-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TJrZ4QpMK52VcxdM8rhSbYT6eEqALv1n7LLF6RbJZZX7MlBcxXqZc4ixdsbaEP9i f31QXj+uc3GZQ4rdEXt4FQ== 0000950123-96-001384.txt : 19960329 0000950123-96-001384.hdr.sgml : 19960329 ACCESSION NUMBER: 0000950123-96-001384 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHUBB CORP CENTRAL INDEX KEY: 0000020171 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 132595722 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08661 FILM NUMBER: 96539909 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 28, 1996 =============================================================================== 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, 1995 / / 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. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant was $8,787,867,670 as of March 4, 1996. 87,311,778 Number of shares of common stock outstanding as of March 4, 1996 DOCUMENTS INCORPORATED BY REFERENCE Portions of The Chubb Corporation 1995 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 23, 1996 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. The Corporation and its subsidiaries employed approximately 10,900 persons on December 31, 1995. Revenues, income from operations before income tax and identifiable assets for each industry segment for the three years ended December 31, 1995 are included in Note (15) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1995 Annual Report to Shareholders. The property and casualty insurance subsidiaries provide insurance coverages principally in the United States, Canada, Europe, Australia and the Far East. The life and health insurance and real estate subsidiaries have no international operations. Revenues, income from operations before income tax and identifiable assets of the property and casualty insurance subsidiaries by geographic area for the three years ended December 31, 1995 are included in Note (16) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1995 Annual Report to Shareholders. PROPERTY AND CASUALTY INSURANCE GROUP The Property and Casualty Insurance Group (the Group) is composed of Federal Insurance Company (Federal), Pacific Indemnity Company (Pacific Indemnity), Vigilant Insurance Company (Vigilant), Great Northern Insurance Company (Great Northern), Chubb Custom Insurance Company (Chubb Custom), Chubb National Insurance Company (Chubb National), Chubb Indemnity Insurance Company (Chubb Indemnity), Chubb Insurance Company of New Jersey (Chubb New Jersey), Texas Pacific Indemnity Company, Northwestern Pacific Indemnity Company, Chubb Insurance Company of Canada, Chubb Insurance Company of Europe, S.A., Chubb Insurance Company of Australia, Limited and Chubb Atlantic Indemnity Ltd. The Group presently underwrites most forms of property and casualty insurance. All members of the Group write non-participating policies. Several members of the Group also write participating policies, particularly in the workers' compensation class of business, under which dividends are paid to the policyholders. Premiums Written An analysis of the Group's premiums written during the past three years is shown in the following table.
DIRECT REINSURANCE REINSURANCE NET PREMIUMS PREMIUMS PREMIUMS PREMIUMS YEAR WRITTEN ASSUMED(a) CEDED(a) WRITTEN - ---- -------- ----------- ----------- -------- (IN THOUSANDS) 1993........................ $4,268,104 $565,140 $1,186,949 $3,646,295 1994........................ 4,578,061 681,316 1,308,168 3,951,209 1995........................ 4,907,320 747,320 1,348,648 4,305,992
- --------------- (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 16 of the Corporation's 1995 Annual Report to Shareholders. One or more members of the Group are licensed and transact business in each of the 50 states of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, Canada, Australia and parts of Europe and the Far East. In 1995, approximately 86% 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 2 3 with 14%, California with 11%, New Jersey with 6% and Pennsylvania with 5%. No other state accounted for 5% or more of such premiums. Approximately 4% of the Group's direct premiums written was produced in Canada. Underwriting Results A frequently used industry measurement of property and casualty insurance underwriting results is the combined loss and expense ratio. This ratio is the sum of the ratio of incurred losses and related loss adjustment expenses to premiums earned (loss ratio) plus the ratio of underwriting expenses to premiums written (expense ratio) after reducing both premium amounts by dividends to policyholders. When the combined ratio is under 100%, underwriting results are generally considered profitable; when the combined ratio is over 100%, underwriting results are generally considered unprofitable. Investment income, other non-underwriting income or expense and income taxes are not reflected in the combined ratio. The profitability of property and casualty insurance companies depends on income from both underwriting operations and investments. The net premiums and the loss, expense and combined loss and expense ratios of the Group for the last five years are shown in the following table.
NET PREMIUMS COMBINED (IN THOUSANDS) LOSS AND ------------------------- LOSS EXPENSE EXPENSE YEAR WRITTEN EARNED RATIOS RATIOS RATIOS - ---- ------- ------ ------ ------- ------- 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 1994......................... 3,951,209 3,776,283 67.0 32.5 99.5 1995......................... 4,305,992 4,147,162 64.7 32.1 96.8 ----------- ----------- ---- ---- ----- Total for five years ended December 31, 1995......... $18,258,266 $17,628,739 69.0% 33.2% 102.2% =========== =========== ==== ==== =====
Results for 1993 include the effects of a $675 million increase in unpaid claims related to an agreement for the settlement of asbestos-related litigation and a $125 million return premium to the Group related to the commutation of a medical malpractice reinsurance agreement. Excluding the effects of these items, the loss ratio, the expense ratio and the combined loss and expense ratio were 65.5%, 33.5% and 99.0%, respectively, for the year 1993 and 65.6%, 33.4% and 99.0%, respectively, for the five years ended December 31, 1995. The combined loss and expense ratios during the last five years for major classes of the Group's business are incorporated by reference from page 16 of the Corporation's 1995 Annual Report to Shareholders. Another frequently used measurement in the property and casualty insurance industry is the ratio of statutory net premiums written to policyholders' surplus. At December 31, 1995 and 1994, such ratio for the Group was 1.89 and 2.11, respectively. Producing and Servicing of Business In the United States and Canada, the Group is represented by approximately 3,500 independent agents and accepts business on a regular basis from an estimated 400 insurance brokers. In most instances, these agents and brokers also represent other companies which compete with the Group. The offices maintained by the Group assist these agents and brokers in producing and servicing the Group's business. In addition to the administrative offices of Chubb & Son Inc. in Warren, New Jersey, the Group operates 5 zone administrative offices and 60 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 treaty 3 4 reinsurance assumed principally, but not exclusively, from the Sun Alliance Group plc (Sun Group). In conducting its overseas business, the Group reduces the risks relating to currency fluctuations by maintaining investments in those foreign currencies in which the Group transacts business, with characteristics similar to the liabilities in those currencies. The net asset or liability exposure to the various foreign currencies is regularly reviewed. Business for the Group is also produced through participation in a number of underwriting pools and syndicates including, among others, Associated Aviation Underwriters, Cargo Reinsurance Association, American Cargo War Risk Reinsurance Exchange and American Excess Insurance Association. Such pools and syndicates provide underwriting capacity for risks which an individual insurer cannot prudently underwrite because of the magnitude of the risk assumed or which can be more effectively handled by one organization due to the need for specialized loss control and other services. Reinsurance In accordance with the normal practice of the insurance industry, the Group assumes and cedes reinsurance with other insurers or reinsurers. These reinsurance arrangements provide greater diversification of business and minimize the Group's maximum net loss arising from large risks or from hazards of potential catastrophic events. A large portion of the Group's reinsurance is effected under contracts known as treaties under which all risks meeting prescribed criteria are automatically covered. A substantial portion of the Group's ceded reinsurance is on a quota share basis with a subsidiary of the Sun Group, which is rated A++ by A.M. Best. Additional information related to the Group's ceded reinsurance with the subsidiary of the Sun Group is included in Note (12) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1995 Annual Report to Shareholders and in Item 7 of this report on page 20. Most of the Group's remaining treaty reinsurance arrangements consist of excess of loss and catastrophe contracts with other insurers or reinsurers which protect against a specified part or all of certain types of losses over stipulated amounts arising from any one occurrence or event. In certain circumstances, reinsurance is also effected by negotiation on individual risks. The amount of each risk retained by the Group is subject to maximum limits which vary by line of business and type of coverage. Retention limits are continually reviewed and are revised periodically as the Group's capacity to underwrite risks changes. Reinsurance contracts do not relieve the Group of its obligation to the policyholders. The collectibility of reinsurance is subject to the solvency of the reinsurers. The Group is selective in regard to its reinsurers, placing reinsurance with only those reinsurers with strong balance sheets and superior underwriting ability. The Group monitors the financial strength of its reinsurers on an ongoing basis. As a result, uncollectible amounts have not been significant. The severity of catastrophes in recent years has demonstrated to insurers, including the Group, that most assumptions on the damage potential of catastrophes 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 and develops strategies to manage its exposure to catastrophic events, subject to regulatory constraints. The catastrophe reinsurance market suffered large losses in recent years, particularly in 1992. As a result, the catastrophe reinsurance market's capacity was reduced and the cost of available coverage increased. In response, the Group increased its initial retention limit for each catastrophic event. The Group also raised its reinsurance coverage limits for each event. The Group's current principal catastrophe reinsurance program provides coverage for individual catastrophic events of approximately 60% of losses between $85 million and $300 million. 4 5 Unpaid Claims and Claim Adjustment Expenses and Related Amounts Recoverable from Reinsurers Insurance companies are required to establish a liability in their accounts for the ultimate costs (including claim adjustment expenses) of claims which have been reported but not settled and of claims which have been incurred but not reported. Insurance companies are also required to report as assets the portion of such liability that will be recovered from reinsurers. The process of establishing the liability for unpaid claims and claim adjustment expenses is an imprecise science subject to variables that are influenced by both internal and external factors. This is true because claim settlements to be made in the future will be impacted by changing rates of inflation (particularly medical cost inflation) and other economic conditions, changing legislative, judicial and social environments and changes in the Group's claim handling procedures. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss to the Group and the settlement of the loss. Approximately 50% of the Group's unpaid claims and claim adjustment expenses at December 31, 1995 were for IBNR--claims which had not yet been reported to the Group, some of which were not yet known to the insured, and future development on reported claims. In spite of this imprecision, financial reporting requirements dictate that insurance companies report a single amount as the estimate of unpaid claims and claim adjustment expenses as of each evaluation date. These estimates are continually reviewed and updated. Any resulting adjustments are reflected in current operating results. The Group's estimates of losses for reported claims are established judgmentally on an individual case basis. Such estimates are based on the Group's particular experience with the type of risk involved and its knowledge of the circumstances surrounding each individual claim. These estimates are reviewed on a regular basis or as additional facts become known. The reliability of the estimation process is monitored through comparison with ultimate settlements. The Group's estimates of losses for unreported claims are principally derived from analyses of historical patterns of the development of paid and reported losses by accident year for each class of business. This process relies on the basic assumption that past experience, adjusted for the effects of current developments and likely trends, is an appropriate basis for predicting future outcomes. For certain classes of business where anticipated loss experience is less predictable because of the small number of claims and/or erratic claim severity patterns, the Group's estimates are based on both expected and actual reported losses. Salvage and subrogation estimates are developed from patterns of actual recoveries. The Group's estimates of unpaid claim adjustment expenses are based on analyses of the relationship of projected ultimate claim adjustment expenses to projected ultimate losses for each class of business. Claim staff has discretion to override these expense formulas where judgment indicates such action is appropriate. The Group's estimates of reinsurance recoverable related to reported and unreported claims and claim adjustment expenses, 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 the development of paid losses, which reflect actual inflation. Inflation is also reflected in the case estimates established on reported open claims which, when combined with paid losses, form another basis to derive estimates of reserves for all unpaid claims. There is no precise method for subsequently evaluating the adequacy of the consideration given to inflation, since claim settlements are affected by many factors. 5 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, 1995, 1994 and 1993.
YEARS ENDED DECEMBER 31 ----------------------------- 1995 1994 1993 ---- ---- ---- (IN MILLIONS) Net liability, beginning of year....................... $6,932.9 $6,450.0 $5,267.6 -------- -------- -------- Net incurred claim and claim adjustment expenses Provision for claims occurring in the current year... 2,705.8 2,549.1 2,214.3 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....................................... (35.8) (29.7) (10.2) -------- -------- -------- 2,670.0 2,519.4 2,879.1 -------- -------- -------- Net payments for claims occurring in Current year......................................... 737.7 764.5 656.8 Prior years.......................................... 1,250.7 1,272.0 1,039.9 -------- -------- -------- 1,988.4 2,036.5 1,696.7 -------- -------- -------- Net liability, end of year............................. 7,614.5 6,932.9 6,450.0 Reinsurance recoverable, end of year................... 1,973.7 1,980.3 1,785.4 -------- -------- -------- Gross liability, end of year........................... $9,588.2 $8,913.2 $8,235.4 ======== ======== ========
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. 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 through 25. As reestimated at December 31, 1995, the liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, as established at the previous year-end was redundant by $35.8 million. This compares with favorable development of $29.7 million during 1994 and unfavorable development of $664.8 million during 1993. Such redundancies and deficiency were reflected in the Group's operating results in these respective years. Excluding the $675 million increase in unpaid claims related to the Fibreboard settlement, the Group experienced favorable development of $10.2 million in 1993. Each of the past three years benefited from favorable claim severity trends for certain liability classes; this was offset each year in varying degrees by increases in claims and claim adjustment expenses relating to asbestos and toxic waste claims. Unpaid claims and claim adjustment expenses, net of reinsurance recoverable, increased 10% in 1995, after increases of 7% and 22% in 1994 and 1993, respectively. The significant increase in 1993 was primarily due to the $675 million increase related to the Fibreboard settlement. Excluding this $675 million, unpaid claims and claim adjustment expenses increased by 10% in 1993. Substantial reserve growth has occurred each year in those liability coverages, primarily excess liability and executive protection, that are characterized by delayed loss reporting and extended periods of settlement. These coverages represent a significant portion of the Group's business. The Group continues to emphasize early and accurate reserving, inventory management of claims and suits, and control of the dollar value of settlements. The number of outstanding claims at year-end 1995 was approximately 11% higher than the number at year-end 1994, which was in turn 9% higher than that at year-end 1993. Such increases were due in part to a shift for certain classes toward a book of business with more frequent claims. 6 7 The uncertainties relating to unpaid claims, particularly for asbestos and toxic waste claims on insurance policies written many years ago, are discussed in Item 7 of this report on pages 23 through 26. 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, 1995, 1994 and 1993. Reinsurance recoveries related to such claims are not significant.
YEARS ENDED DECEMBER 31 ---------------------------------------------------------------------------------------- 1995 1994 1993 -------------------------- -------------------------- -------------------------- FIBREBOARD ALL FIBREBOARD ALL FIBREBOARD ALL RELATED OTHER TOTAL RELATED OTHER TOTAL RELATED OTHER TOTAL ---------- ----- ----- ---------- ----- ----- ---------- ----- ----- (IN MILLIONS) Net liability, beginning of year.... $1,049.4 $240.9 $1,290.3 $1,218.5 $214.4 $1,432.9 $ 220.5 $214.9 $ 435.4 Net incurred claim and claim adjustment expenses............... 10.0 171.8 181.8 35.1 80.1 115.2 1,008.0(a) 67.7 1,075.7 Net payments for claims............. 60.2 68.9 129.1 204.2 53.6 257.8 10.0 68.2 78.2 ---------- ------ -------- --------- ------ -------- -------- ------ -------- Net liability, end of year.......... $ 999.2 $343.8 $1,343.0 $1,049.4 $240.9 $1,290.3 $1,218.5 $214.4 $1,432.9 ========== ====== ======== ======== ====== ======== ========= ====== ========
- --------------- (a) Includes an increase in reserves of $675 million related to the Fibreboard settlement and a reclassification of $300 million of IBNR reserves 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. The $300 million of IBNR reserves had been provided as follows: $40 million in 1992, $160 million in 1991, $50 million in 1990, $25 million in 1989 and $25 million in 1988. There were approximately 4,700 asbestos claims outstanding at December 31, 1995 compared with 3,400 asbestos claims outstanding at December 31, 1994 and 1993. In 1995, approximately 2,600 claims were opened and 1,300 claims were closed. In 1994, approximately 1,800 claims were opened and the same number were closed. In 1993, approximately 1,000 claims were opened and the same number were closed. Generally, an asbestos claim is established for each lawsuit against an insured where potential liability has been determined to exist under a policy issued by a member of the Group. However, when multiple insurers respond to one or more lawsuits involving an insured and a member of the Group is not the principal insurer in directing the litigation, generally, all asbestos litigation involving that insured is counted as one claim. Therefore, a counted claim can have from one to thousands of claimants. As a result, management does not believe the above claim count data is meaningful for analysis purposes. Indemnity payments per claim have varied over time due primarily to wide variations in insureds, policy terms and types of claims. Management cannot predict whether indemnity payments per claim will increase, decrease or remain the same. There were approximately 700 toxic waste claims outstanding at December 31, 1995 compared with 600 toxic waste claims outstanding at December 31, 1994 and 1993. Approximately 300 claims were opened in each of 1995, 1994 and 1993. There were approximately 200 claims closed in 1995 and 300 claims closed in each of 1994 and 1993. Generally, a toxic waste claim is established for each lawsuit, or alleged equivalent, against an insured where potential liability has been determined to exist under a policy issued by a member of the Group. Because indemnity payments to date for toxic waste claims have not been significant in the aggregate and have varied from claim to claim, management cannot determine whether past claims experience will prove to be representative of future claims experience. The Group discontinued writing medical malpractice business in 1984 and entered into a stop loss reinsurance agreement effective year-end 1985 relating to such discontinued class of business. In 1993, as a result of favorable loss experience, the medical malpractice gross liability for unpaid claims and claim adjustment expenses and the related reinsurance recoverable under this agreement were each reduced by approximately $125 million. The reinsurance agreement included a commutation provision under which the Group had an option to reassume the remaining liability of the reinsurer as of December 31, 1995 and receive payment of an amount determined by a formula based on experience under the agreement. The Group exercised this option, which resulted in an amount due from 7 8 the reinsurer of $191.2 million and a reduction in reinsurance recoverable from the reinsurer of $66.2 million. The difference of $125 million represents a return premium to the Group, which was recognized in 1993 at the time the Corporation announced the Group's intention to exercise the commutation option. The amount due from the reinsurer was received in January 1996. 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 1995. The top line of the table shows the estimated liability for unpaid claims and claim adjustment expenses recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and loss adjustment expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Group. The upper section of the table shows the reestimated amount of the previously recorded net liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims for each individual year. The increase or decrease is reflected in the current year's operating results. The "cumulative deficiency (redundancy)" as shown in the table represents the aggregate change in the reserve estimates from the original balance sheet dates through December 31, 1995. 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, 1985, such as that related to the Fibreboard settlement, would be included in the cumulative deficiency amount for each year in the period 1985 through 1992. Yet, the deficiency would be reflected in operating results only in 1993. The effect of changes in estimates of the liabilities for claims occurring in prior years on income before income taxes in each of the past three years is shown in the reconciliation table on page 6. The cumulative deficiencies in liability estimates from 1985 through 1992 relate primarily to additional provisions for asbestos and toxic waste claims, particularly the Fibreboard settlement. The cumulative deficiency in the 1985 column was 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 middle section of the table on page 9 shows the cumulative amount paid with respect to the reestimated liability as of the end of each succeeding year. For example, in the 1985 column, as of December 31, 1995 the Group had paid $2,456.9 million of the currently estimated $4,036.0 million of claims and claim adjustment expenses that were unpaid at the end of 1985; thus, an estimated $1,579.1 million of losses incurred through 1985 remain unpaid as of December 31, 1995, more than half of which relates to the Fibreboard settlement. The lower section of the table shows the gross liability, reinsurance recoverable and net liability recorded at each year-end beginning with 1992 and the reestimation of these amounts as of December 31, 1995. Amounts for years prior to the implementation of Statement of Financial Accounting Standards No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts, have not been presented. 8 9 ANALYSIS OF CLAIM AND CLAIM ADJUSTMENT EXPENSE DEVELOPMENT
DECEMBER 31 ---------------------------------------------------------------------------------------------- YEAR ENDED 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (IN MILLIONS) Net Liability for Unpaid Claims and Claim Adjustment Expenses...................... $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 $6,932.9 $7,614.5 Net Liability Reestimated as of: One year later............... 1,814.6 2,238.6 2,776.9 3,360.5 3,846.2 4,272.3 4,716.3 5,932.4 6,420.3 6,897.1 Two years later.............. 1,989.3 2,313.9 2,835.9 3,336.0 3,854.2 4,244.7 5,368.5 5,904.1 6,363.1 Three years later............ 2,108.5 2,433.2 2,831.0 3,359.8 3,839.8 4,933.0 5,336.5 5,843.5 Four years later............. 2,231.2 2,493.3 2,891.7 3,385.1 4,567.4 4,941.7 5,302.6 Five years later............. 2,353.4 2,585.8 2,961.0 4,203.9 4,602.5 4,969.5 Six years later.............. 2,433.5 2,687.2 3,897.2 4,265.2 4,686.3 Seven years later............ 2,569.0 3,745.2 3,993.7 4,387.6 Eight years later............ 3,673.4 3,865.7 4,157.1 Nine years later............. 3,797.5 4,067.8 Ten years later.............. 4,036.0 Cumulative Net Deficiency (Redundancy).................. 2,433.8 1,926.5 1,338.5 1,013.3 806.2 668.4 558.7 575.9 (86.9) (35.8) Cumulative Net Deficiency Related to Asbestos and Toxic Waste Claims................. 1,939.8 1,911.4 1,845.4 1,754.4 1,625.4 1,480.4 1,232.6 1,072.7 297.0 181.8 Cumulative Amount of Net Liability Paid as of: One year later............... 658.4 651.3 694.7 761.6 880.4 919.1 931.2 1,039.9 1,272.0 1,250.7 Two years later.............. 1,058.1 1,061.6 1,108.3 1,226.3 1,383.9 1,407.2 1,479.9 1,858.5 1,985.7 Three years later............ 1,356.7 1,362.9 1,419.1 1,555.1 1,715.9 1,808.7 2,083.0 2,332.3 Four years later............. 1,568.5 1,595.7 1,651.6 1,778.8 1,958.6 2,292.0 2,386.9 Five years later............. 1,730.0 1,775.3 1,818.2 1,966.1 2,346.9 2,490.2 Six years later.............. 1,867.6 1,907.1 1,961.9 2,307.9 2,500.9 Seven years later............ 1,971.4 2,032.9 2,281.0 2,422.7 Eight years later............ 2,085.5 2,333.6 2,370.5 Nine years later............. 2,378.5 2,412.6 Ten years later.............. 2,456.9 Gross Liability, End of Year... $7,220.9 $8,235.4 $8,913.2 $9,588.2 Reinsurance Recoverable, End of Year......................... 1,953.3 1,785.4 1,980.3 1,973.7 ------- ------- ------- ------- Net Liability, End of Year..... $5,267.6 $6,450.0 $6,932.9 $7,614.5 ======== ======== ======== ======== Reestimated Gross Liability.... $7,785.9 $8,279.3 $8,971.7 Reestimated Reinsurance Recoverable.................. 1,942.4 1,916.2 2,074.6 ------- ------- ------- Reestimated Net Liability...... $5,843.5 $6,363.1 $6,897.1 ======= ======= ======= Cumulative Gross Deficiency.... $ 565.0 $ 43.9 $ 58.5 ======= ======= =======
- --------------- The cumulative deficiencies for the years 1985 through 1992 include the effect of the $675 million increase in claims and claim adjustment expenses related to the Fibreboard settlement. 9 10 Members of the Group are required to file annual statements with insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis). The differences between the liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, reported in the accompanying consolidated financial statements in accordance with generally accepted accounting principles (GAAP) and that reported in the annual statutory statements of the U.S. subsidiaries are as follows:
DECEMBER 31 -------------------- 1995 1994 ---- ---- (IN MILLIONS) Net liability reported on a statutory basis -- U.S. subsidiaries................................................. $7,235.9 $6,661.0 Additions (reductions): Unpaid claims and claim adjustment expenses of foreign subsidiaries.............................................. 433.0 375.8 Medical malpractice stop loss reinsurance and other reserve differences............................................... (54.4) (103.9) --------- --------- Net liability reported on a GAAP basis......................... $7,614.5 $6,932.9 ========= =========
Investments For each member of the Group, current investment policy is implemented by management which reports to its Board of Directors. The main objectives of the investment portfolio of the Group are to maximize after-tax investment income and total investment returns while minimizing credit risks as well as to provide maximum support to the insurance underwriting operations. To accomplish this, the investment function must be highly integrated with the operating functions and capable of responding to the changing conditions in the marketplace. Investment strategies are developed based on many factors including underwriting results and the Group's resulting tax position, fluctuations in interest rates and regulatory requirements. The investment portfolio of the Group is primarily comprised of high quality bonds, principally tax-exempt, U.S. Treasury, government agency and corporate issues. In addition, the portfolio includes common stocks held primarily with the objective of capital appreciation. In 1995, the Group invested new cash primarily in tax-exempt bonds. In 1994, the Group invested new cash primarily in taxable bonds and, to a lesser extent, tax-exempt bonds while reducing its equity security portfolio. At December 31, 1995, 73% 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.
AVERAGE PERCENT EARNED INVESTED INVESTMENT ----------------------- YEAR ASSETS(a) INCOME(b) BEFORE TAX AFTER TAX ---- ---------- ---------- ---------- --------- (IN THOUSANDS) 1993............................ $8,085,302 $529,591 6.6% 5.6% 1994............................ 8,715,877 560,481 6.4 5.4 1995............................ 9,342,295 602,987 6.5 5.4
- --------------- (a) Average of amounts at beginning and end of year with fixed maturity securities at amortized cost and equity securities at market value. (b) Investment income after deduction of investment expenses, but before applicable income tax, excluding income from rental of real estate and fixed assets. 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 Custom, Chubb National, Chubb Indemnity and Chubb New Jersey. Chubb & Son Inc. also provides certain services to Pacific Indemnity and other members of the Property and Casualty Insurance Group for which it is reimbursed. Acting subject to the supervision and control of the Boards of Directors of the members of the Group, Chubb & Son Inc. provides day to day executive management and operating personnel and makes available the economy and flexibility inherent in the common operation of a group of insurance companies. Chubb & Son Inc. also acts as the manager for the United States branch of an unaffiliated South Korean insurance company, Samsung Fire & Marine Insurance Company, Ltd. LIFE AND HEALTH INSURANCE GROUP The Life and Health Insurance Group (Life Group) includes Chubb Life Insurance Company of America (Chubb Life), its wholly-owned subsidiaries, The Colonial Life Insurance Company of America (Colonial) and Chubb Sovereign Life Insurance Company (Sovereign), and ChubbHealth, Inc. (ChubbHealth), a joint venture with Healthsource, Inc. Effective March 1, 1996, Colonial changed its name to Chubb Colonial Life Insurance Company. The Life Group, which markets a wide variety of insurance and investment products, is principally engaged in the sale of personal and group life and health insurance as well as annuity contracts. These products, some of which combine life insurance and investment attributes, include traditional insurance products such as term life, 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. Managed care services are provided through ChubbHealth, a health maintenance organization (HMO) operating in New York and New Jersey. The target market of the Life Group is small- to medium-sized business establishments and those individuals, often the proprietors of such businesses, interested in estate planning and wealth creation. One or more of the companies in the Life Group are licensed and transact business in each of the 50 states of the United States, the District of Columbia, Puerto Rico, Guam and the Virgin Islands. Personal life and health insurance is produced primarily through approximately 1,600 personal producing general agents. Group life and traditional health insurance is produced through approximately 4,500 brokers. Managed care products are produced primarily through approximately 1,500 brokers. The executive, accounting, actuarial and administrative activities of the Life Group are located at the Chubb Life headquarters in Concord, New Hampshire. The personal insurance operations are in Concord and Chattanooga, Tennessee. The group insurance operations are mainly located in Parsippany, New Jersey. ChubbHealth's network management and medical review activities are located in New York, New York. 11 12 The following tables present highlights of the Life Group. LIFE INSURANCE IN-FORCE*
PERSONAL -------------------------------------- NON-PARTICIPATING PARTICIPATING GROUP TOTAL ------------------- ---------------- ----------------- ------------------ YEAR AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT - ---- ------ ------- ------ ------- ------ ------- ------ ------- (IN THOUSANDS) 1993........ $47,740,633 88.0% $81,278 .1% $6,460,954 11.9% $54,282,865 100% 1994........ 55,933,398 90.7 77,990 .1 5,688,639 9.2 61,700,027 100 1995........ 63,646,653 95.5 72,155 .1 2,942,956 4.4 66,661,764 100
- --------------- * Before deduction for reinsurance ceded. 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) 1993.... $216,591 27.0% $19,121 2.4% $4,294 .5% $47,041 5.9% $514,189 64.2% 1994.... 248,850 29.8 19,426 2.3 3,670 .4 44,301 5.3 520,046 62.2 1995.... 285,323 45.8 20,207 3.2 5,745 .9 22,925 3.7 288,737 46.4
REVENUES, ASSETS AND CAPITAL AND SURPLUS
TOTAL PREMIUMS GROSS CAPITAL AND POLICY INVESTMENT AND YEAR CHARGES INCOME ASSETS SURPLUS - ---- ---------- ---------- ------ -------- (IN THOUSANDS) 1993..................................... $801,236 $205,891 $3,529,802 $758,419 1994..................................... 836,293 208,745 3,760,079 731,810 1995..................................... 622,937 232,950 4,275,365 844,645
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 primarily comprised of mortgage-backed securities and corporate bonds. The Life Group invests predominantly in investment grade fixed-income securities with cash flows and maturities which are consistent with life insurance liability characteristics. The investment 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.
AVERAGE INVESTED INVESTMENT PERCENT YEAR ASSETS(a) INCOME(b) EARNED ---- --------- ---------- ------ (IN THOUSANDS) 1993................................ $2,341,028 $202,771 8.7% 1994................................ 2,544,945 205,451 8.1 1995................................ 2,740,921 229,181 8.4
- --------------- (a) Average of amounts at beginning and end of year with fixed maturity securities at amortized cost and equity securities at market value. (b) Investment income after deduction of investment expenses, but before applicable income tax, excluding income from real estate. Reinsurance The Life Group, in accordance with common industry practice, reinsures with other companies portions of the life insurance risks it underwrites. At the present time, the maximum amount of life insurance retained on any one life by 12 13 the Life Group is $1,250,000, excluding accidental death benefits. Including accidental death benefits, the Life Group accepts a maximum net retention of $1,400,000. Policy Liabilities Premium receipts from universal life and other interest-sensitive contracts are established as policyholder account balances. Charges for the cost of insurance and policy administration are assessed against the policyholder account balance. The amount remaining after such charges represents the policy liability before applicable surrender charges. Benefit reserves on individual life insurance contracts with fixed and guaranteed premiums and benefits are computed so that amounts, with additions from actuarial net premiums to be received and with interest on such reserves compounded annually at certain assumed rates, will be sufficient to meet expected policy obligations. In accordance with generally accepted accounting principles, certain additional factors are considered in the reserve computation as more fully set forth in Note (1)(e) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1995 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 anticipated medical inflation and changes in claim backlog. REAL ESTATE GROUP The Real Estate Group is composed of Bellemead Development Corporation and its subsidiaries. The Real Estate Group is involved with commercial and residential real estate development. 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 commercial 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 commercial 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 traditionally centered around acquiring suburban, multi-site land parcels in locations considered prime for office development and then developing the land in progressive stages. In the late 1980s, the Real Estate Group expanded its activities to include a few metropolitan office building projects. Commercial development activities are primarily in northern and central New Jersey with additional operations in Connecticut, Florida, Illinois, Kansas, Maryland, Michigan, Pennsylvania, Texas and the District of Columbia. The Real Estate Group owns 4,436,000 square feet of office and industrial space, of which 92% is leased. The Real Estate Group has varying interests in an additional 6,014,000 square feet of office and industrial space which is 96% leased. Residential development activities of the Real Estate Group consist of the development and sale of condominiums and townhomes in central Florida and northern New Jersey. The Real Estate Group currently has undeveloped land holdings of approximately 4,250 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, through subsidiaries, in the insurance business and is therefore subject to regulation by certain states as an insurance holding company. All states have enacted legislation which regulates insurance holding company systems such as the 13 14 Corporation and its subsidiaries. This legislation generally provides that each insurance company in the system is required to register with the department of insurance of its state of domicile and furnish information concerning the operations of companies within the holding company system which may materially affect the operations, management or financial condition of the insurers within the system. All transactions within a holding company system affecting insurers must be fair and equitable. Notice to the insurance commissioners is required prior to the consummation of transactions affecting the ownership or control of an insurer and of certain material transactions between an insurer and any person in its holding company system and, in addition, certain of such transactions cannot be consummated without the commissioners' prior approval. Property and Casualty Insurance The Property and Casualty Insurance Group is subject to regulation and supervision in the states in which it does business. In general, such regulation is for the protection of policyholders rather than shareholders. The extent of such regulation varies but generally has its source in statutes which delegate regulatory, supervisory and administrative powers to a department of insurance. The regulation, supervision and administration relate to, among other things, the standards of solvency which must be met and maintained; the licensing of insurers and their agents; restrictions on insurance policy terminations; unfair trade practices; the nature of and limitations on investments; premium rates; restrictions on the size of risks which may be insured under a single policy; deposits of securities for the benefit of policyholders; approval of policy forms; periodic examinations of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of companies or for other purposes; limitations on dividends to policyholders and shareholders; and the adequacy of provisions for unearned premiums, unpaid claims and claim adjustment expenses, both reported and unreported, and other liabilities. The extent of insurance regulation on business outside the United States varies significantly among the countries in which the Group operates. Some countries have minimal regulatory requirements, while others regulate insurers extensively. Foreign insurers in many countries are faced with greater restrictions than domestic competitors. In certain countries, the Group has incorporated insurance subsidiaries locally to improve its position. In December 1993, the National Association of Insurance Commissioners adopted a risk-based capital formula for property and casualty insurance companies which was applied for the first time as of year-end 1994. This formula is used by state regulatory authorities to identify insurance companies which may be undercapitalized and which merit further regulatory attention. The formula prescribes a series of risk measurements to determine a minimum capital amount for an insurance company, based on the profile of the individual company. The ratio of a company's actual policyholders' surplus to its minimum capital requirement will determine whether any state regulatory action is required. At December 31, 1995, each member of the Group had more than sufficient capital to meet the risk-based capital requirement. Regulatory requirements applying to premium rates vary from state to state, but generally provide that rates not be "excessive, inadequate or unfairly discriminatory." Rates for many lines of business, including automobile and homeowners insurance, are subject to prior regulatory approval in many states. However, in certain states, prior regulatory approval of rates is not required for most lines of insurance which the Group underwrites. Ocean marine insurance rates are exempt from regulation. Subject to regulatory requirements, the Group's management determines the prices charged for its policies based on a variety of factors including claim and claim adjustment expense experience, inflation, tax law and rate changes, and anticipated changes in the legal environment, both judicial and legislative. Methods for arriving at rates vary by type of business, exposure assumed and size of risk. Underwriting profitability is affected by the accuracy of these assumptions, by the willingness of insurance regulators to approve changes in those rates which they control and by such other matters as underwriting selectivity and expense control. 14 15 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 12th largest United States property and casualty insurance group based on 1994 net premiums written. The relatively large size and underwriting capacity of the Group provide opportunities not available to smaller companies. The property and casualty insurance industry has a history of cyclical performance with successive periods of deterioration and improvement over time. 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 1995, particularly in the commercial classes. In 1993, property related business experienced some rate firming in the wake of the unprecedented catastrophes of 1992; such prices remained stable in 1994 and 1995 despite the significant catastrophe losses experienced by the industry. Price increases in casualty classes continue to be difficult to achieve. The Group continues to be selective in the writing of new business and to reinforce the sound relationships with customers who appreciate the stability, expertise and added value the Group provides. In the personal lines, the regulatory climate for obtaining rate increases continues to be difficult. In all states, insurers authorized to transact certain classes of property and casualty insurance are required to become members of an insolvency fund. In the event of the insolvency of a licensed insurer writing a class of insurance covered by the fund in the state, all members are assessed to pay certain claims against the insolvent insurer. Fund assessments are proportionately based on the members' written premiums for the classes of insurance written by the insolvent insurer. A portion of these assessments is recovered in certain states through premium tax offsets and policyholder surcharges. In 1995, such assessments to the members of the Group amounted to approximately $1 million. The amount of future assessments cannot be reasonably estimated. State insurance regulation requires insurers to participate in assigned risk plans, reinsurance facilities and joint underwriting associations, which are mechanisms that generally provide 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. 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. 15 16 Life and Health Insurance The members of the Life Group are subject to regulation and supervision in each state in which they do business. Such regulation and supervision is generally of the character indicated in the first paragraph under the preceding caption, "Property and Casualty Insurance." The risk-based capital formula for life and health insurers was first effective as of year-end 1993. Each member of the Life Group had more than sufficient capital at December 31, 1995 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 continues to operate in the small group health insurance market, principally in New York and New Jersey, by offering managed care services through ChubbHealth as well as traditional indemnity products. In 1993, New York and New Jersey adopted legislation which significantly affected the manner in which the Life Group and other small group health indemnity insurers conduct business. In general, the laws eliminated health insurance underwriting, created community based rating and limited pre-existing condition exclusions for insured groups with fewer than 50 covered lives. Because of the continuing adverse effects of the legislative changes and other health industry factors on the Life Group's group health results, management is evaluating the Life Group's future role in the traditional indemnity and managed care markets. Members of the Life Group also participate in insolvency funds. In 1995, insolvency fund assessments to the members of the Life Group amounted to approximately $2 million. There are approximately 1,800 legal reserve life insurance companies in the United States. According to the National Underwriter, a trade publication, as of January 1, 1995, Chubb Life, Sovereign and Colonial ranked 60th, 155th and 190th, respectively, among such companies based on total insurance in-force. Legislative and Judicial Developments Although the federal government and its regulatory agencies generally do not directly regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways. Current and proposed federal measures which may significantly affect the insurance business include securities litigation reform, tort reform, toxic waste removal and liability measures, health care reform initiatives, containment of medical care costs, limitations on health insurance premiums, employee benefits regulation, automobile safety regulation, financial services deregulation including the removal of barriers preventing banks from engaging in the insurance business, the taxation of insurance companies and the tax treatment of insurance products. Enacted and contemplated health care reform on both a national and state level are reshaping the health insurance industry. Although federal legislation on health insurance did not pass Congress in 1995, the Clinton Administration and certain members of Congress may pursue some form of health care reform. Significant changes, if they occur, 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. 16 17 Legislative and judicial developments pertaining to asbestos and toxic waste exposures are discussed in Item 7 of this report on pages 23 through 26. 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 and Chattanooga, Tennessee. The Real Estate Group's corporate headquarters is located in Roseland, New Jersey. The insurance subsidiaries maintain zone administrative and branch offices in major cities throughout the United States, and members of the Property and Casualty Insurance Group also have offices in Canada, Europe, Australia, the Far East and Latin America. Office facilities are leased with the exception of buildings in Branchburg, New Jersey and Chattanooga, and a portion of the Life Group's home office complex in Concord. Management considers its office facilities suitable and adequate for the current level of operations. See Note (11) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1995 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 through 25. 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, 1995. 17 18 EXECUTIVE OFFICERS OF THE REGISTRANT
YEAR OF AGE(a) ELECTION(b) ------ ---------- Dean R. O'Hare, Chairman and President of the Corporation................... 53 1972 Douglas A. Batting, Executive Vice President of Chubb & Son Inc. ........... 53 1996 John P. Cavoores, Executive Vice President of Chubb & Son Inc............... 38 1996 Percy Chubb, III, Vice Chairman of the Corporation.......................... 61 1971 Randell G. Craig, Executive Vice President of Chubb Life.................... 50 1994 Robert P. Crawford, Jr., Executive Vice President of the Corporation........ 54 1994 John J. Degnan, Senior Vice President of the Corporation.................... 51 1994 Gail E. Devlin, Senior Vice President of the Corporation.................... 57 1981 Edward Dunlop, Senior Vice President of the Corporation..................... 55 1995 David S. Fowler, Senior Vice President of the Corporation................... 50 1989 Henry G. Gulick, Vice President and Secretary of the Corporation............ 52 1975 Charles M. Luchs, Executive Vice President of Chubb & Son Inc. ............. 56 1996 Brian W. Nocco, Senior Vice President of the Corporation.................... 44 1994 Donn H. Norton, Executive Vice President of the Corporation................. 54 1985 Michael O'Reilly, Senior Vice President of the Corporation.................. 52 1976 Robert Rusis, Senior Vice President and General Counsel of the Corporation.. 62 1990 Henry B. Schram, Senior Vice President of the Corporation................... 49 1985 Theresa M. Stone, Executive Vice President of the Corporation............... 51 1990
- --------------- (a) Ages listed above are as of April 23, 1996. (b) Date indicates year first elected or designated as an executive officer. All of the foregoing officers serve at the pleasure of the Board of Directors of the Corporation or listed subsidiary and have been employees of the Corporation or a subsidiary of the Corporation for more than five years except for Brian W. Nocco. Mr. Nocco, who joined the Corporation in 1994, was previously Treasurer of Continental Bank Corp. 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 1995 Annual Report to Shareholders, page 69. ITEM 6. SELECTED FINANCIAL DATA Selected financial data for the five years ended December 31, 1995 are incorporated by reference from the Corporation's 1995 Annual Report to Shareholders, pages 42 and 43. 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 1995 Annual Report to Shareholders, pages 15, 16 and 44 through 66. Net income amounted to $697 million in 1995 compared with $528 million in 1994 and $324 million in 1993. Net income in 1993 reflected a net charge of $357 million after taxes related to an agreement for the settlement of asbestos-related litigation as well as the Corporation's decision to exercise its option to commute an unrelated medical malpractice reinsurance agreement. Net income in 1993 also reflected 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 $85 million, $41 million and $152 million in 1995, 1994 and 1993, 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 higher in 1995 than in 1994; such 1994 income was significantly higher than that in 1993. Results in 1993 were adversely affected by 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. The $675 million charge was partially offset by a $125 million return premium to our property and casualty insurance subsidiaries related to the Corporation's decision to exercise its option to commute a medical malpractice reinsurance agreement (the "$125 million return premium"). Property and casualty income after taxes was $563 million in 1995 compared with $467 million in 1994 and $118 million in 1993. 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. Earnings in 1995 benefited from highly profitable underwriting results and an increase in investment income compared with 1994. Earnings in 1994 were adversely affected by higher catastrophe losses, resulting from the earthquake in California and the winter storms in the eastern and midwestern parts of the United States in the first quarter. Investment income increased modestly in 1994 compared with the prior year. Catastrophe losses were $64 million in 1995 compared with $169 million in 1994 and $89 million in 1993. Our initial retention level for each catastrophic event is approximately $85 million. We did not have any recoveries from our catastrophe reinsurance coverage during the past three years since there were no individual catastrophes for which our losses exceeded the initial retention. Net premiums written amounted to $4.3 billion in 1995, an increase of 9% compared with 1994. Net premiums written in 1994 increased 12% compared with 1993, after excluding the $125 million return premium from the 1993 amount. Personal coverages accounted for $852 million or 20% of 1995 premiums written, standard commercial coverages for $1,456 million or 34%, specialty commercial coverages for $1,627 million or 38% and reinsurance assumed for $371 million or 8%. The marketplace continued to be competitive, particularly in the commercial 19 20 classes. Price increases in the casualty classes have been difficult to achieve for several years. Prices for property classes have remained stable in the past two years, despite the significant catastrophe losses experienced by the industry. Premium growth in 1995 and 1994 was due primarily to the selective writing of new business and exposure growth on existing business. A significant portion of premium growth in both years was achieved outside the United States, from our expanding international branch network and our participation in the business of the Sun Alliance Group plc. Underwriting results were highly profitable in 1995 compared with near breakeven results in 1994. Underwriting results were extremely unprofitable in 1993 due to the adverse effect of the $675 million charge. The combined loss and expense ratio, the common measure of underwriting profitability, was 96.8% in 1995 compared with 99.5% in 1994 and 114.8% in 1993. 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 64.7% in 1995 compared with 67.0% in 1994 and 82.5% in 1993. Excluding the effects of the $675 million charge and the $125 million return premium, the loss ratio was 65.5% in 1993. The loss ratios continue to reflect the favorable experience resulting from the consistent application of our disciplined underwriting standards. Losses from catastrophes represented 1.5, 4.5 and 2.5 percentage points of the loss ratio in 1995, 1994 and 1993, respectively. Our expense ratio was 32.1% in 1995 compared with 32.5% in 1994 and 32.3% in 1993. Excluding the effect of the $125 million return premium, the expense ratio was 33.5% in 1993. The expense ratio in 1995 and 1994 benefited from growth in written premiums at a greater rate than the increase in overhead expenses. Expenses were reduced by contingent profit sharing accruals of $11 million in 1994 and $9 million in 1993 relating to the medical malpractice reinsurance agreement. After a review of the cost of our casualty excess of loss reinsurance, we modified the program, principally for excess liability and executive protection coverages, effective January 1, 1996. The changes include an increase in the initial retention for each loss from $5 million to $10 million and an increase in the initial aggregate amount of losses that we will retain for each year before reinsurance becomes available. These changes in our casualty reinsurance program are expected to increase net premiums written in 1996 by approximately $100 million. For many years, a portion of the U.S. insurance business written by the Corporation's property and casualty subsidiaries has been reinsured on a quota share basis with a subsidiary of Sun Alliance. Similarly, a subsidiary of the Corporation has assumed a portion of Sun Alliance's property and casualty business on a quota share basis, such participation having increased in recent years. Effective January 1, 1996, the agreements pertaining to the exchange of reinsurance were amended to reduce the portion of each company's business that is reinsured with the other. As a result, our property and casualty subsidiaries will retain a greater portion of the business they write directly and will reduce the amount of reinsurance they assume from Sun Alliance. As a result of the changes to the agreements with Sun Alliance, our net premiums written are expected to increase by approximately $100 million in 1996. The terms of the reinsurance agreements with Sun Alliance will be reviewed annually, at which time further reductions in the portion of each company's business that is reinsured with the other may occur. The impact on underwriting results in 1996 of the changes to our casualty reinsurance program and to the agreements with Sun Alliance is not expected to be significant. PERSONAL INSURANCE Premiums from personal insurance increased 5% in 1995 compared with 1994; such premiums in 1994 were virtually unchanged from 1993. Our disciplined approach to pricing and risk selection, together with our efforts to control exposure in catastrophe prone areas, made it difficult to increase homeowners and other non-automobile business. However, gradual progress was made in 1995 to 20 21 increase premiums written in non-catastrophe prone areas. Personal automobile premiums increased modestly in 1995 as the result of our marketing efforts to provide coverage for high value automobiles. Our personal insurance business produced a substantial underwriting profit in 1995 compared with breakeven results in 1994 and an underwriting profit in 1993. The combined loss and expense ratio was 87.5% in 1995 compared with 100.3% in 1994 and 95.8% in 1993. Results in each of our personal classes of business improved significantly in 1995. Homeowners results were profitable in 1995, benefiting from lower catastrophe losses, fewer large losses and a reduction in non-catastrophe loss frequency. Results were adversely affected by significant catastrophe losses in each of the past three years, but particularly in 1994 due to the winter storms and, to a lesser extent, the California earthquake. Catastrophe losses represented 10.4 percentage points of the loss ratio for this class in 1995 compared with 19.6 percentage points in 1994 and 13.4 percentage points in 1993. Other personal coverages, which include insurance for personal valuables and excess liability, were increasingly profitable in 1994 and 1995. Personal excess liability results improved in both years due to favorable loss experience. Our automobile business produced profitable results in each of the last three years. Results in 1995 were particularly strong due to lower loss frequency and severity. Automobile results were adversely affected each year by losses from the mandated business that we are required by law to accept for those individuals who cannot obtain coverage in the voluntary market. STANDARD COMMERCIAL INSURANCE Premiums from standard commercial insurance, which include coverages for multiple peril, casualty and workers' compensation, increased 9% in 1995 compared with 1994. Premiums in 1994 were 11% higher than in 1993, after excluding the $125 million return premium discussed below from the 1993 premium amounts. Market competition has continued to place significant pressure on prices. Premium growth in both years was due primarily to the selective writing of new accounts and exposure growth on existing business. Premium growth in 1994 and 1995 for multiple peril was particularly strong outside the United States. Medical malpractice business, which we stopped writing in 1984, was reinsured effective year-end 1985. The reinsurance agreement included a commutation provision under which our property and casualty subsidiaries had an option to reassume the remaining liability of the reinsurer as of December 31, 1995 and receive payment of an amount determined by a formula based on experience under the agreement. The property and casualty subsidiaries exercised this option, which resulted in an amount due from the reinsurer of $191 million and a reduction in reinsurance recoverable from the reinsurer of $66 million. The difference of $125 million represents a return premium to our property and casualty subsidiaries, which was recognized in 1993 at the time the Corporation announced its intention to exercise the commutation option. The amount due from the reinsurer was received in January 1996. Our standard commercial results were unprofitable in each of the past three years. The combined loss and expense ratio was 108.8% in 1995 compared with 107.6% in 1994 and 149.7% in 1993. Results were extremely unprofitable in 1993 due to the adverse effect of the $675 million charge. Excluding the effects of that charge and the $125 million return premium, the combined loss and expense ratio was 107.6% in 1993. Casualty results in 1993 included the effects of the $675 million charge and the $125 million return premium. Excluding the effects of these items, casualty results deteriorated in 1994. Casualty results deteriorated further in 1995. In each of the past three years, casualty results have been adversely affected in varying degrees by increases in loss reserves for asbestos-related and toxic waste claims. The substantial deterioration in 1995 was due to a larger increase in such reserves compared with the prior year. The excess liability component of our casualty coverages has remained profitable due to favorable loss experience in this class. Results in the automobile component were also profitable in each of the last three years. 21 22 Multiple peril results improved in 1995 but remained unprofitable. Results in the property component of this business improved in 1995 due to an absence of catastrophe losses. Results in 1994 were adversely affected by significant catastrophe losses, primarily from the earthquake in California. Catastrophe losses for this class represented 0.9 of a percentage point of the loss ratio for 1995 compared with 8.4 percentage points in 1994 and 3.6 percentage points in 1993. The liability component of this business was particularly unprofitable in 1993 due to an increased frequency and severity of losses. Workers' compensation results improved substantially in 1994 and 1995. Results were profitable in 1995 compared with unprofitable results in the prior two years. Results in our voluntary business have benefited from rate increases, reform of the benefit provisions of workers' compensation laws in many states, and the impact of medical cost containment and disability management activities. Results from our share of the involuntary pools and mandatory business in which we must participate by law also benefited from these positive factors. SPECIALTY COMMERCIAL INSURANCE Premiums from specialty commercial business increased by 10% in 1995 compared with 16% in 1994. Premium increases for our executive protection and financial fidelity coverages were due primarily to new business opportunities. Our strategy of working closely with our customers and our ability to differentiate our products have enabled us to renew a large percentage of this business. Growth in several of our specialty classes was particularly strong outside the United States in both years. Our specialty commercial business produced substantial underwriting profits in each of the past three years with combined loss and expense ratios of 90.4% in 1995, 91.7% in 1994 and 91.0% in 1993. Our executive protection and financial fidelity results were highly profitable in each year due to favorable loss experience. Results in the non-fidelity portion of our financial institutions business improved in 1995; results for these coverages had deteriorated in 1994 due in part to several large losses. Surety results were unprofitable in 1995 due to several large losses compared with profitable results in 1994 and 1993. Marine results were profitable in 1995 compared with unprofitable results in 1994 and profitable results in 1993. Results in 1994 were adversely affected by significant catastrophe losses, resulting primarily from the earthquake in California. Results in our smaller specialty classes were near breakeven in 1995 and 1994. These classes were unprofitable in 1993 due primarily to an increased frequency of large losses. REINSURANCE ASSUMED Premiums from reinsurance assumed, which is primarily treaty reinsurance assumed from Sun Alliance, increased 15% in 1995 compared with 37% in 1994. The growth in both years was primarily due to an increase in our participation in the business of Sun Alliance. Premium growth in 1994 also benefited from a firming of rates, primarily in the United Kingdom. Underwriting results for this segment were near breakeven in 1995 and 1994 compared with unprofitable results in 1993. The combined loss and expense ratio was 99.1% in 1995 compared with 100.2% in 1994 and 111.8% in 1993. Results in 1995 and 1994 benefited from rating measures taken by Sun Alliance as well as favorable weather conditions in the United Kingdom. REGULATORY INITIATIVES In 1988, voters in California approved Ballot Proposition 103, an insurance reform initiative affecting most property and casualty insurers writing business in the state. Provisions of Proposition 103 would have required insurers to roll back property and casualty rates for certain lines of business to 20 percent 22 23 below November 1987 levels and would have required an additional 20 percent reduction in automobile rates by November 1989. In May 1995, our property and casualty subsidiaries reached an agreement with the California Insurance Department to refund premiums, with interest, totaling $6.7 million related to business written during the rollback period. The agreement settles all rollback refund obligations of the property and casualty subsidiaries related to Proposition 103. A consumer group challenged the rollback settlement. In December 1995, an administrative law judge affirmed the rollback settlement. The California Insurance Commissioner has adopted the judge's decision and the period during which the Commissioner's action could be appealed has expired. LOSS RESERVES Loss reserves are our property and casualty subsidiaries' largest liability. At the end of 1995, gross loss reserves totaled $9.6 billion compared with $8.9 billion and $8.2 billion at year-end 1994 and 1993, respectively. Reinsurance recoverable on such loss reserves was $2.0 billion at year-end 1995 and 1994 compared with $1.8 billion at the end of 1993. Loss reserves, net of reinsurance recoverable, increased 10% in 1995 compared with 7% in 1994. Loss reserves included $1.0 billion, $1.05 billion and $1.2 billion at year-end 1995, 1994 and 1993, respectively, related to the settlement of asbestos-related claims against Fibreboard Corporation, which is discussed below. Excluding such reserves, loss reserves, net of reinsurance recoverable, increased 12% in both 1995 and 1994. Substantial reserve growth has occurred each year in those liability coverages, primarily excess liability and executive protection, that are characterized by delayed loss reporting and extended periods of settlement. During 1995, we experienced overall favorable development of $36 million on loss reserves established as of the previous year-end. This compares with favorable development of $30 million in 1994 and unfavorable development of $665 million in 1993. Such redundancies and deficiency 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 in 1993. Each of the past three years benefited from favorable claim severity trends for certain liability classes; this was offset each year in varying degrees by increases in loss reserves relating to asbestos and toxic waste claims. 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, 1995 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 23 24 claimants against Fibreboard for all future asbestos-related bodily injury claims against Fibreboard. This agreement is subject to final appellate court approval. Pursuant to the global settlement agreement, a $1.525 billion trust fund will be established to pay future claims, which are claims that were not filed in court before August 27, 1993. Pacific Indemnity will contribute approximately $538 million to the trust fund and Continental Casualty will contribute the remaining amount. In December 1993, upon execution of the global settlement agreement, Pacific Indemnity and Continental Casualty paid their respective shares into an escrow account. Upon final court approval of the settlement, the amount in the escrow account, including interest earned thereon, will be transferred to the trust fund. All of the parties have agreed to use their best efforts to seek final court approval of the global settlement agreement. Pacific Indemnity and Continental Casualty have reached a separate agreement for the handling of all asbestos-related bodily injury claims pending on August 26, 1993 against Fibreboard. In February 1995, the agreement was amended to extend for several years the period over which Pacific Indemnity will pay its remaining obligation, plus interest, under this agreement. Pacific Indemnity's obligation under this agreement is not expected to exceed $635 million, of which approximately $450 million remained unpaid at December 31, 1995. 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 final appellate 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 by an appellate court. Pacific Indemnity's obligation under the trilateral agreement is therefore similar to, and not duplicative of, that under those agreements described above. The trilateral agreement reaffirms portions of an agreement reached in March 1992 between Pacific Indemnity and Fibreboard. Among other matters, that 1992 agreement eliminates any Pacific Indemnity liability to Fibreboard for asbestos-related property damage claims. In July 1995, the United States District Court of the Eastern District of Texas approved the global settlement agreement and the trilateral agreement. The judgments approving these agreements have been appealed to the United States Court of Appeal for the Fifth Circuit. The appeals were argued in early March 1996. The period of ultimate judicial review continues to lengthen and may well extend into 1997. Management is optimistic that the approval of the settlement will be upheld. However, if both the global settlement agreement and the trilateral agreement are disapproved by an appellate court, there can then 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. 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 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. Loss and expense 24 25 payments related to the settlement aggregated $60 million and $204 million in 1995 and 1994, respectively. We have additional potential asbestos exposure on insureds for which we wrote excess liability coverages. Such exposure has increased due to the erosion of much of the underlying limits. The number of claims against such insureds and the value of such claims have increased in recent years due in part to the non-viability of other defendants. Our other remaining asbestos exposures are mostly peripheral defendants, including a mix of manufacturers and distributors of certain products that contain asbestos as well as premises owners. Generally, these insureds are named defendants on a regional rather than a nationwide basis. We continue to receive notices of new asbestos claims and new exposures on existing claims as more peripheral parties are drawn into litigation to replace the now defunct mines and bankrupt manufacturers. The courts have been engaged in developing guidelines regarding coverage for asbestos claims and have begun to articulate more consistent standards regarding the extent of the obligation of insurers to provide coverage and the method of allocation of costs among insurers. However, we still do not know the universe of potential claims. Therefore, uncertainty remains as to our ultimate liability for asbestos-related claims. Hazardous waste sites are another significant potential exposure. Under the "Superfund" law and similar state statutes, when potentially responsible parties (PRPs) fail to handle the clean-up, regulators have the work done and then attempt to establish legal liability against the PRPs. The PRPs, with proper government authorization in many instances, disposed of toxic materials at a waste dump site or transported the materials to the site. Most sites have multiple PRPs. Insurance policies issued to PRPs were not intended to cover the clean-up costs of pollution and, in many cases, did not intend to cover the pollution itself. Pollution was not a recognized hazard at the time many of these policies were written. In more recent cases, however, policies specifically excluded such exposures. As the cost of environmental clean-up continues to grow, PRPs and others have increasingly filed claims with their insurance carriers. 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 remediation costs among governmental authorities and the PRPs varies greatly. Second, different courts have addressed liability and coverage issues regarding pollution claims and have reached inconsistent conclusions in their interpretation of several issues. These significant uncertainties are not likely to be resolved in the near future. Uncertainties also remain as to the Superfund law itself, which has generated far more litigation than it has brought about the cleanup of hazardous waste sites. Superfund's taxing authority expired on December 31, 1995. Notwithstanding continued pressure by the insurance industry and other interested parties to achieve a legislative solution to rewrite this law, the Superfund issue may not be addressed until after the 1996 elections. It is currently not possible to predict the direction that any reforms may take, when they may occur or the effect that any changes may have on the insurance industry. In addition, the Superfund law does not address non-Superfund toxic sites. For that reason, it does not cover all existing toxic waste exposures, such as those involving sites that are subject to state law only. Such sites could prove even more numerous and thus more costly than Superfund sites. Litigation costs continue to escalate, particularly for toxic waste claims. A substantial portion of the funds expended to date by us has been for legal fees incurred in the prolonged litigation of coverage issues. Primary policies provide a limit on indemnity payments but many do not on defense costs. This 25 26 language in the policy sometimes leads to the payment of defense costs in multiples of the policy limits. Reserves for asbestos and toxic waste claims cannot be estimated with traditional loss reserving techniques. We have established case reserves and expense reserves for costs of related litigation where sufficient information has been developed to indicate the involvement of a specific insurance policy. In addition, IBNR reserves have been established to cover additional exposures on both known and unasserted claims. These reserves are continually reviewed and updated. Loss reserve increases relating to asbestos and toxic waste claims were $182 million in 1995, $115 million in 1994 and $1,076 million in 1993. Excluding 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. Further increases in such reserves in 1996 and future years are possible as legal and factual issues concerning these claims are clarified, although the amounts cannot be reasonably estimated. Management believes that the aggregate loss reserves of the property and casualty subsidiaries at December 31, 1995 were adequate to cover claims for losses which had occurred, including both those known to us and those yet to be reported. In establishing such reserves, management considers facts currently known and the present state of the law and coverage litigation. However, given the expansion of coverage and liability by the courts and the legislatures in the past and the possibilities of similar interpretations in the future, particularly as they relate to asbestos and toxic waste claims, as well as the uncertainty in determining what scientific standards will be deemed acceptable for measuring hazardous waste site clean-up, additional increases in loss reserves may emerge which would adversely affect results in future periods. The amount cannot reasonably be estimated at the present time. INVESTMENTS AND LIQUIDITY Investment income after taxes increased 7% in 1995 compared with 4% in 1994. Growth was primarily due to increases in invested assets, which reflected strong cash flow from operations over the period. Growth was tempered in 1994 by the $538 million paid in December 1993 into an escrow account related to the Fibreboard settlement. Similarly, 1995 growth was tempered as a result of the February 1995 amendment to the 1993 agreement between Pacific Indemnity and Continental Casualty, whereby an additional $480 million of the Corporation's assets were designated as funds held for asbestos-related settlement. These assets accrue income for the benefit of participants in the class settlement of asbestos-related bodily injury claims against Fibreboard. The effective tax rate on our investment income was 15.9% in 1995 compared with 15.3% in 1994 and 14.7% in 1993. The effective tax rate increased in 1995 and 1994 as the percentage of our investment income subject to tax has increased. 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, cash receipts from operations, consisting of insurance premiums and investment income, have provided more than sufficient funds to pay losses, operating expenses and dividends to the Corporation. The main objectives of the investment portfolio of the property and casualty subsidiaries are to maximize after-tax investment income and total investment returns while minimizing credit risks as well as to provide maximum support to the insurance underwriting operations. Investment strategies are developed based on many factors including underwriting results and our resulting tax position, fluctuations in interest rates and regulatory requirements. 26 27 New cash available for investment was approximately $495 million in 1995 compared with $725 million in 1994 and $480 million in 1993. The lower amount in 1995 was due to the designation of $480 million of new cash as funds held for asbestos-related settlement. The lower amount in 1993 was due to the $538 million paid in December into an escrow account. In 1995, we invested new cash primarily in tax-exempt bonds. In 1994, we invested new cash in taxable bonds and, to a lesser extent, tax-exempt bonds while reducing our equity security portfolio. In each year we tried to achieve the appropriate mix in our portfolio to balance both investment and tax strategies. The property and casualty subsidiaries have consistently invested in high quality marketable securities. Taxable bonds in our domestic portfolio comprise U.S. Treasury, government agency and corporate issues. Approximately 90% of these 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. Taxable bonds have an average maturity of 7 1/2 years while tax-exempt bonds mature on average in 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. At December 31, 1995, the property and casualty subsidiaries held foreign investments of $1.4 billion supporting their international operations. Such foreign investments have quality and maturity characteristics similar to our domestic portfolio. We reduce the risks relating to currency fluctuations by maintaining investments in those foreign currencies in which we transact business, with characteristics similar to the liabilities in those currencies. The property and casualty subsidiaries maintain sufficient investments in highly liquid, short-term securities at all times to provide for immediate cash needs. At year-end 1994, such investments were at a higher than normal level so that funds would be readily available to pay amounts related to the Fibreboard settlement. Short-term securities were reduced to a more normal level in 1995 as the expected payout period for Fibreboard related amounts has been extended. 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 $28 million in 1995 compared with $14 million in 1994 and $62 million in 1993. Premiums and policy charges were $623 million in 1995 compared with $836 million in 1994 and $801 million in 1993. PERSONAL INSURANCE Earnings from personal insurance were $37 million in 1995 compared with $33 million in 1994 and $37 million in 1993. Earnings in 1995 benefited from favorable mortality. The earnings decrease in 1994 was primarily due to a decrease in the spread between interest earned on our invested assets and interest credited to policyholders on interest-sensitive products. Premiums and policy charges amounted to $311 million in 1995 compared with $272 million in 1994 and $240 million in 1993. New sales of personal insurance as measured by annualized premiums were $112 million in 1995 compared with $97 million in 1994 and $88 million in 1993. Our strategy is to focus on the affluent individual interested in estate planning and wealth creation utilizing equity-linked products as well as on financial planning for business owners. Our ability to increase revenues has been enhanced through marketing initiatives conducted with our property and casualty producers. We have taken a number of steps to increase operating efficiencies in order to improve the competitive position of our personal insurance business. We reduced field office staffing levels 55% by consolidating the 40 offices as of the beginning of 1993 into 14 as of year-end 1995 and also consolidated three service centers into two. In addition, we streamlined our producer network and raised their minimum production requirements. 27 28 GROUP INSURANCE Group insurance operations resulted in losses of $9 million in 1995 and $19 million in 1994 compared with earnings of $25 million in 1993. Group health insurance results in 1995 and 1994 were adversely affected by a high level of claims resulting from the increased cost of medical services and the increased utilization of those services. Results in 1995 benefited from significant rate increases; this was offset in part by the adverse effect of premium revenue decreasing at a greater rate than the decrease in expenses. Premiums were $312 million in 1995 compared with $564 million in 1994 and $561 million in 1993. New group sales as measured by annualized premiums were $21 million in 1995 compared with $52 million in 1994 and $323 million in 1993. Our group health business is concentrated in the New York and New Jersey markets. In 1993, both states adopted legislation which eliminated health insurance underwriting, created community based rating and limited pre-existing condition exclusions for insured groups with fewer than 50 covered lives. As a result, several insurers reduced their market share in the small group health segment in New York in 1993. We offered a competitive product and thus substantially increased our sales in that market during 1993. The high level of premium revenue in 1993 and the first six months of 1994 reflected the effect of the significant increase in sales of new policies during 1993. Due to the increased availability of alternative small group markets in 1994 as well as our significant rate increases in 1994 and 1995, many of the new policies written in 1993, which became eligible for renewal in 1994, were not renewed. Due to this increase in non-renewals, we expected the decline in premium revenue which occurred in 1995. In response, we took a number of steps to reduce our costs including the closing of field offices and regional claim offices, reducing staffing levels by 65%. Given the changes in our marketplace and the continuation of the shift away from traditional indemnity products to managed care alternatives, we anticipate that traditional indemnity premium revenue will continue to decline. In response to this shift, we are offering managed care products through ChubbHealth, Inc., a health maintenance organization. Because of the continuing adverse effects of the legislative changes and other health industry factors on our group health results, we are evaluating our future role in the traditional indemnity and managed care markets. INVESTMENTS AND LIQUIDITY Gross investment income increased 12% in 1995 compared with 1% in 1994. Growth in 1995 was primarily due to an increase in invested assets. Premium receipts in excess of payments for benefits and expenses, together with investment income, continue to provide new cash for investment. New cash amounted to $225 million in 1995 compared with $140 million in 1994 and $225 million in 1993. The increase in new cash in 1995 was primarily due to increases in deposits credited to policyholder funds. The decrease in new cash in 1994 was due to the reduced cash flow from group insurance operations. In 1995, new cash was invested in mortgage-backed securities and, to a lesser extent, corporate bonds and U.S. Treasury securities. In 1994, new cash was invested primarily in mortgage-backed securities. We invest predominantly in fixed-income securities with cash flows and maturities which are consistent with life insurance liability characteristics. Approximately 95% are investment grade and more than half are rated AAA. We maintain sufficient funds in short-term securities to meet unusual needs for cash. The life and health subsidiaries held fixed maturity securities with a carrying value of $2.7 billion and $2.2 billion at December 31, 1995 and 1994, respectively. Corporate bonds comprised 39% and 47% of the portfolio at year-end 1995 and 1994, respectively, and mortgage-backed securities comprised 47% of the portfolio at both year-ends. More than 90% of our mortgage-backed securities holdings at December 31, 1995 and 1994 related to residential mortgages consisting of government agency pass-through securities, government agency collateralized mortgage obligations (CMOs) and AAA rated 28 29 by government agency collateral or single family home mortgages. The majority of the CMOs are actively traded in liquid markets and market value information is readily available from broker/dealers. The notion of impairment associated with default in paying principal is less applicable to residential CMOs. Other risks, most notably prepayment and extension risks, are monitored regularly. Changes in prepayment patterns can either lengthen or shorten the expected timing of the principal repayments and thus the average life and the effective yield of the security. We invest primarily in those classes of residential CMO instruments that are subject to less prepayment and extension risk and are therefore less volatile than other CMO instruments. REAL ESTATE Real estate earnings after taxes were $6 million in 1995 compared with a loss of $2 million in both 1994 and 1993. Results continue to be adversely affected by progressively higher portions of interest cost being charged directly to expense rather than being capitalized and by provisions for possible uncollectible receivables related to mortgages. Results for 1995 benefited from an increase in earnings from rental operations, residential sales and a land sale as well as from a decrease in the provision for uncollectible receivables. The provision for uncollectible receivables was lower in 1995 than in the prior year despite an increase of $10 million to the allowance for uncollectible receivables resulting from the initial application of Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, which established new criteria for measuring impairment of a loan. Revenues were $288 million in 1995 compared with $205 million in 1994 and $161 million in 1993. Revenues in 1995 and 1994 included higher levels of rental revenues on owned properties. Revenues in 1995 also included increased revenues from residential development and the land sale. Our commercial real estate activities traditionally centered around acquiring suburban, multi-site land parcels in locations considered prime for office development and then developing the land in progressive stages. In the late 1980s, we expanded our activities to include a few metropolitan office building projects. We 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 joint venture 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 commercial real estate industry continues to suffer from a reduced demand for real estate investment. For the past several years, the supply of available office space has exceeded the demand. Corporate restructurings and downsizings have 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 low rental rates will continue to cause pressure on the earnings of the real estate development industry. In consideration of the difficult environment in most real estate markets, we have curtailed our construction of new office buildings in recent years. We have focused instead on leasing newly constructed facilities and maintaining established properties at high occupancy levels. Current development activities consist almost exclusively of preconstruction type efforts such as site planning, zoning and similar activities. As a consequence, we expect revenues from our commercial real estate activities for the next several years to come from ongoing income from owned properties and from management and financing 29 30 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 1995, a total of 2,320,000 square feet was leased compared with 2,420,000 square feet in 1994 and 1,710,000 square feet in 1993. At December 31, 1995, we owned or had interests in 10,450,000 square feet of office and industrial space. Our vacancy rate was 6% at year-end 1995 compared with 7% at year-end 1994 and 10% at year-end 1993. The lower vacancy rates in 1995 and 1994 were due to our ability to market space as it became available despite the difficult leasing market. In certain markets, renewing leases in established buildings has been difficult as newly constructed space is available nearby at competitive rates. While we have experienced significant leasing activity in recent years, we have had to enter into multiple year leases at low 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. Ultimate realizable value for real estate properties is determined based on our ability to fully recover costs through a future revenue stream. 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. We analyze both individual buildings and development sites on a continuing basis. Estimates are made of both additional costs to be incurred to complete development where necessary and the 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 Corporation will adopt SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, in the first quarter of 1996. SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets. The adoption of SFAS No. 121 is not expected to have a significant impact on net income in 1996. This pronouncement is discussed further in Note (1) (p) of the Notes to Consolidated Financial Statements on page 51. Loans receivable, which were issued in connection with our joint venture activities and other property sales, are primarily purchase money mortgages. Such loans, which represent only 2% of consolidated assets, are generally collateralized by buildings and land. We continuously evaluate the ultimate collectibility of such loans, of which no significant amounts are due in the near term, and establish appropriate reserves. Our agreements to manage all aspects of the joint venture properties have played a significant role in enabling us to control potential collectibility issues related to these receivables. The reserve for possible uncollectible receivables was increased by charges against income of $18 million in 1995, $29 million in 1994 and $22 million in 1993, principally related to loans on selected properties with operating income at levels which may not fully meet debt service requirements. The 1995 charge includes the $10 million from the initial application of SFAS No. 114. During 1995 and 1994, such reserve was reduced by writedowns aggregating $4 million and $10 million, respectively, related to specific loans that are uncollectible. Management believes the reserve of $88 million at 30 31 December 31, 1995 adequately reflects the current condition of the portfolio. If conditions in the real estate market do not improve, however, additional reserves may be required. The fair value of these loans receivable is estimated through the use of valuation techniques which consider current yield factors applied to the lesser of the value of the discounted future cash flows of the loan or the discounted future net cash flows from the properties serving as the underlying collateral for the loan. The fair value of the loans represents a point-in-time estimate that is not relevant in predicting future earnings or cash flows related to such loans. At December 31, 1995, the aggregate fair value of the loans was $405 million and the carrying value was $410 million. Our Florida residential development activities continued during 1995. Construction of a 171 unit oceanfront high-rise condominium project, commenced during 1994, is expected to be completed in 1996. At year-end 1995, 156 units were under contract. During 1995, construction of a 214 unit mid-rise condominium project was completed. At year-end, 123 units were sold and 22 units were under contract. During 1994, we began development of residential projects in northern New Jersey. Our first project is a 178 unit townhome project which we expect to complete in 1996. At year-end 1995, 131 units were sold and 19 units were under contract. During 1995, we entered into a joint venture for the construction of 84 townhomes. Real estate activities are funded with short-term credit instruments, primarily commercial paper, and debt issued by Chubb Capital Corporation as well as term loans and mortgages. The weighted average interest cost on short-term credit instruments approximated 6% in 1995 compared with 4 1/2% in 1994 and 3 1/4% in 1993. In 1995, the range of interest rates for term loans was 6% to 9 1/2% and for mortgages the range was 5% to 12%. We expect to refinance, under similar terms, most of the term loans and mortgages which become due in 1996. Cash from operations combined with the ability to utilize the Corporation's borrowing facilities will provide sufficient funds for 1996. CORPORATE The Corporation filed a shelf registration statement which the Securities and Exchange Commission declared effective in June 1995, under which up to $400 million of various types of securities may be issued by the Corporation or Chubb Capital. No securities have been issued under this registration. In February 1994, the Board of Directors authorized the repurchase of up to 5,000,000 shares of common stock. During 1994, the Corporation repurchased approximately 1,000,000 shares in open-market transactions at a cost of $72 million. The Corporation has outstanding $120 million of unsecured 8 3/4% notes due in 1999. In each of the years 1996 through 1998, the Corporation will pay as a mandatory sinking fund an amount sufficient to redeem $30 million of principal. Chubb Capital has outstanding in the Eurodollar market $250 million of 6% subordinated notes due in 1998. The notes are guaranteed by the Corporation and exchangeable into its common stock. The proceeds have been used to support our real estate operations. Chubb Capital has outstanding $150 million of 6% notes due in 1998 and $100 million of 6 7/8% notes due in 2003. The notes are unsecured and are guaranteed by the Corporation. A substantial portion of the proceeds has been used to support our real estate operations. The Corporation has a revolving credit agreement with a group of banks that provides for unsecured borrowings of up to $300 million. The agreement terminates on July 15, 1997 at which time any loans then outstanding become payable. There have been no borrowings under this agreement. The Corporation had additional unused lines of credit of approximately $178 million at December 31, 1995. 31 32 Investment income earned on corporate invested assets and interest and other expenses not allocable to the operating subsidiaries are reflected in the corporate segment. Corporate income after taxes was $15 million in 1995, $8 million in 1994 and $14 million in 1993. INVESTMENT GAINS AND LOSSES Net investment gains were realized by the Corporation and its insurance subsidiaries in 1995, 1994 and 1993. Such gains before taxes consisted of the following:
1995 1994 1993 ---- ---- ---- (IN MILLIONS) Equity securities............................... $100 $125 $ 60 Fixed maturities................................ 31 (62) 173 ---- ---- ---- $131 $ 63 $233 ==== ==== ====
In 1995 and 1994, a redistribution of invested assets from equity securities to fixed maturities resulted in significant realized investment gains. A restructuring of the equity security portfolio begun in 1992 resulted in significant realized investment gains in 1993. A primary reason for the sale of fixed maturities in each of the last three years has been to improve our after-tax portfolio return without sacrificing quality, where market opportunities have existed to do so. The substantial gains realized 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 in statutory surplus of our property and casualty subsidiaries resulting from the decrease in income related to the Fibreboard settlement. Fixed maturities which the Corporation and its insurance subsidiaries have the ability and intent to hold to maturity are classified as held-to-maturity. The remaining fixed maturities, which may be sold prior to maturity to support our investment strategies, such as in response to changes in interest rates and the yield curve or to maximize after-tax returns, are classified as available-for-sale. Effective January 1, 1994, the Corporation adopted SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 115 established more stringent criteria for classifying fixed maturity securities as held-to-maturity. Thus, upon adopting SFAS No. 115, the Corporation reclassified $4.2 billion of fixed maturities as available-for-sale which were previously classified as held-to-maturity. At December 31, 1995, 27% of our fixed maturity portfolio was classified as held-to-maturity compared with 35% at December 31, 1994 and 79% at December 31, 1993. At December 31, 1995 and 1994, in accordance with the requirements of SFAS No. 115, fixed maturities classified as held-to-maturity were carried at amortized cost while fixed maturities classified as available-for-sale were carried at market value. At December 31, 1993, all fixed maturities were carried at amortized cost. The unrealized appreciation or depreciation of investments carried at market value, which includes equity securities and fixed maturities classified as available-for-sale, is reflected in a separate component of shareholders' equity, net of applicable deferred income tax. The unrealized market appreciation before tax of those fixed maturities carried at amortized cost was $209 million, $13 million and $736 million at December 31, 1995, 1994 and 1993, respectively. Such unrealized appreciation was not reflected in the consolidated financial statements. The changes in unrealized market appreciation of fixed maturities were due to fluctuations in interest rates. FEDERAL INCOME TAXES The Omnibus Budget Reconciliation Act of 1993, enacted in August 1993, 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, 32 33 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 1993, life and health insurance income after taxes included a benefit of $5 million resulting from a reversal of income tax reserves based on a settlement of prior years' taxes. CHANGES IN ACCOUNTING PRINCIPLES In 1995, the Corporation adopted SFAS No. 114, Accounting by Creditors for Impairment of a Loan. In 1994, the Corporation adopted SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. In 1993, the Corporation adopted SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, and SFAS No. 109, Accounting for Income Taxes. These pronouncements and their effect on the consolidated financial statements are discussed in Note (2) of the Notes to Consolidated Financial Statements on page 51. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated financial statements of the Corporation at December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 and the Report of Independent Auditors thereon and the Corporation's unaudited quarterly financial data for the two-year period ended December 31, 1995 are incorporated by reference from the Corporation's 1995 Annual Report to Shareholders, pages 44 through 68. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 33 34 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 23, 1996, pages 2, 3 and 6. 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 23, 1996, pages 8 through 20 other than the Performance Graph and the Organization and Compensation Committee Report appearing on pages 13 through 18. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 23, 1996, pages 4 through 7. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 23, 1996, pages 20 and 21. 34 35 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), 33-30020 (filed July 18, 1989), 33-49230 (filed July 2, 1992) and 33-49232 (filed July 2, 1992): 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. 35 36 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. THE CHUBB CORPORATION (REGISTRANT) March 1, 1996 By /s/ DEAN R. O'HARE --------------------------- (DEAN R. O'HARE, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER) PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE --------- ----- ---- /s/ DEAN R. O'HARE Chairman, President, Chief March 1, 1996 ---------------------------- Executive Officer and (DEAN R. O'HARE) Director /s/ JOHN C. BECK Director March 1, 1996 ---------------------------- (JOHN C. BECK) /s/ PERCY CHUBB, III Vice Chairman, Chief Financial March 1, 1996 ---------------------------- Officer and Director (PERCY CHUBB, III) /s/ JOEL J. COHEN Director March 1, 1996 ---------------------------- (JOEL J. COHEN) /s/ HENRY U. HARDER Director March 1, 1996 ---------------------------- (HENRY U. HARDER) /s/ DAVID H. HOAG Director March 1, 1996 ---------------------------- (DAVID H. HOAG) /s/ ROBERT V. LINDSAY Director March 1, 1996 ---------------------------- (ROBERT V. LINDSAY) /s/ THOMAS C. MACAVOY Director March 1, 1996 ---------------------------- (THOMAS C. MACAVOY)
36 37
SIGNATURE TITLE DATE --------- ----- ---- /s/ GERTRUDE G. MICHELSON Director March 1, 1996 - -------------------------------------- (GERTRUDE G. MICHELSON) Director March 1, 1996 - -------------------------------------- (WARREN B. RUDMAN) /s/ DAVID G. SCHOLEY Director March 1, 1996 - -------------------------------------- (DAVID G. SCHOLEY) /s/ RAYMOND G.H. SEITZ Director March 1, 1996 - -------------------------------------- (RAYMOND G.H. SEITZ) /s/ LAWRENCE M. SMALL Director March 1, 1996 - -------------------------------------- (LAWRENCE M. SMALL) /s/ RICHARD D. WOOD Director March 1, 1996 - -------------------------------------- (RICHARD D. WOOD) /s/ HENRY B. SCHRAM Senior Vice President March 1, 1996 - -------------------------------------- and Chief Accounting (HENRY B. SCHRAM) Officer
37 38 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 67 -- Consolidated Balance Sheets at December 31, 1995 and 1994 45 -- Consolidated Statements of Income for the Years Ended Decem- ber 31, 1995, 1994 and 1993 44 -- Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 46 -- Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 47 -- Notes to Consolidated Financial Statements 48 -- Supplementary Information (unaudited) Quarterly Financial Data 68 -- Schedules: I -- Consolidated Summary of Investments -- Other than Investments in Related Parties at December 31, 1995 -- 40 II -- Condensed Financial Information of Registrant at December 31, 1995 and 1994 and for the Years Ended December 31, 1995, 1994 and 1993 -- 41 III -- Consolidated Supplementary Insurance Information at and for the Years Ended December 31, 1995, 1994 and 1993 -- 44 IV -- Consolidated Reinsurance at and for the Years Ended December 31, 1995, 1994 and 1993 -- 45 VI -- Consolidated Supplementary Property and Casualty Insurance Information for the Years Ended December 31, 1995, 1994 and 1993 -- 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, 1995, are hereby incorporated by reference. 38 39 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of The Chubb Corporation of our report dated February 23, 1996 (except for Note 18, as to which the date is March 1, 1996), included in the 1995 Annual Report to Shareholders of The Chubb Corporation. Our audits also included the financial statement schedules of The Chubb Corporation listed in Item 14(a). These schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-3: No. 33-5911 and Form S-8: No. 33-12208, No. 33-29185, No. 33-30020, No. 33-49230 and No. 33-49232) of our report dated February 23, 1996 (except for Note 18, as to which the date is March 1, 1996), with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) of The Chubb Corporation. /s/ ERNST & YOUNG LLP New York, New York March 26, 1996 39 40 THE CHUBB CORPORATION SCHEDULE I CONSOLIDATED SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES (IN THOUSANDS) DECEMBER 31, 1995
AMOUNT AT WHICH COST OR SHOWN IN AMORTIZED MARKET THE TYPE OF INVESTMENT COST VALUE BALANCE SHEET ------------------ --------- ------- ------------- Short term investments......................... $ 484,439 $ 484,439 $ 484,439 ----------- ----------- ----------- Fixed maturities Bonds United States Government and government agencies and authorities................ 2,460,192 2,555,083 2,545,627 States, municipalities and political subdivisions............................ 6,385,830 6,815,369 6,639,808 Foreign................................... 1,466,281 1,526,787 1,524,528 Public utilities.......................... 111,576 116,447 115,527 All other corporate bonds................. 1,668,242 1,770,847 1,749,610 ----------- ----------- ----------- Total bonds..................... 12,092,121 12,784,533 12,575,100 Redeemable preferred stocks.................. 27,704 27,710 27,710 ----------- ----------- ----------- Total fixed maturities.......... 12,119,825 12,812,243 12,602,810 ----------- ----------- ----------- Equity securities Common stocks Public utilities.......................... 11,222 11,994 11,994 Banks, trusts and insurance companies..... 13,985 23,885 23,885 Industrial, miscellaneous and other....... 467,178 550,942 550,942 ----------- ----------- ----------- Total common stocks............. 492,385 586,821 586,821 Non-redeemable preferred stocks.............. 1,031 1,004 1,004 ----------- ----------- ----------- Total equity securities......... 493,416 587,825 587,825 ----------- ----------- ----------- Policy and mortgage loans...................... 212,339 212,339 212,339 ----------- ----------- ----------- Total invested assets........... $13,310,019 $14,096,846 $13,887,413 =========== =========== ===========
40 41 THE CHUBB CORPORATION SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS -- PARENT COMPANY ONLY (IN THOUSANDS) DECEMBER 31, 1995 AND 1994
1995 1994 ---- ---- Assets Invested Assets Short Term Investments..................................... $ 62,727 $ 61,430 Taxable Fixed Maturities -- Available-for-Sale (cost $207,053 and $289,319)............................. 216,048 275,373 Equity Securities (cost $48,640 and $42,817)............... 75,837 52,731 ---------- ---------- TOTAL INVESTED ASSETS................................. 354,612 389,534 Cash.......................................................... 59 132 Investment in Consolidated Subsidiaries....................... 4,969,988 4,041,551 Other Assets.................................................. 145,264 149,900 ---------- ---------- TOTAL ASSETS.......................................... $5,469,923 $4,581,117 ========== ========== Liabilities Dividend Payable to Shareholders.............................. $ 42,741 $ 40,035 Payable to Chubb Capital Corporation.......................... -- 74,340 Long Term Debt................................................ 120,000 150,000 Accrued Expenses and Other Liabilities........................ 44,453 69,713 ---------- ---------- TOTAL LIABILITIES..................................... 207,194 334,088 ---------- ---------- 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 87,819,355 and 87,798,286 Shares...... 87,819 87,798 Paid-In Surplus............................................... 778,239 786,596 Retained Earnings............................................. 4,206,517 3,680,554 Foreign Currency Translation Gains (Losses), Net of Income Tax........................................................ (3,433) 9,766 Unrealized Appreciation (Depreciation) of Investments, Net.... 345,894 (124,339) Receivable from Employee Stock Ownership Plan................. (114,998) (122,999) Treasury Stock, at Cost -- 518,468 and 977,580 Shares......... (37,309) (70,347) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY............................ 5,262,729 4,247,029 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ $5,469,923 $4,581,117 ========== ==========
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 1995 Annual Report to Shareholders. 41 42 THE CHUBB CORPORATION SCHEDULE II (CONTINUED) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME -- PARENT COMPANY ONLY (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 ---- ---- ---- Investment Income...................................... $ 19,982 $ 25,031 $ 28,015 Realized Investment Gains (Losses)..................... (505) (13,145) 21,076 Investment Expenses.................................... (1,132) (1,307) (917) Corporate Expenses..................................... (33,355) (34,850) (24,220) -------- -------- -------- (15,010) (24,271) 23,954 Federal and Foreign Income Tax (Credit)................ 2,639 (4,578) (9,050) -------- -------- -------- (17,649) (19,693) 33,004 Equity in Income Before Cumulative Effect of Changes in Accounting Principles of Consolidated Subsidiaries... 714,277 548,162 311,213 -------- -------- -------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES........................... 696,628 528,469 344,217 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........................................ $696,628 $528,469 $324,217 ======== ======== ========
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 1995 Annual Report to Shareholders. 42 43 THE CHUBB CORPORATION SCHEDULE II (CONTINUED) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY (IN THOUSANDS) YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 ---- ---- ---- Cash Flows from Operating Activities Net Income........................................... $ 696,628 $ 528,469 $ 324,217 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)..................................... (714,277) (548,162) (222,613) Realized Investment (Gains) Losses................ 505 13,145 (21,076) Cumulative Effect of Changes in Accounting Principles...................................... -- -- (68,600) Other, Net........................................ 5,024 16,886 30,305 --------- --------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES......................... (12,120) 10,338 42,233 --------- --------- --------- Cash Flows from Investing Activities Proceeds from Sales of Fixed Maturities.............. 110,234 234,132 463,625 Proceeds from Maturities of Fixed Maturities......... 13,369 21,632 6,760 Proceeds from Sales of Equity Securities............. 2,479 5,333 4,957 Purchases of Fixed Maturities........................ (39,585) (218,380) (421,876) Purchases of Equity Securities....................... (8,683) (26,004) (6,191) Decrease (Increase) in Short Term Investments, Net... (1,297) 1,375 (22,258) Dividends Received from Consolidated Subsidiaries.... 244,008 244,008 148,008 Capital Contributions to Consolidated Subsidiaries... (24,000) (40,000) (10,280) Other, Net........................................... (40,123) (9,353) (91,175) --------- --------- --------- NET CASH PROVIDED BY INVESTING ACTIVITIES......................... 256,402 212,743 71,570 --------- --------- --------- Cash Flows from Financing Activities Increase (Decrease) in Payable to Chubb Capital Corporation............................... (74,340) (2,950) 22,290 Repayment of Long Term Debt.......................... (30,000) -- -- Dividends Paid to Shareholders....................... (167,959) (158,735) (148,070) Repurchase of Shares................................. -- (72,052) -- Other, Net........................................... 27,944 10,608 11,793 --------- --------- --------- NET CASH USED IN FINANCING ACTIVITIES......................... (244,355) (223,129) (113,987) --------- --------- --------- Net Decrease in Cash................................... (73) (48) (184) Cash at Beginning of Year.............................. 132 180 364 --------- --------- --------- CASH AT END OF YEAR............................. $ 59 $ 132 $ 180 ========= ========= =========
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 1995 Annual Report to Shareholders. 43 44 THE CHUBB CORPORATION SCHEDULE III CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION (IN THOUSANDS)
DECEMBER 31 ----------------------------------------------- OTHER POLICY DEFERRED UNPAID CLAIMS POLICY CLAIMS AND ACQUISITION AND POLICY UNEARNED BENEFITS SEGMENT COSTS LIABILITIES PREMIUMS PAYABLE ------- ----------- ----------- -------- -------- 1995 Property and Casualty Insurance Personal................................. $ 129,789 $ 659,138 $ 539,454 Standard Commercial...................... 177,842 4,701,321 854,374 Specialty Commercial..................... 191,351 3,806,386 996,473 Reinsurance Assumed...................... 59,694 421,296 180,381 Investments.............................. ---------- ----------- ---------- 558,676 9,588,141 2,570,682 Life and Health Insurance.................. 612,709 2,844,415 $ 98,723 ---------- ----------- ---------- -------- $1,171,385 $12,432,556 $2,570,682 $ 98,723 ========== =========== ========== ======== 1994 Property and Casualty Insurance Personal................................. $ 131,306 $ 675,520 $ 510,869 Standard Commercial...................... 168,962 4,330,870 788,771 Specialty Commercial..................... 179,310 3,521,176 923,969 Reinsurance Assumed...................... 49,875 385,654 158,936 Investments.............................. ---------- ----------- ---------- 529,453 8,913,220 2,382,545 Life and Health Insurance.................. 606,493 2,594,995 $ 64,588 ---------- ----------- ---------- -------- $1,135,946 $11,508,215 $2,382,545 $ 64,588 ========== =========== ========== ======== 1993 Property and Casualty Insurance Personal................................. $ 133,565 $ 654,617 $ 503,350 Standard Commercial...................... 157,347 4,182,997 720,487 Specialty Commercial..................... 162,461 3,086,515 839,835 Reinsurance Assumed...................... 36,329 311,313 116,191 Investments.............................. ---------- ----------- ---------- 489,702 8,235,442 2,179,863 Life and Health Insurance.................. 522,544 2,384,936 $ 61,684 ---------- ----------- ---------- -------- $1,012,246 $10,620,378 $2,179,863 $ 61,684 ========== =========== ========== ======== YEAR ENDED DECEMBER 31 ------------------------------------------------------------------------- PREMIUMS INSURANCE AMORTIZATION OTHER EARNED CLAIMS OF DEFERRED INSURANCE AND NET AND POLICY OPERATING POLICY INVESTMENT POLICYHOLDERS' ACQUISITION COSTS AND PREMIUMS SEGMENT CHARGES INCOME BENEFITS COSTS EXPENSES WRITTEN ------- -------- ---------- -------------- ------------ --------- -------- 1995 Property and Casualty Insurance Personal................................. $ 832,423 $ 436,562 $ 250,174 $ 53,001 $ 851,582 Standard Commercial...................... 1,408,811 1,083,851 363,304 96,751 1,456,466 Specialty Commercial..................... 1,556,473 920,521 391,433 112,332 1,627,032 Reinsurance Assumed...................... 349,455 229,047 116,032 370,912 Investments.............................. $602,987* ---------- -------- ---------- ---------- -------- ---------- 4,147,162 602,987 2,669,981 1,120,943 262,084 $4,305,992 ========== Life and Health Insurance.................. 622,937 230,090 549,219 77,457 185,086 ---------- -------- ---------- ---------- -------- $4,770,099 $833,077 $3,219,200 $1,198,400 $447,170 ========== ======== ========== ========== ======== 1994 Property and Casualty Insurance Personal................................. $ 812,033 $ 522,158 $ 253,203 $ 44,147 $ 813,736 Standard Commercial...................... 1,279,069 970,764 336,877 77,554 1,338,554 Specialty Commercial..................... 1,404,793 834,926 361,021 102,289 1,475,761 Reinsurance Assumed...................... 280,388 191,511 90,144 323,158 Investments.............................. $560,481* ---------- -------- ---------- ---------- -------- ---------- 3,776,283 560,481 2,519,359 1,041,245 223,990 $3,951,209 ========== Life and Health Insurance.................. 836,293 206,315 752,205 72,250 199,399 ---------- -------- ---------- ---------- -------- $4,612,576 $766,796 $3,271,564 $1,113,495 $423,389 ========== ======== ========== ========== ======== 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 ========== ======== ========== ========== ======== - --------------- * 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.
44 45 THE CHUBB CORPORATION SCHEDULE IV CONSOLIDATED REINSURANCE (IN THOUSANDS)
PERCENTAGE OF CEDED ASSUMED AMOUNT DIRECT TO OTHER FROM OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET ------ --------- ---------- ------ ------------- 1995 Life Insurance In Force at Year-End....................... $66,612,412 $12,533,816 $ 49,352 $54,127,948 .1% =========== =========== ======== =========== Premiums Earned and Policy Charges for the Year: Life Insurance.................. $ 332,967 $ 20,740 $ 1,766 $ 313,993 .6 Accident and Health Insurance... 319,068 10,124 -- 308,944 -- Property and Casualty Insurance..................... 4,754,423 1,319,341 712,080 4,147,162 17.2 ----------- ----------- -------- ----------- Total Premiums and Policy Charges.................... $ 5,406,458 $ 1,350,205 $713,846 $ 4,770,099 =========== =========== ======== =========== 1994 Life Insurance In Force at Year-End........................ $61,618,417 $12,169,589 $ 81,610 $49,530,438 .2 =========== =========== ======== =========== Premiums Earned and Policy Charges for the Year: Life Insurance.................. $ 313,913 $ 19,068 $ 1,976 $ 296,821 .7 Accident and Health Insurance... 548,172 8,780 80 539,472 -- Property and Casualty Insurance..................... 4,415,080 1,280,412 641,615 3,776,283 17.0 ---------- ----------- -------- ----------- Total Premiums and Policy Charges.................... $ 5,277,165 $ 1,308,260 $643,671 $ 4,612,576 =========== =========== ======== =========== 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 ========== =========== ======== ===========
45 46 THE CHUBB CORPORATION SCHEDULE VI CONSOLIDATED SUPPLEMENTARY PROPERTY AND CASUALTY INSURANCE INFORMATION (in thousands) YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
CLAIMS AND CLAIM ADJUSTMENT PAID EXPENSES INCURRED CLAIMS RELATED TO AND ------------------------ CLAIM CURRENT PRIOR ADJUSTMENT YEAR YEARS EXPENSES ---------- -------- ---------- 1995............................................. $2,705,800 $(35,819) $1,988,386 ========== ======== ========== 1994............................................. $2,549,100 $(29,741) $2,036,525 ========== ======== ========== 1993............................................. $2,214,300 $664,798 $1,696,666 ========== ======== ==========
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, 1994. (4) -- The registrant is not filing any instruments evidencing any indebtedness since the total amount of securities authorized under any single instrument does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. Copies of such instruments will be furnished to the Securities and Exchange Commission upon request. (10) -- Material contracts Global Settlement Agreement among Fibreboard Corporation, Continental Casualty Company, CNA Casualty Company of California, Columbia Casualty Company, Pacific Indemnity Company, and the Settlement Class and together with Exhibits A through D incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1993. Settlement Agreement with Fibreboard Corporation, Continental Casualty Company, CNA Casualty Company of California and Columbia Casualty Company incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-Q for the nine months ended September 30, 1993. Continental-Pacific Agreement with Continental Casualty Company incorpo- rated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-Q for the nine months ended September 30, 1993. Amendment to the Continental-Pacific Agreement with Continental Casualty Company incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1994. Executive Compensation Plans and Arrangements. The Chubb Corporation 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 (1994) incor- porated by reference to Exhibit A of the registrant's definitive proxy statement for the Annual Meeting of Shareholders held on April 26, 1994. The Chubb Corporation Stock Option Plan (1984) incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1994. The Chubb Corporation Stock Option Plan for Non-Employee Directors (1992) incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1992. The Chubb Corporation Deferred Compensation Plan for Directors 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, 1994. Executive Severance Agreements filed herewith. Aggregate Excess of Loss Reinsurance Agreement with Phoenix Assurance Public Limited Company of London, incorporated by reference to Ex- hibit (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 15, 16, and 42 through 69 of the 1995 Annual Report to Shareholders. (21) -- Subsidiaries of the registrant filed herewith. (23) -- Consent of Independent Auditors (see page 39 of this report). (27) -- Financial Data Schedule (28) -- Information from reports furnished to state insurance regulatory authorities. Filed concurrently herewith under cover of Form SE.
48 EX-10 2 THE CHUBB CORPORATION DEFERRED COMPENSATION PLAN 1 As of 1/1/92 THE CHUBB CORPORATION DEFERRED COMPENSATION PLAN FOR DIRECTORS ----------------- SECTION 1. EFFECTIVE DATE - ------------------------- The effective date of the Plan is July 1, 1987. SECTION 2. ELIGIBILITY - ---------------------- Any Director of The Chubb Corporation (the "Company") or any Director of a participating subsidiary of the Company who is also a Director of the Company, who is not an officer or employee of the Company or a subsidiary thereof is eligible to participate in the Plan. A subsidiary shall become a participating subsidiary upon adoption of this Plan by the Board of Directors and by obtaining the consent to such adoption from the Board of Directors of the Company. SECTION 3. DEFERRED COMPENSATION ACCOUNTS - ----------------------------------------- There shall be established for each participant a deferred compensation account or accounts in the participant's name. SECTION 4. AMOUNT OF DEFERRAL - ----------------------------- A participant may elect to defer receipt for any Plan Year of all compensation payable to the participant in the form of stipends and/or meeting fees for serving on the Board of Directors of the Company and Committees of the Board of Directors as well as compensation payable to the participant in the form of stipends and/or meeting fees for serving on the Board of Directors and Committees of the Board of Directors of participating subsidiaries of the Company. SECTION 5. INVESTMENT OF DEFERRED AMOUNTS - ----------------------------------------- (a) GENERAL. A participant may designate, in increments of 10%, what part of the compensation to be deferred or compensation already deferred that should be allocated to a cash account, a market value account and a shareholder's equity value account or any combination of such accounts. With the exception of allocations to a shareholder's equity account (which must be made in accordance with Section 5(d)), any change in such designation may be made no later than the 15th day of each March, June, September and December during the deferral period to be effective on the date next following such notification that compensation would have been paid in accordance with the Company's normal practice, or as applicable, the participating subsidiary's normal practice, but for the election to defer. 2 -2- (b) CASH ACCOUNT. The amount, if any, allocated to the participant's ------------ deferred compensation cash account shall be credited with interest, to be compounded quarterly, calculated prospectively at a rate equal to the prime rate of Citibank, N.A. in effect on the first day of each January, April, July and October during the deferral period. (c) MARKET VALUE ACCOUNT. The amount, if any, allocated to the -------------------- participant's deferred compensation market value account on each date compensation would have been paid in accordance with the Company's normal practice, or as applicable, the participating subsidiary's normal practice, but for the election to defer shall be expressed in units, the number of which shall be equal to such amount divided by the closing price of shares of the Company's Common Stock on the New York Stock Exchange (hereinafter referred to as "Market Value") on such date or on the trading day next preceding such date if such date is not a trading day. On each date that the Company pays a regular cash dividend on shares of its Common Stock outstanding, the participant's account shall be credited with a number of units equal to the amount of such dividend per share multiplied by the number of units in the participant's account on such date divided by the Market Value on such dividend date or on the trading day next preceding such date if the dividend payment date is not a trading day. The value of the units in the participant's market value account on any given date shall be determined by reference to the Market Value on such date. (d) SHAREHOLDER'S EQUITY ACCOUNT. Beginning January 1, 1988, at any time ---------------------------- during the period commencing January 1 and ending March 15 of any calendar year, the participant may elect to allocate on April 1 of such year to a deferred compensation shareholder's equity account compensation payable on April 1 of such year which he has previously elected to defer, amounts in the participant's cash and market value accounts on such date, or any combination (in increments of 10%) of such compensation or cash account or market value account balance. The amounts so allocated shall be expressed in units, the number of which shall be equal to such amount divided by the shareholder's equity per share as reported in the Company's Annual Report to Shareholders for the year just ended. Any amount allocated to a shareholder's equity account may not thereafter be reallocated to any other account. On each date that the Company pays a regular cash dividend on shares of its Common Share outstanding, the participant's shareholder's equity account shall be credited with a number of units equal to the amount of such a dividend per share multiplied by the number of units in the participant's shareholder's equity account on such date divided by the Market Value on such dividend date or on the trading day next preceding such date if the dividend payment date is not a trading day. The value of the units in the participant's shareholder's equity account on any given date shall be determined by reference to the shareholder's equity at the close of the most recent fiscal year. (e) RECAPITALIZATION. The number of units in the participant's market value ---------------- and shareholder's equity accounts shall be proportionally adjusted for any increase or decrease in the number of issued shares of Common Stock of the Company resulting from a subdivision or consolidation of shares or other capital adjustment, or the payment of a stock dividend or other 3 -3- increase or decrease in such shares effected without receipt of consideration by the Company, or any distribution or spin-off of assets (other than cash) to the shareholders of the Company. SECTION 6. PERIOD OF DEFERRAL - ----------------------------- A participant may elect to defer receipt of compensation either (a) until a specified year in the future or (b) until the participant's termination of service as a Director of the Company. If alternative (a) is elected, actual payment will be made or will commence within ninety days after the beginning of the year specified. If alternative (b) is elected, payment will be made or will commence within ninety days after termination of services as a Director of the Company. SECTION 7. FORM OF PAYMENT - -------------------------- A participant may elect to receive the compensation deferred under the plan in either (a) a lump sum or (b) a number of annual installments as specified by the participants. All amounts shall be paid in cash. SECTION 8. DEATH OR DISABILITY PRIOR TO RECEIPT - ----------------------------------------------- In the event that a participant dies or becomes totally and permanently disabled prior to receipt of any or all of the amounts payable to the participant pursuant to the Plan, any amounts remaining in the participant's deferred compensation account shall be paid to his estate or personal representative in a lump sum within ninety (90) days following the Company's notification of the participant's death or disability. SECTION 9. TIME OF ELECTION OF DEFERRAL - --------------------------------------- The Plan Year shall be the period from July 1, 1987 to December 31, 1987 and effective January 1, 1988, the period commencing January 1 and ending December 31 of each year. All election to defer compensation may be made by a nominee for election as a Director prior to, or concurrently with the nominee's election for, the term for which the nominee is being elected, and may be made by a person then currently serving as a Director for the next succeeding Plan Year no later than the preceding December 15th (or June 15, 1987 for the Plan Year beginning July 1, 1987). SECTION 10. MANNER OF ELECTING DEFERRAL - --------------------------------------- A participant may elect to defer stipend and/or meeting fee compensation by giving written notice to the Secretary of the Company on a form provided by the Company, which notice shall include the accounts to which such deferred amounts are to be allocated and the percentage (in increments of 10%) of such amounts to be allocated to each account, the period of deferral, and the form of payment, including the number of installments. 4 -4- SECTION 11. EFFECT OF ELECTION - ------------------------------ An election to defer compensation shall be irrevocable once the Plan Year to which it applies has commenced. An election covering more than one Plan Year may be revoked or modified with respect to Plan Years not yet begun by notifying the Secretary of the Company in writing at least fifteen (15) days prior to the commencement of such Plan Year. SECTION 12. PARTICIPANT'S RIGHTS UNSECURED - ------------------------------------------ The right of any participant to receive future payments under the provisions of the Plan shall be an unsecured claim against the general assets of the Company, or as applicable, the participating subsidiary. SECTION 13. STATEMENT OF ACCOUNTS - --------------------------------- Statements will be sent to each participant by April 1st of each year as to the value of the participant's deferred compensation accounts as of the end of the preceding December. SECTION 14. ASSIGNABILITY - ------------------------- No right to receive payments hereunder shall be transferable or assignable by a participant, except by will or by the laws of descent and distribution. The participant may not sell, assign, transfer, pledge or otherwise encumber any interest in the participant's deferred compensation account and any attempt to do so shall be void against, and shall not be recognized by, the Company or participating subsidiaries. SECTION 15. ADMINISTRATION - -------------------------- The Plan shall be administered by the Secretary and the General Counsel of the Company, who together shall have the authority to adopt rules and regulations for carrying out the Plan and interpret, construe and implement the provisions of the Plan. SECTION 16. AMENDMENT - --------------------- The Plan may at any time or from time to time be amended, modified or terminated by the Company. No amendment, modification or termination shall, without the consent of the participant, adversely effect accruals in such participant's deferred compensation account or accounts at the time of such amendment, modification or termination. EX-10 3 EXECUTIVE SEVERANCE AGREEMENTS 1 [THE CHUBB CORPORATION LETTERHEAD] December 6, 1995 Mr. John J. Degnan 945 Old Chester Road Far Hills, NJ 07931 Dear Mr. Degnan: In order to induce you to remain in the employ of The Chubb Corporation (the "Company") and in consideration of your continuing in the Company's employ, the Company agrees to provide the severance benefits specified below on the terms and subject to the conditions stated. However, in the absence of a Change in Control of the Company, as defined below, nothing in this Agreement shall affect the Company's normal right to terminate your employment or your right to leave its employ. 1. Change in Control. For purposes of this Agreement a Change in ----------------- Control will be deemed to have occurred (A) if following (i) a tender or exchange offer for voting securities of the Company, (ii) a proxy contest for the election of Directors of the Company or (iii) a merger or consolidation or sale of all or substantially all of the business or assets of the Company, the Directors of the Company immediately prior to the initiation of such event cease to constitute a majority of the Board of Directors of the Company upon the occurrence of such event or within one year after such event, or (B) if any "person" or "group" (as defined under the beneficial ownership rules of Sections 12(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934 and Rule 13d3 thereunder) acquires ownership or control, or power to control, 25% or more of the outstanding voting securities of the Company without prior approval or ratification by a majority of the Company's Directors in office at the time of such event. 2. Conditions to Severance Benefits. The benefits provided for in -------------------------------- Section 5 shall be payable or accrue to you if (a) a Change in Control has occurred and (b) your employment with the Company has terminated within two years after the Change in Control, other than termination by reason of 2 Mr. John J. Degnan December 6, 1995 Page 2 (i) your death, (ii) your retirement at normal retirement age ("Retirement") under the Company's pension plan as in effect immediately prior to the Change in Control, (iii) your voluntary termination other than for Good Reason, (iv) your retirement for Disability or (v) your discharge for cause. Termination by you of your employment for "Good Reason" shall mean termination by you of your employment, subsequent to a Change in Control, because of: (A) the assignment to you, without your express written consent, of any duties inconsistent with your positions, duties, responsibilities, authority and status with the Company and its principal subsidiaries immediately prior to such Change in Control, or a change in your reporting responsibilities, titles or offices as in effect immediately prior to the Change in Control, or any removal of you from or any failure to re-elect you to any of such positions, except in connection with the termination of your employment for Cause, Disability, Retirement, as a result of your death or by you without Good Reason; (B) a reduction by the Company in your base salary as in effect at the time of such Change in Control; (C) a failure by the Company to continue (or to replace with equivalent plans) the Performance Share Plan, the Annual Incentive Compensation Plan or any other Bonus Plan in which you participated for the year immediately preceding such Change in Control (the "Bonus Plans") which are in effect at the time of such Change in Control or a failure by the Company to continue you as a participant in such Bonus Plans (or equivalent plans) on a basis which would entitle you to receive under such Bonus Plans (or equivalent plans) amounts at least equal to the average amounts you received pursuant to such Bonus Plans for the three years preceding such Change in Control; (D) the Company's requiring you to maintain your principal office or conduct your principal activities anywhere other than at the Company's principal executive offices in the New York Metropolitan area, including Somerset County, New Jersey; (E) the failure by the Company to continue in effect (or to replace with equivalent plans) the Company's Capital Accumulation Plan 3 Mr. John J. Degnan December 6, 1995 Page 3 or any other compensation plan, any stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health and accident plan, financial services plan, hospital-medical plan, dental plan, or disability plan in which you are participating or eligible to participate at the time of such Change in Control, or the taking of any action by the Company which would adversely affect your participation in or materially reduce your benefits under any such plans (or equivalent plans) or deprive you of any material fringe benefit enjoyed or to be enjoyed by you at the time of such Change in Control; (F) the failure by the Company to obtain the assumption of the agreement to perform this Agreement by any successor as contemplated in Section 7 hereof; (G) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the applicable requirements with respect to such Notice; or (H) a determination made by you in good faith, whether before or after the date you are eligible for early retirement under the Company's pension plan, that as a result of such Change in Control you are not able to discharge your duties effectively; or (I) any termination of this Agreement pursuant to Section 6 prior to the expiration of two years from the occurrence of the Change in Control. Termination of your employment for "Cause" shall mean termination because of (A) the willful and continued failure by you substantially to perform your duties with the Company and its principal subsidiaries (other than any such failure resulting from your incapacity due to physical or mental illness), after a demand for substantial performance is delivered to you by the Chief Executive Officer of the Company, which specifically identifies the manner in which such executive believes that you have not substantially performed your duties, or (B) the willful engaging by you in misconduct which is materially injurious to the Company, monetarily or otherwise. For purposes of this paragraph, no act, or failure to act, on your part shall be considered "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in or not opposed to the best interests of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a 4 Mr. John J. Degnan December 6, 1995 Page 4 copy of a Notice of Termination from the Chief Executive Officer of the Company after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board of Directors, and a finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clauses (A) or (B) of the first sentence of this paragraph and specifying the particulars thereof in detail. Termination of your employment for Disability shall mean termination in accordance with the provisions of the Company's Long Term Disability Plan as in effect immediately preceding the Change in Control. 3. Notice of Termination. Any purported termination of your employment --------------------- shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. No purported termination of your employment by the Company shall be effective if it is not effected pursuant to a Notice of Termination satisfying the requirements of this Section 3. 4. Date of Termination. "Date of Termination" shall mean (A) if your ------------------- employment is terminated for Disability, 30 days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such 30-day period) and (B) if your employment is terminated for any other reason, the date on which a Notice of Termination is given. 5. Severance Benefits. Subject to the conditions in Section 2, on ------------------ termination of your employment you shall be entitled to the following benefits: (A) You shall be entitled to an amount (the "Severance Compensation") equal to 2 times the sum of (i) one year's salary at the annual rate in effect at the time of the Change in Control and (ii) the average for the three calendar years preceding such Change in Control of your bonuses under the Annual Incentive Compensation Plan (1984) (or successor plan), provided, however, that your Severance Compensation shall not be greater than the amount you would have received as salary and such bonuses from the Company had you remained in the employ of the Company from the Date of Termination until your normal retirement date under the Company's pension plan (on the assumption that your salary 5 Mr. John J. Degnan December 6, 1995 Page 5 would remain at the same annual rate as in effect at the time of Change in Control and that your annual bonuses would be the average for the three calendar years preceding such Change in Control of such bonuses). The Severance Compensation will be payable in full on the Date of Termination. (B) The Company shall also pay to you an amount equal to all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce or retain any right or benefit provided by this Agreement); (C) The Company shall maintain in full force and effect, for your continued benefit until the earlier of (a) two years after the Date of Termination or, (b) your commencement of full time employment with a new employer, all life insurance, hospital-medical, dental, health and accident, and disability plans in which you were entitled to participate immediately prior to such Change in Control, provided that your continued participation is possible under the general terms and provisions of such plans and programs. In the event that your participation in any such plan or program is barred for any reason whatsoever, the Company shall arrange to provide you with benefits substantially similar to those which you are entitled to receive under such plan or program; (D) You shall not be required to mitigate the amount of any payment provided for in this Section 5 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Section 5 be reduced by any compensation earned by you as the result of employment by another employer after the Date of Termination or otherwise. 6. Term of Agreement. This Agreement shall have an initial term of two ----------------- (2) years from the date hereof and shall be automatically extended at the expiration of said two-year period for successive two (2) year periods unless the Company gives you one year's prior written notice that it is terminating this Agreement at the expiration of the then current two year period. 7. Successors: Binding Agreement. ----------------------------- (A) The Company will require any purchaser of all or substantially 6 Mr. John J. Degnan December 6, 1995 Page 6 all of the business or assets of the Company, by agreement in form and substance satisfactory to you to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such purchase had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business or assets as aforesaid which executes and delivers the agreement provided for in this section 7A or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (B) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, divisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate. 8. Notices. For the purposes of this Agreement, notices and all other ------- communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Chairman of the Company, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. Miscellaneous. No provisions of this Agreement may be modified, ------------- waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by you and such officer as may be specifically designated by the Board of Directors of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement; provided, however, that this Agreement shall not supersede or in -------- ------- 7 Mr. John J. Degnan December 6, 1995 Page 7 any way affect the rights, duties or obligations you may have under any other written agreement with the Company. This Agreement shall be governed by, and construed in accordance with, the laws (other than principles of conflicts of laws) of the State of New York. 10. Validity. The invalidity or unenforceability of any provision of this Agreement in any respect shall not affect the validity or enforceability of such provision in any other respect or of any other provision of this Agreement, all of which shall remain in full force and effect. If the foregoing correctly sets forth our understanding on the subject matter hereof, kindly sign and return to the Company the enclosed copy hereof, which will thereupon become our binding agreement. Sincerely, THE CHUBB CORPORATION By /s/ DEAN R. O'HARE ------------------- Dean R. O'Hare Chairman Agreed to this 8th day of December, 1995. /s/ JOHN J. DEGNAN - ------------------- John J. Degnan 8 [CHUBB CORPORATION LETTERHEAD] December 6, 1995 Ms. Theresa M. Stone 1185 Hopkinton Road Hopkinton, NH 03229 Dear Ms. Stone: In order to induce you to remain in the employ of The Chubb Corporation (the "Company") and in consideration of your continuing in the Company's employ, the Company agrees to provide the severance benefits specified below on the terms and subject to the conditions stated. However, in the absence of a Change in Control of the Company, as defined below, nothing in this Agreement shall affect the Company's normal right to terminate your employment or your right to leave its employ. 1. Change in Control. For purposes of this Agreement a Change in Control ----------------- will be deemed to have occurred (A) if following (i) a tender or exchange offer for voting securities of the Company, (ii) a proxy contest for the election of Directors of the Company or (iii) a merger or consolidation or sale of all or substantially all of the business or assets of the Company, the Directors of the Company immediately prior to the initiation of such event cease to constitute a majority of the Board of Directors of the Company upon the occurrence of such event or within one year after such event, or (B) if any "person" or "group" (as defined under the beneficial ownership rules of Sections 12(d) (3) and 14(d) (2) of the Securities Exchange Act of 1934 and Rule 13d3 thereunder) acquires ownership or control, or power to control, 25% or more of the outstanding voting securities of the Company without prior approval or ratification by a majority of the Company's Directors in office at the time of such event. 2. Conditions to Severance Benefits. The benefits provided for in Section -------------------------------- 5 shall be payable or accrue to you if (a) a Change in Control has occurred and (b) your employment with the Company has terminated within two years after the Change in Control, other than termination by reason of (i) your death, (ii) your retirement at normal retirement age ("Retirement") under the Company's pension 9 Ms. Theresa M. Stone December 6, 1995 Page 2 plan as in effect immediately prior to the Change in Control, (iii) your voluntary termination other than for Good Reason, (iv) your retirement for Disability or (v) your discharge for cause. Termination by you of your employment for "Good Reason" shall mean termination by you of your employment, subsequent to a Change in Control, because of: (A) the assignment to you, without your express written consent, of any duties inconsistent with your positions, duties, responsibilities, authority and status with the Company and its principal subsidiaries immediately prior to such Change in Control, or a change in your reporting responsibilities, titles or offices as in effect immediately prior to the Change in Control, or any removal of you from or any failure to re-elect you to any of such positions, except in connection with the termination of your employment for Cause, Disability, Retirement, as a result of your death or by you without Good Reason; (B) a reduction by the Company in your base salary as in effect at the time of such Change in Control; (C) a failure by the Company to continue (or to replace with equivalent plans) the Performance Share Plan, the Annual Incentive Compensation Plan or any other Bonus Plan in which you participated for the year immediately preceding such Change in Control (the "Bonus Plans") which are in effect at the time of such Change in Control or a failure by the Company to continue you as a participant in such Bonus Plans (or equivalent plans) on a basis which would entitle you to receive under such Bonus Plans (or equivalent plans) amounts at least equal to the average amounts you received pursuant to such Bonus Plans for the three years preceding such Change in Control; (D) the Company's requiring you to maintain your principal office or conduct your principal activities anywhere other than at the Company's principal executive offices in the New York Metropolitan area, including Somerset County, New Jersey; (E) the failure by the Company to continue in effect (or to replace with equivalent plans) the Company's Capital Accumulation Plan or any other compensation plan, any stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health and accident plan, financial services plan, hospital-medical plan, dental plan, or 10 Ms. Theresa M. Stone December 6, 1995 Page 3 disability plan in which you are participating or eligible to participate at the time of such Change in Control, or the taking of any action by the Company which would adversely affect your participation in or materially reduce your benefits under any such plans (or equivalent plans) or deprive you of any material fringe benefit enjoyed or to be enjoyed by you at the time of such Change in Control; (F) the failure by the Company to obtain the assumption of the agreement to perform this Agreement by any successor as contemplated in Section 7 hereof; (G) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the applicable requirements with respect to such Notice; or (H) a determination made by you in good faith, whether before or after the date you are eligible for early retirement under the Company's pension plan, that as a result of such Change in Control you are not able to discharge your duties effectively; or (I) any termination of this Agreement pursuant to Section 6 prior to the expiration of two years from the occurrence of the Change in Control. Termination of your employment for "Cause" shall mean termination because of (A) the willful and continued failure by you substantially to perform your duties with the Company and its principal subsidiaries (other than any such failure resulting from your incapacity due to physical or mental illness), after a demand for substantial performance is delivered to you by the Chief Executive Officer of the Company, which specifically identifies the manner in which such executive believes that you have not substantially performed your duties, or (B) the willful engaging by you in misconduct which is materially injurious to the Company, monetarily or otherwise. For purposes of this paragraph, no act, or failure to act, on your part shall be considered "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in or not opposed to the best interests of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a 11 Ms. Theresa M. Stone December 6, 1995 Page 4 copy of a Notice of Termination from the Chief Executive Officer of the Company after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board of Directors, and a finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clauses (A) or (B) of the first sentence of this paragraph and specifying the particulars thereof in detail. Termination of your employment for Disability shall mean termination in accordance with the provisions of the Company's Long Term Disability Plan as in effect immediately preceding the Change in Control. 3. Notice of Termination. Any purported termination of your employment --------------------- shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. No purported termination of your employment by the Company shall be effective if it is not effected pursuant to a Notice of Termination satisfying the requirements of this Section 3. 4. Date of Termination. "Date of Termination" shall mean (A) if your ------------------- employment is terminated for Disability, 30 days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such 30-day period) and (B) if your employment is terminated for any other reason, the date on which a Notice of Termination is given. 5. Severance Benefits. Subject to the conditions in Section 2, on ------------------ termination of your employment you shall be entitled to the following benefits: (A) You shall be entitled to an amount (the "Severance Compensation") equal to 2 times the sum of (i) one year's salary at the annual rate in effect at the time of the Change in Control and (ii) the average for the three calendar years preceding such Change in Control of your bonuses under the Annual Incentive Compensation Plan (1984) (or successor plan), provided, however, that your Severance Compensation shall not be greater than the amount you would have received as salary and such bonuses from the Company had you remained in the employ of the Company from the Date of Termination until your normal retirement date 12 Ms. Theresa M. Stone December 6, 1995 Page 5 under the Company's pension plan (on the assumption that your salary would remain at the same annual rate as in effect at the time of Change in Control and that your annual bonuses would be the average for the three calendar years preceding such Change in Control of such bonuses). The Severance Compensation will be payable in full on the Date of Termination. (B) The Company shall also pay to you an amount equal to all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce or retain any right or benefit provided by this Agreement); (C) The Company shall maintain in full force and effect, for your continued benefit until the earlier of (a) two years after the Date of Termination, or (b) your commencement of full time employment with a new employer, all life insurance, hospital-medical, dental, health and accident, and disability plans in which you were entitled to participate immediately prior to such Change in Control, provided that your continued participation is possible under the general terms and provisions of such plans and programs. In the event that your participation in any such plan or program is barred for any reason whatsoever, the Company shall arrange to provide you with benefits substantially similar to those which you are entitled to receive under such plan or program; (D) You shall not be required to mitigate the amount of any payment provided for in this Section 5 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Section 5 be reduced by any compensation earned by you as the result of employment by another employer after the Date of Termination or otherwise. 6. Term of Agreement. This Agreement shall have an initial term of two ----------------- (2) years from the date hereof and shall be automatically extended at the expiration of said two-year period for successive two(2) year periods unless the Company gives you one year's prior written notice that it is terminating this Agreement at the expiration of the then current two year period. 7. Successors; Binding Agreement. ----------------------------- (A) The Company will require any purchaser of all or substantially all of the business or assets of the Company, by agreement in form and 13 Ms. Theresa M. Stone December 6, 1995 Page 6 substance satisfactory to you to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such purchase had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business or assets as aforesaid which executes and delivers the agreement provided for in this Section 7A or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (B) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, divisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate. 8. Notices. For the purposes of this Agreement, notices and all other ------- communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Chairman of the Company, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. Miscellaneous. No provisions of this Agreement may be modified, ------------- waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by you and such officer as may be specifically designated by the Board of Directors of the Company. No waiver by either party hereto at any time of any breach by the other party hereto, of or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, 14 Mrs. Theresa M. Stone December 6, 1995 Page 7 oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement; provided, however, that this Agreement shall not supersede or in any way affect the rights, duties or obligations you may have under any other written agreement with the Company. This Agreement shall be governed by, and construed in accordance with, the laws (other than principles of conflicts of laws) of the State of New York. 10. Validity. The invalidity or unenforceability of any provision of this Agreement in any respect shall not affect the validity or enforceability of such provision in any other respect or of any other provision of this Agreement, all of which shall remain in full force and effect. If the foregoing correctly sets forth our understanding on the subject matter hereof, kindly sign and return to the Company the enclosed copy hereof, which will thereupon become our binding agreement. Sincerely, THE CHUBB CORPORATION By /s/ DEAN R. O'HARE ---------------------- Dean R. O'Hare Chairman Agreed to this 8th day of December, 1995. /s/ THERESA M. STONE - ------------------------ Theresa M. Stone 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, 1995, 1994 AND 1993
1995 1994 1993 ---- ---- ---- Net income......................................... $696,628 $528,469 $324,217 After-tax interest expense on 6% guaranteed exchangeable subordinated notes.................. 9,750 9,750 9,750 -------- -------- -------- Net income for computing earnings per share........ $706,378 $538,219 $333,967 ======== ======== ======== Average number of common shares outstanding........ 87,035 87,543 87,642 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 2,907 -------- -------- -------- Average number of common and common equivalent shares assumed outstanding for computing earnings per share........................................ 89,942 90,450 90,549 ======== ======== ======== Net income per share............................... $ 7.85 $ 5.95 $ 3.69
EX-13 5 1995 ANNUAL REPORT PAGES 1 EXHIBIT 13 SUPPLEMENTARY FINANCIAL DATA
IN THOUSANDS YEARS ENDED DECEMBER 31 1995 1994 1993 --------- --------- --------- PROPERTY AND CASUALTY INSURANCE UNDERWRITING Net Premiums Written............................. $4,305,992 $3,951,209 $3,521,295 Increase in Unearned Premiums.................... (158,830) (174,926) (141,457) ---------- ---------- ---------- Premiums Earned.................................. 4,147,162 3,776,283 3,379,838 ---------- ---------- ---------- Claims and Claim Expenses........................ 2,669,981 2,519,359 2,204,098 Operating Costs and Expenses..................... 1,393,373 1,288,692 1,181,316 Increase in Deferred Policy Acquisition Costs.... (29,223) (39,751) (34,726) Dividends to Policyholders....................... 18,877 16,294 14,242 ---------- ---------- ---------- Underwriting Income (Loss) Before Increase in Unpaid Claims for Asbestos-Related Settlement and Return Premium for Medical Malpractice Commutation.................................... 94,154 (8,311) 14,908 Increase in Unpaid Claims for Asbestos-Related Settlement..................................... -- -- (675,000) Return Premium for Medical Malpractice Commutation.................................... -- -- 125,000 ---------- ---------- ---------- Underwriting Income (Loss) Before Income Tax..... 94,154 (8,311) (535,092) Federal and Foreign Income Tax (Credit).......... 38,500 (500) (197,600) ---------- ---------- ---------- UNDERWRITING INCOME (LOSS)....................... 55,654 (7,811) (337,492) ---------- ---------- ---------- INVESTMENTS Investment Income Before Expenses and Income Tax. 613,242 570,531 541,749 Investment Expenses.............................. 10,255 10,050 8,040 ---------- ---------- ---------- Investment Income Before Income Tax.............. 602,987 560,481 533,709 Federal and Foreign Income Tax................... 95,800 85,500 78,300 ---------- ---------- ---------- INVESTMENT INCOME................................ 507,187 474,981 455,409 ---------- ---------- ---------- PROPERTY AND CASUALTY INCOME........................ $ 562,841 $ 467,170 $ 117,917 ========== ========== ========== LIFE AND HEALTH INSURANCE Premiums and Policy Charges......................... $ 622,937 $ 836,293 $ 801,236 Investment Income................................... 232,950 208,745 205,891 ---------- ---------- ---------- Total Revenues...................................... 855,887 1,045,038 1,007,127 ---------- ---------- ---------- Benefits............................................ 549,219 752,205 669,422 Operating Costs and Expenses........................ 265,403 274,079 248,976 ---------- ---------- ---------- Life and Health Income Before Income Tax............ 41,265 18,754 88,729 Federal Income Tax.................................. 13,225 4,251 26,212 ---------- ---------- ---------- LIFE AND HEALTH INCOME.............................. $ 28,040 $ 14,503 $ 62,517 ========== ========== ========== REAL ESTATE Revenues............................................ $ 287,795 $ 204,849 $ 160,650 Cost of Sales and Expenses.......................... 280,099(a) 210,799 158,599 ---------- ---------- ---------- Real Estate Income (Loss) Before Income Tax......... 7,696 (5,950) 2,051 Federal Income Tax (Credit)......................... 1,686 (3,913) 4,244 ---------- ---------- ---------- REAL ESTATE INCOME (LOSS)........................... $ 6,010 $ (2,037) $ (2,193) ========== ========== ========== CORPORATE, NET OF TAX................................. $ 14,809 $ 7,661 $ 14,357 ========== ========== ========== REALIZED INVESTMENT GAINS, NET OF TAX................. $ 84,928 $ 41,172 $ 151,619 ========== ========== ========== INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES............... $ 696,628 $ 528,469 $ 344,217 ========== ========== ==========
(a) Includes an increase of $10,000,000 to the allowance for uncollectible receivables resulting from the initial application of Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan. The above federal and foreign income tax provisions represent allocations of the consolidated provision. 15 2 PROPERTY AND CASUALTY UNDERWRITING RESULTS NET PREMIUMS WRITTEN (In Millions of Dollars)
1995 1994 1993 1992 1991 Personal Insurance Automobile........................ $ 199.7 $ 187.7 $ 191.7 $ 190.9 $ 189.5 Homeowners........................ 449.8 429.7 428.4 416.9 432.2 Other............................. 202.1 196.3 194.4 188.6 193.0 -------- -------- -------- -------- -------- 851.6 813.7 814.5 796.4 814.7 -------- -------- -------- -------- -------- Standard Commercial Insurance Multiple Peril.................... 678.5 604.0 528.8 483.2 482.6 Casualty.......................... 565.9 544.3 626.0(a) 481.7 456.1 Workers' Compensation............. 212.1 190.2 172.0 168.6 177.1 -------- -------- -------- -------- -------- 1,456.5 1,338.5 1,326.8(a) 1,133.5 1,115.8 -------- -------- -------- -------- -------- Specialty Commercial Insurance Fidelity and Surety............... 757.4 706.7 618.7 585.1 538.0 Other............................. 869.6 769.1 650.8 566.6 496.7 -------- -------- -------- -------- -------- 1,627.0 1,475.8 1,269.5 1,151.7 1,034.7 -------- -------- -------- -------- -------- Reinsurance Assumed................. 370.9 323.1 235.5 160.9 147.1 -------- -------- -------- -------- -------- Total........................ $4,306.0 $3,951.1 $3,646.3(a) $3,242.5 $3,112.3 ======== ======== ======== ======== ======== (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........................ 87.5% 96.5% 97.6% 100.2% 106.2% Homeowners........................ 93.7 110.7 100.2 113.3 106.0 Other............................. 73.6 81.3 84.2 89.9 93.5 -------- -------- -------- -------- -------- 87.5 100.3 95.8 104.6 103.1 -------- -------- -------- -------- -------- Standard Commercial Insurance Multiple Peril.................... 104.3 109.6 110.6 112.8 109.0 Casualty.......................... 118.7 106.2 190.6(b) 94.2 86.2 Workers' Compensation............. 95.0 104.5 117.9 118.7 130.6 -------- -------- -------- -------- -------- 108.8 107.6 149.7(b) 105.7 102.6 -------- -------- -------- -------- -------- Specialty Commercial Insurance Fidelity and Surety............... 82.9 79.2 78.1 81.3 82.4 Other............................. 97.0 103.4 103.4 100.2 98.9 -------- -------- -------- -------- -------- 90.4 91.7 91.0 90.5 90.3 -------- -------- -------- -------- -------- Reinsurance Assumed................. 99.1 100.2 111.8 126.9 119.3 -------- -------- -------- -------- -------- Total........................ 96.8% 99.5% 114.8%(b) 101.1% 99.5% ======== ======== ======== ======== ======== (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.
16 3 TEN YEAR FINANCIAL SUMMARY (in thousands except for per share amounts)
FOR THE YEAR 1995 1994 1993 1992 1991 REVENUES Property and Casualty Insurance Premiums Earned................... $4,147,162 $3,776,283 $3,504,838(a) $3,163,288 $ 3,037,168 Investment Income................. 613,242 570,531 541,749 501,140 476,984 Life and Health Insurance Premiums and Policy Charges....... 622,937 836,293 801,236 689,173 634,016 Investment Income................. 232,950 208,745 205,891 192,748 177,654 Real Estate........................ 287,795 204,849 160,650 149,945 140,957 Corporate Investment Income........ 54,445 49,405 52,706 57,176 45,400 Realized Investment Gains (Losses)... 130,660 63,429 232,638 187,349 65,718 TOTAL REVENUES.................. 6,089,191 5,709,535 5,499,708 4,940,819 4,578,897 COMPONENTS OF NET INCOME* Property and Casualty Insurance Underwriting Income (Loss) (b).... 55,654 (7,811) (337,492)(c) (15,352) 18,594 Investment Income................. 507,187 474,981 455,409 422,755 397,595 Life and Health Insurance.......... 28,040 14,503 62,517 56,221 51,119 Real Estate Income (Loss).......... 6,010(e) (2,037) (2,193) 10,050 25,007 Corporate.......................... 14,809 7,661 14,357 19,794 16,325 Realized Investment Gains (Losses)... 84,928 41,172 151,619 123,631 43,344 INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES..................... 696,628 528,469 344,217 617,099 551,984 Per Share (b)................... 7.85(e) 5.95 3.91(c) 6.96 6.32 NET INCOME...................... 696,628 528,469 324,217(f) 617,099 551,984 Per Share....................... 7.85 5.95 3.69(f) 6.96 6.32 DIVIDENDS DECLARED ON COMMON STOCK... 170,665 161,055 150,784 139,612 127,757 Per Share....................... 1.96 1.84 1.72 1.60 1,48 CHANGE IN UNREALIZED APPRECIATION OR DEPRECIATION OF INVESTMENTS, NET... 470,233 (487,951) 46,534 (82,082) 12,163 AT YEAR END TOTAL ASSETS......................... 22,996,525 20,723,055 19,436,870 17,559,182 16,163,605 INVESTED ASSETS Property and Casualty Insurance.... 10,013,557 8,938,752 8,403,141 7,767,462 7,086,572 Life and Health Insurance.......... 2,967,259 2,560,184 2,473,253 2,208,803 2,063,518 Corporate.......................... 906,597 879,475 965,715 955,828 840,291 PROPERTY AND CASUALTY UNPAID CLAIMS.. 9,588,141 8,913,220 8,235,442 7,220,919 6,591,305 LIFE AND HEALTH POLICY LIABILITIES... 2,943,138 2,659,583 2,446,620 2,193,486 2,072,727 LONG TERM DEBT....................... 1,156,044 1,285,614 1,273,830 1,072,841 1,053,550 SHAREHOLDERS' EQUITY................. 5,262,729 4,247,029 4,196,129 3,954,402 3,541,605 Per Common Share................ 60.28 48.92 47.84 45.18 40.74 * The federal and foreign income tax provided for each component of net income represents its allocated portion of the consolidated provision. Amounts for 1995 and 1994 reflect the accounting changes prescribed by Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Restatement of prior year amounts was not permitted. The change in unrealized appreciation or depreciation of investments for 1994 excludes the increase in unrealized appreciation, as of January 1, 1994, of $220,519,000 resulting from the change in accounting principle.
42 4
FOR THE YEAR 1990 1989 1988 1987 1986 REVENUES Property and Casualty Insurance Premiums Earned................... $ 2,836,135 $ 2,693,553 $ 2,705,560 $ 2,615,866 $ 2,250,758 Investment Income................. 463,413 426,267 364,126 266,230 216,558 Life and Health Insurance Premiums and Policy Charges....... 561,961 496,405 426,992 384,108 323,293 Investment Income................. 171,570 159,828 144,264 124,640 104,934 Real Estate........................ 174,846 221,338 155,170 143,381 181,184 Corporate Investment Income........ 39,555 25,167 17,806 17,531 18,329 Realized Investment Gains (Losses)... 46,317 46,942 (17,987) (22,561) 97,710 TOTAL REVENUES.................. 4,293,797 4,069,500 3,795,931 3,529,195 3,192,766 COMPONENTS OF NET INCOME* Property and Casualty Insurance Underwriting Income (Loss) (b).... 20,709(d) (25,040) 15,818 62,394 (29,837) Investment Income................. 371,351 330,096 290,647 226,546 177,146 Life and Health Insurance.......... 45,081 42,103 31,458 23,889 36,573 Real Estate Income (Loss).......... 40,015 42,021 40,018 36,079 32,756 Corporate.......................... 14,760 705 (5,357) (4,229) (2,203) Realized Investment Gains (Losses)... 30,193 30,932 (12,959) (14,619) 53,506 INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES..................... 522,109 420,817 359,625 330,060 267,941 Per Share (b)................... 6.07(d) 4.91 4.27 3.97 3.53 NET INCOME...................... 522,109 420,817 359,625 330,060 267,941 Per Share....................... 6.07 4.91 4.27 3.97 3.53 DIVIDENDS DECLARED ON COMMON STOCK... 109,136 96,515 87,766 71,443 60,485 Per Share....................... 1.32 1.16 1.08 .89 .80 CHANGE IN UNREALIZED APPRECIATION OR DEPRECIATION OF INVESTMENTS, NET... (19,425) 70,330 29,815 12,294 12,878 AT YEAR END TOTAL ASSETS......................... 14,510,750 13,384,850 11,507,145 10,167,250 8,486,643 INVESTED ASSETS Property and Casualty Insurance.... 6,297,825 5,793,656 5,153,027 4,519,268 3,574,360 Life and Health Insurance.......... 1,928,687 1,752,532 1,582,962 1,401,553 1,127,695 Corporate.......................... 688,380 647,817 366,237 256,397 295,617 PROPERTY AND CASUALTY UNPAID CLAIMS.. 6,016,396 5,605,006 4,585,848 3,888,485 3,069,083 LIFE AND HEALTH POLICY LIABILITIES... 1,959,568 1,806,325 1,645,195 1,430,119 1,067,290 LONG TERM DEBT....................... 820,825 612,874 362,779 325,049 391,801 SHAREHOLDERS' EQUITY................. 2,882,639 2,603,739 2,238,447 1,937,033 1,559,138 Per Common Share................ 35.19 30.84 27.54 23.85 20.06 (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 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. (e) Net income has been reduced by a charge of $6,500,000 or $.07 per share for the after-tax effect of a $10,000,000 increase to the allowance for uncollectible receivables resulting from the initial application of Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan. (f) 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.
43 5 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF INCOME
IN THOUSANDS YEARS ENDED DECEMBER 31 REVENUES 1995 1994 1993 ---------- ---------- ---------- Premiums Earned and Policy Charges (Notes 12 and 13).. $4,770,099 $4,612,576 $4,306,074 Investment Income (Note 3)............................ 900,637 828,681 800,346 Real Estate........................................... 287,795 204,849 160,650 Realized Investment Gains (Note 3).................... 130,660 63,429 232,638 ---------- ---------- ---------- TOTAL REVENUES................................... 6,089,191 5,709,535 5,499,708 ---------- ---------- ---------- BENEFITS, CLAIMS AND EXPENSES Insurance Claims and Policyholders' Benefits (Notes 13 and 14).......................................... 3,219,200 3,271,564 3,548,520 Amortization of Deferred Policy Acquisition Costs (Note 4)............................................ 1,198,400 1,113,495 1,012,105 Other Insurance Operating Costs and Expenses.......... 447,170 423,389 395,605 Real Estate Cost of Sales and Expenses................ 280,099 210,799 158,599 Investment Expenses................................... 14,747 14,047 11,091 Corporate Expenses.................................... 29,504 36,877 29,296 ---------- ---------- ---------- TOTAL BENEFITS, CLAIMS AND EXPENSES.............. 5,189,120 5,070,171 5,155,216 ---------- ---------- ---------- INCOME BEFORE FEDERAL AND FOREIGN INCOME TAX..................................... 900,071 639,364 344,492 FEDERAL AND FOREIGN INCOME TAX (NOTE 8).................... 203,443 110,895 275 ---------- ---------- ---------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES.......................... 696,628 528,469 344,217 CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES, NET OF TAX (NOTE 2)...................................... -- -- (20,000) ---------- ---------- ---------- NET INCOME....................................... $ 696,628 $ 528,469 $ 324,217 ========== ========== ========== PER SHARE DATA (NOTES 1 AND 18) Income Before Cumulative Effect of Changes in Accounting Principles............................... $ 7.85 $ 5.95 $ 3.91 Cumulative Effect of Changes in Accounting Principles.......................................... -- -- (.22) ---------- ---------- ---------- Net Income....................................... $ 7.85 $ 5.95 $ 3.69 ========== ========== ========== See accompanying notes.
44 6 THE CHUBB CORPORATION CONSOLIDATED BALANCE SHEETS
IN THOUSANDS DECEMBER 31 1995 1994 ----------- ----------- ASSETS Invested Assets (Note 3) Short Term Investments.......................................... $ 484,439 $ 810,873 Fixed Maturities Held-to-Maturity Tax Exempt (market $3,004,775 and $3,177,097).............. 2,826,737 3,149,479 Taxable (market $433,883 and $604,077)..................... 402,488 619,095 Available-for-Sale Tax Exempt (cost $3,607,925 and $2,524,446)................ 3,860,630 2,530,186 Taxable (cost $5,282,675 and $4,604,182)................... 5,512,955 4,423,946 Equity Securities (cost $493,416 and $609,535).................. 587,825 642,153 Policy and Mortgage Loans....................................... 212,339 202,679 ----------- ----------- TOTAL INVESTED ASSETS......................................... 13,887,413 12,378,411 Cash (Note 7)...................................................... 11,950 5,599 Accrued Investment Income.......................................... 245,319 215,703 Premiums Receivable................................................ 872,912 787,177 Reinsurance Recoverable on Property and Casualty Unpaid Claims (Note 12)....................................................... 1,973,666 1,980,340 Prepaid Reinsurance Premiums....................................... 484,358 455,051 Funds Held for Asbestos-Related Settlement (Note 14)............... 1,038,149 558,141 Deferred Policy Acquisition Costs (Note 4) Property and Casualty Insurance................................. 558,676 529,453 Life and Health Insurance....................................... 612,709 606,493 Real Estate Assets (Notes 5 and 7)................................. 1,742,580 1,740,287 Deferred Income Tax (Note 8)....................................... 159,674 314,720 Other Assets....................................................... 1,409,119 1,151,680 ----------- ----------- TOTAL ASSETS.................................................. $22,996,525 $20,723,055 =========== =========== LIABILITIES Property and Casualty Unpaid Claims (Note 14)...................... $ 9,588,141 $ 8,913,220 Life and Health Policy Liabilities................................. 2,943,138 2,659,583 Unearned Premiums.................................................. 2,570,682 2,382,545 Short Term Debt (Note 7)........................................... 187,600 153,340 Long Term Debt (Note 7)............................................ 1,156,044 1,285,614 Dividend Payable to Shareholders................................... 42,741 40,035 Accrued Expenses and Other Liabilities............................. 1,245,450 1,041,689 ----------- ----------- TOTAL LIABILITIES............................................. 17,733,796 16,476,026 ----------- ----------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 11 AND 14) SHAREHOLDERS' EQUITY (NOTES 10, 17 AND 18) Preferred Stock -- Authorized 4,000,000 Shares; $1 Par Value; Issued -- None.................................... -- -- Common Stock -- Authorized 300,000,000 Shares; $1 Par Value; Issued 87,819,355 and 87,798,286 Shares........... 87,819 87,798 Paid-In Surplus.................................................... 778,239 786,596 Retained Earnings.................................................. 4,206,517 3,680,554 Foreign Currency Translation Gains (Losses), Net of Income Tax..... (3,433) 9,766 Unrealized Appreciation (Depreciation) of Investments, Net (Note 3) 345,894 (124,339) Receivable from Employee Stock Ownership Plan...................... (114,998) (122,999) Treasury Stock, at Cost -- 518,468 and 977,580 Shares.............. (37,309) (70,347) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY.................................... 5,262,729 4,247,029 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $22,996,525 $20,723,055 =========== ===========
See accompanying notes. 45 7 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN THOUSANDS YEARS ENDED DECEMBER 31 1995 1994 1993 ---------- ---------- ---------- PREFERRED STOCK Balance, Beginning and End of Year.................... $ -- $ -- $ -- ---------- ---------- ---------- COMMON STOCK Balance, Beginning of Year............................ 87,798 87,709 87,520 Shares Issued under Option and Incentive Plans........ 21 89 189 ---------- ---------- ---------- Balance, End of Year............................. 87,819 87,798 87,709 ---------- ---------- ---------- PAID-IN SURPLUS Balance, Beginning of Year............................ 786,596 782,186 772,815 Additions (Reductions) Resulting from Shares Issued under Option and Incentive Plans.................... (8,357) 4,410 9,371 ---------- ---------- ---------- Balance, End of Year............................. 778,239 786,596 782,186 ---------- ---------- ---------- RETAINED EARNINGS Balance, Beginning of Year............................ 3,680,554 3,313,140 3,139,707 Net Income............................................ 696,628 528,469 324,217 Dividends Declared (per share $1.96, $1.84 and $1.72).............................................. (170,665) (161,055) (150,784) ---------- ---------- ---------- Balance, End of Year............................. 4,206,517 3,680,554 3,313,140 ---------- ---------- ---------- FOREIGN CURRENCY TRANSLATION GAINS (LOSSES) Balance, Beginning of Year............................ 9,766 327 (5,164) Change During Year, Net of Income Tax (Note 16)....... (13,199) 9,439 5,491 ---------- ---------- ---------- Balance, End of Year............................. (3,433) 9,766 327 ---------- ---------- ---------- UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS Balance, Beginning of Year............................ (124,339) 143,093 96,559 Cumulative Effect, as of January 1, 1994, of Change in Accounting Principle, Net (Note 2).................. -- 220,519 -- Change During Year, Net (Note 3)...................... 470,233 (487,951) 46,534 ---------- ---------- ---------- Balance, End of Year............................. 345,894 (124,339) 143,093 ---------- ---------- ---------- RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN Balance, Beginning of Year............................ (122,999) (130,326) (137,035) Principal Repayments.................................. 8,001 7,327 6,709 ---------- ---------- ---------- Balance, End of Year............................. (114,998) (122,999) (130,326) ---------- ---------- ---------- TREASURY STOCK, AT COST Balance, Beginning of Year............................ (70,347) -- -- Repurchase of Shares.................................. -- (72,052) -- Shares Issued under Option and Incentive Plans........ 33,038 -- -- Shares Issued -- Other................................ -- 1,705 -- --------- ---------- ---------- Balance, End of Year............................. (37,309) (70,347) -- --------- ---------- ---------- TOTAL SHAREHOLDERS' EQUITY....................... $5,262,729 $4,247,029 $4,196,129 ========== ========== ==========
See accompanying notes. 46 8 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS YEARS ENDED DECEMBER 31 1995 1994 1993 ----------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income.......................................... $ 696,628 $ 528,469 $ 324,217 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Increase in Property and Casualty Unpaid Claims, Net............................................ 681,595 482,834 1,182,432 Increase (Decrease) in Life and Health Policy Liabilities, Net............................... (24,163) (10,769) 55,841 Increase in Unearned Premiums, Net............... 158,830 174,926 141,457 Increase in Premiums Receivable.................. (85,735) (67,055) (49,329) Increase in Funds Held for Asbestos-Related Settlement..................................... (480,008) (19,969) (538,172) Increase in Medical Malpractice Reinsurance Related Receivable............................. (66,194) -- (125,000) Increase in Deferred Policy Acquisition Costs.... (107,671) (96,718) (82,977) Deferred Income Tax Credit....................... (25,023) (18,588) (116,720) Realized Investment Gains........................ (130,660) (63,429) (232,638) Cumulative Effect of Changes in Accounting Principles..................................... -- -- 20,000 Other, Net....................................... 96,693 (13,026) 116,410 ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES................................... 714,292 896,675 695,521 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sales of Fixed Maturities............. 4,552,855 2,906,535 4,051,247 Proceeds from Maturities of Fixed Maturities........ 782,566 577,131 671,229 Proceeds from Sales of Equity Securities............ 411,993 623,482 298,790 Purchases of Fixed Maturities....................... (6,524,918) (4,265,835) (5,005,539) Purchases of Equity Securities...................... (195,950) (397,749) (357,254) Decrease (Increase) in Short Term Investments, Net.............................................. 326,434 (279,591) (268,077) Additions to Real Estate Assets, Net................ (34,305) (43,216) (69,552) Purchases of Fixed Assets........................... (75,388) (71,778) (47,332) Other, Net.......................................... (20,766) (9,009) (27,436) ----------- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES.......... (777,479) (960,030) (753,924) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Deposits Credited to Policyholder Funds............. 442,934 336,765 295,189 Withdrawals from Policyholder Funds................. (138,071) (122,502) (108,116) Proceeds from Issuance of Long Term Debt............ 173,900 33,225 255,045 Repayment of Long Term Debt......................... (303,470) (21,441) (55,928) Increase (Decrease) in Short Term Debt, Net......... 34,260 58,500 (193,668) Dividends Paid to Shareholders...................... (167,959) (158,735) (148,070) Repurchase of Shares................................ -- (72,052) -- Other, Net.......................................... 27,944 10,608 11,793 ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES................................... 69,538 64,368 56,245 ----------- ----------- ----------- Net Increase (Decrease) in Cash....................... 6,351 1,013 (2,158) Cash at Beginning of Year............................. 5,599 4,586 6,744 ----------- ----------- ----------- CASH AT END OF YEAR............................ $ 11,950 $ 5,599 $ 4,586 =========== =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION Cash Paid During the Year for Interest (Net of Amounts Capitalized)............ $ 86,041 $ 78,272 $ 56,156 Federal and Foreign Income Taxes................. 218,446 135,187 126,955
See accompanying notes. 47 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 subsidiaries. Significant intercompany transactions have been eliminated in consolidation. The consolidated financial statements reflect estimates and judgments made by management which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In 1995, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan. SFAS No. 114 may not be retroactively applied to prior years' financial statements; accordingly, the 1994 and 1993 consolidated financial statements have not been restated for this accounting change. This accounting change and the accounting changes adopted in 1994 and 1993 are further described in Note (2). Certain amounts in the financial statements for prior years have been reclassified to conform with the 1995 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 positive intent to hold to maturity are classified as held-to-maturity and carried at amortized cost. Fixed maturities which may be sold prior to maturity to support the investment strategies of the Corporation and its insurance subsidiaries are classified as available-for-sale and carried at market value as of the balance sheet date. Equity securities, which include common stocks and non-redeemable preferred stocks, are carried at market value as of the balance sheet date. Policy and mortgage 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 investments carried at market value, net of applicable deferred income tax, is excluded from income and credited or charged directly to a separate component of shareholders' equity. (c) Premium Revenues and Related Expenses Property and casualty insurance premiums are earned on a monthly pro rata basis over the terms of the policies. Revenues include estimates of audit premiums and premiums on retrospectively rated policies. Unearned premiums represent the portion of premiums written applicable to the unexpired terms of policies in force. Acquisition costs, consisting of commissions, premium taxes and other costs that vary with and are primarily related to the production of business, are deferred by major product groups and amortized over the period in which the related premiums are earned. 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. Beginning in 1994, deferred policy acquisition costs related to such contracts are also adjusted to reflect the effects that unrealized gains or losses on investments classified as available-for-sale would have had on the present value of estimated gross profits had such gains or losses actually been realized. This adjustment is excluded from income and charged or credited directly to the unrealized appreciation 48 10 or depreciation of investments component of shareholders' equity, net of applicable deferred income tax. Deferred policy acquisition costs for traditional life insurance contracts are amortized over the premium payment period of the related contracts using assumptions consistent with those used in computing policy liabilities. Deferred policy acquisition costs for all insurance operations are reviewed to determine that they do not exceed recoverable amounts, after considering anticipated investment income. (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 3 1/2% to 8% in 1995. Liabilities for traditional life insurance contracts consist of future policy benefits which are computed by the net level premium method based upon estimated future investment yield, expected mortality and estimated withdrawals. Assumptions generally vary by plan, age at issue and year of issue. Interest rate assumptions ranged from 3% to 9% in 1995. 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 ceded are considered in determining net acquisition costs eligible for deferral. Reinsurance recoverable on unpaid claims and policy liabilities represent estimates of the portion of such liabilities that will be recovered from reinsurers, determined in a manner consistent with the liabilities associated with the reinsured policies. (g) Funds Held for Asbestos-Related Settlement Funds held for asbestos-related settlement are assets of the Corporation's property and casualty insurance subsidiaries that accrue income for the benefit of participants in the class settlement of asbestos-related bodily injury claims against Fibreboard Corporation (see Note (14)). (h) 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 realizable value. Impairment would be recognized to the extent ultimate realizable value for a property was less than its carrying value. Ultimate realizable value is the undiscounted expected future net cash flows from the property. Depreciation of real estate properties is calculated using the straight-line method over the estimated useful lives of the properties. Real estate mortgages and notes receivable are carried at unpaid principal balances less an allowance for uncollectible amounts. The equity method of accounting is used for joint ventures in which the Corporation's real estate subsidiaries own an interest of less than 50%. Rental revenues are recognized on a straight-line basis over the term of the lease. Profits on land, townhome and commercial building sales are recognized at closing, subject to compliance with applicable accounting guidelines. Profits on high-rise condominium unit sales are recognized using the percentage of completion method, subject to achievement of a minimum level of unit sales. Profits on construction contracts are recognized using the percentage of completion method. 49 11 (i) 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. (j) 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 $74,591,000 and $72,041,000 at December 31, 1995 and 1994, respectively. (k) Income Taxes The Corporation and its domestic subsidiaries file a consolidated federal income tax return. Deferred income tax assets and liabilities are recognized for the expected future tax effects attributable to temporary differences between the financial reporting and tax bases of assets and liabilities, based on enacted tax rates and other provisions of tax law. The effect of a change in tax laws or rates is recognized in income in the period in which such change is enacted. U. S. federal income taxes are accrued on undistributed earnings of foreign subsidiaries. (l) 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. (m) Fair Values of Financial Instruments Fair values of financial instruments are based on quoted market prices where available. Fair values of financial instruments for which quoted market prices are not available are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rates and the estimated amounts and timing of future cash flows. Accordingly, the derived fair value estimates cannot be substantiated by comparison to independent markets and are not necessarily indicative of the amounts that could be realized in immediate settlement of the instrument. Certain financial instruments, particularly insurance contracts, are excluded from fair value disclosure requirements. The methods and assumptions used to estimate the fair value of financial instruments are as follows: (i) The carrying value of short term investments approximates fair value due to the short maturities of these investments. (ii) Fair values of fixed maturities with active markets are based on quoted market prices. For fixed maturities that trade in less active markets, fair values are obtained from independent pricing services. Fair values of fixed maturities are principally a function of current interest rates. Care should be used in evaluating the significance of these estimated market values. (iii) Fair values of equity securities are based on quoted market prices. (iv) Fair values of policy and mortgage loans of the insurance subsidiaries are estimated using discounted cash flow analyses and approximate the carrying values. (v) Fair values of real estate mortgages and notes receivable are estimated individually as the lesser of (1) the value of the discounted future cash flows of the loan or (2) the estimated value of the collateral, which is based on the discounted future net cash flows from such collateral. The cash flows are discounted at rates based on a U.S. Treasury security with a maturity similar to the loan, adjusted for credit risk. (vi) The carrying value of short term debt approximates fair value due to the short maturities of this debt. (vii) Long term debt consists of term loans, mortgages payable and long term notes. Fair values of term loans approximate the carrying values because such loans consist primarily of variable-rate debt that reprices frequently. Fair values of mortgages payable are estimated using discounted cash flow analyses. Fair values of long term notes are based on prices quoted by dealers. The carrying values and fair values of financial instruments were as follows:
December 31 ------------------------------------------ 1995 1994 ------------------- ------------------ Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- ----- (in thousands) ASSETS Invested assets Short term investments.... $ 484,439 $ 484,439 $ 810,873 $ 810,873 Fixed maturities (Note 3) Held-to-maturity........ 3,229,225 3,438,658 3,768,574 3,781,174 Available-for-sale...... 9,373,585 9,373,585 6,954,132 6,954,132 Equity securities......... 587,825 587,825 642,153 642,153 Policy and mortgage loans................... 212,339 212,339 202,679 202,679 Real estate mortgages and notes receivable (Note 5)........................ 409,564 405,400 395,490 353,800 LIABILITIES Short term debt (Note 7).... 187,600 187,600 153,340 153,340 Long term debt (Note 7)..... 1,156,044 1,219,634 1,285,614 1,255,892
50 12 (n) 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 89,942,341, 90,449,577 and 90,548,534 in 1995, 1994 and 1993, respectively. The 6% guaranteed exchangeable subordinated notes are considered to be common equivalent shares. The computation assumes the addition to income of the after-tax interest expense applicable to such notes. The allocated and unallocated shares held by the Corporation's Employee Stock Ownership Plan are considered common shares outstanding. (o) Cash Flow Information In the statement of cash flows, short term investments are not considered to be cash equivalents. The effect of changes in foreign exchange rates on cash balances was immaterial. (p) Accounting Pronouncements Not Yet Adopted In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets. Under SFAS No. 121, an impairment loss is recognized if the sum of the undiscounted expected future cash flows is less than the carrying amount of the asset. Measurement of impairment should be based on the fair value of the asset. SFAS No. 121 is effective for years beginning after December 15, 1995. Restatement of prior years' financial statements is not permitted. The Corporation will adopt SFAS No. 121 in the first quarter of 1996. The adoption of SFAS No. 121 is not expected to have a significant impact on net income in 1996. In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 encourages but does not require entities to adopt the fair value based method of accounting for all employee stock compensation plans, under which compensation cost is measured based on the fair value of the award at the grant date and recognized over the service period. Entities may continue to account for these plans using the intrinsic value based method of accounting, under which compensation cost is measured as the excess, if any, of the quoted market price of the stock at the grant date over the amount an employee must pay to acquire the stock. Entities not adopting the fair value based method must present pro forma disclosures of net income and earnings per share as if this method had been applied. SFAS No. 123 is effective for years beginning after December 15, 1995. The Corporation plans to continue to use the intrinsic value based method to measure compensation cost for these plans. (2) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 1995, the Corporation adopted SFAS No. 114, Accounting by Creditors for Impairment of a Loan. Under SFAS No. 114, a loan is considered impaired and a valuation allowance is established when it is probable that a creditor will be unable to collect all principal and interest amounts due according to the contractual terms of the loan agreement. SFAS No. 114 requires creditors to measure impairment of a loan based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, based on the market price of the loan or the fair value of the collateral if the loan is collateral dependent. Prior to 1995, the Corporation measured impairment of a loan based on undiscounted expected future cash flows. SFAS No. 114 may not be retroactively applied to prior years' financial statements. The initial application of SFAS No. 114 resulted in an increase of $10,000,000 to the allowance for uncollectible receivables. Effective January 1, 1994, the Corporation adopted SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Similar to the Corporation's previous accounting policy for investments in fixed maturities and equity securities, SFAS No. 115 provides that the accounting for such securities depends on their classification as either held-to-maturity (previously referred to as held for investment), available-for-sale or trading. However, SFAS No. 115 establishes more stringent criteria for classifying fixed maturities as held-to-maturity. Therefore, the adoption of SFAS No. 115 resulted 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. Prior to 1994, such fixed maturities were carried at the lower of the aggregate amortized cost or market value. In conjunction with the Corporation's adoption of SFAS No. 115, deferred policy acquisition costs related to universal life and other interest-sensitive life insurance contracts were adjusted to reflect the effects that would have been recognized had the unrealized gains relating to investments classified as available-for-sale actually been realized, with a corresponding charge directly to the separate component of shareholders' equity. SFAS No. 115 may not be retroactively applied to prior years' financial statements. The cumulative effect on shareholders' equity, as of January 1, 1994, of the change in accounting principle was as follows:
(in thousands) Unrealized appreciation of fixed maturities considered available-for-sale................... $399,980 Adjustment to deferred policy acquisition costs .. (60,720) -------- 339,260 Deferred income tax............................... 118,741 -------- Increase in shareholders' equity.............. $220,519 ========
Adoption of the Statement did not have an impact on net income in 1994 or 1995 nor will it in future years. 51 13 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. 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. 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 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. (3) INVESTED ASSETS AND RELATED INCOME (a) The sources of net investment income were as follows:
Years Ended December 31 ----------------------- 1995 1994 1993 ---- ---- ---- (in thousands) Fixed maturities.............. $812,910 $740,871 $734,353 Equity securities............. 15,836 27,066 23,709 Short term investments........ 39,581 28,925 22,169 Other......................... 32,310 31,819 20,115 -------- -------- -------- Gross investment income..... 900,637 828,681 800,346 Investment expenses........... 14,747 14,047 11,091 -------- -------- -------- $885,890 $814,634 $789,255 ======== ======== ========
(b) Realized investment gains and losses were as follows:
Years Ended December 31 ----------------------- 1995 1994 1993 ---- ---- ---- (in thousands) Gross realized investment gains Fixed maturities.......... $ 81,665 $ 68,613 $193,738 Equity securities......... 108,430 138,432 62,274 -------- -------- -------- 190,095 207,045 256,012 -------- -------- -------- Gross realized investment losses Fixed maturities.......... 50,929 130,547 20,627 Equity securities......... 8,506 13,069 2,747 -------- -------- -------- 59,435 143,616 23,374 -------- -------- -------- Realized investment gains..... 130,660 63,429 232,638 Income tax.................... 45,732 22,257 81,019 -------- -------- -------- $ 84,928 $ 41,172 $151,619 ======== ======== ========
Proceeds from sales of fixed maturities considered available-for-sale were $4,552,855,000, $2,894,475,000 and $3,471,404,000 in 1995, 1994 and 1993, respectively. Gross gains of $81,665,000, $68,553,000 and $152,483,000 and gross losses of $50,929,000, $130,547,000 and $12,542,000 were realized on such sales in 1995, 1994 and 1993, respectively. (c) The components of unrealized appreciation (depreciation) of investments carried at market value were as follows:
December 31 ----------- 1995 1994 ---- ---- (in thousands) Equity securities Gross unrealized appreciation..... $105,495 $ 58,680 Gross unrealized depreciation..... 11,086 26,062 -------- --------- 94,409 32,618 -------- --------- Fixed maturities Gross unrealized appreciation..... 504,812 89,999 Gross unrealized depreciation..... 21,827 264,495 -------- --------- 482,985 (174,496) -------- --------- 577,394 (141,878) Deferred policy acquisition cost adjustment.......................... (45,250) 26,982 -------- --------- 532,144 (114,896) Deferred income tax liability, net of valuation allowance of $49,657 in 1994................................ 186,250 9,443 -------- --------- $345,894 $(124,339) ======== =========
The change in unrealized appreciation or depreciation of investments carried at market value was as follows:
Years Ended December 31 ----------------------- 1995 1994 1993 ---- ---- ---- (in thousands) Change in unrealized appreciation of equity securities................... $ 61,791 $(187,524) $73,841 Change in unrealized appreciation or depreciation of fixed maturities.......... 657,481 (574,476) -- Change in deferred policy acquisition cost adjustment.. (72,232) 87,702 -- -------- --------- ------- 647,040 (674,298) 73,841 Deferred income tax (credit)... 226,464 (236,004) 27,307 Increase (decrease) in valuation allowance.......... (49,657) 49,657 -- -------- --------- ------- 470,233 (487,951) 46,534 Cumulative effect, as of January 1, 1994, of change in accounting principle, net.......................... -- 220,519 -- -------- --------- ------- $470,233 $(267,432) $46,534 ======== ========= =======
52 14 At December 31, 1995 and 1994, fixed maturities classified as held-to-maturity were carried at amortized cost while fixed maturities classified as available-for-sale were carried at market value. In prior years, all fixed maturities were carried at amortized cost. The unrealized appreciation or depreciation of fixed maturities carried at amortized cost is not reflected in the financial statements. The change in unrealized appreciation of fixed maturities carried at amortized cost was an increase of $196,833,000, a decrease of $723,889,000 and an increase of $213,959,000 for the years ended December 31, 1995, 1994 and 1993, respectively. (d) The amortized cost and estimated market value of fixed maturities were as follows:
December 31 --------------------------------------------------------------------------------------------------------- 1995 1994 -------------------------------------------------- --------------------------------------------------- Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Appreciation Depreciation Value Cost Appreciation Depreciation Value --------- ------------ ------------ --------- --------- ------------ ------------ --------- (in thousands) Held-to-maturity Tax exempt........ $ 2,826,737 $178,997 $ 959 $ 3,004,775 $ 3,149,479 $ 72,939 $ 45,321 $ 3,177,097 ----------- -------- -------- ----------- ----------- -------- -------- ----------- Taxable U.S. Government and government agency and authority obligations... 17,946 2,350 -- 20,296 17,256 -- 163 17,093 Corporate bonds......... 191,127 21,621 -- 212,748 235,056 8,809 1,976 241,889 Foreign bonds... 15,119 2,259 -- 17,378 149 17 -- 166 Mortgage-backed securities.... 178,296 5,211 46 183,461 366,634 2,316 24,021 344,929 ----------- -------- -------- ----------- ----------- -------- -------- ----------- 402,488 31,441 46 433,883 619,095 11,142 26,160 604,077 ----------- -------- -------- ----------- ----------- -------- -------- ----------- Total held- to-maturity... 3,229,225 210,438 1,005 3,438,658 3,768,574 84,081 71,481 3,781,174 ----------- -------- -------- ----------- ----------- -------- -------- ----------- Available-for-sale Tax exempt........ 3,607,925 253,814 1,109 3,860,630 2,524,446 64,309 58,569 2,530,186 ----------- -------- -------- ----------- ----------- -------- -------- ----------- Taxable U.S. Government and government agency and authority obligations... 976,411 38,763 27 1,015,147 1,000,325 1,221 59,891 941,655 Corporate bonds......... 1,106,876 67,734 7,213 1,167,397 1,269,054 14,083 46,099 1,237,038 Foreign bonds... 1,451,162 68,598 10,351 1,509,409 980,900 3,016 38,692 945,224 Mortgage-backed securities.... 1,720,522 75,694 2,924 1,793,292 1,335,876 6,951 61,186 1,281,641 Redeemable preferred stocks........ 27,704 209 203 27,710 18,027 419 58 18,388 ----------- -------- -------- ----------- ----------- -------- -------- ----------- 5,282,675 250,998 20,718 5,512,955 4,604,182 25,690 205,926 4,423,946 ----------- -------- -------- ----------- ----------- -------- -------- ----------- Total available-for- sale.......... 8,890,600 504,812 21,827 9,373,585 7,128,628 89,999 264,495 6,954,132 ----------- -------- -------- ----------- ----------- -------- -------- ----------- Total fixed maturities... $12,119,825 $715,250 $ 22,832 $12,812,243 $10,897,202 $174,080 $335,976 $10,735,306 =========== ======== ======== =========== =========== ======== ======== ===========
In December 1995, fixed maturities classified as held-to-maturity with an aggregate amortized cost of $232,167,000 and unrealized appreciation of $4,019,000 were reclassified as available-for-sale. Such reclassifications resulted from the Corporation's reassessment of its classifications of fixed maturities as permitted under SFAS No. 115 implementation guidance issued by the FASB in November 1995. The amortized cost and estimated market value of fixed maturities at December 31, 1995 by contractual maturity were as follows:
Held-to-Maturity Available-for-Sale ---------------------- ---------------------- Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value --------- --------- --------- --------- (in thousands) Due in one year or less............................. $ 131,301 $ 133,083 $ 93,793 $ 96,013 Due after one year through five years............... 761,773 810,495 1,283,827 1,349,230 Due after five years through ten years.............. 1,036,461 1,117,958 2,351,732 2,494,389 Due after ten years................................. 1,121,394 1,193,661 3,440,726 3,640,661 ---------- ---------- ---------- ---------- 3,050,929 3,255,197 7,170,078 7,580,293 Mortgage-backed securities.......................... 178,296 183,461 1,720,522 1,793,292 ---------- ---------- ---------- ---------- $3,229,225 $3,438,658 $8,890,600 $9,373,585 ========== ========== ========== ==========
Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations. 53 15 (4) DEFERRED POLICY ACQUISITION COSTS Policy acquisition costs deferred and the related amortization charged to income were as follows:
Years Ended December 31 --------------------------------- 1995 1994 1993 ---- ---- ---- (in thousands) Property and Casualty Insurance Balance, beginning of year ............... $ 529,453 $ 489,702 $ 454,976 ----------- ----------- --------- Costs deferred during year Commissions and brokerage............ 592,687 544,733 463,977 Premium taxes and assessments.......... 108,002 108,008 103,928 Salaries and overhead............. 449,477 428,255 415,788 ----------- ----------- --------- 1,150,166 1,080,996 983,693 Amortization during year .......... (1,120,943) (1,041,245) (948,967) ----------- ----------- --------- Balance, end of year..... $ 558,676 $ 529,453 $ 489,702 =========== =========== ========= Life and Health Insurance Balance, beginning of year .................... $ 606,493 $ 522,544 $ 474,293 Cumulative effect, as of January 1, 1994, of change in accounting principle.............. -- (60,720) -- Costs deferred during year .................. 155,905 129,217 111,389 Amortization during year.................... (77,457) (72,250) (63,138) Change in adjustment to reflect the effects of unrealized (gains) losses on investments.. (72,232) 87,702 -- ----------- ----------- --------- Balance, end of year..... $ 612,709 $ 606,493 $ 522,544 =========== =========== =========
(5) REAL ESTATE ASSETS The components of real estate assets were as follows:
December 31 ----------------- 1995 1994 ---- ---- (in thousands) Mortgages and notes receivable (net of allowance for uncollectible amounts of $87,617 and $73,863)............. $ 409,564 $ 395,490 Income producing properties (net of accumulated depreciation of $50,192 and $36,069)........................ 864,449 826,768 Construction in progress.............. 87,870 86,125 Land under development and unimproved land................................ 380,697 431,904 ---------- ---------- $1,742,580 $1,740,287 ========== ==========
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 $405,400,000 and $353,800,000 at December 31, 1995 and 1994, respectively. The fair value amounts represent point-in-time estimates that are not relevant in predicting future earnings or cash flows related to such receivables. Depreciation expense related to income producing properties was $14,123,000, $12,086,000 and $8,671,000 for 1995, 1994 and 1993, respectively. (6) PROPERTY AND EQUIPMENT Property and equipment included in other assets were as follows:
December 31 --------------- 1995 1994 ---- ---- (in thousands) Cost.................................. $437,073 $385,610 Less accumulated depreciation......... 193,546 168,128 -------- -------- $243,527 $217,482 ======== ========
Depreciation expense related to property and equipment was $48,279,000, $40,839,000 and $31,280,000 for 1995, 1994 and 1993, respectively. (7) DEBT AND CREDIT ARRANGEMENTS (a) Short term debt consisted of the following:
December 31 --------------- 1995 1994 ---- ---- (in thousands) Commercial paper...................... $177,600 $143,340 Notes................................. 10,000 10,000 -------- -------- $187,600 $153,340 ======== ========
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. The weighted average interest rate on short term debt approximated 5 3/4% and 6% at December 31, 1995 and 1994, respectively. 54 16 (b) Long term debt consisted of the following:
December 31 --------------------------------------------- 1995 1994 ------------------- ------------------- Carrying Fair Carrying Fair Value Value Value Value -------- ------- -------- ------- (in thousands) Term loans....... $ 331,023 $ 331,023 $ 324,413 $ 324,413 Mortgages........ 205,021 205,607 211,201 196,104 8 3/4% notes..... 120,000 133,104 150,000 151,125 8 5/8% notes..... -- -- 100,000 100,000 6% notes......... 150,000 151,365 150,000 141,000 6 7/8% notes..... 100,000 105,410 100,000 90,750 6% exchangeable subordinated notes.......... 250,000 293,125 250,000 252,500 ---------- ---------- ---------- ---------- $1,156,044 $1,219,634 $1,285,614 $1,255,892 ========== ========== ========== ==========
The term loans and mortgages are obligations of the real estate subsidiaries, except for a $5,212,000 mortgage loan of the life and health insurance subsidiaries. The term loans mature in varying amounts through 2000. Substantially all term loans are at an interest rate equivalent to the lower of the prime rate or a rate associated with the lender's cost of funds. The mortgages payable are due in varying amounts monthly through 2013. At December 31, 1995, the range of interest rates for term loans was 6% to 9 1/2% and for mortgages payable the range was 5% to 12%. The term loans and mortgages payable are secured by real estate assets with a net book value of $1,009,821,000 at December 31, 1995. The Corporation has outstanding $120,000,000 of unsecured 8 3/4% notes due November 15, 1999. The notes are subject to mandatory sinking fund payments in amounts sufficient to redeem $30,000,000 of principal in each of the years 1996 through 1998. The notes are to be redeemed on a pro rata basis on November 15 of each of these years at a redemption price of 100% of their principal amount. Chubb Capital has outstanding $150,000,000 of 6% notes due February 1, 1998 and $100,000,000 of 6 7/8% notes due February 1, 2003. These notes are unsecured and are guaranteed by the Corporation. Chubb Capital has outstanding in the Eurodollar market $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 redemption prices declining annually from 102.6% of the principal amount if redeemed before May 15, 1996 to 100.9% of the principal amount if redeemed on or after May 15, 1997. The Corporation filed a shelf registration statement which the Securities and Exchange Commission declared effective in June 1995, under which up to $400,000,000 of various types of securities may be issued by the Corporation or Chubb Capital. No securities have been issued under this registration. The amounts of long term debt due annually during the five years subsequent to December 31, 1995 are as follows:
Term Loans Years Ending and December 31 Mortgages Notes Total - ------------ ---------- ----- ----- (in thousands) 1996.................. $167,737 $ 30,000 $197,737 1997.................. 52,026 30,000 82,026 1998.................. 46,875 430,000 476,875 1999.................. 85,760 30,000 115,760 2000.................. 149,917 -- 149,917
(c) Interest costs of $101,526,000, $98,685,000 and $92,905,000 were incurred in 1995, 1994 and 1993, respectively, of which $16,352,000, $19,407,000 and $28,685,000 were capitalized. (d) The Corporation has a revolving credit agreement with a group of banks that provides for unsecured borrowings of up to $300,000,000. The agreement terminates on July 15, 1997 at which time any loans then outstanding become payable. Various interest rate options are available to the Corporation, all of which are based on market rates. The Corporation pays a facility fee of 1/10% per annum. There have been no borrowings under this agreement. The Corporation and its subsidiaries had additional unused lines of credit of approximately $178,000,000 at December 31, 1995. 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. 55 17 (8) FEDERAL AND FOREIGN INCOME TAX (a) Income tax expense consisted of the following components:
Years Ended December 31 ------------------------------ 1995 1994 1993 ---- ---- ---- (in thousands) Current tax United States............................................................. $207,004 $ 97,848 $ 105,293 Foreign................................................................... 21,462 31,635 11,702 Deferred tax credit, principally United States.............................. (25,023) (18,588) (116,720) -------- -------- --------- $203,443 $110,895 $ 275 ======== ======== =========
(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 ------------------------------------------------------------------- 1995 1994 1993 ------------------- ------------------- ------------------- % of % of % of Pre-Tax Pre-Tax Pre-Tax Amount Income Amount Income Amount Income ------ ------- ------ ------- ------ ------- (in thousands) Income before federal and foreign income tax.... $ 900,071 $ 639,364 $ 344,492 ========= ========= ========= Tax at statutory federal income tax rate........ $ 315,025 35.0% $ 223,777 35.0% $ 120,572 35.0% Tax exempt interest income...................... (115,165) (12.8) (109,980) (17.2) (110,297) (32.0) Other, net...................................... 3,583 .4 (2,902) (.5) (10,000) (2.9) --------- ------ --------- ------ --------- ------ Actual tax.............................. $ 203,443 22.6% $ 110,895 17.3% $ 275 .1% ========= ====== ========= ====== ========= ======
(c) The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities were as follows:
December 31 --------------------- 1995 1994 ---- ---- (in thousands) Deferred income tax assets Property and casualty unpaid claims................................................ $523,535 $478,166 Unearned premiums.................................................................. 130,226 121,269 Life and health policy liabilities................................................. 147,284 127,867 Unrealized depreciation of investments............................................. -- 49,657 Postretirement benefits............................................................ 54,997 50,015 -------- -------- 856,042 826,974 Valuation allowance................................................................ -- (49,657) -------- -------- Total............................................................................ 856,042 777,317 -------- -------- Deferred income tax liabilities Deferred policy acquisition costs.................................................. 338,313 338,897 Real estate assets................................................................. 118,225 116,056 Unrealized appreciation of investments............................................. 202,088 -- Other, net......................................................................... 37,742 7,644 -------- -------- Total............................................................................ 696,368 462,597 -------- -------- Net deferred income tax asset........................................................ $159,674 $314,720 ======== ========
The valuation allowance at December 31, 1994 was related to future tax benefits on unrealized depreciation of investments, the realization of which was uncertain. The valuation allowance had no impact on net income. 56 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 ---------------------------- 1995 1994 1993 ---- ---- ---- (in thousands) Service cost of current period.................... $ 20,422 $ 19,702 $ 17,877 Interest cost on projected benefit obligation................ 23,822 21,232 19,598 Actual return on plan assets.................... (68,542) (523) (30,767) Net amortization and deferral.................. 42,730 (23,420) 10,706 -------- -------- -------- Net pension cost............ $ 18,432 $ 16,991 $ 17,414 ======== ======== ========
The following table sets forth the plans' funded status and amounts recognized in the balance sheets:
December 31 -------------- 1995 1994 ---- ---- (in thousands) Actuarial present value of benefit obligation for service rendered to date: Accumulated benefit obligation based on current salary levels, including vested benefits of $212,752 and $180,407............. $224,821 $190,100 Additional amount related to projected future salary increases......................... 131,473 118,283 -------- -------- Projected benefit obligation for service rendered to date.......... 356,294 308,383 Plan assets at fair value............... 341,112 269,349 -------- -------- Projected benefit obligation in excess of plan assets........................ 15,182 39,034 Unrecognized net gain from past experience different from that assumed............................... 36,196 10,209 Unrecognized prior service costs........ (5,208) (5,625) Unrecognized net asset at January 1, 1985, being recognized principally over 19 years......................... 8,297 9,647 -------- -------- Pension liability included in other liabilities........................... $ 54,467 $ 53,265 ======== ========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation at December 31, 1995 and 1994 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 employees may become eligible for these benefits upon retirement if they meet minimum age and years of service requirements. The Corporation does not fund these benefits in advance. Benefits are paid as covered expenses are incurred. Health care coverage is contributory. Retiree contributions vary based upon a retiree's age, type of coverage and years of service with the Corporation. Life insurance coverage is non-contributory. The components of net postretirement benefit cost were as follows:
Years Ended December 31 ---------------------------- 1995 1994 1993 ---- ---- ---- (in thousands) Service cost of current period... $ 5,687 $ 5,153 $ 4,384 Interest cost on accumulated benefit obligation............. 7,949 7,420 6,864 ------- ------- ------- Net postretirement benefit cost........................... $13,636 $12,573 $11,248 ======= ======= =======
The components of the accumulated postretirement benefit obligation were as follows:
December 31 --------------- 1995 1994 ---- ---- (in thousands) Retirees.................................. $ 38,735 $ 38,713 Fully eligible active plan participants... 5,103 4,371 Other active plan participants............ 74,572 61,207 -------- -------- Accumulated postretirement benefit obligation.............................. 118,410 104,291 Unrecognized net gain (loss) from past experience different from that assumed................................. (933) 3,909 -------- -------- Postretirement benefit liability included in other liabilities........... $117,477 $108,200 ======== ========
The weighted average discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation at December 31, 1995 and 1994 was 7 1/2% and 7 3/4%, respectively. At December 31, 1995, the weighted average health care cost trend rate used to measure the accumulated postretirement cost for medical benefits was 11 3/4% for 1996 and was 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, 1995 by $15,674,000 and the aggregate of the service and interest cost components of net postretirement benefit cost for the year ended December 31, 1995 by $2,017,000. 57 19 (10) OPTION AND INCENTIVE PLANS (a) The Long-Term Stock Incentive Plan provides for the granting of stock options, performance shares, restricted stock, 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, 1995, 1,220,273 shares were available for grant under the Long-Term Stock Incentive Plan. Stock options are granted at exercise prices not less than the fair market value of the Corporation's common stock on the date of grant. The terms and conditions upon which options become exercisable may vary among grants. Options expire no later than ten years from the date of grant. Information concerning stock options granted under the Long-Term Stock Incentive Plan and the prior plan is as follows:
1995 1994 1993 --------------------------- --------------------------- ---------- 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................... 2,724,809 $24.50-92.63 2,083,758 $13.23-92.63 1,558,484 $13.23-74.06 Granted..................... 997,115 82.06-98.75 754,525 81.94 678,461 83.56-92.63 Exercised................... (369,166) 24.50-83.56 (76,034) 13.23-72.06 (136,888) 13.23-72.06 Cancelled................... (70,241) 66.75-88.69 (37,440) 47.75-83.56 (16,299) 24.50-83.56 ---------- ---------- ---------- ----------- Outstanding, end of year.... 3,282,517 27.93-98.75 2,724,809 24.50-92.63 2,083,758 13.23-92.63 ========== =========== ========== =========== Exercisable, end of year.... 1,980,793 27.93-98.75 1,665,228 24.50-92.63 1,147,272 13.23-92.63
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 $8,626,000, $5,213,000 and $4,219,000 in 1995, 1994 and 1993, 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, 1995, 224,000 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:
1995 1994 1993 -------------------------- -------------------------- ------------------------- 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....... 146,000 $26.84-86.94 124,000 $26.84-86.94 100,000 $26.84-69.19 Granted.............................. 24,000 78.75 24,000 77.50 28,000 86.94 Exercised............................ (11,000) 26.84-69.19 (2,000) 34.22 (4,000) 26.84-44.19 ------- ------- ------- Outstanding and exercisable, end of year............................... 159,000 26.84-86.94 146,000 26.84-86.94 124,000 26.84-86.94 ======= ======= =======
58 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 1995, 1994 and 1993, cash contributions to the ESOP of $12,307,000, $12,146,000 and $12,172,000, respectively, were charged against income. Dividends on unallocated shares used for debt service by the ESOP were $4,468,000, $4,615,000 and $4,711,000 in 1995, 1994 and 1993, respectively. The number of allocated and unallocated shares held by the ESOP at December 31, 1995 were 1,392,527 and 2,337,662, respectively. (d) The Corporation has a savings plan, the Capital Accumulation Plan, in which substantially all employees are eligible to participate. Under this plan, the employer makes a matching contribution equal to 100% of each eligible employee's pre-tax elective contributions, up to 4% of the employee's compensation. Contributions are invested at the election of the employee in the Corporation's common stock or in various other investment funds. Employer contributions of $13,443,000, $13,026,000 and $12,564,000 were charged against income in 1995, 1994 and 1993, 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 based on compensation. Shares are purchased at a price not less than 95% of the fair market value on the date of grant. At December 31, 1995, there were 369,365 subscribed shares at a price of $70.69. (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 ---------------------------- 1995 1994 1993 ---- ---- ---- (in thousands) Office facilities............. $70,748 $69,679 $68,805 Equipment..................... 14,596 16,240 20,794 ------- ------- ------- $85,344 $85,919 $89,599 ======= ======= =======
At December 31, 1995, future minimum rental payments required under non-cancellable operating leases were as follows:
Years Ending December 31 (in thousands) 1996..................................... $ 73,825 1997..................................... 67,970 1998..................................... 61,279 1999..................................... 52,364 2000..................................... 37,770 After 2000............................... 108,757 -------- $401,965 ========
59 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 5.2% of the Corporation's common stock. A portion 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 $520,528,000, $489,727,000 and $457,321,000 in 1995, 1994 and 1993, respectively. Reinsurance recoverable on property and casualty unpaid claims included approximately $775,000,000 and $845,000,000 at December 31, 1995 and 1994, respectively, from the Sun Group. A property and casualty insurance subsidiary of the Corporation 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 $340,767,000, $264,343,000 and $170,131,000 in 1995, 1994 and 1993, respectively. The property and casualty insurance subsidiaries of the Corporation 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 included a commutation provision under which the property and casualty insurance subsidiaries had an option to reassume the remaining liability of the Sun Group as of December 31, 1995 and receive payment of an amount determined by a formula based on experience under the agreement. The property and casualty insurance subsidiaries exercised this option, which resulted in an amount due from the Sun Group of $191,194,000 and a reduction in reinsurance recoverable on unpaid claims from the Sun Group of $66,194,000. The difference of $125,000,000 represents a return premium to the property and casualty insurance subsidiaries, which was recognized in 1993 at the time the Corporation announced its intention to exercise the commutation option. The amount due from the Sun Group was received in January 1996. The agreement also included 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 $11,062,000 and $9,000,000 in 1994 and 1993, respectively. These amounts were reflected as reductions of other insurance operating costs and expenses. 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 ------------------------------- 1995 1994 1993 ---- ---- ---- (in thousands) Direct.................... $ 4,754,423 $ 4,415,080 $ 4,155,356 Reinsurance assumed....... 712,080 641,615 478,464 Reinsurance ceded......... (1,319,341) (1,280,412) (1,128,982) ----------- ----------- ----------- Premiums earned........... $ 4,147,162 $ 3,776,283 $ 3,504,838 =========== =========== ===========
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 $936,080,000, $962,332,000 and $590,502,000 in 1995, 1994 and 1993, respectively. The effect of reinsurance on the premiums and policy charges of the life and health insurance subsidiaries was as follows:
Years Ended December 31 ----------------------- 1995 1994 1993 ---- ---- ---- (in thousands) Direct.......................... $652,035 $862,085 $831,849 Reinsurance assumed............. 1,766 2,056 2,784 Reinsurance ceded............... (30,864) (27,848) (33,397) -------- -------- -------- Premiums and policy charges..... $622,937 $836,293 $801,236 ======== ======== ========
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 $50,537,000, $53,141,000 and $42,005,000 in 1995, 1994 and 1993, respectively. (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. 60 22 In 1993, Pacific Indemnity Company, a subsidiary of the Corporation, entered into a global settlement agreement with Continental Casualty Company (a subsidiary of CNA Financial Corporation), Fibreboard Corporation, and attorneys representing claimants against Fibreboard for all future asbestos-related bodily injury claims against Fibreboard. This agreement is subject to final appellate court approval. Pursuant to the global settlement agreement, a $1,525,000,000 trust fund will be established to pay future claims, which are claims that were not filed in court before August 27, 1993. Pacific Indemnity will contribute $538,172,000 to the trust fund and Continental Casualty will contribute the remaining amount. In December 1993, upon execution of the global settlement agreement, Pacific Indemnity and Continental Casualty paid their respective shares into an escrow account. Pacific Indemnity's share is included in funds held for asbestos-related settlement. Upon final court approval of the settlement, the amount in the escrow account, including interest earned thereon, will be transferred to the trust fund. All of the parties have agreed to use their best efforts to seek final court approval of the global settlement agreement. Pacific Indemnity and Continental Casualty have reached a separate agreement for the handling of all asbestos-related bodily injury claims pending on August 26, 1993 against Fibreboard. In February 1995, the agreement was amended to extend for several years the period over which Pacific Indemnity will pay its remaining obligation, plus interest, under this agreement. Pacific Indemnity's obligation under this agreement is not expected to exceed $635,000,000, of which approximately $450,000,000 remained unpaid at December 31, 1995. Assets to be used for the payment of this obligation have been designated as funds held for asbestos-related settlement. 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 final appellate 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 by an appellate court. Pacific Indemnity's obligation under the trilateral agreement is therefore similar to, and not duplicative of, that under those agreements described above. The trilateral agreement reaffirms portions of an agreement reached in March 1992 between Pacific Indemnity and Fibreboard. Among other matters, that 1992 agreement eliminates any Pacific Indemnity liability to Fibreboard for asbestos-related property damage claims. Additional loss reserves of $675,000,000 were provided in 1993 at the time the settlement was negotiated. In July 1995, the United States District Court of the Eastern District of Texas approved the global settlement agreement and the trilateral agreement. The judgments approving these agreements have been appealed to the United States Court of Appeal for the Fifth Circuit. The appeals are scheduled to be argued in early March 1996. The period of ultimate judicial review continues to lengthen and may well extend into 1997. Management is optimistic that the approval of the settlement will be upheld. However, if both the global settlement agreement and the trilateral agreement are disapproved by an appellate court, there can then 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. 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. The property and casualty insurance subsidiaries have additional potential asbestos exposure on insureds for which excess liability coverages were written. Such exposure has increased due to the erosion of much of the underlying limits. The number of claims against such insureds and the value of such claims have increased in recent years due in part to the non-viability of other defendants. Other remaining asbestos exposures are mostly peripheral defendants, including a mix of manufacturers and distributors of certain products that contain asbestos as well as premises owners. Generally, these insureds are named defendants on a regional rather than a nationwide basis. Notices of new asbestos claims and new exposures on existing claims continue to be received as more peripheral parties are drawn into litigation to replace the now defunct mines and bankrupt manufacturers. 61 23 The courts have been engaged in developing guidelines regarding coverage for asbestos claims and have begun to articulate more consistent standards regarding the extent of the obligation of insurers to provide coverage and the method of allocation of costs among insurers. However, the universe of potential claims is still unknown. Therefore, uncertainty remains as to the property and casualty insurance subsidiaries' ultimate liability for asbestos-related claims. Hazardous waste sites are another significant potential exposure. Under the "Superfund" law and similar state statutes, when potentially responsible parties (PRPs) fail to handle the clean-up, regulators have the work done and then attempt to establish legal liability against the PRPs. The PRPs disposed of toxic materials at a waste dump site or transported the materials to the site. Insurance policies issued to PRPs were not intended to cover the clean-up costs of pollution and, in many cases, did not intend to cover the pollution itself. As the cost of environmental clean-up continues to grow, PRPs and others have increasingly filed claims with their insurance carriers. 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 remediation costs among governmental authorities and the PRPs varies greatly. Second, different courts have addressed liability and coverage issues regarding pollution claims and have reached inconsistent conclusions in their interpretation of several issues. These significant uncertainties are not likely to be resolved in the near future. Uncertainties also remain as to the Superfund law itself. Superfund's taxing authority expired on December 31, 1995. It is currently not possible to predict the direction that any reforms may take, when they may occur or the effect that any changes may have on the insurance industry. Reserves for asbestos and toxic waste claims cannot be estimated with traditional loss reserving techniques. Case reserves and expense reserves for costs of related litigation have been established where sufficient information has been developed to indicate the involvement of a specific insurance policy. In addition, incurred but not reported reserves have been established to cover additional exposures on both known and unasserted claims. These reserves are continually reviewed and updated. A reconciliation of the beginning and ending liability for property and casualty unpaid claims, net of reinsurance recoverable, and a reconciliation of the net liability to the corresponding liability on a gross basis is as follows:
1995 1994 1993 ---- ---- ---- (in thousands) Gross liability, beginning of year.................... $8,913,220 $8,235,442 $7,220,919 Reinsurance recoverable, beginning of year.......... 1,980,340 1,785,396 1,953,305 ---------- ---------- ---------- Net liability, beginning of year....................... 6,932,880 6,450,046 5,267,614 ---------- ---------- ---------- Net incurred claims and claim expenses related to: Current year............. 2,705,800 2,549,100 2,214,300 Prior years.............. (35,819) (29,741) 664,798 ---------- ---------- ---------- 2,669,981 2,519,359 2,879,098 ---------- ---------- ---------- Net payments for claims and claim expenses related to: Current year............. 737,686 764,525 656,766 Prior years.............. 1,250,700 1,272,000 1,039,900 ---------- ---------- ---------- 1,988,386 2,036,525 1,696,666 ---------- ---------- ---------- Net liability, end of year... 7,614,475 6,932,880 6,450,046 Reinsurance recoverable, end of year................ 1,973,666 1,980,340 1,785,396 ---------- ---------- ---------- Gross liability, end of year. $9,588,141 $8,913,220 $8,235,442 ========== ========== ==========
During 1995, the property and casualty insurance subsidiaries experienced overall favorable development of $35,819,000 on net unpaid claims established as of the previous year-end. This compares with favorable development of $29,741,000 in 1994 and unfavorable development of $664,798,000 in 1993. Such redundancies and deficiency were reflected in operating results in these respective years. Excluding the effect of the $675,000,000 increase in unpaid claims related to the Fibreboard settlement, the property and casualty insurance subsidiaries experienced favorable development of $10,202,000 in 1993. Each of the past three years benefited from favorable claim severity trends for certain liability classes; this was offset each year in varying degrees by increases in unpaid claims relating to asbestos and toxic waste claims. Management believes that the aggregate loss reserves of the property and casualty insurance subsidiaries at December 31, 1995 were adequate to cover claims for losses which had occurred, including both those known and those yet to be reported. In establishing such reserves, management considers facts currently known and the present state of the law and coverage litigation. However, given the expansion of coverage and liability by the courts and the legislatures in the past and the possibilities of similar interpretations in the future, particularly as they relate to asbestos and toxic waste claims, as well as the uncertainty in determining what scientific standards will be deemed acceptable for measuring hazardous waste site clean-up, additional increases in loss reserves may emerge which would adversely affect results in future periods. The amount cannot reasonably be estimated at the present time. 62 24 (15) 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. The property and casualty insurance subsidiaries underwrite most forms of property and casualty insurance in the United States, Canada, Europe, Australia and the Far East. The geographic distribution of property and casualty business in the United States is broad with a particularly strong market presence in the Northeast. The life and health insurance subsidiaries, which market a wide variety of insurance and investment products throughout the United States, are principally engaged in the sale of personal and group life and health insurance as well as annuity contracts. The real estate subsidiary is involved in commercial development activities primarily in New Jersey with additional operations in several other states as well as residential development activities in central Florida and northern New Jersey. Revenues, income from operations before income tax and identifiable assets for each industry segment were as follows:
Years Ended December 31 ------------------------------------ 1995 1994 1993 ---- ---- ---- Revenues (in thousands) Property and Casualty Insurance Premiums earned............................................................. $ 4,147,162 $ 3,776,283 $ 3,504,838 Investment income........................................................... 613,242 570,531 541,749 Life and Health Insurance Premiums and policy charges................................................. 622,937 836,293 801,236 Investment income........................................................... 232,950 208,745 205,891 Real Estate..................................................................... 287,795 204,849 160,650 ----------- ----------- ----------- 5,904,086 5,596,701 5,214,364 Corporate investment income..................................................... 54,445 49,405 52,706 Realized investment gains (losses) Property and Casualty Insurance............................................. 95,030 55,203 172,925 Life and Health Insurance................................................... 21,808 9,304 22,056 Corporate................................................................... 13,822 (1,078) 37,657 ----------- ----------- ----------- Total revenues.......................................................... $ 6,089,191 $ 5,709,535 $ 5,499,708 =========== =========== =========== Income (loss) from operations before income tax Property and Casualty Insurance................................................. $ 697,141 $ 552,170 $ (1,383) Life and Health Insurance....................................................... 41,265 18,754 88,729 Real Estate..................................................................... 7,696 (5,950) 2,051 ----------- ----------- ----------- 746,102 564,974 89,397 Corporate....................................................................... 23,309 10,961 22,457 Realized investment gains (losses) Property and Casualty Insurance............................................. 95,030 55,203 172,925 Life and Health Insurance................................................... 21,808 9,304 22,056 Corporate................................................................... 13,822 (1,078) 37,657 ----------- ----------- ----------- Income before federal and foreign income tax............................ $ 900,071 $ 639,364 $ 344,492 =========== =========== =========== December 31 ------------------------------------------- Identifiable assets Property and Casualty Insurance................................................. $16,157,688 $14,435,933 $13,372,599 Life and Health Insurance....................................................... 4,275,365 3,760,079 3,529,802 Real Estate..................................................................... 1,842,831 1,796,706 1,745,212 ----------- ----------- ----------- Total identifiable assets............................................... 22,275,884 19,992,718 18,647,613 Corporate....................................................................... 959,384 945,397 1,047,606 Adjustments and eliminations.................................................... (238,743) (215,060) (258,349) ----------- ----------- ----------- Total assets............................................................ $22,996,525 $20,723,055 $19,436,870 =========== =========== ===========
63 25 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 ---------------------------------- 1995 1994 1993 ---- ---- ---- (in thousands) Premiums earned Personal........................................................................ $ 832,423 $ 812,033 $ 807,550 Standard Commercial............................................................. 1,408,811 1,279,069 1,294,182 Specialty Commercial............................................................ 1,556,473 1,404,793 1,208,672 Reinsurance Assumed............................................................. 349,455 280,388 194,434 ---------- ---------- ---------- Total premiums earned....................................................... $4,147,162 $3,776,283 $3,504,838 ========== ========== ========== Income (loss) from operations before income tax Personal........................................................................ $ 92,686 $ (7,475) $ 30,536 Standard Commercial............................................................. (135,095) (106,126) (642,747) Specialty Commercial............................................................ 132,187 106,557 101,584 Reinsurance Assumed............................................................. 4,376 (1,267) (24,465) ---------- ---------- ---------- Underwriting income (loss).................................................. 94,154 (8,311) (535,092) Net investment income........................................................... 602,987 560,481 533,709 ---------- ---------- ---------- Income (loss) from operations before income tax............................. $ 697,141 $ 552,170 $ (1,383) ========== ========== ==========
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. The underwriting income or loss by class of business reflects allocations of certain significant underwriting expenses using allocation methods deemed reasonable. Other acceptable allocation methods could produce different results by groupings of classes of business. Property and casualty assets are available for payment of claims and expenses for all classes of business; therefore, such assets and the related investment income have not been identified with specific groupings of classes of business. (16) INTERNATIONAL OPERATIONS The international business of the property and casualty insurance segment is conducted through subsidiaries that operate solely outside of the United States and branch offices of domestic subsidiaries. The assets and liabilities related to such operations are located primarily in the countries in which the insurance risks are written. International business is also obtained from treaty reinsurance assumed, principally from the Sun Group. 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 ------------------------------------ 1995 1994 1993 ---- ---- ---- (in thousands) Revenues United States..................................................... $ 3,715,023 $ 3,508,243 $ 3,397,825 International..................................................... 1,045,381 838,571 648,762 ----------- ----------- ----------- Total....................................................... $ 4,760,404 $ 4,346,814 $ 4,046,587 =========== =========== =========== Income (loss) from operations before income tax United States..................................................... $ 592,684 $ 479,153 $ 8,311 International..................................................... 104,457 73,017 (9,694) ----------- ----------- ----------- Total....................................................... $ 697,141 $ 552,170 $ (1,383) =========== =========== ===========
December 31 ------------------------------------------- Identifiable assets United States..................................................... $14,055,334 $12,937,447 $12,189,556 International..................................................... 2,102,354 1,498,486 1,183,043 ----------- ----------- ----------- Total....................................................... $16,157,688 $14,435,933 $13,372,599 =========== =========== ===========
64 26 Foreign currency translation gains or losses credited or charged directly to the separate component of shareholders' equity were as follows:
Years Ended December 31 ---------------------------- 1995 1994 1993 ---- ---- ---- (in thousands) Gains (losses) on translation of foreign currencies........................... $(15,931) $14,517 $ 8,492 Income tax (credit) Current................................................................... (5,994) 4,633 8,546 Deferred.................................................................. 3,262 445 (5,545) -------- ------- ------- $(13,199) $ 9,439 $ 5,491 ======== ======= =======
(17) SHAREHOLDERS' EQUITY (a) The authorized but unissued preferred shares may be issued in one or more series and the shares of each series shall have such rights as fixed by the Board of Directors. (b) The activity of the Corporation's common stock was as follows:
Years Ended December 31 ---------------------------------- 1995 1994 1993 ---- ---- ---- (number of shares) Common stock issued Balance, beginning of year........................................... 87,798,286 87,709,465 87,519,560 Shares issued under option and incentive plans....................... 21,069 88,821 189,905 ---------- ---------- ---------- Balance, end of year............................................. 87,819,355 87,798,286 87,709,465 ---------- ---------- ---------- Treasury stock Balance, beginning of year........................................... 977,580 -- -- Repurchase of shares................................................. -- 1,001,500 -- Shares issued under option and incentive plans....................... (459,112) -- -- Shares issued -- other............................................... -- (23,920) -- ---------- ---------- ---------- Balance, end of year............................................. 518,468 977,580 -- ---------- ---------- ---------- Common stock outstanding, end of year............................ 87,300,887 86,820,706 87,709,465 ========== ========== ==========
(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 of the interests represented by each right. The rights will become exercisable and will detach from the common stock ten days after a person or group either acquires 25% or more of the outstanding shares of the Corporation's common stock or announces a tender or exchange offer which, if consummated, would result in that person or group owning 25% or more of the outstanding shares of the Corporation's common stock. In the event that any person or group acquires 25% or more of the outstanding shares of the Corporation's common stock, each right will entitle the holder, other than such person or group, to purchase that number of shares of the Corporation's common stock having a market value of two times the exercise price of the right. In the event that, following the acquisition of 25% or more of the Corporation's outstanding common stock by a person or group, the Corporation is acquired in a merger or other business combination transaction or 50% or more of the Corporation's assets or earning power is sold, each right will entitle the holder to purchase common stock of the acquiring company having a value equal to two times the exercise price of the right. The rights do not have the right to vote or to receive dividends. The rights may be redeemed in whole, but not in part, at a price of $.01 per right by the Corporation at any time until the tenth day after the acquisition of 25% or more of the Corporation's outstanding common stock by a person or group. The rights will expire at the close of business on June 12, 1999, unless previously redeemed by the Corporation. 65 27 (d) The Corporation's insurance subsidiaries are required to file annual statements with insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis). For such subsidiaries, generally accepted accounting principles (GAAP) differ in certain respects from statutory accounting practices. A comparison of shareholders' equity on a GAAP basis and policyholders' surplus on a statutory basis is as follows:
December 31 --------------------------------------------------- 1995 1994 ----------------------- ----------------------- GAAP Statutory GAAP Statutory --------- --------- --------- --------- (in thousands) Property and casualty insurance subsidiaries*. $3,617,144 $2,314,720 $2,862,278 $1,923,465 Life and health insurance subsidiaries........ 844,645 317,624 731,810 301,084 ---------- ---------- ---------- ---------- 4,461,789 $2,632,344 3,594,088 $2,224,549 ========== ========== Corporate and eliminations.................. 800,940 652,941 ---------- ---------- $5,262,729 $4,247,029 ========== ==========
A comparison of GAAP and statutory net income (loss) is as follows:
Years Ended December 31 -------------------------------------------------------------------------------- 1995 1994 1993 ---------------------- ---------------------- ---------------------- GAAP Statutory GAAP Statutory GAAP Statutory -------- --------- -------- --------- -------- --------- (in thousands) Property and casualty insurance subsidiaries*. $640,834 $571,199 $506,825 $468,861 $210,204** $ 96,965 Life and health insurance subsidiaries....... 42,216 26,828 20,551 (4,264) 76,853** 31,890 -------- -------- -------- -------- ------- -------- 683,050 $598,027 527,376 $464,597 287,057 $128,855 ======== ======== ======== Corporate and eliminations................... 13,578 1,093 57,160** Cumulative effect of changes in accounting principles, net of tax..................... -- -- (20,000) -------- -------- -------- $696,628 $528,469 $324,217 ======== ======== ========
* 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 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 1995, these subsidiaries paid dividends to the Corporation totaling $244,008,000. The maximum dividend distribution that may be made by insurance subsidiaries to the Corporation during 1996 without prior approval is approximately $465,000,000. (18) SUBSEQUENT EVENT On March 1, 1996, the Board of Directors approved a two-for-one stock split payable to shareholders of record on April 19, 1996. The share and per share amounts in the consolidated financial statements have not been adjusted to reflect the stock split. Net income per share and the weighted average number of common and common equivalent shares outstanding on a pro forma basis to reflect the stock split were as follows:
Years Ended December 31 -------------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Net income per share............................ $3.93 $2.98 $1.84 Average common and common equivalent shares outstanding............................ 179,884,682 180,899,154 181,097,068
At the same time, the Board of Directors approved an increase in the number of authorized shares of common stock of the Corporation from 300,000,000 shares to 600,000,000 shares. 66 28 REPORT OF INDEPENDENT AUDITORS ERNST & YOUNG LLP 787 Seventh Avenue New York, New York 10019 The Board of Directors and Shareholders The Chubb Corporation We have audited the accompanying consolidated balance sheets of The Chubb Corporation as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 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 loan impairment in 1995, for investments in certain debt and equity securities in 1994 and for income taxes and postretirement benefits other than pensions in 1993. /s/ Ernst & Young LLP February 23, 1996, except for Note 18, as to which the date is March 1, 1996 67 29 QUARTERLY FINANCIAL DATA Summarized unaudited quarterly financial data (in millions except per share data) for 1995 and 1994 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 ---------------- ---------------- ---------------- ---------------- 1995 1994 1995 1994 1995 1994 1995 1994 ---- ---- ---- ---- ---- ---- ---- ---- Revenues...................... $1,464.1 $1,396.0 $1,525.8 $1,414.6 $1,533.3 $1,428.9 $1,566.0 $1,470.0 Benefits and expenses......... 1,280.1 1,326.3 1,285.2 1,232.1 1,312.0 1,236.6 1,311.8 1,275.1 Federal and foreign income tax (credit) ........ 37.3 (3.5) 55.6 35.8 49.9 39.6 60.7 39.0 -------- -------- -------- -------- -------- -------- -------- -------- Net income.................... $ 146.7 $ 73.2 $ 185.0 $ 146.7 $ 171.4 $ 152.7 $ 193.5 $ 155.9 ======== ======== ======== ======== ======== ======== ======== ======== Net income per share.......... $ 1.66 $ .83 $ 2.09 $ 1.65 $ 1.93 $ 1.71 $ 2.17 $ 1.76 Underwriting ratios Losses to premiums earned... 63.3% 76.6% 64.5% 63.8% 65.4% 63.8% 65.5% 64.2% Expenses to premiums written................... 33.0 33.3 31.9 32.5 31.5 32.1 32.1 32.3 -------- -------- -------- -------- -------- -------- -------- -------- Combined.................... 96.3% 109.9% 96.4% 96.3% 96.9% 95.9% 97.6% 96.5% ======== ======== ======== ======== ======== ======== ======== ========
Net income in the first quarter of 1994 was adversely affected by catastrophe losses of $147.4 million, resulting primarily from the earthquake in California and the winter storms in the eastern and midwestern parts of the United States, which represented 16.3 percentage points of the combined ratio. 68 30 COMMON STOCK DATA The common stock of the Corporation is listed and principally traded on the New York Stock Exchange (NYSE). The following are the high and low closing sale prices as reported on the NYSE Composite Tape and the quarterly dividends declared for each quarter of 1995 and 1994.
1995 ------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Common stock prices High...................................................... $81.00 $85.13 $96.88 $100.50 Low....................................................... 76.50 77.50 78.25 90.13 Dividends declared............................................ .49 .49 .49 .49
1994 ------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Common stock prices High...................................................... $83.13 $82.63 $78.63 $78.50 Low....................................................... 70.75 72.00 69.50 68.63 Dividends declared............................................ .46 .46 .46 .46
At March 1, 1996, there were approximately 8,375 common shareholders of record. 69 EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 THE CHUBB CORPORATION EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Principal subsidiaries at December 31, 1995 of 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 Northwestern Pacific Indemnity Company........... Oregon 100 Texas Pacific Indemnity Company.................. Texas 100 Great Northern Insurance Company...................... Minnesota 100 Chubb Insurance Company of New Jersey................. New Jersey 100 Chubb Custom Insurance Company........................ Delaware 100 Chubb National Insurance Company...................... Indiana 100 Chubb Indemnity Insurance Company..................... New York 100 CC Canada Holdings Ltd................................ Canada 100 Chubb Insurance Company of Canada................ Canada 100 Chubb Insurance Company of Europe, S.A................ Belgium 100 Bellemead Development Corporation..................... Delaware 100 Chubb Atlantic Indemnity Ltd. ............................. Bermuda 100 Chubb 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 ChubbHealth Holdings, Inc............................. New Hampshire 85 ChubbHealth, Inc................................. New York 100 Chubb & Son Inc............................................ New York 100 Chubb Capital Corporation.................................. New Jersey 100
- --------------- Certain other subsidiaries of the Corporation and its consolidated subsidiaries have been omitted since, in the aggregate, they would not constitute a significant subsidiary. EX-27 7 FINANCIAL DATA SCHEDULE
7 THE CHUBB CORPORATION Financial Data Schedule(*) (*) This schedule contains summary financial information extracted from the Consolidated Balance Sheets and the Consolidated Statements of Income and is qualified in its entirety by reference to such financial statements. 1,000,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 9,374 3,229 3,439 588 10 0 13,887 12 42 1,171 22,997 12,531 2,571 0 0 1,344 88 0 0 5,175 22,997 4,770 901 131 288 3,219 1,198 447 900 203 697 0 0 0 697 7.85 0 6,933 2,706 (36) 738 1,251 7,614 (36) DEBT-HELD-FOR-SALE REPRESENTS FIXED MATURITY INVESTMENTS CLASSIFIED AS AVAILABLE-FOR-SALE AND CARRIED AT MARKET VALUE AS PRESCRIBED BY SFAS NO. 115. DEBT-CARRYING-VALUE REPRESENTS FIXED MATURITY INVESTMENTS CLASSIFIED AS HELD-TO-MATURITY AND CARRIED AT AMORTIZED COST AS PRESCRIBED BY SFAS NO. 115. DEBT-MARKET-VALUE REPRESENTS THE RELATED MARKET VALUE OF FIXED MATURITIES CLASSIFIED AS HELD-TO-MATURITY. RECOVER-REINSURE REPRESENTS REINSURANCE RECOVERABLE ON PAID CLAIMS. POLICY-LOSSES EXCLUDE THE REDUCTIONS FOR REINSURANCE RECOVERABLES ON UNPAID CLAIMS ($1,974) AND POLICY LIABILITIES ($194), AS PRESCRIBED BY SFAS NO. 113. SUCH AMOUNTS ARE INCLUDED IN TOTAL ASSETS. UNEARNED-PREMIUMS EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUMS ($485), AS PRESCRIBED BY SFAS NO. 113. THIS PREPAID AMOUNT IS INCLUDED IN TOTAL ASSETS. NOTES-PAYABLE INCLUDES SHORT-TERM DEBT OF $188 AND LONG-TERM DEBT OF $1,156. OTHER-SE INCLUDES PAID-IN SURPLUS; RETAINED EARNINGS; FOREIGN CURRENCY TRANSLATION LOSSES, NET OF INCOME TAX; UNREALIZED APPRECIATION OF INVESTMENTS, NET; RECEIVABLE FROM ESOP AND TREASURY STOCK. OTHER-INCOME REPRESENTS REVENUES FROM REAL ESTATE OPERATIONS.
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