UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
( X )* ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
* On January 31, 1999, Registrant filed a Form 15, Suspension of Duty to File
Reports Under Sections 13 and 15(d) of the Securities & Exchange Act of 1934,
therefore, this will be the last filing for the Registrant.
For the fiscal year ended December 31, 1998.
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________to___________________________
Commission file number 333-63367
- ------------------------------
World Omni 1998-A Automobile Lease Securitization Trust
(Exact name of registrant as specified in its charter)
Delaware Non-applicable
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 NW 12TH Avenue, Deerfield Beach, FL 33442
---------------------------------------------
(Address of principal executive offices) (Zip Code)
(954)429-2200
-------------
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(g) of the Act:
Floating Rate Automobile Lease Asset-Backed Notes, Class A-1
Floating Rate Automobile Lease Asset-Backed Notes, Class A-2
Floating Rate Automobile Lease Asset-Backed Notes, Class A-3
Floating Rate Automobile Lease Asset-Backed Notes, Class A-4
(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 ___
<PAGE>
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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
As of December 31, 1998, the aggregate market value of the Class A-1,
Class A-2, Class A-3 and Class A-4 Notes was $1,631,383,000.
Documents incorporated by reference
None.
World Omni 1998-A Automobile Lease Securitization Trust*
PART I
ITEM 2. PROPERTIES
The World Omni Floating Rate Automobile Lease Asset-Backed Class A
Notes consist of four classes of notes (respectively, the "Class A-1 Notes",the
"Class A-2 Notes, the "Class A-3" Notes and the "Class A-4 Notes", and
collectively, the "Class A Notes") issued by the World Omni 1998-A Automobile
Lease Securitization Trust (the "Trust"), a Delaware business trust created
pursuant to a Securitization Trust Agreement between World Omni Lease
Securitization L.P.(the "Transferor"),PNC Bank, Delaware, as owner trustee (the
"Owner Trustee") and The Bank of New York, as indenture trustee (the "Indenture
Trustee").
The Class A Notes were issued pursuant to an Indenture between the Trust
and the Indenture Trustee. The Class A Notes are secured by the property of
the Trust, which consists of a 100% undivided interest in a Special Unit of
Beneficial Interest (the "SUBI"), which, in turn, evidences a beneficial
interest in certain specified assets of World Omni LT, an Alabama trust (the
"Origination Trust"), monies on deposit in certain accounts and other assets.
The assets of the Origination Trust (the "Origination Trust Assets") consist of
retail closed-end lease contracts assigned to the Origination Trust by dealers
in the World Omni Financial Corp. ("World Omni") network of dealers, the
automobiles and light duty trucks relating thereto, and payments made under
certain insurance policies relating to such lease contracts, the related lessees
and such leased vehicles, including the Residual Value Insurance Policy, and
certain other assets. World Omni will service the lease contracts included in
the Origination Trust Assets.
The SUBI initially evidences a beneficial interest in specified Origination
Trust Assets, including certain lease contracts, the automobiles and light
duty trucks relating to such lease contracts, certain monies due under or
payable in respect of such lease contracts and leased vehicles on or after
September 1, 1998, payments made under certain insurance policies relating to
such lease contracts, the related leasses and such leased vehicles, including
the Residual Value Insurance Policy, and certain other Origination Trust Assets
(collectively, the "SUBI Assets"). From time to time until principal is first
distributed to the Noteholders, principal collections on the SUBI Assets are
reinvested in additional lease contracts and related Origination Trust Assets,
which at the time of reinvestment become SUBI Assets.
A summary of lease contracts and related leased vehicles allocated to
SUBI Assets and delinquency information follows (unaudited):
<TABLE>
Units Book Balance
($ in 000's)
<S> <C> <C>
Lease Contracts outstanding,
09/1/98 74,744
Prepayments, 11/30/98 687 $ 5,624
Scheduled Terminations 0 0
Charge-Offs 99 $ 1,421
Subsequent contracts added, 11/30/98 0 0
Lease contracts outstanding,
11/30/98 73,959
</TABLE>
Delinquent lease contracts as of December 31, 1998:
<TABLE>
Units ($in 000's)
<S> <C> <C>
31-60 days 800 $17,499
61-90 days 136 $ 2,936
91 days + 23 $ 436
_______ _______
TOTAL 959 $20,871
</TABLE>
<PAGE>
Losses on repossessions for the period ending December 31, 1998 were
$1,421,420.58 on 99 charge-offs.
*The information provided herein is being provided in accordance with
the registrant's no-action letter to the SEC dated as of August 25, 1994.
ITEM 3. LEGAL PROCEEDINGS
As of December 31, 1998, there were no material legal proceedings in
respect to the Trust or the Origination Trust. The Origination Trust is a
defendant in various cases which constitute ordinary routine litigation
incidental to its business as an assignee of leased vehicles and leases.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No vote or consent of the holders of the Class A Notes has been
solicited.
Part II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Depository Trust Company is registered holder of all Class A Notes.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
--------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**
Beneficial owners of more than 5% of the Class A-1 Notes at December 31, 1998:
<TABLE>
<S> <C> <C> <C>
Amount of Percent
Title of Class Name Certificates Held of Class
Class A-1 Chase Manhattan Bank 183,000,000 42.56%
4 New York Plaza
13th Floor
New York, NY 10004
Class A-1 Boston Safe Deposit and Trust 175,000,000 40.70%
Company
c/o Mellon Bank, N.A.
Three Mellon Bank Center
Room 153-3015
Pittsburgh, PA 15259
Class A-1 Bankers Trust Company 50,000,000 11.63%
c/o BT Services Tennessee, Inc.
648 Grassmere Park Drive
Nashville, TN 37211
</TABLE>
Beneficial owners of more than 5% of the Class A-2 Notes at December 31, 1998:
<TABLE>
<S> <C> <C> <C>
Class A-2 Chase Manhattan Bank 228,000,000 51.82%
4 New York Plaza
13th Floor
New York, NY 10004
Class A-2 Boston Safe Deposit and Trust 56,600,000 12.84%
Company
c/o Mellon Bank, N.A.
Three Mellon Bank Center
Room 153-3015
Pittsburgh, PA 15259
Class A-2 Citibank, N.A. 35,000,000 7.95%
P.O. Box 30576
New York, NY 10004
Class A-2 The Bank of New York 25,000,000 5.68%
925 Patterson Plank Road
Secaucus, NJ 07094
</TABLE>
Beneficial owners of more than 5% of the Class A-3 Notes at December 31, 1998:
<TABLE>
<S> <C> <C> <C>
Class A-3 Chase Manhattan Bank 95,000,000 23.17%
4 New York Plaza
13th Floor
New York, NY 10004
Class A-3 The Bank of New York 91,000,000 22.20%
925 Patterson Plank Road
Secaucus, NJ 07094
Class A-3 Citibank, N.A. 72,750,000 17.74%
P. O. Box 30576
Tampa, FL 33630-3576
Class A-3 Boston Safe Deposit and Trust 50,000,000 12.20%
Company
c/o Mellon Bank, N.A.
Three Mellon Bank Center
Room 153-3015
Pittsburgh, PA 15259
Class A-3 Bankers Trust Company 40,000,000 9.76%
c/o BT Services Tennessee, Inc.
648 Grassmere Park Drive
Nashville, TN 37211
Class A-3 NBD Bank 39,000,000 9.51%
Municipal Bond Department
Attn: Securities Department
611 Woodward Avenue
Detroit, MI 48226
<PAGE>
</TABLE>
Beneficial owners of more than 5% of the Class A-4 Notes at December 31, 1998:
<TABLE>
<S> <C> <C> <C>
Class A-4 The Bank of New York 105,000,000 29.88%
One Wall Street
New York, NY 10286
Class A-4 Citibank, N.A. 82,800,000 23.56%
P.O. Box 30576
Tampa, FL 33630-3576
Class A-4 The Bank of New York 40,000,000 11.38%
Banco Di Napoli
One Wall Street
New York, NY 10286
Class A-4 Chase Manhattan Bank 30,000,000 8.54%
4 New York Plaza
13th Floor
New York, NY 10004
Class A-4 Bankers Trust Company 28,000,000 7.97%
c/o B/T Services Tennesse, Inc.
648 Grassmere Park Drive
Nashville, TN 37211
Class A-4 SSB 22,000,000 6.26%
Bank Portfolio
225 Franklin Street
Boston, MA 02110
Class A-4 Boston Safe Deposit and Trust 20,000,000 5.69%
Company
c/o Mellon Bank, N.A.
Three Mellon Bank Center
Room 153-3015
Pittsburgh, PA 15259
</TABLE>
**Source: The Depository Trust Company.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no transactions of the type described in S-K item
404(a)(3) between the Trust and any 5% beneficial owner of the Class A Notes.
<PAGE>
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 10-K
(1) Annual Officer's Certificate
(2) Annual Accountants' Report*
(3) Summary of Monthly Reports
(4) Statutory Financial Statements - Federal Insurance
Company
- --------------------
* The Accountants' Report relates to compliance with the requirements of the
Servicing Agreement. It is not being filed because the distribution of such
Report is restricted to the parties to the Servicing Agreement. Per Statement on
Auditing Standards AU 623.20 the restriction arises because the matters on which
the accountant is reporting are set forth in a document that is not available to
other persons. A copy of the Report will be provided to the Securities and
Exchange Commission upon request, at which time the Registrant will request
confidential treatment of the Report. The limited distribution of this type of
Report was discussed at a SEC Regulations Committee meeting on March 7, 1995.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
World Omni 1998-A Automobile Lease Securitization Trust
-------------------------------------------------------
(Registrant)
BY: World Omni Financial Corp.,
as Servicer
Date: April 6, 1999 BY: /s/Alan J. Browdy
----------------- -----------------------------------
Alan J. Browdy
Vice President Accounting
Corporate Controller
World Omni Financial Corp.
(Duly Authorized Officer of the Servicer
on behalf of the Trust)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
Exhibit Page No.
(1) Annual Officer's Certificate 1
(2) Annual Accountants' Report (not being filed)
(3) Summary of Monthly Reports 2
(4) Index to Stautory Financial Statements - Federal Insurance 9
Company
</TABLE>
ANNUAL SERVICER'S OFFICER'S CERTIFICATE
WORLD OMNI FINANCIAL CORP.
The undersigned, duly authorized representative of World Omni
Financial Corp. ("WOFCO"), as Servicer, pursuant to Section 3.03 of the Second
Amended and Restated Servicing Agreement dated as of July 1, 1994, as amended
by Amendment No. 1 to Second Amended and Restated Servicing Agreement dated
September 23, 1998 and as supplemented by the Supplement 1996-A to Servicing
Agreement dated as of May 1, 1996, Supplement 1996-B to Servicing Agreement
dated as of October 1, 1996, Supplement 1997-A to Servicing Agreement dated
May 1, 1997, Supplement 1997-B to Servicing Agreement dated October 1, 1997, and
Supplement 1998-A to Servicing Agreement dated October 1, 1998, all between VT
Inc., as Trustee of World Omni LT and WOFCO, (as amended and supplemented, the
"Agreement"), does hereby certify that a review of the activities of the
Servicer during the period from January 1, 1998 through December 31, 1998, has
been made under my supervision with a view to determining whether during such
period the Servicer has performed and observed all of its obligations under the
Agreement. To the best of my knowledge, no default by the Servicer under the
Agreement has occurred and is continuing.
Capitalized terms used but not defined herein are used as defined in
the Agreement.
IN WITNESS WHEREOF, the undersigned has duly executed this
Certificate this 31st day of March, 1999.
By:________________________________
Name: Alan J. Browdy
Title: Vice President Accounting,
Corporate Controller
Page 1
<TABLE>
<CAPTION>
WORLD OMNI 1998-A AUTOMOBILE LEASE SECURITIZATION TRUST
ANNUAL SERVICER CERTIFICATE
FOR THE PERIOD SEPTEMBER 1, 1998 THROUGH NOVEMBER 30, 1998
<S> <C> <C> <C>
Aggregate
Net Investment
Aggregate Net Investment Value Value
Original 1,763,657,871.20
09/1/98 1,763,657,871.20
Principal collections & reimbursement loss amount 62,114,287.53
11/30/98 1,701,543,583.67
Note Balance @ 11/30/98 1,763,657,871.20
Class A-1
Allocation Note
Aggregate Net Investment Value Percentage Balance
Original 24.94236% 430,000,000
09/1/98 24.94236% 430,000,000
Principal collections & reimbursement loss amount 60,725,537
11/30/98 369,274,463
Note Balance @ 11/30/98 24.94236% 430,000,000
Class A-2
Allocation Note
Aggregate Net Investment Value Percentage Balance
Original 25.52241% 440,000,000
09/1/98 25.52241% 440,000,000
Principal collections & reimbursement loss amount 0
11/30/98 440,000,000
Note Balance @ 11/30/98 25.52241% 440,000,000
Class A-3
Allocation Note
Aggregate Net Investment Value Percentage Balance
Original 23.78225% 410,000,000
09/1/98 23.78225% 410,000,000
Principal collections & reimbursement loss amount 0
11/30/98 410,000,000
Note Balance @ 11/30/98 23.78225% 410,000,000
Class A-4
Percentage Note
Aggregate Net Investment Value Percentage Balance
Original 20.38214% 351,383,000
09/1/98 20.38214% 351,383,000
PAGE 2
<PAGE>
Principal collections & reimbursement loss amount 0
11/30/98 351,383,000
Note Balance @ 11/30/98 20.38214% 351,383,000
Class B
Allocation Note
Aggregate Net Investment Value Percentage Balance
Original 5.37084% 92,592,000
09/1/98 5.37084% 92,592,000
Principal collections & reimbursement loss amount 0
11/30/98 92,592,000
Note Balance @ 11/30/98 5.37084% 92,592,000
Aggregate Net Investment Value Transferor Interest Balance
Original 2.25000% 39,682,871
09/1/98 39,682,871
Principal collections & reimbursement loss amount 1,388,751
11/30/98 38,294,121
Note Balance @ 11/30/98 2.25000% 39,682,871
Distributable Amounts Total
Interest Distributable Amount 7,791,597.54
Principal Distributable Amount (1) 61,722,246.70
Reimbursement of Covered Loss Amount (1) 392,040.83
Reimbursement of Uncovered Loss Amount (1) 0.00
Class A Net Swap Payment / (Receipt) (275,597.69)
Class B Net Swap Payment / (Receipt) (8,954.83)
Total 69,621,332.55
Distributable Amounts Class A-1 %
Interest Distributable Amount 1,743,430.94
Principal Distributable Amount (1) 60,333,496.15 97.75000%
Reimbursement of Covered Loss Amount (1) 392,040.83 100.00000%
Reimbursement of Uncovered Loss Amount (1) 0.00 100.00000%
Class A Net Swap Payment / (Receipt)
Class B Net Swap Payment / (Receipt)
Total 62,468,967.92
Distributable Amounts Class A-2 %
Interest Distributable Amount 1,799,864.73
Principal Distributable Amount (1) 0.00 0.00000%
Reimbursement of Covered Loss Amount (1) 0.00 0.00000%
Reimbursement of Uncovered Loss Amount (1) 0.00 0.00000%
Class A Net Swap Payment / (Receipt)
Class B Net Swap Payment / (Receipt)
Total 1,799,864.73
Distributable Amounts Class A-3 %
Interest Distributable Amount 1,691,952.24
Principal Distributable Amount (1) 0.00 0.00000%
Reimbursement of Covered Loss Amount (1) 0.00 0.00000%
Reimbursement of Uncovered Loss Amount (1) 0.00 0.00000%
Class A Net Swap Payment / (Receipt)
Class B Net Swap Payment / (Receipt)
Total 1,691,952.24
Distributable Amounts Class A-4 %
Interest Distributable Amount 1,475,434.38
Principal Distributable Amount (1) 0.00 0.00000%
Reimbursement of Covered Loss Amount (1) 0.00 0.00000%
Reimbursement of Uncovered Loss Amount (1) 0.00 0.00000%
Class A Net Swap Payment / (Receipt)
Class B Net Swap Payment / (Receipt)
Total 1,475,434.38
PAGE 3
<PAGE>
Distributable Amounts Class B %
Interest Distributable Amount 408,849.39
Principal Distributable Amount (1) 0.00 0.00000%
Reimbursement of Covered Loss Amount (1) 0.00 0.00000%
Reimbursement of Uncovered Loss Amount (1) 0.00 0.00000%
Class A Net Swap Payment / (Receipt)
Class B Net Swap Payment / (Receipt)
Total 408,849.39
Distributable Amounts Transferor Interest %
Interest Distributable Amount 672,065.85
Principal Distributable Amount (1) 1,388,750.55 2.25000%
Reimbursement of Covered Loss Amount (1) 0.00 0.00000%
Reimbursement of Uncovered Loss Amount (1) 0.00 0.00000%
Class A Net Swap Payment / (Receipt)
Class B Net Swap Payment / (Receipt)
Total 2,060,816.40
(1) These amounts will not be distributed during the Revolving period. They will
be reinvested in additional contracts.
Note Factors Series A-1 Series A-2
09/1/98 100.0000000% 100.0000000%
11/30/98 100.0000000% 100.0000000%
Note Factors Series A-3 Series A-4
09/1/98 100.0000000% 100.0000000%
11/30/98 100.0000000% 100.0000000%
Note Factors Series B
09/1/98 100.0000000%
11/30/98 100.0000000%
Pool Data 09/1/98 $
Number of Loans 74,744
Prepayments 0 0.00
Scheduled Terminations 0 0.00
Charge-Offs 0 0.00
Weighted Ave APR 8.90%
Pool Data 11/30/98 $
Number of Loans 73,959
Prepayments 687 5,624,347.50
Scheduled Terminations 0 0.00
Charge-Offs 99 1,421,420.58
Weighted Ave APR 8.89%
Account Balances Pay Ahead Advance Reserve Fund
Balance as of 09/01/98 0.00 0.00 17,636,578.71
Balance as of 11/30/98 2,580,649.58 388,078.40 17,636,578.71
Change 2,580,649.58 388,078.40 0.00
Required Cash (withdrawal from reserve) 0.00
Reserve Fund Requirement 17,636,578.71
Reserve Fund Supplemental Requirements 0.00
Insured Residual Value Loss Amount 0.00
Distribution per $1,000 Total
Total Distribution Amount 4.41786225
Interest Distribution Amount 4.41786225
Carryover Shortfall 0.00000000
Prior Carryover Shortfall 0.00000000
Total Carryover Shortfall 0.00000000
Principal Distribution Amount 0.00000000
PAGE 4
<PAGE>
Principal Loss Amounts
Reimbursed Principal Loss Amount 0.00000000
Aggregate Unreimbursed Principal Loss Amount 0.00000000
Principal Loss Interest Amount
Reimbursed Principal Loss Interest Amount 0.00000000
Unpaid Principal Loss Interest Amount 0.00000000
Transferor Principal not paid to Transferor -----
Transferor Interest not paid to Transferor -----
Unpaid Class B Principal Carryover Shortfall -----
Distribution per $1,000 Class A-1
Total Distribution Amount 4.05449056
Interest Distribution Amount 4.05449056
Carryover Shortfall 0.00000000
Prior Carryover Shortfall 0.00000000
Total Carryover Shortfall 0.00000000
Principal Distribution Amount 0.00000000
Principal Loss Amounts
Reimbursed Principal Loss Amount 0.00000000
Aggregate Unreimbursed Principal Loss Amount 0.00000000
Principal Loss Interest Amount
Reimbursed Principal Loss Interest Amount 0.00000000
Unpaid Principal Loss Interest Amount 0.00000000
Transferor Principal not paid to Transferor -----
Transferor Interest not paid to Transferor -----
Unpaid Class B Principal Carryover Shortfall -----
Distribution per $1,000 Class A-2
Total Distribution Amount 4.09060167
Interest Distribution Amount 4.09060167
Carryover Shortfall 0.00000000
Prior Carryover Shortfall 0.00000000
Total Carryover Shortfall 0.00000000
Principal Distribution Amount 0.00000000
Principal Loss Amounts
Reimbursed Principal Loss Amount 0.00000000
Aggregate Unreimbursed Principal Loss Amount 0.00000000
Principal Loss Interest Amount
Reimbursed Principal Loss Interest Amount 0.00000000
Unpaid Principal Loss Interest Amount 0.00000000
Transferor Principal not paid to Transferor -----
Transferor Interest not paid to Transferor -----
Unpaid Class B Principal Carryover Shortfall -----
Distribution per $1,000 Class A-3
Total Distribution Amount 4.12671278
Interest Distribution Amount 4.12671278
Carryover Shortfall 0.00000000
Prior Carryover Shortfall 0.00000000
Total Carryover Shortfall 0.00000000
Principal Distribution Amount 0.00000000
PAGE 5
<PAGE>
Principal Loss Amounts
Reimbursed Principal Loss Amount 0.00000000
Aggregate Unreimbursed Principal Loss Amount 0.00000000
Principal Loss Interest Amount
Reimbursed Principal Loss Interest Amount 0.00000000
Unpaid Principal Loss Interest Amount 0.00000000
Transferor Principal not paid to Transferor -----
Transferor Interest not paid to Transferor -----
Unpaid Class B Principal Carryover Shortfall -----
Distribution per $1,000 Class A-4
Total Distribution Amount 4.19893500
Interest Distribution Amount 4.19893500
Carryover Shortfall 0.00000000
Prior Carryover Shortfall 0.00000000
Total Carryover Shortfall 0.00000000
Principal Distribution Amount 0.00000000
Principal Loss Amounts
Reimbursed Principal Loss Amount 0.00000000
Aggregate Unreimbursed Principal Loss Amount 0.00000000
Principal Loss Interest Amount
Reimbursed Principal Loss Interest Amount 0.00000000
Unpaid Principal Loss Interest Amount 0.00000000
Transferor Principal not paid to Transferor -----
Transferor Interest not paid to Transferor -----
Unpaid Class B Principal Carryover Shortfall -----
Distribution per $1,000 Class B
Total Distribution Amount 4.41560167
Interest Distribution Amount 4.41560167
Carryover Shortfall 0.00000000
Prior Carryover Shortfall 0.00000000
Total Carryover Shortfall 0.00000000
Principal Distribution Amount 0.00000000
Principal Loss Amounts
Reimbursed Principal Loss Amount 0.00000000
Aggregate Unreimbursed Principal Loss Amount 0.00000000
Principal Loss Interest Amount
Reimbursed Principal Loss Interest Amount 0.00000000
Unpaid Principal Loss Interest Amount 0.00000000
Transferor Principal not paid to Transferor -----
Transferor Interest not paid to Transferor -----
Unpaid Class B Principal Carryover Shortfall 0.00000000
Distribution per $1,000 Transferor Interest
Total Distribution Amount 16.93591793
Interest Distribution Amount 16.93591793
Carryover Shortfall -----
Prior Carryover Shortfall -----
Total Carryover Shortfall -----
PAGE 6
<PAGE>
Principal Distribution Amount 0.00000000
Principal Loss Amounts
Reimbursed Principal Loss Amount 0.00000000
Aggregate Unreimbursed Principal Loss Amount -----
Principal Loss Interest Amount
Reimbursed Principal Loss Interest Amount -----
Unpaid Principal Loss Interest Amount -----
Transferor Principal not paid to Transferor 0.00000000
Transferor Interest not paid to Transferor 0.00000000
Unpaid Class B Principal Carryover Shortfall -----
Servicing Fee Total
Amount of Servicing Fee Paid 4,409,144.68
Total Unpaid 0.00
Origination Trustee Expenses Paid (1)
UTI 0.00
SUBI 0.00
0.00
Securitization Trustee Expenses Paid (1) 0.00
Additional Loss Amounts (2) 0.00
(1) Expenses greater than $50,000 are broken out as follows:
(2) Broken out as follows:
CHARGE-OFF RATE November
Outstanding 1,421,420.58
Balance
Net
Liquidation 725,529.79
Proceeds
Average
Aggregate
Net Investment 1,763,657,871.20
Value
Annualized
Average
Charge-Off 0.47%
Rate
(Charge-off Rate Test will be satisfied if the annualized ratio is 2.75% or less) 0.47%
DELINQUENCY RATE
# $
Past Due 31-60 days 800 17,499,132
Past Due 61-90 days 136 2,936,335
Past Due 91 + days 23 435,719
Total 959 20,871,186
(Delinquency Rate Test will be satisfied if the ratio is 1.75% or less)
Delinquent Current Delinquency
Contracts Contracts Rate
(> 60 days)
November 159 73,959 0.21%
PAGE 7
<PAGE>
0.21%
Number of Number of
Matured Scheduled Maturity
Leases Maturities Ratio
MATURITY RATIO
November 0 0 N/A
N/A
REALIZATION RATIO
November
Sale
Proceeds 0.00
Residual Value
of Sold
Matured Leases 0.00
Realization
Ratio 0.00% 0.00%
</TABLE>
PAGE 8
INDEX TO FINANCIAL STATEMENTS
of Federal Insurance Company
<TABLE>
<CAPTION>
<S> <C>
Financial Statements
Report of Independent Auditors.........................................F-1
Balance Sheets (Statutory Basis) as of December 31, 1998 and December
31, 1997...............................................................F-2
Statements of Income (Statutory Basis) for Years Ended December
31, 1998, 1997 and 1996................................................F-3
Statements of Surplus (Statutory Basis) for Years Ended December
31, 1998, 1997 and 1996................................................F-4
Statements of Cash Flows (Statutory Basis) for Years Ended December
31, 1998, 1997 and 1996 ............................................F-5
Notes to Financial Statements..........................................F-6
</TABLE>
THE FINANCIAL STATEMENTS OF FEDERAL INSURANCE COMPANY ("FEDERAL") INCLUDED
HEREIN HAVE BEEN PREPARED ON A STATUTORY BASIS, RATHER THAN IN ACCORDANCE
WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES BECAUSE STATE INSURANCE
DEPARTMENTS RESPONSIBLE FOR OVERSIGHT OF FEDERAL'S FINANCIAL CONDITION
REQUIRE FINANCIAL STATEMENTS TO BE PRESENTED ON A STATUTORY BASIS. AS A
RESULT, THE CHUBB CORPORATION DOES NOT PREPARE FINANCIAL STATEMENTS IN
ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR FEDERAL, ITS
WHOLLY OWNED SUBSIDIARY.
PAGE 9
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Federal Insurance Company
We have audited the accompanying statutory-basis balance sheets of
Federal Insurance Company (Company) as of December 31, 1998 and 1997, and the
related statutory-basis statements of income, surplus to policyholders, and
cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1, these financial statements have been prepared in
conformity with accounting practices prescribed or permitted by the Indiana
Insurance Department, the jurisdiction of domicile of the Company, which
practices differ from generally accepted accounting principles. The variances
from such practices and generally accepted accounting principles are also
described in Note 1. The effects on the financial statements of these variances
are not reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matter described in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of Federal Insurance Company at December 31, 1998 and 1997 or
the results of its operations or its cash flows for each of the three years in
the period ended December 31, 1998.
However, in our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Federal
Insurance Company at December 31, 1998 and 1997 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with accounting practices prescribed or
permitted by the Indiana Insurance Department.
ERNST & YOUNG LLP
New York, New York
February 24, 1999
PAGE F-1
<PAGE>
<TABLE>
<CAPTION>
FEDERAL INSURANCE COMPANY
BALANCE SHEETS - STATUTORY BASIS
December 31, 1998 and 1997
(dollars in thousands except per share amounts)
<S> <C> <C>
1998 1997
----------------- --------------------
ADMITTED ASSETS
Invested Assets:
Cash and Short Term Investments, at Amortized Cost $ 408,664 $ 719,375
Tax Exempt Bonds, at Amortized Cost 5,901,710 5,221,481
Taxable Bonds, at Amortized Cost 1,852,756 1,922,965
Equity Securities, at Market 495,285 465,563
Investments in U.S. Property & Casualty Subsidiaries 1,083,050 1,042,295
Investments in Other Unconsolidated Subsidiaries 220,550 220,182
Receivable for Securities 10,157 29,838
Other Invested Assets 252,850 237,340
----------------- --------------------
Total Cash and Invested Assets (Note 2) 10,225,022 9,859,039
Premiums Receivable 589,650 625,601
Interest and Dividends Due and Accrued 138,990 126,395
Reinsurance Recoverable on Paid Losses 100,011 49,763
Equities and Deposits in Pools and Associations 79,495 66,276
Amounts Due from Associated Companies (Note 3) 158,233 51,388
Other Assets 282,176 174,057
----------------- --------------------
11,573,577 10,952,519
Deduct: Non-Admitted Assets 186,876 127,261
----------------- --------------------
Total Admitted Assets $11,386,701 $10,825,258
================= ====================
LIABILITIES AND SURPLUS TO POLICYHOLDERS
Outstanding Losses and Loss
Expenses (Notes 7 and 8) $ 6,348,319 $ 6,065,735
Unearned Premiums 1,803,792 1,683,472
Working Funds Due to Manager - 136,598
Provision for Reinsurance 61,892 45,454
Accrued Expenses and Other Liabilities 384,480 338,883
----------------- --------------------
Total Liabilities 8,598,483 8,270,142
----------------- --------------------
Commitments and Contingent Liabilities (Notes 6 and 8)
Common Capital Stock 13,987 13,987
Paid-In Surplus 378,890 378,890
Unassigned Funds 2,262,120 1,972,505
Unrealized Appreciation of Investments 133,221 189,734
----------------- --------------------
----------------- --------------------
Total Surplus To Policyholders (Note 9) 2,788,218 2,555,116
----------------- --------------------
Total Liabilities and
----------------- --------------------
Surplus to Policyholders $11,386,701 $10,825,258
================= ====================
Common Capital Stock:
Shares Authorized 3,499,971 3,499,971
Shares Issued and Outstanding 3,496,678 3,496,678
Par Value Per Share $ 4 $ 4
</TABLE>
PAGE F-2
<PAGE>
FEDERAL INSURANCE COMPANY
STATEMENTS OF INCOME - STATUTORY BASIS
Years Ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
------------------ ------------------ ------------------
Net Premiums Written $3,491,466 $3,676,579 $2,582,131
Increase in Unearned Premiums
Net of Accrued Retrospective Premiums 120,320 428,188 137,785
------------------ ------------------ ------------------
Premiums Earned (Note 7) 3,371,146 3,248,391 2,444,346
------------------ ------------------ ------------------
Losses and Loss Expenses (Note 7) 2,293,839 2,139,189 1,697,816
Underwriting Expenses 1,120,183 1,120,121 790,017
Dividends to Policyholders 26,139 23,089 14,581
------------------
------------------ ------------------ ------------------
3,440,161 3,282,399 2,502,414
------------------ ------------------ ------------------
Underwriting Loss (69,015) (34,008) (58,068)
------------------ ------------------ ------------------
Investment Income Before Expenses 654,947 977,002 559,686
Realized Capital Gains 92,737 53,132 34,693
Investment Expenses 8,495 7,540 5,325
------------------
------------------ ------------------ ------------------
Investment Income 739,189 1,022,594 589,054
------------------ ------------------ ------------------
Other Income (Loss) (including gain
or loss on foreign exchange) (Note 6) (15,863) 1,786 (9,617)
------------------ ------------------ ------------------
Income Before Federal and Foreign Income Tax 654,311 990,372 521,369
Federal and Foreign Income Tax (Note 4) 62,188 164,440 83,186
------------------ ------------------ ------------------
Net Income $ 592,123 $ 825,932 $ 438,183
================== ================== ==================
</TABLE>
PAGE F-3
<PAGE>
FEDERAL INSURANCE COMPANY
STATEMENTS OF SURPLUS TO POLICYHOLDERS - STATUTORY BASIS
Years Ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997 1996
----------------- ----------------- ------------------
Common Stock
Balance, Beginning and End of Year $ 13,987 $ 13,987 $ 13,987
----------------- ----------------- ------------------
Paid-In Surplus
Balance, Beginning of Year 378,890 472,986 472,986
Distribution of Bellemead Development
Corporation to Parent - (94,096) -
----------------- ----------------- ------------------
Balance, End of Year 378,890 378,890 472,986
----------------- ----------------- ------------------
Unassigned Funds
Balance, Beginning of Year 1,972,505 1,649,830 1,347,361
Net Income 592,123 825,932 438,183
Dividends Declared to Parent (280,000) (280,000) (250,000)
Decrease (Increase) in Provision
for Reinsurance (16,438) (12,361) 9,505
Decrease (Increase) in Non-Admitted Assets (59,615) (17,421) 71
Increase (Decrease) in Unassigned Funds of
U.S. Property & Casualty Subsidiaries 53,562 (193,261) 89,809
Other, Net (17) (214) 14,901
----------------- ------------------
----------------- ----------------- ------------------
Balance, End of Year 2,262,120 1,972,505 1,649,830
----------------- ----------------- ------------------
Unrealized Appreciation of Investments
Balance, Beginning of Year 189,734 326,682 433,116
Distribution of Bellemead Development
Corporation to Parent - (175,664) -
Change During the Year (56,513) 38,716 (106,434)
------------------
----------------- ----------------- ------------------
Balance, End of Year 133,221 189,734 326,682
----------------- ----------------- ------------------
Total Surplus to Policyholders $2,788,218 $2,555,116 $2,463,485
================= ================= ==================
</TABLE>
PAGE F-4
<PAGE>
FEDERAL INSURANCE COMPANY
STATEMENTS OF CASH FLOWS - STATUTORY BASIS
Years Ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997 1996
---------------- ---------------- ---------------
Cash From Operations
Premiums Collected Net of Reinsurance $3,527,417 $3,644,597 $2,527,854
Losses and Loss Expenses Paid (net of
salvage and subrogation) 2,061,503 967,543 1,717,314
Underwriting Expenses Paid 1,112,444 1,079,486 787,594
Other Underwriting Income (Expenses) (158,443) (97,527) 163,458
---------------- ---------------- ---------------
Cash from Underwriting 195,027 1,500,041 186,404
Investment Income (net of investment expenses) 638,633 959,457 542,767
Other Income (Expenses) (28,895) 2,275 11,223
Dividends to Policyholders Paid (19,694) (8,862) (10,912)
Federal Income Taxes Paid (59,267) (181,083) (72,964)
---------------- ---------------- ---------------
Net Cash from Operations 725,804 2,271,828 656,518
---------------- ---------------- ---------------
Cash From Investments
Proceeds from Investments Sold or Matured:
Bonds 1,674,555 1,826,979 2,378,073
Equity Securities 188,319 77,626 155,359
Other Invested Assets 76,864 72,019 33,972
Miscellaneous Proceeds 607 2,894 15,801
---------------- ---------------- ---------------
---------------- ---------------- ---------------
Total Investment Proceeds 1,940,345 1,979,518 2,583,205
---------------- ---------------- ---------------
Cost of Investments Acquired:
Bonds 2,270,292 3,591,204 2,806,024
Equity Securities 209,449 304,742 196,520
Other Invested Assets 72,411 55,568 47,323
Miscellaneous Applications 49,180 314 389
---------------- ---------------- ---------------
Total Investments Acquired 2,601,332 3,951,828 3,050,256
---------------- ---------------- ---------------
---------------- ---------------- ---------------
Net Cash from Investments (660,987) (1,972,310) (467,051)
---------------- ---------------- ---------------
Cash From Financing and Miscellaneous Sources
Other Cash Provided 631 14,458 639
---------------- ---------------- ---------------
Cash Applied:
Dividends to Stockholders Paid 280,000 280,000 250,000
Other Applications 96,159 2,507 11,963
---------------- ---------------- ---------------
Total Cash Applied 376,159 282,507 261,963
---------------- ---------------- ---------------
Net Cash from Financing and
Miscellaneous Sources (375,528) (268,049) (261,324)
---------------- ---------------- ---------------
Net Change in Cash and Short Term Investments (310,711) 31,469 (71,857)
Cash and Short Term Investments:
Beginning of Year 719,375 687,906 759,763
---------------- ---------------- ---------------
End of Year $ 408,664 $ 719,375 $ 687,906
================ ================ ===============
</TABLE>
PAGE F-5
<PAGE>
FEDERAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. Summary of significant accounting policies
(a) Federal Insurance Company (Company) is a wholly-owned property and
casualty insurance subsidiary of The Chubb Corporation (Chubb). The Company is
domiciled in the State of Indiana and underwrites most forms of property and
casualty insurance, principally in the United States. The geographic
distribution of business in the United States is broad with a particularly
strong market presence in the Northeast.
The Company is a member of an affiliated group of U.S. based property and
casualty insurance companies, including several wholly-owned subsidiaries. For
purposes of this report, the affiliated group of companies, including Federal
Insurance Company, is collectively referred to as the Companies.
The financial statements reflect estimates and judgments made by
management for those transactions that are not yet complete or for which the
ultimate effects cannot be precisely determined. Such estimates and judgments
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
Certain amounts in the prior year financial statements have been
reclassified to conform with the 1998 presentation.
These financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Insurance
Department. Such accounting practices vary in certain respects from generally
accepted accounting principles (GAAP), including:
(i) investments in bonds are reported at amortized cost and are not
classified as held-to-maturity or available-for-sale; under GAAP,
those bonds classified as available-for-sale are carried at
market value,
(ii) the costs of acquiring new business are charged to operations as
incurred rather than being deferred and amortized over the
period in which the related premiums are earned,
(iii) certain assets designated "non-admitted" are excluded,
(iv) outstanding losses and loss expenses are reported net of
amounts recoverable from reinsurers; unearned premiums are
reported net of the unearned portion of premiums ceded,
(v) a provision is made for statutory liabilities with respect to
unearned premiums and losses reinsured with non-admitted
reinsurers and for certain overdue amounts from admitted
reinsurers to the extent funds are not held,
PAGE F-6
<PAGE>
FEDERAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. Summary of significant accounting policies (Cont'd)
(vi) no provision is made for deferred federal income tax, and
(vii) investments in wholly-owned U.S. and foreign property and
casualty insurance subsidiaries, various other subsidiaries
which are not material and, in 1996, a wholly-owned
non-property and casualty insurance subsidiary (see Note 1(f))
are included at statutory net asset value and are not
consolidated; dividends declared by such subsidiaries are
included in investment income. Net income of the U.S. property
and casualty insurance subsidiaries is included as a change in
unassigned funds. Net income of the other subsidiaries is
included as a change in unrealized appreciation of
investments.
The effects of the foregoing variances from GAAP on the statutory basis
financial statements have not been determined, but are presumed to be material.
(b) Invested assets are carried at values prescribed by the National
Association of Insurance Commissioners (NAIC). Short term investments, which
have an original maturity of one year or less, are carried at amortized cost.
Bonds are generally 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 are carried at market value.
Investments in unconsolidated subsidiaries and other invested assets are
accounted for on the equity basis.
Realized gains and losses on the sale of investments are determined on
the basis of the cost of the specific investments sold and are credited or
charged to income. Unrealized appreciation or depreciation of equity securities,
unconsolidated subsidiaries and other invested assets are excluded from income
and credited or charged directly to surplus to policyholders.
(c) Premiums are earned on a monthly pro rata basis over the terms of the
policies. Unearned premiums represent the portion of premiums written applicable
to the unexpired terms of policies in force.
(d) Liabilities for outstanding losses and loss expenses 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.
PAGE F-7
<PAGE>
FEDERAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. Summary of significant accounting policies (Cont'd)
(e) 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 bonds with active markets are based on quoted
market prices. For bonds that trade in less active markets, fair
values are obtained from independent pricing services. Fair
values of bonds 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.
(f) In 1997, the Company distributed its investment in Bellemead
Development Corporation to Chubb; in connection with the distribution, paid-in
surplus was reduced by $94,096,000 representing the cost of the investment,
and unrealized appreciation of investments was reduced by $175,664,000
representing the increase in the statutory net asset value of Bellemead
Development Corporation from the date of acquisition through the date of
transfer. This non-cash transaction has been excluded from the statement of
cash flows.
2. Invested assets
(a) The realized capital gains and losses at December 31, 1998, 1997,
and 1996 were as follows (in thousands):
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Gross realized capital gains $106,328 $68,320 $65,229
Gross realized capital losses 13,591 15,188 30,536
-------- ------- -------
$ 92,737 $53,132 $34,693
======== ======= =======
</TABLE>
(b) The cost of equity securities, investments in unconsolidated
subsidiaries and other invested assets at December 31, 1998 and 1997 were as
follows (in thousands):
<TABLE>
<S> <C> <C>
1998 1997
---- ----
Equity Securities $462,750 $410,001
Unconsolidated Subsidiaries 181,681 173,362
Other Invested Assets 219,656 191,791
</TABLE>
PAGE F-8
<PAGE>
FEDERAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
2. Invested assets (Cont'd)
(c) The components of unrealized appreciation of investments at December
31, 1998 and 1997 were as follows (in thousands):
<TABLE>
<S> <C> <C>
1998 1997
---- ----
Gross Unrealized Appreciation $239,814 $256,947
Gross Unrealized Depreciation 106,593 67,213
-------- --------
$133,221 $189,734
======== ========
</TABLE>
(d) The amortized cost and estimated market value of bonds were as follows
(in thousands):
<TABLE>
December 31, 1998
<S> <C> <C> <C> <C>
Gross Gross Estimated
Amortized Cost Unrealized Unrealized Market
Gains Losses Value
Tax Exempt Bonds $5,901,710 $373,873 $ 1,754 $6,273,829
Taxable U.S. Government Bonds 159,767 2,780 - 162,547
Taxable Corporate Bonds 778,730 32,583 804 810,509
Taxable Foreign Bonds 179,552 11,450 1,510 189,492
Mortgage-Backed Securities 734,707 7,606 15,290 727,023
---------- -------- ------- -------
Total Bonds $7,754,466 $428,292 $19,358 $8,163,400
========== ======== ======= ==========
</TABLE>
December 31, 1997
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross Estimated
Amortized Cost Unrealized Unrealized Market
Gains Losses Value
Tax Exempt Bonds $5,221,481 $326,053 $ 148 $5,547,386
Taxable U.S. Government Bonds 286,812 4,470 97 291,185
Taxable Corporate Bonds 589,826 21,129 1,998 608,957
Taxable Foreign Bonds 150,320 5,524 1,864 153,980
Mortgage-Backed Securities 896,007 22,843 1,510 917,340
---------- -------- ------- --------
Total Bonds $7,144,446 $380,019 $5,617 $7,518,848
========== ======== ====== ==========
</TABLE>
PAGE F-9
<PAGE>
FEDERAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
2. Invested assets (Cont'd)
(e) The amortized cost and estimated market value of bonds at December
31, 1998 by contractual maturity were as follows (in thousands):
<TABLE>
<S> <C> <C>
Amortized Market
Cost Value
Due in One Year or Less $ 238,938 $ 240,814
Due after One Year through Five Years 1,038,941 1,079,466
Due after Five Years through Ten Years 2,516,845 2,694,400
Due after Ten Years 3,225,035 3,421,697
Mortgage-Backed Securities 734,707 727,023
Total Bonds $7,754,466 $8,163,400
========== ==========
</TABLE>
Actual maturities could differ from contractual maturities because
borrowers may have the right to call or prepay obligations.
3. Related party transactions
During 1997 and 1996, Chubb & Son Inc. (C&S), a subsidiary of Chubb, had
agreements with the Companies pursuant to which the Companies participated in
the U.S. insurance business written through C&S. C&S arranged for the exchange
of reinsurance between the Companies (See Note 8).
The terms of the agreements included that C&S be reimbursed for all
expenses incurred on behalf of the Companies. Such expenses are included
primarily in underwriting expenses.
On December 31, 1997, the agreements with C&S were terminated.
Effective January 1, 1998, new agreements were entered into substituting
Federal, through its Chubb & Son division, in place of C&S.
Investment income includes dividends from subsidiaries of $146,000,000,
$507,370,000 and $177,225,000 in 1998, 1997, and 1996, respectively.
PAGE F-10
<PAGE>
FEDERAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
4. Federal and foreign income tax
The Company is a member of an affiliated group which files a
consolidated federal income tax return. Intercompany tax transactions and
allocations are governed by an intercompany tax allocation agreement between
Chubb and the Companies. Under the written agreement, which is in accordance
with Section 1552(a)(1) of the Internal Revenue Code, each of the companies with
taxable income is allocated a current tax provision based on the ratio of its
taxable income to the total taxable income of those companies having taxable
income.
The provision for federal and foreign income tax gives effect to
differences between income for statutory reporting purposes and taxable income.
The principal differences are (i) interest income on tax exempt bonds and (ii)
the accelerated recognition of taxable income through the discounting of
outstanding losses and loss expenses and the reduction of unearned premium
reserves for tax purposes.
5. Employee benefits
The employees of the Companies are afforded benefits under retirement
and other postretirement benefit programs. The Company contributes its
proportionate share towards the cost of these programs.
The Company participates in a non-contributory, defined benefit pension
and retirement plan covering employees of the Companies. The benefits are
generally based on an employee's years of service and average compensation
during the last five years of employment.
Vested benefits are fully funded. The employers' policy is to make
annual contributions that meet the minimum funding requirements of the Employee
Retirement Income Security Act of 1974. Each participating affiliate is charged
for its allocable share of such contributions.
No pension expense was allocated to the Company in 1998 and 1997.
Pension expense allocated to the Company in 1996 was $4,077,000.
As of January 1, 1998, the most recent actuarial valuation date, the
plan's total accumulated benefit obligation was $287,025,000 based on an assumed
interest rate of 7.5%, including vested benefits of $271,252,000; the fair value
of plan assets was $470,642,000.
PAGE F-11
<PAGE>
FEDERAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
5. Employee benefits (cont'd)
In addition to pension benefits, retired employees and their
beneficiaries and covered dependents are provided other postretirement benefits,
principally health care and life insurance. Substantially all U.S. employees may
become eligible for these benefits upon retirement if they meet minimum age and
years of service requirements.
The Company 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 Company. Life insurance coverage is non-contributory.
The Company accrues its proportionate share of the expected cost of
providing postretirement benefits to retirees and other fully eligible or vested
plan participants and their beneficiaries and covered dependents. The Companies
elected to amortize the transition obligation, which represents their unfunded
and unrecognized accumulated postretirement benefit obligation as of January 1,
1993, over 20 years. The unamortized transition obligation of the Companies was
$29,947,000 and $32,086,000 at December 31, 1998 and 1997, respectively. Net
postretirement benefit costs include the expected cost of such benefits for
newly eligible or vested employees, interest cost, gains and losses arising from
differences in actuarial assumptions and actual experience and amortization of
the transition obligation. Net postretirement benefit costs allocated to the
Company for the years ended December 31, 1998, 1997 and 1996 were $7,188,000,
$5,447,000 and $5,254,000, respectively. The Company's portion of the unfunded
postretirement benefit liability included in other liabilities at December 31,
1998 and 1997 was $22,177,000 and $18,366,000, respectively.
The estimated amount of the postretirement benefit obligation of the
Companies for active nonvested employees as of December 31, 1998 and 1997 was
$50,586,000 and $53,950,000, respectively.
The weighted average discount rate used in determining the actuarial
present value of the accumulated postretirement benefit obligation at December
31, 1998 and 1997 was 7.25% and 7.5%, respectively. At December 31, 1998, the
weighted average health care cost trend rate used to measure the accumulated
postretirement cost for medical benefits was 9.9% for 1999 and was assumed to
decrease gradually to 6.0% for the year 2005 and remain at that level
thereafter.
PAGE F-12
<PAGE>
FEDERAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
6. Restructuring charge
During the fourth quarter of 1997, the Companies began an activity value
analysis process to identify and eliminate low-value activities and to improve
operational efficiency in order to reduce expenses and redirect resources to
those current activities and new initiatives that have the greatest potential to
contribute to future results. Implementation began in the first quarter of 1998
and is substantially completed. In the first quarter of 1998, the Company
recorded a restructuring charge of $14,623,000 related to the implementation of
the cost control initiative.
7. Leases
The Companies 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 Companies lease data processing,
office and transportation equipment. Leases are the obligation of the Company.
The Company contributes its proportionate share of the rental cost under such
leases.
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.
At December 31, 1998, future minimum rental payments required under
non-cancelable operating leases were as follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C> <C>
1999 $ 67,987
2000 65,765
2001 59,767
2002 53,558
2003 47,957
After 2003 325,865
--------
$620,899
</TABLE>
PAGE F-13
<PAGE>
FEDERAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
8. Reinsurance
The Company participates in pooling arrangements with affiliated
insurers whereby these companies assume and cede reinsurance with each other.
These arrangements vary as a function of the line of business and location of
the risk. A substantial amount of the reinsurance of the Company is effected
under these pooling arrangements. Effective January 1, 1997, the Company's pro
rata participation in the pooled property and casualty business increased.
In the ordinary course of business, the Company assumes and cedes
reinsurance with other insurance companies and is a member of various pools and
associations. Reinsurance is ceded to provide greater diversification of
business and minimize 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 Company
of its primary obligation to the policyholders.
The effect of reinsurance on premiums earned for the years ended
December 31, 1998, 1997 and 1996 was as follows (in thousands):
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Direct $ 2,975,310 $ 2,932,452 $ 2,868,065
Assumed 1,504,786 1,436,560 1,158,882
Ceded (1,108,950) (1,120,621) (1,582,601)
----------- ----------- -----------
Net $ 3,371,146 $ 3,248,391 $ 2,444,346
=========== =========== ===========
</TABLE>
For many years, a portion of the U. S. insurance business written by the
Company was reinsured on a quota share basis with a subsidiary of Royal & Sun
Alliance Insurance Group plc. Effective January 1, 1997, the reinsurance
agreement with Royal & Sun Alliance was terminated. Ceded reinsurance premiums
earned in 1996 included $266,796,000 from such reinsurance.
Reinsurance recoveries which have been deducted from losses and loss
expenses were $920,522,000, $711,805,000 and $1,048,760,000 in 1998, 1997 and
1996, respectively.
9. Outstanding losses and loss expenses
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 Company'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 and the settlement of the loss.
PAGE F-14
<PAGE>
FEDERAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
9. Outstanding losses and loss expenses (cont'd)
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
other cases 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.
In 1993, Pacific Indemnity Company (Pacific Indemnity), a wholly-owned
property and casualty insurance subsidiary of the Company, entered into a global
settlement agreement with Continental Casualty Company (a subsidiary of CNA
Financial Corporation), Fibreboard Corporation, and attorneys representing
claimants against Fibreboard for all future asbestos-related bodily injury
claims against Fibreboard. This agreement is subject to final appellate court
approval. The settlement relates to an insurance policy issued to Fibreboard
Corporation by Pacific Indemnity. The Pacific Indemnity policy was 100%
reinsured by the Company. Pursuant to the global settlement agreement, a
$1,525,000,000 trust fund will be established to pay future claims, which are
claims that were not filed in court before August 27, 1993. The Company, as
reinsurer of the Pacific Indemnity policy, will contribute $538,172,000 to the
trust fund and Continental Casualty will contribute the remaining amount. In
December 1993, upon execution of the global settlement agreement, the Company
and Continental Casualty paid their respective shares into an escrow account.
The Company's share is included in short-term investments. Upon final court
approval of the settlement, the amount in the escrow account, including interest
earned thereon, will be transferred to the trust fund. All of the parties have
agreed to use their best efforts to seek final court approval of the global
settlement agreement.
Pacific Indemnity and Continental Casualty reached a separate agreement
in 1993 for the handling of all asbestos-related bodily injury claims pending on
August 26, 1993 against Fibreboard. As reinsurer of Pacific Indemnity, the
Company's obligation under this agreement with respect to such pending claims is
approximately $635,000,000, all of which has been paid. The agreement further
provides that the total responsibility of Pacific Indemnity and Continental
Casualty with respect to pending and future asbestos-related bodily injury
claims against Fibreboard will be shared on an approximate 35% and 65% basis,
respectively.
PAGE F-15
<PAGE>
FEDERAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
9. Outstanding losses and loss expenses (Cont'd)
At the same time, Pacific Indemnity, Continental Casualty and Fibreboard
entered into a trilateral agreement to settle all present and future
asbestos-related bodily injury claims resulting from insurance policies that
were, or may have been, issued to Fibreboard by the two insurers. The trilateral
agreement will be triggered if the global settlement agreement is ultimately
disapproved. The Company's obligation, as reinsurer of Pacific Indemnity, under
the trilateral agreement is therefore similar to, and not duplicative of, that
under those agreements described above.
The trilateral agreement reaffirms portions of an agreement reached in
March 1992 between Pacific Indemnity and Fibreboard. Among other matters, that
1992 agreement eliminates any Pacific Indemnity liability to Fibreboard for
asbestos-related property damage claims.
In July 1995, the United States District Court of the Eastern District
of Texas approved the global settlement agreement and the trilateral agreement.
The judgments approving these agreements were appealed to the United States
Court of Appeals for the Fifth Circuit. In July 1996, the Fifth Circuit Court
affirmed the 1995 judgments of the District Court. The objectors to the global
settlement agreement appealed to the United States Supreme Court. In June 1997,
the Supreme Court set aside the ruling by the Fifth Circuit Court that had
approved the global settlement agreement and ordered the Fifth Circuit Court to
reconsider its approval. In January 1998, the Fifth Circuit Court again affirmed
the global settlement agreement. In April 1998, the objectors to the settlement
petitioned the Supreme Court to review the decision. In December 1998, argument
was held before the Supreme Court on the objectors' challenge. A decision is
expected during 1999.
The trilateral agreement was never appealed to the United States Supreme
Court and is final. As a result, management continues to believe that the
uncertainty of the Company's exposure, as reinsurer of Pacific Indemnity, with
respect to asbestos-related bodily injury claims against Fibreboard has been
eliminated.
Since 1993, a California Court of Appeal has agreed, in response to a
request by Pacific Indemnity, Continental Casualty and Fibreboard, to delay its
decisions regarding asbestos-related insurance coverage issues that are
currently before it and involve the three parties exclusively, while the
approval of the global settlement is pending in court. Continental Casualty and
Pacific Indemnity have dismissed disputes against each other which involved
Fibreboard and were in litigation.
The Company has additional potential asbestos exposure, primarily on
insureds for which excess liability coverages were written. Such exposure has
increased due to the erosion of much of the underlying limits. The number of
claims against such insureds and the value of such claims have increased in
recent years due in part to the non-viability of other defendants.
PAGE F-16
<PAGE>
FEDERAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
9. Outstanding losses and loss expenses (Cont'd)
The remaining asbestos exposures are mostly peripheral defendants,
including a mix of manufacturers and distributors of certain products that
contain asbestos as well as premises owners. Generally, these insureds are named
defendants on a regional rather than a nationwide basis. Notices of new asbestos
claims and new exposures on existing claims continue to be received as more
peripheral parties are drawn into litigation to replace the now defunct mines
and bankrupt manufacturers.
Hazardous waste sites are another significant potential exposure. Under
the federal "Superfund" law and similar state statutes, when potentially
responsible parties (PRPs) fail to handle the clean-up, regulators have the work
done and then attempt to establish legal liability against the PRPs. The PRPs
disposed of toxic materials at a waste dump site or transported the materials to
the site. Insurance policies issued to PRPs were not intended to cover the
clean-up costs of pollution and, in many cases, did not intend to cover the
pollution itself. As the costs of environmental clean-up have become
substantial, PRPs and others have increasingly filed claims with their insurance
carriers. Litigation against insurers extends to issues of liability, coverage
and other policy provisions. There is great uncertainty involved in estimating
the Company's liabilities related to these claims. First, the liabilities of the
claimants are extremely difficult to estimate. At any given clean-up site, the
allocation of remediation costs among governmental authorities and the PRPs
varies greatly. Second, different courts have addressed liability and coverage
issues regarding pollution claims and have reached inconsistent conclusions in
their interpretation of several issues. These significant uncertainties are not
likely to be resolved in the near future.
Uncertainties also remain as to the Superfund law itself. Superfund's
taxing authority expired on December 31, 1995. It is currently not possible to
predict the direction that any reforms may take, when they may occur or the
effect that any changes may have on the insurance industry.
Reserves for asbestos and toxic waste claims cannot be estimated with
traditional loss reserving techniques that rely on historical accident year loss
development factors. Case reserves and expense reserves for costs of related
litigation have been established where sufficient information has been developed
to indicate the involvement of a specific insurance policy. In addition,
incurred but not reported reserves have been established to cover additional
exposures on both known and unasserted claims. These reserves are continually
reviewed and updated.
PAGE F-17
<PAGE>
FEDERAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
9. Outstanding losses and loss expenses (Cont'd)
A reconciliation of the beginning and ending liability for outstanding
losses and loss expenses, net of reinsurance recoverable, and a reconciliation
of the net liability to the corresponding liability on a gross basis is as
follows (in thousands):
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Gross liability, beginning of year $8,644,186 $8,020,224 $7,896,430
Reinsurance recoverable,
beginning of year 2,578,451 3,126,676 2,992,274
---------- ---------- ----------
Net liability, beginning of year 6,065,735 4,893,548 4,904,156
---------- ---------- ----------
Net incurred claims and claim
expenses related to:
Current year 2,403,351 2,167,893 1,678,276
Prior years (109,512) (28,704) 19,540
---------- ---------- ----------
2,293,839 2,139,189 1,697,816
---------- ---------- ----------
Net payments for claims and
claim expenses related to:
Current year 765,500 640,581 489,074
Prior years 1,245,755 326,421 1,219,350
---------- ---------- ----------
2,011,255 967,002 1,708,424
---------- ---------- ----------
Net liability, end of year 6,348,319 6,065,735 4,893,548
Reinsurance recoverable,
end of year 2,750,484 2,578,451 3,126,676
---------- ---------- ----------
Gross liability, end of year $9,098,803 $8,644,186 $8,020,224
========== ========== ==========
</TABLE>
PAGE F-18
<PAGE>
FEDERAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
9. Outstanding losses and loss expenses (Cont'd)
A reconciliation of the beginning and ending gross and net liability for
outstanding losses and loss expenses related to asbestos and toxic waste claims
is as follows (in thousands):
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Gross of Reinsurance:
Liability, beginning of year $1,172,751 $1,086,500 $1,437,764
Incurred losses and loss adjustment
expenses 103,251 159,562 219,231
Calendar year payments for losses
and loss adjustment expenses 119,264 73,311 570,495
---------- ---------- ----------
Liability, end of year $1,156,738 $1,172,751 $1,086,500
========== ========== ==========
Net of reinsurance:
Liability, beginning of year $1,036,393 $ 908,189 $1,289,883
Incurred losses and loss adjustment
expenses 87,909 127,837 153,614
Calendar year payments for losses
and loss adjustment expenses 98,426 (367) 535,308
---------- ---------- ----------
Liability, end of year $1,025,876 $1,036,393 $ 908,189
========== ========== ==========
</TABLE>
During 1998, the Company experienced overall favorable development of
$109,512,000 on outstanding losses and loss expenses, including unallocated loss
adjustment expenses, established as of the previous year-end. This compares with
favorable development of $28,704,000 in 1997 and unfavorable development of
$19,540,000 in 1996. Such development was 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 outstanding loss and loss expense
reserves of the Company at December 31, 1998 were adequate to cover claims for
losses which had occurred, including both those known and those yet to be
reported. In establishing such reserves, management considers facts currently
known and the present state of the law and coverage litigation. However, given
the expansion of coverage and liability by the courts and the legislatures in
the past and the possibilities of similar interpretations in the future,
particularly as they relate to asbestos and toxic waste claims, as well as the
uncertainty in determining what scientific standards will be deemed acceptable
for measuring hazardous waste site clean-up, additional increases in loss
reserves may emerge which would adversely affect results in future periods. The
amount cannot reasonably be estimated at the present time.
PAGE F-19
<PAGE>
FEDERAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
10. Dividend restrictions
Indiana Insurance laws restrict the Company as to the amount of
shareholder dividends it may pay without prior approval. The restrictions are
generally based on net investment income and on statutory surplus. Dividends in
excess of such thresholds are considered "extraordinary" and require prior
approval. The maximum dividend distribution that may be made by the Company
during 1999 without prior approval is $592,123,000.
11. Year 2000 Readiness Disclosure (Unaudited)
The Year 2000 issue relates to the inability of certain information
technology (IT) systems and applications as well as non-IT systems, such as
equipment with imbedded chips and microprocessors, to properly process data
containing dates beginning with the year 2000. The issue exists because many
systems used two digits rather than four to define the applicable year. Such
systems may recognize the date "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing disruptions of
normal business activities or other unforeseen problems.
The Company has performed an inventory and assessment of its mainframe
systems to determine which must be retired, renovated or rewritten as a result
of Year 2000 issues. As of December 31, 1998, remediation and testing procedures
were completed on 95% of the Company's mainframe IT systems, including all
mission critical systems except one. Management expects the remediation and
testing of all remaining systems to be completed by June 1999.
The Company has also completed an inventory and assessment of all its
personal computers, servers and other non-mainframe computers. Management
expects that all such computers and related software will be Year 2000 ready by
the third quarter of 1999. The Company has also assessed its non-IT systems.
Management believes that the failure of any of these systems would have minimal
impact on the Company's operations.
The Company has initiated contact with third parties that it has
interaction with regarding their plans for Year 2000 readiness. The information
obtained will be used to develop business contingency plans to address any
mission critical operations that may be adversely impacted by the noncompliance
of a third party with whom the Company interacts.
The Company has identified those third parties that are critical to its
operations and is assessing risks with respect to the potential failure of such
parties to be Year 2000 ready. However, the Company does not have control over
these third parties and management is unable to determine whether all such third
parties will address the Year 2000 issue successfully. Management cannot
determine the effect on the Company's future operating results of the failure of
third parties to be Year 2000 ready.
PAGE F-20
<PAGE>
FEDERAL INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
11. Year 2000 Readiness Disclosure (Unaudited)(Cont'd)
The Company's Year 2000 plans have been developed with the intention of
minimizing the need for actual implementation of contingency activities. A
substantial portion of 1999 will be used to monitor systems already remediated
for Year 2000 for any unidentified problems and to perform additional
remediation and testing as necessary. Additionally, management is studying the
development of contingency plans to continue business in the unlikely event
that one of the Company's critical systems fails.
Management believes that the Company is taking the necessary measures to
address Year 2000 issues that may arise and that its internal systems will be
compliant. Notwithstanding such efforts, significant Year 2000 problems could
arise. Given the uncertain nature of Year 2000 problems that may arise,
management cannot determine at this time whether the consequences of Year 2000
related problems will have a material impact on the Company's financial position
or results of operations.
An additional concern is the potential future impact of the Year 2000
issue on insurance coverages written by the Company. The Year 2000 issue is a
risk for some of the Company's insureds and needs to be considered during the
underwriting process similar to any other risk to which its customers may be
exposed. It is possible that Year 2000 related losses may emerge that would
adversely affect the Company's operating results in future periods. At this
time, in the absence of any significant claims experience, management cannot
determine the nature and extent of any losses, the availability of coverage for
such losses or the likelihood of significant claims.
PAGE F-21
