31, 1998, there were no subscribed shares.
(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 (including continuing and discontinued
operations) were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Service cost of current
period...................... $ 18.8 $ 19.9 $ 20.6
Interest cost on projected
benefit obligation.......... 34.5 30.3 26.0
Expected return on plan
assets...................... (40.3) (35.1) (25.6)
Other gains................... (2.5) (2.0) (6.0)
------ ------ ------
Net pension cost.......... $ 10.5 $ 13.1 $ 15.0
====== ====== ======
</TABLE>
In 1998, an expense of $29.0 million related to enhanced pension benefits
provided to employees who accepted an early retirement incentive offer was
included as part of a restructuring charge (see Note (12)).
The following table sets forth the plans' funded status and amounts recognized
in the balance sheets:
<TABLE>
<CAPTION>
December 31
-------------------
1998 1997
---- ----
(in millions)
<S> <C> <C>
Actuarial present value of projected
benefit obligation for service rendered
to date.................................. $518.7 $435.0
Plan assets at fair value.................. 552.9 487.8
------ ------
Plan assets in excess of projected benefit
obligation............................... (34.2) (52.8)
Unrecognized net gain from past experience
different from that assumed.............. 127.3 120.7
Unrecognized prior service costs........... (7.5) (8.8)
Unrecognized net asset at January 1, 1985,
being recognized principally over 19
years.................................... 4.9 6.4
------ ------
Pension liability included in other
liabilities............................ $ 90.5 $ 65.5
====== ======
</TABLE>
52
<PAGE> 18
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation at December 31, 1998 and 1997 was
7 1/4% and 7 1/2%, respectively, and the rate of increase in future compensation
levels was 4 1/2% for 1998 and 5% for 1997. The expected long term rate of
return on assets was 9% for both years. Plan assets are principally invested in
publicly traded stocks and bonds.
(b) The Corporation and its subsidiaries provide certain other postretirement
benefits, principally health care and life insurance, to retired employees and
their beneficiaries and covered dependents. Substantially all employees may
become eligible for these benefits upon retirement if they meet minimum age and
years of service requirements. The expected cost of these benefits is accrued
during the years that the employees render the necessary service.
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 (including continuing and
discontinued operations) were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Service cost of current period.... $ 4.2 $ 4.9 $ 6.0
Interest cost on accumulated
benefit obligation.............. 8.2 8.8 8.6
Net amortization and deferral..... (1.3) (.7) --
----- ----- -----
Net postretirement benefit
cost.......................... $11.1 $13.0 $14.6
===== ===== =====
</TABLE>
The components of the accumulated postretirement benefit obligation were as
follows:
<TABLE>
<CAPTION>
December 31
-------------------
1998 1997
---- ----
(in millions)
<S> <C> <C>
Accumulated postretirement benefit
obligation................................ $123.1 $125.8
Unrecognized net gain from past experience
different from that assumed............... 27.1 18.1
------ ------
Postretirement benefit liability included
in other liabilities.................... $150.2 $143.9
====== ======
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the accumulated postretirement benefit obligation at December 31, 1998
and 1997 was 7 1/4% and 7 1/2%, respectively. At December 31, 1998, the weighted
average health care cost trend rate used to measure the accumulated
postretirement cost for medical benefits was 10% for 1999 and was assumed to
decrease gradually to 6% for the year 2005 and remain at that level thereafter.
The health care cost trend rate assumption has a significant effect on the
amount of the accumulated postretirement benefit obligation and the net
postretirement benefit cost reported. To illustrate, a one percent increase or
decrease in the trend rate for each year would increase or decrease the
accumulated postretirement benefit obligation at December 31, 1998 by
approximately $18 million and the aggregate of the service and interest cost
components of net postretirement benefit cost for the year ended December 31,
1998 by approximately $2 million.
(c) 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 $14.5 million, $15.0 million and $14.5 million were
charged against income (including continuing and discontinued operations) in
1998, 1997 and 1996, respectively.
(12) RESTRUCTURING CHARGE
During the fourth quarter of 1997, the Corporation began an activity value
analysis process to identify and eliminate low-value activities and to improve
operational efficiency in order to reduce expenses and redirect resources to
those current activities and new initiatives that have the greatest potential to
contribute to the future results of the Corporation. Implementation began in the
first quarter of 1998 and is substantially completed. This cost control
initiative has resulted in approximately 500 job reductions in the home office
and the branch network through a combination of early retirements, terminations
and attrition. Other savings involve vendor management, consulting expenses and
other operating costs.
In the first quarter of 1998, the Corporation recorded a restructuring charge
of $40.0 million related to the implementation of the cost control initiative.
The restructuring charge relates primarily to costs associated with providing
enhanced pension benefits to employees who accepted an early retirement
incentive offer, severance costs and other costs. The initiative was
substantially completed in 1998 with no significant differences from original
estimates.
53
<PAGE> 19
(13) REINSURANCE
Premiums earned and insurance claims are reported net of reinsurance in the
consolidated statements of income.
The effect of reinsurance on the premiums written and earned of the property
and casualty insurance subsidiaries was as follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Direct premiums written....... $5,842.0 $5,524.4 $5,166.5
Reinsurance assumed
Royal & Sun Alliance........ -- (3.8) 202.5
Other....................... 141.9 166.7 234.3
Reinsurance ceded
Royal & Sun Alliance........ -- 174.6 (269.2)
Other....................... (480.4) (413.9) (560.3)
-------- -------- --------
Net premiums written........ $5,503.5 $5,448.0 $4,773.8
======== ======== ========
Direct premiums earned........ $5,624.7 $5,315.8 $5,023.5
Reinsurance assumed
Royal & Sun Alliance........ -- 94.9 284.0
Other....................... 140.6 197.5 249.0
Reinsurance ceded
Royal & Sun Alliance........ -- -- (348.0)
Other....................... (461.5) (450.8) (639.2)
-------- -------- --------
Net premiums earned......... $5,303.8 $5,157.4 $4,569.3
======== ======== ========
</TABLE>
The Royal & Sun Alliance Insurance Group plc is the beneficial owner of 5.6%
of the Corporation's common stock. Prior to 1997, a property and casualty
insurance subsidiary of the Corporation assumed on a quota share basis a portion
of the property and casualty insurance business written by certain subsidiaries
of Royal & Sun Alliance. Similarly, a portion of the U.S. insurance business
written by the Corporation's property and casualty insurance subsidiaries was
reinsured on a quota share basis with a subsidiary of Royal & Sun Alliance.
Effective January 1, 1996, the reinsurance agreements with Royal & Sun
Alliance were amended to reduce the amount of each company's business reinsured
with the other. Effective January 1, 1997, the agreements were terminated. The
changes to the agreements in 1996 and their termination in 1997 resulted in
portfolio transfers of the business previously ceded to Royal & Sun Alliance
back to the Corporation's property and casualty insurance subsidiaries and of
the business previously assumed by the Corporation's property and casualty
insurance subsidiaries back to Royal & Sun Alliance. The effect of the portfolio
transfers was a reduction of ceded premiums written of $174.6 million and $91.6
million in 1997 and 1996, respectively, and a reduction of assumed premiums
written of $93.6 million and $65.2 million in 1997 and 1996, respectively.
The 1997 assumed reinsurance premiums written and earned from Royal & Sun
Alliance include business assumed for the second half of 1996 which was reported
on a lag.
Reinsurance recoveries by the property and casualty insurance subsidiaries
which have been deducted from insurance claims were $447.4 million, $346.8
million and $651.9 million in 1998, 1997 and 1996, respectively. The 1996 amount
included recoveries of $251.4 million from the subsidiary of Royal & Sun
Alliance.
(14) 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 three to five
years; certain lease agreements provide for rent increases based on price-level
factors. All leases are operating leases.
Rent expense was as follows:
<TABLE>
<CAPTION>
Years Ended
December 31
--------------------------------
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Office facilities......................... $73.8 $71.1 $67.6
Equipment................................. 13.3 12.6 11.8
----- ----- -----
$87.1 $83.7 $79.4
===== ===== =====
</TABLE>
At December 31, 1998, future minimum rental payments required under
non-cancellable operating leases were as follows:
<TABLE>
<CAPTION>
Years Ending
December 31
- ------------ (in millions)
<S> <C>
1999..................................... $ 78.9
2000..................................... 75.9
2001..................................... 69.5
2002..................................... 62.9
2003..................................... 55.9
After 2003............................... 351.5
------
$694.6
======
</TABLE>
54
<PAGE> 20
(15) UNPAID CLAIMS
The process of establishing loss reserves is a complex and imprecise science
that reflects significant judgmental factors. This is true because claim
settlements to be made in the future will be impacted by changing rates of
inflation and other economic conditions, changing legislative, judicial and
social environments and changes in the property and casualty insurance
subsidiaries' 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 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 continue to
further complicate 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 inconsistent court decisions
and 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 $1,525.0 million
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
$538.2 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. 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 in
1993 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 $635.0 million,
all of which has been paid. 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.
At the same time, 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 ultimately
disapproved. Pacific Indemnity's obligation under the trilateral agreement is
therefore similar to, and not duplicative of, that under those agreements
described above.
The trilateral agreement reaffirms portions of an agreement reached in March
1992 between Pacific Indemnity and Fibreboard. Among other matters, that 1992
agreement eliminates any Pacific Indemnity liability to Fibreboard for
asbestos-related property damage claims.
In July 1995, the United States District Court of the Eastern District of
Texas approved the global settlement agreement and the trilateral agreement. The
judgments approving these agreements 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 objectors to the global settlement
agreement appealed to the United States Supreme Court. In June 1997, the Supreme
Court set aside the ruling by the Fifth Circuit Court that had approved the
global settlement agreement and ordered the Fifth Circuit Court to reconsider
its approval. In January 1998, the Fifth Circuit Court again affirmed the global
settlement agreement. In April 1998, the objectors to the settlement petitioned
the Supreme Court to review the decision. In December 1998, argument was held
before the Supreme Court on the objectors' challenge. A decision is expected
during 1999.
The trilateral agreement was never appealed to the United States Supreme Court
and is final. As a result, management continues to believe 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 that 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.
55
<PAGE> 21
The property and casualty insurance subsidiaries have additional potential
asbestos exposure, primarily 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.
The 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.
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 costs of environmental clean-up have become substantial, 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
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 that rely on historical accident year loss
development factors. 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>
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Gross liability, beginning of
year.......................... $ 9,772.5 $9,523.7 $9,588.2
Reinsurance recoverable,
beginning of year............. 1,207.9 1,767.8 1,973.7
--------- -------- --------
Net liability, beginning of
year.......................... 8,564.6 7,755.9 7,614.5
--------- -------- --------
Net incurred claims and claim
expenses related to
Current year................ 3,712.1 3,372.3 3,053.6
Prior years................. (218.4) (65.3) (42.8)
--------- -------- --------
3,493.7 3,307.0 3,010.8
--------- -------- --------
Net payments for claims and
claim expenses related to
Current year................ 1,210.7 1,080.0 980.0
Prior years................. 1,797.7 1,418.3 1,889.4
--------- -------- --------
3,008.4 2,498.3 2,869.4
--------- -------- --------
Net liability, end of year...... 9,049.9 8,564.6 7,755.9
Reinsurance recoverable,
end of year................... 1,306.6 1,207.9 1,767.8
--------- -------- --------
Gross liability, end of year.... $10,356.5 $9,772.5 $9,523.7
========= ======== ========
</TABLE>
During 1998, the property and casualty insurance subsidiaries experienced
overall favorable development of $218.4 million on net unpaid claims established
as of the previous year-end. This compares with favorable
development of $65.3 million and $42.8 million in 1997 and 1996, 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
incurred losses relating to asbestos and toxic waste claims.
Management believes that the aggregate loss reserves of the property and
casualty insurance subsidiaries at December 31, 1998 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.
56
<PAGE> 22
(16) SEGMENTS INFORMATION
Effective December 31, 1998, the Corporation adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 establishes new standards for reporting information about operating segments
in annual financial statements and requires the reporting of selected segment
information in interim reports to shareholders. The adoption of SFAS No. 131 did
not result in a significant change from the Corporation's previous segment
disclosures and had no effect on the Corporation's financial position or results
of operations.
The property and casualty operations include four reportable underwriting
segments and the investment function. The underwriting segments are personal,
standard commercial, specialty commercial and reinsurance assumed. The personal
and commercial segments are managed separately because they target different
customers. The commercial business is further distinguished by those classes of
business that are generally available in broad markets and are of a more
commodity nature (standard) and those classes available in more limited markets
that require specialized underwriting and claim settlement (specialty). Standard
commercial classes include multiple peril, casualty and workers' compensation
and specialty commercial classes include property and marine, executive
protection, financial institutions and other commercial classes. Reinsurance
assumed is treaty reinsurance that was assumed from Royal & Sun Alliance prior
to 1997. The real estate segment includes commercial development activities
primarily in New Jersey and residential development activities primarily in
central Florida.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies in Note (1). Performance of the
property and casualty underwriting segments is based on underwriting results
before deferred policy acquisition costs and certain charges. Investment income
performance is based on investment income net of investment expenses. Real
estate performance is based on pretax income.
Revenues, income from continuing operations before income tax and assets of
each operating segment were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------
1998 1997 1996
---- ---- ----
Revenues (in millions)
<S> <C> <C> <C>
Property and casualty insurance
Premiums earned
Personal.......................................... $1,304.3 $1,188.1 $ 969.7
Standard commercial............................... 1,980.6 1,906.1 1,642.4
Specialty commercial.............................. 2,018.9 1,968.3 1,673.2
Reinsurance assumed............................... -- 94.9 284.0
-------- -------- --------
5,303.8 5,157.4 4,569.3
Investment income..................................... 760.0 721.4 656.2
-------- -------- --------
Total property and casualty insurance............. 6,063.8 5,878.8 5,225.5
Real estate............................................... 82.2 616.1 319.8
-------- -------- --------
6,146.0 6,494.9 5,545.3
Corporate investment income............................... 61.9 63.9 55.4
Realized investment gains................................. 141.9 105.2 79.8
-------- -------- --------
Total revenues.................................... $6,349.8 $6,664.0 $5,680.5
======== ======== ========
Income (loss) from continuing operations before income tax
Property and casualty insurance
Underwriting
Personal.......................................... $ 168.1 $ 161.5 $ 57.9
Standard commercial............................... (360.0) (312.3) (250.4)
Specialty commercial.............................. 133.5 198.0 191.9
Reinsurance assumed............................... -- 18.2 12.4
-------- -------- --------
(58.4) 65.4 11.8
Increase in deferred policy acquisition costs......... 51.8 75.7 42.5
Other charges......................................... (17.4) (24.1) (24.0)
-------- -------- --------
Underwriting income (loss)............................ (24.0) 117.0 30.3
Investment income..................................... 748.9 711.2 646.1
Restructuring charge.................................. (40.0) -- --
-------- -------- --------
Total property and casualty insurance............. 684.9 828.2 676.4
Real estate loss.......................................... (3.5) (8.6) (235.9)
-------- -------- --------
681.4 819.6 440.5
Corporate income.......................................... 26.4 49.3 26.6
Realized investment gains................................. 141.9 105.2 79.8
-------- -------- --------
Total income from continuing operations before
income tax...................................... $ 849.7 $ 974.1 $ 546.9
======== ======== ========
</TABLE>
57
<PAGE> 23
<TABLE>
<CAPTION>
December 31
---------------------------------
1998 1997 1996
---- ---- ----
Assets (in millions)
<S> <C> <C> <C>
Property and casualty insurance........................... $18,954.2 $17,592.4 $16,577.9
Real estate............................................... 770.0 815.2 1,641.3
--------- --------- ---------
19,724.2 18,407.6 18,219.2
Corporate................................................. 1,108.2 1,424.7 959.8
Adjustments and eliminations.............................. (86.4) (216.7) (83.5)
Net assets of discontinued operations..................... -- -- 843.4
--------- --------- ---------
Total assets...................................... $20,746.0 $19,615.6 $19,938.9
========= ========= =========
</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 allocated to underwriting segments.
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. Prior to 1997, international
business was also obtained from treaty reinsurance assumed from Royal & Sun
Alliance.
Revenues of the property and casualty insurance subsidiaries by geographic
area were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------
1998 1997 1996
---- ---- ----
(in millions)
<S> <C> <C> <C>
Revenues
United States............................................. $ 5,116.6 $ 4,886.8 $ 4,145.7
International............................................. 947.2 992.0 1,079.8
--------- --------- ---------
Total................................................... $ 6,063.8 $ 5,878.8 $ 5,225.5
========= ========= =========
</TABLE>
(17) EARNINGS PER SHARE
Basic earnings per common share is based on income from continuing
operations divided by the weighted average number of common shares outstanding
during each year. Diluted earnings per share assumes the conversion of all
outstanding convertible debt and the maximum dilutive effect of awards under
stock-based compensation plans.
The following table sets forth the computation of basic and diluted income
from continuing operations per share:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1998 1997 1996
---- ---- ----
(in millions except for per
share amounts)
<S> <C> <C> <C>
Basic earnings per share:
Income from continuing operations......................... $707.0 $769.5 $486.2
====== ====== ======
Weighted average number of common shares outstanding...... 165.6 171.6 174.2
====== ====== ======
Income from continuing operations per share............... $ 4.27 $ 4.48 $ 2.79
====== ====== ======
Diluted earnings per share:
Income from continuing operations......................... $707.0 $769.5 $486.2
After-tax interest expense on 6% exchangeable subordinated
notes................................................... -- 3.3 9.7
------ ------ ------
Income from continuing operations for computing diluted
earnings per share...................................... $707.0 $772.8 $495.9
====== ====== ======
Weighted average number of common shares outstanding...... 165.6 171.6 174.2
Additional shares from assumed conversion of 6%
exchangeable subordinated notes as if each $1,000 of
principal amount had been converted at issuance into
23.256 shares of common stock........................... -- 1.8 5.8
Additional shares from assumed exercise of stock-based
compensation awards..................................... 3.0 2.8 1.6
------ ------ ------
Weighted average number of common shares and potential
common shares assumed outstanding for computing diluted
earnings per share...................................... 168.6 176.2 181.6
====== ====== ======
Income from continuing operations per diluted share....... $ 4.19 $ 4.39 $ 2.73
====== ====== ======
</TABLE>
For additional disclosure regarding the stock-based compensation awards,
see Note (10).
58
<PAGE> 24
(18) 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. In such instances, 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 which
can fluctuate based on such factors as interest rates, inflation, monetary
policy and general economic conditions.
(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) Long term debt consists of a term loan, mortgages payable and long term
notes. The fair value of the term loan approximates the carrying value because
such loan consists of variable-rate debt that reprices frequently. Fair values
of mortgages payable are estimated using discounted cash flow analyses. Fair
values of long term notes are based on prices quoted by dealers.
The carrying values and fair values of financial instruments were as follows:
<TABLE>
<CAPTION>
December 31
-------------------------------------------
1998 1997
--------------------- -------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(in millions)
<S> <C> <C> <C> <C>
Assets
Invested assets
Short term investments.................................. $ 344.2 $ 344.2 $ 725.1 $ 725.1
Fixed maturities (Note 4)
Held-to-maturity...................................... 2,002.2 2,140.2 2,200.6 2,347.2
Available-for-sale.................................... 11,316.7 11,316.7 10,252.8 10,252.8
Equity securities....................................... 1,092.2 1,092.2 871.1 871.1
Real estate mortgages and notes receivable (Note 5)....... 105.2 106.9 123.8 121.0
Liabilities
Long term debt (Note 8)................................... 607.5 635.2 398.6 402.8
</TABLE>
59
<PAGE> 25
(19) COMPREHENSIVE INCOME
In the first quarter of 1998, the Corporation adopted SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes standards for the
reporting and presentation of comprehensive income and its components.
Comprehensive income is defined as all changes in shareholders' equity, except
those arising from transactions with shareholders. For the Corporation,
comprehensive income includes net income, changes in unrealized appreciation or
depreciation of investments carried at market value and changes in foreign
currency translation gains or losses. SFAS No. 130 only requires the
presentation of additional information in the financial statements; therefore,
the adoption of SFAS No. 130 had no effect on the Corporation's financial
position or results of operations.
The components of other comprehensive income or loss were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- -----------------------------
Income Income Income
Before Tax Before Tax Before Tax
Tax (Credit) Net Tax (Credit) Net Tax (Credit) Net
------ -------- --- ------ -------- --- ------ -------- ---
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Continuing operations
Unrealized holding gains (losses)
arising during the year......... $164.3 $57.5 $106.8 $353.5 $123.7 $229.8 $ (22.5) $ (8.0) $ (14.5)
Less: reclassification adjustment
for realized gains included in
net income...................... 141.9 49.7 92.2 105.2 36.8 68.4 79.8 27.8 52.0
------ ----- ------ ------ ------ ------ ------- ------ -------
Net unrealized gains (losses)
recognized in other
comprehensive income............ 22.4 7.8 14.6 248.3 86.9 161.4 (102.3) (35.8) (66.5)
Foreign currency translation
losses.......................... (14.2) (3.9) (10.3) (15.3) (5.2) (10.1) (15.1) (2.9) (12.2)
------ ----- ------ ------ ------ ------ ------- ------ -------
Total other comprehensive income
(loss) from continuing
operations.................... $ 8.2 $ 3.9 4.3 $233.0 $ 81.7 151.3 $(117.4) $(38.7) (78.7)
====== ===== ====== ====== ======= ======
Discontinued operations, net...... -- -- (40.7)
------ ------ -------
Total other comprehensive income
(loss)........................ $ 4.3 $151.3 $(119.4)
====== ====== =======
</TABLE>
(20) 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 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
-----------------------------------------
1998 1997 1996
---- ---- ----
(number of shares)
<S> <C> <C> <C>
Common stock issued
Balance, beginning of year................................ 176,037,850 176,084,173 87,819,355
Two-for-one stock split................................... -- -- 87,819,355
Shares issued upon exchange of long term debt............. -- 2,440 480,464
Share activity under option and incentive plans........... (48,648) (48,763) (35,001)
----------- ----------- -----------
Balance, end of year.................................. 175,989,202 176,037,850 176,084,173
----------- ----------- -----------
Treasury stock
Balance, beginning of year................................ 7,320,410 1,223,182 518,468
Two-for-one stock split................................... -- -- 518,468
Repurchase of shares...................................... 8,203,000 12,940,500 1,700,000
Shares issued upon exchange of long term debt............. -- (5,314,125) --
Share activity under option and incentive plans........... (1,801,034) (1,529,147) (1,513,754)
----------- ----------- -----------
Balance, end of year.................................. 13,722,376 7,320,410 1,223,182
----------- ----------- -----------
Common stock outstanding, end of year................. 162,266,826 168,717,440 174,860,991
=========== =========== ===========
</TABLE>
60
<PAGE> 26
(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 buy, upon occurrence of
certain events, one one-hundredth of a share of preferred stock at an exercise
price of $225. The rights generally become exercisable if a person or group
acquires 25% or more of the Corporation's common stock, or commences a tender or
exchange offer that, upon consummation, would result in a person or group owning
25% or more of the Corporation's common stock. On March 12, 1999, the Board of
Directors approved the redemption of the rights, which were scheduled to expire
on June 12, 1999, for $.01 per right as of March 31, 1999.
On March 12, 1999, the Board of Directors also adopted a new shareholder
rights plan, under which the rights attach on March 31, 1999. Under the new
plan, each shareholder has one right for each share of common stock of the
Corporation held. Each right entitles the holder to purchase from the
Corporation one one-thousandth of a share of Series B Participating Cumulative
Preferred Stock at an exercise price of $240. 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 20% 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 20% or more
of the outstanding shares of the Corporation's common stock.
In the event that any person or group acquires 20% 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 20%
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.
At any time after any person or group acquires 20% or more of the
Corporation's common stock, but before such person or group acquires 50% or more
of such stock, the Corporation may exchange all or part of the rights, other
than the rights owned by such person or group, for shares of the Corporation's
common stock at an exchange ratio of one share of common stock per 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 20%
or more of the Corporation's outstanding common stock by a person or group. The
rights will expire at the close of business on March 12, 2009, unless previously
exchanged or redeemed by the Corporation.
(d) The Corporation's insurance subsidiaries are required to file annual
statements with insurance regulatory authorities prepared on an accounting basis
prescribed or permitted by such authorities (statutory basis). For such
subsidiaries, generally accepted accounting principles (GAAP) differ in certain
respects from statutory accounting practices.
A comparison of shareholders' equity on a GAAP basis and policyholders'
surplus on a statutory basis is as follows:
<TABLE>
<CAPTION>
December 31
------------------------------------------------
1998 1997
--------------------- ---------------------
GAAP Statutory GAAP Statutory
---- --------- ---- ---------
(in millions)
<S> <C> <C> <C> <C>
Property and casualty insurance subsidiaries................ $4,570.0 $2,836.9 $4,162.5 $2,596.0
======== ========
Real estate subsidiary...................................... 544.7 264.4
Corporate and eliminations.................................. 529.4 1,230.2
-------- --------
$5,644.1 $5,657.1
======== ========
</TABLE>
61
<PAGE> 27
A comparison of GAAP and statutory net income is as follows:
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
GAAP Statutory GAAP Statutory GAAP Statutory
-------- --------- -------- --------- -------- ---------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Property and casualty insurance subsidiaries*..... $672.4 $663.1 $752.3 $652.4 $453.3 $560.2
Discontinued life and health insurance
operations...................................... -- -- -- -- 26.5** 34.0
------ ------ ------ ------ ------ ------
672.4 $663.1 752.3 $652.4 479.8 $594.2
====== ====== ======
Corporate and eliminations........................ 34.6 17.2 32.9
------ ------ ------
$707.0 $769.5 $512.7
====== ====== ======
</TABLE>
* A property and casualty subsidiary owned the real estate subsidiary until
December 1997, when the real estate subsidiary was distributed to the
Corporation in the form of a dividend.
** Includes the $22.0 million 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 1998, these subsidiaries paid cash dividends to the Corporation totaling
$280.0 million.
The maximum dividend distribution that may be made by the property and
casualty insurance subsidiaries to the Corporation during 1999 without prior
approval is approximately $590 million.
(21) PENDING TRANSACTIONS
(a) On February 8, 1999, the Corporation announced that it entered into a
definitive merger agreement under which it would acquire Executive Risk Inc.
Executive Risk is a specialty insurance company offering directors and officers,
errors and omissions and professional liability coverages. Executive Risk's
gross and net written premiums for 1998 were approximately $500 million and $280
million, respectively.
The acquisition will be accounted for using the purchase method of
accounting. The agreement provides that Executive Risk shareholders will receive
1.235 shares of the Corporation's common stock for each outstanding common share
of Executive Risk. The agreement contemplates that approximately 13,730,000
shares of common stock of the Corporation will be issued to Executive Risk
shareholders and approximately 2,300,000 shares of common stock of the
Corporation will be reserved for issuance upon exercise of Executive Risk stock
options. The total value of the transaction is expected to be approximately $850
million. Completion of the acquisition is subject to approval by Executive Risk
shareholders and various regulatory authorities. Closing is expected in the
second quarter of 1999.
(b) The Corporation has agreed to purchase a 27% interest in Hiscox plc, a
leading U.K. personal and commercial specialty insurer, for approximately $140
million. Closing of this transaction is subject to regulatory approvals which
are pending.
62
<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, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity, cash flows and comprehensive income
for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
February 24, 1999,
except for Note 20(c), as to which the date is
March 12, 1999
63
<PAGE> 29
Quarterly Financial Data
Summarized unaudited quarterly financial data for 1998 and 1997 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
-------------------- -------------------- -------------------- --------------------
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
(in millions except for per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................... $1,587.3 $1,576.9 $1,597.6 $1,509.6 $1,593.2 $1,568.8 $1,571.7 $2,008.7
Claims and expenses................ 1,348.0 1,331.4 1,375.2 1,270.2 1,386.0 1,322.3 1,390.9 1,766.0
Federal and foreign income tax..... 47.5 53.4 38.2 50.7 33.8 52.5 23.2 48.0
-------- -------- -------- -------- -------- -------- -------- --------
Net income..................... $ 191.8(a) $ 192.1 $ 184.2 $ 188.7 $ 173.4 $ 194.0 $ 157.6 $ 194.7
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings per share........... $ 1.14(a) $ 1.11 $ 1.10 $ 1.10 $ 1.05 $ 1.12 $ .98 $ 1.15
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings per share......... $ 1.12(a) $ 1.08 $ 1.08 $ 1.08 $ 1.04 $ 1.10 $ .95 $ 1.13
======== ======== ======== ======== ======== ======== ======== ========
Underwriting ratios
Losses to premiums earned........ 62.8% 63.9% 67.0% 63.3% 67.4% 65.3% 68.1% 65.5%
Expenses to premiums written..... 33.3 32.4 33.3 32.0 33.8 32.2 33.6 32.9
-------- -------- -------- -------- -------- -------- -------- --------
Combined....................... 96.1% 96.3% 100.3% 95.3% 101.2% 97.5% 101.7% 98.4%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
(a) Net income has been reduced by a net charge of $26.0 million or $.15 per
share for the after-tax effect of a $40.0 million restructuring charge.
64
<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 1998 and 1997.
<TABLE>
<CAPTION>
1998
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Common stock prices
High.................................................... $81.44 $82.63 $88.25 $73.38
Low..................................................... 71.00 73.31 62.50 57.00
Dividends declared.......................................... .31 .31 .31 .31
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Common stock prices
High.................................................... $62.25 $67.63 $71.75 $78.13
Low..................................................... 53.00 51.25 65.56 65.88
Dividends declared.......................................... .29 .29 .29 .29
</TABLE>
At March 8, 1999, there were approximately 7,650 common shareholders of
record.
65
<PAGE> 1
THE CHUBB CORPORATION
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Significant subsidiaries at December 31, 1998 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
PLACE OF OF SECURITIES
INCORPORATION OWNED
COMPANY ------------- -------------
<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.............................. Wisconsin 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
Chubb Atlantic Indemnity Ltd. .............................. Bermuda 100
DHC Corporation........................................ Delaware 100
Chubb do Brasil Companhia de Seguros.............. Brazil 99
Bellemead Development Corporation........................... Delaware 100
Chubb Capital Corporation................................... New Jersey 100
</TABLE>
- ---------------
Certain other subsidiaries of the Corporation and its consolidated
subsidiaries have been omitted since, in the aggregate, they would not
constitute a significant subsidiary.
47
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 11,317<F1>
<DEBT-CARRYING-VALUE> 2,002<F2>
<DEBT-MARKET-VALUE> 2,140<F3>
<EQUITIES> 1,092
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 14,755
<CASH> 8
<RECOVER-REINSURE> 114<F4>
<DEFERRED-ACQUISITION> 729
<TOTAL-ASSETS> 20,746
<POLICY-LOSSES> 10,357<F5>
<UNEARNED-PREMIUMS> 2,916<F6>
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 608<F7>
<COMMON> 176
0
0
<OTHER-SE> 5,468<F8>
<TOTAL-LIABILITY-AND-EQUITY> 20,746
5,304
<INVESTMENT-INCOME> 822
<INVESTMENT-GAINS> 142
<OTHER-INCOME> 82<F9>
<BENEFITS> 3,494
<UNDERWRITING-AMORTIZATION> 1,464
<UNDERWRITING-OTHER> 370
<INCOME-PRETAX> 850
<INCOME-TAX> 143
<INCOME-CONTINUING> 707
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 707
<EPS-PRIMARY> 4.27
<EPS-DILUTED> 4.19
<RESERVE-OPEN> 8,565
<PROVISION-CURRENT> 3,712
<PROVISION-PRIOR> (218)
<PAYMENTS-CURRENT> 1,211
<PAYMENTS-PRIOR> 1,798
<RESERVE-CLOSE> 9,050
<CUMULATIVE-DEFICIENCY> (218)
<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 ($1,307), AS PRESCRIBED BY SFAS NO. 113. SUCH AMOUNTS ARE
INCLUDED IN TOTAL ASSETS.
<F6>UNEARNED-PREMIUMS EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUMS
($135) AS PRESCRIBED BY SFAS NO. 113. THIS PREPAID AMOUNT IS INCLUDED IN
TOTAL ASSETS.
<F7>NOTES-PAYABLE INCLUDES LONG-TERM DEBT OF $608.
<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>
