-----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, MuT38mFo4mQtThGF8dq5TQaVqFXmVfDV8HH/g15zms6YoKqSVNuwPVUWF2Qbkmba d/ld+1GIrdFfZeYIC2awWA== 0000950123-97-002686.txt : 19970329 0000950123-97-002686.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950123-97-002686 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 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: 97566853 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, 1997 ================================================================================ 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 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO________ Commission File No. 1-8661
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 $10,155,793,133 as of March 3, 1997. 172,956,346 Number of shares of common stock outstanding as of March 3, 1997 DOCUMENTS INCORPORATED BY REFERENCE Portions of The Chubb Corporation 1996 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 22, 1997 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 with subsidiaries principally engaged in two industries: property and casualty insurance and real estate. On February 23, 1997, the Corporation entered into a definitive agreement to sell its life and health insurance subsidiaries to Jefferson-Pilot Corporation. Accordingly, the life and health insurance subsidiaries have been classified as discontinued operations in the consolidated financial statements. The Corporation and its subsidiaries employed approximately 11,600 persons on December 31, 1996, including approximately 1,100 persons employed by the life and health insurance subsidiaries. Revenues, income from continuing operations before income tax and identifiable assets for each industry segment for the three years ended December 31, 1996 are included in Note (15) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1996 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 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, 1996 are included in Note (16) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1996 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) 1994........................ $4,578,061 $681,316 $1,308,168 $3,951,209 1995........................ 4,907,320 747,320 1,348,648 4,305,992 1996........................ 5,166,471 436,840 829,558 4,773,753
- --------------- (a) Intercompany items eliminated. The net premiums written during the last five years for major classes of the Group's business are incorporated by reference from page 22 of the Corporation's 1996 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 1996, approximately 85% of the Group's direct business was produced in the United States, where the Group's businesses enjoy broad geographic distribution with a particu- 2 3 larly strong market presence in the Northeast. The four states accounting for the largest amounts of direct premiums written were New York 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 ------- ------ ------ ---------- --------- 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 1996......................... 4,773,753 4,569,256 66.2 32.1 98.3 ---------- ---------- ----- ----- --------- Total for five years ended December 31, 1996......... $19,919,755 $19,160,827 69.1% 32.6% 101.7% ========== ========== ========== ========== =========
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 66.0%, 32.8% and 98.8%, respectively, for the five years ended December 31, 1996. 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 22 of the Corporation's 1996 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, 1996 and 1995, such ratio for the Group was 1.81 and 1.89, respectively. Producing and Servicing of Business In the United States and Canada, the Group is represented by approximately 3,600 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 61 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 has also been obtained from reinsurance assumed on a quota share basis from certain subsidiaries of the Royal & Sun Alliance Insurance Group plc (Sun Alliance). Effective January 1, 1997, this reinsurance 3 4 agreement was terminated. In conducting its overseas business, the Group reduces the risks relating to currency fluctuations by maintaining investments in those foreign currencies in which the Group transacts business, with characteristics similar to the liabilities in those currencies. The net asset or liability exposure to the various foreign currencies is regularly reviewed. Business for the Group is also produced through participation in a number of underwriting pools and syndicates including, among others, Associated Aviation Underwriters, Cargo Reinsurance Association, American Cargo War Risk Reinsurance Exchange and American Accident Reinsurance Group. Such pools and syndicates provide underwriting capacity for risks which an individual insurer cannot prudently underwrite because of the magnitude of the risk assumed or which can be more effectively handled by one organization due to the need for specialized loss control and other services. Reinsurance In accordance with the normal practice of the insurance industry, the Group assumes and cedes reinsurance with other insurers or reinsurers. 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 portion of the Group's ceded reinsurance has been on a quota share basis with a subsidiary of Sun Alliance, which is rated A by A.M. Best. Effective January 1, 1997, this reinsurance agreement was terminated. Additional information related to the Group's ceded reinsurance with the subsidiary of Sun Alliance is included in Note (13) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1996 Annual Report to Shareholders and in Item 7 on pages 18 and 19 of this report. 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. Additional information related to the Group's reinsurance programs is included in Item 7 of this report on pages 18 and 19. 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 were 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. In recent years, the Group has increased its initial retention limit for each catastrophic event. The Group has 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 73% of losses between $100 million and $450 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 60% of the Group's unpaid claims and claim adjustment expenses at December 31, 1996 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 represent the portion of such liabilities that will be recovered from reinsurers. Amounts recoverable from reinsurers are recognized as assets at the same time and in a manner consistent with the liabilities associated with the reinsured policies. The anticipated effect of inflation is implicitly considered when estimating liabilities for unpaid claims and claim adjustment expenses. Estimates of the ultimate value of all unpaid claims are based in part on the development of paid losses, which reflect actual inflation. Inflation is also reflected in the case estimates established on reported open claims which, when combined with paid losses, form another basis to derive estimates of reserves for all unpaid claims. There is no precise method for subsequently evaluating the adequacy of the consideration given to inflation, since claim settlements are affected by many factors. 5 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, 1996, 1995 and 1994.
YEARS ENDED DECEMBER 31 ----------------------------- 1996 1995 1994 ------- ------- ------- (IN MILLIONS) Net liability, beginning of year....................... $7,614.5 $6,932.9 $6,450.0 ------- ------- ------- Net incurred claim and claim adjustment expenses Provision for claims occurring in the current year... 3,053.6 2,705.8 2,549.1 Decrease in estimates for claims occurring in prior years............................................. (42.8) (35.8) (29.7) ------- ------- ------- 3,010.8 2,670.0 2,519.4 ------- ------- ------- Net payments for claims occurring in Current year......................................... 980.0 737.7 764.5 Prior years.......................................... 1,889.4 1,250.7 1,272.0 ------- ------- ------- 2,869.4 1,988.4 2,036.5 ------- ------- ------- Net liability, end of year............................. 7,755.9 7,614.5 6,932.9 Reinsurance recoverable, end of year................... 1,767.8 1,973.7 1,980.3 ------- ------- ------- Gross liability, end of year........................... $9,523.7 $9,588.2 $8,913.2 ======= ======= =======
As reestimated at December 31, 1996, the liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, as established at the previous year-end was redundant by $42.8 million. This compares with favorable development of $35.8 million and $29.7 million during 1995 and 1994, respectively. Such redundancies were reflected in the Group's operating results in these respective years. Each of the past three years benefited from favorable claim severity trends for certain liability classes; this was offset each year in varying degrees by 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 2% in 1996, after increases of 10% and 7% in 1995 and 1994, respectively. The 1996 increase would have been greater except that loss reserves were reduced as the result of significant payments during the year related to the settlement of asbestos-related claims against Fibreboard Corporation. Excluding the Fibreboard reserves, loss reserves increased 9% in 1996 and 12% in both 1995 and 1994. The Fibreboard reserves and related loss payments are presented in the table on page 7. The Fibreboard settlement is further discussed in Item 7 of this report on pages 21 through 23. 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 1996 was approximately 7% higher than the number at year-end 1995, which was in turn 11% higher than that at year-end 1994. Such increases were due in part to a shift for certain classes toward a book of business with more frequent and less severe claims. 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 21 through 24. 6 7 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, 1996, 1995 and 1994. Reinsurance recoveries related to such claims are not significant.
YEARS ENDED DECEMBER 31 ------------------------------------------------------------------------------------------ 1996 1995 1994 ---------------------------- ---------------------------- ---------------------------- FIBREBOARD ALL FIBREBOARD ALL FIBREBOARD ALL RELATED OTHER TOTAL RELATED OTHER TOTAL RELATED OTHER TOTAL ---------- ------ -------- ---------- ------ -------- ---------- ------ -------- (IN MILLIONS) Net liability, beginning 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 Net incurred claim and claim adjustment expenses............... 5.0 145.7 150.7 10.0 171.8 181.8 35.1 80.1 115.2 Net payments for claims............. 461.5 73.6 535.1 60.2 68.9 129.1 204.2 53.6 257.8 ---------- ------ -------- ---------- ------ -------- ---------- ------ -------- Net liability, end of year.......... $542.7 $415.9 $ 958.6 $ 999.2 $343.8 $1,343.0 $1,049.4 $240.9 $1,290.3 ========== ====== ======= ========== ====== ======= ========== ====== =======
There were approximately 3,900 asbestos claims outstanding at December 31, 1996 compared with 4,700 asbestos claims outstanding at December 31, 1995 and 3,400 at December 31, 1994. In 1996, approximately 1,800 claims were opened and 2,600 claims were closed. 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. 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 800 toxic waste claims outstanding at December 31, 1996 compared with 700 toxic waste claims outstanding at December 31, 1995 and 600 toxic waste claims outstanding at December 31, 1994. Approximately 400 claims were opened in 1996 and 300 claims were opened in both 1995 and 1994. There were approximately 300 claims closed in 1996, 200 claims closed in 1995 and 300 claims closed in 1994. Generally, a toxic waste claim is established for each lawsuit, or alleged equivalent, against an insured where potential liability has been determined to exist under a policy issued by a member of the Group. Because indemnity payments to date for toxic waste claims have not been significant in the aggregate and have varied from claim to claim, management cannot determine whether past claims experience will prove to be representative of future claims experience. The table on page 9 presents the subsequent development of the estimated year-end liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, for the ten years prior to 1996. 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, 1996. The amounts noted are cumulative in nature; that is, an increase in a loss estimate that related to a prior period 7 8 occurrence generates a deficiency in each intermediate year. For example, a deficiency recognized in 1993 relating to losses incurred prior to December 31, 1986, such as the $675 million increase in loss reserves related to the Fibreboard settlement, would be included in the cumulative deficiency amount for each year in the period 1986 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 net deficiencies in liability estimates from 1986 through 1992 relate primarily to additional provisions for asbestos and toxic waste claims, particularly the Fibreboard settlement. The cumulative net 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. The cumulative net deficiencies (redundancies) from 1987 through 1995 reflect, to varying degrees, decreases in reserves for certain liability classes as the result of favorable claim severity trends. 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 1986 column, as of December 31, 1996 the Group had paid $2,993.0 million of the currently estimated $4,264.8 million of claims and claim adjustment expenses that were unpaid at the end of 1986; thus, an estimated $1,271.8 million of losses incurred through 1986 remain unpaid as of December 31, 1996, approximately 40% 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, 1996. 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 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 - ------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (IN MILLIONS) Net Liability for Unpaid Claims and Claim Adjustment Expenses......................$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 $7,755.9 Net Liability Reestimated as of: One year later............... 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 7,571.7 Two years later.............. 2,313.9 2,835.9 3,336.0 3,854.2 4,244.7 5,368.5 5,904.1 6,363.1 6,874.5 Three years later............ 2,433.2 2,831.0 3,359.8 3,839.8 4,933.0 5,336.5 5,843.5 6,380.4 Four years later............. 2,493.3 2,891.7 3,385.1 4,567.4 4,941.7 5,302.6 5,894.6 Five years later............. 2,585.8 2,961.0 4,203.9 4,602.5 4,969.5 5,389.5 Six years later.............. 2,687.2 3,897.2 4,265.2 4,686.3 5,079.3 Seven years later............ 3,745.2 3,993.7 4,387.6 4,800.4 Eight years later............ 3,865.7 4,157.1 4,522.5 Nine years later............. 4,067.8 4,304.9 Ten years later.............. 4,264.8 Cumulative Net Deficiency (Redundancy).................. 2,123.5 1,486.3 1,148.2 920.3 778.2 645.6 627.0 (69.6) (58.4) (42.8) Cumulative Net Deficiency Related to Asbestos and Toxic Waste Claims................. 2,062.1 1,996.1 1,905.1 1,776.1 1,631.1 1,383.3 1,223.4 447.7 332.5 150.7 Cumulative Amount of Net Liability Paid as of: One year later............... 651.3 694.7 761.6 880.4 919.1 931.2 1,039.9 1,272.0 1,250.7 1,889.4 Two years later.............. 1,061.6 1,108.3 1,226.3 1,383.9 1,407.2 1,479.9 1,858.5 1,985.7 2,550.7 Three years later............ 1,362.9 1,419.1 1,555.1 1,715.9 1,808.7 2,083.0 2,332.3 3,015.8 Four years later............. 1,595.7 1,651.6 1,778.8 1,958.6 2,292.0 2,386.9 3,181.4 Five years later............. 1,775.3 1,818.2 1,966.1 2,346.9 2,490.2 3,125.8 Six years later.............. 1,907.1 1,961.9 2,307.9 2,500.9 3,174.7 Seven years later............ 2,032.9 2,281.0 2,422.7 3,120.6 Eight years later............ 2,333.6 2,370.5 3,009.5 Nine years later............. 2,412.6 2,952.4 Ten years later.............. 2,993.0 Gross Liability, End of Year... $7,220.9 $8,235.4 $8,913.2 $9,588.2 $9,523.7 Reinsurance Recoverable, End of Year......................... 1,953.3 1,785.4 1,980.3 1,973.7 1,767.8 ------- ------- ------- ------- ------- Net Liability, End of Year..... $5,267.6 $6,450.0 $6,932.9 $7,614.5 $7,755.9 ======= ======= ======= ======= ======= Reestimated Gross Liability.... $7,883.5 $8,346.6 $9,011.7 $9,611.8 Reestimated Reinsurance Recoverable.................. 1,988.9 1,966.2 2,137.2 2,040.1 ------- ------- ------- ------- Reestimated Net Liability...... $5,894.6 $6,380.4 $6,874.5 $7,571.7 ======= ======= ======= ======= Cumulative Gross Deficiency.... $ 662.6 $ 111.2 $ 98.5 $ 23.6 ======= ======= ======= =======
- --------------- The cumulative deficiencies for the years 1986 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 -------------------- 1996 1995 ------- ------- (IN MILLIONS) Net liability reported on a statutory basis -- U.S. subsidiaries................................................. $7,305.2 $7,235.9 Additions (reductions): Unpaid claims and claim adjustment expenses of foreign subsidiaries.............................................. 528.8 433.0 Other reserve differences.................................... (78.1) (54.4) -------- -------- Net liability reported on a GAAP basis......................... $7,755.9 $7,614.5 ======== ========
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, mortgage-backed securities and corporate issues. In addition, the portfolio includes equity securities held primarily with the objective of capital appreciation. In 1996, the Group invested new cash primarily in mortgage-backed securities and tax-exempt bonds. In 1995, the Group invested new cash primarily in tax-exempt bonds. In each year, the Group tried to achieve the appropriate mix in its portfolio to balance both investment and tax strategies. At December 31, 1996, 68% of the Group's fixed maturity portfolio was invested in tax-exempt bonds compared with 73% 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) 1994........................... $ 8,715,877 $560,481 6.4% 5.4% 1995........................... 9,342,295 602,987 6.5 5.4 1996........................... 10,333,819 646,056 6.3 5.3
- --------------- (a) Average of amounts for the years presented with fixed maturity securities at amortized cost and equity securities at market value. (b) Investment income after deduction of investment expenses, but before applicable income tax. 10 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. 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. In October 1996, the Corporation announced it was exploring the possible sale of all or a significant portion of its real estate assets. During February 1997, indications of interest in purchasing substantially all of the commercial properties were received from several parties. In March 1997, the Corporation announced that it had entered into an agreement with a prospective purchaser to perform due diligence in anticipation of executing a contract for the sale of these properties. In addition, the Corporation is continuing to explore the sale of its residential and retail properties. The Corporation plans to retain approximately $380 million of undeveloped land, which is expected to be developed in the future, as well as certain commercial properties and land parcels under lease. Additional information related to the potential sale of real estate assets is included in Item 7 of this report on pages 25 through 27. Over the past several years, revenues from commercial real estate activities have come primarily from ongoing income from owned properties and from management and financing activities related to previously sold properties or properties held in joint ventures. 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 4,521,000 square feet of office and industrial space, of which 90% is leased. The Real Estate Group has varying interests in an additional 5,570,000 square feet of office and industrial space which is 97% 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 has undeveloped land holdings of approximately 4,050 acres, with primary holdings in New Jersey and Florida and lesser holdings in 5 additional states. DISCONTINUED OPERATIONS The Life and Health Insurance Group (Life Group) includes Chubb Life Insurance Company of America (Chubb Life) and its wholly-owned subsidiaries, Chubb Colonial Life Insurance Company (Colonial) and Chubb Sovereign Life Insurance Company (Sovereign). 11 12 In October 1996, the Corporation announced it was reviewing strategic alternatives for the Life Group. The Life Group operates in a highly competitive industry in which it does not hold a significant market share. The consolidation now taking place in the life insurance sector is resulting in an industry dominated by large, efficient companies. As a result, the Life Group faced a growing competitive disadvantage against these competitors. These changing fundamentals in the life insurance industry led to the Corporation's decision to sell the Life Group. The Corporation entered into a definitive agreement, dated February 23, 1997, to sell Chubb Life Insurance Company of America for $875,000,000 in cash, subject to various closing adjustments and other customary conditions. The sale is subject to regulatory approvals and is expected to be completed by the end of the second quarter of 1997. The sale of the Life Group is further discussed in Item 7 of this report on pages 28 and 29. 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 and whole life, as well as fixed premium interest-sensitive life, universal life and variable universal life insurance and mutual funds. 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 2,500 brokers. The executive, accounting, actuarial and administrative activities of the Life Group are primarily 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. The following table presents revenues by class of the Life Group for each of the past three years. 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) 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 1996........... 313,894 55.8 19,617 3.5 4,271 .8 11,848 2.1 212,428 37.8
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 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) 1994................................. $2,544,945 $205,451 8.1% 1995................................. 2,740,921 229,181 8.4 1996................................. 2,992,820 239,665 8.0
- --------------- (a) Average of amounts for the years presented with fixed maturity securities at amortized cost and equity securities at market value. (b) Investment income after deduction of investment expenses, but before applicable income tax, excluding income from real estate. 12 13 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 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 (3)(b) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1996 Annual Report to Shareholders. REGULATION, PREMIUM RATES AND COMPETITION The Corporation is a holding company with subsidiaries primarily engaged 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 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. 13 14 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, 1996, 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. 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 more than 3,000 property and casualty insurance companies in the United States operating independently or in groups and no single company or group is dominant. According to A.M. Best, the Group is the 13th largest United States property and casualty insurance group based on 1995 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. Price competition increased in the property and casualty marketplace during 1987 and has continued through 1996, particularly in the commercial classes. The Group continues to be selective in the writing of new business and to reinforce the sound relationships with customers who appreciate the stability, expertise and added value the Group provides. In all states, insurers authorized to transact certain classes of property and casualty insurance are required to become members of an insolvency fund. In the event of the insolvency of a licensed insurer writing a class of insurance covered by the fund in the state, 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 1996, such assessments to the members of the Group amounted to approximately $3 million. The amount of future assessments cannot be reasonably estimated. State insurance regulation requires insurers to participate in assigned risk plans, reinsurance facilities and joint underwriting associations, which are mechanisms that generally provide applicants with various basic insurance coverages when they are not available in voluntary markets. Such 14 15 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. 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, 1996 to meet the risk-based capital requirement. There are more than 1,700 legal reserve life insurance companies in the United States. According to the National Underwriter, a trade publication, as of January 1, 1996, Chubb Life, Sovereign and Colonial ranked 59th, 163rd and 203rd, 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, containment of medical costs, employee benefits regulation, automobile safety regulation, financial services deregulation including the removal of barriers preventing banks from engaging in the insurance business and the taxation of insurance companies. Insurance companies are also affected by a variety of state and federal legislative and regulatory measures as well as by decisions of their courts that define and extend the risks and benefits for which insurance is provided. These include redefinitions of risk exposure in areas such as product liability and commercial general liability as well as extension and protection of employee benefits, including pension, workers' compensation and disability benefits. Legislative and judicial developments pertaining to asbestos and toxic waste exposures are discussed in Item 7 of this report on pages 21 through 24. 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 Real Estate Group's corporate headquarters is located in Roseland, New Jersey. The Life Group has its administrative offices in Concord, New Hampshire; Parsippany, New Jersey and Chattanooga, Tennessee. 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 (12) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1996 Annual Report to Shareholders. 15 16 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 21 through 24. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the shareholders during the last quarter of the year ended December 31, 1996. EXECUTIVE OFFICERS OF THE REGISTRANT
YEAR OF AGE(A) ELECTION(B) ------ ---------- Dean R. O'Hare, Chairman of the Corporation................................. 54 1972 Douglas A. Batting, Executive Vice President of Chubb & Son Inc. ........... 54 1996 John P. Cavoores, Executive Vice President of Chubb & Son Inc............... 39 1996 Robert P. Crawford, Jr., Executive Vice President of the Corporation........ 55 1994 John J. Degnan, President of the Corporation................................ 52 1994 Gail E. Devlin, Senior Vice President of the Corporation.................... 58 1981 Edward Dunlop, Senior Vice President of the Corporation..................... 56 1995 David S. Fowler, Senior Vice President of the Corporation................... 51 1989 Henry G. Gulick, Vice President and Secretary of the Corporation............ 53 1975 David B. Kelso, Executive Vice President of the Corporation................. 44 1996 Charles M. Luchs, Executive Vice President of Chubb & Son Inc. ............. 57 1996 Brian W. Nocco, Senior Vice President of the Corporation.................... 45 1994 Donn H. Norton, Executive Vice President of the Corporation................. 55 1985 Michael O'Reilly, Senior Vice President of the Corporation.................. 53 1976 Robert Rusis, Senior Vice President and General Counsel of the Corporation............................................................... 63 1990 Henry B. Schram, Senior Vice President of the Corporation................... 50 1985 Theresa M. Stone, Executive Vice President of the Corporation............... 52 1990
- --------------- (a) Ages listed above are as of April 22, 1997. (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 and David B. Kelso. Mr. Nocco, who joined the Corporation in 1994, was previously Treasurer of Continental Bank Corp. Prior to joining Chubb in 1996, Mr. Kelso was Executive Vice President of First Commerce Corporation in New Orleans, where he has also served as Chief Financial Officer. Mr. Kelso was previously a partner and head of the North American Banking Practice for The MAC Group (now known as Gemini Consulting), an international general management consulting firm. 16 17 PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Incorporated by reference from the Corporation's 1996 Annual Report to Shareholders, page 67. ITEM 6. SELECTED FINANCIAL DATA Selected financial data for the five years ended December 31, 1996 are incorporated by reference from the Corporation's 1996 Annual Report to Shareholders, pages 40 and 41. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion presents our past results and our expectations for the near term future. The supplementary financial information and the consolidated financial statements and related notes, all of which are integral parts of the following analysis of our results and our financial position, are incorporated by reference from the Corporation's 1996 Annual Report to Shareholders, pages 21, 22 and 42 through 64. Certain statements in this document, as well as certain statements incorporated by reference herein, may be considered to be "forward looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995, such as statements that include the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions. In particular, this report includes forward looking statements relating, but not limited to, the Corporation's recent sale activities, reinsurance programs, and future premium and investment income growth. Such statements are subject to certain risks and uncertainties. The factors which could cause actual results to differ materially from those suggested by any such statements include, but are not limited to, those discussed or identified from time to time in the Corporation's public filings with the Securities & Exchange Commission and specifically to: risks or uncertainties associated with the Corporation's announced sale activities relating to portions of its non-property and casualty business, or associated with its expectations of proceeds deployment, asset valuations, or premium and investment income growth projections, product initiatives, and new cash available for investment, and, more generally, to: general economic conditions including changes in interest rates and the performance of the financial markets, changes in domestic and foreign laws, regulations and taxes, changes in competition and pricing environments, regional or general changes in asset valuation, the occurrence of significant natural disasters, the inability to reinsure certain risks economically, the adequacy of loss reserves, as well as general market conditions, competition, pricing and restructurings. Net income amounted to $513 million in 1996 compared with $697 million in 1995 and $528 million in 1994. Net income in 1996 reflects a fourth quarter charge of $160 million after taxes related to the write-down of the carrying value of certain real estate assets. The Corporation entered into a definitive agreement, dated February 23, 1997, to sell its life and health insurance operations to Jefferson-Pilot Corporation for $875 million in cash, subject to various closing adjustments and other customary conditions. The sale is subject to regulatory approvals and is expected to be completed by the end of the second quarter of 1997. In light of the decision to sell, the life and health insurance operations have been classified as discontinued operations. For a further discussion of the discontinued life and health insurance operations, see page 29. Income from continuing operations, which includes realized investment gains and losses related to such operations, was $486 million in 1996 compared with $655 million in 1995 and $508 million in 1994. 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. Operating income from continuing operations, which excludes realized investment gains and losses, was $434 million in 1996 compared with $584 million in 1995 and $473 million in 1994. 17 18 PROPERTY AND CASUALTY INSURANCE Property and casualty income in 1996 was similar to that in 1995, which was significantly higher than 1994 income. Property and casualty income after taxes was $561 million in 1996 compared with $563 million in 1995 and $467 million in 1994. Earnings in 1996 reflect lower underwriting income compared with 1995 due to substantially higher catastrophe losses, resulting primarily from the winter storms in the eastern part of the United States in the first quarter. Investment income increased in 1996 compared with the prior year. 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. Catastrophe losses were $142 million in 1996, $64 million in 1995 and $169 million in 1994. Our initial retention level for each catastrophic event is approximately $100 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 $4.8 billion in 1996, an increase of 11% compared with 1995. Net premiums written increased 9% in 1995 compared with 1994. Personal coverages accounted for $1,039 million or 22% of 1996 premiums written, commercial coverages for $3,532 million or 74% and reinsurance assumed for $203 million or 4%. More than half of the 1996 premium growth was due to changes in certain reinsurance agreements, which are discussed below. The marketplace remained competitive, particularly in the commercial classes, in all our markets worldwide. Competitors continued to place significant pressure on pricing as they attempted to maintain or increase market share. As a result, price increases have been difficult to achieve. In this environment, we have focused on our specialty lines where we emphasize the added value we provide to our customers. Premium growth in 1996 and 1995 was due to exposure growth on existing business, the purchase of additional coverages by current customers and the selective writing of new business. Substantial premium growth in both years was achieved outside the United States from our expanding international branch network. 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 the Sun Alliance Group plc. Similarly, a subsidiary of the Corporation has assumed a portion of Sun Alliance's property and casualty business on a quota share basis. Effective January 1, 1996, the agreements pertaining to the exchange of reinsurance were amended to reduce the portion of each company's business reinsured with the other. Consequently, during 1996, the Corporation's property and casualty subsidiaries retained a greater portion of the business they wrote directly and assumed less reinsurance from Sun Alliance. As a result of these changes in retention, net premiums written in 1996 increased by $64 million for the personal classes and $138 million for the commercial classes and decreased by $88 million for reinsurance assumed. There was an additional impact on net premiums written in the first quarter of 1996 due to the effect of the portfolio transfers of unearned premiums as of January 1, 1996 resulting from these changes. The effect of these portfolio transfers was an increase in net premiums written of $31 million for the personal classes and $61 million for the commercial classes and a decrease of $65 million for reinsurance assumed. Also, effective January 1, 1996, our casualty excess of loss reinsurance program was modified, principally for excess liability and executive protection coverages. The changes included an increase in the initial retention for each loss from $5 million to $10 million and an increase in the initial aggregate amount of losses retained for each year before reinsurance becomes available. These changes in our casualty reinsurance program increased net premiums written in 1996 by approximately $130 million. Underwriting results were profitable in 1996 and 1995 compared with near breakeven results in 1994. The combined loss and expense ratio, the common measure of underwriting profitability, was 98.3% in 1996 compared with 96.8% in 1995 and 99.5% in 1994. 18 19 The loss ratio was 66.2% in 1996 compared with 64.7% in 1995 and 67.0% in 1994. The loss ratios continue to reflect the favorable experience resulting from the consistent application of our disciplined underwriting standards. Losses from catastrophes represented 3.1, 1.5 and 4.5 percentage points of the loss ratio in 1996, 1995, and 1994, respectively. Our expense ratio was 32.1% in 1996 and 1995 and 32.5% in 1994. Expenses were reduced in 1994 by a contingent profit sharing accrual of $11 million related to a medical malpractice reinsurance agreement. As a result of the 1996 merger of Sun Alliance with Royal Insurance Holdings plc, the unwinding of our reinsurance agreements with Sun Alliance was accelerated. Effective January 1, 1997, the agreements pertaining to the exchange of reinsurance on a quota share basis were terminated. As a result of the termination of these agreements, our net premiums written are expected to increase in 1997 by approximately $125 million for the personal classes and approximately $250 million for the commercial classes. Personal and commercial net premiums written will also include approximately $65 million and $110 million, respectively, in the first quarter of 1997 due to the effect of the portfolio transfer of unearned premiums as of January 1, 1997 resulting from the termination of the agreements. Net premiums written for reinsurance assumed, which were $203 million in 1996, are expected to be negligible in 1997 as the reduction in premiums related to the portfolio transfer of unearned premiums to Sun Alliance as of January 1, 1997 will be offset by the effect of the lag in our reporting of the business we assumed from Sun Alliance for the second half of 1996. During 1996, we continued to evaluate the relative costs and benefits of our casualty excess of loss reinsurance program. As a result, effective January 1, 1997, we again modified the program, increasing the initial retention for each loss from $10 million to $25 million. The increase in net premiums written in 1997 resulting from this change in our casualty reinsurance program is not expected to be significant. The impact on underwriting results in 1997 of the termination of the reinsurance agreements with Sun Alliance and the changes to our casualty reinsurance program is not expected to be significant. Management believes that the retention of a greater portion of the business underwritten by the property and casualty subsidiaries will have a positive impact on net income in the future. The following discussion of underwriting results reflects certain reclassifications to present results in a manner more consistent with the way the property and casualty business is now managed. Prior period amounts have been restated to conform with the new presentation. PERSONAL INSURANCE Premiums from personal insurance increased 20% in 1996 compared with a 5% increase in 1995. More than half of the growth in 1996 was due to the changes in the reinsurance agreement with Sun Alliance which resulted in both the portfolio transfer of unearned premiums as of January 1, 1996 and an increase in our retention percentage for these classes. Excluding the effects of the changes in the reinsurance agreement, personal lines premiums increased 9% in 1996, our best growth rate in many years. We continued to grow our homeowners and other non-automobile business in non-catastrophe prone areas while maintaining our disciplined approach to pricing and risk selection. Personal automobile premiums increased as a result of an increase in the number of in-force policies for high-value automobiles. Our personal insurance business produced substantial underwriting profits in 1996 and 1995 compared with breakeven results in 1994. The combined loss and expense ratio was 91.7% in 1996 compared with 87.1% in 1995 and 99.8% in 1994. The profitability of our homeowners business each year is affected substantially by the extent of catastrophe losses experienced. Homeowners results were unprofitable in 1996 as catastrophe losses, particularly the winter storms, adversely affected results. Homeowners results were profitable in 1995, benefiting from lower catastrophe losses, fewer large losses and a reduction in loss frequency. The 19 20 unprofitable results in 1994 reflect the adverse effect of significant catastrophe losses, particularly the winter storms and, to a lesser extent, the California earthquake. Catastrophe losses represented 16.7 percentage points of the loss ratio for this class in 1996 compared with 10.3 percentage points in 1995 and 19.4 percentage points in 1994. Other personal coverages, which include insurance for personal valuables and excess liability, were highly profitable in each of the past three years. Personal excess liability results improved in 1995 and 1996 due to favorable loss experience. Our automobile business produced profitable results in each of the last three years. Results in 1996 and 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. COMMERCIAL INSURANCE Premiums from commercial insurance increased 15% in 1996 compared with 9% in 1995. Approximately 40% of the 1996 growth in premiums was due to the changes in the reinsurance agreement with Sun Alliance which resulted in both the portfolio transfer of unearned premiums as of January 1, 1996 and an increase in our retention percentage for these classes. In addition, premium growth in 1996 for the excess liability component of our casualty coverages and for our executive protection coverages benefited from the changes in our casualty excess of loss reinsurance program. Excluding the effects of these changes in our reinsurance agreements, premium growth in 1996 and 1995 was due primarily to the selective writing of new accounts, exposure growth on existing business and the purchase of additional coverages by current customers. Premium growth was particularly strong outside the United States. The competitive market worldwide has continued to place significant pressure on prices and has made price increases difficult to achieve for most coverages. Our strategy of working closely with our customers and our ability to differentiate our products have enabled us to renew a large percentage of our business. Our commercial insurance business produced near breakeven underwriting results in each of the past three years. The combined loss and expense ratio was 99.7% in 1996 compared with 99.3% in 1995 and 99.4% in 1994. Multiple peril results were unprofitable in each of the past three years due, in large part, to inadequate prices. Results deteriorated in 1996 due primarily to higher catastrophe losses and an increase in the frequency of large losses. Results for this class benefited in 1995 from an absence of catastrophe losses. Results in 1994 were adversely affected by significant catastrophe losses, primarily from the earthquake in California. Catastrophe losses represented 4.8 percentage points of the loss ratio for this class in 1996 compared with 1.0 percentage point in 1995 and 9.7 percentage points in 1994. Results for our casualty business were similarly unprofitable in 1996 and 1995 compared with near breakeven results in 1994. In each of the past three years, but more so in 1996 and 1995, casualty results have been adversely affected by increases in loss reserves for asbestos-related and toxic waste claims. 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 breakeven in 1996 compared with profitable results in 1995 and 1994. Workers' compensation results were slightly unprofitable in 1996 compared with profitable results in 1995 and unprofitable results in 1994. Results deteriorated in 1996 due in part to an increase in claim frequency and the impact of price reductions. Results in 1995 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 have also benefited from these positive factors. 20 21 Property and marine results were profitable in 1996 and 1995 compared with unprofitable results in 1994. Results in 1996 deteriorated somewhat due to an increase in catastrophe losses which were insignificant in 1995. Both years benefited from stable loss frequency. Results for this class in 1994 were adversely affected by significant catastrophe losses, resulting primarily from the earthquake in California. Catastrophe losses represented 4.5 percentage points of the loss ratio for this class in 1996 compared with 0.8 of a percentage point in 1995 and 6.8 percentage points in 1994. Our executive protection results were highly profitable in each of the past three years due to favorable loss experience. Our financial institutions business produced increasingly profitable results in 1995 and 1996. The financial fidelity portion of this business was highly profitable in each of the past three years. Results in the non-fidelity portion of this business were unprofitable in 1994 due in part to several large losses. Results in our other commercial classes were slightly profitable in 1996 compared with unprofitable results in 1995 and 1994. The improvement was attributable to our surety business which had highly profitable results in 1996. Results for this class were unprofitable in 1995 due to several large losses. REINSURANCE ASSUMED Reinsurance assumed is treaty reinsurance assumed primarily from Sun Alliance. The growth in premiums in 1995 was primarily due to an increase in our participation in the business of Sun Alliance. The substantial decrease in premiums in 1996 was due to the effects of the changes in the reinsurance agreement with Sun Alliance whereby we assumed less reinsurance from them. The decrease in premiums included the first quarter effect of the $65 million portfolio transfer of unearned premiums to Sun Alliance as of January 1, 1996. The reinsurance agreement with Sun Alliance was terminated effective January 1, 1997. Underwriting results for this segment were near breakeven in each of the past three years. LOSS RESERVES Loss reserves are our property and casualty subsidiaries' largest liability. At the end of 1996, gross loss reserves totaled $9.5 billion compared with $9.6 billion and $8.9 billion at year-end 1995 and 1994, respectively. Reinsurance recoverable on such loss reserves was $1.8 billion at year-end 1996 compared with $2.0 billion at the end of 1995 and 1994. As a result of the changes in the reinsurance agreements with Sun Alliance, there were portfolio transfers of gross loss reserves and reinsurance recoverable as of January 1, 1996. The effect of these portfolio transfers was a decrease in gross loss reserves of $209 million and a decrease in reinsurance recoverable of $244 million. Loss reserves, net of reinsurance recoverable, increased 2% in 1996 compared with 10% in 1995. The 1996 increase would have been greater except that loss reserves were reduced as the result of significant payments during the year related to the settlement of asbestos-related claims against Fibreboard Corporation, which is discussed below. Loss reserves included $543 million, $999 million and $1,049 million at year-end 1996, 1995 and 1994, respectively, related to the Fibreboard settlement. Loss and expense payments related to the settlement aggregated $462 million, $60 million and $204 million in 1996, 1995 and 1994, respectively. Excluding the Fibreboard reserves, loss reserves, net of reinsurance recoverable, increased 9% in 1996 and 12% in 1995. 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 1996, we experienced overall favorable development of $43 million on loss reserves established as of the previous year-end. This compares with favorable development of $36 million in 1995 and $30 million in 1994. Such redundancies were reflected in operating results in these respective years. Each of the past three years benefited from favorable claim severity trends for certain liability classes; this was offset each year in varying degrees by increases in loss reserves relating to asbestos and toxic waste claims. 21 22 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 60% of our loss reserves at December 31, 1996 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 complex 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 efforts to quantify these exposures. Our most costly asbestos exposure relates to an insurance policy issued to Fibreboard Corporation by Pacific Indemnity Company in 1956. In 1993, Pacific Indemnity Company, a subsidiary of the Corporation, entered into a global settlement agreement with Continental Casualty Company (a subsidiary of CNA Financial Corporation), Fibreboard Corporation, and attorneys representing claimants against Fibreboard for all future asbestos-related bodily injury claims against Fibreboard. This agreement is subject to final appellate court approval. Pursuant to the global settlement agreement, a $1.525 billion trust fund will be established to pay future claims, which are claims that were not filed in court before August 27, 1993. Pacific Indemnity will contribute approximately $538 million to the trust fund and Continental Casualty will contribute the remaining amount. In December 1993, upon execution of the global settlement agreement, Pacific Indemnity and Continental Casualty paid their respective shares into an escrow account. Upon final court approval of the settlement, the amount in the escrow account, including interest earned thereon, will be transferred to the trust fund. All of the parties have agreed to use their best efforts to seek final court approval of the global settlement agreement. Pacific Indemnity and Continental Casualty reached a separate agreement for the handling of all asbestos-related bodily injury claims pending on August 26, 1993 against Fibreboard. Pacific Indemnity's obligation under this agreement with respect to such pending claims is approximately $635 million, the final $450 million of which was paid during 1996. 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 entered into a trilateral agreement to settle all present and future asbestos-related bodily injury claims resulting from insurance policies that were, or may have been, issued to Fibreboard by the two insurers. The trilateral agreement will be triggered if the global settlement agreement is disapproved by the United States Supreme 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 1995, the United States District Court of the Eastern District of Texas approved the global settlement agreement and the trilateral agreement. The judgments approving these agreements were appealed to the United States Court of Appeals for the Fifth Circuit. In July 1996, the Fifth Circuit 22 23 Court affirmed the 1995 judgments of the District Court. The affirmation of these agreements had no effect on the amount of loss reserves provided for the settlement. A petition for re-hearing the global settlement agreement before the entire Fifth Circuit Court was denied. An appeal to the United States Supreme Court by the objectors to the global settlement has been filed and the Supreme Court will decide whether to hear this matter. The trilateral agreement, however, was not appealed to the United States Supreme Court and is now final. As a result, management believes that the uncertainty of Pacific Indemnity's exposure with respect to asbestos-related bodily injury claims against Fibreboard has been eliminated. Since 1993, a California Court of Appeal has agreed, in response to a request by Pacific Indemnity, Continental Casualty and Fibreboard, to delay its decisions regarding asbestos-related insurance coverage issues 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. We have additional potential asbestos exposure, primarily on insureds for which we wrote excess liability coverages. Such exposure has increased due to the erosion of much of the underlying limits. The number of claims against such insureds and the value of such claims have increased in recent years due in part to the non-viability of other defendants. Our 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 federal "Superfund" law and similar state statutes, when potentially responsible parties (PRPs) fail to handle the clean-up, regulators have the work done and then attempt to establish legal liability against the PRPs. The PRPs, with proper government authorization in many instances, disposed of toxic materials at a waste dump site or transported the materials to the site. Most sites have multiple PRPs. Insurance policies issued to PRPs were not intended to cover the clean-up costs of pollution and, in many cases, did not intend to cover the pollution itself. Pollution was not a recognized hazard at the time many of these policies were written. In more recent years, however, policies specifically exclude such exposures. As the cost of environmental clean-up continues to grow, PRPs and others have increasingly filed claims with their insurance carriers. Litigation against insurers extends to issues of liability, coverage and other policy provisions. There is great uncertainty involved in estimating our liabilities related to these claims. First, the 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 23 24 December 31, 1995. Notwithstanding continued pressure by the insurance industry and other interested parties to achieve a legislative solution which would reform the liability provisions of the law, Congress did not address Superfund in 1996. 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. Because of the large number of state sites, such sites could prove even more costly in the aggregate than Superfund sites. Litigation costs remain substantial, particularly for 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 limit defense costs. This 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. Increases in loss reserves relating to asbestos and toxic waste claims were $151 million in 1996, $182 million in 1995 and $115 million in 1994. Further increases in such reserves in 1997 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, 1996 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 both 1996 and 1995. Growth was primarily due to increases in invested assets, which reflected strong cash flow from operations over the period, offset somewhat in 1996 by lower yields on new investments. The effective tax rate on our investment income was 15.8% in 1996, 15.9% in 1995 and 15.3% in 1994. The effective tax rate increased in 1995 as the percentage of our investment income subject to tax increased. Generally, premiums are received by our property and casualty subsidiaries months or even years before losses are paid under the policies purchased by such premiums. These funds are used first to make current claim and expense payments. The balance is invested to augment the investment income generated by the existing portfolio. Historically, cash receipts from operations, consisting of insurance premiums and investment income, have provided more than sufficient funds to pay losses, operating expenses and dividends to the Corporation. 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 24 25 are developed based on many factors including underwriting results and our resulting tax position, fluctuations in interest rates and regulatory requirements. New cash available for investment was approximately $1,215 million in 1996 compared with $495 million and $725 million in 1995 and 1994, respectively. New cash in 1996 included $191 million received in January as a result of the commutation of a stop loss reinsurance agreement related to medical malpractice unpaid claims arising from business written prior to 1985. The lower amount in 1995 was due to the designation of $480 million of new cash as funds held for asbestos-related settlement. Income on these assets accrued for the benefit of participants in the class settlement of asbestos-related bodily injury claims against Fibreboard. In 1997, the property and casualty subsidiaries will receive approximately $300 million as the net result of the portfolio transfers of unearned premiums and loss reserves as of January 1, 1997 related to the termination of the reinsurance agreements with Sun Alliance. In 1996, we invested new cash primarily in mortgage-backed securities and tax-exempt bonds. In 1995, we invested new cash primarily in tax-exempt bonds. In 1994, we invested new cash primarily in taxable bonds and, to a lesser extent, tax-exempt bonds. In each year, we tried to achieve the appropriate mix in our portfolio to balance both investment and tax strategies. The property and casualty subsidiaries 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 the taxable bonds are either backed by the U.S. Government or rated AA or better by Moody's or Standard & Poor's. Of the tax-exempt bonds, practically all are rated A or better, with more than half rated AAA. Both taxable and tax-exempt bonds have an average maturity of approximately 9 years. Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations. Equity securities are high quality and readily marketable. At December 31, 1996, the property and casualty subsidiaries held foreign investments of $1.3 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 and the Corporation maintains bank credit facilities that are available to respond to unexpected cash demands. REAL ESTATE In October 1996, the Corporation announced that it was exploring the possible sale of all or a significant portion of its real estate assets. During February 1997, indications of interest in purchasing substantially all of our commercial properties were received from several parties. In March 1997, the Corporation announced that it had entered into an agreement with a prospective purchaser to perform due diligence in anticipation of executing a contract for the sale of these properties. In addition, we are continuing to explore the sale of our residential and retail properties. Because the plan to pursue the sale of these assets in the near term represented a change in circumstances relating to the manner in which these assets are expected to be used, we reassessed the recoverability of their carrying value. As a result, we recorded an impairment loss of $255 million, or $160 million after tax, in the fourth quarter of 1996 to reduce the carrying value of these assets to their estimated fair value. We plan to retain approximately $380 million of undeveloped land which we expect will be developed in the future. In addition, we plan to retain certain commercial properties and land parcels under lease. 25 26 Real estate operations resulted in a loss after taxes of $147 million in 1996 compared with income of $6 million in 1995 and a loss of $2 million in 1994. The loss in 1996 reflects the $160 million after tax impairment charge. Excluding this charge, real estate income after taxes was $13 million. Results in 1996 benefited from the sale of several rental properties and a decrease in interest expense caused by lower average interest rates. Results in 1995 benefited from a land sale. Results in both years benefited from increases in earnings from residential sales as well as from lower provisions for possible uncollectible mortgages receivable. In each of the last three years, results were adversely affected by a high proportion of interest costs being charged directly to expense rather than being capitalized. Revenues were $320 million in 1996, $288 million in 1995 and $205 million in 1994. Revenues in 1996 and 1995 included higher levels of revenues from residential development. Revenues in 1996 also included the sale of rental properties while 1995 revenues included the land sale. Over the past several years, revenues from our commercial real estate activities have come primarily from ongoing income from owned properties and from management and financing activities related to previously sold properties or properties held in joint ventures. 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 developed real estate properties ourselves rather than through third party developers. We are distinguished from most other real estate developers in that we coordinated all phases of the development process from concept to completion. Upon completion of development, the properties were 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 investment interests in joint ventures generally consist of the ownership and lease of the underlying land and the management and operation of the buildings. We have agreements with joint ventures to manage all aspects of the joint venture properties, including debt structures, tenant leasing, and building improvements and maintenance. Our occupancy rate has been strong in substantially all markets in which we operate. We have been successful in both retaining existing tenants and securing new ones and we do not have a significant credit problem with tenants. During 1996, a total of 2,280,000 square feet was leased compared with 2,320,000 square feet in 1995 and 2,420,000 square feet in 1994. At December 31, 1996, we owned or had interest in 10,091,000 square feet of office and industrial space. Our vacancy rate was 6% at year-end 1996 and 1995 and 7% at year-end 1994. In certain markets, renewing leases in established buildings has been difficult as demand for commercial office space diminished due to an overbuilt market and corporate downsizing. While we have experienced significant leasing activity in recent years and have achieved improved rental rates on many of these buildings, a significant portion of our existing leases are at low market rental rates. Our entry into the New Jersey residential development market met with initial success. In 1996, we completed our first townhome project containing 178 units. Our second project, a joint venture, is an 84 unit townhome project which we expect to complete in 1997. At year-end 1996, 41 units were sold. In Florida, sales continued to be strong in two existing condominium projects which total 385 units. At year-end 1996, all but 41 units were sold. The Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, 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. SFAS No. 121 requires that we analyze our individual buildings, leased land and development sites on a continuing basis to determine if an impairment loss has occurred. Estimates are made of the revenues and operating costs, as well as any additional costs to be incurred to complete development, 26 27 of the property in the future through an assumed holding period, based on our intended use of the property. The time value of money is not considered in assessing whether impairment has occurred. If it is determined that impairment has occurred, measurement of such impairment is based on the fair value of the assets. The $255 million write-down of real estate assets in 1996 was made in accordance with the provisions of SFAS No. 121. No similar write-down was recorded in 1995 or 1994. Loans receivable, which were issued in connection with our joint venture activities and other property sales, are primarily purchase money mortgages. Such loans are generally collateralized by buildings and, in some cases, land. We continually evaluate the ultimate collectibility of such loans and establish appropriate reserves. Our valuation approach is similar to that utilized under SFAS No. 121, except that future cash flows are discounted at the receivable interest rates. 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 $2 million in 1996, $18 million in 1995 and $29 million in 1994, principally related to loans on selected properties with operating income at levels which may not fully meet debt service requirements. The 1995 charge included $10 million from the initial application of SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which established new criteria for measuring impairment of a loan. The reserve was reduced by write-downs aggregating $4 million in both 1996 and 1995 and $10 million in 1994 related to specific loans that are uncollectible. Management believes the reserve of $86 million at December 31, 1996 adequately reflects the current condition of the portfolio. However, if conditions in the real estate market do not improve, additional reserves may be required. In accordance with SFAS No. 107, Disclosures About Fair Value of Financial Instruments, the fair value of loans receivable is estimated individually as the value of the discounted cash flows of the loan, subject to the estimated fair value of the underlying collateral. 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, 1996, the aggregate fair value of the loans was $487 million and the carrying value was $502 million. The write-downs related to the real estate assets we plan to dispose of in the near term are based on the estimated fair value of these assets, which reflects the amounts we expect to realize from the sales. The recoverability of the carrying value of the remaining real estate assets is assessed based on our ability to fully recover costs through a future revenue stream. The process by which SFAS No. 121 is applied and necessary write-downs are calculated assumes that these properties will be developed and disposed of over a period of time. The assumptions reflect a continued improvement in demand for office space, an increase in rental rates and the ability and intent to obtain financing in order to hold and develop the remaining properties and protect our interests over the long term. Management believes that the carrying values of both the assets to be disposed of and the remaining assets are recoverable. However, if the assumptions related to these assets are modified in the future, it is possible that additional losses may be recognized. Real estate activities have been 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 5 1/2% in 1996 compared with 6% in 1995 and 4 1/2% in 1994. In 1996, the range of interest rates for term loans was 7% to 9 1/2% and for mortgages the range was 5% to 12%. It is expected that funds received from any real estate asset sales will be used substantially to reduce debt currently supporting the real estate business. Cash from operations combined with the ability to utilize the Corporation's borrowing facilities would provide sufficient funds to repay any debt due in 1997 not otherwise repaid. 27 28 CORPORATE Investment income earned on corporate invested assets and interest and other expenses not allocable to the operating subsidiaries are reflected in the corporate segment. Corporate income after taxes was $20 million in 1996, $15 million in 1995 and $8 million in 1994. INVESTMENT GAINS AND LOSSES Net investment gains (losses) realized by the Corporation and its property and casualty insurance subsidiaries were as follows:
1996 1995 1994 ---- ---- ---- (IN MILLIONS) Equity securities....................................... $69 $ 89 $118 Fixed maturities........................................ 11 20 (64) ---- ---- ---- Realized investment gains before tax.................... $80 109 $ 54 ==== ==== ==== Realized investment gains after tax..................... $52 $ 71 $ 35 ==== ==== ====
Sales of equity securities in each of the last three years resulted in realized investment gains due primarily to the significant appreciation in the United States equity markets. In 1995 and 1994, sales of equity securities were in part the result of the redistribution of invested assets from equity securities to fixed maturities. A primary reason for the sale of fixed maturities in each of the last three years has been to improve our after-tax portfolio return without sacrificing quality where market opportunities have existed to do so. Fixed maturities which the Corporation and its insurance subsidiaries have the ability and intent to hold to maturity are classified as held-to-maturity. The remaining fixed maturities, which may be sold prior to maturity to support our investment strategies, such as in response to changes in interest rates and the yield curve or to maximize after-tax returns, are classified as available-for-sale. Fixed maturities classified as held-to-maturity are carried at amortized cost while fixed maturities classified as available-for-sale are carried at market value. At December 31, 1996, 22% of the fixed maturity portfolio of our continuing operations was classified as held-to-maturity compared with 30% at December 31, 1995 and 36% at December 31, 1994. 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 of the Corporation and its property and casualty insurance companies carried at amortized cost was $130 million, $178 million and $28 million at December 31, 1996, 1995 and 1994, respectively. Such unrealized appreciation was not reflected in the consolidated financial statements. Changes in unrealized market appreciation or depreciation of fixed maturities were due to fluctuations in interest rates. DISCONTINUED OPERATIONS -- LIFE AND HEALTH INSURANCE The Corporation entered into a definitive agreement, dated February 23, 1997, to sell Chubb Life Insurance Company of America to Jefferson-Pilot Corporation for $875 million in cash, subject to various closing adjustments and other customary conditions. The sale is subject to regulatory approvals and is expected to be completed by the end of the second quarter of 1997. The estimated loss on the sale of the life and health insurance operations is $22 million, consisting of a loss before tax of $5 million and a tax of $17 million on the sale. The tax on the sale is due to the tax 28 29 carrying value of these operations being lower than their carrying value for financial statement purposes. The purchase price will not be adjusted to reflect results of operations subsequent to December 31, 1996. Therefore, it is expected that the discontinued life and health insurance operations will not affect the Corporation's net income in the future. The results of the life and health insurance operations for the three years ended December 31, 1996 were as follows:
1996 1995 1994 ---- ---- ----- (IN MILLIONS) Premiums and policy charges............................ $562 $623 $ 836 Investment income...................................... 242 233 209 ---- ---- ----- Total revenues.................................... 804 856 1,045 ---- ---- ----- Benefits............................................... 492 549 752 Operating costs and expenses........................... 251 266 274 ---- ---- ----- Income before income tax.......................... 61 41 19 Federal income tax..................................... 20 13 5 ---- ---- ----- Income before realized investment gains........... 41 28 14 Realized investment gains, net of tax.................. 8 14 6 ---- ---- ----- Income from operations............................ 49 42 20 Loss on disposal....................................... (22) -- -- ---- ---- ----- Income from discontinued operations............... $ 27 $ 42 $ 20 ==== ==== =====
Earnings from personal insurance were $42 million in 1996 compared with $37 million in 1995 and $33 million in 1994. The earnings increase in 1996 was primarily due to lower expense levels. Earnings in 1995 benefited from favorable mortality. Premiums and policy charges amounted to $338 million in 1996 compared with $311 million in 1995 and $272 million in 1994. New sales of personal insurance as measured by annualized premiums were $104 million in 1996 compared with $112 million in 1995 and $97 million in 1994. Group insurance operations resulted in losses of $1 million in 1996, $9 million in 1995 and $19 million in 1994. Premiums were $224 million in 1996 compared with $312 million in 1995 and $564 million in 1994. Gross investment income increased 4% in 1996 compared with 12% in 1995. Growth was primarily due to an increase in invested assets, tempered in 1996 by lower yields on new investments. New cash available for investment amounted to $265 million in 1996 compared with $225 million in 1995 and $140 million in 1994. The new cash was primarily due to increases in deposits credited to policyholder funds. In 1996, we reduced the portfolio of mortgage-backed securities by approximately $100 million. Proceeds from the sale of these securities and new cash were invested primarily in corporate bonds. In 1995, new cash was invested primarily 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. The life and health subsidiaries held fixed maturity securities with a carrying value of $2.9 billion and $2.7 billion at December 31, 1996 and 1995, respectively. Corporate bonds comprised 48% and 39% of the portfolio at year-end 1996 and 1995, respectively, and mortgage-backed securities comprised 38% and 47% of the portfolio at year-end 1996 and 1995, respectively. Approximately 90% of the 29 30 mortgage-backed securities holdings at December 31, 1996 and 1995 related to residential mortgages consisting of government agency pass-through securities, government agency collateralized mortgage obligations (CMOs) and AAA rated non-agency CMOs backed by government agency collateral or single family home mortgages. The majority of the CMOs are actively traded in liquid markets and market value information is readily available from broker-dealers. 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. Net investment gains realized by the life and health insurance operations were as follows:
1996 1995 1994 ---- ---- ---- (IN MILLIONS) Equity securities....................................... $ 5 $11 $ 7 Fixed maturities........................................ 7 11 2 ---- ---- ---- Realized investment gains before tax.................... $12 $22 $ 9 ==== ==== ==== Realized investment gains after tax..................... $ 8 $14 $ 6 ==== ==== ====
CAPITAL RESOURCES On March 1, 1996, the Board of Directors approved an increase in the number of authorized shares of common stock of the Corporation from 300 million shares to 600 million shares. At the same time, the Board of Directors approved a two-for-one stock split payable to shareholders of record as of April 19, 1996. 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 10,000,000 shares of common stock. During 1994, the Corporation repurchased approximately 2,000,000 shares in open-market transactions at a cost of $72 million. During 1996, the Corporation repurchased an additional 1,700,000 shares at a cost of $83 million. In March 1997, the Board of Directors replaced the 1994 program with a new share repurchase program, which authorizes the repurchase of up to 17,500,000 shares of common stock. It is expected that the Corporation will use a substantial portion of the proceeds from the sale of the life and health insurance operations to repurchase shares. The Corporation has outstanding $90 million of unsecured 8 3/4% notes due in 1999. In 1997 and 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 $229 million of 6% exchangeable 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. During 1996, the holders of $21 million of exchangeable notes elected the available option to exchange such notes into shares of common stock of the Corporation, resulting in the issuance of 480,464 shares of common stock. 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 have been used to support our real estate operations. 30 31 The Corporation has a revolving credit agreement with a group of banks that provides for unsecured borrowings of up to $300 million. There have been no borrowings under this agreement. The agreement terminates on July 15, 1997 at which time any loans then outstanding become payable. Management anticipates that a similar credit agreement will replace this agreement. The Corporation had additional unused lines of credit of approximately $140 million at December 31, 1996. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated financial statements of the Corporation at December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 and the Report of Independent Auditors thereon and the Corporation's unaudited quarterly financial data for the two-year period ended December 31, 1996 are incorporated by reference from the Corporation's 1996 Annual Report to Shareholders, pages 42 through 66. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 31 32 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 22, 1997, pages 2, 3 and 4. Information regarding the executive officers is included in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 22, 1997, pages 8 through 21 other than the Performance Graph and the Organization and Compensation Committee Report appearing on pages 14 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 22, 1997, pages 5 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 22, 1997, pages 21 through 23. 32 33 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS AND 2. SCHEDULES The financial statements and schedules listed in the accompanying index to financial statements and financial statement schedules are filed as part of this report. 3. EXHIBITS The exhibits listed in the accompanying index to exhibits are filed as part of this report. (b) REPORTS ON FORM 8-K The Registrant filed a current report on Form 8-K dated October 29, 1996 with respect to the announcement on October 29, 1996 that the Registrant (1) retained Goldman, Sachs & Co. to assist it in the process of evaluating its strategic alternatives with respect to the Registrant's life insurance companies and (2) was considering its strategic alternatives with respect to its real estate subsidiary, Bellemead Development Corporation. The Registrant filed a current report on Form 8-K dated February 6, 1997 with respect to the announcement on February 6, 1997 of its preliminary financial results for the quarter and year ended December 31, 1996. The Registrant filed a current report on Form 8-K dated February 24, 1997 with respect to the announcement on February 24, 1997 that the Registrant signed a definitive purchase agreement under which the Registrant will sell Chubb Life Insurance Company of America to Jefferson-Pilot Corporation for $875 million in cash. The Registrant filed a current report on Form 8-K dated March 7, 1997 with respect to the announcement on March 7, 1997 that (1) the Board of Directors of the Registrant declared a regular quarterly dividend in the amount of $.29 per share, (2) the Board of Directors of the Registrant approved a new share repurchase program and (3) the Registrant was restating its preliminary 1996 financial results to reflect the classification of its life insurance business as a discontinued operation and to recognize a charge related to the write-down of certain real estate assets. 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. 2-90826 (filed May 1, 1984), 33-29185 (filed June 7, 1989), 33-30020 (filed July 18, 1989), 33-49230 (filed July 2, 1992), 33-49232 (filed July 2, 1992), 333-09273 (filed July 31, 1996) and 333-09275 (filed July 31, 1996): 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. 33 34 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 7, 1997 By /s/ DEAN R. O'HARE ---------------------------------- (DEAN R. O'HARE, CHAIRMAN AND CHIEF EXECUTIVE OFFICER) PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE /s/ DEAN R. O'HARE Chairman, Chief March 7, 1997 - ------------------------------------------ Executive Officer and (DEAN R. O'HARE) Director /s/ JOHN C. BECK Director March 7, 1997 - ------------------------------------------ (JOHN C. BECK) Director March 7, 1997 - ------------------------------------------ (SHEILA P. BURKE) /s/ JAMES I. CASH, JR. Director March 7, 1997 - ------------------------------------------ (JAMES I. CASH, JR.) /s/ PERCY CHUBB, III Director March 7, 1997 - ------------------------------------------ (PERCY CHUBB, III) /s/ JOEL J. COHEN Director March 7, 1997 - ------------------------------------------ (JOEL J. COHEN) /s/ DAVID H. HOAG Director March 7, 1997 - ------------------------------------------ (DAVID H. HOAG) /s/ ROBERT V. LINDSAY Director March 7, 1997 - ------------------------------------------ (ROBERT V. LINDSAY)
34 35
SIGNATURE TITLE DATE Director March 7, 1997 - ------------------------------------------ (THOMAS C. MACAVOY) /s/ GERTRUDE G. MICHELSON Director March 7, 1997 - ------------------------------------------ (GERTRUDE G. MICHELSON) /s/ WARREN B. RUDMAN Director March 7, 1997 - ------------------------------------------ (WARREN B. RUDMAN) /s/ DAVID G. SCHOLEY Director March 7, 1997 - ------------------------------------------ (DAVID G. SCHOLEY) /s/ RAYMOND G.H. SEITZ Director March 7, 1997 - ------------------------------------------ (RAYMOND G.H. SEITZ) /s/ LAWRENCE M. SMALL Director March 7, 1997 - ------------------------------------------ (LAWRENCE M. SMALL) /s/ RICHARD D. WOOD Director March 7, 1997 - ------------------------------------------ (RICHARD D. WOOD) /s/ DAVID B. KELSO Executive Vice President and March 7, 1997 - ------------------------------------------ Chief Financial Officer (DAVID B. KELSO) /s/ HENRY B. SCHRAM Senior Vice President and March 7, 1997 - ------------------------------------------ Chief Accounting Officer (HENRY B. SCHRAM)
35 36 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 65 -- Consolidated Balance Sheets at December 31, 1996 and 1995 43 -- Consolidated Statements of Income for the Years Ended Decem- ber 31, 1996, 1995 and 1994 42 -- Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 44 -- Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 45 -- Notes to Consolidated Financial Statements 46 -- Supplementary Information (unaudited) Quarterly Financial Data 66 -- Schedules: I -- Consolidated Summary of Investments -- Other than Investments in Related Parties at December 31, 1996 -- 38 II -- Condensed Financial Information of Registrant at December 31, 1996 and 1995 and for the Years Ended December 31, 1996, 1995 and 1994 -- 39 III -- Consolidated Supplementary Insurance Information at and for the Years Ended December 31, 1996, 1995 and 1994 -- 42 IV -- Consolidated Reinsurance for the Years Ended December 31, 1996, 1995 and 1994 -- 43 VI -- Consolidated Supplementary Property and Casualty Insurance Information for the Years Ended December 31, 1996, 1995 and 1994 -- 44
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, 1996, are hereby incorporated by reference. 36 37 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 March 5, 1997 included in the 1996 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. 33-59111 and Form S-8: No. 2-90826, No. 33-29185, No. 33-30020, No. 33-49230, No. 33-49232, No. 333-09273 and No. 333-09275) of our report dated March 5, 1997, 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, 1997 37 38 THE CHUBB CORPORATION SCHEDULE I CONSOLIDATED SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES (IN THOUSANDS) DECEMBER 31, 1996
AMOUNT AT WHICH COST OR SHOWN IN AMORTIZED MARKET THE TYPE OF INVESTMENT COST VALUE BALANCE SHEET ------------------ --------- --------- ------------- Short term investments......................... $ 275,909 $ 275,909 $ 275,909 ---------- ---------- ------------- Fixed maturities Bonds United States Government and government agencies and authorities................ 2,176,366 2,176,122 2,174,095 States, municipalities and political subdivisions............................ 6,806,811 7,142,001 7,014,267 Foreign................................... 1,169,238 1,216,450 1,216,450 Public utilities.......................... 50,119 51,671 51,671 All other corporate bonds................. 679,910 687,215 687,215 ---------- ---------- ------------- Total bonds..................... 10,882,444 11,273,459 11,143,698 Redeemable preferred stocks.................. 15,000 15,150 15,150 ---------- ---------- ------------- Total fixed maturities.......... 10,897,444 11,288,609 11,158,848 ---------- ---------- ------------- Equity securities Common stocks Banks, trusts and insurance companies..... 11,697 19,912 19,912 Industrial, miscellaneous and other....... 432,979 528,774 528,774 ---------- ---------- ------------- Total common stocks............. 444,676 548,686 548,686 Non-redeemable preferred stocks.............. 95,846 97,617 97,617 ---------- ---------- ------------- Total equity securities......... 540,522 646,303 646,303 ---------- ---------- ------------- Total invested assets........... $11,713,875 $12,210,821 $12,081,060 ========== ========== =============
38 39 THE CHUBB CORPORATION SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS -- PARENT COMPANY ONLY (IN THOUSANDS) DECEMBER 31
1996 1995 ---------- ---------- Assets Invested Assets Short Term Investments..................................... $ 9,703 $ 62,727 Taxable Fixed Maturities -- Available-for-Sale (cost $792,919 and $207,053)............................. 786,837 216,048 Equity Securities (cost $52,036 and $48,640)............... 86,857 75,837 ---------- ---------- TOTAL INVESTED ASSETS................................. 883,397 354,612 Cash.......................................................... 6 59 Investment in Consolidated Subsidiaries Continuing Operations...................................... 3,714,685 4,125,343 Discontinued Operations.................................... 843,408 844,645 Other Assets.................................................. 212,565 145,264 ---------- ---------- TOTAL ASSETS.......................................... $5,654,061 $5,469,923 ========= ========= Liabilities Dividend Payable to Shareholders.............................. $ 47,210 $ 42,741 Long Term Debt................................................ 90,000 120,000 Accrued Expenses and Other Liabilities........................ 53,977 44,453 ---------- ---------- TOTAL LIABILITIES..................................... 191,187 207,194 ---------- ---------- Shareholders' Equity Preferred Stock -- Authorized 4,000,000 Shares; $1 Par Value; Issued -- None............................... -- -- Common Stock -- Authorized 600,000,000 Shares; $1 Par Value; Issued 176,084,173 and 87,819,355 Shares..... 176,084 87,819 Paid-In Surplus............................................... 695,762 778,239 Retained Earnings............................................. 4,530,512 4,206,517 Foreign Currency Translation Losses, Net of Income Tax........ (15,678) (3,433) Unrealized Appreciation of Investments, Net................... 238,669 345,894 Receivable from Employee Stock Ownership Plan................. (106,261) (114,998) Treasury Stock, at Cost -- 1,223,182 and 518,468 Shares....... (56,214) (37,309) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY............................ 5,462,874 5,262,729 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ $5,654,061 $5,469,923 ========= =========
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 1996 Annual Report to Shareholders. 39 40 THE CHUBB CORPORATION SCHEDULE II (CONTINUED) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME -- PARENT COMPANY ONLY (IN THOUSANDS) YEARS ENDED DECEMBER 31
1996 1995 1994 -------- -------- -------- Investment Income...................................... $ 41,464 $ 19,982 $ 25,031 Realized Investment Gains (Losses)..................... 12,799 (505) (13,145) Investment Expenses.................................... (2,110) (1,132) (1,307) Corporate Expenses..................................... (33,384) (33,355) (34,850) -------- -------- -------- 18,769 (15,010) (24,271) Federal and Foreign Income Tax (Credit)................ (28) 2,639 (4,578) -------- -------- -------- 18,797 (17,649) (19,693) Equity in Income from Continuing Operations of Consoli- dated Subsidiaries................................... 467,396 672,061 527,611 -------- -------- -------- INCOME FROM CONTINUING OPERATIONS................. 486,193 654,412 507,918 Equity in Income from Discontinued Operations.......... 26,491 42,216 20,551 -------- -------- -------- NET INCOME........................................ $512,684 $696,628 $528,469 ======== ======== ========
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 1996 Annual Report to Shareholders. 40 41 THE CHUBB CORPORATION SCHEDULE II (CONTINUED) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY (IN THOUSANDS) YEARS ENDED DECEMBER 31
1996 1995 1994 --------- --------- --------- Cash Flows from Operating Activities Net Income........................................... $ 512,684 $ 696,628 $ 528,469 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Equity in Income of Continuing Operations of Consolidated Subsidiaries....................... (467,396) (672,061) (527,611) Equity in Income from Discontinued Operations..... (26,491) (42,216) (20,551) Realized Investment (Gains) Losses................ (12,799) 505 13,145 Other, Net........................................ (12,734) 5,024 16,886 --------- --------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES......................... (6,736) (12,120) 10,338 --------- --------- --------- Cash Flows from Investing Activities Proceeds from Sales of Fixed Maturities.............. 237,675 110,234 234,132 Proceeds from Maturities of Fixed Maturities......... 104,928 13,369 21,632 Proceeds from Sales of Equity Securities............. 17,269 2,479 5,333 Purchases of Fixed Maturities........................ (397,959) (39,585) (218,380) Purchases of Equity Securities....................... (16,078) (8,683) (26,004) Decrease (Increase) in Short Term Investments, Net... 53,024 (1,297) 1,375 Dividends Received from Consolidated Subsidiaries.... 275,202 244,008 244,008 Capital Contributions to Consolidated Subsidiaries... -- (24,000) (40,000) Other, Net........................................... (23,379) (40,123) (9,353) --------- --------- --------- NET CASH PROVIDED BY INVESTING ACTIVITIES......................... 250,682 256,402 212,743 --------- --------- --------- Cash Flows from Financing Activities Decrease in Payable to Chubb Capital Corporation..... -- (74,340) (2,950) Repayment of Long Term Debt.......................... (30,000) (30,000) -- Dividends Paid to Shareholders....................... (184,220) (167,959) (158,735) Repurchase of Shares................................. (82,528) -- (72,052) Other, Net........................................... 52,749 27,944 10,608 --------- --------- --------- NET CASH USED IN FINANCING ACTIVITIES......................... (243,999) (244,355) (223,129) --------- --------- --------- Net Decrease in Cash................................... (53) (73) (48) Cash at Beginning of Year.............................. 59 132 180 --------- --------- --------- CASH AT END OF YEAR............................. $ 6 $ 59 $ 132 ========= ========= =========
In 1996, $520,270,000 of fixed maturity securities were received as a dividend from a consolidated investment company subsidiary of the Corporation. This noncash transaction has been excluded from the statements of cash flows. The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 1996 Annual Report to Shareholders. 41 42 THE CHUBB CORPORATION SCHEDULE III CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION (IN THOUSANDS)
DECEMBER 31 YEAR ENDED DECEMBER 31 ------------------------------------ ------------------------ DEFERRED POLICY NET ACQUISITION UNPAID UNEARNED PREMIUMS INVESTMENT SEGMENT COSTS CLAIMS PREMIUMS EARNED INCOME - -------------------------------------------------------- -------- ---------- ---------- ---------- ---------- 1996 Property and Casualty Insurance Personal............................................ $146,096 $ 688,483 $ 591,875 $ 969,710 Commercial.......................................... 425,230 8,652,843 1,926,845 3,315,526 Reinsurance Assumed................................. 29,872 182,383 98,783 284,020 Investments......................................... $ 646,056* -------- ---------- ---------- ---------- ---------- $601,198 $9,523,709 $2,617,503 $4,569,256 $ 646,056 ======== ========= ========= ========= ======== 1995 Property and Casualty Insurance Personal............................................ $131,542 $ 691,991 $ 548,094 $ 847,474 Commercial.......................................... 367,146 8,498,498 1,842,332 2,952,751 Reinsurance Assumed................................. 59,988 397,652 180,256 346,937 Investments......................................... $ 602,987* -------- ---------- ---------- ---------- ---------- $558,676 $9,588,141 $2,570,682 $4,147,162 $ 602,987 ======== ========= ========= ========= ======== 1994 Property and Casualty Insurance Personal............................................ $133,021 $ 704,233 $ 519,298 $ 826,068 Commercial.......................................... 346,118 7,876,836 1,704,512 2,677,914 Reinsurance Assumed................................. 50,314 332,151 158,735 272,301 Investments......................................... $ 560,481* -------- ---------- ---------- ---------- ---------- $529,453 $8,913,220 $2,382,545 $3,776,283 $ 560,481 ======== ========= ========= ========= ======== YEAR ENDED DECEMBER 31 ------------------------------------------------ AMORTIZATION OF OTHER DEFERRED INSURANCE POLICY OPERATING INSURANCE ACQUISITION COSTS AND PREMIUMS SEGMENT CLAIMS COSTS EXPENSES WRITTEN - -------------------------------------------------------- ---------- ---------- ---------- ---------- 1996 Property and Casualty Insurance Personal............................................ $ 570,465 $ 273,470 $ 58,531 $1,039,134 Commercial.......................................... 2,252,564 849,464 231,660 3,532,072 Reinsurance Assumed................................. 187,726 115,034 202,547 Investments......................................... ---------- ---------- ---------- ---------- $3,010,755 $1,237,968 $ 290,191 $4,773,753 ========= ========= ======== ========= 1995 Property and Casualty Insurance Personal............................................ $ 442,462 $ 254,020 $ 53,691 $ 866,782 Commercial.......................................... 2,000,774 750,541 208,393 3,070,752 Reinsurance Assumed................................. 226,745 116,382 368,458 Investments......................................... ---------- ---------- ---------- ---------- $2,669,981 $1,120,943 $ 262,084 $4,305,992 ========= ========= ======== ========= 1994 Property and Casualty Insurance Personal............................................ $ 527,856 $ 256,604 $ 44,855 $ 828,803 Commercial.......................................... 1,806,464 695,861 179,135 2,807,185 Reinsurance Assumed................................. 185,039 88,780 315,221 Investments......................................... ---------- ---------- ---------- ---------- $2,519,359 $1,041,245 $ 223,990 $3,951,209 ========= ========= ======== =========
- --------------- * 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. The Consolidated Supplementary Insurance Information amounts for 1995 and 1994 include certain reclassifications to conform with the 1996 presentation, which more closely reflects the way the property and casualty business is now managed. The total amounts are not affected. 42 43 THE CHUBB CORPORATION SCHEDULE IV CONSOLIDATED REINSURANCE (IN THOUSANDS) YEARS ENDED DECEMBER 31
PROPERTY AND CASUALTY INSURANCE PREMIUMS EARNED ---------------------------------------------- PERCENTAGE OF CEDED ASSUMED AMOUNT DIRECT TO OTHER FROM OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET --------- ---------- ---------- --------- ------------- 1996.................................... $5,023,489 $ 987,235 $533,002 $4,569,256 11.7% ========== ========== ======== ========== 1995.................................... $4,754,423 $1,319,341 $712,080 $4,147,162 17.2 ========== ========== ======== ========== 1994.................................... $4,415,080 $1,280,412 $641,615 $3,776,283 17.0 ========== ========== ======== ==========
43 44 THE CHUBB CORPORATION SCHEDULE VI CONSOLIDATED SUPPLEMENTARY PROPERTY AND CASUALTY INSURANCE INFORMATION (IN THOUSANDS) YEARS ENDED DECEMBER 31
CLAIMS AND CLAIM ADJUSTMENT PAID EXPENSES INCURRED CLAIMS RELATED TO AND ------------------------ CLAIM CURRENT PRIOR ADJUSTMENT YEAR YEARS EXPENSES --------- -------- --------- 1996............................................. $3,053,600 $(42,845) $2,869,406 ========== ========= ========== 1995............................................. $2,705,800 $(35,819) $1,988,386 ========== ========= ========== 1994............................................. $2,549,100 $(29,741) $2,036,525 ========== ========= ==========
44 45 THE CHUBB CORPORATION EXHIBITS (ITEM 14(A))
DESCRIPTION (2) -- Stock Purchase Agreement dated as of February 23, 1997 between Jefferson-Pilot Corporation and the registrant, filed herewith. (Confidential treatment requested with respect to certain portions thereof. Exhibits and schedules included in the Stock Purchase Agreement have been omitted and will be provided to the Securities and Exchange Commission upon request.) (3) -- Articles of Incorporation and By-Laws Restated Certificate of Incorporation. Incorporated by reference to Exhibit (3) of the registrant's Report to the Securities and Exchange Commission on Form 10-Q for the six months ended June 30, 1996. 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 Annual Incentive Compensation Plan (1996) incor- porated by reference to Exhibit A of the registrant's definitive proxy statement for the Annual Meeting of Shareholders held on April 23, 1996. The Chubb Corporation Long-Term Stock Incentive Plan (1996), as amended, incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-Q for the six months ended June 30, 1996. The Chubb Corporation Stock Option Plan for Non-Employee Directors (1996) incorporated by reference to Exhibit C of the registrant's definitive proxy statement for the Annual Meeting of Shareholders held on April 23, 1996.
45 46
DESCRIPTION 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 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 incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1995. Executive Severance Agreements 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 incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1995. Contract for consulting and advisory services with Percy Chubb III, a director of the registrant, filed herewith. (11) -- Computation of earnings per share filed herewith. (13) -- Pages 21, 22, and 40 through 67 of the 1996 Annual Report to Shareholders. (21) -- Subsidiaries of the registrant filed herewith. (23) -- Consent of Independent Auditors (see page 37 of this report). (27) -- Financial Data Schedule
46 EX-2 2 STOCK PURCHASE AGREEMENT 1 CONFORMED COPY (With Certain Provisions Redacted) STOCK PURCHASE AGREEMENT dated as of February 23, 1997 between JEFFERSON-PILOT CORPORATION and THE CHUBB CORPORATION relating to the purchase and sale of 100% of the Common Stock of Chubb Life Insurance Company of America [CONFIDENTIAL TREATMENT REQUESTED] INDICATES THE PORTIONS OF THIS AGREEMENT THAT HAVE BEEN OMITTED PURSUANT TO A REQUEST BY THE CHUBB CORPORATION FOR CONFIDENTIAL TREATMENT BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"). SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE SEC. 2 TABLE OF CONTENTS ---------------------- PAGE ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions...................................................1 ARTICLE 2 PURCHASE AND SALE SECTION 2.01. Purchase and Sale.............................................7 SECTION 2.02 Closing.......................................................7 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER SECTION 3.01. Corporate Existence and Power.................................8 SECTION 3.02. Corporate Authorization.......................................9 SECTION 3.03. Governmental Authorization...................................10 SECTION 3.04. Non-Contravention............................................10 SECTION 3.05. Capitalization...............................................10 SECTION 3.06. Ownership of Shares..........................................11 SECTION 3.07. Subsidiaries.................................................11 SECTION 3.08. Financial Statements.........................................11 SECTION 3.09. Absence of Certain Changes...................................12 SECTION 3.10. No Undisclosed Material Liabilities..........................15 SECTION 3.11. Material Contracts...........................................15 SECTION 3.12. Litigation...................................................16 SECTION 3.13. Compliance with Laws and Court Orders........................16 SECTION 3.14. Finders' Fees................................................17 SECTION 3.15. Insurance Filings............................................17 SECTION 3.16. Insurance Business...........................................19 SECTION 3.17. ERISA Representations........................................20 SECTION 3.18. Property.....................................................21 SECTION 3.19. Environmental Matters........................................21 SECTION 3.20. Guaranty Fund Assessments....................................22 SECTION 3.21. Actuarial Analysis...........................................22 SECTION 3.22. Investments; Defaults........................................22 SECTION 3.23. Separate Accounts............................................23 SECTION 3.24. Funds........................................................23 SECTION 3.25. Employees and Compensation...................................23 3 PAGE SECTION 3.26. Producers for the Company and the Insurance Subsidiaries.....24 SECTION 3.27. Insurance....................................................25 SECTION 3.28. Full Disclosure..............................................25 SECTION 3.29. Company Trademarks; Software.................................25 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER SECTION 4.01. Corporate Existence and Power................................26 SECTION 4.02. Corporate Authorization......................................26 SECTION 4.03. Governmental Authorization...................................26 SECTION 4.04. Non-Contravention............................................26 SECTION 4.05. Purchase for Investment......................................27 SECTION 4.06. Litigation...................................................27 SECTION 4.07. Finders' Fees................................................27 SECTION 4.08. Financing....................................................27 ARTICLE 5 COVENANTS OF SELLER SECTION 5.01. Conduct of the Company.......................................27 SECTION 5.02. Access to Information........................................28 SECTION 5.03. Notices of Certain Events....................................28 SECTION 5.04. Other Offers.................................................29 SECTION 5.05. Non-Solicitation.............................................29 SECTION 5.06. Computer Services and Software...............................29 SECTION 5.07. Minimum Statutory Net Worth..................................30 SECTION 5.08. Special Dividend.............................................30 SECTION 5.09. Noncompetition Agreement.....................................31 SECTION 5.10. Other Agreements.............................................32 SECTION 5.11. Cross-Defaults...............................................32 SECTION 5.12. Portfolio Management.........................................32 ARTICLE 6 COVENANTS OF BUYER SECTION 6.01. Confidentiality..............................................32 SECTION 6.02. Access.......................................................33 SECTION 6.03. Compliance with Section 15 of the 1940 Act...................33 4 PAGE ARTICLE 7 COVENANTS OF BUYER AND SELLER SECTION 7.01. Reasonable Efforts...........................................34 SECTION 7.02. Further Assurances...........................................34 SECTION 7.03. Public Announcements.........................................34 SECTION 7.04. Intercompany Accounts........................................34 SECTION 7.05. Service Marks, Trademarks and Trade Names....................35 SECTION 7.06. Purchase of Mainframe Computer...............................35 SECTION 7.07. Reports......................................................36 SECTION 7.08. Joint Marketing Arrangements.................................36 SECTION 7.09. Post-Closing Review of Minimum Statutory Equity Amount.......36 SECTION 7.10. Certain Transition Arrangements..............................38 ARTICLE 8 TAX MATTERS SECTION 8.01. Definitions..................................................38 SECTION 8.02. Tax Representations..........................................40 SECTION 8.03. Tax Covenants................................................41 SECTION 8.04. Termination of Existing Tax Sharing Agreements...............44 SECTION 8.05. Tax Sharing..................................................44 SECTION 8.06. Cooperation on Tax Matters...................................44 SECTION 8.07. Indemnification by Seller....................................45 SECTION 8.08. Survival.....................................................47 ARTICLE 9 EMPLOYEES AND EMPLOYEE BENEFITS SECTION 9.01. Pension Plans................................................47 SECTION 9.02. Individual Account Plans.....................................47 SECTION 9.03. Other Employee Plans and Benefit Arrangements................48 SECTION 9.04. Plans Following the Closing..................................49 SECTION 9.05. Third Party Beneficiaries....................................50 ARTICLE 10 CONDITIONS TO CLOSING SECTION 10.01. Conditions to Obligations of Buyer and Seller................50 SECTION 10.02. Conditions to Obligation of Buyer............................51 SECTION 10.03. Conditions to Obligation of Seller...........................52 5 PAGE ARTICLE 11 SURVIVAL; INDEMNIFICATION SECTION 11.01. Survival....................................................52 SECTION 11.02. Indemnification.............................................53 SECTION 11.03. Procedures; Exclusivity.....................................55 SECTION 11.04. [CONFIDENTIAL TREATMENT REQUESTED]...........................56 SECTION 11.05. Procedures for Certain Litigation...........................57 SECTION 11.06. Limitation of Indemnification...............................58 ARTICLE 12 TERMINATION SECTION 12.01. Grounds for Termination.....................................59 SECTION 12.02. Effect of Termination.......................................60 ARTICLE 13 MISCELLANEOUS SECTION 13.01. Notices.....................................................60 SECTION 13.02. Amendments and Waivers......................................61 SECTION 13.03. Expenses....................................................61 SECTION 13.04. Successors and Assigns......................................61 SECTION 13.05. Governing Law...............................................62 SECTION 13.06. Jurisdiction................................................62 SECTION 13.07. WAIVER OF JURY TRIAL........................................62 SECTION 13.08. Counterparts; Third Party Beneficiaries.....................62 SECTION 13.09. Entire Agreement............................................62 EXHIBITS AND SCHEDULES Exhibit I Form of Opinion of Robert Rusis, Esq., General Counsel for Seller Exhibit II Form of Opinion of Shanley & Fisher, P.C., New Jersey Counsel for Seller Exhibit III Form of Opinion of Davis Polk & Wardwell, Special Counsel for Seller Exhibit IV Form of Opinion of King & Spalding, Special Counsel for Buyer 6 Schedule 3.01(a) Corporate Existence and Power Schedule 3.01(b) Certificates of Authority Schedule 3.01(c) Pending Licenses Schedule 3.03 Governmental Authorizations of Seller Schedule 3.04 Non-Contravention Schedule 3.07 Subsidiaries Schedule 3.09 Certain Changes Schedule 3.11 Material Contracts Schedule 3.12 Litigation Schedule 3.13 Violations Schedule 3.15(a) Holding Company Reports Schedule 3.15(b) Statutory Insurance Statements Schedule 3.15(b)(iii) Fines and Penalties Schedule 3.15(d) Reports of Examination Schedule 3.16 Insurance Business Schedule 3.17 Employee Plans and Benefit Arrangements Schedule 3.19 Environmental Matters Schedule 3.22 Investments; Defaults Schedule 3.23 Separate Accounts Schedule 3.24 Funds Schedule 4.03 Governmental Authorizations of Buyer Schedule 5.06(a) Computer Services Agreement Schedule 5.06(b) Form of List of Software Contracts Schedule 5.09 Noncompetition Schedule 7.04 Intercompany Accounts Schedule 7.05 Certain Company Trademarks Schedule 8.02 Tax Representations 7 STOCK PURCHASE AGREEMENT AGREEMENT dated as of February 23, 1997 between Jefferson-Pilot Corporation, a North Carolina corporation ("Buyer"), and The Chubb Corporation, a New Jersey corporation ("Seller"). W I T N E S S E T H : WHEREAS, Seller is the record and beneficial owner of the Shares and desires to sell the Shares to Buyer, and Buyer desires to purchase the Shares from Seller, upon the terms and subject to the conditions hereinafter set forth; The parties hereto agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions. (a) The following terms, as used herein, have the following meanings: "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with, such Person; provided that neither the Company nor any Subsidiary shall be considered an Affiliate of Seller. "Balance Sheet" means the unaudited consolidated balance sheet of the Company and its Subsidiaries as of September 30, 1996 prepared in conformity with generally accepted accounting principles applied on a consistent basis. "Balance Sheet Date" means September 30, 1996. "Benefit Arrangement" means any written employment, severance or similar contract, arrangement or policy, or any written plan or arrangement providing for severance benefits, insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, deferred compensation, profit-sharing, bonuses, stock options, equity-based pay, stock appreciation rights or other forms of incentive compensation or post-retirement insurance, compensation or benefits that (i) is not an Employee Plan, (ii) is entered 8 into or maintained, as the case may be, by Seller or any of its ERISA Affiliates and (iii) covers any employee or former employee of the Company or any Subsidiary. "Capital Accumulation Plan" means the Capital Accumulation Plan of The Chubb Corporation, Chubb & Son Inc. and Participating Affiliates. "CASC" means Chubb America Service Corporation, a New Hampshire corporation. "Chubb Colonial" means Chubb Colonial Life Insurance Company, a New Jersey corporation. "Chubb Life America" is a service mark for the Company, Chubb Colonial and Chubb Sovereign. "The Chubb Life Companies" is a service mark for the Company, Chubb Colonial and Chubb Securities Corporation. "Chubb Securities Material Adverse Effect" means an event, occurrence or condition which would prevent Chubb Securities Corporation, a wholly-owned subsidiary of the Company, from operating its business in the ordinary course. "Chubb Sovereign" means Chubb Sovereign Life Insurance Company, a New Hampshire corporation. "CIAC" means Chubb Investment Advisory Corporation, a Tennessee corporation. "Closing Date" means the date of the Closing. "Company" means Chubb Life Insurance Company of America, a New Hampshire corporation. "Defined Contribution Excess Plan" means the Defined Contribution Excess Benefit Plan of The Chubb Corporation, Federal Insurance Company, Vigilant Insurance Company and Chubb Life Insurance Company of America. "Employee Plan" means any "employee benefit plan", as defined in Section 3(3) of ERISA, that (i) is subject to any provision of ERISA, (ii) is maintained, administered or contributed to by Seller or any of its ERISA Affiliates and (iii) covers any employee or former employee of the Company or any Subsidiary. 9 "Environmental Laws" shall mean all federal, state, local and foreign laws, statutes, ordinances, rules, regulations, principles of common law, orders, decrees, judgments and injunctions relating to pollution, the environment, natural resources, nuclear power production or Hazardous Substances. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statue thereto, and the rules and regulations promulgated thereunder. "ERISA Affiliate" of any entity means any other entity which, together with such entity, would be treated as a single employer under Section 414 of the Code. "Excess Pension Plan" means the Pension Excess Benefit Plan of The Chubb Corporation, Chubb & Son Inc. and Participating Affiliates. "Hazardous Substances" means any waste, pollutant, hazardous substance, toxic substance, hazardous waste, special waste, nuclear substance or waste, radioactive substance or waste, petroleum and petroleum-derived substance or waste, with respect to any of such items to the extent regulated under, or defined by, any Environmental Laws. "HSR Act" means the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder. "Individual Account Plans" means the Capital Accumulation Plan and The Chubb Corporation Employee Stock Ownership Plan. "Insurance Subsidiaries" means Chubb Colonial and Chubb Sovereign. "Investment Company" has the meaning assigned to it in the Investment Company Act of 1940, as amended. "Investment Contracts" means each contract or agreement, as in effect on the date hereof, relating to the rendering by CIAC of investment advisory or management services, including without limitation all sub-advisory services. "Lien" means, with respect to any property or asset, any mortgage, lien, pledge, charge, security interest, encumbrance or other adverse claim of any kind in respect of such property or asset other than (i) Liens arising by operation of law and in the ordinary course of business, such as mechanics', carriers' or materialmen's liens (none of which would materially impair or interfere with the use or operation of such property or asset); (ii) Liens for Taxes which are either 10 not delinquent or are being contested in good faith; and (iii) Liens which secure indebtedness for borrowed money reflected on the Balance Sheet. For the purposes of this Agreement, a Person shall be deemed to own subject to a Lien any property or asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such property or asset. "Material Adverse Effect" means a material adverse effect on the condition (financial or otherwise), business, assets or results of operations of the Company and the Subsidiaries, taken as whole. "Multiemployer Plan" means each Employee Plan that is a multiemployer plan, as defined in Section 3(37) of ERISA. "NASD" means the National Association of Securities Dealers. "NOLHGA" means National Organization of Life and Health Guaranty Associations. "PBGC" means the Pension Benefit Guaranty Corporation. "PLI" means Personal Lines Insurance Brokerage, Inc., a wholly-owned subsidiary of Seller. "Pension Plan" means the Pension Plan of The Chubb Corporation, Chubb & Son Inc. and Participating Affiliates 1985. "Person" means an individual, corporation, partnership, association, trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Reference Rate" means a rate per annum equal to the prime rate announced from time to time by Morgan Guaranty Trust Company of New York. "Release" means any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leeching or migration into the indoor or outdoor environment or into or out of any property, including the movement of Hazardous Substances through or in the air, soil, surface water, ground water or property. "Required Jurisdictions" means the jurisdictions set forth on Schedule 3.03 hereto. 11 "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Shares" means all of the issued and outstanding shares of the capital stock of the Company. "Subsidiary" means each Insurance Subsidiary, CIAC, and each of the other Subsidiaries listed on Schedule 3.07 hereto. "Title IV Plan" means an Employee Plan, other than a Multiemployer Plan, subject to Title IV of ERISA. "Transferred Employee" means each individual who, as of the Closing Date, is employed (including persons absent from active service by reason of illness, short-term disability or leave of absence, whether paid or unpaid) by the Company or any Subsidiary; provided, that an individual who is employed as of the Closing Date by the Company or any Subsidiary, but on such date is absent from active service by reason of short-term disability and subsequently begins to receive long-term disability benefits under the Seller's long-term disability plan shall not be considered a Transferred Employee for the period commencing on the date such individual begins to receive long-term disability benefits under Seller's long-term disability plan. (b) Each of the following terms is defined in the Section set forth opposite such term: Term Section - ---- ------- Accounting Referee 8.01 Acquisition Proposal 5.04 Applicable Tax Rate 8.01 Arbiter 7.09(e) Basket 8.01 Buyer Recitals Buyer Plan 9.02 Claim Indemnified Parties 11.02(a) Chubb Trademarks 7.05 Claims 11.05(a) [CONFIDENTIAL TREATMENT REQUESTED] 11.02(a)(iii)(A) Closing 2.02 Closing Date Statutory Statements 7.09(a) Code 8.01 12 Company Securities 3.05(b) Company Trademarks 3.29(a) Computer Services Agreement 5.06(a) Conversion Date 5.06(a) Damages 11.02(a) Direct Rollover 9.02 Disputed Amounts 7.09(e) Dispute Notice 7.09(e) Dispute Notice Date 7.09(e) Employees 8.03(d) Federal Tax 8.01 Final Arbiter 7.09(e) Funds 3.24 Geographic Area 5.09(c) Holding Company Reports 3.15(a) Indemnifiable Tax 8.01 Indemnified Party 11.03(a) Indemnifying Party 11.03(a) Life Insurance Companies 5.09(a) Loss 8.07(a) M&R Analysis 3.21 Minimum Statutory Equity Amount 5.07 1940 Act 3.23 Post-Closing Tax Period 8.01 Potential Claim 11.04 Pre-Closing Tax Period 8.01 Price Allocation Schedule 8.03(f) Producer Plans 3.26(a) Producers 3.26(a) Purchase Price 2.01 Referee 11.05(e) Reinsurance Association Agreement Schedule 3.04 Required Disposition 5.09(a) Returns 8.02(a) Scheduled Products 5.09(c) Section 338 Benefit 8.03(f) Section 338 Cost 8.03(f) Section 338(h)(10) Election 8.03(f) Seller Recitals Seller Group 8.01 Seller Stock Option 8.03(d) Separate Accounts 3.23 Software 3.29(b) 13 Statutory Insurance Statements 3.15(b) Statutory Financial Statements 3.15(c) Straddle Period 8.01 Subsidiary Securities 3.07(b) Tax 8.01 Tax Asset 8.01 Tax Sharing Agreement 8.01 Taxing Authority 8.01 Temporary Difference 8.07(b) Trademark License Agreement 7.05 Transition Period 5.06 ARTICLE 2 PURCHASE AND SALE SECTION 2.01. Purchase and Sale. Upon the terms and subject to the conditions of this Agreement, Seller agrees to sell to Buyer and Buyer agrees to purchase from Seller, the Shares at the Closing. The purchase price for the Shares (the "Purchase Price") is $875,000,000 in cash, less any amounts paid by the Company to Seller in accordance with Section 5.08. If the Closing shall not have occurred on or before June 30, 1997, interest shall accrue on the Purchase Price at the Reference Rate from and including July 1, 1997 to, but excluding, the Closing Date. Such interest shall be calculated daily on the basis of a year of 365 days and the actual number of days elapsed. The Purchase Price, together with any accrued interest thereon, shall be paid as provided in Section 2.02. SECTION 2.02. Closing. The closing (the "Closing") of the purchase and sale of the Shares hereunder shall take place at the offices of Davis Polk & Wardwell, 450 Lexington Avenue, New York, New York on the last business day of the month in which the conditions set forth in Article 10 are satisfied, or at such other time or place as Buyer and Seller may agree. At the Closing: (a) Buyer shall deliver to Seller: (i) the Purchase Price, together with any accrued interest thereon, in immediately available funds by wire transfer to an account of Seller with a bank in New York City designated by Seller, by notice to Buyer, not later than two business days prior to the Closing Date (or if not 14 so designated, then by certified or official bank check payable in immediately available funds to the order of Seller in such amount); and (ii) the opinion, certificates and other documents set forth in Section 10.03 of this Agreement. (b) Seller shall deliver to Buyer: (i) certificates for the Shares duly endorsed or accompanied by stock powers duly endorsed in blank, with any required transfer stamps affixed thereto; (ii) true copies of the articles of incorporation and by-laws of each of Seller, the Company and the Subsidiaries; (iii) the complete stock books, stock ledgers, minute books and corporate seals of the Company and the Subsidiaries and the stock certificates evidencing ownership of the Subsidiaries; (iv) the opinions, certificates and other documents set forth in Section 10.02 of this Agreement; and (v) resignations of such directors and officers (from their offices as such) of the Company and the Subsidiaries as Buyer may request. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Buyer as of the date hereof that: SECTION 3.01. Corporate Existence and Power. (a) Each of Seller and the Company is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now conducted. Except as disclosed on Schedule 3.01(a), the Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where such qualification is necessary, except for those jurisdictions where failure to be so qualified would not reasonably be expected to have a Material Adverse Effect. Seller has heretofore made available to Buyer true and complete copies of the certificate of incorporation and bylaws of Seller and the Company as currently in effect. The minutes of the Board of Directors', any 15 investment committees' and stockholders' meetings and the stock books of the Company and the Subsidiaries, all of which have been previously made available to Buyer, are the complete and correct records of such Board of Directors', investment committee's and stockholders' meetings and stock issuances from, in the case of such minutes, December 31, 1993 through and including the date hereof and reflect all transactions through and including the date hereof required to be contained in such records, and all such meetings were duly called. (b) Attached hereto as Schedule 3.01(b) is a complete and accurate list of all jurisdictions where the Company and each of the Insurance Subsidiaries has written or is qualified to write insurance; a list of all licenses and permits held by the Company and each of the Insurance Subsidiaries issued by any insurance authority of any such jurisdiction; and a description of the classes and lines of businesses the Company and each of the Insurance Subsidiaries is authorized to write in each jurisdiction. The Company's and each of the Insurance Subsidiaries' authority to write the classes and lines of insurance business reflected on said schedule is not restricted in any material respect, and neither the Company nor any of the Insurance Subsidiaries is a party to any agreement with any state insurance regulatory official limiting the Company's or such Insurance Subsidiary's ability to make full use of the licenses or permits which have been issued to it or requiring the Company and the Insurance Subsidiaries to comply with regulatory standards, procedures or requirements different from those applicable to companies with licenses or permits identical to those issued to the Company or such Insurance Subsidiary. The licenses and permits listed on Schedule 3.01(b) constitute all licenses and permits material to the conduct of their business, as it is now conducted and will be conducted prior to the Closing. Excluding the Company's license in Taiwan, all such licenses and permits are in full force and effect, and there are no reasonable grounds to believe that any such license or permit will not, in the ordinary course, be renewed upon its expiration. (c) Attached hereto as Schedule 3.01(c) is a complete and accurate list of all jurisdictions in which the Company or any Insurance Subsidiary currently has applications for licenses, permits or certificates of authority pending. Schedule 3.01(c) also sets forth the current status of all such applications. SECTION 3.02. Corporate Authorization. The execution, delivery and performance by Seller of this Agreement are within Seller's corporate powers and have been duly authorized by all necessary corporate action on the part of Seller. This Agreement constitutes a valid and binding agreement of Seller enforceable in accordance with its terms, except as (i) the enforceability hereof may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability. 16 SECTION 3.03. Governmental Authorization. The execution, delivery and performance by Seller of this Agreement require no action by or in respect of, or filing with, any governmental body, agency, or official other than (i) compliance with any applicable requirements of the HSR Act, (ii) the approvals or non-disapprovals of the Required Jurisdictions, and (iii) any such action or filing as to which the failure to make or obtain would not reasonably be expected to have a Material Adverse Effect or a Chubb Securities Material Adverse Effect. SECTION 3.04. Non-Contravention. The execution, delivery and performance by Seller of this Agreement do not and will not (i) violate the certificate of incorporation or bylaws of Seller or the Company or any Subsidiary, (ii) assuming compliance with the matters referred to in Section 3.03, violate any applicable law, rule, regulation, judgment, injunction, order or decree or alter or, except as set forth on Schedule 3.04, impair any license, franchise, permit or other similar authorization held by Seller or the Company or any Subsidiary, (iii) except as disclosed on Schedule 3.04, require any consent or other action by any Person under, constitute a default under, or give rise to any right of termination, cancellation or acceleration of any right or obligation of Seller or the Company or any Subsidiary or to a loss of any benefit to which the Company or any Subsidiary is entitled under, any agreement or other instrument binding upon Seller or the Company or any Subsidiary or their properties or assets or (iv) result in the creation or imposition of any Lien on any asset of the Company or any Subsidiary, except, in the case of clauses (iii) and (iv), to the extent that any such violation, failure to obtain any such consent or other action, default, right, loss or Lien would not reasonably be expected to have a Material Adverse Effect. SECTION 3.05. Capitalization. (a) The authorized capital stock of the Company consists of 600,000 shares of common stock, par value $5.00 per share. As of the date hereof, there are 600,000 shares outstanding. (b) The Shares have been duly authorized and validly issued and are fully paid and non-assessable. Except as set forth in this Section 3.05, there are no outstanding (i) shares of capital stock or voting securities of the Company, (ii) securities of the Company convertible into or exchangeable for shares of capital stock or voting securities of the Company or (iii) options or other rights to acquire from the Company, or other obligation of the Company to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of the Company (the items in clauses (i), (ii) and (iii) being referred to collectively as the "Company Securities"). There are no outstanding obligations of the Company or any Subsidiary to repurchase, redeem or otherwise acquire any Company Securities. 17 SECTION 3.06. Ownership of Shares. Seller is the record and beneficial owner of the Shares, free and clear of any Lien and any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of the Shares), and will transfer and deliver to Buyer at the Closing valid title to the Shares free and clear of any Lien and any such limitation or restriction. SECTION 3.07. Subsidiaries. (a) Each Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, has all corporate power and authority to own, lease and operate its properties and to carry on its business as now conducted. Each Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where such qualification is necessary, except for those jurisdictions where failure to be so qualified would not reasonably be expected to have a Material Adverse Effect. All Subsidiaries and their respective jurisdictions of incorporation are identified on Schedule 3.07. No later than 10 days after the date hereof, Seller shall deliver to Buyer an amendment to Schedule 3.07 which shall set forth the authorized and outstanding shares of capital stock of each Subsidiary. (b) All of the outstanding capital stock of, or other voting securities or ownership interests in, each Subsidiary, is owned by the Company, directly or indirectly, free and clear of any Lien and free of any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock or other voting securities or ownership interests). There are no outstanding (i) securities of the Company or any Subsidiary convertible into or exchangeable for shares of capital stock or other voting securities or ownership interests in any Subsidiary or (ii) options or other rights to acquire from the Company or any Subsidiary, or other obligation of the Company or any Subsidiary to issue, any capital stock or other voting securities or ownership interests in, or any securities convertible into or exchangeable for any capital stock or other voting securities or ownership interests in, any Subsidiary (the items in clauses (i) and (ii) being referred to collectively as the "Subsidiary Securities"). There are no outstanding obligations of the Company or any Subsidiary to repurchase, redeem or otherwise acquire any outstanding Subsidiary Securities. SECTION 3.08. Financial Statements. The audited consolidated balance sheets of the Company and its Subsidiaries as of December 31, 1994 and December 31, 1995 and the related consolidated statements of income and cash flows for each of the years ended December 31, 1994 and December 31, 1995 and the Balance Sheet and the related unaudited consolidated statements of income and cash flows in the nine months ended September 30, 1996 present fairly, in all material respects, the consolidated financial position of the Company or any Subsidiary as of the dates thereof and their consolidated results of operations and 18 changes in the consolidated financial position for the periods then ended in conformity with generally accepted accounting principles applied on a consistent basis, except as set forth in the notes, exhibits or schedules thereto (subject, in the case of any unaudited statements, to normal year-end adjustments). Promptly after they become available, but in no event later than May 15, 1997, Seller will deliver to Buyer audited consolidated balance sheets of the Company and its Subsidiaries at December 31, 1996 and consolidated statements of income, cash flows and changes in stockholder's equity for the year then ended, and the notes thereto, and will deliver as soon as they are available interim financial statements of the Company and its Subsidiaries as of the end of each subsequent quarter and for the quarter and year then ended, in each case prepared in accordance with generally accepted accounting principles applied on a consistent basis. SECTION 3.09. Absence of Certain Changes. Since the Balance Sheet Date, except (i) as disclosed on Schedule 3.09 and (ii) for the transactions contemplated hereby, the business of the Company and each Subsidiary has been conducted in the ordinary course consistent with past practices and there has not been: (i) any event, occurrence, development or state of circumstances or facts which has had a Material Adverse Effect or a Chubb Securities Material Adverse Effect, other than those resulting from changes in general conditions (including laws and regulations) applicable to the industry, or general economic conditions; (ii) any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of the Company, or any repurchase, redemption or other acquisition by the Company or any Subsidiary of any outstanding shares of capital stock or other securities of, or other material ownership interests in, the Company or any Subsidiary, or the issuance by the Company or any Subsidiary of any capital stock or the issuance or grant by the Company or any Subsidiary of any option, warrant, call, commitment, subscription, right to purchase or contract of any character relating to its authorized or issued capital stock or any securities convertible into, relating to or based on its capital stock; (iii) any amendment of the articles of incorporation or by-laws or similar governing instruments or outstanding security of the Company or any Subsidiary; (iv) any incurrence, assumption or guarantee by the Company or any Subsidiary of any indebtedness for borrowed money in excess of $100,000; 19 (v) any creation or assumption by the Company or any Subsidiary of any Lien on any asset other than in the ordinary course of business; (vi) any making of any loan, advance or capital contributions to or investment of any nature in any Person other than loans, advances or capital contributions to or investments in wholly-owned Subsidiaries and portfolio transactions made, in each case, in the ordinary course of business; (vii) any reported damage, destruction or other casualty loss affecting the business or assets of the Company or any Subsidiary which after giving effect to any applicable insurance payment has had a Material Adverse Effect; (viii) any transaction or commitment made, or any contract or agreement entered into, by the Company or any Subsidiary relating to its material assets or business (including the acquisition or disposition of any assets) or any relinquishment by the Company or any Subsidiary of any contract or other right, in either case, involving more than $1,000,000 over its noncancellable term, other than transactions and commitments contemplated by this Agreement; (ix) any change in any method of accounting or accounting practice by the Company or any Subsidiary, except for any such change after the date hereof required by law or by reason of a concurrent change in generally accepted accounting principles, or any change in any actuarial or reserving standard or any change in depreciation or amortization policies or rates adopted by it; (x) any (A) employment, deferred compensation, severance, retirement or other similar agreement entered into with any director or officer of the Company or any Subsidiary (or any amendment to any such existing agreement), (B) grant of any severance or termination pay to any director or officer of the Company or any Subsidiary, or (C) change in compensation or other benefits payable to any director or officer of the Company or any Subsidiary pursuant to any severance or retirement plans or policies thereof, except for enhanced vesting, if any, relating to awards outstanding under Seller's Long-Term Stock Incentive Plans and under the Pension Plan and Individual Account Plans; provided that no such enhanced vesting shall result in any liability or obligation to the Company, any Subsidiary or Buyer; 20 (xi) any labor dispute, other than routine individual grievances, or, to the knowledge of Seller, any activity or proceeding by a labor union or representative thereof to organize any employees of the Company or any Subsidiary, or any lockouts, strikes, slowdowns, work stoppages or, to the knowledge of Seller, any threats thereof by or with respect to any employees of the Company or any Subsidiary; (xii) except as referenced in subsection (x) of this Section 3.09 and except for customary wage or salary increases for employees and customary compensation increases for agents, any increase in the compensation payable or to become payable to any employee or agent or any increase in any bonus, insurance, severance, pension or other Benefit Arrangement or Employee Plan for such employees or agents or any employment, consulting, severance or other similar contract entered into, except for (a) at will employment arrangements and (b) contracts with agents, in each case entered into in the ordinary course of business consistent with past practice; (xiii) any change in its underwriting standards, retention limits or administrative practices with respect to additions to (new business) or deletions from (policy terminations) any policy master files; (xiv) any change in interest rates credited on life insurance or annuity policies, except for such changes that the Company deems reasonably necessary consistent with past practice to respond to competitive factors; (xv) any change in systems of internal accounting controls that could reasonably be expected to increase the risk of a Material Adverse Effect; (xvi) any amendment to any form of the contracts with Producers or Producer Plans referred to in Section 3.26(a); (xvii) any transaction or commitment made to acquire or dispose of any real property; or (xviii) any agreement, understanding or commitment to take any action described in this Section 3.09. SECTION 3.10. No Undisclosed Material Liabilities. There are no liabilities of the Company or any Subsidiary of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, other than: 21 (a) liabilities provided for on the consolidated balance sheet of the Company and its Subsidiaries dated December 31, 1995, or disclosed in the notes thereto; (b) liabilities incurred in the ordinary course of business since December 31, 1995 that have not had and are not reasonably expected to have a Material Adverse Effect; and (c) liabilities or other obligations disclosed in, or related to, contracts or other matters disclosed in this Agreement or any Schedule to this Agreement. SECTION 3.11. Material Contracts. (a) Except as disclosed on Schedule 3.11, and except, in the case of Section 3.11(a)(i), (ii) and (vii), for any agreements that are terminable on not more than 60 days notice and without the payment of any penalty by, or any other material consequence to, the Company or any Subsidiary, neither the Company nor any Subsidiary, to the best of their knowledge, is a party to or bound by: (i) any lease not made in the ordinary course of business which involves payments of more than $150,000 per year or extends beyond December 31, 1999; (ii) any agreement for the purchase of materials, supplies, goods, services, equipment or other assets not made in the ordinary course of business which individually does not exceed $250,000; (iii) any agreement relating to indebtedness for borrowed money or the deferred purchase price of property (in either case, whether incurred, assumed, guaranteed or secured by any asset), except any such agreement entered into in the ordinary course of business with an aggregate outstanding principal amount not exceeding $25,000; (iv) any material partnership, joint venture or other similar agreement or arrangement; (v) any material agency, dealer, sales representative, marketing or other similar agreement not made in the ordinary course of business; (vi) any material agreement or arrangement with Seller or any of its Affiliates; or 22 (vii) any other agreement not made in the ordinary course of business that is material to the Company and the Subsidiaries taken as a whole. (b) Except for agreements which are disclosed as terminable on Schedule 3.11, each agreement disclosed in any Schedule to this Agreement to which the Company or any Subsidiary is a party is a valid and binding agreement of the Company or a Subsidiary, as the case may be, and is in full force and effect, and neither the Company nor any Subsidiary is, nor to the knowledge of Seller is any other party thereto, in default or breach in any material respect under the terms of any such agreement, except for such defaults or breaches which would not reasonably be expected to have a Material Adverse Effect or a Chubb Securities Material Adverse Effect. SECTION 3.12. Litigation. Except as set forth on Schedule 3.12, there is no action, suit, investigation or proceeding pending against, or to the knowledge of Seller threatened against or affecting, Seller, the Company or any Subsidiary before any court or arbitrator or any governmental or regulatory body, agency or official which would reasonably be expected to result in costs or losses in excess of $100,000 in any single instance against or on behalf of the Company or any Subsidiary, or any officer, employee or director thereof in such individual's capacity as officer, employee or director of the Company or any Subsidiary or involving any of their properties or businesses, whether at law or in equity. [ CONFIDENTIAL TREATMENT REQUESTED ] Further, except as set forth on Schedule 3.12, there are no outstanding judgments, orders, decrees, stipulations or awards (whether rendered by a court, administrative agency, or by arbitration, pursuant to a grievance or other procedures) against or relating to the Company or any Subsidiary which contain any remaining restrictions or obligations to perform. There is no pending or, to the best knowledge of the Seller, the Company and the Subsidiaries, any threatened action, proceeding or investigation with respect to the Company, any Subsidiary or any other Person which questions the validity of this Agreement or the transactions contemplated hereby, could prevent or materially adversely affect any action taken to be taken pursuant hereto or which could reasonably be expected to result in any revocation, suspension or limitation of any regulatory authority of the Company or any Subsidiary. SECTION 3.13. Compliance with Laws and Court Orders. Except as disclosed on Schedule 3.13 and 3.15(b)(iii), since December 31, 1993, the Company and each Subsidiary has complied in all material respects with its obligation to make all required filings or reports with governmental or regulatory bodies and has complied in all material respects with all laws, rules, regulations, 23 licensing requirements and orders applicable to the Company or such Subsidiary or the operation of their respective businesses, and there has been no written assertion received, and no elected officer has received any oral notice, from any party responsible for the administration or enforcement thereof that the Company or any Subsidiary has violated any such laws, rules, regulations, requirements or orders. All filings and reports to governmental or regulatory authorities have been true, complete and accurate in all material respects. This Section does not cover any environmental matters, for which Section 3.19 is solely applicable. SECTION 3.14. Finders' Fees. Except for Goldman, Sachs & Co., whose fees will be paid by Seller, there is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of Seller or the Company or any Subsidiary who might be entitled to any finder's fee or commission in connection with the transactions contemplated by this Agreement. SECTION 3.15. Insurance Filings. (a) Holding Company Reports. Schedule 3.15(a) contains a true and complete list of all annual holding company reports ("Holding Company Reports") which the Company and each Insurance Subsidiary has filed with or submitted to the insurance regulatory authorities of New Jersey, New Hampshire and California (and certain other jurisdictions) since December 31, 1993. (b) Statutory Insurance Statements. Schedule 3.15(b) contains a true and complete list of all annual and quarterly statements ("Statutory Insurance Statements") which the Company and each Insurance Subsidiary has filed (or caused to be filed) with or submitted to the insurance regulatory authorities of New Jersey, New Hampshire and California and in each other jurisdiction in which such company is an admitted insurer since December 31, 1993. Except as indicated therein or in the reports of examination referred to Section 3.15(d), (i) no material deficiencies have been asserted to the Company or any such Insurance Subsidiary by any such regulatory authority with respect to such filings or submissions; (ii) neither the Company nor any such Insurance Subsidiary has submitted any response with respect to material comments from such insurance regulatory authorities concerning such filings, submissions or reports of examination; (iii) since December 31, 1993 and except as disclosed on Schedule 3.15(b)(iii), no fine or penalty in excess of $500 has been imposed on the Company or any Insurance Subsidiary by any such insurance regulatory authority; and (iv) no deposits have been made by the Company or any Insurance Subsidiary with any such insurance regulatory authority which were not shown in the most recent annual Statutory Insurance Statement of the Company and each of the Insurance Subsidiaries. The Company has delivered to Buyer true and complete copies of the Statutory Insurance Statements. 24 (c) Statutory Financial Statements. The statutory financial statements ("Statutory Financial Statements") of the Company and of each Insurance Subsidiary which are included in the Statutory Insurance Statements present fairly, in all material respects, the statutory financial condition of the Company and of each Insurance Subsidiary as of the dates thereof and the statutory results of its operations and other data contained therein for each of the years then ended in conformity with required or permitted statutory insurance accounting requirements and practices which have been applied on a consistent basis, except as set forth in the notes, exhibits or schedules thereto. Seller shall deliver to Buyer as soon as they are filed such interim or annual Statutory Financial Statements that may be required to be filed with any state departments of insurance on behalf of the Company or any Insurance Subsidiary, and such Statutory Financial Statements to be delivered hereafter will present fairly, in all material respects, the statutory financial condition of the Company and each Insurance Subsidiary as of such date and the statutory results of operations of the Company and each Insurance Subsidiary for the period then ended, in accordance with required or permitted statutory insurance accounting requirements and practices which have been applied on a consistent basis, except as set forth in the notes, exhibits or schedules thereto. (d) Reports of Examination. Schedule 3.15(d) contains a true and complete list of the Reports of Examination as to Condition for the Company and each Insurance Subsidiary, constituting the most recent National Association of Insurance Commissioners Zone Examination for the Company and any such Insurance Subsidiary under applicable insurance laws, true and complete copies of which have been delivered to Buyer. (e) Reserves, etc. The amounts shown in the Statutory Insurance Statements as reserves and liabilities for past and future insurance policy benefits, losses, claims and expenses under insurance policies as of the end of each such year were computed in accordance with commonly accepted actuarial standards consistently applied, were fairly stated in accordance with sound actuarial principles, were based on actuarial assumptions which were in accordance with those called for in policy provisions and met the requirements of the insurance laws of New Jersey, New Hampshire, New York and California, as applicable, and such amounts shown on the Statutory Insurance Statements filed after the date hereof and on or prior to the Closing Date will be so computed and based and will meet all such requirements. No other state has objected to such Statutory Insurance Statements as filed. SECTION 3.16. Insurance Business. (a) Reinsurance. All material contracts, arrangements, treaties and agreements to which the Company or any 25 Insurance Subsidiary is a party with respect to reinsurance applicable to insurance in force (including grace periods and other extensions) on the date of this Agreement, a list of which is included on Schedule 3.16, and all such material contracts, arrangements, treaties and agreements under which the Company or any such Insurance Subsidiary has any obligation to cede insurance, are valid, binding and in full force and effect in accordance with their terms. To the best knowledge of Seller, the Company is generally in good standing under its reinsurance agreements with respect to the reporting of business to be ceded and the timely payment of premiums. Neither the Company nor any Insurance Subsidiary is, and, to the best knowledge of Seller, no other party thereto is, in material default of any provision thereof and, except as set forth on Schedule 3.16, no such material agreement contains any provision providing that the other party thereto may terminate the same by reason of the transactions contemplated by this Agreement or any other provision which would be altered or otherwise become applicable by reason of such transactions. Except as provided for in the Statutory Financial Statements as of and for the year ended December 31, 1995, or as set forth on Schedule 3.16, all reinsurance represented by reinsurance treaties to which the Company or any Insurance Subsidiary is a party represents an admitted asset or reduction of loss reserves of the Company or the Insurance Subsidiary in the respective Statutory Financial Statements and their carrying values have been described in conformity with statutory accounting principles in accordance with values described by the National Association of Insurance Commissioners, when appropriate, consistent with the prior reporting practices of the Company and the Insurance Subsidiaries. Except as set forth on Schedule 3.16, (i) no consent from any assuming reinsurer under any of such reinsurance treaties is required in order for Seller to validly and effectively sell the Shares to Buyer as provided hereunder, and (ii) the termination of any reinsurance treaty between or among the Company and any Insurance Subsidiary will not result in adverse tax consequences to the Company or any Insurance Subsidiary. (b) Insurance Policy Forms and Rates. Except as set forth on Schedule 3.16, each insurance policy or certificate form, as well as any related application form, written advertising material and rate or rule currently marketed by the Company and each Insurance Subsidiary, the use or issuance of which requires filing or approval, has been appropriately filed, and if required, approved by the insurance regulatory authorities of New Jersey and New Hampshire (and any other state in which such policies and forms are required to be filed). To the knowledge of the Company, all such policies and certificates, forms, applications, advertising materials and rates or rules are in compliance in all material respects with all applicable laws and regulations. 26 (c) No Policy Dividends. Except as set forth on Schedule 3.16, no provision in any policy in force gives policyholders the right to receive dividends or distributions on their policies (other than accruals of interest on cash values or as claim benefits) or otherwise share in the benefits, revenue or profits of the Company or any Insurance Subsidiary, provided that the practice in certain instances of making premium refunds based upon group policyholder loss experience shall not violate the representation contained in this sentence. Except as set forth on Schedule 3.16, and except as paid in the ordinary course of business, none of the Insurance Subsidiaries or the Company is liable to pay commissions upon the renewal of any insurance policy nor is it a party to any agreement providing for the collection of insurance premiums payable to the Company or any such Insurance Subsidiary by any other person. (d) Threats of Cancellation. Except as set forth on Schedule 3.16, since December 31, 1995, no policyholder or related group of policyholders or persons or entities producing insurance business which accounted for five percent or more of the gross income of the Company and the Insurance Subsidiaries for the year ended December 31, 1995 has or have, at its or their initiative, terminated or threatened to terminate in writing its or their relationship with the Company or any such Insurance Subsidiary. (e) Underwriting Standards. Each of the Company and the Insurance Subsidiaries have complied in all material respects with its respective underwriting standards and, with respect to insurance contracts reinsured in whole or in part, such insurance contracts conform in all material respects to the standards agreed to with the reinsurer in the related reinsurance, coinsurance or other similar contracts. SECTION 3.17. ERISA Representations. (a) Schedule 3.17 identifies each Employee Plan. Seller has furnished or made available to Buyer copies of the Employee Plans and all amendments thereto together with (i) the most recent annual report prepared in connection with any Employee Plan (Form 5500 including, if applicable, Schedule B thereto) and (ii) the most recent actuarial valuation report prepared in connection with any Employee Plan. (b) Neither the Seller nor any ERISA Affiliate of Seller has incurred, or reasonably expects to incur prior to the Closing Date, any liability under Title IV of ERISA arising in connection with the complete or partial termination of, or complete or partial withdrawal from, any plan covered or previously covered by Title IV of ERISA that could become a liability of the Buyer or any of its ERISA Affiliates after the Closing Date. (c) Each Employee Plan that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the Internal 27 Revenue Service. Each Employee Plan which is not a Multiemployer Plan has been maintained in substantial compliance with its terms and with the requirements prescribed by any and all applicable statutes, orders, rules and regulations, including but not limited to ERISA and the Code. No Employee Plan is a Multiemployer Plan. (d) Schedule 3.17 identifies each Benefit Arrangement. Seller has furnished or made available to Buyer copies or descriptions of each Benefit Arrangement. Each Benefit Arrangement has been maintained in substantial compliance with its terms and with the requirements prescribed by any and all applicable statutes, orders, rules and regulations. SECTION 3.18. Property. (a) All of the real property owned by the Company and its Subsidiaries is shown on its Balance Sheet, except with respect to any acquisitions or dispositions of property since the Balance Sheet Date that are disclosed on Schedule 3.09, and each of the Company and its Subsidiaries has good and marketable title to all such real property, and to such personal property (other than leased property referred to in Section 3.18(b)) as is necessary to conduct its business as presently conducted, free and clear of any Lien, covenant or other restriction which would materially and adversely affect the Company's or any of its Subsidiaries' ability to conduct their respective business as such business is currently conducted. (b) Each of the Company and its Subsidiaries has the right to use and possess all property currently leased to it, with such rights being evidenced by valid and enforceable leases. (c) Except for the equipment described in Section 7.06 and the computer software referred to in Section 5.06(b), all of the personal property necessary for the Company and each of the Subsidiaries to conduct its business as presently conducted is under the possession or control of the Company or such Subsidiary. SECTION 3.19. Environmental Matters. Except as set forth on Schedule 3.19: (a) The Company and the Subsidiaries are in compliance in all material respects with all Environmental Laws. (b) With respect to any properties owned, leased or operated by the Company or any Subsidiary, to the knowledge of the Seller, the Company and the Subsidiaries there has been no Release or threatened Release of Hazardous Substances in violation of Environmental Laws that would reasonably be expected to result in a Material Adverse Effect. 28 (c) Neither the Company nor any Subsidiary has received any claim, notice or advice from a Person (i) asserting that the Company or the Subsidiaries are or may be liable for (A) personal injury, (B) property damage or (C) cleaning up Hazardous Substances on, under, in or migrating from such properties, in each case arising under Environmental Laws or (ii) that (A) Hazardous Substances are or may be migrating onto or under such properties or (B) such properties are or may be subject to any environmental investigation or evaluation by any Person. SECTION 3.20. Guaranty Fund Assessments. Each of the Company and the Insurance Subsidiaries has fully reserved in its respective Statutory Financial Statements as of and for the nine months ended September 30, 1996 for any present or future guaranty fund assessments, up to the amount reserved for in accordance with the calculations of NOLHGA, relating to any rehabilitation, conservatorship or insolvency known to exist as of the date hereof, as reported by the most recent NOLHGA survey dated April 1, 1996. SECTION 3.21. Actuarial Analysis. Seller has delivered to Buyer a true and complete copy of the Actuarial Evaluation Report of Milliman & Robertson, Inc. as of September 30, 1996, the Roll Forward Analysis as of February 10, 1997, and any other information prepared by Milliman & Robertson and generally made available to prospective purchasers of the Company (the "M&R Analysis"). The information furnished to Milliman & Robertson, Inc. in connection with the preparation of the M&R Analysis was accurate in all material respects; provided that no representation or warranty is made with respect to projections of future economic events, future expenses, new business production levels or future management actions. The assumptions utilized in making such projections were arrived at in good faith and Seller believes that they were reasonable when made. SECTION 3.22. Investments; Defaults. Seller has previously delivered to Buyer a complete list of all investments owned, directly or indirectly, by the Company and the Subsidiaries as of December 31, 1996. Schedule 3.22 also contains a list of all bankruptcies, restructured assets, nonperforming assets, foreclosures and defaults known to the Seller, the Company or any of the Subsidiaries with respect to the investments as of December 31, 1996. Except as set forth on Schedule 3.22, no liability will inure to the Company or any Subsidiary under any ISDA Master Swap Agreement to which the Company or any Subsidiary is a party as a result of the transactions contemplated by this Agreement. SECTION 3.23. Separate Accounts. Each separate account maintained by the Company or an Insurance Subsidiary is listed on Schedule 3.23 (collectively, the "Separate Accounts"). Each Separate Account is duly and validly established 29 and maintained under the laws of its state of formation and is either excluded from the definition of an investment company pursuant to Section 3(c)(11) of the Investment Company Act of 1940, as amended (the "1940 Act") or is duly registered as an investment company under the 1940 Act. Each such Separate Account, if registered, is operated in compliance in all material respects with the 1940 Act, has filed all reports and amendments of its registration statement required to be filed, has filed all annual reports on Form N-SAR with the SEC, has filed all notices, including Form 24f-2, and paid all fees in connection with shares or units sold, and has been granted all exemptive relief necessary for its operations as presently conducted. The insurance contracts under which the Separate Account assets are held are duly and validly issued and are either exempt from registration under the Securities Act pursuant to Section 3(a)(2) of the Securities Act or were sold pursuant to an effective registration statement under the Securities Act, and any such registration statement is currently in effect to the extent necessary to allow the appropriate Company or Insurance Subsidiary to receive contributions under such policies. SECTION 3.24. Funds. Each of the mutual funds presently sponsored or intended to be sponsored by the Company or an Insurance Subsidiary is listed on Schedule 3.24 (the "Funds"). Except as listed on Schedule 3.24, (i) each Fund is or will be duly registered with the SEC as an open-end management investment company under the 1940 Act, (ii) each Fund is or will be in material compliance with the 1940 Act and the SEC regulations promulgated thereunder, including the requirements to file semi-annual or annual reports on N-SAR with the SEC, (iii) all shares of the Funds are or will be duly registered under the Securities Act and any applicable state securities law, and (iv) each of the Funds is or will be duly incorporated and in good standing under the laws of the state of its incorporation or is or will be a validly existing business trust under the laws of the jurisdiction in which it was formed. SECTION 3.25. Employees and Compensation. (a) Each of the Company and the Subsidiaries has complied in all material respects with all applicable rules, laws and regulations concerning wages, bonuses, discrimination in employment, disabilities, family and medical leave, immigration, wrongful termination, worker's compensation for injury or sickness, collective bargaining, OSHA and other employment matters and made, in a timely manner, true, complete and accurate filings (in all material respects) required in connection therewith by any federal, state or local governmental unit or agency. Except for items 9, 12 and 13 of Schedule 3.09, there are no employment contracts with any employee of the Company or any Subsidiary and the employment of each employee of the Company and the Subsidiaries is terminable at will by the Company and the Subsidiaries without restriction, penalty or payment of any kind, other than payments with respect to liabilities reflected on the financial statements of the 30 Company and the Subsidiaries as of and for the year ended December 31, 1995 and for services actually performed, non-material payments for accrued benefits and the severance plan referred to on Schedule 3.17 or as may be provided for under federal, state or local laws, rules or regulations. (b) The employees of the Company and the Subsidiaries are not represented by a labor organization, none of the Company or the Subsidiaries is a signatory to a collective bargaining agreement with any labor organization, no union claims to represent any such employees and, to the best knowledge of Seller, no union organizing effort is or within the last three years has been underway involving employees of the Company or any Subsidiary. SECTION 3.26. Producers for the Company and the Insurance Subsidiaries. (a) Seller has provided to Buyer true, accurate and complete copies of the forms of all agreements, including all amendments or modifications thereof since December 31, 1993, with agents, brokers or others that have the authority to generate business for the Company or any of the Insurance Subsidiaries, including the authority to bind the Company or a Subsidiary to a contract for insurance (the "Producers"). Items 28-32, 34, 37-42 and 49 of Schedule 3.11 constitute a list of all other plans, programs and practices, whether written or oral, maintained or contributed to by the Company or any Insurance Subsidiary in effect as of the date hereof which presently provide or are reasonably likely to provide in the future benefits or compensation in excess of $25,000 individually to or on behalf of Producers or former Producers of the Company or any Insurance Subsidiary (excluding any promotional contests for Producers as to which the aggregate amounts payable thereunder do not exceed $100,000) ("Producer Plans"), copies of which have previously been furnished to Buyer. Except as set forth in the forms and in the items referred to in the preceding sentence, each such Producer Plan may be terminated within 90 days of the giving of notice without any liability whatsoever to any person whomsoever except payment to or on behalf of any Producers or former Producers (other than commissions accrued prior to such termination and vested renewals) of an amount less than or equal to $25,000 or, in the aggregate for all such Producers or former Producers, of an amount less than or equal to $250,000. (b) To the best knowledge of Seller, the Company and the Subsidiaries there is no, and since the Balance Sheet Date there has not been any, condition or state of fact (excluding the transactions contemplated by this Agreement and external political and economic conditions) which is reasonably likely to affect the Company's and the Subsidiaries' relations with the Producers in a manner which would have a Material Adverse Effect, and no Producer or group of Producers, the loss of whom would have a Material Adverse Effect, has notified the Company or any Subsidiary since the Balance Sheet Date of his or their intent to (i) terminate 31 his or their relationship with the Company or any Subsidiary or (ii) make any demand for material payments or modifications of his or their arrangements with the Company or any Insurance Subsidiary. SECTION 3.27. Insurance. The Company and the Subsidiaries have been and are insured by licensed insurers with respect to their properties and the conduct of their business in such amounts and against such risks as are reasonable in relation to their business, and the Company will use commercially reasonable efforts to maintain such insurance in force at least through the Closing Date. SECTION 3.28. Full Disclosure. There is no fact or condition known to senior management of Seller, the Company or any Subsidiary which has not been disclosed to Buyer in writing which has had a Material Adverse Effect or to the knowledge of senior management of Seller, the Company or any Subsidiary could reasonably be expected to have a Material Adverse Effect. SECTION 3.29. Company Trademarks; Software. (a) Schedule 7.05 sets forth a complete and accurate list of all material trademarks, trade names and applications therefor, other than the Chubb Trademarks (as defined in Section 7.05), owned by the Company or any Subsidiary (collectively, the "Company Trademarks"). The Company Trademarks are free of any Liens and are all those which are necessary to the conduct of the business of the Company as now conducted other than the Chubb Trademarks. None of the Company Trademarks are licensed to the Company by a third party. The Company Trademarks and the Chubb Trademarks are not the subject of any pending or, to the knowledge of Seller, threatened litigation. The consummation of the transactions contemplated by this Agreement will not result in the loss or impairment of any of the Company Trademarks or result in any requirement of new or additional royalties, licensing fees, relicensing fees or other expenses. Neither the Seller, the Company nor any Subsidiary knows of any use by others of the Company Trademarks. (b) The Company and its Subsidiaries have valid and enforceable rights to use all the computer software necessary for the operation of their business as currently conducted (the "Software"). The transfer of ownership of the Company and the Subsidiaries contemplated by this Agreement will not limit or impair the rights of the Company and its Subsidiaries to use material Software owned or directly licensed by the Company and its Subsidiaries. . 32 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller as of the date hereof that: SECTION 4.01. Corporate Existence and Power. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of North Carolina and has all corporate powers and all material governmental licenses, authorizations, permits, consents and approvals required to carry on its business as now conducted, except for those licenses, authorizations, permits, consents and approvals the absence of which would not, individually or in the aggregate, have an adverse effect on Buyer's ability to consummate the transactions contemplated hereby. SECTION 4.02. Corporate Authorization. The execution, delivery and performance by Buyer of this Agreement are within the corporate powers of Buyer and, except for any required approval by Buyer's stockholders, have been duly authorized by all necessary corporate action on the part of Buyer. This Agreement constitutes a valid and binding agreement of Buyer enforceable in accordance with its terms, except as (i) the enforceability hereof may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability. SECTION 4.03. Governmental Authorization. The execution, delivery and performance by Buyer of this Agreement require no action by or in respect of, or filing with, any governmental body, agency or official other than (i) compliance with any applicable requirements of the HSR Act, (ii) the approvals or non- disapprovals set forth on Schedule 4.03, and (iii) any such action or filing as to which the failure to make or obtain would not, individually or in the aggregate, have an adverse effect on Buyer's ability to consummate the transactions contemplated hereby. SECTION 4.04. Non-Contravention. The execution, delivery and performance by Buyer of this Agreement do not and will not (i) violate the certificate of incorporation or bylaws of Buyer, (ii) assuming compliance with the matters referred to in Section 4.03, violate any applicable law, rule, regulation, judgment, injunction, order or decree or any license, franchise, permit or other similar authorization held by Buyer or (iii) require any consent or other action by any Person under, constitute a default under, or give rise to any right of termination, cancellation or acceleration of any right or obligation of Buyer under, any agreement or other instrument binding upon Buyer or its properties or assets, except, in the case of clauses (ii) and (iii), to the extent that any such violation, 33 failure to obtain any such consent or other action, default, right or loss would not reasonably be expected to have an adverse effect on Buyer's ability to consummate the transactions contemplated hereby. SECTION 4.05. Purchase for Investment. Buyer is purchasing the Shares for investment for its own account and not with a view to, or for sale in connection with, any distribution thereof. Buyer (either alone or together with its advisors) has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of its investments in the Shares and is capable of bearing the economic risks of such investment. SECTION 4.06. Litigation. There is no action, suit, investigation or proceeding pending against, or to the knowledge of Buyer threatened against or affecting, Buyer before any court or arbitrator or any governmental body, agency or official which in any manner challenges or seeks to prevent, enjoin, alter or materially delay the transactions contemplated by this Agreement. SECTION 4.07. Finders' Fees. Except for Morgan Stanley & Co. Incorporated whose fees will be paid by Buyer, there is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of Buyer who might be entitled to any fee or commission from Seller or any of its Affiliates upon consummation of the transactions contemplated by this Agreement. SECTION 4.08. Financing. Buyer has, or will have prior to the Closing, sufficient cash, available lines of credit or other sources of immediately available funds to enable it to make payment of the Purchase Price and any other amounts to be paid by it hereunder. ARTICLE 5 COVENANTS OF SELLER Seller agrees that: SECTION 5.01. Conduct of the Company. From the date hereof until the Closing Date, except for the transactions contemplated hereby, Seller shall cause the Company and each of its Subsidiaries to conduct their business in the ordinary course and to use commercially reasonable efforts to preserve intact their business organizations and relationships with third parties and to keep available the services of its present officers and employees. Without limiting the generality of the foregoing, from the date hereof until the Closing Date, Seller will not permit the 34 Company or any Subsidiary to adopt or propose any change to its certificate of incorporation or bylaws. Except as otherwise agreed to by Buyer, Seller will not, and will not permit the Company or any Subsidiary to, take any action the effect of which would prevent any representation and warranty of Seller hereunder from being accurate in any material respect at the Closing Date. SECTION 5.02. Access to Information. From the date hereof until the Closing Date, Seller will (i) give, and will cause the Company and each Subsidiary to give, Buyer, its counsel, financial advisors, auditors and other authorized representatives access during normal working hours to the offices, properties, books and records of the Company and each Subsidiary, (ii) furnish, and will cause the Company and each Subsidiary to furnish, to Buyer, its counsel, financial advisors, auditors and other authorized representatives such available financial and operating data and other information relating to the Company or any Subsidiary as such Persons may reasonably request and (iii) instruct the employees, counsel and financial advisors of Seller, Company and the Subsidiaries to cooperate with Buyer in its investigation of the Company or any Subsidiary. Notwithstanding the foregoing, Buyer shall not have access to personnel records of the Company or any Subsidiary relating to: individual performance or evaluation records, medical histories or other information, in each such case which in Seller's good faith opinion is sensitive or the disclosure of which could subject Seller to risk of liability. SECTION 5.03. Notices of Certain Events. Seller shall promptly notify Buyer of: (i) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement; (ii) any notice or other communication from any governmental or regulatory agency or authority in connection with the transactions contemplated by this Agreement; (iii) any actions, suits, claims, investigations or proceedings commenced or, to its knowledge, threatened against, relating to or involving or otherwise affecting Seller, the Company or any Subsidiary that, if pending on the date of this Agreement would have been required to have been disclosed pursuant to Section 3.12 or that relate to the consummation of the transactions contemplated by this Agreement; and 35 (iv) notices of investigations, proceedings or regulatory actions instituted or to be instituted against the Company or any Subsidiary by governmental or regulatory agencies or authorities. SECTION 5.04. Other Offers. From the date hereof until the termination of this Agreement or the Closing Date, whichever first occurs, Seller will not, will cause the Company and the Subsidiaries not to, and will use its best efforts to cause the officers, directors, employees or other agents of the Seller, the Company and the Subsidiaries not to, directly or indirectly, (i) take any action to solicit or initiate any offer or indication of interest from any person with respect to any Acquisition Proposal (as hereinafter defined) or (ii) engage in negotiations with or disclose any nonpublic information relating to the Company or the Subsidiaries or afford access to the properties, books or records of the Company or the Subsidiaries to any person that may be considering making, or has made, an offer with respect to an Acquisition Proposal. For purposes hereof, "Acquisition Proposal" means any proposal for a merger or other business combination involving the Company or the Subsidiaries or the acquisition of any equity interest in, or a substantial portion of the assets of, the Company or any Subsidiary, other than the transactions contemplated by this Agreement. Seller will, and will cause the Company to, terminate any existing discussions or negotiations with any person (other than Buyer) relating to any Acquisition Proposal. SECTION 5.05. Non-Solicitation. Until [CONFIDENTIAL TREATMENT REQUESTED], Seller agrees that, without the prior written consent of Buyer, neither Seller nor any of its Affiliates will hire, or solicit to hire, any Producers (only with respect to the Scheduled Products), officers, directors or other employees of the Company or any Subsidiary; provided that Seller shall not be prohibited from hiring or soliciting to hire (i) individuals whose employment is terminated by the Company or any Subsidiary after the Closing Date and (ii) any clerical or other individuals who are not officers and who respond to any general solicitation. SECTION 5.06. Computer Services and Software. (a) On or before the Closing Date, Seller, for itself and on behalf of its Affiliates, shall enter into a computer services agreement with the Company (the "Computer Services Agreement") for the services and on the terms set forth on Schedule 5.06(a). The Computer Services Agreement shall have a term of 12 months from the Closing Date (subject to earlier termination at the sole option of Buyer upon 90 days prior written notice, with the termination date of the Computer Services Agreement being deemed the "Conversion Date"). (b) During the period beginning on the Closing Date and ending on the Conversion Date (the "Transition Period"), Seller shall make available for use by the Company and its Subsidiaries any Software not owned or directly licensed by 36 the Company and its Subsidiaries (other than the Software licensed pursuant to the contract (x) with SunGard Corporation listed on Schedule 3.11 and (y) referred to in Item 35 of Schedule 3.04). Seller shall (i)(A) obtain the necessary consents to make such Software available in accordance with the preceding sentence and (B) assign the licenses for such Software, or otherwise obtain the benefit of use of such Software, for the Company and its Subsidiaries following the Conversion Date (or, in each case, provide alternative software which will permit the Company and its Subsidiaries to continue to operate their business as currently conducted), and (ii) pay any costs, fees and expenses incurred in connection therewith; provided, however, that any on-going, periodic, or usage fees or royalties payable in connection with the use of such Software by the Company or its Subsidiaries shall be paid by the Company or its Subsidiaries. In the event that any Software licensed by the Company would terminate as a result of the transactions contemplated by this Agreement, Seller shall cause the Company to obtain any consents necessary to make such Software available for use by the Company and its Subsidiaries during the Transition Period or otherwise provide alternative Software which will permit the Company and its Subsidiaries to continue to operate their business as currently conducted. (c) Seller shall deliver to Buyer, no later than sixty days following the date hereof, a complete and accurate list, in the form of Schedule 5.06(b), of all Software, which list shall indicate whether such Software is owned or licensed directly by the Company or its Subsidiaries, together with copies of all contracts relating thereto. SECTION 5.07. Minimum Statutory Net Worth. Seller shall cause the sum of the amount of the aggregate capital and surplus of the Company and the aggregate asset valuation reserves and interest maintenance reserves of the Company and the Insurance Subsidiaries at the Closing Date to be not less than the sum of [CONFIDENTIAL TREATMENT REQUESTED], minus the amount of any special dividend paid to Seller as contemplated by Section 5.08 (the "Minimum Statutory Equity Amount"). SECTION 5.08. Special Dividend. Seller shall use commercially reasonable efforts to cause the Company to declare and pay the maximum approved special dividend to Seller, in an amount not exceeding $100,000,000, immediately prior to Closing. Seller and Buyer shall cooperate (i) to seek any regulatory approval which may be required for the payment of any such dividend (including the payment of any dividend from the Insurance Subsidiaries), and (ii) to identify mutually agreed upon U.S. government obligations which the Company or its Subsidiaries shall sell in order to facilitate the payment of the special dividend described in this Section 5.08. The Purchase Price (calculated prior to the accrual 37 of any interest thereon) shall be reduced by the amount of any dividend paid to Seller pursuant to this Section 5.08. SECTION 5.09. Noncompetition Agreement. [ CONFIDENTIAL TREATMENT REQUESTED . ] 38 [ CONFIDENTIAL TREATMENT REQUESTED ] SECTION 5.10. Other Agreements. Except as otherwise provided in this Agreement, Seller hereby agrees to assume and be responsible for any obligation or liability relating to, arising under, or based upon (a) any contract or agreement that Schedule 3.11 to this Agreement indicates may be terminated (or amended to exclude the Company and the Subsidiaries) by Seller or its Affiliates which is in fact terminated or so amended and (b) the agreements identified in Item 19 of Schedule 3.11 to this Agreement. SECTION 5.11. Cross-Defaults. Seller shall cause any contract or other arrangement of the Company or any of its Subsidiaries which is subject to a cross- default arising from any performance obligation of Seller or any of its Affiliates (not including the Company or any of the Subsidiaries) to be terminated or amended to remove any such cross-default provision prior to the Closing Date, and Seller shall protect the Company and each Subsidiary from any cost or charge to the Company or any Subsidiary resulting from such termination or amendment. SECTION 5.12. Portfolio Management. Seller agrees that with respect to the investment portfolios of the Company and each Subsidiary it will cause the Company and each Subsidiary to attempt to minimize the incurrence of capital gains and, to the extent reasonably practicable, if capital gains are incurred, to offset such gains with capital losses, it being understood that the responsibility for management of the investment portfolios shall reside with the Company and each Subsidiary. ARTICLE 6 COVENANTS OF BUYER Buyer agrees that: SECTION 6.01. Confidentiality. Prior to the Closing Date and after any termination of this Agreement, Buyer and its Affiliates will hold, and will use their best efforts to cause their respective officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold, in confidence, unless compelled to disclose by judicial or administrative process or by other requirements of law, all confidential documents and information concerning the Company or any Affiliate or Subsidiary furnished to Buyer or its Affiliates in connection with the transactions contemplated by this Agreement, except to the extent that 39 such information can be shown to have been (i) previously known on a nonconfidential basis by Buyer, provided that such information is not known by Buyer to be subject to another confidentiality agreement with or other obligation of secrecy to the Seller or the Company or any Subsidiary or any other party, or (ii) becomes generally available to the public other than as a result of a disclosure by Buyer or its directors, officers, employees, agents or advisors, or (iii) becomes available to Buyer on a non-confidential basis from a source other than the Seller or the Company or any Subsidiary or their advisors, provided that such source is not known by Buyer to be bound by a confidentiality agreement with or other obligation of secrecy to the Seller or the Company or any Subsidiary or any other party. Buyer shall be responsible for any breach of this Section 6.01 by any Persons to whom Buyer discloses any of the confidential information which is subject to this Section. If this Agreement is terminated, Buyer and its Affiliates will, and will use their best efforts to cause their respective officers, directors, employees, accountants, counsel, consultants, advisors and agents to, destroy or deliver to Seller, upon request, all documents and other materials, and all copies thereof, obtained by Buyer or its Affiliates or on their behalf from Seller or the Company or any Subsidiary in connection with this Agreement that are subject to such confidence. SECTION 6.02. Access. Buyer will cause the Company and each Subsidiary, on and after the Closing Date, to afford promptly to Seller and its agents reasonable access to their properties, books, records, employees and auditors to the extent necessary to permit Seller to determine any matter relating to its rights and obligations hereunder or to any period ending on or before the Closing Date. To the extent necessary or helpful in connection with any tax or other matters relating to any period ending on or before the Closing Date, Buyer will furnish to Seller or permit the Seller and its agents to inspect and copy all books and records of the Company and its Subsidiaries which relate to any period prior to the Closing Date. Seller will hold, and will use its best efforts to cause its officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold, in confidence, unless compelled to disclose by an order of a court of final jurisdiction, all confidential documents and information concerning the Company or any Subsidiary provided to it pursuant to this Section. SECTION 6.03. Compliance with Section 15 of the 1940 Act. Buyer acknowledges that the Seller has entered into this Agreement in reliance upon the benefits and protections provided by Section 15(f) of the 1940 Act. Buyer agrees that Buyer (including its Affiliates) (i) shall not take any action that would have the effect of causing Section 15(f) of the 1940 Act not to be met in respect of this Agreement and the transactions contemplated hereby, and (ii) shall not fail to take any action if the failure to take such action would have the effect of causing 40 Section 15(f) of the 1940 Act not to be met in respect of this Agreement and the transactions contemplated hereby. ARTICLE 7 COVENANTS OF BUYER AND SELLER Buyer and Seller agree that: SECTION 7.01. Reasonable Efforts. Subject to the terms and conditions of this Agreement, Buyer and Seller will use commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary or desirable under applicable laws and regulations to consummate the transactions contemplated by this Agreement including, without limitation, (i) the obtaining of the approval or non-disapproval of the Insurance Departments of the Required Jurisdictions and those set forth on Schedule 4.03, (ii) the obtaining of the consents required under Items 1, 2 and 3 of Schedule 3.04 and, in connection therewith, consents to the election of designees of Buyer as directors of the Funds or, with respect to Item 1 of such Schedule, new Investment Contracts substantially in the form of CIAC's existing Investment Contracts, with each Investment Company to which CIAC currently provides investment advisory or management services and (iii) the compliance with the filing and waiting period requirements of the HSR Act. SECTION 7.02. Further Assurances. Seller and Buyer agree, and Seller, prior to the Closing, and Buyer, after the Closing, agree to cause the Company and each Subsidiary, to execute and deliver such other documents, certificates, agreements and other writings and to take such other actions as may be necessary or desirable in order to consummate or implement expeditiously the transactions contemplated by this Agreement. SECTION 7.03. Public Announcements. The parties agree to consult with each other before issuing any press release or making any public statement with respect to this Agreement or the transactions contemplated hereby and, except as may be required by applicable law or any listing agreement with any national securities exchange, will not issue any such press release or make any such public statement prior to such consultation. SECTION 7.04. Intercompany Accounts. All intercompany accounts between the Seller or its Affiliates, on the one hand, and the Company or any Subsidiary, on the other hand, as of the Closing shall be settled in accordance with their terms or in the ordinary course consistent with past practice, as the case may 41 be, in the categories listed on Schedule 7.04 (which represent estimates of any amounts outstanding as of December 31, 1996). From the date hereof through the Closing Date, any changes in such accounts shall only be made in the ordinary course of business consistent with past practice. SECTION 7.05. Service Marks, Trademarks and Trade Names. On or prior to the Closing Date, Seller shall cause the Company to take such action as is necessary to cause all rights, including ownership and registration of any trademark, trade name, service mark, logo design or other identifying mark or symbol utilizing the stylized letter "C" or the name "Chubb" (collectively the "Chubb Trademarks") to be conveyed and assigned to Seller, and Seller shall take such action as is necessary to ensure that the ownership of and rights relating to the trademarks listed on Schedule 7.05 shall remain with the Company and that such trademarks shall be available for use by Buyer, the Company and its Subsidiaries following the Closing Date. On or prior to the Closing Date, Seller shall execute a royalty-free license (the "Trademark License Agreement") with the Company to permit the Company and the Subsidiaries to continue to use any of the Chubb Trademarks currently in use in the conduct of their businesses, including but not limited to, the use of any contract materials, signs or policy forms which contain any Chubb Trademarks, for a period of up to one year following the Closing Date. As promptly as practicable following the Closing Date, Buyer shall cause the Company and the Subsidiaries to take such action as is necessary, including seeking all requisite regulatory and shareholder approvals, to change, by deleting the name "Chubb" or the stylized letter "C" therefrom, the product names, marketing materials, policy forms and materials that utilize such name or stylized letter, and to cause the name "Chubb" to be deleted from its name, from the name of each Subsidiary and from the name Chubb America Fund, Inc. and Chubb Investment Funds, Inc. SECTION 7.06. Purchase of Mainframe Computer. On the Closing Date, Buyer shall purchase from Seller or its Affiliate, the mainframe computer and all peripheral equipment (including without limitation tape and disk storage units and all communications hardware) that is currently being utilized in connection with the business of the Company and the Subsidiaries located in Branchburg, New Jersey, which serves as the sole mainframe computer supporting the Company's insurance operations, at a purchase price in an amount equal to the average between its depreciated book value and its fair market value at the Closing Date. The fair market value as of the Closing Date of the computer and related equipment hereunder shall be agreed upon by Buyer and Seller as of a date not later than the fifth business day preceding the Closing Date. If Buyer and Seller do not reach such agreement, then Buyer and Seller shall jointly select a third party expert to promptly make such fair market value determination, which will be binding upon the parties. The purchase price of the computer and the related 42 equipment shall be paid on the Closing Date by wire transfer of immediately available funds to an account designated in writing by Seller or its Affiliate. Promptly after the Conversion Date, Buyer shall provide for the removal of the mainframe computer from the Branchburg location. SECTION 7.07. Reports. The Company shall from time to time furnish to Buyer, promptly following the receipt by senior management of the Company or any Subsidiaries (i) copies of all monthly management reports prepared for senior management of the Company or any Subsidiary, (ii) copies of all monthly financial statements and reports, and (iii) a copy of any report filed with any insurance regulatory authority, which in each such case, shall be prepared in a manner consistent with past practice. SECTION 7.08. Joint Marketing Arrangements. Seller and Buyer each agree that it will negotiate in good faith to develop and enter into a mutually beneficial marketing arrangement that will make available to Buyer, the Company and the Insurance Subsidiaries after the Closing Date, the property and casualty agency distribution and bank distribution channels of Seller, including without limitation the continued marketing of life insurance products through the general agencies recruited by Seller prior to the date hereof. SECTION 7.09. Post-Closing Review of Minimum Statutory Equity Amount. (a) As soon as practicable, but in any event within 90 calendar days following the Closing Date, the Company shall prepare and deliver to Seller and Buyer the statements of assets, liabilities, surplus and other funds and summary of operations and cash flows of the Company and each of the Insurance Subsidiaries as of, and for the period beginning January 1, 1997 and ending on, the Closing Date (or the most recent end of a month if the Closing Date is not the last business day of a month) (the "Closing Date Statutory Statements"), which shall be prepared in conformity with statutory insurance accounting requirements and practices, consistently applied. The Closing Date Statutory Statements shall present fairly, in all material respects, in accordance with statutory accounting principles and practices consistently applied the financial position of the Company and the Insurance Subsidiaries as of the Closing Date, and the results of their operations for the period specified and ending on the Closing Date (or the most recent end of a month if the Closing Date is not the last business day of a month). (b) Subsequent to the delivery of the Closing Date Statutory Statements, Buyer shall give Seller and its accountants, actuaries, counsel and other representatives reasonable access to the books and records of the Company and the Insurance Subsidiaries in order to make such investigations as Seller shall desire in conjunction with the evaluation by it of the Closing Date Statutory Statements. During such period, Buyer shall permit Seller and its representatives to 43 consult with the respective employees, auditors, actuaries, attorneys and agents of the Company and the Insurance Subsidiaries. (c) The Closing Date Statutory Statements shall be deemed final upon the earliest to occur of the date on which Seller and Buyer jointly agree that the Closing Date Statutory Statements are final, the 31st day following the delivery of the Closing Date Statutory Statements, if neither Seller nor Buyer has notified the other of a dispute in amounts shown on the Closing Date Statutory Statements, and the date on which all disputes relating to such statements and calculations between Buyer and Seller are resolved in accordance with Section 7.09(e). (d) On the fifth business day following the date on which the Closing Date Statutory Statements are deemed final, if the sum of the aggregate amount of the capital and surplus of the Company plus the aggregate asset valuation reserves and interest maintenance reserves of the Company and the Insurance Subsidiaries, each as set forth in the Closing Date Statutory Statements, is less than the Minimum Statutory Equity Amount, Seller shall pay to the Company, by wire transfer, the amount of such difference, together with interest on any such amount at the Reference Rate (based upon a 365-day year) from the Closing Date to (but not including) the date of such payment. (e) In the event that the Seller and Buyer do not agree to the determination of the calculation set forth in Section 7.09(d) (the "Disputed Amounts"), the disputing Party shall provide notice of such disagreement to the other Party hereto (the "Dispute Notice", and the date of its delivery, the "Dispute Notice Date"). The chief financial officer of Buyer and the chief financial officer of Seller shall meet (by conference telephone call or in person at a mutually agreeable site) within one week after notice of a disagreement is given as provided above. The chief financial officers shall attempt to make a final determination of the Disputed Amounts, and if the chief financial officers reach agreement, any payments shall be made within five days in accordance with such agreement. If the chief financial officers do not reach agreement within a reasonable time, either or both of such chief financial officers shall give notice of an impasse, in which case the chief executive officer of Buyer and the chief executive officer of Seller shall meet (by conference telephone call or in person at a mutually agreeable site) within one week after notice of an impasse is given by the chief financial officers. If the chief executive officers have hereto not reached agreement as to the Disputed Amounts within a reasonable time, either chief executive officer may give notice of an impasse, and such determination shall be promptly submitted to a nationally recognized independent public accounting firm or a nationally recognized actuarial firm (an "Arbiter") jointly selected by Seller and Buyer. If Seller or Buyer do not agree upon the joint selection of an Arbiter within five (5) business days following the notice of such impasse by the chief executive officers, either Seller or Buyer 44 may designate a proposed qualified Arbiter to the other by written notice. Within five (5) business days such other Party shall either agree to the proposed qualified Arbiter or propose a different Arbiter (failure to propose a different Arbiter within such five business day period shall be deemed such Party's agreement to the other Party's proposed Arbiter), and in the case in which such Party has proposed a different Arbiter the two Arbiters so proposed shall within five (5) business days thereafter select an Arbiter to make a final determination of the Disputed Amounts. The Arbiter so selected by either Seller and Buyer jointly or by the Arbiters (the "Final Arbiter") shall make its determination of the Disputed Amounts solely in accordance with the terms of this Agreement. The Parties shall cooperate fully in assisting the Final Arbiter in calculating the Disputed Amounts and shall take such actions as necessary to expedite and to cause the Final Arbiter to expedite such calculation. Each of Seller and Buyer shall pay one-half of the total fees and expenses of the Final Arbiter. SECTION 7.10. Certain Transition Arrangements. Buyer and Seller will cooperate to facilitate the transition to Buyer of the asset management services and mortgage servicing currently provided to the Company and its Subsidiaries by Affiliates of Seller. ARTICLE 8 TAX MATTERS SECTION 8.01. Definitions. The following terms, as used herein, have the following meanings: "Accounting Referee" means a nationally recognized accounting firm with no material relationship with Buyer, Seller or their Affiliates, mutually acceptable to both Buyer and Seller and chosen within five days of the date on which the need to choose the Accounting Referee arises. "Applicable Tax Rate" means (i) the maximum combined effective federal and state corporate tax rate in effect at the time such adjustment is made by a Taxing Authority, or (ii) in the case of a credit 100%. "Basket" means the amount at any time equal to (a) $100,000 plus the liability for Taxes excluding any amount attributable to deferred Taxes, if any, provided for on the books and records of the Company and the Subsidiaries, minus (b) any reductions (in the aggregate) made pursuant to Section 8.07 hereof. "Code" means the United States Internal Revenue Code of 1986, as amended. 45 "Federal Tax" means any income Tax imposed under the Code. "Indemnifiable Tax" means (i) any Tax related to a Pre-Closing Tax Period and (ii) any liability for the payment of any amount of the type described in the immediately preceding clause (i) as a result of the Company being a member of the Seller Group. "Post-Closing Tax Period" means any Tax period commencing after the close of business on the Closing Date or the post-Closing portion of a Straddle Period. "Pre-Closing Tax Period" means any Tax period ending on or before the Closing Date or the pre-Closing portion of a Straddle Period. "Seller Group" means, with respect to federal income Taxes, the affiliated group of corporations (as defined in Section 1504(a) of the Code) of which Seller is a member and, with respect to state income or franchise Taxes, the consolidated, combined or unitary group of which Seller or any of its Affiliates is a member. "Straddle Period" means any taxable period that includes the Closing Date, but which does not terminate on such date. "Tax" means (i) any tax imposed under Subtitle A of the Code and any net income, alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad valorem, value added, transfer, franchise, profits, license, withholding on amounts paid to or by the Company or any Subsidiary, payroll, employment, excise, severance, stamp, capital stock, occupation, property, environmental or windfall profit tax, premium, custom, duty or other tax, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest, penalty (including any payment made to any Taxing Authority in connection with the failure to properly report any payment or distribution of income to any recipient), addition to tax or additional amount imposed by any governmental authority (a "Taxing Authority") responsible for the imposition of any such tax (domestic or foreign), (ii) liability of the Company or its Subsidiary for the payment of any amounts of the type described in (i) as a result of being a member of an affiliated, consolidated, combined or unitary group with any other corporation at any time on or prior to the Closing Date, (iii) any payment paid to any Taxing Authority to secure any closing agreement, or similar agreement, related to any violations of Sections 72, 817, 7702 or 7702A and (iv) liability of the Company or any Subsidiary for the payment of any amounts as a result of being a party to any Tax Sharing Agreement or with respect to the payment of any amounts of the type described in (i) or (ii) as a result of any express or implied obligation to indemnify any other Person. 46 "Tax Asset" means any net operating loss, net capital loss, investment tax credit, foreign tax credit, charitable deduction or any other credit or tax attribute which could reduce Taxes (including, without limitation, deductions and credits related to alternative minimum Taxes). "Tax Sharing Agreements" means all existing Tax sharing agreements or arrangements (whether or not written) binding the Company or its Subsidiary (including without limitation the Tax Sharing Agreement between and among the Seller and the Company effective May 1, 1992 (the "Tax Sharing Agreement") and any agreements or arrangements which afford any other person the benefit of any Tax Asset of the Company or its Subsidiary, afford the Company or its Subsidiary the benefit of any Tax Asset of any other person or require or permit the transfer or assignment of income, revenues, receipts, or gains). SECTION 8.02. Tax Representations. (a) Seller represents and warrants to Buyer as of the date hereof and as of the Closing Date that, except as set forth in the Balance Sheet (including the notes thereto) or on Annex 3.09 (ix) or Schedule 8.02, (i) all Tax returns, statements, reports and forms (collectively, the "Returns") required to be filed with any Taxing Authority on or before the Closing Date with respect to any Pre-Closing Tax Period by, or with respect to, the Company or any Subsidiary have been or will be timely filed in accordance with all applicable laws; (ii) with respect to the Company and the Subsidiaries, all such Returns for Pre-Closing Periods are or will be true and complete in all material respects, (iii) the Company and the Subsidiaries have timely paid all Taxes shown as due and payable on the Returns that have been filed; (iv) the Company and the Subsidiaries have made or will on or before the Closing Date make provision for all Taxes payable by the Company and the Subsidiaries for any Pre-Closing Tax Period for which no Return has yet been filed; (v) the charges, accruals and reserves for Taxes with respect to the Company and the Subsidiaries reflected on the Balance Sheet are adequate to cover the Tax liabilities accruing through the date thereof; and (vi) there is no action, suit, proceeding, investigation, audit or claim now proposed or pending against or with respect to the Company or any Subsidiary in respect of any Tax. (b) The Company and the Subsidiaries are not in violation of any material applicable tax information reporting and tax withholding obligations (or with notice or lapse of time, or both, would be in violation). Except as disclosed on Schedule 8.02, the Company and the Subsidiaries have timely withheld from, and paid over to the appropriate Taxing Authorities, and have properly reported all salaries, wages, and other compensation. Each life insurance and annuity product issued, sold or administered by, or on behalf of, the Company and the Subsidiaries has been, and is, in compliance in all material respects with Sections 72, 817, 7702 and/or 7702A of the Code. 47 SECTION 8.03. Tax Covenants. (a) Buyer covenants that, other than in the ordinary course of business, it will not cause or permit the Company, any Subsidiary or any Affiliate of Buyer (i) to take any action on the Closing Date, including but not limited to the distribution of any dividend or the effectuation of any redemption that could give rise to any Tax liability of the Seller Group or any loss of the Seller or the Seller Group under this Agreement or (ii) without the prior written consent of the Seller, which shall not be unreasonably withheld, to make or change any Tax election (other than the Section 338 (h)(10) Election), amend any Return or take any Tax position on any Return, take any action, omit to take any action or enter into any transaction that results in any increased Tax liability or reduction of any Tax Asset of Seller in respect of any Pre-Closing Tax Period. Buyer agrees that Seller is to have no liability for any Tax resulting from any action, referred to in the preceding sentence, of the Company, Buyer or any Affiliate of Buyer on the Closing Date, and agrees to indemnify and hold harmless Seller and its Affiliates against any such Tax. Each of Seller and Buyer agrees to give prompt notice to the other party of the assertion of any claim, or the commencement of any action or proceeding, in respect of which indemnity may be sought under this Section 8.03(a). Buyer may participate in and assume the defense of any such suit, action or proceeding at its own expense. If Buyer assumes such defense, Seller shall have the right (but not the duty) to participate in the defense thereof and to employ counsel, at its own expense, separate from the counsel employed by Buyer. Whether or not Seller chooses to defend or prosecute any claim, the parties hereto shall cooperate in the defense or prosecution thereof. (b) Buyer agrees to cause the Company and the Subsidiaries to elect, where permitted by law, to carry forward any net operating loss, net capital loss, charitable contribution or other item arising after the Closing Date that would, absent such election, be carried back to a Pre-Closing Tax Period of the Company or the Subsidiaries in which the Company or the Subsidiaries filed a consolidated, combined or unitary Return with Seller or an Affiliate of Seller. (c) The Buyer will cause the Company and any Subsidiary to timely file any separate Returns required to be filed by the Company or any such Subsidiary after the Closing Date. (d) Buyer shall claim a compensation deduction with respect to the exercise by employees and retired or former employees of the Company or any of its Subsidiaries ("Employees") of options to purchase shares of common stock of Seller which were granted to Employees pursuant to an employee benefit arrangement maintained by Seller (a "Seller Stock Option"). Seller will notify Buyer of the amount of such compensation deductions. Buyer covenants that it will remit to Seller within fifteen days after the filing of its Federal Tax Return for 48 each taxable year the amount of any deduction multiplied by the maximum federal corporate tax rate applicable to the tax year in which the deduction is claimed; provided that if any such deduction is disallowed by any Taxing Authority, Seller shall make appropriate adjustments to Buyer. Simultaneously with the reporting of income in connection with the exercise of the Seller Stock Options, Seller shall pay to Buyer an amount equal to the sum of (i) all Taxes required to be withheld in respect of such income and (ii) the employer portion of all FICA Taxes in respect of such income. (e) All transfer, documentary, sales, use, stamp, registration and other such Taxes and fees (including any penalties and interest) incurred in connection with this Agreement (including any New York State Transfer Tax, New York City Transfer Tax and any similar tax imposed in other states or subdivisions) shall be borne and paid by Buyer, and Buyer will, at its own expense, file all necessary Returns and other documentation with respect to all such Taxes and fees, and, if required by applicable law, Seller will, and will cause its Affiliates to, join in the execution of any such Returns and other documentation. (f) Seller shall, upon the request of Buyer, make a timely, effective and irrevocable joint election under Section 338(g) and Section 338(h)(10) of the Code and any comparable elections under state and local tax law (together, the "Section 338(h)(10) Election") with respect to the Company and each Subsidiary. Except as otherwise provided in this Section 8.03(f), Buyer, on the one side, and Seller, on the other side, shall bear their respective administrative, legal, accounting, and similar expenses resulting from the making of the Section 338(h)(10) Election. Seller and Buyer agree to cooperate fully with respect to the making of the Section 338(h)(10) Election. Such cooperation shall include, but not be limited to, the following: (i) the treatment of the transaction as an assumption reinsurance transaction; (ii) the determination of the fair market value of the assets of the Company and each Subsidiary, and the calculation of the adjusted gross-up basis, within the meaning of Treasury Regulation Section 1.338(b)-1; (iii) the allocation of the deemed purchase price among the acquired assets in accordance with all applicable rules and regulations under Section 338 of the Code; and (iv) the preparation and timely filing of all Tax Returns, including all forms or schedules necessary or appropriate to the Section 338(h)(10) Election. 49 No later than December 31, 1997, Buyer shall prepare and deliver to Seller a schedule (the "Price Allocation Schedule") allocating the modified ADSP (as such term is defined in Treasury Regulations Section 1.338(h)(10)-1) among the assets of the Company and the Subsidiaries in accordance with the Treasury regulations promulgated under Section 338(h)(10). Any objections by Seller to the Price Allocation Schedule prepared by Buyer shall be raised within 60 business days after the receipt by Buyer of the Price Allocation Schedule. If Buyer and Seller are unable to resolve any differences within 60 business days thereafter, such dispute shall be resolved by the Accounting Referee, and, if necessary, a revised Price Allocation Schedule consistent with the determination made by the Accounting Referee shall be prepared by Buyer as soon as possible thereafter. In all events, the Price Allocation Schedule shall be finally prepared and agreed upon prior to August 15, 1998. Buyer and Seller shall each pay one-half of the costs, fees and expenses of the Accounting Referee. The Price Allocation Schedule shall be binding on the parties hereto, and Seller and Buyer agree to act in accordance with such Schedule in the preparation, filing and audit of any Tax return. Buyer agrees to pay Seller for the "Section 338 Cost". The Section 338 Cost shall be equal to fifty percent of the excess, if any, of (a) the Tax payable by Seller taking into account the Section 338(h)(10) Election and the deemed liquidation of the Company and its Subsidiaries and giving effect to the price allocation contained in the Price Allocation Schedule (including any Tax payable as a consequence of the triggering of the policyholder surplus account upon the deemed liquidation) over (b) the amount of Tax that would have been payable if the Seller had reported the sale of the Shares for the Purchase Price hereunder on the Closing Date, such Tax being computed in each case using the maximum applicable statutory rate, provided, however, that the Section 338 Cost shall in no event exceed $3,500,000. Seller agrees to pay Buyer for the "Section 338 Benefit". The Section 338 Benefit shall be equal to fifty percent of the excess, if any, of (a) the amount of Tax that would have been payable if the Seller had reported the sale of the Shares for the Purchase Price hereunder on the Closing Date, such Tax being computed in each case using the maximum applicable statutory rate, over (b) the Tax payable by Seller taking into account the Section 338(h)(10) Election and the deemed liquidation of the Company and its Subsidiaries and giving effect to the price allocation contained in the Price Allocation Schedule (including any Tax payable as a consequence of the triggering of the policyholder surplus account upon the deemed liquidation) provided, however, that the Section 338 Benefit shall in no event exceed $3,500,000. 50 The amount of the Section 338 Cost or the Section 338 Benefit, as applicable, shall be calculated in each case by Seller, and shall be determined without regard to the Tax consequences of the payment required by this Section 8.03(f). Any objection by Buyer to the legal or factual basis for the calculation by Seller of the Section 338 Cost or Section 338 Benefit, as applicable, shall be settled by the Accounting Referee. Buyer and Seller shall each pay one-half of the costs, fees and expenses of the Accounting Referee. SECTION 8.04. Termination of Existing Tax Sharing Agreements. Any and all existing Tax Sharing Agreements between the Company or any Subsidiary and any member of the Seller Group shall be terminated as of the Closing Date. After such date neither the Company, any Subsidiary, Seller nor any Affiliate of Seller shall have any further rights or liabilities thereunder, and this Agreement shall be the sole Tax sharing agreement relating to the Company or any Subsidiary for all Pre-Closing Tax Periods. SECTION 8.05. Tax Sharing. Immediately preceding the Closing, the Company shall pay Seller, based on Seller's good faith estimate, an amount equal to the Federal Taxes of the Company and the Subsidiaries with respect to all Pre-Closing Tax Periods for which no Federal Tax Return has yet been filed, exclusive of any Taxes resulting from the Section 338(h)(10) Election. Promptly after the filing of Federal Tax Returns for the Pre-Closing Tax Periods, the Company and Seller shall settle any difference between the provision for Federal Taxes calculated in accordance with the Tax Sharing Agreement, exclusive of any Federal Taxes resulting from the Section 338(h)(10) Election, and the payments made pursuant to this Section 8.05. SECTION 8.06. Cooperation on Tax Matters. (a) Seller will cause the Company and each Subsidiary to retain all books, records or other information that reflect, as of the last date on which such information is available (but not prior to December 31, 1996), (i) the original tax cost, (ii) the adjusted tax basis of all assets (including but not limited to all investment assets, all depreciable real or personal property, and all amortizable and non-amortizable intangible assets), and a schedule of all depreciation or amortization claimed on such assets. Buyer and Seller agree to furnish or cause to be furnished to each other, upon request, as promptly as practicable, such information (including access to books and records) and assistance relating to the Company as is reasonably necessary for the filing of any return, for the preparation for any audit, and for the prosecution or defense of any claim, suit or proceeding relating to any proposed adjustment. Buyer and Seller agree to retain or cause to be retained all books and records pertinent to the Company and the Subsidiaries until the applicable period for assessment under applicable law (giving effect to any and all extensions or waivers) has expired, and to abide by or cause the abidance with all record retention agreements entered into 51 with any Taxing Authority. The Company agrees to give Seller reasonable notice prior to transferring, discarding or destroying any such books and records relating to Tax matters and, if Seller so requests, the Company shall allow Seller to take possession of such books and records. Buyer and Seller shall cooperate with each other in the conduct of any audit or other proceedings involving the Company for any Tax purposes and each shall execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this subsection. (b) Buyer and Seller further agree, upon request, to provide the other party with all information that either party may be required to report pursuant to Section 6043 of the Code and all Treasury Department Regulations promulgated thereunder. SECTION 8.07. Indemnification by Seller. (a) Seller hereby indemnifies Buyer against and agrees to hold it harmless from any (i) Indemnifiable Tax of the Company or any Subsidiary, and (ii) liabilities, costs, expenses (including, without limitation, reasonable expenses of investigation and attorneys' fees and expenses), arising out of or incident to the imposition, assessment or assertion of any Indemnifiable Tax, including those incurred in the contest in good faith in appropriate proceedings relating to the imposition, assessment or assertion of any Indemnifiable Tax, in each case incurred or suffered by Buyer, any of its Affiliates or, effective upon the Closing, the Company, or any Subsidiary (the sum of (i) and (ii) being referred to as a "Loss"); provided, however, that Seller shall have no liability for the payment of any loss attributable to or resulting from any action described in Section 8.03(a) hereof; and provided, further, that Seller shall have no obligation to make any payment to Buyer pursuant to this Section 8.07 until the amount of all claims arising pursuant hereto in the aggregate (minus any Temporary Difference attributable thereto multiplied by the Applicable Tax Rate, each as defined in Section 8.07(b) hereof) exceeds the Basket, in which case Buyer shall be entitled to indemnity calculated in accordance with Section 8.07(b) for the full amount of all claims in excess of the Basket. (b) If Seller's indemnification obligation under Section 8.07(a) arises in respect of an adjustment which makes allowable to Buyer, any of its Affiliates, the Company or any Subsidiary, for any Post-Closing Tax Period, any deduction, amortization, exclusion from income, credit or other allowance (a "Temporary Difference") which would not, but for such adjustment, be allowable, then any payment by Seller to Buyer under Section 8.07(a) shall be an amount equal to (x) the amount otherwise due but for this subsection (b), minus (y) the present value of the Temporary Difference (determined as if the Buyer and its Affiliates have sufficient taxable income or other tax attributes to permit the utilization of the Temporary Difference at the earliest time permissible under applicable law) discounted at a rate of 10%, multiplied by the Applicable Tax Rate plus (z) the 52 present value of the Temporary Difference, if any, allowable to Seller as a consequence of the adjustment giving rise to such payment, discounted at a rate of 10%, multiplied by the Applicable Tax Rate. (c) If as a result of an adjustment Seller makes a payment to any Taxing Authority in respect of an Indemnifiable Tax of the Company with respect to any Pre-Closing Tax Period, then Buyer shall promptly pay to Seller an amount equal to such payment made by Seller, provided, however, that any such payment by Buyer shall not exceed an amount equal to (x) the positive balance, if any, in the Basket plus (y) the present value of the Temporary Difference, if any, allowable to Buyer, any of its Affiliates or, effective upon the Closing, the Company or any Subsidiary as a consequence of the adjustment giving rise to such payment, discounted at a rate of 10%, multiplied by the Applicable Tax Rate minus (z) the present value of the Temporary Difference, if any, allowable to Seller as a consequence of the adjustment giving rise to such payment, discounted at a rate of 10%, multiplied by the Applicable Tax Rate. (d) The Basket shall be reduced by (i) the amount of any claim of Buyer under Section 8.07(a) hereof that is not paid in whole or part by Seller solely by reason of there being a positive balance in the Basket, minus any Temporary Difference attributable thereto multiplied by the Applicable Tax Rate, and (ii) the amount of any payment of Buyer to Seller under Section 8.07(c) hereof, minus any Temporary Difference attributable thereto multiplied by the Applicable Tax Rate. (e) If any claim or demand for Indemnifiable Taxes is asserted in writing against Buyer, any of its Affiliates or, effective upon the Closing, the Company or any Subsidiary, Buyer shall notify Seller of such claim or demand within 20 days of receipt thereof, or such earlier time that would allow Seller to timely respond to such claim or demand, and shall give Seller such information with respect thereto as Seller may reasonably request. Seller may discharge, at any time, its indemnification obligation under this Section 8.07 by paying to Buyer the amount of the applicable Loss, calculated on the date of such payment. Seller may, at its own expense, participate in and, upon notice to Buyer, assume the defense of any such claim, suit, action, litigation or proceeding (including any Tax audit). If Seller assumes such defense, Buyer shall have the right (but not the duty) to participate in the defense thereof and to employ counsel, at its own expense, separate from the counsel employed by Seller. Whether or not Seller chooses to defend or prosecute any claim, all of the parties hereto shall cooperate in the defense or prosecution thereof. (f) Any payment by Seller pursuant to this Section 8.07 shall be made not later than 30 days after receipt by Seller of written notice from Buyer stating that any Loss has been paid by Buyer, any of its Affiliates or, effective upon the 53 Closing, the Company or any Subsidiary and the amount thereof and of the indemnity payment requested. (g) Seller shall not be liable under this Section 8.07 for (i) any Indemnifiable Tax the payment of which was made without Seller's prior written consent or (ii) any settlements effected without the consent of Seller, or resulting from any claim, suit, action, litigation or proceeding in which Seller was not permitted an opportunity to participate. SECTION 8.08. Survival. Notwithstanding anything in this Agreement to the contrary, the provisions of this Article 8 shall survive for the full period of all statutes of limitations (giving effect to any waiver, mitigation or extension thereof). ARTICLE 9 EMPLOYEES AND EMPLOYEE BENEFITS SECTION 9.01. Pension Plans. Seller and its Affiliates shall retain all liabilities and obligations in respect of benefits accrued by Transferred Employees under the Pension Plan and the Excess Pension Plan. Benefit accruals in respect of Transferred Employees under the Pension Plan shall cease as of the Closing Date and Transferred Employees participating therein shall be considered to have terminated employment for purposes of such Plan. No Pension Plan assets shall be transferred to Buyer or any of its Affiliates or to any plan of Buyer or its Affiliates. SECTION 9.02. Individual Account Plans. (a) The Seller shall retain all liabilities and obligations in respect to benefits accrued by Transferred Employees under the Individual Account Plans and the Defined Contribution Excess Plan. On the Closing Date, the Seller shall take such action as may be necessary, if any, to permit each Transferred Employee to exercise his rights under the Individual Account Plans to effect an immediate distribution of such Transferred Employee's vested account balances under the Individual Account Plans or to effect a tax-free rollover of the taxable portion of the account balances into an eligible retirement plan (within the meaning of Section 401(a)(31) of the Code, a "Direct Rollover") maintained by the Buyer or a Subsidiary of the Buyer (the "Buyer Plan") or to an individual retirement account. The Seller and the Buyer shall work together in order to facilitate any such distribution or rollover and to effect a Direct Rollover for those participants who elect to roll over their account balances directly into the Buyer Plan; provided that, except as provided in Section 9.02(c) below, nothing contained herein shall obligate the Buyer Plan to accept a Direct Rollover in a form other than cash. 54 (b) On the Closing Date, or as soon as practicable thereafter, the Buyer shall establish or designate the Buyer Plan in order to accommodate the Direct Rollovers described above and shall take all action necessary, if any, to qualify the Buyer Plan under the applicable provisions of the Code and shall make any and all filings and submissions to the appropriate governmental authorities required to be made by it in connection with any Direct Rollover. (c) On the Closing Date, for each Transferred Employee who has an outstanding loan under the Capital Accumulation Plan and who elects a Direct Rollover to the Buyer Plan, the Direct Rollover shall include the note related to such outstanding loan provided that Buyer with respect to the Buyer Plan and Seller with respect to the Capital Accumulation Plan conclude that such Direct Rollover complies with the applicable rules under Section 401 of the Code and such note is enforceable under applicable law by the trustees of Buyer Plan. In the event either Buyer or Seller is unable to so conclude, Buyer and Seller agree to take such steps as may be necessary to amend the eligibility rules and permit such Transferred Employee to secure a loan under the Buyer Plan (to the extent of the loan permitted under the loan rules of the Buyer Plan) in order to make a further rollover to the Buyer Plan of the amount of the distribution from the Capital Accumulation Plan represented by such Transferred Employee's loan balance under the Capital Accumulation Plan. SECTION 9.03. Other Employee Plans and Benefit Arrangements. (a) Buyer shall be liable for, and, where appropriate, shall cause the Company to perform: (i) all obligations to any Transferred Employee under Seller's short-term disability and wage continuation programs; (ii) all obligations to any Transferred Employee in respect of the continuation of coverage rules under Section 601 through 608 of ERISA and Section 4980B of the Code; (iii) all obligations relating to any Transferred Employee in connection with applicable Worker's Compensation laws, including any such obligations relating to events that occur prior to the Closing Date; (iv) all obligations relating to severance benefits with respect to any Transferred Employee whose employment by the Company or a Subsidiary terminates on or after the Closing Date with such severance benefits for any Transferred Employee whose employment terminates in the six month period beginning on the Closing Date being at least equal to the 55 benefit such Transferred Employee would have received under the Company's severance policy in effect on the Closing Date; (v) all obligations relating to bonus and profit sharing to which each Transferred Employee is entitled for the period from January 1, 1997 through the Closing Date and vacation and personal holidays (including personal time off (PTO) days) to which each Transferred Employee is entitled as of the Closing Date; and (vi) subject to Buyer's annual discretionary review, a payroll deduction function to continue and facilitate the purchase of insurance and the payment of premiums for such coverages for personal insurance products made available through Affiliates of the Seller to employees of the Company and its Subsidiaries as described in Benefit Arrangement Item 22 on Schedule 3.17. (b) Seller shall retain all obligations and liabilities under the Employee Plans and Benefit Arrangements in respect of any employee or former employee or any independent contractor (including any beneficiary or dependent thereof) who is not a Transferred Employee (other than Items 23 and 24 on Schedule 3.17, which shall be the liability of the Company). (c) With respect to Transferred Employees, Seller shall have no obligation or liability relating to or arising under the Employee Plans or Benefit Arrangements except as otherwise provided in Sections 9.01 or 9.02 and except for any liability arising under the Employee Plans or Benefit Arrangements which are attributable to events occurring on or prior to the Closing Date, which Seller hereby assumes, provided, however, that with respect to any Transferred Employee who, on the Closing Date, is absent by reason of short-term disability or wage continuation, Buyer shall assume and be liable for any payment attributable to the period beginning on the Closing Date. SECTION 9.04. Plans Following the Closing. Buyer will, or will cause the Company to, give Transferred Employees full credit for purposes of eligibility and vesting under any plans or arrangements maintained by Buyer or the Company for such Transferred Employees' service recognized for such purposes under the Employee Plans and Benefit Arrangements. Buyer shall cause all health and welfare plans in which Transferred Employees become participants on or after the Closing Date to waive any and all pre-existing condition exclusions and waiting period requirements to the extent necessary to provide a Transferred Employee with the same status as such Transferred Employee had under the Employee Plans as of the date of this Agreement, and to recognize, to the extent such participation commences other than at the beginning of a plan year, expenses previously 56 incurred for purpose of applicable deductible and co-payment rules to the extent such expenses would have been recognized under the applicable Seller plan as in effect immediately prior to the Closing Date. SECTION 9.05. Third Party Beneficiaries. No provision of this Article 9 shall create any third party beneficiary rights in any employee or former employee of the Company or any Subsidiary (including any beneficiary or dependent thereof) in respect of continued employment or resumed employment, and no provision of this Article 9 shall create any rights in any such persons in respect of any benefits that may be provided, directly or indirectly, under any employee benefit plan or arrangement. Except as otherwise provided in this Article 9, Buyer makes no representations, warranties or covenants with respect to any compensation or benefits to be offered or provided to Transferred Employees or former employees of the Company or any Subsidiary after the Closing Date. ARTICLE 10 CONDITIONS TO CLOSING SECTION 10.01. Conditions to Obligations of Buyer and Seller. The obligations of Buyer and Seller to consummate the Closing are subject to the satisfaction of the following conditions: (i) Any applicable waiting period under the HSR Act relating to the transactions contemplated hereby shall have expired or been terminated. (ii) No provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the consummation of the Closing. There shall not be pending or threatened any claim, suit, action or proceeding by any governmental agency before any court or governmental agency, seeking to prohibit or restrain the transactions contemplated by this Agreement or seeking material damages in connection therewith. (iii) This Agreement and the consummation of the transactions contemplated hereby shall have been approved by the Insurance Departments of the Required Jurisdictions and the jurisdictions set forth on Schedule 4.03 or shall not have been disapproved by such Departments and the period of time during which such Departments and jurisdictions may, under applicable law, disapprove this Agreement and the consummation of 57 such transactions shall have lapsed, and the parties shall have received reasonably satisfactory evidence of such approvals or non-disapprovals. SECTION 10.02. Conditions to Obligation of Buyer. The obligation of Buyer to consummate the Closing is subject to the satisfaction of the following further conditions: (i) (A) Seller shall have performed in all material respects all of its obligations hereunder required to be performed by it on or prior to the Closing Date and (B) the representations and warranties of Seller contained in this Agreement and in any certificate or other writing delivered by Seller pursuant hereto shall be true in all material respects at and as of the Closing Date, as if made at and as of such date, except for those representations and warranties made as of a specified date, and (C) Buyer shall have received a certificate signed by an executive officer of Seller to the foregoing effect. (ii) Buyer shall have received an opinion of Robert Rusis, Esq., General Counsel of Seller, and an opinion of Davis Polk & Wardwell, counsel to Seller, dated the Closing Date in the forms attached as Exhibits I and III hereto. In rendering such opinions, such counsel may rely: (x) upon certificates of public officers, (y) as to matters governed by the laws of jurisdictions other than New York and the corporate laws of Delaware or the federal laws of the United States of America, upon the opinions of Shanley & Fisher, P.C. (as to the laws of New Jersey), Frederick Condon, General Counsel to the Company (as to the laws of New Hampshire), and any other counsel reasonably satisfactory to Buyer and (z) as to matters of fact, upon certificates of officers of Seller, the Company or any Subsidiary, copies of which opinions and certificates shall be contemporaneously delivered to Buyer. (iii) The Company shall have obtained the consents required under Item 1 of Schedule 3.04 or new Investment Contracts, substantially in the form of CIAC's existing Investment Contracts, with each Investment Company to which CIAC currently provides investment advisory or management services. (iv) Buyer shall have received all documents it may reasonably request relating to the existence of Seller, the Company and Subsidiary and the authority of Seller for this Agreement, all in form and substance reasonably satisfactory to Buyer. 58 SECTION 10.03. Conditions to Obligation of Seller. The obligation of Seller to consummate the Closing is subject to the satisfaction of the following further conditions: (i) (A) Buyer shall have performed in all material respects all of its obligations hereunder required to be performed by it at or prior to the Closing Date and (B) the representations and warranties of Buyer contained in this Agreement and in any certificate or other writing delivered by Buyer pursuant hereto shall be true at and as of the Closing Date, as if made at and as of such date, except for those representations and warranties made as of an earlier date, and (C) Seller shall have received a certificate signed by an executive officer of Buyer to the foregoing effect. (ii) Seller shall have received an opinion of King & Spalding, counsel to Buyer, dated the Closing Date in the form attached as Exhibit IV hereto. In rendering such opinion, such counsel may rely upon certificates of public officers, as to matters governed by the laws of jurisdictions other than New York or the federal laws of the United States of America, upon opinions of counsel reasonably satisfactory to Seller and, as to matters of fact, upon certificates of officers of Buyer, copies of which opinions and certificates shall be contemporaneously delivered to Seller. (iii) Seller shall have received all documents it may reasonably request relating to the existence of Buyer and the authority of Buyer for this Agreement, all in form and substance reasonably satisfactory to Seller. ARTICLE 11 SURVIVAL; INDEMNIFICATION SECTION 11.01. Survival. The representations and warranties of the parties hereto contained in this Agreement or in any certificate or other writing delivered pursuant hereto or in connection herewith shall survive the Closing until 18 months after the Closing Date; provided that (i) the representations and warranties contained in Sections 3.02, 3.05, 3.06 and 3.07(b) and the covenants and agreements contained in Sections 5.10, 5.11, 6.02, 7.02, 7.04 and 13.03 and Article 11 shall survive indefinitely, (ii) the covenants and agreements set forth in Sections 5.05, 5.06, 5.09, 6.03, 7.05, 7.06, 7.08 and 7.09 shall survive for the respective periods set forth therein and (iii) the covenants, agreements, representations and warranties contained in Articles 8 and 9 shall survive until 59 expiration of the statute of limitations applicable to the matters covered thereby (giving effect to any waiver, mitigation or extension thereof), if later. No covenant, agreement, representation or warranty contained in this Agreement shall survive after the time at which it would otherwise terminate pursuant to the preceding sentence unless written notice of the inaccuracy or breach thereof shall have been given to the party against whom such indemnity may be sought prior to such time. SECTION 11.02. Indemnification. (a) Seller hereby indemnifies Buyer and, effective at the Closing, without duplication, the Company or any Subsidiary and their officers, directors, employees, agents, successors and assigns (the "Claim Indemnified Parties") against and agrees to hold them harmless from any and all damage, loss, liability and expense (including without limitation reasonable expenses of investigation and reasonable attorneys' fees and expenses in connection with any claim, action, suit or proceeding) ("Damages") relating to or arising out of: (i) any inaccuracy in or breach of any representation or warranty made by Seller pursuant to this Agreement (other than pursuant to Section 3.19 or Article 8); provided that (x) Seller shall not be liable under this Section 11.02(a)(i) unless the aggregate amount of Damages with respect to all matters referred to in this Section 11.02(a)(i) exceeds $12,000,000 and then only to the amount of such excess, provided that this limitation shall not apply to the breach of any representation or warranty contained in Sections 3.02, 3.05, 3.06 and 3.07(b), and (y) Seller's maximum liability under this Section 11.02(a)(i) shall not exceed an amount equal to the Purchase Price; (ii) Seller's breach of or failure to perform any of its covenants or agreements contained in or made pursuant to this Agreement (other than Article 8); (iii) [ CONFIDENTIAL TREATMENT REQUESTED ] 60 [ CONFIDENTIAL TREATMENT REQUESTED ] (iv) any obligation or liability of the Company or any Subsidiary that is payable after December 31, 1996 under any acquisition, disposition or joint venture agreement involving a significant amount of assets owned or previously owned by the Company or any Subsidiary, to the extent such obligation or liability is not fully reflected in the Statutory Financial Statements of the Company and the Insurance Subsidiaries as of and for the year ended December 31, 1996; and (v) any cause of action, claim, suit or proceeding relating to or arising out of the Company's or any Subsidiary's violation of, or liability under, any Environmental Laws which arises out of facts or circumstances occurring prior to the Closing Date; provided that (x) Seller shall not be liable under this Section 11.02(a)(v) unless the aggregate amount of Damages with respect to all matters referred to in this Section 11.02(a)(v) exceeds $250,000 and then only to the amount of such excess, and (y) Seller's maximum liability under this Section 11.02(a)(v) shall not exceed $3,000,000. (b) Buyer hereby indemnifies Seller and its officers, directors, employees, agents, successors and assigns against and agrees to hold them harmless from any and all Damages relating to or arising out of (i) any inaccuracy or breach of any representation or warranty made by Buyer pursuant to this Agreement (other than pursuant to Article 8); provided that Buyer shall not be liable under this Section 61 11.02(b) unless the aggregate amount of Damages with respect to all matters referred to in this Section 11.02(b) exceeds an amount equal to $12,000,000 and then only to the extent of such excess, (ii) Buyer's breach of or failure to perform any of its covenants and agreements pursuant to this Agreement (other than Article 8) and (iii) any Damages resulting from the use, after the Closing Date, of any policy forms and materials or marketing materials containing the Chubb Trademarks or the "Chubb" name or the use of the Chubb Trademarks. SECTION 11.03. Procedures; Exclusivity. (a) The party seeking indemnification under Section 11.02 (the "Indemnified Party") agrees to give prompt written notice to the party against whom indemnity is sought (the "Indemnifying Party") of the assertion of any claim, or the commencement of any suit, action or proceeding in respect of which indemnity may be sought under such Section. The Indemnifying Party may, and at its election shall, participate in and control the defense of any such suit, action or proceeding at its own expense. Except as otherwise provided in this Article 11, the Indemnifying Party shall not be liable under Section 11.02 for any settlement effected without its consent of any claim, litigation or proceeding in respect of which indemnity may be sought hereunder. (b) The Indemnified Party shall have the right to employ separate counsel in any action or claim and to participate in the defense thereof at the expense of the Indemnifying Party (i) if the retention of such counsel has been specifically authorized by the Indemnifying Party, or (ii) if the counsel is retained because the Indemnifying Party does not notify the Indemnified Party within twenty (20) days after receipt of a claim notice that it elects to undertake the defense thereof. The Indemnified Person shall have the right to employ counsel at the Indemnified Party's own expense and participate in such action or claim, including settlement or trial. (c) Except as otherwise provided in Section 11.05, the Indemnifying Party shall obtain the prior written approval of the Indemnified Party before entering into any settlement, adjustment, or compromise of such claim or ceasing to defend against such claim that provides for any relief (i) other than the payment of monetary damages by the Indemnifying Party or (ii) which might adversely affect the Indemnified Party or its business or operations, and the determination of whether and under what conditions such approval may be given shall be in the sole discretion of the Indemnified Party. (d) If the Indemnifying Party does not assume control over the defense of such claim as provided in Section 11.03(a) within 30 days of receipt of notice thereof, the Indemnified Party shall have the right to defend the claim in such 62 manner as it may deem appropriate at the cost and expense of the Indemnifying Party, including the right to settle, adjust or compromise such claim. (e) Except as otherwise specifically set forth in this Agreement, Buyer and its Affiliates (including, effective at the Closing without duplication, the Company or any Subsidiary) hereby waive all rights for contribution or other rights of recovery with respect to Damages arising under or relating to Environmental Laws that Buyer or any of the Affiliates may have by statute or otherwise against Seller or any of its Affiliates. (f) After the Closing, Section 11.02 will provide the exclusive remedy for any breach of representation or warranty (other than those contained in Article 8) or other claim arising under this Agreement. SECTION 11.04. [ CONFIDENTIAL TREATMENT REQUESTED ] 63 [ CONFIDENTIAL TREATMENT REQUESTED ] SECTION 11.05. Procedures for Certain Litigation. (a) For the purposes of this Section 11.05, "Claims" shall mean [CONFIDENTIAL TREATMENT REQUESTED] and any cause of action, claim, suit or proceeding described in Sections 11.02(a)(iii)(B)-(D). (b) The Claim Indemnified Parties shall take no action with respect to any Claim without Seller's express written consent. Seller shall control the defense of the Claims at its own expense and with counsel of its choosing; provided that Seller shall keep the Buyer apprised of all material developments relating to the conduct of the litigation relating to the Claims. (c) Seller shall have the right to consent to a settlement of, or the entry of any judgment arising from any Claim, without the consent of the Buyer; provided, that Seller (i) shall pay or cause to be paid all amounts arising out of such settlement or judgment concurrently with the effectiveness thereof; (ii) shall not encumber any assets of the Claim Indemnified Parties or agree to any condition or restriction that would apply to the Claim Indemnified Parties or to the conduct of their respective businesses; and (iii) shall obtain an unconditional release of the Claim Indemnified Parties, as applicable, from such Claim. Seller shall not be liable under this Section 11.05 for any settlement of a Claim effected without its consent. 64 (d) The Claim Indemnified Parties and their Affiliates shall cooperate fully with Seller and its counsel in the investigation, trial and defense of any Claim (including the filing by the Company of any cross-claim, counter-claim or other proceeding deemed reasonably appropriate by Seller) and any appeal arising therefrom. Such cooperation shall include, but shall not be limited to, the Claim Indemnified Parties' giving prompt written notice to Seller of any notice, request, pleading or similar matter it shall receive relating to any Claim, making available, without charge, to Seller and its counsel such of the books, records, documents and other data of the Company and its Subsidiaries, and such employees and representatives of the Company and its Subsidiaries as Seller, in its sole discretion, shall deem necessary. The Claim Indemnified Parties hereby agree to retain all such books, records, documents and other data until the final resolution of the Claims. (e) If Seller and Buyer are unable to agree with respect to any matter arising under this Section 11.05, Seller and Buyer, shall, within five days after notice of disagreement given by either party, present their differences in writing (each party simultaneously providing to the other a copy of all documents submitted) to the Judicial Arbitration and Mediation Service, New York, New York (the "Referee"), who shall promptly review and resolve the disputed matter. The decision of the Referee shall be final and binding unless both the Seller and the Buyer agree otherwise. Seller and Buyer shall equally share all costs and fees of the Referee. It is the express understanding of the parties hereto that a failure of cooperation could be materially prejudicial to the interests of the Seller and that the procedure described in this paragraph (e) shall resolve any dispute in as timely a manner as possible, such that any such dispute has no affect on the underlying Claim. It is the further understanding of the parties hereto that the decision of the Referee with respect to any matter may be specifically enforced through injunctive and other equitable relief. SECTION 11.06. Limitation of Indemnification. Notwithstanding the foregoing provisions of this Article 11, an Indemnifying Party's obligation to indemnify an Indemnified Party shall be subject to the following limitations: (i) No indemnification shall be required to be made by Buyer or Seller with respect to any claim for indemnity which when aggregated with any similar claims is less than $1,000. (ii) The Damages required to be paid by the Indemnifying Party pursuant to this Article 11 shall be reduced to the extent of any amounts actually received by the Indemnified Party after the Closing Date pursuant to the terms of any insurance policies covering such Damages. 65 (iii) Each of the parties agrees that to the extent the other party indemnifies it from any claim for Damages, the Indemnified Party shall assign its rights to such claim to the Indemnifying Party to the extent of any amounts actually received by the Indemnified Party from the Indemnifying Party. ARTICLE 12 TERMINATION SECTION 12.01. Grounds for Termination. This Agreement may be terminated at any time prior to the Closing: (i) by mutual written agreement of Seller and Buyer; (ii) by either Seller or Buyer if the Closing shall not have been consummated on or before September 30, 1997; (iii) by either Seller or Buyer if there shall be any law or regulation that makes consummation of the transactions contemplated hereby illegal or otherwise prohibited or if consummation of the transactions contemplated hereby would violate any nonappealable final order, decree or judgment of any court or governmental body having competent jurisdiction; (iv) by Seller if events occur which render impossible compliance with one or more conditions set forth in Section 10.01 and Section 10.03 hereof and such conditions are not waived by Seller; provided that such events did result from any action or omission by Seller, the Company or the Subsidiaries which were within the control of such entity and which such entity was not expressly permitted to take or omit by the terms of this Agreement; or (v) by Buyer if events occur which render impossible compliance with one or more conditions set forth in Section 10.01 and 10.02 hereof, and such conditions are not waived by Buyer; provided that such events did not result from any action or omission by Buyer which was within its control and which Buyer was not expressly permitted to take or omit by the terms of this Agreement; The party desiring to terminate this Agreement shall give notice of such termination to the other party. 66 SECTION 12.02. Effect of Termination. If this Agreement is terminated as permitted by Section 12.01, termination shall be without liability of either party (or any stockholder, director, officer, employee, agent, consultant or representative of such party) to the other party to this Agreement; provided that if such termination shall result from the willful failure of either party to fulfill a condition to the performance of the obligations of the other party or to perform a covenant of this Agreement or from a willful breach by either party to this Agreement, such party shall be fully liable for any and all Damages incurred or suffered by the other party as a result of such failure or breach. The provisions of Sections 6.01, 6.02 and 13.03 shall survive any termination hereof pursuant to Section 12.01. ARTICLE 13 MISCELLANEOUS SECTION 13.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including facsimile transmission) and shall be given, if to Buyer, to: Jefferson-Pilot Corporation 100 N. Greene Street Greensboro, NC 27401 Attention: General Counsel Fax: 910-691-3639 with a copy to: King & Spalding 120 West 45th Street New York, NY 10036 Attention: E. William Bates, II Fax: 212-556-2222 67 if to Seller, to: The Chubb Corporation 15 Mountain View Road Warren, New Jersey 07061-1625 Attention: General Counsel Fax: (908) 903-3607 with a copy to: Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 Attention: Dennis S. Hersch, Esq. Fax: (212) 450-4800 All such notices, requests and other communications shall be deemed received on the date of receipt by the recipient thereof if received prior to 5 p.m. in the place of receipt and such day is a business day in the place of receipt. Otherwise, any such notice, request or communication shall be deemed not to have been received until the next succeeding business day in the place of receipt. SECTION 13.02. Amendments and Waivers. (a) Any provision of this Agreement may be amended or waived prior to the Closing Date if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by each party to this Agreement, or in the case of a waiver, by the party against whom the waiver is to be effective. (b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 13.03. Expenses. All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such cost and expense and neither the Company nor any Subsidiary shall be responsible for or pay any such cost or expense. SECTION 13.04. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. No party shall assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the prior written consent of each other party hereto. Notwithstanding the foregoing, 68 Buyer may assign all or any portion of its rights, interest or obligations hereunder to any Affiliate of Buyer without the prior written consent of Seller, provided that such assignment shall not release Buyer from or in any manner limit Buyer's obligations hereunder. SECTION 13.05. Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of New York, without regard to the conflicts of law rules of such state. SECTION 13.06. Jurisdiction. Except as otherwise expressly provided in this Agreement, any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby may be brought in the United States District Court for the Southern District of New York or any other New York State court sitting in New York City, and each of the parties hereby consents to the jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient form. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each party agrees that service of process on such party as provided in Section 13.01 shall be deemed effective service of process on such party. SECTION 13.07. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 13.08. Counterparts; Third Party Beneficiaries. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. No provision of this Agreement is intended to confer upon any Person other than the parties hereto any rights or remedies hereunder. SECTION 13.09. Entire Agreement. This Agreement and the Confidentiality Agreement between Buyer and Seller dated October 16, 1996 constitute the entire agreement between the parties with respect to the subject matter of this Agreement and supersedes all prior agreements and understandings, both oral and written, between the parties with respect to the subject matter of this 69 Agreement. No representation, inducement, promise, understanding, condition or warranty not set forth herein has been made or relied upon by either party hereto. Neither this Agreement nor any provision hereof is intended to confer upon any Person other than the parties hereto any rights or remedies hereunder. 70 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. JEFFERSON-PILOT CORPORATION By: /s/ David A. Stonecipher -------------------------------------- Title: President and Chief Executive Officer THE CHUBB CORPORATION By: /s/ Dean R. O'Hare ------------------------------------- Title: Chairman and Chief Executive Officer EX-10 3 CONTRACT FOR CONSULTING & ADVISORY SERVICES 1 THE CHUBB CORPORATION DEAN R. O'HARE Chairman and Chief Executive Officer October 1, 1996 Mr. Percy Chubb III 431 Claremont Road Bernardsville, NJ 07924 Dear Pi: I am pleased that, effective February 1, 1997, you have agreed to serve as a senior advisor to Chubb & Son Inc. for a term of twelve (12) months. You will report directly to me and your duties as senior advisor will be specified by me from time to time. Chubb will indemnify and hold you harmless for liability which may arise out of your performing duties under this agreement. During the term of your consulting agreement, you will receive an annual fee of $100,000 for your services plus reimbursement of all your necessary expenses. Payments will be made in $25,000 installments during the last week of each calendar quarter. Please submit to me for approval all necessary travel and other expenses incurred by you as a consultant for Chubb & Son Inc. As of February 1, 1997, you no longer will be an employee of Chubb & Son Inc. You will be an independent contractor and no withholding for taxes or benefit deductions will be taken from your quarterly payments. Payments of any local, state or federal taxes, including payments pursuant to the Self-Employment Contribution Act "SECA" shall be your responsibility. 15 Mountain View Road, Warren, NJ 07059 * Phone: (908) 903-3565 2 -2- It is understood that you will receive all of the benefits normally provided to a retiree of Chubb & Son Inc. By mutual consent, this consulting agreement may be extended or modified effective February 1 of each subsequent calendar year. The agreement can be canceled by either party as of the end of any month, provided written notice is given by the 15th of that month. Should you find the above terms acceptable, kindly sign where indicated, retain a copy and return the original to me. Sincerely, /s/ Dean R. O'Hare ------------------ Dean R. O'Hare Chairman /s/ Percy Chubb III - ------------------- Percy Chubb III 2 October 1996 - -------------- Date 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
1996 1995 1994 -------- -------- -------- Net income......................................... $512,684 $696,628 $528,469 After-tax interest expense on 6% guaranteed exchangeable subordinated notes.................. 9,735 9,750 9,750 -------- -------- -------- Net income for computing earnings per share........ $522,419 $706,378 $538,219 ======== ======== ======== Weighted average number of common shares outstanding...................................... 174,402 174,071 175,085 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 23.256 shares of common stock..................................... 5,793 5,814 5,814 -------- -------- -------- Weighted average number of common and common equivalent shares assumed outstanding for computing earnings per share..................... 180,195 179,885 180,899 ======== ======== ======== Net income per share............................... $ 2.90 $ 3.93 $ 2.98
Share and per share amounts have been retroactively adjusted to reflect the two-for-one stock split effective April 19, 1996. 47 EX-13 5 1996 ANNUAL REPORT PAGES 21,22, AND 40 THROUGH 67 1 Supplementary Financial Data
IN THOUSANDS YEARS ENDED DECEMBER 31 1996 1995 1994 ---------- ---------- ---------- PROPERTY AND CASUALTY INSURANCE UNDERWRITING Net Premiums Written............................. $4,773,753 $4,305,992 $3,951,209 Increase in Unearned Premiums.................... (204,497) (158,830) (174,926) ---------- ---------- ---------- Premiums Earned.................................. 4,569,256 4,147,162 3,776,283 ---------- ---------- ---------- Claims and Claim Expenses........................ 3,010,755 2,669,981 2,519,359 Operating Costs and Expenses..................... 1,547,402 1,393,373 1,288,692 Increase in Deferred Policy Acquisition Costs.... (42,522) (29,223) (39,751) Dividends to Policyholders....................... 23,279 18,877 16,294 ---------- ---------- ---------- Underwriting Income (Loss) Before Income Tax..... 30,342 94,154 (8,311) Federal and Foreign Income Tax (Credit).......... 13,200 38,500 (500) ---------- ---------- ---------- UNDERWRITING INCOME (LOSS)....................... 17,142 55,654 (7,811) ---------- ---------- ---------- INVESTMENTS Investment Income Before Expenses and Income Tax............................................ 656,135 613,242 570,531 Investment Expenses.............................. 10,079 10,255 10,050 ---------- ---------- ---------- Investment Income Before Income Tax.............. 646,056 602,987 560,481 Federal and Foreign Income Tax................... 101,900 95,800 85,500 ---------- ---------- ---------- INVESTMENT INCOME................................ 544,156 507,187 474,981 ---------- ---------- ---------- PROPERTY AND CASUALTY INCOME........................ 561,298 562,841 467,170 ---------- ---------- ---------- REAL ESTATE Revenues............................................ 319,787 287,795 204,849 Cost of Sales and Expenses.......................... 555,642(a) 280,099(b) 210,799 ---------- ---------- ---------- Real Estate Income (Loss) Before Income Tax......... (235,855) 7,696 (5,950) Federal Income Tax (Credit)......................... (89,069) 1,686 (3,913) ---------- ---------- ---------- REAL ESTATE INCOME (LOSS)........................... (146,786) 6,010 (2,037) ---------- ---------- ---------- CORPORATE, NET OF TAX................................. 19,652 14,809 7,661 ---------- ---------- ---------- CONSOLIDATED OPERATING INCOME FROM CONTINUING OPERATIONS..................................... 434,164 583,660 472,794 REALIZED INVESTMENT GAINS FROM CONTINUING OPERATIONS, NET OF TAX.......................................... 52,029 70,752 35,124 ---------- ---------- ---------- CONSOLIDATED INCOME FROM CONTINUING OPERATIONS... 486,193 654,412 507,918 INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX (c)... 26,491 42,216 20,551 ---------- ---------- ---------- CONSOLIDATED NET INCOME.......................... $ 512,684 $ 696,628 $ 528,469 ========== ========== ==========
(a) Includes a $255,000,000 write-down of the carrying value of certain real estate assets to their estimated fair value. (b) 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. (c) In February 1997, the Corporation entered into a definitive agreement to sell its life and health insurance operations. As a result, these operations have been classified as discontinued operations. The above federal and foreign income tax provisions represent allocations of the consolidated provision. 21 2 Property and Casualty Underwriting Results NET PREMIUMS WRITTEN (In Millions of Dollars)
1996 1995 1994 1993 1992 Personal Insurance Automobile......................... $ 243.1 $ 200.3 $ 188.0 $ 192.1 $ 191.3 Homeowners......................... 546.1 455.6 436.5 434.1 420.6 Other.............................. 250.0 210.9 204.3 201.6 195.4 -------- -------- -------- -------- -------- Total Personal................ 1,039.2 866.8 828.8 827.8 807.3 -------- -------- -------- -------- -------- Commercial Insurance Multiple Peril..................... 671.0 575.7 522.6 480.8 432.9 Casualty........................... 818.0 717.3 667.8 728.9(a) 569.9 Workers' Compensation.............. 243.7 223.4 201.6 181.1 175.5 Property and Marine................ 495.0 426.3 360.0 277.5 236.0 Executive Protection............... 775.7 647.0 596.4 515.2 496.8 Other.............................. 528.7 481.0 458.8 415.1 379.0 -------- -------- -------- -------- -------- Total Commercial.............. 3,532.1 3,070.7 2,807.2 2,598.6(a) 2,290.1 -------- -------- -------- -------- -------- Reinsurance Assumed.................. 202.5 368.5 315.2 219.9 145.1 -------- -------- -------- -------- -------- Total......................... $4,773.8 $4,306.0 $3,951.2 $3,646.3(a) $3,242.5 ======== ======== ======== ======== ========
(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 $603.9 million for Casualty, $2,473.6 million for Commercial and $3,521.3 million in Total. Effective January 1, 1996, the reinsurance agreements with the Royal & Sun Alliance Insurance Group plc were changed. This resulted in the Corporation's property and casualty insurance subsidiaries retaining a greater portion of the business written directly and assuming less reinsurance from Royal & Sun Alliance. COMBINED LOSS AND EXPENSE RATIOS Personal Insurance Automobile......................... 86.5% 87.4% 96.3% 97.5% 100.2% Homeowners......................... 104.3 93.8 110.2 100.1 113.1 Other.............................. 69.3 72.6 80.7 84.2 89.2 -------- -------- -------- -------- -------- Total Personal................ 91.7 87.1 99.8 95.6 104.3 -------- -------- -------- -------- -------- Commercial Insurance Multiple Peril..................... 118.1 110.0 112.4 117.2 116.0 Casualty........................... 113.3 113.8 101.9 175.8(b) 91.3 Workers' Compensation.............. 101.8 95.1 103.9 117.3 117.7 Property and Marine................ 97.8 92.9 102.5 98.7 99.1 Executive Protection............... 76.5 82.1 81.4 78.4 83.1 Other.............................. 89.3 95.1 100.2 99.1 98.9 -------- -------- -------- -------- -------- Total Commercial.............. 99.7 99.3 99.4 121.4(b) 98.2 -------- -------- -------- -------- -------- Reinsurance Assumed.................. N/M 99.2 100.1 112.4 129.9 -------- -------- -------- -------- -------- Total......................... 98.3% 96.8% 99.5% 114.8%(b) 101.1% ======== ======== ======== ======== ========
(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 97.4% for Casualty, 99.2% for 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. The underwriting results for prior years include certain reclassifications to conform with the 1996 presentation, which more closely reflects the way the property and casualty business is now managed. The total net premiums written and combined loss and expense ratio are not affected. 22 3 Ten Year Financial Summary (in thousands except for per share amounts)
FOR THE YEAR 1996 1995 1994 1993 1992 REVENUES Property and Casualty Insurance Premiums Earned................... $4,569,256 $4,147,162 $3,776,283 $3,504,838(a) $3,163,288 Investment Income................. 656,135 613,242 570,531 541,749 501,140 Real Estate........................ 319,787 287,795 204,849 160,650 149,945 Corporate Investment Income........ 55,425 54,445 49,405 52,706 57,176 Realized Investment Gains (Losses). 79,929 108,852 54,125 210,582 174,061 TOTAL REVENUES................... 5,680,532 5,211,496 4,655,193 4,470,525 4,045,610 COMPONENTS OF NET INCOME* Property and Casualty Insurance Underwriting Income (Loss) (b).... 17,142 55,654 (7,811) (337,492)(c) (15,352) Investment Income................. 544,156 507,187 474,981 455,409 422,755 Real Estate Income (Loss).......... (146,786)(e) 6,010(f) (2,037) (2,193) 10,050 Corporate Income (Loss)............ 19,652 14,809 7,661 14,357 19,794 OPERATING INCOME FROM CONTINUING OPERATIONS..................... 434,164 583,660 472,794 130,081 437,247 Realized Investment Gains (Losses) from Continuing Operations....... 52,029 70,752 35,124 137,283 114,861 INCOME FROM CONTINUING OPERATIONS 486,193 654,412 507,918 267,364 552,108 Income from Discontinued Operations 26,491 42,216 20,551 76,853 64,991 NET INCOME....................... 512,684 696,628 528,469 324,217(g) 617,099 DIVIDENDS DECLARED ON COMMON STOCK... 188,689 170,665 161,055 150,784 139,612 CHANGE IN UNREALIZED APPRECIATION OR DEPRECIATION OF INVESTMENTS, NET... (107,225) 470,233 (487,951) 46,534 (82,082) PER SHARE DATA** Operating Income from Continuing Operations....................... $2.46 $3.30 $2.67 $ .77 $2.48 Income from Continuing Operations.. 2.75 3.70 2.87 1.53 3.12 Income from Discontinued Operations .15 .23 .11 .42 .36 Net Income(b)...................... 2.90(e) 3.93(f) 2.98 1.84(c)(g) 3.48 Dividends Declared................. 1.08 .98 .92 .86 .80 AT YEAR END TOTAL ASSETS......................... $19,938,866 $19,636,277 $17,760,969 $16,729,505 $15,197,641 INVESTED ASSETS Property and Casualty Insurance.... 11,190,619 10,013,557 8,938,752 8,403,141 7,767,462 Corporate.......................... 890,441 906,597 879,475 965,715 955,828 UNPAID CLAIMS........................ 9,523,709 9,588,141 8,913,220 8,235,442 7,220,919 LONG TERM DEBT....................... 1,070,532 1,150,832 1,279,649 1,267,193 1,065,604 TOTAL SHAREHOLDERS' EQUITY........... 5,462,874 5,262,729 4,247,029 4,196,129 3,954,402 Per Common Share**............... 31.24 30.14 24.46 23.92 22.59
* The federal and foreign income tax provided for each component of income represents its allocated portion of the consolidated provision. ** Per share amounts have been retroactively adjusted to reflect the two-for-one stock split effective April 19, 1996. In February 1997, the Corporation entered into a definitive agreement to sell its life and health insurance operations. As a result, these operations have been classified as discontinued operations. Amounts prior to 1994 do not reflect the accounting changes prescribed by Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, as restatement of prior year amounts was not permitted. The change in unrealized appreciation or depreciation of investments for 1994 excludes the increase in unrealized appreciation, as of January 1, 1994, of $220,519,000 resulting from the change in accounting principle. 40 4
FOR THE YEAR 1991 1990 1989 1988 1987 REVENUES Property and Casualty Insurance Premiums Earned........................ $3,037,168 $2,836,135 $2,693,553 $2,705,560 $2,615,866 Investment Income...................... 476,984 463,413 426,267 364,126 266,230 Real Estate............................. 140,957 174,846 221,338 155,170 143,381 Corporate Investment Income............. 46,400 39,555 25,167 17,806 17,531 Realized Investment Gains (Losses)...... 61,089 39,619 40,147 (19,647) (16,088) TOTAL REVENUES........................ 3,762,598 3,553,568 3,406,472 3,223,015 3,026,920 COMPONENTS OF NET INCOME* Property and Casualty Insurance Underwriting Income (Loss) (b)......... 18,594 20,709(d) (25,040) 15,818 62,394 Investment Income...................... 397,595 371,351 330,096 290,647 226,546 Real Estate Income (Loss)............... 25,007 40,015 42,021 40,018 36,079 Corporate Income (Loss)................. 16,325 14,760 705 (5,357) (4,229) OPERATING INCOME FROM CONTINUING OPERATIONS.......................... 457,521 446,835 347,782 341,126 320,790 Realized Investment Gains (Losses) from Continuing Operations................. 40,289 25,819 26,447 (14,048) (9,388) INCOME FROM CONTINUING OPERATIONS..... 497,810 472,654 374,229 327,078 311,402 Income from Discontinued Operations..... 54,174 49,455 46,588 32,547 18,658 NET INCOME............................ 551,984 522,109 420,817 359,625 330,060 DIVIDENDS DECLARED ON COMMON STOCK........ 127,757 109,136 96,515 87,766 71,443 CHANGE IN UNREALIZED APPRECIATION OR DEPRECIATION OF INVESTMENTS, NET........ 12,163 (19,425) 70,330 29,815 12,294 PER SHARE DATA** Operating Income from Continuing Operations............................ $2.62 $2.60 $2.04 $2.03 $1.93 Income from Continuing Operations....... 2.85 2.75 2.19 1.95 1.88 Income from Discontinued Operations..... .31 .28 .27 .19 .11 Net Income(b)........................... 3.16 3.03(d) 2.46 2.14 1.99 Dividends Declared...................... .74 .66 .58 .54 .44 1/2 AT YEAR END TOTAL ASSETS.............................. $13,885,882 $12,347,786 $11,390,374 $9,699,414 $8,615,658 INVESTED ASSETS Property and Casualty Insurance......... 7,086,572 6,297,825 5,793,656 5,153,027 4,519,268 Corporate............................... 840,291 688,380 647,817 366,237 256,397 UNPAID CLAIMS............................. 6,591,305 6,016,396 5,605,006 4,585,848 3,888,485 LONG TERM DEBT............................ 1,045,776 812,573 604,156 353,684 315,620 TOTAL SHAREHOLDERS' EQUITY................ 3,541,605 2,882,639 2,603,739 2,238,447 1,937,033 Per Common Share**.................... 20.37 17.60 15.42 13.77 11.93
(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 $.04 per share in 1992, $7,200,000 or $.04 per share in 1991, $10,800,000 or $.06 per share in 1990, $19,200,000 or $.11 per share in 1989, $20,400,000 or $.12 per share in 1988 and $28,800,000 or $.17 per share in 1987 related to the exclusion from taxable income of a portion of the "fresh start" discount on property and casualty unpaid claims as a result of the Tax Reform Act of 1986. (c) Net income has been reduced by a net charge of $357,500,000 or $1.97 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 $.08 per share elimination of deferred income taxes related to estimated property and casualty salvage and subrogation recoverable as a result of the Revenue Reconciliation Act of 1990. (e) Net income has been reduced by a net charge of $160,000,000 or $.89 per share for the after-tax effect of a $255,000,000 write-down of the carrying value of certain real estate assets to their estimated fair value. (f) Net income has been reduced by a charge of $6,500,000 or $.04 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. (g) Net income has been reduced by a one-time charge of $20,000,000 or $.11 per share for the cumulative effect of changes in accounting principles resulting from the Corporation's adoption of Statements of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, and No. 109, Accounting for Income Taxes. Income before the cumulative effect of changes in accounting principles was $344,217,000 or $1.95 per share. 41 5 The Chubb Corporation CONSOLIDATED STATEMENTS OF INCOME
IN THOUSANDS YEARS ENDED DECEMBER 31 REVENUES 1996 1995 1994 ---------- ---------- ---------- Premiums Earned (Note 13)............................... $4,569,256 $4,147,162 $3,776,283 Investment Income (Note 4).............................. 711,560 667,687 619,936 Real Estate............................................. 319,787 287,795 204,849 Realized Investment Gains (Note 4)...................... 79,929 108,852 54,125 ---------- ---------- ---------- TOTAL REVENUES..................................... 5,680,532 5,211,496 4,655,193 ---------- ---------- ---------- CLAIMS AND EXPENSES Insurance Claims (Notes 13 and 14)...................... 3,010,755 2,669,981 2,519,359 Amortization of Deferred Policy Acquisition Costs (Note 6).......................................... 1,237,968 1,120,943 1,041,245 Other Insurance Operating Costs and Expenses............ 290,191 262,084 223,990 Real Estate Cost of Sales and Expenses (Note 5)......... 555,642 280,099 210,799 Investment Expenses..................................... 12,436 11,887 11,617 Corporate Expenses...................................... 26,616 29,504 36,877 ---------- ---------- ---------- TOTAL CLAIMS AND EXPENSES.......................... 5,133,608 4,374,498 4,043,887 ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE FEDERAL AND FOREIGN INCOME TAX........................... 546,924 836,998 611,306 FEDERAL AND FOREIGN INCOME TAX (NOTE 9)...................... 60,731 182,586 103,388 ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS.................. 486,193 654,412 507,918 DISCONTINUED OPERATIONS, NET OF TAX (NOTE 3) Income from Operations.................................. 48,491 42,216 20,551 Loss on Disposal........................................ (22,000) -- -- ---------- ---------- ---------- INCOME FROM DISCONTINUED OPERATIONS................ 26,491 42,216 20,551 ---------- ---------- ---------- NET INCOME......................................... $ 512,684 $ 696,628 $ 528,469 ========= ========= ========= PER SHARE DATA (NOTES 1 AND 10) Income from Continuing Operations....................... $ 2.75 $ 3.70 $ 2.87 Income from Discontinued Operations..................... .15 .23 .11 ---------- ---------- ---------- Net Income......................................... $ 2.90 $ 3.93 $ 2.98 ========= ========= =========
See accompanying notes. 42 6 The Chubb Corporation CONSOLIDATED BALANCE SHEETS
IN THOUSANDS DECEMBER 31 ASSETS 1996 1995 ----------- ----------- ASSETS Invested Assets (Note 4) Short Term Investments.......................................... $ 275,909 $ 429,217 Fixed Maturities Held-to-Maturity -- Tax Exempt (market $2,573,356 and $3,003,686)................................................ 2,443,595 2,825,686 Available-for-Sale Tax Exempt (cost $4,415,101 and $3,607,925)................ 4,622,556 3,860,630 Taxable (cost $4,038,748 and $3,128,739)................... 4,092,697 3,257,004 Equity Securities (cost $540,522 and $459,087).................. 646,303 547,617 ----------- ----------- TOTAL INVESTED ASSETS......................................... 12,081,060 10,920,154 Cash............................................................... 4,657 11,950 Accrued Investment Income.......................................... 195,346 199,228 Premiums Receivable................................................ 984,906 860,390 Reinsurance Recoverable on Unpaid Claims (Note 13)................. 1,767,885 1,973,666 Prepaid Reinsurance Premiums....................................... 326,682 484,358 Funds Held for Asbestos-Related Settlement (Note 14)............... 599,859 1,038,149 Deferred Policy Acquisition Costs (Note 6)......................... 601,198 558,676 Real Estate Assets (Notes 5 and 8)................................. 1,603,975 1,742,580 Deferred Income Tax (Note 9)....................................... 365,591 230,146 Other Assets....................................................... 564,299 772,335 Net Assets of Discontinued Operations (Note 3)..................... 843,408 844,645 ----------- ----------- TOTAL ASSETS.................................................. $19,938,866 $19,636,277 ========== ========== LIABILITIES Unpaid Claims (Note 14)............................................ $ 9,523,709 $ 9,588,141 Unearned Premiums.................................................. 2,617,503 2,570,682 Short Term Debt (Note 8)........................................... 189,450 151,600 Long Term Debt (Note 8)............................................ 1,070,532 1,150,832 Dividend Payable to Shareholders................................... 47,210 42,741 Accrued Expenses and Other Liabilities............................. 1,027,588 869,552 ----------- ----------- TOTAL LIABILITIES............................................. 14,475,992 14,373,548 ----------- ----------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 12 AND 14) SHAREHOLDERS' EQUITY (NOTES 10 AND 17) Preferred Stock -- Authorized 4,000,000 Shares; $1 Par Value; Issued -- None.................................... -- -- Common Stock -- Authorized 600,000,000 Shares; $1 Par Value; Issued 176,084,173 and 87,819,355 Shares.......... 176,084 87,819 Paid-In Surplus.................................................... 695,762 778,239 Retained Earnings.................................................. 4,530,512 4,206,517 Foreign Currency Translation Losses, Net of Income Tax............. (15,678) (3,433) Unrealized Appreciation of Investments, Net (Note 4)............... 238,669 345,894 Receivable from Employee Stock Ownership Plan...................... (106,261) (114,998) Treasury Stock, at Cost -- 1,223,182 and 518,468 Shares............ (56,214) (37,309) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY.................................... 5,462,874 5,262,729 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $19,938,866 $19,636,277 ========== ==========
See accompanying notes. 43 7 The Chubb Corporation CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN THOUSANDS YEARS ENDED DECEMBER 31 1996 1995 1994 ---------- ---------- ---------- PREFERRED STOCK Balance, Beginning and End of Year.................... $ -- $ -- $ -- ---------- ---------- ---------- COMMON STOCK Balance, Beginning of Year............................ 87,819 87,798 87,709 Two-for-One Stock Split............................... 87,819 -- -- Shares Issued upon Exchange of Long Term Debt......... 481 -- -- Share Activity under Option and Incentive Plans....... (35) 21 89 ---------- ---------- ---------- Balance, End of Year............................. 176,084 87,819 87,798 ---------- ---------- ---------- PAID-IN SURPLUS Balance, Beginning of Year............................ 778,239 786,596 782,186 Two-for-One Stock Split............................... (87,819) -- -- Exchange of Long Term Debt............................ 20,844 -- -- Additions (Reductions) Resulting from Share Activity under Option and Incentive Plans.................... (15,502) (8,357) 4,410 ---------- ---------- ---------- Balance, End of Year............................. 695,762 778,239 786,596 ---------- ---------- ---------- RETAINED EARNINGS Balance, Beginning of Year............................ 4,206,517 3,680,554 3,313,140 Net Income............................................ 512,684 696,628 528,469 Dividends Declared (per share $1.08, $.98 and $.92)... (188,689) (170,665) (161,055) ---------- ---------- ---------- Balance, End of Year............................. 4,530,512 4,206,517 3,680,554 ---------- ---------- ---------- FOREIGN CURRENCY TRANSLATION GAINS (LOSSES) Balance, Beginning of Year............................ (3,433) 9,766 327 Change During Year, Net of Income Tax (Note 16)....... (12,245) (13,199) 9,439 ---------- ---------- ---------- Balance, End of Year............................. (15,678) (3,433) 9,766 ---------- ---------- ---------- UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS Balance, Beginning of Year............................ 345,894 (124,339) 143,093 Cumulative Effect, as of January 1, 1994, of Change in Accounting Principle, Net (Note 2).................. -- -- 220,519 Change During Year, Net (Note 4)...................... (107,225) 470,233 (487,951) ---------- ---------- ---------- Balance, End of Year............................. 238,669 345,894 (124,339) ---------- ---------- ---------- RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN Balance, Beginning of Year............................ (114,998) (122,999) (130,326) Principal Repayments.................................. 8,737 8,001 7,327 ---------- ---------- ---------- Balance, End of Year............................. (106,261) (114,998) (122,999) ---------- ---------- ---------- TREASURY STOCK, AT COST Balance, Beginning of Year............................ (37,309) (70,347) -- Repurchase of Shares.................................. (82,528) -- (72,052) Share Activity under Option and Incentive Plans....... 63,623 33,038 -- Shares Issued -- Other................................ -- -- 1,705 ---------- ---------- ---------- Balance, End of Year............................. (56,214) (37,309) (70,347) ---------- ---------- ---------- TOTAL SHAREHOLDERS' EQUITY....................... $5,462,874 $5,262,729 $4,247,029 ========== ========== ==========
See accompanying notes. 44 8 The Chubb Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS YEARS ENDED DECEMBER 31 1996 1995 1994 ----------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income.......................................... $ 512,684 $ 696,628 $ 528,469 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Increase in Unpaid Claims, Net................... 141,349 681,595 482,834 Increase in Unearned Premiums, Net............... 204,497 158,830 174,926 Increase in Premiums Receivable.................. (124,516) (96,258) (72,196) Decrease (Increase) in Funds Held for Asbestos-Related Settlement.................... 438,290 (480,008) (19,969) Decrease (Increase) in Medical Malpractice Reinsurance Related Receivable................. 191,194 (66,194) -- Increase in Deferred Policy Acquisition Costs.... (42,522) (29,223) (39,751) Deferred Income Tax Credit....................... (117,573) (16,830) (16,287) Write-down of Real Estate Assets................. 255,000 -- -- Depreciation..................................... 58,991 53,535 44,157 Realized Investment Gains........................ (79,929) (108,852) (54,125) Other, Net....................................... 193,376 46,808 (29,576) Discontinued Operations, Net..................... (79,451) (125,739) (101,807) ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES................................... 1,551,390 714,292 896,675 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sales of Fixed Maturities -- Available-for-Sale................................. 3,430,532 3,953,901 2,723,317 Proceeds from Maturities of Fixed Maturities........ 762,885 651,385 401,469 Proceeds from Sales of Equity Securities............ 382,917 302,311 567,170 Purchases of Fixed Maturities....................... (5,520,511) (5,466,024) (3,814,935) Purchases of Equity Securities...................... (395,198) (145,056) (358,734) Decrease (Increase) in Short Term Investments, Net.. 153,308 269,263 (221,941) Additions to Real Estate Assets, Net................ (81,963) (34,305) (43,216) Purchases of Fixed Assets........................... (58,686) (68,435) (62,830) Other, Net.......................................... (53,147) (23,940) (17,303) Discontinued Operations, Net........................ (249,152) (216,579) (133,027) ----------- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES.......... (1,629,015) (777,479) (960,030) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Issuance of Long Term Debt............ 85,989 173,900 33,225 Repayment of Long Term Debt......................... (145,629) (302,717) (20,769) Increase in Short Term Debt, Net.................... 37,850 34,260 53,800 Dividends Paid to Shareholders...................... (184,220) (167,959) (158,735) Repurchase of Shares................................ (82,528) -- (72,052) Other, Net.......................................... 52,749 27,944 10,608 Discontinued Operations, Net........................ 306,121 304,110 218,291 ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES................................... 70,332 69,538 64,368 ----------- ----------- ----------- Net Increase (Decrease) in Cash....................... (7,293) 6,351 1,013 Cash at Beginning of Year............................. 11,950 5,599 4,586 ----------- ----------- ----------- CASH AT END OF YEAR............................ $ 4,657 $ 11,950 $ 5,599 =========== =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION Cash Paid During the Year from Continuing Operations for Interest (Net of Amounts Capitalized)............ $ 77,728 $ 83,461 $ 75,840 Federal and Foreign Income Taxes................. 163,265 191,989 121,610
See accompanying notes. 45 9 Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of The Chubb Corporation (Corporation) and its subsidiaries. Significant intercompany transactions have been eliminated in consolidation. The consolidated financial statements reflect estimates and judgments made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Corporation is a holding company with subsidiaries principally engaged in two industries: property and casualty insurance and real estate. On February 23, 1997, the Corporation entered into a definitive agreement to sell its life and health insurance subsidiaries. Accordingly, the life and health insurance subsidiaries have been classified as discontinued operations in the consolidated financial statements (see Note (3)). Certain other amounts in the consolidated financial statements for prior years have been reclassified to conform with the 1996 presentation. Also, share and per share amounts have been retroactively adjusted to reflect the two-for-one stock split paid to shareholders of record as of April 19, 1996. (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. 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. Deferred policy acquisition costs are reviewed to determine that they do not exceed recoverable amounts, after considering anticipated investment income. (d) Unpaid Claims Liabilities for unpaid claims include the accumulation of individual case estimates for claims reported 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) 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. Ceded 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. 46 10 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. Amounts recoverable from reinsurers are recognized as assets at the same time and in a manner consistent with the liabilities associated with the reinsured policies. (f) Funds Held for Asbestos-Related Settlement Funds held for asbestos-related settlement are assets of the Corporation's property and casualty insurance subsidiaries that accrue income for the benefit of participants in the class settlement of asbestos-related bodily injury claims against Fibreboard Corporation (see Note (14)). (g) Real Estate Real estate properties are carried at cost, net of write-downs for impairment. Real estate taxes, interest and other carrying costs incurred prior to completion of the assets for their intended use are capitalized. Also, costs incurred during the initial leasing of income producing properties are capitalized until the project is substantially complete, subject to a maximum time period subsequent to completion of major construction activity. Effective January 1, 1996, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets. Under SFAS No. 121, real estate properties are reviewed for impairment whenever events or circumstances indicate that the carrying value of such properties may not be recoverable. In performing the review for recoverability of carrying value, estimates are made of the future undiscounted cash flows from each of the properties during the period the property will be held and upon its eventual disposition. If the expected future undiscounted cash flows are less than the carrying value of such properties, an impairment loss is recognized, resulting in a write-down of the carrying value of the property to an amount based on its fair value. Depreciation of real estate properties is calculated using the straight-line method over the estimated useful lives of the properties. Real estate mortgages and notes receivable are carried at unpaid principal balances less an allowance for uncollectible amounts. A loan is considered impaired when it is probable that all principal and interest amounts will not be collected according to the contractual terms of the loan agreement. An allowance for uncollectible amounts is established to the extent that the unpaid principal balance is greater than the discounted future cash flows of the loan, subject to the estimated fair value of the underlying collateral. These cash flows are discounted at the loan's effective interest rate. Rental revenues are recognized on a straight-line basis over the term of the lease. Profits on land, townhome unit and commercial building sales are recognized at closing, subject to compliance with applicable accounting guidelines. Profits on high-rise condominium unit sales are recognized using the percentage of completion method, subject to achievement of a minimum level of unit sales. Profits on construction contracts are recognized using the percentage of completion method. (h) Property and Equipment Property and equipment used in operations are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. (i) Stock-based Compensation The intrinsic value method of accounting is used for stock-based compensation plans. Under the intrinsic value method, compensation cost is measured as the excess, if any, of the quoted market price of the stock at the grant date over the amount an employee must pay to acquire the stock. (j) Income Taxes The Corporation and its domestic subsidiaries file a consolidated federal income tax return. Deferred income tax assets and liabilities are recognized for the expected future tax effects attributable to temporary differences between the financial reporting and tax bases of assets and liabilities, based on enacted tax rates and other provisions of tax law. The effect of a change in tax laws or rates is recognized in income in the period in which such change is enacted. U. S. federal income taxes are accrued on undistributed earnings of foreign subsidiaries. (k) Foreign Exchange Assets and liabilities relating to foreign operations are translated into U. S. dollars using current exchange rates; revenues and expenses are translated into U. S. dollars using the average exchange rates for each year. The functional currency of 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. 47 11 (l) 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 180,195,310, 179,884,682 and 180,899,154 in 1996, 1995 and 1994, 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. (m) Cash Flow Information In the statement of cash flows, short term investments are not considered to be cash equivalents. The effect of changes in foreign exchange rates on cash balances was immaterial. In 1996, $20,660,000 of the 6% exchangeable subordinated notes were exchanged for 480,464 shares of common stock of the Corporation. This noncash transaction has been excluded from the consolidated statements of cash flows. (n) 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 real estate mortgages and notes receivable are estimated individually as the value of the discounted future cash flows of the loan, subject to the estimated fair value of the underlying collateral. The cash flows are discounted at rates based on a U.S. Treasury security with a maturity similar to the loan, adjusted for credit risk. (v) The carrying value of short term debt approximates fair value due to the short maturities of this debt. (vi) 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 of continuing operations were as follows:
December 31 ---------------------------------------------- 1996 1995 ---------------------- ---------------------- Carrying Fair Carrying Fair Value Value Value Value ---------- ---------- ---------- ---------- (in thousands) Assets Invested assets Short term investments.... $ 275,909 $ 275,909 $ 429,217 $ 429,217 Fixed maturities (Note 4) Held-to-maturity........ 2,443,595 2,573,356 2,825,686 3,003,686 Available-for-sale...... 8,715,253 8,715,253 7,117,634 7,117,634 Equity securities......... 646,303 646,303 547,617 547,617 Real estate mortgages and notes receivable (Note 5).................. 502,374 487,200 409,564 405,400 Liabilities Short term debt (Note 8).... 189,450 189,450 151,600 151,600 Long term debt (Note 8)..... 1,070,532 1,128,500 1,150,832 1,214,422
(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. 48 12 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, available-for-sale or trading. However, SFAS No. 115 establishes more stringent criteria for classifying fixed maturities 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 SFAS No. 115 has not had an impact on net income nor will it in future years. (3) DISCONTINUED OPERATIONS The Corporation entered into a definitive agreement, dated February 23, 1997, to sell Chubb Life Insurance Company of America and its subsidiaries to Jefferson-Pilot Corporation for $875,000,000 in cash, subject to various closing adjustments and other customary conditions. The sale is subject to regulatory approvals and is expected to be completed by the end of the second quarter of 1997. The estimated loss on the sale of the life and health insurance subsidiaries is $22,000,000 consisting of a loss before tax of $5,000,000 and a tax of $17,000,000 on the sale. The tax on the sale is due to the tax carrying value of these subsidiaries being lower than their carrying value for financial statement purposes. The purchase price will not be adjusted to reflect results of operations subsequent to December 31, 1996. Therefore, it is expected that the discontinued life and health insurance operations will not affect the Corporation's net income in the future. The results of the discontinued operations were as follows:
Years Ended December 31 ------------------------------ 1996 1995 1994 -------- -------- ---------- (in thousands) Revenues Premiums earned and policy charges...................... $562,058 $622,937 $ 836,293 Investment income.............. 242,226 232,950 208,745 Realized investment gains...... 12,587 21,808 9,304 -------- -------- ---------- Total revenues............. 816,871 877,695 1,054,342 -------- -------- ---------- Benefits, claims and expenses Insurance claims and policyholder benefits........ 492,467 549,219 752,205 Amortization of deferred policy acquisition costs............ 97,127 77,457 72,250 Other insurance costs and expenses..................... 152,042 185,086 199,399 Investment expenses............ 2,301 2,860 2,430 -------- -------- ---------- Total benefits, claims and expenses................. 743,937 814,622 1,026,284 -------- -------- ---------- Income before federal income tax............... 72,934 63,073 28,058 Federal income tax (credit) Current........................ 30,415 29,050 9,808 Deferred....................... (5,972) (8,193) (2,301) -------- -------- ---------- 24,443 20,857 7,507 -------- -------- ---------- Income from operations..... $ 48,491 $ 42,216 $ 20,551 ======== ======== ==========
The assets and liabilities of the discontinued operations were as follows:
December 31 ----------------------- 1996 1995 ---------- ---------- (in thousands) Assets Invested assets Short term investments............. $ 48,333 $ 55,222 Fixed maturities Held-to-maturity................. 381,230 403,539 Available-for-sale............... 2,498,281 2,255,951 Equity securities.................. 30,681 40,208 Policy and mortgage loans.......... 226,802 212,339 ---------- ---------- 3,185,327 2,967,259 Accrued investment income............ 52,473 46,091 Deferred policy acquisition costs.... 679,113 612,709 Other assets......................... 814,906 649,306 ---------- ---------- Total assets..................... 4,731,819 4,275,365 ---------- ---------- Liabilities Life and health policy liabilities... 3,230,656 2,943,138 Short term debt...................... 50,500 36,000 Deferred income tax.................. 44,095 70,472 Accrued expenses and other liabilities........................ 563,160 381,110 ---------- ---------- Total liabilities................ 3,888,411 3,430,720 ---------- ---------- Net assets of discontinued operations..................... $ 843,408 $ 844,645 ========== ==========
In addition to the applicable accounting policies for continuing operations disclosed in Note (1), the following accounting policies relate to discontinued operations: (a) Premium Revenues and Related Expenses 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 charged against income include claims incurred in excess of the related policyholder account balances and interest credited to the policyholder account balances. 49 13 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. Certain costs of acquiring life insurance contracts, principally commissions, underwriting costs and certain variable agency costs, are deferred. Deferred policy acquisition costs for universal life and other interest-sensitive life insurance contracts are amortized over the lives of the contracts in relation to the present value of estimated gross profits expected to be realized. Deferred policy acquisition costs related to such contracts are 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 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. (b) Policy Liabilities Liabilities for universal life and other interest-sensitive life insurance contracts represent the policyholder account balances before surrender charges. Interest crediting rates ranged from 4% to 6 7/8% in 1996. 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 1996. 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. (c) 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 of the discontinued operations was $63,196,000 and $65,382,000 at December 31, 1996 and 1995, respectively. (4) INVESTED ASSETS AND RELATED INCOME (a) The sources of net investment income from continuing operations were as follows:
Years Ended December 31 -------------------------------- 1996 1995 1994 -------- -------- -------- (in thousands) Fixed maturities................ $669,715 $604,312 $555,278 Equity securities............... 9,977 12,292 22,070 Short term investments.......... 23,889 35,045 25,992 Other........................... 7,979 16,038 16,596 -------- -------- -------- Gross investment income........ 711,560 667,687 619,936 Investment expenses............. 12,436 11,887 11,617 -------- -------- -------- Net investment income from continuing operations...... $699,124 $655,800 $608,319 ======== ======== ========
(b) Realized investment gains and losses from continuing operations were as follows:
Years Ended December 31 -------------------------------- 1996 1995 1994 -------- -------- -------- (in thousands) Gross realized investment gains Fixed maturities............... $ 56,492 $ 66,763 $ 62,636 Equity securities.............. 75,566 95,379 130,129 -------- -------- -------- 132,058 162,142 192,765 -------- -------- -------- Gross realized investment losses Fixed maturities............... 45,717 46,520 126,965 Equity securities.............. 6,412 6,770 11,675 -------- -------- -------- 52,129 53,290 138,640 -------- -------- -------- Realized investment gains....... 79,929 108,852 54,125 Income tax...................... 27,900 38,100 19,001 -------- -------- -------- Realized investment gains from continuing operations........ $ 52,029 $ 70,752 $ 35,124 ======== ======== ========
(c) The components of unrealized appreciation of investments carried at market value were as follows:
December 31 --------------------- 1996 1995 -------- -------- (in thousands) Continuing operations Equity securities Gross unrealized appreciation........ $114,940 $ 99,481 Gross unrealized depreciation........ 9,159 10,951 -------- -------- 105,781 88,530 -------- -------- Fixed maturities Gross unrealized appreciation........ 297,045 393,521 Gross unrealized depreciation........ 35,641 12,551 -------- -------- 261,404 380,970 -------- -------- 367,185 469,500 Deferred income tax liability.......... 128,516 164,326 -------- -------- 238,669 305,174 Discontinued operations, net............. -- 40,720 -------- -------- $238,669 $345,894 ======== ========
50 14 The change in unrealized appreciation or depreciation of investments carried at market value was as follows:
Years Ended December 31 ------------------------------------------ 1996 1995 1994 --------- -------- --------- (in thousands) Continuing operations Change in unrealized appreciation of equity securities............................. $ 17,251 $ 60,878 $(178,267) Change in unrealized appreciation or depreciation of fixed maturities.............. (119,566) 499,053 (418,668) --------- -------- --------- (102,315) 559,931 (596,935) Deferred income tax (credit)....................................................... (35,810) 195,976 (208,927) Increase (decrease) in valuation allowance......................................... -- (31,651) 31,651 --------- -------- --------- Change in unrealized appreciation or depreciation.................................. (66,505) 395,606 (419,659) Discontinued operations, net......................................................... (40,720) 74,627 (68,292) --------- -------- --------- (107,225) 470,233 (487,951) Cumulative effect, as of January 1, 1994, of change in accounting principle, net..... -- -- 220,519 --------- -------- --------- $(107,225) $470,233 $(267,432) ========= ======== =========
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 of continuing operations carried at amortized cost was a decrease of $48,239,000, an increase of $150,427,000 and a decrease of $557,123,000 for the years ended December 31, 1996, 1995 and 1994, respectively. (d) The amortized cost and estimated market value of fixed maturities were as follows:
December 31 ------------------------------------------------------------------------------------------------------------ 1996 1995 ---------------------------------------------------- ---------------------------------------------------- Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Appreciation Depreciation Value Cost Appreciation Depreciation Value ----------- ------------ ------------ ----------- ---------- ------------ ------------ ------------ (in thousands) Continuing operations Held-to-maturity -- Tax exempt....... $ 2,443,595 $131,147 $ 1,386 $ 2,573,356 $2,825,686 $178,959 $ 959 $3,003,686 ----------- -------- ------- ----------- ---------- -------- ------- ----------- Available-for-sale Tax exempt....... 4,415,101 210,136 2,681 4,622,556 3,607,925 253,814 1,109 3,860,630 ----------- -------- ------- ----------- ---------- -------- ------- ----------- Taxable U.S. Government and government agency and authority obligations 1,092,269 5,756 8,345 1,089,680 784,394 32,051 25 816,420 Corporate bonds........ 317,735 7,460 1,845 323,350 301,108 17,982 419 318,671 Foreign bonds........ 1,169,238 58,500 11,288 1,216,450 1,316,938 61,750 10,280 1,368,408 Mortgage-backed securities... 1,444,506 15,043 11,482 1,448,067 701,299 27,924 535 728,688 Redeemable preferred stocks....... 15,000 150 -- 15,150 25,000 -- 183 24,817 ----------- -------- ------- ----------- ---------- -------- ------- ----------- 4,038,748 86,909 32,960 4,092,697 3,128,739 139,707 11,442 3,257,004 ----------- -------- ------- ----------- ---------- -------- ------- ----------- Total avail- able for sale 8,453,849 297,045 35,641 8,715,253 6,736,664 393,521 12,551 7,117,634 ----------- -------- ------- ----------- ---------- -------- ------- ----------- Total fixed maturities... $10,897,444 $428,192 $37,027 $11,288,609 $9,562,350 $572,480 $13,510 $10,121,320 =========== ======== ======= =========== ========== ======== ======= =========== Discontinued operations Held-to-maturity... $ 381,230 $ 20,022 $ 2,343 $ 398,909 $ 403,539 $ 31,479 $ 46 $ 434,972 Available-for-sale... 2,443,448 71,332 16,499 2,498,281 2,153,936 111,291 9,276 2,255,951 ----------- -------- ------- ----------- ---------- -------- ------- ----------- Total fixed maturities... $ 2,824,678 $ 91,354 $18,842 $ 2,897,190 $2,557,475 $142,770 $ 9,322 $ 2,690,923 =========== ======== ======= =========== ========== ======== ======= ===========
The amortized cost and estimated market value of fixed maturities at December 31, 1996 by contractual maturity were as follows:
Continuing Operations Discontinued Operations ------------------------------------------------- ------------------------- Held-to-Maturity Available-for-Sale Held-to-Maturity ----------------------- ----------------------- --------------------- Estimated Estimated Estimated Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value ---------- ---------- ---------- ---------- --------- --------- (in thousands) (in thousands) Due in one year or less............. $ 105,859 $ 107,145 $ 80,671 $ 81,629 $ 10,026 $ 10,207 Due after one year through five years............................. 684,380 720,503 1,306,804 1,330,143 63,785 68,892 Due after five years through ten years............................. 924,995 979,145 2,307,112 2,402,009 75,743 81,875 Due after ten years................. 728,361 766,563 3,314,756 3,453,405 58,656 65,043 ---------- ---------- ---------- ---------- -------- -------- 2,443,595 2,573,356 7,009,343 7,267,186 208,210 226,017 Mortgage-backed securities.......... -- -- 1,444,506 1,448,067 173,020 172,892 ---------- ---------- ---------- ---------- -------- -------- $2,443,595 $2,573,356 $8,453,849 $8,715,253 $381,230 $398,909 ========== ========== ========== ========== ======== ======== Discontinued Operations ---------------------------------------- Available-for-Sale Available-for-Sale ------------------ ------------------ Estimated Amortized Market Cost Value ---------- ---------- Due in one year or less............. $ 10,240 $ 10,266 Due after one year through five years............................. 257,205 266,921 Due after five years through ten years............................. 445,479 456,299 Due after ten years................. 819,276 830,643 ---------- ---------- 1,532,200 1,564,129 Mortgage-backed securities.......... 911,248 934,152 ---------- ---------- $2,443,448 $2,498,281 ========== ==========
Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations. 51 15 (5) REAL ESTATE In October 1996, the Corporation announced that it was exploring the possible sale of all or a portion of its real estate assets. During February 1997, indications of interest in purchasing a substantial portion of the commercial properties were received from several parties. In March 1997, the Corporation announced that it had entered into an agreement with a prospective purchaser to perform due diligence in anticipation of executing a contract for the sale of these properties. In addition, the Corporation is continuing to explore the sale of its residential and retail properties. Because the plan to pursue the sale of these assets in the near term represented a change in circumstances relating to the manner in which these assets are expected to be used, the recoverability of their carrying value was reassessed. As a result, an impairment loss of $255,000,000 was recognized in 1996 to reduce the carrying value of these assets to their estimated fair value. This charge is included in real estate cost of sales and expenses in the consolidated statements of income. The components of real estate assets were as follows:
December 31 ----------------------- 1996 1995 ---------- ---------- (in thousands) Mortgages and notes receivable (net of allowance for uncollectible amounts of $85,669 and $87,617).............. $ 502,374 $ 409,564 Income producing properties............ 584,496 864,449 Construction in progress............... 135,030 87,870 Land under development and unimproved land................................. 382,075 380,697 ---------- ---------- $1,603,975 $1,742,580 ========== ==========
Substantially all mortgages and notes receivable are secured by buildings and land. The ultimate collectibility of the receivables is evaluated continuously and an appropriate allowance for uncollectible amounts established. Mortgages and notes receivable had an aggregate fair value of approximately $487,200,000 and $405,400,000 at December 31, 1996 and 1995, 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 $10,978,000, $14,123,000 and $12,086,000 for 1996, 1995 and 1994, respectively. (6) DEFERRED POLICY ACQUISITION COSTS Property and casualty insurance policy acquisition costs deferred and the related amortization charged against income were as follows:
Years Ended December 31 ----------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (in thousands) Balance, beginning of year.................. $ 558,676 $ 529,453 $ 489,702 ----------- ----------- ----------- Costs deferred during year Commissions and brokerage........... 653,534 592,687 544,733 Premium taxes and assessments......... 114,666 108,002 108,008 Salaries and overhead............ 512,290 449,477 428,255 ----------- ----------- ----------- 1,280,490 1,150,166 1,080,996 Amortization during year.................. (1,237,968) (1,120,943) (1,041,245) ----------- ----------- ----------- Balance, end of year.... $ 601,198 $ 558,676 $ 529,453 =========== =========== ===========
(7) PROPERTY AND EQUIPMENT Property and equipment of continuing operations included in other assets were as follows:
December 31 ------------------- 1996 1995 -------- -------- (in thousands) Cost...................................... $363,079 $329,728 Less accumulated depreciation............. 155,502 131,218 -------- -------- $207,577 $198,510 ======== ========
Depreciation expense related to property and equipment from continuing operations was $48,013,000, $39,412,000 and $32,071,000 for 1996, 1995 and 1994, respectively. (8) DEBT AND CREDIT ARRANGEMENTS (a) Short term debt consists of commercial paper used 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. Borrowings 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 1/2% and 5 3/4% at December 31, 1996 and 1995, respectively. 52 16 (b) Long term debt consisted of the following:
December 31 ------------------------------------------------- 1996 1995 ----------------------- ----------------------- Carrying Fair Carrying Fair Value Value Value Value ---------- ---------- ---------- ---------- (in thousands) Term loans....... $ 311,351 $ 313,648 $ 331,023 $ 331,023 Mortgages........ 189,841 191,630 199,809 200,395 8 3/4% notes..... 90,000 93,879 120,000 133,104 6% notes......... 150,000 149,685 150,000 151,365 6 7/8% notes..... 100,000 101,010 100,000 105,410 6% exchangeable subordinated notes.......... 229,340 278,648 250,000 293,125 ---------- ---------- ---------- ---------- $1,070,532 $1,128,500 $1,150,832 $1,214,422 ========== ========== ========== ==========
The term loans and mortgages are obligations of the real estate subsidiaries. The term loans mature in varying amounts through 2001. 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 2010. At December 31, 1996, the range of interest rates for term loans was 7% 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 $880,410,000 at December 31, 1996. The Corporation has outstanding $90,000,000 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 1997 and 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 $229,340,000 of 6% exchangeable subordinated notes due May 15, 1998, which are guaranteed by the Corporation. The notes are redeemable, in whole or in part, at the option of Chubb Capital at redemption prices declining from 101.7% of the principal amount if redeemed before May 15, 1997 to 100.9% of the principal amount if redeemed thereafter. The notes are exchangeable at the option of the holder into 23.256 shares of common stock of the Corporation for each $1,000 of principal amount, equivalent to a conversion price of $43.00 per share. In 1996, the holders of $20,660,000 of notes elected this option, resulting in the issuance of 480,464 shares of common stock. 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, 1996 are as follows:
Years Ending Term Loans December 31 and Mortgages Notes Total - ------------------------- ------------- -------- -------- (in thousands) 1997................... $ 78,790 $ 30,000 $108,790 1998................... 49,187 409,340 458,527 1999................... 61,999 30,000 91,999 2000................... 114,839 -- 114,839 2001................... 178,890 -- 178,890
(c) Interest costs for continuing operations of $89,482,000, $98,644,000 and $96,488,000 were incurred in 1996, 1995 and 1994, respectively, of which $12,764,000, $16,352,000 and $19,407,000 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 $140,000,000 at December 31, 1996. 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. 53 17 (9) FEDERAL AND FOREIGN INCOME TAX (a) Income tax expense for continuing operations consisted of the following components:
Years Ended December 31 ----------------------------------- 1996 1995 1994 --------- -------- -------- (in thousands) Current tax United States................................................................... $ 152,061 $177,954 $ 88,040 Foreign......................................................................... 26,243 21,462 31,635 Deferred tax credit, principally United States.................................... (117,573) (16,830) (16,287) --------- -------- -------- $ 60,731 $182,586 $103,388 ========= ======== ========
(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 -------------------------------------------------------------------- 1996 1995 1994 -------------------- -------------------- -------------------- % of % of % of Pre-Tax Pre-Tax Pre-Tax Amount Income Amount Income Amount Income --------- ------- --------- ------- --------- ------- (dollars in thousands) Income from continuing operations before federal and foreign income tax.................................. $ 546,924 $ 836,998 $ 611,306 ========= ========= ========= Tax at statutory federal income tax rate.............. $ 191,423 35.0% $ 292,949 35.0% $ 213,957 35.0% Tax exempt interest income............................ (118,961) (21.8) (114,113) (13.6) (108,859) (17.8) Other, net............................................ (11,731) (2.1) 3,750 .4 (1,710) (.3) --------- ----- --------- ----- --------- ----- Actual tax for continuing operations............ $ 60,731 11.1% $ 182,586 21.8% $ 103,388 16.9% ========= ===== ========= ===== ========= =====
(c) The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities were as follows:
December 31 ------------------------- 1996 1995 -------- -------- (in thousands) Deferred income tax assets Unpaid claims............................................................................ $521,952 $523,535 Unearned premiums........................................................................ 142,153 130,226 Postretirement benefits.................................................................. 52,921 46,851 Other, net............................................................................... 25,150 9,567 -------- -------- Total.................................................................................. 742,176 710,179 -------- -------- Deferred income tax liabilities Deferred policy acquisition costs........................................................ 185,805 173,936 Real estate assets....................................................................... 45,264 141,771 Unrealized appreciation of investments................................................... 128,516 164,326 Tax on the sale of discontinued operations............................................... 17,000 -- -------- -------- Total.................................................................................. 376,585 480,033 -------- -------- Net deferred income tax asset for continuing operations.............................. $365,591 $230,146 ======== ========
54 18 (10) STOCK-BASED COMPENSATION PLANS (a) In 1996, the Corporation adopted the Long-Term Stock Incentive Plan (1996), which succeeded the Long-Term Stock Incentive Plan (1992). The Long-Term Stock Incentive Plan (1996) provides for the granting of stock options, performance shares, restricted stock and other stock-based awards to key employees. The maximum number of shares of the Corporation's common stock in respect to which stock-based awards may be granted under the 1996 plan is 10,230,000 shares plus up to an additional 3,770,000 shares to the extent shares are reacquired by the Corporation subsequent to December 31, 1996. At December 31, 1996, 10,178,354 shares were available for grant under the 1996 Plan. Stock options are granted at exercise prices not less than the fair market value of the Corporation's common stock on the date of grant. The terms and conditions upon which options become exercisable may vary among grants. Options expire no later than ten years from the date of grant. Information concerning stock options granted under the Long-Term Stock Incentive Plans and a prior stock option plan is as follows:
1996 1995 ------------------------------- ------------------------------------- Number Weighted Average Number Weighted Average of Shares Exercise Price of Shares Exercise Price ---------- ---------------- ---------------- ---------------- Outstanding, beginning of year....... 6,565,034 $37.59 5,449,618 $35.11 Granted.............................. 2,504,048 48.82 1,994,230 41.12 Exercised............................ (782,403) 31.77 (738,332) 28.13 Forfeited............................ (227,850) 43.26 (140,482) 40.93 ---------- ---------- Outstanding, end of year............. 8,058,829 41.48 6,565,034 37.59 ========== ========== Exercisable, end of year............. 4,852,845 38.10 3,961,586 35.35 1994 ------------------------------------- Number Weighted Average of Shares Exercise Price ---------------- ---------------- Outstanding, beginning of year....... 4,167,516 $32.58 Granted.............................. 1,509,050 40.97 Exercised............................ (152,068) 20.62 Forfeited............................ (74,880) 39.91 ---------- Outstanding, end of year............. 5,449,618 35.11 ========== Exercisable, end of year............. 3,330,456 31.23
December 31, 1996 ------------------------------------------------------------------------------------------ Options Outstanding ----------------------------------------------------- Options Exercisable Weighted Average -------------------------------- Range of Number Weighted Average Remaining Number Weighted Average Option Exercise Price Outstanding Exercise Price Contractual Life Exercisable Exercise Price - ------------------------------------- ----------- ---------------- ---------------- ----------- ---------------- $14.31 - $36.03.................... 1,511,685 $30.51 4.4 years 1,511,685 $30.51 40.97 - 55.19.................... 6,547,144 44.02 8.1 years 3,341,160 41.53 ----------- ----------- 8,058,829 41.48 7.4 years 4,852,845 38.10 ========== ==========
Performance share awards are based on the achievement of various goals over performance cycle periods. The cost of such awards is expensed over the performance cycle. Such awards are payable in cash, in shares of the Corporation's common stock or in a combination of both. Restricted stock awards consist of shares of common stock of the Corporation granted at no cost. Shares of restricted stock become outstanding when granted, receive dividends and have voting rights. The shares are subject to forfeiture and to restrictions which limit the sale or transfer during the restriction period. An amount equal to the fair market value of the shares at the date of grant is expensed over the restriction period. The Corporation uses the intrinsic value based method of accounting for stock-based compensation, under which compensation cost is measured as the excess, if any, of the quoted market price of the stock at the grant date over the amount an employee must pay to acquire the stock. Since the exercise price of stock options granted under the Long-Term Stock Incentive Plans is not less than the market price of the underlying stock on the date of grant, no compensation cost has been recognized for such grants. The aggregate amount charged against income with respect to performance share and restricted stock awards was $10,156,000, $8,626,000 and $5,213,000 in 1996, 1995 and 1994, respectively. The following pro forma net income and earnings per share information has been determined as if the Corporation had accounted for stock-based compensation awarded under the Long-Term Stock Incentive Plans using the fair value based method. Under the fair value method, the estimated fair value of awards would be charged against income on a straight-line basis over the vesting period. The pro forma effect on net income for 1995 and 1996 is not representative of the pro forma effect on net income in future years because, as required by SFAS No. 123, Accounting for Stock Based Compensation, no consideration has been given to awards granted prior to 1995.
1996 1995 ----------------------- ----------------------- As Pro As Pro Reported Forma Reported Forma -------- -------- -------- -------- (in thousands except for earnings per share) Net Income........................................ $512,684 $496,640 $696,628 $692,360 Earnings Per Share................................ 2.90 2.81 3.93 3.90
55 19 The weighted average fair value of options granted under the Long-Term Stock Incentive Plans during 1996 and 1995 were $11.04 and $10.18, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes Model with the following weighted average assumptions. The risk-free interest rates for 1996 and 1995 were 5.9% and 6.3%, respectively. The expected volatility of the market price of the Corporation's common stock for 1996 and 1995 grants was 18.3% and 19.3%, respectively. The expected average term of the granted options was 5 1/2 years and the dividend yield was 2.1% for both years. (b) The Corporation has a leveraged Employee Stock Ownership Plan (ESOP) in which substantially all employees are eligible to participate. At its inception in 1989, the ESOP used the proceeds of a $150,000,000 loan from the Corporation to purchase 7,792,204 newly issued shares of the Corporation's common stock. The loan is due in September 2004 and bears interest at 9%. The Corporation has recorded the receivable from the ESOP as a separate reduction of shareholders' equity on the consolidated balance sheets. This balance is reduced as repayments are made on the loan principal. The Corporation and its participating subsidiaries make semi-annual contributions to the ESOP in amounts determined at the discretion of the Corporation's Board of Directors. The contributions, together with the dividends on the 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 1996, 1995 and 1994, cash contributions to the ESOP of $12,707,000, $12,307,000 and $12,146,000, respectively, were charged against income. Dividends on unallocated shares used for debt service by the ESOP were $4,571,000, $4,468,000 and $4,615,000 in 1996, 1995 and 1994, respectively. The number of allocated and unallocated shares held by the ESOP at December 31, 1996 were 3,093,619 and 4,155,844, respectively. (c) The Corporation has a Stock Purchase Plan under which substantially all employees are eligible to purchase shares of the Corporation's common stock based on compensation. Shares are purchased at a price not less than 95% of the fair market value on the date of grant. At December 31, 1996, there were 566,309 subscribed shares at a price of $52.81. The right to purchase such shares expires in December 1998. No compensation cost has been recognized for such rights. Had the fair value method been used, the cost under this method would have been immaterial. (11) EMPLOYEE BENEFITS (a) The Corporation and its subsidiaries have several non-contributory defined benefit pension plans covering substantially all employees. The benefits are generally based on an employee's years of service and average compensation during the last five years of employment. Pension costs are determined using the projected unit credit method. The Corporation's policy is to make annual contributions that meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The components of net pension cost were as follows:
Years Ended December 31 -------------------------------- 1996 1995 1994 -------- -------- -------- (in thousands) Service cost of current period.................... $ 20,633 $ 20,422 $ 19,702 Interest cost on projected benefit obligation........ 26,022 23,822 21,232 Actual return on plan assets.................... (49,075) (68,542) (523) Net amortization and deferral.................. 17,468 42,730 (23,420) -------- -------- -------- Net pension cost........ $ 15,048 $ 18,432 $ 16,991 ======== ======== ========
56 20 The following table sets forth the plans' funded status and amounts recognized in the balance sheets:
December 31 ------------------ 1996 1995 -------- -------- (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 $241,392 and $212,752............. $253,893 $224,821 Additional amount related to projected future salary increases......................... 107,004 131,473 -------- -------- Projected benefit obligation for service rendered to date.......... 360,897 356,294 Plan assets at fair value............... 406,876 341,112 -------- -------- Projected benefit obligation in excess of (less than) plan assets............ (45,979) 15,182 Unrecognized net gain from past experience different from that assumed............................... 98,567 36,196 Unrecognized prior service costs........ (4,648) (5,208) Unrecognized net asset at January 1, 1985, being recognized principally over 19 years............................... 6,874 8,297 -------- -------- Pension liability included in other liabilities......................... $ 54,814 $ 54,467 ======== ========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation at December 31, 1996 and 1995 was 7 3/4% and 7 1/2%, respectively, and the rate of increase in future compensation levels was 5% for 1996 and 6% for 1995. The expected long term rate of return on assets was 9% for both years. The decrease in net pension cost in 1996 was due primarily to the reduction, effective January 1, 1996, in the assumed rate of increase in future compensation levels. Such reduction also resulted in a decrease in the portion of the projected benefit obligation related to future salary increases. Plan assets are principally invested in publicly traded stocks and bonds. (b) The Corporation and its subsidiaries have a savings plan, the Capital Accumulation Plan, in which substantially all employees are eligible to participate. Under this plan, the employer makes a matching contribution equal to 100% of each eligible employee's pre-tax elective contributions, up to 4% of the employee's compensation. Contributions are invested at the election of the employee in the Corporation's common stock or in various other investment funds. Employer contributions of $14,519,000, $13,443,000 and $13,026,000 were charged against income in 1996, 1995 and 1994, respectively. (c) 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 ------------------------------- 1996 1995 1994 ------- ------- ------- (in thousands) Service cost of current period...................... $ 6,016 $ 5,687 $ 5,153 Interest cost on accumulated benefit obligation.......... 8,601 7,949 7,420 ------- ------- ------- Net postretirement benefit cost...................... $14,617 $13,636 $12,573 ======= ======= =======
The components of the accumulated postretirement benefit obligation were as follows:
December 31 ------------------- 1996 1995 -------- -------- (in thousands) Retirees................................ $ 42,770 $ 38,735 Fully eligible active plan participants.......................... 8,389 5,103 Other active plan participants.......... 63,448 74,572 -------- -------- Accumulated postretirement benefit obligation............................ 114,607 118,410 Unrecognized net gain (loss) from past experience different from that assumed............................... 13,203 (933) -------- -------- Postretirement benefit liability included in other liabilities....... $127,810 $117,477 ======== ========
The weighted average discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation at December 31, 1996 and 1995 was 7 3/4% and 7 1/2%, respectively. At December 31, 1996, the weighted average health care cost trend rate used to measure the accumulated postretirement cost for medical benefits was 11 1/4% for 1997 and was assumed to decrease gradually to 6% for the year 2008 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, 1996 by $19,040,000 and the aggregate of the service and interest cost components of net postretirement benefit cost for the year ended December 31, 1996 by $2,834,000. 57 21 (12) LEASES The Corporation and its subsidiaries occupy office facilities under lease agreements which expire at various dates through 2019; such leases are generally renewed or replaced by other leases. In addition, the Corporation's subsidiaries lease data processing, office and transportation equipment. Most leases contain renewal options for increments ranging from two to ten years; certain lease agreements provide for rent increases based on price-level factors. All leases are operating leases. Rent expense for continuing operations was as follows:
Years Ended December 31 --------------------------- 1996 1995 1994 ------- ------- ------- (in thousands) Office facilities.................... $67,587 $66,996 $66,188 Equipment............................ 11,823 12,788 14,632 ------- ------- ------- $79,410 $79,784 $80,820 ======= ======= =======
At December 31, 1996, future minimum rental payments required under non-cancellable operating leases of continuing operations were as follows:
Years Ending December 31 (in thousands) - ------------ 1997..................................... $ 68,957 1998..................................... 67,417 1999..................................... 65,283 2000..................................... 62,614 2001..................................... 55,752 After 2001............................... 328,366 -------- $648,389 ========
(13) REINSURANCE Premiums earned and claims incurred are reported net of reinsurance in the consolidated statements of income. The effect of reinsurance on the premiums earned of the property and casualty insurance subsidiaries was as follows:
Years Ended December 31 --------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (in thousands) Direct.................... $ 5,023,489 $ 4,754,423 $ 4,415,080 Reinsurance assumed....... 533,002 712,080 641,615 Reinsurance ceded......... (987,235) (1,319,341) (1,280,412) ----------- ----------- ----------- Premiums earned......... $ 4,569,256 $ 4,147,162 $ 3,776,283 =========== =========== ===========
The Royal & Sun Alliance Insurance Group plc is the beneficial owner of 5.2% of the Corporation's common stock. A property and casualty insurance subsidiary of the Corporation has assumed on a quota share basis a portion of the property and casualty insurance business written by certain subsidiaries of Royal & Sun Alliance. The assumed reinsurance premiums earned of the property and casualty insurance subsidiaries include $282,905,000, $340,767,000 and $264,343,000 in 1996, 1995 and 1994, respectively, from such business. A portion of the U.S. insurance business written by the Corporation's property and casualty insurance subsidiaries has been reinsured on a quota share basis with a subsidiary of Royal & Sun Alliance. The ceded reinsurance premiums earned of the property and casualty insurance subsidiaries include $348,024,000, $520,528,000 and $489,727,000 in 1996, 1995 and 1994, respectively, from such reinsurance. Reinsurance recoveries by the property and casualty insurance subsidiaries which have been deducted from insurance claims were $651,889,000, $936,080,000 and $962,332,000 in 1996, 1995 and 1994, respectively. Such amounts included recoveries of $251,361,000, $333,759,000 and $337,077,000 in 1996, 1995 and 1994, respectively, from the subsidiary of Royal & Sun Alliance. Reinsurance recoverable on property and casualty unpaid claims included approximately $471,000,000 and $681,000,000 at December 31, 1996 and 1995, respectively, from the subsidiary of Royal & Sun Alliance. Effective January 1, 1997, the reinsurance agreements with Royal & Sun Alliance have been terminated. The property and casualty insurance subsidiaries of the Corporation entered into a stop loss reinsurance agreement with a subsidiary of Royal & Sun Alliance, effective year end 1985, relating to medical malpractice unpaid claims. On December 31, 1995, the property and casualty insurance subsidiaries exercised a commutation provision under this agreement, which resulted in an amount due from the Royal & Sun Alliance subsidiary of $191,194,000. The amount due was received in January 1996. 58 22 (14) 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 complex loss reserving process. The uncertainties relating to asbestos and toxic waste claims on insurance policies written many years ago are exacerbated by judicial and legislative interpretations of coverage that in some cases have tended to erode the clear and express intent of such policies and in others have expanded theories of liability. The industry is engaged in extensive litigation over these coverage and liability issues and is thus confronted with a continuing uncertainty in its effort to quantify these exposures. In 1993, Pacific Indemnity Company, a subsidiary of the Corporation, entered into a global settlement agreement with Continental Casualty Company (a subsidiary of CNA Financial Corporation), Fibreboard Corporation, and attorneys representing claimants against Fibreboard for all future asbestos-related bodily injury claims against Fibreboard. This agreement is subject to 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 reached a separate agreement for the handling of all asbestos-related bodily injury claims pending on August 26, 1993 against Fibreboard. Pacific Indemnity's obligation under this agreement with respect to such pending claims is approximately $635,000,000, the final $450,000,000 of which was paid during 1996. Assets designated as funds held for asbestos-related settlement were used to pay this obligation. 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 entered into a trilateral agreement to settle all present and future asbestos-related bodily injury claims resulting from insurance policies that were, or may have been, issued to Fibreboard by the two insurers. The trilateral agreement will be triggered if the global settlement agreement is disapproved by the United States Supreme 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 1995, the United States District Court of the Eastern District of Texas approved the global settlement agreement and the trilateral agreement. The judgments approving these agreements were appealed to the United States Court of Appeals for the Fifth Circuit. In July 1996, the Fifth Circuit Court affirmed the 1995 judgments of the District Court. The affirmation of these agreements had no effect on the amount of loss reserves provided for the settlement. A petition for re-hearing the global settlement agreement before the entire Fifth Circuit Court was denied. An appeal to the United States Supreme Court by the objectors to the global settlement has been filed and the Supreme Court will decide whether to hear this matter. The trilateral agreement, however, was not appealed to the United States Supreme Court and is now final. As a result, management believes that the uncertainty of Pacific Indemnity's exposure with respect to asbestos-related bodily injury claims against Fibreboard has been eliminated. Since 1993, a California Court of Appeal has agreed, in response to a request by Pacific Indemnity, Continental Casualty and Fibreboard, to delay its decisions regarding asbestos-related insurance coverage issues 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. 59 23 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. 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 federal "Superfund" law and similar state statutes, when potentially responsible parties (PRPs) fail to handle the clean-up, regulators have the work done and then attempt to establish legal liability against the PRPs. The PRPs disposed of toxic materials at a waste dump site or transported the materials to the site. Insurance policies issued to PRPs were not intended to cover the clean-up costs of pollution and, in many cases, did not intend to cover the pollution itself. As the cost of environmental clean-up continues to grow, PRPs and others have increasingly filed claims with their insurance carriers. Litigation against insurers extends to issues of liability, coverage and other policy provisions. There is great uncertainty involved in estimating the property and casualty insurance subsidiaries' liabilities related to these claims. First, the 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 unpaid claims, net of reinsurance recoverable, and a reconciliation of the net liability to the corresponding liability on a gross basis is as follows:
1996 1995 1994 ---------- ---------- ---------- (in thousands) Gross liability, beginning of year.................. $9,588,141 $8,913,220 $8,235,442 Reinsurance recoverable, beginning of year........ 1,973,666 1,980,340 1,785,396 ---------- ---------- ---------- Net liability, beginning of year..................... 7,614,475 6,932,880 6,450,046 ---------- ---------- ---------- Net incurred claims and claim expenses related to Current year........... 3,053,600 2,705,800 2,549,100 Prior years............ (42,845) (35,819) (29,741) ---------- ---------- ---------- 3,010,755 2,669,981 2,519,359 ---------- ---------- ---------- Net payments for claims and claim expenses related to Current year........... 980,006 737,686 764,525 Prior years............ 1,889,400 1,250,700 1,272,000 ---------- ---------- ---------- 2,869,406 1,988,386 2,036,525 ---------- ---------- ---------- Net liability, end of year..................... 7,755,824 7,614,475 6,932,880 Reinsurance recoverable, end of year.............. 1,767,885 1,973,666 1,980,340 ---------- ---------- ---------- Gross liability, end of year..................... $9,523,709 $9,588,141 $8,913,220 ========== ========== ==========
During 1996, the property and casualty insurance subsidiaries experienced overall favorable development of $42,845,000 on net unpaid claims established as of the previous year-end. This compares with favorable development of $35,819,000 and $29,741,000 in 1995 and 1994, respectively. Such redundancies were reflected in operating results in these respective years. Each of the past three years benefited from favorable claim severity trends for certain liability classes; this was offset each year in varying degrees by 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, 1996 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. 60 24 (15) BUSINESS SEGMENTS 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 real estate subsidiary has been 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 continuing operations before income tax and identifiable assets of each industry segment were as follows:
Years Ended December 31 ------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Revenues (in thousands) Property and Casualty Insurance Premiums earned............................................................... $ 4,569,256 $ 4,147,162 $ 3,776,283 Investment income............................................................. 656,135 613,242 570,531 Real Estate....................................................................... 319,787 287,795 204,849 ----------- ----------- ----------- 5,545,178 5,048,199 4,551,663 Corporate investment income....................................................... 55,425 54,445 49,405 Realized investment gains (losses) Property and Casualty Insurance............................................... 65,275 95,030 55,203 Corporate..................................................................... 14,654 13,822 (1,078) ----------- ----------- ----------- Total revenues.............................................................. $ 5,680,532 $ 5,211,496 $ 4,655,193 =========== =========== =========== Income (loss) from continuing operations before income tax Property and Casualty Insurance................................................... $ 676,398 $ 697,141 $ 552,170 Real Estate....................................................................... (235,855) 7,696 (5,950) ----------- ----------- ----------- 440,543 704,837 546,220 Corporate......................................................................... 26,452 23,309 10,961 Realized investment gains (losses) Property and Casualty Insurance............................................... 65,275 95,030 55,203 Corporate..................................................................... 14,654 13,822 (1,078) ----------- ----------- ----------- Income from continuing operations before federal and foreign income tax..... $ 546,924 $ 836,998 $ 611,306 =========== =========== ===========
December 31 ------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (in thousands) Identifiable assets Property and Casualty Insurance................................................... $16,577,935 $16,157,688 $14,435,933 Real Estate....................................................................... 1,641,231 1,842,831 1,796,706 ----------- ----------- ----------- Total identifiable assets................................................... 18,219,166 18,000,519 16,232,639 Corporate......................................................................... 959,953 959,384 945,397 Adjustments and eliminations...................................................... (83,661) (168,271) (148,877) Net assets of discontinued operations............................................. 843,408 844,645 731,810 ----------- ----------- ----------- Total assets................................................................ $19,938,866 $19,636,277 $17,760,969 =========== =========== ===========
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 ------------------------------------------ 1996 1995 1994 ---------- ---------- ---------- (in thousands) Premiums earned Personal........................................................................ $ 969,710 $ 847,474 $ 826,068 Commercial...................................................................... 3,315,526 2,952,751 2,677,914 Reinsurance Assumed............................................................. 284,020 346,937 272,301 ---------- ---------- ---------- Total premiums earned..................................................... $4,569,256 $4,147,162 $3,776,283 ========== ========== ========== Income (loss) from operations before income tax Personal........................................................................ $ 67,244 $ 97,301 $ (3,247) Commercial...................................................................... (18,162) (6,957) (3,546) Reinsurance Assumed............................................................. (18,740) 3,810 (1,518) ---------- ---------- ---------- Underwriting income (loss)................................................ 30,342 94,154 (8,311) Net investment income........................................................... 646,056 602,987 560,481 ---------- ---------- ---------- Income from operations before income tax.................................. $ 676,398 $ 697,141 $ 552,170 ========== ========== ==========
61 25 The premiums earned and underwriting income or loss by groupings of classes of business for prior years include certain reclassifications to conform with the 1996 presentation, which more closely reflects the way the property and casualty business is now managed. 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 has also been obtained from treaty reinsurance assumed, principally from Royal & Sun Alliance. 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 ------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (in thousands) Revenues United States................................................................... $ 4,145,638 $ 3,715,023 $ 3,508,243 International................................................................... 1,079,753 1,045,381 838,571 ----------- ----------- ----------- Total......................................................................... $ 5,225,391 $ 4,760,404 $ 4,346,814 =========== =========== =========== Income from operations before income tax United States................................................................... $ 571,575 $ 592,684 $ 479,153 International................................................................... 104,823 104,457 73,017 ----------- ----------- ----------- Total......................................................................... $ 676,398 $ 697,141 $ 552,170 =========== =========== =========== December 31 ------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (in thousands) Identifiable assets United States................................................................... $14,573,417 $14,055,334 $12,937,447 International................................................................... 2,004,518 2,102,354 1,498,486 ----------- ----------- ----------- Total......................................................................... $16,577,935 $16,157,688 $14,435,933 =========== =========== ===========
Foreign currency translation gains or losses credited or charged directly to the separate component of shareholders' equity were as follows:
Years Ended December 31 ------------------------------- 1996 1995 1994 -------- -------- ------- (in thousands) Gains (losses) on translation of foreign currencies............................................ $(15,129) $(15,931) $14,517 Income tax (credit) Current.................................................................................... (3,822) (5,994) 4,633 Deferred................................................................................... 938 3,262 445 -------- -------- ------- $(12,245) $(13,199) $ 9,439 ======== ======== =======
62 26 (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) On March 1, 1996, 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. At the same time, the Board of Directors approved a two-for-one stock split payable to shareholders of record as of April 19, 1996. The activity of the Corporation's common stock was as follows:
Years Ended December 31 ----------------------------------------- 1996 1995 1994 ----------- ---------- ---------- (number of shares) Common stock issued Balance, beginning of year........................................................ 87,819,355 87,798,286 87,709,465 Two-for-one stock split........................................................... 87,819,355 -- -- Shares issued upon exchange of long term debt..................................... 480,464 -- -- Share activity under option and incentive plans................................... (35,001) 21,069 88,821 ----------- ---------- ---------- Balance, end of year.......................................................... 176,084,173 87,819,355 87,798,286 ----------- ---------- ---------- Treasury stock Balance, beginning of year........................................................ 518,468 977,580 -- Two-for-one stock split........................................................... 518,468 -- -- Repurchase of shares.............................................................. 1,700,000 -- 1,001,500 Share activity under option and incentive plans................................... (1,513,754) (459,112) -- Shares issued -- other............................................................ -- -- (23,920) ----------- ---------- ---------- Balance, end of year.......................................................... 1,223,182 518,468 977,580 ----------- ---------- ---------- Common stock outstanding, end of year......................................... 174,860,991 87,300,887 86,820,706 =========== ========== ==========
(c) The Corporation has a Shareholder Rights Plan under which each shareholder has one-quarter of a right for each share of common stock of the Corporation held. Each right entitles the holder to 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. 63 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 --------------------------------------------------------- 1996 1995 ------------------------- ------------------------- GAAP Statutory GAAP Statutory ---------- ---------- ---------- ---------- (in thousands) Property and casualty insurance subsidiaries*....................... $3,788,655 $2,514,203 $3,617,144 $2,314,720 Discontinued life and health insurance operations................... 843,408 328,327 844,645 317,624 ---------- ---------- ---------- ---------- 4,632,063 $2,842,530 4,461,789 $2,632,344 ========== ========== Corporate and eliminations.......................................... 830,811 800,940 ---------- ---------- $5,462,874 $5,262,729 ========== ==========
A comparison of GAAP and statutory net income (loss) is as follows:
Years Ended December 31 ---------------------------------------------------------------------------------- 1996 1995 1994 ---------------------- ----------------------- ----------------------- GAAP Statutory GAAP Statutory GAAP Statutory -------- --------- --------- --------- --------- --------- (in thousands) Property and casualty insurance subsidiaries*............................ $453,300 $560,193 $ 640,834 $571,199 $ 506,825 $468,861 Discontinued life and health insurance operations............................... 26,491** 33,988 42,216 26,828 20,551 (4,264) -------- -------- --------- -------- --------- -------- 479,791 $594,181 683,050 $598,027 527,376 $464,597 ======== ======== ======== Corporate and eliminations................. 32,893 13,578 1,093 -------- --------- --------- $512,684 $ 696,628 $ 528,469 ======== ========= =========
* A property and casualty subsidiary owns the real estate subsidiaries. ** Includes the $22,000,000 after tax loss on disposal. (e) The Corporation's ability to continue to pay dividends to shareholders and interest on debt obligations is affected by the availability of liquid assets held by the Corporation and by the dividend paying ability of its property and casualty insurance subsidiaries. Various state insurance laws restrict the Corporation's property and casualty insurance subsidiaries as to the amount of dividends they may pay to the Corporation without the prior approval of regulatory authorities. The restrictions are generally based on net income and on certain levels of policyholders' surplus as determined in accordance with statutory accounting practices. Dividends in excess of such thresholds are considered "extraordinary" and require prior regulatory approval. During 1996, these subsidiaries paid dividends to the Corporation totaling $250,000,000. The maximum dividend distribution that may be made by the property and casualty insurance subsidiaries to the Corporation during 1997 without prior approval is approximately $438,000,000. 64 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, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. As described in Notes (1)(g) and (2) to the financial statements, The Chubb Corporation changed its methods of accounting for impairment of long-lived assets in 1996 and for investments in certain debt and equity securities in 1994. March 5, 1997 /s/ ERNST & YOUNG LLP 65 29 Quarterly Financial Data Summarized unaudited quarterly financial data for 1996 and 1995 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 ------------------- ------------------- ------------------- ------------------- 1996 1995 1996 1995 1996 1995 1996 1995 -------- -------- -------- -------- -------- -------- -------- -------- (in millions except per share data) Revenues............................ $1,481.6 $1,226.0 $1,382.0 $1,299.4 $1,357.0 $1,325.7 $1,459.9 $1,360.4 Claims and expenses................. 1,311.2 1,051.9 1,174.3 1,080.2 1,168.3 1,124.6 1,479.8 1,117.8 Federal and foreign income tax (credit).......................... 30.0 34.0 42.9 48.5 34.4 43.1 (46.6) 57.0 -------- -------- -------- -------- -------- -------- -------- -------- Income from continuing operations...................... 140.4 140.1 164.8 170.7 154.3 158.0 26.7 185.6 Income (loss) from discontinued operations, net of tax.......... 11.0 6.6 9.5 14.3 10.9 13.4 (4.9) 7.9 -------- -------- -------- -------- -------- -------- -------- -------- Net income.................... $ 151.4 $ 146.7 $ 174.3 $ 185.0 $ 165.2 $ 171.4 $ 21.8 $ 193.5 ======== ======== ======== ======== ======== ======== ======== ======== Per share data Income from continuing operations...................... $ .79 $ .79 $ .93 $ .96 $ .87 $ .90 $ .16 $ 1.05 Income (loss) from discontinued operations...................... .06 .04 .05 .08 .06 .07 (.02) .04 -------- -------- -------- -------- -------- -------- -------- -------- Net income.................... $ .85 $ .83 $ .98 $ 1.04 $ .93 $ .97 $ .14 $ 1.09 ======== ======== ======== ======== ======== ======== ======== ======== Underwriting ratios Losses to premiums earned......... 68.8% 63.3% 64.3% 64.5% 65.4% 65.4% 66.4% 65.5% Expenses to premiums written...... 32.5 33.0 32.0 31.9 31.8 31.5 32.0 32.1 -------- -------- -------- -------- -------- -------- -------- -------- Combined...................... 101.3% 96.3% 96.3% 96.4% 97.2% 96.9% 98.4% 97.6% ======== ======== ======== ======== ======== ======== ======== ========
In February 1997, the Corporation entered into a definitive agreement to sell its life and health insurance operations. As a result, these operations have been classified as discontinued operations. Loss from discontinued operations for the fourth quarter of 1996 reflects a charge of $22.0 million or $.12 per share for the after-tax loss on the sale. Claims and expenses for the fourth quarter of 1996 include a $255.0 million write-down of the carrying value of certain real estate assets to their estimated fair value. Income from continuing operations for the quarter has been reduced by a charge of $160.0 million or $.89 per share for the after-tax effect of the write-down. Per share amounts have been retroactively adjusted to reflect the two-for-one stock split effective April 19, 1996. 66 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 1996 and 1995.
1996 ------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Common stock prices High.................................................................... $52.13 $49.88 $50.00 $55.50 Low..................................................................... 46.94 44.13 41.38 45.50 Dividends declared.......................................................... .27 .27 .27 .27 1995 ------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Common stock prices High.................................................................... $40.50 $42.56 $48.44 $50.25 Low..................................................................... 38.25 38.75 39.13 45.06 Dividends declared.......................................................... .24 1/2 .24 1/2 .24 1/2 .24 1/2
The per share amounts have been retroactively adjusted to reflect the two-for-one stock split effective April 19, 1996. At March 1, 1997, there were approximately 8,425 common shareholders of record. 67 EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 THE CHUBB CORPORATION EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Principal subsidiaries at December 31, 1996 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 & Son Inc............................................ New York 100 Chubb Capital Corporation.................................. New Jersey 100 Chubb Life Insurance Company of America.................... New Hampshire 100 Chubb Colonial Life Insurance Company................. New Jersey 100 Chubb Sovereign Life Insurance Company................ California 100 Chubb America Service Corporation..................... New Hampshire 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. 48 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-31-1996 JAN-01-1996 DEC-31-1996 8,715 2,444 2,573 646 0 0 12,081 5 57 601 19,939 9,524 2,618 0 0 1,260 176 0 0 5,287 19,939 4,569 712 80 320 3,011 1,238 290 547 61 486 27 0 0 513 2.90 0 7,614 3,054 (43) 980 1,889 7,756 (43) 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 ($1,768), AS PRESCRIBED BY SFAS NO. 113. SUCH AMOUNTS ARE INCLUDED IN TOTAL ASSETS. UNEARNED-PREMIUMS EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUMS ($327) AS PRESCRIBED BY SFAS NO. 113. THIS PREPAID AMOUNT IS INCLUDED IN TOTAL ASSETS. NOTES-PAYABLE INCLUDES SHORT-TERM DEBT OF $189 AND LONG-TERM DEBT OF $1,071. 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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