-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Dt42NXJCM+uAVwQgazJq9D7ywxyeoXS7lYibh8M9Pj+sLxF+/DvE87N3TWUgkSfS u/98dWMmCecH2y43nt71Lg== 0000950123-94-000630.txt : 19940330 0000950123-94-000630.hdr.sgml : 19940330 ACCESSION NUMBER: 0000950123-94-000630 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHUBB CORP CENTRAL INDEX KEY: 0000020171 STANDARD INDUSTRIAL CLASSIFICATION: 6331 IRS NUMBER: 132595722 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-08661 FILM NUMBER: 94518721 BUSINESS ADDRESS: STREET 1: 15 MOUNTAIN VIEW RD P O BOX 1615 CITY: WARREN STATE: NJ ZIP: 07061 BUSINESS PHONE: 9805802000 10-K 1 FORM 10-K, THE CHUBB CORPORATION 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 1994 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM _________ TO __________ Commission File No. 1-8661
THE CHUBB CORPORATION (Exact name of registrant as specified in its charter) 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)
(908) 903-2000 (Registrant's telephone number) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Common Stock, par value $1 per share New York Stock Exchange Series A Participating Cumulative Preferred Stock Purchase Rights New York Stock Exchange (Title of each class) (Name of each exchange on which registered)
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. [X] The aggregate market value of voting stock held by non-affiliates of the registrant was $6,520,075,104 as of March 7, 1994. 87,736,074 Number of shares of common stock outstanding as of March 7, 1994 DOCUMENTS INCORPORATED BY REFERENCE Portions of The Chubb Corporation 1993 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 26, 1994 are incorporated by reference in Part III herein. =============================================================================== 2 PART I. ITEM 1. BUSINESS GENERAL The Chubb Corporation (the Corporation) was incorporated as a business corporation under the laws of the State of New Jersey in June 1967. The Corporation is a holding company and is principally engaged, through subsidiaries, in three industries: property and casualty insurance, life and health insurance and real estate development. The Corporation and its subsidiaries employed approximately 10,500 persons on December 31, 1993. Revenues, income from operations before income tax and identifiable assets for each industry segment for the three years ended December 31, 1993 are included in Note (16) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1993 Annual Report to Shareholders. The property and casualty insurance subsidiaries provide insurance coverages on a direct and assumed basis, principally in the United States, Canada, Europe, Australia and the Far East. The life and health insurance and real estate development subsidiaries have no international operations. Revenues, income from operations before income tax and identifiable assets of the property and casualty insurance subsidiaries by geographic area for the three years ended December 31, 1993 are included in Note (17) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1993 Annual Report to Shareholders. PROPERTY AND CASUALTY INSURANCE GROUP The Property and Casualty Insurance Group (the Group) is composed of Federal Insurance Company (Federal), Pacific Indemnity Company (Pacific Indemnity), Vigilant Insurance Company (Vigilant), Great Northern Insurance Company (Great Northern), Chubb Insurance Company of New Jersey (Chubb New Jersey), Chubb Custom Insurance Company (Chubb Custom), Chubb National Insurance Company (Chubb National), Texas Pacific Indemnity Company, Northwestern Pacific Indemnity Company, Chubb Insurance Company of Canada, Chubb Insurance Company of Europe, S.A., Chubb Insurance Company of Australia, Limited and Chubb Atlantic Indemnity Ltd. The Group presently underwrites most forms of property and casualty insurance. All members of the Group write non-participating policies. Several members of the Group also write participating policies, particularly in the workers' compensation class of business, under which dividends are paid to the policyholders. Premiums Written An analysis of the Group's premiums written during the past three years is shown in the following table.
DIRECT REINSURANCE REINSURANCE NET PREMIUMS PREMIUMS PREMIUMS PREMIUMS YEAR WRITTEN ASSUMED(a) CEDED(a) WRITTEN - ---- ---------- ------------ ---------- --------- (IN THOUSANDS) 1991........................ $3,646,728 $488,666 $1,023,130 $3,112,264 1992........................ 3,983,239 376,776 1,117,509 3,242,506 1993........................ 4,268,104 565,140 1,186,949 3,646,295
- --------------- (a) Intercompany items eliminated. The net premiums written during the last five years for major insurance classes of the Group are incorporated by reference from page 12 of the Corporation's 1993 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 and parts of Europe, Australia and the Far East. In 1993, approximately 88% of the Group's direct business was produced in the United States, where the Group's businesses enjoy broad geographic distribution with a particularly strong market presence in the Northeast. The four states accounting for the largest amounts of direct premiums written were New York with 15%, California with 14%, New Jersey with 6% and Pennsylvania with 5%. No other state accounted for 5% or more of such premiums. Approximately 4% of the Group's direct premiums written were produced in Canada. 2 3 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, deferred policy acquisition costs, 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 ratios of the Group for the last five years are shown in the following table.
NET PREMIUMS COMBINED (IN THOUSANDS) LOSS AND ------------------------- LOSS EXPENSE EXPENSE YEAR WRITTEN EARNED RATIOS RATIOS RATIOS - ---- ------- ------ ------ ------- -------- 1989......................... $ 2,734,918 $ 2,693,553 67.0% 34.5% 101.5% 1990......................... 2,919,663 2,836,135 65.2 34.5 99.7 1991......................... 3,112,264 3,037,168 64.4 35.1 99.5 1992......................... 3,242,506 3,163,288 66.7 34.4 101.1 1993......................... 3,646,295 3,504,838 82.5 32.3 114.8 ----------- ----------- ---- ---- ----- Total for five years ended December 31, 1993......... $15,655,646 $15,234,982 69.6% 34.1% 103.7% =========== =========== ==== ==== =====
The 1993 ratios include the effects of a $675 million increase in unpaid claims related to an agreement for the settlement of asbestos-related litigation and a $125 million return premium to the Group related to the commutation of a medical malpractice reinsurance agreement. Excluding the effects of these items, the loss ratio, the expense ratio and the combined loss and expense ratio were 65.5%, 33.5% and 99.0%, respectively, for the year 1993 and 65.7%, 34.4% and 100.1%, respectively, for the five years ended December 31, 1993. 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 12 of the Corporation's 1993 Annual Report to Shareholders. Producing and Servicing of Business In the United States and Canada, the Group is represented by approximately 3,000 independent agents and accepts business on a regular basis from an estimated 500 insurance brokers. In most instances, these agents and brokers also represent other companies which compete with the Group. The offices maintained by the Group assist these agents and brokers in producing and servicing the Group's business. In addition to the administrative offices of Chubb & Son Inc. in Warren, New Jersey, the Group operates six zonal management offices and 63 branch and service offices in the United States and Canada. The Group's overseas business is developed by its foreign agents and brokers through local branch offices of the Group and by its United States and Canadian agents and brokers. Overseas business is also obtained from foreign treaty reinsurance assumed principally, but not exclusively, from the Sun Alliance Group plc (Sun Group). In conducting its overseas business, the Group attempts to minimize the risks relating to currency fluctuations. 3 4 Business for the Group is also produced through participation in a number of underwriting pools and syndicates including, among others, Associated Aviation Underwriters, Industrial Risk Insurers, American Accident Reinsurance Group, American Excess Insurance Association, Cargo Reinsurance Association and American Cargo War Risk Reinsurance Exchange. 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 service. Reinsurance In accordance with the normal practice of the insurance industry, the Group assumes and cedes reinsurance with other insurers or reinsurers. These reinsurance arrangements provide greater diversification of business and minimize the Group's maximum net loss arising from large risks or from hazards of catastrophic potentialities. A large portion of the Group's reinsurance is effected under contracts known as treaties under which all risks meeting prescribed criteria are automatically covered. A substantial portion of the Group's ceded reinsurance is on a quota share basis with a subsidiary of the Sun Group. Most of the remaining 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 some instances, reinsurance is effected by negotiation on individual risks. The amount of each risk retained by the Group is subject to maximum limits which vary by line of business and type of coverage. Retention limits are continually reviewed and are revised periodically as the Group's capacity to underwrite risks changes. Reinsurance contracts do not relieve the Group of its obligation to the policyholders. The collectibility of reinsurance is subject to the solvency of the reinsurers. The Group is selective in regard to its reinsurers, placing reinsurance with only those reinsurers with strong balance sheets and superior underwriting ability. The Group monitors the financial strength of its reinsurers on an ongoing basis. As a result, uncollectible amounts have not been significant. The severity of recent catastrophes, particularly Hurricane Andrew in 1992, has demonstrated to insurers, including the Group, that assumptions on the damage potential of catastrophes have been too optimistic. The Group maintains records showing concentrations of risks in catastrophe prone areas such as California (earthquakes and brush fires) and the Southeast coast of the United States (hurricanes). The Group continually assesses its concentration of underwriting exposures in catastrophe prone areas. The Group is continuing to develop strategies which will further limit the aggregation of exposure in any one catastrophic event. The catastrophe reinsurance market has suffered large losses in recent years. As a result, the reinsurance market's capacity was substantially reduced in 1993 and the cost of available coverages rose significantly. In response, the Group has increased its retention levels for individual catastrophe losses. The effect on the Group's exposure to future catastrophe losses will depend on the severity of such losses. Unpaid Claims and Claim Adjustment Expenses and Related Amounts Recoverable from Reinsurers Insurance companies are required to make provision 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 as well as for the portion of such provision that will be recovered from reinsurers. 4 5 The process of establishing the liability for unpaid claims and claim adjustment expenses is an imprecise science subject to variables that are influenced by both internal and external factors. This is true because claim settlements to be made in the future will be impacted by changing rates of inflation (particularly medical cost inflation) and other economic conditions, changing legislative, judicial and social environments and changes in the Group's claim handling procedures. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss to the Group and the settlement of the loss. Approximately 50% of the Group's unpaid claims and claim adjustment expenses are provided for IBNR--claims which have 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 estimating 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 events. 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. Claims staff has discretion to override these expense formulas either upward or downward where judgment indicates such action is appropriate. In 1993, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. SFAS No. 113 establishes the conditions required for a contract with a reinsurer to be accounted for as reinsurance and prescribes accounting and reporting standards for those contracts. SFAS No. 113 requires that reinsurance recoverable on unpaid claims be reported separately as an asset on the balance sheet rather than the previous practice of reducing the liability for unpaid claims and claim adjustment expenses by such amount. The Group's estimates of reinsurance recoverable related to reported and unreported claims and claim adjustment expenses, which represent the portion of such liabilities that will be recovered from reinsurers, are determined in a manner consistent with the liabilities associated with the reinsured policies. The anticipated effect of inflation is implicitly considered when estimating liabilities for unpaid claims and claim adjustment expenses. Estimates of the ultimate value of all unpaid claims are based in part on paid losses, which reflect actual inflation. Inflation is also reflected in estimates established on reported open claims which, when combined with paid losses, form another basis to derive estimates of reserves for all open claims. There is no precise method for subsequently evaluating the adequacy of the consideration given to inflation, since claim settlements are affected by many factors. 5 6 The following table provides a reconciliation of the beginning and ending liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, and a reconciliation of the ending net liability to the corresponding liability on a gross basis for the years ended December 31, 1993, 1992 and 1991.
YEARS ENDED DECEMBER 31 ------------------------------ 1993 1992 1991 -------- -------- -------- (IN MILLIONS) Net liability, beginning of year........................ $5,267.6 $4,743.9 $4,301.1 -------- -------- -------- Net incurred claim and claim adjustment expenses Provision for claims occurring in the current year.... 2,214.3 2,125.7 1,970.2 Increase in prior years' claims estimate relating to an agreement for the settlement of asbestos-related litigation......................................... 675.0 -- -- Decrease in estimates for other claims occurring in prior years........................................ (10.2) (27.6) (28.8) -------- -------- -------- 2,879.1 2,098.1 1,941.4 -------- -------- -------- Net payments for claims occurring in Current year.......................................... 656.8 643.2 579.5 Prior years........................................... 1,039.9 931.2 919.1 -------- -------- -------- 1,696.7 1,574.4 1,498.6 -------- -------- -------- Net liability, end of year.............................. 6,450.0 5,267.6 4,743.9 Reinsurance recoverable, end of year.................... 1,785.4 1,953.3 1,847.4 -------- -------- -------- Gross liability, end of year............................ $8,235.4 $7,220.9 $6,591.3 ======== ======== ========
In 1993, Pacific Indemnity entered into a global settlement agreement with Continental Casualty Company (a subsidiary of CNA Financial Corporation), Fibreboard Corporation, and attorneys representing claimants against Fibreboard for all future asbestos-related bodily injury claims against Fibreboard. This settlement relates to an insurance policy issued to Fibreboard by Pacific Indemnity in 1956. Pacific Indemnity and Continental Casualty reached a separate agreement for the handling of all pending asbestos-related bodily injury claims against Fibreboard. Prior to the settlement, the Group had paid $40 million and had existing loss reserves of $545 million to cover a portion of its obligation under these agreements. This amount included $300 million of IBNR reserves which were not previously classified as specific reserves for asbestos claims since it was management's belief that doing so would increase the demands of plaintiffs' attorneys. At the time the settlement was negotiated, the Group increased its loss reserves by $675 million. The Fibreboard settlement is further discussed in Item 7 of this report on pages 23 and 24. As a result of the $675 million increase, in 1993, the estimated liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, as established at the previous year-end was deficient by $664.8 million. This compares with favorable development of $27.6 million and $28.8 million during 1992 and 1991, respectively. Such deficiency and redundancies were reflected in the Group's operating results in these respective years. Excluding the $675 million, the Group experienced favorable development of $10.2 million in 1993. Each of the past three years benefited from favorable claim frequency and severity trends for certain liability classes; this was offset each year in varying degrees by increases in unpaid claims and claim adjustment expenses relating to asbestos and toxic waste claims. 6 7 Unpaid claims and claim adjustment expenses, net of reinsurance recoverable, increased 22% in 1993, after increases of 11% and 10% in 1992 and 1991, respectively. The significant increase in 1993 was primarily due to the $675 million increase related to the Fibreboard settlement. Excluding this $675 million, reserves increased by 10% in 1993. Substantial reserve growth has occurred each year in those liability coverages, primarily excess liability and executive protection, that have delayed loss reporting and extended periods of settlement. These coverages have become a more significant portion of the Group's business in recent years. 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 1993 was approximately 7% lower than the number at year-end 1992. This decrease was due primarily to the settlement during 1993 of the large number of open claims at December 31, 1992 relating to Hurricane Andrew and the December 1992 storm in the Northeast. The uncertainties relating to unpaid claims, particularly for asbestos and toxic waste claims on insurance policies written many years ago, are discussed in Item 7 of this report on pages 23 through 25. There were approximately 4,000 asbestos and toxic waste claims outstanding at December 31, 1993 and 1992 compared with approximately 5,000 claims outstanding at December 31, 1991. The decrease in 1992 was primarily the result of fewer asbestos-related new arisings as well as increases in bulk settlements and closed claims relating to asbestos claims. 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, 1993, 1992 and 1991. Reinsurance recoveries related to asbestos and toxic waste claims are not significant.
YEARS ENDED DECEMBER 31 ------------------------------ 1993 1992 1991 -------- ------ ------ (IN MILLIONS) Net liability, beginning of year..................... $ 435.4 $370.6 $334.6 Net incurred claim and claim adjustment expenses Increase in reserves related to the Fibreboard settlement........................... 675.0 -- -- IBNR reserves reclassified as reserves specifically related to the Fibreboard settlement............ 300.0 -- -- Other.............................................. 100.7 119.9 87.8 Net payments for claims.............................. 78.2 55.1 51.8 -------- ------ ------ Net liability, end of year........................... $1,432.9 $435.4 $370.6 ======== ====== ======
During 1984, the Group discontinued writing medical malpractice business. The Group entered into a stop loss reinsurance agreement, effective year-end 1985, which provides that the reinsurer will pay up to $285 million of losses and allocated loss adjustment expenses for this discontinued class of business in excess of the initial $225 million to be paid by the Group subsequent to December 31, 1985. The agreement also provides that the Group may elect to commute the remaining liability from the reinsurer as of December 31, 1995 and receive payment, at that time, of an amount determined by the agreement. The cost of this reinsurance was $173.5 million. Since the effective date of this agreement, the Group has paid an aggregate of $249.9 million of medical malpractice losses and loss adjustment expenses and has recovered the amount in excess of $225 million from the reinsurer. The amount of paid losses is approximately 55% of what was anticipated at the time the business was reinsured eight years ago. As a result of the favorable loss experience over this extended period, the Group reduced both its gross medical malpractice liability for unpaid claims and claim adjustment expenses and the related reinsurance recoverable by approximately $125 million in 1993. At that time, the Group announced its intention to exercise the election to commute the stop loss reinsurance agreement. The commutation will result in a return premium to the Group of approximately $125 million, which was recognized in 1993. 7 8 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 1993. 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 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" as shown in the table represents the aggregate change in the reserve estimates from the original balance sheet dates through December 31, 1993. 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, 1983, such as that related to the Fibreboard settlement, would be included in the cumulative deficiency amount for each year in the period 1983 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. A substantial portion of the cumulative deficiencies in liability estimates from 1983 through 1992 relates to additional provisions for asbestos and toxic waste claims, particularly the Fibreboard settlement. The cumulative deficiencies in the 1983 through 1985 columns were also due to additional provisions for medical malpractice claims as well as the substantially increased severity and complexity of liability claims. The cumulative deficiencies experienced relating to asbestos and toxic waste claims were, to varying degrees, the result of: (1) an increase in the actual number of claims filed; (2) an increase in the number of unasserted claims estimated; (3) an increase in the severity of actual and unasserted claims; and (4) an increase in litigation costs associated with such claims. Conditions and trends that have affected development of the liability for unpaid claims and claim adjustment expenses in the past will not necessarily recur in the future. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies based on the data in this table. The lower 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 1983 column, as of December 31, 1993 the Group had paid $1,707.6 million of the currently estimated $3,142.9 million of claims and claim adjustment expenses that were unpaid at the end of 1983; thus, an estimated $1,435.3 million of losses incurred through 1983 remain unpaid as of December 31, 1993, most of which relates to the Fibreboard settlement. Members of the Group are required to file annual statements with state insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis). In 1993, the Group amended its statutory basis of accounting to reflect salvage and subrogation recoveries on an accrual basis as a reduction of the liability for unpaid claims and claim adjustment 8 9 ANALYSIS OF CLAIM AND CLAIM ADJUSTMENT EXPENSE DEVELOPMENT (NET OF REINSURANCE RECOVERABLE)
DECEMBER 31 ------------------------------------------------------------------------------------------------- YEAR ENDED 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (IN MILLIONS) Net Liability for Unpaid Claims and Claim Adjustment Expenses...................... $1,112.8 $1,306.9 $1,602.2 $2,141.3 $2,818.6 $3,374.3 $3,880.1 $4,301.1 $4,743.9 $5,267.6 $6,450.0 Net Liability Reestimated as of: One year later............... 1,208.7 1,495.6 1,814.6 2,238.6 2,776.9 3,360.5 3,846.2 4,272.3 4,716.3 5,932.4 Two years later.............. 1,379.5 1,660.6 1,989.3 2,313.9 2,835.9 3,336.0 3,854.2 4,244.7 5,368.5 Three years later............ 1,486.5 1,817.6 2,108.5 2,433.2 2,831.0 3,359.8 3,839.8 4,933.0 Four years later............. 1,595.8 1,901.4 2,231.2 2,493.3 2,891.7 3,385.1 4,567.4 Five years later............. 1,651.8 2,005.6 2,353.4 2,585.8 2,961.0 4,203.9 Six years later.............. 1,738.2 2,093.6 2,433.5 2,687.2 3,897.2 Seven years later............ 1,816.1 2,176.6 2,569.0 3,745.2 Eight years later............ 1,891.5 2,322.5 3,673.4 Nine years later............. 2,040.9 3,441.6 Ten years later.............. 3,142.9 Cumulative Deficiency*......... 2,030.1 2,134.7 2,071.2 1,603.9 1,078.6 829.6 687.3 631.9 624.6 664.8** Cumulative Amount of Net Liability Paid as of: One year later............... 465.9 585.7 658.4 651.3 694.7 761.6 880.4 919.1 931.2 1,039.9 Two years later.............. 765.7 941.1 1,058.1 1,061.6 1,108.3 1,226.3 1,383.9 1,407.2 1,479.9 Three years later............ 996.8 1,207.0 1,356.7 1,362.9 1,419.1 1,555.1 1,715.9 1,808.7 Four years later............. 1,168.5 1,397.3 1,568.5 1,595.7 1,651.6 1,778.8 1,958.6 Five years later............. 1,287.2 1,544.1 1,730.0 1,775.3 1,818.2 1,966.1 Six years later.............. 1,386.1 1,646.7 1,867.6 1,907.1 1,961.9 Seven years later............ 1,459.3 1,756.4 1,971.4 2,032.9 Eight years later............ 1,547.7 1,841.8 2,085.5 Nine years later............. 1,620.9 1,937.1 Ten years later.............. 1,707.6
- --------------- * The cumulative deficiencies for the years 1983 through 1992 include the effect of the increase in the liability for unpaid claims and claim adjustment expenses related to the Fibreboard settlement. ** The medical malpractice gross liability for unpaid claims and claim adjustment expenses and the related reinsurance recoverable were both reduced by approximately $125 million in 1993. Excluding the effect of this item, the deficiency resulting from the reestimation of the December 31, 1992 liability for unpaid claims and claim adjustment expenses as of December 31, 1993 on a gross basis was not significantly different from that on a net basis. 9 10 expenses. Prior to 1993, salvage and subrogation recoveries were recorded on a cash basis in the statutory basis financial statements. 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 are as follows:
DECEMBER 31 --------------------- 1993 1992 -------- -------- (IN MILLIONS) Net liability reported on a statutory basis............ $6,435.8 $5,475.1 Additions (Reductions): Medical malpractice stop loss reinsurance reserve.... (88.5) (216.3) Salvage and subrogation recoveries recorded on a cash basis for statutory and on an accrual basis for GAAP in 1992...................................... -- (60.3) Other reserve differences............................ 102.7 69.1 -------- -------- Net liability reported on a GAAP basis................. $6,450.0 $5,267.6 ======== ========
Investments For each member of the Group, current investment policy is implemented by management which reports to its Board of Directors. The main objective of the investment portfolio of the Group is 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 a variety of factors including underwriting results and the Group's resulting tax position, fluctuations in interest rates and regulatory requirements. The investment portfolio of the Group is primarily composed of high quality bonds, principally tax-exempt, U.S. Treasury, government agency and corporate issues. In addition, the portfolio includes common stocks held primarily with the objective of capital appreciation. In 1993 and 1992, the Group invested new cash primarily in tax-exempt bonds. In each year the Group tried to achieve the appropriate mix in its portfolio to balance both investment and tax strategies. In 1993, the Group reduced its taxable bond portfolio by $225 million and increased its short term investments so that funds are readily available to pay amounts related to the Fibreboard settlement. At December 31, 1993, 75% of the Group's fixed maturity portfolio was invested in tax-exempt bonds compared with 71% at the previous year-end. The investment results of the Group for each of the past three years are shown in the following table.
CHANGE IN AVERAGE PERCENT EARNED UNREALIZED INVESTED INVESTMENT ----------------------- REALIZED APPRECIATION YEAR ASSETS(a) INCOME(b) BEFORE TAX AFTER TAX GAINS(c) (c)(d) - ---- ---------- ------------ ---------- --------- -------- ------------ (IN THOUSANDS) 1991................ $6,692,199 $466,081 7.0% 5.9% $ 50,656 $ 87,553 1992................ 7,427,017 490,183 6.6 5.7 96,704 (38,585) 1993................ 8,085,302 529,591 6.6 5.6 172,925 51,842
- --------------- (a) Average of amounts at beginning and end of calendar year. (b) Investment income after deduction of investment expenses, but before applicable income tax, excluding income from rental of real estate and fixed assets. (c) Before applicable income tax. (d) Relates to equity securities. 10 11 CHUBB & SON INC. Chubb & Son Inc., a wholly-owned subsidiary of the Corporation, was incorporated in 1959 under the laws of New York as a successor to the partnership of Chubb & Son which was organized in 1882 by Thomas Caldecot Chubb to act as underwriter and manager of insurance companies. Chubb & Son Inc. is the manager of Federal, Vigilant, Great Northern, Chubb New Jersey, Chubb Custom and Chubb National. Chubb & Son Inc. also provides certain services to Pacific Indemnity and other members of the Property and Casualty Insurance Group for which it is reimbursed. Acting subject to the supervision and control of the Boards of Directors of the members of the Group, Chubb & Son Inc. provides day to day executive management and operating personnel and makes available the economy and flexibility inherent in the common operation of a group of insurance companies. In addition, Chubb & Son Inc. arranges for the exchange of reinsurance between members of the Group. Chubb & Son Inc. is the United States manager for Samsung Fire & Marine Insurance Company, Ltd. (formerly known as Ankuk Fire & Marine Insurance Company, Ltd.). Through December 31, 1993, Chubb & Son Inc. managed the aviation departments of certain other insurance companies. Effective January 1, 1994, Associated Aviation Underwriters, Inc., a company 50% owned by Chubb and Son Inc., assumed management of this aviation business. LIFE AND HEALTH INSURANCE GROUP The Life and Health Insurance Group (Life Group) includes Chubb Life Insurance Company of America (Chubb Life) and its wholly-owned subsidiaries, The Colonial Life Insurance Company of America (Colonial) and Chubb Sovereign Life Insurance Company (Sovereign). The Life Group, which markets a wide variety of insurance and investment products, is principally engaged in the sale of personal and group life and health insurance as well as annuity contracts. These products, some of which combine life insurance and investment attributes, include traditional insurance products such as term, whole life, and accident and health insurance, as well as fixed premium interest-sensitive life, universal life and variable universal life insurance and mutual funds. The target market of the Life Group is small-to medium-sized business establishments and those people, often the proprietors of such businesses, whose needs for financial planning are more complex and diverse than average. One or more of the companies in the Life Group are licensed and transact business in each of the 50 states, the District of Columbia, Puerto Rico, Guam and the Virgin Islands. Personal life and health insurance is marketed primarily through approximately 1,400 personal producing general agents and 20,600 brokers. Group life and health insurance is marketed through approximately 9,100 brokers. The executive, accounting, actuarial and administrative activities of the Life Group other than Sovereign are located at the Chubb Life headquarters in Concord, New Hampshire. Sovereign's activities are administered both in Concord and Santa Barbara, California. The group insurance operations are mainly located in Parsippany, New Jersey. Personal insurance operations are in Concord, Santa Barbara and Chattanooga, Tennessee. The following tables present highlights of the Life Group. LIFE INSURANCE IN-FORCE*
PERSONAL ---------------------------------------- PARTICIPATING NON-PARTICIPATING GROUP TOTAL ----------------- -------------------- ------------------- -------------------- YEAR AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT - ---- ------- ------- ----------- ------- ---------- ------- ----------- ------- (IN THOUSANDS) 1991...... $95,079 .2% $34,565,026 83.3% $6,842,363 16.5% $41,502,468 100% 1992...... 88,001 .2 39,950,972 86.0 6,415,545 13.8 46,454,518 100 1993...... 81,278 .1 47,740,633 88.0 6,460,954 11.9 54,282,865 100
- --------------- * Before deduction for reinsurance ceded. 11 12 PREMIUM AND POLICY CHARGE REVENUES BY CLASS
PERSONAL GROUP ------------------------------------------------------- ------------------------------------- ACCIDENT AND ACCIDENT AND ORDINARY LIFE HEALTH ANNUITIES LIFE HEALTH ------------------ ---------------- --------------- ---------------- ------------------ YEAR AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT - ---- ------- ------- ------ ------- ------ ------- ------ ------- ------ ------- (IN THOUSANDS) 1991...... $171,903 27.1% $17,449 2.7% $2,378 .4% $44,852 7.1% $397,434 62.7% 1992...... 192,202 27.9 18,558 2.7 2,938 .4 44,389 6.4 431,086 62.6 1993...... 216,591 27.0 19,121 2.4 4,294 .5 47,041 5.9 514,189 64.2
REVENUES, ASSETS AND CAPITAL AND SURPLUS
TOTAL PREMIUMS GROSS CAPITAL AND POLICY INVESTMENT AND YEAR CHARGES INCOME ASSETS SURPLUS - ---- ---------- ---------- --------- -------- (IN THOUSANDS) 1991................................. $634,016 $177,654 $2,951,704 $673,981 1992................................. 689,173 192,748 3,150,630 736,801 1993................................. 801,236 205,891 3,529,802 758,419
The main objective of the investment portfolio of the Life Group is to earn a rate of return in excess of that required to satisfy the obligations to policyholders and to cover expenses. The portfolio of the Life Group is comprised primarily of mortgage-backed securities and corporate bonds. The Life Group invests predominantly in investment grade, current coupon fixed-income securities with stable cash flow characteristics and maturities which are consistent with life insurance reserve requirements. The investment strategy emphasizes maintaining portfolio quality while achieving competitive investment yields. The investment results of the Life Group for each of the past three years are shown in the following table.
CHANGE IN AVERAGE UNREALIZED INVESTED INVESTMENT PERCENT REALIZED APPRECIATION YEAR ASSETS(a) INCOME(b) EARNED GAINS(c) (c)(d) - ---- --------- ---------- ------ -------- --------------- (IN THOUSANDS) 1991........................ $1,996,103 $174,870 8.8% $ 4,629 $7,023 1992........................ 2,136,161 189,500 8.9 13,288 2,783 1993........................ 2,341,028 202,771 8.7 22,056 4,720
- --------------- (a) Average of amounts at beginning and end of calendar year. (b) Investment income after deduction of investment expenses, but before applicable income tax, excluding income from real estate. (c) Before applicable income tax. (d) Relates to equity securities. Reinsurance The companies in the Life Group, in accordance with common industry practice, reinsure portions of the life insurance risks they underwrite with other companies. At the present time, the maximum amount of life insurance retained on any one life by the Life Group is $1,250,000, excluding accidental death benefits. Including accidental death benefits, the Life Group accepts a maximum net retention of $1,400,000. Policy Liabilities Premium receipts from universal life and other interest-sensitive contracts are established as policyholder account balances. Charges for the cost of insurance and policy administration are assessed against the policyholder account balance. The amount remaining after such charges represents the policy liability before applicable surrender charges. Benefit reserves on individual life insurance contracts with fixed and guaranteed premiums and benefits are computed so that amounts, with additions from actuarial net premiums to be received and with interest on such reserves compounded annually at certain assumed rates, will be sufficient to meet expected policy obligations. 12 13 In accordance with generally accepted accounting principles, certain additional factors are considered in the reserve computation as more fully set forth in Note (1)(e) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1993 Annual Report to Shareholders. Group life reserves represent the unearned premium. Group medical reserves are computed utilizing "lag and adjusted lag" methods. These methods take into account historical claim experience and adjust for current medical inflation and changes in claim backlog. REAL ESTATE DEVELOPMENT GROUP The Real Estate Development Group (Real Estate Group) is composed of Bellemead Development Corporation and its subsidiaries. The Real Estate Group is involved with commercial and residential real estate development. The Real Estate Group develops real estate properties itself rather than through third party developers. It is distinguished from most other real estate developers in that it coordinates all phases of the development process from concept to completion. The services offered to its customers include land acquisition, site planning, architecture, engineering, construction, financing, marketing and property management. Upon completion of development, the properties may be either owned and operated for the Real Estate Group's own account or sold to third parties. The Real Estate Group directly manages virtually all of the properties which it either owns or has sold and retained interests in through secured loans. The Real Estate Group's continuing investment interests in joint ventures generally consist of the ownership and lease of the underlying land and the management and operation of the buildings. The Real Estate Group's commercial development activities center around acquiring suburban, multi-site land parcels in locations considered prime for office development, and then developing the land in progressive stages. The Real Estate Group's activities include a few metropolitan office building projects. Commercial development activities are primarily in northern and central New Jersey with additional operations in Connecticut, Florida, Illinois, Maryland, Michigan, Pennsylvania and Texas. The Real Estate Group owns 4,455,000 square feet of office and industrial space, of which 87% is leased. The Real Estate Group has varying interests in an additional 6,080,000 square feet of office and industrial space which is 92% leased. Residential development activities of the Real Estate Group are primarily in central Florida. The Real Estate Group currently has undeveloped land holdings of approximately 4,600 acres, with primary holdings in New Jersey and Florida and lesser holdings in six additional states. REGULATION, PREMIUM RATES AND COMPETITION The Corporation is a holding company primarily engaged in the insurance business and is therefore subject to regulation by certain states as an insurance holding company. California, Indiana, Minnesota, New Hampshire, New Jersey, New York and all other 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. 13 14 Property and Casualty Insurance The Property and Casualty Insurance Group is subject to regulation and supervision in the states in which it does business. In general, such regulation is for the protection of policyholders rather than shareholders. The extent of such regulation varies but generally has its source in statutes which delegate regulatory, supervisory and administrative powers to a department of insurance. The regulation, supervision and administration relate to, among other things, the standards of solvency which must be met and maintained; the licensing of insurers and their agents; restrictions on insurance policy terminations; unfair trade practices; the nature of and limitations on investments; premium rates; restrictions on the size of risks which may be insured under a single policy; deposits of securities for the benefit of policyholders; approval of policy forms; periodic examinations of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of companies or for other purposes; limitations on dividends to policyholders and shareholders; and the adequacy of provisions for unearned premiums, unpaid claims and claim adjustment expenses, both reported and unreported, and other liabilities. In December 1993, the National Association of Insurance Commissioners adopted a risk-based capital formula for property and casualty insurance companies. This formula will be used by state regulatory authorities to identify insurance companies which may be undercapitalized and which merit further regulatory attention. The formula prescribes a series of risk measurements to determine a minimum capital amount for an insurance company, based on the profile of the individual company. The ratio of a company's actual policyholders' surplus to its minimum capital requirement will determine whether any state regulatory action is required. The risk-based capital requirement will be applicable to property and casualty insurance companies for the first time as of year-end 1994. Based on preliminary calculations using 1993 data, each member of the Group has more than sufficient capital to meet the risk-based capital requirement. Regulatory requirements applying to premium rates vary from state to state, but generally provide that rates not be "excessive, inadequate or unfairly discriminatory." Rates for many lines of business, including automobile and homeowners insurance, are subject to prior regulatory approval in many states. However, in certain states, prior regulatory approval of rates is not required for most lines of insurance which the Group underwrites. Ocean marine insurance rates are exempt from regulation. Subject to regulatory requirements, the Group's management determines the prices charged for its policies based on a variety of factors including claim and claim adjustment expense experience, inflation, tax law and rate changes, and anticipated changes in the legal environment, both judicial and legislative. Methods for arriving at rates vary by type of business, exposure assumed and size of risk. Underwriting profitability is affected by the accuracy of these assumptions, by the willingness of insurance regulators to grant increases in those rates which they control and by such other matters as underwriting selectivity and expense control. 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 an insurer writing a class of insurance covered by the fund in the state, all members are assessed to pay certain claims against the insolvent insurer. Fund assessments are proportionately based on the members' written premiums for the classes of insurance written by the insolvent insurer. A portion of these assessments is recovered in certain states through premium tax offsets and policyholder surcharges. In 1993, such assessments to the members of the Group amounted to approximately $8 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 to provide risks with various basic insurance coverages when they are not available in voluntary markets. Such mechanisms are most prevalent for automobile and workers' compensation insurance, but a majority of states also mandate participation in Fair Plans or Windstorm Plans, which provide basic property coverages. Some states also require insurers to participate in facilities that provide homeowners, crime and medical malpractice insurance. Participation is based upon the amount of a company's voluntary written premiums in a particular state for the classes of insurance involved. These involuntary market plans generally are underpriced and produce unprofitable underwriting results. 14 15 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. 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. Such restrictions include the need to secure new licenses and compulsory cessions of reinsurance. In certain countries the Group has incorporated insurance subsidiaries locally to improve its position. The property and casualty insurance industry is highly competitive both as to price and service. Members of the Group compete not only with other stock companies but also with mutual companies, other underwriting organizations and alternative risk sharing mechanisms. Some competitors obtain their business at a lower cost through the use of salaried personnel rather than independent agents and brokers. Rates are not uniform for all insurers and vary according to the types of insurers and methods of operation. The Group competes for business not only on the basis of price, but also on the basis of availability of coverage desired by customers and quality of service, including claim adjustment service. The Group's products and services are generally designed to serve specific customer groups or needs and to offer a degree of customization that is of value to the insured. There are approximately 3,900 property and casualty insurance companies in the United States operating independently or in groups and no single company or group is dominant. According to A.M. Best, the Group is the 14th largest United States property and casualty insurance group based on 1992 net premiums written. The relatively large size and underwriting capacity of the Group make available opportunities not available to smaller companies. The property and casualty insurance industry has a history of cyclical performance with successive periods of deterioration and improvement over time. The industry and the Group experienced substantial underwriting losses from 1980 through 1984. Beginning in 1984, the industry and the Group were able to increase prices and tighten underwriting terms. Substantial price increases were achieved in most commercial lines from 1984 through 1986. Price competition increased in the property and casualty marketplace during 1987 and has continued through 1993, particularly in the commercial classes. In 1993, property related business experienced some rate firming in the wake of the unprecedented catastrophes of 1992; however, price increases in casualty lines continued to be difficult to achieve. The Group continues to be selective in the writing of new business and to reinforce the sound relationships with its customers who appreciate the stability, expertise and added value the Group provides. In the personal lines, the regulatory climate for obtaining rate increases continues to be difficult, particularly in the automobile class. Life and Health Insurance The members of the Life Group are subject to regulation and supervision in each state in which they do business. Such regulation and supervision is generally of the character indicated in the first two paragraphs under the preceding caption, "Property and Casualty Insurance." The risk-based capital formula for life and health insurers was first effective as of year-end 1993. Each member of the Life Group had more than sufficient capital at December 31, 1993 to meet the risk-based capital requirement. The Life Group operates in a highly competitive industry in which it does not hold a significant market share. The Life Group competes in the personal insurance market not only with other life insurance companies but also with other financial institutions. By offering a full line of products, including interest-sensitive and variable products, both with and without life contingencies, the Life Group meets this competition for its selected customer group. The Life Group also competes in the small group health insurance market by offering competitively priced indemnity products with comprehensive benefits, and a full line of ancillary products including group dental, life and long term disability. In 1993, the Life Group accelerated its involvement in managed care through the 15 16 development of ChubbHealth Inc., a health maintenance organization that will serve the New York City metropolitan area. ChubbHealth is a joint venture with Healthsource, Inc. ChubbHealth is in the final stages of licensing and will be operational during the first half of 1994. Members of the Life Group also participate in insolvency funds. In 1993, insolvency fund assessments to the members of the Life Group amounted to approximately $2 million. There are approximately 2,000 legal reserve life insurance companies in the United States. According to the National Underwriter, a trade publication, as of January 1, 1993, Chubb Life, Colonial and Sovereign ranked 71st, 151st and 167th, respectively, among such companies based on total insurance in-force. Legislative and Judicial Developments Although the federal government and its regulatory agencies generally do not directly regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways. Current and proposed federal measures which may significantly affect the insurance business include health care reform initiatives, containment of medical care costs, limitations on health insurance premiums, toxic waste removal and liability measures, financial services deregulation, solvency regulation, employee benefits regulation, automobile safety regulation, the taxation of insurance companies, the tax treatment of insurance products and modification of the limited exemption for the business of insurance from the federal antitrust laws. Enacted and contemplated health care reform on both a national and state level are reshaping the health insurance industry. Federal legislation on health insurance is being considered which, if enacted, could create less favorable conditions for the health insurance industry. Significant changes are not expected to become operational for some time. It is currently not possible to predict the long term impact of health care reforms on the Life Group's business. Insurance companies are also affected by a variety of state and federal legislative and regulatory measures as well as by decisions of their courts that define and extend the risks and benefits for which insurance is provided. These include redefinitions of risk exposure in areas such as product liability and commercial general liability as well as extension and protection of employee benefits, including pension, workers' compensation and disability benefits. Regulatory concerns with insurance risk classification have increased significantly in recent years. There is continuous legislative, regulatory and judicial activity regarding the use of gender in determining premium rates and benefit payments. Also, some states have restricted the use of underwriting criteria related to Human Immunodeficiency Virus related illnesses. The Corporation's insurance subsidiaries have taken steps to limit their underwriting exposures in those jurisdictions that severely restrict underwriting freedom. In July 1992, New York adopted legislation implementing changes in the small employer group health insurance market. The major provisions became effective April 1, 1993. New Jersey adopted similar legislation in November 1992, which generally became effective January 1, 1994. Both laws significantly affect the manner in which the Life Group and other small group health indemnity insurers conduct business. In general, the laws create community based rating, mandate prior approval of rates by the insurance department, require open enrollment periods, limit pre-existing condition exclusions and eliminate health underwriting for insured groups with fewer than 50 covered lives. Several lawsuits have been filed by a number of insurers, including a member of the Life Group, to overturn the New York law and regulations. Certain provisions of the law have been successfully challenged; however, the New York Superintendent of Insurance has appealed such decisions. Approximately 80% of the Life Group's group health insurance premiums are written in New York and New Jersey. The Life Group has taken actions, including redesigning products and restructuring rates and sales commissions, which will allow the Life Group to remain competitive with other small employer group health indemnity insurers in New York and New Jersey. In 1988, voters in California approved Ballot Proposition 103, an insurance reform initiative, which is discussed in Item 7 of this report on page 22. 16 17 In 1990, New Jersey adopted legislation imposing controls over automobile insurance risk selection, pricing, coverage and termination. The New Jersey statute also applied the state's antitrust laws to automobile insurers, abolished the deficit-ridden Automobile Joint Underwriting Association (JUA), established a Market Transition Facility (MTF) to issue automobile policies until the implementation of an assigned risk mechanism on October 1, 1992 and levied an assessment and surtax on certain insurance coverages to help defray the estimated $3 billion obligation of the JUA. Under the law, insurers must make special rate filings to recoup these added charges from their insurance customers. The MTF has also generated a deficit during its two year existence. Pursuant to statute, the deficit is required to be allocated to automobile insurers, including members of the Group, based on market share. Regulations permit insurers to apply for a surcharge to recover these allocations when paid. In December 1993, the Group entered into an agreement with the Insurance Commissioner to pay approximately $10 million as its share of the then projected deficit of $900 million. The Group's share is subject to adjustment based on any changes in the estimated deficit. The agreement also entitles the Group to a refund or credit of any payments made in the event that litigation commenced by representatives of the insurance industry challenging the Insurance Commissioner's authority to allocate the deficit to insurers is successful. Such litigation is currently pending. In March 1994, the acting Insurance Commissioner announced that the deficit had been reestimated to be approximately $1.3 billion. The Group's share of the reestimated deficit is approximately $15 million. ITEM 2. PROPERTIES The executive offices of the Corporation and the administrative offices of the Property and Casualty Group are in Warren, New Jersey. The Life Group has its administrative offices in Concord, New Hampshire; Parsippany, New Jersey; Chattanooga, Tennessee and Santa Barbara, California. The Real Estate Group's corporate headquarters is located in Roseland, New Jersey. The insurance subsidiaries maintain zonal and branch offices in major cities throughout the United States, and members of the Property and Casualty Insurance Group also have offices in Canada, Europe, Australia and the Far East. Office facilities are leased with the exception of buildings in Branchburg, New Jersey, Chattanooga and Santa Barbara, and a portion of the Life Group's home office complex in Concord. Management considers its office facilities suitable and adequate for the current level of operations. See Note (11) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1993 Annual Report to Shareholders. ITEM 3. LEGAL PROCEEDINGS The Corporation and its subsidiaries are defendants in various lawsuits arising out of their businesses. It is the opinion of management that the final outcome of these matters will not materially affect the consolidated financial position of the registrant. Information regarding certain litigation to which property and casualty insurance subsidiaries of the Corporation are a party is included in Item 7 of this report on pages 23 and 24. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the shareholders during the last quarter of the year ended December 31, 1993. 17 18 EXECUTIVE OFFICERS OF THE REGISTRANT
YEAR OF AGE(a) ELECTION(b) Dean R. O'Hare, Chairman of the Corporation.............................. 51 1972 Percy Chubb, III, Vice Chairman of the Corporation....................... 59 1971 Richard D. Smith, President of the Corporation........................... 65 1983 Randell G. Craig, Executive Vice President of Chubb Life................. 48 1994 Robert P. Crawford, Jr., Executive Vice President of the Corporation..... 52 1994 John J. Degnan, Vice Chairman and General Counsel of Chubb & Son Inc. ... 49 1994 Gail E. Devlin, Senior Vice President of the Corporation................. 55 1981 David S. Fowler, Senior Vice President of the Corporation................ 48 1989 Henry G. Gulick, Vice President and Secretary of the Corporation......... 50 1975 Donn H. Norton, Executive Vice President of the Corporation.............. 52 1985 Michael O'Reilly, Senior Vice President of the Corporation............... 50 1976 Robert Rusis, Senior Vice President and General Counsel of the Corporation............................................................ 60 1990 Henry B. Schram, Senior Vice President of the Corporation................ 47 1985 Theresa M. Stone, Senior Vice President of the Corporation............... 49 1990 John F. Swope, Executive Vice President of the Corporation............... 55 1985 George T. Van Gilder, Executive Vice President of Chubb & Son Inc. ...... 50 1994
- --------------- (a) Ages listed above are as of April 26, 1994. (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 Randell G. Craig, John J. Degnan and Theresa M. Stone. Mr. Craig joined Chubb Life in 1990 and was previously a vice president with Crown Life Insurance Company. Prior to joining Chubb & Son Inc. in 1990, Mr. Degnan was a senior partner in the New Jersey law firm of Shanley & Fisher. Ms. Stone, who joined the Corporation in 1990, was previously a principal with Morgan Stanley & Co. Incorporated. 18 19 PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Incorporated by reference from the Corporation's 1993 Annual Report to Shareholders, page 67. ITEM 6. SELECTED FINANCIAL DATA Selected financial data for the five years ended December 31, 1993 are incorporated by reference from the Corporation's 1993 Annual Report to Shareholders, pages 38 and 39. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion presents our past results and our expectations for the near term future. The supplementary financial information and 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 1993 Annual Report to Shareholders, pages 11, 12 and 40 through 61. Net income amounted to $324 million in 1993 compared with $617 million in 1992 and $552 million in 1991. Net income in 1993 reflects a net charge of $357 million after taxes related to an agreement for the settlement of asbestos-related litigation and the Corporation's intention to exercise its option to commute an unrelated existing medical malpractice reinsurance agreement. Net income in 1993 also reflects a one-time charge of $20 million for the cumulative effect of adopting new accounting requirements for postretirement benefits other than pensions and for income taxes. Net income included realized investment gains after taxes of $152 million, $124 million and $43 million in 1993, 1992 and 1991, respectively. Decisions to sell securities are governed principally by considerations of investment opportunities and tax consequences. Thus, realized investment gains and losses may vary significantly from year to year. As a result, net income may not be indicative of our operating performance for the period. PROPERTY AND CASUALTY INSURANCE Property and casualty income was significantly lower in 1993 compared with 1992 and 1991 due to a $675 million increase in loss reserves related to an agreement for the settlement of asbestos-related litigation (the "$675 million charge"), which is further described under Loss Reserves. This was partially offset by a $125 million return premium to the property and casualty insurance subsidiaries related to the Corporation's intention to exercise its option to commute an existing medical malpractice reinsurance agreement (the "$125 million return premium"). Property and casualty income after taxes was $118 million in 1993 compared with $407 million in 1992 and $416 million in 1991. Excluding the effects of the $675 million charge and the $125 million return premium, property and casualty income after taxes was $475 million in 1993. Results for 1993 benefited from lower catastrophe losses and an increase in investment income compared with the prior year. The earnings decrease in 1992 was due to a decline in underwriting results caused by substantial catastrophe losses, including those from Hurricane Andrew, partially offset by an increase in investment income. Catastrophe losses were $89 million in 1993 compared with $175 million in 1992 and $72 million in 1991. Net premiums written, excluding the $125 million return premium, amounted to $3.5 billion in 1993, an increase of 9% compared with 1992, which was in turn 4% higher than 1991. Personal coverages accounted for $814 million or 23% of 1993 premiums written, standard commercial coverages for $1,202 million or 34%, specialty commercial coverages for $1,270 million or 36% and reinsurance assumed for $235 million or 7%. The marketplace continued to be competitive, particularly in the commercial classes. Property related business experienced some rate firming in 1993 in the wake of the unprecedented catastrophes of 1992, but price increases in casualty lines continued to be difficult to 19 20 achieve. We have continued to be selective in the writing of new business and to reinforce the sound relationships with our customers who appreciate the stability, expertise and added value we provide. Due to the adverse effect of the $675 million charge, underwriting results were extremely unprofitable in 1993. The combined loss and expense ratio, the common measure of underwriting profitability, was 114.8% in 1993 compared with 101.1% in 1992 and 99.5% in 1991. Excluding the effects of the $675 million charge and the $125 million return premium, the combined loss and expense ratio was 99.0% in 1993. The loss ratio was 82.5% in 1993 compared with 66.7% in 1992 and 64.4% in 1991. Excluding the effects of the $675 million charge and the $125 million return premium, the loss ratio was 65.5% in 1993, continuing to reflect the favorable experience resulting from the consistent application of our underwriting standards. Losses from catastrophes represented 2.5, 5.6 and 2.4 percentage points of the loss ratio in 1993, 1992 and 1991, respectively. Our expense ratio was 32.3% in 1993 compared with 34.4% in 1992 and 35.1% in 1991. Excluding the effect of the $125 million return premium, the expense ratio was 33.5% in 1993. The improvement from the comparable 1992 ratio was due to lower commissions and to growth in written premiums at a somewhat greater rate than the increase in overhead expenses. The decrease in the expense ratio in 1992 was due to lower commissions. Expenses were reduced by contingent profit sharing accruals of $9 million in each of the three years relating to the medical malpractice reinsurance agreement. We anticipate a similar accrual during 1994. There will be no further profit sharing allowance under this agreement after 1994. The effect of Hurricane Andrew on our underwriting results in 1992 was mitigated to a great extent by our catastrophe reinsurance program. The catastrophe reinsurance market has suffered large losses in recent years. As a result, the reinsurance market's capacity was substantially reduced in 1993 and the cost of available coverages rose significantly. We responded by increasing our retention levels for individual catastrophe losses. The effect of this change on our 1993 underwriting results was not significant due to the absence of severe catastrophe losses. PERSONAL INSURANCE Premiums from personal insurance increased 2% in 1993 compared with a 2% decrease in 1992. It continues to be difficult to write new homeowners and other non-automobile business due to our disciplined pricing as well as the weakness in residential real estate markets. Personal automobile premiums have remained level over the past three years as modest rate increases have offset a reduction in the number of in force policies, which is consistent with our plan to control our exposure in this class. Our personal insurance business produced an underwriting profit in 1993 compared with underwriting losses in 1992 and 1991. All classes contributed to the 1993 improvement. The combined loss and expense ratio was 95.8% in 1993 compared with 104.6% in 1992 and 103.1% in 1991. Underwriting results in each of these years were adversely affected by significant catastrophe losses in the homeowners class, particularly Hurricane Andrew in 1992. Homeowners results, excluding the impact of catastrophes, benefited in 1992 and 1993 from disciplined pricing and stable loss frequency and severity. Catastrophe losses for this class represented 13.4 percentage points of the loss ratio for 1993 compared with 25.0 percentage points in 1992 and 13.1 percentage points in 1991. Our automobile business was modestly profitable in 1993 compared with breakeven results in 1992 and unprofitable results in 1991. The improvement in 1993 was due to stable loss frequency and severity while in 1992 it was primarily due to a reduced frequency of losses. Automobile results were adversely affected each year by significant losses from the mandated business which we are required by law to accept for those individuals who cannot obtain coverage in the voluntary market. Other personal coverages, which include insurance for personal valuables and excess liability, were increasingly profitable in 1992 and 1993. 20 21 STANDARD COMMERCIAL INSURANCE Excluding the $125 million return premium discussed below, premiums from standard commercial insurance, which include coverages for multiple peril, casualty and workers' compensation, increased 6% in 1993 compared with 2% in 1992. The competitive market has continued to place significant pressure on rates. Premium growth in 1993 was most significant in the multiple peril class; such growth was due primarily to improved renewal retention as well as exposure growth on such renewals. Medical malpractice business, which we stopped writing in 1984, was reinsured effective year-end 1985. Under the provisions of the reinsurance agreement, we may elect to commute the remaining liability from the reinsurer as of December 31, 1995 and receive payment, at that time, of an amount determined by the agreement. In August 1993, the Corporation announced its intention to exercise this election. As the result of the favorable loss payment pattern in the eight years since this business was reinsured, the commutation will result in a return premium to the property and casualty insurance subsidiaries of approximately $125 million, which was recognized in the third quarter of 1993. Our standard commercial underwriting results were unprofitable in each of the past three years. Such results were extremely unprofitable in 1993 due to the adverse effect of the $675 million charge. The combined loss and expense ratio was 149.7% in 1993 compared with 105.7% in 1992 and 102.6% in 1991. Excluding the effects of the $675 million charge and the $125 million return premium, the combined loss and expense ratio was 107.6% in 1993. Casualty results include the effects of the $675 million charge and the $125 million return premium. Excluding the effects of these items, casualty results were near breakeven in 1993 compared with profitable results in 1992 and 1991. The excess liability component deteriorated somewhat in 1993 but remained profitable due to the relative price adequacy and favorable loss experience in this class. These favorable results were offset in varying degrees in each of the past three years by increases in loss reserves on general liability business written in earlier years, particularly for asbestos-related and toxic waste claims. Results in the automobile component were modestly profitable in each of the last three years. Multiple peril results were similarly unprofitable in each of the last three years due to the less than adequate prices. Results in the property component of this business improved in 1993 due to a reduction in the impact of catastrophe losses. This was offset by a deterioration in the liability component that was due to an increase in the frequency and severity of losses. Results in 1992 were adversely affected by higher catastrophe losses, primarily from Hurricane Andrew and the civil disorder in Los Angeles. Catastrophe losses for this class represented 3.6 percentage points of the loss ratio for 1993 compared with 10.1 percentage points in 1992 and 1.3 percentage points in 1991. Workers' compensation results were extremely unprofitable in each of the past three years. Results in our voluntary business have benefited somewhat from rate increases and a reduced frequency of losses. Results in this class have been aggravated each year, but particularly in 1991, by our share of the significant losses incurred by the involuntary pools and mandatory business in which we must participate by law. SPECIALTY COMMERCIAL INSURANCE Premiums from specialty commercial insurance increased 10% in 1993 compared with 11% in 1992. The growth was due primarily to rate and exposure increases in several of our smaller specialty classes. Price increases for most of our executive protection and financial fidelity coverages were difficult to achieve. Our strategy of working closely with our customers and our ability to differentiate our products has enabled us to retain a large percentage of our business. The specialty commercial business produced substantial underwriting profits in each of the past three years with combined loss and expense ratios of 91.0% in 1993, 90.5% in 1992 and 90.3% in 1991. Our executive protection, financial fidelity and surety results were highly profitable in each year due to favorable loss experience. 21 22 Marine results were profitable in 1993 and 1992 compared with near breakeven results in 1991. Results in several of our smaller specialty classes deteriorated in 1993 compared with the prior two years, due primarily to an increased frequency of large losses. REINSURANCE ASSUMED Premiums from reinsurance assumed, which is primarily treaty reinsurance assumed from the Sun Alliance Group plc, increased 46% in 1993 compared with 9% in 1992. The growth in 1993 was due to an increase in our participation in the business of Sun Alliance and a firming of rates in Sun Alliance's markets, primarily in the United Kingdom. Underwriting results for this segment, while substantially improved in 1993 due to the firming of rates, have been unprofitable in each of the last three years. The combined loss and expense ratio was 111.8% in 1993 compared with 126.9% in 1992 and 119.3% in 1991. Results in 1992 were adversely affected by our share of the substantial mortgage indemnity insurance losses experienced by Sun Alliance in the United Kingdom. Results in 1991 reflect the adverse effect on Sun Alliance of excessive price competition and a damaging recession in the United Kingdom. REGULATORY INITIATIVES In 1988, voters in California approved Ballot Proposition 103, an insurance reform initiative which affects most property and casualty insurers writing business in the state. Approximately 14% of the direct business of the Corporation's property and casualty subsidiaries is written in California. Provisions of Proposition 103 would have required insurers to roll back property and casualty insurance rates for certain lines of business to 20 percent below November 1987 levels and would have required an additional 20 percent reduction in automobile rates by November 1989. In 1989, the California Supreme Court, ruling on the constitutional challenge to Proposition 103, ruled that an insurer is entitled to a fair rate of return. The regulations implementing the rate determination and premium rollback provisions of Proposition 103 continue to evolve. A California Superior Court decision declared invalid and void the rollback and rate review regulations proposed by the elected Insurance Commissioner. The Court decision prohibits the Commissioner from enforcing the regulations as well. The Commissioner has appealed the Superior Court decision to the California Supreme Court and the outcome of that appeal is uncertain. In a separate action, a California Court of Appeal has ruled that Proposition 103 regulations need not be submitted for approval to the California Office of Administrative Law. A petition for review has been filed with the California Supreme Court. There are at present no regulations in force or proposed which establish a final rollback formula. None of our property and casualty subsidiaries have been among the companies thus far ordered to refund premiums for the rollback period. Based on our analysis of the operating results of our property and casualty subsidiaries in the State of California during the rollback period, it is management's belief that it is probable that any final court decision will not result in premium refunds of a material amount by the Corporation's property and casualty subsidiaries. LOSS RESERVES Loss reserves are our property and casualty subsidiaries' largest liability. At the end of 1993, gross loss reserves totaled $8.2 billion compared with $7.2 billion and $6.6 billion at year-end 1992 and 1991, respectively. Reinsurance recoverable on such loss reserves was $1.8 billion at the end of 1993 compared with $2.0 billion and $1.8 billion at year-end 1992 and 1991, respectively. Loss reserves, net of reinsurance recoverable, increased 22% in 1993, after increases of 11% and 10% in 1992 and 1991, respectively. The significant increase in 1993 was primarily due to the $675 million increase related to the settlement of asbestos-related litigation. Excluding this $675 million, loss reserves increased by 10% in 1993. Substantial reserve growth has occurred each year in those liability coverages, primarily excess 22 23 liability and executive protection, that have delayed loss reporting and extended periods of settlement. These coverages have become a more significant portion of our business in recent years. The process of establishing loss reserves is an imprecise science and reflects significant judgmental factors. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss and the settlement of the loss. In fact, approximately 50% of our loss reserves at December 31, 1993 were for claims that had not yet been reported to us, some of which were not yet known to the insured, and for future development on reported claims. Judicial decisions and legislative actions continue to broaden liability and policy definitions and to increase the severity of claim payments. As a result of this and other societal and economic developments, the uncertainties inherent in estimating ultimate claim costs on the basis of past experience have increased significantly, further complicating the already difficult loss reserving process. The uncertainties relating to asbestos and toxic waste claims on insurance policies written many years ago are exacerbated by judicial and legislative interpretations of coverage that in some cases have tended to erode the clear and express intent of such policies and in others have expanded theories of liability. The industry is engaged in extensive litigation over these coverage and liability issues and is thus confronted with a continuing uncertainty in its effort to quantify these exposures. Our most costly asbestos exposure relates to an insurance policy issued to Fibreboard Corporation by Pacific Indemnity Company in 1956. In 1993, Pacific Indemnity Company, a subsidiary of the Corporation, entered into a global settlement agreement with Continental Casualty Company (a subsidiary of CNA Financial Corporation), Fibreboard Corporation, and attorneys representing claimants against Fibreboard for all future asbestos-related bodily injury claims against Fibreboard. This agreement is subject to court approval. Pursuant to the global settlement agreement, a $1.525 billion trust fund will be established to pay future claims, which are claims that were not filed in court before August 27, 1993. Pacific Indemnity will contribute approximately $538 million to the trust fund and Continental Casualty will contribute the remaining amount. In December 1993, upon execution of the global settlement agreement, Pacific Indemnity and Continental Casualty paid their respective shares into an escrow account. Upon final court approval of the settlement, which could take up to two years or more, 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 court approval of the global settlement agreement. Although it is likely that this agreement will be challenged, management is optimistic that the courts will approve the settlement. Pacific Indemnity and Continental Casualty have reached a separate agreement for the handling of all pending asbestos-related bodily injury claims against Fibreboard. Pacific Indemnity's obligation under this agreement is not expected to exceed $635 million, most of which is expected to be paid over the next two years. The agreement further provides that the total responsibility of both insurers with respect to pending and future asbestos-related bodily injury claims against Fibreboard will be shared between Pacific Indemnity and Continental Casualty on an approximate 35% and 65% basis, respectively. Pacific Indemnity, Continental Casualty and Fibreboard have entered into a trilateral agreement, subject to court approval, to settle all present and future asbestos-related bodily injury claims resulting from insurance policies that were, or may have been, issued to Fibreboard by the two insurers. The trilateral agreement will be triggered if the global settlement agreement is disapproved. Pacific Indemnity's obligation under the trilateral agreement is therefore similar to, and not duplicative of, that under those agreements described above. 23 24 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. Pacific Indemnity, Continental Casualty and Fibreboard have requested a California Court of Appeal to delay its decisions regarding asbestos-related insurance coverage issues, which are currently before it and involve the three parties exclusively, while the approval of the global settlement is pending in court. Continental Casualty and Pacific Indemnity have dismissed disputes against each other which involved Fibreboard and were in litigation. Prior to the settlement, the Corporation's property and casualty subsidiaries had paid $40 million and had existing loss reserves of $545 million to cover a portion of their obligation under these agreements. This amount included $300 million of general liability incurred but not reported (IBNR) reserves which were not previously classified as specific reserves for asbestos claims since it was management's belief that doing so would increase the demands of plaintiffs' attorneys. Additional loss reserves of $675 million were provided in the third quarter of 1993 at the time the settlement was negotiated. Management believes that, as a result of the global settlement agreement and the trilateral agreement, the uncertainty of our exposure with respect to asbestos-related bodily injury claims against Fibreboard has been greatly reduced. However, if both the global settlement agreement and the trilateral agreement are disapproved, there can be no assurance that the loss reserves established for future claims would be sufficient to pay all amounts which ultimately could become payable in respect of future asbestos-related bodily injury claims against Fibreboard. Other than Fibreboard, our remaining asbestos exposures are mostly limited to peripheral regional defendants, principally distributors. We continue to receive new asbestos claims and new exposures on existing claims as more peripheral parties are drawn into litigation to replace the now defunct mines and bankrupt manufacturers. The recent claims are complex in that they include significant and yet unresolved liability issues. Further, we still do not know the universe of potential claims. Hazardous waste sites are another significant potential exposure. Under the existing "Superfund" law and similar state statutes, when potentially responsible parties (PRPs) fail to handle the clean-up, regulators will 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. As the cost of environmental clean-up continues to grow, PRPs and others continue to file claims with their insurance carriers. 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 some cases, however, more recent policies specifically excluded such exposures. Ensuing litigation extends to issues of liability, coverage and other policy provisions. There is great uncertainty involved in estimating our liabilities related to these claims. First, the underlying liabilities of the claimants are extremely difficult to estimate. At any given clean-up site, the allocation of financial responsibility among the governmental authorities and PRPs varies greatly. Second, various 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. The law, which is subject to reauthorization in 1994, has generated far more litigation than it has provided clean up. The Clinton Administration has recently unveiled its plan for rewriting the Superfund law. The proposal creates a new Superfund insurance trust and includes a new non-judicial arbitration process aimed at removing Superfund disputes from the courts. It also creates a new tax on commercial insurance companies to be used to fund the trust and to settle Superfund related lawsuits between PRPs and their insurers. It also 24 25 provides for some relaxation of clean-up standards under certain conditions. We view this proposal as a positive first step. However, it does not yet come close to achieving its essential objectives -- resolving 90% of Superfund claims in litigation at a cost which is fair and affordable to the insurance industry. It is important to note that the proposal does not address non-Superfund site cases. For that reason, it does not cover all existing toxic waste litigation, for example, sites that are subject to state law only. Litigation costs continue to escalate, particularly for toxic waste claims. A substantial portion of the funds expended to date has been for legal fees incurred in the prolonged litigation of coverage issues. Many policies provide an indemnity policy limit but an unlimited contract for defense costs. This language in the policy sometimes leads to the payment of defense costs in sizable multiples of the policy limits. Reserves for asbestos and toxic waste claims cannot be estimated with traditional loss reserving techniques. Case reserves and costs of related litigation have been established 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. Other than the $675 million increase in loss reserves related to the Fibreboard settlement and the reclassification of $300 million of general liability IBNR reserves as specific reserves for this settlement, the increase in loss reserves relating to asbestos and toxic waste claims was $101 million in 1993 compared with $120 million in 1992 and $88 million in 1991. Further increases in such reserves in 1994 and future years are possible as legal and factual issues concerning these claims are clarified, although the amounts cannot be reasonably estimated. During 1993, due to the $675 million increase in loss reserves related to the Fibreboard settlement, we experienced overall unfavorable development of $665 million on loss reserves established as of the previous year-end. This compares with favorable development of $28 million and $29 million in 1992 and 1991, respectively. Such deficiency and redundancies were reflected in operating results in these respective years. Excluding the effect of the $675 million increase in loss reserves related to the Fibreboard settlement, we experienced favorable development of $10 million during 1993. Each of the past three years benefited from favorable claim frequency and severity trends for certain liability classes; this was offset each year in varying degrees by increases in loss reserves relating to asbestos and toxic waste claims. Management believes that the aggregate loss reserves of the property and casualty subsidiaries at December 31, 1993 were adequate to cover claims for losses which had occurred, including both those known to us and those yet to be reported. In establishing such reserves, management considers facts currently known and the present state of the law and coverage litigation. However, given the expansion of coverage and liability by the courts and the legislatures in the past and the possibilities of similar interpretations in the future, particularly as they relate to asbestos and toxic waste claims, as well as the uncertainty in determining what scientific standards will be acceptable for measuring hazardous waste site clean-up, additional increases in loss reserves may emerge which may adversely affect results in future periods. This emergence cannot reasonably be estimated. INVESTMENTS AND LIQUIDITY Investment income after taxes increased 8% in 1993 compared with 6% in 1992. Growth was primarily due to significant increases in invested assets, which reflected strong cash flow from operations over the period, offset in part by lower yields on new investments. The effective tax rate on our investment income was 14.7% in 1993 compared with 14.3% in 1992 and 15.3% in 1991. The increase in the effective tax rate in 1993 was due to the increase in the federal corporate tax rate from 34% to 35%, offset in part by holding a larger proportion of tax-exempt securities in our investment portfolio. In 1992, the effective tax rate decreased due to our holding a larger proportion of tax-exempt securities in our investment portfolio. 25 26 Generally, premiums are received by our property and casualty subsidiaries months or even years before we pay the losses under the policies purchased by such premiums. These funds are used first to make current claim and expense payments. The balance is invested to augment the investment income generated by the existing portfolio. Historically, more than sufficient funds have been provided from insurance revenues to pay losses, operating expenses and dividends to the Corporation. Cash available for investment was approximately $480 million in 1993 compared with $655 million in 1992 and $730 million in 1991. The decrease in 1993 was due to the $538 million paid in December into an escrow account related to the Fibreboard settlement. The main objective of the investment portfolio of the property and casualty companies is to provide maximum support to the insurance underwriting operations. Investment strategies are developed based on many factors including underwriting results and our resulting tax position, fluctuations in interest rates and regulatory requirements. In 1993 and 1992, we invested new cash primarily in tax-exempt bonds. In each year we tried to achieve the appropriate mix in our portfolio to balance both investment and tax strategies. In 1993, we reduced our taxable bond portfolio by approximately $225 million and increased our short-term investments. The property and casualty subsidiaries have consistently invested in high quality marketable securities. Taxable bonds in our domestic portfolio comprise U.S. Treasury, government agency and corporate issues. Approximately 90% of our taxable bonds are either backed by the U.S. government or rated AA or better by Moody's or Standard & Poor's. Of the tax-exempt bonds, practically all are rated A or better, with approximately half rated AAA. Both taxable and tax-exempt bonds have an average maturity of 9 years. Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations. Common stocks are high quality and readily marketable. Foreign investments are managed to provide liquidity to support insurance operations outside of the United States, while minimizing our exposure to currency fluctuations. The property and casualty subsidiaries maintain sufficient investments in highly liquid, short-term securities at all times to provide for immediate cash needs. At year-end 1993, such investments were at a higher than normal level so that funds are readily available to pay amounts related to the Fibreboard settlement. The Corporation maintains bank credit facilities that are available to respond to unexpected cash demands. LIFE AND HEALTH INSURANCE Life and health insurance earnings after taxes were $63 million in 1993 compared with $56 million in 1992 and $51 million in 1991. Premiums and policy charges were $801 million in 1993 compared with $689 million in 1992 and $634 million in 1991. PERSONAL INSURANCE Earnings from personal insurance were $37 million in 1993 compared with $34 million in 1992 and $33 million in 1991. Earnings increased in 1993 primarily due to an increase in the spread between interest earned on our invested assets and interest credited to policyholders on interest-sensitive products. Earnings in 1992 were adversely affected by higher mortality experience, primarily in our universal life and term life products. As the result of various adjustments, the tax rate on personal insurance earnings was 26%, 18% and 28% in 1993, 1992 and 1991, respectively. Premiums and policy charges amounted to $240 million in 1993 compared with $214 million in 1992 and $192 million in 1991. New sales of personal insurance as measured by annualized premiums were $88 million in 1993 compared with $71 million in 1992 and $54 million in 1991. Marketing initiatives conducted with our property and casualty insurance distribution system together with the increasing popularity of variable universal life products have contributed to our growth. 26 27 GROUP INSURANCE Earnings from group insurance were $26 million in 1993 compared with $22 million in 1992 and $18 million in 1991. Group health rate levels have kept pace with medical costs over this three year period. Group life insurance, which is primarily marketed as an ancillary product to group health insurance, contributed modestly to earnings in each of the last three years. Premiums were $561 million in 1993 compared with $475 million in 1992 and $442 million in 1991. New group sales as measured by annualized premiums were $323 million in 1993 compared with $118 million in 1992 and $161 million in 1991. Approximately 80% of our group health premiums are written in New York and New Jersey. Both states have adopted legislation which eliminates health insurance underwriting, creates community based rating and limits pre-existing condition exclusions for insured groups with fewer than 50 covered lives. As the result of this legislation, we had anticipated a reduction in premium and sales levels in 1993. However, we were able to offer a competitive product in New York, which is our major market, at a time when several insurers reduced their market share, resulting in substantial increases in premiums and sales. Sales decreased in 1992 due to our adherence to disciplined pricing as well as state legislative actions which disrupted our markets in several jurisdictions. We expect higher levels of competition in the small group market in 1994 and, as a result, anticipate that we will experience a reduction in premium and sales levels. Enacted and contemplated health care reform on both a national and state level are reshaping the health insurance industry. Federal legislation on health insurance is being considered which, if enacted, could create less favorable conditions for the health insurance industry. Significant changes are not expected to become operational for some time. It is currently not possible to predict the long term impact of health care reforms on our business. We believe that traditional indemnity plans will be a less viable product option in the long term for both the consumer and the companies selling such plans. Recognizing this, we have accelerated our involvement in managed care and also worked to lessen our dependence on medical premium. The most visible action we have taken in 1993 is the development of ChubbHealth Inc., a health maintenance organization that will serve the New York City metropolitan area. ChubbHealth is in the final stages of licensing and will be operational during the first half of 1994. We have also increased our emphasis on managed care outside New York by offering preferred provider organizations, which are networks of hospitals, clinics and doctors that offer cost savings compared with traditional indemnity plans. Ancillary coverages, like dental, long-term disability and group life, complete the product offering to this market segment. INVESTMENTS AND LIQUIDITY Gross investment income increased 7% in 1993 compared with 8% in 1992. Premium receipts in excess of payments for benefits and expenses, together with investment income, continue to provide cash for new investments. New cash available amounted to $225 million in 1993 compared with $120 million in 1992 and $115 million in 1991. The increase in new cash in 1993 was due to the significant increase in group health premiums and to new single premium sales. In 1993 and 1992, new cash was invested primarily in mortgage-backed securities and corporate bonds. We invest predominantly in investment grade current coupon fixed-income securities with stable cash flow characteristics and maturities which are consistent with life insurance reserve requirements. Approximately 95% are investment grade and nearly half are rated AAA. We maintain sufficient funds in short-term securities to meet unusual needs for cash. 27 28 REAL ESTATE DEVELOPMENT Real estate operations resulted in a loss after taxes of $2 million in 1993 compared with income of $10 million in 1992 and $25 million in 1991. Earnings were adversely affected by progressively higher portions of interest costs being charged directly to expense rather than being capitalized and by provisions each year for possible uncollectible receivables related to mortgages. Results were also adversely affected in 1993 by a $3 million tax charge related to the federal corporate tax rate increase. Revenues were $161 million in 1993 compared with $150 million in 1992 and $141 million in 1991. Our commercial real estate activities centered around acquiring suburban, multi-site land parcels in locations considered prime for office development, and then developing the land in progressive stages. We expanded our activities to include a few metropolitan office building projects. We develop real estate properties ourselves rather than through third party developers. We are distinguished from most other real estate developers in that we coordinate all phases of the development process from concept to completion. Upon completion of development, the properties may be either owned and operated for our own account or sold to third parties. We directly manage virtually all of the properties which we either own or have sold and retained interests in through secured loans. Our continuing investment interests in joint ventures generally consist of the ownership and lease of the underlying land and the management and operation of the buildings. Our agreements with joint ventures to manage all aspects of the ventured properties, including debt structures, tenant leasing, and building improvements and maintenance, have put us in a strong position to protect our ongoing financial interests in the current difficult real estate environment. The real estate industry continues to suffer from a significantly reduced demand for real estate investment. For the past several years, the supply of available office space has exceeded the demand. The slowdown in the economy exacerbated the problem as businesses consolidated their facilities, increasing the supply of available space. While selected real estate markets have experienced increases in leasing activity and some stability in rental rates, the oversupply of available office space for lease in most markets and the resultant depressed rental rates will continue to cause downward pressure on the earnings of the real estate industry. In light of the current real estate market conditions, we have curtailed our construction of new office buildings in recent years. In 1991 and 1992, we completed high-rise office buildings in Washington, D.C. and New Jersey, which are currently approximately 95% leased. Also, in 1991, we acquired a 1.2 million square foot office building, which is 87% leased, and adjacent land in Dallas for approximately $200 million, which includes a $114 million assumed mortgage. In 1993, we focused on completing and leasing newly-constructed facilities and maintaining established properties at high occupancy levels. We also commenced construction on three new suburban office buildings in locations where there are indications of tenant interest. Other than this new construction, development activities consist almost exclusively of preconstruction type efforts such as site planning, zoning and similar activities. As a consequence, we expect revenues for the next several years to come from ongoing income from owned properties and from management and financing activities related to previously sold properties or properties held in joint ventures. This does not preclude us from entertaining proposals to purchase our properties when such offers provide a reasonable return. Our vacancy rates are better than the average in substantially all markets in which we operate. We have been successful in both retaining existing tenants and securing new ones and have not had significant credit problems with tenants. During 1993, a total of 1,710,000 square feet was leased compared with 1,790,000 square feet in 1992 and 1,402,000 square feet in 1991. At December 31, 1993, we owned or had interests in 10,915,000 square feet of office and industrial space. Our vacancy rate was 10% at year-end 1993 compared with 14% at year-end 1992 and 17% at year-end 1991. The high vacancy rate in 1991 was the result of several multi-year projects being completed in a difficult leasing market. 28 29 The decreases in the vacancy rate in 1992 and 1993 were due to our ability to market a significant amount of the new space which became available in 1991. In certain markets, renewing leases in established buildings has been difficult as newly-constructed space is available nearby at similar rates. While we have experienced significant leasing activity over the past two years, we have had to enter into multiple year leases at depressed market rental rates. This, together with the lack of construction and transaction based activity, will place continued pressure on our real estate earnings for the next several years. We expect that in 1994 a larger portion of interest costs will be charged directly to expense as a result of several recently completed projects becoming fully operational during 1993 and development activities being curtailed at some of our office parks. Ultimate net realizable value for real estate assets is determined based on our ability to fully recover costs through a future revenue stream supported principally by rental revenues. In many instances, there currently is not an active market for commercial real estate. Therefore, the prices which might be realized if we were forced to liquidate such properties on an immediate sale basis would probably be less than the carrying values. In light of current market conditions and our intent and ability to hold properties for the long term, our primary focus is to ensure that we can recover our costs through ownership and operation rather than sale. Individual buildings and development sites are analyzed on a continuing basis with estimates made of both additional costs to be incurred to complete development where necessary and the estimated revenues and operating costs of the property in the future. The time value of money is not considered in assessing revenues versus costs. Revenue assumptions take into account local market conditions with respect to the lease-up periods, occupancy rates, and current and future construction activity. There are uncertainties as to the actual realization of the assumptions relative to future revenues and future costs. However, management does not believe there is any permanent impairment in real estate carrying values. The loans receivable issued in connection with our joint venture activities include primarily purchase money mortgages. Such loans, which represent only 2% of consolidated assets, are generally collateralized by buildings and land. The ultimate collectibility of such loans, of which no significant amounts are due in the near term, is evaluated continuously and appropriate reserves established. Our agreements to manage all aspects of the ventured properties have played a significant role in enabling us to control potential collectibility issues related to these receivables. We have had no significant foreclosures or in-substance foreclosures. The reserve for potential uncollectible amounts was increased by $22 million in both 1993 and 1992 and $9 million in 1991, principally related to loans on selected properties currently experiencing high vacancy rates. Management believes the reserve at December 31, 1993 adequately reflects the current condition of the portfolio; however, if conditions in the real estate market do not improve, additional reserves may be required. The fair value of these loans receivable is estimated through the use of valuation techniques which consider the net cash flows of the properties serving as the underlying collateral for the loans. The fair value of the loans represents a point-in-time estimate that is not relevant in predicting future earnings or cash flows related to such loans. The difference between the aggregate fair value of $394 million and the carrying value of $425 million at December 31, 1993 is not expected to be realized as we intend to hold the loan portfolio to maturity. Our Florida residential development activities continued during 1993. All but nine units at a 181 unit mid-rise condominium project completed in 1991 have been sold. We completed construction of a 120 unit oceanfront high-rise condominium during 1992. At year-end 1993, 103 units were sold. Construction of a 104 unit mid-rise condominium project commenced in 1993 with 41 units already under contract. Real estate activities are funded with short-term credit instruments, primarily commercial paper, as well as term loans and debt issued by the Corporation and Chubb Capital Corporation, a subsidiary 29 30 of the Corporation. The weighted average interest cost on short-term credit instruments approximated 3.3% in 1993 compared with 4.6% in 1992 and 7.2% in 1991. The interest rates on term loans ranged from 4.3% to 9.9% in 1993. Cash from operations combined with the ability to utilize the Corporation's commercial paper facility will provide sufficient funds for 1994. Term loans and mortgages which become due in 1994 are expected in most cases to be refinanced under similar terms. CORPORATE The Corporation called for redemption on April 15, 1991 the $200 million of 5 1/2% convertible notes that were due in 1993. Prior to the redemption date, all but $85,000 of the notes were converted, resulting in the issuance of 4,687,123 shares of the Corporation's common stock. The Corporation has outstanding $150 million of unsecured 8 3/4% notes due in 1999. In each of the years 1995 through 1998, the Corporation will pay as a mandatory sinking fund an amount sufficient to redeem $30 million of principal. Chubb Capital has outstanding $100 million of unsecured 8 5/8% notes due in 1995, which are guaranteed by the Corporation. The proceeds have been used to support our real estate operations. In May 1991, Chubb Capital sold in the Eurodollar market $250 million of 6% subordinated notes due in 1998. The notes are guaranteed by the Corporation and exchangeable into its common stock. Of the proceeds, $150 million has been used to support our real estate operations. In February 1993, Chubb Capital sold $150 million of 6% notes due in 1998 and $100 million of 6 7/8% notes due in 2003. The notes are guaranteed by the Corporation. A substantial portion of the proceeds has been used to repay certain short-term debt and term loans incurred to support the real estate operations. In November 1991, the Corporation entered into a revolving credit agreement with a group of banks that provides for unsecured borrowings of up to $300 million. There have been no borrowings under this agreement. The agreement terminates on November 30, 1994 at which time any loans then outstanding become payable. Management anticipates that a similar credit agreement will replace this agreement. In November 1992, the Corporation and Sun Alliance partially reduced their investment in the shares of each other. The proceeds from our sale of Sun Alliance shares were approximately $230 million. The sales have not affected the ongoing business relationship between the Corporation's property and casualty subsidiaries and Sun Alliance. Investment income earned on corporate invested assets and interest expense not allocable to the operating subsidiaries are reflected in the corporate segment. Corporate income after taxes was $14 million in 1993 compared with $20 million in 1992 and $16 million in 1991. INVESTMENT GAINS AND LOSSES Investment gains were realized by the Corporation and its insurance subsidiaries in 1993, 1992 and 1991. Such gains before taxes consisted of the following:
1993 1992 1991 ---- ---- --- (in millions) Equity securities......................................... $ 60 $133 $ 3 Fixed maturities.......................................... 173 54 63 ---- ---- --- $233 $187 $66 ==== ==== ===
30 31 A restructuring of the equity security portfolio begun in 1992 resulted in significant realized investment gains in 1992 and 1993. In addition, approximately $75 million of investment gains were realized in 1992 from the Corporation's partial sale of its investment in Sun Alliance. Equity securities are reported in our financial statements at market value. The unrealized appreciation on such securities is reflected as a separate component of shareholders' equity, net of applicable deferred income tax. The Corporation and its insurance subsidiaries purchase long-term fixed maturity securities which have income, duration and credit quality characteristics which fit the long-range strategic plans of our businesses. We monitor the mix of taxable and tax-exempt fixed maturity securities in order to maximize after-tax returns. Those fixed maturity investments 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 considered available for sale and carried at the lower of the aggregate amortized cost or market value. At each of the last three year-ends, the aggregate market value of these securities has exceeded their amortized cost. Those fixed maturities which the Corporation and its insurance subsidiaries have the ability and intent to hold to maturity are considered held for investment and carried at amortized cost. A primary reason for the sale of fixed maturities in each of the last three years has been to improve our after-tax portfolio yield without sacrificing quality, where market opportunities have existed to do so. Declining interest rates and the resulting appreciation of our fixed maturity securities made it difficult to adjust our portfolio during those years without realizing significant investment gains. The significantly higher gains in 1993 were due to the sale of fixed maturities in the first half of the year as part of the realignment of our portfolio and in the latter part of the year to realize gains to partially offset the reduction of statutory surplus of the property and casualty subsidiaries resulting from the decrease in earnings related to the Fibreboard settlement. At December 31, 1993, 1992 and 1991, the unrealized market appreciation of our fixed maturity portfolio was $736 million, $523 million and $490 million, respectively. Such unrealized appreciation was not reflected in the consolidated financial statements. The 1993 amount comprises fixed maturities with gross unrealized appreciation aggregating $771 million and those with gross unrealized depreciation aggregating $35 million. FEDERAL INCOME TAXES The Omnibus Budget Reconciliation Act of 1993 was enacted in August 1993. One provision of the Act increased the federal corporate tax rate from 34% to 35%, retroactive to January 1, 1993. In addition to applying the higher tax rate to pre-tax income for 1993, the federal income tax provision for 1993 reflects the effect of the rate increase on deferred income tax assets and liabilities. This effect was a tax benefit of approximately $5 million. The effect on the various business segments was as follows:
Tax Provision (Benefit) ------------- (in millions) Property and casualty insurance Underwriting.................................................. $(11) Investment income............................................. 2 Life and health insurance....................................... 1 Real estate..................................................... 3
In 1992, property and casualty underwriting income after taxes included a benefit of $12 million resulting from a reversal of income tax reserves based on a settlement of prior years' taxes. Life and 31 32 health insurance income after taxes included similar benefits of $5 million and $3 million in 1993 and 1992, respectively. The Tax Reform Act of 1986 requires the property and casualty subsidiaries to discount loss reserves for tax purposes as of January 1, 1987 and provides that the initial discount on such loss reserves be excluded from taxable income. The benefit of this exclusion amounted to $7 million in 1991 and $6 million in 1992. There was no similar benefit in 1993 since, for accounting purposes, the remaining "fresh start" benefit was recognized effective January 1, 1993 as part of the cumulative effect of the change in accounting principle upon the Corporation's adoption of the new accounting requirements for income taxes. The Corporation's federal income tax payments for 1991 and 1992 were $160 million and $175 million, respectively. Tax payments for 1993 are expected to approximate only $80 million due to the substantial underwriting loss resulting from the increase in loss reserves related to the settlement of asbestos-related litigation. NEW ACCOUNTING PRONOUNCEMENTS In 1993, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, SFAS No. 109, Accounting for Income Taxes, and SFAS No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. These pronouncements and their effect on the consolidated financial statements are discussed in Note (2) of the Notes to Consolidated Financial Statements incorporated by reference from the Corporation's 1993 Annual Report to Shareholders. The Financial Accounting Standards Board has also issued SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which is effective in 1995, and SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, which is effective in 1994. These pronouncements, which will affect the Corporation's consolidated financial statements when adopted, are discussed in Note (1)(o) of the Notes to Consolidated Financial Statements incorporated by reference from the Corporation's 1993 Annual Report to Shareholders. SUBSEQUENT EVENTS In January 1994, the Los Angeles area experienced a major earthquake. Also, in January 1994, the Eastern and Midwestern parts of the United States experienced severe winter storms. Losses from these catastrophes are estimated to amount to $125 million net of reinsurance, including $90 million from the earthquake and $35 million from the storm activity. The effect of these catastrophe losses on after-tax earnings is expected to approximate $81 million, which will be reflected in the first quarter of 1994. Additional claims may be reported which could increase the estimate. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated financial statements of the Corporation at December 31, 1993 and 1992 and for each of the three years in the period ended December 31, 1993 and the Report of Independent Auditors thereon and the Corporation's unaudited quarterly financial data for the two-year period ended December 31, 1993 are incorporated by reference from the Corporation's 1993 Annual Report to Shareholders, pages 40 through 63. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 32 33 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the Corporation's Directors is incorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 26, 1994, pages 2 through 5. 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 26, 1994, pages 14 through 30 other than the Performance Graph and the Organization and Compensation Committee Report appearing on pages 19 through 26. 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 26, 1994, pages 6 through 9. 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 26, 1994, pages 30 through 32. 33 34 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS AND 2. SCHEDULES The financial statements and schedules listed in the accompanying index to financial statements and financial statement schedules are filed as part of this report. 3. EXHIBITS The exhibits listed in the accompanying index to exhibits are filed as part of this report. (b) REPORTS ON FORM 8-K There were no reports on Form 8-K filed during the last quarter of the period covered by this report. For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 33-12208 (filed June 12, 1987), 33-29185 (filed June 7, 1989), and 33-30020 (filed July 18, 1989): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 34 35 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS ANNUAL REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. THE CHUBB CORPORATION (REGISTRANT) March 4, 1994 By /s/ DEAN R. O'HARE ---------------------------- (DEAN R. O'HARE, CHAIRMAN) 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:
SIGNATURE TITLE DATE --------- ----- ---- /s/ DEAN R. O'HARE Chairman, Chief Executive March 4, 1994 ---------------------------- Officer and Director (DEAN R. O'HARE) /s/ JOHN C. BECK Director March 4, 1994 ---------------------------- (JOHN C. BECK) /s/ PERCY CHUBB, III Vice Chairman, Chief Financial March 4, 1994 ---------------------------- Officer and Director (PERCY CHUBB, III) /s/ JOEL J. COHEN Director March 4, 1994 ---------------------------- (JOEL J. COHEN) /s/ HENRY U. HARDER Director March 4, 1994 ---------------------------- (HENRY U. HARDER) /s/ ROBERT V. LINDSAY Director March 4, 1994 ---------------------------- (ROBERT V. LINDSAY) Director March , 1994 ----------------------------- (THOMAS C. MACAVOY)
35 36
SIGNATURE TITLE DATE --------- ----- ---- /s/ GERTRUDE G. MICHELSON Director March 4, 1994 ---------------------------- (GERTRUDE G. MICHELSON) /s/ EMIL MOSBACHER, JR. Director March 4, 1994 ---------------------------- (EMIL MOSBACHER, JR.) /s/ ERNESTA G. PROCOPE Director March 4, 1994 ---------------------------- (ERNESTA G. PROCOPE) /s/ FREDERIC L. ROCKEFELLER Director March 4, 1994 ---------------------------- (FREDERIC L. ROCKEFELLER) /s/ WARREN B. RUDMAN Director March 4, 1994 ---------------------------- (WARREN B. RUDMAN) /s/ DAVID G. SCHOLEY Director March 4, 1994 ---------------------------- (DAVID G. SCHOLEY) /s/ LAWRENCE M. SMALL Director March 4, 1994 ---------------------------- (LAWRENCE M. SMALL) /s/ RICHARD D. SMITH President and Director March 4, 1994 ---------------------------- (RICHARD D. SMITH) /s/ ROBERT G. STONE, JR. Director March 4, 1994 ---------------------------- (ROBERT G. STONE, JR.) /s/ RICHARD D. WOOD Director March 4, 1994 ---------------------------- (RICHARD D. WOOD) /s/ HENRY B. SCHRAM Senior Vice President and March 4, 1994 ---------------------------- Chief Accounting Officer (HENRY B. SCHRAM)
36 37 THE CHUBB CORPORATION INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF INDEPENDENT AUDITORS (ITEM 14(A))
ANNUAL REPORT TO SHAREHOLDERS FORM 10-K PAGE PAGE ---------------- ------------ Report of Independent Auditors 62 -- Consolidated Balance Sheets at December 31, 1993 and 1992 41 -- Consolidated Statements of Income for the Years Ended Decem- ber 31, 1993, 1992 and 1991 40 -- Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1993, 1992 and 1991 42 -- Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1992 and 1991 43 -- Notes to Consolidated Financial Statements 44 -- Supplementary Information (unaudited) Quarterly Financial Data 63 -- Schedules: I -- Consolidated Summary of Investments -- Other than Investments in Related Parties at December 31, 1993 -- 39 III -- Condensed Financial Information of Registrant at December 31, 1993 and 1992 and for the Years Ended December 31, 1993, 1992 and 1991 -- 40 V -- Consolidated Supplementary Insurance Information at and for the Years Ended December 31, 1993, 1992 and 1991 -- 43 VI -- Consolidated Reinsurance at and for the Years Ended December 31, 1993, 1992 and 1991 -- 44 IX -- Consolidated Short Term Borrowings at and for the Years Ended December 31, 1993, 1992 and 1991 -- 45 X -- Consolidated Supplementary Property and Casualty Insurance Information for the Years Ended December 31, 1993, 1992 and 1991 -- 46
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, 1993, are hereby incorporated by reference. 37 38 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of The Chubb Corporation of our report dated February 25, 1994, included in the 1993 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-8: No. 33-12208, No. 33-29185, No. 33-30020, No. 33-49230 and No. 33-49232) of our report dated February 25, 1994, 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 New York, New York March 28, 1994 38 39 THE CHUBB CORPORATION SCHEDULE I CONSOLIDATED SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES (IN THOUSANDS) DECEMBER 31, 1993
AMOUNT AT WHICH COST OR SHOWN IN AMORTIZED MARKET THE TYPE OF INVESTMENT COST VALUE BALANCE SHEET ------------------ ---------- --------- ------------- Short term investments......................... $ 531,282 $ 531,282 $ 531,282 ----------- ----------- ----------- Fixed maturities Bonds United States Government and government agencies and authorities................ 2,363,772 2,397,981 2,363,772 States, municipalities and political subdivisions............................ 5,469,480 5,986,244 5,469,480 Foreign................................... 776,923 832,174 776,923 Public utilities.......................... 117,646 128,763 117,646 All other corporate bonds................. 1,455,284 1,573,625 1,455,284 ----------- ----------- ----------- Total bonds..................... 10,183,105 10,918,787 10,183,105 Redeemable preferred stocks.................. 3,359 4,166 3,359 ----------- ----------- ----------- Total fixed maturities.......... 10,186,464 10,922,953 10,186,464 ----------- ----------- ----------- Equity securities Common stocks Public utilities.......................... 19,798 25,393 25,393 Banks, trusts and insurance companies..... 97,931 166,230 166,230 Industrial, miscellaneous and other....... 544,989 688,703 688,703 ----------- ----------- ----------- Total common stocks............. 662,718 880,326 880,326 Non-redeemable preferred stocks.............. 47,187 49,721 49,721 ----------- ----------- ----------- Total equity securities......... 709,905 930,047 930,047 ----------- ----------- ----------- Mortgage loans................................. 15,121 15,121 15,121 Policy loans................................... 179,195 179,195 179,195 ----------- ----------- ----------- Total invested assets........... $11,621,967 $12,578,598 $11,842,109 =========== =========== ===========
39 40 THE CHUBB CORPORATION SCHEDULE III CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS -- PARENT COMPANY ONLY (IN THOUSANDS) DECEMBER 31, 1993 AND 1992
1993 1992 --------- --------- Assets Invested Assets Short Term Investments..................................... $ 62,805 $ 40,547 Taxable Fixed Maturities -- Available-for-Sale (market $340,131 and $386,123)........................... 342,534 373,842 Equity Securities (cost $19,682 and $17,335)............... 34,987 24,785 ---------- ---------- TOTAL INVESTED ASSETS................................. 440,326 439,174 Cash.......................................................... 180 364 Investment in Consolidated Subsidiaries....................... 3,941,408 3,809,542 Other Assets.................................................. 117,563 49,505 ---------- ---------- TOTAL ASSETS.......................................... $4,499,477 $4,298,585 ========== ========== Liabilities Dividend Payable to Shareholders.............................. $ 37,715 $ 35,001 Payable to Chubb Capital Corporation.......................... 77,290 55,000 Long Term Debt................................................ 150,000 150,000 Accrued Expenses and Other Liabilities........................ 38,343 104,182 ---------- ---------- TOTAL LIABILITIES..................................... 303,348 344,183 ---------- ---------- Shareholders' Equity Preferred Stock -- Authorized 4,000,000 Shares; $1 Par Value; Issued -- None............................... -- -- Common Stock -- Authorized 300,000,000 Shares; $1 Par Value; Issued 87,709,465 and 87,519,560 Shares...... 87,709 87,520 Paid-In Surplus............................................... 782,186 772,815 Retained Earnings............................................. 3,313,140 3,139,707 Foreign Currency Translation Gains (Losses), Net of Income Tax 327 (5,164) Unrealized Appreciation of Equity Securities, Net of Deferred Income Tax................................. 143,093 96,559 Receivable from Employee Stock Ownership Plan................. (130,326) (137,035) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY............................ 4,196,129 3,954,402 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ $4,499,477 $4,298,585 ========== ==========
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 1993 Annual Report to Shareholders. 40 41 THE CHUBB CORPORATION SCHEDULE III (CONTINUED) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME -- PARENT COMPANY ONLY (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
1993 1992 1991 -------- -------- -------- Investment Income...................................... $ 28,015 $ 49,550 $ 47,081 Realized Investment Gains.............................. 21,076 10,926 10,433 Investment Expenses.................................... (917) (689) (780) Corporate Expenses..................................... (24,220) (23,150) (13,900) -------- -------- -------- 23,954 36,637 42,834 Federal and Foreign Income Tax (Credit)................ (9,050) 16,753 12,349 -------- -------- -------- 33,004 19,884 30,485 Equity in Income Before Cumulative Effect of Changes in Accounting Principles of Consolidated Subsidiaries... 311,213 597,215 521,499 -------- -------- -------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES........................... 344,217 617,099 551,984 Cumulative Effect of Changes in Accounting Principles, Net of Tax............................... 68,600 -- -- Equity in Cumulative Effect of Changes in Accounting Principles of Consolidated Subsidiaries... (88,600) -- -- -------- -------- -------- NET INCOME........................................ $324,217 $617,099 $551,984 ======== ======== ========
The Corporation and its domestic subsidiaries file a consolidated federal income tax return. The Corporation's federal income tax represents its share of the consolidated federal income tax under the Corporation's tax allocation agreements with its subsidiaries. The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 1993 Annual Report to Shareholders. 41 42 THE CHUBB CORPORATION SCHEDULE III (CONTINUED) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
1993 1992 1991 --------- --------- --------- Cash Flows from Operating Activities Net Income........................................... $ 324,217 $ 617,099 $ 551,984 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Equity in Net Income of Consolidated Subsidiaries (after reduction of $88,600 in 1993 due to cumulative effect of changes in accounting principles)..................................... (222,613) (597,215) (521,499) Realized Investment Gains......................... (21,076) (10,926) (10,433) Cumulative Effect of Changes in Accounting Principles...................................... (68,600) -- -- Other, Net........................................ 30,305 (1,335) 28,818 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES......................... 42,233 7,623 48,870 --------- --------- --------- Cash Flows from Investing Activities Proceeds from Sales of Fixed Maturities.............. 463,625 228,855 181,256 Proceeds from Maturities of Fixed Maturities......... 6,760 2,490 18,945 Proceeds from Sales of Equity Securities............. 4,957 15,875 13,485 Purchases of Fixed Maturities........................ (421,876) (367,824) (491,894) Purchases of Equity Securities....................... (6,191) (7,923) (16,062) Decrease (Increase) in Short Term Investments, Net... (22,258) 15,188 76,969 Dividends Received from Consolidated Subsidiaries.... 148,008 224,008 204,005 Capital Contributions to Consolidated Subsidiaries... (10,280) -- (25,600) Other, Net........................................... (91,175) 952 1,304 --------- --------- --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......................... 71,570 111,621 (37,592) --------- --------- --------- Cash Flows from Financing Activities Increase (Decrease) in Payable to Chubb Capital Corporation............................... 22,290 (7,800) 62,800 Dividends Paid to Shareholders....................... (148,070) (136,772) (122,625) Other, Net........................................... 11,793 25,664 48,556 --------- --------- --------- NET CASH USED IN FINANCING ACTIVITIES......................... (113,987) (118,908) (11,269) --------- --------- --------- Net Increase (Decrease) in Cash........................ (184) 336 9 Cash at Beginning of Year.............................. 364 28 19 --------- --------- --------- CASH AT END OF YEAR............................. $ 180 $ 364 $ 28 --------- --------- --------- --------- --------- ---------
In 1992, $401,634,000 of fixed maturities and equity securities was contributed at cost to a consolidated investment company subsidiary of the Corporation. In 1991, $199,915,000 of long term debt was converted into 4,687,123 shares of common stock 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 1993 Annual Report to Shareholders. 42 43 THE CHUBB CORPORATION SCHEDULE V CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION (IN THOUSANDS)
DECEMBER 31 ------------------------------------------------ FUTURE OTHER POLICY POLICY DEFERRED BENEFITS, CLAIMS POLICY CLAIMS AND AND ACQUISITION CLAIM UNEARNED BENEFITS SEGMENT COSTS EXPENSES PREMIUMS PAYABLE ------- ----------- ---------- --------- --------- 1993 Property and Casualty Insurance Personal................................. $ 133,565 $ 527,316 $ 423,575 Standard Commercial...................... 157,347 3,464,535 588,697 Specialty Commercial..................... 162,461 2,158,605 624,166 Reinsurance Assumed...................... 36,329 299,590 116,130 Investments.............................. ---------- ---------- ---------- 489,702 6,450,046 1,752,568 Life and Health Insurance.................. 522,544 2,185,759 $79,260 ---------- ---------- ---------- ------- $1,012,246 $8,635,805 $1,752,568 $79,260 ========== ========== ========== ======= 1992 Property and Casualty Insurance Personal................................. $ 133,300 $ 521,429 $ 416,639 Standard Commercial...................... 149,515 2,581,948 556,068 Specialty Commercial..................... 147,608 1,946,307 563,346 Reinsurance Assumed...................... 24,553 217,930 75,058 Investments.............................. ---------- ---------- ---------- 454,976 5,267,614 1,611,111 Life and Health Insurance.................. 474,293 1,950,397 $71,708 ---------- ---------- ---------- ------- $ 929,269 $7,218,011 $1,611,111 $71,708 ========== ========== ========== ======= 1991 Property and Casualty Insurance Personal................................. $ 129,638 $ 518,045 $ 410,204 Standard Commercial...................... 149,360 2,361,657 536,248 Specialty Commercial..................... 140,072 1,677,240 520,551 Reinsurance Assumed...................... 20,955 186,922 64,890 Investments.............................. ---------- ---------- ---------- 440,025 4,743,864 1,531,893 Life and Health Insurance.................. 445,505 1,845,655 $65,382 ---------- ---------- ---------- ------- $ 885,530 $6,589,519 $1,531,893 $65,382 ========== ========== ========== ======= YEAR ENDED DECEMBER 31 ----------------------------------------------------------------------------- PREMIUMS BENEFITS, AMORTIZATION EARNED CLAIMS, OF DEFERRED AND NET LOSSES AND POLICY OTHER POLICY INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS SEGMENT CHARGES INCOME EXPENSES COSTS EXPENSES WRITTEN ------- ---------- ---------- ---------- ------------ --------- ---------- 1993 Property and Casualty Insurance Personal................................. $ 807,550 $ 474,786 $ 256,968 $ 45,260 $ 814,486 Standard Commercial...................... 1,294,182 1,547,400 313,892 75,637 1,326,811 Specialty Commercial..................... 1,208,672 700,868 315,252 90,968 1,269,492 Reinsurance Assumed...................... 194,434 156,044 62,855 235,506 Investments.............................. $533,709* ---------- -------- ---------- ---------- -------- ---------- 3,504,838 533,709 2,879,098 948,967 211,865 $3,646,295 ========== Life and Health Insurance.................. 801,236 203,793 669,422 63,138 183,740 ---------- -------- ---------- ---------- -------- $4,306,074 $737,502 $3,548,520 $1,012,105 $395,605 ========== ======== ========== ========== ======== 1992 Property and Casualty Insurance Personal................................. $ 789,923 $ 526,809 $ 254,693 $ 44,579 $ 796,358 Standard Commercial...................... 1,113,654 800,067 308,880 75,583 1,133,474 Specialty Commercial..................... 1,108,913 629,443 298,754 83,822 1,151,708 Reinsurance Assumed...................... 150,798 141,810 49,500 160,966 Investments.............................. $493,455* ---------- -------- ---------- ---------- -------- ---------- 3,163,288 493,455 2,098,129 911,827 203,984 $3,242,506 ========== Life and Health Insurance.................. 689,173 190,449 591,009 56,784 157,328 ---------- -------- ---------- ---------- -------- $3,852,461 $683,904 $2,689,138 $ 968,611 $361,312 ========== ======== ========== ========== ======== 1991 Property and Casualty Insurance Personal................................. $ 804,410 $ 527,670 $ 258,799 $ 45,332 $ 814,690 Standard Commercial...................... 1,088,635 734,891 305,698 77,644 1,115,751 Specialty Commercial..................... 1,000,078 554,048 266,385 80,280 1,034,749 Reinsurance Assumed...................... 144,045 124,744 45,783 147,074 Investments.............................. $469,495* 266,385 80,280 1,034,74 ---------- -------- ---------- ---------- -------- ---------- 3,037,168 469,495 1,941,353 876,665 203,256 $3,112,264 ========== Life and Health Insurance.................. 634,016 175,512 527,551 59,525 149,196 ---------- -------- ---------- ---------- -------- $3,671,184 $645,007 $2,468,904 $ 936,190 $352,452 ========== ======== ========== ========== ========
* Property and casualty assets are available for payment of claims and expenses for all classes of business; therefore, such assets and the related investment income have not been identified with specific groupings of classes of business. Information as of December 31, 1993, 1992 and 1991 and for the years then ended is presented net of related reinsurance amounts. 43 44 THE CHUBB CORPORATION SCHEDULE VI CONSOLIDATED REINSURANCE (IN THOUSANDS)
PERCENTAGE OF CEDED ASSUMED AMOUNT DIRECT TO OTHER FROM OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET ------ --------- ---------- ------ ------------- 1993 Life Insurance In Force at Year-End. $54,219,990 $8,584,856 $ 62,875 $45,698,009 .1% =========== ========== ========= =========== Premiums Earned and Policy Charges for the Year: Life Insurance................... $ 289,391 $ 23,759 $ 2,294 $ 267,926 .9 Accident and Health Insurance.... 542,458 9,638 490 533,310 .1 Property and Casualty Insurance.. 4,155,356 1,128,982 478,464 3,504,838 13.7 ----------- ---------- --------- ----------- Total Premiums and Policy Charges..................... $ 4,987,205 $1,162,379 $ 481,248 $ 4,306,074 =========== ========== ========= =========== 1992 Life Insurance In Force at Year-End. $46,363,886 $7,555,070 $ 90,632 $38,899,448 .2 =========== ========== ========= =========== Premiums Earned and Policy Charges for the Year: Life Insurance................... $ 261,334 $ 23,901 $ 2,096 $ 239,529 .9 Accident and Health Insurance.... 460,451 11,462 655 449,644 .1 Property and Casualty Insurance.. 3,824,520 1,090,379 429,147 3,163,288 13.6 ----------- ---------- --------- ----------- Total Premiums and Policy Charges..................... $ 4,546,305 $1,125,742 $ 431,898 $ 3,852,461 =========== ========== ========= =========== 1991 Life Insurance In Force at Year-End. $41,386,464 $7,123,174 $ 116,004 $34,379,294 .3 =========== ========== ========= =========== Premiums Earned and Policy Charges for the Year: Life Insurance................... $ 238,307 $ 21,171 $ 1,997 $ 219,133 .9 Accident and Health Insurance.... 425,503 11,717 1,097 414,883 .3 Property and Casualty Insurance.. 3,579,774 1,019,458 476,852 3,037,168 15.7 ----------- ---------- --------- ----------- Total Premiums and Policy Charges..................... $ 4,243,584 $1,052,346 $ 479,946 $ 3,671,184 =========== ========== ========= ===========
44 45 THE CHUBB CORPORATION SCHEDULE IX CONSOLIDATED SHORT TERM BORROWINGS (IN THOUSANDS)
DECEMBER 31 YEAR ENDED DECEMBER 31 --------------------- -------------------------------------------------------- WEIGHTED MAXIMUM AVERAGE AMOUNT WEIGHTED BALANCE AVERAGE AMOUNT OUTSTANDING AVERAGE CATEGORY OF AGGREGATE AT END INTEREST OUTSTANDING DURING INTEREST RATE SHORT TERM BORROWINGS OF PERIOD RATE DURING PERIOD(a) PERIOD(a) DURING PERIOD(b) - --------------------------- --------- -------- ---------------- ---------------- ---------------- 1993 Commercial Paper......... $ 89,540 3.4% $207,333 $ 98,243 3.2% Notes Payable to Banks... 5,300 4.0 39,400 12,231 5.1 1992 Commercial Paper......... 223,108 3.7 252,200 193,224 3.9 Notes Payable to Banks... 65,400 6.0 95,000 78,546 6.4 1991 Commercial Paper......... 121,700 5.0 171,509 137,751 6.0 Notes Payable to Banks... 105,000 7.3 105,000 95,346 8.6
- ------------------ (a) The maximum and average amounts outstanding during the period were based on month end balances. (b) The weighted average interest rate during the period was computed by dividing the actual interest cost by the average amount outstanding during the period. Notes payable to banks are obligations under revolving credit arrangements. Commercial paper and notes payable generally have terms ranging from thirty days to one year and are at interest rates generally extended to prime borrowers. 45 46 THE CHUBB CORPORATION SCHEDULE X CONSOLIDATED SUPPLEMENTARY PROPERTY AND CASUALTY INSURANCE INFORMATION (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
CLAIMS AND CLAIM ADJUSTMENT EXPENSES INCURRED RELATED TO --------------------------- PAID CLAIMS AND CLAIM CURRENT PRIOR ADJUSTMENT YEAR YEARS EXPENSES ---------- --------- ----------- 1993........................................... $2,214,300 $664,798 $1,696,666 ========== ======== ========== 1992........................................... $2,125,700 $(27,571) $1,574,379 ========== ======== ========== 1991........................................... $1,970,200 $(28,847) $1,498,626 ========== ======== ==========
Information for the years ended December 31, 1993, 1992 and 1991 is presented net of related reinsurance amounts. 46 47 THE CHUBB CORPORATION EXHIBITS (ITEM 14(A))
DESCRIPTION ----------- (3) -- Articles of Incorporation and By-Laws Restated Certificate of Incorporation. Incorporated by reference to Exhibit (3) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1990. By-Laws. Incorporated by reference to Exhibit (3) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1989. (4) -- The registrant is not filing any instruments evidencing any indebtedness since the total amount of securities authorized under any single instrument does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. Copies of such instruments will be furnished to the Securities and Exchange Commission upon request. (10) -- Material contracts Global Settlement Agreement among Fibreboard Corporation, Continental Casualty Company, CNA Casualty Company of California, Columbia Casualty Company, Pacific Indemnity Company, and the Settlement Class and together with Exhibits A through D filed herewith. Settlement Agreement with Fibreboard Corporation, Continental Casualty Company, CNA Casualty Company of California and Columbia Casualty Company incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-Q for the nine months ended September 30, 1993. Continental-Pacific Agreement with Continental Casualty Company incorpo- rated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-Q for the nine months ended September 30, 1993. Executive Compensation Plans and Arrangements. The Chubb Corporation Long-Term Stock Incentive Plan (1992) incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1992. The Chubb Corporation Annual Incentive Compensation Plan (1984) incor- porated 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, 1989. The Chubb Corporation Stock Option Plan (1984) incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1989. The Chubb Corporation Stock Option Plan for Non-Employee Directors (1992) incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1992. Description of the Chubb LifeAmerica Incentive 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, 1992. The Chubb Corporation Investment Department/Chubb Asset Managers, Inc. Incentive Compensation Plan filed herewith.
47 48
DESCRIPTION Executive Severance Agreements and their amendments incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1989. Aggregate Excess of Loss Reinsurance Agreement with Phoenix Assurance Public Limited Company of London, 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, 1990. (11) -- Computation of earnings per share filed herewith. (13) -- Pages 11, 12, 38 through 63 and 67 of the 1993 Annual Report to Shareholders. (21) -- Subsidiaries of the registrant filed herewith. (23) -- Consent of Independent Auditors (see page 38 of this report). (28) -- Information from reports furnished to state insurance regulatory authorities.
48 EX-10 2 MATERIAL CONTRACTS - GLOBAL SETTLEMENT AGREEMENT 1 GLOBAL SETTLEMENT AGREEMENT AMONG FIBREBOARD CORPORATION, CONTINENTAL CASUALTY COMPANY, CNA CASUALTY COMPANY OF CALIFORNIA, COLUMBIA CASUALTY COMPANY, PACIFIC INDEMNITY COMPANY, AND THE SETTLEMENT CLASS 2 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 1.1 Certain Defined Terms . . . . . . . . . . . . . . . . 8 ARTICLE 2 SETTLEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 2.1 Settlement . . . . . . . . . . . . . . . . . . . . . 8 SECTION 2.2 Exclusive Rights Against the Trust . . . . . . . . . 8 SECTION 2.3 Payments . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 2.4 Additional Fibreboard Obligations . . . . . . . . . . 11 SECTION 2.5 Releases . . . . . . . . . . . . . . . . . . . . . . 14 SECTION 2.6 Final Settlement of the Insurance Policies . . . . . 16 SECTION 2.7 Indemnity Obligation of the Trust after Global Approval Judgment . . . . . . . . . . . . . . . . . . 17 SECTION 2.8 Fibreboard Corporation's Indemnity and Related Obligations . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE 3 ACTIONS TO BE TAKEN TO IMPLEMENT THIS AGREEMENT . . . . . . . . . 19 SECTION 3.1 Applications for Initial Court Orders, Settlement Class Order, Defendant Class Order and Global Approval Judgment . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 3.2 Effect of Class Certification . . . . . . . . . . . . 19 SECTION 3.3 Execution and Delivery of Escrow Instructions . . . . 20 ARTICLE 4 TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 4.1 Termination . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE 5 SETTLEMENT TRUST . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 5.1 Trust Agreement . . . . . . . . . . . . . . . . . . . 24 SECTION 5.2 Continuing Jurisdiction of the Court . . . . . . . . 24 SECTION 5.3 Preservation of Funds . . . . . . . . . . . . . . . . 25 ARTICLE 6 THIRD PARTY CLAIMS . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 6.1 Bar Orders . . . . . . . . . . . . . . . . . . . . . 25 SECTION 6.2 Judgment Reduction and Subrogation Rights . . . . . . 25 SECTION 6.3 Actions Necessary to Obtain Discharges and Bar Orders . . . . . . . . . . . . . . . . . . . . . 26
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Page ---- ARTICLE 7 INTERIM CLAIM LIQUIDATION PROCEDURES . . . . . . . . . . . . . . 28 SECTION 7.1 Interim Claims . . . . . . . . . . . . . . . . . . . 28 SECTION 7.2 Processing Interim Claims . . . . . . . . . . . . . . 29 SECTION 7.3 Payment of Exigent and Extreme Hardship Claims . . . 32 SECTION 7.4 Payment of Interim Claims Other Than Exigent Health Claims and Extreme Hardship Claims . . . . . . . . . 32 SECTION 7.5 Sources of Payment of Liquidated Amounts for Interim Claims . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 7.6 Miscellaneous Interim Claim Provisions . . . . . . . 35 ARTICLE 8 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . 36 SECTION 8.1 Designated or Qualified Settlement Fund . . . . . . . 36 SECTION 8.2 Counsel . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 8.3 No Oral Representations . . . . . . . . . . . . . . . 38 SECTION 8.4 Payment of Costs . . . . . . . . . . . . . . . . . . 38 SECTION 8.5 Modification and Waiver . . . . . . . . . . . . . . . 39 SECTION 8.6 Further Actions . . . . . . . . . . . . . . . . . . . 39 SECTION 8.7 Effectiveness of Agreement Notwithstanding Developments . . . . . . . . . . . . . . . . . . . . 40 SECTION 8.8 No Admission or Use . . . . . . . . . . . . . . . . . 40 SECTION 8.9 No Breach of Other Obligations . . . . . . . . . . . 41 SECTION 8.10 Third Party Beneficiaries . . . . . . . . . . . . . . 41 SECTION 8.11 Rights and Obligations of Fibreboard Corporation and the Insurers Under the Settlement Agreement and Related Agreements . . . . . . . . . . . . . . . . . 42 SECTION 8.12 Headings . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 8.13 Notices . . . . . . . . . . . . . . . . . . . . . . . 42 SECTION 8.14 Counterparts . . . . . . . . . . . . . . . . . . . . 47
-ii- 4 UNITED STATES DISTRICT COURT EASTERN DISTRICT OF TEXAS TYLER DIVISION GERALD AHEARN, JAMES DENNIS and ) CHARLES W. JEEP, On Behalf of ) Themselves and Others Similarly Situated, ) ) Plaintiffs, ) ) vs. ) ) Civil Action No. 6:93 cv 526 FIBREBOARD CORPORATION, ) ) Defendant, ) ) CONTINENTAL CASUALTY COMPANY ) ) and ) ) PACIFIC INDEMNITY COMPANY, ) ) Intervenors. ) ) - ------------------------------------------ GLOBAL SETTLEMENT AGREEMENT This Agreement is made and entered into as of August 27, 1993, by and among the Representative plaintiffs as representatives of the Settlement Class, acting by and through Class Counsel; Fibreboard Corporation, a Delaware corporation; Continental Casualty Company, an Illinois corporation; CNA Casualty Company of California, a California corporation; Columbia Casualty Company, an Illinois corporation; and Pacific Indemnity Company, a California corporation, together the "Parties." 5 RECITALS A. The Representative Plaintiffs have filed a class action complaint in the Class Action on behalf of the Settlement Class against Fibreboard Corporation in the Global Court, and the Court has provisionally certified that class under Rule 23(b)(1)(B) of the Federal Rules of Civil Procedure for settlement purposes only. Continental and Pacific have been allowed to intervene as parties to the Class Action. B. For more than fifteen years, thousands of individuals exposed to asbestos or asbestos-containing products have filed lawsuits alleging personal injury and damage in the state and federal courts against Fibreboard Corporation and against many other defendants. C. These lawsuits have resulted in extensive discovery concerning the potential liability of Fibreboard Corporation and other defendants, as well as full consideration of the legal and factual bases, including medical issues, underlying each individual asbestos plaintiff's personal injury lawsuit. D. The vast majority of the asbestos personal injury lawsuits brought against Fibreboard Corporation and others in the past fifteen years have been settled without trial, although a small percentage have been tried to verdict, with plaintiffs prevailing in some cases and Fibreboard Corporation and other defendants prevailing in other cases. E. Despite significant success in reducing litigation costs through a variety of mechanisms, plaintiffs and defendants have spent, and continue to spend, -2- 6 enormous resources contesting both liability and damages, allocating responsibility among the parties, and litigating issues of insurance coverage. F. Continental, CNA Casualty, Columbia and Pacific issued certain Insurance Policies to Fibreboard. G. Fibreboard Corporation and certain of the Insurers have been and are engaged in litigation in several actions involving disputed questions of insurance coverage, the first of which was filed in 1979 in the Superior Court of the State of California in and for the City and County of San Francisco entitled Fireman's Fund Insurance Company v. Fibreboard Corporation et al., No. 753885, and is an included action in the Coverage Case. H. In the Coverage Case, Fibreboard Corporation contends that certain of the Insurers are obligated to defend and indemnify Fibreboard Corporation against certain of Fibreboard Corporation's liabilities for claims for asbestos personal injury or death and for related claims. These Insurers contend that they have no further obligation to defend or indemnify Fibreboard Corporation for any such claims. A judgment in favor of Fibreboard Corporation was rendered by Judge Ira Brown in the Coverage Case on January 24, 1990, and that judgment is currently on appeal. The Parties' contentions are, inter alia, set forth in the pleadings in the Coverage Case and in the briefs before the Court of Appeal. I. In addition to the tens of thousands of claims for asbestos personal injury or death that have been filed and resolved against Fibreboard Corporation and other defendants in jurisdictions throughout the United States, tens of thousands of filed claims remain pending and thousands more are expected to be -3- 7 filed in the future. Litigating the asbestos-related personal injury lawsuits is depleting Fibreboard Corporation's resources, including insurance resources, available to compensate claimants. Absent substantial insurance resources, Fibreboard Corporation could not satisfy the claims for asbestos personal injury pending against it. J. The expenditures necessary to process and resolve asbestos lawsuits have contributed to more than ten major asbestos defendants filing for bankruptcy reorganization. Because some of these defendants represent a significant portion of the traditional liability share for asbestos personal injury cases, and many jurisdictions apply the principle of joint and several liability, these bankruptcy filings have increased costs substantially, caused significant delays to plaintiffs and created financial pressures on the remaining defendants. K. Continental and Fibreboard Corporation entered into an agreement, dated April 9, 1993, pursuant to which Continental and Fibreboard Corporation agreed, among other things, upon terms and conditions set forth therein, to use their best efforts jointly to negotiate and finalize a global class action settlement with personal injury claimants, and Continental agreed, whether or not a global settlement was reached, to pay certain defense and other costs of certain asbestos-related claims on an interim basis. L. On or about August 22, 1993 and August 29, 1993, Continental and Pacific entered into agreements, which agreements have been superseded by the Continental-Pacific Agreement, dated as of October 12, 1993, whereby Continental -4- 8 and Pacific settled the dispute between them and agreed upon terms for the sharing of liabilities of each of them with respect to certain asbestos-related claims. M. Fibreboard Corporation, Continental, CNA Casualty, Columbia and Pacific entered into the Settlement Agreement, dated October 12, 1993, pursuant to which they agreed, among other things, to settle and compromise all claims and potential claims against the Insurers under the Insurance Policies. N. Fibreboard Corporation has invested substantial sums in pursuing its insurance coverage for certain asbestos-related personal injury claims asserted against Fibreboard Corporation. Although Fibreboard Corporation has been successful in this litigation to date, it is still subject to risks and uncertainties. These include the risks associated with the Coverage Case and the continuing effect on Fibreboard Corporation's corporate operations created by asbestos-related personal injury claims and Fibreboard Corporation's unresolved insurance coverage with respect thereto. The Settlement Class Members are also subject to the risks associated with the Coverage Case since their ability to collect upon any judgments they may obtain against Fibreboard Corporation is largely dependent upon the existence and extent of Fibreboard Corporation's insurance coverage. Continental and Pacific are similarly subjected to the risks and uncertainties presented by the Coverage Case and the potential liabilities Continental and Pacific may have with respect to asbestos-related personal injury claims. Absent this Agreement, the results in the Coverage Case likely would be severely prejudicial to either Continental and Pacific, on the one hand, or Fibreboard Corporation and the Settlement Class Members, on the other hand. -5- 9 O. Counsel for the Representative Plaintiffs each has a decade or more of experience in the litigation of asbestos-related personal injury cases. They have conducted a thorough investigation into the law and facts relating to matters set forth in the class action complaint. P. In light of the uncertainties associated with the pending, unresolved issues enumerated above, there are substantial risks that adjudications with respect to certain asbestos-related personal injury claims by Settlement Class Members will, as a practical matter, be dispositive of the claims and interests of certain other Settlement Class Members not yet adjudicated or will substantially impair or impede the ability of such other Settlement Class Members to protect their interests. Q. The primary purpose of this Agreement is to create a fund to compensate the Settlement Class Members, free of the risks of the pending Coverage Case litigation between Fibreboard Corporation and the Insurers, and to apply the fund thus created to an equitable settlement of the claims of the Settlement Class Members. The mechanism for accomplishing this purpose is creation of the Trust, to which the claims of all Settlement Class Members against Fibreboard Corporation or the Insurers shall be directed. R. The settlement contemplated by this Agreement would provide a fair, flexible, speedy, cost-effective and assured method of compensating claimants who have been exposed to asbestos or asbestos-containing products for which Fibreboard Corporation may bear legal liability and who have contracted or will in the future contract an asbestos-related conditions. Thus, this Agreement provides -6- 10 considerable benefit to the Settlement Class, while avoiding costly litigation of difficult and contentious issues. S. Based on extensive analysis of the law and facts at issue in the Class Action, the other factors and considerations enumerated above concerning asbestos litigation, and the fair, flexible, speedy, cost-effective and assured procedures set forth in this Agreement and its exhibits for compensating the Settlement Class, each Party has determined that settlement on the terms set forth below would be fair, adequate and reasonable, and thus in its best interests. T. Third Party Claims are litigated infrequently in asbestos litigation. The vast majority of asbestos personal injury, death and related cases are settled before trial. In those cases where trials result in judgments against nonsettling defendants, the law in most jurisdictions protects settling defendants against claims for contribution by judgement debtors. Nevertheless, because the potential for Third Party Claims would remain, absent provision for them, this Agreement sets forth a fair, flexible, speedy, cost-effective and assured procedure for resolving Third Party Claims. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the Parties hereby agree as follows: -7- 11 ARTICLE 1 DEFINITIONS SECTION 1.1 Certain Defined Terms. Capitalized terms used herein and not defined herein shall have the definitions for such terms set forth in the Glossary annexed as Exhibit A hereto and incorporated herein. ARTICLE 2 SETTLEMENT SECTION 2.1 Settlement. Effective upon Global Approval Judgment, Representative Plaintiffs, on their own behalf and on behalf of all Settlement Class Members, hereby compromise and settle, finally and fully, all of the Class Member Claims with Fibreboard Corporation, Continental, CNA Casualty, Columbia and Pacific on the terms and conditions set forth herein; provided, however, that nothing in this Agreement or in any exhibit hereto shall discharge the Insurers from liability predicated on policies other than the Insurance Policies. SECTION 2.2 Exclusive Rights Against the Trust. A. Effective upon Global Approval Judgment, all Class Member Claims are finally and fully settled by this Agreement, and none of such claims or any Third Party Claim shall be prosecuted in any way against any of the Fibreboard, Continental or Pacific Releasees. All Class Member Claims, except claims for punitive or exemplary damages (which are dismissed and shall not be enforceable), are hereby directed to the Trust for disposition pursuant to the Trust Agreement and -8- 12 Trust Distribution Process. Third Party Claims shall be treated as provided in Article 6 of this Agreement. The Court shall retain jurisdiction over this Agreement and shall use its equitable powers to enforce this Section. B. The claims of Persons providing workers compensation benefits to Settlement Class Members shall be directed to the Trust, instead of Fibreboard Corporation or the Insurers, and disposed of pursuant to the Trust Agreement and the Trust Distribution Process. Such Persons providing workers compensation benefits shall have existing remedies, whether by way of lien rights against a Settlement Class Member's Claim against the Trust, subrogation, direct action, or otherwise, against the Trust (instead of Fibreboard Corporation or the Insurers), subject only to the provisions of the Trust Agreement and Trust Distribution Process. Only payment of funds pursuant to a Settlement Class Member's individual settlement with the Trust, and not this Agreement (or the resulting Global Approval Judgment, dismissal and release), shall trigger the notice, approval and forfeiture provisions of the Longshore and Harbor Workers Compensation Act (33 USC Section 933) and other similar state and federal workers compensation provisions. SECTION 2.3 Payments. A. After execution of this Agreement, Continental and Pacific shall (1) pay, on December 30, 1993, an aggregate amount of $1,525,000,000 into an escrow account (the "Escrow Fund") and (2) pay the class notice costs, court costs and other incidental expenses associated with obtaining Global Approval Judgment and Settlement Agreement Approval Judgment. Of the foregoing amounts, Continental shall pay 64.71% and Pacific shall pay 35.29%. Such payment -9- 13 obligations of Continental and Pacific shall be several and not joint. The Escrow Fund shall be held in the manner provided in the Escrow Agreement that is substantially in the form of Exhibit D to this Agreement. B. Upon Global Approval Judgment: (1) The amount in the Escrow Fund shall be transferred to the Trust. (2) Fibreboard Corporation shall pay $10,000,000 into the Trust, plus simple interest at the rate of 3.085% from August 27, 1993; provided that, with respect to interest owed on the sum of $9,892,223 (of the $10,000,000 referred to above) from September 23, 1993, Fibreboard Corporation's obligation shall be fully discharged and satisfied by delivery of an assignment (in the form attached hereto as Exhibit E) from Fibreboard Corporation to the Trust of Fibreboard Corporation's rights against Home Insurance Company to payment of such interest and to damages arising from bad faith or other tortious conduct for failure to pay the $9,892,223 in a timely fashion and to pay such interest. Before Global Approval Judgment Fibreboard Corporation will pay the costs of its exercise of reasonable diligence in cooperation with Class Counsel in pursuing such assigned claims on its own behalf and on behalf of the Settlement Class. After Global Approval Judgment Fibreboard will pay the reasonable costs of pursuing such assigned claims. -10- 14 (3) Continental shall pay 64.71% and Pacific shall pay 35.29% of (i) the fees of Class Counsel as determined and approved by the Court up to a maximum of 3% of the sum set forth in Section 2.3(A) and (ii) the reasonable expenses of Class Counsel as determined and approved by the Court. The payment obligations of Continental and Pacific under this subsection (B)(3) shall be several and not joint. SECTION 2.4 Additional Fibreboard Obligations. A. Fibreboard Corporation shall provide for intake, maintenance and processing (but not evaluation) of Class Member Claims for a period of five years from August 27, 1993 or one year from Global Approval Judgment, whichever occurs later (unless the obligation is earlier terminated, at the election of the Trustees). The Parties anticipate that Fibreboard Corporation and the Trust will subsequently refine the scope of Fibreboard Corporation's obligation under this paragraph. B. At the end of the period referred to in subsection (A) above, Fibreboard Corporation shall transfer without charge the data and (to the extent transferrable) software with respect to its case management system (including a perpetual, non-exclusive license to use the case management system software exclusively for the purpose of processing Class Member Claims and Third Party Claims), but not including equipment or other hard assets associated therewith, to the Trust. Thereafter, Fibreboard Corporation shall have no further responsibility with respect to Class Member and Third Party Claims. The Trust shall allow -11- 15 Trustors access to and use of the case management system thereafter for use in connection with Settled Claims and Unsettled Claims. The Trust shall establish any necessary procedures to be followed by the Trustors to facilitate this arrangement and shall be reimbursed for the actual cost of providing information or data to the Trustors. The Trust shall not disclose any information it may obtain relating to Settled Claims or Unsettled Claims except as required by court order. The Trust shall promptly advise the Trustors of any request for such information and afford them an opportunity to object to disclosure of any such information. C. Fibreboard Corporation shall cooperate by providing existing information and evidence to the Trust as is reasonably necessary to evaluate, defend and resolve Class Member Claims and Third Party Claims, including, but not limited to, information and evidence concerning Fibreboard's products and their distribution, the history of the conduct of Fibreboard's business, Fibreboard's defenses and the history of Fibreboard's settlements in asbestos-related personal injury lawsuits. All such information and evidence shall be used only for such purposes. Fibreboard Corporation shall not withhold such information or evidence from the Trust on any grounds, including attorney- client, work product or any other privilege; provided, however, that Fibreboard Corporation shall provide information and evidence which is subject to an express claim of privilege to the Trust only on the basis that such information and evidence remain privileged and confidential, and that the Trust shall keep all such information and evidence privileged and confidential and shall not waive the privileged and confidential status of such information and evidence without Fibreboard Corporation's written consent. With respect to Trust requests -12- 16 for information or evidence possessed by Fibreboard Corporation which is subject to a shared ownership, shared work product or shared attorney-client privilege with a Defendant Class Member, the Trust shall be deemed the successor-in-interest to Fibreboard Corporation, but any such Defendant Class Member affected by the proposed transfer of information shall receive reasonable notice of, and may object to, any proposed transfer of such shared information or evidence. D. Effective upon Global Approval Judgment, Fibreboard Corporation, except as provided in Section H of the Trust Distribution Process, transfers to the Trust its rights, if any, to all claims for contribution or indemnity against other joint tortfeasors arising from (i) Class Member Claims, (ii) Personal Injury Asbestos Claims that were settled against Fibreboard Corporation before August 27, 1993 and remain settled thereafter and (iii) judgments against Fibreboard Corporation that became final before August 27, 1993. Effective upon Global Approval Judgment, to the extent that Continental, CNA Casualty, Columbia or Pacific has been subrogated to the foregoing rights of Fibreboard to contribution or indemnity claims, each such subrogee transfers these rights to the Trust; provided, however, that such transfer shall not include the rights of any of the Insurers to any contribution, indemnity or reinsurance claims against other insurance, reinsurance or indemnity entities or syndicates. E. Fibreboard Corporation agrees that to the extent Fibreboard obtains insurance proceeds from companies other than the Insurers for asbestos-related personal injury claims that are not applied to asbestos-related -13- 17 indemnity or defense costs and are no longer needed by Fibreboard for such purposes, such residual proceeds shall be made available to the Trust. SECTION 2.5 Releases. Effective upon Global Approval Judgment: A. The Representative Plaintiffs, on behalf of themselves and as representatives of the Settlement Class, release each of the Fibreboard, Continental and Pacific Releasees from each and every Class Member Claim. B. Fibreboard Corporation, on behalf of itself and its Subsidiaries, releases Continental, CNA Casualty and Columbia, their parents, Subsidiaries, Affiliates, directors, employees, officers, agents and attorneys (the "Continental Releases") from any and all claims of whatsoever description by Fibreboard Corporation and its Subsidiaries, including bad faith claims, except that such release shall not include any claims arising out of this Agreement, the Settlement Agreement (or the related agreements referred to therein) or any obligation of a Party pursuant to an agreement or agreements entered into after this Agreement is executed. Notwithstanding the foregoing exceptions, such release shall include any and all claims arising from paragraphs 1 and 2 of the April 9 Agreement. Nothing herein shall affect the validity or effectiveness of the releases provided for in the April 9 Agreement, all of which are hereby ratified by Fibreboard Corporation, Continental, CNA Casualty and Columbia. C. Fibreboard Corporation, on behalf of itself and its Subsidiaries, releases Pacific, its parents, Subsidiaries, Affiliates, directors, employees, officers, agents and attorneys (the "Pacific Releasees") from any and all claims of whatsoever -14- 18 description by Fibreboard Corporation and its Subsidiaries, including bad faith claims, except that such release shall not include any claims arising out of this Agreement, the Settlement Agreement (or the related agreements referred to therein) or any obligation of a Party pursuant to an agreement or agreements entered into after this Agreement is executed. Nothing herein shall affect the validity or effectiveness of the releases provided for in the Pacific Indemnity Agreement, all of which are hereby ratified by Fibreboard Corporation and Pacific. D. Continental, CNA Casualty and Columbia, on behalf of themselves and their Subsidiaries, release Fibreboard Corporation, its parents, Subsidiaries, Affiliates, directors, employees, officers, agents and attorneys from any and all claims of whatsoever description by Continental, CNA Casualty and Columbia and their Subsidiaries, except that such release (i) shall not include any claims arising out of this Agreement, the Settlement Agreement (or the related agreements referred to therein) or any obligation of a Party pursuant to an agreement or agreements entered into after this Agreement is executed, and (ii) shall not prevent Continental, CNA Casualty or Columbia from raising any defenses to claims brought against them by any person or entity claiming an interest in the Insurance Policies, including, without limitation, defenses against the validity or enforceability of assignments or settlements to which Continental, CNA Casualty or Columbia is not a party. Notwithstanding the foregoing exceptions, such release shall include any and all claims arising from paragraphs 1 and 2 of the April 9 Agreement. Nothing herein shall affect the validity or effectiveness of the releases -15- 19 provided for in the April 9 Agreement, all of which are hereby ratified by Fibreboard Corporation, Continental, CNA Casualty and Columbia. E. Pacific, on behalf of itself and its Subsidiaries, releases Fibreboard Corporation, its parents, Subsidiaries, Affiliates, directors, employees, officers, agents and attorneys from any and all claims of whatsoever description by Pacific and its Subsidiaries, except that such release (i) shall not include any claims arising out this Agreement, the Settlement Agreement (or the related agreements referred to therein) or any obligation of a Party pursuant to an agreement or agreements entered into after this Agreement is executed, and (ii) shall not prevent Pacific from raising any defenses to claims brought against Pacific by any person or entity claiming an interest in the Insurance Policies. Nothing herein shall affect the validity or effectiveness of the releases provided for in the Pacific Indemnity Agreement, all of which are hereby ratified by Fibreboard Corporation and Pacific. F. The releases required by Sections 2.5(A)-(E) above shall be effective as a bar to each and every claim, demand and cause of action encompassed thereby and shall include, as necessary to effectuate that purpose, waivers by the Parties of any and all benefits conferred on any of them by Section 1542 of the California Civil Code or similar provisions in other jurisdictions. SECTION 2.6 Final Settlement of the Insurance Policies. Fibreboard Corporation and the Insurers agree that upon Global Approval Judgment, except for obligations that an Insurer has specifically assumed or preserved under this Agreement, or under the Settlement Agreement (or the related agreements referred to therein), the Insurers shall be discharged from any -16- 20 and all of their obligations (whether direct or indirect) under or in connection with the Insurance Policies, including any obligations imposed by judgment, decree, statute, regulation or common law. Upon Global Approval Judgment, Fibreboard Corporation shall execute and deliver a stipulation for the dismissal with prejudice of the Coverage Case as to Continental, CNA Casualty, Columbia and Pacific. SECTION 2.7 Indemnity Obligation of the Trust after Global Approval Judgment. A. Except as provided in Section 2.4(A) as to Fibreboard Corporation, the Trust shall defend and indemnify the Fibreboard, Continental and Pacific Releasees against, and hold them harmless from, any costs, fees, claims, liabilities, settlements or judgments incurred or occurring after Global Approval Judgment and resulting, directly or indirectly, from the assertion against any of them of any Class Member Claim or Third Party Claim. This obligation shall include, without limitation, any such claim to the extent that, after Global Approval Judgment, that claim attacks the validity or enforceability of the Global Approval Judgment. Fibreboard Corporation and the Insurers may, at their own expense, elect to participate with the Trust in the defense of any such action or claim. B. The Trust shall reimburse any Person entitled to reimbursement out of the Escrow Fund pursuant to Section 3.3(A) to the extent that such Person did not receive reimbursement from the Escrow Fund. SECTION 2.8 Fibreboard Corporation's Indemnity and Related Obligations. Upon Global Approval Judgment, the Continental and Pacific Releasees shall not have any liability for, and Fibreboard Corporation shall -17- 21 indemnify the Continental and Pacific Releasees against, and hold them harmless from, any and all costs, fees, claims or liabilities relating to Personal Injury Asbestos Claims and Additional Policy Claims of whatsoever kind, including those attacking the validity or enforceability of the Global Approval Judgment, (a) except for costs, claims or liabilities that the Insurers have specifically undertaken to pay under this Agreement, the Settlement Agreement (or the related agreements referred to therein), and (b) except for Defense Costs directly attributable to an actual or threatened attack on the validity or enforceability of the Global Approval Judgment ("Collateral Attack"). As to claims asserted against Fibreboard Corporation that (a) would not be covered by the foregoing indemnity (e.g., claims unrelated to asbestos) and (b) could be claimed to give rise to a direct action against any of the Insurers, Fibreboard Corporation agrees to reasonably and diligently defend and promptly pay or bond judgments so as to preclude any such direct action claims. In the event of a Collateral Attack, Continental and Pacific shall pay Fibreboard Corporation the reasonable costs incurred by Fibreboard Corporation in defending against a Collateral Attack to the extent not paid by the Trust (provided that Continental's and Pacific's obligation shall extend only to those costs directly attributable to litigation with respect to the validity and enforceability of the Global Approval Judgment, not to those attributable to litigation with respect to any underlying claims). Continental, Pacific and Fibreboard Corporation shall jointly defend against a Collateral Attack and will cooperate reasonably with one another in this regard. -18- 22 ARTICLE 3 ACTIONS TO BE TAKEN TO IMPLEMENT THIS AGREEMENT SECTION 3.1 Applications for Initial Court Orders, Settlement Class Order, Defendant Class Order and Global Approval Judgment. Promptly upon the execution of this Agreement, the Parties shall, by joint motions, in form and substance satisfactory to counsel for each of the Parties: A. request entry of an order (i) preliminarily approving this Agreement and the settlement contemplated by this Agreement for the purpose of the Rule 23 Notice and settlement hearing contemplated therein, (ii) preliminarily approving the Defendant Class Settlement Agreement and the settlement contemplated by that agreement, and (iii) approving the contents and methods for the dissemination of the Rule 23 Notice (which notice shall be in form and substance satisfactory to the above counsel; and B. request (i) entry of the Settlement Class Order and the Defendant Class Order and (ii) entry of Global Approval Judgment. SECTION 3.2 Effect of Class Certification. The certification of the Settlement Class pursuant to this Agreement shall be binding if Global Approval Judgment is entered. In the event this Agreement is terminated prior to Global Approval Judgment, Fibreboard Corporation and the Insurers shall retain their right to object to the continued prosecution of the Class Action as a class action under Rule 23. Neither this -19- 23 Agreement, nor its exhibits, nor the settlement negotiations, nor the proceedings seeking approval of the settlement, may be used (i) in support of any application for a determination that the Class Action or any other action shall proceed as a class action except for the purposes of the settlement in accordance with this Agreement or (ii) as evidence in any litigation (other than an action to enforce the terms of this Agreement or any of its exhibits) or proceeding against Fibreboard Corporation, Continental, CNA Casualty, Columbia or Pacific in any court at any time. SECTION 3.3 Execution and Delivery of Escrow Instructions. A. Class Counsel (or, after appointment of the Trustees, the Trustees), Fibreboard Corporation, Continental and Pacific shall each execute and deliver from time to time to the Escrow Agent instructions sufficient to order the disbursement from the Escrow Fund of funds needed to pay the following obligations: (1) To pay sums payable out of the Escrow Fund pursuant to Article 7 of this Agreement. (2) To reimburse monthly to any of the Fibreboard, Continental or Pacific Releasees amounts, if any, paid by any of them for costs, fees, claims, liabilities, settlements, arbitration awards or judgments with respect to (i) Class Member Claims or Third Party Claims which receive approval from the Court during the Interim Period to proceed to trial or (ii) Interim Claims. (3) To reimburse monthly any cost or expenses of the Trust incurred during the Interim Period, including the fees and expenses of the Interim Trustee, the Trustees or Class Counsel's -20- 24 designee to the Interim Committee and other reasonable expenditures. (4) To reimburse monthly any cost or expense of the SCB (in their capacity as such, and not in their capacity as Class Counsel) incurred during the Interim Period and determined by the Court or agreed by the Trustees to be reasonable. B. Notwithstanding the provisions of Section 3.3(A)(2), (i) the cost of compliance with Fibreboard Corporation's obligations under Section 2.4(A), the cost of any in-house employees of Fibreboard or the Insurers, and the use of more outside personnel than are reasonably necessary in connection with the economical defense or settlement of a claim shall not be reimbursed, and (ii) any non-indemnity fees or costs subject to reimbursement shall be reasonably necessary for the resolution of an Interim Claim, Class Member Claim or Third Party Claim as determined by the Court or agreed by the Trustees or their designee. Until the third anniversary after Global Approval Judgment, the Trust may seek reimbursement from any Person to whom amounts were disbursed from the Escrow Fund pursuant to Section 3.3(A)(2) which the Trust alleges, based on the actual experience of the Trust in processing and resolving claims, were in fact unreasonable and thus improperly paid from the Escrow Fund. After a hearing on notice to all of the Parties, the Court shall finally determine the eligibility of any contested expenditure for reimbursement under Section 3.3(A)(2). C. Fibreboard Corporation, the Insurers and the SCB agree to keep separate billing accounts for all fees and expenses subject to reimbursement -21- 25 pursuant to Section 3.3(A)(2) or 3.3(A)(4) and, if requested by the Trustees or Class Counsel's designee to the Interim Committee, submit them to the Court for a determination as to the reasonableness and eligibility for reimbursement. D. Class Counsel, Fibreboard Corporation, Continental and Pacific shall each execute and deliver a written notice of termination of the Escrow Agreement and execute and deliver escrow instructions to the Escrow Agent sufficient to order distribution of the balance of the Escrow Fund to the following persons upon occurrence of the following events: (1) to the Trust upon occurrence of Global Approval Judgment (including Global Approval Judgment as to which an effective waiver of one or more elements has been given); (2) to the trust or other entity described in Section 2.3(c) of the Settlement Agreement if (i) Settlement Agreement Approval Judgment occurs and Global Court Disapproval occurs, and (ii) the conditions to the establishment of such trust or other entity set forth in Section 2.3(c) of the Settlement Agreement are satisfied in the opinion of counsel for Fibreboard Corporation, Continental and Pacific; (3) to Continental and Pacific in the percentages of 64.71% and 35.29%, respectively, if (i) Settlement Agreement Approval Judgment occurs and Global Court Disapproval occurs, and (ii) the conditions to the establishment of such trust or other entity set forth of Section 2.3(c) of the Settlement Agreement are not -22- 26 satisfied in the opinion of counsel for Fibreboard Corporation, Continental and Pacific; or (4) to Continental and Pacific in the percentages of 64.71% and 35.29%, respectively, if both Settlement Agreement Court Disapproval and Global Court Disapproval occur. ARTICLE 4 TERMINATION SECTION 4.1 Termination. This Agreement shall automatically terminate without any further action by any of the Parties, upon Global Court Disapproval or upon a stipulation terminating this Agreement signed by all parties and filed with this Court. Upon such termination, the Settlement Class Members and the other Parties shall, as far as may be practicable, be restored to their respective positions, rights and obligations that existed as if this Agreement had not been entered into. Notwithstanding the foregoing, the following provisions of this Agreement and the Trust Distribution Process, and the rights, obligations, and liabilities created therewith shall survive such termination: Sections 3.2, 3.3, 4.1, 8.2, 8.3, 8.4, 8.5, 8.8, 8.9, 8.10, 8.11, 8.13 and Article 7 of this Agreement and section D.2.f(i) of the Trust Distribution Process. -23- 27 ARTICLE 5 SETTLEMENT TRUST SECTION 5.1 Trust Agreement. A Trust shall be created in accordance with the provisions of the Trust Agreement attached as Exhibit B hereto. The funds in the Trust shall be invested and expended in accordance with the terms of the Trust Agreement and Trust Distribution Process. The Trust shall be separate and independent from Fibreboard Corporation. Neither the Trust nor Fibreboard Corporation shall be bound by any adjudications rendered in any litigation (other than the Class Action, the related class action respecting the Defendant Class and any future litigation to which both the Trust and Fibreboard Corporation are parties) to which one, but not the other, has been a party or privy. Neither Fibreboard Corporation nor the Trust shall be bound by any stipulations or agreements entered into by the other. SECTION 5.2 Continuing Jurisdiction of the Court. The Court shall retain continuing jurisdiction over the maintenance, administration and distribution of the Trust and the funds contained therein, subject to and in accordance with the provisions of the Trust Agreement, the Trust Distribution Process, and the Defendant Class Settlement Agreement. However, the Court shall not have such continuing jurisdiction of Settlement Class Members, Defendant Class Members, Fibreboard Corporation or the Insurers beyond that necessary to enforce this Agreement, the Trust Agreement, the Trust Distribution Process, and the Defendant Class Settlement Agreement. -24- 28 SECTION 5.3 Preservation of Funds. To ensure that adequate Trust funds remain available to pay claims of all Settlement Class Members, the Parties agree that they will support the goals and purposes of the Trust and that they will cooperate in taking such steps as may be appropriate from time to time to require the Trustees to comply with the spending limitations, budgeting requirements, financial reporting, accounting and audit requirements set forth in the Trust Agreement and Trust Distribution Process. ARTICLE 6 THIRD PARTY CLAIMS SECTION 6.1 Bar Orders. All Third Party Claims shall be barred and permanently enjoined from prosecution against any of the Fibreboard, Continental and Pacific Releasees in any proceeding or court. Third Party Claims against the Trust in its own capacity or in Fibreboard Corporation's stead shall be governed by section H of the Trust Distribution Process and the Defendant Class Settlement Agreement. SECTION 6.2 Judgment Reduction and Subrogation Rights. Defendant Class Members shall have such rights to obtain credits, set-offs, judgment reductions and subrogation to claims of Settlement Class Members as are provided for in the Defendant Class Settlement Agreement and the Trust Distribution Process. -25- 29 SECTION 6.3 Actions Necessary to Obtain Discharges and Bar Orders. A. In exchange for the subrogation and the credit and set-off rights accorded them under the Trust Distribution Process, the Defendant Class Members in the Defendant Class Settlement Agreement are releasing all Third Party Claims against the Fibreboard, Continental and Pacific Releasees and have agreed that those releases be enforced by the Global Approval Judgment. Notwithstanding the provisions of the Defendant Class Settlement Agreement, and except as set forth in Section 6.3(C) below, in the event that Global Approval Judgment cannot be obtained because of failure to obtain the discharge of, or an injunction against, one or more Express Indemnity or Additional Policy Claims, then each and every such Express Indemnity or Additional Policy Claim against the Fibreboard, Continental and Pacific Releasees shall (as a sole and exclusive remedy, in lieu of any claims or remedies at law or in equity against the Fibreboard, Continental and Pacific Releasees, which claims or remedies are and will be forever barred and enjoined) be resolved with and compensated by the Trust as Residual Claims under the provisions of the Trust Distribution Process. B. Except as set forth in Section 6.3(C) below, in the event the Parties receive notice that notwithstanding the right to compensation under the provisions of Section 6.3(A) above, Global Approval Judgment cannot be obtained because of failure to obtain the discharges of, or injunctions against, any Third Party Claim against the Fibreboard, Continental and Pacific Releasees, Settlement Class Members agree to reduce judgments in their favor against Defendant Class Members -26- 30 in such amounts as may be necessary to obtain the discharges of and injunctions against Third Party Claims as against the Fibreboard, Continental and Pacific Releasees which are required for the entry of Global Approval Judgment. Any such reduction of judgment may be up to (but may not exceed) the full amount that a Defendant Class Member would have been entitled to recover from any of the Fibreboard, Continental and/or Pacific Releasees in the event that a valid Third Party Claim arising from the judgment or payment thereof could have been brought against any of them in the absence of Global Approval Judgment. C. The Parties believe that there are no valid Express Indemnity Claims or Additional Policy Claims arising from the distribution of asbestos or asbestos-containing materials or products manufactured by Fibreboard and sold or distributed under a label, trade name or brand name of a Person unaffiliated with Fibreboard pursuant to an agreement with Fibreboard. Fibreboard Corporation represents that, except as disclosed to the Insurers and to Class Counsel in writing, it knows of no Persons unaffiliated with Fibreboard who sold or distributed such materials or products. In the event the Parties receive notice that Global Approval Judgment cannot be obtained because of failure to obtain the discharge of, or an injunction against, any Express Indemnity Claim or Additional Policy Claim asserted by any Person listed in the writing referred to in the second sentence of this Section 6.3(C), then (i) the obligations imposed on Settlement Class Members set forth in Section 6.3(B) do not apply to those claims, (ii) Continental, Pacific and Fibreboard Corporation may advise Class Counsel within seven days of receipt of such notice that they have waived such failure to obtain the discharge of, or -27- 31 injunction against, such claim or claims, and (iii) in the event that Continental, Pacific and Fibreboard Corporation have not so advised Class Counsel, then the Attorney Ad Litem shall for 14 days following expiration of the seven-day period have the option, but not the obligation, to elect to have Section 6.3(B) apply to such claim or claims. If Continental and Pacific elect pursuant to the foregoing sentence to waive failure to obtain the discharge of, or an injunction against, any of the Express Indemnity Claims or Additional Policy Claims described in the preceding sentence, Fibreboard Corporation shall be deemed to have waived such failure if Continental and Pacific agree to indemnify and hold harmless Fibreboard Corporation against any cost or liability resulting from the assertion of any such claims against Fibreboard Corporation. ARTICLE 7 INTERIM CLAIM LIQUIDATION PROCEDURES SECTION 7.1 Interim Claims. The provisions of this Article 7 specify the procedures to be followed in handling certain Class Member Claims presented during the "Interim Period," which is the period commencing at the later of January 1, 1994 or the execution of this Global Settlement Agreement, and ending at Global Approval Judgment or Global Court Disapproval. Third Party Claims of Defendant Class Members arising out of Interim Claims shall be resolved in accordance with the terms of the Defendant Class Settlement Agreement. An "Interim Committee," consisting of a designee of Class Counsel, a designee of Fibreboard Corporation, and a designee of -28- 32 the Insurers, shall perform the functions specified for it in this Article in connection with Liquidation of Interim Claims. An "Interim Claim" is a Class Member Claim which a Settlement Class Member seeks to Liquidate during the Interim Period and which meets one of the following criteria: A. it is an Exigent Health Claim; B. it is an Extreme Hardship Claim; or C. the Settlement Class Member establishes to the satisfaction of the Interim Committee that his or her asbestos-related personal injury claim in the tort system against a Defendant Class Member will be tried to judgment during the Interim Period and that the trial will adjudicate issues unique to that Settlement Class Member (e.g., damages, legal causation), as distinguished from issues common to a number of plaintiffs (e.g., negligence, strict liability, punitive damages). SECTION 7.2 Processing Interim Claims. A. Any Settlement Class Member electing to submit an Interim Claim shall forward a notice of Interim Claim and a proof of claim to the Interim Committee, on forms to be prescribed by the Interim Committee. B. Interim Claims shall be processed in accordance with the claims procedures set forth in the Trust Distribution Process, except as follows: (1) Negotiations and any arbitration with respect to any Interim Claim shall be between the Interim Claimant, on the one hand, and Fibreboard Corporation and the Insurers (and not the Trust), on the other hand. -29- 33 (2) Each Interim Claimant asserting an Exigent Health Claim or Extreme Hardship Claim shall present a written demand within seven days of submitting the notice of Interim Claim and properly completed proof of claim. Fibreboard Corporation and the Insurers shall evaluate such Interim Claim. Fibreboard Corporation and the Insurers shall jointly respond with a written offer in no more than seven days from receipt of the written demand. If settlement negotiations fail to produce a settlement within 14 days from receipt of the initial offer, such Interim Claimant may proceed to binding arbitration. The arbitration shall be held within 30 days after arbitration is requested by such Interim Claimant. (3) Each Interim Claimant asserting an Interim Claim other than an Exigent Health Claim or Extreme Hardship Claim shall within seven days of receipt of a trial date submit a properly completed proof of claim form and a notice of the date that trial is scheduled to commence. A settlement demand shall also be submitted by such Interim Claimant at that time. Fibreboard Corporation and the Insurers shall evaluate such Interim Claim. Fibreboard Corporation and the Insurers shall jointly respond with a written offer in no more than 28 days from receipt of the written demand. The parties shall negotiate in good faith, and, if a settlement is not reached by 14 days prior to trial, such -30- 34 Interim Claim shall be set for binding arbitration to be conducted and concluded prior to entry of judgment in the trial court; provided, however, that such Interim Claimant may, as early as 30 days prior to the scheduled trial date, request binding arbitration. (4) The arbitration shall consist of an abbreviated hearing which may be conducted by conference call, with the award based upon the oral presentations, and any written submissions, of the parties' respective settlement positions. Neither party may submit any evidence in the arbitration that was not submitted to the other party at least seven days prior to the earlier of the commencement of the arbitration or the submission of its final offer or demand. The written demands and offers required by subsections (B)(1) and (B)(3) above shall be included in such submissions. (5) The Interim Committee shall establish and maintain a list of Qualified Arbitrators. An arbitrator shall be told the amount of the final offer and the amount of the Interim Claimant's final demand at the commencement of arbitration. The arbitrator shall only have discretion to award one of those two amounts. C. Any settlement of an Interim Claimant shall be with the consent of Class Counsel's designee, which consent shall not be unreasonably withheld. -31- 35 SECTION 7.3 Payment of Exigent and Extreme Hardship Claims. Interim Claims that are Exigent Health Claims or Extreme Hardship Claims shall be paid as follows: A. 50% of the amount for which such Interim Claim has been Liquidated shall be paid 30 days after the Interim Claim is Liquidated. B. The remaining 50% of such amount shall be paid 60 days after the first to occur of (i) Global Approval Judgment, (ii) Settlement Agreement Approval Judgment or (iii) entry of the Final Decision in the Coverage Case; provided that (x) any amount to be paid under this Section 7.3(B) by reason of the fact that the Final Decision is the first to occur of the foregoing triggering events shall be paid 60 days after that event only to the extent of the Insurer's coverage obligations as determined by the Final Decision and (y) any portion of such amount that remains unpaid after that time shall be paid 60 days after the first to occur of (a) any of other triggering events or (b) both Global Court Disapproval and Settlement Agreement Court Disapproval. SECTION 7.4 Payment of Interim Claims Other Than Exigent Health Claims and Extreme Hardship Claims. Interim Claims other than Exigent Health Claims or Extreme Hardship Claims shall be paid as follows: A. If Global Approval Judgement is entered on or before June 30, 1996, these Interim Claims shall be paid in accordance with the Trust Distribution Process in the same manner as other Class Member Claims. -32- 36 B. If Global Approval Judgment has not been entered on or before June 30, 1996, (1) 50% of the amount for which such Interim Claim has been Liquidated shall be paid upon the later of (i) the first to occur of November 30, 1996 or 30 days after Settlement Agreement Approval Judgment, or (ii) 60 days after receipt by the Insurers and Fibreboard Corporation of a declaration or affidavit stating that the case against a Defendant Class Member has been tried to judgment or has been settled against all non-bankrupt defendants in such case, unless both Global Court Disapproval and Settlement Agreement Court Disapproval have occurred by such time. (2) Any unpaid balance of such amount shall be paid 60 days after the first to occur of (i) Global Approval Judgment, (ii) Settlement Agreement Approval Judgment or (iii) entry of the Final Decision in the Coverage Case; provided that (x) any amount to be paid under this Section 7.4(B)(2) by reason of the fact that the Final Decision is the first to occur of the foregoing triggering events shall be paid 60 days after that event only to the extent of the Insurer's coverage obligations as determined by the Final Decision and (y) any portion of such amount that remains unpaid after that time shall be paid 60 days after the first to occur of (a) any of the other triggering events or -33- 37 (b) both Global Court Disapproval and Settlement Court Agreement Disapproval. (3) Notwithstanding the provisions of subsections B(1) and B(2) above, if an Interim Claim against one or more Defendant Class Members is consolidated for trial with the claims of more than 50 other Settlement Class Members, (i) the Interim Committee, at the request of the Trustees, shall pay amounts payable out of the Escrow Fund with respect to such Interim Claims in such manner and over such a longer time period (not to exceed 10 years) as the Trustees shall determine is in the best interests of the Trust and the Beneficiaries and (ii) the Trustees shall have discretion to pay amounts payable by the Trust with Respect to such Interim Claims in such manner and over such a longer time period (not to exceed 10 years) as the Trustees shall determine is in the best interests of the Trust and the Beneficiaries. SECTION 7.5 Sources of Payment of liquidated amounts for Interim Claims. The amounts due for payment under Sections 7.3 and 7.4 shall be paid: A. by the Trust if Global Approval Judgment has been entered by the date payment is due; B. by Fibreboard Corporation if both Settlement Agreement Approval Judgment and Global Court Disapproval have occurred by the date payment is due; -34- 38 C. by the Insurers to the extent of their coverage obligations as determined by the Final Decision in the Coverage Case, with any remaining balance paid by Fibreboard Corporation, if each of Global Court Disapproval, Settlement Agreement Court Disapproval and the Final Decision has occurred by the date payment is due; and D. out of the Escrow Fund if neither (A), (B), nor (C) is applicable by the date a payment is due. SECTION 7.6 Miscellaneous Interim Claim Provisions. Any Interim Committee decision shall require the unanimous approval of all members of the Interim Committee. In the event that unanimity cannot be achieved, disputes over the handling of Interim Claims shall be submitted to the Court for resolution. Class Counsel's designee shall not disclose any privileged or confidential information supplied to such designee by Fibreboard Corporation or the Insurers except as required by court order and shall promptly notify the Party which designated such information as privileged or confidential upon receipt of any subpoena or other formal request for such information. The members of the Interim Committee shall not disclose any settlement information with respect to Interim Claims to anyone other than Fibreboard Corporation, Continental, Pacific or the Trust, except as required by court order and upon reasonable prior notice to Fibreboard Corporation, Continental, Pacific and the Trust. -35- 39 ARTICLE 8 MISCELLANEOUS SECTION 8.1 Designated or Qualified Settlement Fund. Fibreboard Corporation's, Continental's, CNA Casualty's, Columbia's and Pacific's obligation to proceed with this Agreement are expressly conditioned upon the receipt by Fibreboard Corporation and the Insurers of a letter ruling from the Internal Revenue Service pursuant to which the Internal Revenue Service confirms that the Trust will be treated either (i) as a Designated Settlement Fund or (ii) as a Qualified Settlement Fund. In the event that the Internal Revenue Service has not issued such a ruling within twelve months after execution of this Agreement and has not expressed substantial concerns about the merits of the ruling request, then Fibreboard Corporation's and the Insurers' obligations to proceed are expressly conditioned upon receipt of a written opinion reasonably satisfactory to Fibreboard Corporation no later than twelve months after the date of this Agreement from an independent and distinguished professional tax advisor that either (i) the Trust will be treated either as a Designated Settlement Fund or as a Qualified Settlement Fund or (ii) Fibreboard Corporation will not recognize any net taxable income as a result of the Global Approval Judgment and the transactions contemplated thereby, establishment of the Trust, or any payments (other than those paid to Fibreboard Corporation) made by the Trust for Trust Expenses, Class Member Claims or Third Party Claims. Fibreboard Corporation and the Insurers shall use good faith efforts to obtain such a ruling or advice, as the case may be, as promptly as practicable after -36- 40 the date of this Agreement. Class Counsel shall be kept fully informed about, and may participate in, the efforts to obtain such a ruling. The tax advisor will be selected in the following manner. Fibreboard Corporation shall name three tax advisors. Within 5 days of receipt of such names, Class Counsel or the Insurers may notify Fibreboard Corporation that either of them objects to any such person on the ground that he or she is not an independent and distinguished professional tax advisor. Fibreboard Corporation shall select the final tax advisor from those persons remaining. If no persons remain, Fibreboard Corporation may name a substitute or substitutes, or may apply to Judge Patrick H. Higginbotham for (i) his binding determination that any of the persons objected to is an independent and distinguished professional tax advisor, and if he determines that any of the persons selected is an independent and distinguished tax advisor Fibreboard Corporation shall select the final tax advisor, from those persons remaining, and (ii) if he determines that none of the persons remaining is an independent and distinguished tax advisor, he will give his determination how any future naming of candidates by Fibreboard Corporation and objections by Class Counsel and the Insurers will proceed. If Fibreboard Corporation names a substitute or substitutes, within five days of receipt of such name(s), Class Counsel or the Insurers may notify Fibreboard Corporation that either of them objects to any such person on the ground that he or she is not an independent and distinguished professional tax advisor. Objections to any such substitute may be brought to Judge Higginbotham as described above. -37- 41 SECTION 8.2 Counsel. Any act or consent required by or which may be given by Representative Plaintiffs pursuant to this Agreement may be accomplished by Class Counsel acting on behalf of all Representative Plaintiffs. Class Counsel may act or give their consent with the approval of any three or more of the Class Counsel and, in such event, the Representative Plaintiffs shall be deemed to have so acted or consented. Continental, Pacific, CNA Casualty, Columbia and Fibreboard Corporation shall be entitled to rely upon such act or consent by Class Counsel in any case where the act or consent is evidenced in a writing reflecting the approval of any three of Class Counsel. SECTION 8.3 No Oral Representations. This Agreement, together with its accompanying exhibits, supersedes and renders unenforceable all earlier oral representations, warranties or promises made by any Party to any other Party with respect to the subject matter of this Agreement. SECTION 8.4 Payment of Costs. Except as otherwise agreed, each of Fibreboard Corporation, Continental, CNA Casualty, Columbia and Pacific shall pay its own legal and other costs and expenses incurred in connection with the preparation, negotiation, execution and delivery of this Agreement and the consummation of the settlement contemplated hereby. -38- 42 SECTION 8.5 Modification and Waiver. A. Subject to any necessary court approvals, this Agreement and any of the exhibits hereto may be amended, supplemented or modified from time to time by a writing executed by each of the Parties or, in the case of Representative Plaintiffs, by Class Counsel (prior to Global Approval Judgment) or the SCB (after Global Approval Judgment); provided, however, that the Trust Agreement and the exhibits thereto, including the Trust Distribution Process, may be amended only in accordance with the requirements and procedures contained therein. B. Fibreboard Corporation, Continental, CNA Casualty, Columbia, Pacific or the Representative Plaintiffs (on behalf of the Settlement Class), as the case may be, may from time to time by written instrument waive any provision of this Agreement or any of the exhibits hereto which inures to its or their benefit; provided, however, that the provisions of the Trust Agreement and exhibits thereto, including the Trust Distribution Process, may be waived only in accordance with the requirements and procedures contained therein. Any such waiver or consent shall be effective only in the specific instance, for the specific provision of this Agreement or exhibit hereto and for the specific purpose for which it is given. SECTION 8.6 Further Actions. Each of Fibreboard Corporation, Continental, CNA Casualty, Columbia, Pacific and the Representative Plaintiffs and their respective counsel shall take such actions and execute such additional documents as may be reasonably necessary or appropriate to consummate or implement the settlement contemplated by this Agreement. -39- 43 SECTION 8.7 Effectiveness of Agreement Notwithstanding Developments. The Parties understand and contemplate that during the period necessary to obtain Global Approval Judgment there will almost certainly be developments that bear on the issues being resolved and compromised by this Agreement, including but not limited to, decisions on issues common to other parties in the Coverage Case, controlling decisions by the California Supreme Court issued in other cases, changes in estimates as to volume and severity of future asbestos personal injury claims, procedural rulings or legislative actions that may make it easier or more difficult successfully to prosecute claims against asbestos defendants or their insurers and changes in the financial condition of other asbestos defendants, any of which may appear to have a bearing on the settlement of issues resolved herein. The Parties have carefully weighed potential developments of this nature and have taken them into account in reaching the compromise recited on the record on August 27, 1993 and reflected in this Agreement and no such event subsequent to that date shall be the basis for modifying this Agreement or relieving any of the Parties from any of its terms. The fairness and reasonableness of this Agreement shall be assessed as of August 27, 1993. SECTION 8.8 No Admission or Use. This Agreement and the provisions thereof, whether or not Global Approval Judgment is entered, shall in no event be offered as or be deemed to be evidence or an admission or a concession on the part of any of the Parties of or with respect to any claim or any fault, liability or damages whatsoever. This Agreement -40- 44 and the settlement provided for herein, whether or not consummated, and any actions or proceedings taken to enter into or pursuant to this Agreement or otherwise, are not, and shall not in any event be construed, interpreted or used as evidence of a presumption, concession or admission by any Party of the truth of any fact alleged or the validity of any claim or defense which has, could have been or could be asserted in any litigation, or of any deficiency in any claim or defense which was, could have been or could be asserted in any litigation, or of any liability, fault or dereliction of duty or breach of contract of any Party. Notwithstanding the foregoing, any Party shall be entitled to introduce this Agreement in evidence for the purpose of enforcing its terms. Nothing herein is intended to suggest that any asbestos-related personal injury claim may be asserted against Fibreboard, the Settlement Trust or the Insurers by a person who cannot prove exposure to asbestos-containing materials manufactured by Fibreboard. SECTION 8.9 No Breach of Other Obligations. Neither this Agreement nor any acts, statements or omissions of the Parties in connection with the negotiation, execution or performance thereof shall be claimed to constitute a breach of any contract, policy of insurance or law or the basis for any claim of bad faith. Nothing in this Agreement calls for or obligates any of the Parties in any way to violate or breach its obligations under any agreement and no term or provision of this Agreement shall be so construed. SECTION 8.10 Third Party Beneficiaries. There shall be no third party beneficiaries of this Agreement other than the non-Party Releasees hereunder. No Person other than the Parties hereto, -41- 45 the Settlement Class Members and the Releasees hereunder, shall have any right or claim under or in respect of this Agreement. SECTION 8.11 Rights and Obligations of Fibreboard Corporation and the Insurers Under the Settlement Agreement and Related Agreements. This Agreement shall not abridge or in any way modify or affect the rights or obligations of Fibreboard Corporation, Pacific, Continental, CNA Casualty or Columbia in relation to each other under the Settlement Agreement or related agreements referred to therein. All such rights and obligations shall be in addition to those created by this Agreement even where they pertain to the same subject matter. The definitions contained in the Glossary and in the provisions of this Global Settlement Agreement and its exhibits shall have no application to the Settlement Agreement or the related agreements referred to therein unless incorporated explicitly by written addendum to such agreements. SECTION 8.12 Headings. The section headings contained in this Agreement and its exhibits are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement or its exhibits. SECTION 8.13 Notices. All notices, requests, demands, claims and other communications hereunder shall be in writing. Any notice, request, demand, claim or other communication hereunder shall be deemed duly given if it is sent by registered or certified mail, postage prepaid, or sent by prepaid overnight courier or confirmed telecopier, and addressed to the intended recipient as set forth below: -42- 46 If to Fibreboard Corporation, addressed to: Fibreboard Corporation 2121 North California Blvd. Walnut Creek, CA 94596 Attention: Michael R. Douglas Senior Vice President and General Counsel Telecopier: (510) 274-0714 and BROBECK, PHLEGER & HARRISON Spear Street Tower One Market Plaza San Francisco, California 94105 Attention: Stephen M. Snyder, Esq. Telecopier: (415) 442-1020 If to Continental, addressed to: Continental Casualty Co. Specialty Claims Office, 12th Floor 50 Fremont Street San Francisco, CA 94105 Attention: Claim Manager Telecopier: (415) 512-4899 and WACHTELL, LIPTON, ROSEN & KATZ 51 West 52nd St. New York, New York 10019 Attention: Herbert M. Wachtell, Esq. Telecopier: (212) 403-2000 and CARROLL, BURDICK & McDONOUGH 44 Montgomery St., Suite 400 San Francisco, CA 94104 Attention: Rodney L. Eshelman, Esq. Telecopier: (415) 989-0932 -43- 47 If to Columbia, addressed to: Columbia Casualty Company c/o Continental Casualty Co. Specialty Claims Office, 12th Floor 50 Fremont Street San Francisco, CA 94105 Attention: Claim Manager Telecopier: (415) 512-4899 and WACHTELL, LIPTON, ROSEN & KATZ 51 West 52nd St. New York, New York 10019 Attention: Herbert M. Wachtell, Esq. Telecopier: (212) 403-2000 and CARROLL, BURDICK & McDONOUGH 44 Montgomery St., Suite 400 San Francisco, CA 94104 Attention: Rodney L. Eshelman, Esq. Telecopier: (415) 989-0932 If to CNA Casualty, addressed to: CNA Casualty Company of California c/o Continental Casualty Co. Specialty Claims Office, 12th Floor 50 Fremont Street San Francisco, CA 94105 Attention: Claim Manager Telecopier: (415) 512-4899 and WACHTELL, LIPTON, ROSEN & KATZ 51 West 52nd St. New York, New York 10019 Attention: Herbert M. Wachtell, Esq. Telecopier: (212) 403-2000 -44- 48 and CARROLL, BURDICK & McDONOUGH 44 Montgomery St., Suite 400 San Francisco, CA 94104 Attention: Rodney L. Eshelman, Esq. Telecopier: (415) 989-0932 If to Pacific, addressed to: Pacific Indemnity Company Chubb & Son Inc. 15 Mountain View Road P.O. Box 1615 Warren, NJ 07061-1615 Attention: Malcolm B. Burton Telecopier: (908) 580-3030 and WHITE & CASE 1155 Avenue of the Americas New York, NY 10036 Attention: Paul J. Bschorr, Esq. Telecopier: (212) 354-8113 If to the Representative Plaintiffs, addressed to: NESS, MOTLEY, LOADHOLT, RICHARDSON & POOLE 151 Meeting Street, Suite 600 P.O. Box 1137 Charleston, South Carolina 29402 Attention: Joseph F. Rice, Esq. Joseph B. Cox, Jr., Esq. Telecopier: (803) 577-7513 CARTWRIGHT, SLOBODIN, BOKELMAN, BOROWSKY, WATNICK, MOORE & HARRIS, INC. 101 California Street, Suite 2600 San Francisco, California 94111 Attention: Harry F. Wartnick, Esq. Telecopier: (415) 391-5845 -45- 49 KAZAN, McCLAIN, EDISES & SIMON 171 Twelfth Street, Suite 300 Oakland, California 94607 Attention: Steven Kazan, Esq. Telecopier: (510) 835-4913 and CAPLIN & DRYSDALE, CHARTERED 399 Park Avenue New York, New York 10022 Attention: Elihu Inselbuch, Esq. Telecopier: (212) 644-6755 Such communications shall be effective when they are received by the addressee thereof. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth. -46- 50 SECTION 8.14 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, this Agreement has been executed on December 23, 1993 by the undersigned, thereunto duly authorized. On behalf of the Representative Plaintiffs By: /S/ JOSEPH RICE, ESQ. -------------------------------------------------------------------- Joseph Rice, Esq. By: /S/ JOSEPH B. COX, JR., ESQ. -------------------------------------------------------------------- Joseph B. Cox, Jr., Esq. By: /S/ HARRY F. WARTNICK, ESQ. -------------------------------------------------------------------- Harry F. Wartnick, Esq. By: /S/ STEVEN KAZAN, ESQ. -------------------------------------------------------------------- Steven Kazan, Esq. By: /S/ ELIHU INSELBUCH, ESQ. -------------------------------------------------------------------- Elihu Inselbuch, Esq. -47- 51 FIBREBOARD CORPORATION By: /S/ MICHAEL R. DOUGLAS ---------------------------------------------------------------------- Title Senior Vice President & General Counsel -------------------------------------------------------------------- CONTINENTAL CASUALTY COMPANY By: /S/ LAURENS F. TERRY ---------------------------------------------------------------------- Title Vice President ------------------------------------------------------------------- CNA CASUALTY COMPANY OF CALIFORNIA By: /S/ LAURENS F. TERRY ---------------------------------------------------------------------- Title Vice President -------------------------------------------------------------------- COLUMBIA CASUALTY COMPANY By: /S/ LAURENS F. TERRY ---------------------------------------------------------------------- Title Vice President Columbia Casualty Co. -------------------------------------------------------------------- -48- 52 PACIFIC INDEMNITY COMPANY By: /S/ JOHN J. DEGNAN --------------------------------------------------------------------- Title Senior Vice President ------------------------------------------------------------------- -49- 53 EXHIBIT A GLOSSARY OF TERMS IN GLOBAL SETTLEMENT AGREEMENT, TRUST AGREEMENT, TRUST DISTRIBUTION PROCESS, AND DEFENDANT CLASS SETTLEMENT AGREEMENT 54 TABLE OF CONTENTS Additional Policy Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 April 9 Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Asbestos Lung Disease I or ALD-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Asbestos Lung Disease II or ALD-2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Attorney Ad Litem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 B-reader Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Claimant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Claims Resolution Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Class Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Class Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Class Member Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 CNA Casualty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Columbia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Continental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Continental-Pacific Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Continental Releasees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Court . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Coverage Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Defendant Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Defendant Class Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Defendant Class Member . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Defendant Class Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Defendant Class Settlement Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Defense Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Designated Settlement Fund or DSF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Distributable Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Distribution Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Earnings Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Escrow Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Escrow Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Escrow Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Exigent Health Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Expedited Review Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Exposed Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Express Indemnity Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Extreme Hardship Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Fibreboard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Fibreboard Releasees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 FIFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Final Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
-i- 55 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Fund I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Fund II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Fund III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Global Approval Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Global Court . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Global Court Disapproval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Global Settlement Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Increased Principal Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Initial Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Insurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Interim Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Interim Claimant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Interim Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Interim Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Judgment Forum Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Lung Cancer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Malignancy Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Medical Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Mesothelioma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Non-Malignancy Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Other Cancer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Other Claims Resolution Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Pacific Indemnity Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Pacific Releasees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Permitted Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Personal Injury Asbestos Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 PFT Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Principal Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Qualified Arbitrator and Qualified Mediator . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Qualified Settlement Fund or QSF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Released Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Representative Defendant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Representative Plaintiffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Reserve Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Residual Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Rule 23 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Select Counsel for the Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Schedule Category . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
-ii- 56 Scheduled Disease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Second Injury Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Settled Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Settlement Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Settlement Agreement Approval Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Settlement Agreement Court Disapproval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Settlement Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Settlement Class Member . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Settlement Class Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Settlement Conference Designee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Termination Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Third Party Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Third Party Claimant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Trust Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Trust Distribution Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Trust Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Trust Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Trustors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Unreimbursed Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Unsettled Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
-iii- 57 1. "Additional Policy Claim" means each and every claim, demand, action or suit of any kind (i) which arises under, pursuant to or related to the Insurance Policies by any person or entity, whether directly or indirectly asserted against the Insurers or any third party, or arising under any term or terms or alleged coverage provided by the Insurance Policies and (ii) which arises directly or indirectly from personal injury resulting from exposure to asbestos or asbestos-containing materials for which Fibreboard may bear legal liability. 2. "Affiliate" of a Person means (i) a Subsidiary of such Person, (ii) a Person which owns, either alone or with or through one or more Affiliates, directly or indirectly, securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such Person, and (iii) a Subsidiary of any Affiliate of such Person. 3. "April 9 Agreement" means the agreement between Continental and Fibreboard Corporation dated April 9, 1993, as it has been amended, pursuant to which Continental and Fibreboard Corporation agreed, among other things, upon terms and conditions set forth therein, to use their best efforts jointly to negotiate and finalize a global class action settlement with personal injury claimants and Continental agreed, whether or not a global settlement was reached, to pay certain defense and other costs of certain asbestos-related claims on an interim basis. -1- 58 4. "Asbestos Lung Disease I" or "ALD-1" means either: (1) a diagnosis of pulmonary asbestosis by a board-certified internist or pulmonary specialist based on the following minimum objective criteria: (i) Chest X-rays for which a B-reader report is furnished showing small irregular opacities of ILO Grade 1/0 and pulmonary function testing and physical examination that shows either: a. FVC <80% of predicted with FEV-1/FVC > or = to 75% (actual value); or b. TLC <80% of predicted, with either DLCO < or = to 76% of predicted or bilateral basilar crackles, and also the absence of any probable explanation for this DLCO result or bilateral basilar crackles finding other than the presence of asbestos lung disease; or (ii) Chest X-rays for which B-reader report is furnished showing small irregular opacities of ILO Grade 1/1 or greater; and pulmonary function testing that shows either: -2- 59 a. FVC <80% of predicted with FEV-1/FVC > or = to 72% (actual value) or, if the individual tested is at least 68 years old at the time of the testing, with FEV-1/FVC > or = to 65% (actual value); or b. TLC <80% of predicted. or (2) A statement by a board-certified pathologist that more than one representative section of lung tissue otherwise uninvolved with any other process (e.g., cancer or emphysema) demonstrates a pattern of peribronchiolar or parenchymal scarring in the presence of characteristic asbestos bodies, and also that there is no other more likely explanation for the presence of the fibrosis. 5. "Asbestos Lung Disease II" or "ALD-2" means a diagnosis by a qualified physician that indicates other abnormalities of the parenchyma or pleura attributed to prior asbestos exposure, including pleural plaques, pleural thickening, pleural encasement and mild parenchymal fibrosis not meeting the definition of ALD-1. -3- 60 6. "Attorney Ad Litem" means Professor Eric Green of Boston University Law School or such successor as may be appointed by the Court. 7. "Beneficiary" means any Settlement Class Member who asserts a Class Member Claim, now or at any time in the future. 8. "B-reader Report" means a report of a B-reader certified at the time the report is prepared (or of an individual who at one time was a certified B-reader and who has not subsequently failed the examination for certification or recertification as a B-reader) based on chest x-rays of an Exposed Person. 9. "Claimant" means any Person, or legal representative of a Person, who seeks recovery from the Trust for a Personal Injury Asbestos Claim of any kind. 10. "Claims Resolution Facility" means a facility that establishes a method for the liquidation and resolution of claims that is administered by the Trust. 11. "Class Action" means Ahearn et al. v. Fibreboard Corp. et al., 6:93 cv 526 (E.D. Tex.), filed by Representative Plaintiffs in the Global Court on behalf of themselves and the Settlement Class Against Fibreboard Corporation on September 9, 1993. -4- 61 12. "Class Counsel" means Joseph F. Rice and Joseph B. Cox, Jr., of the firm of Ness, Motley, Loadholt, Richardson & Poole, P.C.; Harry F. Wartnick, of the firm of Cartwright, Slobodin, Bokelman, Borowsky, Wartnick, Moore & Harris, Inc.; and Steven Kazan, of the firm of Kazan, McClain, Edises & Simon; or successors of the foregoing individuals. 13. "Class Member Claim" means any Personal Injury Asbestos Claim of a Settlement Class Member. 14. "CNA Casualty" means CNA Casualty Company of California, a California corporation. 15. "Columbia" means Columbia Casualty Company, an Illinois Corporation. 16. "Continental" means Continental Casualty Company, an Illinois Corporation. 17. "Continental-Pacific Agreement" means the agreement between Continental and Pacific dated as of October 12, 1993 pursuant to which Continental and Pacific settled the dispute between them and agreed upon terms for the sharing of liabilities of each of them with respect to ceratin asbestos-related claims. -5- 62 18. "Continental Releases" are as defined in Section 2.5(B) of the Global Settlement Agreement. 19. "Court" means the Honorable Robert M. Parker, now the Chief Judge for the United States District Court for the Eastern District of Texas. In the event that for any reason Judge Parker ceases to be a Judge of the United States as defined in Article III of the United States Constitution or otherwise cannot fulfill the responsibilities of the Court, the term "Court" shall mean any United States Circuit or District Judge designated by the Chief Judge of the United States Court of Appeals of the Fifth Circuit to exercise continuing jurisdiction over the Trust and the Global Settlement Agreement. 20. "Coverage Case" means the action bearing the caption Asbestos Insurance Coverage Cases, Judicial Council Coordination Proceeding No. 1072, which was pending as of the date of the Global Settlement Agreement in the Court of Appeal of the State of California, First Appellate District, Division One, Nos. A049419 et al. 21. "Defendant Class" means all Persons with Third Party Claims. 22. "Defendant Class Counsel" means Richard Josephson of Baker & Botts and R. Bruce Shaw of Nelson, Mullins, Riley & Scarborough or their successors. -6- 63 23. "Defendant Class Member" means any Person who or which is a member of the Defendant Class. 24. "Defendant Class Order" means an order of the Court finally certifying the Defendant Class as a class for settlement purposes under Rule 23(b)(1) and/or (b)(2) of the Federal Rules of Civil Procedure. 25. "Defendant Class Settlement Agreement" means the agreement annexed to the Global Settlement Agreement as Exhibit C. 26. "Defense Costs" mean Fibreboard Corporation's defense fees and costs, including case management system fees and costs, as more fully defined in the Settlement Agreement. 27. "Designated Settlement Fund" or "DSF" is as defined in Section 468B of the Internal Revenue Code of 1986. 28. "Distributable Amount" means, with respect to Fund I, Fund II or Fund III, for any Fiscal Year, the sum of the Earnings Amount for that Fund for that Fiscal Year plus (i) the Principal Amount or (ii) in the event that the provisions of Appendix 1 to the Trust Distribution Process apply, the Increased Principal Amount, for that Fiscal Year. -7- 64 29. "Distribution Date" is as defined in paragraph E.4 of the Trust Distribution Process. 30. "Earnings Amount" means, with respect to Fund I, Fund II or Fund III, as the case may be, all elements of current periodic income from such Fund (other than any such income on the amounts in the Reserve Account), including interest, periodic dividends (but not special, liquidating or wasting dividends), rent, royalty and other similar payments which represent earnings or profit on an asset, and do not represent elements of appreciation or gain or depreciation or loss (whether realized or unrealized) on an asset, all determined on an accrual basis in accordance with generally accepted accounting principles. 31. "Escrow Agent" means the Person acting as escrow agent pursuant to the Escrow Agreement. 32. "Escrow Agreement" means an Escrow Agreement substantially in the form attached to the Global Settlement Agreement as Exhibit D. 33. "Escrow Fund" means the escrow account established pursuant to Section 2.3(A) of the Global Settlement Agreement. 34. "Exigent Health Claim" means a Class Member Claim that is supported by an affidavit or declaration made under penalty of perjury from a physician who has examined the Settlement Class Member within 120 days of the -8- 65 date of the affidavit or declaration, which states that the physician believes that because of asbestos-related disease there is substantial medical doubt that the Settlement Class Member will survive beyond six months from the date of the declaration or affidavit. 35. "Expedited Review Claim" is as defined in Section B.2 of the Trust Distribution Process. 36. "Exposed Person" means the individual whose exposure to asbestos results in a Personal Injury Asbestos Claim. 37. "Express Indemnity Claim" means a Third Party Claim (i) which asserts that Fibreboard is liable to indemnify or reimburse the holder of such claim for payments made or liabilities, expenses or costs incurred by such claim holder on account of an asbestos-related personal injury claim asserted against such claim holder by a Settlement Class Member and (ii) which would not be barred under applicable law by a court determination that a settlement between Fibreboard (or the Trust) and the Settlement Class Member asserting such asbestos-related personal injury claim was made in good faith. 38. "Extreme Hardship Claim" means a Class Member Claim as to which the Interim Committee (if the Class Member Claim is submitted during the Interim Period) or the Trust (if the Class Member Claim is submitted after entry of -9- 66 Global Approval Judgment), in its sole discretion, determines that because of an asbestos-related disease the Settlement Class Member is suffering a severe financial hardship. 39. "Fibreboard" means Fibreboard Corporation; Fibreboard Paper Product Corporation; Fibreboard Products, Incorporated; Paraffine Companies, Incorporated; Plant Rubber & Asbestos Works; Pabco Products, Incorporated; and Pabco Insulation Corporation; and each of their respective predecessors, Subsidiaries and divisions, and with regard to Fibreboard Corporation's liability only, each of their respective successors in interest. 40. "Fiberboard Releasees" mean the following entities, each of their respective predecessors, Subsidiaries, divisions, current and former attorneys, officers, directors and employees, and, with regard to Fiberboard Corporation's liability only, each of their respective successors in interest: (i) Fibreboard Corporation; Fibreboard Paper Products Corporation; Fibreboard Products, Incorporated; Paraffine Companies, Incorporated; Plant Rubber & Asbestos Works; Pabco Products, Incorporated; and Pabco Insulation Corporation; -10- 67 (ii) Louisiana-Pacific Corporation (other than for asbestos-related claims against Louisiana-Pacific which (a) state a basis for liability by Louisiana-Pacific wholly independent of any relationship between Louisiana-Pacific and Fibreboard Corporation or any act or omission in connection with such a relationship, and (b) as to which there is no basis for any claim against Fibreboard Corporation by the claimant or by Louisiana-Pacific). 41. "FIFO" means first in, first out. 42. "Final Decision" means the final decision or decisions obtained when all the issues that are pending in the Coverage Case by Fibreboard Corporation against certain of the Insurers have been finally resolved and no further appellate review or remand proceedings are possible with respect to such claims. 43. "Fiscal Year" means the calendar year, except that the first Fiscal Year shall be that portion of a calendar year commencing with the date of execution of the Trust Agreement and ending on the last day of the calendar year in which such execution occurs, and references to a number of Fiscal Years after Global Approval Judgment shall be determined based on the assumption that the first Fiscal Year after Global Approval Judgment shall be the Fiscal Year during which Global Approval Judgment occurs. -11- 68 44. "Fund I" is as defined in paragraph E of the Trust Distribution Process. 45. "Fund II" is as defined in paragraph E of the Trust Distribution Process. 46. "Fund III" is as defined in paragraph E of the Trust Distribution Process. 47. "Global Approval Judgment" means a judgment, order or other decree issued and entered by the Global Court in an action in which Fibreboard Corporation, Continental, CNA Casualty, Columbia, Pacific, the Settlement Class and all persons having or who may have Third Party Claims have been made parties, either directly or in a representative capacity, as to which judgment, order or decree any appeal (and subsequent remand, if any) has been finally decided and no further appeal or petition for certiorari can be taken or granted and which judgment, order or decree: (a) approves the terms and provisions of the Global Settlement Agreement, including the releases and indemnities contained therein; (b) approves the Trust Agreement and the Trust Distribution Process incorporated in the Global Settlement Agreement; -12- 69 (c) orders the parties to implement the Global Settlement Agreement; (d) determines and awards the fees and expenses of Class Counsel; (e) declares that the settlement reflected by the Global Settlement Agreement, with respect to both Class Member Claims and Third Party Claims, is fair, reasonable and adequate and was entered into in good faith; (f) declares that the Settlement Class Members and the Defendant Class Members have received adequate notice of the settlement contemplated by the Global Settlement Agreement and Rule 23 of the Federal Rules of Civil Procedure; (g) declares that the Settlement Class Members have been adequately, professionally and ethically represented by Class Counsel; (h) orders all Class Member Claims, except for claims for punitive or exemplary damages, directed to the Trust for disposition pursuant to the Trust Agreement and Trust Disposition Process; -13- 70 (i) declares that, as provided in Section 2.2(B) of the Global Settlement Agreement, only payment of funds pursuant to the Settlement Class Members' individual settlements with the Trust shall trigger the notice, approval and forfeiture provisions of the Longshore and Harbor Workers Compensation Act and other similar state and federal workers compensation provisions; (j) orders dismissal on the merits, without costs and with prejudice, of the Class Action and all of the Class Member Claims (including all punitive and exemplary damage claims) against the Fibreboard, Continental and Pacific Releasees; (k) declares the provision contained in the Global Settlement Agreement whereby Fibreboard Corporation and the Insurers agree that the Insurers shall be discharged from any further obligation under or in connection with the Insurance Policies, except as an Insurer has specifically assumed under the Global Settlement Agreement or has preserved under the Settlement Agreement (and the related agreements referred to therein), to be fair, reasonable and non-collusive; -14- 71 (l) discharges the Fibreboard, Continental and Pacific Releasees from any further liability with respect to any Class Member Claim or Third Party Claim; (m) permanently enjoins Fibreboard Corporation from asserting any claim released or discharged under the Global Settlement Agreement against any Continental or Pacific Releasee; (n) permanently enjoins any Settlement Class Member or Third Party Claimant from asserting any claim released or discharged under the Global Settlement Agreement against any Fibreboard, Continental or Pacific Releasee; (o) approves the provisions set forth in the Global Settlement Agreement and the Trust Distribution Process for the resolution of Third Party Claims; and (p) retains exclusive jurisdiction in the Court rendering such judgment, order or decree (1) to enforce the provisions of such judgment, order or decree, (2) to resolve any disputes as to the performance or interpretation of the Global Settlement Agreement, or such judgment, order or decree, (3) to adjudicate any attempt by any person to challenge such judgment, order or -15- 72 decree in any respect, and (4) over the maintenance, administration and distribution of the Trust and the funds contained therein, subject to and in accordance with the provisions of the Trust Agreement and the Trust Distribution Process incorporated therein; provided that Global Approval Judgment shall not be deemed to have been entered unless and until either Settlement Agreement Approval Judgment has been entered or Settlement Agreement Court Disapproval occurs. 48. "Global Court" means the United States District Court for the Eastern District of Texas. 49. "Global Court Disapproval" means a judgment, order or other decree of the Global Court or other court of competent jurisdiction in an action in which Fibreboard Corporation, Continental, CNA Casualty, Columbia, Pacific and the Settlement Class have been made parties, as to which judgment, order or decree any appeal (and subsequent remand, if any) has been finally decided and no further appeal or petition for certiorari can be taken or granted and which judgment, order or decree disapproves or declines to approve the Global Settlement Agreement. 50. "Global Settlement Agreement" means the settlement agreement as of August 27, 1993 among Continental, CNA Casualty, Columbia, Pacific, -16- 73 Fibreboard Corporation and the Representative Plaintiffs as representatives of the Settlement Class. 51. "Glossary" means this Exhibit A to the Global Settlement Agreement. 52. "Increased Principal Amount" (i) for any of the third through the twelfth Fiscal Years after Global Approval Judgment, means 125% of the Principal Amount for such Fiscal Year and (ii) for any of the sixteenth through the twentieth Fiscal Years after Global Approval Judgment, means 112.5% of the Principal Amount for such Fiscal Year. 53. "Initial Trustee" is as defined in Section 7.18 of the Trust Agreement. 54. "Insurance Policies" mean policy number CLP 3197650 issued by Continental effective May 4, 1957, in favor of Fibreboard Corporation under its former name, Fibreboard Paper Products Corporation, policy number RD 951 90 81 issued by Continental, policy number RDU 975 65 87 issued by CNA Casualty and an endorsement thereto issued by Continental, policy number RDU 186 27 82 issued by Columbia, policy number RDU 186 30 62 issued by Columbia, policy number RDU 365 32 19 issued by Columbia, the policy that was alleged by Fibreboard Corporation to have been issued by Continental in the period 1954-1956, and policy number LAC 88700 found to have been issued by Pacific to Fibreboard Corporation -17- 74 effective May 4, 1956, and any other policies that were, or may be alleged to have been, issued to Fibreboard Corporation by any of the Insurers, including those set forth in the Pacific Indemnity Agreement. 55. "Insurers" mean (i) Continental, CNA Casualty, Columbia and all insurance or indemnity companies controlling, controlled by or under common control with any of them and (ii) Pacific and all insurance or indemnity companies controlling, controlled by or under common control with it. 56. "Interim Claim" is as defined in Section 7.1 of the Global Settlement Agreement. 57. "Interim Claimant" is a Person asserting an Interim Claim. 58. "Interim Committee" is as defined in Section 7.1 of the Global Settlement Agreement. 59. "Interim Period" is as defined in Section 7.1 of the Global Settlement Agreement. 60. "Judgment Forum Law" is as defined in Section H.1.a of the Trust Distribution Process. 61. "Liquidation" occurs with respect to any Class Member Claim or Third Party Claim on the date on which the validity and amount thereof is finally -18- 75 determined pursuant to the Trust Distribution Process or the date on which a final, nonappealable judgment is entered against the Trust with respect to such Class Member Claim or Third Party Claim. 62. "Lung Cancer" means a diagnosis by a qualified physician of a malignant primary tumor of any cell type, originating within the lung, caused or contributed to by exposure to asbestos. 63. "Malignancy Claim" means a claim for Mesothelioma, Lung Cancer, or Other Cancer as defined in this Glossary. 64. "Medical Report" means a written narrative report by a physician confirming that (i) an Exposed Person has an asbestos-related personal injury or disease, based on a physical examination (as reflected in medical records or performed by the physician preparing the narrative report) of the Exposed Person, or (ii) following review of pertinent medical records and information, that an asbestos-related personal injury or disease caused or substantially contributed to the death of an Exposed Person. 65. "Mesothelioma" means a diagnosis by a board certified pathologist of a malignant tumor caused or contributed to by exposure to asbestos originating in the mesothelial cells of the pleura, peritoneum or like tissue, or -19- 76 reasonable equivalent clinical diagnosis in the absence of adequate tissue for pathological diagnosis. 66. "Non-Malignancy Claim" means a claim for ALD-1 or ALD-2 as defined in this Glossary. 67. "Other Cancer" means a diagnosis by a qualified physician that indicates a malignant tumor originating in the larynx, pharynx, stomach, esophagus, colon or rectum, caused or contributed to by exposure to asbestos. 68. "Other Claims Resolution Facility" means a facility that establishes a method for the liquidation and resolution of asbestos-related personal injury claims administered by a Person other than the Trust. 69. "Pacific" means Pacific Indemnity Company, a California corporation. 70. "Pacific Indemnity Agreement" collectively means the Agreement and a Rescission of Insurance Policies, both dated March 27, 1992, between Fibreboard Corporation and Pacific, pursuant to which Pacific and Fibreboard Corporation agreed to settle their insurance coverage dispute. 71. "Pacific Releasees" are as defined in Section 2.5(C) of the Global Settlement Agreement. -20- 77 72. "Permitted Investments" are as defined in Section 4.3 of the Trust Agreement. 73. "Person" means any individual, corporation, partnership or association, whether or not incorporated, and any federal, state or local government or agency thereof, or any other entity and his, her or its legal representative. 74. "Personal Injury Asbestos Claim" means: (i) each and every claim, demand, action or suit of any kind for personal injury arising, directly or indirectly, from exposure to asbestos-containing products (including, without limitation, any direct action claim, wrongful death claim, punitive or exemplary damages claim, loss of consortium claim, fear of disease claim, bad faith claim, or surviving personal injury claim) and whether such injury manifested itself heretofore or hereafter, or (ii) any claim, demand, action or suit of any kind arising, directly or indirectly, from any such claim, demand, action or suit referred to in (i) above (including without limitation any bad faith claim, contribution claim, indemnity claim, warranty claim, direct action claim or Additional Policy Claim) against Fibreboard, against the Insurance Policies or against the Insurers in any way predicated on obligations created by the Insurance Policies; provided, however, that -21- 78 a Personal Injury Asbestos Claim shall not include any claim for benefits brought by an employee or his or her personal representative under any federal or state workers compensation statute (including, but not limited to, the United States Longshore and Harbor Workers Compensation Act and the Federal Employees Compensation Act), but shall include any subrogation, contribution or indemnity claim arising from such claim for benefits. 75. "PFT Report" means a report by a pulmonary specialist or a board-certified internist interpreting the results of pulmonary function testing of an Exposed Person. 76. "Principal Amount" means, for any Fiscal Year after Global Approval Judgment: (i) (a) (x) the aggregate fair market value of all of the investment assets contained in the Fund for which the Distributable Amount is being determined (excluding the then outstanding balance of the Reserve Account) at the close of business on the last business day of the Fiscal Year for which the calculation is made, minus (y) the Earnings Amount for such Fiscal Year, plus (z) all amounts, if any, paid during such Fiscal Year for Trust Expenses, Class Member Claims, Third Party Claims and payments made pursuant to Section 7.16 of the Trust Agreement, in each case for such Fiscal Year (other than any such payments made out of the Reserve Account), minus (b) for any Fiscal Year prior to the 21st Fiscal Year after Global Approval Judgment, the greater of (i) Zero and (ii) the lesser of (Y) the aggregate Surplus for all prior Fiscal Years and (Z) Zero minus Unreimbursed Borrowings; multiplied by (ii) a fraction, the numerator of which is one and the denominator of which is the number of Fiscal Years that will occur from the beginning -22- 79 of the Fiscal Year for which the calculation is made through and including the end of the 25th Fiscal Year after Global Approval Judgment in the case of Fund I, the 20th Fiscal Year after the end of Fund I (or, if the Trustees have determined to delay the transfer of the remaining balance in Fund II beyond the twentieth Fiscal Year after the end of Fund I pursuant to Section E.2.c(ii) of the Trust Distribution Process, the end of Fund II so determined by the Trustees) in the case of Fund II and the 15th Fiscal Year after the end of Fund II in the case of Fund III (so that, for example, for the Principal Amount applicable to the tenth Fiscal Year after Global Approval Judgment, such denominator would be 16); provided, however, that (1) for the first Fiscal Year after Global Approval Judgment (a) the numerator in the fraction stated in clause (ii) above shall be a fraction in which the numerator is the number of full weeks in such Fiscal Year (but not less than one) and the denominator is 52 (to adjust for the length of such Fiscal Year) and (b) the Principal Amount determined as provided above, including as set forth in clause (1)(a) of this proviso shall be multiplied by 0.4; (2) for the second Fiscal Year after Global Approval Judgment the Principal Amount shall be the sum of (A) the Principal Amount otherwise determined as provided in this definition of Principal Amount multiplied by 0.4, plus (B) the Principal Amount with respect to the first Fiscal Year after Global Approval Judgment as determined in clause (1) above multiplied by 0.75; and -23- 80 (3) for each of the twenty-first through the twenty-fifth Fiscal Years after Global Approval Judgment, the Distributable Amount may be increased by the Trustees up to an amount not in excess of the Principal Amount and the Earnings Amount that was in effect for the twentieth Fiscal Year after Global Approval Judgment. 77. "Qualified Arbitrator" and "Qualified Mediator" shall each be an impartial, neutral person. No person shall serve as an arbitrator or mediator if he/she has any financial or personal interest in the proceedings or, except when otherwise agreed by the parties, in any asbestos-related matters. Prior to accepting an appointment, the prospective arbitrator or mediator shall disclose any circumstances likely to create a reasonable inference of bias or prevent a prompt hearing or conference with the parties. 78. "Qualified Settlement Fund" or "QSF" is as defined in the Treasury Regulations under Section 468.B of the Internal Revenue Code of 1986. 79. "Released Parties" collectively, and "Released Party" individually, mean the Fibreboard, Continental and Pacific Releasees. 80. "Representative Defendant" means Owens-Illinois, Inc., a Delaware corporation, or such other Person or Persons as may be certified by the Global Court, in the capacity as representative(s) of the Defendant Class Members. -24- 81 81. "Representative Plaintiffs" mean Gerald Ahearn, James Dennis and Charles W. Jeep, the named plaintiffs in the Class Action, or such other, lesser or greater number of Representative Plaintiffs as may be certified by the Global Court, in their capacities as representatives of the interests of the Settlement Class Members. 82. "Reserve Account" means the reserve (which shall be part of Fund I) in the original principal amount described on Appendix I to the Trust Distribution Process as such amount may be increased or decreased from time to time in accordance with the provisions described on Appendix 1 to the Trust Distribution Process and by earnings, capital gains or losses or other similar items. 83. "Residual Claim" means any Express Indemnity Claim or Additional Policy Claim, the disposition of which becomes the responsibility of the Trust pursuant to the Global Approval Judgment. 84. "Rule 23 Notice" means the notice to be given to the Settlement Class Members and Defendant Class Members pursuant to Rule 23 of the Federal Rules of Civil Procedure. 85. "Select Counsel for the Beneficiaries" or "SCB" means four lawyers, initially: Joseph B. Cox, Jr., Steven Kazan, Joseph F. Rice and Harry F. -25- 82 Wartnick, and a fifth to be selected unanimously by the other four lawyers as provided in Section 6.1 of the Trust Agreement. 86. "Schedule Category" means: 1) Mesothelioma and Lung Cancer; 2) ALD-1 and Other Cancer; 3) ALD-2; and 4) Residual Claims. 87. "Scheduled Disease" means Mesothelioma, Lung Cancer, Other Cancer, Asbestos Lung Disease I and Asbestos Lung Disease II. 88. "Second Injury Claim" is a Malignancy Claim by a Claimant who settled a Non-Malignancy Claim in exchange for a limited release which allowed subsequent Malignancy Claims. 89. "Settled Claims" means claims of individuals for asbestos-related personal injuries (a) that are not Class Member Claims and (b) that as of August 27, 1993 had been settled (by Fibreboard Corporation or by Fibreboard Corporation and Continental) or were the subject of a verdict or judgment. For the purposes of this definition, a claim included within the terms of a settlement agreement (whether written, oral or placed on a court record) prior to August 27, 1993 shall be deemed to have been settled before August 27, 1993 even if (i) an opt-out right with respect to that claim has been or is exercised, or (ii) the settlement is subsequently repudiated by the Plaintiff; provided, however, that no claim which was included within the terms of a settlement agreement and -26- 83 which was not filed prior to August 27, 1993 shall be deemed settled unless it was eligible to be processed and liquidated prior to August 27, 1993. 90. "Settlement Agreement" means the agreement among Fibreboard Corporation, Continental, CNA Casualty, Columbia and Pacific dated as of October 12, 1993 pursuant to which they agreed, among other things, to settle and compromise all claims and potential claims against the Insurers under the Insurance Policies. 91. "Settlement Agreement Approval Judgment" is as defined in the Settlement Agreement. 92. "Settlement Agreement Court Disapproval" is as defined in the Settlement Agreement. 93. "Settlement Class" means: (a) All persons (or their legal representatives) who prior to August 27, 1993 were exposed, directly or indirectly (including but not limited to exposure through the exposure of a spouse, household member or any other person), to asbestos or to asbestos-containing products for which Fibreboard may bear legal liability and who have not, before August 27, 1993, (i) filed a lawsuit for any asbestos related personal injury, or damage, or -27- 84 death arising from such exposure in any court against Fibreboard or persons or entities for whose actions or omissions Fibreboard bears legal liability; or (ii) settled a claim for any asbestos-related personal injury, or damage, or death arising from such exposure with Fibreboard or with persons or entities for whose actions or omissions Fibreboard bears legal liability; (b) All persons (or their legal representatives) exposed to asbestos or to asbestos-containing products, directly or indirectly (including but not limited to exposure through the exposure of a spouse, household member or any other person), who dismissed an action prior to August 27, 1993 without prejudice against Fibreboard, and who retain the right to sue Fibreboard upon development of a nonmalignant disease process or a malignancy; provided, however, that the Settlement Class does not include persons who filed and, for cash payment or some other negotiated value, dismissed claims against Fibreboard, and whose only retained right is to sue Fibreboard upon development of an asbestos-related malignancy; and (c) All past, present and future spouses, parents, children and other relatives (or their legal representatives) of the class members -28- 85 described in paragraphs (a) and (b) above, except for any such person who has, before August 27, 1993, (i) filed a lawsuit for the asbestos-related personal injury, or damage, or death of a class member described in paragraph (a) or (b) above in any court against Fibreboard (or against entities for whose actions or omissions Fibreboard bears legal liability), or (ii) settled a claim for the asbestos-related personal injury, or damage, or death of a class member described in (a) or (b) above with Fibreboard (or with entities for whose actions or omissions Fibreboard bears legal liability). For the purposes of this definition, a claim included within the terms of a settlement agreement (whether written, oral, or placed on a court record) prior to August 27, 1993 shall be deemed to have been settled before August 27, 1993 even if (i) an opt-out right with respect to that claim has been or is exercised, or (ii) the settlement is subsequently repudiated by the Plaintiff; provided, however that no claim which was included within the terms of a settlement agreement and which claim was not filed prior to August 27, 1993 shall be deemed settled unless it was eligible to be processed and liquidated prior to August 27, 1993. 94. "Settlement Class Member" means any Person who is a member of the Settlement Class. -29- 86 95. "Settlement Class Order" means an order of the Court finally certifying the Settlement Class as a class under Rule 23(b)(1)(B) of the Federal Rules of Civil Procedure for settlement purposes. 96. "Settlement Conference Designee" is as defined in paragraph D.1 of the Trust Distribution Process. 97. "Subsidiary" means, with respect to any Person, any corporation or other entity in which that Person owns, directly or indirectly, securities or other ownership interest having ordinary voting power to elect a majority of the board of directors or other Persons performing similar functions. 98. "Surplus" means, as of any Distribution Date: (i) the Distributable Amount for the prior Fiscal Year, minus (ii) the aggregate amounts (other than payments from the Reserve Account) actually paid by the Trust for Trust Expenses, Class Member Claims, Third Party Claims and payments made pursuant to Section 7.16 of the Trust Agreement, in each case for such prior Fiscal Year. 99. "Termination Date" is as defined in Section 7.2 of the Trust Agreement. -30- 87 100. "Third Party Claim" shall mean any Personal Injury Asbestos Claim that is not a Class Member Claim, except for Settled Claims, Unsettled Claims or any claims arising directly or indirectly from any such Settled Claims or Unsettled Claims. 101. "Third Party Claimant" shall mean any Person having a Third Party Claim. 102. "Trust" means the trust referred to in Article V of the Global Settlement Agreement. 103. "Trust Agreement" means the Fibreboard Asbestos Compensation Trust Agreement among Continental, CNA Casualty, Columbia, Pacific, Fibreboard Corporation and the Trustees attached as Exhibit B to the Global Settlement Agreement. 104. "Trust Distribution Process" means Annex A to the Trust Agreement. 105. "Trust Estate" at any time means all assets of the Trust at such time. 106. "Trust Expenses" means all expenses of the Trust (including, without limitation, compensation, legal, accounting and other professional fees, -31- 88 expenses relating to the operation of a Claims Resolution Facility, an Other Claims Resolution Facility, disbursements and related expenses, administrative expenses, taxes and related expenses, the cost of liability insurance and reimbursement and indemnification payments), other than payments in respect of Class Member Claims and Third Party Claims and payments made pursuant to Section 7.16 of the Trust Agreement. 107. "Trustees" are as defined in Section 7.18 of the Trust Agreement. 108. "Trustors" mean Continental, CNA Casualty, Columbia, Pacific and Fibreboard Corporation. 109. "Unreimbursed Borrowings" means, as of any Distribution Date: (a) the aggregate of the Principal Amounts (not including any Increased Principal Amounts) and Earnings Amounts for all Fiscal Years prior to the Fiscal Year to which such Distribution Date relates, minus (b) the aggregate amounts (other than payments from the Reserve Account) actually paid by the Trust for Trust Expenses, Class Member Claims and Third Party Claims for all such prior Fiscal Years. -32- 89 110. "Unsettled Claims" shall mean claims of individuals for asbestos-related personal injuries brought against Fibreboard in lawsuits filed prior to August 27, 1993 and that are not Settled Claims. For purposes of this definition, "Unsettled Claims" shall include claims of persons who filed and for cash payment or some other negotiated value dismissed claims against Fibreboard and whose only retained right is to sue Fibreboard upon development of an asbestos-related malignancy. -33- 90 EXHIBIT B ----------------------------------------------------------------------- FIBREBOARD ASBESTOS COMPENSATION TRUST AGREEMENT ----------------------------------------------------------------------- 91 TABLE OF CONTENTS PAGE ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II DECLARATION OF TRUST . . . . . . . . . . . . . . . . . . . . . . 1 2.1 Name . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.2 Purposes . . . . . . . . . . . . . . . . . . . . . . . . 1 2.3 Transfer of Assets . . . . . . . . . . . . . . . . . . . 2 2.4 Acceptance of Assets and Assumption of Liabilities . . . . . . . . . . . . . . . . . . . . . . . 2 2.5 Maintenance of Trustor Privileges and Confidences . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE III POWERS; TRUST ADMINISTRATION . . . . . . . . . . . . . . . . . . 3 3.1 Powers . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.2 Administration . . . . . . . . . . . . . . . . . . . . . 10 3.3 Actions by Trustors . . . . . . . . . . . . . . . . . . . 14 3.4 Protection of Confidential Information from Disclosure to the Beneficiaries . . . . . . . . . . . . . 14 ARTICLE IV FUNDS, PAYMENTS AND INVESTMENTS . . . . . . . . . . . . . . . . 14 4.1 Funds . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.2 Payments . . . . . . . . . . . . . . . . . . . . . . . . 16 4.3 Investments . . . . . . . . . . . . . . . . . . . . . . . 16 4.4 Source of Payments . . . . . . . . . . . . . . . . . . . 20 ARTICLE V TRUSTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.1 Number . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.2 Term of Service . . . . . . . . . . . . . . . . . . . . . 21 5.3 Appointment of Successor Trustees . . . . . . . . . . . . 22 5.4 Liability of Trustees, Officers and Employees . . . . . . 23 5.5 Compensation and Expenses of Trustees . . . . . . . . . . 23 5.6 Indemnification of Trustees, Officers and Employees . . . . . . . . . . . . . . . . . . . . . . . . 24 5.7 Trustees' Employment of Experts . . . . . . . . . . . . . 24 ARTICLE VI SELECT COUNSEL FOR THE BENEFICIARIES . . . . . . . . . . . . . . 25 6.1 Formation; Duties . . . . . . . . . . . . . . . . . . . . 25 6.2 Term of Office . . . . . . . . . . . . . . . . . . . . . 26 6.3 Appointment of Successor . . . . . . . . . . . . . . . . 26 -i- 92 6.4 Compensation, Expenses and Liability of SCB Members . . . . . . . . . . . . . . . . . . . . . . . . 27 6.5 Resolution of Disputes Involving Approval of the Select Counsel for the Beneficiaries . . . . . . . 28 ARTICLE VII GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . 29 7.1 Irrevocability . . . . . . . . . . . . . . . . . . . . 29 7.2 Termination . . . . . . . . . . . . . . . . . . . . . . 29 7.3 Amendments . . . . . . . . . . . . . . . . . . . . . . 30 7.4 Severability . . . . . . . . . . . . . . . . . . . . . 30 7.5 Notices . . . . . . . . . . . . . . . . . . . . . . . . 31 7.6 Counterparts . . . . . . . . . . . . . . . . . . . . . 31 7.7 Successors and Assigns . . . . . . . . . . . . . . . . 31 7.8 No Waiver . . . . . . . . . . . . . . . . . . . . . . . 32 7.9 Headings; Section References . . . . . . . . . . . . . 32 7.10 Governing Law . . . . . . . . . . . . . . . . . . . . . 32 7.11 Dispute Resolution . . . . . . . . . . . . . . . . . . 33 7.12 Enforcement and Administration . . . . . . . . . . . . 33 7.13 Settlement of Trustees' Accounts . . . . . . . . . . . 33 7.14 No Bond Required . . . . . . . . . . . . . . . . . . . 33 7.15 Service of Process . . . . . . . . . . . . . . . . . . 34 7.16 Lawsuits Against Trustors . . . . . . . . . . . . . . . 34 7.17 No Disqualification of SCB . . . . . . . . . . . . . . 35 7.18 Initial Trustee; Powers . . . . . . . . . . . . . . . . 35 -ii- 93 FIBREBOARD ASBESTOS COMPENSATION TRUST AGREEMENT Trust Agreement ("Trust Agreement") dated as of December 23, 1993, among Continental, CNA Casualty, Columbia, Pacific, and Fibreboard Corporation, as Trustors and Francis McGovern, as Initial Trustee as provided in Section 7.18. NOW, THEREFORE, THIS TRUST AGREEMENT WITNESSETH AND IT IS HEREBY DECLARED as follows: ARTICLE I DEFINITIONS 1.1 Capitalized terms used in this Trust Agreement are defined herein or in the Glossary. ARTICLE II DECLARATION OF TRUST 2.1 Name. The Trust shall be known as the "Fibreboard Asbestos Compensation Trust," and the Trustees may transact the business and affairs of the Trust in that name. 2.2 Purposes. The purposes of the Trust are: (a) to use the assets in the Trust Estate efficiently to deliver fair and equitable compensation to all qualified Beneficiaries consistent with Trust resources, without overpaying or underpaying any Beneficiary and with settlement to be preferred -1- 94 over mediation, mediation to be preferred over arbitration, and arbitration to be preferred over resort to the tort system, all pursuant to the provisions of this Trust Agreement and the Trust Distribution Process; (b) to enhance and preserve the Trust Estate; (c) otherwise to carry out the provisions of this Trust Agreement and the Trust Distribution Process. 2.3 Transfer of Assets. On the date of Global Approval Judgment, the Trustors shall transfer and assign to the Trust the amounts provided for in Section 2.3(B) of the Global Settlement Agreement, having heretofore taken any and all steps necessary and prerequisite to such transfer. 2.4 Acceptance of Assets and Assumption of Liabilities. In connection with and in furtherance of its purposes, and subject to Section 5.4, the Trustees hereby agree to accept on behalf of the Trust the transfer of the assets described in Section 2.3 above and hereby further expressly agree on behalf of the Trust to assume liability or undertake responsibility for all Class Member Claims and those Third Party Claims for which the Trust is responsible under the Global Settlement Agreement and Trust Distribution Process. Except as otherwise provided in the Trust Distribution Process, the Trust shall have all defenses, cross claims, and rights to liens, offsets and recoupment that Fibreboard or any other Trustor would have had under applicable law with respect to the Class Member Claims and Third Party Claims to be assumed by the Trust. 2.5 Maintenance of Trustor Privileges and Confidences. The Trust shall maintain as privileged and confidential all information expressly designated as such -2- 95 which is provided to it by or on behalf of Fibreboard Corporation or any other Trustor, including without limitation information relating to Fibreboard's products and their distribution, the history of the conduct of Fibreboard's or any other Trustor's business, and Fibreboard's or any other Trustor's defenses and the history of Fibreboard's settlements in asbestos-related personal injury lawsuits. The Trust will not waive the privileged and confidential status of such information without the prior written consent of the Trustor which designated such information privileged and confidential. The Trust shall promptly upon receipt of any subpoena or other formal request for such information notify the Trustor which designated such information as privileged or confidential. ARTICLE III POWERS; TRUST ADMINISTRATION 3.1 Powers. (a) Subject to the limitations set forth in this Trust Agreement and the Trust Distribution Process, the Trustees shall have the powers to take any and all actions as in the judgment of the Trustees are necessary or convenient to effectuate the purposes of the Trust, including, without limitation, each power expressly granted in Subsection (b) below and any power reasonably incidental thereto. Unless otherwise specified in this Trust Agreement or the Trust Distribution Process, the Trustees may act by the vote of a majority. All actions by the Trustees shall be taken at a meeting (which may be by conference telephone call at which all participants may hear, and be heard by, -3- 96 each other) of all Trustees or by unanimous written consent that a particular action may be taken without a meeting; provided, however, that any such meeting at which at least two Trustees are present shall be deemed to satisfy the requirement of this sentence if notice of such meeting was given to all Trustees not less than five business days' prior thereto, or if all Trustees have executed, at or prior to such meeting, a waiver of such notice, and all Trustees are given the opportunity to participate in person or by such a conference telephone call. (1) The following actions may be taken only with the unanimous consent of the Trustees: (i) Joining in, engaging in or disengaging from an Other Claims Resolution Facility pursuant to Section 3.1(b)(iii), except that this action shall also require SCB approval. (ii) Appointment or removal of the chief executive officer, chief financial officer or general counsel pursuant to Section 3.1(b)(ix). (iii) Taking of structural or other actions to minimize tax on the Trust Estate pursuant to Section 3.2(b)(iv), except that this action shall also require SCB approval. (iv) Approval of annual and quarterly financial statements of the Trust pursuant to Sections 3.2(c)(i) and (ii); provided, however, that after a good faith effort to act unanimously, a majority of the Trustees may grant approval in a writing that shall include either comments of the Trustee who did not join in the approval reflecting the reasons for his or -4- 97 her failure to join in the approval or, if such Trustee is not willing to provide such comments, comments from the other Trustee or Trustees reflecting their understanding as to such reasons. (v) Approval of reports of claims dispositions pursuant to Section 3.2(c)(iii); provided, however, that after a good faith effort to act unanimously, a majority of the Trustees may grant approval in a writing that shall include either comments of the Trustee who did not join in the approval reflecting the reasons for his or her failure to join in the approval or, if such Trustee is not willing to provide such comments, comments from the other Trustee or Trustees reflecting their understanding as to such reasons. (vi) Approval of budgets and cash flow projections pursuant to Section 3.2(d); provided, however, that after a good faith effort to act unanimously, a majority of the Trustees may grant approval in a writing that shall include either comments of the Trustee who did not join in the approval reflecting the reasons for his or her failure to join in the approval or, if such Trustee is not willing to provide such comments, comments from the other Trustee or Trustees reflecting their understanding as to such reasons. (vii) Amendment or waiver of the Trust Agreement other than Sections 2.2, 2.3, 2.4, 2.5, 3.1, 3.2, 3.3, 4.1, 4.2, 4.3, 4.4, 5.1, 5.2, 5.3, 5.4, 5.6, 5.7, 7.1, 7.2, 7.3, 7.4, 7.7, 7.8, 7.11, 7.12, 7.13, 7.16, 7.17 and 7.18, except -5- 98 that any amendment or waiver of any provision of Article VI shall also require SCB approval. (viii) Approval of the fixed cash payment for Expedited Review Claims pursuant to Trust Distribution Process Section B.2. (ix) Approval of additional categories of Expedited Review Claims pursuant to Trust Distribution Process Section B.2, except that this action shall also require SCB approval. (x) Elimination or suspension of the Expedited Review Option for one or more categories of Class Member Claims pursuant to Trust Distribution Process Section B.2. (xi) Increase in the amount distributable in any Fiscal Year from the Principal Amount to the Increased Principal Amount in accordance with Appendix 1 to the Trust Distribution Process. (xii) Amendment or waiver of Section B.6 of the Trust Distribution Process (but only as to the amounts referred to therein, and except that any such amendment or waiver shall also require SCB approval) or Section F.3.a of the Trust Distribution Process (provided that no such amendment or waiver can advance the time for any payments referred to therein for any Fiscal Year in which any of the Increased Principal Amount was utilized). -6- 99 (xiii) Permitting another Person to join in any claims resolution facility established pursuant to Section 3.1(b)(ii), except that this action shall also require SCB approval. (2) The following actions shall require the approval of a majority of the Trustees and, unless the unanimous approval of the Trustees has been obtained, shall also require the approval of the SCB pursuant to Section 6.1: (i) Approval of the claim forms pursuant to Trust Distribution Process Section B.1. (ii) Approval of the Expedited Review Claim form pursuant to Trust Distribution Process Section B.2. (iii) Approval of form of release pursuant to Trust Distribution Process Section B.4. (iv) Requirement that Beneficiaries submit additional kinds of medical evidence in support of Class Member Claims pursuant to Trust Distribution Process Section B.4. (v) Selection of locations for mediations and arbitrations pursuant to Trust Distribution Process Section C.3. (3) Any provision of the Trust Agreement, the Trust Distribution Process, or the Glossary not expressly described above in Sections 3.1(a)(1) and (2) may be amended or waived with the unanimous approval of each of the Trustors and the Trustees, the approval of a majority of the SCB, and the approval of the Court, and not otherwise. -7- 100 (b) Without limiting the generality of Subsection (a) above, the Trustees shall have the power to: (i) receive and hold the Trust Estate, and invest monies held from time to time therein; (ii) establish, supervise and administer a Claims Resolution Facility; (iii) join in or with or engage an Other Claims Resolution Facility to reduce the costs of liquidating Class Member Claims and Third Party Claims; (iv) pay Trust Expenses, Class Member Claims and Third Party Claims Liquidated in accordance with the Trust Distribution Process; (v) borrow money and issue notes and other evidences of indebtedness (which notes or other evidences of indebtedness may exonerate the Trustees from personal liability with respect thereto) in the ordinary course of operations in order to finance the acquisition of equipment or to pay Trust Expenses; provided, however, that no such borrowing shall be for a term in excess of five years or for an amount in excess of $2 million outstanding at any time; (vi) take all actions contemplated hereunder with respect to the Funds of the Trust and establish such reserves and accounts within such Funds as may be useful in carrying out the purposes of the Trust; -8- 101 (vii) sue and be sued and participate, as a party or otherwise, in any judicial, administrative, arbitration or other proceeding, including, without limitation, in connection with any Claims Resolution Facility administered by or for the Trust; (viii) adopt and amend bylaws to govern the affairs of the Trust which are consistent with this Trust Agreement, the Trust Distribution Process and the Global Settlement Agreement; (ix) appoint such officers, including a chief executive officer, chief financial officer and general counsel, hire such employees and engage such legal, financial and other advisors and agents as the business of the Trust requires, pay the Trustees and the SCB subject to Sections 5.5 and 6.4 and pay such officers, employees, advisors and agents reasonable compensation; (x) enter into such other arrangements with third parties as are deemed by the Trustees to be useful in carrying out the purposes of the Trust (including, without limitation, engaging a Person to act as paying agent, depositary or custodian and pay such third parties reasonable compensation); (xi) enter into the indemnification agreements referred to in Sections 5.6, 6.4(c) and 7.16; (xii) enter into any contract or otherwise engage in any transaction with any Trustee or any Person affiliated with any Trustee, -9- 102 provided that such contract or such transaction is approved by the unanimous vote of the Trustees who are not parties to or otherwise involved in, and do not have an interest in, such contract or transaction; it being understood that the usual rules prohibiting fiduciaries from dealing with themselves as individuals or from dealing with respect to any matter in which they have a personal interest shall apply to the Trustees; and (xiii) make such elections and determinations with respect to taxes as are deemed by the Trustees to be useful in carrying out the purposes of the Trust. (c) The Trustees shall not have the power to guarantee or assume, directly or indirectly, any debt or borrowings of other Persons. 3.2 Administration. (a) The accounting period for the Trust shall be the Fiscal Year. The first Fiscal Year shall begin on the date of this Agreement and end on December 31 of the same year. The Trust shall use the accrual method of accounting under generally accepted accounting principles. (b) (i) The Trustees shall timely file such income tax and other returns and statements, and shall provide for and pay such Trust taxes, as are required to comply with applicable provisions of the Internal Revenue Code and of any state or local law and the regulations promulgated thereunder. -10- 103 (ii) For federal income tax purposes, the Trustees and the Trustors intend that the Trust will be taxable either as a Qualified Settlement Fund or a Designated Settlement Fund. Trustors agree to cooperate in providing such information or documents as the Trustees determine are useful for the preparation and filing of tax returns by the Trust. Each of the Trustors agrees to do such other and further things as may be reasonably requested by the Trustees in connection with the tax affairs of the Trust which shall not result in any tax liability or other material liability to any of the Trustors. (iii) The Trustees are hereby designated as the "administrator" of the Qualified Settlement Fund or Designated Settlement Fund for federal income tax purposes within the meaning of Treasury Regulations section 1.468B-2(k)(3). For federal income tax purposes, the taxable year of the Trust shall be the calendar year and the Trust shall use an accrual method of accounting. (iv) The Trustees are authorized to take such structural changes or other actions, as the Trustees deem prudent and appropriate in reducing or minimizing the effect of taxes on the Trust Estate, provided that such changes or actions do not result in any additional tax liability or other material liability to any of the Trustors or directly or indirectly amend any provision of this Agreement or the Trust Distribution Process that cannot be amended except pursuant to Section 3.1(a)(3). -11- 104 (c) (i) The Trustees shall cause to be prepared, and file with the Court, as soon as available and in any event within 90 days following the end of each Fiscal Year, an annual report containing financial statements of the Trust (including, without limitation, a balance sheet of the Trust as of the end of such Fiscal Year and a statement of operations for such Fiscal Year) audited by a nationally recognized firm of independent public accountants selected by the Trustees and certified by such firm. (ii) The Trustees shall cause to be prepared and file with the Court as soon as available and in any event within 45 days following the end of each of the first three quarters of each Fiscal Year, a quarterly report containing financial statements of the Trust (including, without limitation, an unaudited balance sheet of the Trust as of the end of such quarter and a statement of operations for such quarter), certified, subject to normal year-end adjustments (including without limitation as to consistency with the prior Fiscal Year's audited financial statements), by an appropriate officer of the Trust. (iii) Simultaneously with delivery of each set of financial statements referred to in Subsections (i) and (ii) above, the Trustees shall cause to be prepared, approve and file with the Court a report containing a summary (in reasonable detail) of the following information with respect to the period covered by the financial statement: -12- 105 (1) the number of Class Member Claims Liquidated; (2) the amount of investment income earned by the Trust and the fair market value of the assets of the Trust as of the last business day of the applicable accounting period; (3) the amount of Trust Expenses incurred by the Trust; and (4) a certification as to compliance with the Trust Agreement and Trust Distribution Process, specifically identifying any lack of compliance. (d) The Trustees shall cause to be prepared and approve not later than 30 days nor more than 60 days prior to the commencement of each Fiscal Year annual budgets and cash flow projections for the next five years of the Trust and budgets and cash flow projections for the remaining life of the Trust. The budgets and cash flow projections shall be based on the actual number and type of claims filed against the Trust, the income, expense and claims payment history of the Trust to date as well as projected trends in such items. (e) A copy of all financial statements, reports, budgets and cash flow projections (including any general historical information upon which such budgets and projections are based) prepared by the Trustees pursuant to this Section 3.2 shall be delivered to the SCB and each of the Trustors or their successors and assigns at the time of filing with the Court or, if not filed with the Court, at the time such documents are prepared. The Trustees shall petition the Court each year for approval of the annual -13- 106 financial statements and reports required by Section 3.2(c). The SCB and any of the Trustors shall have standing to object to and be heard on such financial statements and reports. The Trust will provide to any of the Insurers information which it may need in order to pursue any reinsurance claim. 3.3 Actions by Trustors. All actions by the Trustors shall be taken by unanimous vote, unless otherwise provided to the contrary in this Trust Agreement or the Trust Distribution Process. 3.4 Protection of Confidential Information from Disclosure to the Beneficiaries. Consistent with the purposes of the Trust, the Trustees have the authority and power to keep confidential from the Beneficiaries such information as the Trust may determine should be protected from disclosure in order to avoid prejudicing the Trust's position in negotiation, mediation, arbitration or litigation of claims presented to the Trust. Nothing contained in this Section 3.4 shall affect the right of the SCB, the Trustees or the Trustors to receive any such confidential information, provided that they shall only use such confidential information for the purpose of conducting their activities in such capacities. ARTICLE IV FUNDS, PAYMENTS AND INVESTMENTS 4.1 Funds. (a) There are hereby created within the Trust Estate three Funds, Fund I, Fund II and Fund III. -14- 107 (b) Fund I shall consist of all of the assets transferred to the Trust (including all accrued interest) less $210,000,000 which will be segregated and allocated to Funds II and III. The Trust shall invest the amounts in Fund I subject to the limitations set forth in Section 4.3. (c) Fund II shall consist of $200,000,000 segregated from the assets transferred to the Trust. The Trust shall invest the $200,000,000 subject to the limitations set forth in Section 4.3. No payments of any kind may be made from Fund II until at least 21 years after Global Approval Judgment. (d) Fund III shall consist of $10,000,000 segregated from the assets transferred to the Trust. The Trust shall invest the $10,000,000, subject to the limitations set forth in Section 4.3. No payments of any kind may be made from Fund III until at least 41 years after Global Approval Judgment. (e) Subject to Section 2.2 hereof, the Trustees may, from time to time, create additional reserves and accounts (all of which shall remain part of the Fund from which such amounts were created) within the Trust Estate as they may deem necessary, prudent or useful in order to provide for the payment of Trust Expenses, Class Member Claims and Third Party Claims assumed by the Trust, and may, with respect to any such reserve or account, restrict the use of monies therein. (f) Any investment earnings received with respect to, or other proceeds of, any asset held within any Fund (including any reserve or account which is a part thereof) created hereby or pursuant hereto shall be credited to, and shall be a part of, such Fund. -15- 108 4.2 Payments. Payments of Trust Expenses, Class Member Claims and Third Party Claims shall be made from Funds I, II and III and such other reserves or accounts as the Trustees may from time to time establish pursuant to Section 4.1(e). The maximum annual payments which may be made from such Funds for such Trust Expenses, Class Member Claims and Third Party Claims are set forth in Section E of the Trust Distribution Process. 4.3 Investments. Investment of monies held in the Trust Estate shall be administered in the manner in which individuals of ordinary prudence, discretion and judgment would act in the management of their own affairs with the goal of constructing a reasonably conservative portfolio which minimizes volatility. The Trust shall retain at least two nationally recognized, independent, professional investment advisers or managers to assist in investing the Trust Estate subject to the limitations contained in this Section 4.3. The Trust's investments shall be subject to each and every one of the following limitations and provisions, and, notwithstanding anything to the contrary in this Trust Agreement, the Trust shall not purchase or otherwise acquire the equity, debt obligations or other securities of, assets of, or any interest in any Person, or otherwise extend any credit to or make any investments in any Person other than the investments described below ("Permitted Investments"): (a) The Trust shall not (i) acquire, directly or indirectly, any equity interest in any Person if, immediately following such acquisition, the Trust would hold more than 5% of the equity in such Person or business enterprise, or (ii) hold, directly or indirectly, more than 10% of the equity interest in any Person. -16- 109 (b) The Trust may acquire and hold commercial paper if such commercial paper is rated "Prime-1" or higher by Moody's Investors Service, Inc. ("Moody's"), "A-1" or higher by Standard and Poor's Corporation ("S&P") or has been given an equivalent rating by another nationally recognized statistical rating agency. (c) The Trust may acquire and hold other corporate debt securities if such securities are rated "A1" or higher by Moody's, "A+" or higher by S&P, or have been given an equivalent investment grade rating by another nationally recognized statistical rating agency. (d) The Trust may acquire and hold equity securities constituting preferred stock if such preferred stock is rated "a1" or higher by Moody's, "A+" or higher by S&P or has been given an equivalent investment grade rating by another nationally recognized statistical rating agency. (e) The Trust shall not acquire or hold any equity securities of any Person unless such equity is in the form of securities which are traded on a national securities exchange in the United States or over the National Association of Securities Dealers Automated Quotation System. (f) The Trust may acquire and hold any equity securities constituting common stock if the long-term debt securities of the issuer are rated "A1" or higher by Moody's, or "A+" or higher by S&P or have been given an equivalent rating by another nationally recognized statistical rating agency. (g) The Trust may acquire and hold certificates of deposit issued by and bankers' acceptances of and interest bearing deposits with any U.S. commercial -17- 110 bank or any branch or agency of a non-U.S. bank licensed to conduct business in the U.S. having combined capital and surplus of not less than $1,000,000,000, if all publicly held long-term debt securities, if any, of such bank and the holding company, if any, of which such bank is a Subsidiary meet the standards set forth in Section 4.3(c). (h) The Trust may acquire and hold repurchase obligations if (1) in the opinion of the Trustees, they are adequately collateralized, (2) the collateral constitutes investment instruments that would otherwise constitute Permitted Investments hereunder and (3) such obligations are entered into with either a nationally recognized investment banking firm or a commercial bank meeting the requirements set forth in Section 4.3(g). (i) The Trust may acquire and hold marketable direct obligations issued or unconditionally guaranteed by the United States government or issued by any agency or instrumentality thereof. (j) The Trust may acquire and hold marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof if such securities are rated "A1" or higher by Moody's, "A+" or higher S&P, or have been given an equivalent rating by another nationally recognized statistical rating agency. (k) The Trust may acquire and hold equity, bond, money market and other funds organized under the laws of the United States or any state thereof that invest solely in any of the foregoing investments permitted under Sections 4.3(b) through (j). -18- 111 (l) The Trust may enter into futures and options arrangements, and interest rate and currency swap agreements, cap, floor and collar agreements, interest rate insurance, currency spot and forward contracts and other agreements or arrangements solely for the purposes or protecting against fluctuations in the principal of, or interest or currency exchange rates on, the Trust's investments, provided that the net obligations of the Trust in respect thereof shall not exceed 5% of the Trust Estate at any time. (m) The Trust shall not acquire or hold any obligations or securities denominated in a currency other than U.S. Dollars without substantially hedging against fluctuations in such currency, provided that the net obligations of the Trust in respect thereof shall not exceed 5% of the Trust Estate at any time. (n) The Trust shall not acquire or hold any equity, debt securities or other instruments or obligations of any Person (other than debt securities or other debt instruments described in Section 4.3(i) or any fund described in Section 4.3(k) investing solely in the foregoing) if the aggregate market value of all equity, debt securities and other instruments and obligations of such Person held by the Trust would exceed 5% of the aggregate value of the Trust Estate. (o) The Trust shall not (i) acquire any equity securities of any Person if, following such acquisition, the aggregate market value of all equity securities held by the Trust would exceed 50% of the aggregate value of the Trust Estate, or (ii) hold any equity securities to the extent that the aggregate market value of all equity -19- 112 securities held by the Trust would exceed 60% of the aggregate value of the Trust Estate. (p) The Trust may acquire and hold mutual funds investing in "baskets" of securities designed to track the performance of the S&P 500 stock index or the Lehman Brothers Aggregate Bond Index, provided that the aggregate obligations of the Trust in respect thereof, together with the aggregate market value of all equity securities held by the Trust, shall not exceed 60% of the aggregate value of the Trust Estate at any time. (q) The Trust may acquire and hold investments of a type not permitted under Subsections (b)-(l) or (p) above in an aggregate amount not to exceed 5% of the aggregate value of the Trust Estate at any time. 4.4 Source of Payments. All Trust Expenses and payments in respect of Class Member Claims and Third Party Claims shall be payable solely out of the Trust Estate. Neither the Trustees nor any officer, agent or employee of the Trust nor any of the Trustors nor any of their Subsidiaries nor any Affiliate, director, officer, employee or agent of the Trustors or any of their Subsidiaries nor any member of the SCB shall be liable for the payment of any Trust Expense, Class Member Claim or Third Party Claim or other liability of or on account of the Trust, and no Person shall look to any of the foregoing Persons for payment of any such expense or liability. -20- 113 ARTICLE V TRUSTEES 5.1 Number. Prior to the appointment of the Trustees hereunder, the provisions of Section 7.18 shall govern. Thereafter, there shall be three Trustees at all times (other than during the period contemplated by Section 5.3(b)), described as the Class A, B and C Trustees. Each Trustee shall be an individual who has substantial professional experience related to one or more of the purposes of the Trust and who is able to devote the necessary time and resources to his or her duties hereunder, it being understood that whenever possible any person named to serve as a Trustee will have experience concerning asbestos litigation, although failure to have such experience will not in and of itself disqualify any Person from service as a Trustee. No Trustee may simultaneously hold another office or position in the Trust. 5.2 Term of Service. (a) The initial term of the Class A, B and C Trustees are four, five and six years, respectively. Thereafter, each Trustee shall serve a five-year term. In each case the term of the Trustee shall be terminated upon death, resignation pursuant to Subsection (b) below or removal pursuant to Subsection (c) below. (b) Any Trustee may resign at any time by written notice to each of the remaining Trustees. Such notice shall specify a date when such resignation shall take effect, which shall not be less than 90 days after the date such notice is given unless all of the Persons entitled to appoint the resigning Trustee's successor under Section 5.3(a) consent to a different date. -21- 114 (c) Any Trustee may be removed for cause by the Court upon application of any of the Trustors or a majority of the SCB. (d) Any Trustee may be reappointed for additional terms. (e) Any successor Trustee filling an unexpired term shall serve until the end of such term. 5.3 Appointment of Successor Trustees. (a) In the event of a vacancy in the position of a Trustee, the vacancy shall be filled by the SCB in the case of a Class A or Class B Trustee or by the Trustors in the case of the Class C Trustee. (b) If the SCB or the Trustors, as the case may be, fail to appoint a successor Trustee pursuant to Subsection (a) above who accepts such appointment in writing within 90 days after the occurrence of the vacancy in the position of a Trustee, the remaining Trustees shall apply to the Court, which shall appoint a successor Trustee or successor Trustees. For a period of 10 days after the occurrence of the vacancy in the position of a Trustee, no vote on any action requiring the unanimous consent of the Trustees shall be permitted to occur. (c) Immediately upon the appointment of any successor Trustee, all rights, titles, duties, powers and authority of the predecessor Trustee hereunder shall be vested in and undertaken by the successor Trustee without any further act. No successor Trustee shall be liable personally for any act or omission of his or her predecessor, or for any Trust act or omission which occurred prior to his or her -22- 115 appointment, unless such act or omission is expressly ratified by the successor Trustee after his or her appointment. 5.4 Liability of Trustees, Officers and Employees. No Trustee, officer or employee of the Trust shall be liable to the Trust, any Beneficiary or any other Person except for his own gross negligence or willful misconduct. No Trustee, officer or employee of the Trust shall be liable for any act or omission of any other officer, agent or employee of the Trust unless the Trustee, officer or employee acted with gross negligence or willful misconduct in the selection or retention of such officer, agent or employee. 5.5 Compensation and Expenses of Trustees. (a) Each of the Trustees shall receive compensation from the Trust for his or her services as Trustee in the amount of $100,000 per annum plus, after the first 12 days during which the Trustee has performed the services described below in this sentence, $1,000 per diem for each meeting of the Trustees or any committee or subcommittee thereof attended by such Trustee, reduced proportionately to account for any fraction of a day spent on such duties in the case of any such meeting not attended in person, or for special duties performed by such Trustee on behalf of the Trust, reduced proportionately to account for any fraction of a day spent on such duties, and $500 for each day of substantial travel in connection with attendance at any such meeting or performance of any such special duties. Such compensation amounts shall be increased or decreased annually at the rate of the Consumer Price Index for urban wage earners and clerical workers (U.S. City Average) unadjusted for seasonal variation, -23- 116 published by the Bureau of Labor Statistics of the United States Department of Labor, or otherwise by the Trustees with the approval of the Court. In the event that at any time the Trustees determine that the amount of time required to perform their duties as Trustees has substantially decreased, they shall in good faith determine whether a reduction in their compensation is warranted. (b) All reasonable out-of-pocket costs and expenses incurred by the Trustees in connection with the performance of their duties hereunder shall be paid by the Trust or, if paid by a Trustee, shall be promptly reimbursed to such Trustee by the Trust. 5.6 Indemnification of Trustees, Officers and Employees. The Trustees, officers and employees of the Trust shall be indemnified by the Trust to the fullest extent permitted under applicable law against any and all liabilities, expenses, claims, damages or losses incurred by them in the performance of their duties hereunder, except any liability, expense, claim, damage or loss as to which they are liable under Section 5.4. The Trustees, officers and employees of the Trust shall be entitled to advancement of attorneys' fees and expenses from the Trust for the purposes set forth in this Section 5.6 to the fullest extent permitted under applicable law. 5.7 Trustees' Employment of Experts. The Trustees may, but shall not be required to, consult with independent, outside counsel, accountants, appraisers, investment bankers and other parties reasonably selected and determined in good faith by the Trustees to be qualified as experts on the matters submitted to them, except as otherwise expressly provided in this Trust Agreement, and the opinion of any such -24- 117 parties on any matters submitted to them by the Trustees shall be full and complete justification for any action taken or not taken by the Trustees hereunder in good faith and in reasonable reliance upon the written opinion of any such expert. ARTICLE VI SELECT COUNSEL FOR THE BENEFICIARIES 6.1 Formation: Duties. The SCB shall consist of five lawyers chosen to represent the interests of the Beneficiaries, and the initial four SCB lawyers shall be Joseph Rice; Joseph Cox; Harry Wartnick; and Steven Kazan. The fifth SCB lawyer shall be selected unanimously by the initial four lawyers on or before January 14, 1994. If the initial four SCB members are unable to reach unanimous agreement on the identity of the fifth SCB member, the four SCB members shall appear in Court on January 17, 1994, and with the assistance of the Court, work day to day until agreement is reached. In giving their approval or in acting pursuant to this Agreement the members of the SCB shall act in the best interests of the Beneficiaries and consistent with the purposes of the Trust. The SCB shall hold an annual meeting to which all lawyers who have submitted a Class Member Claim to the Trust during the past five years shall be invited and be entitled to be present. The SCB shall give a report to the annual meeting describing the activities of the Trust for the prior year, including any approvals given by the SCB pursuant to this Agreement and/or the Trust Distribution Process and all matters on which the Trustees have indicated that they intend to seek the approval of the SCB during the following year. In giving approval to the Trustees, the SCB shall -25- 118 consider in good faith all recommendations made at such annual meeting. The Trustees shall consult with the SCB on the implementation and administration of the Trust Distribution Process. The Trustees may consult with the SCB on any matter affecting the Trust, and, as provided in Section 3.1(a), certain actions by the Trustees shall require the prior approval of the SCB. All approvals of the SCB shall be by majority vote. 6.2 Term of Office. (a) Each member of the SCB shall serve for the duration of the Trust, subject to the earlier of his or her death, resignation, or removal. (b) Subject to section 6.3(a) hereof, any member of the SCB may resign at any time by written notice to each of the remaining members specifying the date when such resignation shall become effective. (c) Any member of the SCB may be removed for cause by the Court upon joint application of all of the other SCB members. 6.3 Appointment of Successor. (a) A vacancy in the SCB caused by the resignation of an SCB member shall be filled with an individual nominated by the resigning SCB member and approved by the unanimous vote of all SCB members. The resigning SCB member's resignation shall not be effective until such approval is obtained and the successor SCB member has accepted the appointment. (b) In the event of a vacancy in the membership of the SCB other than one caused by resignation as aforesaid, the vacancy shall be filled by the unanimous vote of the remaining member(s) of the SCB. -26- 119 6.4 Compensation Expenses and Liability of SCB Members. (a) Each member of the SCB shall receive compensation from the Trust for his or her services in the amount of $1,000 per diem for travel related to and attendance at the SCB meetings attended in person by such member, and $1,000 per diem (adjusted proportionately to account for any fraction of a day spent on, or in travel in connection with, such duties) for work done by the members of the SCB (other than attending SCB meetings in person) in carrying out their duties and responsibilities under the Trust Agreement. Such compensation shall be payable as determined the Trustees, but not less frequently than quarterly. Such per diem amount shall be increased or decreased annually pro rata with the amount that the per diem for meetings paid to the Trustees is increased or decreased pursuant to Section 5.5. (b) The reasonable out-of-pocket costs and expenses incurred by SCB members in connection with the performance of their duties hereunder, together with the reasonable fees and expenses of their counsel, shall be paid by the Trust or, if paid by a member of the SCB, shall be promptly reimbursed to such member by the Trust. (c) Liability of SCB. No present or former member of the SCB shall be liable to the Trust, any Beneficiary or any other Person except for his own gross negligence or willful misconduct. All present or former members of the SCB shall be indemnified by the Trust to the fullest extent permitted under applicable law against any and all liabilities, expenses, claims, damages or losses incurred by them in the performance of their duties hereunder or in serving as Class Counsel, except any liability, -27- 120 expense, claim, damage or loss as to which they are liable under this Section. No present or former member of the SCB shall be liable personally for any act or omission of his or her predecessor, or for any act or omission of the SCB which occurred prior to his or her appointment, unless such act or omission is expressly ratified by such person after his or her appointment. The present and former members of the SCB shall be entitled to advancement of attorneys' fees and expenses from the Trust for the purposes set forth in this subsection (c) to the fullest extent permitted under applicable law. 6.5 Resolution of Disputes Involving Approval of the Select Counsel for the Beneficiaries. (a) Approval Procedures. In any circumstance arising under this Trust Agreement or the Trust Distribution Process where the Trust makes a decision with respect to matters which require the approval of the SCB, the Trust shall: (i) provide the SCB with reasonable access to experts retained by the Trust and to Trust staff during such time as the decision is being made; (ii) bring the proposed decision to the attention of the SCB; and (iii) unless the circumstances prevent, provide the SCB no fewer than 10 days to comment with respect to such proposed decision. In the event the SCB disagree with the Trust's decision, they shall express their view as fully as possible to the Trust and make such counterproposal as may be appropriate. The Trust and the SCB shall thereupon consult in an effort to reach agreement. -28- 121 (b) Approval in Writing. The approval of the SCB, when required under the Trust Agreement or the Trust Distribution Process, must be in writing to be effective; provided, however, that in the event the SCB fails to approve or disapprove an action requiring SCB approval pursuant to Section 3.1(a) within 30 days of notice of proposed action by the Trust, the SCB shall be deemed to have approved such action. (c) Access to Financial Information. Subject to entry into an appropriate confidentiality agreement where applicable, the Trust shall make available to the SCB any investment banking or other financial, accounting or statistical information available to the Trust relating to issues to be discussed and/or as to which the approval of the SCB is required. ARTICLE VII GENERAL PROVISIONS 7.1 Irrevocability. The Trust is irrevocable. 7.2 Termination. (a) The Trust shall terminate on the date (the "Termination Date") which is the earlier of (1) the first date on which all Class Member Claims and Third Party Claims filed with or against the Trust have been resolved, 24 consecutive months have elapsed during which no such claim has been filed with the Trust and approval of such termination by the Court has been obtained upon joint application of all of the Trustees and a majority of the SCB; or (2) 21 years less 91 days pass after the -29- 122 death of the last survivor of any of the descendants of Joseph P. Kennedy living on the date hereof. (b) On the Termination Date, after payment of all liabilities of the Trust have been provided for, the Trust shall be dissolved, and all of the Trust's assets shall be applied to such charitable purposes as the Trustees in their reasonable discretion, after consultation with the SCB, shall determine, which charitable purposes, if practicable, shall relate to occupational health. 7.3 Amendments. (a) This Trust Agreement may only be amended or waived as provided in Section 3.1(a). Thirty days' advance written notice of any proposed amendment or waiver shall be given to the SCB and the Trustors. (b) The Trust Distribution Process may only be amended or waived as provided in Section 3.1(a) of this Trust Agreement and, where applicable, Section H.7 of the Trust Distribution Process. Thirty days' advance written notice of any proposed amendment or waiver of the Trust Distribution Process shall be given to the SCB, the Trustors and, where appropriate,the Representative Defendant. (c) The definitions used in this Trust Agreement or in the Trust Distribution Process and contained in the Glossary may be amended or waived only if and in the same manner as the Section of this Trust Agreement or the Trust Distribution Process in which such definition is used may be amended or waived. 7.4 Severability. Should any provision of this Trust Agreement or the Trust Distribution Process be determined to be unenforceable, such determination shall -30- 123 in no way limit or affect the enforceability and operative effect of any and all other provisions of this Trust Agreement or the Trust Distribution Process. 7.5 Notices. Notices to Persons asserting claims shall be given at the address of such Person, or, where applicable, such Person's legal representative, in each case as provided on such Person's proof of claim. Any notices or other communications required or permitted hereunder shall be in writing and (a) delivered at, or sent by telex or telecopy to, the addresses designated in Section 8.13 of the Global Settlement Agreement or, in the case of the Trustees, the addresses provided by the Trustees to the Trust, the SCB and the Trustors, or (b) mailed by registered or certified mail, return receipt requested, postage prepaid, addressed as aforesaid, or to such other address or addresses as may hereafter be furnished by any of the Trustors, the Trust or the Trustees or the SCB to the others. All such notices and communications shall be effective when delivered at the designated addresses or when the telex or telecopy communication is received at the designated addresses and confirmed by the recipient by return telex or telecopy in conformity with the provisions hereof. 7.6 Counterparts. This Trust Agreement may be executed in any number of counterparts, each of which shall constitute an original, but such counterparts shall together constitute but one and the same instrument. 7.7 Successors and Assigns. The provisions of this Trust Agreement shall be binding upon and inure to the benefit of the Trustors, the Trust, the Trustees, the SCB and their respective successors and assigns, except that neither the Trustors nor -31- 124 the Trust nor any Trustee, nor the SCB members may assign or otherwise transfer any of its, his or her rights or obligations under this Trust Agreement except, in the case of the Trust and the Trustees, as contemplated by Section 7.2. 7.8 No Waiver. No failure to exercise or delay in exercising any right, power or privilege hereunder or under the Trust Distribution Process shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder or under the Trust Distribution Process preclude any further exercise thereof or any other right, power or privilege. The rights and remedies provided herein or in the Trust Distribution Process are cumulative and are not exclusive of rights under law or in equity. 7.9 Headings: Section References. The headings used in this Trust Agreement and in the Trust Distribution Process are inserted for convenience only and neither constitute a portion of this Trust Agreement or the Trust Distribution Process nor in any manner affect the construction of the provisions of this Trust Agreement or the Trust Distribution Process. All references in this Trust Agreement or in the Trust Distribution Process to "Sections," unless otherwise expressly indicated, shall be deemed to refer to sections of the document in which such reference appears. 7.10 Governing Law. This Trust Agreement and the Trust Distribution Process shall be governed by, administered under and construed in accordance with, the laws of the State of Texas. -32- 125 7.11 Dispute Resolution. Any disputes which arise under this Trust Agreement or the Trust Distribution Process shall be resolved by the Court, except as otherwise provided herein or in the Trust Distribution Process. 7.12 Enforcement and Administration. The provisions of this Trust Agreement and the Trust Distribution Process shall be enforced and administered by the Court. 7.13 Settlement of Trustees' Accounts. Notwithstanding any state law to the contrary, the Court shall have exclusive jurisdiction over the settlement of the accounts of the Trustees, whether such account is rendered by the Trustees themselves or is sought by any Beneficiary or other Person. The Trustees shall render successive accounts covering periods of not more than one Fiscal Year, commencing on the first completed Fiscal Year of the Trust or the last day of the prior accounting period, as the case may be, except that an account shall be rendered for the period ending on the date of the death, resignation, removal or retirement of any Trustee. Upon the acceptance of any such account by the Court after hearing on notice to the SCB, the Trustors and such other parties as the Court shall designate, the Trustees shall be discharged from any further liability or responsibility to any Beneficiary or other Person as to all matters embraced in such account. 7.14 No Bond Required. Notwithstanding any state law to the contrary, each Trustee (including any successor Trustee) shall be exempt from giving any bond or other security in any jurisdiction. -33- 126 7.15 Service of Process. Service of process upon any of the Trustees in an action or proceeding under Sections 7.11, 7.12 or 7.13 shall be effective upon delivery to the address set forth in Section 7.5. Successor Trustees, by acceptance of their appointment as such, shall be deemed to have approved this method of service. 7.16 Lawsuits Against Trustors. Except as provided in Section 2.4(a) of the Global Settlement Agreement as to Fibreboard Corporation, the Trust shall defend and indemnify the Fibreboard, Continental and Pacific Releases against and hold them harmless from any costs, fees, claims, liabilities, settlements or judgements incurred or occurring after Global Approval Judgement and resulting, directly or indirectly, from the assertion against any of them of any Class Member Claim or Third Party Claim. This obligation shall include without limitation any such claim to the extent that, after Global Approval Judgment, that claim attacks the validity or enforceability of the Global Approval Judgment, but shall exclude any Additional Policy Claims or Express Indemnity Claims that are the subject of a waiver by the Insurers or Fibreboard under Section 6.3(C) of the Global Settlement Agreement. The defense of any such lawsuit will be tendered to the Trust and any defense costs or indemnity obligation will be paid by the Trust for so long as funds remain in Funds I, II and III. The Trustors may, at their own expense, elect to participate with the Trust in the defense of any such action or claim. Amounts paid to or on behalf of the Fibreboard, Continental and Pacific Releasees pursuant to this Section shall not be limited in any manner, including by the provisions of Section E of the Trust Distribution Process. The provisions of this -34- 127 Section 7.16 shall only be applicable after Global Approval Judgment, subject to Section 2.7(B) of the Global Settlement Agreement. 7.17 No Disqualification of SCB. No member of the SCB shall be disqualified solely by reason of his or her service as an SCB member from serving as counsel for any Class Member in connection with submission of any Class Member Claim to the Trust, nor shall service as such counsel be deemed to create a conflict of interest with respect to service to the Trust as an SCB member. No SCB member shall take any action in his or her capacity as such that would prefer the interests of his or her clients over the interests of similarly situated Beneficiaries generally. 7.18 Initial Trustee; Powers. In the event that as of the date of execution of the Global Settlement Agreement, the Trustees have not been selected, then: (a) On that date, the Trustors shall contribute $100 to the Trust. Francis McGovern shall be the sole initial trustee ("Initial Trustee"). The Initial Trustee shall have only the power to take those ministerial and administrative actions necessary or desirable to apply for a letter ruling from the Internal Revenue Service pursuant to Section 8.1 of the Global Settlement Agreement and preserve the existence of the Trust until Trustees are appointed hereunder. The Initial Trustee shall not have authority to make any discretionary decisions, waivers or amendments to the Trust Agreement. (b) No later than January 14, 1994, the Trustors and the Class Counsel (as defined in the Global Settlement Agreement) shall select three trustees, who shall be the original Class A, Class B and Class C Trustees (such persons, and their successors appointed pursuant to Section 5.3, being referred to as the "Trustees"). -35- 128 Trustors and Class Counsel have agreed to confer to attempt to reach joint agreement as to the selection of all three original Trustees. If Trustors and Class Counsel cannot agree, Class Counsel will unanimously select the Class A and B Trustees and Trustors will unanimously select the Class C Trustee. Absent agreement among Class Counsel as to the selection of the Class A and B Trustees, or among Trustors as to the selection of the Class C Trustee, all Class Counsel and/or all Trustors agree to appear in Court on January 17, 1994, and with the assistance of the Court, to work from day to day until agreement on the selection of the Trustee(s) for whom they are responsible is reached. Upon acceptance of this Trust Agreement by the original Class A, Class B and Class C Trustees, the Initial Trustee shall resign. IN WITNESS WHEREOF, the parties have executed this Trust Agreement on this 23rd day of December, 1993. TRUSTORS: FIBREBOARD CORPORATION By: /s/ MICHAEL R. DOUGLAS ---------------------------------------- Title: Senior Vice President & General Counsel ---------------------------------------- COLUMBIA CASUALTY COMPANY By: /s/ LAURENS F. TERRY ---------------------------------------- Title: Vice President ---------------------------------------- CONTINENTAL CASUALTY COMPANY By: /s/ LAURENS F. TERRY ---------------------------------------- Title: Vice President ---------------------------------------- -36- 129 CNA CASUALTY COMPANY OF CALIFORNIA By: /s/ LAURENS F. TERRY ---------------------------------------- Title: Vice President ---------------------------------------- PACIFIC INDEMNITY COMPANY By: /s/ JOHN J. DEGNAN ---------------------------------------- Title: Senior Vice President ---------------------------------------- INITIAL TRUSTEE: /s/ M. IWEN ------------------------------------------------- -37- 130 TRUST DISTRIBUTION PROCESS ANNEX A TO THE TRUST AGREEMENT 131 TABLE OF CONTENTS
Page ---- A. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 B. The Claim Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1. Submitting a Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2. Expedited Review Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3. Ordering of Claims for Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 4. Initial Evaluation of Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 5. Further Claims Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 6. Second (Malignant) Injury Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 7. Audit Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 8. Exigent Health and Extreme Hardship Claims . . . . . . . . . . . . . . . . . . . . . . . . 9 9. Withdrawal of Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 C. ADR Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1. Mediation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2. Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3. Location for ADR Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 D. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1. Mandatory Settlement Conference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2. Procedural Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 E. Funds for Payment of Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 1. Fund I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 a. Commencement of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 b. Distributable Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 c. Distribution of Remaining Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2. Fund II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 a. Commencement of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 b. Distributable Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 c. Distribution of Remaining Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . 21 3. Fund III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 a. Commencement of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 b. Distributable Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 c. Distribution of Remaining Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . 22 4. Determination of Distributable Amount for Each Fund . . . . . . . . . . . . . . . . . . . 22 F. Order, Timing and Limitations on Payments of Claims . . . . . . . . . . . . . . . . . . . . . 22 1. Eligibility for Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2. Order of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
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3. Terms of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 a. Claims Resolved Outside the Tort System . . . . . . . . . . . . . . . . . . . . . . . 25 b. Claims Resolved in the Tort System . . . . . . . . . . . . . . . . . . . . . . . . . 25 4. Deferral of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5. Limitation on Payment of Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 G. All Claims Resolved Pursuant to the Trust Distribution Process . . . . . . . . . . . . . . . 27 H. Defendant Class Member Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 1. Claims Liquidated Before Judgment Against Defendant Class Members . . . . . . . . . . . . 29 a. Calculation of Set-Off Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 b. Status of the Trust at Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 c. Discovery and Informational Issues . . . . . . . . . . . . . . . . . . . . . . . . . . 31 2. Claims Not Liquidated When Verdict or Judgment Obtained Against Defendant Class Members . 31 a. Effect of Verdict or Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 b. Retention of Several Liability Claim . . . . . . . . . . . . . . . . . . . . . . . . . 32 c. Payment of Verdict or Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 3. Tort System Claims Against the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 4. Litigation Between Defendant Class Members and Settlement Class Members . . . . . . . . . 34 5. Pursuit of Third Party Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 a. Defendant Class Member to Stand in Settlement Class Members' Stead . . . . . . . . . . 35 b. Resolution of Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 c. Processing and Payment of Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 d. Multiple Claims or Multiple Third Party Claims . . . . . . . . . . . . . . . . . . . . 37 6. Cooperation for Court Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 7. No Modification Without Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 I. Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 J. Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 APPENDIX 1 TO THE TRUST DISTRIBUTION PROCESS . . . . . . . . . . . . . . . . . . . . . . . . . . A-1 SCHEDULE A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
-ii- 133 TRUST DISTRIBUTION PROCESS ANNEX A TO THE TRUST AGREEMENT This Trust Distribution Process creates the procedures for submitting, processing and paying Class Member Claims and Third Party Claims. Capitalized terms used in this Trust Distribution Process are defined herein or in the Glossary. A. OVERVIEW. The primary goal of the Trust is fair and equitable treatment for all Beneficiaries consistent with Trust resources. This Trust Distribution Process furthers that goal by establishing procedures that are intended to process and evaluate Class Member Claims of Beneficiaries impartially, pay all Class Member Claims over time, and maintain reasonable reserves for any Class Member Claims in excess of projections. The Trustees shall implement and administer this Trust Distribution Process in accordance with their duties under the Trust Agreement. The claims resolution process begins with a proof of claim. The Trust then makes a determination whether the claim meets the criteria for any of the five Scheduled Diseases: Mesothelioma, Lung Cancer, Other Cancer, Asbestos Lung Disease I ("ALD-1") and Asbestos Lung Disease II ("ALD-2"). If the claim meets the criteria for a Scheduled Disease, it will be evaluated based on factors that have significance in the resolution of similar claims by settlement or trial, including but not limited to the factors set forth in Schedule A hereto. If the claim does not meet the criteria for one of the -1- 134 Scheduled Diseases, the Trust will evaluate whether it nonetheless asserts a compensable claim for an asbestos-related injury. After evaluation, the Trust will make a good faith settlement offer or advise the Beneficiary of the reasons for rejecting the claim. The Beneficiary may either accept or reject that offer or negotiate further with the Trust. If the Beneficiary rejects the Trust's offer, he or she may submit supplemental information to the Trust and have his or her claim reevaluated by the Trust and/or negotiate further with the Trust. If negotiation with the Trust fails, the Beneficiary shall, if he or she wishes to pursue the claim, proceed to mediation and then to binding or nonbinding arbitration. Beneficiaries may bring an action against the Trust in the tort system only after they have participated in good faith in both mediation and nonbinding arbitration and have rejected the award in a nonbinding arbitration. Beneficiaries must also appear at a mandatory settlement conference under the auspices of the Court before proceeding to the tort system. If a Beneficiary rejects settlement following the settlement conference, he or she may elect immediate binding arbitration or exit to the tort system. No punitive damages, pre-judgment or post-judgement interest, damages for risk of cancer, or compensatory damages beyond Fibreboard's own share will be allowable in the tort system. Judgments may be collected only as provided in this Trust Distribution Process. Similar claims-handling procedures (described in Section H below) apply to certain Third Party Claims including those of Defendant Class Members who succeed to Class Member Claims. -2- 135 Class Member Claims and Third Party Claims will be eligible for payment once they are Liquidated, whether by settlement, arbitration, or judgment. Judgments or claims settled after exit to the tort system will normally be paid out over a five-year period, while claims resolved without resort to the tort system will normally be paid out over a three-year period. Total payments from the Trust in each year for Trust Expenses, Class Member Claims and Third Party Claims are limited to the amounts set forth in Section E. While the Trust is expected to be able to pay all claims as Liquidated yearly, if amounts available are insufficient to make all payments due on Liquidated claims in any year, claims for Mesothelioma and Lung Cancer will be paid first, then Other Cancer and ALD-1 claims, then ALD-2 claims, and then Residual Claims, whether any such claims have been Liquidated by settlement, arbitration or judgment. Within each of those categories, claims will be paid in the order of the date on which a release is received by the Trust (for settled claims), an arbitration ruling is rendered (for claims resolved through arbitration) or a judgment becomes final (for claims resolved in the tort system). Class Member Claims and Third Party Claims which cannot be paid because the amount available for that year is insufficient to make all payments due on such claims will be deferred for payment (FIFO within their payment categories) until the following year. B. THE CLAIM PROCEDURE. 1. SUBMITTING A CLAIM. Other than Interim Claims submitted pursuant to Article 7 of the Global Settlement Agreement, commencing on February 14, 1994, any Beneficiary may submit a claim to the Trust. To do so, the Beneficiary shall provide to -3- 136 the Trust, on forms approved by the Trustees and the SCB, a proof of claim including at least the following information concerning the Exposed Person: name, address, social security number, date of birth, date of death (if applicable), marital status and number and age of dependents, spouse's name and social security number, occupation, smoking history, year of first exposure to any asbestos or asbestos-containing products, identification and source of identification of asbestos-containing products manufactured or supplied by Fibreboard to which the Exposed Person was exposed, the work sites where the Exposed Person was exposed to asbestos or to Fibreboard asbestos, the years of such exposures including specific descriptive comments concerning the duration and intensity of such exposure, the status of related workers compensation or civil litigation regarding asbestos exposure, and the Scheduled Disease, if any, for which the Beneficiary believes the claim qualifies or a statement of the disease or injury the Beneficiary asserts he or she has if he or she does not believe he or she qualifies for a Scheduled Disease. In addition, the Beneficiary shall provide the Trust with a Medical Report, a PFT Report and a B-reader Report, and, in Malignancy Claims, a pathology report (where available). 2. EXPEDITED REVIEW OPTION. The Trust may establish a process for expedited review of ALD-2 claims by persons desiring an accelerated settlement of their claim at a fixed amount ("Expedited Review Claims"). A Beneficiary seeking such expedited review shall submit an abbreviated proof of claim for expedited review by the Trust. The abbreviated proof of claim shall provide the following information concerning the Exposed Person: name, address, social security number, date of birth, date of death (if applicable), marital status, spouse's name and social security number, occupation, the -4- 137 Scheduled Disease for which the Beneficiary believes the claim qualifies, the work sites where the Exposed Person was exposed to asbestos or to Fibreboard asbestos and such information requested by the Trust that adequately demonstrates exposure to asbestos or asbestos-containing products and to Fibreboard asbestos or asbestos-containing products. In addition, the Beneficiary shall supply the Trust with a Medical Report. The Trust will expeditiously review the abbreviated proof of claim and may, but is not required to, offer to settle such Expedited Review Claims for a single fixed cash payment of an amount and on a time schedule established from time to time by the Trust. If the Trust determines not to offer to settle an Expedited Review Claim, the Beneficiary may submit a proof of claim as set forth in Section B.1. The Trust may establish additional categories of Expedited Review Claims with differing fixed cash payments and differing information requirements. In addition, the Trust may eliminate or suspend the Expedited Review Claim option for one or more categories of Class Member Claims if it determines that such option is encouraging the filing of claims that would not otherwise be eligible for payment under these procedures or is using a disproportionate share of the Trust's assets. 3. ORDERING OF CLAIMS FOR PROCESSING. Claims shall be ordered for processing by the Trust in the manner described in this Section. As a general practice, the Trust shall review its claims files on a regular basis and notify all Beneficiaries whose claims are likely to be processed in the near future. A Beneficiary's position in the FIFO queue for processing will be determined by the date of receipt by the Trust of a properly completed proof of claim form, and among claims received the same day, by the date of -5- 138 diagnosis of the disease on which the claim is based. Where the Beneficiary has filed an incomplete proof of claim, the Trust shall notify the Beneficiary of the need for additional information and shall not process the claim until the file is complete. A Beneficiary shall not receive a position in the FIFO processing queue until his or her proof of claim is properly completed. 4. INITIAL EVALUATION OF CLAIMS. As a proof of claim is reached in the FIFO queue, the Trust shall evaluate it to determine whether the claim qualifies as one of the five Scheduled Diseases. A Beneficiary's right to assert a valid claim for an asbestos-related injury or disease is in no way prejudiced by failure of his or her asbestos-related injury or disease to qualify as one of the Scheduled Diseases. If a Scheduled Disease is determined to exist, the Trust shall evaluate the Beneficiary's claim using factors relevant to the resolution of asbestos claims for that Scheduled Disease by settlement or trial, including the factors set forth in Schedule A hereto. If the Trust concludes that the Beneficiary's injury or disease does not meet the criteria for a Scheduled Disease, it shall determine whether the Beneficiary nonetheless asserts a meritorious claim for an asbestos-related injury or disease and shall evaluate the claim using factors relevant to the resolution of similar claims by settlement or trial. If the Trust accepts for disposition a claim with respect to a disease which is not a Scheduled Disease, the Trust shall place it in a Schedule Category based on which Scheduled Disease it most closely resembles. In addition to the medical evidence which Beneficiaries are required to submit with initial proof of claim or submit as part of any supplemental information -6- 139 provided to the Trust, the Trust may require that additional kinds of medical evidence be provided. The Trust may obtain additional medical evidence which it believes necessary to evaluate any claim. Once its evaluation is completed, the Trust shall make a written good faith offer of settlement based upon such evaluation or advise the Beneficiary of the reasons for rejecting the claim. Such responses shall be sent to the Beneficiary's counsel or representative, if any, or to the Beneficiary. The claim shall not be processed further until the Trust receives a response from the Beneficiary. The Beneficiary and the Trust shall then negotiate in good faith toward a resolution of the claim. Once the Trust receives confirmation of resolution of the claim, it shall forward an appropriate form of release approved by the Trust to the Beneficiary's counsel or representative, or to the Beneficiary. The claim's eligibility for payment under Section F shall be based on the date the executed release with respect to a resolved claim is received by the Trust. 5. FURTHER CLAIMS PROCESSING. If the Beneficiary rejects the Trust's initial offer, he or she may elect to negotiate further with the Trust and may submit additional information to the Trust in support of the claim. Alternatively, he or she may proceed to mediation as set forth below. The Trust shall evaluate claims based on the medical evidence submitted to the Trust as part of the Beneficiary's proof of claim. A Beneficiary may, but need not, supplement this information from time to time with additional medical evidence. If he or she does so, the Beneficiary's legal representative or, if he or she has no legal representative, the Beneficiary shall submit an affidavit or declaration under penalty of perjury, in a form acceptable to the Trust, stating that he or -7- 140 she has submitted to the Trust all medical reports relating to any alleged asbestos-related condition other than those subject to attorney work product privilege. If the Beneficiary submits supplemental information to the Trust, the Trust shall reevaluate the claim and either make a written good faith settlement offer or reject the claim. The Beneficiary shall then reject or accept any offer based on reevaluation using the procedures outlined above for rejection or acceptance of the Trust's initial offer. If the Beneficiary rejects such offer, he or she may elect to negotiate further with the Trust or shall proceed to mediation. 6. SECOND (MALIGNANT) INJURY CLAIMS. The Trust shall offer to settle Non-Malignancy Claims on two alternative bases: 1) in exchange for a general release; or 2) in exchange for a limited release covering all asbestos-related personal injury claims other than subsequent Malignancy Claims. The Trust's settlement offer for a limited release shall be for the amount of its offer for the general release minus the lesser of: 1) half of its settlement offer for the general release; and 2) $1,750. If a Beneficiary accepts the Trust's offer of a limited release, the Trust shall account for the monetary difference between its settlement offer for the general release and its settlement offer for the limited release in a separate account. A Second Injury Claim shall be ordered in the FIFO queue for processing based upon the date of receipt by the Trust of the Second Injury Claim, and shall be treated as a new claim under this Trust Distribution Process. 7. AUDIT PROCEDURES. In all cases, the Trust may require that medical x-rays, tests, laboratory examinations and other medical evidence comply with recognized medical standards regarding equipment, testing methods, and procedures to assure that -8- 141 such evidence is reliable. The Trust may develop methods for auditing the reliability of all data submitted in support of claims, including product identification and medical evidence, and may require independent interpretation of CT scans, X-rays, pathology specimens or other physical evidence. If its audits show an unacceptable level of reliability for evidence submitted from specific individuals or institutions, the Trust may refuse to accept evidence from them. In addition, the Trust may develop methods for auditing other types of evidence necessary to support a claim. 8. EXIGENT HEALTH AND EXTREME HARDSHIP CLAIMS. Notwithstanding the FIFO order processing rules described in Sections B.2 through B.4, the Trust may process and Liquidate Extreme Hardship Claims and Exigent Health Claims at any time. The Trust shall establish procedures to expedite its processing, evaluation and negotiation of Exigent Health Claims and Extreme Hardship Claims as well as the ADR procedures the Beneficiary asserting such a claim shall be required to follow under Section C. Such expedited procedures shall be designed to allow all Exigent Health Claims to be Liquidated within six months of presentation of a properly completed proof of claim to the Trust, and to ensure, to the maximum extent practicable, that in jurisdictions in which Beneficiaries can obtain accelerated trial dates for Exigent Health Claims, the Trust's negotiation process and the ADR procedures can be completed before a trial of an Exigent Health claimant's case against Defendant Class Members. If the Trust determines, in its sole discretion, that a Beneficiary asserting an Extreme Hardship Claim needs greater financial assistance than would be afforded by the payout scheme set forth in Section F.3, the Trust may accelerate payment to the -9- 142 Beneficiary of part or all of the amount for which that claim has been Liquidated as the Trust deems appropriate. Payments with respect to Exigent Health Claims shall be made only in accordance with the payout scheme set forth in Section F.3. 9. WITHDRAWAL OF CLAIMS. If the Beneficiary does not respond to the Trust's offer on initial evaluation or reevaluation within 30 days, the Trust's offer and the claim shall be deemed to be withdrawn without prejudice unless the Beneficiary has requested in writing one or more extensions of time, not to exceed six months in the aggregate, within which to respond to the offer. If the Beneficiary still has not responded to the Trust's offer at the end of the extension period, the Trust's offer and the claim shall then be deemed to be withdrawn without prejudice. A Beneficiary may also elect to withdraw a claim at any time without prejudice. A claim that is withdrawn or deemed to have been withdrawn may be resubmitted at any time, and shall be reordered in the FIFO queue for processing based on the date of receipt by the Trust of a properly completed proof of claim with respect to the refiled claim. C. ADR PROCEDURES. 1. MEDIATION. If the Beneficiary chooses not to submit supplemental information or rejects the Trust's offer based on its evaluation of such supplemental information and elects not to negotiate further with the Trust, the Beneficiary's claim shall be referred to mediation. The Trust shall establish and maintain a list of Qualified Mediators, compensated by the Trust. The Trust shall refer claims to Qualified Mediators from the list in rotation as soon as practicable after being notified by the claimant that he wishes to proceed to mediation. -10- 143 Claims shall be handled by each mediator in the order received by him or her, to the extent practicable. Any party may be represented by legal counsel. The mediator shall confer with the parties and/or their legal representatives, individually and jointly. Such conference may be in person or by telephone, at the claimant's election. The Beneficiary and a representative of the Trust with settlement authority must personally participate in the conference unless, in the judgment of the mediator, the Beneficiary's physical or psychological condition precludes such participation. Such conference shall be in the nature of a settlement conference. The mediator shall review the claim and the positions of the parties, the prior negotiations between the parties, the offer(s) and demand(s), such information as the parties may wish to submit as to a fair and equitable settlement, and all documents and medical reports relevant to the claim. At least five days prior to the mediation conference, Beneficiary and the Trust shall each submit to the mediator a concise, confidential statement outlining the Beneficiary's medical condition, exposure to Fibreboard products and each party's position on settlement value. The mediator shall work with both sides toward reaching an acceptable, reasonable settlement. The mediator does not have the authority to impose a settlement on the parties. 2. ARBITRATION. If the Beneficiary is unable to settle his or her claim with the Trust within 30 days of the mediation conference, the Beneficiary shall, if he or she wishes to pursue the claim, proceed to arbitration of the claim. The arbitration shall be commenced by a written demand for arbitration by the Beneficiary served on the Trust within 45 days of the mediation conference. Such arbitration shall be binding or -11- 144 nonbinding at the election of the Beneficiary, which election must be made in the Beneficiary's written demand for arbitration. The Trust and the Beneficiary shall bear their own fees and costs, except that the Trust shall pay the administrative fees and costs of conducting the arbitration unless the arbitrator in his or her sole discretion assesses such administrative fees and costs against any Beneficiary for delaying or abusing the arbitration procedures. The Trust shall maintain a list of Qualified Arbitrators. Arbitrations shall be conducted by a single Qualified Arbitrator. The Beneficiary and the Trust shall attempt to agree on a Qualified Arbitrator who will preferably, but not necessarily, be selected from the list maintained by the Trust. If the parties cannot agree on a Qualified Arbitrator, a Qualified Arbitrator shall be selected pursuant to the procedures of an independent arbitration facility to be selected by the Trust or by such other procedures as may be adopted by the Trust. The parties shall provide the Qualified Arbitrator and each other with copies of all relevant materials concerning the claim and any supplementary information they wish the Qualified Arbitrator to consider not less than 30 days prior to the date of the arbitration hearing. The Qualified Arbitrator may require the parties to submit such additional information as he or she deems necessary. The Qualified Arbitrator shall conduct a hearing on the claim at which testimony may be offered, unless both parties agree to waive such hearing. In nonbinding arbitrations, the Beneficiary must attend the hearing in person, unless in the judgment of the Qualified Arbitrator his or her physical or psychological condition makes such attendance impossible. The Qualified Arbitrator shall issue an award promptly but in no event later -12- 145 than 120 days from the date on which he or she receives the last submission of information from either of the parties relevant to the claim, unless the parties agree to extend such time. The Award shall be based on the same factors used by the Trust in evaluating claims. If the Beneficiary elected binding arbitration at the time of the demand, neither party shall have the right to appeal the award other than on grounds set forth in the Federal Arbitration Act. If the Beneficiary elected nonbinding arbitration at the time of the demand, the award shall become final and binding if the Beneficiary does not reject the award by so notifying the Trust in writing within 30 days after receipt of the award. If the Beneficiary does not reject the award as provided above, he or she shall be deemed to have accepted it. If the Beneficiary rejects the award, the award shall not be binding on either party and the Beneficiary may proceed to the tort system under the procedures set forth below. 3. LOCATION FOR ADR PROCEDURES. The Trust shall establish procedures to conduct mediations and arbitrations at scheduled intervals at such locations around the United States as the Trust determines will be convenient to the largest numbers of claimants and will not impose undue burden on the Trust. D. LITIGATION. A Beneficiary may not proceed to litigate his or her claim against the Trust in the tort system unless he or she has in good faith: (1) submitted a proof of claim and rejected the resulting settlement offer from the Trust; (2) participated in a mediation conference and failed to settle his or her claim; (3) participated in nonbinding arbitration -13- 146 and rejected the resulting arbitration award; and (4) participated in a mandatory settlement conference as described below. The following procedures shall govern any Beneficiary who elects to litigate in the tort system his or her claim against the Trust. 1. MANDATORY SETTLEMENT CONFERENCE. Before any Beneficiary may proceed to the tort system, the Beneficiary must request the Court to conduct a mandatory settlement conference with respect to the claim. This mandatory settlement conference may be conducted by the Court, or by another judge or a neutral special master designated by the Court, or, if both the Beneficiary and the Trust agree, by a mutually selected, neutral third party other than the Court (the "Settlement Conference Designee"). The settlement conference may be conducted by telephone unless the Court or the Settlement Conference Designee determines, on application by the Trust or the Beneficiary, that the conference should be conducted in person. If the Court or the Settlement Conference Designee so determines, the settlement conference must be attended in person by the Beneficiary, unless in the judgement of the Court or the Settlement Conference Designee his or her physical or psychological condition makes such attendance impossible, and by a representative of the Trust with settlement authority at such location as the Court or the Settlement Conference Designee shall determine. If no settlement is reached within 30 days of the mandatory settlement conference, the Beneficiary and the Trust shall submit to each other on that date a written settlement offer that will remain in effect for an additional 30 days. If neither party accepts the other party's settlement offer during this period, then the Beneficiary may, upon certification from the Court or the Settlement Conference Designee that the -14- 147 Beneficiary has completed the settlement conference process and otherwise has complied with the requirements of the preceding paragraph of this Section D, commence a lawsuit against the Trust in the tort system or elect binding arbitration. 2. PROCEDURAL RULES. a. Any Beneficiary who elects binding arbitration following the mandatory settlement conference shall follow the procedures set forth in Section C.2 above. Payment of any resulting award shall, however, be governed by Section F of this Trust Distribution Process. b. Any Beneficiary who elects to resolve a claim through the tort system may pursue the claim in any appropriate forum, subject to the procedures set forth herein. Payment of any resulting judgment shall, however, be governed by Section F of this Trust Distribution Process. c. The Trust may assert any and all defenses available to it or which would have been available to any Trustor against which the claim could have been asserted absent Global Approval Judgment with respect to Beneficiaries who elect to resolve their claims through the tort system. d. In no event shall a Beneficiary be permitted to seek or recover from the Trust in a lawsuit in the tort system any punitive or exemplary damages of any sort. Nor may any claimant seek or recover compensatory damages in excess of Fibreboard's actual share of responsibility or for the actual percentage risk of contracting cancer. Finally, no Beneficiary may seek or recover pre-judgement interest in a suit in the tort -15- 148 system. Any other damages available under the applicable law shall remain recoverable except as provided in Section D.2.e below. e. In no event shall the Trust or any other Person be required to post a bond to stay collection of a judgment in the tort system. Judgments shall be paid by the Trust in the order set forth in Section F below, and no Beneficiary shall be permitted to take any steps to collect a judgment from the Trust except as set forth in this Trust Distribution Process. The Trust shall not be responsible to pay post-judgment interest; in lieu thereof, the procedures set forth in the last sentence of Section F.1 shall apply. f. (i) The death of a Beneficiary after he or she has filed a proof of claim with the Trust shall not eliminate compensable elements of his or her claim accruing prior to the date of death, by, for example, eliminating any claim for damages for pain and suffering occurring prior to the date of death or by creating an offset to a lost earnings award for personal consumption occurring prior to the date of death, notwithstanding applicable state law to the contrary. (ii) However, such compensable elements may not be recovered after exit to the tort system unless the Beneficiary shows that he or she could have recovered such damages absent compliance with the requirements of the Trust Distribution Process. g. At trial the defendant shall be the Trust and the Trust and Beneficiary shall jointly request that the Trust be introduced to the trier of fact (judge or jury as the case may be) in the following fashion or in another substantially similar fashion as the trial court may direct, in addition to any other evidence permitted by the Court about the Trust's identity, goals and operations: -16- 149 Members of the jury, this is an action for damages for [personal injury/wrongful death] brought by the plaintiff[s] against [various defendants, including] the Fibreboard Asbestos Compensation Trust. The Fibreboard Asbestos Compensation Trust was created by Order of a United States District Court to provide fair and equitable treatment for persons with asbestos injury for which Fibreboard Corporation might bear legal liability. The Trust has a fixed amount of money with which to compensate all persons with an asbestos injury to whom Fibreboard is found to be legally liable. This sum of money must cover all victims, past and future. Under no circumstances may you award any sum designed or intended to punish or make an example of Fibreboard or the Trust. If you should find that Fibreboard or products manufactured by Fibreboard were a legal cause of injury to plaintiff[s], any payment of damages awarded with respect to Fibreboard's products will be made by the Trust, not by Fibreboard itself. The fact that a trust exists is in no way an indication that you should impose any liability on the Trust. No sum you might award will be paid by either Fibreboard or by insurance; any award will be paid only by the Trust. h. Any Beneficiary who elects to resolve a claim through the tort system shall provide the Trust (without cost to the Trust) with copies of all pleadings, discovery materials, evaluations, and other similar nonprivileged documentation requested by the Trust in connection with its defense of the claim in the tort system, so that the Trust may effectively and economically prepare for trial. E. FUNDS FOR PAYMENT OF CLAIMS. As set forth in the Trust Agreement, the Trust shall administer three funds, for payment of Trust Expenses, Class Member Claims and Third Party Claims, to be known as "Fund I," "Fund II," and "Fund III." Fund I is primarily intended to pay expenses of, and claims against, the Trust during the first 25 years after Global Approval -17- 150 Judgment. Fund II is primarily intended to pay expenses of, and claims against, the Trust commencing 26 years after Global Approval Judgment, although it is available to pay expenses and claims commencing 21 years after Global Approval Judgment, if Fund I is insufficient for that purpose. Fund III is primarily intended to pay any expenses and claims not paid from Fund I or Fund II, commencing 46 years after Global Approval Judgment, although it is available to pay expenses and claims commencing 41 years after Global Approval Judgment if Fund II is exhausted prior to 46 years after Global Approval Judgment. In order to assure that, to the maximum extent feasible, Trust resources are preserved and fairly allocated among all Beneficiaries (i.e., those who now will have claims in the future as well as those who have claims now) Appendix 1 describes in detail how Trust surpluses realized in any Fiscal Year are to be preserved and limits amounts that can be spent in any Fiscal Year to pay claims from Funds I, II or III. In general, Appendix 1 specifies that payments for Trust Expenses, Class Member Claims and Third Party Claims may not exceed annual earnings on the assets within the relevant Fund plus a portion of the remaining principal (calculated by allocating remaining Fund principal equally over the years remaining in the Fund then in use). If any Surplus remains after payment of all Trust Expenses, Class Member Claims and Third Party Claims and certain indemnity expenses for a Fiscal Year (and after restoration of any increases in Principal Amount used in prior years as described below), such Surplus will either increase the Reserve Account or build Trust principal. This Reserve Account will be used to pay expenses or claims for any later year before Trustees may access any -18- 151 Increased Principal Amount to be used in that year. If, however, in any of the Fiscal Years 3 through 12 or 16 through 20 after Global Approval Judgment, the Earnings Amount and Principal Amount together with the funds contained in the Reserve Account in excess of $10,000,000 are not sufficient to pay Trust Expenses and to make all payments with respect to Class Member Claims or Third Party Claims for the first two Schedule Categories that are due or all payments with respect to Class Member Claims or Third Party Claims for the third Schedule Category that were due and unpaid on four consecutive prior Distribution Dates, the Trust may increase the usable portion of the Fund principal by up to 25% for any of Fiscal Years 3 through 12 after Global Approval Judgment or 12.5% for any of Fiscal Years 16 through 20 after Global Approval Judgment. 1. FUND I. a. COMMENCEMENT OF PAYMENTS. The Trust shall not pay any Class Member Claim or Third Party Claim (other than Extreme Hardship Claims and Expedited Review Claims) from Fund I until the Distribution Date first occurring after the end of the first Fiscal Year after Global Approval Judgment. b. DISTRIBUTABLE AMOUNT. Total payments for Trust Expenses, Class Member Claims and Third Party Claims made from Fund I for any Fiscal Year (i.e., payments for Trust Expenses, Extreme Hardship Claims and Expedited Review Claims made during that Fiscal Year, together with payments for Class Member Claims and Third Party Claims for that Fiscal Year made on the Distribution Date immediately following that Fiscal Year)(other than any payments made from the Reserve Account) -19- 152 shall not exceed the Distributable Amount for the Fiscal Year. For the first Fiscal Year after Global Approval Judgment the Earnings Amount for Fund I shall be calculated from the date of Global Approval Judgment. c. DISTRIBUTION OF REMAINING BALANCE. The transfer from Fund I to Fund II of any remaining balance in Fund I shall occur on the earlier of (i) the day after the Distribution Date for the twenty-fifth Fiscal Year after Global Approval Judgment, or (ii) the day before the Distribution Date for the first Fiscal Year occurring after the twentieth Fiscal Year after Global Approval Judgment in which the maximum possible Distributable Amount is less than the Earnings Amount and the Principal Amount that were in effect for Fund I for the twentieth Fiscal Year after Global Approval Judgment, the Trust shall transfer such remaining balance and the remaining balance of the Reserve Account to Fund II, at which time payments out of Fund II shall commence as provided in Section E.2. 2. FUND II. a. COMMENCEMENT OF PAYMENTS. No payments shall be made from Fund II until the Distribution Date for the twenty-first Fiscal Year after Global Approval Judgment. If at that time Fund I still has money left to pay Trust Expenses, Class Member Claims or Third Party Claims, no payments shall be made from Fund II until the earlier of: (1) the day after the Distribution Date for the twenty-fifth Fiscal Year after Global Approval Judgment; or (2) the Fiscal Year in which the Distribution Date referred to in section E.1.c.(ii) occurs. -20- 153 b. DISTRIBUTABLE AMOUNT. The total amount of payments for Trust Expenses, Class Member Claims and Third Party Claims made from Fund II for any Fiscal Year is limited to the Distributable Amount for the Fiscal Year. c. DISTRIBUTION OF REMAINING BALANCE. The transfer from Fund II to Fund III of any remaining balance in Fund II shall occur on (i) the day after the Distribution Date for the twentieth Fiscal Year after the transfer of the balance in Fund I to Fund II pursuant to Section E.1.c, or (ii) such later date as the Trustees determine would be in the best interests of all Beneficiaries, both present and future (but in no event later than the day after the Distribution Date for the forty-fifth Fiscal Year after Global Approval Judgment); at which time payments out of Fund III shall commence as provided in Section E.3. 3. FUND III a. COMMENCEMENT OF PAYMENTS. No payments shall be made from Fund III until the Distribution Date for the forty-first Fiscal Year after Global Approval Judgment. If at that time Fund II still has money left to pay Trust Expenses, Class Member Claims or Third Party Claims, no payments shall be made from Fund III until the date Fund II is exhausted or the balance of Fund II has been transferred into Fund III pursuant to Section E.2.c. b. DISTRIBUTABLE AMOUNT. The total amount of payments for Trust Expenses, Class Member Claims and Third Party Claims made from Fund III for any Fiscal Year is limited to the Distributable Amount for the Fiscal Year. -21- 154 c. DISTRIBUTION OF REMAINING BALANCE. If there is a remaining balance in Fund III on the day after the Distribution Date for the sixty-first Fiscal Year after Global Approval Judgment, and there are then, or are anticipated by the Trustees to be in the future, any Trust Expenses, Class Member Claims, Third Party Claims and other obligations of the Trust which have not yet been liquidated and/or fully paid, the Trust shall use the remaining balance of Fund III to pay such Trust Expenses, Class Member Claims, Third Party Claims and other obligations of the Trust. Upon the occurrence of the Termination Date, the Trust shall apply any remaining balance of Fund III to such charitable purposes as the Trustees in their reasonable discretion, after consultation with the SCB, shall determine, which charitable purposes, if practicable, shall be related to occupational health. 4. DETERMINATION OF DISTRIBUTABLE AMOUNT FOR EACH FUND. Within 90 days following the end of each Fiscal Year after Global Approval Judgment, the Trust shall determine the Distributable Amount for such Fiscal Year, which Distributable Amount (after payment of Trust Expenses, Extreme Hardship Claims and Expedited Review Claims for such Fiscal Year) shall be distributed to pay Class Member Claims and Third Party Claims, in the order set forth in Section F.2, on a date, no later than 120 days following the end of each such Fiscal Year, chosen by the Trust (the "Distribution Date"). F. ORDER, TIMING AND LIMITATIONS ON PAYMENTS OF CLAIMS. 1. ELIGIBILITY FOR PAYMENT. All Class Member Claims and Third Party Claims become eligible to begin receiving payments from the Trust on the Distribution Date -22- 155 immediately following the Fiscal Year in which such Class Member Claims or Third Party Claims are Liquidated, provided that in the case of settled Class Member Claims the Trust has received the release required by Section B.4. Judgments obtained in the tort system shall be eligible for payment in the same order as Claims Liquidated by settlement or arbitration, except as provided in Section F.3.b, and shall be treated as having been Liquidated on the date the claimant obtains a final, nonappealable judgment, except that upon an unsuccessful appeal by the Trust, the date of Liquidation shall be the date of the trial court judgment. 2. ORDER OF PAYMENT. On each Distribution Date, the Trust shall make payments on Liquidated Class Member Claims and Third Party Claims in the following order: (1) claims for Mesothelioma and Lung Cancer; (2) claims for Other Cancer and Asbestos Lung Disease I; (3) the first payment on claims for Asbestos Lung Disease II which was due and unpaid on four or more consecutive prior Distribution Dates, (4) the second payment on claims for Asbestos Lung Disease II which was originally due and unpaid on four or more consecutive prior Distribution Dates; (5) the third payment for claims on Asbestos Lung Disease II which was originally due and unpaid on four or more consecutive prior Distribution Dates; (6) any other payments on claims for Asbestos Lung Disease II; and (7) Residual Claims. While it is anticipated that the Trust will be able to pay all Liquidated Class Member Claims and Third Party Claims on each Distribution Date, all payments due on Liquidated claims for Mesothelioma and Lung Cancer must be made before any payments due on Liquidated claims for Asbestos Lung Disease I and Other Cancer may be made, all payments due on Liquidated claims -23- 156 for Asbestos Lung Disease I and Other Cancer must be made before any payments due on Liquidated claims for Asbestos Lung Disease II may be made, the first payment on Liquidated claims for Asbestos Lung Disease II which was due and unpaid on four or more consecutive prior Distribution Dates must be made before any other payments for other Liquidated claims for Asbestos Lung Disease II may be made, the second payment on Liquidated claims for Asbestos Lung Disease II which was originally due and unpaid on four or more consecutive prior Distribution Dates must be made before any other payments for other Liquidated claims for Asbestos Lung Disease II may be made, the third payment on Liquidated claims for Asbestos Lung Disease II which was originally due and unpaid on four or more consecutive prior Distribution Dates must be made before any other payments for other Liquidated claims for Asbestos Lung Disease II and all other payments due on Liquidated claims for Asbestos Lung Disease II must be made before any payments due on Liquidated Residual Claims may be made. Within each of the seven categories, payments due on Class Member Claims and Third Party Claims shall be made in FIFO order based on when the Class Member Claims and Third Party Claims were Liquidated, whether by settlement, arbitration or judgment, except that settled Class Member Claims shall be ordered within each such category according to when the release required by Section B.4 is received by the Trust. Other than by virtue of subrogation to a Class Member Claim pursuant to Section H.5.a, no contribution claim brought by a Defendant Class Member shall be paid inasmuch as resolution of a Class Member Claim against the Trust gives rise to a right of set-off or reduction under -24- 157 Section H.1.a of the Trust Distribution Process sufficient to satisfy, and bar the assertion of, any such contribution claim against the Trust. 3. TERMS OF PAYMENT a. CLAIMS RESOLVED OUTSIDE THE TORT SYSTEM. Class Member Claims resolved without filing an action against the Trust in the tort system and all Third Party Claims shall be eligible for payment over a three-year period, 40% due on the Distribution Date immediately following the Fiscal Year in which such claim was Liquidated and 30% due on each of the next two Distribution Dates, except for Expedited Review Claims paid pursuant to Section B.2 and Extreme Hardship Claims paid pursuant to Section B.8 of this Trust Distribution Process. b. CLAIMS RESOLVED IN THE TORT SYSTEM. (i) Class Member Claims resolved after the filing of an action against the Trust in the tort system shall be eligible for payment on the following schedule. On the Distribution Date following the Fiscal Year in which such claim was Liquidated, the Beneficiary shall be eligible to receive the lesser of: (1) 100% of the last settlement offer made by the Trust before the Beneficiary filed an action against the Trust in the tort system, or 100% of the proposed Award in nonbinding arbitration with the Trust pursuant to Section C, whichever is greater; and (2) 40% of the amount of the judgment or settlement after the action was filed. The remaining balance of the judgment or settlement shall be eligible for payment on the Distribution Dates following the next four Fiscal Years in equal installments so long as each such installment does not exceed $50,000. In the event that each such installment would exceed $50,000, the -25- 158 Beneficiary shall be eligible to receive $50,000 per year until the Class Member Claim is fully paid. In the event that any resulting judgment is less that the proposed Award in nonbinding arbitration with the Trust pursuant to Section C, the Trust shall be entitled to recover as a cost of litigation and deduct from the judgment its cost of mediation and arbitration pursuant to the procedures set forth in Section C. (ii) Notwithstanding the foregoing, in order to prevent evasion or abuse of the ADR provisions of this Trust Distribution Process, to conserve the assets of the Trust for the benefit of all Beneficiaries, and to manage prudently the cash flow of the Trust in a manner consistent with Section E of this Trust Distribution Process, the Trustees shall have the discretion, in any instance in which the Beneficiaries' judgments against the Trust result from a trial of the claims of more than 15 such Beneficiaries, to pay such judgments in such manner and over such a longer time period (not to exceed 10 years) as the Trustees shall determine is in the best interests of the Trust and of all Beneficiaries. 4. DEFERRAL OF PAYMENTS. All Class Member Claims or Third Party Claims eligible for a payment on a Distribution Date which do not receive that payment on that Date because the Distributable Amount for the Fiscal Year has been exhausted shall have that payment deferred until the following Distribution Date. Any payment obligation so deferred shall retain its position in the FIFO queue as set forth in Section F.2 and shall be accorded priority as set forth in Section F.2. Deferrals may continue from year to year until the Distributable Amount is sufficient to make the payments due on deferred obligations. -26- 159 5. LIMITATION ON PAYMENT CLAIMS. Aggregate payments on account of Class Member Claims and Third Party Claims arising from any one individual's exposure to asbestos shall not total more than $500,000, whether the Class Member Claim or Third Party Claim is Liquidated through settlement, mediation, arbitration or in the tort system. Any individual with asbestos-related disease shall be deemed to be a separate exposure for purposes of this section. G. ALL CLAIMS RESOLVED PURSUANT TO THE TRUST DISTRIBUTION PROCESS. In order to conserve the assets of the Trust, all Claimants are enjoined from filing future litigation based on or arising out of a Class Member Claim or Third Party Claim against the Fibreboard, Continental or Pacific Releasees. Any such claim may only be pursued against the Trust as provided in this Trust Distribution Process. H. DEFENDANT CLASS MEMBER PROCEDURES. Pursuant to the Defendant Class Settlement Agreement, and except as otherwise provided herein, (a) Defendant Class Members are releasing Third Party Claims against the Trust, Fibreboard Releasees, Continental Releasees and Pacific Releasees (except that nothing in this Trust Distribution Process or the Defendant Class Settlement Agreement shall be read as releasing, or be deemed to release, any claims whatsoever Defendant Class Members may have against the Continental Releasees and Pacific Releasees other than those arising out of, or in any way predicated upon obligations created by, the Insurance Policies); (b) Fibreboard Corporation and the Trust are releasing contribution and indemnity claims arising out of Class Member Claims; and (c) the Continental Releasees and Pacific Releasees are releasing any claims (except for - 27 - 160 reinsurance claims) arising out of Class Member Claims they may have against Defendant Class Members; provided, however, that Defendant Class Members shall have rights against the Trust and the Trust shall succeed to Fibreboard's rights against Defendant Class Members to the extent provided for under them by this Trust Distribution Process. Without enlarging any substantive rights accorded them by this Trust Distribution Process, Defendant Class Members shall have such procedural rights (relating to procedural issues not expressly dealt with by this Trust Distribution Process) reasonably necessary to pursue or defend rights accorded them by this Trust Distribution Process. Class Member Claims against the Trust to which Defendant Class Members succeed shall be governed by this Section H of the Trust Distribution Process. Settlement Class Members, Fibreboard Corporation, Continental, Pacific and the Trust are bound by the terms of this Section and must abide by the following procedures in connection with suits by Settlement Class Members for asbestos-related injury or disease against Defendant Class Members. 1. CLAIMS LIQUIDATED BEFORE JUDGMENT AGAINST DEFENDANT CLASS MEMBERS. a. CALCULATION OF SET-OFF AMOUNT. If a Settlement Class Member Liquidates his or her Class Member Claim against the Trust before judgment is rendered in litigation between the Settlement Class Member and Defendant Class Member(s), the Trust (itself or in Fibreboard Corporation's stead) shall be deemed, in such ongoing litigation, to be (i) a settled defendant within the meaning of the law which governs the judgment entered by the trial court (or any underlying verdict) (the "Judgment Forum Law") and (ii) a legally responsible joint tortfeasor under Judgment Forum Law, without - 28 - 161 introduction of further proof. Any judgment obtained by a Settlement Class Member against Defendant Class Member(s) shall be reduced or set off to reflect the Settlement Class Member's settlement with the Trust in the manner (whether pro tanto, pro rata, jury allocation or apportionment or otherwise), and in the amount provided for under Judgment Forum Law. Where the dollar amount of the settlement between the Trust and the Settlement Class Member is relevant to the calculation of any such reduction or set off, that dollar amount shall be the total amount agreed to by the Settlement Class Member and the Trust in settlement of the Class Member Claim, including all sums paid and agreed to be paid, without any reduction to present value for claims paid or to be paid within three years of Liquidation. For that portion of any claim not to be paid within three years of Liquidation, the amount of reduction or set off will be calculated at present value as of the end of that three year period. Trust estimates as to the length of time likely to elapse before future payments will be made will be binding on Defendant Class Members and Settlement Class Members alike. Where the judgment against the Defendant Class Member(s) resolves only a portion of the Class Member Claim or potential Class Member Claim that the Class Member has settled with the Trust (for example, personal injury as distinct from wrongful death claims), the dollar amount of the settlement between the Trust and the Settlement Class Member used in calculation of any reduction or set off shall reflect any apportionment made by the Trust and the Settlement Class Member reasonably and in good faith with regard to rights of the Defendant Class Members under this Trust Distribution Process, provided (i) that Defendant Class Members shall retain any rights available to them under Judgment - 29 - 162 death of the last survivor of any of the descendants of Joseph P. Kennedy living on the date hereof. (b) On the Termination Date, after payment of all liabilities of the Trust have been provided for, the Trust shall be dissolved, and all of the Trust's assets shall be applied to such charitable purposes as the Trustees in their reasonable discretion, after consultation with the SCB, shall determine, which charitable purposes, if practicable, shall relate to occupational health. 7.3 Amendments. (a) This Trust Agreement may only be amended or waived as provided in Section 3.1(a). Thirty days' advance written notice of any proposed amendment or waiver shall be given to the SCB and the Trustors. (b) The Trust Distribution Process may only be amended or waived as provided in Section 3.1(a) of this Trust Agreement and, where applicable, Section H.7 of the Trust Distribution Process. Thirty days' advance written notice of any proposed amendment or waiver of the Trust Distribution Process shall be given to the SCB, the Trustors and, where appropriate, the Representative Defendant. (c) The definitions used in this Trust Agreement or in the Trust Distribution Process and contained in the Glossary may be amended or waived only if and in the same manner as the Section of this Trust Agreement or the Trust Distribution Process in which such definition is used may be amended or waived. 7.4 Severability. Should any provision of this Trust Agreement or the Trust Distribution Process be determined to be unenforceable, such determination shall - 30 - 163 to such Class Member Claim. In response to a Defendant Class Member request, the Trust and the Settlement Class Member shall promptly verify, no later than the start of jury selection in the trial of an action by the Settlement Class Member against the Defendant Class Member, the fact of the settlement; and in accordance with Judgment Forum Law, also shall provide information regarding the amount and terms of any such settlement of a Class Member Claim. Without waiver by the Trust or Settlement Class Members of their rights to object to discovery of such information, neither product exposure nor disease information provided pursuant to this Subsection H.1.c shall be considered inadmissible at trial based on Rule 408 of the Federal Rules of Evidence or any of its state law counterparts. 2. CLAIMS NOT LIQUIDATED WHEN VERDICT OR JUDGMENT OBTAINED AGAINST DEFENDANT CLASS MEMBERS. a. EFFECT OF VERDICT OR JUDGMENT. Except as provided in Section H.2.b and Section H.3, if a Settlement Class Member goes to judgment or verdict against one or more Defendant Class Members without having Liquidated his or her Class Member Claim against the Trust, the Settlement Class Member forever waives and releases that portion of his or her Class Member Claim against the Trust which would have been determined (under principles of Judgment Forum Law unaffected by Global Approval Judgment) by the verdict or judgment had the Trust for itself or in Fibreboard Corporation's stead been a judgment defendant. b. RETENTION OF SEVERAL LIABILITY CLAIM. Notwithstanding any other provision of Section H.2, where (under principles of Judgment Forum Law unaffected by Global Approval Judgment) the Trust's liability to a Settlement Class Member would be - 31 - 164 several only, or where the Trust's liability as to a particular category of damages (for example, non-economic damages) would be several only, a Settlement Class Member shall retain that several-only aspect of his or her claim against the Trust, even if the Settlement Class Member goes to judgment or verdict against a Defendant Class Member without having Liquidated his or her Class Member Claim. However, no aspect of the Class Member Claim to which principles of joint or joint and several liability would apply shall be so retained. Should the Trust thereafter settle with the Settlement Class Member based only on the Trust's several liability, the release shall state that Third Party Claims based on joint, or joint and several, liability are not barred by virtue of the several liability settlement and may be pursued in accordance with the provisions of this Trust Distribution Process. c. PAYMENT OF VERDICT OR JUDGMENT. Upon payment of a verdict or judgment returned prior to Liquidation of the underlying Class Member Claim, the Defendant Class Member(s) shall succeed in all respects to that portion of the Class Member Claim against the Trust which would have been determined (under principles of Judgment Forum Law unaffected by Global Approval Judgment) by the judgment in the action against the Defendant Class Member had the Trust for itself or Fibreboard Corporation's stead been a judgment defendant, except to the extent provided in Sections H.2.b and H.5 hereof, and may pursue such Class Member Claim in accordance with this Trust Distribution Process. Notwithstanding any contrary provisions of Judgment Forum Law, a Class Member Claim to which a Defendant Class Member may succeed under this subsection upon payment of a verdict or judgment shall not be lost or extinguished - 32 - 165 7.11 Dispute Resolution. Any disputes which arise under this Trust Agreement or the Trust Distribution Process shall be resolved by the Court, except as otherwise provided herein or in the Trust Distribution Process. 7.12 Enforcement and Administration. The provisions of this Trust Agreement and the Trust Distribution Process shall be enforced and administered by the Court. 7.13 Settlement of Trustees' Accounts. Notwithstanding any state law to the contrary, the Court shall have exclusive jurisdiction over the settlement of the accounts of the Trustees, whether such account is rendered by the Trustees themselves or is sought by any Beneficiary or other Person. The Trustees shall render successive accounts covering periods of not more than one Fiscal Year, commencing on the first completed Fiscal Year of the Trust or the last day of the prior accounting period, as the case may be, except that an account shall be rendered for the period ending on the date of the death, resignation, removal or retirement of any Trustee. Upon the acceptance of any such account by the Court after hearing on notice to the SCB, the Trustors and such other parties as the Court shall designate, the Trustees shall be discharged from any further liability or responsibility to any Beneficiary or other Person as to all matters embraced in such account. 7.14 No Bond Required. Notwithstanding any state law to the contrary, each Trustee (including any successor Trustee) shall be exempt from giving any bond or other security in any jurisdiction. - 33 - 166 or indemnity against Fibreboard or the Trust. Nothing in this Section H.3 or in Section H.2.a shall prevent the Settlement Class Member from liquidating and collection pursuant to other provisions of Section D of this Trust Distribution Process his or her claim against the Trust based on the verdict or judgment referred to in this Section H.3. 4. LITIGATION BETWEEN DEFENDANT CLASS MEMBERS AND SETTLEMENT CLASS MEMBERS. In any litigation between Defendant Class Members and Settlement Class Members each shall retain their respective rights under Judgment Forum Law to introduce evidence at trial. Under no circumstances (other than the commencement by the Trust of formal bankruptcy or insolvency proceedings) shall the Trust (or Fibreboard Corporation) be treated as a bankrupt or insolvent defendant, nor shall the Trust (or Fibreboard Corporation) be considered, for purposes of litigation between Defendant Class Members and Settlement Class Members only, a Person who cannot be made a party for lack of personal jurisdiction, or otherwise a party over whom a Settlement Class Member is unable to obtain jurisdiction. 5. PURSUIT OF THIRD PARTY CLAIMS. a. DEFENDANT CLASS MEMBER TO STAND IN SETTLEMENT CLASS MEMBERS' STEAD. In pursuing any Class Member Claim against the Trust to which a Defendant Class Member has succeeded under subsection H.2.c above, (i) the Defendant Class Member shall stand in the stead of the Settlement Class Member in respect of whose Class Member Claim the Defendant Class Member has succeeded, (ii) such Class - 34 - 167 Member Claim shall be resolved by Defendant Class Members under this Trust Distribution Process in the same manner as such Class Member Claim would have been resolved had it been asserted by the Settlement Class Member, and (iii) it shall be evaluated on the same basis as if the Settlement Class Member directly presented his or her Class Member Claim to the Trust, without any enhancement, discount or limitation because it is asserted by a Defendant Class Member. Defendant Class Members must present evidence of such Class Member Claims in the same manner as Settlement Class Members; provided, however, that Defendant Class Members are not required to provide information unavailable to them because such information is solely within the control of the Settlement Class Member. In any event, however, Defendant Class Member Claims are to be evaluated by the same standards as Class Member Claims. For the limited purpose of pursuing Class Member Claims, or otherwise in respect of assertion of other rights specifically granted under this Trust Distribution Process, Defendant Class Members shall be treated as beneficiaries of the Trust; provided, however, that under no circumstances shall Section H.6 below apply to Class Member Claims to which Defendant Class Members have succeeded. b. RESOLUTION OF CLAIMS. Notwithstanding any other provision of this subsection, Class Member Claims to which Defendant Class Members have succeeded under Section H.2.c hereof or Residual Claims shall be decided by binding arbitration under Section C.2 of this Trust Distribution Process, if not settled previously, and may not exit to the tort system. In such arbitrations and in its negotiations with Defendant Class Members, the Trust shall not assert any Fibreboard Corporation defenses based on - 35 - 168 the state of the art, or failure to show negligence or product defect (whether based upon design, manufacture or failure to warn), except in those circumstances under which the Trust would also have asserted those defenses against the Settlement Class Member to whose Class Member Claim the Defendant Class Member has succeeded. Moreover, the Trust shall not assert failure to show negligence or product defect as a defense where a Class Member Claim to which the Defendant Class Member has succeeded is brought by a former manufacturer and/or distributor of asbestos-containing high-temperature pipe and block insulation, if the issues of product defect or negligence (as the case may be) covering such pipe and block insulation were fully litigated to an adverse result against that Defendant Class Member at trial of the underlying asbestos-related personal injury action. Under no other circumstances shall the results of such trial be given preclusive effect in any such arbitration. Any arbitration under this subsection shall be confidential, and no statement made, or contention advanced, at such arbitration shall be introduced as evidence or otherwise used against the maker or proponent of such statement or contention in the course of any proceeding other than arbitrations under this Trust Distribution Process. c. PROCESSING AND PAYMENT OF CLAIMS. Class Member Claims to which Defendant Class Members have succeeded shall be included in the FIFO queue established pursuant to this Trust Distribution Process. For purposes of processing, the position of a Class Member Claim to which a Defendant Class Member has succeeded in the FIFO queue shall be determined by the earlier of (a) the date the Settlement Class Member filed within the Trust the underlying Class Member Claim or (b) the date on - 36 - 169 which the Defendant Class Member paid the Settlement Class Member with respect to the judgment or verdict. For purposes of payment, a Class Member Claim to which a Defendant Class Member has succeeded will be placed within the appropriate Schedule Category set forth in Section F.2 and, within such category, in FIFO order, based on the date on which the Defendant Class Member paid the Settlement Class Member in respect to the judgment or verdict. Class Member Claims to which Defendant Class Members have succeeded, shall be paid under the terms set forth in Section F.3.a. Prior to receiving payment the Defendant Class Member shall have provided a release as described in Section B.4. d. MULTIPLE CLAIMS OR MULTIPLE THIRD PARTY CLAIMS. Where Defendant Class Members succeed to a portion of a Class Member Claim by virtue of payment with respect to any verdict or judgment where a Beneficiary retains an interest in the several liability aspect of the same Class Member Claim (regardless of the number of Defendant Class Members who may have succeeded to portions of the Class Member Claim) ("Partial Claims"), Settlement Class Members and Defendant Class Members shall comply with procedures established by the Trust to ensure that all persons with rights under this Trust Distribution Process in respect of the same Class Member Claim coordinate their effort so that all such Partial Claims can be processed and Liquidated in a single proceeding, designed to resolve all the elements of such claims, whether malignancy or non-malignancy, and all causes of action, whether for personal injury, death, loss of consortium, or otherwise against the Trust; provided, however, that nothing in the foregoing shall prevent the Trust, a Settlement Class Member or a Defendant Class - 37 - 170 Member, as the case may be, from electing to give or take a limited, non-malignancy release under this Trust Distribution Process. In evaluating Partial Claims in the course of such a single proceeding, the Trust shall not differentiate among the aspects of such claims based on whether the right to payment is asserted by a Settlement Class Member or Defendant Class Member. In those circumstances where different parties (whether Settlement Class Member and Defendant Class Member(s), or more than one Defendant Class Member) assert rights under this Trust Distribution Process in respect of the same Class Member Claim, any disputes regarding such Class Member Claim shall be presented in a single arbitration. Should more than one Defendant Class Member be entitled to payment from a single settlement or award by the Trust, the Defendant Class Members shall share such amount in the same proportion that each made payments to the Settlement Class Member. Notwithstanding the above or any other provision of this Trust Distribution Process, (i) a Settlement Class Member shall not be entitled to take to the tort system a Class Member Claim if any portion of that claim was resolved as to a Defendant Class Member by settlement or in binding arbitration pursuant to Section H.5.b of this Trust Distribution Process; and (ii) Settlement Class Members retain all rights to resolve their Partial Claims with the Trust after the verdict or judgment against the Defendant Class Member and before one or more Defendant Class Member's related Partial Claim(s) is submitted to the Trust in writing for resolution; provided, however, that the Settlement Class Member's resolution of his or her Partial Claim shall not bind any Defendant Class Members or the Trust with respect to any Defendant Class - 38 - 171 Member's related Partial Claim. The Trust shall settle Partial Claims only in accordance with Section H.5.d-g. e. If a Settlement Class Member resolves his or her Partial Claim pursuant to Section H.5.d, the Trust or arbitrator will apportion the settlement or award among all elements of the claims that are being resolved (for example, personal injury, wrongful death, loss of consortium, etc.). Until such time as the Partial Claim of a Defendant Class Member has been Liquidated and paid or denied, the related Partial Claim of a Settlement Class Member Liquidated under Section H.5.d(ii) shall only be entitled to payment of (i) that portion of the Settlement Class Member's Partial Claim allocated to resolved claims which were not included in the verdict or judgment against the Defendant Class Member, plus (ii) $500,000 minus the amount in (i) above, multiplied by the ratio of (x) the several liability portion of the verdict or judgment against the Defendant Class Member. Any award of punitive or exemplary damages will be excluded from the verdict or judgment against the Defendant Class Member when calculating (x) or (y). f. The provisions of Section H.5.e shall not apply if the underlying total verdict or judgment in favor of a Settlement Class Member against one or more Defendant Class Members (excluding any award for punitive or exemplary damages) is $500,000 or less. - 39 - 172 g. The provisions of Section H.5.e will cease to apply if the Partial Claim of a Settlement Class Member plus the related Partial Claims of all Defendant Class Members are Liquidated for a total of $500,000 or less. h. The provisions of Section H.5.e will cease to apply as to any Partial Claim of a Defendant Class Member which is not submitted to the Trust and served on the Settlement Class Member, or his attorney, if any, within three months of the date on which the underlying judgment against the Defendant Class Member becomes final. 6. COOPERATION FOR COURT APPROVALS. Upon liquidation of his or her Class Member Claim, each Beneficiary shall cooperate with the Trust in seeking any needed trial court approval under Judgment Forum Law of the settlement. 7. NO MODIFICATION WITHOUT CONSENT. Neither the terms of this Section H nor as they apply to Defendant Class Members the provisions of this Trust Distribution Process as to arbitration may be modified without the written concurrence of the Representative Defendant. Other provisions of the First Distribution Process may be modified (after prior notice to the Representative Defendant) without the concurrence of the Representative Defendant unless the modification (i) has an adverse effect on Defendant Class Members and (ii) discriminates against them vis-a-vis Settlement Class Members, in which case the modification shall require the written concurrence of the Representative Defendant. I. ATTORNEYS' FEES. Attorneys' fees payable in connection with Class Member Claims Liquidated and paid through this Trust Distribution Process, whether as a result of - 40 - 173 settlement, an arbitration award, or a judgment obtained in the tort system, and whether or not calculated as a percentage of recovery, shall be the lower of the fee provided in the contract between the Beneficiary and counsel and 25%. Costs related to the prosecution of the claim shall be subtracted from the recovery before calculating the attorney's fee. Legal fees shall be paid pro rata from the payments due to the Beneficiaries as such payments are made by the Trust. J. AMENDMENT. No amendments or waivers of this Trust Distribution Process will be permitted except as set forth in Section 3.1 of the Trust Agreement. - 41 - 174 APPENDIX 1 TO THE TRUST DISTRIBUTION PROCESS 1. INCREASED PRINCIPAL AMOUNT. The Trustees may increase the Principal Amount for any of the third Fiscal Year through the twelfth Fiscal Year after Global Approval Judgment or the sixteenth Fiscal Year through the twentieth Fiscal Year after Global Approval Judgment up to the Increased Principal Amount for that year, if (i) the Distributable Amount (if not increased as provided in this sentence) for that Fiscal Year, plus the amount, if any, by which the balance (on the last business day of that Fiscal Year) of the Reserve Account exceeds $10 million, is insufficient to pay all Trust Expenses for such Fiscal Year plus all Class Member Claims and Third Party Claims included in any of the first two Schedule Categories due and payable on the Distribution Date immediately following that Fiscal Year, or any payments with respect to Class Member Claims or Third Party Claims included in the third Schedule Category that were due and unpaid on four or more consecutive Distribution Dates prior to the Distribution Date immediately following that Fiscal Year, and (ii) the Trustees conclude that increasing the Principal Amount would be in the best interests of all Beneficiaries, both present and future, and that the sum of the Earnings Amount for Fund I, such amount in the Reserve Account in excess of $10 million and the amount of the Increased Principal Amount does not exceed the amount required to pay all such Trust Expenses and Class Member Claims and Third Party Claims included in the first two Schedule Categories and any payments with respect to - A-1 - 175 Class Member Claims or Third Party Claims included in the third Schedule Category that were due and unpaid on four or more consecutive Distribution Dates prior to such Distribution Date. 2. RESERVE ACCOUNT. The Reserve Account shall initially be credited with the full amount transferred to the Trust pursuant to Section 2.3(B) of the Global Settlement Agreement, minus the sum of (a) $1.340 billion of the starting balance of Fund I, (b) $200 million, the starting balance of Fund II, and (c) $10 million, the starting balance of Fund III. The Reserve Account is part of Fund I. The Reserve Account shall be increased on each Distribution Date by (x) 100%, until the balance of the Reserve Account equals $25 million, (y) 50%, after the balance of the Reserve Account equals $25 million and until the balance of the Reserve Account equals the sum of the Principal Amount and Earnings Amount for the prior Fiscal Year, and (z) 0%, after the balance of the Reserve Account equals the sum of the Principal Amount and Earnings Amount for the prior Fiscal Year, of either (i) if the Unreimbursed Borrowings as of such date is zero or a positive number, then the Surplus as of such date, or - A-2 - 176 (ii) if the Unreimbursed Borrowings as of such date is a negative number, but such Unreimbursed Borrowings plus the Surplus as of such date is a positive number, then such positive number, or (iii) if Unreimbursed Borrowings as of such date plus the Surplus as of such date is zero or a negative number, then zero (so that this calculation shall not result in a decrease in the Reserve Account). The Reserve Account shall be used to pay all Trust Expenses, Class Member Claims, Third Party Claims, and payments made pursuant to Section 7.16 of the Trust Agreement (it being understood that such payments pursuant to Section 7.16 shall not be limited by the amounts in the Reserve Account) for any Fiscal Year in which the Principal Amount and the Earnings Amount is insufficient for such purpose; provided, that the provisions of this sentence shall not be applied to require the reduction of the balance of the Reserve Account below $10 million. Notwithstanding the foregoing, during the Fiscal Year after Global Approval Judgment, the Trustees shall create and thereafter maintain an appropriate reserve (to be taken out of the amounts otherwise included in the Reserve Account) for required payments in later Fiscal Years for Class Member Claims and Third Party Claims presented in such first Fiscal Year or before, which reserve shall not be otherwise available for the purposes of the immediately preceding sentence. The Trustees shall have the discretion to utilize any - A-3 - 177 and all amounts in the Reserve Account to pay Trust Expenses, Class Member Claims, Third Party Claims and payments pursuant to Section 7.16 of the Trust Agreement. - A-4 - 178 SCHEDULE A
INJURY FACTOR Mesothelioma Fibreboard share age at diagnosis of mesothelioma venue and status of litigation amount of lost income claimant alive or deceased number of dependents Lung Cancer Fibreboard share year of diagnosis venue and status of litigation degree of functional impairment industry of most significant exposure amount of lost income number of dependents current or former smoker ILO x-ray reading Other Cancer Fibreboard share age at diagnosis of cancer venue and status of litigation degree of functional impairment time since first exposure prior claim of less severe injury employment status number of minor dependents Asbestos Lung Disease I Fibreboard share venue and status of litigation degree of functional impairment industry of most significant exposure disputed claim claimant alive or deceased claimant housebound and sedentary claim for lost wages ILO x-ray reading Asbestos Lung Disease II Fibreboard share venue and status of litigation degree of functional impairment ILO x-ray reading
- B-1 - 179 EXHIBIT C DEFENDANT CLASS SETTLEMENT AGREEMENT This Defendant Class Settlement Agreement is made and entered into as of December 22, 1993, by and among Owens-Illinois, Inc., a Delaware corporation ("Representative Defendant"), as representative of the Defendant Class, acting by and through Defendant Class Counsel; Fibreboard Corporation, a Delaware corporation; the Representative Plaintiffs as representatives of the Settlement Class, acting by and through Class Counsel; Continental Casualty Company, an Illinois corporation ("Continental"); CNA Casualty Company of California, a California corporation ("CNA Casualty"); Columbia Casualty Company, an Illinois corporation ("Columbia"); and Pacific Indemnity Company, a California corporation ("Pacific"), together the "Parties." RECITALS A. On August 27, 1993, Class Counsel, Fibreboard Corporation, Continental, CNA Casualty, Columbia, and Pacific announced an agreement in principle to settle all future asbestos-related personal injury claims against Fibreboard (the "Global Settlement"). The Global Settlement is set forth in the transcript of a hearing before the Honorable Robert Parker, Chief Judge, United States District Court for the Eastern District of Texas (the "Global Court"). The Global Settlement, as announced, was subject to the execution of definitive agreements and final court approval, among other conditions. B. In connection with implementing the Global Settlement, Representative Plaintiffs, on behalf of themselves and the Settlement Class, filed the Class Action on -1- 180 September 9, 1993. On September 9, 1993, the Court provisionally certified the Settlement Class as a mandatory, non-opt out class under Federal Rules of Civil Procedure, Rule 23(b)(1)(B), and entered a temporary restraining order preventing any member of the Settlement Class from initiating any asbestos-related claims against Fibreboard. The relief afforded by the temporary restraining order was extended by the entry of a preliminary injunction on September 27, 1993, which shall remain in effect pending notice to the Settlement Class and the hearing and determination of the fairness, reasonableness, and adequacy of the proposed settlement of the Class Action. C. In December, 1993 Representative Plaintiffs on behalf of themselves and as representatives of the Settlement Class, Fibreboard Corporation, Continental, CNA Casualty, Columbia, and Pacific, entered into a definitive agreement to implement the Global Settlement (the "Global Settlement Agreement"). A copy of the Global Settlement Agreement (including exhibits thereto) is attached as Exhibit A hereto. D. The expenditures necessary to process and resolve asbestos lawsuits have contributed to more than ten major asbestos defendants filing for bankruptcy reorganization. Because some of these defendants represented a significant portion of the traditional liability share for asbestos personal injury cases, and since many jurisdictions apply the principle of joint and several liability, these bankruptcy filings have increased costs substantially and have caused significant delays to plaintiffs. E. Claims for contribution and/or indemnification are infrequently litigated in asbestos personal injury cases. The vast majority of asbestos-related personal injury cases are settled by all defendants before trial. In those cases where trials result in - 2 - 181 judgments against non-settling defendants, the law in most jurisdictions protects settling defendants against claims for contribution and/or indemnity by judgment debtors. Nevertheless, the potential remains for litigation of contribution and/or indemnity claims. The parties to the Global Settlement Agreement and the members of the Defendant Class all have strong and common interests in preventing a Fibreboard Corporation insolvency, in Fibreboard Corporation funding a Global Settlement, in Fibreboard Corporation paying its unfunded settlement obligations and in resolving potential Third Party Claims by Defendant Class Members without the delay, expense, and uncertainty of litigating such claims. Although Defendant Class Members are numerous and include, among others, manufacturers, distributors, shipowners, premises owners and/or occupiers, and so-called "peripheral" defendants, any differing interests that may exist among Defendant Class Members are outweighed by the benefits to the Defendant Class as a whole afforded by the funds to be provided by the success of the Global Settlement Agreement. F. Fibreboard Corporation has been engaged in insurance coverage litigation with Continental and Pacific for a number of years. Although Fibreboard Corporation was awarded coverage under a trial court judgment, the insurers appealed that judgment and the outcome of the appeal remains uncertain. The interests of the Defendant Class are served by the Global Settlement Agreement, which provides over $1.5 billion to compensate Settlement Class members for asbestos-related personal injuries for which Fibreboard Corporation may bear legal liability, while eliminating the risk that Fibreboard Corporation may lose insurance coverage, and which also may enable Fibreboard Corporation to fund existing unfunded settlement obligations totalling over $1.0 billion. - 3 - 182 Absent the funds that will be made available by and as a result of the Global Settlement Agreement, Defendant Class Members could bear a proportionately greater share of the overall liability for asbestos-related personal injuries. G. Representative Defendant adequately represents the interests of the Defendant Class, in that Representative Defendant is a publicly held corporation that has been sued in thousands of asbestos-related personal injury lawsuits in jurisdictions throughout the country. H. Defendant Class Counsel have extensive experience in asbestos-related litigation. Defendant Class Counsel have reviewed the Global Settlement Agreement (including the exhibits thereto) and have been advised of the record to date in the Class Action, and have otherwise conducted a thorough investigation of the facts and law relevant to the matters set forth herein. Based upon this experience and investigation, Defendant Class Counsel have determined that this Agreement is in the best interests of the Defendant Class. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the Parties hereby agree as follows: I. DEFINITIONS Capitalized terms used, and not otherwise defined, herein are defined in the Glossary of Terms attached as Exhibit A to the Global Settlement Agreement. II. RESOLUTION OF DEFENDANT CLASS CLAIMS A. Defendant Class Members hereby release the Released Parties from any and all Third Party Claims and agree that the Global Approval Judgment shall bar and - 4 - 183 enjoin permanently Defendant Class Members from prosecution of any Third Party Claims against any of the Released Parties in any proceeding or court. B. Fibreboard Corporation, Continental, CNA Casualty, Columbia, Pacific and the Trust release contribution and\or indemnity claims against Defendant Class Members set forth in the Trust Distribution Process. C. Defendant Class Members shall have the rights described in Section H of the Trust Distribution Process. III. ACTIONS TO IMPLEMENT THIS AGREEMENT A. Fibreboard Corporation shall commence, as a third-party claim or other appropriate pleading in the Class Action, a mandatory, non-opt out class action against the Defendant Class pursuant to Federal Rules of Civil Procedure, Rule 23(b)(1) and (2) (the "Defendant Class Action"). B. The Parties shall join in motions, in form and substance satisfactory to counsel for each of the Parties, to certify provisionally the Defendant Class for settlement purposes only, to preliminarily enjoin the prosecution of any Third Party Claim during the pendency of the Defendant Class Action and for entry of the Defendant Class Order and Global Approval Judgement. Should the motions to certify provisionally the Defendant Class for settlement purposes only and to preliminarily enjoin the prosecution of any Third Party Claims be granted, while the orders granting those motions are in effect before entry of Global Approval Judgment, Section H of the Trust Distribution Process and this Defendant Class Settlement Agreement shall govern - -- as if they were fully operative -- the rights and liabilities of the Parties with respect to claims of Defendant Class Members arising out of - 5 - 184 Interim Claims resolved under Section 7 of the Global Settlement Agreement; provided that during the Interim Period Fibreboard, the Insurers, the Interim Committee and the Escrow Fund shall have (as appropriate and consistent with Section 7 of the Global Settlement Agreement) the rights and responsibilities assigned to the Trust in Section H of the Trust Distribution Process. Should Global Court Disapproval occur, Defendant Class Members shall be restored to any rights they may have under applicable law to pursue claims otherwise released under this Defendant Class Settlement Agreement. C. Notice shall be given to the Defendant Class in form and substance satisfactory to counsel for each of the Parties and approved by the Court. Pursuant to such notice, a hearing shall be held pursuant to Federal Rules of Civil Procedure, Rule 23(e), to determine the fairness and reasonableness of the settlement contemplated by this Defendant Class Settlement Agreement. D. The certification of the Defendant Class pursuant to this Defendant Class Settlement Agreement shall be binding if Global Approval Judgment is entered. E. In the event either (i) Global Court Disapproval occurs; (ii) Class Counsel move to convert the Class Action or the Defendant Class Action to a litigation class action; (iii) either the Court or the Global Court enters an order over objection by the Representative Defendant converting the Class Action or the Defendant Class Action to a litigation class action; or (iv) before Global Approval Judgment or Global Court Disapproval, the Trust Distribution Process is amended without complying with Section H.7 of the Trust Distribution Process, then the order certifying the Defendant Class shall be vacated, and Fibreboard Corporation and Representative Defendant shall stipulate to the - 6 - 185 dismissal of the Defendant Class Action without prejudice, and the Parties shall return in all respects to the status quo ante, including, but not limited to, the revocation of any releases given in this document or in the Trust Distribution Process. The Defendant Class shall retain any and all rights to object to the continued prosecution of such action as a litigation class action under Rule 23. Neither this Defendant Class Settlement Agreement, nor its exhibits, nor the settlement negotiations, nor the proceedings seeking approval of the settlement, may be used in support of any application for a determination that such action or any other action shall proceed as a class action except for the purposes of the settlement in accordance with this Defendant Class Settlement Agreement, or as evidence in any litigation or proceeding against any of the Parties other than an action or proceeding to enforce the provisions of this Defendant Class Settlement Agreement. IV. MISCELLANEOUS A. Amendments. No amendment of any provision of this Defendant Class Settlement Agreement (or to Section H of the Trust Distribution Process) shall be valid unless the same shall be in writing and signed by all Parties hereto and, upon the request of any of them, approved by the Court. B. Counterparts. This Defendant Class Settlement Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. C. Further Actions. The parties shall take such reasonable actions as may be necessary or appropriate to consummate or implement this Defendant Class Settlement Agreement. - 7 - 186 D. The Representative Defendant shall not be responsible for any cost or expenses (including the expense of any class notice) associated with obtaining any necessary Court approvals of this Defendant Class Settlement Agreement. In the event of Global Approval Judgment, Representative Defendant may apply to the Court for approval of reimbursement of its own reasonable costs and expenses, including the reasonable cost and expenses of its counsel, in an amount not to exceed $250,000, incurred in connection with negotiating and obtaining any necessary approvals of this Defendant Class Settlement Agreement. In the event of Global Court Disapproval, Fibreboard and the Insurers will negotiate in good faith with the Representative Defendant regarding whether, and to what extent, reimbursement of Representative Defendant's expenses is appropriate. E. Defendant Class shall not change the identity of Representative Defendant without consent of Class Counsel, Fibreboard Corporation, Continental and Pacific without approval of the Court. IN WITNESS WHEREOF, this Agreement has been executed as of the date first above written by the Parties hereto, thereunto duly authorized. ON BEHALF OF DEFENDANT CLASS By /s/ PHILIP MCWEENY ----------------------------- Philip McWeeny FIBREBOARD CORPORATION By /s/ MICHAEL R. DOUGLAS ----------------------------- Title: Sr. Vice President and General Counsel - 8 - 187 CONTINENTAL CASUALTY COMPANY By /s/ LAURENS F. TERRY -------------------------------- Title: Vice President CNA CASUALTY COMPANY OF CALIFORNIA By /s/ LAURENS F. TERRY -------------------------------- Title: Vice President COLUMBIA CASUALTY COMPANY By /s/ LAURENS F. TERRY -------------------------------- Title: Vice President Continental Casualty Company PACIFIC INDEMNITY COMPANY By /s/ JOHN J. DEGNAN -------------------------------- Title: ON BEHALF OF SETTLEMENT CLASS By /s/ JOSEPH F. RICE -------------------------------- Joseph F. Rice, Esq. By /s/ JOSEPH B. COX -------------------------------- Joseph B. Cox, Jr., Esq. By /s/ STEVEN KAZAN -------------------------------- Steven Kazan, Esq. By /s/ HARRY F. WARTNICK -------------------------------- Harry F. Wartnick, Esq. - 9 - 188 EXHIBIT D ESCROW AGREEMENT ESCROW AGREEMENT made this 23rd day of December, 1993, by and among Continental Casualty Company, an Illinois corporation ("Continental"), Pacific Indemnity Company, a California corporation ("Pacific"), and The First National Bank of Chicago (the "Escrow Agent"). WHEREAS, Continental, Pacific and Fibreboard Corporation, a Delaware corporation, have entered into an Agreement dated as of October 12, 1993 (as the same may be amended from time to time, the "Settlement Agreement") relating to the settlement of lawsuits relating to questions of insurance coverage, all as described in the Settlement Agreement; WHEREAS, Fibreboard Corporation, Continental, Pacific, the Representative Plaintiffs (acting by and through Class Counsel) (as such terms are defined in the Glossary to the Global Settlement Agreement (as defined below) as Exhibit A (the "Glossary")) entered into a Global Settlement Agreement as of August 27, 1993 (as the same may be amended from time to time, the "Global Settlement Agreement"), relating to the settlement, inter alia, of personal injury lawsuits and lawsuits relating to questions of insurance coverage, all as described in the Global Settlement Agreement; - 1 - 189 WHEREAS, the Global Settlement Agreement provides for payment of an aggregate amount of $1,525,000,000 by Continental and Pacific into an escrow account pending further distribution of such funds; and WHEREAS, the parties desire to arrange for such escrow and appoint Escrow Agent as the escrow agent in accordance with the terms hereof. NOW, THEREFORE, in consideration of the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound, the parties agree as follows: 1. INTERPRETATION AND DEFINITIONS. This Escrow Agreement is being executed and delivered pursuant to Section 2.3 of the Global Settlement Agreement and the Escrow Account created pursuant to this Escrow Agreement is the Escrow Fund referred to therein. The provisions of this Escrow Agreement shall not in any event be construed so as to enlarge or diminish the rights of any party under the Global Settlement Agreement. Capitalized terms used and not defined herein have the meanings given to them in the Glossary. 2. APPOINTMENT AND COMPENSATION OF ESCROW AGENT. Escrow Agent is hereby appointed to act as escrow agent in accordance with the terms hereof, and - 2 - 190 Escrow Agent hereby accepts such appointment. Escrow Agent shall have all the rights, powers, duties and obligations provided herein. All persons dealing with the Escrow Agent are released from inquiry into the decision or authority of the Escrow Agent and from seeing to the application of any monies, securities or other property paid or delivered to the Escrow Fund. Escrow Agent shall be entitled to charge the Escrow Account for its fees, as determined in accordance with the fee letter attached hereto as Exhibit A, and for reimbursement of reasonable costs and expenses suffered or incurred by Escrow Agent in connection with the performance of its duties and obligations hereunder including, but not limited to, any suit in interpleader brought by Escrow Agent. 3. DEPOSIT AND INVESTMENT OF FUNDS. (a) On December 30, 1993, Continental shall deliver $986,827,500, and Pacific shall deliver $538,172,500, for an aggregate amount of $1,525,000,000 (collectively, the "Funds") to Escrow Agent, by wire transfer of immediately available funds to such account of Escrow Agent that Escrow Agent identifies in a writing delivered to Continental and Pacific. (b) On or before the date hereof, Escrow Agent shall establish at the office of its corporate trust department in Chicago, Illinois and, at all times thereafter until the escrow created by this Escrow Agreement shall have terminated pursuant to Section 6 hereof (the "Escrow Termination Date"), shall maintain a separate account entitled the "Fibreboard Asbestos Claimants Escrow Account" (the "Escrow Account"). - 3 - 191 All funds, securities and other property held by the Escrow Agent (collectively, the "Escrow Assets") at any time pursuant to this Escrow Agreement, including the Funds and all investments, interest, earnings and proceeds thereof and thereon, shall be held in the Escrow Account. No property other than the Escrow Assets shall be held in the Escrow Account. Escrow Agent shall make and maintain, at all times until the Escrow Termination Date, appropriate entries in its books and records to reflect that all of the Escrow Assets existing from time to time are held in the Escrow Account. (c) During the term of this Escrow Agreement, Escrow Agent shall invest and reinvest the Escrow Assets from time to time in obligations backed by the full faith and credit of the United States of America which have a maturity date which is not more than three months from the date of acquisition ("Eligible Treasury Securities"); provided, however, that pending investment or prompt distribution Escrow Agent may invest funds in an aggregate amount at any time not exceeding the lesser of $10,000,000 or 5% of the amount of the Escrow Assets in (i) a money market fund or funds sponsored by an Eligible Institution (as defined below) or (ii) repurchase agreements with an Eligible Institution with a term of not more than one day for Eligible Treasury Securities, with respect to which such Eligible Treasury Securities are held by Escrow Agent in its account with a Federal Reserve Bank and maintained on its books and records in the Escrow Account. An Eligible Institution shall mean a commercial bank having a combined capital and surplus of at least Five Hundred Million Dollars - 4 - 192 ($500,000,000) and which is well capitalized or adequately capitalized (as such terms are defined in applicable federal regulations). The Escrow Agent shall liquidate investments in order to comply with the provisions of this Escrow Agreement without liability for any resulting losses. Any losses incurred from an investment shall be borne by the Escrow Account. 4. ACCRUED INTEREST ON THE ESCROW ASSETS. All interest and earnings of the Escrow Assets shall be added to and become part of the Escrow Assets, and shall be held by Escrow Agent under this Escrow Agreement. 5. PAYMENTS OF AMOUNTS HELD IN ESCROW ACCOUNT. (a) Subject to Sections 5(b) and 5(c) hereof, upon termination of the Escrow Agreement pursuant to Section 6 hereof, Escrow Agent shall distribute all amounts held in the Escrow Account pursuant to (i) written payment instructions executed by each of Continental, Pacific, Fibreboard Corporation, Class Counsel (acting on behalf of the Settlement Class), and, after appointment of the Trustees, the Trustees or (ii) an order obtained after a hearing held on notice to each of Continental, Pacific, Fibreboard Corporation and Class Counsel (a "Court Order") of the United States District Court for the Eastern District of Texas. - 5 - 193 (b) At any time and from time to time during the term of this Escrow Agreement, Escrow Agent shall (i) at the written direction of each of Continental, Pacific, Fibreboard Corporation, Class Counsel, and, after appointment of the Trustees, the Trustees distribute such amount or amounts to such person or persons and at such time or times as each of Continental, Pacific, Fibreboard Corporation, Class Counsel, and, after appointment of the Trustees, the Trustees shall direct in an Interim Payment Direction or (ii) in accordance with a Court Order, distribute such amount or amounts to such person or persons and at such time or times as is specified in the Court Order. Any payment instructions to the Escrow Agent shall include the mailing address and taxpayer identification number of the person or persons receiving the distribution hereunder. (c) Notwithstanding any contrary provision of this Escrow Agreement, within the 30-day period following the end of each calendar quarter, Escrow Agent shall pay to Continental 64.71% and to Pacific 35.29% of 5% of the income earned by the Escrow Account during such calendar quarter. 6. TERMINATION. Escrow Agent shall maintain the escrow Account and hold the Escrow Assets in escrow pursuant to this Escrow Agreement until receipt of written notice of termination from each of Continental, Pacific, Fibreboard Corporation, Class Counsel, and, after appointment of the Trustees, the Trustees. - 6 - 194 7. ESCROW AGENT QUALIFICATIONS. Escrow Agent shall at all times be (i) a bank, savings and loan association or trust company in good standing, organized and doing business under the laws of the United States or a state of the United States or a United States branch of a foreign bank, (ii) have combined capital and surplus of not less than Five Hundred Million Dollars ($500,000,000) and be well capitalized or adequately capitalized (as such terms are defined in applicable federal regulations) and (iii) be authorized under the laws governing its organization to exercise corporate trust powers and be authorized under such laws to enter into and perform this Escrow Agreement. If Escrow Agent shall at any time cease to have the foregoing qualifications, Escrow Agent shall give notice of resignation to Continental and Pacific as provided in Section 10 hereof and Continental and Pacific agree to thereupon promptly appoint a qualified successor escrow agent in accordance with Section 11. 8. LIMITATIONS ON LIABILITY OF ESCROW AGENT. (a) Escrow Agent may act upon any written notice, certificate, instrument, request, waiver, consent, paper or other document that Escrow Agent in good faith reasonably believes to be genuine and to have been made, sent, signed, prescribed, or presented by the proper person or persons acting on behalf of the parties named in paragraph 5(a) and 5(b). Escrow Agent shall not be liable for any action taken or omitted by it in connection with the performance of its duties and obligations hereunder, except for its own gross negligence or willful misconduct. Escrow Agent shall be under no obligation to institute or defend any action, suit or legal proceeding in connection - 7 - 195 with this escrow or this Escrow Agreement unless it is indemnified to its satisfaction by the party or parties who desire that it undertake such action. (b) Escrow Agent shall be under no obligation or liability for failure to inform Continental, Pacific, Fibreboard Corporation or Class Counsel regarding any transaction or facts within Escrow Agent's knowledge, even though the same may concern the matters described herein, provided they do not prevent or interfere with Escrow Agent's compliance with this Escrow Agreement, nor shall Escrow Agent be liable for the sufficiency, correctness or genuineness as to form, manner of execution or validity of any instrument deposited, nor as to identity, authority, or rights of any person executing the same, except as above provided. (c) Should Escrow Agent during or after the term of the escrow receive or become aware of any conflicting demands or claims with respect to the Escrow Account, Escrow Assets or the rights of any of the parties hereto, Fibreboard Corporation or Class Counsel, Escrow Agent shall have the right to discontinue any or all further acts on its part until such conflict is resolved to its satisfaction, and Escrow Agent shall have the further right to commence or defend any action or proceeding for the determination of such conflict. In the event Escrow Agent should file suit in interpleader and deposit the Escrow Assets in dispute in a court of competent jurisdiction, it shall be fully released and discharged from all further obligations under this Escrow - 8 - 196 Agreement with respect to such Escrow Assets (but such release and discharge shall not relieve Escrow Agent from any liability incurred prior to such event). (d) Escrow Agent may consult with legal counsel satisfactory to it in connection with any dispute, the construction of any provision of this Escrow Agreement or the duties and obligations of Escrow Agent under this Escrow Agreement. 9. ACCOUNT AND RELEASE OF ESCROW AGENT. (a) The retention and distribution of the Escrow Assets in accordance with the terms and provisions of this Escrow Agreement shall fully and completely release Escrow Agent from any obligations or liabilities assumed under this Escrow Agreement with respect to the Escrow Assets. Nothing in this Escrow Agreement shall be interpreted as depriving the Escrow Agent, Continental, Pacific, Fibreboard Corporation or Class Counsel of the right to have judicial settlement of the Escrow Agent's accounts, and upon any proceeding for a judicial settlement of the Escrow Agent's accounts or for instructions the only necessary parties thereto will be the Escrow Agent, Continental, Pacific, Fibreboard Corporation and Class Counsel. (b) The Escrow Agent shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be done, including such specific records as shall be agreed upon in writing between Continental, Pacific and the Escrow Agent. Within ten (10) days following the close of each calendar - 9 - 197 month, the Escrow Agent shall deliver to Continental, Pacific, Fibreboard Corporation and Class Counsel a written account of its administration of the escrow during such month and cumulatively for the period from the date hereof through the end of such month, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or received being shown separately), showing all cash, securities and other property held in the Escrow Account at the end of such month and the book and fair market value of all Escrow Assets. (c) All accounts, books and records maintained pursuant to this Section shall be opened to inspection and audit at all reasonable times by Continental, Pacific, Fibreboard Corporation and Class Counsel and their respective representatives. (d) The fair market value of the Escrow Assets shall be determined by the Escrow Agent whenever required pursuant to the Escrow Agreement, but in any event not less than monthly. The Escrow Agent may base such determination upon such sources of information as it may deem reliable including, but not limited to, information reported in (i) newspapers of general circulation, (ii) standard financial periodicals or publications, (iii) statistical and valuation services, (iv) the records of securities exchanges or brokerage firms deemed by the Escrow Agent to be reliable, or any combination thereof. The Escrow Agent shall promptly inform Continental, Pacific, - 10 - 198 Fibreboard Corporation and Class Counsel of any such valuation and provide them with complete copies thereof. 10. RESIGNATION AND REMOVAL OF ESCROW AGENT. Escrow Agent may be removed by the joint action of Continental and Pacific, with or without cause, at any time upon 15 days' prior written notice to Escrow Agent, which notice may be waived by Escrow Agent. Escrow Agent may resign at any time upon 60 days' prior written notice to Continental, Pacific, Fibreboard Corporation and Class Counsel. Notwithstanding any resignation or removal of Escrow Agent pursuant to Section 7 hereof or this Section 10, such resignation or removal shall not be effective and Escrow Agent shall continue to serve in its capacity as Escrow Agent until (i) a successor escrow agent is appointed in accordance with the provisions of Section 11 hereof and has accepted such appointment and (ii) the Escrow Assets together with such records and documents as may be reasonably required to enable the successor escrow agent to properly administer the Escrow Fund have been transferred to and received by such successor escrow agent. Continental and Pacific shall promptly take the necessary action to appoint a successor escrow agent in accordance with the provisions of Section 11 hereof. 11. APPOINTMENT OF SUCCESSOR ESCROW AGENT. If at any time Escrow Agent shall resign, be removed or otherwise become incapable of acting as Escrow Agent - 11 - 199 pursuant to this Escrow Agreement, or if at any time a vacancy shall occur in the office of Escrow Agent for any other cause, a successor Escrow Agent that meets the qualifications set forth in Section 7 shall be appointed jointly by Continental and Pacific by a written instrument delivered to the successor Escrow Agent with a copy delivered to the Escrow Agent. If no successor Escrow Agent is appointed (i) within 30 days after the time Escrow Agent becomes incapable of acting or a vacancy occurred in the office of Escrow Agent or (ii) within 60 days of Escrow Agent's giving notice of resignation, any party hereto may petition a court of competent jurisdiction for an appointment of a successor Escrow Agent. Upon the appointment and acceptance of any successor Escrow Agent hereunder, Escrow Agent shall transfer the Escrow Assets to its successor. Upon receipt by the successor Escrow Agent of the Escrow Assets, Escrow Agent shall be discharged from any continuing duties or obligations under this Escrow Agreement, but such discharge shall not relieve Escrow Agent from any liability incurred prior to such event, and the successor Escrow Agent shall be vested with all rights, powers, duties and obligations of Escrow Agent under this Agreement. 12. IRS FILINGS AND EXAMINATIONS. (a) For federal income tax purposes, the parties expect that Continental will be allocated 64.71% of the income, gains and deductions of the Escrow Fund and that Pacific will be allocated 35.29% of the income, gains and deductions of the Escrow Fund and that Continental and Pacific will each be required to include those items of taxable income, gains and deductions of the Escrow Fund which are attributable to them in computing their separate taxable income and this - 12 - 200 Escrow Agreement shall be construed accordingly. Notwithstanding the foregoing, Escrow Agent shall timely file such tax and other returns and statements for the Escrow Account (collectively "Returns"), and shall provide for and pay such taxes, as are required to comply with applicable provisions of the Internal Revenue Code of 1986, as amended, and of any state or local law and the regulations promulgated thereunder. The Escrow Agent shall provide all completed Returns to Continental and Pacific at least 10 days in advance of the due date for such Returns and shall obtain the consent of Continental and Pacific to all Returns before they are filed. The Escrow Agent is authorized to employ such agents and independent contractors as it deems necessary in its best judgment in order to perform the federal and state tax reporting required by this paragraph. Continental and Pacific will advise the Escrow Agent of the party who will sign any required federal and state tax returns on behalf of the Escrow Account. (b) The Escrow Agent agrees that Continental and Pacific shall have the sole and exclusive responsibility for handling any income tax examinations relating to the Escrow Fund. All costs and expenses of any income tax examination relating to potential tax liability of the Escrow Fund, including the expense of defending any adjustments or proposed adjustments, shall be charged to the Escrow Fund. (c) Escrow Agent agrees that it will inform Continental and Pacific promptly of all questions raised by agents conducting an income tax examination of the Escrow Account and shall cooperate with accountants, tax advisers and counsel retained - 13 - 201 by Continental and Pacific in working with the income tax agents and in responding to any questions and proposed tax adjustments. 13. NOTICES. Any notice or other communication hereunder must be given in writing and either (a) delivered in person, (b) transmitted by telex, telefax or other telecopy mechanism, provided that any notice so given is also mailed as provided in clause (c), or (c) mailed, postage prepaid, receipt requested, as follows: If to Continental, addressed to: Continental Casualty Co. Specialty Claims Office, 12th Floor 50 Fremont Street San Francisco, CA 94105 Attention: Claim Manager Telecopier: (415) 512-4899 and WACHTELL, LIPTON, ROSEN & KATZ 51 West 52nd Street New York, New York 10019 Attention: Herbert M. Wachtell, Esq. Telecopier: (212) 403-2000 and CARROLL, BURDICK & McDONOUGH 44 Montgomery Street, Suite 400 San Francisco, CA 94104 Attention: Rodney L. Eshelman, Esq. Telecopier: (415) 989-0932 - 14 - 202 If to Pacific, addressed to: Pacific Indemnity Company Chubb & Son Inc. 15 Mountain View Road P.O. Box 1615 Warren, NJ 07061-1615 Attention: Malcolm B. Burton Telecopier: (908) 580-3030 and WHITE & CASE 1155 Avenue of the Americas New York, NY 10036 Attention: Paul J. Bschorr, Esq. Telecopier: (212) 354-8113 If to Fibreboard, addressed to: FIBREBOARD CORPORATION 2121 North California Blvd. Walnut Creek, CA 94596 Attention: Michael R. Douglas Senior Vice President and General Counsel Telecopier: (510) 274-0714 and BROBECK, PHLEGER & HARRISON Spear Street Tower One Market Plaza San Francisco, CA 94105 Attention: Stephen M. Snyder, Esq. Telecopier: (415) 442-1020 If to the Class Counsel, addressed to: CAPLIN & DRYSDALE, CHARTERED 399 Park Avenue New York, NY 10022 Attention: Elihu Inselbuch - 15 - 203 Telecopier: (212) 644-6755 If to Escrow Agent, addressed to: The First National Bank of Chicago One Federal National Plaza, Suite 0126 Chicago, IL 60670-0126 Attention: Joseph Cahill Telecopier: (312) 407-1708 or to such other address or to such other person as either party shall have last designated by such notice to the other party. Each such notice or other communication shall be effective (i) if given by telecommunication, when transmitted to the applicable number so specified in (or pursuant to) this Section 13 and an appropriate answer back is received, (ii) if given by mail, three business days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when actually delivered at such address. 14. AMENDMENTS; WAIVERS. This Escrow Agreement may be amended only by (i) and agreement in writing executed by Escrow Agent, Continental, Pacific, Fibreboard Corporation and Class Counsel, or (ii) pursuant to a Court Order. No waiver of any provisions nor consent to any exception to the terms of this Escrow Agreement shall be effective unless in writing and signed by the party to be bound, and then only to the specific purpose, extent and instance as so provided. 15. COUNTERPARTS. This Escrow Agreement and any other agreement (or document) delivered pursuant hereto may be executed in one or more counterparts and - 16 - 204 by different parties in separate counterparts. All such counterparts shall constitute one and the same agreement and shall become effective when one or more counterparts of this Escrow Agreement have been signed by each party, and delivered to the other parties. 16. ASSIGNMENT. Neither this Escrow Agreement nor any rights or obligations under it are assignable. 17. GOVERNING LAW. This Escrow Agreement and the legal relations among the parties shall be governed by and construed in accordance with the laws of the State of Illinois applicable to contracts made and performed in such state without regard to conflicts of law doctrines, except to the extent that certain matters are preempted by federal law or are governed by the law of the jurisdiction of organization of the respective parties. 18. INTEGRATION. This Escrow Agreement constitutes the entire agreement and understanding of Continental, Pacific, Fibreboard Corporation and Class Counsel on the one hand and Escrow Agent on the other with respect to the subject matter of this Escrow Agreement and supersedes all prior agreements and understandings with respect thereto. - 17 - 205 19. SEVERABILITY. If any provision of this Escrow Agreement is held invalid by any court, governmental agency or regulatory body, the other provisions shall remain in full force and effect. 20. PARTIES IN INTEREST. This Escrow Agreement shall be binding upon and inure to the benefit of each party, Fibreboard Corporation and Class Counsel, and nothing in this Escrow Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever by, under or by reason of this Escrow Agreement. Nothing in this Escrow Agreement is intended to relieve or discharge the obligation of any third person to, or to confer any right of subrogation or action over against, any party to this Escrow Agreement or Fibreboard Corporation or Class Counsel or Class Counsel. 21. HEADINGS. The descriptive headings of the Sections of this Escrow Agreement are for convenience only and do not constitute a part of this Escrow Agreement. - 18 - 206 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed on the day and year first above written. CONTINENTAL CASUALTY COMPANY By /s/ LAURENS F. TERRY ---------------------------- Title Vice President ----------------------- PACIFIC INDEMNITY CORPORATION By /s/ JOHN J. DEGNAN ---------------------------- Title Senior Vice President ----------------------- THE FIRST NATIONAL BANK OF CHICAGO By /s/ R.D. MANELLA ---------------------------- Title Vice President ----------------------- AGREED TO: FIBREBOARD CORPORATION By /s/ MICHAEL R. DOUGLAS --------------------------------------------- Title Sr. Vice President and General Counsel ---------------------------------------- CLASS COUNSEL By /s/ JOSEPH RICE ------------------------ Joseph Rice By /s/ JOSEPH COX ------------------------ Joseph Cox By /s/ HARRY WARTNICK ------------------------ Harry Wartnick By /s/ STEVEN KAZAN ------------------------ Steven Kazan - 19 - EX-10 3 INCENTIVE COMPENSATION PLAN 1 THE CHUBB CORPORATION INVESTMENT DEPARTMENT/ CHUBB ASSET MANAGERS, INC. INCENTIVE COMPENSATION PLAN 1. PURPOSE. The purpose of The Chubb Corporation Investment Department/Chubb Asset Managers, Inc. Incentive Compensation Plan (the "Plan") is to provide annual and long-term cash incentives to key employees of The Chubb Corporation Investment Department and Chubb Asset Managers, Inc. (the "Company") which are competitive with similar financial institutions in order to attract, retain and motivate superior quality investment professionals. 2. EFFECTIVE DATE OF THE PLAN. The Plan shall become effective for the fiscal year commencing January 1, 1987. 3. ADMINISTRATION. The Plan shall be administered by the Chief Financial Officer and the Compensation Committee of The Chubb Corporation's Board of Directors ("Compensation Committee") as set forth in the Plan. Subject to the provisions of the Plan, the Compensation Committee shall be authorized to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan and make all other determinations necessary or advisable for the administration of the Plan. The determination of the Compensation Committee in the administration of the Plan, as described herein, shall be final and conclusive. The Compensation Committee may, in its discretion, delegate its administrative authority as it deems proper to the Chief Financial Officer, except that it may not delegate its authority to approve target awards or to approve Award Determinations which shall in all cases be made by the Compensation Committee. 2 4. COVERED EMPLOYEES. Awards under the Plan for any fiscal year of the Company may be granted to those key employees of the Company ("Participants") who shall be selected by the Chief Financial Officer of the Company. The Chief Financial Officer will have absolute discretionary authority to select Participants. 5. TARGET INCENTIVE DETERMINATION. As soon as practicable after the beginning of each plan year, the Chief Financial Officer shall designate a list of Participants for such plan year and designate target awards by salary grade or such other standard as determined by the Chief Financial Officer. Target Awards shall include an Annual Segment and a Long-Term Segment which will be determined respectively by measuring one-year and five-year performance of the Participants and Company against certain indices which the Chief Financial Officer, in his sole discretion, shall select. The Target Awards shall be presented to the Compensation Committee at its March meeting by the Chief Financial Officer for approval, or such other time during the fiscal year as deemed appropriate. 6. INDIVIDUAL AWARD DETERMINATION. The Chief Financial Officer, in his discretion, will recommend individual awards through a comparison of the individual Participant's and Company's results against the applicable indices. The individual award recommendations will be presented to the Compensation Committee at its March meeting for the preceding one year and five year periods. a) Annual Award Segment - The Annual Award Segment will be determined each year by measuring Participant's and Company's results for the immediately preceding plan year. 3 b) Long-Term Award Segment - The Long-Term Award Segment will be determined each year based upon a comparison of the Participant's and Company's cumulative results for each preceding five-year period commencing with the five-year period ending December 31, 1987. For the five-year periods ending December 31, 1987, 1988 and 1989, the Long-Term Award Segment will be phased in over a three-year period. As measured against the applicable indices and subject to the Chief Financial Officer's discretion, one-third of the calculated Long-Term Segment will be recommended to the Compensation Committee for the five-year period ending December 31, 1987, two-thirds of the calculated Long-Term Segment will be recommended to the Compensation Committee for the five-year period ending December 31, 1988 and one hundred percent of the calculated Long-Term Segment will be recommended to the Compensation Committee for the five-year period ending December 31, 1989. 7. AWARD PAYMENT. Annual award payments and Long-Term Award Payments shall be made as follows: a) Annual Award Payment. Individual Annual Award Payments shall be paid in cash as soon as practicable after approval by the Compensation Committee. b) Long-Term Award Payment. Individual Long-Term Award Payments shall be paid in cash three years following approval by the Compensation Committee. 4 provided, Participants meet all other eligibility requirements set forth in this Plan. 8. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are applicable to this Plan: a) Except in the event of the death of a Participant, the rights and interests of a Participant under the Plan may not be assigned, encumbered or transferred. b) No Participant, employee or other person shall have any claim or right to be granted an Award under the Plan. Neither the Plan nor any action taken thereunder shall be construed as giving any employee or other person any right to continued employment by the Company or any of its subsidiaries. c) Payment values shall be treated as compensation under the Excess Benefit Plan of The Chubb Corporation, Chubb & Son Inc., and Participating Affiliates, but shall not be deemed compensation in determining the amount of any entitlement under any other employee benefit plan of the Company, unless so provided under the terms of such plan. d) The Company shall have the right to deduct from all Payments made under the Plan any taxes required by law to be withheld with respect to such Payments. 5 e) The Plan shall be construed in accordance with and governed by the laws of the state of New York. f) Each Participant shall designate in a manner determined by the Compensation Committee a beneficiary to receive Payments due hereunder in the event of such Participant's death. If no designated beneficiary survives the Participant, it shall be the surviving spouse of the Participant or, if there is no surviving spouse, it shall be the estate of the Participant. g) Participants must be employed by the Company or one of its subsidiaries as of the payment date to be eligible for Award Payments, provided that if the Participant's employment is terminated prior to the payment date by reason of death, retirement on or after the Participant's normal retirement date under the Company's Pension Plan, disability (as defined in such Pension Plan), or any other reason with the consent of the Compensation Committee, the Compensation Committee, in its sole discretion, may provide for an Award Payment to that Participant or the Participant's designated beneficiary, if applicable. h) For purposes of the Long-Term Segment, termination of employment for any reason prior to the end of the first year of a respective five-year period shall result in forfeiture of all Payments to the terminated Participant for such five-year period. If prior to the end of an applicable five-year period but after the end of the first year of the period, a Participant dies or ceases to be an employee by 6 reason of retirement on or after the Participant's Normal Retirement Date under the Company's Pension Plan, disability (as defined in such Pension Plan), or for any other reason with the consent of the Compensation Committee, the Participant, or in the case of death, the Participant's designated beneficiary, shall be entitled to the Payment in an amount which would have been paid had the Participant continued to be employed until the payment date for the applicable five-year period multiplied by a fraction, (1) the numerator of which shall be the number of full calendar months from the start of the performance cycle, through the date of such death or termination of employment, as the case may be, and (2) the denominator of which shall be 60; provided that the Compensation Committee is authorized to declare that a Participant, or designated beneficiary, is entitled to receive a greater amount, up to but not exceeding the payment values which would have been paid had the Participant continued to be employed for the applicable five-year period and through to the applicable payment date. An accelerated payment of an Award under this subsection (h) may be made at such time as the Compensation Committee deems appropriate. EX-11 4 COMPUTATION OF EARNINGS PER SHARE 1 THE CHUBB CORPORATION EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
1993 1992 1991 -------- -------- -------- Net income......................................... $324,217 $617,099 $551,984 After-tax interest expense: 6% guaranteed exchangeable subordinated notes. 9,750 9,900 6,188 5 1/2% convertible subordinated notes......... -- -- 1,636 -------- -------- -------- Net income for computing earnings per share........ $333,967 $626,999 $559,808 ======== ======== ======== Average number of common shares outstanding........ 87,642 87,187 85,786 Additional shares from assumed conversion of: 6% guaranteed exchangeable subordinated notes as if each $1,000 of principal amount had been converted at issuance into 11.628 shares of common stock...................... 2,907 2,907 1,817 5 1/2% convertible subordinated notes as if each $1,000 of principal amount had been converted at issuance into 23.446 shares of common stock................................ -- -- 1,035 -------- -------- -------- Average number of common and common equivalent shares assumed outstanding for computing earnings per share........................................ 90,549 90,094 88,638 ======== ======== ======== Net income per share............................... $ 3.69 $ 6.96 $ 6.32
EX-13 5 1993 ANNUAL REPORT PGS 1 SUPPLEMENTARY FINANCIAL DATA
IN THOUSANDS YEARS ENDED DECEMBER 31 1993 1992 1991 ---------- ---------- ---------- PROPERTY AND CASUALTY INSURANCE UNDERWRITING Net Premiums Written............................. $3,521,295 $3,242,506 $3,112,264 Increase in Unearned Premiums.................... (141,457) (79,218) (75,096) ---------- ---------- ---------- Premiums Earned.................................. 3,379,838 3,163,288 3,037,168 ---------- ---------- ---------- Claims and Claim Expenses........................ 2,204,098 2,098,129 1,941,353 Operating Costs and Expenses..................... 1,181,316 1,115,007 1,087,365 Increase in Deferred Policy Acquisition Costs.... (34,726) (14,951) (27,597) Dividends to Policyholders....................... 14,242 15,755 20,153 ---------- ---------- ---------- Underwriting Income (Loss) Before Increase in Unpaid Claims for Asbestos-Related Settlement and Return Premium for Medical Malpractice Commutation.................................... 14,908 (50,652) 15,894 Increase in Unpaid Claims for Asbestos-Related Settlement..................................... (675,000) -- -- Return Premium for Medical Malpractice Commutation.................................... 125,000 -- -- ---------- ---------- ---------- Underwriting Income (Loss) Before Income Tax..... (535,092) (50,652) 15,894 Federal and Foreign Income Tax Credit............ (197,600) (35,300)(a) (2,700) ---------- ---------- ---------- UNDERWRITING INCOME (LOSS)....................... (337,492) (15,352) 18,594 ---------- ---------- ---------- INVESTMENTS Investment Income Before Expenses and Income Tax 541,749 501,140 476,984 Investment Expenses.............................. 8,040 7,685 7,489 ---------- ---------- ---------- Investment Income Before Income Tax.............. 533,709 493,455 469,495 Federal and Foreign Income Tax................... 78,300 70,700 71,900 ---------- ---------- ---------- INVESTMENT INCOME................................ 455,409 422,755 397,595 ---------- ---------- ---------- PROPERTY AND CASUALTY INCOME........................ $ 117,917 $ 407,403 $ 416,189 ========== ========== ========== LIFE AND HEALTH INSURANCE Premiums and Policy Charges......................... $ 801,236 $ 689,173 $ 634,016 Investment Income................................... 205,891 192,748 177,654 ---------- ---------- ---------- Total Revenues...................................... 1,007,127 881,921 811,670 ---------- ---------- ---------- Benefits............................................ 669,422 591,009 527,551 Operating Costs and Expenses........................ 248,976 216,411 210,863 ---------- ---------- ---------- Life and Health Income Before Income Tax............ 88,729 74,501 73,256 Federal Income Tax.................................. 26,212 18,280 22,137 ---------- ---------- ---------- LIFE AND HEALTH INCOME.............................. $ 62,517 $ 56,221 $ 51,119 ========== ========== ========== REAL ESTATE Revenues............................................ $ 160,650 $ 149,945 $ 140,957 Cost of Sales and Expenses.......................... 158,599 134,851 106,169 ---------- ---------- ---------- Real Estate Income Before Income Tax................ 2,051 15,094 34,788 Federal Income Tax.................................. 4,244 5,044 9,781 ---------- ---------- ---------- REAL ESTATE INCOME (LOSS)........................... $ (2,193) $ 10,050 $ 25,007 ========== ========== ========== CORPORATE, NET OF TAX................................. $ 14,357 $ 19,794 $ 16,325 ========== ========== ========== REALIZED INVESTMENT GAINS, NET OF TAX................. $ 151,619 $ 123,631 $ 43,344 ========== ========== ========== INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES............... $ 344,217 $ 617,099 $ 551,984 ========== ========== ==========
(a) Reflects a benefit of $12,000,000 resulting from a reversal of income tax reserves based on a settlement of prior years' taxes. The above federal and foreign income tax provisions represent allocations of the consolidated provision. 11 2 PROPERTY AND CASUALTY UNDERWRITING RESULTS NET PREMIUMS WRITTEN (In Millions of Dollars)
1993 1992 1991 1990 1989 Personal Insurance Automobile........................ $ 191.7 $ 190.9 $ 189.5 $ 192.0 $ 188.6 Homeowners........................ 428.4 416.9 432.2 408.7 373.6 Other............................. 194.4 188.6 193.0 187.8 177.8 -------- -------- -------- -------- -------- 814.5 796.4 814.7 788.5 740.0 -------- -------- -------- -------- -------- Standard Commercial Insurance Multiple Peril.................... 528.8 483.2 482.6 466.7 437.7 Casualty.......................... 626.0(a) 481.7 456.1 427.7 404.8 Workers' Compensation............. 172.0 168.6 177.1 151.4 137.9 -------- -------- -------- -------- -------- 1,326.8(a) 1,133.5 1,115.8 1,045.8 980.4 -------- -------- -------- -------- -------- Specialty Commercial Insurance Fidelity and Surety............... 618.7 585.1 538.0 514.2 483.5 Other............................. 650.8 566.6 496.7 443.9 408.5 -------- -------- -------- -------- -------- 1,269.5 1,151.7 1,034.7 958.1 892.0 -------- -------- -------- -------- -------- Reinsurance Assumed................. 235.5 160.9 147.1 127.3 122.5 -------- -------- -------- -------- -------- Total........................ $3,646.3(a) $3,242.5 $3,112.3 $2,919.7 $2,734.9 ======== ======== ======== ======== ========
(a) Includes a $125 million return premium to the Corporation's property and casualty insurance subsidiaries related to the commutation of a medical malpractice reinsurance agreement. Excluding this return premium, net premiums written were $501.0 million for Casualty, $1,201.8 million for Standard Commercial and $3,521.3 million in Total. COMBINED LOSS AND EXPENSE RATIOS Personal Insurance Automobile........................ 97.6% 100.2% 106.2% 106.1% 102.8% Homeowners........................ 100.2 113.3 106.0 104.1 108.2 Other............................. 84.2 89.9 93.5 95.6 100.5 -------- -------- -------- -------- -------- 95.8 104.6 103.1 102.5 104.9 -------- -------- -------- -------- -------- Standard Commercial Insurance Multiple Peril.................... 110.6 112.8 109.0 107.9 107.3 Casualty.......................... 190.6(b) 94.2 86.2 99.1 106.9 Workers' Compensation............. 117.9 118.7 130.6 138.5 149.2 -------- -------- -------- -------- -------- 149.7(b) 105.7 102.6 108.2 112.2 -------- -------- -------- -------- -------- Specialty Commercial Insurance Fidelity and Surety............... 78.1 81.3 82.4 78.9 76.9 Other............................. 103.4 100.2 98.9 97.3 100.5 -------- -------- -------- -------- -------- 91.0 90.5 90.3 87.3 87.7 -------- -------- -------- -------- -------- Reinsurance Assumed................. 111.8 126.9 119.3 109.2 97.2 -------- -------- -------- -------- -------- Total........................ 114.8%(b) 101.1% 99.5% 99.7% 101.5% ======== ======== ======== ======== ========
(b) Includes the effects of a $675 million increase in unpaid claims related to an agreement for the settlement of asbestos-related litigation and the $125 million return premium related to the commutation of a medical malpractice reinsurance agreement. Excluding the effects of these items, the combined loss and expense ratio was 100.7% for Casualty, 107.6% for Standard Commercial and 99.0% in Total. The combined loss and expense ratio, expressed as a percentage, is the key measure of underwriting profitability traditionally used in the property and casualty insurance business. It is the sum of the ratio of losses to premiums earned plus the ratio of underwriting expenses to premiums written after reducing both premium amounts by dividends to policyholders. 12 3 TEN YEAR FINANCIAL SUMMARY (in thousands except for per share amounts)
FOR THE YEAR 1993 1992 1991 1990 1989 REVENUES Property and Casualty Insurance Premiums Earned.................... $ 3,504,838(a) $ 3,163,288 $ 3,037,168 $ 2,836,135 $ 2,693,553 Investment Income.................. 541,749 501,140 476,984 463,413 426,267 Life and Health Insurance Premiums and Policy Charges........ 801,236 689,173 634,016 561,961 496,405 Investment Income.................. 205,891 192,748 177,654 171,570 159,828 Real Estate......................... 160,650 149,945 140,957 174,846 221,338 Corporate Investment Income......... 52,706 57,176 46,400 39,555 25,167 Realized Investment Gains (Losses).. 232,638 187,349 65,718 46,317 46,942 TOTAL REVENUES................... 5,499,708 4,940,819 4,578,897 4,293,797 4,069,500 COMPONENTS OF NET INCOME* Property and Casualty Insurance Underwriting Income (Loss) (b)..... (337,492)(c) (15,352) 18,594 20,709(e) (25,040) Investment Income.................. 455,409 422,755 397,595 371,351 330,096 Life and Health Insurance........... 62,517 56,221 51,119 45,081 42,103 Real Estate Income (Loss)........... (2,193) 10,050 25,007 40,015 42,021 Corporate........................... 14,357 19,794 16,325 14,760 705 Realized Investment Gains (Losses).. 151,619 123,631 43,344 30,193 30,932 INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES...................... 344,217 617,099 551,984 522,109 420,817 Per Share (b).................... 3.91(c) 6.96 6.32 6.07(e) 4.91 NET INCOME....................... 324,217(d) 617,099 551,984 522,109 420,817 Per Share........................ 3.69(d) 6.96 6.32 6.07 4.91 DIVIDENDS DECLARED ON COMMON STOCK.... 150,784 139,612 127,757 109,136 96,515 Per Share........................ 1.72 1.60 1.48 1.32 1.16 CHANGE IN UNREALIZED APPRECIATION OF EQUITY SECURITIES, NET OF DEFERRED INCOME TAX................. 46,534 (82,082) 12,163 (19,425) 70,330 AT YEAR END TOTAL ASSETS.......................... 19,436,870 17,559,182 16,163,605 14,510,750 13,384,850 INVESTED ASSETS Property and Casualty Insurance..... 8,403,141 7,767,462 7,086,572 6,297,825 5,793,656 Life and Health Insurance........... 2,473,253 2,208,803 2,063,518 1,928,687 1,752,532 Corporate........................... 965,715 955,828 840,291 688,380 647,817 PROPERTY AND CASUALTY UNPAID CLAIMS... 8,235,442 7,220,919 6,591,305 6,016,396 5,605,006 LIFE AND HEALTH POLICY LIABILITIES.... 2,446,620 2,193,486 2,072,727 1,959,568 1,806,325 LONG TERM DEBT........................ 1,273,830 1,072,841 1,053,550 820,825 612,874 SHAREHOLDERS' EQUITY.................. 4,196,129 3,954,402 3,541,605 2,882,639 2,603,739 Per Common Share................. 47.84 45.18 40.74 35.19 30.84
* The federal and foreign income tax provided for each component of net income represents its allocated portion of the consolidated provision. Prior year amounts have been restated to reflect the accounting changes prescribed by Statement of Financial Accounting Standards No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. 38 4
FOR THE YEAR 1988 1987 1986 1985 1984 REVENUES Property and Casualty Insurance Premiums Earned.................... $ 2,705,560 $ 2,615,866 $2,250,758 $1,507,127 $1,331,112 Investment Income.................. 364,126 266,230 216,558 190,609 160,644 Life and Health Insurance Premiums and Policy Charges........ 426,992 384,108 323,293 302,711 263,690 Investment Income.................. 144,264 124,640 104,934 96,786 74,277 Real Estate......................... 155,170 143,381 181,184 194,758 133,787 Corporate Investment Income......... 17,806 17,531 18,329 6,929 3,984 Realized Investment Gains (Losses).. (17,987) (22,561) 97,710 109,666 25,405 TOTAL REVENUES................... 3,795,931 3,529,195 3,192,766 2,408,586 1,992,899 COMPONENTS OF NET INCOME* Property and Casualty Insurance Underwriting Income (Loss) (b)..... 15,818 62,394 (29,837) (188,045) (115,262) Investment Income.................. 290,647 226,546 177,146 137,047 115,291 Life and Health Insurance........... 31,458 23,889 36,573 34,340 46,531(f) Real Estate Income (Loss)........... 40,018 36,079 32,756 29,502 24,490 Corporate........................... (5,357) (4,229) (2,203) (1,905) (2,456) Realized Investment Gains (Losses).. (12,959) (14,619) 53,506 59,601 14,405 INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES...................... 359,625 330,060 267,941 70,540 82,999 Per Share (b).................... 4.27 3.97 3.53 .96 1.42(f) NET INCOME....................... 359,625 330,060 267,941 70,540 82,999 Per Share........................ 4.27 3.97 3.53 .96 1.42 DIVIDENDS DECLARED ON COMMON STOCK.... 87,766 71,443 60,485 47,710 42,992 Per Share........................ 1.08 .89 .80 .76 .73 CHANGE IN UNREALIZED APPRECIATION OF EQUITY SECURITIES, NET OF DEFERRED INCOME TAX................. 29,815 12,294 12,878 50,650 (27,082) AT YEAR END TOTAL ASSETS.......................... 11,507,145 10,167,250 8,486,643 6,801,928 4,987,202 INVESTED ASSETS Property and Casualty Insurance..... 5,153,027 4,519,268 3,574,360 2,832,286 1,979,917 Life and Health Insurance........... 1,582,962 1,401,553 1,127,695 1,012,820 927,613 Corporate........................... 366,237 256,397 295,617 76,272 50,677 PROPERTY AND CASUALTY UNPAID CLAIMS... 4,585,848 3,888,485 3,069,083 2,345,527 1,698,584 LIFE AND HEALTH POLICY LIABILITIES.... 1,645,195 1,430,119 1,067,290 939,937 867,690 LONG TERM DEBT........................ 362,779 325,049 391,801 388,121 201,120 SHAREHOLDERS' EQUITY.................. 2,238,447 1,937,033 1,559,138 1,088,400 878,417 Per Common Share................. 27.54 23.85 20.06 14.88 13.94
(a) Premiums earned have been increased by a $125,000,000 return premium to the Corporation's property and casualty insurance subsidiaries related to the commutation of a medical malpractice reinsurance agreement. (b) Net income has been increased by tax benefits of $6,400,000 or $.07 per share in 1992, $7,200,000 or $.08 per share in 1991, $10,800,000 or $.12 per share in 1990, $19,200,000 or $.22 per share in 1989, $20,400,000 or $.24 per share in 1988 and $28,800,000 or $.34 per share in 1987 relating to the exclusion from taxable income of a portion of the "fresh start" discount on property and casualty unpaid claims as a result of the Tax Reform Act of 1986. (c) Net income has been reduced by a net charge of $357,500,000 or $3.95 per share for the after-tax effects of a $675,000,000 increase in unpaid claims related to an agreement for the settlement of asbestos-related litigation and the $125,000,000 return premium related to the commutation of a medical malpractice reinsurance agreement. (d) Net income has been reduced by a one-time charge of $20,000,000 or $.22 per share for the cumulative effect of changes in accounting principles resulting from the Corporation's adoption of Statements of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, and No. 109, Accounting for Income Taxes. (e) Net income has been increased by the one-time benefit of a $14,000,000 or $.16 per share elimination of deferred income taxes relating to estimated property and casualty salvage and subrogation recoverable as a result of the Revenue Reconciliation Act of 1990. (f) Net income has been increased by the one-time benefit of a $20,000,000 or $.34 per share elimination of deferred income taxes relating to life insurance policy reserves as a result of the Tax Reform Act of 1984. 39 5 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF INCOME
IN THOUSANDS YEARS ENDED DECEMBER 31 1993 1992 1991 ---------- ---------- ---------- REVENUES Premiums Earned and Policy Charges (Notes 12 and 13).......................................... $4,306,074 $3,852,461 $3,671,184 Investment Income (Note 3)......................... 800,346 751,064 701,038 Real Estate........................................ 160,650 149,945 140,957 Realized Investment Gains (Note 3)................. 232,638 187,349 65,718 ---------- ---------- ---------- TOTAL REVENUES................................ 5,499,708 4,940,819 4,578,897 ---------- ---------- ---------- BENEFITS, CLAIMS AND EXPENSES Insurance Claims and Policyholders' Benefits (Notes 13 and 14)................................ 3,548,520 2,689,138 2,468,904 Amortization of Deferred Policy Acquisition Costs (Note 4)......................................... 1,012,105 968,611 936,190 Other Insurance Operating Costs and Expenses....... 395,605 361,312 352,452 Real Estate Cost of Sales and Expenses............. 158,599 134,851 106,169 Investment Expenses................................ 11,091 10,679 10,416 Corporate Expenses................................. 29,296 27,787 21,090 ---------- ---------- ---------- TOTAL BENEFITS, CLAIMS AND EXPENSES........... 5,155,216 4,192,378 3,895,221 ---------- ---------- ---------- INCOME BEFORE FEDERAL AND FOREIGN INCOME TAX.................................. 344,492 748,441 683,676 FEDERAL AND FOREIGN INCOME TAX (NOTE 8)................. 275 131,342 131,692 ---------- ---------- ---------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES....................... 344,217 617,099 551,984 CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES, NET OF TAX (NOTE 2)................................... (20,000) -- -- ---------- ---------- ---------- NET INCOME.................................... $ 324,217 $ 617,099 $ 551,984 ========== ========== ========== PER SHARE DATA (NOTE 1) Income Before Cumulative Effect of Changes in Accounting Principles............................ $ 3.91 $ 6.96 $ 6.32 Cumulative Effect of Changes in Accounting Principles....................................... (.22) -- -- ---------- ---------- ---------- Net Income.................................... $ 3.69 $ 6.96 $ 6.32 ========== ========== ==========
See accompanying notes. 40 6 THE CHUBB CORPORATION CONSOLIDATED BALANCE SHEETS
IN THOUSANDS DECEMBER 31 1993 1992 ----------- ----------- ASSETS Invested Assets (Note 3) Short Term Investments.......................................... $ 531,282 $ 263,205 Fixed Maturities Held for Investment Tax Exempt (market $6,048,421 and $5,401,783).............. 5,528,880 5,080,706 Taxable (market $2,726,032 and $2,810,898)................. 2,528,907 2,658,857 Available-for-Sale -- Taxable (market $2,148,500 and $2,047,602).................................................. 2,128,677 1,998,190 Equity Securities (cost $709,905 and $591,914).................. 930,047 738,215 Mortgage Loans.................................................. 15,121 27,618 Policy Loans.................................................... 179,195 165,302 ----------- ----------- TOTAL INVESTED ASSETS......................................... 11,842,109 10,932,093 Cash (Note 7)...................................................... 4,586 6,744 Accrued Investment Income.......................................... 204,961 200,497 Premiums Receivable................................................ 720,122 670,793 Reinsurance Recoverable on Property and Casualty Unpaid Claims (Note 12)....................................................... 1,785,396 1,953,305 Prepaid Reinsurance Premiums....................................... 427,295 369,328 Funds in Escrow -- Asbestos-Related Settlement (Note 14)........... 538,172 -- Deferred Policy Acquisition Costs (Note 4) Property and Casualty Insurance................................. 489,702 454,976 Life and Health Insurance....................................... 522,544 474,293 Real Estate Assets (Notes 5 and 7)................................. 1,708,981 1,642,774 Deferred Income Tax (Note 8)....................................... 228,971 64,613 Other Assets (Note 6).............................................. 964,031 789,766 ----------- ----------- TOTAL ASSETS.................................................. $19,436,870 $17,559,182 =========== =========== LIABILITIES Property and Casualty Unpaid Claims (Note 14)...................... $ 8,235,442 $ 7,220,919 Life and Health Policy Liabilities................................. 2,446,620 2,193,486 Unearned Premiums.................................................. 2,179,863 1,980,439 Short Term Debt (Note 7)........................................... 94,840 288,508 Long Term Debt (Note 7)............................................ 1,273,830 1,072,841 Dividend Payable to Shareholders................................... 37,715 35,001 Accrued Expenses and Other Liabilities (Note 9).................... 972,431 813,586 ----------- ----------- TOTAL LIABILITIES............................................. 15,240,741 13,604,780 ----------- ----------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 11, 14 AND 15) SHAREHOLDERS' EQUITY (NOTE 18) Preferred Stock -- Authorized 4,000,000 Shares; $1 Par Value; Issued -- None.................................... -- -- Common Stock -- Authorized 300,000,000 Shares; $1 Par Value; Issued 87,709,465 and 87,519,560 Shares........... 87,709 87,520 Paid-In Surplus.................................................... 782,186 772,815 Retained Earnings.................................................. 3,313,140 3,139,707 Foreign Currency Translation Gains (Losses), Net of Income Tax..... 327 (5,164) Unrealized Appreciation of Equity Securities, Net of Deferred Income Tax (Note 3)............................. 143,093 96,559 Receivable from Employee Stock Ownership Plan (Note 10)............ (130,326) (137,035) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY.................................... 4,196,129 3,954,402 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $19,436,870 $17,559,182 =========== ===========
See accompanying notes. 41 7 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN THOUSANDS YEARS ENDED DECEMBER 31 1993 1992 1991 ---------- ---------- ---------- PREFERRED STOCK Balance, Beginning and End of Year.................... $ -- $ -- $ -- ---------- ---------- ---------- COMMON STOCK Balance, Beginning of Year............................ 87,520 86,938 81,912 Shares Issued upon Conversion of Long Term Debt....... -- -- 4,687 Shares Issued under Stock Option and Purchase Plans... 126 515 276 Shares Awarded under Incentive Plans.................. 63 67 63 ---------- ---------- ---------- Balance, End of Year............................. 87,709 87,520 86,938 ---------- ---------- ---------- PAID-IN SURPLUS Balance, Beginning of Year............................ 772,815 749,742 542,331 Conversion of Long Term Debt.......................... -- -- 196,040 Additions Resulting from Shares Issued under Stock Option and Purchase Plans........................... 4,944 19,068 7,804 Additions Resulting from Shares Awarded under Incentive Plans..................................... 4,427 4,005 3,567 ---------- ---------- ---------- Balance, End of Year............................. 782,186 772,815 749,742 ---------- ---------- ---------- RETAINED EARNINGS Balance, Beginning of Year............................ 3,139,707 2,662,220 2,237,993 Net Income............................................ 324,217 617,099 551,984 Dividends Declared (per share $1.72, $1.60 and $1.48). (150,784) (139,612) (127,757) ---------- ---------- ---------- Balance, End of Year............................. 3,313,140 3,139,707 2,662,220 ---------- ---------- ---------- FOREIGN CURRENCY TRANSLATION GAINS (LOSSES) Balance, Beginning of Year............................ (5,164) 7,243 2,730 Change, Net of Income Tax (Note 17)................... 5,491 (12,407) 4,513 ---------- ---------- ---------- Balance, End of Year............................. 327 (5,164) 7,243 ---------- ---------- ---------- UNREALIZED APPRECIATION OF EQUITY SECURITIES Balance, Beginning of Year............................ 96,559 178,641 166,478 Change, Net of Deferred Income Tax.................... 46,534 (82,082) 12,163 ---------- ---------- ---------- Balance, End of Year............................. 143,093 96,559 178,641 ---------- ---------- ---------- RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN Balance, Beginning of Year............................ (137,035) (143,179) (148,805) Principal Repayments.................................. 6,709 6,144 5,626 ---------- ---------- ---------- Balance, End of Year............................. (130,326) (137,035) (143,179) ---------- ---------- ---------- TOTAL SHAREHOLDERS' EQUITY....................... $4,196,129 $3,954,402 $3,541,605 ========== ========== ==========
See accompanying notes. 42 8 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS YEARS ENDED DECEMBER 31 1993 1992 1991 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income.......................................... $ 324,217 $ 617,099 $ 551,984 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Increase in Property and Casualty Unpaid Claims, Net............................. 1,182,432 523,750 442,727 Increase (Decrease) in Life and Health Policy Liabilities, Net............................... 55,841 (14,372) (5,907) Increase in Unearned Premiums, Net............... 141,457 79,218 75,096 Increase in Premiums Receivable.................. (49,329) (1,241) (4,541) Funds in Escrow -- Asbestos-Related Settlement... (538,172) -- -- Medical Malpractice Reinsurance Premium Receivable..................................... (125,000) -- -- Increase in Deferred Policy Acquisition Costs.... (82,977) (43,739) (54,397) Deferred Income Tax Credit....................... (116,720) (55,303) (48,159) Realized Investment Gains........................ (232,638) (187,349) (65,718) Cumulative Effect of Changes in Accounting Principles..................................... 20,000 -- -- Other, Net....................................... 116,410 (60,207) (16,591) ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES................................... 695,521 857,856 874,494 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sales of Fixed Maturities............. 4,051,247 2,509,625 3,478,051 Proceeds from Maturities of Fixed Maturities........ 671,229 560,752 405,181 Proceeds from Sales of Equity Securities............ 298,790 810,438 340,375 Purchases of Fixed Maturities....................... (5,005,539) (4,378,183) (5,003,046) Purchases of Equity Securities...................... (357,254) (396,045) (604,710) Decrease (Increase) in Short Term Investments, Net.. (268,077) 4,327 398,505 Increase (Decrease) in Net Payable from Security Transactions Not Settled......................... (19,092) 41,858 29,696 Additions to Real Estate Properties, Net............ (69,552) (83,703) (160,037) Purchases of Fixed Assets........................... (47,332) (33,075) (46,336) Other, Net.......................................... (8,344) 7,706 (3,455) ----------- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES.......... (753,924) (956,300) (1,165,776) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Deposits Credited to Policyholder Funds............. 295,189 232,032 213,368 Withdrawals from Policyholder Funds................. (108,116) (106,592) (99,113) Proceeds from Issuance of Long Term Debt............ 255,045 58,217 315,908 Repayment of Long Term Debt......................... (55,928) (38,926) (3,118) Increase (Decrease) in Short Term Debt, Net......... (193,668) 61,808 (28,109) Dividends Paid to Shareholders...................... (148,070) (136,772) (122,625) Other, Net.......................................... 11,793 25,664 13,058 ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES...... 56,245 95,431 289,369 ----------- ----------- ----------- Net Decrease in Cash.................................. (2,158) (3,013) (1,913) Cash at Beginning of Year............................. 6,744 9,757 11,670 ----------- ----------- ----------- CASH AT END OF YEAR............................ $ 4,586 $ 6,744 $ 9,757 =========== =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION Cash Paid During the Year for Interest (Net of Amounts Capitalized)............ $ 56,156 $ 53,898 $ 42,692 Federal and Foreign Income Taxes................. 126,955 202,431 180,659
See accompanying notes. 43 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of The Chubb Corporation (Corporation) and its property and casualty insurance, life and health insurance and real estate development subsidiaries. Significant intercompany transactions have been eliminated in consolidation. In 1993, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions, SFAS No. 109, Accounting for Income Taxes, and SFAS No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. The accounting changes for SFAS No. 106 and SFAS No. 109 have not been retroactively applied; accordingly, the 1992 and 1991 consolidated financial statements have not been restated for these changes in accounting policies. The accounting changes for SFAS No. 113 have been retroactively applied; however, there was no effect on prior years' net income. These accounting changes are further described in Note (2). Certain other amounts in the financial statements for prior years have been reclassified to conform with the 1993 presentation. (b) Investments Short term investments, which have an original maturity of one year or less, are carried at amortized cost. Fixed maturities, which include bonds and redeemable preferred stocks, are purchased to support the investment strategies of the Corporation and its insurance subsidiaries. These strategies are developed based on many factors including rate of return, maturity, credit risk, tax considerations and regulatory requirements. Those fixed maturities which the Corporation and its insurance subsidiaries have the ability and intent to hold to maturity are considered held for investment and carried at amortized cost. Fixed maturities which may be sold prior to maturity to support the investment strategies of the Corporation and its insurance subsidiaries are considered available for sale and carried at the lower of the aggregate amortized cost or market value as of the balance sheet dates. Equity securities, which include common stocks and non-redeemable preferred stocks, are carried at market values as of the balance sheet dates. Mortgage loans and policy loans of the insurance subsidiaries are carried at unpaid principal balances. Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold and are credited or charged to income. Unrealized appreciation or depreciation of equity securities, net of applicable deferred income tax, is excluded from income and credited or charged directly to a separate component of shareholders' equity. (c) Premium Revenues and Related Expenses Property and casualty insurance premiums are earned on a monthly pro rata basis over the terms of the policies. Revenues include estimates of audit premiums and premiums on retrospectively rated policies. Unearned premiums represent the portion of premiums written applicable to the unexpired terms of policies in force. Acquisition costs, consisting of commissions, premium taxes and other costs that vary with and are primarily related to the production of business, are deferred by major product groups and amortized over the period in which the related premiums are earned. Premium receipts from universal life and other interest-sensitive life insurance contracts are not reported as revenues, but established as policyholder account balances. Revenues for these contracts consist of policy charges assessed against the policyholder account balances for the cost of insurance, policy administration and surrenders. Benefits include claims incurred in excess of the related policyholder account balances and interest credited to the policyholder account balances. Premiums for traditional life insurance contracts under which the premiums and benefits are fixed and guaranteed are recognized as revenues when due. Benefits and expenses are provided against such revenues so as to recognize profits over the estimated lives of the contracts. This is accomplished by means of the provision for future policy benefits and the deferral and subsequent amortization of acquisition costs. Health insurance premiums are earned on a monthly pro rata basis over the terms of the policies. Certain costs of acquiring life insurance contracts, principally commissions, underwriting costs and certain variable agency costs, are deferred. Deferred policy acquisition costs for universal life and other interest-sensitive life insurance contracts are amortized over the lives of the contracts in relation to the present value of estimated gross profits expected to be realized. Deferred policy acquisition costs for traditional life insurance contracts are amortized over the premium payment period of the related contracts using assumptions consistent with those used in computing policy liabilities. Deferred policy acquisition costs for all insurance operations are reviewed to determine that they do not exceed recoverable amounts, after considering anticipated investment income. 44 10 (d) Property and Casualty Unpaid Claims Liabilities for unpaid claims include the accumulation of individual case estimates for claims reported and estimates of unreported claims and claim settlement expenses less estimates of anticipated salvage and subrogation recoveries. Estimates are based upon past claim experience modified for current trends as well as prevailing economic, legal and social conditions. Such estimates are continually reviewed and updated. Any resulting adjustments are reflected in current operating results. (e) Life and Health Policy Liabilities Liabilities for universal life and other interest-sensitive life insurance contracts represent the policyholder account balances before surrender charges. Interest crediting rates ranged from 4% to 7 5/8%. Liabilities for traditional life insurance contracts consist of future policy benefits which are computed by the net level premium method based upon estimated future investment yield, expected mortality and estimated withdrawals. Assumptions generally vary by plan, age at issue and year of issue. Interest rate assumptions ranged from 3% to 9%. Mortality is calculated principally on an experience multiple applied to select and ultimate tables in common usage in the industry. Estimated withdrawals are determined principally based on industry tables. Liabilities for health insurance include estimates for claims reported and for claims incurred but not reported. (f) Reinsurance In the ordinary course of business, the Corporation's insurance subsidiaries assume and cede reinsurance with other insurance companies and are members of various pools and associations. These arrangements provide greater diversification of business and minimize the maximum net loss potential arising from large risks. A large portion of the reinsurance is effected under contracts known as treaties and in some instances by negotiation on individual risks. Certain of these arrangements consist of excess of loss and catastrophe contracts which protect against losses over stipulated amounts arising from any one occurrence or event. Reinsurance contracts do not relieve the Corporation's insurance subsidiaries of their obligation to the policyholders. Prepaid reinsurance premiums represent the portion of property and casualty insurance premiums ceded to reinsurers applicable to the unexpired terms of the reinsurance contracts in force. Commissions received related to reinsurance premiums are considered in determining net acquisition costs eligible for deferral. Reinsurance recoverable on unpaid claims and policy liabilities represent estimates of the portion of such liabilities that will be recovered from reinsurers, determined in a manner consistent with the liabilities associated with the reinsured policies. (g) Real Estate Real estate properties are carried at cost and include real estate taxes, interest and other carrying costs incurred prior to completion of the assets for their intended use. Costs incurred during the initial leasing of income producing properties are capitalized until the project is substantially complete, subject to a maximum time period subsequent to completion of major construction activity. The carrying value of real estate properties does not exceed their ultimate net realizable value. Impairment would be recognized to the extent ultimate net realizable value were less than the carrying value. Ultimate net realizable value is determined based on the ability to fully recover costs through a future revenue stream supported principally by rental revenues, after consideration of related costs. The time value of money is not considered in assessing revenues versus costs. Depreciation of real estate properties is calculated using the straight-line method over the estimated useful lives of the properties. Real estate mortgages and notes receivable are carried at unpaid principal balances less an allowance for uncollectible amounts. The equity method of accounting is used for joint ventures in which the real estate subsidiaries own an interest of less than 50%. Profits on land and building sales are recognized at closing, subject to receipt of down payments and other requirements in accordance with applicable accounting guidelines. Profits on construction contracts are recognized using the percentage of completion method. Profits on condominium unit sales are recognized using the percentage of completion method, subject to achievement of a minimum level of unit sales. 45 11 (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) Goodwill Goodwill, which represents the excess of the purchase price over the fair value of net assets of subsidiaries acquired, is amortized using the straight-line method over periods not exceeding 40 years. Total unamortized goodwill included in other assets was $69,755,000 and $71,941,000 at December 31, 1993 and 1992, respectively. (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. Prior to 1993, deferred income taxes were provided to recognize timing differences, which resulted from reporting certain revenues and expenses in different periods for financial reporting purposes than for income tax purposes. Deferred income taxes provided for unrealized appreciation of equity securities and foreign currency translation gains and losses are recorded as a charge or credit directly to the applicable component of shareholders' equity. U. S. federal income taxes are accrued on undistributed earnings of foreign subsidiaries. (k) Foreign Exchange Assets and liabilities relating to foreign operations are translated into U.S. dollars using current exchange rates; revenues and expenses are translated into U. S. dollars using the average exchange rates for each year. The functional currency of most foreign operations is the currency of the local operating environment since their business is primarily transacted in such local currencies. Translation gains and losses, net of applicable income tax, are excluded from income and accumulated in a separate component of shareholders' equity. (l) 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 estimates of future cash flows. Accordingly, the derived fair value estimates cannot be substantiated by comparison to independent markets and are not necessarily indicative of the amounts that could be realized in immediate settlement of the instrument. Certain financial instruments, particularly insurance contracts, are excluded from fair value disclosure requirements. The methods and assumptions used to estimate the fair value of financial instruments are as follows: (i) The carrying value of short term investments approximates fair value due to the short maturities of these investments. (ii) Fair values of fixed maturities with active markets are based on quoted market prices. For fixed maturities that trade in less active markets, fair values are obtained from independent pricing services. Fair values of fixed maturities are principally a function of current interest rates. Care should be used in evaluating the significance of these estimated market values. (iii) Fair values of equity securities are based on quoted market prices. (iv) Fair values of mortgage loans and policy loans of the insurance subsidiaries are estimated using discounted cash flow analyses and approximate carrying values. (v) Fair values of real estate mortgages and notes receivable are estimated individually as the lesser of (1) the capitalization value of the non-discounted cash flow of the property serving as the collateral for the loan or (2) the value of the discounted cash flow required by the loan. The capitalization value is determined for each loan by applying the yield, adjusted for credit risk, of a U.S. Treasury security with a maturity similar to the loan to the estimated net cash flow from the property's underlying leases. A similar yield is used for the discounted cash flow analysis. (vi) The carrying value of short term debt approximates fair value due to the short maturities of this debt. (vii) Fair values of term loans and mortgages payable approximate carrying values because such loans and mortgages consist primarily of variable-rate debt that reprices frequently and recently issued debt with interest rates which approximate the current incremental borrowing rates of the issuing subsidiaries. Fair values of long term notes are based on prices quoted by dealers. 46 12 (m) Earnings Per Share Earnings per share amounts are based on the weighted average number of common and common equivalent shares outstanding during each year, which were 90,548,534, 90,093,741 and 88,637,522 in 1993, 1992 and 1991, respectively. The 5 1/2% convertible subordinated notes, which were converted or redeemed during 1991, and the 6% guaranteed exchangeable subordinated notes are both considered to be common equivalent shares during the period they were outstanding. The computation assumes the addition to income of the after-tax interest expense applicable to such notes. (n) Cash Flow Information In the statements 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 1991, $199,915,000 of the 5 1/2% convertible subordinated notes was converted into 4,687,123 shares of common stock of the Corporation and a real estate development subsidiary assumed a $113,500,000 mortgage in connection with a property acquisition. These noncash transactions have been excluded from the statements of cash flows. (o) Accounting Pronouncements Not Yet Adopted In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No. 114, Accounting by Creditors for Impairment of a Loan. SFAS No. 114 requires creditors to evaluate the collectibility of both contractual interest and contractual principal payments when assessing impairment. Currently, the Corporation assesses impairment based solely on the recoverability of the principal balance. SFAS No. 114 also requires creditors to measure impairment of a loan based on the present value of the loan's expected cash flows discounted at the loan's effective interest rate or, if more practical, based on the loan's market price or the fair value of the underlying collateral. SFAS No. 114 is effective for fiscal years beginning after December 15, 1994. Restatement of prior year financial statements is not permitted. Management has not yet determined in what year it intends to adopt SFAS No. 114. The impact of the Statement on the Corporation's financial position and future operating results has not yet been quantified. In May 1993, the FASB also issued SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Similar to the Corporation's current accounting policy for investments in fixed maturities and equity securities, SFAS No. 115 provides that the accounting for such securities depends on their classification as either held-to-maturity (currently referred to as held for investment), available-for-sale or trading. However, SFAS No. 115 establishes more stringent criteria to classify fixed maturities as held-to-maturity. Therefore, SFAS No. 115, when adopted, will result in an increase in the portion of the Corporation's fixed maturities classified as available-for-sale and a similar decrease in those classified as held-to-maturity. SFAS No. 115 also requires that fixed maturities classified as available-for-sale be carried at market value, with unrealized appreciation or depreciation excluded from income and credited or charged directly to a separate component of shareholders' equity. Currently, such fixed maturities are carried at the lower of the aggregate amortized cost or market value. Upon the Corporation's adoption of SFAS No. 115, deferred policy acquisition costs related to interest-sensitive life insurance contracts will be adjusted to reflect the effects that would have been recognized had the unrealized gains and losses relating to investments classified as available-for-sale actually been realized, with a corresponding charge or credit directly to the separate component of shareholders' equity. SFAS No. 115 is effective for fiscal years beginning after December 15, 1993 and may not be retroactively applied to prior years' financial statements. The Corporation will adopt the Statement in the first quarter of 1994. SFAS No. 115, when adopted, will increase shareholders' equity by an amount which has not yet been quantified. Adoption of the Statement will not have an impact on net income in the year of adoption or in future years. (2) CHANGES IN ACCOUNTING PRINCIPLES Effective January 1, 1993, the Corporation adopted SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. SFAS No. 106 requires the Corporation to accrue the expected cost of providing postretirement benefits, principally health care and life insurance, to employees and their beneficiaries and covered dependents during the years that the employees render the necessary service. Prior to 1993, the Corporation used the pay-as-you-go, or cash, method to recognize the cost of these benefits. The transition obligation of $89,400,000, which represents the unfunded and unrecognized accumulated postretirement benefit obligation as of January 1, 1993, was recognized in the first quarter of 1993 as the cumulative effect of a change in accounting principle. The cumulative effect, net of related income tax benefits of $30,400,000, was a decrease in net income of $59,000,000 or $.65 per share. 47 13 Effective January 1, 1993, the Corporation also adopted SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 prescribes an asset and liability method of accounting for income taxes, the objective of which is to recognize an asset or liability for the expected future tax effects attributable to temporary differences between the financial reporting and tax bases of assets and liabilities. Under the asset and liability method, deferred tax assets and liabilities are adjusted to reflect changes in tax rates and other provisions of tax law in the period in which such changes are enacted. (Prior to 1993, the Corporation used the deferred method, the objective of which was to match income tax expense with pre-tax accounting income. Under the deferred method, deferred tax assets and liabilities were not adjusted for changes in the provisions of the tax law.) Under SFAS No. 109, deferred tax assets are to be recognized unless it is more likely than not that some portion or all of the deferred tax assets will not be realized. SFAS No. 109 was implemented by including the cumulative effect of the change in accounting principle in net income in the first quarter of 1993. Such cumulative effect was an increase in net income of $39,000,000 or $.43 per share, due principally to the recognition of the tax benefit relating to the remaining "fresh start" discount on property and casualty unpaid claims as a result of the Tax Reform Act of 1986. In 1993, the Corporation adopted SFAS No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. SFAS No. 113 establishes the conditions required for a contract with a reinsurer to be accounted for as reinsurance and prescribes accounting and reporting standards for those contracts. SFAS No. 113 requires that reinsurance recoverables and prepaid reinsurance premiums be reported separately as assets on the balance sheet rather than the previous practice of reducing the related insurance liabilities by such amounts. The change has been retroactively applied. Accordingly, the 1992 balance sheet amounts have been restated. The adoption of SFAS No. 113 had no effect on prior years' net income. Excluding the cumulative effect adjustments, the adoption of these statements did not have a significant effect on net income in 1993. Their impact on net income in future years is also not expected to be significant. (3) INVESTED ASSETS AND RELATED INCOME (a) The sources of net investment income were as follows:
Years Ended December 31 -------------------------------- 1993 1992 1991 -------- -------- -------- (in thousands) Fixed maturities.............. $734,353 $682,466 $614,667 Equity securities............. 23,709 43,141 47,091 Short term investments........ 22,169 12,121 30,390 Other......................... 20,115 13,336 8,890 -------- -------- -------- Gross investment income..... 800,346 751,064 701,038 Investment expenses........... 11,091 10,679 10,416 -------- -------- -------- $789,255 $740,385 $690,622 ======== ======== ========
(b) Realized investment gains and losses were as follows:
Years Ended December 31 -------------------------------- 1993 1992 1991 -------- -------- -------- (in thousands) Gross realized investment gains Fixed maturities............ $193,738 $ 74,253 $ 70,465 Equity securities........... 62,274 157,356 41,393 -------- -------- -------- 256,012 231,609 111,858 -------- -------- -------- Gross realized investment losses Fixed maturities............ 20,627 20,538 7,738 Equity securities........... 2,747 23,722 38,402 -------- -------- -------- 23,374 44,260 46,140 -------- -------- -------- Realized investment gains....... 232,638 187,349 65,718 Income tax...................... 81,019 63,718 22,374 -------- -------- -------- $151,619 $123,631 $ 43,344 ======== ======== ========
Proceeds from sales of fixed maturities considered available for sale were $3,471,404,000 and $2,114,707,000 in 1993 and 1992, respectively. Gross gains of $152,483,000 and $57,191,000 and gross losses of $12,542,000 and $15,508,000 were realized on such sales in 1993 and 1992, respectively. (c) The components of unrealized appreciation of equity securities were as follows:
December 31 ----------------------- 1993 1992 -------- -------- (in thousands) Gross unrealized appreciation... $228,765 $151,262 Gross unrealized depreciation... 8,623 4,961 -------- -------- 220,142 146,301 Deferred income tax............. 77,049 49,742 -------- -------- $143,093 $ 96,559 ======== ========
The change in unrealized appreciation of equity securities was as follows:
Years Ended December 31 ------------------------------ 1993 1992 1991 ------- --------- ------- (in thousands) Change in unrealized appreciation of equity securities........... $73,841 $(124,361) $18,298 Deferred income tax (credit)..... 27,307 (42,279) 6,135 ------- --------- ------- $46,534 $ (82,082) $12,163 ======= ========== =======
48 14 (d) The amortized cost and estimated market value of fixed maturities were as follows:
December 31 ------------------------------------------------------------------------------------------------ 1993 1992 ---------------------------------------------- ------------------------------------------------ Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value ---------- ---------- ---------- ----------- ---------- ---------- ---------- ----------- (in thousands) Held for investment Tax exempt............. $ 5,528,880 $519,989 $ 448 $ 6,048,421 $5,080,706 $322,575 $ 1,498 $ 5,401,783 ----------- -------- ------- ----------- ---------- -------- ------- ----------- Taxable Corporate bonds...... 1,323,642 125,355 3,119 1,445,878 1,431,808 92,161 7,498 1,516,471 Foreign bonds........ 325,059 34,114 161 359,012 505,560 19,110 805 523,865 Mortgage-backed securities......... 876,847 41,942 1,813 916,976 716,626 49,619 1,300 764,945 Redeemable preferred stocks............. 3,359 807 -- 4,166 4,863 810 56 5,617 ----------- -------- ------- ----------- ---------- -------- ------- ----------- 2,528,907 202,218 5,093 2,726,032 2,658,857 161,700 9,659 2,810,898 ----------- -------- ------- ----------- ---------- -------- ------- ----------- Total held for investment....... 8,057,787 722,207 5,541 8,774,453 7,739,563 484,275 11,157 8,212,681 ----------- -------- ------- ----------- ---------- -------- ------- ----------- Available for sale Taxable U.S. Government and government agency and authority obligations........ 951,739 13,530 19,198 946,071 1,076,497 45,110 436 1,121,171 Corporate bonds...... 47,934 149 648 47,435 221,049 394 2,006 219,437 Foreign bonds........ 451,864 21,310 12 473,162 184,952 1,685 1,520 185,117 Mortgage-backed securities......... 677,140 13,814 9,122 681,832 515,692 11,988 5,803 521,877 ----------- -------- ------- ----------- ---------- -------- ------- ----------- Total available for sale............. 2,128,677 48,803 28,980 2,148,500 1,998,190 59,177 9,765 2,047,602 ----------- -------- ------- ----------- ---------- -------- ------- ----------- Total fixed maturities....... $10,186,464 $771,010 $34,521 $10,922,953 $9,737,753 $543,452 $20,922 $10,260,283 =========== ======== ======= =========== ========== ======== ======= ===========
The increase in unrealized appreciation of fixed maturities was $213,959,000, $32,059,000 and $411,120,000 for the years ended December 31, 1993, 1992 and 1991, respectively. The amortized cost and estimated market value of fixed maturities at December 31, 1993 by contractual maturity were as follows:
Estimated Amortized Market Cost Value ----------- ----------- (in thousands) Due in one year or less.................................... $ 259,188 $ 264,183 Due after one year through five years...................... 1,586,837 1,694,341 Due after five years through ten years..................... 2,657,578 2,894,833 Due after ten years........................................ 4,128,874 4,470,788 ----------- ----------- 8,632,477 9,324,145 Mortgage-backed securities................................. 1,553,987 1,598,808 ----------- ----------- $10,186,464 $10,922,953 =========== ===========
Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 49 15 (4) DEFERRED POLICY ACQUISITION COSTS Policy acquisition costs deferred and the related amortization charged to income were as follows:
Years Ended December 31 ----------------------------------- 1993 1992 1991 --------- --------- --------- (in thousands) Property and Casualty Insurance Balance, beginning of year...... $ 454,976 $ 440,025 $ 412,428 --------- --------- --------- Costs deferred during year Commissions and brokerage..... 463,977 432,608 437,426 Premium taxes and assessments. 103,928 103,776 94,152 Salaries and overhead......... 415,788 390,394 372,684 --------- --------- --------- 983,693 926,778 904,262 Amortization during year........ (948,967) (911,827) (876,665) --------- --------- --------- Balance, end of year............ $ 489,702 $ 454,976 $ 440,025 ========= ========= ========= Life and Health Insurance Balance, beginning of year...... $ 474,293 $ 445,505 $ 418,705 Costs deferred during year...... 111,389 85,572 86,325 Amortization during year........ (63,138) (56,784) (59,525) --------- --------- --------- Balance, end of year............ $ 522,544 $ 474,293 $ 445,505 ========= ========= =========
(5) REAL ESTATE ASSETS The components of real estate assets were as follows:
December 31 ----------------------- 1993 1992 ---------- ---------- (in thousands) Mortgages and notes receivable (net of allowance for uncollectible amounts of $54,948 and $33,234)................................ $ 424,679 $ 430,350 Income producing properties (net of accumulated depreciation of $23,983 and $15,626).... 795,205 461,238 Construction in progress.............................. 67,087 229,657 Land under development and unimproved land............ 422,010 521,529 ---------- ---------- $1,708,981 $1,642,774 ========== ==========
Substantially all mortgages and notes receivable are secured by buildings and land. The ultimate collectibility of the receivables, of which no significant amounts are due in the near term, is evaluated continuously and an appropriate allowance for uncollectible amounts established. Mortgages and notes receivable had an aggregate fair value of approximately $394,000,000 and $406,000,000 at December 31, 1993 and 1992, 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. The difference between the fair value and carrying value at December 31, 1993 is not expected to be realized as the real estate subsidiaries intend to hold the mortgages and notes to maturity. (6) PROPERTY AND EQUIPMENT Property and equipment included in other assets were as follows:
December 31 ------------------- 1993 1992 -------- -------- (in thousands) Cost.................................. $329,876 $302,952 Less accumulated depreciation......... 140,718 122,454 -------- -------- $189,158 $180,498 ======== ========
Depreciation expense was $39,951,000, $36,660,000 and $31,700,000 for 1993, 1992 and 1991, respectively. (7) DEBT AND CREDIT ARRANGEMENTS (a) Short term debt consisted of the following:
December 31 ------------------ 1993 1992 ------- -------- (in thousands) Commercial paper....................... $89,540 $223,108 Notes.................................. 5,300 65,400 ------- -------- $94,840 $288,508 ======= ========
Short term debt is used primarily to support the real estate operations. The commercial paper is issued by Chubb Capital Corporation (Chubb Capital), a subsidiary of the Corporation, and is guaranteed by the Corporation. The notes are current obligations under revolving credit arrangements. Borrowings under these short term instruments are unsecured and are on terms and at interest rates generally extended to prime borrowers. (b) Long term debt consisted of the following:
December 31 ------------------------------------------------- 1993 1992 ----------------------- ----------------------- Carrying Fair Carrying Fair Value Value Value Value ---------- ---------- ---------- ---------- (in thousands) Term loans...... $ 306,236 $ 306,236 $ 352,475 $ 352,475 Mortgages....... 217,594 217,594 220,366 220,366 8 3/4% notes.... 150,000 171,188 150,000 163,388 8 5/8% notes.... 100,000 103,500 100,000 106,665 6% notes........ 150,000 153,188 -- -- 6 7/8% notes.... 100,000 103,875 -- -- 6% exchangeable subordinated notes......... 250,000 266,250 250,000 303,125 ---------- ---------- ---------- ---------- $1,273,830 $1,321,831 $1,072,841 $1,146,019 ========== ========== ========== ==========
The term loans and mortgages are obligations of the real estate subsidiaries, except for a $6,637,000 mortgage loan of the life and health insurance subsidiaries. The term loans mature in varying amounts through 1997. Substantially all term loans are at an interest rate equivalent to the lower of the prime rate or a rate associated with the lender's cost of funds. At December 31, 1993, the interest rates related to these borrowings ranged from 4 1/4% to 10%. The real estate subsidiaries' mortgages payable are due in varying amounts monthly through 2013 with interest rates ranging from 5% to 12%. The term loans and mortgages payable are secured by real estate assets with a net book value of $860,097,000 at December 31, 1993. 50 16 The life and health insurance subsidiaries' mortgage, which is secured by a portion of their home office complex, bears interest at 11 3/8% and is payable monthly through December 2000. The Corporation has outstanding $150,000,000 of unsecured 8 3/4% notes due November 15, 1999. In each of the years 1995 through 1998, the Corporation will pay as a mandatory sinking fund an amount sufficient to redeem $30,000,000 of principal. The notes will be redeemed on a pro rata basis on November 15 of each of these years at a redemption price of 100% of their principal amount. Chubb Capital has outstanding $100,000,000 of unsecured 8 5/8% notes due January 15, 1995 which are guaranteed by the Corporation. In February 1993, Chubb Capital sold $150,000,000 of 6% notes due February 1, 1998 and $100,000,000 of 6 7/8% notes due February 1, 2003, the aggregate net proceeds from which were $248,128,000. These notes are unsecured and are guaranteed by the Corporation. Chubb Capital has outstanding in the Eurodollar market $250,000,000 of 6% exchangeable subordinated notes due May 15, 1998, which are guaranteed by the Corporation. The notes are exchangeable at the option of the holder into 11.628 shares of common stock of the Corporation for each $1,000 of principal amount, equivalent to a conversion price of $86.00 per share. The notes are redeemable, in whole or in part, at the option of Chubb Capital, at any time on or after May 15, 1994, at redemption prices declining annually from 103.4% of the principal amount if redeemed before May 15, 1995 to 100.9% of the principal amount if redeemed on or after May 15, 1997. The amounts of long term debt due annually during the five years subsequent to December 31, 1993 are as follows:
Term Loans Years Ending and December 31 Mortgages Notes Total ------------------ ---------- -------- -------- (in thousands) 1994.................. $107,136 $ -- $107,136 1995.................. 139,447 130,000 269,447 1996.................. 219,854 30,000 249,854 1997.................. 42,579 30,000 72,579 1998.................. 2,881 430,000 432,881
(c) Interest costs of $92,905,000, $94,824,000 and $90,911,000 were incurred in 1993, 1992 and 1991, respectively, of which $28,685,000, $40,284,000 and $46,369,000 were capitalized. (d) The Corporation has a revolving credit agreement with a group of banks that provides for unsecured borrowings of up to $300,000,000. The agreement terminates on November 30, 1994 at which time any loans then outstanding become payable. Borrowings will, at the Corporation's option, bear interest at various rates, all of which are based on market rates. The Corporation pays a facility fee of 1/4% per annum. As of December 31, 1993, there were no borrowings under this agreement. The Corporation and its subsidiaries had additional unused lines of credit of approximately $186,000,000 at December 31, 1993. These lines of credit generally have terms ranging from thirty days to one year and are paid for with a combination of fees and compensating bank balances. Unused credit facilities are available to support the commercial paper borrowing arrangement. (8) FEDERAL AND FOREIGN INCOME TAX (a) Income tax expense consisted of the following components:
Years Ended December 31 ----------------------------------- 1993 1992 1991 --------- -------- -------- (in thousands) Current tax United States............................................ $ 105,293 $159,193 $148,913 Foreign.................................................. 11,702 27,452 30,938 Deferred tax credit, principally United States............. (116,720) (55,303) (48,159) --------- -------- -------- $ 275 $131,342 $131,692 ========= ======== ========
The Tax Reform Act of 1986 requires property and casualty insurance companies to discount unpaid claims for tax purposes as of January 1, 1987 and provides that the initial discount on such unpaid claims be excluded from taxable income. Until 1993, the tax benefit of this exclusion was included in income as the "fresh start" was recognized on the tax return. The federal income tax provisions in 1992 and 1991 reflect tax benefits of $6,400,000 and $7,200,000, respectively, relating to the exclusion from taxable income of a portion of the "fresh start" discount. There was no tax benefit in 1993 since, for accounting purposes, the remaining "fresh start" benefit was recognized, effective January 1, 1993, as part of the cumulative effect of the change in accounting principle upon the adoption by the Corporation of SFAS No. 109 (see Note (2)). 51 17 (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:
Years Ended December 31 ----------------------------------------------------------------------- 1993 1992 1991 --------------------- -------------------- -------------------- % of % of % of Pre-Tax Pre-Tax Pre-Tax Amount Income Amount Income Amount Income --------- -------- -------- -------- -------- -------- (in thousands) Income before federal and foreign income tax............ $ 344,492 $748,441 $683,676 ========= ======== ======== Tax at statutory federal income tax rate................ $ 120,572 35.0% $254,470 34.0% $232,450 34.0% Tax exempt interest income.............................. (110,297) (32.0) (96,420) (12.9) (86,719) (12.7) Deferred income tax benefit due to increase in tax rate. (4,661) (1.4) -- -- -- -- Settlement of prior years' taxes........................ (4,602) (1.3) (15,170) (2.0) -- -- "Fresh start" discount on property and casualty unpaid claims................................................ -- -- (6,400) (.9) (7,200) (1.0) Other, net.............................................. (737) (.2) (5,138) (.7) (6,839) (1.0) --------- ------- -------- ------- -------- ------- Actual tax...................................... $ 275 .1% $131,342 17.5% $131,692 19.3% ========= ======= ======== ======= ======== =======
(c) The tax effects of temporary differences that gave rise to deferred tax assets and liabilities at December 31, 1993 were as follows:
(in thousands) Deferred tax assets Property and casualty unpaid claims...................................................... $461,879 Unearned premiums........................................................................ 111,164 Life and health policy liabilities....................................................... 115,347 Postretirement benefits.................................................................. 49,524 -------- Total.................................................................................. 737,914 -------- Deferred tax liabilities Deferred policy acquisition costs........................................................ 296,642 Real estate assets....................................................................... 118,386 Unrealized appreciation of equity securities............................................. 77,049 Other, net............................................................................... 16,866 -------- Total.................................................................................. 508,943 -------- Net deferred tax asset..................................................................... $228,971 ========
Management believes that it is more likely than not that the net deferred tax asset at December 31, 1993 will be fully realized. Prior to the adoption of SFAS No. 109, deferred income tax expense represented the tax effect of timing differences in the recognition of revenues and expenses for financial reporting and income tax purposes. The sources of these differences and the tax effect of each were as follows:
Years Ended December 31 ----------------------- 1992 1991 -------- -------- (in thousands) Discount on property and casualty unpaid claims.................................... $(39,044) $(45,647) Unearned premium reserve phase-in.................................................. (12,955) (12,955) Real estate assets................................................................. 13,059 10,591 Other, net......................................................................... (16,363) (148) -------- -------- $(55,303) $(48,159) ======== ========
52 18 (9) PENSIONS AND OTHER POSTRETIREMENT BENEFITS (a) The Corporation and its subsidiaries have several non-contributory defined benefit pension plans covering substantially all employees. The benefits are generally based on an employee's years of service and average compensation during the last five years of employment. Pension costs are determined using the projected unit credit method. The Corporation's policy is to make annual contributions that meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The components of net pension cost were as follows:
Years Ended December 31 -------------------------------- 1993 1992 1991 -------- -------- -------- (in thousands) Service cost of current period............................... $ 17,877 $ 15,188 $ 13,039 Interest cost on projected benefit obligation................ 19,598 16,962 14,362 Actual return on plan assets................................. (30,767) (19,361) (42,536) Net amortization and deferral................................ 10,706 1,996 28,925 -------- -------- -------- Net pension cost............................................. $ 17,414 $ 14,785 $ 13,790 ======== ======== ========
The following table sets forth the plans' funded status and amounts recognized in the balance sheets:
December 31 ------------------- 1993 1992 -------- -------- (in thousands) Actuarial present value of benefit obligations for service rendered to date: Accumulated benefit obligation based on current salary levels, including vested benefits of $168,702 and $142,861.. $178,439 $151,172 Additional amount related to projected future salary increases............................................ 117,084 96,969 -------- -------- Projected benefit obligation for service rendered to date..... 295,523 248,141 Plan assets at fair value......................................... 265,453 227,674 -------- -------- Projected benefit obligation in excess of plan assets............. 30,070 20,467 Unrecognized net gain from past experience different from that assumed............................................... 13,438 21,613 Unrecognized prior service costs.................................. (5,196) (5,884) Unrecognized net asset at January 1, 1985, being recognized principally over 19 years....................................... 11,034 12,424 -------- -------- Pension liability included in other liabilities................... $ 49,346 $ 48,620 ======== ========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligations at December 31, 1993 and 1992 was 7 1/2% and 7 3/4%, respectively, and the rate of increase in future compensation levels was 6% for both years. The expected long term rate of return on assets was 9% for both years. Plan assets are principally invested in publicly traded stocks and bonds. (b) The Corporation and its subsidiaries provide certain other postretirement benefits, principally health care and life insurance, to retired employees and their beneficiaries and covered dependents. Substantially all U.S. employees may become eligible for these benefits upon retirement if they meet minimum age and years of service requirements. The Corporation does not fund these benefits in advance. Benefits are paid as covered expenses are incurred. Health care coverage is contributory. Retiree contributions vary based upon a retiree's age, type of coverage and years of service with the Corporation. Life insurance coverage is noncontributory. The components of net postretirement benefit cost for the year ended December 31, 1993 were as follows:
(in thousands) Service cost of current period.............................. $ 4,384 Interest cost on accumulated benefit obligation............. 6,864 -------- Net postretirement benefit cost............................. $ 11,248 ========
Prior to the adoption of SFAS No. 106, the cost of other postretirement benefits was recognized when the annual insurance premiums, which were immaterial, were paid. The components of the accumulated postretirement benefit obligation at December 31, 1993 were as follows:
(in thousands) Retirees.................................................... $ 39,316 Fully eligible active plan participants..................... 6,072 Other active plan participants.............................. 59,198 -------- Accumulated postretirement benefit obligation............... 104,586 Unrecognized net loss from past experience different from that assumed............................... (5,729) -------- Postretirement benefit liability included in other liabilities............................................... $ 98,857 ========
The weighted average discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation at December 31, 1993 was 7 1/2%. The health care cost trend rate used to measure the accumulated postretirement cost for medical benefits was 15% for 1993. The rate is assumed to decrease gradually to 7 1/2% for the year 2005 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amount of the accumulated postretirement benefit obligation and the net postretirement benefit cost reported. To illustrate, a one percent increase in the trend rate for each year would increase the accumulated postretirement benefit obligation at December 31, 1993 by $11,565,000 and the aggregate of the service and interest cost components of net postretirement benefit cost for the year ended December 31, 1993 by $1,395,000. 53 19 (10) OPTION AND INCENTIVE PLANS (a) The Long-Term Stock Incentive Plan provides for the granting of stock options, stock appreciation rights, performance shares, restricted stock, restricted stock units, convertible debentures and other stock based awards to key employees. The Long-Term Stock Incentive Plan succeeds a prior stock option plan which continues to govern awards made pursuant to it. The maximum number of shares of the Corporation's common stock in respect to which stock based awards may be granted under the plan is 4,400,000 shares. At December 31, 1993, 3,064,635 shares were available for grant under the Long-Term Stock Incentive Plan. Stock options are rights to purchase shares of the Corporation's common stock. Stock appreciation rights are rights to receive an amount equal to the excess of the fair market value of a share over the grant price of such right in cash, in shares of the Corporation's common stock or in a combination of both. Stock appreciation rights may be granted in tandem with or unrelated to options. Stock options and stock appreciation rights 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 and stock appreciation rights become exercisable may vary among grants. However, stock appreciation rights are not exercisable earlier than six months after grant. Options and stock appreciation rights expire no later than ten years from the date of grant. Information concerning stock options granted under the Long-Term Stock Incentive Plan and the prior plan is as follows:
1993 1992 1991 ------------------------- ----------------------------- ----------------------------- Option Option Option Number Price Number Price Number Price of Shares Per Share of Shares Per Share of Shares Per Share --------- ------------ --------- ------------ --------- ------------ Outstanding, beginning of year............... 1,558,484 $13.23-74.06 1,228,979 $13.23-72.06 1,144,363 $13.23-47.75 Granted............... 678,461 83.56-92.63 554,900 66.75-74.06 344,350 64.63-72.06 Exercised............. (136,888) 13.23-72.06 (210,220) 13.23-72.06 (245,484) 13.23-47.75 Cancelled............. (16,299) 24.50-83.56 (15,175) 47.75-72.06 (14,250) 35.00-72.06 --------- --------- --------- Outstanding, end of year................ 2,083,758 13.23-92.63 1,558,484 13.23-74.06 1,228,979 13.23-72.06 ========= ========= ========= Exercisable, end of year................ 1,147,272 13.23-92.63 847,809 13.23-72.06 737,979 13.23-47.75
No stock appreciation rights unrelated to stock options have been granted. Of the stock options outstanding at December 31, 1993, 1992 and 1991, 136,962, 157,769 and 238,382, respectively, had stock appreciation rights granted in tandem with the options. Stock appreciation rights have not been granted since 1990. Performance share awards are based on the achievement of various goals over performance cycle periods. The cost of such awards is expensed over the performance cycle. Such awards are payable in cash, in shares of the Corporation's common stock or in a combination of both. Restricted stock awards consist of shares of common stock of the Corporation granted at no cost. Shares of restricted stock become outstanding when granted, receive dividends and have voting rights. The shares are subject to forfeiture and to restrictions which limit the sale or transfer during the restriction period. An amount equal to the fair market value of the shares at the date of grant is expensed over the restriction period. Convertible debenture awards are convertible into shares of common stock of the Corporation. The debentures and any shares of common stock issued upon conversion are subject to forfeiture and to restrictions which limit the sale or transfer during the restriction period. The cost of the debenture awards is expensed during the period the related service is performed. The aggregate amount charged against income with respect to these awards was $4,219,000, $5,100,000 and $8,214,000 in 1993, 1992 and 1991, respectively. (b) The Stock Option Plan for Non-Employee Directors provides for the granting of options to eligible directors to purchase shares of the Corporation's common stock. Options are granted at exercise prices equal to the fair market value of the Corporation's common stock on the date of grant. Options become exercisable immediately and expire no later than five years from the date of termination as an eligible director. The maximum number of shares in respect to which options may be granted under the plan is 300,000 shares. At December 31, 1993, 272,000 shares were available for grant under the Stock Option Plan for Non-Employee Directors. Information concerning stock options granted under the Stock Option Plan for Non-Employee Directors is as follows:
1993 1992 1991 --------------------------- --------------------------- --------------------------- Option Option Option Number Price Number Price Number Price of Shares Per Share of Shares Per Share of Shares Per Share --------- ------------ --------- ------------ --------- ------------ Outstanding, beginning of year.. 100,000 $26.84-69.19 96,000 $26.84-69.19 68,000 $26.84-44.19 Granted......................... 28,000 86.94 28,000 65.19 30,000 69.19 Exercised....................... (4,000) 26.84-44.19 (24,000) 26.84-69.19 (2,000) 69.19 ------- ------- ------ Outstanding and exercisable, end of year....................... 124,000 26.84-86.94 100,000 26.84-69.19 96,000 26.84-69.19 ======= ======= ======
54 20 (c) The Corporation has a leveraged Employee Stock Ownership Plan (ESOP) in which substantially all employees are eligible to participate. At its inception in 1989, the ESOP used the proceeds of a $150,000,000 loan from the Corporation to purchase 3,896,102 newly issued shares of the Corporation's common stock. The loan is due in September 2004 and bears interest at 9%. The Corporation has recorded the receivable from the ESOP as a separate reduction of shareholders' equity on the consolidated balance sheets. This balance is reduced as repayments are made on the loan principal. The Corporation and its participating subsidiaries make semi-annual contributions to the ESOP in amounts determined at the discretion of the Corporation's Board of Directors. The contributions, together with the dividends on the unallocated shares of common stock in the ESOP, are used by the ESOP to make loan interest and principal payments to the Corporation. As interest and principal are paid, a portion of the common stock is allocated to eligible employees. The Corporation uses the cash payment method of recognizing ESOP expense. In 1993, 1992 and 1991, contributions to the ESOP were $12,172,000, $11,995,000 and $11,841,000, respectively, and dividends on unallocated shares used for debt service by the ESOP were $4,711,000, $4,709,000 and $4,623,000, respectively. (d) The Corporation has a savings plan, the Capital Accumulation Plan. Effective in 1992, participation in the plan was extended to employees of the life and health insurance and real estate development subsidiaries. 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 $12,564,000, $12,182,000 and $9,154,000 were charged against income in 1993, 1992 and 1991, respectively. (e) The Corporation has a Stock Purchase Plan under which substantially all employees are eligible to purchase shares of the Corporation's common stock. Shares are purchased at a price not less than 95% of the fair market value on the date of grant. At December 31, 1993, there were 237,412 subscribed shares at a price of $86.06. (11) LEASES The Corporation and its subsidiaries occupy office facilities under lease agreements which expire at various dates through 2009; such leases are generally renewed or replaced by other leases. In addition, the Corporation's subsidiaries lease data processing, office and transportation equipment. Most leases contain renewal options for increments ranging from two to ten years; certain lease agreements provide for rent increases based on price-level factors. All leases are operating leases. Rent expense was as follows:
Years Ended December 31 ------------------------------- 1993 1992 1991 ------- ------- ------- (in thousands) Office facilities............. $68,805 $65,678 $60,030 Equipment..................... 20,794 24,404 24,207 ------- ------- ------- $89,599 $90,082 $84,237 ======= ======= =======
At December 31, 1993, future minimum rental payments required under non-cancellable operating leases were as follows:
Years Ending December 31 (in thousands) 1994..................................... $ 79,095 1995..................................... 72,576 1996..................................... 62,984 1997..................................... 52,038 1998..................................... 43,698 After 1998............................... 101,367 -------- $411,758 ========
55 21 (12) RELATED PARTY TRANSACTIONS Sun Alliance Group plc (Sun Group), an insurance holding company organized under the laws of England, is the beneficial owner of 5.1% of the Corporation's common stock, acquired solely for the purpose of investment. Approximately 14% of the U.S. insurance business written by the Corporation's property and casualty insurance subsidiaries is reinsured on a quota share basis with a subsidiary of the Sun Group. The Sun Group's premiums earned arising from such reinsurance were $457,321,000, $438,939,000 and $423,055,000 in 1993, 1992 and 1991, respectively. Reinsurance recoverable on property and casualty unpaid claims included approximately $840,000,000 and $1,000,000,000 at December 31, 1993 and 1992, respectively, from the Sun Group. A property and casualty insurance subsidiary assumes a portion of the Sun Group's property and casualty insurance business on a quota share basis. The assumed reinsurance premiums earned arising from this business were $170,131,000, $125,731,000 and $120,913,000 in 1993, 1992 and 1991, respectively. The property and casualty insurance subsidiaries entered into a stop loss reinsurance agreement with a subsidiary of the Sun Group, effective year end 1985, relating to medical malpractice unpaid claims. The agreement provides that the Sun Group will pay up to $285,000,000 of losses and loss adjustment expenses for this discontinued class of business in excess of the initial $225,000,000 to be paid by the property and casualty insurance subsidiaries subsequent to December 31, 1985. Since the effective date of this agreement, the property and casualty insurance subsidiaries have paid an aggregate of $249,877,000 of medical malpractice losses and loss adjustment expenses and, under the agreement, have recovered the amount in excess of $225,000,000 from the Sun Group. The agreement includes a provision for contingent profit sharing payments to the property and casualty insurance subsidiaries based on calculations at specified dates during the period of the reinsurance agreement. Profit sharing accruals related to the agreement were $9,000,000, $9,479,000 and $9,000,000 in 1993, 1992 and 1991, respectively. These amounts were reflected as reductions of other insurance operating costs and expenses. The agreement also provides that the property and casualty insurance subsidiaries may elect to commute the remaining liability as of December 31, 1995. In 1993, the Corporation announced its intention to exercise this election. The commutation will result in a return premium to the property and casualty insurance subsidiaries of approximately $125,000,000, which was recognized in 1993. The reinsurance amounts described in Note (13) include the effects of these transactions with the Sun Group. (13) REINSURANCE The effect of reinsurance on the premiums earned of the property and casualty insurance subsidiaries was as follows:
Years Ended December 31 ------------------------------------- 1993 1992 1991 ----------- ----------- ----------- (in thousands) Direct................... $ 4,155,356 $ 3,824,520 $ 3,579,774 Reinsurance assumed...... 478,464 429,147 476,852 Reinsurance ceded........ (1,128,982) (1,090,379) (1,019,458) ----------- ----------- ----------- Premiums earned.......... $ 3,504,838 $ 3,163,288 $ 3,037,168 =========== =========== ===========
Reinsurance recoveries by the property and casualty insurance subsidiaries which have been deducted from insurance claims and policyholders' benefits in the consolidated statements of income were $568,847,000 in 1993. The effect of reinsurance on the premiums and policy charges of the life and health insurance subsidiaries was as follows:
Years Ended December 31 ------------------------------ 1993 1992 1991 -------- -------- -------- (in thousands) Direct.......................... $831,849 $721,785 $663,810 Reinsurance assumed............. 2,784 2,751 3,094 Reinsurance ceded............... (33,397) (35,363) (32,888) -------- -------- -------- Premiums and policy charges..... $801,236 $689,173 $634,016 ======== ======== ========
The maximum amount of individual life insurance retained on any one life, including accidental death benefits, amounted to $1,400,000. Reinsurance recoveries by the life and health insurance subsidiaries which have been deducted from insurance claims and policyholders' benefits in the consolidated statements of income were $42,005,000 in 1993. 56 22 (14) PROPERTY AND CASUALTY UNPAID CLAIMS The process of establishing loss reserves is an imprecise science and reflects significant judgmental factors. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss and the settlement of the loss. Judicial decisions and legislative actions continue to broaden liability and policy definitions and to increase the severity of claim payments. As a result of this and other societal and economic developments, the uncertainties inherent in estimating ultimate claim costs on the basis of past experience have increased significantly, further complicating the already difficult loss reserving process. The uncertainties relating to asbestos and toxic waste claims on insurance policies written many years ago are exacerbated by judicial and legislative interpretations of coverage that in some cases have tended to erode the clear and express intent of such policies and in others have expanded theories of liability. The industry is engaged in extensive litigation over these coverage and liability issues and is thus confronted with a continuing uncertainty in its effort to quantify these exposures. In 1993, Pacific Indemnity Company, a subsidiary of the Corporation, entered into a global settlement agreement with Continental Casualty Company (a subsidiary of CNA Financial Corporation), Fibreboard Corporation, and attorneys representing claimants against Fibreboard for all future asbestos-related bodily injury claims against Fibreboard. This agreement is subject to court approval. Pursuant to the global settlement agreement, a $1,525,000,000 trust fund will be established to pay future claims, which are claims that were not filed in court before August 27, 1993. Pacific Indemnity will contribute $538,172,000 to the trust fund and Continental Casualty will contribute the remaining amount. In December 1993, upon execution of the global settlement agreement, Pacific Indemnity and Continental Casualty paid their respective shares into an escrow account. Upon final court approval of the settlement, which could take up to two years or more, 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 court approval of the global settlement agreement. Although it is likely that this agreement will be challenged, management is optimistic that the courts will approve the settlement. Pacific Indemnity and Continental Casualty have reached a separate agreement for the handling of all pending asbestos-related bodily injury claims against Fibreboard. Pacific Indemnity's obligation under this agreement is not expected to exceed $635,000,000. The agreement further provides that the total responsibility of both insurers with respect to pending and future asbestos- related bodily injury claims against Fibreboard will be shared between Pacific Indemnity and Continental Casualty on an approximate 35% and 65% basis, respectively. Pacific Indemnity, Continental Casualty and Fibreboard have entered into a trilateral agreement, subject to court approval, to settle all present and future asbestos-related bodily injury claims resulting from insurance policies that were, or may have been, issued to Fibreboard by the two insurers. The trilateral agreement will be triggered if the global settlement agreement is disapproved. Pacific Indemnity's obligation under the trilateral agreement is therefore similar to, and not duplicative of, that under those agreements described above. The trilateral agreement reaffirms portions of an agreement reached in March 1992 between Pacific Indemnity and Fibreboard. Among other matters, that 1992 agreement eliminates any Pacific Indemnity liability to Fibreboard for asbestos-related property damage claims. Pacific Indemnity, Continental Casualty and Fibreboard have requested a California Court of Appeal to delay its decisions regarding asbestos-related insurance coverage issues, which are currently before it and involve the three parties exclusively, while the approval of the global settlement is pending in court. Continental Casualty and Pacific Indemnity have dismissed disputes against each other which involved Fibreboard and were in litigation. Additional loss reserves of $675,000,000 were provided in 1993 at the time the settlement was negotiated. Management believes that, as a result of the global settlement agreement and the trilateral agreement, the uncertainty of Pacific Indemnity's exposure with respect to asbestos-related bodily injury claims against Fibreboard has been greatly reduced. However, if both the global settlement agreement and the trilateral agreement are disapproved, there can be no assurance that the loss reserves established for future claims would be sufficient to pay all amounts which ultimately could become payable in respect of future asbestos-related bodily injury claims against Fibreboard. 57 23 Other than Fibreboard, remaining asbestos exposures are mostly limited to peripheral regional defendants, principally distributors. New asbestos claims and new exposures on existing claims continue to be received as more peripheral parties are drawn into litigation to replace the now defunct mines and bankrupt manufacturers. The recent claims are complex in that they include significant and yet unresolved liability issues. Further, the universe of potential claims is still not known. Hazardous waste sites are another significant potential exposure. As the cost of environmental clean-up continues to grow, potentially responsible parties (PRPs) and others continue to file claims with their insurance carriers. 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. Ensuing litigation extends to issues of liability, coverage and other policy provisions. There is great uncertainty involved in estimating the property and casualty insurance subsidiaries' liabilities related to these claims. First, the underlying liabilities of the claimants are extremely difficult to estimate. At any given clean-up site, the allocation of financial responsibility among the governmental authorities and PRPs varies greatly. Second, various 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. Reserves for asbestos and toxic waste claims cannot be estimated with traditional loss reserving techniques. Case reserves and 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. Management believes that the aggregate loss reserves of the property and casualty insurance subsidiaries at December 31, 1993 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 acceptable for measuring hazardous waste site clean-up, additional increases in loss reserves may emerge which may adversely affect results in future periods. This emergence cannot reasonably be estimated. (15) CONTINGENCIES In 1988, voters in California approved Ballot Proposition 103, an insurance reform initiative which affects most property and casualty insurers writing business in the state. Approximately 14% of the direct business of the Corporation's property and casualty insurance subsidiaries is written in California. Provisions of Proposition 103 would have required insurers to roll back property and casualty insurance rates for certain lines of business to 20 percent below November 1987 levels and would have required an additional 20 percent reduction in automobile rates by November 1989. In 1989, the California Supreme Court, ruling on the constitutional challenge to Proposition 103, ruled that an insurer is entitled to a fair rate of return. The regulations implementing the rate determination and premium rollback provisions of Proposition 103 continue to evolve. A California Superior Court decision declared invalid and void the rollback and rate review regulations proposed by the elected Insurance Commissioner. The Court decision prohibits the Commissioner from enforcing the regulations as well. The Commissioner has appealed the Superior Court decision to the California Supreme Court and the outcome of that appeal is uncertain. In a separate action, a California Court of Appeal has ruled that Proposition 103 regulations need not be submitted for approval to the California Office of Administrative Law. A petition for review has been filed with the California Supreme Court. There are at present no regulations in force or proposed which establish a final rollback formula. None of the Corporation's property and casualty insurance subsidiaries have been among the companies thus far ordered to refund premiums for the rollback period. Based on an analysis of the operating results of the Corporation's property and casualty insurance subsidiaries in the State of California during the rollback period, it is management's belief that it is probable that any final court decision will not result in premium refunds of a material amount by the Corporation's property and casualty insurance subsidiaries. 58 24 (16) BUSINESS SEGMENTS The Corporation is a holding company and is principally engaged, through subsidiaries, in three industries: property and casualty insurance, life and health insurance and real estate development. Revenues, income from operations before income tax and identifiable assets for each industry segment were as follows:
Years Ended December 31 ----------------------------------------- 1993 1992 1991 ----------- ----------- ----------- (in thousands) REVENUES Property and Casualty Insurance Premiums earned............................................................. $ 3,504,838 $ 3,163,288 $ 3,037,168 Investment income........................................................... 541,749 501,140 476,984 Life and Health Insurance Premiums and policy charges................................................. 801,236 689,173 634,016 Investment income........................................................... 205,891 192,748 177,654 Real Estate..................................................................... 160,650 149,945 140,957 ----------- ----------- ----------- 5,214,364 4,696,294 4,466,779 Corporate investment income..................................................... 52,706 57,176 46,400 Realized investment gains....................................................... 232,638 187,349 65,718 ----------- ----------- ----------- Total revenues.......................................................... $ 5,499,708 $ 4,940,819 $ 4,578,897 =========== =========== =========== INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAX Property and Casualty Insurance................................................. $ (1,383) $ 442,803 $ 485,389 Life and Health Insurance....................................................... 88,729 74,501 73,256 Real Estate..................................................................... 2,051 15,094 34,788 ----------- ----------- ----------- 89,397 532,398 593,433 Corporate....................................................................... 22,457 28,694 24,525 Realized investment gains....................................................... 232,638 187,349 65,718 ----------- ----------- ----------- Income before federal and foreign income tax............................ $ 344,492 $ 748,441 $ 683,676 =========== =========== =========== December 31 ----------------------------------------- IDENTIFIABLE ASSETS Property and Casualty Insurance................................................. $13,372,599 $11,999,538 $10,991,559 Life and Health Insurance....................................................... 3,529,802 3,150,630 2,951,704 Real Estate..................................................................... 1,745,212 1,679,138 1,587,511 ----------- ----------- ----------- Total identifiable assets............................................... 18,647,613 16,829,306 15,530,774 Corporate....................................................................... 1,047,606 1,009,257 899,474 Adjustments and eliminations.................................................... (258,349) (279,381) (266,643) ----------- ----------- ----------- Total assets............................................................ $19,436,870 $17,559,182 $16,163,605 =========== =========== ===========
The following additional information is with respect to the more significant groupings of classes of business for the property and casualty operations:
Years Ended December 31 ---------------------------------------- 1993 1992 1991 ---------- ---------- ---------- (in thousands) PREMIUMS EARNED Personal........................................................................ $ 807,550 $ 789,923 $ 804,410 Standard Commercial............................................................. 1,294,182 1,113,654 1,088,635 Specialty Commercial............................................................ 1,208,672 1,108,913 1,000,078 Reinsurance Assumed............................................................. 194,434 150,798 144,045 ---------- ---------- ---------- Total premiums earned....................................................... $3,504,838 $3,163,288 $3,037,168 ========== ========== ========== INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAX Personal........................................................................ $ 30,536 $ (36,158) $ (27,391) Standard Commercial............................................................. (642,747) (70,876) (29,598) Specialty Commercial............................................................ 101,584 96,894 99,365 Reinsurance Assumed............................................................. (24,465) (40,512) (26,482) ---------- ---------- ---------- Underwriting income (loss).................................................. (535,092) (50,652) 15,894 Net investment income........................................................... 533,709 493,455 469,495 ---------- ---------- ---------- Income (loss) from operations before income tax............................. $ (1,383) $ 442,803 $ 485,389 ========== ========== ==========
Standard Commercial premiums earned for 1993 include a $125,000,000 return premium to the property and casualty insurance subsidiaries related to the commutation of a medical malpractice reinsurance agreement. Standard Commercial underwriting loss in 1993 reflects a $675,000,000 increase in unpaid claims related to an agreement for the settlement of asbestos-related litigation and the $125,000,000 return premium, resulting in a net charge of $550,000,000. 59 25 The underwriting income or loss by class of business reflects allocations of certain significant underwriting expenses using allocation methods deemed reasonable. Other acceptable allocation methods could produce different results by groupings of classes of business. Property and casualty assets are available for payment of claims and expenses for all classes of business; therefore, such assets and the related investment income have not been identified with specific groupings of classes of business. (17) INTERNATIONAL OPERATIONS Several of the property and casualty insurance subsidiaries provide international insurance coverages on a direct and assumed basis, principally in Canada, Europe, Australia and the Far East. The life and health insurance and real estate subsidiaries have no international operations. Shown below is a summary of revenues, income from operations before income tax and identifiable assets of the property and casualty insurance subsidiaries by geographic area.
Years Ended December 31 -------------------------------------- 1993 1992 1991 ---------- ---------- ---------- (in thousands) Revenues United States........................................................ $3,397,825 $3,089,635 $2,981,312 International........................................................ 648,762 574,793 532,840 ---------- ---------- ---------- Total.......................................................... $4,046,587 $3,664,428 $3,514,152 ========== ========== ========== Income (loss) from operations before income tax United States........................................................ $ 8,311 $ 472,359 $ 455,706 International........................................................ (9,694) (29,556) 29,683 ---------- ---------- ---------- Total.......................................................... $ (1,383) $ 442,803 $ 485,389 ========== ========== ==========
December 31 --------------------------------------- 1993 1992 1991 ----------- ----------- ----------- (in thousands) Identifiable assets United States....................................................... $12,189,556 $10,993,111 $10,130,473 International....................................................... 1,183,043 1,006,427 861,086 ----------- ----------- ----------- Total......................................................... $13,372,599 $11,999,538 $10,991,559 =========== =========== ===========
Foreign currency translation gains or losses credited or charged directly to the separate component of shareholders' equity were as follows:
Years Ended December 31 ------------------------------- 1993 1992 1991 ------- -------- ------ (in thousands) Gains (losses) on translation of foreign currencies............................ $ 8,492 $(18,801) $6,611 Income tax (credit) Current.................................................................... 8,546 (1,534) 2,165 Deferred................................................................... (5,545) (4,860) (67) ------- -------- ------ $ 5,491 $(12,407) $4,513 ======= ======== ======
(18) 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:
Years Ended December 31 -------------------------------------- 1993 1992 1991 ---------- ---------- ---------- (number of shares) Common stock issued Balance, beginning of year........................................... 87,519,560 86,937,565 81,911,530 Shares issued upon conversion of long term debt...................... -- -- 4,687,123 Shares issued under stock option and purchase plans.................. 126,355 515,301 276,054 Shares awarded under incentive plans................................. 63,550 66,694 62,858 ---------- ---------- ---------- Common stock outstanding, end of year............................ 87,709,465 87,519,560 86,937,565 ========== ========== ==========
(c) The Corporation has a Shareholder Rights Plan under which each shareholder has one-half of a right for each share of common stock of the Corporation held. Each right entitles the holder to purchase from the Corporation one one-hundredth of a share of Series A Participating Cumulative Preferred Stock at an exercise price of $225. The rights attach to all outstanding shares of common stock and trade with the common stock until the rights become exercisable. The rights are subject to adjustment to prevent dilution. 60 26 The rights will become exercisable and will detach from the common stock ten days after a person or group either acquires 25% or more of the outstanding shares of the Corporation's common stock or announces a tender or exchange offer which, if consummated, would result in that person or group owning 25% or more of the outstanding shares of the Corporation's common stock. In the event that any person or group acquires 25% or more of the outstanding shares of the Corporation's common stock, each right will entitle the holder, other than such person or group, to purchase that number of shares of the Corporation's common stock having a market value of two times the exercise price of the right. In the event that, following the acquisition of 25% or more of the Corporation's outstanding common stock by a person or group, the Corporation is acquired in a merger or other business combination transaction or 50% or more of the Corporation's assets or earning power is sold, each right will entitle the holder to purchase common stock of the acquiring company having a value equal to two times the exercise price of the right. The rights do not have the right to vote or to receive dividends. The rights may be redeemed in whole, but not in part, at a price of $.01 per right by the Corporation at any time until the tenth day after the acquisition of 25% or more of the Corporation's outstanding common stock by a person or group. The rights will expire at the close of business on June 12, 1999, unless previously redeemed by the Corporation. (d) The Corporation's insurance subsidiaries are required to file annual statements with state 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:
December 31 ---------------------------------------------------- 1993 1992 ------------------------ ------------------------ GAAP Statutory GAAP Statutory ---------- ---------- ---------- ---------- (in thousands) Property and casualty insurance subsidiaries* $2,683,264 $1,794,101 $2,600,163 $1,787,176 Life and health insurance subsidiaries...... 758,419 305,609 736,801 321,035 ---------- ---------- ---------- ---------- 3,441,683 $2,099,710 3,336,964 $2,108,211 ========== ========== Corporate and eliminations.................. 754,446 617,438 ---------- ---------- $4,196,129 $3,954,402 ========== ==========
A comparison of GAAP and statutory net income is as follows:
Years Ended December 31 ------------------------------------------------------------------------------- 1993 1992 1991 --------------------- --------------------- --------------------- GAAP Statutory GAAP Statutory GAAP Statutory -------- --------- -------- --------- -------- --------- (in thousands) Property and casualty insurance subsidiaries*.............................. $210,204** $ 96,965 $483,896 $396,952 $475,201 $394,373 Life and health insurance subsidiaries....... 76,853** 31,890 64,991 32,501 54,174 39,565 -------- -------- -------- -------- -------- -------- 287,057 $128,855 548,887 $429,453 529,375 $433,938 ======== ======== ======== Corporate and eliminations................... 57,160** 68,212 22,609 Cumulative effect of changes in accounting principles, net of tax.................... (20,000) -- -- -------- -------- -------- $324,217 $617,099 $551,984 ======== ======== ========
* A property and casualty subsidiary owns the real estate subsidiaries. ** Before cumulative effect of changes in accounting principles. (e) The Corporation's ability to continue to pay dividends to shareholders and interest on debt obligations is affected by the availability of liquid assets held by the Corporation and by the dividend paying ability of its insurance subsidiaries. Various state insurance laws restrict the Corporation's insurance subsidiaries as to the amount of dividends they may pay to the Corporation without the prior approval of regulatory authorities. The restrictions are generally based on net investment 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 1993, these subsidiaries paid dividends to the Corporation totaling $148,008,000. For 1994, the Corporation's principal property and casualty insurance subsidiary, an Indiana corporation, requested and received approval to pay an amount which constitutes an "extraordinary" dividend. The maximum dividend distribution that may be made by insurance subsidiaries to the Corporation during 1994, including the "extraordinary" dividend, is approximately $271,000,000. 61 27 REPORT OF INDEPENDENT AUDITORS ERNST & YOUNG 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, 1993 and 1992, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Chubb Corporation at December 31, 1993 and 1992 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. As described in Note (2) to the financial statements, The Chubb Corporation changed its methods of accounting for postretirement benefits other than pensions, income taxes and reinsurance of short-duration and long-duration contracts in 1993. /s/ Ernst & Young February 25, 1994 62 28 QUARTERLY FINANCIAL DATA Summarized unaudited quarterly financial data (in millions except per share data) for 1993 and 1992 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.
Three Months Ended -------------------------------------------------------------------------------------------------- March 31 June 30 September 30 December 31 -------------------- -------------------- -------------------- -------------------- 1993 1992 1993 1992 1993 1992 1993 1992 -------- -------- -------- -------- -------- -------- -------- -------- Revenues...................... $1,237.5 $1,175.6 $1,283.6 $1,179.0 $1,570.3 $1,243.7 $1,408.1 $1,342.5 Benefits and expenses......... 1,057.6 997.9 1,072.3 1,025.5 1,815.6 1,062.9 1,209.6 1,106.0 Federal and foreign income tax (credit).................... 34.1 34.6 42.8 23.1 (114.7) 34.7 38.0 39.0 -------- -------- -------- -------- -------- -------- -------- -------- Income (loss) before cumulative effect of changes in accounting principles.... 145.8 143.1 168.5 130.4 (130.6) 146.1 160.5 197.5 Cumulative effect of changes in accounting principles, net of tax.................. (20.0) -- -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss)............. $ 125.8 $ 143.1 $ 168.5 $ 130.4 $ (130.6) $ 146.1 $ 160.5 $ 197.5 ======== ======== ======== ======== ======== ======== ======== ======== Per share data Income (loss) before cumulative effect of changes in accounting principles................ $ 1.64 $ 1.62 $ 1.89 $ 1.48 $ (1.42) $ 1.65 $ 1.80 $ 2.21 Cumulative effect of changes in accounting principles.. (.22) -- -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss)........... $ 1.42 $ 1.62 $ 1.89 $ 1.48 $ (1.42) $ 1.65 $ 1.80 $ 2.21 ======== ======== ======== ======== ======== ======== ======== ======== Underwriting ratios Losses to premiums earned... 65.1% 62.7% 64.6% 65.6% 125.9% 67.6% 66.9% 70.5% Expenses to premiums written................... 34.7 35.4 33.4 34.1 29.0 34.2 33.0 34.2 -------- -------- -------- -------- -------- -------- -------- -------- Combined.................... 99.8% 98.1% 98.0% 99.7% 154.9% 101.8% 99.9% 104.7% ======== ======== ======== ======== ======== ======== ======== ========
Revenues for the third quarter of 1993 include a $125 million return premium to the Corporation's property and casualty insurance subsidiaries related to the commutation of a medical malpractice reinsurance agreement. Benefits and expenses for the same period include a $675 million increase in unpaid claims related to an agreement for the settlement of asbestos-related litigation. Net income for the quarter was reduced by a net charge of $357.5 million or $3.95 per share for the after-tax effect of these items. Excluding the effects of these items, the losses to premiums earned ratio for the quarter was 65.2%, the expenses to premiums written ratio was 33.0% and the combined ratio was 98.2%. The income tax provision for the fourth quarter of 1992 reflects a benefit of $12.0 million resulting from a reversal of income tax reserves based on a settlement of prior years' taxes. The effect was to increase net income by $.13 per share for the quarter. 63 29 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 1993 and 1992.
1993 ------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Common stock prices High...................................................... $95.75 $95.63 $92.75 $83.75 Low....................................................... 84.38 80.75 84.13 76.63 Dividends declared............................................ .43 .43 .43 .43
1992 ------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Common stock prices High...................................................... $75.63 $72.63 $85.50 $91.00 Low....................................................... 63.63 63.38 72.75 82.25 Dividends declared............................................ .40 .40 .40 .40
At March 1, 1994, there were approximately 9,025 common shareholders of record. 67 EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 THE CHUBB CORPORATION EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Principal subsidiaries at December 31, 1993 of the The Chubb Corporation, a New Jersey Corporation, and their subsidiaries (indented), together with the percentages of ownership, are set forth below.
PERCENTAGE OF PLACE OF SECURITIES COMPANY INCORPORATION OWNED* ------- ------------- ----------- Federal Insurance Company.................................. Indiana 100% Vigilant Insurance Company............................ New York 100 Chubb Insurance Company of Australia, Limited.... Australia 100 Pacific Indemnity Company............................. California 100 Texas Pacific Indemnity Company.................. Texas 100 Northwestern Pacific Indemnity Company........... Oregon 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 CC Canada Holdings Ltd................................ Canada 100 Chubb Insurance Company of Canada................ Canada 100 Chubb Insurance Company of Europe, S.A................ Belgium 100 Bellemead Development Corporation..................... Delaware 100 Chubb Atlantic Indemnity Ltd. ............................. Bermuda 100 Chubb Life Insurance Company of America.................... New Hampshire 100 The Colonial Life Insurance Company of America........ New Jersey 100 Chubb Sovereign Life Insurance Company................ California 100 Chubb America Service Corporation..................... New Hampshire 100 Chubb & Son Inc............................................ New York 100 Chubb Capital Corporation.................................. New Jersey 100
- --------------- * Includes directors' qualifying shares. Certain other subsidiaries of the Corporation and its consolidated subsidiaries have been omitted since, in the aggregate, they would not constitute a significant subsidiary. -----END PRIVACY-ENHANCED MESSAGE-----