<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 27, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1999
[ ] 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 B 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 $9,247,973,082 as of March 17, 2000.
174,691,167
Number of shares of common stock outstanding as of March 17, 2000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of The Chubb Corporation 1999 Annual Report to Shareholders are
incorporated by reference in Parts I, II and IV of this Form 10-K. Portions of
the definitive Proxy Statement for the Annual Meeting of Shareholders on April
25, 2000 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 11,900 persons worldwide on December 31, 1999.
In July 1999, the Corporation completed its acquisition of Executive Risk
Inc. The results of operations of Executive Risk are included in the
Corporation's consolidated results of operations from the date of acquisition.
Executive Risk offers directors and officers, errors and omissions and
professional liability coverages through its insurance subsidiaries, Executive
Risk Indemnity Inc., Executive Risk Specialty Insurance Company and Quadrant
Indemnity Company. Additional information related to the Corporation's
acquisition of Executive Risk is included in Note (3) of the notes to
consolidated financial statements incorporated by reference from the
Corporation's 1999 Annual Report to Shareholders.
Revenues, income before income tax and assets for each operating segment
for the three years ended December 31, 1999 are included in Note (16) of the
notes to consolidated financial statements incorporated by reference from the
Corporation's 1999 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,
1999 are included in Note (16) of the notes to consolidated financial statements
incorporated by reference from the Corporation's 1999 Annual Report to
Shareholders.
PROPERTY AND CASUALTY INSURANCE
The principal members of the Property and Casualty Insurance Group (the
Group) are 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, Executive Risk Indemnity Inc., Executive Risk Specialty
Insurance Company and Quadrant Indemnity Company in the United States, as well
as 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. Effective January 1, 2000,
Federal became the manager of Executive Risk Indemnity Inc., Executive Risk
Specialty Insurance Company and Quadrant Indemnity Company. 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.
2
<PAGE> 3
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>
1997............................. $5,524.4 $162.9 $239.3 $5,448.0
1998............................. 5,842.0 141.9 480.4 5,503.5
1999............................. 6,042.6 275.2 616.7 5,701.1
</TABLE>
- ---------------
(a) Intercompany items eliminated.
Reinsurance premiums assumed and ceded in 1997 were affected by changes in
reinsurance agreements with the Royal & Sun Alliance Insurance Group plc (Sun
Alliance). These changes are described in Note (8) of the notes to consolidated
financial statements incorporated by reference from the Corporation's 1999
Annual Report to Shareholders.
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 1999 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 1999, approximately 82% 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% and New Jersey, 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>
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
1999............................. 5,701.1 5,652.0 70.3 32.5 102.8
--------- --------- ------- ------- ---------
Total for five years ended
December 31, 1999............. $25,732.4 $24,829.7 66.6% 32.5% 99.1%
========= ========= ======= ======= =========
</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 1999 Annual Report to Shareholders.
3
<PAGE> 4
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, 1999 and 1998, such ratio for the Group was 1.76 and
1.95, respectively.
Producing and Servicing of Business
In the United States and Canada, the Group is represented by approximately
4,500 independent agents and accepts business on a regular basis from an
estimated 1,100 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 7 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 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. Reinsurance contracts do not relieve the Group of its
primary obligation to the policyholders.
The existing reinsurance program of the Executive Risk insurance
subsidiaries at the time of the acquisition was designed to limit the loss
retained from a loss occurrence to an amount lower than that typically retained
by the Group. Executive Risk has utilized reinsurance to a greater extent
because its size has limited the amount of risk it could retain. Most of
Executive Risk's reinsurance program has been left in place and will be reviewed
during 2000.
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 unpredict-
4
<PAGE> 5
able. 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 globally and develops strategies to manage
this exposure through individual risk selection, subject to regulatory
constraints, and through the purchase of catastrophe reinsurance. The Group uses
modeling techniques and concentration management tools that allow it to better
monitor and control catastrophe exposures. 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 78% of losses between $100 million and $450
million in the United States and approximately 90% of losses between $25 million
and $175 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.
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 65% of the Group's net unpaid claims and
claim adjustment expenses at December 31, 1999 were for incurred but not
reported (IBNR) losses--claims which had not yet been reported to the Group,
some of which were not yet known to the insured, and future development on
reported claims. In spite of this imprecision, financial reporting requirements
dictate that insurance companies report a single amount as the estimate of
unpaid claims and claim adjustment expenses as of each evaluation date. These
estimates are continually reviewed and updated. Any resulting adjustments are
reflected in current operating results.
The Group's estimates of losses for reported claims are established
judgmentally on an individual case basis. Such estimates are based on the
Group's particular experience with the type of risk involved and its knowledge
of the circumstances surrounding each individual claim. These estimates are
reviewed on a regular basis or as additional facts become known. The reliability
of the estimation process is monitored through comparison with ultimate
settlements.
The Group's estimates of losses for unreported claims are principally
derived from analyses of historical patterns of the development of paid and
reported losses by accident year for each class of business. This process relies
on the basic assumption that past experience, adjusted for the effects of
current developments and likely trends, is an appropriate basis for predicting
future outcomes. For certain classes of business where anticipated loss
experience is less predictable because of the small number of claims and/or
erratic claim severity patterns, the Group's estimates are based on both
expected and actual reported losses. Salvage and subrogation estimates are
developed from patterns of actual recoveries.
The Group's estimates of unpaid claim adjustment expenses are based on
analyses of the relationship of projected ultimate claim adjustment expenses to
projected ultimate losses for each class of business. Claim staff has discretion
to override these expense formulas where judgment indicates such action is
appropriate.
The Group's estimates of reinsurance recoverable related to reported and
unreported claims and claim adjustment expenses represent the portion of such
liabilities that will be recovered from reinsurers. Amounts recoverable from
reinsurers are recognized as assets at the same time and in a manner consistent
with the liabilities associated with the reinsured policies.
5
<PAGE> 6
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.
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, 1999,
1998 and 1997:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Net liability, beginning of year................... $ 9,049.9 $ 8,564.6 $7,755.9
--------- --------- --------
Net increase related to acquisition of Executive
Risk (net of reinsurance recoverable of
$339.5).......................................... 605.8 -- --
--------- --------- --------
Net incurred claims and claim adjustment expenses
Provision for claims occurring in the current
year.......................................... 4,147.6 3,712.1 3,372.3
Decrease in estimates for claims occurring in
prior years................................... (205.6) (218.4) (65.3)
--------- --------- --------
3,942.0 3,493.7 3,307.0
--------- --------- --------
Net payments for claims and claim adjustment
expenses related to
Current year..................................... 1,278.9 1,210.7 1,080.0
Prior years...................................... 2,570.0 1,797.7 1,418.3
--------- --------- --------
3,848.9 3,008.4 2,498.3
--------- --------- --------
Net liability, end of year......................... 9,748.8 9,049.9 8,564.6
Reinsurance recoverable, end of year............... 1,685.9 1,306.6 1,207.9
--------- --------- --------
Gross liability, end of year....................... $11,434.7 $10,356.5 $9,772.5
========= ========= ========
</TABLE>
As reestimated at December 31, 1999, the liability for unpaid claims and
claim adjustment expenses, net of reinsurance recoverable, as established at the
previous year-end was redundant by $205.6 million. This compares with favorable
development of $218.4 million and $65.3 million during 1998 and 1997,
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 experience for certain liability classes; this was offset in part by
losses incurred relating to asbestos and toxic waste claims of $46.8 million,
$67.8 million and $125.2 million in 1999, 1998 and 1997, respectively. The
higher favorable development in 1999 and 1998 compared with 1997 was due to more
favorable loss experience for executive protection and excess liability
coverages as well as the substantially lower incurred losses related to asbestos
and toxic waste claims.
As a result of the termination of the reinsurance agreements with Sun
Alliance, there were portfolio transfers of gross loss reserves and reinsurance
recoverable as of January 1, 1997. The effect of these portfolio transfers was
to increase net loss reserves by $286.2 million in 1997 and decrease paid losses
by the same amount. The loss portfolio transfers had no effect on incurred
claims and claim adjustment expenses.
Unpaid claims and claim adjustment expenses, net of reinsurance
recoverable, increased by $698.9 million in 1999, $485.3 million in 1998 and
$808.7 million in 1997. The increase in 1999 includes $605.8 million of net
reserves assumed in July upon the acquisition of Executive Risk. The 1999
increase would have been $548.7 million greater except that loss reserves were
reduced by payments in that amount 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.
6
<PAGE> 7
The Fibreboard settlement is further discussed in Item 7 of this report on pages
21 and 22. The increase in net loss reserves in 1997 includes the effect of the
portfolio transfers with Sun Alliance.
Excluding the Fibreboard reserves, the effect of the Executive Risk
reserves assumed and the effect of the portfolio transfers, loss reserves, net
of reinsurance recoverable, increased by $641.8 million or 8% in 1999, $485.3
million or 6% in 1998, and $516.5 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. 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 1999 was flat compared with the number at year-end 1998, which was in
turn 4% higher than that at year-end 1997.
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, 1999, 1998 and 1997. Reinsurance recoveries related to such claims
are not significant.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ -------------------------------
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 $527.0 $1,075.7 $548.7 $543.7 $1,092.4 $542.7 $415.9 $ 958.6
Net incurred claims and
claim adjustment
expenses................. -- 46.8 46.8 -- 67.8 67.8 6.0 119.2 125.2
Net payments for claims.... 548.7 49.3 598.0 -- 84.5 84.5 -- (8.6)(a) (8.6)
------ ------ -------- ------ ------ -------- ------ ------ --------
Net liability, end of
year..................... $ -- $524.5 $ 524.5 $548.7 $527.0 $1,075.7 $548.7 $543.7 $1,092.4
====== ====== ======== ====== ====== ======== ====== ====== ========
</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 1,600 asbestos claims outstanding at December 31,
1999 compared with 2,000 asbestos claims outstanding at December 31, 1998 and
3,700 asbestos claims outstanding at December 31, 1997. In 1999, approximately
200 claims were opened and 600 claims were closed. In 1998, approximately 500
claims were opened and 2,200 claims were closed, including claims "closed" to
adjust the data base to the methodology implemented in 1998. In 1997,
approximately 1,300 claims were opened and 1,500 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 600 toxic waste claims outstanding at December 31,
1999 compared with 650 toxic waste claims outstanding at December 31, 1998 and
800 toxic waste claims outstanding at December 31, 1997. Approximately 300
claims were opened in 1999, 250 claims were opened in 1998 and 300 claims were
opened in 1997. There were approximately 350 claims closed in 1999, 400 claims
closed in 1998 and 300 claims closed in 1997. Generally, a toxic waste claim is
established for each lawsuit, or alleged equivalent, against an insured where
potential liability has been determined to exist
7
<PAGE> 8
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 1999. The amounts in the
table for the years ended December 31, 1989 through 1998 do not include
Executive Risk's unpaid claims and claim adjustment expenses. The top line of
the table shows the estimated liability for unpaid claims and claim adjustment
expenses recorded at the balance sheet date for each of the indicated years.
This liability represents the estimated amount of losses and loss adjustment
expenses for claims arising in all prior years that are unpaid at the balance
sheet date, including losses that had been incurred but not yet reported to the
Group.
The upper section of the table shows the reestimated amount of the
previously recorded net liability based on experience as of the end of each
succeeding year. The estimate is increased or decreased as more information
becomes known about the frequency and severity of claims for each individual
year. The increase or decrease is reflected in the current year's operating
results. The "cumulative deficiency (redundancy)" as shown in the table
represents the aggregate change in the reserve estimates from the original
balance sheet dates through December 31, 1999. 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, 1989, 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 1989 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 1989 through 1998, there was favorable development for
certain liability classes as the result of favorable loss experience. 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
1989 through 1992 in particular reflect the effects of the $675 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 1989 column, as of December 31, 1999 the Group had paid
$3,922.1 million of the currently estimated $4,798.9 million of claims and claim
adjustment expenses that were unpaid at the end of 1989; thus, an estimated
$876.8 million of losses incurred through 1989 remain unpaid as of December 31,
1999, approximately 60% 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, 1999. 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 1989 1990 1991 1992 1993 1994 1995 1996
---------- ---- ---- ---- ---- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Liability for Unpaid Claims and
Claim Adjustment Expenses........... $3,880.1 $4,301.1 $4,743.9 $5,267.6 $6,450.0 $6,932.9 $7,614.5 $7,755.9
Net Liability Reestimated as of:
One year later..................... 3,846.2 4,272.3 4,716.3 5,932.4 6,420.3 6,897.1 7,571.7 7,690.6
Two years later.................... 3,854.2 4,244.7 5,368.5 5,904.1 6,363.1 6,874.5 7,520.9 7,419.6
Three years later.................. 3,839.8 4,933.0 5,336.5 5,843.5 6,380.4 6,829.8 7,256.8 6,986.2
Four years later................... 4,567.4 4,941.7 5,302.6 5,894.6 6,338.1 6,605.4 6,901.5
Five years later................... 4,602.5 4,969.5 5,389.5 5,863.3 6,150.1 6,352.2
Six years later.................... 4,686.3 5,079.3 5,375.3 5,738.4 5,904.9
Seven years later.................. 4,800.4 5,094.2 5,303.9 5,582.1
Eight years later.................. 4,817.2 5,058.8 5,203.3
Nine years later................... 4,810.6 5,002.6
Ten years later.................... 4,798.9
Cumulative Net Deficiency
(Redundancy)........................ 918.8 701.5 459.4 314.5 (545.1) (580.7) (713.0) (769.7)
Cumulative Net Deficiency Related to
Asbestos and Toxic Waste Claims..... 2,015.9 1,870.9 1,623.1 1,463.2 687.5 572.3 390.5 239.8
Cumulative Amount of
Net Liability Paid as of:
One year later..................... 880.4 919.1 931.2 1,039.9 1,272.0 1,250.7 1,889.4 1,418.3
Two years later.................... 1,383.9 1,407.2 1,479.9 1,858.5 1,985.7 2,550.7 2,678.2 2,488.2
Three years later.................. 1,715.9 1,808.7 2,083.0 2,332.3 3,015.8 3,073.7 3,438.8 3,757.0
Four years later................... 1,958.6 2,292.0 2,386.9 3,181.4 3,264.5 3,589.8 4,457.6
Five years later................... 2,346.9 2,490.2 3,125.8 3,323.0 3,624.2 4,444.4
Six years later.................... 2,500.9 3,174.7 3,200.4 3,603.5 4,367.9
Seven years later.................. 3,120.6 3,200.4 3,412.7 4,307.7
Eight years later.................. 3,126.5 3,380.5 4.095.5
Nine years later................... 3,278.2 4,040.1
Ten years later.................... 3,922.1
Gross Liability, End of Year......... $7,220.9 $8,235.4 $8,913.2 $9,588.2 $9,523.7
Reinsurance Recoverable, End of
Year............................... 1,953.3 1,785.4 1,980.3 1,973.7 1,767.8
-------- -------- -------- -------- --------
Net Liability, End of Year........... $5,267.6 $6,450.0 $6,932.9 $7,614.5 $7,755.9
======== ======== ======== ======== ========
Reestimated Gross Liability.......... $7,577.4 $7,883.4 $8,500.6 $8,980.7 $8,781.7
Reestimated Reinsurance Recoverable.. 1,995.3 1,978.5 2,148.4 2,079.2 1,795.5
-------- -------- -------- -------- --------
Reestimated Net Liability............ $5,582.1 $5,904.9 $6,352.2 $6,901.5 $6,986.2
======== ======== ======== ======== ========
Cumulative Gross Deficiency
(Redundancy)....................... $ 356.5 $ (352.0) $ (412.6) $ (607.5) $ (742.0)
======== ======== ======== ======== ========
<CAPTION>
DECEMBER 31
--------------------------------
YEAR ENDED 1997 1998 1999
---------- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Net Liability for Unpaid Claims and
Claim Adjustment Expenses........... $8,564.6 $9,049.9 $ 9,748.8
Net Liability Reestimated as of:
One year later..................... 8,346.2 8,854.8
Two years later.................... 7,899.8
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)........................ (664.8) (195.1)
Cumulative Net Deficiency Related to
Asbestos and Toxic Waste Claims..... 114.6 46.8
Cumulative Amount of
Net Liability Paid as of:
One year later..................... 1,797.7 2,520.1
Two years later.................... 3,444.2
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......... $9,772.5 $10,356.5 $11,434.7
Reinsurance Recoverable, End of
Year............................... 1,207.9 1,306.6 1,685.9
-------- --------- ---------
Net Liability, End of Year........... $8,564.6 $ 9,049.9 $ 9,748.8
======== ========= =========
Reestimated Gross Liability.......... $9,104.8 $10,159.3
Reestimated Reinsurance Recoverable.. 1,205.0 1,304.5
-------- ---------
Reestimated Net Liability............ $7,899.8 $ 8,854.8
======== =========
Cumulative Gross Deficiency
(Redundancy)....................... $ (667.7) $ (197.2)
======== =========
</TABLE>
- ---------------
The amounts for the years 1989 through 1998 do not include Executive Risk's
unpaid claims and claim adjustment expenses. During the period from the date
Executive Risk was acquired through December 31, 1999, the decrease in its
estimates for claims occurring in prior years was $10.5 million.
The cumulative deficiencies for the years 1989 through 1992 include the effect
of the $675 million increase in claims and claim adjustment expenses related to
the Fibreboard settlement.
9
<PAGE> 10
Members of the Group are required to file annual statements with insurance
regulatory authorities prepared on an accounting basis prescribed or permitted
by such authorities (statutory basis). The differences between the liability for
unpaid claims and claim adjustment expenses, net of reinsurance recoverable,
reported in the accompanying consolidated financial statements in accordance
with generally accepted accounting principles (GAAP) and that reported in the
annual statutory statements of the U.S. subsidiaries are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1999 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Net liability reported on a statutory basis--U.S.
subsidiaries.............................................. $9,032.6 $8,470.4
Additions (reductions):
Unpaid claims and claim adjustment expenses of foreign
subsidiaries........................................... 720.5 659.7
Other reserve differences................................. (4.3) (80.2)
-------- --------
Net liability reported on a GAAP basis...................... $9,748.8 $9,049.9
======== ========
</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 1999, the Group invested new cash primarily in tax-exempt bonds and
corporate bonds. 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 each year, the Group tried to achieve the
appropriate mix in its portfolio to balance both investment and tax strategies.
At December 31, 1999, 70% of the Group's fixed maturity portfolio was invested
in tax-exempt bonds compared with 71% at December 31, 1998 and 68% at December
31, 1997.
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>
1997............................. $11,725.9 $711.2 6.07% 5.05%
1998............................. 12,795.7 748.9 5.85 4.96
1999............................. 14,208.0 821.0 5.78 4.87
</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
November 1997, the Real Estate Group sold a substantial portion of its
commercial properties for $736.9 million,which included $628.3 million in cash
and the assumption of $108.6 million in debt. In addition to the sale to the
joint venture in November 1997, The Real Estate Group sold selected commercial
properties as well as residential properties in each of the past three years.
The Real Estate Group owns approximately $355 million of land, which is
expected to be developed in the future, and approximately $190 million of
commercial properties and land parcels under lease. The Real Estate Group is
continuing to explore the sale of certain of its remaining properties.
Additional information related to the Corporation's real estate operations is
included in Item 7 of this report on pages 24 and 25.
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 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
11
<PAGE> 12
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, 1999, 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 14th largest United
States property and casualty insurance group based on 1998 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 1999, particularly in the commercial classes. The
Group continues to be selective in the writing of new business and to reinforce
the sound relationships with customers who appreciate the stability, expertise
and added value the Group provides.
In all states, insurers authorized to transact certain classes of property
and casualty insurance are required to become members of an insolvency fund. In
the event of the insolvency of a licensed insurer writing a class of insurance
covered by the fund in the state, 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 1999,
assessments to the members of the Group amounted to approximately $8.3 million.
The amount of future assessments cannot be reasonably estimated.
State insurance regulation requires insurers to participate in assigned
risk plans, reinsurance facilities and joint underwriting associations, which
are mechanisms that generally provide applicants with various basic insurance
coverages when they are not available in voluntary markets. Such 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
12
<PAGE> 13
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,
patients' rights, privacy, e-commerce, international trade, automobile safety,
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 Insurance 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 buildings in Branchburg, New Jersey and Simsbury,
Connecticut. 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 1999
Annual Report to Shareholders.
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are defendants in various lawsuits
arising out of their businesses. It is the opinion of management that the final
outcome of these matters will not materially affect the consolidated financial
position of the registrant.
Information regarding certain litigation to which property and casualty
insurance subsidiaries of the Corporation are a party is included in Item 7 of
this report on pages 20 through 23.
13
<PAGE> 14
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, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
YEAR OF
AGE(A) ELECTION(B)
------ -----------
<S> <C> <C>
Dean R. O'Hare, Chairman of the Corporation................. 57 1972
Joanne L. Bober, Senior Vice President and General Counsel
of the Corporation........................................ 47 1999
John J. Degnan, President of the Corporation................ 55 1994
Gail E. Devlin, Senior Vice President of the Corporation.... 61 1981
George R. Fay, Executive Vice President of Chubb & Son, a
division of Federal....................................... 51 1999
David S. Fowler, Senior Vice President of the Corporation... 54 1989
Sylvester Green, Executive Vice President of Chubb & Son, a
division of Federal....................................... 59 1998
Henry G. Gulick, Vice President and Secretary of the
Corporation............................................... 56 1975
Ralph E. Jones, III, Executive Vice President of Chubb &
Son, a division of Federal................................ 44 1999
David B. Kelso, Executive Vice President of the
Corporation............................................... 47 1996
Charles M. Luchs, Executive Vice President of Chubb & Son, a
division of Federal....................................... 60 1996
Andrew A. McElwee, Jr., Senior Vice President of the
Corporation............................................... 45 1997
Glenn A. Montgomery, Senior Vice President of the
Corporation............................................... 47 1997
Thomas F. Motamed, Executive Vice President of the
Corporation............................................... 51 1997
Michael J. O'Neill, Jr., Senior Vice President and Counsel
of the Corporation........................................ 51 1999
Michael O'Reilly, Executive Vice President of the
Corporation............................................... 56 1976
Henry B. Schram, Senior Vice President of the Corporation... 53 1985
Stephen J. Sills, Executive Vice President of the
Corporation............................................... 51 1999
</TABLE>
- ---------------
(a) Ages listed above are as of April 25, 2000.
(b) Date indicates year first elected or designated as an executive
officer.
All of the foregoing officers serve at the pleasure of the Board of
Directors of the Corporation or listed subsidiary and have been employees of the
Corporation or a subsidiary of the Corporation for more than five years except
for Ms. Bober and Messrs. Jones, Kelso and Sills.
Prior to joining the Corporation in 1999, Ms. Bober was Senior Vice
President, General Counsel and Secretary of General Signal Corporation since
1997. Previously, she was a partner in the law firm of Jones, Day, Reavis &
Pogue.
Before rejoining Chubb in 1999, Mr. Jones was a Director of Hiscox Plc and
Managing Director of Hiscox Insurance Company Ltd. since July 1997. Mr. Jones
was previously President and Director of Chubb Insurance Company of Europe, as
well as a Senior Vice President and Managing Director of Chubb & Son Inc.
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.
Mr. Sills, who joined the Corporation in 1999, was most recently President
and Chief Executive Officer of Executive Risk, Inc. since 1997. Previously, he
served as Executive Vice President and Chief Underwriting Officer for Executive
Risk, Inc.
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 1999 Annual Report to
Shareholders, page 64.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended December 31, 1999 are
incorporated by reference from the Corporation's 1999 Annual Report to
Shareholders, pages 36 through 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 1999 Annual Report to
Shareholders, pages 15, 16 and 40 through 61.
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 or business retention or profitability estimates, as well as with
respect to loss reserve adequacy, its investment income or cash flow
projections, or its announced real estate plans, 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 or privacy liabilities, the inability to
reinsure certain risks economically, the adequacy of loss reserves or currency
conversion transactions, as well as general market conditions, competition,
pricing and restructurings.
Operating income, which excludes realized investment gains and losses, was
$565 million in 1999 compared with $615 million in 1998 and $701 million in
1997. Operating income in 1998 reflects a first quarter restructuring charge of
$26 million after taxes related to the implementation of a cost control
initiative.
Net income, which includes realized investment gains and losses, was $621
million in 1999 compared with $707 million in 1998 and $770 million in 1997.
ACQUISITION OF EXECUTIVE RISK INC.
In July 1999, The Chubb Corporation (Corporation) completed its acquisition
of Executive Risk Inc. Executive Risk is a specialty insurance company offering
primarily executive protection coverages, particularly directors and officers,
errors and omissions and professional liability.
15
<PAGE> 16
Executive Risk shareholders received 1.235 shares of the Corporation's
common stock for each outstanding common share of Executive Risk. In addition,
outstanding Executive Risk stock options were converted to stock options of the
Corporation. Approximately 14.3 million shares of common stock of the
Corporation were issued to Executive Risk shareholders and an additional 1.8
million shares of common stock of the Corporation were reserved for issuance
upon exercise of the converted Executive Risk stock options.
The acquisition has been accounted for using the purchase method of
accounting. Therefore, the results of operations of Executive Risk are included
in the Corporation's consolidated results of operations from the date of
acquisition. The assets and liabilities of Executive Risk were recorded at their
estimated fair values at the date of acquisition. The value of the stock options
assumed by the Corporation was included in the purchase price. The total
purchase price was approximately $832 million. The excess of the purchase price
over the estimated fair value of the net assets acquired, amounting to
approximately $517 million, has been recorded as goodwill and is being amortized
over 26 years.
PROPERTY AND CASUALTY INSURANCE
Property and casualty income before taxes was $626 million in 1999 compared
with $685 million in 1998 and $828 million in 1997. The decrease in earnings in
1999 was due to deterioration in underwriting results caused in large part by
the continued weakness in the standard commercial classes, which include
multiple peril, casualty and workers' compensation, and to a lesser extent,
higher catastrophe losses. The decrease in earnings in 1998 was due to a decline
in underwriting results
caused in large part by substantially higher catastrophe losses compared with
1997 and to a first quarter restructuring charge of $40 million before taxes.
Investment income increased in both 1999 and 1998 compared with the respective
prior years.
Catastrophe losses were $225 million in 1999, $173 million in 1998 and $57
million in 1997. The 1998 amount was net of reinsurance recoveries of
approximately $130 million related to Hurricane Georges. We did not have any
recoveries from our catastrophe reinsurance program during 1999 or 1997 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 $5.7 billion in 1999, an increase
of 4% compared with 1998. Excluding premiums written by Executive Risk, premium
growth was 1% in 1999. Personal coverages accounted for $1.5 billion or 27% of
1999 premiums written, standard commercial coverages for $1.9 billion or 32% and
specialty commercial coverages for $2.3 billion or 41%. Reported net premiums
written increased 1% in 1998 compared with 1997. The reported growth in premiums
written in 1998 was affected by the termination in 1997 of 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. As a result of the 1996 merger of Sun Alliance
with Royal Insurance Holdings plc, the agreements pertaining to the exchange of
reinsurance were terminated effective January 1, 1997. Consequently, during
1997, the property and casualty subsidiaries retained a 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 1997
due to the effect of the portfolio transfers of unearned premiums as of January
1 of that year resulting from the changes in retention.
16
<PAGE> 17
After adjusting 1997 reported net premiums for the effects of the
termination of the reinsurance agreements with Sun Alliance, net premiums
written increased 4% in 1998 compared with 1997.
Premium growth in personal lines was strong in both 1999 and 1998. In
commercial lines, intense competition in the worldwide marketplace has made
profitable premium growth difficult, particularly in the standard commercial
classes. Our priorities for 1999 were to renew good business at adequate prices
and not renew underperforming accounts where we could not attain price adequacy.
We made steady progress in this regard during 1999, increasing rates and
non-renewing underperforming business throughout the year. Further, many of our
competitors also increased rates during the latter part of 1999. As a result,
the pricing outlook in the standard commercial classes is considerably brighter
than it was at the outset of 1999.
Substantial premium growth was achieved in 1999 and 1998 outside the United
States, particularly in Europe, our largest foreign market. Excluding the
business that was assumed from Sun Alliance, non-U.S. premiums grew 12% and 9%
in 1999 and 1998, respectively, in original currency.
Underwriting results were unprofitable in 1999 compared with near-breakeven
results in 1998 and profitable results in 1997. The combined loss and expense
ratio, the common measure of underwriting profitability, was 102.8% in 1999
compared with 99.8% in 1998 and 96.9% in 1997.
The loss ratio was 70.3% in 1999 compared with 66.3% in 1998 and 64.5% in
1997. Losses from catastrophes represented 4.0 percentage points of the loss
ratio in 1999 compared with 3.3 percentage points in 1998 and 1.1 percentage
points in 1997. Catastrophe losses affecting results in 1999 resulted primarily
from weather-related events in the United States: winter storms in the first
quarter, windstorms and tornadoes in the second quarter and Hurricane Floyd in
the third quarter. The 1998 catastrophe losses resulted primarily from 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.
Our expense ratio was 32.5% in 1999 compared with 33.5% in 1998 and 32.4%
in 1997. The lower ratio in 1999 was due to salary and overhead expenses
decreasing due to a cost control initiative discussed below and a change in
accounting that resulted in the capitalization of certain costs incurred to
develop computer software for internal use. The increase in the expense 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 commenced an activity value analysis
process to identify and eliminate low-value activities and improve operational
efficiency while redirecting resources to activities having the greatest
potential to contribute to the Corporation's results. Implementation began in
the first quarter of 1998 and was substantially completed by the end of that
year. The cost control initiative 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 resulted from improved
vendor management and lower consulting expenses and other operating costs.
In the first quarter of 1998, we recorded a restructuring charge of $40
million related to the implementation of the cost control initiative. Of the $40
million restructuring charge, $30 million was comprised of accruals for
providing enhanced pension benefits and postretirement medical benefits to
employees who accepted an early retirement incentive offer and $5 million was
severance costs for employees who were terminated. The remainder of the charge
was for other expenses such as the cost of outplacement services. The initiative
was completed with no significant differences from the original estimates of the
restructuring costs. The liabilities related to the enhanced pension and
postretirement medical benefits were included in the pension and postretirement
medical benefits liabilities, which will be reduced as benefit payments are made
over time. Of the other restructuring costs, $1.5 million remained unpaid at
December 31, 1999.
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<PAGE> 18
PERSONAL INSURANCE
Our personal insurance business continued to produce exceptionally strong
results in 1999, measured by both growth and profitability.
Reported net premiums from personal insurance increased 12% in 1999
compared with a 5% increase in 1998. After adjusting 1997 reported net premiums
for the effects of the termination of the reinsurance agreement with Sun
Alliance, premium growth in 1998 was 10% compared with 1997. Our in-force policy
count increased in 1999 by about 10% for automobile, homeowners and other
personal coverages. Such growth was achieved while maintaining our disciplined
approach to pricing and risk selection. Premiums outside the United States grew
significantly in 1999 and 1998, although from a small base.
Our personal insurance business produced substantial underwriting profits
in each of the past three years. The combined loss and expense ratio was 89.9%
in 1999 compared with 85.6% in 1998 and 83.1% in 1997.
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 an unusually low
frequency of non-catastrophe related losses in 1998 substantially offset an
increase in catastrophe losses. Homeowners results in 1999 were less profitable
than in 1998 due to an increase in both catastrophe losses and non-catastrophe
losses. The frequency of non-catastrophe related losses returned to a more
normal level in 1999. Results in 1999 were also adversely affected by two large
losses aggregating $15 million net of reinsurance. Homeowners results were
unprofitable outside the United States in each of the past three years as we are
still building the critical mass necessary to absorb the costs of operating the
franchise. Catastrophe losses represented 11.8 percentage points of the loss
ratio for this class in 1999 compared with 8.5 percentage points in 1998 and 2.9
percentage points in 1997.
Our personal 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, as
favorable loss experience has continued.
STANDARD COMMERCIAL INSURANCE
Reported net premiums from standard commercial insurance decreased 8% in
1999 compared with a 1% decrease in 1998. After adjusting 1997 reported net
premiums for the effects of the termination of the reinsurance agreement with
Sun Alliance, premiums increased 2% in 1998 compared with 1997. The decrease in
premiums in 1999 was the result of the strategy we put in place in late 1998 to
renew good business at adequate prices and not renew underperforming business
where we cannot attain price adequacy. As a result, retention levels were lower
in 1999 than in 1998. On the business that was renewed, rates have increased
steadily throughout 1999 and we expect this trend to continue. We achieved
premium growth in 1999 and 1998 in standard commercial lines outside the United
States.
Our standard commercial insurance business produced substantial
underwriting losses in each of the past three years, with results becoming
increasingly unprofitable each year. The combined loss and expense ratio was
123.6% in 1999 compared with 118.0% in 1998 and 114.5% in 1997.
It will take at least two annual renewal cycles to adequately reprice the
entire standard commercial book, and during that time we will continue to have
losses from underpriced business. Thus, it will be the latter part of 2000
before our pricing initiative is expected to have a noticeable effect on our
standard commercial results.
Multiple peril results were unprofitable in each of the past three years
due, in large part, to inadequate prices. Such results were progressively more
unprofitable each year. In the liability component of this class, results
deteriorated in 1998 and again in 1999 due to increases in the severity of
losses. Results in 1997 were adversely affected by substantial incurred losses
relating to asbestos and toxic waste claims. Results for the property component
deteriorated in 1998 due to higher catastrophe
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<PAGE> 19
losses compared with 1997. Property results deteriorated further in 1999 due
primarily to several large losses overseas. Catastrophe losses in 1999 were
similar to those in 1998. Catastrophe losses represented 9.6 percentage points
of the loss ratio for this class in 1999 compared with 8.6 percentage points in
1998 and 1.5 percentage points in 1997.
Results for our casualty business were unprofitable in each of the past
three years. Results deteriorated in 1999, primarily in the automobile and
primary liability components. In each year, but more so in 1998 and 1997,
casualty results were adversely affected by incurred losses relating to asbestos
and toxic waste claims. The excess liability component of our casualty coverages
was modestly unprofitable in 1999 compared with the near breakeven results in
1998 and the profitable results in 1997 due to increases in the frequency of
large losses as well as declining prices. Excess liability results in each of
the past three years benefited from favorable development of prior year loss
reserves. Results for the primary liability component were unprofitable in each
of the past three years, but more so in 1999 and 1997 due to a higher frequency
of large losses in those years. Results in the automobile component were
increasingly unprofitable in each of the past three years due to an increase in
the frequency of losses. Our commercial automobile book of business has been
inadequately priced, a consequence of the prolonged soft market.
Workers' compensation results were unprofitable in each of the past three
years, reflecting the cumulative effect of price reductions over the past
several years. Results were also adversely affected in 1999 and 1998 by an
increased frequency of large losses.
SPECIALTY COMMERCIAL INSURANCE
Reported net premiums from specialty commercial insurance increased by 9%
in 1999 compared with a 1% increase in 1998. Excluding premiums written by
Executive Risk, premium growth was 4% in 1999. After adjusting 1997 reported net
premiums for the effects of the termination of the reinsurance agreement with
Sun Alliance, premium growth in 1998 was 3% compared with 1997.
Our strategy of working closely with our customers and our ability to
differentiate our products continue to enable us to renew a large percentage of
our executive protection and financial institutions business. However, a
competitive market continues to put prices under pressure for this business.
Excluding premiums written by Executive Risk, executive protection premiums
increased 2% in 1999 while financial institutions premiums decreased 5%.
Property and marine premiums decreased due to the effect on retention
levels of pricing initiatives and non-renewing certain unprofitable accounts.
Other specialty commercial business includes $73 million of premiums in 1999
generated by Chubb Re, our reinsurance business that began operations during the
year.
Our specialty commercial business produced substantial underwriting profits
in each of the last three years. The combined loss and expense ratio was 93.6%
in 1999 compared with 91.5% in 1998 and 87.5% in 1997.
Property and marine results were unprofitable in each of the past three
years. The positive effect of the pricing initiatives and the culling of
unprofitable accounts in 1999 was somewhat offset by higher catastrophe losses.
Catastrophe losses for this class represented 10.2 percentage points of the loss
ratio in 1999 compared with 5.7 percentage points in 1998 and 4.9 percentage
points in 1997. Results in all three years were adversely affected by a high
frequency of large property losses, including several overseas losses in 1998
and 1997.
Executive protection results were highly profitable in each of the past
three years due to favorable loss experience on business worldwide, particularly
in the directors and officers and fiduciary components. However, such results
were less profitable in 1999 due to the less adequate prices in recent years.
Our financial institutions business was also profitable in each of the last
three years due to favorable loss experience in the fidelity component of this
business. The standard commercial business
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<PAGE> 20
written on financial institutions was unprofitable in 1999 and 1997 compared
with profitable results in 1998.
Our other commercial classes produced profitable results in 1999 and 1997
compared with near-breakeven results in 1998. The deterioration in 1998 was
attributable to our aviation business, which produced highly unprofitable
results. Our surety business produced highly profitable results in each of the
past three years.
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, our
share of the Sun Alliance business for the last six months of 1996 was included
in our results in the first quarter of 1997. Such results were near breakeven.
LOSS RESERVES
Loss reserves are our property and casualty subsidiaries' largest
liability. At the end of 1999, gross loss reserves totaled $11.4 billion
compared with $10.4 billion and $9.8 billion at year-end 1998 and 1997,
respectively. Reinsurance recoverable on such loss reserves was $1.7 billion at
year-end 1999 compared with $1.3 billion and $1.2 billion at the end of 1998 and
1997, respectively. At year end 1999, gross loss reserves of $1.0 billion and
reinsurance recoverable of $390 million were related to Executive Risk.
Executive Risk has historically utilized reinsurance to a greater extent because
its size has limited the amount of risk it could retain.
Loss reserves, net of reinsurance recoverable, increased by $699 million or
8% in 1999 compared with $485 million or 6% in 1998. The increase in 1999
includes $606 million of net reserves assumed in July upon the acquisition of
Executive Risk. The 1999 increase would have been $549 million greater except
that loss reserves were reduced by payments in that amount during the year
related to the settlement of asbestos-related claims against Fibreboard
Corporation, which is discussed below. Excluding the Executive Risk reserves
assumed and the Fibreboard payments, loss reserves increased 7% in 1999.
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 1999, we experienced overall favorable development of $206 million
on loss reserves established as of the previous year-end. This compares with
favorable development of $218 million in 1998 and $65 million in 1997. Such
redundancies were reflected in operating results in these respective years. Each
of the past three years benefited from favorable claim experience for certain
liability classes; this was offset in part by losses incurred relating to
asbestos and toxic waste claims of $47 million, $68 million and $125 million in
1999, 1998 and 1997, respectively. The higher favorable development in 1999 and
1998 compared with 1997 was due to more favorable loss experience for executive
protection and excess liability coverages as well as the substantially lower
incurred losses related to asbestos and toxic waste 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 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 65% of our net loss
reserves at December 31, 1999 were for incurred but not reported (IBNR)
losses -- claims that had not yet been reported to us, some of which were not
yet known to the insured, and 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
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<PAGE> 21
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 related to an insurance policy issued to
Fibreboard Corporation by Pacific Indemnity Company in 1956. As a result of
events during 1999 that are described below, management believes that Pacific
Indemnity's exposure with respect to asbestos-related claims against Fibreboard
has ended.
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 was subject to final appellate
court approval. Pursuant to the global settlement agreement, a $1.525 billion
trust fund would be established to pay "future" claims, defined as claims that
were not filed in court before August 27, 1993. Pacific Indemnity would
contribute approximately $538 million to the trust fund and Continental Casualty
would 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,
would be transferred to the trust fund.
Pacific Indemnity and Continental Casualty reached a separate agreement in
1993 for the handling of all "pending" asbestos-related bodily injury claims,
defined as claims pending on August 26, 1993 against Fibreboard. Pacific
Indemnity's obligation under this agreement with respect to such pending claims
was approximately $635 million, all of which was paid by the end of 1996. The
agreement further provided that the total responsibility of both insurers with
respect to pending and future asbestos-related bodily injury claims against
Fibreboard would 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 pending 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 would be triggered if the global settlement agreement was 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 reaffirmed portions of an agreement reached in
March 1992 between Pacific Indemnity and Fibreboard. Among other matters, that
1992 agreement eliminated 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 1999, the Supreme
Court refused to affirm approval of the global settlement agreement. The case
was returned to the United States District Court of the Eastern District of
Texas for further proceedings. In September 1999, the District Court entered
judgment disapproving the global settlement agreement. That judgment was not
appealed and became final in November 1999.
The trilateral agreement was never appealed to the United States Supreme
Court and is final. Upon final disapproval of the global settlement agreement,
the trilateral agreement became effective.
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In December 1999, the funds that had been held in the escrow account were paid
to a trust established to pay future asbestos-related bodily injury claims
against Fibreboard.
We continue to have potentially significant asbestos exposure, primarily on
those traditional defendants who manufactured, distributed or installed asbestos
products for whom we wrote excess liability coverages. Such exposure has
increased in recent years due to the erosion of much of the underlying limits
and the non-viability of other defendants.
Our other potential 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. As the resources of
traditional asbestos defendants have been depleted, more peripheral parties have
been drawn into litigation. Thus, we continue to receive notices of new asbestos
claims and new exposures on existing claims despite the fact that practically
all manufacturing and usage of asbestos ended nearly two decades ago.
Uncertainty remains as to our ultimate liability relating to asbestos
claims due to such factors as the long latency period between asbestos exposure
and disease manifestation and the resulting potential for involvement of
multiple policy periods for individual claims. Significant issues remain
unresolved, adding to the complexity and uncertainty of asbestos litigation.
These issues primarily involve questions regarding allocation of indemnity and
expense costs and exhaustion of policy limits. We are involved in disputes with
other insurers and with insureds over these issues, which increase the
difficulty of settlement negotiations.
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 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 that 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
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costs. This unlimited defense provided in the policies sometimes leads to the
payment of defense costs substantially exceeding 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 somewhat 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 $47
million in 1999 and $68 million in 1998, substantially less than the $125
million in 1997. Further increases in such loss reserves in 2000 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, 1999 were adequate to cover claims for
losses that 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 globally 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 used modeling technologies and concentration management tools
that allow us to better monitor and control catastrophe exposures. We also
continue to explore and analyze credible scientific evidence, including the
impact of global climate change, that may affect our potential exposure under
insurance policies.
INVESTMENTS AND LIQUIDITY
Growth in investment income in 1999 and 1998 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 15.7% in 1999 compared with
15.3% in 1998 and 16.7% in 1997. The effective tax rate fluctuates each year as
a result of changes in the percentage of our portfolio invested in tax-exempt
bonds. Investment income after taxes increased 9% in 1999 compared with 1998 and
7% in 1998 compared with 1997. Excluding the investment income of Executive
Risk, such growth was 5% in 1999.
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 together with the investment income generated by the
existing portfolio to build the portfolio and thereby increase future investment
income. Historically, cash receipts from operations, consisting of insurance
premiums and
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<PAGE> 24
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 $940 million in 1999 compared with $860 million in 1998 and
$1,260 million in 1997. New cash available in 1999 was not affected by the
Fibreboard-related payments during the year since such payments were made from
the escrow account that was funded in 1993. New cash in 1997 included
approximately $330 million received as the net result of the portfolio transfers
of unearned premiums and loss reserves as of January 1, 1997 related to the
termination of the reinsurance agreements with Sun Alliance.
In 1999, new cash was invested in tax-exempt bonds and corporate bonds.
Also, during 1999, we reduced our equity securities portfolio by approximately
$350 million with $145 million of the proceeds used to fund the purchase of a
28% interest in Hiscox plc, a leading U.K. personal and commercial specialty
insurer. 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 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 AND OTHER
Corporate and other includes investment income earned on corporate invested
assets, interest and other expenses not allocable to the operating subsidiaries,
and the results of our real estate subsidiary. Corporate and other produced a
loss before taxes of $4 million in 1999 compared with income of $23 million in
1998 and $41 million in 1997. The decrease in corporate and other income in 1998
and again in 1999 was due primarily to increasingly higher interest expense in
each year.
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 November 1997, our
real estate subsidiary sold a substantial portion of its commercial properties
for $737 million, which included $628 million in cash and the assumption of $109
million in debt. The proceeds from the sale were used to repay outstanding short
term debt and certain term loans and mortgages. In the fourth quarter of 1996,
we had recorded an impairment loss of $255 million, or $160 million after taxes,
to reduce the carrying value of these assets to their estimated fair value.
Real estate operations resulted in a loss before taxes of $4 million in
both 1999 and 1998 and $9 million in 1997, which amounts are included in the
corporate and other results for those respective years.
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. In addition to the November 1997
sale, we sold selected commercial properties as well as residential properties
in each of the past three years. Real estate revenues were $97 million in 1999,
$82 million in 1998 and $616 million in 1997. Revenues in 1999 and 1998 reflect
the reduced operating activity as a result of the sale of a substantial portion
of our real estate assets in 1997.
We own approximately $355 million of land which we expect will be developed
in the future. In addition, we own approximately $190 million of commercial
properties and land parcels under lease. We are continuing to explore the sale
of certain of our remaining properties.
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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 $81 million at December 31, 1999, 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 assumptions used 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.
INVESTMENT GAINS AND LOSSES
Net investment gains realized by the Corporation and its property and
casualty subsidiaries were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(in millions)
<S> <C> <C> <C>
Equity securities........................................... $63 $100 $ 75
Fixed maturities............................................ 24 42 30
--- ---- ----
Realized investment gains before tax........................ $87 $142 $105
=== ==== ====
Realized investment gains after tax......................... $56 $ 92 $ 68
=== ==== ====
</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 maturity securities 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, 1999, 12% of
the fixed maturity portfolio was classified as held-to-maturity compared with
15% at December 31, 1998 and 18% at December 31, 1997.
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 $59 million, $138 million and $147 million at
December 31, 1999, 1998 and 1997, respectively. Such unrealized appreciation was
not reflected in the consolidated financial statements.
Changes in unrealized market appreciation or depreciation of fixed
maturities were due to fluctuations in interest rates.
25
<PAGE> 26
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 of the Corporation and its
property and casualty subsidiaries relate primarily 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 the potential changes in price of our fixed
income investments 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 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, 1999 and 1998. 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.
26
<PAGE> 27
FIXED MATURITIES
EXPECTED CASH FLOWS OF PRINCIPAL AMOUNTS
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
-------------------------------------------------------------------------
TOTAL
---------------------
ESTIMATED
THERE- AMORTIZED MARKET
2000 2001 2002 2003 2004 AFTER COST VALUE
---- ---- ---- ---- ---- ------ --------- ---------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-exempt.............................. $475 $ 585 $ 680 $ 549 $ 931 $6,411 $ 9,631 $ 9,669
Average interest rate................. 6.7% 6.7% 6.1% 5.9% 5.8% 5.4% -- --
Taxable -- other than mortgage-backed
securities............................ 97 251 372 429 452 1,779 3,380 3,310
Average interest rate................. 6.6% 6.6% 6.6% 6.4% 6.5% 6.5% -- --
Mortgage-backed securities.............. 164 180 231 181 137 782 1,675 1,599
Average interest rate................. 6.7% 6.8% 6.9% 6.8% 6.8% 7.0% -- --
---- ------ ------ ------ ------ ------ ------- -------
Total................................... $736 $1,016 $1,283 $1,159 $1,520 $8,972 $14,686 $14,578
==== ====== ====== ====== ====== ====== ======= =======
<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
==== ====== ====== ====== ====== ====== ======= =======
</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
27
<PAGE> 28
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 33% and 40% of our taxable bond
portfolio at year-end 1999 and 1998, respectively. About 35% of our
mortgage-backed securities holdings at December 31, 1999 related to residential
mortgages consisting of government agency pass-through securities, government
agency collateralized mortgage obligations (CMOs) and AAA rated non-agency CMOs
backed by government agency collateral or single family home mortgages. The
majority of the CMOs are actively traded in liquid markets and market value
information is readily available from broker/dealers. An additional 40% of our
mortgage-backed securities were call protected AAA rated commercial securities.
The remaining mortgage-backed holdings were all in 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 loss reserves and other liabilities. Such
investments have characteristics similar to our liabilities in those currencies.
At December 31, 1999, the property and casualty subsidiaries held foreign
investments of $1.5 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 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, 1999 and 1998. 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, 1999
-----------------------------------------------------------------
TOTAL
---------------------
ESTIMATED
THERE- AMORTIZED MARKET
2000 2001 2002 2003 2004 AFTER COST VALUE
---- ---- ---- ---- ---- ------ --------- ---------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Canadian dollar........................... $19 $43 $50 $64 $58 $132 $366 $372
British pound sterling.................... 10 -- 28 40 38 112 228 225
</TABLE>
<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>
Equity price risk is the potential loss arising from adverse 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, diversified across industries and readily marketable. A hypothetical
decrease of 10% in the
28
<PAGE> 29
market prices of the equity securities held at December 31, 1999 and 1998 would
have resulted in a decrease of $77 million and $109 million, respectively, in
the fair value of the equity securities portfolio.
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.
Interest rate risk also exists on our debt obligations. At December 31,
1999, the expected cash flows of principal amounts of such debt obligations were
a $15 million 7.3% term loan in 2001, $100 million of 6 7/8% notes in 2003 and
$642 million after 2004 with a weighted average interest rate of 7.0%.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue referred to the potential that certain information
technology (IT) systems and applications as well as non-IT systems, such as
equipment with embedded chips and microprocessors, would be unable to properly
process data containing dates beginning with the year 2000. The issue existed
because many computer systems used two digits rather than four to define the
applicable year. Such systems, if not remediated, might have recognized the date
"00" as the year 1900 rather than the year 2000, resulting in a system failure
or miscalculation 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. A significant focus of the project was
the retirement, renovation or rewriting of those mainframe systems that were not
Year 2000 ready. From 1995 through 1999, we completed remediation and testing
procedures on all of our mainframe IT systems as well as our personal computers,
servers and other non-mainframe computers and related software. Our Year 2000
compliance project also included developing a plan to evaluate the readiness of
third parties with whom we interact, preparing contingency plans to address the
noncompliance of any such third parties and physically testing electronic data
interchanges with third parties for Year 2000 compliance.
As a result of these remediation efforts, our internal systems proved to be
Year 2000 ready and we did not have any significant Year 2000 related
difficulties interacting with any third party with whom we conduct business. We
have not experienced any disruption of our business and therefore we have not
needed to implement any contingency plans.
The Year 2000 team included employees of the Corporation and software
consultants. A portion of the remediation effort was accomplished by redirecting
existing systems resources to the Year 2000 effort. However, we do not believe
that this had a significant adverse effect on other systems initiatives.
The cost to address the Year 2000 IT systems issue, including compensation
of employees and the cost of consultants, approximated $36 million.
Approximately $6 million, $14 million and $9 million was incurred in 1999, 1998
and 1997, respectively. 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. Future
expenditures related to the Year 2000 issue are expected to be negligible.
We have closely monitored the potential impact of the Year 2000 issue on
insurance coverages written by our property and casualty subsidiaries. To date,
we have received a relatively small number of claims related to the Year 2000
issue. The policies under which such claims have been made include provisions
that we believe either preclude or limit the amount of coverage. For these
reasons, management does not believe at this time that there is a likelihood of
a significant adverse financial impact from Year 2000 related losses.
Nevertheless, it is possible that Year 2000 related losses may emerge that would
adversely affect operating results in future periods.
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
29
<PAGE> 30
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. In July 1998, the Board of Directors authorized the
repurchase of up to an additional 12,500,000 shares. Through December 31, 1999,
the Corporation had repurchased 20,591,600 shares under the 1997 and 1998
authorizations. As of December 31, 1999, 9,408,400 shares remained under the
current share repurchase authorizations. In the aggregate, the Corporation
repurchased 2,596,700 shares in open-market transactions in 1999 at a cost of
$145 million, 8,203,000 shares in 1998 at a cost of $609 million and 12,940,500
shares in 1997 at a cost of $828 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 Corporation, a wholly owned subsidiary. No securities have been
issued under this registration statement.
The Corporation has outstanding $300 million of unsecured 6.15% notes due
in 2005 and $100 million of unsecured 6.60% debentures due in 2018. Chubb
Capital has outstanding $100 million of unsecured 6 7/8 % notes due in 2003. The
Chubb Capital notes are guaranteed by the Corporation.
The long term debt obligations of Executive Risk remained in place
subsequent to the acquisition. Chubb Executive Risk Inc., a wholly owned
subsidiary of the Corporation, has outstanding $75 million of unsecured 7 1/8 %
notes due in 2007. Executive Risk Capital Trust, wholly owned by Chubb Executive
Risk, has outstanding $125 million of 8.675% capital securities. The sole assets
of the Trust are debentures issued by Chubb Executive Risk. The capital
securities are subject to mandatory redemption in 2027 upon repayment of the
debentures. The capital securities are also subject to mandatory redemption
under certain circumstances beginning in 2007.
The Corporation has 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 was to have terminated
on July 7, 1999, was extended to July 5, 2000, 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.
CHANGE IN ACCOUNTING PRINCIPLES
In 1999, the Corporation adopted Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use, which was issued by the American Institute of Certified Public Accountants.
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. Prior to 1999, we expensed all development
costs of internal use computer software. The SOP has been applied prospectively.
The adoption of SOP 98-1 increased the Corporation's net income in 1999 by $17
million. 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 25 through 29 of this report.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of the Corporation at December 31, 1999
and 1998 and for each of the three years in the period ended December 31, 1999
and the Report of Independent Auditors thereon and the Corporation's unaudited
quarterly financial data for the two-year period ended December 31, 1999 are
incorporated by reference from the Corporation's 1999 Annual Report to
Shareholders, pages 40 through 62 and 64.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
<PAGE> 31
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Corporation's Directors is incorporated by
reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Shareholders on April 25, 2000, 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 25, 2000, pages 8 through 20
other than the Performance Graphs and the Organization and Compensation
Committee Report appearing on pages 13 through 18.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Corporation's definitive Proxy Statement
for the Annual Meeting of Shareholders on April 25, 2000, pages 5 and 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 25, 2000, page 21.
31
<PAGE> 32
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS AND 2. SCHEDULES
The financial statements and schedules listed in the accompanying
index to financial statements and financial statement schedules are filed
as part of this report.
3. EXHIBITS
The exhibits listed in the accompanying index to exhibits are filed as
part of this report.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed for the three months ended
December 31, 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),
333-67347 (filed November 16, 1998) and Post-Effective Amendment No. 2 to Form
S-4 on Form S-8 No. 333-73073 (filed July 19, 1999):
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.
32
<PAGE> 33
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 3, 2000
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 3, 2000
- --------------------------------------------------- Executive Officer and
(DEAN R. O'HARE) Director
/s/ ZOE BAIRD Director March 3, 2000
- ---------------------------------------------------
(ZOE BAIRD)
/s/ JOHN C. BECK Director March 3, 2000
- ---------------------------------------------------
(JOHN C. BECK)
/s/ SHEILA P. BURKE Director March 3, 2000
- ---------------------------------------------------
(SHEILA P. BURKE)
/s/ JAMES I. CASH, JR. Director March 3, 2000
- ---------------------------------------------------
(JAMES I. CASH, JR.)
/s/ PERCY CHUBB, III Director March 3, 2000
- ---------------------------------------------------
(PERCY CHUBB, III)
/s/ JOEL J. COHEN Director March 3, 2000
- ---------------------------------------------------
(JOEL J. COHEN)
/s/ JAMES M. CORNELIUS Director March 3, 2000
- ---------------------------------------------------
(JAMES M. CORNELIUS)
/s/ DAVID H. HOAG Director March 3, 2000
- ---------------------------------------------------
(DAVID H. HOAG)
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<C> <S> <C>
/s/ THOMAS C. MACAVOY Director March 3, 2000
- ---------------------------------------------------
(THOMAS C. MACAVOY)
/s/ WARREN B. RUDMAN Director March 3, 2000
- ---------------------------------------------------
(WARREN B. RUDMAN)
/s/ DAVID G. SCHOLEY Director March 3, 2000
- ---------------------------------------------------
(DAVID G. SCHOLEY)
Director March 3, 2000
- ---------------------------------------------------
(RAYMOND G.H. SEITZ)
/s/ LAWRENCE M. SMALL Director March 3, 2000
- ---------------------------------------------------
(LAWRENCE M. SMALL)
/s/ JAMES M. ZIMMERMAN Director March 3, 2000
- ---------------------------------------------------
(JAMES M. ZIMMERMAN)
/s/ DAVID B. KELSO Executive Vice President and March 3, 2000
- --------------------------------------------------- Chief Financial Officer
(DAVID B. KELSO)
/s/ HENRY B. SCHRAM Senior Vice President and March 3, 2000
- --------------------------------------------------- Chief Accounting Officer
(HENRY B. SCHRAM)
</TABLE>
34
<PAGE> 35
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 62 --
Consolidated Balance Sheets at December 31, 1999 and 1998 41 --
Consolidated Statements of Income for the Years Ended Decem-
ber 31, 1999, 1998 and 1997 40 --
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997 42 --
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 43 --
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1999, 1998, and 1997 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, 1999 -- 37
II -- Condensed Financial Information of Registrant at
December 31, 1999 and 1998 and for the Years
Ended December 31, 1999, 1998 and 1997 -- 38
III -- Consolidated Supplementary Insurance Information
at and for the Years Ended December 31, 1999,
1998 and 1997 -- 41
IV -- Consolidated Reinsurance for the Years Ended De-
cember 31, 1999, 1998 and 1997 -- 42
VI -- Consolidated Supplementary Property and Casualty
Insurance Information for the Years Ended
December 31, 1999, 1998 and 1997 -- 42
</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, 1999, are hereby
incorporated by reference.
35
<PAGE> 36
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of The Chubb Corporation of our report dated February 23, 2000 included in
the 1999 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, No. 333-67347 and Post-Effective Amendment No. 2 to Form S-4 on Form
S-8 No. 333-73073) of our report dated February 23, 2000, 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 24, 2000
36
<PAGE> 37
THE CHUBB CORPORATION
SCHEDULE I
CONSOLIDATED SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
(IN MILLIONS)
DECEMBER 31, 1999
<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................................ $ 731.1 $ 731.1 $ 731.1
--------- --------- ---------
Fixed maturities
Bonds
United States Government and government agencies
and authorities................................ 1,067.0 1,043.7 1,042.5
States, municipalities and political
subdivisions................................... 9,588.7 9,624.8 9,566.9
Foreign.......................................... 1,199.2 1,203.0 1,203.0
Public utilities................................. 341.5 324.4 324.4
All other corporate bonds........................ 2,419.2 2,312.4 2,312.4
--------- --------- ---------
Total bonds............................ 14,615.6 14,508.3 14,449.2
Redeemable preferred stocks......................... 70.3 69.9 69.9
--------- --------- ---------
Total fixed maturities................. 14,685.9 14,578.2 14,519.1
--------- --------- ---------
Equity securities
Common stocks
Public utilities................................. 1.9 2.5 2.5
Banks, trusts and insurance companies............ 9.4 13.9 13.9
Industrial, miscellaneous and other.............. 688.4 738.3 738.3
--------- --------- ---------
Total common stocks.................... 699.7 754.7 754.7
Non-redeemable preferred stocks..................... 15.3 14.5 14.5
--------- --------- ---------
Total equity securities................ 715.0 769.2 769.2
--------- --------- ---------
Total invested assets.................. $16,132.0 $16,078.5 $16,019.4
========= ========= =========
</TABLE>
37
<PAGE> 38
THE CHUBB CORPORATION
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS -- PARENT COMPANY ONLY
(IN MILLIONS)
DECEMBER 31
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Assets
Invested Assets
Short Term Investments................................. $ 106.7 $ 98.2
Taxable Fixed Maturities -- Available-for-Sale (cost
$323.8 and $377.3).................................... 308.9 357.9
Equity Securities (cost $131.6 and $114.2)............. 184.9 129.5
-------- --------
TOTAL INVESTED ASSETS............................. 600.5 585.6
Cash...................................................... .5 --
Investment in Consolidated Subsidiaries................... 5,751.3 5,191.9
Receivable from Consolidated Subsidiary................... 201.7 208.1
Other Assets.............................................. 219.7 189.3
-------- --------
TOTAL ASSETS...................................... $6,773.7 $6,174.9
======== ========
Liabilities
Long Term Debt............................................ $ 400.0 $ 430.0
Dividend Payable to Shareholders.......................... 56.2 50.3
Accrued Expenses and Other Liabilities.................... 45.7 50.5
-------- --------
TOTAL LIABILITIES................................. 501.9 530.8
-------- --------
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 177,272,322 and 175,989,202
Shares................................................. 177.3 176.0
Paid-In Surplus........................................... 418.4 546.7
Retained Earnings......................................... 6,008.6 5,604.0
Accumulated Other Comprehensive Income
Unrealized Appreciation (Depreciation) of Investments,
Net of Tax............................................ (112.6) 414.7
Foreign Currency Translation Losses, Net of Tax........ (44.8) (36.0)
Receivable from Employee Stock Ownership Plan............. (74.9) (86.3)
Treasury Stock, at Cost -- 1,782,489 and 13,722,376
Shares................................................. (100.2) (975.0)
-------- --------
TOTAL SHAREHOLDERS' EQUITY........................ 6,271.8 5,644.1
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $6,773.7 $6,174.9
======== ========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in the Corporation's 1999
Annual Report to Shareholders.
38
<PAGE> 39
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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Investment Income........................................... $ 41.9 $ 46.2 $ 71.8
Realized Investment Gains................................... 18.1 23.0 13.2
Investment Expenses......................................... (2.1) (2.1) (1.8)
Corporate Expenses.......................................... (41.2) (27.7) (34.9)
------ ------ ------
16.7 39.4 48.3
Federal and Foreign Income Tax.............................. 6.9 3.9 44.0
------ ------ ------
9.8 35.5 4.3
Equity in Net Income of Consolidated Subsidiaries........... 611.3 671.5 765.2
------ ------ ------
NET INCOME............................................. $621.1 $707.0 $769.5
====== ====== ======
</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 1999
Annual Report to Shareholders.
39
<PAGE> 40
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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income................................................ $ 621.1 $ 707.0 $ 769.5
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Equity in Net Income of Consolidated Subsidiaries...... (611.3) (671.5) (765.2)
Realized Investment Gains.............................. (18.1) (23.0) (13.2)
Other, Net............................................. 16.3 (17.5) 16.9
------- ------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES.............................. 8.0 (5.0) 8.0
------- ------- -------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities................... 105.5 70.6 600.1
Proceeds from Maturities of Fixed Maturities.............. 30.4 94.5 49.1
Proceeds from Sales of Equity Securities.................. 68.7 97.9 89.7
Proceeds from Sale of Discontinued Operations, Net........ -- -- 861.2
Purchases of Fixed Maturities............................. (83.8) (213.5) (606.3)
Purchases of Equity Securities............................ (67.7) (122.7) (84.0)
Decrease (Increase) in Short Term Investments, Net........ (8.5) 322.6 (411.1)
Dividends Received from Consolidated Subsidiaries......... 300.0 280.0 280.0
Other, Net................................................ (9.8) (25.1) 19.6
------- ------- -------
NET CASH PROVIDED BY INVESTING ACTIVITIES............ 334.8 504.3 798.3
------- ------- -------
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............................ (210.6) (203.4) (196.5)
Repurchase of Shares...................................... (145.0) (608.5) (827.9)
Decrease (Increase) in Receivable from Consolidated
Subsidiary............................................. 6.4 (131.2) (61.0)
Other, Net................................................ 36.9 73.2 60.4
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES................ (342.3) (499.9) (805.7)
------- ------- -------
Net Increase (Decrease) in Cash............................. .5 (.6) .6
Cash at Beginning of Year................................... -- .6 --
------- ------- -------
CASH AT END OF YEAR.................................. $ .5 $ -- $ .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 1999, the Corporation acquired all of the outstanding common shares of
Executive Risk Inc. in exchange for common stock of the Corporation. 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. 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 1999
Annual Report to Shareholders.
40
<PAGE> 41
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>
1999
Property and Casualty Insurance
Personal....................... $201.7 $ 778.8 $ 784.1 $1,447.5 $ 836.8
Standard Commercial............ 226.1 5,386.7 920.4 1,944.9 1,704.8
Specialty Commercial........... 351.9 5,269.2 1,618.6 2,259.6 1,400.4
Investments.................... $821.0*
------ --------- -------- -------- ------ --------
$779.7 $11,434.7 $3,323.1 $5,652.0 $821.0 $3,942.0
====== ========= ======== ======== ====== ========
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
====== ========= ======== ======== ====== ========
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
AMORTIZATION OTHER
OF DEFERRED INSURANCE
POLICY OPERATING
ACQUISITION COSTS AND PREMIUMS
SEGMENT COSTS EXPENSES** WRITTEN
------- ------------ ---------- --------
<S> <C> <C> <C>
1999
Property and Casualty Insurance
Personal....................... $ 401.3 $ 73.1 $1,524.5
Standard Commercial............ 538.5 152.7 1,842.2
Specialty Commercial........... 589.9 133.3 2,334.4
Investments....................
-------- ------ --------
$1,529.7 $359.1 $5,701.1
======== ====== ========
1998
Property and Casualty Insurance
Personal....................... $ 370.1 $ 72.7 $1,364.7
Standard Commercial............ 554.0 145.6 2,005.8
Specialty Commercial........... 540.2 134.1 2,133.0
Investments....................
-------- ------ --------
$1,464.3 $352.4 $5,503.5
======== ====== ========
1997
Property and Casualty Insurance
Personal....................... $ 340.3 $ 62.4 $1,306.4
Standard Commercial............ 515.6 128.3 2,026.1
Specialty Commercial........... 505.5 116.0 2,119.3
Reinsurance Assumed............ 41.2 (3.8)
Investments....................
-------- ------ --------
$1,402.6 $306.7 $5,448.0
======== ====== ========
</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.
** Other insurance operating costs and expenses does not include amortization of
goodwill and other charges.
41
<PAGE> 42
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>
1999.................................... $6,037.1 $631.6 $246.5 $5,652.0 4.4
======== ====== ====== ========
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
======== ====== ====== ========
</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>
1999............................................ $4,147.6 $(205.6) $3,848.9
======== ======= ========
1998............................................ $3,712.1 $(218.4) $3,008.4
======== ======= ========
1997............................................ $3,372.3 $ (65.3) $2,498.3
======== ======= ========
</TABLE>
42
<PAGE> 43
THE CHUBB CORPORATION
EXHIBITS
(ITEM 14(A))
<TABLE>
<CAPTION>
DESCRIPTION
<C> <S>
(2) -- Plan of acquisition, reorganization, arrangement,
liquidation or succession
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. Incorporated by reference to Exhibit (3) of
the registrant's Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31,
1998.
Certificate of Correction of Certificate of Amendment to the
Restated Certificate of Incorporation. Incorporated by
reference to Exhibit (3) of the registrant's Report to the
Securities and Exchange Commission on Form 10-K for the
year ended December 31, 1998.
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.
Rights Agreement dated as of March 12, 1999 between The
Chubb Corporation and First Chicago Trust Company of New
York as Rights Agent. Incorporated by reference to Exhibit
99.1 of the registrant's Report to the Securities and
Exchange Commission on Form 8-K dated March 12, 1999.
(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 Septem-
ber 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>
43
<PAGE> 44
<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, 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, 1998.
The Chubb Corporation Stock Option Plan for Non-Employee
Directors (1996), as amended, 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, 1998.
The Chubb Corporation Long-Term Stock Incentive Plan
(1992), as amended, 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, 1998.
The Chubb Corporation Stock Option Plan for Non-Employee
Directors (1992), as amended, 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, 1998.
The Chubb Corporation Deferred Compensation Plan for
Directors, as amended, 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, 1998.
The Chubb Corporation Executive Deferred Compensation Plan
incorporated by reference to Exhibit (10) of the
registrant's Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31,
1998.
The Chubb Corporation Estate Enhancement Program
incorporated by reference to Exhibit (10) of the
registrant's Report to the Securities and Exchange
Commission on Form 10-Q for the three months ended
March 31, 1999.
The Chubb Corporation Estate Enhancement Program for
Non-Employee Directors incorporated by reference to
Exhibit (10) of the registrant's Report to the
Securities and Exchange Commission on Form 10-Q for the
three months ended March 31, 1999.
Executive Severance Agreement, as amended, 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 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, 1998.
</TABLE>
44
<PAGE> 45
<TABLE>
<CAPTION>
DESCRIPTION
<C> <S>
(11) -- Computation of earnings per share incorporated by reference
from Note (17) of the notes to consolidated financial
statements of the 1999 Annual Report to Shareholders.
(13) -- Pages 15, 16, 36 through 62 and 64 of the 1999 Annual Report
to Shareholders.
(21) -- Subsidiaries of the registrant filed herewith.
(23) -- Consent of Independent Auditors (see page 36 of this
report).
(27) -- Financial Data Schedule filed herewith.
</TABLE>
45
<PAGE> 1
Supplementary Financial Data
<TABLE>
<CAPTION>
IN MILLIONS
YEARS ENDED DECEMBER 31
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
PROPERTY AND CASUALTY INSURANCE
UNDERWRITING
Net Premiums Written................................... $5,701.1 $5,503.5 $5,448.0
Increase in Unearned Premiums.......................... (49.1) (199.7) (290.6)
-------- -------- --------
Premiums Earned........................................ 5,652.0 5,303.8 5,157.4
-------- -------- --------
Claims and Claim Expenses.............................. 3,942.0 3,493.7 3,307.0
Operating Costs and Expenses........................... 1,841.5 1,832.6 1,753.3
Decrease (Increase) in Deferred Policy Acquisition
Costs................................................ 4.2 (51.8) (75.7)
Dividends to Policyholders............................. 43.1 35.9 31.7
-------- -------- --------
UNDERWRITING INCOME (LOSS)............................. (178.8) (6.6) 141.1
-------- -------- --------
INVESTMENTS
Investment Income Before Expenses...................... 832.6 760.0 721.4
Investment Expenses.................................... 11.6 11.1 10.2
-------- -------- --------
INVESTMENT INCOME...................................... 821.0 748.9 711.2
-------- -------- --------
Amortization of Goodwill and Other Charges................ (16.0) (17.4) (24.1)
Restructuring Charge (a).................................. -- (40.0) --
-------- -------- --------
PROPERTY AND CASUALTY INCOME.............................. 626.2 684.9 828.2
CORPORATE AND OTHER......................................... (3.5) 22.9 40.7
-------- -------- --------
CONSOLIDATED OPERATING INCOME BEFORE INCOME TAX............. 622.7 707.8 868.9
Federal and Foreign Income Tax.............................. 57.4 93.0 167.8
-------- -------- --------
CONSOLIDATED OPERATING INCOME............................... 565.3 614.8 701.1
REALIZED INVESTMENT GAINS AFTER INCOME TAX.................. 55.8 92.2 68.4
-------- -------- --------
CONSOLIDATED NET INCOME..................................... $ 621.1 $ 707.0 $ 769.5
======== ======== ========
PROPERTY AND CASUALTY INVESTMENT INCOME AFTER INCOME TAX.... $ 691.9 $ 634.1 $ 592.3
======== ======== ========
</TABLE>
(a) In the first quarter of 1998, a restructuring charge of $40.0 million ($26.0
million after taxes) related to a cost reduction program was recorded.
15
<PAGE> 2
Property and Casualty Underwriting Results
NET PREMIUMS WRITTEN (In Millions of Dollars)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Personal Insurance
Automobile................................... $ 346.1 $ 309.4 $ 298.6 $ 243.1 $ 200.3
Homeowners................................... 826.7 735.1 697.4 546.1 455.6
Other........................................ 351.7 320.2 310.4 250.0 210.9
-------- -------- -------- -------- --------
Total Personal.......................... 1,524.5 1,364.7 1,306.4 1,039.2 866.8
-------- -------- -------- -------- --------
Commercial Insurance
Multiple Peril............................... 714.5 784.5 813.6 671.0 575.7
Casualty..................................... 828.2 900.5 915.8 818.0 717.3
Workers' Compensation........................ 299.5 320.8 296.7 243.7 223.4
-------- -------- -------- -------- --------
Total Standard Commercial............... 1,842.2 2,005.8 2,026.1 1,732.7 1,516.4
-------- -------- -------- -------- --------
Property and Marine.......................... 498.4 524.0 583.0 495.0 426.3
Executive Protection......................... 1,078.0 949.8 891.4 775.7 647.0
Financial Institutions....................... 385.8 391.6 384.3 340.4 285.5
Other........................................ 372.2 267.6 260.6 188.3 195.5
-------- -------- -------- -------- --------
Total Specialty Commercial.............. 2,334.4 2,133.0 2,119.3 1,799.4 1,554.3
-------- -------- -------- -------- --------
Total Commercial........................ 4,176.6 4,138.8 4,145.4 3,532.1 3,070.7
-------- -------- -------- -------- --------
Total Personal and Commercial........... 5,701.1 5,503.5 5,451.8 4,571.3 3,937.5
Reinsurance Assumed from Royal & Sun
Alliance..................................... -- -- (3.8) 202.5 368.5
-------- -------- -------- -------- --------
Total................................... $5,701.1 $5,503.5 $5,448.0 $4,773.8 $4,306.0
======== ======== ======== ======== ========
</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>
<S> <C> <C> <C> <C> <C>
Personal Insurance
Automobile................................... 91.8% 89.2% 86.6% 86.5% 87.4%
Homeowners................................... 97.9 90.8 88.9 104.3 93.8
Other........................................ 69.4 70.2 66.9 69.3 72.6
-------- -------- -------- -------- --------
Total Personal.......................... 89.9 85.6 83.1 91.7 87.1
-------- -------- -------- -------- --------
Commercial Insurance
Multiple Peril............................... 132.7 124.2 118.7 118.1 110.0
Casualty..................................... 119.3 114.6 113.5 113.3 113.8
Workers' Compensation........................ 112.6 111.5 105.0 101.8 95.1
-------- -------- -------- -------- --------
Total Standard Commercial............... 123.6 118.0 114.5 113.6 109.7
-------- -------- -------- -------- --------
Property and Marine.......................... 111.3 116.5 105.5 97.8 92.9
Executive Protection......................... 84.3 75.8 74.5 76.5 82.1
Financial Institutions....................... 95.5 86.7 91.5 83.7 88.8
Other........................................ 92.9 100.9 85.0 99.0 103.9
-------- -------- -------- -------- --------
Total Specialty Commercial.............. 93.6 91.5 87.5 86.1 89.1
-------- -------- -------- -------- --------
Total Commercial........................ 107.3 104.5 100.7 99.7 99.3
-------- -------- -------- -------- --------
Total Personal and Commercial........... 102.8 99.8 96.6 97.9 96.5
Reinsurance Assumed from Royal & Sun
Alliance..................................... -- -- N/M N/M 99.2
-------- -------- -------- -------- --------
Total................................... 102.8% 99.8% 96.9% 98.3% 96.8%
======== ======== ======== ======== ========
</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 1999 1998 1997
<S> <C> <C> <C>
INCOME
Property and Casualty Insurance
Underwriting Income (Loss)............................... $(178.8) $ (6.6) $ 141.1
Investment Income........................................ 821.0 748.9 711.2
Amortization of Goodwill and Other Charges............... (16.0) (57.4)(b) (24.1)
Property and Casualty Insurance Income.................... 626.2 684.9 828.2
Corporate and Other....................................... (3.5) 22.9 40.7
OPERATING INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX...................................... 622.7 707.8 868.9
Federal and Foreign Income Tax (Credit)................... 57.4 93.0 167.8
OPERATING INCOME FROM CONTINUING OPERATIONS............... 565.3 614.8 701.1
Realized Investment Gains from Continuing Operations...... 55.8 92.2 68.4
INCOME FROM CONTINUING OPERATIONS......................... 621.1 707.0 769.5
Income from Discontinued Operations (1)................... -- -- --
NET INCOME................................................ 621.1 707.0 769.5
Property and Casualty Investment Income After Income
Tax.................................................... 691.9 634.1 592.3
Dividends Declared on Common Stock.......................... 216.5 204.7 198.3
Net Change in Unrealized Appreciation or Depreciation of
Investments, Net of Tax(2)................................ (527.3) 14.6 161.4
PER SHARE
Operating Income from Continuing Operations............... 3.33 3.65(b) 4.00
Income from Continuing Operations......................... 3.66 4.19 4.39
Income from Discontinued Operations(1).................... -- -- --
Net Income................................................ 3.66 4.19 4.39
Dividends Declared on Common Stock........................ 1.28 1.24 1.16
Average Common and Potentially Dilutive Shares.............. 169.8 168.6 176.2
</TABLE>
(1) In May 1997, the Corporation sold its life and health
insurance operations, which have been classified as
discontinued operations.
(2) 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.
36
<PAGE> 4
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
$ 54.3 $ 111.7 $ .4 $(528.9)(a) $ (46.3) $ 17.1 $ 4.1
646.1 603.0 560.5 533.7 493.5 469.5 456.3
(24.0) (17.5) (8.7) (6.2) (4.3) (1.2) (5.5)
676.4 697.2 552.2 (1.4) 442.9 485.4 454.9
(209.3)(c) 31.0 5.0 24.5 43.8 59.3 80.2
467.1 728.2 557.2 23.1 486.7 544.7 535.1
32.9 144.5 84.4 (107.0) 49.4 87.2 88.3
434.2 583.7 472.8 130.1 437.3 457.5 446.8
52.0 70.7 35.1 137.3 114.8 40.3 25.8
486.2 654.4 507.9 267.4 552.1 497.8 472.6
26.5 42.2 20.6 76.8 65.0 54.2 49.5
512.7 696.6 528.5 324.2(d) 617.1 552.0 522.1
544.2 507.2 475.0 455.4 422.8 397.6 371.4
188.7 170.6 161.1 150.8 139.6 127.8 109.1
(107.2) 470.2 (487.9) 46.5 (82.1) 12.2 (19.4)
2.44(c) 3.27 2.66 .77(a) 2.47 2.61 2.59
2.73 3.67 2.85 1.52 3.10 2.84 2.74
.15 .23 .11 .42 .36 .30 .28
2.88 3.90 2.96 1.83(d) 3.46 3.14 3.02
1.08 .98 .92 .86 .80 .74 .66
181.6 180.9 181.6 182.2 181.4 178.5 175.5
</TABLE>
(a) Underwriting income has been reduced by $550.0 million ($357.5 million
after-tax or $1.96 per share) for the net effect of a $675.0 million
increase in unpaid claims related to an agreement for the settlement of
asbestos-related litigation and a $125.0 million return premium related to
the commutation of a medical malpractice reinsurance agreement.
(b) Property and casualty insurance other charges includes a restructuring
charge of $40.0 million ($26.0 million after-tax or $.15 per share).
(c) Real estate income has been reduced by a charge of $255.0 million ($160.0
million after-tax or $.89 per share) for the write-down of the carrying
value of certain real estate assets to their estimated fair value.
(d) 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.
37
<PAGE> 5
Ten Year Financial Summary
(in millions except for per share amounts)
<TABLE>
<CAPTION>
FOR THE YEAR 1999 1998 1997
<S> <C> <C> <C>
REVENUES
Property and Casualty Insurance
Premiums Earned......................................... $ 5,652.0 $ 5,303.8 $ 5,157.4
Investment Income....................................... 832.6 760.0 721.4
Real Estate.............................................. 96.8 82.2 616.1
Corporate Investment Income.............................. 60.8 61.9 63.9
Realized Investment Gains................................ 87.4 141.9 105.2
TOTAL REVENUES........................................ 6,729.6 6,349.8 6,664.0
AT YEAR END
Total Assets............................................... 23,537.0 20,746.0 19,615.6
Invested Assets
Property and Casualty Insurance.......................... 14,869.9 13,715.0 12,777.3
Corporate................................................ 1,149.5 1,040.3 1,272.3
Unpaid Claims.............................................. 11,434.7 10,356.5 9,772.5
Long Term Debt............................................. 759.2 607.5 398.6
Total Shareholders' Equity................................. 6,271.8 5,644.1 5,657.1
Per Common Share......................................... 35.74 34.78 33.53
Per Common Share, Excluding the Effects of SFAS No.
115................................................... 36.58 32.59 31.69
Actual Common Shares Outstanding........................... 175.5 162.3 168.7
</TABLE>
Amounts prior to 1994 do not reflect the accounting changes
prescribed by Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities, as restatement of prior year amounts
was not permitted.
38
<PAGE> 6
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
$ 4,569.3 $ 4,147.2 $ 3,776.3 $ 3,504.8(a) $ 3,163.3 $ 3,037.2 $ 2,836.1
656.2 613.3 570.5 541.7 501.1 477.0 463.4
319.8 287.8 204.9 160.6 150.0 140.9 174.9
55.4 54.4 49.4 52.7 57.2 46.3 39.6
79.8 108.8 54.1 210.6 174.1 61.1 39.6
5,680.5 5,211.5 4,655.2 4,470.4 4,045.7 3,762.5 3,553.6
19,938.9 19,636.3 17,761.0 16,729.5 15,197.6 13,885.9 12,347.8
11,190.7 10,013.6 8,938.8 8,403.1 7,767.5 7,086.6 6,297.8
890.4 906.6 879.5 965.7 955.8 840.3 688.4
9,523.7 9,588.2 8,913.2 8,235.4 7,220.9 6,591.3 6,016.4
1,070.5 1,150.8 1,279.6 1,267.2 1,065.6 1,045.8 812.6
5,462.9 5,262.7 4,247.0 4,196.1 3,954.4 3,541.6 2,882.6
31.24 30.14 24.46 23.92 22.59 20.37 17.60
30.27 28.51 25.30 23.92 22.59 20.37 17.60
174.9 174.6 173.6 175.4 175.0 173.9 163.8
</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.
39
<PAGE> 7
The Chubb Corporation
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
IN MILLIONS
YEARS ENDED DECEMBER 31
1999 1998 1997
REVENUES -------- -------- --------
<S> <C> <C> <C>
Premiums Earned (Note 8)............................... $5,652.0 $5,303.8 $5,157.4
Investment Income (Note 4)............................. 893.4 821.9 785.3
Real Estate............................................ 96.8 82.2 616.1
Realized Investment Gains (Note 4)..................... 87.4 141.9 105.2
-------- -------- --------
TOTAL REVENUES.................................... 6,729.6 6,349.8 6,664.0
-------- -------- --------
CLAIMS AND EXPENSES
Insurance Claims (Notes 8 and 15)...................... 3,942.0 3,493.7 3,307.0
Amortization of Deferred Policy Acquisition Costs (Note
5).................................................... 1,529.7 1,464.3 1,402.6
Other Insurance Operating Costs and Expenses........... 375.1 369.8 330.8
Real Estate Cost of Sales and Expenses................. 100.3 85.7 624.7
Investment Expenses.................................... 13.7 13.2 12.0
Corporate Expenses..................................... 58.7 33.4 12.8
Restructuring Charge (Note 9).......................... -- 40.0 --
-------- -------- --------
TOTAL CLAIMS AND EXPENSES......................... 6,019.5 5,500.1 5,689.9
-------- -------- --------
INCOME BEFORE FEDERAL AND FOREIGN INCOME TAX...... 710.1 849.7 974.1
FEDERAL AND FOREIGN INCOME TAX (NOTE 11).................... 89.0 142.7 204.6
-------- -------- --------
NET INCOME........................................ $ 621.1 $ 707.0 $ 769.5
======== ======== ========
NET INCOME PER SHARE (NOTE 17)
Basic............................................. $ 3.70 $ 4.27 $ 4.48
Diluted........................................... 3.66 4.19 4.39
</TABLE>
See accompanying notes.
40
<PAGE> 8
The Chubb Corporation
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
IN MILLIONS
DECEMBER 31
1999 1998
ASSETS ---- ---------
<S> <C> <C>
Invested Assets (Note 4)
Short Term Investments................................. $ 731.1 $ 344.2
Fixed Maturities
Held-to-Maturity -- Tax Exempt (market $1,801.0 and
$2,140.2)........................................... 1,741.9 2,002.2
Available-for-Sale
Tax Exempt (cost $7,889.3 and $6,509.3)........... 7,867.5 6,935.1
Taxable (cost $5,054.7 and $4,259.0).............. 4,909.7 4,381.6
Equity Securities (cost $715.0 and $1,002.6)........... 769.2 1,092.2
--------- ---------
TOTAL INVESTED ASSETS................................ 16,019.4 14,755.3
Cash...................................................... 22.7 8.3
Securities Lending Collateral............................. 469.5 --
Accrued Investment Income................................. 242.9 221.0
Premiums Receivable....................................... 1,234.7 1,199.3
Reinsurance Recoverable on Unpaid Claims.................. 1,685.9 1,306.6
Prepaid Reinsurance Premiums.............................. 240.1 134.6
Funds Held for Asbestos-Related Settlement................ -- 607.4
Deferred Policy Acquisition Costs (Note 5)................ 779.7 728.7
Real Estate Assets (Notes 6 and 10)....................... 699.4 746.0
Deferred Income Tax (Note 11)............................. 584.2 320.8
Goodwill.................................................. 507.2 --
Other Assets.............................................. 1,051.3 718.0
--------- ---------
TOTAL ASSETS......................................... $23,537.0 $20,746.0
========= =========
LIABILITIES
Unpaid Claims (Note 15)................................... $11,434.7 $10,356.5
Unearned Premiums......................................... 3,323.1 2,915.7
Securities Lending Payable................................ 469.5 --
Long Term Debt (Note 10).................................. 759.2 607.5
Dividend Payable to Shareholders.......................... 56.2 50.3
Accrued Expenses and Other Liabilities.................... 1,222.5 1,171.9
--------- ---------
TOTAL LIABILITIES.................................... 17,265.2 15,101.9
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 14 AND 15)
SHAREHOLDERS' EQUITY (NOTES 12 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 177,272,322 and 175,989,202
Shares................................................. 177.3 176.0
Paid-In Surplus........................................... 418.4 546.7
Retained Earnings......................................... 6,008.6 5,604.0
Accumulated Other Comprehensive Income
Unrealized Appreciation (Depreciation) of Investments,
Net of Tax (Note 4)................................... (112.6) 414.7
Foreign Currency Translation Losses, Net of Tax........ (44.8) (36.0)
Receivable from Employee Stock Ownership Plan............. (74.9) (86.3)
Treasury Stock, at Cost -- 1,782,489 and 13,722,376
Shares................................................. (100.2) (975.0)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY........................... 6,271.8 5,644.1
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $23,537.0 $20,746.0
========= =========
</TABLE>
See accompanying notes.
41
<PAGE> 9
The Chubb Corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
IN MILLIONS
YEARS ENDED DECEMBER 31
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
PREFERRED STOCK
Balance, Beginning and End of Year..................... $ -- $ -- $ --
-------- -------- --------
COMMON STOCK
Balance, Beginning of Year............................. 176.0 176.0 176.1
Share Activity Related to Acquisition of Executive
Risk................................................. .6 -- --
Share Activity under Option and Incentive Plans........ .7 -- (.1)
-------- -------- --------
Balance, End of Year.............................. 177.3 176.0 176.0
-------- -------- --------
PAID-IN SURPLUS
Balance, Beginning of Year............................. 546.7 593.0 695.7
Share Activity Related to Acquisition of Executive
Risk................................................. (126.3) -- --
Exchange of Long Term Debt............................. -- -- (68.4)
Share Activity under Option and Incentive Plans........ (2.0) (46.3) (34.3)
-------- -------- --------
Balance, End of Year.............................. 418.4 546.7 593.0
-------- -------- --------
RETAINED EARNINGS
Balance, Beginning of Year............................. 5,604.0 5,101.7 4,530.5
Net Income............................................. 621.1 707.0 769.5
Dividends Declared (per share $1.28, $1.24 and
$1.16)............................................... (216.5) (204.7) (198.3)
-------- -------- --------
Balance, End of Year.............................. 6,008.6 5,604.0 5,101.7
-------- -------- --------
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS
Balance, Beginning of Year............................. 414.7 400.1 238.7
Change During Year, Net (Note 4)....................... (527.3) 14.6 161.4
-------- -------- --------
Balance, End of Year.............................. (112.6) 414.7 400.1
-------- -------- --------
FOREIGN CURRENCY TRANSLATION LOSSES
Balance, Beginning of Year............................. (36.0) (25.7) (15.6)
Change During Year, Net of Tax......................... (8.8) (10.3) (10.1)
-------- -------- --------
Balance, End of Year.............................. (44.8) (36.0) (25.7)
-------- -------- --------
RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN
Balance, Beginning of Year............................. (86.3) (96.7) (106.3)
Principal Repayments................................... 11.4 10.4 9.6
-------- -------- --------
Balance, End of Year.............................. (74.9) (86.3) (96.7)
-------- -------- --------
TREASURY STOCK, AT COST
Balance, Beginning of Year............................. (975.0) (491.3) (56.2)
Repurchase of Shares................................... (145.0) (608.5) (827.9)
Share Activity Related to Acquisition of Executive
Risk................................................. 957.2 -- --
Shares Issued upon Exchange of Long Term Debt.......... -- -- 304.4
Share Activity under Option and Incentive Plans........ 62.6 124.8 88.4
-------- -------- --------
Balance, End of Year.............................. (100.2) (975.0) (491.3)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY........................ $6,271.8 $5,644.1 $5,657.1
======== ======== ========
</TABLE>
See accompanying notes.
42
<PAGE> 10
The Chubb Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
IN MILLIONS
YEARS ENDED DECEMBER 31
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................ $ 621.1 $ 707.0 $ 769.5
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Claims, Net......................... 93.1 485.3 808.7
Increase in Unearned Premiums, Net..................... 49.1 199.7 290.6
Decrease (Increase) in Premiums Receivable............. 14.9 (54.9) (159.5)
Decrease (Increase) in Funds Held for Asbestos-Related
Settlement........................................... 607.4 (7.9) .4
Decrease (Increase) in Deferred Policy Acquisition
Costs................................................ 4.2 (51.8) (75.7)
Deferred Income Tax (Credit)........................... 5.3 (5.5) (33.3)
Depreciation........................................... 68.4 58.2 56.4
Realized Investment Gains.............................. (87.4) (141.9) (105.2)
Other, Net............................................. (37.2) 25.8 13.2
--------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES......................................... 1,338.9 1,214.0 1,565.1
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturities -- Available-for-
Sale..................................................... 1,427.5 1,668.8 3,682.6
Proceeds from Maturities of Fixed Maturities.............. 860.3 784.2 658.5
Proceeds from Sales of Equity Securities.................. 1,030.6 366.7 401.3
Proceeds from Sale of Discontinued Operations, Net........ -- -- 861.2
Purchases of Fixed Maturities............................. (3,252.2) (3,218.4) (5,394.8)
Purchases of Equity Securities............................ (590.7) (535.7) (519.3)
Purchase of Interest in Hiscox plc........................ (145.3) -- --
Decrease (Increase) in Short Term Investments, Net........ (190.9) 380.9 (449.2)
Proceeds from Sale of Real Estate Properties.............. 7.0 33.6 759.6
Additions to Real Estate Assets........................... (11.7) (13.2) (40.1)
Purchases of Fixed Assets, Net............................ (98.4) (78.8) (71.0)
Other, Net................................................ 6.3 (75.5) 41.1
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES................ (957.5) (687.4) (70.1)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Long Term Debt.................. -- 400.5 10.2
Repayment of Long Term Debt............................... (48.3) (191.6) (344.9)
Decrease in Short Term Debt, Net.......................... -- -- (189.5)
Dividends Paid to Shareholders............................ (210.6) (203.4) (196.5)
Repurchase of Shares...................................... (145.0) (608.5) (827.9)
Other, Net................................................ 36.9 73.2 60.4
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES................ (367.0) (529.8) (1,488.2)
--------- --------- ---------
Net Increase (Decrease) in Cash............................. 14.4 (3.2) 6.8
Cash at Beginning of Year................................... 8.3 11.5 4.7
--------- --------- ---------
CASH AT END OF YEAR.................................. $ 22.7 $ 8.3 $ 11.5
========= ========= =========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net Income.................................................. $ 621.1 $ 707.0 $ 769.5
Other Comprehensive Income (Loss)
Change in Unrealized Appreciation or Depreciation of
Investments, Net of Tax................................ (527.3) 14.6 161.4
Foreign Currency Translation Losses,
Net of Tax............................................. (8.8) (10.3) (10.1)
--------- --------- ---------
(536.1) 4.3 151.3
--------- --------- ---------
COMPREHENSIVE INCOME................................. $ 85.0 $ 711.3 $ 920.8
========= ========= =========
</TABLE>
See accompanying notes.
43
<PAGE> 11
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 include amounts based on informed
estimates and judgments of 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.
In May 1997, the Corporation completed the sale of its 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
subsequent to December 31, 1996.
Certain amounts in the consolidated financial statements for prior years have
been reclassified to conform with the 1999 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 a separate component of comprehensive income.
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 risk 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> 12
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) 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.
(g) Goodwill
Goodwill, which represents the excess of the purchase price over the fair
value of net assets of subsidiaries acquired, is being amortized using the
straight-line method over 26 years. The carrying value of goodwill is
periodically reviewed for impairment. If it became probable that the projected
future undiscounted cash flows were not sufficient to recover the carrying value
of the goodwill, an impairment loss would be recognized resulting in a
write-down of the carrying value of the goodwill.
(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 a separate
component of comprehensive income.
45
<PAGE> 13
(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 1999, the Corporation acquired all of the outstanding common shares of
Executive Risk Inc. in exchange for common stock of the Corporation (see Note
(3)). The details of the acquisition were as follows: fair value of assets
acquired, including goodwill, $2,459 million; fair value of liabilities assumed,
$1,627 million; and fair value of common stock issued and options assumed, $832
million. In 1997, $228.6 million of exchangeable subordinated notes were
exchanged for 5,316,565 shares of common stock of the Corporation. Also, 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 October 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-7, Deposit Accounting: Accounting
for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk.
This SOP provides guidance on how to account for insurance and reinsurance
contracts that do not transfer insurance risk. SOP 98-7 is effective for the
Corporation for the year beginning January 1, 2000. Restatement of previously
issued financial statements is not permitted. The adoption of SOP 98-7 is not
expected to have a significant effect on the Corporation's financial position or
results of operations.
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 in the balance sheet as
assets or liabilities and be measured at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and whether it qualifies for hedge accounting. SFAS No. 133, as amended by SFAS
No. 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133, is
effective for the Corporation for the year beginning January 1, 2001. 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.
(2) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1999, the Corporation adopted SOP 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use, which was
issued by the AICPA. The 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. Prior to 1999, the Corporation
expensed all costs of developing internal use computer software as incurred. The
SOP has been applied prospectively. Adoption of SOP 98-1 decreased claims and
operating expenses by $25.4 million in 1999, resulting in an increase to net
income of $16.5 million or $.10 per diluted share for the year. The effect on
net income will decrease in future years as the new method of accounting is
phased in.
(3) ACQUISITIONS
(a) In July 1999, the Corporation completed its acquisition of Executive Risk
Inc. Executive Risk is a specialty insurance company offering directors and
officers, errors and omissions and professional liability coverages.
Executive Risk shareholders received 1.235 shares of the Corporation's common
stock for each outstanding common share of Executive Risk. In addition,
outstanding Executive Risk stock options were converted to stock options of the
Corporation. Approximately 14.3 million shares of common stock of the
Corporation were issued to Executive Risk shareholders and an additional 1.8
million shares of common stock of the Corporation were reserved for issuance
upon exercise of the converted Executive Risk stock options.
The acquisition has been accounted for using the purchase method of
accounting. Therefore, the results of operations of Executive Risk are included
in the Corporation's consolidated results of operations from the date of
acquisition. The assets and liabilities of Executive Risk were recorded at their
estimated fair values at the date of acquisition. The value of the stock options
assumed by the Corporation was included in the purchase price. The total
purchase price was approximately $832 million. The excess of the purchase price
over the estimated fair value of the net assets acquired, amounting to
approximately $517 million, has been recorded as goodwill and is being amortized
over 26 years.
Pro forma results of operations showing the effects on the Corporation's
operations prior to the date of acquisition have not been presented due to
immateriality.
(b) In March 1999, the Corporation completed its purchase of a 28% interest in
Hiscox plc, a leading U.K. personal and commercial specialty insurer, for
approximately $145 million.
46
<PAGE> 14
(4) INVESTED ASSETS AND RELATED INCOME
(a) The amortized cost and estimated market value of fixed maturities were as
follows:
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------------
1999 1998
--------------------------------------------------- ------------------------
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....... $ 1,741.9 $ 60.3 $ 1.2 $ 1,801.0 $ 2,002.2 $138.0
--------- ------ ------ --------- --------- ------
Available-for-sale
Tax exempt......................... 7,889.3 137.5 159.3 7,867.5 6,509.3 427.9
--------- ------ ------ --------- --------- ------
Taxable
U.S. Government and government
agency and authority
obligations.................... 575.4 .5 14.4 561.5 344.2 8.8
Corporate bonds.................. 1,535.0 2.1 61.2 1,475.9 1,031.9 44.5
Foreign bonds.................... 1,199.2 19.4 15.6 1,203.0 1,118.3 85.4
Mortgage-backed securities....... 1,674.8 13.2 88.6 1,599.4 1,694.3 22.1
Redeemable preferred stocks...... 70.3 .1 .5 69.9 70.3 2.9
--------- ------ ------ --------- --------- ------
5,054.7 35.3 180.3 4,909.7 4,259.0 163.7
--------- ------ ------ --------- --------- ------
Total available-for-sale....... 12,944.0 172.8 339.6 12,777.2 10,768.3 591.6
--------- ------ ------ --------- --------- ------
Total fixed maturities......... $14,685.9 $233.1 $340.8 $14,578.2 $12,770.5 $729.6
========= ====== ====== ========= ========= ======
<CAPTION>
December 31
------------------------
1998
------------------------
Gross Estimated
Unrealized Market
Depreciation Value
------------ ---------
(in millions)
<S> <C> <C>
Held-to-maturity -- Tax exempt....... $-- $ 2,140.2
----- ---------
Available-for-sale
Tax exempt......................... 2.1 6,935.1
----- ---------
Taxable
U.S. Government and government
agency and authority
obligations.................... -- 353.0
Corporate bonds.................. .6 1,075.8
Foreign bonds.................... 1.6 1,202.1
Mortgage-backed securities....... 38.9 1,677.5
Redeemable preferred stocks...... -- 73.2
----- ---------
41.1 4,381.6
----- ---------
Total available-for-sale....... 43.2 11,316.7
----- ---------
Total fixed maturities......... $43.2 $13,456.9
===== =========
</TABLE>
The amortized cost and estimated market value of fixed maturities at December
31, 1999 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.................................. $ 185.4 $ 187.2
Due after one year through five years.................... 535.3 552.9
Due after five years through ten years................... 709.0 735.2
Due after ten years...................................... 312.2 325.7
--------- ---------
$ 1,741.9 $ 1,801.0
========= =========
Available-for-sale
Due in one year or less.................................. $ 115.5 $ 116.6
Due after one year through five years.................... 2,002.8 2,014.8
Due after five years through ten years................... 4,221.5 4,257.1
Due after ten years...................................... 4,929.4 4,789.3
--------- ---------
11,269.2 11,177.8
Mortgage-backed securities............................... 1,674.8 1,599.4
--------- ---------
$12,944.0 $12,777.2
========= =========
</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 (depreciation) of investments
carried at market value were as follows:
<TABLE>
<CAPTION>
December 31
----------------------
1999 1998
---- ----
(in millions)
<S> <C> <C>
Equity securities
Gross unrealized appreciation............................ $ 89.7 $164.6
Gross unrealized depreciation............................ 35.5 75.0
------- ------
54.2 89.6
------- ------
Fixed maturities
Gross unrealized appreciation............................ 172.8 591.6
Gross unrealized depreciation............................ 339.6 43.2
------- ------
(166.8) 548.4
------- ------
(112.6) 638.0
Deferred income tax liability (asset)...................... (39.4) 223.3
Valuation allowance........................................ 39.4 --
------- ------
$(112.6) $414.7
======= ======
</TABLE>
47
<PAGE> 15
The change in unrealized appreciation or depreciation of investments carried
at market value was as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------
1999 1998 1997
---- ---- ----
(in millions)
<S> <C> <C> <C>
Change in unrealized appreciation
of equity securities.............. $ (35.4) $(47.6) $ 31.4
Change in unrealized appreciation
or
depreciation of fixed
maturities........................ (715.2) 70.0 216.9
------- ------ ------
(750.6) 22.4 248.3
Deferred income tax (credit)....... (262.7) 7.8 86.9
Increase in valuation allowance.... 39.4 -- --
------- ------ ------
$(527.3) $ 14.6 $161.4
======= ====== ======
</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 carried at amortized cost was a decrease of $78.9 million, a
decrease of $8.6 million and an increase of $16.8 million for the years ended
December 31, 1999, 1998 and 1997, respectively.
(c) The sources of net investment income were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------
1999 1998 1997
---- ---- ----
(in millions)
<S> <C> <C> <C>
Fixed maturities.................... $816.9 $761.1 $726.1
Equity securities................... 31.2 24.7 10.8
Short term investments.............. 43.8 35.8 47.6
Other............................... 1.5 .3 .8
------ ------ ------
Gross investment income............ 893.4 821.9 785.3
Investment expenses................. 13.7 13.2 12.0
------ ------ ------
$879.7 $808.7 $773.3
====== ====== ======
</TABLE>
(d) Realized investment gains and losses were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------
1999 1998 1997
---- ---- ----
(in millions)
<S> <C> <C> <C>
Gross realized investment gains
Fixed maturities................... $ 38.2 $ 49.2 $ 56.3
Equity securities.................. 172.9 118.5 93.8
------ ------ ------
211.1 167.7 150.1
------ ------ ------
Gross realized investment losses
Fixed maturities................... 14.3 7.0 26.5
Equity securities.................. 109.4 18.8 18.4
------ ------ ------
123.7 25.8 44.9
------ ------ ------
Realized investment gains........... 87.4 141.9 105.2
Income tax.......................... 31.6 49.7 36.8
------ ------ ------
$ 55.8 $ 92.2 $ 68.4
====== ====== ======
</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 in accordance with the Corporation's
guidelines to generate additional income for the Corporation.
(5) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs deferred and the related amortization charged against
income were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------
1999 1998 1997
---- ---- ----
(in millions)
<S> <C> <C> <C>
Balance, beginning of year..... $ 728.7 $ 676.9 $ 601.2
--------- --------- ---------
Increase related to acquisition
of Executive Risk............ 55.2 -- --
--------- --------- ---------
Costs deferred during year
Commissions and brokerage.... 784.4 768.0 775.0
Premium taxes and
assessments................ 132.8 128.5 124.9
Salaries and operating
costs...................... 608.3 619.6 578.4
--------- --------- ---------
1,525.5 1,516.1 1,478.3
Amortization during year....... (1,529.7) (1,464.3) (1,402.6)
--------- --------- ---------
Balance, end of year........... $ 779.7 $ 728.7 $ 676.9
========= ========= =========
</TABLE>
(6) 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
November 1997, the real estate subsidiary sold a substantial portion of its
commercial properties for $736.9 million, which included $628.3 million in cash
and the assumption of $108.6 million in debt. 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
-------------------
1999 1998
---- ----
(in millions)
<S> <C> <C>
Mortgages and notes receivable (net of allowance
for uncollectible amounts of $13.9 and $16.8).... $ 81.2 $105.2
Income producing properties....................... 196.8 166.5
Construction in progress.......................... 66.2 109.2
Land under development and unimproved land........ 355.2 365.1
------ ------
$699.4 $746.0
====== ======
</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 $85.5 million and
$106.9 million at December 31, 1999 and 1998, 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 $3.5 million,
$2.9 million and $2.7 million for 1999, 1998 and 1997, respectively.
48
<PAGE> 16
(7) PROPERTY AND EQUIPMENT
Property and equipment included in other assets were as follows:
<TABLE>
<CAPTION>
December 31
-------------------
1999 1998
---- ----
(in millions)
<S> <C> <C>
Cost.......................................... $517.6 $428.3
Accumulated depreciation...................... 224.1 196.3
------ ------
$293.5 $232.0
====== ======
</TABLE>
Depreciation expense related to property and equipment was $64.9 million,
$55.3 million and $53.7 million for 1999, 1998 and 1997, respectively.
(8) 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
------------------------------
1999 1998 1997
---- ---- ----
(in millions)
<S> <C> <C> <C>
Direct premiums written....... $6,042.6 $5,842.0 $5,524.4
Reinsurance assumed
Royal & Sun Alliance........ -- -- (3.8)
Other....................... 275.2 141.9 166.7
Reinsurance ceded
Royal & Sun Alliance........ -- -- 174.6
Other....................... (616.7) (480.4) (413.9)
-------- -------- --------
Net premiums written........ $5,701.1 $5,503.5 $5,448.0
======== ======== ========
Direct premiums earned........ $6,037.1 $5,624.7 $5,315.8
Reinsurance assumed
Royal & Sun Alliance........ -- -- 94.9
Other....................... 246.5 140.6 197.5
Reinsurance ceded............. (631.6) (461.5) (450.8)
-------- -------- --------
Net premiums earned......... $5,652.0 $5,303.8 $5,157.4
======== ======== ========
</TABLE>
The Royal & Sun Alliance Insurance Group plc is the beneficial owner of 5.1%
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, 1997, the reinsurance agreements with Royal & Sun
Alliance were terminated. The termination of the agreements 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 a
reduction of assumed premiums written of $93.6 million in 1997.
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 $501.2 million, $447.4
million and $346.8 million in 1999, 1998 and 1997, respectively. There were no
recoveries from Royal & Sun Alliance in any of these years.
(9) RESTRUCTURING CHARGE
During 1998, the Corporation implemented an activity value analysis process to
identify and eliminate low-value activities and to improve operational
efficiency while redirecting resources to activities having the greatest
potential to contribute to the Corporation's results. The cost control
initiative 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 resulted from improved vendor management and lower
consulting expenses and other operating costs.
In the first quarter of 1998, a restructuring charge of $40.0 million was
recorded related to the implementation of the cost control initiative. Of the
$40.0 million restructuring charge, approximately $30 million was comprised of
accruals for providing enhanced pension benefits and postretirement medical
benefits to employees who accepted an early retirement incentive offer and
approximately $5 million was severance costs for employees who were terminated.
The remainder of the charge was for other expenses such as the cost of
outplacement services. The initiative was completed with no significant
differences from the original estimates of the restructuring costs. The
liabilities related to the enhanced pension and postretirement medical benefits
were included in the pension and postretirement medical benefits liabilities,
which will be reduced as benefit payments are made over time. Of the other
restructuring costs, $1.5 million remained unpaid at December 31, 1999.
49
<PAGE> 17
(10) DEBT AND CREDIT ARRANGEMENTS
(a) Long term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
-------------------------------------
1999 1998
----------------- -----------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(in millions)
<S> <C> <C> <C> <C>
Term loan................. $ 15.0 $ 15.0 $ 28.5 $ 28.5
Mortgages................. 44.2 44.8 49.0 48.9
8 3/4% notes.............. -- -- 30.0 30.8
6.15% notes............... 300.0 284.8 300.0 312.8
6.60% debentures.......... 100.0 89.2 100.0 108.1
6 7/8% notes.............. 100.0 99.4 100.0 106.1
7 1/8% notes.............. 75.0 71.0 -- --
8.675% capital
securities.............. 125.0 125.0 -- --
------ ------ ------ ------
$759.2 $729.2 $607.5 $635.2
====== ====== ====== ======
</TABLE>
The term loan and mortgages are obligations of the real estate subsidiaries.
The term loan matures in 2001. The mortgages payable are due in varying amounts
monthly through 2010. At December 31, 1999, the interest rate on the term loan
was 7.3% and the interest rate for the mortgages payable approximated 8 1/2%.
The term loan and mortgages payable are secured by real estate assets with a net
book value of $185.0 million at December 31, 1999.
The Corporation has outstanding $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.
Chubb Capital Corporation, a wholly owned subsidiary of the Corporation, has
outstanding $100.0 million of unsecured 6 7/8% notes due February 1, 2003. These
notes are fully and unconditionally guaranteed by the Corporation.
Chubb Executive Risk Inc., a wholly owned subsidiary of the Corporation, has
outstanding $75.0 million of unsecured 7 1/8% notes due December 15, 2007.
Executive Risk Capital Trust, wholly owned by Chubb Executive Risk, has
outstanding $125.0 million of 8.675% capital securities. The Trust in turn used
the proceeds from the issuance of the capital securities to acquire $125.0
million of Chubb Executive Risk 8.675% junior subordinated deferrable interest
debentures due February 1, 2027. The sole assets of the Trust are the
debentures. The debentures and the related income effects are eliminated in the
consolidated financial statements. The capital securities are subject to
mandatory redemption on February 1, 2027, upon repayment of the debentures. The
capital securities are also subject to mandatory redemption in certain other
specified circumstances beginning in 2007 at a redemption price that includes a
make whole premium through 2017 and at par thereafter. Chubb Executive Risk has
the right, at any time, to defer payments of interest on the debentures and
hence distributions on the capital securities for a period not exceeding 10
consecutive semi-annual periods up to the maturity dates of the respective
securities. During any such period, interest will continue to accrue and Chubb
Executive Risk may not declare or pay any dividends to the Corporation. Chubb
Executive Risk's obligations under the debentures and related agreements, taken
together, constitute a full and unconditional guarantee by it of payments due on
the capital securities.
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, 1999 are as follows:
<TABLE>
<CAPTION>
Years Ending Term Loan
December 31 and Mortgages Notes Total
------------ ------------- ----- -----
(in millions)
<S> <C> <C> <C>
2000.................. $ .3 $ -- $ .3
2001.................. 15.3 -- 15.3
2002.................. .4 -- .4
2003.................. .4 100.0 100.4
2004.................. .4 -- .4
</TABLE>
(b) Interest costs of $48.5 million, $28.9 million and $72.4 million were
incurred in 1999, 1998 and 1997, respectively, of which $8.7 million was
capitalized in 1997. Interest paid, net of amounts capitalized, was $48.0
million, $23.4 million and $60.4 million in 1999, 1998 and 1997, 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
was to have terminated on July 7, 1999, was extended to July 5, 2000, 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.
50
<PAGE> 18
(11) FEDERAL AND FOREIGN INCOME TAX
(a) Income tax expense consisted of the following components:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------
1999 1998 1997
---- ---- ----
(in millions)
<S> <C> <C> <C>
Current tax
United States............................................. $41.0 $124.7 $194.4
Foreign................................................... 42.7 23.5 43.5
Deferred tax (credit), principally United States............ 5.3 (5.5) (33.3)
----- ------ ------
$89.0 $142.7 $204.6
===== ====== ======
</TABLE>
Federal and foreign income taxes paid were $83.5 million, $177.9 million
and $253.5 million in 1999, 1998 and 1997, 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
---------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
% 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 before federal and foreign income tax.............. $710.1 $849.7 $974.1
======= ======= =======
Tax at statutory federal income tax rate.................. $248.5 35.0% $297.3 35.0% $340.9 35.0%
Tax exempt interest income................................ (150.6) (21.2) (137.5) (16.2) (126.4) (13.0)
Other, net................................................ (8.9) (1.3) (17.1) (2.0) (9.9) (1.0)
------- ----- ------- ----- ------- -----
Actual tax.......................................... $ 89.0 12.5% $142.7 16.8% $204.6 21.0%
======= ===== ======= ===== ======= =====
</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
--------------------
1999 1998
---- ----
(in millions)
<S> <C> <C>
Deferred income tax assets
Unpaid claims............................................. $521.2 $541.7
Unearned premiums......................................... 191.6 172.7
Postretirement benefits................................... 76.1 73.1
Alternative minimum tax credit carryforward............... 43.1 --
Unrealized depreciation of investments.................... 39.4 --
Other, net................................................ 73.9 60.9
------ ------
945.3 848.4
Valuation allowance....................................... (39.4) --
------ ------
Total................................................... 905.9 848.4
------ ------
Deferred income tax liabilities
Deferred policy acquisition costs......................... 238.0 225.0
Real estate assets........................................ 83.7 79.3
Unrealized appreciation of investments.................... -- 223.3
------ ------
Total................................................... 321.7 527.6
------ ------
Net deferred income tax asset......................... $584.2 $320.8
====== ======
</TABLE>
The valuation allowance at December 31, 1999 relates to future tax benefits
on unrealized depreciation of investments, the realization of which is
uncertain. The valuation allowance had no impact on net income.
51
<PAGE> 19
(12) 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, 1999, 5,216,197 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 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------- ----------------------------- -----------------------------
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....... 9,765,090 $54.78 9,124,803 $47.67 8,058,829 $41.48
Exchanged for Executive Risk
options............................ 1,809,885 36.77 -- -- -- --
Granted.............................. 4,761,683 60.31 2,168,804 78.75 2,753,007 61.05
Exercised............................ (1,359,855) 39.50 (1,320,504) 41.78 (1,486,812) 38.39
Forfeited............................ (411,219) 64.20 (208,013) 75.25 (200,221) 51.69
---------- ---------- ----------
Outstanding, end of year............. 14,565,584 55.58 9,765,090 54.78 9,124,803 47.67
========== ========== ==========
Exercisable, end of year............. 9,187,352 51.09 6,879,061 47.26 5,932,905 42.54
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Weighted Average
Range of Number Weighted Average Remaining Number Weighted Average
Option Exercise Prices Outstanding Exercise Price Contractual Life Exercisable Exercise Price
---------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 3.95 - $52.40.................... 5,513,261 $41.09 4.2 5,468,336 $41.04
52.41 - 87.34.................... 9,052,323 64.41 7.9 3,719,016 65.87
---------- ---------
14,565,584 55.58 6.5 9,187,352 51.09
========== =========
</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 with respect to performance share and restricted stock
awards was $5.2 million in 1999 and $14.4 million in 1998 and 1997.
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 based 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>
1999 1998 1997
---------------------- ---------------------- ----------------------
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........................ $621.1 $585.6 $707.0 $679.6 $769.5 $746.3
Diluted earnings per share........ 3.66 3.45 4.19 4.03 4.39 4.26
</TABLE>
52
<PAGE> 20
The weighted average fair value of options granted under the Long-Term Stock
Incentive Plans during 1999, 1998 and 1997 was $13.77, $17.36 and $13.83,
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 1999, 1998 and 1997 were
5.4%, 5.5% and 6.5%, respectively. The expected volatility of the market price
of the Corporation's common stock for 1999, 1998 and 1997 grants was 19.0%,
16.4% and 16.3%, respectively. The expected average term of the granted options
was 5 1/2 years for 1999 and 5 years for 1998 and 1997. The dividend yield was
2.1% for 1999, 1.6% for 1998 and 1.9% for 1997.
(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
1999, 1998 and 1997, cash contributions to the ESOP of $11.2 million, $11.0
million and $12.2 million, respectively, were charged against income. Dividends
on shares of common stock in the ESOP used for debt service were $7.7 million,
$7.8 million and $6.2 million in 1999, 1998 and 1997, respectively.
The number of allocated and unallocated shares held by the ESOP at December
31, 1999 were 3,319,357 and 2,597,404, 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, 1999, there were 1,411,010 shares
subscribed, giving employees the right to purchase such shares at a price of
$53.89 in March 2001. No compensation cost has been recognized for such rights.
Had the fair value based method been used, the cost would have been immaterial.
(13) EMPLOYEE BENEFITS
(a) The Corporation and its subsidiaries have several non-contributory defined
benefit pension plans covering substantially all employees. The benefits are
generally based on an employee's years of service and average compensation
during the last five years of employment. Pension costs are determined using the
projected unit credit method. The Corporation's policy is to make annual
contributions that meet the minimum funding requirements of the Employee
Retirement Income Security Act of 1974. Contributions are intended to provide
not only for benefits attributed to service to date but also for those expected
to be earned in the future.
The components of net pension cost were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------
1999 1998 1997
---- ---- ----
(in millions)
<S> <C> <C> <C>
Service cost of current
period...................... $ 22.2 $ 18.8 $ 19.9
Interest cost on projected
benefit obligation.......... 37.6 34.5 30.3
Expected return on plan
assets...................... (44.5) (40.3) (35.1)
Other gains................... (2.5) (2.5) (2.0)
------ ------ ------
Net pension cost.......... $ 12.8 $ 10.5 $ 13.1
====== ====== ======
</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 (9)).
The following table sets forth the plans' funded status and amounts recognized
in the balance sheets:
<TABLE>
<CAPTION>
December 31
-------------------
1999 1998
---- ----
(in millions)
<S> <C> <C>
Actuarial present value of projected
benefit obligation for service rendered
to date.................................. $543.4 $518.7
Plan assets at fair value.................. 599.0 552.9
------ ------
Plan assets in excess of projected benefit
obligation............................... (55.6) (34.2)
Unrecognized net gain from past experience
different from that assumed.............. 153.8 127.3
Unrecognized prior service costs........... (6.3) (7.5)
Unrecognized net asset at January 1, 1985,
being recognized principally over 19
years.................................... 3.4 4.9
------ ------
Pension liability included in other
liabilities............................ $ 95.3 $ 90.5
====== ======
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation at December 31, 1999 and 1998 was
7 1/2% and 7 1/4%, respectively, and the rate of increase in future compensation
levels was 4 1/2% for 1999 and 1998. 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.
53
<PAGE> 21
(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 were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------
1999 1998 1997
---- ---- ----
(in millions)
<S> <C> <C> <C>
Service cost of current period... $ 4.5 $ 4.2 $ 4.9
Interest cost on accumulated
benefit obligation............. 8.6 8.2 8.8
Net amortization and deferral.... (1.0) (1.3) (.7)
----- ----- -----
Net postretirement benefit
cost......................... $12.1 $11.1 $13.0
===== ===== =====
</TABLE>
The components of the accumulated postretirement benefit obligation were as
follows:
<TABLE>
<CAPTION>
December 31
-------------------
1999 1998
---- ----
(in millions)
<S> <C> <C>
Accumulated postretirement benefit
obligation................................ $123.4 $123.1
Unrecognized net gain from past experience
different from that assumed............... 32.2 27.1
------ ------
Postretirement benefit liability included
in other liabilities.................... $155.6 $150.2
====== ======
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the accumulated postretirement benefit obligation at December 31, 1999
and 1998 was 7 1/2% and 7 1/4%, respectively. At December 31, 1999, the weighted
average health care cost trend rate used to measure the accumulated
postretirement cost for medical benefits was 9% for 2000 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, 1999 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,
1999 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 $15.1 million, $14.5 million and $15.0 million were
charged against income in 1999, 1998 and 1997, respectively.
(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
--------------------------------
1999 1998 1997
---- ---- ----
(in millions)
<S> <C> <C> <C>
Office facilities........................ $71.0 $73.8 $71.1
Equipment................................ 13.4 13.3 12.6
----- ----- -----
$84.4 $87.1 $83.7
===== ===== =====
</TABLE>
At December 31, 1999, future minimum rental payments required under
non-cancellable operating leases were as follows:
<TABLE>
<CAPTION>
Years Ending
December 31
------------ (in millions)
<S> <C>
2000.................................... $ 84.2
2001.................................... 79.9
2002.................................... 71.3
2003.................................... 63.7
2004.................................... 54.2
After 2004.............................. 324.8
------
$678.1
======
</TABLE>
54
<PAGE> 22
(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 was subject to final appellate
court approval. Pursuant to the global settlement agreement, a $1,525.0 million
trust fund would be established to pay "future" claims, defined as claims that
were not filed in court before August 27, 1993. Pacific Indemnity would
contribute $538.2 million to the trust fund and Continental Casualty would
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 was included
in funds held for asbestos-related settlement in the consolidated balance sheet.
Upon final court approval of the settlement, the amount in the escrow account,
including interest earned thereon, would be transferred to the trust fund.
Pacific Indemnity and Continental Casualty reached a separate agreement in
1993 for the handling of all "pending" asbestos-related bodily injury claims,
defined as claims pending on August 26, 1993 against Fibreboard. Pacific
Indemnity's obligation under this agreement with respect to such pending claims
was approximately $635.0 million, all of which was paid by the end of 1996. The
agreement further provided that the total responsibility of both insurers with
respect to pending and future asbestos-related bodily injury claims against
Fibreboard would 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 pending 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 would be triggered if the global settlement agreement was 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 reaffirmed portions of an agreement reached in March
1992 between Pacific Indemnity and Fibreboard. Among other matters, that 1992
agreement eliminated 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 1999, the Supreme
Court refused to affirm approval of the global settlement agreement. The case
was returned to the United States District Court of the Eastern District of
Texas for further proceedings. In September 1999, the District Court entered
judgment disapproving the global settlement agreement. That judgment was not
appealed and became final in November 1999.
The trilateral agreement was never appealed to the United States Supreme Court
and is final. Upon final disapproval of the global settlement agreement, the
trilateral agreement became effective. In December 1999, the funds that had been
held in the escrow account were paid to a trust established to pay future
asbestos-related bodily injury claims against Fibreboard. Management believes
that Pacific Indemnity's exposure with respect to asbestos-related claims
against Fibreboard has ended.
The property and casualty subsidiaries continue to have potentially
significant asbestos exposure, primarily on those traditional defendants who
manufactured, distributed or installed asbestos products for whom excess
liability coverages were written. Such exposure has increased in recent years
due to the erosion of much of the underlying limits and the non-viability of
other defendants.
55
<PAGE> 23
The other potential 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. As the resources of
traditional asbestos defendants have been depleted, more peripheral parties have
been drawn into litigation. Thus, notices of new asbestos claims and new
exposures on existing claims continue to be received despite the fact that
practically all manufacturing and usage of asbestos ended nearly two decades
ago.
Uncertainty remains as to the ultimate liability relating to asbestos claims
due to such factors as the long latency period between asbestos exposure and
disease manifestation and the resulting potential for involvement of multiple
policy periods for individual claims. Significant issues remain unresolved,
adding to the complexity and uncertainty of asbestos litigation. These issues
primarily involve questions regarding allocation of indemnity and expense costs
and exhaustion of policy limits. The property and casualty subsidiaries are
involved in disputes with other insurers and with insureds over these issues,
which increase the difficulty of settlement negotiations.
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
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 definitively 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>
1999 1998 1997
---- ---- ----
(in millions)
<S> <C> <C> <C>
Gross liability, beginning of
year......................... $10,356.5 $ 9,772.5 $9,523.7
Reinsurance recoverable,
beginning of year............ 1,306.6 1,207.9 1,767.8
--------- --------- --------
Net liability, beginning of
year......................... 9,049.9 8,564.6 7,755.9
--------- --------- --------
Net increase related to
acquisition of Executive Risk
(net of reinsurance
recoverable of $339.5)....... 605.8 -- --
--------- --------- --------
Net incurred claims and claim
expenses related to
Current year............... 4,147.6 3,712.1 3,372.3
Prior years................ (205.6) (218.4) (65.3)
--------- --------- --------
3,942.0 3,493.7 3,307.0
--------- --------- --------
Net payments for claims and
claim expenses related to
Current year............... 1,278.9 1,210.7 1,080.0
Prior years................ 2,570.0 1,797.7 1,418.3
--------- --------- --------
3,848.9 3,008.4 2,498.3
--------- --------- --------
Net liability, end of year..... 9,748.8 9,049.9 8,564.6
Reinsurance recoverable,
end of year.................. 1,685.9 1,306.6 1,207.9
--------- --------- --------
Gross liability, end of year... $11,434.7 $10,356.5 $9,772.5
========= ========= ========
</TABLE>
During 1999, the property and casualty insurance subsidiaries experienced
overall favorable development of $205.6 million on net unpaid claims established
as of the previous year-end. This compares with favorable development of $218.4
million and $65.3 million in 1998 and 1997, 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, 1999 were adequate to cover
claims for losses that 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> 24
(16) SEGMENTS INFORMATION
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 from Royal &
Sun Alliance. 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. Specialty commercial classes include
property and marine, executive protection, financial institutions and other
commercial classes. Other specialty commercial business in 1999 includes
reinsurance assumed written through Chubb Re, which began operations during the
year. Reinsurance assumed from Royal & Sun Alliance was treaty reinsurance that
has been terminated (see Note 8).
Corporate and other includes corporate investment income, corporate
expenses and the results of the real estate subsidiary.
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, amortization of goodwill and certain
charges. Investment income performance is based on investment income net of
investment expenses, excluding realized investment gains.
Revenues, income before income tax and assets of each operating segment
were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------
1999 1998 1997
---- ---- ----
Revenues (in millions)
<S> <C> <C> <C>
Property and casualty insurance
Premiums earned
Personal.......................................... $1,447.5 $1,304.3 $1,188.1
Standard commercial............................... 1,944.9 1,980.6 1,906.1
Specialty commercial.............................. 2,259.6 2,018.9 1,968.3
Reinsurance assumed from Royal & Sun Alliance..... -- -- 94.9
-------- -------- --------
5,652.0 5,303.8 5,157.4
Investment income..................................... 832.6 760.0 721.4
-------- -------- --------
Total property and casualty insurance............. 6,484.6 6,063.8 5,878.8
Corporate and other
Real estate........................................... 96.8 82.2 616.1
Corporate investment income........................... 60.8 61.9 63.9
Realized investment gains................................. 87.4 141.9 105.2
-------- -------- --------
Total revenues.................................... $6,729.6 $6,349.8 $6,664.0
======== ======== ========
Income (loss) before income tax
Property and casualty insurance
Underwriting
Personal.......................................... $ 121.1 $ 168.1 $ 161.5
Standard commercial............................... (416.8) (360.0) (312.3)
Specialty commercial.............................. 121.1 133.5 198.0
Reinsurance assumed from Royal & Sun Alliance..... -- -- 18.2
-------- -------- --------
(174.6) (58.4) 65.4
Increase (decrease) in deferred policy acquisition
costs........................................... (4.2) 51.8 75.7
-------- -------- --------
Underwriting income (loss)............................ (178.8) (6.6) 141.1
Investment income..................................... 821.0 748.9 711.2
Amortization of goodwill and other charges............ (16.0) (17.4) (24.1)
Restructuring charge.................................. -- (40.0) --
-------- -------- --------
Total property and casualty insurance............. 626.2 684.9 828.2
Corporate and other income (loss)......................... (3.5) 22.9 40.7
Realized investment gains................................. 87.4 141.9 105.2
-------- -------- --------
Total income before income tax.................... $ 710.1 $ 849.7 $ 974.1
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31
---------------------------------
1999 1998 1997
---- ---- ----
(in millions)
<CAPTION>
<S> <C> <C> <C>
Assets
Property and casualty insurance........................... $21,628.1 $18,954.2 $17,592.4
Corporate and other....................................... 1,976.9 1,878.2 2,239.9
Adjustments and eliminations.............................. (68.0) (86.4) (216.7)
--------- --------- ---------
Total assets...................................... $23,537.0 $20,746.0 $19,615.6
========= ========= =========
</TABLE>
Distinct investment portfolios are not maintained for each underwriting
segment. 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 are not allocated to underwriting segments.
57
<PAGE> 25
The international business of the property and casualty insurance segment
is conducted primarily through subsidiaries that operate solely outside of the
United States. Their assets and liabilities are located principally in the
countries where the insurance risks are written. International business is also
written by branch offices of certain domestic subsidiaries.
Revenues of the property and casualty insurance subsidiaries by geographic
area were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1999 1998 1997
---- ---- ----
(in millions)
<S> <C> <C> <C>
Revenues
United States............................................. $5,452.1 $5,116.6 $4,886.8
International............................................. 1,032.5 947.2 992.0
-------- -------- --------
Total................................................... $6,484.6 $6,063.8 $5,878.8
======== ======== ========
</TABLE>
(17) EARNINGS PER SHARE
Basic earnings per common share is based on net income 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
earnings per share:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1999 1998 1997
---- ---- ----
(in millions except for per
share amounts)
<S> <C> <C> <C>
Basic earnings per share:
Net income................................................ $621.1 $707.0 $769.5
====== ====== ======
Weighted average number of common shares outstanding...... 167.7 165.6 171.6
====== ====== ======
Basic earnings per share.................................. $ 3.70 $ 4.27 $ 4.48
====== ====== ======
Diluted earnings per share:
Net income................................................ $621.1 $707.0 $769.5
After-tax interest expense on 6% exchangeable subordinated
notes................................................... -- -- 3.3
------ ------ ------
Net income for computing diluted earnings per share....... $621.1 $707.0 $772.8
====== ====== ======
Weighted average number of common shares outstanding...... 167.7 165.6 171.6
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
Additional shares from assumed exercise of stock-based
compensation awards..................................... 2.1 3.0 2.8
------ ------ ------
Weighted average number of common shares and potential
common shares assumed outstanding for computing diluted
earnings per share...................................... 169.8 168.6 176.2
====== ====== ======
Diluted earnings per share................................ $ 3.66 $ 4.19 $ 4.39
====== ====== ======
</TABLE>
In 1999 and 1998, options to purchase 5.2 million shares and 1.6 million
shares of common stock, respectively, with weighted average exercise prices of
$67.71 per share and $78.77 per share, respectively, were excluded from the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the Corporation's common stock.
For additional disclosure regarding the stock-based compensation awards,
see Note (12).
58
<PAGE> 26
(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, long term
notes and capital securities. 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 the long term notes and capital securities
are based on prices quoted by dealers.
The carrying values and fair values of financial instruments were as follows:
<TABLE>
<CAPTION>
December 31
-------------------------------------------
1999 1998
--------------------- -------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(in millions)
<S> <C> <C> <C> <C>
Assets
Invested assets
Short term investments.................................. $ 731.1 $ 731.1 $ 344.2 $ 344.2
Fixed maturities (Note 4)
Held-to-maturity...................................... 1,741.9 1,801.0 2,002.2 2,140.2
Available-for-sale.................................... 12,777.2 12,777.2 11,316.7 11,316.7
Equity securities....................................... 769.2 769.2 1,092.2 1,092.2
Real estate mortgages and notes receivable (Note 6)....... 81.2 85.5 105.2 106.9
Liabilities
Long term debt (Note 10).................................. 759.2 729.2 607.5 635.2
</TABLE>
59
<PAGE> 27
(19) COMPREHENSIVE INCOME
Comprehensive income is defined as all changes in shareholders' equity,
except those arising from transactions with shareholders. Comprehensive income
includes net income and other comprehensive income, which for the Corporation
consists of changes in unrealized appreciation or depreciation of investments
carried at market value and changes in foreign currency translation gains or
losses.
The components of other comprehensive income or loss were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- -------------------------- --------------------------
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>
Unrealized holding gains (losses)
arising during the year............ $(663.2) $(191.7)* $(471.5) $164.3 $57.5 $106.8 $353.5 $123.7 $229.8
Less: reclassification adjustment for
realized gains included in net
income............................. 87.4 31.6 55.8 141.9 49.7 92.2 105.2 36.8 68.4
------- ------- ------- ------ ----- ------ ------ ------ ------
Net unrealized gains (losses)
recognized in other comprehensive
income............................. (750.6) (223.3) (527.3) 22.4 7.8 14.6 248.3 86.9 161.4
Foreign currency translation
losses............................. (14.2) (5.4) (8.8) (14.2) (3.9) (10.3) (15.3) (5.2) (10.1)
------- ------- ------- ------ ----- ------ ------ ------ ------
Total other comprehensive
income (loss).................... $(764.8) $(228.7) $(536.1) $ 8.2 $ 3.9 $ 4.3 $233.0 $ 81.7 $151.3
======= ======= ======= ====== ===== ====== ====== ====== ======
</TABLE>
* Reflects a valuation allowance of $39.4 million.
(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) The activity of the Corporation's common stock was as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------
1999 1998 1997
---- ---- ----
(number of shares)
<S> <C> <C> <C>
Common stock issued
Balance, beginning of year................................ 175,989,202 176,037,850 176,084,173
Share activity related to acquisition of Executive Risk... 641,474 -- --
Shares issued upon exchange of long term debt............. -- -- 2,440
Share activity under option and incentive plans........... 641,646 (48,648) (48,763)
----------- ----------- -----------
Balance, end of year.................................. 177,272,322 175,989,202 176,037,850
----------- ----------- -----------
Treasury stock
Balance, beginning of year................................ 13,722,376 7,320,410 1,223,182
Share activity related to acquisition of Executive Risk... (13,651,028) -- --
Repurchase of shares...................................... 2,596,700 8,203,000 12,940,500
Shares issued upon exchange of long term debt............. -- -- (5,314,125)
Share activity under option and incentive plans........... (885,559) (1,801,034) (1,529,147)
----------- ----------- -----------
Balance, end of year.................................. 1,782,489 13,722,376 7,320,410
----------- ----------- -----------
Common stock outstanding, end of year................. 175,489,833 162,266,826 168,717,440
=========== =========== ===========
</TABLE>
(c) The Corporation had a shareholders rights plan under which each
shareholder had one quarter of a right for each share of common stock of the
Corporation held. The rights were scheduled to expire on June 12, 1999. On March
12, 1999, the Board of Directors approved the redemption of these rights for
$.01 per right as of March 31, 1999.
On March 12, 1999, the Board of Directors adopted a new shareholder rights
plan, under which the rights attached 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 are attached 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.
60
<PAGE> 28
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
------------------------------------------------
1999 1998
--------------------- ---------------------
GAAP Statutory GAAP Statutory
---- --------- ---- ---------
(in millions)
<S> <C> <C> <C> <C>
Property and casualty insurance subsidiaries................ $5,255.3 $3,341.5 $4,570.0 $2,836.9
======== ========
Corporate and other......................................... 1,016.5 1,074.1
-------- --------
$6,271.8 $5,644.1
======== ========
</TABLE>
A comparison of GAAP and statutory net income is as follows:
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
GAAP Statutory GAAP Statutory GAAP Statutory
-------- --------- -------- --------- -------- ---------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Property and casualty insurance subsidiaries...... $610.6 $609.3 $672.4 $663.1 $752.3 $652.4
====== ====== ======
Corporate and eliminations........................ 10.5 34.6 17.2
------ ------ ------
$621.1 $707.0 $769.5
====== ====== ======
</TABLE>
(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 1999, these subsidiaries paid cash dividends to the Corporation totaling
$300.0 million.
The maximum dividend distribution that may be made by the property and
casualty insurance subsidiaries to the Corporation during 2000 without prior
approval is approximately $590 million.
61
<PAGE> 29
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, 1999 and 1998, 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, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
/s/ ERNST & YOUNG LP
February 23, 2000
62
<PAGE> 30
Quarterly Financial Data
Summarized unaudited quarterly financial data for 1999 and 1998 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
-------------------- -------------------- -------------------- --------------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(in millions except for per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................... $1,629.6 $1,587.3 $1,686.6 $1,597.6 $1,709.3 $1,593.2 $1,704.1 $1,571.7
Claims and expenses................ 1,403.0 1,348.0 1,450.7 1,375.2 1,653.3 1,386.0 1,512.5 1,390.9
Federal and foreign income tax
(credit)......................... 39.7 47.5 42.6 38.2 (21.3) 33.8 28.0 23.2
-------- -------- -------- -------- -------- -------- -------- --------
Net income..................... $ 186.9 $ 191.8(a) $ 193.3 $ 184.2 $ 77.3 $ 173.4 $ 163.6 $ 157.6
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings per share........... $ 1.16 $ 1.14(a) $ 1.19 $ 1.10 $ .45 $ 1.05 $ .93 $ .98
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings per share......... $ 1.14 $ 1.12(a) $ 1.18 $ 1.08 $ .44 $ 1.04 $ .93 $ .95
======== ======== ======== ======== ======== ======== ======== ========
Underwriting ratios
Losses to premiums earned........ 66.3% 62.8% 67.6% 67.0% 78.1% 67.4% 68.8% 68.1%
Expenses to premiums written..... 32.9 33.3 32.7 33.3 32.3 33.8 32.3 33.6
-------- -------- -------- -------- -------- -------- -------- --------
Combined....................... 99.2% 96.1% 100.3% 100.3% 110.4% 101.2% 101.1% 101.7%
======== ======== ======== ======== ======== ======== ======== ========
</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.
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 1999 and 1998.
<TABLE>
<CAPTION>
1999
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Common stock prices
High.................................................... $66.44 $75.94 $69.63 $60.75
Low..................................................... 55.44 58.06 49.63 45.50
Dividends declared.......................................... .32 .32 .32 .32
</TABLE>
<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>
At March 6, 2000, there were approximately 7,225 common shareholders of
record.
64
<PAGE> 1
THE CHUBB CORPORATION
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Significant subsidiaries at December 31, 1999 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
COMPANY INCORPORATION OWNED
------- ------------- -------------
<S> <C> <C>
Federal Insurance Company................................... Indiana 100%
Vigilant Insurance Company............................. New York 100
Chubb Insurance Company of Australia Limited...... Australia 100
Pacific Indemnity Company.............................. 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 Executive Risk Inc. .................................. Delaware 100
Executive Re Inc. ..................................... Delaware 100
Executive Risk Indemnity Inc. .................... Delaware 100
Executive Risk Specialty Insurance Company... Connecticut 100
Quadrant Indemnity Company................... Connecticut 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.
46
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 12,777<F1>
<DEBT-CARRYING-VALUE> 1,742<F2>
<DEBT-MARKET-VALUE> 1,801<F3>
<EQUITIES> 769
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 16,019
<CASH> 23
<RECOVER-REINSURE> 109<F4>
<DEFERRED-ACQUISITION> 780
<TOTAL-ASSETS> 23,537
<POLICY-LOSSES> 11,435<F5>
<UNEARNED-PREMIUMS> 3,323<F6>
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 759<F7>
0
0
<COMMON> 177
<OTHER-SE> 6,095<F8>
<TOTAL-LIABILITY-AND-EQUITY> 23,537
5,652
<INVESTMENT-INCOME> 893
<INVESTMENT-GAINS> 87
<OTHER-INCOME> 97<F9>
<BENEFITS> 3,942
<UNDERWRITING-AMORTIZATION> 1,530
<UNDERWRITING-OTHER> 375
<INCOME-PRETAX> 710
<INCOME-TAX> 89
<INCOME-CONTINUING> 621
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 621
<EPS-BASIC> 3.70
<EPS-DILUTED> 3.66
<RESERVE-OPEN> 9,050
<PROVISION-CURRENT> 4,148
<PROVISION-PRIOR> (206)
<PAYMENTS-CURRENT> 1,279
<PAYMENTS-PRIOR> 2,570
<RESERVE-CLOSE> 9,749<F10>
<CUMULATIVE-DEFICIENCY> (206)
<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 ($1,686) AS PRESCRIBED BY SFAS 113. SUCH AMOUNTS ARE INCLUDED IN
TOTAL ASSETS.
<F6>UNEARNED-PREMIUMS EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUMS
($240) AS PRESCRIBED BY SFAS NO. 113. THIS PREPAID AMOUNT IS INCLUDED IN
TOTAL ASSETS.
<F7>NOTES-PAYABLE INCLUDES LONG-TERM DEBT OF $759.
<F8>OTHER-SE INCLUDES PAID IN SURPLUS; RETAINED EARNINGS; FOREIGN CURRENCY
TRANSLATION LOSSES, NET OF INCOME TAX; UNREALIZED DEPRECIATION OF
INVESTMENTS, NET; RECEIVABLE FROM ESOP AND TREASURY STOCK.
<F9>OTHER-INCOME REPRESENTS REVENUES FROM REAL ESTATE OPERATIONS.
<F10>RESERVE-CLOSE INCLUDES $606 EXECUTIVE RISK RESERVES AT ACQUISITION.
</FN>
</TABLE>
