-----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, KUPOxU3OijwHuaLzxTAHaK6dQ/anib9sqMCa/1MIDef2cBST8u/Agn802XpUXk1P hrmamXN/HHL5NSjCK6zzCg== 0000950123-99-002671.txt : 19990330 0000950123-99-002671.hdr.sgml : 19990330 ACCESSION NUMBER: 0000950123-99-002671 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 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: SEC FILE NUMBER: 001-08661 FILM NUMBER: 99576002 BUSINESS ADDRESS: STREET 1: 15 MOUNTAIN VIEW RD P O BOX 1615 CITY: WARREN STATE: NJ ZIP: 07061 BUSINESS PHONE: 9089032000 10-K 1 THE CHUBB CORPORATION 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO________ Commission File 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 $9,734,295,897 as of March 8, 1999. 161,361,903 Number of shares of common stock outstanding as of March 8, 1999 DOCUMENTS INCORPORATED BY REFERENCE Portions of The Chubb Corporation 1998 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 27, 1999 are incorporated by reference in Part III of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I. ITEM 1. BUSINESS GENERAL The Chubb Corporation (the Corporation) was incorporated as a business corporation under the laws of the State of New Jersey in June 1967. The Corporation is a holding company with subsidiaries principally engaged in the property and casualty insurance business. The Corporation and its subsidiaries employed approximately 10,700 persons worldwide on December 31, 1998. Revenues, income from continuing operations before income tax and assets for each operating segment for the three years ended December 31, 1998 are included in Note (16) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1998 Annual Report to Shareholders. The property and casualty insurance subsidiaries provide insurance coverages principally in the United States, Canada, Europe and parts of Australia, Latin America and the Far East. Revenues of the property and casualty insurance subsidiaries by geographic area for the three years ended December 31, 1998 are included in Note (16) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1998 Annual Report to Shareholders. PROPERTY AND CASUALTY INSURANCE 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, Chubb do Brasil Companhia de Seguros and Chubb Atlantic Indemnity Ltd. Federal is the manager of Vigilant, Pacific Indemnity, Great Northern, Chubb National, Chubb Indemnity and Chubb New Jersey. Federal also provides certain services to other members of the Group. Acting subject to the supervision and control of the Boards of Directors of the members of the Group, the Chubb & Son division of Federal provides day to day executive management and operating personnel and makes available the economy and flexibility inherent in the common operation of a group of insurance companies. The Group presently underwrites most forms of property and casualty insurance. All members of the Group write non-participating policies. Several members of the Group also write participating policies, particularly in the workers' compensation class of business, under which dividends are paid to the policyholders. 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 WRITTEN ASSUMED(A) CEDED(A) WRITTEN YEAR -------- ----------- ----------- -------- (IN MILLIONS) 1996............................. $5,166.5 $436.8 $ 829.5 $4,773.8 1997............................. 5,524.4 162.9 239.3 5,448.0 1998............................. 5,842.0 141.9 480.4 5,503.5
- --------------- (a) Intercompany items eliminated. Reinsurance premiums assumed and ceded have been affected by changes in reinsurance agreements with the Royal & Sun Alliance Insurance Group plc (Sun Alliance). These changes are described in Note (13) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1998 Annual Report to Shareholders. 2 3 The net premiums written during the last five years for major classes of the Group's business are incorporated by reference from page 16 of the Corporation's 1998 Annual Report to Shareholders. One or more members of the Group are licensed and transact business in each of the 50 states of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, Canada, Europe and parts of Australia, Latin America and the Far East. In 1998, approximately 83% of the Group's direct business was produced in the United States, where the Group's businesses enjoy broad geographic distribution with a particularly strong market presence in the Northeast. The five states accounting for the largest amounts of direct premiums written were New York with 13%, California with 10%, New Jersey with 6% and Pennsylvania and Texas each with 5%. No other state accounted for 5% or more of such premiums. Approximately 10% of the Group's direct premiums written was produced in Europe and 4% was produced in Canada. Underwriting Results A frequently used industry measurement of property and casualty insurance underwriting results is the combined loss and expense ratio. This ratio is the sum of the ratio of incurred losses and related loss adjustment expenses to premiums earned (loss ratio) plus the ratio of underwriting expenses to premiums written (expense ratio) after reducing both premium amounts by dividends to policyholders. When the combined ratio is under 100%, underwriting results are generally considered profitable; when the combined ratio is over 100%, underwriting results are generally considered unprofitable. Investment income, other non-underwriting income or expense and income taxes are not reflected in the combined ratio. The profitability of property and casualty insurance companies depends on income from both underwriting operations and investments. The net premiums and the loss, expense and combined loss and expense ratios of the Group for the last five years are shown in the following table:
NET PREMIUMS COMBINED (IN MILLIONS) LOSS AND ---------------------- EXPENSE EXPENSE LOSS RATIOS RATIOS YEAR WRITTEN EARNED RATIOS ------- -------- 1994............................. $ 3,951.2 $ 3,776.3 67.0% 32.5% 99.5% 1995............................. 4,306.0 4,147.2 64.7 32.1 96.8 1996............................. 4,773.8 4,569.3 66.2 32.1 98.3 1997............................. 5,448.0 5,157.4 64.5 32.4 96.9 1998............................. 5,503.5 5,303.8 66.3 33.5 99.8 --------- --------- ------- ------- --------- Total for five years ended December 31, 1998............. $23,982.5 $22,954.0 65.7% 32.6% 98.3% ========= ========= ======= ======= =========
The combined loss and expense ratios during the last five years for major classes of the Group's business are incorporated by reference from page 16 of the Corporation's 1998 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, 1998 and 1997, such ratio for the Group was 1.95 and 2.13, respectively. Producing and Servicing of Business In the United States and Canada, the Group is represented by approximately 4,000 independent agents and accepts business on a regular basis from an estimated 525 insurance brokers. In most instances, these agents and brokers also represent other companies which compete with the Group. The offices maintained by the Group assist these agents and brokers in producing and servicing the Group's business. In addition to the administrative offices in Warren, New Jersey, the Group operates 5 zone offices and branch and service offices throughout the United States and Canada. The Group's overseas business is developed by its foreign agents and brokers through local branch offices of the Group and by its United States and Canadian agents and brokers. In conducting its 3 4 overseas business, the Group reduces the risks relating to currency fluctuations by maintaining investments in those foreign currencies in which the Group transacts business, with characteristics similar to the liabilities in those currencies. The net asset or liability exposure to the various foreign currencies is regularly reviewed. Business for the Group is also produced through participation in a number of underwriting pools and syndicates including, among others, Associated Aviation Underwriters, Cargo Reinsurance Association, American Cargo War Risk Reinsurance Exchange and American Accident Reinsurance Group. Such pools and syndicates provide underwriting capacity for risks which an individual insurer cannot prudently underwrite because of the magnitude of the risk assumed or which can be more effectively handled by one organization due to the need for specialized loss control and other services. Reinsurance In accordance with the normal practice of the insurance industry, the Group assumes and cedes reinsurance with other insurers or reinsurers. Reinsurance is ceded to provide greater diversification of business and minimize the Group's maximum net loss arising from large risks or from hazards of potential catastrophic events. A large portion of the Group's reinsurance is effected under contracts known as treaties under which all risks meeting prescribed criteria are automatically covered. Most of the Group's treaty reinsurance arrangements consist of excess of loss and catastrophe contracts with other insurers or reinsurers which protect against a specified part or all of certain types of losses over stipulated amounts arising from any one occurrence or event. In certain circumstances, reinsurance is also effected by negotiation on individual risks. The amount of each risk retained by the Group is subject to maximum limits which vary by line of business and type of coverage. Retention limits are continually reviewed and are revised periodically as the Group's capacity to underwrite risks changes. Additional information related to the Group's reinsurance programs is included in Item 7 of this report on pages 16 and 17. Reinsurance contracts do not relieve the Group of its primary 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 Group has an exposure to insured losses caused by hurricanes, earthquakes, winter storms, windstorms and other catastrophic events. The frequency and severity of catastrophes are unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. The Group continually assesses its concentration of underwriting exposures in catastrophe prone areas and develops strategies to manage this exposure through individual risk selection, subject to regulatory constraints, and through the purchase of catastrophe reinsurance. The Group has invested in modeling techniques that allow it to better monitor catastrophe exposures. In addition, the Group maintains records showing concentrations of risk in catastrophe prone areas such as California (earthquake and brush fires) and the Southeast coast of the United States (hurricanes). The Group's current catastrophe reinsurance program provides coverage for individual catastrophic events of approximately 73% of losses between $100 million and $450 million in the United States and approximately 88% of losses between $25 million and $125 million outside the United States. Unpaid Claims and Claim Adjustment Expenses and Related Amounts Recoverable from Reinsurers Insurance companies are required to establish a liability in their accounts for the ultimate costs (including claim adjustment expenses) of claims which have been reported but not settled and of claims which have been incurred but not reported. Insurance companies are also required to report as assets the portion of such liability that will be recovered from reinsurers. 4 5 The process of establishing the liability for unpaid claims and claim adjustment expenses is a complex and imprecise science that reflects significant judgmental factors. This is true because claim settlements to be made in the future will be impacted by changing rates of inflation and other economic conditions, changing legislative, judicial and social environments and changes in the Group's claim handling procedures. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss to the Group and the settlement of the loss. Approximately 60% of the Group's net unpaid claims and claim adjustment expenses at December 31, 1998 were for IBNR--claims which had not yet been reported to the Group, some of which were not yet known to the insured, and for 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, 1998, 1997 and 1996:
YEARS ENDED DECEMBER 31 --------------------------------- 1998 1997 1996 ---- ---- ---- (IN MILLIONS) Net liability, beginning of year.................... $ 8,564.6 $7,755.9 $7,614.5 --------- -------- -------- Net incurred claims and claim adjustment expenses Provision for claims occurring in the current year........................................... 3,712.1 3,372.3 3,053.6 Decrease in estimates for claims occurring in prior years.................................... (218.4) (65.3) (42.8) --------- -------- -------- 3,493.7 3,307.0 3,010.8 --------- -------- -------- Net payments for claims and claim expenses related to Current year...................................... 1,210.7 1,080.0 980.0 Prior years....................................... 1,797.7 1,418.3 1,889.4 --------- -------- -------- 3,008.4 2,498.3 2,869.4 --------- -------- -------- Net liability, end of year.......................... 9,049.9 8,564.6 7,755.9 Reinsurance recoverable, end of year................ 1,306.6 1,207.9 1,767.8 --------- -------- -------- Gross liability, end of year........................ $10,356.5 $9,772.5 $9,523.7 ========= ======== ========
As reestimated at December 31, 1998, the liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, as established at the previous year-end was redundant by $218.4 million. This compares with favorable development of $65.3 million and $42.8 million during 1997 and 1996, 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 incurred losses relating to asbestos and toxic waste claims. The higher favorable development in 1998 compared with the prior years was due to substantially lower incurred losses related to asbestos and toxic waste claims, the continued favorable loss experience for executive protection coverages and favorable development on certain excess liability case reserves set up several years ago. As a result of the changes to the reinsurance agreements with Sun Alliance, there were portfolio transfers of gross loss reserves and reinsurance recoverable as of January 1, 1996 and 1997. The effect of these portfolio transfers was a decrease in gross loss reserves of $183.8 million and $209.3 million and a decrease in reinsurance recoverable of $470.0 million and $244.3 million in 1997 and 1996, respectively. Unpaid claims and claim adjustment expenses, net of reinsurance recoverable, increased by $485.3 million in 1998 compared with $808.7 million and $141.4 million in 1997 and 1996, respectively. The increases in 1997 and 1996 include the effect of the portfolio transfers with Sun Alliance. The 1996 increase would have been greater except that loss reserves were reduced as the result of payments of $461.5 million during the year related to the settlement of asbestos-related claims against Fibreboard Corporation. The Fibreboard reserves and related loss payments are presented in the table on page 7. The Fibreboard settlement is further discussed in Item 7 of this report on pages 21 and 22. Excluding the Fibreboard reserves and the effect of the portfolio transfers, loss reserves, net of reinsurance recoverable, increased by $485.3 million or 6% in 1998, $516.5 million or 7% in 1997, and $562.9 million or 9% in 1996. Substantial reserve growth has occurred each year in those liability classes, primarily excess liability and executive protection, that are characterized by delayed loss reporting and extended periods of settlement. These coverages represent a significant portion of the Group's business. The Group continues to emphasize early and accurate reserving, inventory management of claims and suits, and control of the dollar value of settlements. The number of outstanding claims at year-end 1998 was approximately 4% higher than the number at year-end 1997, which was in turn 3% higher than that at year-end 1996. 6 7 The uncertainties relating to unpaid claims, particularly for asbestos and toxic waste claims on insurance policies written many years ago, are discussed in Item 7 of this report on pages 20 through 23. The following table provides a reconciliation of the beginning and ending liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, related to asbestos and toxic waste claims for the years ended December 31, 1998, 1997 and 1996. Reinsurance recoveries related to such claims are not significant.
YEARS ENDED DECEMBER 31 -------------------------------------------------------------------------------------------------- 1998 1997 1996 ------------------------------ -------------------------------- ------------------------------ FIBREBOARD ALL FIBREBOARD ALL FIBREBOARD ALL RELATED OTHER TOTAL RELATED OTHER TOTAL RELATED OTHER TOTAL ---------- ----- ----- ---------- ----- ----- ---------- ----- ----- (IN MILLIONS) Net liability, beginning of year................. $548.7 $543.7 $1,092.4 $542.7 $415.9 $ 958.6 $999.2 $343.8 $1,343.0 Net incurred claims and claim adjustment expenses................ -- 67.8 67.8 6.0 119.2 125.2 5.0 145.7 150.7 Net payments for claims... -- 84.5 84.5 -- (8.6)(a) (8.6) 461.5 73.6 535.1 ------ ------ -------- ------ ------ -------- ------ ------ -------- Net liability, end of year.................... $548.7 $527.0 $1,075.7 $548.7 $543.7 $1,092.4 $542.7 $415.9 $ 958.6 ====== ====== ======== ====== ====== ======== ====== ====== ========
(a) As a result of the termination of the reinsurance agreements with Sun Alliance, there was a portfolio transfer of asbestos and toxic waste loss reserves as of January 1, 1997. The effect of the portfolio transfer was to increase loss reserves by $55.6 million and decrease paid losses by the same amount. The loss portfolio transfer had no effect on incurred claims and claim adjustment expenses. The method by which asbestos claims are established by the Group's claim staff was changed in 1998. Previously, claims were generally established for each lawsuit. Since the change was implemented in 1998, one master claim is generally established for all similar claims and lawsuits involving an insured. Prior year claim counts were not adjusted to conform to the new methodology. A counted claim can have from one to thousands of claimants. Management does not believe the following claim count data is meaningful for analysis purposes. There were approximately 2,000 asbestos claims outstanding at December 31, 1998 compared with 3,700 asbestos claims outstanding at December 31, 1997 and 3,900 asbestos claims outstanding at December 31, 1996. In 1998, approximately 500 claims were opened and 2,200 claims were closed, including claims "closed" to adjust the data base to the new methodology. In 1997, approximately 1,300 claims were opened and 1,500 claims were closed. In 1996, approximately 1,800 claims were opened and 2,600 claims were closed. Indemnity payments per claim have varied over time due primarily to variations in insureds, policy terms and types of claims. Management cannot predict whether indemnity payments per claim will increase, decrease or remain the same. There were approximately 650 toxic waste claims outstanding at December 31, 1998 compared with 800 toxic waste claims outstanding at December 31, 1997 and 1996. Approximately 250 claims were opened in 1998, 300 claims were opened in 1997 and 400 claims were opened in 1996. There were approximately 400 claims closed in 1998 and 300 claims closed in 1997 and 1996. 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 1998. 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. 7 8 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, 1998. The amounts noted are cumulative in nature; that is, an increase in a loss estimate that related to a prior period occurrence generates a deficiency in each intermediate year. For example, a deficiency recognized in 1993 relating to losses incurred prior to December 31, 1988, such as the $675.0 million increase in loss reserves related to the Fibreboard settlement, would be included in the cumulative deficiency amount for each year in the period 1988 through 1992. Yet, the deficiency would be reflected in operating results only in 1993. The effect of changes in estimates of the liabilities for claims occurring in prior years on income before income taxes in each of the past three years is shown in the reconciliation table on page 6. In each of the years 1988 through 1997, there was favorable development for certain liability classes as the result of favorable claim severity trends. In each of these years, this favorable development was offset, in varying degrees, by unfavorable development related to asbestos and toxic waste claims. The years 1988 through 1992 in particular reflect the effects of the $675.0 million increase in loss reserves related to the Fibreboard settlement. The cumulative net deficiencies experienced relating to asbestos and toxic waste claims were also, to varying degrees, the result of: (1) an increase in the actual number of claims filed; (2) an increase in the number of unasserted claims estimated; (3) an increase in the severity of actual and unasserted claims; and (4) an increase in litigation costs associated with such claims. Conditions and trends that have affected development of the liability for unpaid claims and claim adjustment expenses in the past will not necessarily recur in the future. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies based on the data in this table. The middle section of the table on page 9 shows the cumulative amount paid with respect to the reestimated liability as of the end of each succeeding year. For example, in the 1988 column, as of December 31, 1998 the Group had paid $3,159.3 million of the currently estimated $4,601.9 million of claims and claim adjustment expenses that were unpaid at the end of 1988; thus, an estimated $1,442.6 million of losses incurred through 1988 remain unpaid as of December 31, 1998, approximately 75% of which relates to asbestos and toxic waste claims. The lower section of the table on page 9 shows the gross liability, reinsurance recoverable and net liability recorded at each year-end beginning with 1992 and the reestimation of these amounts as of December 31, 1998. 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 1988 1989 1990 1991 1992 1993 1994 1995 ---------- ---- ---- ---- ---- ---- ---- ---- ---- (IN MILLIONS) Net Liability for Unpaid Claims and Claim Adjustment Expenses........... $3,374.3 $3,880.1 $4,301.1 $4,743.9 $5,267.6 $6,450.0 $6,932.9 $7,614.5 Net Liability Reestimated as of: One year later..................... 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.................... 3,336.0 3,854.2 4,244.7 5,368.5 5,904.1 6,363.1 6,874.5 7,520.9 Three years later.................. 3,359.8 3,839.8 4,933.0 5,336.5 5,843.5 6,380.4 6,829.8 7,256.8 Four years later................... 3,385.1 4,567.4 4,941.7 5,302.6 5,894.6 6,338.1 6,605.4 Five years later................... 4,203.9 4,602.5 4,969.5 5,389.5 5,863.3 6,150.1 Six years later.................... 4,265.2 4,686.3 5,079.3 5,375.3 5,738.4 Seven years later.................. 4,387.6 4,800.4 5,094.2 5,303.9 Eight years later.................. 4,522.5 4,817.2 5,058.8 Nine years later................... 4,550.7 4,810.6 Ten years later.................... 4,601.9 Cumulative Net Deficiency (Redundancy)........................ 1,227.6 930.5 757.7 560.0 470.8 (299.9) (327.5) (357.7) Cumulative Net Deficiency Related to Asbestos and Toxic Waste Claims..... 2,098.1 1,969.1 1,824.1 1,576.3 1,416.4 640.7 525.5 343.7 Cumulative Amount of Net Liability Paid as of: One year later..................... 761.6 880.4 919.1 931.2 1,039.9 1,272.0 1,250.7 1,889.4 Two years later.................... 1,226.3 1,383.9 1,407.2 1,479.9 1,858.5 1,985.7 2,550.7 2,678.2 Three years later.................. 1,555.1 1,715.9 1,808.7 2,083.0 2,332.3 3,015.8 3,073.7 3,438.8 Four years later................... 1,778.8 1,958.6 2,292.0 2,386.9 3,181.4 3,264.5 3,589.8 Five years later................... 1,966.1 2,346.9 2,490.2 3,125.8 3,323.0 3,624.2 Six years later.................... 2,307.9 2,500.9 3,174.7 3,200.4 3,603.5 Seven years later.................. 2,422.7 3,120.6 3,200.4 3,412.7 Eight years later.................. 3,009.5 3,126.5 3,380.5 Nine years later................... 3,014.2 3,278.2 Ten years later.................... 3,159.3 Gross Liability, End of Year......... $7,220.9 $8,235.4 $8,913.2 $9,588.2 Reinsurance Recoverable, End of Year............................... 1,953.3 1,785.4 1,980.3 1,973.7 -------- -------- -------- -------- Net Liability, End of Year........... $5,267.6 $6,450.0 $6,932.9 $7,614.5 ======== ======== ======== ======== Reestimated Gross Liability.......... $7,753.4 $8,152.3 $8,797.5 $9,395.8 Reestimated Reinsurance Recoverable.. 2,015.0 2,002.2 2,192.1 2,139.0 -------- -------- -------- -------- Reestimated Net Liability............ $5,738.4 $6,150.1 $6,605.4 $7,256.8 ======== ======== ======== ======== Cumulative Gross Deficiency (Redundancy)....................... $ 532.5 $ (83.1) $ (115.7) $ (192.4) ======== ======== ======== ======== DECEMBER 31 ------------------------------- YEAR ENDED 1996 1997 1998 ---------- ---- ---- ---- Net Liability for Unpaid Claims and Claim Adjustment Expenses........... $7,755.9 $8,564.6 $ 9,049.9 Net Liability Reestimated as of: One year later..................... 7,690.6 8,346.2 Two years later.................... 7,419.6 Three years later.................. Four years later................... Five years later................... Six years later.................... Seven years later.................. Eight years later.................. Nine years later................... Ten years later.................... Cumulative Net Deficiency (Redundancy)........................ (336.3) (218.4) Cumulative Net Deficiency Related to Asbestos and Toxic Waste Claims..... 193.0 67.8 Cumulative Amount of Net Liability Paid as of: One year later..................... 1,418.3 1,797.7 Two years later.................... 2,488.2 Three years later.................. Four years later................... Five years later................... Six years later.................... Seven years later.................. Eight years later.................. Nine years later................... Ten years later.................... Gross Liability, End of Year......... $9,523.7 $9,772.5 $10,356.5 Reinsurance Recoverable, End of Year............................... 1,767.8 1,207.9 1,306.6 -------- -------- --------- Net Liability, End of Year........... $7,755.9 $8,564.6 $ 9,049.9 ======== ======== ========= Reestimated Gross Liability.......... $9,278.3 $9,605.2 Reestimated Reinsurance Recoverable.. 1,858.7 1,259.0 -------- -------- Reestimated Net Liability............ $7,419.6 $8,346.2 ======== ======== Cumulative Gross Deficiency (Redundancy)....................... $ (245.4) $ (167.3) ======== ========
- --------------- The cumulative deficiencies for the years 1988 through 1992 include the effect of the $675.0 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 -------------------- 1998 1997 ---- ---- (IN MILLIONS) Net liability reported on a statutory basis -- U.S. subsidiaries.............................................. $8,470.4 $8,086.3 Additions (reductions): Unpaid claims and claim adjustment expenses of foreign subsidiaries........................................... 659.7 553.9 Other reserve differences................................. (80.2) (75.6) -------- -------- Net liability reported on a GAAP basis...................... $9,049.9 $8,564.6 ======== ========
Investments Investment decisions are centrally managed by investment professionals based on guidelines established by management and approved by the board of directors for each member of the Group. The main objectives in managing the investment portfolio of the Group are to maximize after-tax investment income and total investment returns while minimizing credit risks in order to provide maximum support to the insurance underwriting operations. To accomplish this, the investment function must be highly integrated with the operating functions and capable of responding to the changing conditions in the marketplace. Investment strategies are developed based on many factors including underwriting results and the Group's resulting tax position, regulatory requirements, fluctuations in interest rates and consideration of other market risks. The investment portfolio of the Group is primarily comprised of high quality bonds, principally tax-exempt, U.S. Treasury, government agency, mortgage-backed securities and corporate issues. In addition, the portfolio includes equity securities held primarily with the objective of capital appreciation. In 1998, the Group invested new cash primarily in tax-exempt bonds and, to a lesser extent, equity securities. In 1997, the Group invested new cash primarily in tax-exempt bonds and, to a lesser extent, corporate bonds and mortgage-backed securities. In 1996, the Group invested new cash primarily in mortgage-backed securities and 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, 1998, 71% of the Group's fixed maturity portfolio was invested in tax-exempt bonds compared with 68% at December 31, 1997 and 1996. The investment results of the Group for each of the past three years are shown in the following table.
AVERAGE PERCENT EARNED INVESTED INVESTMENT ---------------------- ASSETS(A) INCOME(B) BEFORE TAX AFTER TAX YEAR --------- ---------- ---------- --------- (IN MILLIONS) 1996............................. $10,333.8 $646.1 6.25% 5.27% 1997............................. 11,725.9 711.2 6.07 5.05 1998............................. 12,795.7 748.9 5.85 4.96
- --------------- (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 REAL ESTATE GROUP The Real Estate Group is composed of Bellemead Development Corporation and its subsidiaries. The Real Estate Group is involved in commercial development activities primarily in New Jersey and residential development activities primarily in central Florida. In October 1996, the Corporation announced that the Real Estate Group was exploring the possible sale of all or a portion of its real estate assets. In March 1997, Bellemead entered into an agreement with a prospective purchaser to perform due diligence in anticipation of executing a contract for the sale of substantially all of its commercial properties. In June 1997, a definitive agreement was reached with the purchaser. In November 1997, the sale of almost all of the properties covered by the agreement reached in June was closed for $736.9 million. The buyer is a joint venture formed by Paine Webber Real Estate Securities Inc., Morgan Stanley Real Estate Fund II, L.P. and Gale & Wentworth, L.L.C. Closing on the one remaining property under the agreement is expected to occur in 1999. In addition to the sale to the joint venture in November 1997, several other commercial properties as well as residential properties were sold in 1997 and 1998. The Real Estate Group is continuing to explore the sale of certain of its remaining properties. The Real Estate Group has retained approximately $365 million of land, which is expected to be developed in the future, and approximately $165 million of commercial properties and land parcels under lease. Additional information related to the Corporation's real estate operations is included in Item 7 of this report on pages 24 through 26. DISCONTINUED OPERATIONS In May 1997, the Corporation completed the sale of Chubb Life Insurance Company of America and its subsidiaries, Chubb Colonial Life Insurance Company and Chubb Sovereign Life Insurance Company, to Jefferson-Pilot Corporation for $875.0 million in cash, subject to various closing adjustments, none of which were material. In 1996, the Corporation recognized a loss of $22.0 million relating to the sale of the life and health insurance subsidiaries. The purchase price was not adjusted to reflect results of operations subsequent to December 31, 1996. The discontinued life and health insurance operations did not affect the Corporation's net income in 1997 and 1998 and will not affect net income in future periods. Earnings in 1996 from the discontinued life and health insurance operations were $48.5 million, including realized investment gains of $8.2 million. REGULATION, PREMIUM RATES AND COMPETITION The Corporation is a holding company with subsidiaries primarily engaged in the property and casualty insurance business and is therefore subject to regulation by certain states as an insurance holding company. All states have enacted legislation which regulates insurance holding company systems such as the Corporation and its subsidiaries. This legislation generally provides that each insurance company in the system is required to register with the department of insurance of its state of domicile and furnish information concerning the operations of companies within the holding company system which may materially affect the operations, management or financial condition of the insurers within the system. All transactions within a holding company system affecting insurers must be fair and equitable. Notice to the insurance commissioners is required prior to the consummation of transactions affecting the ownership or control of an insurer and of certain material transactions between an insurer and any person in its holding company system and, in addition, certain of such transactions cannot be consummated without the commissioners' prior approval. The Group is subject to regulation and supervision in the states in which it does business. In general, such regulation is for the protection of policyholders rather than shareholders. The extent of such regulation varies but generally has its source in statutes which delegate regulatory, supervisory and administrative powers to a department of insurance. The regulation, supervision and administration relate to, among other things, the standards of solvency which must be met and maintained; the 11 12 licensing of insurers and their agents; restrictions on insurance policy terminations; unfair trade practices; the nature of and limitations on investments; premium rates; restrictions on the size of risks which may be insured under a single policy; deposits of securities for the benefit of policyholders; approval of policy forms; periodic examinations of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of companies or for other purposes; limitations on dividends to policyholders and shareholders; and the adequacy of provisions for unearned premiums, unpaid claims and claim adjustment expenses, both reported and unreported, and other liabilities. The extent of insurance regulation on business outside the United States varies significantly among the countries in which the Group operates. Some countries have minimal regulatory requirements, while others regulate insurers extensively. Foreign insurers in many countries are faced with greater restrictions than domestic competitors. In certain countries, the Group has incorporated insurance subsidiaries locally to improve its position. The National Association of Insurance Commissioners has a risk-based capital requirement for property and casualty insurance companies. The risk-based capital formula is used by state regulatory authorities to identify insurance companies which may be undercapitalized and which merit further 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, 1998, each member of the Group had more than sufficient capital to meet the risk-based capital requirement. Regulatory requirements applying to premium rates vary from state to state, but generally provide that rates not be "excessive, inadequate or unfairly discriminatory." Rates for many lines of business, including automobile and homeowners insurance, are subject to prior regulatory approval in many states. However, in certain states, prior regulatory approval of rates is not required for most lines of insurance which the Group underwrites. Ocean marine insurance rates are exempt from regulation. Subject to regulatory requirements, the Group's management determines the prices charged for its policies based on a variety of factors including claim and claim adjustment expense experience, inflation, tax law and rate changes, and anticipated changes in the legal environment, both judicial and legislative. Methods for arriving at prices vary by type of business, exposure assumed and size of risk. Underwriting profitability is affected by the accuracy of these assumptions, by the willingness of insurance regulators to approve changes in those rates which they control and by such other matters as underwriting selectivity and expense control. The property and casualty insurance industry is highly competitive both as to price and service. Members of the Group compete not only with other stock companies but also with mutual companies, other underwriting organizations and alternative risk sharing mechanisms. Some competitors obtain their business at a lower cost through the use of salaried personnel rather than independent agents and brokers. Rates are not uniform for all insurers and vary according to the types of insurers and methods of operation. The Group competes for business not only on the basis of price, but also on the basis of availability of coverage desired by customers and quality of service, including claim adjustment service. The Group's products and services are generally designed to serve specific customer groups or needs and to offer a degree of customization that is of value to the insured. There are approximately 3,000 property and casualty insurance companies in the United States operating independently or in groups and no single company or group is dominant. According to A.M. Best, the Group is the 12th largest United States property and casualty insurance group based on 1997 net premiums written. The relatively large size and underwriting capacity of the Group provide opportunities not available to smaller companies. Price competition increased in the property and casualty marketplace during 1987 and has continued through 1998, particularly in the commercial classes. The Group continues to be selective 12 13 in the writing of new business and to reinforce the sound relationships with customers who appreciate the stability, expertise and added value the Group provides. In all states, insurers authorized to transact certain classes of property and casualty insurance are required to become members of an insolvency fund. In the event of the insolvency of a licensed insurer writing a class of insurance covered by the fund in the state, members are assessed to pay certain claims against the insolvent insurer. Generally, fund assessments are proportionately based on the members' written premiums for the classes of insurance written by the insolvent insurer. In certain states, a portion of these assessments is recovered through premium tax offsets and policyholder surcharges. In 1998, assessments to the members of the Group amounted to approximately $8.2 million. The amount of future assessments cannot be reasonably estimated. State insurance regulation requires insurers to participate in assigned risk plans, reinsurance facilities and joint underwriting associations, which are mechanisms that generally provide applicants with various basic insurance coverages when they are not available in voluntary markets. Such mechanisms are most prevalent for automobile and workers' compensation insurance, but a majority of states also mandate participation in Fair Plans or Windstorm Plans, which provide basic property coverages. Some states also require insurers to participate in facilities that provide homeowners and crime insurance. Participation is based upon the amount of a company's voluntary written premiums in a particular state for the classes of insurance involved. These involuntary market plans generally are underpriced and produce unprofitable underwriting results. In several states, insurers, including members of the Group, participate in market assistance plans. Typically, a market assistance plan is voluntary, of limited duration and operates under the supervision of the insurance commissioner to provide assistance to applicants unable to obtain commercial and personal liability and property insurance. The assistance may range from identifying sources where coverage may be obtained to pooling of risks among the participating insurers. Although the federal government and its regulatory agencies generally do not directly regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways. Current and proposed federal measures which may significantly affect the insurance business include limitation of Year 2000 liability, tort reform, natural disaster reinsurance, hazardous waste removal and liability measures, containment of medical costs, 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 workers' compensation and disability benefits. Legislative and judicial developments pertaining to asbestos and toxic waste exposures are discussed in Item 7 of this report on pages 20 through 23. ITEM 2. PROPERTIES The executive offices of the Corporation and the administrative offices of the Property and Casualty Group are in Warren, New Jersey. The Property and Casualty Insurance Group maintains zone administrative and branch offices in major cities throughout the United States and also has offices in Canada, Europe, Australia, the Far East and Latin America. Office facilities are leased with the exception of a building in Branchburg, New Jersey. Management considers its office facilities suitable and adequate for the current level of operations. See Note (14) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1998 Annual Report to Shareholders. 13 14 ITEM 3. LEGAL PROCEEDINGS The Corporation and its subsidiaries are defendants in various lawsuits arising out of their businesses. It is the opinion of management that the final outcome of these matters will not materially affect the consolidated financial position of the registrant. Information regarding certain litigation to which property and casualty insurance subsidiaries of the Corporation are a party is included in Item 7 of this report on pages 20 through 23. 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, 1998. EXECUTIVE OFFICERS OF THE REGISTRANT
YEAR OF AGE(A) ELECTION(B) ------ ----------- Dean R. O'Hare, Chairman of the Corporation................. 56 1972 Douglas A. Batting, Executive Vice President of Chubb & Son, a division of Federal..................................... 56 1996 John J. Degnan, President of the Corporation................ 54 1994 Gail E. Devlin, Senior Vice President of the Corporation.... 60 1981 George R. Fay, Executive Vice President of Chubb & Son, a division of Federal....................................... 50 1999 David S. Fowler, Senior Vice President of the Corporation... 53 1989 Sylvester Green, Executive Vice President of Chubb & Son, a division of Federal....................................... 58 1998 Henry G. Gulick, Vice President and Secretary of the Corporation............................................... 55 1975 David B. Kelso, Executive Vice President of the Corporation............................................... 46 1996 Charles M. Luchs, Executive Vice President of Chubb & Son, a division of Federal....................................... 59 1996 Andrew A. McElwee, Jr., Senior Vice President of the Corporation............................................... 44 1997 Glenn A. Montgomery, Senior Vice President of the Corporation............................................... 46 1997 Thomas F. Motamed, Executive Vice President of the Corporation............................................... 50 1997 Donn H. Norton, Executive Vice President of the Corporation (c)....................................................... 57 1985 Michael J. O'Neill, Jr., Senior Vice President and Counsel of the Corporation........................................ 50 1999 Michael O'Reilly, Executive Vice President of the Corporation............................................... 55 1976 Robert Rusis, Senior Vice President and General Counsel of the Corporation........................................... 65 1990 Henry B. Schram, Senior Vice President of the Corporation... 52 1985
- --------------- (a) Ages listed above are as of April 27, 1999. (b) Date indicates year first elected or designated as an executive officer. (c) Mr. Norton retired as an executive officer of the registrant effective February 1999. 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 David B. Kelso. Prior to joining Chubb in 1996, Mr. Kelso was Executive Vice President of First Commerce Corporation in New Orleans, where he had also served as Chief Financial Officer. Mr. Kelso was previously a partner and head of the North American Banking Practice for The MAC Group (now known as Gemini Consulting), an international general management consulting firm. 14 15 PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Incorporated by reference from the Corporation's 1998 Annual Report to Shareholders, page 65. ITEM 6. SELECTED FINANCIAL DATA Selected financial data for the five years ended December 31, 1998 are incorporated by reference from the Corporation's 1998 Annual Report to Shareholders, pages 38 and 39. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion presents our past results and our expectations for the near term future. The supplementary financial information and 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 1998 Annual Report to Shareholders, pages 15, 16 and 40 through 62. Certain statements in this document, as well as certain statements incorporated by reference herein, may be considered to be "forward looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995, such as statements that include the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions. Such statements are subject to certain risks and uncertainties. The factors which could cause actual results to differ materially from those suggested by any such statements include, but are not limited to, those discussed or identified from time to time in the Corporation's public filings with the Securities and Exchange Commission and specifically to: risks or uncertainties associated with the Corporation's expectations with respect to premium price increases, the non-renewal of underpriced insurance accounts, business profitability or growth estimates, as well as with respect to its activity value analysis program, investment income or cash flow projections, its announced real estate plans, or the timing or earnings impact of the announced Executive Risk transaction, and more generally, to: general economic conditions including changes in interest rates and the performance of the financial markets, changes in domestic and foreign laws, regulations and taxes, changes in competition and pricing environments, regional or general changes in asset valuations, the occurrence of significant natural disasters, the development of major Year 2000 liabilities, the inability to reinsure certain risks economically, the adequacy of loss reserves, Euro or currency conversion transactions, as well as general market conditions, competition, pricing and restructurings. Operating income from continuing operations, which excludes realized investment gains and losses, was $615 million in 1998 compared with $701 million in 1997 and $434 million in 1996. Operating income in 1998 reflects a first quarter restructuring charge of $26 million after taxes related to the implementation of a cost control initiative. Operating 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. Income from continuing operations, which includes realized investment gains and losses related to such operations, was $707 million in 1998 compared with $770 million in 1997 and $486 million in 1996. In May 1997, the Corporation completed the sale of its life and health insurance operations. The life and health insurance operations have been classified as discontinued operations. Net income, which includes the results of the discontinued operations, amounted to $707 million in 1998 compared with $770 million in 1997 and $513 million in 1996. 15 16 PROPERTY AND CASUALTY INSURANCE Property and casualty earnings were lower in 1998 compared with 1997. Such earnings in 1997 were substantially higher than in 1996. Property and casualty income after taxes was $620 million in 1998 compared with $670 million in 1997 and $561 million in 1996. The decrease in earnings in 1998 was due to a decline in underwriting results caused in large part by substantially higher catastrophe losses. Investment income increased in 1998 compared with the prior year. The increase in earnings in 1997 was due to highly profitable underwriting results as well as strong growth in investment income compared with 1996. Earnings in 1996 were adversely affected by higher catastrophe losses. Catastrophe losses were $173 million in 1998, $57 million in 1997 and $142 million in 1996. The 1998 amount was net of reinsurance recoveries of approximately $150 million relating to Hurricane Georges. We did not have any recoveries from our catastrophe reinsurance program during 1997 or 1996 since there were no individual catastrophes for which our losses exceeded the initial retention. Our initial retention level for each catastrophic event is approximately $100 million in the United States and generally $25 million outside the United States. Reported net premiums written amounted to $5.5 billion in 1998, an increase of 1% compared with 1997. Reported net premiums written increased 14% in 1997 compared with 1996. Personal coverages accounted for $1.4 billion or 25% of 1998 premiums written and commercial coverages for $4.1 billion or 75%. The reported growth in premiums written in 1998 and 1997 was affected by changes in certain reinsurance agreements, which are discussed below. For many years, a portion of the U.S. insurance business written by the Corporation's property and casualty subsidiaries was reinsured on a quota share basis with a subsidiary of the Sun Alliance Group plc. Similarly, a subsidiary of the Corporation assumed a portion of Sun Alliance's property and casualty business on a quota share basis. 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 the 1996 merger of Sun Alliance with Royal Insurance Holdings plc, these agreements were terminated effective January 1, 1997. Therefore, in 1997, the property and casualty subsidiaries retained an even greater portion of the business they wrote directly and assumed no reinsurance from Sun Alliance. There was an additional impact on net premiums written in the first quarter of 1996 and 1997 due to the effect of the portfolio transfers of unearned premiums as of January 1 of each year resulting from the changes in retention. A comparison of reported net premiums written with net premiums written adjusted to reflect the changes to the reinsurance agreements with Sun Alliance follows:
1998 1997 1996 ---- ---- ---- (IN MILLIONS) Reported net premiums written....................... $5,504 $5,448 $4,774 Premiums assumed from Sun Alliance.................. (4) 203 ------ ------ ------ Net premiums written, excluding premiums assumed from Sun Alliance................................. 5,504 5,452 4,571 Portfolio transfers of unearned premiums............ 175 92 ------ ------ ------ Adjusted net premiums written (1998 compared with 1997)......................... $5,504 5,277 ====== Increase in retention -- 1997....................... 392 ------ ------ Adjusted net premiums written (1997 compared with 1996)......................... $4,885 $4,479 ====== ======
Net premiums written, as adjusted, increased 4% in 1998 compared with 1997. Similarly, net premiums written, as adjusted, increased 9% in 1997 compared with 1996. 16 17 After a review of the costs and benefits of our casualty excess of loss reinsurance program, effective January 1, 1996, we modified the program, principally for the excess liability and executive protection classes. 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 responds. These changes in our casualty reinsurance program increased net premiums written in 1996 by approximately $130 million compared with the prior year. During 1996, we continued to evaluate the relative costs and benefits of the 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. This change in our casualty reinsurance program increased net premiums written in 1997 by approximately $65 million compared with 1996. These changes have had a positive impact on the cash flows and resulting investment income of the property and casualty subsidiaries. Premium growth in personal lines was strong in both 1997 and 1998. In commercial lines, intense competition in the worldwide marketplace has made profitable premium growth difficult, particularly in the standard classes, which include multiple peril, casualty and workers' compensation. In 1998, competitors continued to place significant pressure on pricing as they attempted to maintain or increase market share. In an environment where price increases have been difficult to achieve, we have focused on our specialty lines where we emphasize the added value we provide to our customers. Strong growth was achieved in both years in premiums outside the United States, particularly in Europe, our largest foreign market. In view of the continuing unprofitability of the standard commercial classes, we have accelerated actions to achieve price increases. Our priorities for 1999 are to renew good business at adequate prices and not renew underperforming accounts where we cannot attain price adequacy. This aggressive pricing strategy could cause us to lose some business. Therefore, we expect overall premium growth to be flat in 1999. Underwriting results were near-breakeven in 1998 compared with profitable results in 1997 and 1996. The combined loss and expense ratio, the common measure of underwriting profitability, was 99.8% in 1998 compared with 96.9% in 1997 and 98.3% in 1996. The loss ratio was 66.3% in 1998 compared with 64.5% in 1997 and 66.2% in 1996. The loss ratio continues to reflect the favorable experience resulting from the consistent application of our disciplined underwriting standards. Losses from catastrophes represented 3.3 percentage points of the loss ratio in 1998 compared with 1.1 percentage points in 1997 and 3.1 percentage points in 1996. The significant catastrophes affecting results in 1998 included the winter ice storms in Canada in the first quarter, the wind and hail storms in the United States in the second quarter and Hurricane Georges in Puerto Rico in the third quarter. Catastrophe losses in 1996 resulted primarily from the winter storms in the eastern part of the United States in the first quarter. Our expense ratio was 33.5% in 1998 compared with 32.4% in 1997 and 32.1% in 1996. The increase in the ratio in 1998 was due primarily to an increase in commission expense caused in part by higher contingent payments and also to written premiums growing at a somewhat lesser rate than overhead expenses. During the fourth quarter of 1997, we began an activity value analysis process to identify and eliminate low-value activities and to improve operational efficiency in order to reduce expenses and redirect resources to those current activities and new initiatives having the greatest potential to contribute to the future results of the Corporation. Implementation began in the first quarter of 1998 and is substantially completed. This cost control initiative has resulted in approximately 500 job reductions in the home office and the branch network through a combination of early retirements, terminations and attrition. Other savings involve vendor management, consulting expenses and other operating costs. The initiative is expected to result in annual cost savings of approximately $150 million, beginning in 1999. 17 18 In the first quarter of 1998, we recorded a restructuring charge of $40 million, or $26 million after taxes, related to the implementation of the cost control initiative. The restructuring charge relates primarily to costs associated with providing enhanced pension benefits to employees who accepted an early retirement incentive offer, severance costs and other costs. PERSONAL INSURANCE Reported premiums from personal insurance increased 5% in 1998 compared with a 26% increase in 1997. The effect on net premiums written of the changes to the reinsurance agreement with Sun Alliance was as follows:
1998 1997 1996 ---- ---- ---- (IN MILLIONS) Reported net premiums written............................... $1,365 $1,306 $1,039 Portfolio transfers of unearned premiums.................... 66 31 ------ ------ ------ Adjusted net premiums written (1998 compared with 1997)................................. $1,365 1,240 ====== Increase in retention -- 1997............................... 139 ------ ------ Adjusted net premiums written (1997 compared with 1996)................................. $1,101 $1,008 ====== ======
Net premiums written, as adjusted, increased 10% in 1998 compared with 1997 and 9% in 1997 compared with 1996. 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 grew 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 each of the past three years. The combined loss and expense ratio was 85.6% in 1998 compared with 83.1% in 1997 and 91.7% in 1996. The profitability of our homeowners business each year is affected substantially by the amount of catastrophe losses we incur. Homeowners results were profitable by a similar margin in 1998 and 1997 as a reduction in the frequency of non-catastrophe related losses in 1998 substantially offset an increase in catastrophe losses. Results for this class were unprofitable in 1996 as catastrophe losses, particularly those caused by the winter storms, adversely affected results. Catastrophe losses represented 8.5 percentage points of the loss ratio for this class in 1998 compared with 2.9 percentage points in 1997 and 16.7 percentage points in 1996. Our automobile business produced substantial profits in each of the last three years. Results in each year benefited from stable loss frequency and severity. Other personal coverages, which include insurance for personal valuables and excess liability, were highly profitable in each of the past three years. Personal excess liability profitability increased in 1997 due to favorable loss experience but decreased somewhat in 1998 due to an increase in the frequency of large losses. 18 19 COMMERCIAL INSURANCE Reported premiums from commercial insurance were virtually unchanged in 1998 compared with 1997. Reported premiums in 1997 were 17% higher than in 1996. The effect on net premiums written of the changes to the reinsurance agreement with Sun Alliance was as follows:
1998 1997 1996 ---- ---- ---- (IN MILLIONS) Reported net premiums written............................... $4,139 $4,146 $3,532 Portfolio transfers of unearned premiums.................... 109 61 ------ ------ ------ Adjusted net premiums written (1998 compared with 1997)................................. $4,139 4,037 ====== Increase in retention -- 1997............................... 253 ------ ------ Adjusted net premiums written (1997 compared with 1996)................................. $3,784 $3,471 ====== ======
Net premiums written, as adjusted, increased 3% in 1998 compared with 1997 and 9% in 1997 compared with 1996. 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. Growth was achieved in 1998 in our executive protection business due to an emphasis on new products. Financial services consolidation together with competition has constrained growth in our financial institutions business. Premium growth in the standard commercial classes continues to be hindered by the intense competition that has driven prices to increasingly unprofitable levels. Premium growth in 1997 for the excess liability component of our casualty coverages and for our executive protection coverages benefited from the changes to our casualty excess of loss reinsurance program. Premium growth in 1998 and 1997 was stronger outside the United States. Our commercial insurance business produced unprofitable results in 1998 compared with near breakeven underwriting results in 1997 and 1996. The combined loss and expense ratio was 104.5% in 1998 compared with 100.7% in 1997 and 99.7% in 1996. Multiple peril results were unprofitable in each of the past three years due, in large part, to inadequate prices. Results for this class in 1998 deteriorated in the property component due to higher catastrophe losses. In the liability component, there was an increase in the frequency of large losses in 1998. However, this was offset by negligible multiple peril incurred losses in 1998 relating to asbestos and toxic waste claims on insurance policies written many years ago compared with the substantial incurred losses in 1997 relating to such claims. Results for the multiple peril class were similar in 1997 and 1996 as an improvement in 1997 in the property component, due in part to an absence of catastrophe losses, was offset by higher losses in the liability component resulting from an increase in the frequency of large losses and higher incurred losses relating to asbestos and toxic waste claims. Catastrophe losses represented 8.6 percentage points of the loss ratio for this class in 1998 compared with 1.5 percentage points in 1997 and 4.8 percentage points in 1996. Results for our casualty business were similarly unprofitable in each of the past three years. In each year, casualty results were adversely affected by incurred losses relating to asbestos and toxic waste claims, but more so in 1996. The excess liability component of our casualty coverages was slightly unprofitable in 1998 compared with profitable results in 1997 and 1996 due to declining prices and an increase in the frequency of losses. Excess liability results in 1998 benefited from favorable development on certain case reserves set up several years ago. Results for the primary liability component were unprofitable in each of the past three years, but more so in 1997 and 1996 due to a higher frequency of losses in those years. Results in the automobile component were more unprofitable in 1998 than in 1997 compared with breakeven results in 1996. The deterioration in 1997 and again in 1998 was due to an increase in the frequency of large losses. 19 20 Workers' compensation results were unprofitable in each of the past three years. Results deteriorated in 1997 and again in 1998 due in large part to the cumulative effect of price reductions over the past several years. Results were also adversely affected in 1998 by several large losses. Property and marine results were unprofitable in 1998 and 1997, but more so in 1998, compared with profitable results in 1996. Results in 1998 and 1997 were adversely affected by an increase in the frequency of large losses, including several large overseas losses. Results in all three years were adversely affected by catastrophe losses. Catastrophe losses for this class represented 5.7 percentage points of the loss ratio in 1998 compared with 4.9 percentage points in 1997 and 4.5 percentage points in 1996. Executive protection results were highly profitable in each of the past three years due to favorable loss experience, particularly in the directors and officers and fiduciary components. Our financial institutions business was also profitable during the same period due to the favorable loss experience in the fidelity component of this business. Such profitability was somewhat lower in 1997 due to several large losses in the non-fidelity portion of this business. Our other commercial classes produced near breakeven results in 1998 compared with profitable results in 1997 and near breakeven results in 1996. The deterioration in 1998 was attributable to our aviation business, which produced highly unprofitable results. The improvement in 1997 was primarily attributable to our surety and accident business. REINSURANCE ASSUMED Reinsurance assumed is treaty reinsurance that was assumed from Sun Alliance. The reinsurance agreement with Sun Alliance was terminated effective January 1, 1997. However, due to the lag in our reporting of such business, net premiums written in the first quarter of 1997 included $90 million related to business we assumed from Sun Alliance in the second half of 1996. Net premiums written for this segment were reduced by $94 million and $65 million in the first quarter of 1997 and 1996, respectively, due to the effect of the portfolio transfers of unearned premiums back to Sun Alliance as of January 1 of each year. Underwriting results for this segment in 1997, which represent our share of the Sun Alliance business for the last six months of 1996, were near breakeven. Underwriting results were also near breakeven in 1996. LOSS RESERVES Loss reserves are our property and casualty subsidiaries' largest liability. At the end of 1998, gross loss reserves totaled $10.4 billion compared with $9.8 billion and $9.5 billion at year-end 1997 and 1996, respectively. Reinsurance recoverable on such loss reserves was $1.3 billion at year-end 1998 compared with $1.2 billion and $1.8 billion at the end of 1997 and 1996, respectively. As a result of the changes to the reinsurance agreements with Sun Alliance, there were portfolio transfers of gross loss reserves and reinsurance recoverable as of January 1, 1997 and 1996. The effect of these portfolio transfers was a decrease in gross loss reserves of $184 million and $209 million and a decrease in reinsurance recoverable of $470 million and $244 million in 1997 and 1996, respectively. Loss reserves, net of reinsurance recoverable, increased by $485 million or 6% in 1998 compared with $809 million or 10% in 1997. Excluding the effect of the 1997 portfolio transfer, net loss reserves increased by $523 million or 7% in 1997. Substantial reserve growth has occurred each year in those liability classes, primarily excess liability and executive protection, that are characterized by delayed loss reporting and extended periods of settlement. During 1998, we experienced overall favorable development of $218 million on loss reserves established as of the previous year-end. This compares with favorable development of $65 million in 1997 and $43 million in 1996. Such redundancies were reflected in operating results in these respective 20 21 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 losses incurred relating to asbestos and toxic waste claims. The higher favorable development in 1998 compared with the prior years was due to substantially lower incurred losses related to asbestos and toxic waste claims, the continued favorable loss experience for executive protection coverages and favorable development on certain excess liability case reserves set up several years ago. The process of establishing loss reserves is a complex and imprecise science that reflects significant judgmental factors. This is true because claim settlements to be made in the future will be impacted by changing rates of inflation and other economic conditions, changing legislative, judicial and social environments and changes in our claim handling procedures. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss and the settlement of the loss. In fact, approximately 60% of our net loss reserves at December 31, 1998 were for IBNR -- 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 continue to further complicate the already complex loss reserving process. The uncertainties relating to asbestos and toxic waste claims on insurance policies written many years ago are exacerbated by inconsistent court decisions and judicial and legislative interpretations of coverage that in some cases have tended to erode the clear and express intent of such policies and in others have expanded theories of liability. The industry is engaged in extensive litigation over these coverage and liability issues and is thus confronted with a continuing uncertainty in its efforts to quantify these exposures. Our most costly asbestos exposure 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 in 1993 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, all of which has been paid. 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. At the same time, Pacific Indemnity, Continental Casualty and Fibreboard entered into a trilateral agreement to settle all present and future asbestos-related bodily injury claims resulting from insurance policies that were, or may have been, issued to Fibreboard by the two insurers. The trilateral agreement will be triggered if the global settlement agreement is ultimately disapproved. Pacific 21 22 Indemnity's obligation under the trilateral agreement is therefore similar to, and not duplicative of, that under those agreements described above. The trilateral agreement reaffirms portions of an agreement reached in March 1992 between Pacific Indemnity and Fibreboard. Among other matters, that 1992 agreement eliminates any Pacific Indemnity liability to Fibreboard for asbestos-related property damage claims. In July 1995, the United States District Court of the Eastern District of Texas approved the global settlement agreement and the trilateral agreement. The judgments approving these agreements were appealed to the United States Court of Appeals for the Fifth Circuit. In July 1996, the Fifth Circuit Court affirmed the 1995 judgments of the District Court. The objectors to the global settlement agreement appealed to the United States Supreme Court. In June 1997, the Supreme Court set aside the ruling by the Fifth Circuit Court that had approved the global settlement agreement and ordered the Fifth Circuit Court to reconsider its approval. In January 1998, the Fifth Circuit Court again affirmed the global settlement agreement. In April 1998, the objectors to the settlement petitioned the Supreme Court to review the decision. In December 1998, argument was held before the Supreme Court on the objectors' challenge. A decision is expected during 1999. The trilateral agreement was never appealed to the United States Supreme Court and is final. As a result, management continues to believe that the uncertainty of 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 that are currently before it and involve the three parties exclusively, while the approval of the global settlement is pending in court. Continental Casualty and Pacific Indemnity have dismissed disputes against each other which involved Fibreboard and were in litigation. 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 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. Hazardous waste sites are another significant potential exposure. Under the federal "Superfund" law and similar state statutes, when potentially responsible parties (PRPs) fail to handle the clean-up, regulators have the work done and then attempt to establish legal liability against the PRPs. The PRPs, with proper government authorization in many instances, disposed of toxic materials at a waste dump site or transported the materials to the site. Most sites have multiple PRPs. Insurance policies issued to PRPs were not intended to cover the clean-up costs of pollution and, in many cases, did not intend to cover the pollution itself. Pollution was not a recognized hazard at the time many of these policies were written. In more recent years, however, policies specifically exclude such exposures. As the costs of environmental clean-up have become substantial, PRPs and others have increasingly filed claims with their insurance carriers. Litigation against insurers extends to issues of liability, coverage and other policy provisions. There is great uncertainty involved in estimating our liabilities related to these claims. First, the liabilities of the claimants are extremely difficult to estimate. At any given site, the allocation of remediation costs among governmental authorities and the PRPs varies greatly. Second, different courts have addressed liability and coverage issues regarding pollution claims and have reached 22 23 inconsistent conclusions in their interpretation of several issues. These significant uncertainties are not likely to be resolved definitively in the near future. Uncertainties also remain as to the Superfund law itself. Superfund's taxing authority expired on December 31, 1995. Notwithstanding continued pressure by the insurance industry and other interested parties to achieve a legislative solution which would reform the liability provisions of the law, Congress has not yet addressed the issue. It is currently not possible to predict the direction that any reforms may take, when they may occur or the effect that any changes may have on the insurance industry. The Superfund law does not address non-Superfund sites. For that reason, it does not cover all existing hazardous waste exposures, such as those involving sites that are subject to state law only. There remains significant uncertainty as to the cost of remediating the state sites. Because of the large number of state sites, such sites could prove even more costly in the aggregate than Superfund sites. Litigation costs remain substantial, particularly for hazardous waste claims. A substantial portion of the funds we have expended to date has been for legal fees incurred in the prolonged litigation of coverage issues. Primary policies provide a limit on indemnity payments but many do not limit defense costs. This unlimited defense provided in the policy sometimes leads to the payment of defense costs in multiples of the indemnity exposure. Reserves for asbestos and toxic waste claims cannot be estimated with traditional loss reserving techniques that rely on historical accident year loss development factors. We have established case reserves and expense reserves for costs of related litigation where sufficient information has been developed to indicate the involvement of a specific insurance policy. In addition, IBNR reserves have been established to cover additional exposures on both known and unasserted claims. These reserves are continually reviewed and updated. We have evaluated ultimate incurred losses using newly emerging techniques for estimating environmental liabilities and have expanded our claim data base. As a result, we are more confident about the range of likely ultimate incurred losses relating to asbestos and toxic waste claims. Therefore, the incurred losses relating to asbestos and toxic waste claims were only $68 million in 1998, substantially less than the $125 million in 1997 and the $151 million in 1996. Further increases in such loss reserves in 1999 and future years are possible as legal and factual issues concerning these claims continue to be clarified. The amount cannot be reasonably estimated. Management believes that the aggregate loss reserves of the property and casualty subsidiaries at December 31, 1998 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. CATASTROPHE EXPOSURE The Corporation's property and casualty subsidiaries have an exposure to insured losses caused by hurricanes, earthquakes, winter storms, windstorms and other catastrophic events. The frequency and severity of catastrophes are unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. We continually assess our concentration of underwriting exposures in catastrophe prone areas and develop strategies to manage this exposure through individual risk selection, subject to regulatory constraints, and through the purchase of catastrophe reinsurance. In recent years, we have invested in modeling technologies that allow us to better monitor catastrophe exposures. We also continue to explore and 23 24 analyze credible scientific evidence, including the impact of global climate change, that may affect our potential exposure under insurance policies. INVESTMENTS AND LIQUIDITY Investment income after taxes increased 7% in 1998 compared with 9% in 1997. Growth was primarily due to increases in invested assets, which reflected strong cash flow from operations over the period, partially offset by lower average yields on new investments. The effective tax rate on our investment income was 15.3% in 1998 compared with 16.7% in 1997 and 15.8% in 1996. The effective tax rate increased in 1997 and then decreased in 1998 due to changes in the percentage of our investment income subject to tax. 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. New cash available for investment by the property and casualty subsidiaries was approximately $860 million in 1998 compared with $1,260 million in 1997 and $1,150 million in 1996. New cash in 1997 and 1996 included approximately $330 million and $40 million, respectively, received as the net result of the portfolio transfers of unearned premiums and loss reserves as of January 1 of each year related to the changes to the reinsurance agreements with Sun Alliance. New cash in 1996 also 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. In 1998, new cash was invested primarily in tax-exempt bonds and, to a lesser extent, equity securities. In 1997, new cash was invested in tax-exempt bonds and, to a lesser extent, corporate bonds and mortgage-backed securities. In addition, in the first quarter of 1997, $250 million of foreign denominated bonds were sold due to the reduction in foreign liabilities resulting from the termination of the reinsurance agreements with Sun Alliance, with the proceeds invested in U.S. dollar denominated securities. In 1996, we invested new cash primarily in mortgage-backed securities and 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 maintain sufficient investments in highly liquid, short-term securities at all times to provide for immediate cash needs and the Corporation maintains bank credit facilities that are available to respond to unexpected cash demands. CORPORATE 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 $23 million in 1998 compared with $36 million in 1997 and $20 million in 1996. The increase in corporate income in 1997 was due primarily to a reduction in interest expense. The lower corporate income in 1998 was due primarily to an increase in interest expense. REAL ESTATE In October 1996, we announced that we were exploring the possible sale of all or a significant portion of our real estate assets. In March 1997, our real estate subsidiary entered into an agreement with a prospective purchaser to perform due diligence in anticipation of executing a contract for the sale of substantially all of its commercial properties. Because the plan to pursue the sale of these assets in the near term represented a significant change in circumstances relating to the manner in which these assets would be used, we reassessed the recoverability of their carrying value as of December 31, 24 25 1996. As a result, we recorded an impairment loss of $255 million, or $160 million after taxes, in the fourth quarter of 1996 to reduce the carrying value of these assets to their estimated fair value. In June 1997, a definitive agreement was reached with the purchaser. In November 1997, the sale of almost all of the properties covered by the agreement reached in June was closed for $737 million, which included $628 million in cash and the assumption of $109 million in debt. The buyer is a joint venture formed by Paine Webber Real Estate Securities Inc., Morgan Stanley Real Estate Fund II, L.P. and Gale & Wentworth, L.L.C. Closing on the one remaining property under the agreement is expected to occur in 1999. In addition to the sale to the joint venture in November 1997, we sold several other commercial properties as well as residential properties in 1997 and 1998. We are continuing to explore the sale of certain of our remaining properties. We have retained approximately $365 million of land which we expect will be developed in the future. In addition, we have retained approximately $165 million of commercial properties and land parcels under lease. Real estate operations resulted in a loss after taxes of $2 million in 1998 compared with losses of $5 million in 1997 and $147 million in 1996. The loss in 1996 reflects the $160 million after tax impairment charge. Excluding the impact of the impairment charge, results in 1996 benefited from the sale of several rental properties. Revenues were $82 million in 1998, $616 million in 1997 and $320 million in 1996. Revenues in 1998 reflect the reduced operating activity as a result of the sale of a substantial portion of our real estate assets in 1997. Revenues in 1997 included $380 million from the November sale of real estate properties. Proceeds received from that sale that related to mortgages receivable are not classified as revenues. Revenues in 1996 included higher levels of revenues from residential development and the sale of rental properties. 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, 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, plus any additional costs to be incurred to complete development, 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 an 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 writedown of real estate assets in 1996 was made in accordance with the provisions of SFAS No. 121. Loans receivable, which were issued in connection with our joint venture activities and other property sales, are primarily purchase money mortgages. Such loans, which amounted to $105 million at December 31, 1998, are generally collateralized by buildings and, in some cases, land. We continually evaluate the ultimate collectibility of such loans and establish appropriate reserves. The carrying value of the real estate assets we plan to dispose of in the near term is based on the estimated fair value of these assets. The recoverability of the carrying value of the remaining real estate assets is assessed based on our ability to fully recover costs through a future revenue stream. The process by which SFAS No. 121 is applied and necessary write-downs are calculated assumes 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 such remaining properties and protect our interests over the long term. Management believes that it has made adequate provisions for impairment of real estate assets. However, if the assets are not sold or developed as presently contemplated, it is possible that additional impairment losses may be recognized. 25 26 Real estate activities were funded in the past with short-term credit instruments, primarily commercial paper, and debt issued by Chubb Capital Corporation as well as with term loans and mortgages. Proceeds from the November 1997 sale were used to repay the outstanding short-term debt and certain term loans and mortgages as well as to reduce intercompany borrowings from Chubb Capital. In February 1998, the remaining $300 million of intercompany borrowings from Chubb Capital was converted into preferred stock of the real estate subsidiary. In 1998, the interest rate on the remaining term loan approximated 7 1/2% and for mortgages the range of interest rates was 6% to 12%. INVESTMENT GAINS AND LOSSES Net investment gains realized by the Corporation and its property and casualty subsidiaries were as follows:
1998 1997 1996 ---- ---- ---- (IN MILLIONS) Equity securities........................................... $100 $ 75 $69 Fixed maturities............................................ 42 30 11 ---- ---- --- Realized investment gains before tax........................ $142 $105 $80 ==== ==== === Realized investment gains after tax......................... $ 92 $ 68 $52 ==== ==== ===
Decisions to sell securities are governed principally by considerations of investment opportunities and tax consequences. Thus, realized investment gains and losses may vary significantly from year to year. Sales of equity securities in each of the last three years resulted in net realized investment gains due primarily to the significant appreciation in the United States equity markets. A primary reason for the sale of fixed maturities in each of the last three years has been to improve our after-tax portfolio return without sacrificing quality where market opportunities have existed to do so. Fixed 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, 1998, 15% of the fixed maturity portfolio was classified as held-to-maturity compared with 18% at December 31, 1997 and 22% at December 31, 1996. The unrealized appreciation or depreciation of investments carried at market value, which includes equity securities and fixed maturities classified as available-for-sale, is reflected in a separate component of other comprehensive income, net of applicable deferred income tax. The unrealized market appreciation before tax of those fixed maturities carried at amortized cost was $138 million, $147 million and $130 million at December 31, 1998, 1997 and 1996, respectively. Such unrealized appreciation was not reflected in the consolidated financial statements. Changes in unrealized market appreciation of fixed maturities were due to fluctuations in interest rates. DISCONTINUED OPERATIONS -- LIFE AND HEALTH INSURANCE In May 1997, the Corporation completed the sale of Chubb Life Insurance Company of America to Jefferson-Pilot Corporation for $875 million in cash, subject to various closing adjustments, none of which were material. 26 27 In 1996, the Corporation recognized a loss of $22 million relating to the sale of the life and health insurance operations. The purchase price was not adjusted to reflect results of operations subsequent to December 31, 1996. The discontinued life and health insurance operations did not affect the Corporation's net income in 1997 and 1998 and will not affect net income in future periods. Earnings in 1996 from the discontinued life and health insurance operations were $49 million, including realized investment gains of $8 million. MARKET RISK The main objectives in managing the investment portfolios of the Corporation and its property and casualty subsidiaries are to maximize after-tax investment income and total investment returns while minimizing credit risks in order to provide maximum support to the insurance underwriting operations. Investment strategies are developed based on many factors including underwriting results and our resulting tax position, regulatory requirements, fluctuations in interest rates and consideration of other market risks. Investment decisions are centrally managed by investment professionals based on guidelines established by management and approved by the boards of directors. Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. The market risks related to financial instruments of the Corporation and its property and casualty subsidiaries primarily relate to the investment portfolio, which exposes the Corporation to risks related to interest rates and, to a lesser extent, credit quality, prepayment, foreign currency exchange rates and equity prices. Analytical tools and monitoring systems are in place to assess each of these elements of market risk. Interest rate risk is the price sensitivity of a fixed income security to changes in interest rates. We view these potential changes in price within the overall context of asset and liability management. Our actuaries estimate the payout pattern of our liabilities, primarily our property and casualty loss reserves, to determine their duration, which is the present value of the weighted average payments expressed in years. We set duration targets for our fixed income investment portfolios after consideration of the duration of these liabilities and other factors, which we believe mitigates the overall effect of interest rate risk for the Corporation and its property and casualty subsidiaries. The table on the following page provides information about all our fixed maturity investments, which are sensitive to changes in interest rates. The table presents cash flows of principal amounts and related weighted average interest rates by expected maturity dates at December 31, 1998 and 1997. The cash flows are based on the earlier of the call date or the maturity date or, for mortgage-backed securities, expected payment patterns. Actual cash flows could differ from the expected amounts. 27 28 FIXED MATURITIES EXPECTED CASH FLOWS OF PRINCIPAL AMOUNTS
AT DECEMBER 31, 1998 ---------------------------------------------------------------------------- TOTAL ---------------------- ESTIMATED THERE- AMORTIZED MARKET 1999 2000 2001 2002 2003 AFTER COST VALUE ---- ---- ---- ---- ---- ------ --------- --------- (IN MILLIONS) Tax-exempt........................... $462 $391 $578 $ 637 $ 575 $5,869 $ 8,512 $ 9,075 Average interest rate.............. 6.8% 6.7% 6.7% 6.1% 5.7% 5.5% -- -- Taxable-- other than mortgage-backed securities......................... 201 139 175 209 389 1,451 2,564 2,704 Average interest rate.............. 6.5% 6.3% 6.9% 6.6% 6.6% 6.6% -- -- Mortgage-backed securities........... 196 189 208 163 117 822 1,695 1,678 Average interest rate.............. 7.1% 7.1% 7.1% 7.0% 7.0% 7.3% -- -- ---- ---- ---- ------ ------ ------- ------- ------- Total................................ $859 $719 $961 $1,009 $1,081 $8,142 $12,771 $13,457 ==== ==== ==== ====== ====== ====== ======= ======= AT DECEMBER 31, 1997 ---------------------------------------------------------------------------- TOTAL ---------------------- ESTIMATED THERE- AMORTIZED MARKET 1998 1999 2000 2001 2002 AFTER COST VALUE ---- ---- ---- ------ ------ ------ --------- --------- (IN MILLIONS) Tax-exempt........................... $387 $423 $384 $ 520 $ 563 $5,332 $ 7,609 $ 8,114 Average interest rate.............. 6.7% 6.9% 6.7% 6.7% 6.0% 5.7% -- -- Taxable-- other than mortgage-backed securities......................... 158 308 146 258 140 1,578 2,588 2,675 Average interest rate.............. 7.7% 6.3% 6.7% 6.8% 7.3% 7.0% -- -- Mortgage-backed securities........... 231 162 167 180 177 861 1,778 1,811 Average interest rate.............. 7.1% 7.3% 7.4% 7.3% 7.4% 7.4% -- -- ---- ---- ---- ------ ------ ------ ------- ------- Total................................ $776 $893 $697 $ 958 $ 880 $7,771 $11,975 $12,600 ==== ==== ==== ====== ====== ====== ======= =======
The Corporation and its property and casualty subsidiaries have consistently invested in high quality marketable securities. As a result, we believe that we have minimal credit quality risk. Taxable bonds in our domestic portfolio comprise U.S. Treasury, government agency, mortgage-backed and corporate securities. During 1998, to increase our investment returns, we shifted a portion of the taxable portfolio from government agency mortgage-backed securities and lower yielding U.S. Treasury securities to commercial mortgage-backed securities and corporate bonds. Approximately 60% of taxable bonds are issued by the U.S. Treasury or U.S. government agencies or rated AA or better by Moody's or Standard and Poor's. Of the tax-exempt bonds, approximately 90% are rated AA or better with more than half rated AAA. Only 1% of our bond portfolio is below investment grade. Taxable bonds have an average maturity of 7 years while tax-exempt bonds mature on average in 9 years. Prepayment risk refers to the changes in prepayment patterns related to decreases and increases in interest rates that can either shorten or lengthen the expected timing of the principal repayments and thus the average life and the effective yield of a security. Such risk exists primarily within our portfolio of mortgage-backed securities. We monitor such risk regularly and invest primarily in those classes of mortgage-backed securities that are less subject to prepayment risk. Mortgage-backed securities comprised 40% of our taxable bond portfolio at both year-end 1998 and 1997. About 40% of our mortgage-backed securities holdings at December 31, 1998 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 28 29 liquid markets and market value information is readily available from broker/dealers. An additional 40% of our mortgage-backed securities were call protected AAA rated commercial securities. The remaining mortgage-backed holdings were all investment grade commercial mortgage-backed securities. Foreign currency risk is the sensitivity to foreign exchange rate fluctuations of the market value and investment income related to foreign currency denominated financial instruments. The functional currency of our foreign operations is generally the currency of the local operating environment since their business is primarily transacted in such local currency. We reduce the risks relating to currency fluctuations by maintaining investments in those foreign currencies in which we have unpaid claims and other liabilities. Such investments have characteristics similar to our liabilities in those currencies. At December 31, 1998, the property and casualty subsidiaries held foreign investments of $1.2 billion supporting their international operations. Such foreign investments have quality and maturity characteristics similar to our domestic portfolio. The principal currencies creating foreign exchange rate risk for the property and casualty subsidiaries are the Canadian dollar and the British pound sterling. The table below provides information about those fixed maturity investments included in the table on page 28 that are denominated in these two currencies. The table presents cash flows of principal amounts in U.S. dollar equivalents by expected maturity dates at December 31, 1998 and 1997. Actual cash flows could differ from the expected amounts. FOREIGN CURRENCY DENOMINATED FIXED MATURITIES EXPECTED CASH FLOWS OF PRINCIPAL AMOUNTS
AT DECEMBER 31, 1998 ----------------------------------------------------------------- TOTAL --------------------- ESTIMATED THERE- AMORTIZED MARKET 1999 2000 2001 2002 2003 AFTER COST VALUE ---- ---- ---- ---- ---- ------ --------- --------- (IN MILLIONS) Canadian dollar........................ $5 $31 $39 $40 $46 $151 $312 $343 British pound sterling................. -- 24 21 39 32 140 256 284
AT DECEMBER 31, 1997 ----------------------------------------------------------------- TOTAL --------------------- ESTIMATED THERE- AMORTIZED MARKET 1998 1999 2000 2001 2002 AFTER COST VALUE ---- ---- ---- ---- ---- ------ --------- --------- (IN MILLIONS) Canadian dollar........................ $-- $ 6 $16 $47 $43 $195 $307 $337 British pound sterling................. -- -- 19 23 5 175 222 229
Equity price risk is the potential loss arising from changes in the value of equity securities. In general, equities have more year-to-year price variability than intermediate term high grade bonds. However, returns over longer time frames have been consistently higher. Our equity securities are high quality and readily marketable. All of the above risks are monitored on an ongoing basis. A combination of in-house systems and proprietary models and externally licensed software are used to analyze individual securities as well as each portfolio. These tools provide the portfolio managers with information to assist them in the evaluation of the market risks of the portfolio. YEAR 2000 READINESS DISCLOSURE The Year 2000 issue relates to the inability of certain information technology (IT) systems and applications as well as non-IT systems, such as equipment with imbedded chips and microprocessors, to properly process data containing dates beginning with the year 2000. The issue exists because many 29 30 systems used two digits rather than four to define the applicable year. Such systems may recognize the date "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of normal business activities or other unforeseen problems. In 1995, we initiated a project to ensure Year 2000 readiness of the Corporation's systems and applications. We put in place a team responsible for bringing our systems and equipment into Year 2000 compliance. The team performed an inventory and assessment of our mainframe systems to determine which must be retired, renovated or rewritten as a result of Year 2000 issues. As of December 31, 1998, we completed remediation and testing procedures on 95% of our mainframe IT systems, including all mission critical systems except one. We expect to complete the remediation and testing of all remaining systems by June 1999. We have also completed an inventory and assessment of all our personal computers, servers and other non-mainframe computers. We expect that all such computers and related software will be Year 2000 ready by the third quarter of 1999. We have also assessed our non-IT systems and believe that the failure of any of these systems would have minimal impact on our operations. The Corporation and its subsidiaries have interaction with many third parties, including producers, reinsurers, financial institutions, vendors, suppliers and others. We have initiated contact with these parties regarding their plans for Year 2000 readiness. We are in the process of evaluating the responses and following up with those parties from whom we have received no response. The information obtained will be used to develop business contingency plans to address any mission critical operations that may be adversely impacted by the noncompliance of a third party with whom we interact. We have electronic data interchanges with some third parties. We are physically testing such interchanges for Year 2000 compliance. We expect that such testing will be completed by June 1999. We have identified those third parties that are critical to our operations and are assessing risks with respect to the potential failure of such parties to be Year 2000 ready. However, we do not have control over these third parties and are unable to determine whether all such third parties will address the Year 2000 issue successfully, including third parties located outside the United States where it is believed that Year 2000 remediation efforts in general may be less advanced. Management cannot determine the effect on the Corporation's future operating results of the failure of third parties to be Year 2000 ready. Our Year 2000 plans have been developed with the intention of minimizing the need for actual implementation of contingency activities. We anticipate that a substantial portion of 1999 will be used to monitor systems already remediated for Year 2000 for any unidentified problems and to perform additional remediation and testing as necessary. Nonetheless, in order to address any unexpected difficulties that may arise, we will keep our core Year 2000 readiness team intact until June 2000. Additionally, we are studying the development of contingency plans to continue business in the unlikely event that one or more of our critical systems fail. We believe that we are taking the necessary measures to address Year 2000 issues that may arise and that our internal systems will be compliant. Notwithstanding such efforts, significant Year 2000 problems could arise. In particular, the prolonged failure of power and telecommunications systems could have a material adverse effect on our operations. Similarly, Year 2000 related difficulties experienced by our producers or financial institutions have the potential to materially disrupt our business. Given the uncertain nature of Year 2000 problems that may arise, management cannot determine at this time whether the consequences of Year 2000 related problems will have a material impact on the Corporation's financial position or results of operations. The Year 2000 team has included employees of the Corporation and software consultants. A portion of the remediation effort has been accomplished by redirecting existing systems resources to the Year 2000 effort. However, we do not believe that this has had a significant adverse effect on other systems initiatives. 30 31 We expect that the cost to address the Year 2000 IT systems issue, including compensation of employees and the cost of consultants, will approximate $36 million. Approximately $30 million was incurred as of December 31, 1998, of which $14 million was incurred in 1998. These amounts do not include the cost of computer equipment purchased to replace equipment that would have been upgraded in the normal course of business, but not necessarily prior to January 2000. An additional concern to the Corporation is the potential future impact of the Year 2000 issue on insurance coverages written by our property and casualty subsidiaries. The Year 2000 issue is a risk for some of our insureds and needs to be considered during the underwriting process similar to any other risk to which our customers may be exposed. It is possible that Year 2000 related losses may emerge that would adversely affect operating results in future periods. At this time, in the absence of any significant claims experience, management cannot determine the nature and extent of any losses, the availability of coverage for such losses or the likelihood of significant claims. THE EURO On January 1, 1999, eleven of the fifteen member countries of the European Economic and Monetary Union adopted the euro as their common currency, at which time the rates of conversion between the euro and the participating national currencies were fixed. The euro will be introduced gradually over a period of three years. During this transition period, business in the participating countries will be conducted in the euro or the national currency. Once the national currencies are phased out, the euro will be the sole legal currency in these countries. We have identified the systems and operational issues related to the impact of the adoption of the euro on our European property and casualty operations. We were prepared to transact euro denominated business as of January 1, 1999. We will address additional systems issues over the three year transition period. The adoption of the euro is not expected to have a material effect on the Corporation's financial position or results of operations. CAPITAL RESOURCES In February 1994, the Board of Directors authorized the repurchase of up to 10,000,000 shares of common stock. Through March 1997, the Corporation had repurchased 6,851,600 shares under the 1994 share repurchase authorization. In March 1997, the Board of Directors replaced the 1994 authorization with a new authorization to repurchase up to 17,500,000 shares of common stock. On July 24, 1998, the Board of Directors authorized the repurchase of up to an additional 12,500,000 shares. Through December 31, 1998, the Corporation had repurchased 17,994,900 shares under the 1997 and 1998 authorizations. As of December 31, 1998, 12,005,100 shares remained under the current share repurchase authorizations. In the aggregate, the Corporation repurchased 8,203,000 shares in open-market transactions in 1998 at a cost of $609 million, 12,940,500 shares in 1997 at a cost of $828 million and 1,700,000 shares in 1996 at a cost of $83 million. The Corporation filed a shelf registration statement which the Securities and Exchange Commission declared effective in September 1998, under which up to $600 million of various types of securities may be issued by the Corporation or Chubb Capital. No securities have been issued under this registration statement. In August 1998, the Corporation sold $300 million of unsecured 6.15% notes due in 2005 and $100 million of unsecured 6.60% debentures due in 2018 under a previously filed shelf registration. The proceeds were used for general corporate purposes, which included the repurchase of shares of our common stock. The Corporation also has outstanding $30 million of unsecured 8 3/4% notes due in 1999. Chubb Capital has outstanding $100 million of 6 7/8% notes due in 2003. The Chubb Capital notes are unsecured and are guaranteed by the Corporation. 31 32 In July 1997, the Corporation entered into two credit agreements with a group of banks that provide for unsecured borrowings of up to $500 million in the aggregate. The $200 million short term revolving credit facility, which terminated on July 10, 1998, was extended to July 7, 1999, and may be renewed or replaced. The $300 million medium term revolving credit facility terminates on July 11, 2002. On the respective termination dates, any loans then outstanding become payable. There have been no borrowings under these agreements. These facilities are available for general corporate purposes and to support Chubb Capital's commercial paper borrowing arrangement. PENDING TRANSACTIONS On February 8, 1999, the Corporation announced that it entered into a definitive merger agreement under which it would acquire Executive Risk Inc. Executive Risk is a specialty insurance company offering directors and officers, errors and omissions and professional liability coverages. Executive Risk's gross and net written premiums for 1998 were approximately $500 million and $280 million, respectively. The acquisition will be accounted for using the purchase method of accounting. The agreement provides that Executive Risk shareholders will receive 1.235 shares of the Corporation's common stock for each outstanding common share of Executive Risk. The agreement contemplates that approximately 13,730,000 shares of common stock of the Corporation will be issued to Executive Risk shareholders and approximately 2,300,000 shares of common stock of the Corporation will be reserved for issuance upon exercise of Executive Risk stock options. The total value of the transaction is expected to be approximately $850 million. Completion of the acquisition is subject to approval by Executive Risk shareholders and various regulatory authorities. Closing is expected in the second quarter of 1999. The Corporation has agreed to purchase a 27% interest in Hiscox plc, a leading U.K. personal and commercial specialty insurer, for approximately $140 million. Closing of this transaction is subject to regulatory approvals which are pending. CHANGES IN ACCOUNTING PRINCIPLES In March 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This SOP requires that certain costs incurred to develop or obtain computer software for internal use should be capitalized and amortized over the software's expected useful life. Currently, we expense all development costs of internal use computer software. SOP 98-1 is effective for the Corporation on January 1, 1999 and is to be applied prospectively. The adoption of SOP 98-1 will increase the Corporation's net income in 1999 by an amount that has not yet been quantified. The effect on net income will decrease in future years as the new method of accounting is phased in. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and qualitative disclosures about market risk are included in Item 7, pages 27 through 29 of this report. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated financial statements of the Corporation at December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 and the Report of Independent Auditors thereon and the Corporation's unaudited quarterly financial data for the two-year period ended December 31, 1998 are incorporated by reference from the Corporation's 1998 Annual Report to Shareholders, pages 40 through 64. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 32 33 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the Corporation's Directors is incorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 27, 1999, pages 2 through 4. Information regarding the executive officers is included in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 27, 1999, pages 8 through 19 other than the Performance Graphs and the Organization and Compensation Committee Report appearing on pages 13 through 17. 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 27, 1999, pages 5 through 6. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 27, 1999, page 20. 33 34 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS AND 2. SCHEDULES The financial statements and schedules listed in the accompanying index to financial statements and financial statement schedules are filed as part of this report. 3. EXHIBITS The exhibits listed in the accompanying index to exhibits are filed as part of this report. (b) REPORTS ON FORM 8-K The Registrant filed a current report on Form 8-K dated October 29, 1998 with respect to the announcement on October 29, 1998 of its financial results for the third quarter and first nine months of 1998. The Registrant filed a current report on Form 8-K dated December 17, 1998 with respect to the fact that on December 11, 1998 the Board of Directors of the Registrant adopted amendments and additions to the by-laws of the Registrant. The Registrant filed a current report on Form 8-K dated January 19, 1999 with respect to the announcement on January 18, 1999 of its preliminary financial results for the quarter and year ended December 31, 1998. The Registrant filed a current report on Form 8-K dated February 6, 1999 with respect to the announcement on February 8, 1999 that the Registrant entered into a definitive merger agreement under which the Registrant will acquire Executive Risk Inc. The Registrant filed a current report on Form 8-K dated March 12, 1999 with respect to the announcement on March 12, 1999 that the Registrant had adopted a new shareholder rights plan, replacing the Registrant's existing plan, which was due to expire on June 12, 1999. For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 33-29185 (filed June 7, 1989), 33-30020 (filed July 18, 1989), 33-49230 (filed July 2, 1992), 33-49232 (filed July 2, 1992), 333-09273 (filed July 31, 1996), 333-09275 (filed July 31, 1996), 333-58157 (filed June 30, 1998) and 333-67347 (filed November 16, 1998): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 34 35 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. THE CHUBB CORPORATION (REGISTRANT) March 12, 1999 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 12, 1999 - --------------------------------------------------- Executive Officer and (DEAN R. O'HARE) Director /s/ ZOE E. BAIRD Director March 12, 1999 - --------------------------------------------------- (ZOE E. BAIRD) /s/ JOHN C. BECK Director March 12, 1999 - --------------------------------------------------- (JOHN C. BECK) /s/ SHEILA P. BURKE Director March 12, 1999 - --------------------------------------------------- (SHEILA P. BURKE) Director March 12, 1999 - --------------------------------------------------- (JAMES I. CASH, JR.) /s/ PERCY CHUBB, III Director March 12, 1999 - --------------------------------------------------- (PERCY CHUBB, III) /s/ JOEL J. COHEN Director March 12, 1999 - --------------------------------------------------- (JOEL J. COHEN) /s/ JAMES M. CORNELIUS Director March 12, 1999 - --------------------------------------------------- (JAMES M. CORNELIUS) /s/ DAVID H. HOAG Director March 12, 1999 - --------------------------------------------------- (DAVID H. HOAG)
35 36
SIGNATURE TITLE DATE Director March 12, 1999 - --------------------------------------------------- (THOMAS C. MACAVOY) /s/ WARREN B. RUDMAN Director March 12, 1999 - --------------------------------------------------- (WARREN B. RUDMAN) /s/ DAVID G. SCHOLEY Director March 12, 1999 - --------------------------------------------------- (DAVID G. SCHOLEY) Director March 12, 1999 - --------------------------------------------------- (RAYMOND G.H. SEITZ) /s/ LAWRENCE M. SMALL Director March 12, 1999 - --------------------------------------------------- (LAWRENCE M. SMALL) /s/ JAMES M. ZIMMERMAN Director March 12, 1999 - --------------------------------------------------- (JAMES M. ZIMMERMAN) /s/ DAVID B. KELSO Executive Vice President and March 12, 1999 - --------------------------------------------------- Chief Financial Officer (DAVID B. KELSO) /s/ HENRY B. SCHRAM Senior Vice President and March 12, 1999 - --------------------------------------------------- Chief Accounting Officer (HENRY B. SCHRAM)
36 37 THE CHUBB CORPORATION INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF INDEPENDENT AUDITORS (ITEM 14(A))
ANNUAL REPORT TO SHAREHOLDERS FORM 10-K PAGE PAGE ---------------- --------- Report of Independent Auditors 63 -- Consolidated Balance Sheets at December 31, 1998 and 1997 41 -- Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 40 -- Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 42 -- Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 43 -- Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1998, 1997, and 1996 43 -- Notes to Consolidated Financial Statements 44 -- Supplementary Information (unaudited) Quarterly Financial Data 64 -- Schedules: I -- Consolidated Summary of Investments -- Other than Investments in Related Parties at December 31, 1998 -- 39 II -- Condensed Financial Information of Registrant at December 31, 1998 and 1997 and for the Years Ended December 31, 1998, 1997 and 1996 -- 40 III -- Consolidated Supplementary Insurance Information at and for the Years Ended December 31, 1998, 1997 and 1996 -- 43 IV -- Consolidated Reinsurance for the Years Ended December 31, 1998, 1997 and 1996 -- 44 VI -- Consolidated Supplementary Property and Casualty Insurance Information for the Years Ended December 31, 1998, 1997 and 1996 -- 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, 1998, are hereby incorporated by reference. 37 38 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of The Chubb Corporation of our report dated February 24, 1999, except for Note 20(c), as to which the date is March 12, 1999, included in the 1998 Annual Report to Shareholders of The Chubb Corporation. Our audits also included the financial statement schedules of The Chubb Corporation listed in Item 14(a). These schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-3: No. 333-63175, No. 333-67445 and Form S-8: No. 33-29185, No. 33-30020, No. 33-49230, No. 33-49232, No. 333-09273, No. 333-09275, No. 333-58157 and No. 333-67347) of our report dated February 24, 1999, except for Note 20(c), as to which the date is March 12, 1999, 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, 1999 38 39 THE CHUBB CORPORATION SCHEDULE I CONSOLIDATED SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES (IN MILLIONS) DECEMBER 31, 1998
AMOUNT AT WHICH COST OR SHOWN IN AMORTIZED MARKET THE TYPE OF INVESTMENT COST VALUE BALANCE SHEET Short term investments................................ $ 344.2 $ 344.2 $ 344.2 --------- --------- --------- Fixed maturities Bonds United States Government and government agencies and authorities................................ 944.3 960.2 958.1 States, municipalities and political subdivisions................................... 8,466.5 9,028.2 8,892.3 Foreign.......................................... 1,118.3 1,202.1 1,202.1 Public utilities................................. 340.9 357.7 357.7 All other corporate bonds........................ 1,830.2 1,835.5 1,835.5 --------- --------- --------- Total bonds............................ 12,700.2 13,383.7 13,245.7 Redeemable preferred stocks......................... 70.3 73.2 73.2 --------- --------- --------- Total fixed maturities................. 12,770.5 13,456.9 13,318.9 --------- --------- --------- Equity securities Common stocks Public utilities................................. 18.5 24.3 24.3 Banks, trusts and insurance companies............ 68.6 82.1 82.1 Industrial, miscellaneous and other.............. 831.7 911.6 911.6 --------- --------- --------- Total common stocks.................... 918.8 1,018.0 1,018.0 Non-redeemable preferred stocks..................... 83.8 74.2 74.2 --------- --------- --------- Total equity securities................ 1,002.6 1,092.2 1,092.2 --------- --------- --------- Total invested assets.................. $14,117.3 $14,893.3 $14,755.3 ========= ========= =========
39 40 THE CHUBB CORPORATION SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS -- PARENT COMPANY ONLY (IN MILLIONS) DECEMBER 31
1998 1997 ---- ---- Assets Invested Assets Short Term Investments................................. $ 98.2 $ 420.8 Taxable Fixed Maturities -- Available-for-Sale (cost $377.3 and $330.8).................................... 357.9 334.9 Equity Securities (cost $114.2 and $66.4).............. 129.5 83.6 -------- -------- TOTAL INVESTED ASSETS............................. 585.6 839.3 Cash...................................................... -- .6 Investment in Consolidated Subsidiaries................... 5,191.9 4,779.6 Receivable from Consolidated Subsidiary................... 208.1 76.9 Other Assets.............................................. 189.3 154.5 -------- -------- TOTAL ASSETS...................................... $6,174.9 $5,850.9 ======== ======== Liabilities Long Term Debt............................................ $ 430.0 $ 60.0 Dividend Payable to Shareholders.......................... 50.3 49.0 Deferred Income Tax....................................... 6.6 39.5 Accrued Expenses and Other Liabilities.................... 43.9 45.3 -------- -------- TOTAL LIABILITIES................................. 530.8 193.8 -------- -------- Shareholders' Equity Preferred Stock -- Authorized 4,000,000 Shares; $1 Par Value; Issued -- None........................... -- -- Common Stock -- Authorized 600,000,000 Shares; $1 Par Value; Issued 175,989,202 and 176,037,850 Shares................................................. 176.0 176.0 Paid-In Surplus........................................... 546.7 593.0 Retained Earnings......................................... 5,604.0 5,101.7 Unrealized Appreciation of Investments, Net of Tax........ 414.7 400.1 Foreign Currency Translation Losses, Net of Tax........... (36.0) (25.7) Receivable from Employee Stock Ownership Plan............. (86.3) (96.7) Treasury Stock, at Cost -- 13,722,376 and 7,320,410 Shares................................................. (975.0) (491.3) -------- -------- TOTAL SHAREHOLDERS' EQUITY........................ 5,644.1 5,657.1 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $6,174.9 $5,850.9 ======== ========
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 1998 Annual Report to Shareholders. 40 41 THE CHUBB CORPORATION SCHEDULE II (CONTINUED) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME -- PARENT COMPANY ONLY (IN MILLIONS) YEARS ENDED DECEMBER 31
1998 1997 1996 ---- ---- ---- Investment Income........................................... $ 46.2 $ 71.8 $ 41.5 Realized Investment Gains................................... 23.0 13.2 12.8 Investment Expenses......................................... (2.1) (1.8) (2.0) Corporate Expenses.......................................... (27.7) (34.9) (33.4) ------ ------ ------ 39.4 48.3 18.9 Federal and Foreign Income Tax.............................. 3.9 44.0 .1 ------ ------ ------ 35.5 4.3 18.8 Equity in Income from Continuing Operations of Consolidated Subsidiaries.............................................. 671.5 765.2 467.4 ------ ------ ------ INCOME FROM CONTINUING OPERATIONS...................... 707.0 769.5 486.2 Equity in Income from Discontinued Operations............... -- -- 26.5 ------ ------ ------ NET INCOME............................................. $707.0 $769.5 $512.7 ====== ====== ======
The Corporation and its domestic subsidiaries file a consolidated federal income tax return. The Corporation's federal income tax represents its allocation of federal income tax under the Corporation's tax allocation agreements with its subsidiaries. The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 1998 Annual Report to Shareholders. 41 42 THE CHUBB CORPORATION SCHEDULE II (CONTINUED) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY (IN MILLIONS) YEARS ENDED DECEMBER 31
1998 1997 1996 ---- ---- ---- Cash Flows from Operating Activities Net Income................................................ $ 707.0 $ 769.5 $ 512.7 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Equity in Income of Continuing Operations of Consolidated Subsidiaries............................ (671.5) (765.2) (467.4) Equity in Income from Discontinued Operations.......... -- -- (26.5) Realized Investment Gains.............................. (23.0) (13.2) (12.8) Other, Net............................................. (31.6) 16.9 (12.7) ------- ------- ------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.............................. (19.1) 8.0 (6.7) ------- ------- ------- Cash Flows from Investing Activities Proceeds from Sales of Fixed Maturities................... 70.6 600.1 237.7 Proceeds from Maturities of Fixed Maturities.............. 94.5 49.1 104.9 Proceeds from Sales of Equity Securities.................. 97.9 89.7 17.3 Proceeds from Sale of Discontinued Operations, Net........ -- 861.2 -- Purchases of Fixed Maturities............................. (213.5) (606.3) (398.0) Purchases of Equity Securities............................ (122.7) (84.0) (16.1) Decrease (Increase) in Short Term Investments, Net........ 322.6 (411.1) 53.0 Dividends Received from Consolidated Subsidiaries......... 280.0 280.0 275.2 Other, Net................................................ (25.1) 19.6 (23.4) ------- ------- ------- NET CASH PROVIDED BY INVESTING ACTIVITIES............ 504.3 798.3 250.6 ------- ------- ------- Cash Flows from Financing Activities Proceeds from Exercise of Stock Option by Subsidiary...... -- 249.3(a) -- Proceeds from Issuance of Long Term Debt.................. 400.0 -- -- Repayment of Long Term Debt............................... (30.0) (30.0) (30.0) Dividends Paid to Shareholders............................ (203.4) (196.5) (184.2) Repurchase of Shares...................................... (608.5) (827.9) (82.5) Increase in Receivable from Consolidated Subsidiary....... (131.2) (61.0) (1.8) Other, Net................................................ 87.3 60.4 54.5 ------- ------- ------- NET CASH USED IN FINANCING ACTIVITIES................ (485.8) (805.7) (244.0) ------- ------- ------- Net Increase (Decrease) in Cash............................. (.6) .6 (.1) Cash at Beginning of Year................................... .6 -- .1 ------- ------- ------- CASH AT END OF YEAR.................................. $ -- $ .6 $ -- ======= ======= =======
- --------------- (a) In 1997 and 1996, Chubb Capital Corporation, a subsidiary of the Corporation, exercised its option to obtain 5,316,565 shares and 480,464 shares, respectively, of the Corporation's common stock. Chubb Capital exchanged such shares for $228.6 million and $20.7 million, respectively, of its 6% exchangeable subordinated notes. In 1997, Chubb Capital paid the Corporation for the cost of those shares. In 1997, a $264.4 million investment in a real estate development subsidiary was received as a dividend from a subsidiary of the Corporation. In addition, $410.7 million of fixed maturity securities were contributed to an investment company subsidiary of the Corporation. In 1996, $520.3 million of fixed maturity securities were received as a dividend from the investment company subsidiary. These noncash transactions have been excluded from the statements of cash flows. The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 1998 Annual Report to Shareholders. 42 43 THE CHUBB CORPORATION SCHEDULE III CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION (IN MILLIONS)
DECEMBER 31 YEAR ENDED DECEMBER 31 ---------------------------------- --------------------------------- DEFERRED POLICY NET ACQUISITION UNPAID UNEARNED PREMIUMS INVESTMENT INSURANCE SEGMENT COSTS CLAIMS PREMIUMS EARNED INCOME CLAIMS ------- ----------- --------- -------- -------- ---------- --------- 1998 Property and Casualty Insurance Personal........................................... $186.1 $ 688.9 $ 704.4 $1,304.3 $ 681.8 Standard Commercial................................ 258.5 5,686.4 1,011.6 1,980.6 1,631.7 Specialty Commercial............................... 284.1 3,981.2 1,199.7 2,018.9 1,180.2 Investments........................................ $748.9* ------ --------- -------- -------- ------ -------- $728.7 $10,356.5 $2,915.7 $5,303.8 $748.9 $3,493.7 ====== ========= ======== ======== ====== ======== 1997 Property and Casualty Insurance Personal........................................... $174.5 $ 675.5 $ 644.7 $1,188.1 $ 595.5 Standard Commercial................................ 249.2 5,328.1 984.6 1,906.1 1,534.8 Specialty Commercial............................... 253.2 3,768.9 1,067.3 1,968.3 1,111.3 Reinsurance Assumed................................ 94.9 65.4 Investments........................................ $711.2* ------ --------- -------- -------- ------ -------- $676.9 $ 9,772.5 $2,696.6 $5,157.4 $711.2 $3,307.0 ====== ========= ======== ======== ====== ======== 1996 Property and Casualty Insurance Personal........................................... $146.1 $ 688.5 $ 591.9 $ 969.7 $ 570.5 Standard Commercial................................ 209.5 4,950.7 933.7 1,642.5 1,329.7 Specialty Commercial............................... 215.7 3,702.1 993.1 1,673.1 922.9 Reinsurance Assumed................................ 29.9 182.4 98.8 284.0 187.7 Investments........................................ $646.1* ------ --------- -------- -------- ------ -------- $601.2 $ 9,523.7 $2,617.5 $4,569.3 $646.1 $3,010.8 ====== ========= ======== ======== ====== ======== YEAR ENDED DECEMBER 31 ----------------------------------- AMORTIZATION OTHER OF DEFERRED INSURANCE POLICY OPERATING ACQUISITION COSTS AND PREMIUMS SEGMENT COSTS EXPENSES WRITTEN ------- ------------ --------- -------- 1998 Property and Casualty Insurance Personal........................................... $ 370.1 $ 77.0 $1,364.7 Standard Commercial................................ 554.0 151.9 2,005.8 Specialty Commercial............................... 540.2 140.9 2,133.0 Investments........................................ --------- ------ -------- $ 1,464.3 $369.8 $5,503.5 ========= ====== ======== 1997 Property and Casualty Insurance Personal........................................... $ 340.3 $ 68.2 $1,306.4 Standard Commercial................................ 515.6 137.2 2,026.1 Specialty Commercial............................... 505.5 125.4 2,119.3 Reinsurance Assumed................................ 41.2 (3.8) Investments........................................ --------- ------ -------- $ 1,402.6 $330.8 $5,448.0 ========= ====== ======== 1996 Property and Casualty Insurance Personal........................................... $ 273.5 $ 58.5 $1,039.2 Standard Commercial................................ 412.5 130.9 1,732.7 Specialty Commercial............................... 437.0 100.8 1,799.4 Reinsurance Assumed................................ 115.0 202.5 Investments........................................ --------- ------ -------- $ 1,238.0 $290.2 $4,773.8 ========= ====== ========
- --------------- * Property and casualty assets are available for payment of claims and expenses for all classes of business; therefore, such assets and the related investment income have not been allocated to the underwriting segments. 43 44 THE CHUBB CORPORATION SCHEDULE IV CONSOLIDATED REINSURANCE (IN MILLIONS) 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 ------ --------- ---------- ------ ------------- 1998......................................... $5,624.7 $ 461.5 $140.6 $5,303.8 2.7 ======== ======== ====== ======== 1997......................................... $5,315.8 $ 450.8 $292.4 $5,157.4 5.7 ======== ======== ====== ======== 1996......................................... $5,023.5 $ 987.2 $533.0 $4,569.3 11.7 ======== ======== ====== ========
THE CHUBB CORPORATION SCHEDULE VI CONSOLIDATED SUPPLEMENTARY PROPERTY AND CASUALTY INSURANCE INFORMATION (IN MILLIONS) YEARS ENDED DECEMBER 31
CLAIMS AND CLAIM ADJUSTMENT EXPENSES INCURRED RELATED TO ---------------------- PAID CLAIMS AND CURRENT PRIOR CLAIM ADJUSTMENT YEAR YEARS EXPENSES -------- -------- ---------------- 1998................................................. $3,712.1 $(218.4) $3,008.4 ======== ======= ======== 1997................................................. $3,372.3 $ (65.3) $2,498.3 ======== ======= ======== 1996................................................. $3,053.6 $ (42.8) $2,869.4 ======== ======= ========
44 45 THE CHUBB CORPORATION EXHIBITS (ITEM 14(A))
DESCRIPTION (2) -- Plan of acquisition, reorganization, arrangement, liquidation or succession Stock Purchase Agreement dated as of February 23, 1997 between Jefferson-Pilot Corporation and the registrant incorporated by reference to Exhibit 2.1 of the registrant's Report to the Securities and Exchange Commission on Form 10-Q for the three months ended March 31, 1997. (Confidential treatment granted with respect to certain portions thereof.) Agreement and Plan of Merger dated as of February 6, 1999 among Executive Risk Inc., the registrant and Excalibur Acquisition, Inc. incorporated by reference to Exhibit (99.2) of the registrant's Report to the Securities and Exchange Commission on Form 8-K dated February 6, 1999. (3) -- Articles of Incorporation and By-Laws Restated Certificate of Incorporation. Incorporated by reference to Exhibit (3) of the registrant's Report to the Securities and Exchange Commission on Form 10-Q for the six months ended June 30, 1996. Certificate of Amendment to the Restated Certificate of Incorporation filed herewith. Certificate of Correction of Certificate of Amendment to the Restated Certificate of Incorporation filed herewith. Restated By-Laws. Incorporated by reference to Exhibit (1) of the registrant's Report to the Securities and Exchange Commission on Form 8-K dated December 17, 1998. (4) -- The registrant is not filing any instruments evidencing any indebtedness since the total amount of securities authorized under any single instrument does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. Copies of such instruments will be furnished to the Securities and Exchange Commission upon request. (10) -- Material contracts Global Settlement Agreement among Fibreboard Corporation, Continental Casualty Company, CNA Casualty Company of California, Columbia Casualty Company, Pacific Indemnity Company, and the Settlement Class and together with Exhibits A through D incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1993. Settlement Agreement with Fibreboard Corporation, Continental Casualty Company, CNA Casualty Company of California and Columbia Casualty Company incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-Q for the nine months ended September 30, 1993. Continental-Pacific Agreement with Continental Casualty Company incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-Q for the nine months ended 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.
45 46
DESCRIPTION The Chubb Corporation Producer Stock Incentive Program incorporated by reference to Exhibit (4.3) of the registrant's Report to the Securities and Exchange Commission on Amendment No. 2 to Form S-3 No. 333-67445 dated January 25, 1999. Executive Compensation Plans and Arrangements. The Chubb Corporation Annual Incentive Compensation Plan (1996) incorporated by reference to Exhibit A of the registrant's definitive proxy statement for the Annual Meeting of Shareholders held on April 23, 1996. The Chubb Corporation Long-Term Stock Incentive Plan (1996), as amended, filed herewith. The Chubb Corporation Stock Option Plan for Non-Employee Directors (1996), as amended, filed herewith. The Chubb Corporation Long-Term Stock Incentive Plan (1992), as amended, filed herewith. The Chubb Corporation Stock Option Plan for Non-Employee Directors (1992), as amended, filed herewith. The Chubb Corporation Deferred Compensation Plan for Directors, as amended, filed herewith. The Chubb Corporation Executive Deferred Compensation Plan filed herewith. 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 Agreement incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1995. Executive Severance Agreements incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1997. Executive Severance Agreement filed herewith. Contract for consulting and advisory services with Percy Chubb III, a director of the registrant, 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, 1996. (11) -- Computation of earnings per share incorporated by reference from Note (17) of the notes to consolidated financial statements of the 1998 Annual Report to Shareholders. (13) -- Pages 15, 16, and 38 through 65 of the 1998 Annual Report to Shareholders. (21) -- Subsidiaries of the registrant filed herewith. (23) -- Consent of Independent Auditors (see page 38 of this report). (27) -- Financial Data Schedule filed herewith.
46 EX-3 2 ARTICLES OF INCORPORATION AND BY-LAWS 1 CERTIFICATE OF AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION SERIES B PARTICIPATING CUMULATIVE PREFERRED STOCK of THE CHUBB CORPORATION Pursuant to Section 14A:7-2(4) of the New Jersey Business Corporation Act The undersigned DOES HEREBY CERTIFY: FIRST: That the name of the corporation is THE CHUBB CORPORATION. SECOND: That the following resolution was duly adopted by the Board of Directors of The Chubb Corporation, a New Jersey corporation (hereinafter called the "CORPORATION"), at a meeting duly convened and held on March 12, 1999, at which a quorum was present and acting throughout: RESOLVED: That pursuant to the Restated Certificate of Incorporation of the Corporation, as amended (hereinafter called the "CERTIFICATE OF INCORPORATION"), the By-Laws of the Corporation and the New Jersey Business Corporation Act, the Board of Directors hereby creates a series of authorized Preferred Stock of the Corporation, designated as "Series B Participating Cumulative Preferred Stock", and hereby amends the Certificate of Incorporation by deleting Section B-1 thereof and by adding the following Section B-1 immediately following Section B of Article Fourth of the Certificate of Incorporation so that the designation and the relative voting, dividend, liquidation, conversion and other rights, preferences and limitations of such shares, in addition to those set forth in Section B of the Certificate of Incorporation, are as follows: 2 Section B-2. Provisions Relating to Series B Participating Cumulative Preferred Stock. 1. Designation and Amount. The shares of such series shall be designated as "SERIES B PARTICIPATING CUMULATIVE PREFERRED STOCK" and the number of shares constituting such series shall be 300,000. 2. Dividends and Distributions. (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the Series B Participating Cumulative Preferred Stock with respect to dividends, the holders of shares of Series B Participating Cumulative Preferred Stock, in preference to the shares of Common Stock, par value $1 per share, of the Company (the "COMMON STOCK"), and any other stock of the Company junior to the Series B Participating Cumulative Preferred Stock with respect to dividends, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on March 15, June 15, September 15 and December 15 in each year (each such date being referred to herein as a "QUARTERLY DIVIDEND PAYMENT DATE"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series B Participating Cumulative Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series B Participating Cumulative Preferred Stock. In the event the Company shall at any time after March 12, 1999 (the "RIGHTS DECLARATION DATE") (i) declare or pay any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series B Participating Cumulative Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the 2 3 denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Subject to the provisions of paragraph 17 of Section B of this Article Fourth, the Company shall declare a dividend or distribution on the Series B Participating Cumulative Preferred Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series B Participating Cumulative Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series B Participating Cumulative Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series B Participating Cumulative Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series B Participating Cumulative Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series B Participating Cumulative Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series B Participating Cumulative Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 60 days prior to the date fixed for the payment thereof. 3. Voting Rights. In addition to any other voting rights required by law, the holders of shares of Series B Participating Cumulative Preferred Stock shall have only the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series B Participating Cumulative Preferred Stock shall entitle the holder thereof to one vote on all matters submitted to a vote of the shareholders of the Company, and each fractional share of Series B Participating Cumulative 3 4 Preferred Stock shall entitle the holder thereof to a pro rata fractional vote. In the event the Company shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series B Participating Cumulative Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series B Participating Cumulative Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Company. (C) (i) If at any time dividends on any Series B Participating Cumulative Preferred Stock shall be in arrears in an amount equal to six quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a "DEFAULT PERIOD") which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series B Participating Cumulative Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Preferred Stock (including holders of the Series B Participating Cumulative Preferred Stock) with dividends in arrears in an amount equal to six quarterly dividends thereon, voting as a class, irrespective of series, shall have the right to elect two Directors. (ii) During any default period, such voting right of the holders of Series B Participating Cumulative Preferred Stock may be exercised initially at a special meeting called pursuant to sub-paragraph (iii) of this paragraph 3(C) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that neither such voting right nor the right of the holders of any other series of Preferred Stock, if any, to increase, in certain cases, the authorized number of Directors shall be exercised unless the holders of 33-1/3 percent in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Preferred Stock of such voting right. At any meeting at which the holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect Directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two Directors or, if such right is exercised at an annual 4 5 meeting, to elect two Directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of Directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect Directors in any default period and during the continuance of such period, the number of Directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series B Participating Cumulative Preferred Stock. (iii) Unless the holders of Preferred Stock shall, during an existing default period, have previously exercised their right to elect Directors, the Board of Directors may order, or any stockholder or stockholders owning in the aggregate not less than ten percent of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of special meeting of the holders of Preferred Stock, which meeting shall thereupon be called by the President, a Vice-President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this sub-paragraph (C)(iii) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any stockholder or stockholders owning in the aggregate not less than ten percent of the total number of shares of Series B Participating Cumulative Preferred Stock outstanding. Notwithstanding the provisions of this sub-paragraph (C)(iii), no such special meeting shall be called during the period within 90 days immediately preceding the date fixed for the next annual meeting of the stockholders. (iv) In any default period, the holders of Common Stock, and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of Directors until the holders of Preferred Stock shall have exercised their right to elect two (2) Directors voting as a class, after the exercise of which right (x) the Directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in sub-paragraph (C)(ii) of this paragraph 3) be filled by vote of a majority of the remaining Directors theretofore elected by the holders of the class of stock which elected the Director whose office shall have become vacant. 5 6 (v) Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Stock as a class to elect Directors shall cease, (y) the term of any Directors elected by the holders of Preferred Stock as a class shall terminate, and (z) the number of Directors shall be such number as may be provided for in the certificate of incorporation or by-laws irrespective of any increase made pursuant to the provisions of sub-paragraph (C)(ii) of this paragraph 3 (such number being subject, however, to change thereafter in any manner provided by law or in the certificate of incorporation or by-laws). Any vacancies in the Board of Directors occurring after the expiration of a default period shall be filled in the manner provided for in the certificate of incorporation or by-laws. (D) Except as set forth herein, holders of Series B Participating Cumulative Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series B Participating Cumulative Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series B Participating Cumulative Preferred Stock outstanding shall have been paid in full or set aside for payment, the Company shall not: declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series B Participating Cumulative Preferred Stock; declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series B Participating Cumulative Preferred Stock, except dividends paid ratably on the Series B Participating Cumulative Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series B Participating Cumulative Preferred Stock, provided that the Company may at any time 6 7 redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Company ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series B Participating Cumulative Preferred Stock; or purchase or otherwise acquire for consideration any shares of Series B Participating Cumulative Preferred Stock, or any shares of stock ranking on a parity with the Series B Participating Cumulative Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective Series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Company shall not permit any subsidiary of the Company to purchase or otherwise acquire for consideration any shares of stock of the Company unless the Company could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. 5. Reacquired Shares. Any shares of Series B Participating Cumulative Preferred Stock purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth in the Certificate of Incorporation. 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Company, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series B Participating Cumulative Preferred Stock unless, prior thereto, the holders of shares of Series B Participating Cumulative Preferred Stock shall have received $100.00 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series B Participating Cumulative Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, of not less than 1000 times the aggregate amount to be distributed per share to holders of Common Stock, or (2) to the holders of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or 7 8 winding up) with the Series B Participating Cumulative Preferred Stock, except distributions made ratably on the Series B Participating Cumulative Preferred Stock and all other such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Company shall at any time after the Rights Declaration Date declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series B Participating Cumulative Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 7. Consolidation, Merger, etc. In case the Company shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series B Participating Cumulative Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Company shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series B Participating Cumulative Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 8. No Redemption. The shares of Series B Participating Cumulative Preferred Stock shall not be redeemable. 9. Rank. The Series B Participating Cumulative Preferred Stock shall rank junior with respect to payment of dividends and on liquidation to all other series of the Company's preferred stock outstanding on the date hereof and to all 8 9 such other series that may be issued after the date hereof except to the extent that any such other series specifically provides that it shall rank junior to the Series B Participating Cumulative Preferred Stock. 10. Amendment. The Restated Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series B Participating Cumulative Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least a majority of the outstanding shares of Series B Participating Cumulative Preferred Stock, voting separately as a class. 11. Fractional Shares. Series B Participating Cumulative Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, to receive dividends thereon, and to participate in any distribution of assets and to have the benefit of all other rights of holders of Series B Participating Cumulative Preferred Stock. THIRD: That the Restated Certificate of Incorporation of the Corporation, as amended, is amended so that the designation and number of shares of Series B Participating Cumulative Preferred Stock acted upon in the foregoing resolutions, and the relative rights, preferences and limitations of such series of authorized preferred stock, are as stated in said resolutions. IN WITNESS WHEREOF, The Chubb Corporation has caused its corporate seal to be hereunto affixed and this Amendment to be signed by its Chairman, Dean R. O'Hare, and attested by its Secretary, Henry G. Gulick, this 12 day of March, 1999. /s/ Dean R. O'Hare ----------------------- Chairman Attest: /s/ Henry G. Gulick - ---------------------- Secretary 9 10 /x/ Title 14A:1-6 (5) New Jersey Business Corporation Act (File in DUPLICATE) / / Title 15A:1-7 (e) New Jersey Nonprofit Corporation Act (File in TRIPLICATE) CERTIFICATE OF CORRECTION OF: Corporation Name: The Chubb Corporation Corporation Number: 13-2595722 (IRS Employer Identification No.) (For use by Domestic, Foreign, Profit and Nonprofit Corporations) The undersigned hereby submits for filing a Certificate of Correction executed on behalf of the above name Corporation, pursuant to the provisions of the appropriate Statute, checked above, of the New Jersey Statutes. 1. The Certificate to be corrected is: Certificate of Amendment to Restated Certificate Date Filed: March 15, 1999 of Incorporation 2. The inaccuracy in the Certificate is (indicated inaccuracy or defect): RESOLVED: That pursuant to the Restated Certificate of Incorporation of the Corporation, as amended (hereinafter called the "CERTIFICATE OF INCORPORATION"), the By-Laws of the Corporation and the New Jersey Business Corporation Act, the Board of Directors hereby creates a series of authorized Preferred Stock of the Corporation, designated as "Series B Participating Cumulative Preferred Stock", and hereby amends the Certificate of Incorporation by deleting Section B-1 thereof and by adding the following Section B-1 immediately following Section B of Article Fourth of the Certificate of Incorporation so that the designation and the relative voting, dividend, liquidation, conversion and other rights, preferences and limitations of such shares, in addition to those set forth in Section B of the Certificate of Incorporation, are as follows: 3. The Certificate of Correction hereby reads as follows: RESOLVED: That pursuant to the Restated Certificate of Incorporation of the Corporation, as amended (hereinafter called the "CERTIFICATE OF INCORPORATION"), the By-Laws of the Corporation and the New Jersey Business Corporation Act, the Board of Directors hereby creates a series of authorized Preferred Stock of the Corporation, designated as "Series B Participating Cumulative Preferred Stock", and hereby amends, effective as of March 31, 1999, the Certificate of Incorporation by deleting Section B-1 thereof and by adding the following Section B-1 immediately following Section B of Article Fourth of the Certificate of Incorporation so that the designation and the relative voting, dividend, liquidation, conversion and other rights, preferences and limitations of such shares, in addition to those set forth in Section B of the Certificate of Incorporation, are as follows: 11 IN WITNESS WHEREOF, the undersigned Corporation has caused this Certificate to be executed on its behalf by its duly authorized officer on the 18th day of March, 1999. THE CHUBB CORPORATION By: /s/ John E. Wisinger ----------------------------------------- Name: JOHN E. WISINGER Title: VICE PRESIDENT & ASSOCIATE COUNSEL 2 EX-10 3 MATERIAL CONTRACTS 1 THE CHUBB CORPORATION LONG-TERM STOCK INCENTIVE PLAN (1996) SECTION 1. PURPOSE The purposes of The Chubb Corporation Long-Term Stock Incentive Plan (the "Plan") are to promote the interests of The Chubb Corporation and its shareholders by (i) attracting and retaining executive personnel and other key employees of outstanding ability; (ii) motivating executive personnel and other key employees, by means of performance-related incentives, to achieve longer-range performance goals; and (iii) enabling such employees to participate in the long-term growth and financial success of The Chubb Corporation. SECTION 2. DEFINITIONS "Affiliate" shall mean any corporation or other entity which is not a Subsidiary but as to which the Corporation possesses a direct or indirect ownership interest and has representation on the board of directors or any similar governing body. "Award" shall mean a grant or award under Section 6 through 9, inclusive, of the Plan, as evidenced in a written document delivered to a Participant as provided on Section 10(b). "Board of Directors" shall mean the Board of Directors of the Corporation. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Committee" shall mean the Organization & Compensation Committee of the Board of Directors. "Common Stock" or "Stock" shall mean the Common Stock, $1.00 par value, of the Corporation. "Corporation" shall mean The Chubb Corporation. "Designated Beneficiary" shall mean the beneficiary designated by the Participant, in a manner determined by the Committee, to receive amounts due the Participant in the event of the Participant's death. In the absence of an effective designation by the Participant, Designated Beneficiary shall mean the Participant's estate. "Employee" shall mean (i) an officer or employee of the Employer and (ii) an advisor or consultant to the Employer. For purposes of this Plan, for persons described in clause (ii) above, employment and termination of employment shall mean the maintenance of, or termination of, as the case may be, such person's relationship as an advisor or consultant to the Employer. 1 2 "Employer" shall mean the Corporation and any Subsidiary or Affiliate. "Fair Market Value" shall mean the average of the highest and lowest sales prices reported for consolidated trading of issues listed on the New York Stock Exchange on the date in question, or, if the Stock shall not have been traded on such date, the average of such highest and lowest sales prices on the first day prior thereto on which the Stock was so traded. "Fiscal Year" shall mean the fiscal year of the Corporation. "Incentive Stock Option" shall mean a stock option granted under Section 6 which is intended to meet the requirements of Section 422 of the Code. "Nonstatutory Stock Option" shall mean a stock option granted under Section 6 which is not intended to be an Incentive Stock Option. "Option" shall mean an Incentive Stock Option or a Nonstatutory Stock Option and shall include a Restoration Option. "Participant" shall mean an Employee who is selected by the Committee to receive an Award under the Plan. "Payment Value" shall mean the dollar amount assigned to a Performance Share which shall be equal to the Fair Market Value of the Common Stock on the day of the Committee's determination under Section 8(c)(1) with respect to the applicable Performance Cycle. "Performance Cycle" or "Cycle" shall mean the period of years selected by the Committee during which the performance is measured for the purpose of determining the extent to which an award of Performance Shares has been earned. "Performance Goals" shall mean the objectives established by the Committee for a Performance Cycle, for the purpose of determining the extent to which Performance Shares which have been contingently awarded for such Cycle are earned. "Performance Share" shall mean an award granted pursuant to Section 8 of the Plan expressed as a share of Common Stock. "Prior Plans" shall mean The Chubb Corporation Long-Term Stock Incentive Plan (1992), Long-Term Stock Incentive Plan (1989) and the Stock Option Plan (1984). "Restoration Option" shall mean a stock option granted pursuant to Section 6(d). "Restricted Period" shall mean the period of years selected by the Committee during which a grant of Restricted Stock or Restricted Stock Units may be forfeited to the Corporation. 2 3 "Restricted Stock" shall mean shares of Common Stock contingently granted to a Participant under Section 9 of the Plan. "Restricted Stock Unit" shall mean a fixed or variable dollar denominated unit contingently awarded under Section 9 of the Plan. "Stock Appreciation Right" shall mean a right granted under Section 7. "Subsidiary" shall mean any business entity in which the Corporation possesses directly or indirectly fifty percent (50%) or more of the total combined voting power. SECTION 3. ADMINISTRATION The Plan shall be administered by the Committee. The Committee shall have sole and complete authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the operation of the Plan as it shall from time to time deem advisable, and to interpret the terms and provisions of the Plan. The Committee may delegate to one or more executive officers of the Corporation the power to make Awards to Participants who are not executive officers or directors of the Corporation provided the Committee shall fix the maximum amount of such Awards for the group and a maximum for any one Participant. The Committee's decisions shall be binding upon all persons, including the Corporation, stockholders, an Employer, Employees, Participants and Designated Beneficiaries. SECTION 4. ELIGIBILITY All Employees who, in the opinion of the Committee, have the capacity for contributing in a substantial measure to the successful performance of the Corporation are eligible to be Participants in the Plan. SECTION 5. MAXIMUM AMOUNT AVAILABLE FOR AWARDS (a) The maximum number of shares of Stock in respect of which Awards may be made under the Plan shall be 4,365,000 shares of Common Stock plus up to an additional 2,635,000 shares of Common Stock to the extent shares of Common Stock are reacquired by the Corporation, including shares purchased in the open market, after April 23, 1996. Not more than 1,750,000 shares may be awarded as Restricted Stock, Restricted Stock Units or Performance Shares and not more than 4,365,000 shares may be awarded as incentive stock options. Subject to the foregoing, Shares of Common Stock may be made available from the authorized but unissued shares of the Corporation or from shares reacquired by the Corporation, including shares purchased in the open market. In the event that (i) an Option of Stock Appreciation Right under the Plan or the Prior Plans is settled for cash or expires or is terminated unexercised as to any shares of Common Stock covered thereby, or (ii) any Award under the Plan or the Prior Plans in respect of shares is cancelled or forfeited for any reason without the delivery of shares of Common Stock, such shares shall thereafter be again available for award pursuant to the Plan. In the event that any Option or other Award granted is exercised through the delivery of shares of Common Stock, the number of 3 4 shares of Common Stock available for Awards under the Plan shall be increased by the number of shares so surrendered. (b) No Employee may be granted under the Plan in any calendar year Options or Stock Appreciation Rights on more than 150,000 shares of Common Stock and no Employee may be granted in any calendar year more than 40,000 Performance Shares of Restricted Stock or Restricted Stock Units. (c) In the event that the Committee shall determine that any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock at a price substantially below fair market value, or other similar corporate event affects the Common Stock such that an adjustment is required in order to preserve the benefits or potential benefits intended to be made available under this Plan, then the Committee shall, in its sole discretion, and in such manner as the Committee may deem equitable, adjust any or all of (1) the number and kind of shares which thereafter may be awarded or optioned and sold or made the subject of Stock Appreciation Rights under the Plan, (2) the number and kind of shares subject to outstanding Options and other Awards, and (3) the grant, exercise or conversion price with respect to any of the foregoing and/or, if deemed appropriate, make provision for a cash payment to a Participant or a person who has an outstanding Option or other Award provided, however, that the number of shares subject to any Option or other Award shall always be a whole number. SECTION 6. STOCK OPTIONS (a) Grants. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees to whom Options shall be granted, the number of shares to be covered by each Option, the option price therefor and the conditions and limitations applicable to the exercise of the Option including but not limited to, whether, an to what extent and under what circumstances amounts payable upon exercise of an Option shall be deferred at the election of the holder of such Option. The Committee shall have the authority to grant Incentive Stock Options, or to grant Nonstatutory Stock Options, or to grant both types of options. In the case of Incentive Stock Options, the terms and conditions of such grants shall be subject to and comply with such rules as may be prescribed by Section 422 of the Code, as from time to time amended, and any implementing regulations. (b) Option Price. The Committee shall establish the option price at the time each Option is granted, which price shall not be less than 100% of the Fair Market Value of the Common Stock on the date of grant. (c) Exercise. (1) Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify in the applicable Award or thereafter; provided, however, that in no event may any Option granted hereunder be exercisable after the expiration of ten years from the date of such grant. The Committee may impose such conditions with respect to the exercise of Options, including without limitation, any relating to the application of federal or state securities laws, as it may deem necessary or advisable. 4 5 (2) No shares shall be delivered pursuant to any exercise of an Option until payment in full of the option price therefor is received by the Corporation. Such payment may be made in cash, or its equivalent, or, if and to the extent permitted by the Committee, by exchanging shares of Common Stock owned for at least six months by the optionee (which are not the subject of any pledge or other security interest), or by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the Fair Market Value of any such Common Stock so tendered to the Corporation, valued as of the date of such tender, is at least equal to such option price. (d) Restoration Options. In the event that any Participant delivers shares of Common Stock in payment of the exercise price of any Option granted hereunder in accordance with Section 6(c)(2), the Committee shall have the authority to grant or provide for the automatic grant of a Restoration Option to such Participant. The grant of a Restoration Option shall be subject to the satisfaction of such conditions or criteria as the Committee in its sole discretion shall establish from time to time. A Restoration Option shall entitle the holder thereof to purchase a number of shares of Common Stock equal to the number of such shares so delivered upon exercise of the original Option and, in the discretion of the Committee, the number of shares, if any, tendered to the Corporation to satisfy any withholding tax liability arising in connection with the exercise of the original Option. A Restoration Option shall have a per share exercise price of not less than 100% of the per share Fair Market Value of the Common Stock on the date of grant of such Restoration Option, a term not longer than the remaining term of the original Option at the time of exercise thereof, and such other terms and conditions as the Committee in its sole discretion shall determine. SECTION 7. STOCK APPRECIATION RIGHTS (a) The Committee may, with sole and complete authority, grant Stock Appreciation Rights in tandem with an Option, in addition to an Option, or freestanding and unrelated to an Option. Stock Appreciation Rights granted in tandem with or in addition to an Option may be granted either at the same time as the Option or at a later time. Stock Appreciation Rights shall not be exercisable earlier than six months after grant, shall not be exercisable after the expiration of ten years from the date of grant and shall have an exercise price of not less than 100% of the Fair Market Value of the Common Stock on the date of grant. (b) A Stock Appreciation Right shall entitle the Participant to receive from the Corporation an amount equal to the excess of the Fair Market Value of a share of Common Stock on the exercise of the Stock Appreciation Right over the grant price thereof, provided that the Committee may for administrative convenience determine that, for any Stock Appreciation Right which is not related to an Incentive Stock Option which Stock Appreciation Right can only be exercised during limited periods of time in order to satisfy the conditions of certain rules of the Securities and Exchange Commission, the exercise of any such Stock Appreciation Right for cash during such limited period shall be deemed to occur for all purposes hereunder on the day during such limited period on which the Fair Market Value of the Stock is the highest. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted prior to such determination as well as Stock Appreciation Rights 5 6 thereafter granted. The Committee shall determine upon the exercise of a Stock Appreciation Right whether such Stock Appreciation Right shall be settled in cash, shares of Common Stock or a combination of cash and shares of Common Stock. SECTION 8. PERFORMANCE SHARES (a) The Committee shall have sole and complete authority to determine the Employees who shall receive Performance Shares and the number of such shares for each Performance Cycle, and to determine the duration of each Performance Cycle and the value of each Performance Share. There may be more than one Performance Cycle in existence at any one time, and the duration of Performance Cycles may differ from each other. (b) The Committee shall establish Performance Goals for each Cycle based on any one or more of the following: the operating earnings, net earnings, return on equity, income, market share, shareholder return, combined ratio, level of expenses or growth in revenue. During any Cycle, the Committee may adjust the Performance Goal for such Cycle as it deems equitable in recognition of unusual or non-recurring events affecting the Corporation, changes in applicable tax laws or accounting principles, or such other factors as the Committee may determine. (c) (1) As soon as practicable after the end of a Performance Cycle, the Committee shall determine the number of Performance Shares which have been earned on the basis of performance in relation to the established Performance Goals. (2) Payment Values of earned Performance Shares shall be distributed to the Participant or, if the Participant has died, to the Participant's Designated Beneficiary, as soon as practicable after the expiration of the Performance Cycle and the Committee's determination under paragraph (1), above. The Committee shall determine whether Payment Values are to be distributed in the form of cash and/or shares of Common Stock. SECTION 9. RESTRICTED STOCK AND RESTRICTED STOCK UNITS (a) Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees to whom shares of Restricted Stock and Restricted Stock Units shall be granted, the number of shares of Restricted Stock and the number of Restricted Stock Units to be granted to each Participant, the duration of the Restricted Period during which, and the conditions under which, the Restricted Stock and Restricted Stock Units may be forfeited to the Corporation, and the other terms and conditions of such Awards. The Restricted Period shall consist of at least one year (which may be shortened or waived by the Committee at any time in its discretion) with respect to one or more Participants or Awards outstanding. In its discretion, the Committee may establish performance conditions with respect to awards of Restricted Stock and Restricted Stock Units based on one or more of the same items listed in Section 8(b) in respect of Performance Shares during a performance period selected by the Committee. (b) Shares of Restricted Stock and Restricted Stock Units may not be sold, assigned, transferred, pledged or otherwise encumbered, except as herein provided, during the Restricted 6 7 Period. Certificates issued in respect of shares of Restricted Stock shall be registered in the name of the Participant and deposited by such Participant, together with a stock power endorsed in blank, with the Corporation. At the expiration of the Restricted Period, the Corporation shall deliver such certificates to the Participant or the Participant's legal representative. Payment for Restricted Stock Units shall be made to the Corporation in cash and/or shares of Common Stock, as determined at the sole discretion of the Committee. SECTION 10. GENERAL PROVISIONS (a) Withholding. The Employer shall have the right to deduct from all amounts paid to a Participant in cash (whether under this Plan or otherwise) any taxes required by law to be withheld in respect of Awards under this Plan. In the case of payments of Awards in the form of Common Stock, at the Committee's discretion the Participant may be required to pay to the Employer the amount of any taxes required to be withheld with respect to such Common Stock or, in lieu thereof, the Employer shall have the right to retain (or the Participant may be offered the opportunity to elect to tender) the number of shares of Common Stock whose Fair Market Value equals the amount required to be withheld. (b) Awards. Each Award hereunder shall be evidenced in writing, delivered to the Participant and shall specify the terms and conditions thereof and any rules applicable thereto, including but not limited to the effect on such Award of the death, retirement or other termination of employment of the Participant and the effect thereon, if any, of a change in control of the Corporation. (c) Nontransferability. (i) Except as provided in (ii) below, no Award shall be assignable or transferable, and no right or interest of any Participant shall be subject to any lien, obligation or liability of the Participant, except by will or the laws of descent and distribution. (ii) Notwithstanding subparagraph (i) above, the Committee may determine that an Award may be transferred pursuant to a qualified domestic relations order, as determined by the Committee or its designee or that an Option may be transferred by an Employee to one or more members of the Employee's immediate family, to a partnership of which the only partners are members of the Employee's immediate family, or to a trust established by the Employee for the benefit of one or more members of the Employee's immediate family. For this purpose immediate family means the Employee's spouse, parents, children, grandchildren and the spouses of such parents, children and grandchildren. A transferee described in this subparagraph may not further transfer an Option. An Option transferred pursuant to this subparagraph shall remain subject to all of the applicable provisions of the Plan and the written option agreement. (d) No Right to Employment. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Employer. Further, the Employer expressly reserves the right at any time to dismiss a Participant free from any liability, or any claim under the Plan, except as provided herein or in any agreement entered into with respect to an Award. 7 8 (e) No Rights as Stockholder. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed under the Plan until he or she has become the holder thereof. Notwithstanding the foregoing, in connection with each grant of Restricted Stock hereunder, the applicable Award shall specify if and to what extent the Participant shall not be entitled to the rights of a stockholder in respect of such Restricted Stock. (f) Construction of the Plan. The validity, construction, interpretation, administration and effect of the Plan and of its rules and regulations, and rights relating to the Plan, shall be determined solely in accordance with the laws of New York. (g) Effective Date. Subject to the approval of the stockholders of the Corporation, the Plan shall be effective on April 23, 1996. No Options or Awards may be granted under the Plan after December 31, 2001; provided, however, that the authority for grant of Restoration Options hereunder in accordance with Section 6(d) shall continue, subject to the provisions of Section 5, as long as any Option granted hereunder remains outstanding. (h) Amendment of Plan. The Board of Directors may amend, suspend or terminate the Plan or any portion thereof at any time, provided that no amendment shall be made without stockholder approval if such approval is necessary to comply with any tax or regulatory requirement, including for these purposes any approval requirement which is a prerequisite for exemptive relief under Section 16(b) of the Securities Exchange Act of 1934 with which the Committee has determined it is necessary to desirable to have the Corporation comply. Notwithstanding anything to the contrary contained herein, the Committee may amend the Plan in such manner as may be necessary so as to have the Plan conform with the local rules and regulations. (i) Amendment of Award. The Committee may amend, modify or terminate any outstanding Award with the Participant's consent at any time prior to payment or exercise in any manner not inconsistent with the terms of the Plan, including without limitation, (i) to change the date or dates as of which (A) an Option or Stock Appreciation Right becomes exercisable; (B) a Performance Share is deemed earned; (C) Restricted Stock becomes nonforfeitable; or (ii) to cancel and reissue an Award under such different terms and conditions as it determines appropriate, except that an outstanding stock option shall not be amended to reduce its original exercise price other than in connection with a transaction described in Section 5(c). 8 9 THE CHUBB CORPORATION STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS (1996) 1. PURPOSE The purpose of The Chubb Corporation Stock Option Plan for Non-Employee Directors (1992) (the "Plan") is to increase the proprietary and vested interest of the non-employee directors of The Chubb Corporation (the "Corporation") in the growth and performance of the Corporation by granting such directors options to purchase shares of Common Stock, $1.00 par value per share (the "Stock"), of the Corporation. 2. ADMINISTRATION The Plan shall be administered by the Corporation's Board of Directors (the "Board"). Subject to the provisions of the Plan, the Board shall be authorized to interpret the Plan, to establish, amend, and rescind any rules and regulations relating to the Plan and to make all other determinations necessary or advisable for the administration of the Plan; provided, however, that the Board shall have no discretion with respect to the selection of directors to receive options under the Plan, the number of shares of Stock subject to any such options, the purchase price thereunder or the timing of grants of options under the Plan. The determinations of the Board in the administration of the Plan, as described herein, shall be final and conclusive. The Secretary of the Corporation shall be authorized to implement the Plan in accordance with its terms and to take such actions of a ministerial nature as shall be necessary to effectuate the intent and purposes thereof. The validity, construction and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of New York. 3. ELIGIBILITY The class of individuals eligible for grant of options and Restoration Options under the Plan shall be Eligible Directors, as defined below. Eligible Director shall mean a director of the Corporation who is not an employee of the Corporation or its subsidiaries and has not, within one year immediately preceding the determination of such director's eligibility, received any award under any plan of the Corporation or its subsidiaries that entitles the participants therein to acquire stock, stock options or stock appreciation rights of the Corporation or its subsidiaries (other than any other plan under which participants' entitlements are governed by provisions meeting the requirements of Rule 16b-3(c)(2)(ii) promulgated under the Securities Exchange Act of 1934). Any holder of an option granted hereunder shall hereinafter be referred to as a "Participant". STOCK OPTION PLAN FOR AMENDED 9/11/98 NON-EMPLOYEE DIRECTORS-TCC 1 10 4. SHARES SUBJECT TO THE PLAN Subject to adjustment as provided in Section 7, an aggregate of 300,000 shares of Stock shall be available for issuance upon the exercise of options and Restoration Options, as described in Section 6, granted under the Plan. The shares of Stock deliverable upon the exercise of options and Restoration Options may be made available from authorized but unissued shares or shares reacquired by the Corporation, including shares purchased in the open market or in private transactions. If any option or Restoration Option granted under the Plan shall terminate for any reason without having been exercised, the shares subject to, but not delivered under, such option shall be available for other options and Restoration Options. 5. GRANT, TERMS AND CONDITIONS OF OPTIONS Each individual who is an Eligible Director will be granted an option to purchase 2,000 shares of Stock as of the date of each Annual Shareholders Meeting following the effectiveness of the Plan at which such individual is elected or reelected to the office of director. The options granted will be nonstatutory stock options not intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and shall have the following terms and conditions: (a) Price. The purchase price per share of Stock deliverable upon the exercise of each option shall be 100% of the Fair Market Value per share of the Stock on the date the option is granted. For purposes of this Plan, Fair Market Value shall be the average of the highest and lowest per share sales prices as reported for consolidated trading of issues listed on the New York Stock Exchange on the date in question, or, if the Stock shall not have traded on such date, the average of the highest and lowest per share sales prices on the first date prior thereto on which the Stock was so traded. (b) Payment. Options may be exercised only upon payment of the purchase price thereof in full. Such payment shall be made in cash or in Stock, which shall have a Fair Market Value (determined in accordance with the rules of paragraph (a), above) at least equal to the aggregate exercise price of the shares being purchased, or a combination of cash and Stock. (c) Exercisability and Term of Options. Options shall be exercisable in whole or in part at all times during the period beginning on the date of grant until terminated, as provided in paragraph (d), below. (d) Termination of Service as Eligible Director. (i) Except as provided in subparagraph (ii) of this paragraph (d), all outstanding options held by a Participant shall be automatically cancelled upon such Participant's termination of service as an Eligible Director. STOCK OPTION PLAN FOR AMENDED 9/11/98 NON-EMPLOYEE DIRECTORS-TCC 2 11 (ii) Upon termination of a Participant's service as an Eligible Director by reason of such Participant's voluntary mid-term resignation, declining to stand for reelection (whether as a result of the Corporation's mandatory retirement program or otherwise), becoming an employee of the Corporation or a subsidiary thereof or becoming disabled (as defined in the Corporation's pension plan), all out-standing options held by such Participate on the date of such termination shall expire five years from the date upon which the Participant ceases to be an Eligible Director. In the event of the death of a Participant (whether before or after termination of service as an Eligible Director), all outstanding options held by such Participant (and not previously cancelled or expired) on the date of such death shall be fully exercisable by the Participant's legal representative within one year after the date of death (without regard to the expiration date of the option specified in accordance with the preceding sentence). (e) Non-transferability. (i) Except as provided in (ii) below, no option shall be assignable or transferable, no right or interest of any Participant shall be subject to any lien, obligation or liability of the Participant, except by will or the laws of descent and distribution, and during the lifetime of the Participant to whom an option is granted, it may be exercised only by the Participant or by the Participant's legal guardian or legal representative. Notwithstanding the above, options may be transferred pursuant to a qualified domestic relations order. (ii) Notwithstanding subparagraph (i) above, the Board may determine that an option may be transferred by a Participant to one or more members of the Participant's immediate family, to a partnership of which the only partners are members of the Participant's immediate family, or to a trust established by the Participant for the benefit of one or more members of the Participant's immediate family. For this purpose immediate family means the Participant's spouse, parents, children, grandchildren and the spouses of such parents, children and grandchildren. A transferee described in this subparagraph may not further transfer an option. Subject to such conditions that may be determined by the Board or a person or persons designated by the Board, an option transferred pursuant to this subparagraph shall remain subject to all of the applicable provisions of the Plan and the written option agreement. (f) Listing and Registration. Each option and Restoration Option shall be subject to the requirement that if at any time the Board shall determine, in its discretion, that the listing, registration or qualification of the Stock subject to such option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such option or the issue or purchase of shares thereunder, no such option may STOCK OPTION PLAN FOR AMENDED 9/11/98 NON-EMPLOYEE DIRECTORS-TCC 3 12 be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any condition not acceptable to the Board. (g) Option Agreement. Each option and Restoration Option granted hereunder shall be evidenced by an agreement with the Corporation which shall contain the terms and provisions set forth herein and shall otherwise be consistent with the provisions of the Plan. 6. GRANT, TERMS AND CONDITIONS OF RESTORATION OPTIONS In the event that, within seven years of the date of grant of an option granted hereunder (the "original option"), an Eligible Director delivers shares of the Stock in payment of the exercise price of the original option in accordance with Section 5(b), such Eligible Director shall be granted a Restoration Option, subject to the satisfaction of the conditions and criteria set forth below. Restoration Options will be nonstatutory options not intended to qualify under Section 422 of the Code and shall have the following terms and provisions: (a) Number of Shares. A Restoration Option shall entitle the holder thereof to purchase a number of shares of Stock equal to the number of such shares delivered upon exercise of the original option. (b) Price. A Restoration Option shall have a per share exercise price of 100% of the per share Fair Market Value, determined in accordance with Section 5(a), of the Stock on the date of grant of such Restoration Option. (c) Conditions. Notwithstanding any other provision of this Section 6, no Restoration Option shall be granted if (i) the per share Fair Market Value of the Stock is not at least 125% of the exercise price of the original option, (ii) the original option is a Restoration Option or (iii) the exercising Participant is not an Eligible Director on the date of exercise. (d) Other Provisions. Restoration Options shall be subject to all the other terms and conditions set forth in Section 5, except as expressly set forth and as modified in this Section 6. 7. ADJUSTMENT OF AND CHANGES IN STOCK In the event of a stock split, stock dividend, subdivision or combination of the Stock or other change in corporate structure affecting the Stock, the number of shares of Stock authorized by the Plan shall be increased or decreased proportionately, as the case may be, and the number of shares of Stock subject to any outstanding option or Restoration Option shall be increased or decreased proportionately, as the case may be, with appropriate corresponding adjustment in the purchase price per share of Stock thereunder. STOCK OPTION PLAN FOR AMENDED 9/11/98 NON-EMPLOYEE DIRECTORS-TCC 4 13 8. MERGERS, SALES AND CHANGE OF CONTROL In the case of (i) any merger, consolidation or combination of the Corporation with or into another corporation (other than a merger, consolidation or combination in which the Corporation is the continuing corporation and which does not result in its outstanding Stock being converted into or exchanged for different securities, cash or other property, or any combination thereof) or a sale of all or substantially all of the assets of the Corporation or (ii) a Change in Control (as defined below) of the Corporation, the holder of each option (including for purposes of this Section any Restoration Option) then outstanding immediately prior to such Change in Control shall (unless the Board determines otherwise) have the right to receive on the date or effective date of such event an amount equal to the excess of the Fair Market Value on such date of (a) the securities, cash or other property, or combination thereof, receivable upon such merger, consolidation or combination in respect of a share of Stock, in the cases covered by clause (i) above, or in the case of a sale of assets referred to in such clause (i), a share of Stock, or (b) the final tender offer price in the case of a tender offer resulting in a Change in Control or (c) the value of the Stock covered by the option as determined by the Board, in the case of Change in Control by reason of any other event, over the exercise price of such option, multiplied by the number of shares of Stock subject to such option. Unless otherwise determined by the Board, such amount will be payable fully in cash. Any determination by the Board made pursuant to this Section 8 will be made as to all outstanding options and shall be made (a) in cases covered by clause (i) above, prior to the occurrence of such event, (b) in the event of a tender or exchange offer, prior to the purchase of any Stock pursuant thereto by the offeror and (c) in the case of a Change in Control by reason of any other event, just prior to or as soon as practicable after such Change in Control. A "Change in Control" shall be deemed to have occurred if (a) any person, or any two or more persons acting as a group, and all affiliates of such person or persons, shall own beneficially 25% or more of the Stock outstanding, or (b) if following (i) a tender or exchange offer for voting securities of the Corporation (other than any such offer made by the Corporation), or (ii) a proxy contest for the election of directors of the Corporation, the persons who were directors of the Corporation immediately before the initiation of such event (or directors who were appointed by such directors) cease to constitute a majority of the Board of Directors of the Corporation upon the completion of such tender or exchange offer or proxy contest or within one year after such completion. 9. NO RIGHTS OF SHAREHOLDERS Neither a Participant nor a Participant's legal representative shall be, or have any of the rights and privileges of, a shareholder of the Corporation in respect of any shares purchasable upon the exercise of any option or Restoration Option, in whole or in part, unless and until certificates for such shares shall have been issued. STOCK OPTION PLAN FOR AMENDED 9/11/98 NON-EMPLOYEE DIRECTORS-TCC 5 14 10. PLAN AMENDMENTS The Plan may be amended by the Board, as it shall deem advisable or to conform to any change in any law or regulation applicable thereto; provided, that the Board may not, without the authorization and approval of shareholders: (i) increase the number of shares which may be purchased pursuant to options or Restoration Options hereunder, either individually or in the aggregate, except as permitted by Section 7, (ii) change the requirements of Sections 5(a) and 6(b) that option grants be priced at Fair Market Value, except as permitted by Section 7, (iii) modify in any respect the class of individuals who constitute Eligible Directors; or (iv) materially increase the benefits accruing to Participants hereunder. The provisions of Sections 3, 5 and 6 may not be amended more often than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, or the rules under either such statute. 11. EFFECTIVE DATE AND DURATION OF PLAN The Plan shall become effective on the day after the Corporation's Annual Shareholders Meeting at which the Plan is approved by Shareholders. The Plan shall terminate on the day following the fifth Annual Shareholders Meeting at which Directors are elected succeeding the Annual Shareholders Meeting at which the Plan was approved by Shareholders, unless the Plan is extended or terminated at an earlier date by Shareholders; provided, however, that grants of Restoration Options pursuant to Section 6 shall continue until the seventh anniversary of such fifth Annual Shareholders' Meeting. - -------------------------------------------------------------------------------- STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS - TCC AMENDED 9/11/98 6 15 THE CHUBB CORPORATION LONG-TERM STOCK INCENTIVE PLAN (1992) SECTION 1. PURPOSE The purposes of The Chubb Corporation Long-Term Stock Incentive Plan (1992) (the "Plan") are to promote the interests of The Chubb Corporation and its shareholders by (i) attracting and retaining executive personnel and other key employees of outstanding ability; (ii) motivating executive personnel and other key employees, by means of performance-related incentives, to achieve longer-range performance goals; and (iii) enabling such employees to participate in the long-term growth and financial success of The Chubb Corporation. SECTION 2. DEFINITIONS "Affiliate" shall mean any corporation or other entity which is not a Subsidiary but as to which the Corporation possesses a direct or indirect ownership interest and has representation on the board of directors or any similar governing body. "Award" shall mean a grant or award under Section 6 through 11, inclusive, of the Plan, as evidenced in a written document delivered to a Participant as provided on Section 12(b). "Board of Directors" shall mean the Board of Directors of the Corporation. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Committee" shall mean the Organization & Compensation Committee of the Board of Directors. "Common Stock" or "Stock" shall mean the Common Stock, $1.00 par value, of the Corporation. "Corporation" shall mean The Chubb Corporation. "Debenture" shall mean a convertible debenture awarded under Section 10 of the Plan. "Designated Beneficiary" shall mean the beneficiary designated by the Participant, in a manner determined by the Committee, to receive amounts due the Participant in the event of the Participant's death. In the absence of an effective designation by the Participant, Designated Beneficiary shall mean the Participant's estate. "Employee" shall mean any key employee of the Employer. - -------------------------------------------------------------------------------- LONG-TERM STOCK INCENTIVE PLAN - TCC AMEND. EFF. 11/10/98 1 16 "Employer" shall mean the Corporation and any Subsidiary or Affiliate. "Fair Market Value" shall mean the average of the highest and lowest sales prices reported for consolidated trading of issues listed on the New York Stock Exchange on the date in question, or, if the Stock shall not have been traded on such date, the average of such highest and lowest sales prices on the first day prior thereto on which the Stock was so traded. "Fiscal Year" shall mean the fiscal year of the Corporation. "Incentive Stock Option" shall mean a stock option granted under Section 6 which is intended to meet the requirements of Section 422 of the Code. "Nonstatutory Stock Option" shall mean a stock option granted under Section 6 which is not intended to be an Incentive Stock Option. "Option" shall mean an Incentive Stock Option or a Nonstatutory Stock Option and shall include a Restoration Option. "Participant" shall mean an Employee who is selected by the Committee to receive an Award under the Plan. "Payment Value" shall mean the dollar amount assigned to a Performance Share which shall be equal to the Fair Market Value of the Common Stock on the day of the Committee's determination under Section 8(c)(1) with respect to the applicable Performance Cycle. "Performance Cycle" or "Cycle" shall mean the period of years selected by the Committee during which the performance is measured for the purpose of determining the extent to which an award of Performance Shares has been earned. "Performance Goals" shall mean the objectives established by the Committee for a Performance Cycle, for the purpose of determining the extent to which Performance Shares which have been contingently awarded for such Cycle are earned. "Performance Share" shall mean an award granted pursuant to Section 8 of the Plan expressed as a share of Common Stock. "Restricted Period" shall mean the period of years selected by the Committee during which a grant of Restricted Stock or Restricted Stock Units may be forfeited to the Corporation. "Restricted Stock" shall mean shares of Common Stock contingently granted to a Participant under Section 9 of the Plan. "Restoration Option" shall mean a stock option granted pursuant to Section 6(d). "Restricted Stock Unit" shall mean a fixed or variable dollar denominated unit contingently - -------------------------------------------------------------------------------- LONG-TERM STOCK INCENTIVE PLAN - TCC AMEND. EFF. 11/10/98 2 17 awarded under Section 9 of the Plan. "Stock Appreciation Right" shall mean a right granted under Section 7. "Stock Unit Award" shall mean an award of Common Stock or units granted under Section 11. "Subsidiary" shall mean any business entity in which the Corporation possesses directly or indirectly fifty percent (50%) or more of the total combined voting power. SECTION 3. ADMINISTRATION The Plan shall be administered by the Committee. The Committee shall have sole and complete authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the operation of the Plan as it shall from time to time deem advisable, and to interpret the terms and provisions of the Plan. The Committee may delegate to one or more executive officers of the Corporation the power to make Awards to Participants who are not executive officers or directors of the Corporation provided the Committee shall fix the maximum amount of such Awards for the group and a maximum for any one Participant. The Committee's decisions shall be binding upon all persons, including the Corporation, stockholders, an Employer, Employees, Participants and Designated Beneficiaries. SECTION 4. ELIGIBILITY All Employees who, in the opinion of the Committee, have the capacity for contributing in a substantial measure to the successful performance of the Corporation are eligible to be Participants in the Plan. SECTION 5. MAXIMUM AMOUNT AVAILABLE FOR AWARDS (a) The maximum number of shares of Stock in respect of which Awards may be made under the Plan shall be a total of 4,400,000 shares of Common Stock, of which not more than 1,760,000 may be awarded as Restricted Stock. Shares of Common Stock may be made available from the authorized but unissued shares of the Corporation or from shares reacquired by the Corporation, including shares purchased in the open market. In the event that (i) an Option or Stock Appreciation Right is settled for cash or expires or is terminated unexercised as to any shares of Common Stock covered thereby, or (ii) any Award in respect of shares is cancelled or forfeited for any reason under the Plan without the delivery of shares of Common Stock, such shares shall thereafter be again available for award pursuant to the Plan. In the event that any Option or other Award granted hereunder is exercised through the delivery of shares of Common Stock, the number of shares of Common Stock available for Awards under the Plan shall be increased by the number of shares so surrendered, to the extent permissible under Rule 16b-3, as promulgated under the Securities Exchange Act of 1934 and as interpreted from time to time by the Securities and Exchange Commission or its staff. - -------------------------------------------------------------------------------- LONG-TERM STOCK INCENTIVE PLAN - TCC AMEND. EFF. 11/10/98 3 18 (b) In the event that the Committee shall determine that any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock at a price substantially below fair market value, or other similar corporate event affects the Common Stock such that an adjustment is required in order to preserve the benefits or potential benefits intended to be made available under this Plan, then the Committee shall, in its sole discretion, and in such manner as the Committee may deem equitable, adjust any or all of (1) the number and kind of shares which thereafter may be awarded or optioned and sold or made the subject of Stock Appreciation Rights under the Plan, (2) the number and kind of shares subject to outstanding Options and other Awards, and (3) the grant, exercise or conversion price with respect to any of the foregoing and/or, if deemed appropriate, make provision for a cash payment to a Participant or a person who has an outstanding Option or other Award provided, however, that the number of shares subject to any Option or other Award shall always be a whole number. SECTION 6. STOCK OPTIONS (a) Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees to whom Options shall be granted, the number of shares to be covered by each Option, the option price therefor and the conditions and limitations applicable to the exercise of the Option. The Committee shall have the authority to grant Incentive Stock Options, or to grant Nonstatutory Stock Options, or to grant both types of options. In the case of Incentive Stock Options, the terms and conditions of such grants shall be subject to and comply with such rules as may be prescribed by Section 422 of the Code, as from time to time amended, and any implementing regulations. (b) Option Price. The Committee shall establish the option price at the time each Option is granted, which price shall not be less than 100% of the Fair Market Value of the Common Stock on the date of grant. (c) Exercise. (1) Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify in the applicable Award or thereafter; provided, however, that in no event may any Option granted hereunder be exercisable after the expiration of ten years from the date of such grant. The Committee may impose such conditions with respect to the exercise of Options, including without limitation, any relating to the application of federal or state securities laws, as it may deem necessary or advisable. (2) No shares shall be delivered pursuant to any exercise of an Option until payment in full of the option price therefor is received by the Corporation. Such payment may be made in cash, or its equivalent, or, if and to the extent permitted by the Committee, by exchanging shares of Common Stock owned by the optionee (which are not the subject of any pledge or other security interest), or by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the Fair Market Value of any such Common Stock so tendered to the Corporation, valued as of the date of such tender, is at least equal to such option price. (d) Restoration Options. In the event that any Participant delivers shares of Common Stock - -------------------------------------------------------------------------------- LONG-TERM STOCK INCENTIVE PLAN - TCC AMEND. EFF. 11/10/98 4 19 in payment of the exercise price of any Option granted hereunder in accordance with Section 6(c)(2), the Committee shall have the authority to grant or provide for the automatic grant of a Restoration Option to such Participant. The grant of a Restoration Option shall be subject to the satisfaction of such conditions or criteria as the Committee in its sole discretion shall establish from time to time. A Restoration Option shall entitle the holder thereof to purchase a number of shares of Common Stock equal to the number of such shares so delivered upon exercise of the original Option and, in the discretion of the Committee, the number of shares, if any, tendered to the Corporation to satisfy any withholding tax liability arising in connection with the exercise of the original Option. A Restoration Option shall have a per share exercise price of not less than 100% of the per share Fair Market Value of the Common Stock on the date of grant of such Restoration Option, a term not longer than the remaining term of the original Option at the time of exercise thereof, and such other terms and conditions as the Committee in its sole discretion shall determine. SECTION 7. STOCK APPRECIATION RIGHTS (a) The Committee may, with sole and complete authority, grant Stock Appreciation Rights in tandem with an Option, in addition to an Option, or freestanding and unrelated to an Option. Stock Appreciation Rights granted in tandem with or in addition to an Option may be granted either at the same time as the Option or at a later time. Stock Appreciation Rights shall not be exercisable earlier than six months after grant, shall not be exercisable after the expiration of ten years from the date of grant and shall have an exercise price of not less than 100% of the Fair Market Value of the Common Stock on the date of grant. (b) A Stock Appreciation Right shall entitle the Participant to receive from the Corporation an amount equal to the excess of the Fair Market Value of a share of Common Stock on the exercise of the Stock Appreciation Right over the grant price thereof, provided that the Committee may for administrative convenience determine that, for any Stock Appreciation Right which is not related to an Incentive Stock Option which Stock Appreciation Right can only be exercised during limited periods of time in order to satisfy the conditions of certain rules of the Securities and Exchange Commission, the exercise of any such Stock Appreciation Right for cash during such limited period shall be deemed to occur for all purposes hereunder on the day during such limited period on which the Fair Market Value of the Stock is the highest. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted prior to such determination as well as Stock Appreciation Rights thereafter granted. The Committee shall determine upon the exercise of a Stock Appreciation Right whether such Stock Appreciation Right shall be settled in cash, shares of Common Stock or a combination of cash and shares of Common Stock. SECTION 8. PERFORMANCE SHARES (a) The Committee shall have sole and complete authority to determine the Employees who shall receive Performance Shares and the number of such shares for each Performance Cycle, and to determine the duration of each Performance Cycle and the value of each Performance Share. There may be more than one Performance Cycle in existence at any one time, and the duration of Performance Cycles may differ from each other. - -------------------------------------------------------------------------------- LONG-TERM STOCK INCENTIVE PLAN - TCC AMEND. EFF. 11/10/98 5 20 (b) The Committee shall establish Performance Goals for each Cycle on the basis of such criteria and to accomplish such objectives as the Committee may from time to time select. During any Cycle, the Committee may adjust the Performance Goals for such Cycle as it deems equitable in recognition of unusual or non-recurring events affecting the Corporation, changes in applicable tax laws or accounting principles, or such other factors as the Committee may determine. (c) (1) As soon as practicable after the end of a Performance Cycle, the Committee shall determine the number of Performance Shares which have been earned on the basis of performance in relation to the established Performance Goals. (2) Payment Values of earned Performance Shares shall be distributed to the Participant or, if the Participant has died, to the Participant's Designated Beneficiary, as soon as practicable after the expiration of the Performance Cycle and the Committee's determination under paragraph (1), above. The Committee shall determine whether Payment Values are to be distributed in the form of cash and/or shares of Common Stock. SECTION 9. RESTRICTED STOCK AND RESTRICTED STOCK UNITS (a) Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees to whom shares of Restricted Stock and Restricted Stock Units shall be granted, the number of shares of Restricted Stock and the number of Restricted Stock Units to be granted to each Participant, the duration of the Restricted Period during which, and the conditions under which, the Restricted Stock and Restricted Stock Units may be forfeited to the Corporation, and the other terms and conditions of such Awards. The Restricted Period shall consist of at least one year (which may be shortened or waived by the Committee at any time in its discretion) with respect to one or more Participants or Awards outstanding. (b) Shares of Restricted Stock and Restricted Stock Units may not be sold, assigned, transferred, pledged or otherwise encumbered, except as herein provided, during the Restricted Period. Certificates issued in respect of shares of Restricted Stock shall be registered in the name of the Participant and deposited by such Participant, together with a stock power endorsed in blank, with the Corporation. At the expiration of the Restricted Period, the Corporation shall deliver such certificates to the Participant or the Participant's legal representative. Payment for Restricted Stock Units shall be made to the Corporation in cash and/or shares of Common Stock, as determined at the sole discretion of the Committee. SECTION 10. DEBENTURES (a) The Committee may award, to any Participant, Debentures on such terms and conditions as the Committee shall determine. (b) The Debentures are to be issued pursuant to a signed written agreement containing such terms and conditions as the Committee may determine. - -------------------------------------------------------------------------------- LONG-TERM STOCK INCENTIVE PLAN - TCC AMEND. EFF. 11/10/98 6 21 (c) (1) Each Debenture will have a maturity date of the earliest of (i) such date as the Committee shall determine at the time of award, or (ii) such date as the Corporation redeems a series of Debentures or pre-pays an individual Debenture. The Debentures shall be issued in such denominations and will accrue interest, from the date of issuance, at such rate, which may be fixed or variable, as may be set by the Committee at the time of award. (2) Debentures will be convertible into fully paid and non-assessable shares of Common Stock or such other type of securities, which may immediately be convertible into Common Stock, as the Committee shall determine at the time of award, to the extent the terms and conditions of the award and the Plan are met, but in no event later than the due date. Any such securities, including Common Stock, into which the Debenture is convertible, may be subject to such conditions and restrictions as the Committee shall determine. The conversion rate of a Debenture shall be set by reference to the Fair Market Value of the Common Stock, book value or such other value as the Committee determines. SECTION 11. OTHER STOCK BASED AWARDS (a) In addition to granting Options, Stock Appreciation Rights, Performance Shares, Restricted Stock, Restricted Stock Units and Debentures, the Committee shall have authority to grant to Participants Stock Unit Awards which can be in the form of Common Stock or units, the value of which is based, in whole or in part, on the value of Common Stock. Subject to the provisions of the Plan, including Section 11(b) below, Stock Unit Awards shall be subject to such terms, restrictions, conditions, vesting requirements and payment rules (all of which are sometimes hereinafter collectively referred to as "rules") as the Committee may determine in its sole and complete discretion at the time of grant. The rules need not be identical for each Stock Unit Award. (b) In the sole and complete discretion of the Committee, a Stock Unit Award may be granted subject to the following rules: (1) Any shares of Common Stock which are part of a Stock Unit Award may not be assigned, sold, transferred, pledged or otherwise encumbered prior to the date on which the shares are issued or, if later, the date provided by the Committee at the time of grant of the Stock Unit Award. (2) Stock Unit Awards may provide for the payment of cash consideration by the person to whom such Award is granted or provide that the Award, and any Common Stock to be issued in connection therewith, if applicable, shall be delivered without the payment of cash consideration, provided that for any Common Stock to be purchased in connection with a Stock Unit Award the purchase price shall be not less than 100% of the Fair Market Value of such Common Stock on the date such Award is granted. (3) Stock Unit Awards may relate in whole or in part to certain performance criteria established by the Committee at the time of grant. - -------------------------------------------------------------------------------- LONG-TERM STOCK INCENTIVE PLAN - TCC AMEND. EFF. 11/10/98 7 22 (4) Stock Unit Awards may provide for deferred payment schedules and/or vesting over a specified period of employment. (5) In such circumstances as the Committee may deem advisable, the Committee may waive or otherwise remove, in whole or in part, any restriction or limitation to which a Stock Unit Award was made subject at the time of grant. (c) In the sole and complete discretion of the Committee, an Award, whether made as a Stock Unit Award under this Section 11 or as an Award granted pursuant to Sections 6 through 10, may provide the Participant with (i) dividends or dividend equivalents (payable on a current or deferred basis) and (ii) cash payments in lieu of or in addition to an Award. SECTION 12. GENERAL PROVISIONS (a) Withholding. The Employer shall have the right to deduct from all amounts paid to a Participant in cash (whether under this Plan or otherwise) any taxes required by law to be withheld in respect of Awards under this Plan. In the case of payments of Awards in the form of Common Stock, at the Committee's discretion the Participant may be required to pay to the Employer the amount of any taxes required to be withheld with respect to such Common Stock or, in lieu thereof, the Employer shall have the right to retain (or the Participant may be offered the opportunity to elect to tender) the number of shares of Common Stock whose Fair Market Value equals the amount required to be withheld. (b) Awards. Each Award hereunder shall be evidenced in writing, delivered to the Participant and shall specify the terms and conditions thereof and any rules applicable thereto, including but not limited to the effect on such Award of the death, retirement or other termination of employment of the Participant and the effect thereon, if any, of a change in control of the Corporation. (c) Nontransferability. (1) Except as provided in (2) below, no Award shall be assignable or transferable, and no right or interest of any Participant shall be subject to any lien, obligation or liability of the Participant, except by will or the laws of descent and distribution. (2) Notwithstanding subparagraph (1) above, a Nonstatutory Option held by an officer of The Chubb Corporation and Chubb & Son, a division of Federal Insurance Company at or above the level of Executive Vice President or such other key senior executives of the Corporation and its subsidiaries as the Chairman may designate that is outstanding on November 10, 1998 may be transferred by an Employee to one or more members of the Employee's immediate family, to a partnership of which the only partners are members of the Employee's immediate family, or to a trust established by the Employee for the benefit of one or more members of the employee's immediate family. For this purpose immediate family means the Employee's spouse, parents, children, grandchildren - -------------------------------------------------------------------------------- LONG-TERM STOCK INCENTIVE PLAN - TCC AMEND. EFF. 11/10/98 8 23 and the spouses of such parents, children and grandchildren. A transferee described in this subparagraph may not further transfer an Option. An Option transferred pursuant to this subparagraph shall remain subject to all of the applicable provisions of the Plan and the written option agreement. (d) No Right to Employment. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Employer. Further, the Employer expressly reserves the right at any time to dismiss a Participant free from any liability, or any claim under the Plan, except as provided herein or in any agreement entered into with respect to an Award. (e) No Rights as Stockholder. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed under the Plan until he or she has become the holder thereof. Notwithstanding the foregoing, in connection with each grant of Restricted Stock hereunder, the applicable Award shall specify if and to what extent the Participant shall not be entitled to the rights of a stockholder in respect of such Restricted Stock. (f) Construction of the Plan. The validity, construction, interpretation, administration and effect of the Plan and of its rules and regulations, and rights relating to the Plan, shall be determined solely in accordance with the laws of New York. (g) Effective Date. Subject to the approval of the stockholders of the Corporation, the Plan shall be effective on April 28, 1992. No Options or Awards may be granted under the Plan after December 31, 1996; provided, however, that the authority for grant of Restoration Options hereunder in accordance with Section 6(d) shall continue, subject to the provisions of Section 5, as long as any Option granted hereunder remains outstanding. (h) Amendment of Plan. The Board of Directors may amend, suspend or terminate the Plan or any portion thereof at any time, provided that no amendment shall be made without stockholder approval if such approval is necessary to comply with any tax or regulatory requirement, including for these purposes any approval requirement which is a prerequisite for exemptive relief under Section 16(b) of the Securities Exchange Act of 1934. Notwithstanding anything to the contrary contained herein, the Committee may amend the Plan in such manner as may be necessary so as to have the Plan conform with the local rules and regulations. (i) Amendment of Award. The Committee may amend, modify or terminate any outstanding Award with the Participant's consent at any time prior to payment or exercise in any manner not inconsistent with the terms of the Plan, including without limitation, (i) to change the date or dates as of which (A) an Option or Stock Appreciation Right becomes exercisable; (B) a Performance Share is deemed earned; (C) Restricted Stock becomes nonforfeitable; or (D) a Debenture becomes convertible, or (ii) to cancel and reissue an Award under such different terms and conditions as it determines appropriate. - -------------------------------------------------------------------------------- LONG-TERM STOCK INCENTIVE PLAN - TCC AMEND. EFF. 11/10/98 9 24 THE CHUBB CORPORATION STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS (1992) 1. PURPOSE The purpose of The Chubb Corporation Stock Option Plan for Non-Employee Directors (1992) (the "Plan") is to increase the proprietary and vested interest of the non-employee directors of The Chubb Corporation (the "Corporation") in the growth and performance of the Corporation by granting such directors options to purchase shares of Common Stock, $1.00 par value per share (the "Stock"), of the Corporation. 2. ADMINISTRATION The Plan shall be administered by the Corporation's Board of Directors (the "Board"). Subject to the provisions of the Plan, the Board shall be authorized to interpret the Plan, to establish, amend, and rescind any rules and regulations relating to the Plan and to make all other determinations necessary or advisable for the administration of the Plan; provided, however, that the Board shall have no discretion with respect to the selection of directors to receive options under the Plan, the number of shares of Stock subject to any such options, the purchase price thereunder or the timing of grants of options under the Plan. The determinations of the Board in the administration of the Plan, as described herein, shall be final and conclusive. The Secretary of the Corporation shall be authorized to implement the Plan in accordance with its terms and to take such actions of a ministerial nature as shall be necessary to effectuate the intent and purposes thereof. The validity, construction and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of New York. 3. ELIGIBILITY The class of individuals eligible for grant of options and Restoration Options under the Plan shall be Eligible Directors, as defined below. Eligible Director shall mean a director of the Corporation who is not an employee of the Corporation or its subsidiaries and has not, within one year immediately preceding the determination of such director's eligibility, received any award under any plan of the Corporation or its subsidiaries that entitles the participants therein to acquire stock, stock options or stock appreciation rights of the Corporation or its subsidiaries (other than any other plan under which participants' entitlements are governed by provisions meeting the requirements of Rule 16b-3(c)(2)(ii) promulgated under the Securities Exchange Act of 1934). Any holder of an option granted hereunder shall hereafter be referred to as a "Participant". 4. SHARES SUBJECT TO THE PLAN Subject to adjustment as provided in Section 7, an aggregate of 300,000 shares of Stock shall be available for issuance upon the exercise of options and Restoration Options, as described The Chubb Corporation Stock Option Plan For Non-Employee Directors (1992) (Amended 11/10/98) Page 1 25 in Section 6, granted under the Plan. The shares of Stock deliverable upon the exercise of options and Restoration Options maybe made available from authorized but unissued shares or shares reacquired by the Corporation, including shares purchased in the open market or in private transactions. If any option or Restoration Option granted under the Plan shall terminate for any reason without having been exercised, the shares subject to, but not delivered under, such option shall be available for other options and Restoration Options. 5. GRANT, TERMS AND CONDITIONS OF OPTIONS Each individual who is an Eligible Director will be granted an option to purchase 2,000 shares of Stock as of the date of each Annual Shareholders Meeting following the effectiveness of the Plan at which such individual is elected or reelected to the office of director. The options granted will be nonstatutory stock options not intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and shall have the following terms and conditions. (a) Price. The purchase price per share of Stock deliverable upon the exercise of each option shall be 100% of the Fair Market Value per share of the Stock on the date the option is granted. For purposes of this Plan, Fair Market Value shall be the average of the highest and lowest per share sales prices as reported for consolidated trading of issues listed on the New York Stock Exchange on the date in question, or, if the Stock shall not have traded on such date, the average of the highest and lowest per share sales prices on the first date prior thereto on which the Stock was so traded. (b) Payment. Options may be exercised only upon payment of the purchase price thereof in full. Such payment shall be made in cash or in Stock, which shall have a Fair Market Value (determined in accordance with the rules of paragraph (a) above) at least equal to the aggregate exercise price of the shares being purchased, or a combination of cash and Stock. (c) Exercisability and Term of Options. Options shall be exercisable in whole or in part at all times during the period beginning on the date of grant until terminated, as provided in paragraph (d), below. (d) Termination of Service as Eligible Director. (i) Except as provided in subparagraph (ii) of this paragraph (d), all outstanding options held by a Participant shall be automatically cancelled upon such Participant's termination of service as an Eligible Director. (ii) Upon termination of a Participant's service as an Eligible Director by reason of such Participant's voluntary mid-term resignation, declining to stand for reelection (whether as a result of the Corporation's mandatory retirement program or otherwise), becoming an employee of the Corporation or a subsidiary thereof or becoming disabled (as defined in the Corporation's pension plan), all outstanding options held by such Participant on the date of such termination shall The Chubb Corporation Stock Option Plan For Non-Employee Directors (1992) (Amended 11/10/98) Page 2 26 expire five years from the date upon which the Participant ceases to be an Eligible Director. In the event of the death of a Participant (whether before or after termination of service as an Eligible Director), all outstanding options held by such Participant (and not previously cancelled or expired) on the date of such death shall be fully exercisable by the Participant's legal representative within one year after the date of death (without regard to the expiration date of the option specified in accordance with the preceding sentence). (e) Non-transferability. (i) Except as provided in (ii) below, no option shall be assignable or transferable, no right or interest of any Participant shall be subject to any lien, obligation or liability of the Participant, except by will or the laws of descent and distribution, and during the lifetime of the Participant to whom an option is granted, it may be exercised only by the Participant or by the Participant's legal guardian or legal representative. Notwithstanding the above, options may be transferred pursuant to a qualified domestic relations order. (ii) Notwithstanding subparagraph (i) above, the Board may determine that an option may be transferred by a Participant to one or more members of the Participant's immediate family, to a partnership of which the only partners are members of the Participant's immediate family, or to a trust established by the Participant for the benefit of one or more members of the Participant's immediate family. For this purpose immediate family means the Participant's spouse, parents, children, grandchildren and the spouses of such parents, children and grandchildren. A transferee described in this subparagraph may not further transfer an option. Subject to such conditions that may be determined by the Board or a person or persons designated by the Board, an option transferred pursuant to this subparagraph shall remain subject to all of the applicable provisions of the Plan and the written option agreement. (f) Listing and Registration. Each option and Restoration Option shall be subject to the requirement that if at any time the Board shall determine, in its discretion, that the listing, registration or qualification of the Stock subject to such option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such option or the issue or purchase of shares thereunder, no such option may be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any condition not acceptable to the Board. (g) Option Agreement. Each option and Restoration Option granted hereunder shall be evidenced by an agreement with the Corporation which shall contain the terms and provisions set forth herein and shall otherwise be consistent with the provisions of the Plan. The Chubb Corporation Stock Option Plan For Non-Employee Directors (1992) (Amended 11/10/98) Page 3 27 6. GRANT, TERMS AND CONDITIONS OF RESTORATION OPTIONS In the event that, within seven years of the date of grant of an option granted hereunder (the "original option"), an Eligible Director delivers shares of the Stock in payment of the exercise price of the original option in accordance with Section 5(b), such Eligible Director shall be granted a Restoration Option, subject to the satisfaction of the conditions and criteria set forth below. Restoration Options will be nonstatutory options not intended to qualify under Section 422 of the code and shall have the following terms and provisions: (a) Number of Shares. A Restoration Option shall entitle the holder thereof to purchase a number of shares of Stock equal to the number of such shares delivered upon exercise of the original option. (b) Price. A Restoration Option shall have a per share exercise price of 100% of the per share Fair Market Value, determined in accordance with Section 5(a), of the Stock on the date of grant of such Restoration Option. (c) Conditions. Notwithstanding any other provision of this Section 6, no Restoration Option shall be granted if (i) the per share Fair Market Value of the Stock is not at least 125% of the exercise price of the original option, (ii) the original option is a Restoration Option or (iii) the exercising Participant is not an Eligible Director on the date of exercise. (d) Other Provisions. Restoration Options shall be subject to all other terms and conditions set forth in Section 5, except as expressly set forth and as modified in this Section 6. 7. ADJUSTMENT OF AND CHANGES IN STOCK In the event of a stock split, stock dividend, subdivision or combination of the Stock or other change in corporate structure affecting the Stock, the number of shares of Stock authorized by the Plan shall be increased or decreased proportionately, as the case may be, and the number of shares of Stock subject to any outstanding option or Restoration Option shall be increased or decreased proportionately, as the case may be, with appropriate corresponding adjustment in the purchase price per share of Stock thereunder. 8. MERGERS, SALES AND CHANGE IN CONTROL In the case of (i) any merger, consolidation or combination of the Corporation with or into another corporation (other than a merger, consolidation or combination in which the Corporation is the continuing corporation and which does not result in its outstanding Stock being converted into or exchanged for different securities, cash or other property, or any combination thereof) or a sale of all or substantially all of the assets of the Corporation or (ii) a Change in Control (as defined below) of the Corporation, the holder of each option (including for purposes of this Section any Restoration Option) then outstanding immediately prior to such Change in Control The Chubb Corporation Stock Option Plan For Non-Employee Directors (1992) (Amended 11/10/98) Page 4 28 shall (unless the Board determines otherwise) have the right to receive on the date or effective date of such event an amount equal to the excess of the Fair Market Value on such date of (a) the securities, cash or other property, or combination thereof, receivable upon such merger, consolidation or combination in respect of a share of Stock, in the cases covered by clause (i) above, or in the case of a sale of assets referred to in such clause (i), a share of Stock, or (b) the final tender offer price in the case of a tender offer resulting in a Change in Control or (c) the value of the Stock covered by the option as determined by the Board, in the case of Change in Control by reason of any other event, over the exercise price of such option, multiplied by the number of shares of Stock subject to such option. Such amount will be payable fully in cash. Any determination by the Board made pursuant to this Section 8 will be made as to all outstanding options and shall be made (a) in cases covered by clause (i) above, prior to the occurrence of such event, (b) in the event of a tender or exchange offer, prior to the purchase of any Stock pursuant thereto by the offeror and (c) in the case of a Change in Control by reason of any other event, just prior to or as soon as practicable after such Change in Control. A "Change in Control" shall be deemed to have occurred if (a) any person, or any two or more persons acting as a group, and all affiliates of such person or persons, shall own beneficially 25% or more of the Stock outstanding, or (b) if following (i) a tender or exchange offer for voting securities of the Corporation (other than any such offer made by the Corporation), or (ii) a proxy contest for the election of directors of the Corporation, the persons who were directors of the Corporation immediately before the initiation of such event (or directors who were appointed by such directors) cease to constitute a majority of the Board of Directors of the Corporation upon the completion of such tender or exchange offer or proxy contest or within one year after such completion. 9. NO RIGHTS OF SHAREHOLDERS Neither a Participant nor a Participant's legal representative shall be, or have any of the rights and privileges of, a shareholder of the Corporation in respect of any shares purchasable upon the exercise of any option or Restoration Option, in whole or in part, unless and until certificates for such shares shall have been issued. 10. PLAN AMENDMENTS The Plan may be amended by the Board, as it shall deem advisable or to conform to any change in any law or regulation applicable thereto; provided, that the Board may not, without the authorization and approval of shareholders: (i) increase the number of shares which may be purchased pursuant to options or Restoration Options hereunder, either individually or in the aggregate, except as permitted by Section 7, (ii) change the requirements of Sections 5(a) and 6(b) that option grants be priced at Fair Market Value, except as permitted by Section 7, (iii) modify in any respect the class of individuals who constitute Eligible Directors; or (iv) materially increase the benefits accruing to Participants hereunder. The provisions of Sections 3, 5 and 6 may not be amended more often than once every six months, other than to comport with changes The Chubb Corporation Stock Option Plan For Non-Employee Directors (1992) (Amended 11/10/98) Page 5 29 in the Code, the Employee Retirement Income Security Act, or the rules under either such statute. 11. EFFECTIVE DATE AND DURATION OF PLAN The Plan shall be come effective on the day after the Corporation's Annual Shareholders Meeting at which the Plan is approved by Shareholders. The Plan shall terminate on the day following the fifth Annual Shareholders Meeting at which Directors are elected succeeding the Annual Shareholders Meeting at which the Plan was approved by Shareholders, unless the Plan is extended or terminated at an earlier date by Shareholders; provided, however, that grants of Restoration Options pursuant to Section 6 shall continue until the seventh anniversary of such fifth Annual Shareholders' meeting. The Chubb Corporation Stock Option Plan For Non-Employee Directors (1992) (Amended 11/10/98) Page 6 30 THE CHUBB CORPORATION DEFERRED COMPENSATION PLAN FOR DIRECTORS ------------------------ Section 1. Effective Date The effective date of the Plan is July 1, 1987. Section 2. Eligibility Any Director of The Chubb Corporation (the "Company") or any Director of a participating subsidiary of the Company who is also a Director of the Company, who is not an officer or employee of the Company or a subsidiary thereof is eligible to participate in the Plan. A subsidiary shall become a participating subsidiary upon adoption of this Plan by the Board of Directors and by obtaining the consent to such adoption from the Board of Directors of the Company. Section 3. Deferred Compensation Accounts There shall be established for each participant a deferred compensation account or accounts in the participant's name. Section 4. Amount of Deferral A participant may elect to defer receipt for any Plan Year of all compensation payable to the participant in the form of stipends and/or meeting fees for serving on the Board of Directors of the Company and Committees of the Board of Directors as well as compensation payable to the participant in the form of stipends and/or meeting fees for serving on the Board of Directors and Committees of the Board of Directors of participating subsidiaries of the Company. Section 5. Investment of Deferred Amounts a) General. A participant may designate, in increments of 10%, what part of the compensation to be deferred or compensation already deferred that should be allocated to a cash account, a market value account and a shareholder's equity value account or any combination of such accounts. With the exception of allocations to a shareholder's equity account (which must be made in accordance with Section 5(d), any change in such designation may be made no later than the 15th day of each March, June, September and December during the deferral period to Page 1 of 4 Amended Eff. November 10, 1998 31 be effective on the date next following such notification that compensation would have been paid in accordance with the Company's normal practice, or as applicable, the participating subsidiary's normal practice, but for the election to defer. b) Cash Account. The amount, if any, allocated to the participant's deferred compensation cash account shall be credited with interest, to be compounded quarterly, calculated prospectively at a rate equal to the prime rate of Citibank, N.A. in effect on the first day of each January, April, July and October during the deferral period. c) Market Value Account. The amount, if any, allocated to the participant's deferred compensation market value account on each date compensation would have been paid in accordance with the Company's normal practice, or as applicable, the participating subsidiary's normal practice, but for the election to defer shall be expressed in units, the number of which shall be equal to such amount divided by the closing price of shares of the Company's Common Stock on the New York Stock Exchange (hereinafter referred to as "Market Value") on such date or on the trading day next preceding such date if such date is not a trading day. On each date that the Company pays a regular cash dividend on shares of its Common Stock outstanding, the participant's account shall be credited with a number of units equal to the amount of such dividend per share multiplied by the number of units in the participant's account on such date divided by the Market Value on such dividend date or on the trading day next preceding such date if the dividend payment date is not a trading day. The value of the units in the participant's market value account on any given date shall be determined by reference to the Market Value on such date. Any amount allocated to a market value account may not thereafter be reallocated to any other account. d) Shareholder's Equity Account. At any time during the period commencing January 1 and ending March 15 of any calendar year, the participant may elect to allocate on April 1 of such year to a deferred compensation shareholder's equity account compensation payable on April 1 of such year which he has previously elected to defer or amounts in the participant's cash account on such date (in increments of 10%) of such compensation or cash account balance. The amounts so allocated shall be expressed in units, the number of which shall be equal to such amount divided by the shareholder's equity per share as reported in the Company's Annual Report to Shareholders for the year just ended. Any amount allocated to a shareholder's equity account may not thereafter be reallocated to any other account. On each date that the Company pays a regular cash dividend on shares of its Common Share outstanding, the participant's shareholder's equity account shall be credited with a number of units equal to the amount of such dividend per share multiplied by the number of units in the participant's shareholder's equity account on such date divided by the Market Value on such dividend date or on the trading day next preceding such date if the dividend payment date is not a trading day. The value of the units in the participant's shareholder's equity account on any given date shall be determined by reference to the shareholder's equity at the close of the most recent fiscal year. e) Recapitalization. The number of units in the participant's market value and shareholder's equity accounts shall be proportionally adjusted for any increase or decrease in the number of Page 2 of 4 Amended Eff. November 10, 1998 32 issued shares of Common Stock of the Company resulting from a subdivision or consolidation of shares or other capital adjustment, or the payment of a stock dividend or other increase or decrease in such shares effected without receipt of consideration by the Company, or any distribution or spin-off of assets (other than cash) to the shareholders of the Company. Section 6. Period of Deferral A participant may elect to defer receipt of compensation either (a) until a specified year I the future or (b) until the participant's termination of service as a Director of the Company. If alternative (a) is elected, actual payment will be made or will commence within ninety days after the beginning of the year specified. If alternative (b) is elected, payment will be made or will commence within ninety days after termination of services as a Director of the Company. Section 7. Form of Payment A participant may elect to receive the compensation deferred under the plan in either (a) a lump sum of (b) a number of annual installments as specified by the participants. All amounts shall be paid in cash except that the market value account shall be paid in shares of the Company's Common Stock (other than any fractional share which shall be paid in cash). Section 8. Death or Disability Prior to Receipt In the event that a participant dies or becomes totally and permanently disabled prior to receipt of any or all of the amounts payable to the participant pursuant to the Plan, any amounts remaining in the participant's deferred compensation account shall be paid to his estate or personal representative in a lump sum within ninety (90) days following the Company's notification of the participant's death or disability. Section 9. Time of Election of Deferral The Plan Year shall be the period from July 1, 1987 to December 31, 1987 and effective January 1, 1988, the period commencing January 1 and ending December 31 of each year. An election to defer compensation may be made by a nominee for election as a Director prior to, or concurrently with the nominee's election for, the term for which the nominee is being elected, and may be made by a person then currently serving as a Director for the next succeeding Plan Year no later than the preceding December 15th (or June 15, 1987 for the Plan Year beginning July 1, 1987). Section 10. Manner of Electing Deferral A participant may elect to defer stipend and/or meeting fee compensation by giving written notice to the Secretary of the Company on a form provided by the Company, which notice shall include the accounts to which such deferred amounts are to be allocated and the percentage (in Page 3 of 4 Amended Eff. November 10, 1998 33 increments of 10%) of such amounts to be allocated to each account, the period of deferral, and the form of payment, including the number of installments. Section 11. Effect of Election An election to defer compensation shall be irrevocable once the Plan Year to which it applies has commenced. An election covering more than one Plan Year may be revoked or modified with respect to Plan Years not yet begun by notifying the Secretary of the Company in writing at least fifteen (15) days prior to the commencement of such Plan Year. Notwithstanding anything in the Plan to the contrary, a participant's deferred compensation accounts may be reduced from time to time in connection with the purchase of life insurance on the life of the participant pursuant to the Company's Estate Enhancement Program. Such reduction shall be in accordance with rules promulgated from time to time by the administrators identified in Section 15 and any such life insurance contract shall contain such terms as such administrators shall determine. Section 12. Participant's Rights Unsecured The right of any participant to receive future payments under the provisions of the Plan shall be an unsecured claim against the general assets of the Company, or as applicable, the participant subsidiary. Section 13. Statement of Accounts Statements will be sent to each participant by April 1st of each year as to the value of the participant's deferred compensation accounts as of the end of the preceding December. Section 14. Assignability No right to receive payments hereunder shall be transferable or assignable by a participant, except by will or by the laws of descent and distribution. The participant may not sell, assign, transfer, pledge or otherwise encumber any interest in the participant's deferred compensation account and any attempt to do so shall be void against, and shall not be recognized by, the Company or participating subsidiaries. Section 15. Administration The Plan shall be administered by the Secretary and the General Counsel of the Company, who together shall have the authority to adopt rules and regulations for carrying out the Plan and interpret, construe and implement the provisions of the Plan. Section 16. Amendment The Plan may at any time or from time to time be amended, modified or terminated by the Company. No amendment, modification or termination shall, without the consent of the participant, adversely affect accruals in such participant's deferred compensation account or accounts at the time of such amendment, modification or termination. Page 4 of 4 Amended Eff. November 10, 1998 34 The Chubb Corporation Executive Deferred Compensation Plan 1. STATEMENT OF PURPOSE The purpose of The Chubb Corporation Executive Deferred Compensation Plan (the "Plan") is to aid The Chubb Corporation and its subsidiaries in attracting and retaining key employees by providing a non-qualified compensation deferral vehicle. 2. DEFINITIONS 2.01 BENEFICIARY - "Beneficiary" means the person or persons designated as such in accordance with Section 8. 2.02 BOARD OF DIRECTORS - "Board of Directors" means the Board of Directors of The Chubb Corporation. 2.03 BOND INDEX ACCOUNT - "Bond Index Account" means an investment option providing for a return based upon the hypothetical investment of the Deferral Amount, or a portion thereof, in the Vanguard Bond Index Fund-Total Bond Market Portfolio. 2.04 CALENDAR QUARTER - "Calendar Quarter" means any of the four calendar quarters in a full calendar year (e.g. January, February & March comprise the first calendar quarter). 2.05 COMMITTEE - "Committee" means the Organization & Compensation Committee of the Board of Directors of The Chubb Corporation that will administer the Plan pursuant to the provisions of Section 3 of the Plan. 2.06 COMPANY - "Company" means The Chubb Corporation and, for purposes of Section 2.27 and such other purposes as determined by the Committee, shall include any subsidiary of The Chubb Corporation. 2.07 COMPENSATION - "Compensation" means the Participant's salary, annual incentive bonus, or other items deemed Compensation by the Committee for purposes of this Plan. November 1998 -1- 35 =============================================================================== The Chubb Corporation Executive Deferred Compensation Plan 2.08 CYCLE - "Cycle" means the twelve month pay-in period for each deferral. The first Cycle shall begin on January 1, 1999 and end on December 31, 1999. The following Cycles shall begin on January 1 of each year and end on December 31 of such year. 2.09 DECLINING BALANCE INSTALLMENTS - "Declining Balance Installments" means a series of annual payments such that each payment is determined by taking that portion of the Participant's Deferred Compensation Account in the Bond Index Account or the Equity Index Account as of the Distribution Date and dividing by the number of years of distributions remaining. 2.1 DEFERRAL AMOUNT - "Deferral Amount" means the total amount of Elective Deferred Compensation and/or Non-Elective Deferred Compensation with respect to a Participant. 2.2 DEFERRED COMPENSATION ACCOUNT - "Deferred Compensation Account" means the account maintained on the books of account of the Company for a Participant pursuant to Section 6. 2.3 DISABILITY - "Disability" means the Participant is eligible to receive benefits under a long term disability plan maintained by the Company. 2.4 DISTRIBUTION DATE - "Distribution Date" means the date on which the Company makes distributions from the Participant's Deferred Compensation Account(s). 2.5 EFFECTIVE DATE - "Effective Date" means the date on which this Plan is effective, November 10, 1998. 2.6 ELECTION FORM - "Election Form" means the form or forms attached to this Plan and filed with the Committee by the Participant in order to participate in the Plan. The terms and conditions specified in the Election Form(s) are incorporated by reference herein and form a part of the Plan. 2.7 ELECTIVE DEFERRED COMPENSATION - "Elective Deferred Compensation" means the total amount elected to be deferred by an Eligible Employee on his/her Election Form, subject to approval by the Committee. November 1998 -2- 36 =============================================================================== The Chubb Corporation Executive Deferred Compensation Plan 2.8 ELIGIBLE EMPLOYEE - "Eligible Employee" means any employee of The Chubb Corporation or the Chubb & Son division of Federal Insurance Company who is a Senior Vice President or higher assigned to pay band 7 or higher, or such other key executives of the Company as may be designated by the Chairman of The Chubb Corporation. 2.9 EQUITY INDEX ACCOUNT - "Equity Index Account" means an investment option providing for a return based upon the hypothetical investment of the Deferral Amount, or a portion thereof, in the Fidelity Spartan U.S. Equity Index Fund. 2.10 INVESTMENT ALLOCATION CHANGE FORM - "Investment Allocation Change Form" means the form attached to this Plan and filed with the Committee by the Participant in order to request a change in the allocation of the Participant's Deferred Compensation Account(s) among the Bond Index Account, Equity Index Account and the Stable Value Account. The terms and conditions specified in the Investment Allocation Change Form are incorporated by reference herein and form a part of the Plan. 2.11 INVESTMENT FUNDS - "Investment Funds" means those mutual funds, investment indexes or other measures of performance identified by the Committee, which shall be used to determine the returns on the Participants' Deferred Compensation Accounts. The initial investment funds shall be the Bond Index Account, the Equity Index Account and the Stable Value Account. The Investment Funds may be changed by the Committee from time to time, at the sole discretion of the Committee. 2.12 NON-ELECTIVE DEFERRED COMPENSATION - "Non-Elective Deferred Compensation" means the amount awarded to a Participant by the Committee pursuant to Section 4.02. 2.13 PARTICIPANT - "Participant" means an Eligible Employee participating in the Plan in accordance with the provisions of Section 4. 2.14 PLAN YEAR - "Plan Year" means the twelve month period beginning on the first day of the first Cycle in which the Eligible Employee elects to participate in the Plan. The initial Plan Year will commence on January 1, November 1998 -3- 37 =============================================================================== The Chubb Corporation Executive Deferred Compensation Plan 1999 and end on December 31, 1999. Each later Plan year will begin on January 1 and end on December 31. 2.15 RELATED EMPLOYMENT - "Related Employment" means the employment of a Participant by an employer that is not the Company provided (i) such employment is undertaken by the Participant at the request of the Company; (ii) immediately prior to undertaking such employment, the Participant was an employee of the Company, or was engaged in Related Employment as herein defined; and (iii) such employment is recognized by the Committee, in its sole discretion, as Related Employment. 2.16 STABLE VALUE ACCOUNT - "Stable Value Account" means an investment option providing for a return based on the hypothetical investment of the Deferral Amount, or a portion thereof, in the Stable Value Portfolio of the Chubb Capital Accumulation Plan. 2.17 SUBSTANTIALLY EQUAL INSTALLMENTS - "Substantially Equal Installments" means a series of annual payments, such that equal payments over the remaining payment period would exactly amortize the Participant's Deferred Compensation Account balance in the Stable Value Account as of the Distribution Date if the investment return remained constant at the return credited as of the Valuation Date immediately preceding the Distribution Date for the remainder of the payment period. 2.18 TERMINATION OF EMPLOYMENT - "Termination of Employment" means the end of a Participant's employment with the Company for any reason other than Disability, Related Employment, or the termination of a Participant's Related Employment if the Participant returns to the Company. 2.19 VALUATION DATE - "Valuation Date" means the date on which the value of a Participant's Deferred Compensation Account is determined for each Calendar Quarter as provided in Section 6 hereof. Unless and until changed by the Committee, the Valuation Dates within each Cycle shall be the last day of each of the four Calendar Quarters of the calendar year. If a Participant requests a Liquidating Distribution under Section 7.06, then, for such Participant's Deferred Compensation Account, the Valuation Date for the Plan Year in which the Liquidating November 1998 -4- 38 =============================================================================== The Chubb Corporation Executive Deferred Compensation Plan Distribution is requested shall be the last day of the Calendar Quarter in which the Participant submits the request. 2.20 VESTED PARTICIPANT - "Vested Participant" means a Participant who would be eligible immediately for normal or early retirement under the qualified pension plan maintained by the Company. 3. ADMINISTRATION OF THE PLAN 3.01 PLAN ADMINISTRATOR. The Committee, subject to Section 3.02, shall be the sole administrator of the Plan, and will administer the Plan. The Committee shall have the power to formulate additional details and regulations for carrying out this Plan. The Committee also shall be empowered to make any and all determinations not authorized specifically herein that may be necessary or desirable for the effective administration of the Plan. The Committee is authorized to engage such accountants, consultants and other service providers necessary to assist in the administration of the Plan. Any decision or interpretation of any provision of this Plan adopted by the Committee shall be final and conclusive. 3.02 DELEGATION OF DUTIES. The Committee may delegate any or all of its duties as to the administration of this Plan to other individuals or groups of individuals within the Company, as it deems appropriate. 4. PARTICIPATION 4.01 ELECTIVE PARTICIPATION a. Any Eligible Employee may elect to participate in the Plan for a given Cycle by filing a completed Election Form for the Cycle with the Manager of Compensation and Benefits. With regard to an election to participate: i. The Election Form must be filed with the Manager of Compensation and Benefits prior to the commencement of the Cycle to which the Election Form pertains, or at such earlier time as determined by the Committee. Provided, however, with respect to a deferral of salary, the Committee November 1998 -5- 39 =============================================================================== The Chubb Corporation Executive Deferred Compensation Plan may allow an Election Form for a Cycle to be filed after the commencement of the Cycle with respect to salary to be paid after the Election Form is filed. ii. The minimum deferral for a Cycle shall be $5,000. iii. A Participant may elect to receive payment of amounts deferred during a Cycle upon Termination of Employment, or in a specified year which shall be no earlier than in the third Plan Year following the Plan Year in which such amounts are deferred. Further, a Participant may elect to receive payment in a lump sum or in up to fifteen (15) annual installments. b. A Participant's election to defer future Compensation is irrevocable upon the filing of his/her Election Form with the Manager of Compensation and Benefits, provided, however, that an election to defer salary may be terminated with respect to amounts not yet earned by mutual agreement in writing between the Participant and the Committee. Such termination, if approved, shall be effective immediately. 4.02 NON-ELECTIVE PARTICIPATION. The Committee can, in its sole discretion, award to an Eligible Employee Non-Elective Deferred Compensation. Unless otherwise specified by the Committee, the Participant shall determine the timing and form of payment of any Non-Elective Deferred Compensation at the time it is awarded, provided that the Participant may not elect to receive payment in a specific year which is prior to the third Plan Year following the Plan Year during which the amount is awarded. 5. VESTING OF DEFERRED COMPENSATION ACCOUNT A Participant's interest in his/her Deferred Compensation Account shall vest immediately. November 1998 -6- 40 =============================================================================== The Chubb Corporation Executive Deferred Compensation Plan 6. ACCOUNTS AND VALUATIONS 6.01 DEFERRED COMPENSATION ACCOUNTS. A separate Deferred Compensation Account shall be established and maintained for each Participant for each Cycle. Deferred amounts will be credited to a Participant's account on the first day of the month following the time at which the amount would otherwise have been paid. Any Non-Elective Deferred Compensation awarded to a Participant shall be credited to the Participant's Deferred Compensation Account on such date as specified by the Committee. 6.02 INVESTMENT ALLOCATION OF DEFERRED COMPENSATION ACCOUNT. The Participant's Deferral Amount shall be deemed to be invested in the Investment Funds in accordance with the Participant's election. 6.03 INVESTMENT RETURN CREDITED. That portion of the Participant's Deferred Compensation Account in the Bond Index Account, Equity Index Account or Stable Value Account shall be credited quarterly with an investment return based on the investment return (gain or loss) of the fund in which the Deferral Amount is deemed to be hypothetically invested. 6.04 TIMING OF CREDITING OF INVESTMENT RETURN. That portion of the Participant's Deferred Compensation Account in the Bond Index Account, Equity Index Account or Stable Value Account shall be revalued and credited with investment return as of each Valuation Date. As of each Valuation Date, the value of that portion of the Participant's Deferred Compensation Account in any such account shall consist of the balance of such account as of the immediately preceding Valuation Date, plus the amount of any transfers from another account since the preceding Valuation Date, minus the amount of all distributions and transfers to another account, if any, made from such account since the preceding Valuation Date. As of each Valuation Date, investment return shall be credited on that portion of the Participant's Deferred Compensation Account in the Bond Index Account, Equity Index Account or Stable Value Account since the immediately preceding Valuation Date after adjustment for any transfers thereto or distributions or transfers therefrom. With respect to any Elective Deferred Compensation or Non-Elective Deferred November 1998 -7- 41 =============================================================================== The Chubb Corporation Executive Deferred Compensation Plan Compensation deferred and credited to a Participant's account since the immediately preceding Valuation Date, investment return (or loss) credited on the Valuation Date shall be credited from the time the amount is credited to the Participant's account pursuant to Section 6.01. 6.05 CHANGE OF INVESTMENT ALLOCATION BY A PARTICIPANT. A Participant may make different investment allocations for each Cycle, and may change a Cycle's investment allocation once a year. Any change will be effective as of April 1 of the next year if the Participant submits an Investment Allocation Change Form to the Manager of Compensation and Benefits by December 1 of any Plan year. 6.06 CHANGE OF INVESTMENT FUNDS BY COMMITTEE. The Committee may change the Investment Funds from time to time. In the event of any such change, all Participants shall be given notice of the change at least thirty (30) days before the change is to be effective. In addition, each Participant shall be given the opportunity to change his or her allocation of Investment Funds for his or her Deferred Compensation Account as of the effective date for the change; this change shall be in addition to any change permitted under 6.05. The Committee's decision to change the Investment Funds shall not in any manner alter the returns on the Participants' Deferred Compensation Accounts prior to the effective date of the change. 6.07 NATURE OF ACCOUNT ENTRIES. The establishment and maintenance of Participants' Deferred Compensation Accounts and the crediting of gains and losses pursuant to this Section 6, shall be merely bookkeeping entries and shall not be construed as giving any person any interest in any specific assets of the Company or of any subsidiary of the Company or any trust created by the Company, including any mutual funds or other investment funds owned by the Company or any such subsidiary or trust. The hypothetical investment of the Participants' Deferred Compensation Accounts in the Investment Funds shall be for bookkeeping purposes only, and shall not require the establishment of actual corresponding November 1998 -8- 42 =============================================================================== The Chubb Corporation Executive Deferred Compensation Plan funds by the Committee or the Company. Benefits accrued under this Plan shall constitute an unsecured general obligation of the Company. 7. BENEFITS 7.01 NORMAL BENEFIT a. A Participant's Deferred Compensation Account shall be paid to the Participant in accordance with the terms of the Participant's Election Form, subject to the terms and conditions specified in the Election Form. If a Participant elects to receive payment of that portion of his/her Deferred Compensation Account in the Stable Value Account in installments, subject to a maximum of fifteen (15) installments, payments shall be made in Substantially Equal Installments. If a Participant elects to receive payment of that portion of his/her Deferred Compensation Account in the Bond Index Account or Equity Index Account in installments, subject to a maximum of fifteen (15) installments, payments shall be made in Declining Balance Installments. b. Notwithstanding the provisions of Section 7.01a, and notwithstanding any contrary election made by the Participant on his/her Election Form, if a Participant has a Termination of Employment, and if the Participant does not qualify as a Vested Participant at the time of his/her Termination of Employment, the Participant's Deferred Compensation Account balance will be paid to the Participant in a lump sum in the year following the Participant's Termination of Employment. However, upon the written request of the Participant, the Committee, in its sole discretion, may allow payments to be made to the Participant in up to five (5) annual installments. c. In the event of a Participant's death prior to receiving any payments with respect to a Deferral Amount for a Cycle, the Participant's designated Beneficiary will receive an amount equal to the Participant's Deferred Compensation Account for such Cycle, and such amount shall be paid in a single sum or annual November 1998 -9- 43 =============================================================================== The Chubb Corporation Executive Deferred Compensation Plan installments (not to exceed 10) in accordance with the Participant's election. However, the Committee may, in its sole discretion, pay the Participant's remaining account balance in a single sum if so requested by the Participant's Beneficiary. If the Participant's designated Beneficiary survives the Participant but dies before receiving a complete distribution of the Participant's account, the remaining account balance shall be paid to the estate of such Beneficiary in a lump sum. d. If a Participant dies after beginning to receive payments with respect to a Deferral Amount for a Cycle, the Participant's designated Beneficiary will receive an amount equal to the Participant's remaining account balance for such Cycle. Such remaining account balance shall continue to be paid in accordance with the Participant's election. However, the Committee may, in its sole discretion, pay the Participant's remaining account balance in a single sum if so requested by the Participant's Beneficiary. If the Participant's designated Beneficiary survives the Participant but dies before receiving a complete distribution of the Participant's account, the remaining account balance shall be paid to the estate of such Beneficiary in a lump sum. 7.02 HARDSHIP BENEFIT. In the event that the Committee, upon written petition of the Participant, determines in its sole discretion, that the Participant has suffered an unforeseeable financial emergency, the Company may pay to the Participant, as soon as is practicable following such determination, an amount necessary to meet the emergency, not in excess of the Deferred Compensation Account credited to the Participant. The Deferred Compensation Account of the Participant thereafter shall be reduced to reflect the payment of a Hardship Benefit. 7.03 REQUEST TO COMMITTEE FOR DELAY IN PAYMENT. A Participant shall have no right to modify in any way the schedule for the distribution of amounts from his/her Deferred Compensation Account that the Participant has specified in his/her Election Form. However, upon a written request submitted by the Participant to the Committee, the Committee may, in its November 1998 -10- 44 =============================================================================== The Chubb Corporation Executive Deferred Compensation Plan sole discretion, with respect to the Deferred Compensation Account for each Cycle: a. Postpone one time the date on which payment shall commence; and b. Increase one time the number of installments to a number not to exceed fifteen (15). Any such request(s) must be made at least ninety (90) days prior to the earlier of (1) the beginning of the Plan Year in which the Participant has elected for distributions to commence, or (2) the Participant's Termination of Employment. 7.04 TAXES; WITHHOLDING. To the extent required by law, the Company shall withhold from payments made hereunder an amount equal to at least the minimum taxes required to be withheld by the federal, or any state or local, government. 7.05 DATE OF PAYMENTS. Except as otherwise provided in this Plan, payments under this Plan shall be made (or begin in the case of installments) on or before the fifteenth (15th) day of February of the calendar year following receipt of notice by the Committee of an event that entitles a Participant (or Beneficiary) to payments under the Plan, or at such other date as may be determined by the Committee. Amounts that become payable to the estate of a Beneficiary under Sections 7.01c or 7.01d or pursuant to Section 7.02 or Section 7.06 shall be paid within fifteen (15) days following the end of the calendar quarter in which a determination is made that an amount is payable, or at such other date as may be determined by the Committee. 7.06 LIQUIDATING DISTRIBUTION. Notwithstanding any provisions of the Plan or the Participant's Election Form to the contrary, following the receipt of a written request from a Participant for a Liquidating Distribution, the Company shall pay to the Participant the Participant's Liquidating Distribution Account Balance in a lump sum. "Liquidating Distribution" shall mean a distribution requested by the Participant in writing directed November 1998 -11- 45 =============================================================================== The Chubb Corporation Executive Deferred Compensation Plan to the Committee and specifically referencing this section. "Liquidating Distribution Account Balance" shall mean all of the Deferred Compensation Accounts under the Plan in which the Participant has an undistributed balance, decreased by a forfeiture penalty equal to ten percent (10%) of the value of the Participant's Deferred Compensation Account(s). A Liquidating Distribution shall be paid to a Participant on or before the fifteenth (15th) day of the month following the end of the calendar quarter during which the Participant requests the Liquidating Distribution. Notwithstanding any provisions of the Plan or the Participant's Election Form to the contrary, if the Participant requesting the Liquidating Distribution is, at the time of the request, an active employee of the Company, then the Participant, for a period of one (1) Plan Year following the Plan Year during which the request for the Liquidating Distribution is made, shall be ineligible to participate in the Plan with respect to any Compensation not yet deferred. 7.07 ALLOCATION OF DISTRIBUTIONS. If a distribution of a portion of an account for a Cycle is made to a Participant or Beneficiary, and the amounts for such Cycle are invested in more than one Investment Fund, then a portion of such distribution shall be deemed to have been made from each Investment Fund on a prorata basis, based on the values of the Investment Funds as of the Valuation Date immediately preceding the distribution. 8. BENEFICIARY DESIGNATION At any time prior to complete distribution of the benefits due to a Participant under the Plan, he/she shall have the right to designate, change, and/or cancel, any person(s) or entity as his/her Beneficiary (either primary or contingent) to whom payment under this Plan shall be made in the event of his/her death. Each Beneficiary designation shall become effective only when filed in writing with the Committee during the Participant's lifetime on a form provided by the Committee. The filing of a new beneficiary designation form will cancel all previously filed beneficiary designations relating to such Cycle or Cycles. November 1998 -12- 46 =============================================================================== The Chubb Corporation Executive Deferred Compensation Plan Further, any finalized divorce of a Participant subsequent to the date of filing of a beneficiary designation form in favor of Participant's spouse shall revoke such designation. If a Participant fails to designate a Beneficiary as provided above, or if his/her beneficiary designation is revoked by divorce or otherwise without execution of a new designation, or if all designated Beneficiaries predecease the Participant, then the distribution of such benefits shall be made to the Participant's estate in a lump sum. If the Participant's designated Beneficiary survives the Participant but dies before receiving a complete distribution of the Participant's account, the remaining account balance shall be paid to the estate of such Beneficiary in a lump sum. 9. AMENDMENT AND TERMINATION OF PLAN 9.01 AMENDMENT. The Board of Directors may amend the Plan at any time in whole or in part, provided, however, that, except as provided in 9.02, no amendment shall be effective to decrease the benefits under the Plan payable to any Participant or Beneficiary with respect to any Elective or Non-Elective Deferred Compensation deferred prior to the date of the amendment. Written notice of any amendments shall be given to each Participant in the Plan. 9.02 TERMINATION OF PLAN a. COMPANY'S RIGHT TO TERMINATE. The Board of Directors may terminate the Plan at any time. b. PAYMENTS UPON TERMINATION. Upon any termination of the Plan under this section, Compensation shall cease to be deferred prospectively, and, with respect to Compensation deferred previously, the Company will pay to the Participant (or the Participant's Beneficiary, if after the Participant's death), in a lump-sum, the value of his/her Deferred Compensation Account. November 1998 -13- 47 =============================================================================== The Chubb Corporation Executive Deferred Compensation Plan 10. MISCELLANEOUS 10.01 UNSECURED GENERAL CREDITOR. Participants and their beneficiaries, heirs, successors and assignees shall have no legal or equitable rights, interests, or other claims in any property or assets of the Company, nor shall they be beneficiaries of, or have any rights, claims, or interests in any life insurance policies, annuity contracts, or the policies therefrom owned or that may be acquired by the Company ("policies"). Such policies or other assets of the Company shall not be held in any way as collateral security for the fulfilling of the obligations of the Company under this Plan. Any and all of the Company's assets and policies shall be and will remain general, unpledged, unrestricted assets of the Company. The Company's obligation under the Plan shall be that of an unfunded and unsecured promise of the Company to pay money in the future. 10.02 GRANTOR TRUST. Although the Company is responsible for the payment of all benefits under the Plan, the Company, in its sole discretion, may contribute funds as it deems appropriate to a grantor trust for the purpose of paying benefits under this Plan. Such trust may be irrevocable, but assets of the trust shall be subject to the claims of creditors of the Company. To the extent any benefits provided under the Plan actually are paid from the trust, the Company shall have no further obligation with respect thereto, but to the extent not so paid, such benefits shall remain the obligation of, and shall be paid by, the Company. Participants shall have the status of unsecured creditors on any legal claim for benefits under the Plan, and shall have no security interest in any such grantor trust. 10.03 SUCCESSORS AND MERGERS, CONSOLIDATIONS OR CHANGE IN CONTROL. The terms and conditions of this Plan shall inure to the benefit of the Participants and shall bind the Company, its successors, assignees, and personal representatives. If substantially all of the stock or assets of the Company are acquired by another entity, or if the Company is merged into, or consolidated with, another entity, then the obligations created hereunder shall be obligations of the acquirer or successor entity. November 1998 -14- 48 =============================================================================== The Chubb Corporation Executive Deferred Compensation Plan 10.04 NON-ASSIGNABILITY. Neither a Participant, nor any other person, shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, or convey in advance of the actual receipt, any amounts payable hereunder, or any part thereof. All rights to payments expressly are declared to be unassignable and nontransferable. No part of the amounts payable, prior to actual payment, shall be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant, or any other person, nor shall they be transferable by operation of law in the event of a Participant's, or any other person's, bankruptcy or insolvency. 10.05 EMPLOYMENT OR FUTURE ELIGIBILITY TO PARTICIPATE NOT GUARANTEED. Nothing contained in this Plan, nor any action taken hereunder, shall be construed as a contract of employment, or as giving any Eligible Employee any right to be retained in the employ of the Company. Designation as an Eligible Employee may be revoked at any time by the Board of Directors with respect to any Compensation not yet deferred. 10.06 PROTECTIVE PROVISIONS. A Participant will cooperate with the Company by furnishing any and all information requested by the Company in order to facilitate the payment of benefits hereunder, including taking such physical examinations as the Company reasonably may deem necessary and taking such other relevant action as may be requested by the Company. If a Participant refuses to cooperate, the Participant's election to defer any Compensation which has not yet been deferred shall become null and void, and the Participant shall not be eligible to make any further deferral elections under the Plan. 10.07 GENDER, SINGULAR AND PLURAL. All pronouns, and any variations thereof, shall be deemed to refer to the masculine, feminine, or neuter, as the identity of the person(s) or entity(s) may require. As the context may require, the singular may be read as the plural and the plural as the singular. November 1998 -15- 49 =============================================================================== The Chubb Corporation Executive Deferred Compensation Plan 10.08 CAPTIONS. The captions to the articles, sections, and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 10.09 APPLICABLE LAW. This Plan shall be governed and construed in accordance with the laws of the State of New York. 10.10 VALIDITY. In the event any provision of this Plan is found to be invalid, void, or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of this Plan. 10.11 NOTICE. Any notice or filing required or permitted to be given to the Committee shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the principal office of the Company at 15 Mountain View Road, Warren, NJ 07059, directed to the attention of the Manager of Compensation and Benefits. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. Any notice to the Participant shall be addressed to the Participant at the Participant's residence address as maintained in the Company's records. Any party may change the address for such party here set forth by giving notice of such change to the other parties pursuant to this Section. November 1998 -16- 50 [CHUBB CORPORATION LETTERHEAD] November 11, 1998 Mr. Thomas F. Motamed 14 Timberline Road Hohokus, New Jersey 07423 Dear Tom: In order to induce you to remain in the employ of The Chubb Corporation (the "Company") and in consideration of your continuing in the Company's employ, the Company agrees to provide the severance benefits specified below on the terms and subject to the conditions stated. However, in the absence of a Change in Control of the Company, as defined below, nothing in this Agreement shall affect the Company's normal right to terminate your employment or your right to leave its employ. 1. Change in Control. For purposes of this Agreement a Change in Control will be deemed to have occurred (A) if following (i) a tender or exchange offer for voting securities of the Company, (ii) a proxy contest for the election of Directors of the Company or (iii) a merger or consolidation or sale of all or substantially all of the business or assets of the Company, the Directors of the Company immediately prior to the initiation of such event cease to constitute a majority of the Board of Directors of the Company upon the occurrence of such event or within one year after such event, or (B) if any "person" or "group" (as defined under the beneficial ownership rules of Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934 and Rule 13d-3 thereunder) acquires ownership or control, or power to control, 25% or more of the outstanding voting securities of the Company without prior approval or ratification by a majority of the Company's Directors in office at the time of such event. 2. Conditions to Severance Benefits. The benefits provided for in Section 5 shall be payable or accrue to you if (a) a Change in Control has occurred and (b) your employment with the Company has terminated within two years after the Change in Control, other than termination by reason of (i) your death, (ii) your retirement at normal retirement age ("Retirement") under the Company's pension plan as in effect immediately prior to the Change in Control, (iii) your voluntary termination other than for Good Reason, (iv) your retirement for Disability or (v) your discharge for Cause. 51 Mr. Thomas F. Motamed November 11, 1998 Page 2 Termination by you of your employment for "Good Reason" shall mean termination by you of your employment, subsequent to a Change in Control, because of: (A) the assignment to you, without your express written consent, of any duties inconsistent with your positions, duties, responsibilities, authority and status with the Company and its principal subsidiaries immediately prior to such Change in Control, or a change in your reporting responsibilities, titles or offices as in effect immediately prior to the Change in Control, or any removal of you from or any failure to re-elect you to any of such positions, except in connection with the termination of your employment for Cause, Disability, Retirement, as a result of your death or by you without Good Reason; (B) a reduction by the Company in your base salary as in effect at the time of such Change in Control; (C) a failure by the Company to continue (or to replace with equivalent plans) the Performance Share Plan, the Annual Incentive Compensation Plan or any other Bonus Plan in which you participated for the year immediately preceding such Change in Control (the "Bonus Plans") which are in effect at the time of such Change in Control or a failure by the Company to continue you as a participant in such Bonus Plans (or equivalent plans) on a basis which would entitle you to receive under such Bonus Plans (or equivalent plans) amounts at least equal to the average amounts you received pursuant to such Bonus Plans for the three years preceding such Change in Control; (D) the Company's requiring you to maintain your principal office or conduct your principal activities anywhere other than at the Company's principal executive offices in the New York Metropolitan area, including Somerset County, New Jersey; (E) the failure by the Company to continue in effect (or to replace with equivalent plans) the Company's Capital Accumulation Plan or any other compensation plan, any stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health and accident plan, financial services plan, hospital-medical plan, dental plan, or disability plan in which you are participating or eligible to participate at the time of such Change in Control, or the taking of any action by the Company which would adversely affect your participation in or materially reduce your benefits under any such plans (or equivalent plans) or deprive you of any material fringe benefit enjoyed or to be enjoyed by you at the time of such Change in Control; (F) the failure by the Company to obtain the assumption of the agreement to perform this Agreement by any successor as contemplated in Section 7 hereof; (G) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the applicable requirements with respect to such Notice; or 52 Mr. Thomas F. Motamed November 11, 1998 Page 3 (H) a determination made by you in good faith, whether before or after the date you are eligible for early retirement under the Company's pension plan, that as a result of such Change in Control you are not able to discharge your duties effectively; or (I) any termination of this Agreement pursuant to Section 6 prior to the expiration of two years from the occurrence of the Change in Control. Termination of your employment for "Cause" shall mean termination because of (A) the willful and continued failure by you substantially to perform your duties with the Company and its principal subsidiaries (other than any such failure resulting from your incapacity due to physical or mental illness), after a demand for substantial performance is delivered to you by the Chief Executive Officer of the Company, which specifically identifies the manner in which such executive believes that you have not substantially performed your duties, or (B) the willful engaging by you in misconduct which is materially injurious to the Company, monetarily or otherwise. For purposes of this paragraph, no act, or failure to act, on your part shall be considered "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in or not opposed to the best interests of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a Notice of Termination from the Chief Executive Officer of the Company after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board of Directors, and a finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clauses (A) or (B) of the first sentence of this paragraph and specifying the particulars thereof in detail. Termination of your employment for Disability shall mean termination in accordance with the provisions of the Company's Long Term Disability Plan as in effect immediately preceding the Change in Control. 3. Notice of Termination. Any purported termination of your employment shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. No purported termination of your employment by the Company shall be effective if it is not effected pursuant to a Notice of Termination satisfying the requirements of this Section 3. 4. Date of Termination. "Date of Termination" shall mean (A) if your employment is terminated for Disability, 30 days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such 30-day period) and (B) if your employment is terminated for any other reason, the date on which a Notice of Termination is given. 53 Mr. Thomas F. Motamed November 11, 1998 Page 4 5. Severance Benefits. Subject to the conditions in Section 2, on termination of your employment you shall be entitled to the following benefits: (A) You shall be entitled to an amount (the "Severance Compensation") equal to 2 times the sum of (i) one year's salary at the annual rate in effect at the time of the Change in Control and (ii) the average for the three calendar years preceding such Change in Control of your bonuses under the Annual Incentive Compensation Plan (1984) (or successor plan), provided, however, that your Severance Compensation shall not be greater than the amount you would have received as salary and such bonuses from the Company had you remained in the employ of the Company from the Date of Termination until your normal retirement date under the Company's pension plan (on the assumption that your salary would remain at the same annual rate as in effect at the time of Change in Control and that your annual bonuses would be the average for the three calendar years preceding such Change in Control of such bonuses). The Severance Compensation will be payable in full on the Date of Termination. (B) The Company shall also pay to you an amount equal to all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce or retain any right or benefit provided by this Agreement); (C) The Company shall maintain in full force and effect, for your continued benefit until the earlier of (a) two years after the Date of Termination or, (b) your commencement of full time employment with a new employer, all life insurance, hospital-medical, dental, health and accident, and disability plans in which you were entitled to participate immediately prior to such Change in Control, provided that your continued participation is possible under the general terms and provisions of such plans and programs. In the event that your participation in any such plan or program is barred for any reason whatsoever, the Company shall arrange to provide you with benefits substantially similar to those which you are entitled to receive under such plan or program; (D) You shall not be required to mitigate the amount of any payment provided for in this Section 5 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Section 5 be reduced by any compensation earned by you as the result of employment by another employer after the Date of Termination or otherwise. 6. Term of Agreement. This Agreement shall have an initial term of two (2) years from the date hereof and shall be automatically extended at the expiration of said two-year period for successive two (2) year periods unless the Company gives you one year's prior written notice that it is terminating this Agreement at the expiration of the then current two year period. 54 Mr. Thomas F. Motamed November 11, 1998 Page 5 7. Successors; Binding Agreement. (A) The Company will require any purchaser of all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to you to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such purchase had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business or assets as aforesaid which executes and delivers the agreement provided for in this Section 7(A) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (B) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, divisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate. 8. Notices. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by certified or registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Chairman of the Company, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. Miscellaneous. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by you and such officer as may be specifically designated by the Board of Directors of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement; provided, however, that this Agreement shall not supersede or in any way affect the rights, duties or obligations you may have under any other written agreement with the Company. This Agreement shall be governed by, and construed in accordance with, the laws (other than principles of conflicts of laws) of the State of New York. 10. Validity. The invalidity or unenforceability of any provision of this Agreement in any respect shall not affect the validity or enforceability of such provision in any other respect or of any other provision of this Agreement, all of which shall remain in full force and effect. 55 Mr. Thomas F. Motamed November 11, 1998 Page 6 If the foregoing correctly sets forth our understanding on the subject matter hereof, kindly sign and return to the Company the enclosed copy hereof, which will thereupon become our binding agreement. Sincerely, THE CHUBB CORPORATION By /s/ Dean R. O'Hare -------------------------------------- Dean R. O'Hare Chairman Agreed to this 16th day of November, 1998 /s/ Thomas F. Motamed - -------------------------------------- Thomas F. Motamed EX-13 4 1998 ANNUAL REPORT TO SHAREHOLDERS 1 Supplementary Financial Data
IN MILLIONS YEARS ENDED DECEMBER 31 1998 1997 1996 -------- -------- -------- PROPERTY AND CASUALTY INSURANCE UNDERWRITING Net Premiums Written................................... $5,503.5 $5,448.0 $4,773.8 Increase in Unearned Premiums.......................... (199.7) (290.6) (204.5) -------- -------- -------- Premiums Earned........................................ 5,303.8 5,157.4 4,569.3 -------- -------- -------- Claims and Claim Expenses.............................. 3,493.7 3,307.0 3,010.8 Operating Costs and Expenses........................... 1,850.0 1,777.4 1,547.4 Increase in Deferred Policy Acquisition Costs.......... (51.8) (75.7) (42.5) Dividends to Policyholders............................. 35.9 31.7 23.3 -------- -------- -------- Underwriting Income (Loss) Before Income Tax........... (24.0) 117.0 30.3 Federal and Foreign Income Tax (Credit)................ (9.9) 39.5 13.2 -------- -------- -------- UNDERWRITING INCOME (LOSS)............................. (14.1) 77.5 17.1 -------- -------- -------- INVESTMENTS Investment Income Before Expenses and Income Tax....... 760.0 721.4 656.2 Investment Expenses.................................... 11.1 10.2 10.1 -------- -------- -------- Investment Income Before Income Tax.................... 748.9 711.2 646.1 Federal and Foreign Income Tax......................... 114.8 118.9 101.9 -------- -------- -------- INVESTMENT INCOME...................................... 634.1 592.3 544.2 -------- -------- -------- PROPERTY AND CASUALTY INCOME.............................. 620.0 669.8 561.3 -------- -------- -------- REAL ESTATE Revenues.................................................. 82.2 616.1 319.8 Cost of Sales and Expenses................................ 85.7 624.7 555.7(a) -------- -------- -------- Real Estate Loss Before Income Tax........................ (3.5) (8.6) (235.9) Federal Income Tax Credit................................. (1.5) (3.5) (89.1) -------- -------- -------- REAL ESTATE LOSS.......................................... (2.0) (5.1) (146.8)(a) -------- -------- -------- CORPORATE, NET OF TAX....................................... 22.8 36.4 19.7 -------- -------- -------- CONSOLIDATED OPERATING INCOME FROM CONTINUING OPERATIONS BEFORE RESTRUCTURING CHARGE............... 640.8 701.1 434.2 RESTRUCTURING CHARGE, NET OF TAX (B)........................ (26.0) -- -- -------- -------- -------- CONSOLIDATED OPERATING INCOME FROM CONTINUING OPERATIONS AFTER RESTRUCTURING CHARGE................ 614.8 701.1 434.2 REALIZED INVESTMENT GAINS FROM CONTINUING OPERATIONS, NET OF TAX................................................ 92.2 68.4 52.0 -------- -------- -------- CONSOLIDATED INCOME FROM CONTINUING OPERATIONS......... 707.0 769.5 486.2 INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX (C)......... -- -- 26.5 -------- -------- -------- CONSOLIDATED NET INCOME................................ $ 707.0 $ 769.5 $ 512.7 ======== ======== ========
(a) The 1996 real estate loss reflects a net charge of $160.0 million for the after-tax effect of a $255.0 million write-down of the carrying value of certain real estate assets to their estimated fair value. (b) In the first quarter of 1998, the Corporation recorded a net charge of $26.0 million for the after-tax effect of a $40.0 million restructuring charge. (c) In May 1997, the Corporation sold its life and health insurance operations, which have been classified as discontinued operations. The above federal and foreign income tax provisions represent allocations of the consolidated provision. 15 2 Property and Casualty Underwriting Results NET PREMIUMS WRITTEN (In Millions of Dollars)
1998 1997 1996 1995 1994 Personal Insurance Automobile........................... $ 309.4 $ 298.6 $ 243.1 $ 200.3 $ 188.0 Homeowners........................... 735.1 697.4 546.1 455.6 436.5 Other................................ 320.2 310.4 250.0 210.9 204.3 -------- -------- -------- -------- -------- Total Personal.................. 1,364.7 1,306.4 1,039.2 866.8 828.8 -------- -------- -------- -------- -------- Commercial Insurance Multiple Peril....................... 784.5 813.6 671.0 575.7 522.6 Casualty............................. 900.5 915.8 818.0 717.3 667.8 Workers' Compensation................ 320.8 296.7 243.7 223.4 201.6 Property and Marine.................. 524.0 583.0 495.0 426.3 360.0 Executive Protection................. 949.8 891.4 775.7 647.0 596.4 Financial Institutions............... 391.6 384.3 340.4 285.5 260.0 Other................................ 267.6 260.6 188.3 195.5 198.8 -------- -------- -------- -------- -------- Total Commercial................ 4,138.8 4,145.4 3,532.1 3,070.7 2,807.2 -------- -------- -------- -------- -------- Total Before Reinsurance Assumed...................... 5,503.5 5,451.8 4,571.3 3,937.5 3,636.0 Reinsurance Assumed.................... -- (3.8) 202.5 368.5 315.2 -------- -------- -------- -------- -------- Total........................... $5,503.5 $5,448.0 $4,773.8 $4,306.0 $3,951.2 ======== ======== ======== ======== ========
A portion of the increase in net premiums written in both 1996 and 1997 was due to changes to the reinsurance agreements with the Royal & Sun Alliance Insurance Group plc. Effective January 1, 1996, these agreements were amended to reduce the portion of each company's business reinsured with the other. The agreements were terminated effective January 1, 1997. COMBINED LOSS AND EXPENSE RATIOS
Personal Insurance Automobile........................... 89.2% 86.6% 86.5% 87.4% 96.3% Homeowners........................... 90.8 88.9 104.3 93.8 110.2 Other................................ 70.2 66.9 69.3 72.6 80.7 -------- -------- -------- -------- -------- Total Personal.................. 85.6 83.1 91.7 87.1 99.8 -------- -------- -------- -------- -------- Commercial Insurance Multiple Peril....................... 124.2 118.7 118.1 110.0 112.4 Casualty............................. 114.6 113.5 113.3 113.8 101.9 Workers' Compensation................ 111.5 105.0 101.8 95.1 103.9 Property and Marine.................. 116.5 105.5 97.8 92.9 102.5 Executive Protection................. 75.8 74.5 76.5 82.1 81.4 Financial Institutions............... 86.7 91.5 83.7 88.8 96.2 Other................................ 100.9 85.0 99.0 103.9 105.4 -------- -------- -------- -------- -------- Total Commercial................ 104.5 100.7 99.7 99.3 99.4 -------- -------- -------- -------- -------- Total Before Reinsurance Assumed...................... 99.8 96.6 97.9 96.5 99.5 Reinsurance Assumed.................... -- N/M N/M 99.2 100.1 -------- -------- -------- -------- -------- Total........................... 99.8% 96.9% 98.3% 96.8% 99.5% ======== ======== ======== ======== ========
The combined loss and expense ratio, expressed as a percentage, is the key measure of underwriting profitability traditionally used in the property and casualty insurance business. It is the sum of the ratio of losses to premiums earned plus the ratio of underwriting expenses to premiums written after reducing both premium amounts by dividends to policyholders. 16 3 Ten Year Financial Summary (in millions except for per share amounts)
FOR THE YEAR 1998 1997 1996 REVENUES Property and Casualty Insurance Premiums Earned............................................ $5,303.8 $5,157.4 $4,569.3 Investment Income.......................................... 760.0 721.4 656.2 Real Estate................................................. 82.2 616.1 319.8 Corporate Investment Income................................. 61.9 63.9 55.4 Realized Investment Gains................................... 141.9 105.2 79.8 TOTAL REVENUES........................................... 6,349.8 6,664.0 5,680.5 COMPONENTS OF NET INCOME* Property and Casualty Insurance Underwriting Income (Loss)(b).............................. (14.1) 77.5 17.1 Investment Income.......................................... 634.1 592.3 544.2 Property and Casualty Insurance Income...................... 594.0(e) 669.8 561.3 Real Estate Income (Loss)................................... (2.0) (5.1) (146.8)(f) Corporate Income............................................ 22.8 36.4 19.7 OPERATING INCOME FROM CONTINUING OPERATIONS.............. 614.8 701.1 434.2 Realized Investment Gains from Continuing Operations........ 92.2 68.4 52.0 INCOME FROM CONTINUING OPERATIONS........................ 707.0 769.5 486.2 Income from Discontinued Operations......................... -- -- 26.5 NET INCOME............................................... 707.0 769.5 512.7 DILUTED EARNINGS PER SHARE Operating Income from Continuing Operations(b).............. 3.65(e) 4.00 2.44(f) Income from Continuing Operations........................... 4.19 4.39 2.73 Income from Discontinued Operations......................... -- -- .15 Net Income.................................................. 4.19 4.39 2.88 DIVIDENDS DECLARED ON COMMON STOCK............................ 204.7 198.3 188.7 Per Share................................................... 1.24 1.16 1.08 CHANGE IN UNREALIZED APPRECIATION OR DEPRECIATION OF INVESTMENTS, NET............................................ 14.6 161.4 (107.2) AT YEAR END TOTAL ASSETS.................................................. $20,746.0 $19,615.6 $19,938.9 INVESTED ASSETS Property and Casualty Insurance............................. 13,715.0 12,777.3 11,190.7 Corporate................................................... 1,040.3 1,272.3 890.4 UNPAID CLAIMS................................................. 10,356.5 9,772.5 9,523.7 LONG TERM DEBT................................................ 607.5 398.6 1,070.5 TOTAL SHAREHOLDERS' EQUITY.................................... 5,644.1 5,657.1 5,462.9 Per Common Share............................................ 34.78 33.53 31.24
* The federal and foreign income tax provided for each component of income represents its allocated portion of the consolidated provision. In May 1997, the Corporation sold its life and health insurance operations, which 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 $220.5 million resulting from the change in accounting principle. 38 4
1995 1994 1993 1992 1991 1990 1989 $4,147.2 $3,776.3 $3,504.8(a) $3,163.3 $3,037.2 $2,836.1 $2,693.5 613.3 570.5 541.7 501.1 477.0 463.4 426.2 287.8 204.9 160.6 150.0 140.9 174.9 221.3 54.4 49.4 52.7 57.2 46.3 39.6 25.2 108.8 54.1 210.6 174.1 61.1 39.6 40.2 5,211.5 4,655.2 4,470.4 4,045.7 3,762.5 3,553.6 3,406.4 55.7 (7.8) (337.5)(c) (15.3) 18.6 20.7(d) (25.0) 507.2 475.0 455.4 422.8 397.6 371.4 330.1 562.9 467.2 117.9 407.5 416.2 392.1 305.1 6.0 (2.0) (2.2) 10.0 25.0 40.0 42.0 14.8 7.6 14.4 19.8 16.3 14.7 .7 583.7 472.8 130.1 437.3 457.5 446.8 347.8 70.7 35.1 137.3 114.8 40.3 25.8 26.4 654.4 507.9 267.4 552.1 497.8 472.6 374.2 42.2 20.6 76.8 65.0 54.2 49.5 46.6 696.6 528.5 324.2(g) 617.1 552.0 522.1 420.8 3.27 2.66 .77(c) 2.47 2.61 2.59(d) 2.03 3.67 2.85 1.52 3.10 2.84 2.74 2.18 .23 .11 .42 .36 .30 .28 .27 3.90 2.96 1.83(g) 3.46 3.14 3.02 2.45 170.6 161.1 150.8 139.6 127.8 109.1 96.5 .98 .92 .86 .80 .74 .66 .58 470.2 (487.9) 46.5 (82.1) 12.2 (19.4) 70.3 $19,636.3 $17,761.0 $16,729.5 $15,197.6 $13,885.9 $12,347.8 $11,390.4 10,013.6 8,938.8 8,403.1 7,767.5 7,086.6 6,297.8 5,793.7 906.6 879.5 965.7 955.8 840.3 688.4 647.8 9,588.2 8,913.2 8,235.4 7,220.9 6,591.3 6,016.4 5,605.0 1,150.8 1,279.6 1,267.2 1,065.6 1,045.8 812.6 604.2 5,262.7 4,247.0 4,196.1 3,954.4 3,541.6 2,882.6 2,603.7 30.14 24.46 23.92 22.59 20.37 17.60 15.42
(a) Premiums earned have been increased by a $125.0 million return premium to the Corporation's property and casualty insurance subsidiaries related to the commutation of a medical malpractice reinsurance agreement. (b) Underwriting income has been increased by tax benefits of $6.4 million or $.04 per share in 1992, $7.2 million or $.04 per share in 1991, $10.8 million or $.06 per share in 1990, and $19.2 million or $.11 per share in 1989 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) Underwriting income has been reduced by a net charge of $357.5 million or $1.96 per share for the after-tax effects of a $675.0 million increase in unpaid claims related to an agreement for the settlement of asbestos-related litigation and the $125.0 million return premium related to the commutation of a medical malpractice reinsurance agreement. (d) Underwriting income has been increased by the one-time benefit of a $14.0 million 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) Property and casualty insurance income has been reduced by a net charge of $26.0 million or $.15 per share for the after-tax effect of a $40.0 million restructuring charge. (f) Real estate income has been reduced by a net charge of $160.0 million or $.89 per share for the after-tax effect of a $255.0 million write-down of the carrying value of certain real estate assets to their estimated fair value. (g) Net income has been reduced by a one-time charge of $20.0 million or $.11 per share for the cumulative effect of changes in accounting principles resulting from the Corporation's adoption of Statements of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, and No. 109, Accounting for Income Taxes. Income before the cumulative effect of changes in accounting principles was $344.2 million or $1.94 per share. 39 5 The Chubb Corporation CONSOLIDATED STATEMENTS OF INCOME
IN MILLIONS YEARS ENDED DECEMBER 31 1998 1997 1996 REVENUES -------- -------- -------- Premiums Earned (Note 13).............................. $5,303.8 $5,157.4 $4,569.3 Investment Income (Note 4)............................. 821.9 785.3 711.6 Real Estate............................................ 82.2 616.1 319.8 Realized Investment Gains (Note 4)..................... 141.9 105.2 79.8 -------- -------- -------- TOTAL REVENUES.................................... 6,349.8 6,664.0 5,680.5 -------- -------- -------- CLAIMS AND EXPENSES Insurance Claims (Notes 13 and 15)..................... 3,493.7 3,307.0 3,010.8 Amortization of Deferred Policy Acquisition Costs (Note 6).................................................... 1,464.3 1,402.6 1,238.0 Other Insurance Operating Costs and Expenses........... 369.8 330.8 290.2 Real Estate Cost of Sales and Expenses (Note 5)........ 85.7 624.7 555.7 Investment Expenses.................................... 13.2 12.0 12.3 Corporate Expenses..................................... 33.4 12.8 26.6 Restructuring Charge (Note 12)......................... 40.0 -- -- -------- -------- -------- TOTAL CLAIMS AND EXPENSES......................... 5,500.1 5,689.9 5,133.6 -------- -------- -------- INCOME FROM CONTINUING OPERATIONS BEFORE FEDERAL AND FOREIGN INCOME TAX.......................... 849.7 974.1 546.9 FEDERAL AND FOREIGN INCOME TAX (NOTE 9)..................... 142.7 204.6 60.7 -------- -------- -------- INCOME FROM CONTINUING OPERATIONS................. 707.0 769.5 486.2 DISCONTINUED OPERATIONS, NET OF TAX (NOTE 3) Income from Operations................................. -- -- 48.5 Loss on Disposal....................................... -- -- (22.0) -------- -------- -------- INCOME FROM DISCONTINUED OPERATIONS............... -- -- 26.5 -------- -------- -------- NET INCOME........................................ $ 707.0 $ 769.5 $ 512.7 ======== ======== ======== BASIC EARNINGS PER SHARE (NOTE 17) Income from Continuing Operations...................... $ 4.27 $ 4.48 $ 2.79 Income from Discontinued Operations.................... -- -- .15 -------- -------- -------- Net Income........................................ $ 4.27 $ 4.48 $ 2.94 ======== ======== ======== DILUTED EARNINGS PER SHARE (NOTE 17) Income from Continuing Operations...................... $ 4.19 $ 4.39 $ 2.73 Income from Discontinued Operations.................... -- -- .15 -------- -------- -------- Net Income........................................ $ 4.19 $ 4.39 $ 2.88 ======== ======== ========
See accompanying notes. 40 6 The Chubb Corporation CONSOLIDATED BALANCE SHEETS
IN MILLIONS DECEMBER 31 1998 1997 ASSETS --------- --------- Invested Assets (Note 4) Short Term Investments................................. $ 344.2 $ 725.1 Fixed Maturities Held-to-Maturity -- Tax Exempt (market $2,140.2 and $2,347.2)........................................... 2,002.2 2,200.6 Available-for-Sale Tax Exempt (cost $6,509.3 and $5,408.4)........... 6,935.1 5,766.9 Taxable (cost $4,259.0 and $4,366.0).............. 4,381.6 4,485.9 Equity Securities (cost $1,002.6 and $733.9)........... 1,092.2 871.1 --------- --------- TOTAL INVESTED ASSETS................................ 14,755.3 14,049.6 Cash...................................................... 8.3 11.5 Accrued Investment Income................................. 221.0 203.8 Premiums Receivable....................................... 1,199.3 1,144.4 Reinsurance Recoverable on Unpaid Claims.................. 1,306.6 1,207.9 Prepaid Reinsurance Premiums.............................. 134.6 115.2 Funds Held for Asbestos-Related Settlement (Note 15)...... 607.4 599.5 Deferred Policy Acquisition Costs (Note 6)................ 728.7 676.9 Real Estate Assets (Notes 5 and 8)........................ 746.0 790.0 Deferred Income Tax (Note 9).............................. 320.8 317.0 Other Assets.............................................. 718.0 499.8 --------- --------- TOTAL ASSETS......................................... $20,746.0 $19,615.6 ========= ========= LIABILITIES Unpaid Claims (Note 15)................................... $10,356.5 $ 9,772.5 Unearned Premiums......................................... 2,915.7 2,696.6 Long Term Debt (Note 8)................................... 607.5 398.6 Dividend Payable to Shareholders.......................... 50.3 49.0 Accrued Expenses and Other Liabilities.................... 1,171.9 1,041.8 --------- --------- TOTAL LIABILITIES.................................... 15,101.9 13,958.5 --------- --------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 14, 15 AND 21) SHAREHOLDERS' EQUITY (NOTES 10 AND 20) Preferred Stock -- Authorized 4,000,000 Shares; $1 Par Value; Issued -- None........................... -- -- Common Stock -- Authorized 600,000,000 Shares; $1 Par Value; Issued 175,989,202 and 176,037,850 Shares................................................. 176.0 176.0 Paid-In Surplus........................................... 546.7 593.0 Retained Earnings......................................... 5,604.0 5,101.7 Accumulated Other Comprehensive Income Unrealized Appreciation of Investments, Net of Tax (Note 4).............................................. 414.7 400.1 Foreign Currency Translation Losses, Net of Tax........ (36.0) (25.7) Receivable from Employee Stock Ownership Plan............. (86.3) (96.7) Treasury Stock, at Cost -- 13,722,376 and 7,320,410 Shares................................................. (975.0) (491.3) --------- --------- TOTAL SHAREHOLDERS' EQUITY........................... 5,644.1 5,657.1 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $20,746.0 $19,615.6 ========= =========
See accompanying notes. 41 7 The Chubb Corporation CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN MILLIONS YEARS ENDED DECEMBER 31 1998 1997 1996 -------- -------- -------- PREFERRED STOCK Balance, Beginning and End of Year..................... $ -- $ -- $ -- -------- -------- -------- COMMON STOCK Balance, Beginning of Year............................. 176.0 176.1 87.8 Two-for-One Stock Split................................ -- -- 87.8 Shares Issued upon Exchange of Long Term Debt.......... -- -- .5 Share Activity under Option and Incentive Plans........ -- (.1) -- -------- -------- -------- Balance, End of Year.............................. 176.0 176.0 176.1 -------- -------- -------- PAID-IN SURPLUS Balance, Beginning of Year............................. 593.0 695.7 778.2 Two-for-One Stock Split................................ -- -- (87.8) Exchange of Long Term Debt............................. -- (68.4) 20.8 Share Activity under Option and Incentive Plans........ (46.3) (34.3) (15.5) -------- -------- -------- Balance, End of Year.............................. 546.7 593.0 695.7 -------- -------- -------- RETAINED EARNINGS Balance, Beginning of Year............................. 5,101.7 4,530.5 4,206.5 Net Income............................................. 707.0 769.5 512.7 Dividends Declared (per share $1.24, $1.16 and $1.08)............................................... (204.7) (198.3) (188.7) -------- -------- -------- Balance, End of Year.............................. 5,604.0 5,101.7 4,530.5 -------- -------- -------- UNREALIZED APPRECIATION OF INVESTMENTS Balance, Beginning of Year............................. 400.1 238.7 345.9 Change During Year, Net (Note 4)....................... 14.6 161.4 (107.2) -------- -------- -------- Balance, End of Year.............................. 414.7 400.1 238.7 -------- -------- -------- FOREIGN CURRENCY TRANSLATION LOSSES Balance, Beginning of Year............................. (25.7) (15.6) (3.4) Change During Year, Net of Tax......................... (10.3) (10.1) (12.2) -------- -------- -------- Balance, End of Year.............................. (36.0) (25.7) (15.6) -------- -------- -------- RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN Balance, Beginning of Year............................. (96.7) (106.3) (115.0) Principal Repayments................................... 10.4 9.6 8.7 -------- -------- -------- Balance, End of Year.............................. (86.3) (96.7) (106.3) -------- -------- -------- TREASURY STOCK, AT COST Balance, Beginning of Year............................. (491.3) (56.2) (37.3) Repurchase of Shares................................... (608.5) (827.9) (82.5) Shares Issued upon Exchange of Long Term Debt.......... -- 304.4 -- Share Activity under Option and Incentive Plans........ 124.8 88.4 63.6 -------- -------- -------- Balance, End of Year.............................. (975.0) (491.3) (56.2) -------- -------- -------- TOTAL SHAREHOLDERS' EQUITY........................ $5,644.1 $5,657.1 $5,462.9 ======== ======== ========
See accompanying notes. 42 8 The Chubb Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS
IN MILLIONS YEARS ENDED DECEMBER 31 1998 1997 1996 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income................................................ $ 707.0 $ 769.5 $ 512.7 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Increase in Unpaid Claims, Net......................... 485.3 808.7 141.4 Increase in Unearned Premiums, Net..................... 199.7 290.6 204.5 Increase in Premiums Receivable........................ (54.9) (159.5) (124.5) Change in Funds Held for Asbestos-Related Settlement... (7.9) .4 438.2 Decrease in Medical Reinsurance Related Receivable..... -- -- 191.2 Increase in Deferred Policy Acquisition Costs.......... (51.8) (75.7) (42.5) Deferred Income Tax Credit............................. (5.5) (33.3) (117.6) Write-down of Real Estate Assets....................... -- -- 255.0 Depreciation........................................... 58.2 56.4 59.0 Realized Investment Gains.............................. (141.9) (105.2) (79.8) Income from Discontinued Operations, Net............... -- -- (26.5) Other, Net............................................. 25.8 13.2 188.2 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES......................................... 1,214.0 1,565.1 1,599.3 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sales of Fixed Maturities -- Available-for- Sale..................................................... 1,668.8 3,682.6 3,430.5 Proceeds from Maturities of Fixed Maturities.............. 784.2 658.5 762.9 Proceeds from Sales of Equity Securities.................. 366.7 401.3 383.0 Proceeds from Sale of Discontinued Operations, Net........ -- 861.2 -- Purchases of Fixed Maturities............................. (3,218.4) (5,394.8) (5,520.5) Purchases of Equity Securities............................ (535.7) (519.3) (395.2) Decrease (Increase) in Short Term Investments, Net........ 380.9 (449.2) 153.4 Proceeds from Sale of Real Estate Properties.............. 33.6 759.6 17.4 Additions to Real Estate Assets........................... (13.2) (40.1) (94.3) Purchases of Fixed Assets, Net............................ (78.8) (71.0) (58.7) Other, Net................................................ (75.5) 41.1 (53.2) --------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES................ (687.4) (70.1) (1,374.7) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Issuance of Long Term Debt.................. 400.5 10.2 86.0 Repayment of Long Term Debt............................... (191.6) (344.9) (145.6) Increase (Decrease) in Short Term Debt, Net............... -- (189.5) 37.8 Dividends Paid to Shareholders............................ (203.4) (196.5) (184.2) Repurchase of Shares...................................... (608.5) (827.9) (82.5) Other, Net................................................ 73.2 60.4 56.7 --------- --------- --------- NET CASH USED IN FINANCING ACTIVITIES................ (529.8) (1,488.2) (231.8) --------- --------- --------- Net Increase (Decrease) in Cash............................. (3.2) 6.8 (7.2) Cash at Beginning of Year................................... 11.5 4.7 11.9 --------- --------- --------- CASH AT END OF YEAR.................................. $ 8.3 $ 11.5 $ 4.7 ========= ========= ========= CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Net Income.................................................. $ 707.0 $ 769.5 $ 512.7 Other Comprehensive Income (Loss) Change in Unrealized Appreciation of Investments, Net of Tax............................................. 14.6 161.4 (107.2) Change in Foreign Currency Translation Losses, Net of Tax............................................. (10.3) (10.1) (12.2) --------- --------- --------- 4.3 151.3 (119.4) --------- --------- --------- COMPREHENSIVE INCOME................................. $ 711.3 $ 920.8 $ 393.3 ========= ========= =========
See accompanying notes. 43 9 Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of The Chubb Corporation (Corporation) and its subsidiaries. Significant intercompany transactions have been eliminated in consolidation. The consolidated financial statements reflect estimates and judgments made by management for those transactions that are not yet complete or for which the ultimate effects cannot be precisely determined. Such estimates and judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Corporation is a holding company with subsidiaries principally engaged in the property and casualty insurance business. The property and casualty insurance subsidiaries underwrite most forms of property and casualty insurance in the United States, Canada, Europe and parts of Australia, Latin America and the Far East. The geographic distribution of property and casualty business in the United States is broad with a particularly strong market presence in the Northeast. On May 13, 1997, the Corporation completed the sale of its life and health insurance subsidiaries. The life and health insurance subsidiaries have been classified as discontinued operations (see Note (3)). All footnote disclosures reflect continuing operations only, unless otherwise noted. Certain amounts in the consolidated financial statements for prior years have been reclassified to conform with the 1998 presentation. (b) Investments Short term investments, which have an original maturity of one year or less, are carried at amortized cost. Fixed maturities, which include bonds and redeemable preferred stocks, are purchased to support the investment strategies of the Corporation and its insurance subsidiaries. These strategies are developed based on many factors including rate of return, maturity, credit risk, tax considerations and regulatory requirements. Fixed maturities which may be sold prior to maturity to support the investment strategies of the Corporation and its insurance subsidiaries are classified as available-for-sale and carried at market value as of the balance sheet date. Those fixed maturities which the Corporation and its insurance subsidiaries have the ability and positive intent to hold to maturity are classified as held-to-maturity and carried at amortized cost. Premiums and discounts arising from the purchase of mortgage-backed securities are amortized using the interest method over the estimated remaining term of the securities, adjusted for anticipated prepayments. Equity securities, which include common stocks and non-redeemable preferred stocks, are carried at market value as of the balance sheet date. Unrealized appreciation or depreciation of investments carried at market value is excluded from net income and credited or charged, net of applicable deferred income tax, directly to other comprehensive income, which is a component of shareholders' equity. Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold and are credited or charged to net income. (c) Premium Revenues and Related Expenses Premiums are earned on a monthly pro rata basis over the terms of the policies. Revenues include estimates of audit premiums and premiums on retrospectively rated policies. Unearned premiums represent the portion of premiums written applicable to the unexpired terms of policies in force. Acquisition costs are deferred by major product groups and amortized over the period in which the related premiums are earned. Such costs include commissions, premium taxes and other costs that vary with and are primarily related to the production of business. Deferred policy acquisition costs are reviewed to determine that they do not exceed recoverable amounts, after considering anticipated investment income. (d) Unpaid Claims Liabilities for unpaid claims include the accumulation of individual case estimates for claims reported as well as estimates of unreported claims and claim settlement expenses, less estimates of anticipated salvage and subrogation recoveries. Estimates are based upon past claim experience modified for current trends as well as prevailing economic, legal and social conditions. Such estimates are continually reviewed and updated. Any resulting adjustments are reflected in current operating results. (e) Reinsurance In the ordinary course of business, the Corporation's insurance subsidiaries assume and cede reinsurance with other insurance companies and are members of various pools and associations. Reinsurance is ceded to provide greater diversification of business and to limit the maximum net loss potential arising from large or concentrated risks. A large portion of the reinsurance is effected under contracts known as treaties and in some instances by negotiation on individual risks. Certain of these arrangements consist of excess of loss and catastrophe contracts which protect against losses over stipulated amounts arising from any one occurrence or event. Ceded reinsurance contracts do not relieve the Corporation's insurance subsidiaries of their primary obligation to the policyholders. 44 10 Prepaid reinsurance premiums represent the portion of insurance premiums ceded to reinsurers applicable to the unexpired terms of the reinsurance contracts in force. Commissions received related to reinsurance premiums ceded are considered in determining net acquisition costs eligible for deferral. Reinsurance recoverable on unpaid claims represent estimates of the portion of such liabilities that will be recovered from reinsurers. Amounts recoverable from reinsurers are recognized as assets at the same time and in a manner consistent with the liabilities associated with the reinsured policies. (f) 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 (15)). (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. Real estate properties are reviewed for impairment whenever events or circumstances indicate that the carrying value of such properties may not be recoverable. In performing the review for recoverability of carrying value, estimates are made of the future undiscounted cash flows from each of the properties during the period the property will be held and upon its eventual disposition. If the expected future undiscounted cash flows are less than the carrying value of any such property, an impairment loss is recognized resulting in a write-down of the carrying value of the property. Measurement of such impairment is based on the fair value of the property. Depreciation of real estate properties is calculated using the straight-line method over the estimated useful lives of the properties. Real estate mortgages and notes receivable are carried at unpaid principal balances less an allowance for uncollectible amounts. A loan is considered impaired when it is probable that all principal and interest amounts will not be collected according to the contractual terms of the loan agreement. An allowance for uncollectible amounts is established to recognize any such impairment. Measurement of impairment is based on the discounted future cash flows of the loan, subject to the estimated fair value of the underlying collateral. These cash flows are discounted at the loan's effective interest rate. Rental revenues are recognized on a straight-line basis over the term of the lease. Profits on land, townhome unit and commercial building sales are recognized at closing, subject to compliance with applicable accounting guidelines. Profits on high-rise condominium unit sales are recognized using the percentage of completion method, subject to achievement of a minimum level of unit sales. 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 measurement date over the amount an employee must pay to acquire the stock. (j) Income Taxes The Corporation and its domestic subsidiaries file a consolidated federal income tax return. Deferred income tax assets and liabilities are recognized for the expected future tax effects attributable to temporary differences between the financial reporting and tax bases of assets and liabilities, based on enacted tax rates and other provisions of tax law. The effect of a change in tax laws or rates is recognized in net income in the period in which such change is enacted. U. S. federal income taxes are accrued on undistributed earnings of foreign subsidiaries. (k) Foreign Exchange Assets and liabilities relating to foreign operations are translated into U.S. dollars using current exchange rates; revenues and expenses are translated into U.S. dollars using the average exchange rates for each year. The functional currency of foreign operations is generally the currency of the local operating environment since their business is primarily transacted in such local currency. Translation gains and losses, net of applicable income tax, are excluded from net income and are credited or charged directly to other comprehensive income, which is a component of shareholders' equity. 45 11 (l) Cash Flow Information In the statement of cash flows, short term investments are not considered to be cash equivalents. The effect of changes in foreign exchange rates on cash balances was immaterial. In 1997 and 1996, $228.6 million and $20.7 million of exchangeable subordinated notes were exchanged for 5,316,565 shares and 480,464 shares, respectively, of common stock of the Corporation. In 1997, $108.6 million of long term debt was assumed by a joint venture as a part of the sale of real estate properties. These noncash transactions have been excluded from the consolidated statements of cash flows. (m) Accounting Pronouncements Not Yet Adopted In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that all derivatives be recognized as assets or liabilities and be measured at fair value. The accounting for changes in the fair value of the derivative depends on the intended use of the derivative. SFAS No. 133 is effective for the Corporation on January 1, 2000. This Statement should not be applied retroactively to financial statements of prior periods. Currently, the Corporation's use of derivative instruments is not significant. Thus, the adoption of SFAS No. 133 is not expected to have a significant effect on the Corporation's financial position or results of operations. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This SOP requires that certain costs incurred to develop or obtain computer software for internal use should be capitalized and amortized over the software's expected useful life. Currently, the Corporation expenses all development costs of internal use computer software. SOP 98-1 is effective for the Corporation on January 1, 1999 and is to be applied prospectively. The adoption of SOP 98-1 will increase the Corporation's net income in 1999 by an amount that has not yet been quantified. The effect on net income will decrease in future years as the new method of accounting is phased in. (2) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 1998, the Corporation adopted SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, as amended by SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125. SFAS No. 125 provides new accounting and reporting standards for transfers of financial assets and extinguishments of liabilities. The Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. Transactions covered by this Statement include securitizations, repurchase agreements and securities lending. The Corporation currently engages in securities lending. The Statement has been applied prospectively. Adoption of SFAS No. 125 did not have a significant impact on the Corporation's financial position or results of operations. Effective January 1, 1998, the Corporation adopted SOP 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments, which was issued by the AICPA. The SOP provides guidance for determining when a liability for guaranty fund and other insurance-related assessments should be recognized and how such liability should be measured. The SOP requires that a liability be recognized for insurance-related assessments when an assessment has been imposed or it is probable that an assessment will be imposed, the event obligating an entity to pay the imposed or probable assessment has occurred and the amount of the assessment can be reasonably estimated. Restatement of prior years' financial statements is not permitted. Since the Corporation's previous accounting policy for insurance-related assessments was consistent with the requirements of SOP 97-3, the adoption of SOP 97-3 did not have any impact on the Corporation's financial position or results of operations. (3) DISCONTINUED OPERATIONS On May 13, 1997, the Corporation completed the sale of Chubb Life Insurance Company of America and its subsidiaries to Jefferson-Pilot Corporation for $875.0 million in cash, subject to various closing adjustments, none of which were material. In 1996, the Corporation recognized a loss of $22.0 million related to the sale of the life and health insurance subsidiaries. The purchase price was not adjusted to reflect results of operations subsequent to December 31, 1996. Therefore, the discontinued life and health insurance operations did not affect the Corporation's net income in 1997 and 1998 and will not affect net income in future periods. The results of the discontinued operations for the year ended December 31, 1996 were as follows:
(in millions) Total revenues................................. $816.8 Total benefits, claims and expenses............ 743.9 ------ Income before federal income tax............. 72.9 Federal income tax............................. 24.4 ------ Income from operations....................... $ 48.5 ======
46 12 (4) INVESTED ASSETS AND RELATED INCOME (a) The amortized cost and estimated market value of fixed maturities were as follows:
December 31 ------------------------------------------------------------------------------ 1998 1997 --------------------------------------------------- ------------------------ Gross Gross Estimated Gross Amortized Unrealized Unrealized Market Amortized Unrealized Cost Appreciation Depreciation Value Cost Appreciation --------- ------------ ------------ --------- --------- ------------ (in millions) Held-to-maturity -- Tax exempt....... $ 2,002.2 $138.0 $-- $ 2,140.2 $ 2,200.6 $146.7 --------- ------ ----- --------- --------- ------ Available-for-sale Tax exempt......................... 6,509.3 427.9 2.1 6,935.1 5,408.4 358.6 --------- ------ ----- --------- --------- ------ Taxable U.S. Government and government agency and authority obligations.................... 344.2 8.8 -- 353.0 594.3 9.9 Corporate bonds.................. 1,031.9 44.5 .6 1,075.8 819.9 27.0 Foreign bonds.................... 1,118.3 85.4 1.6 1,202.1 1,022.5 46.3 Mortgage-backed securities....... 1,694.3 22.1 38.9 1,677.5 1,778.2 35.8 Redeemable preferred stocks...... 70.3 2.9 -- 73.2 151.1 8.4 --------- ------ ----- --------- --------- ------ 4,259.0 163.7 41.1 4,381.6 4,366.0 127.4 --------- ------ ----- --------- --------- ------ Total available-for-sale....... 10,768.3 591.6 43.2 11,316.7 9,774.4 486.0 --------- ------ ----- --------- --------- ------ Total fixed maturities......... $12,770.5 $729.6 $43.2 $13,456.9 $11,975.0 $632.7 ========= ====== ===== ========= ========= ====== December 31 ------------------------ 1997 ------------------------ Gross Estimated Unrealized Market Depreciation Value ------------ --------- (in millions) Held-to-maturity -- Tax exempt....... $ .1 $ 2,347.2 ---- --------- Available-for-sale Tax exempt......................... .1 5,766.9 ---- --------- Taxable U.S. Government and government agency and authority obligations.................... .1 604.1 Corporate bonds.................. 2.4 844.5 Foreign bonds.................... 2.4 1,066.4 Mortgage-backed securities....... 2.6 1,811.4 Redeemable preferred stocks...... -- 159.5 ---- --------- 7.5 4,485.9 ---- --------- Total available-for-sale....... 7.6 10,252.8 ---- --------- Total fixed maturities......... $7.7 $12,600.0 ==== =========
The amortized cost and estimated market value of fixed maturities at December 31, 1998 by contractual maturity were as follows:
Estimated Amortized Market Cost Value --------- --------- (in millions) Held-to-maturity Due in one year or less.................................. $ 122.5 $ 124.4 Due after one year through five years.................... 612.4 644.4 Due after five years through ten years................... 851.6 918.5 Due after ten years...................................... 415.7 452.9 -------- -------- $2,002.2 $2,140.2 ======== ========
Available-for-sale Due in one year or less.................................. $ 248.7 $ 250.9 Due after one year through five years.................... 1,216.0 1,272.5 Due after five years through ten years................... 3,223.3 3,461.6 Due after ten years...................................... 4,386.0 4,654.2 --------- --------- 9,074.0 9,639.2 Mortgage-backed securities............................... 1,694.3 1,677.5 --------- --------- $10,768.3 $11,316.7 ========= =========
Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations. (b) The components of unrealized appreciation of investments carried at market value were as follows:
December 31 ------------------- 1998 1997 ---- ---- (in millions) Equity securities Gross unrealized appreciation........................... $164.6 $160.6 Gross unrealized depreciation........................... 75.0 23.4 ------ ------ 89.6 137.2 ------ ------ Fixed maturities Gross unrealized appreciation........................... 591.6 486.0 Gross unrealized depreciation........................... 43.2 7.6 ------ ------ 548.4 478.4 ------ ------ 638.0 615.6 Deferred income tax liability............................. 223.3 215.5 ------ ------ $414.7 $400.1 ====== ======
47 13 The change in unrealized appreciation of investments carried at market value was as follows:
Years Ended December 31 ------------------------------- 1998 1997 1996 ---- ---- ---- (in millions) Continuing operations Change in unrealized appreciation of equity securities............. $(47.6) $ 31.4 $ 17.3 Change in unrealized appreciation of fixed maturities.............. 70.0 216.9 (119.6) ------ ------ ------- 22.4 248.3 (102.3) Deferred income tax (credit)....... 7.8 86.9 (35.8) ------ ------ ------- Change in unrealized appreciation..................... 14.6 161.4 (66.5) Discontinued operations, net........ -- -- (40.7) ------ ------ ------- $ 14.6 $161.4 $(107.2) ====== ====== =======
The unrealized appreciation of fixed maturities carried at amortized cost is not reflected in the financial statements. The change in unrealized appreciation of fixed maturities of continuing operations carried at amortized cost was a decrease of $8.6 million, an increase of $16.8 million and a decrease of $48.2 million for the years ended December 31, 1998, 1997 and 1996, respectively. (c) The sources of net investment income were as follows:
Years Ended December 31 ------------------------------------ 1998 1997 1996 ---- ---- ---- (in millions) Fixed maturities..................... $761.1 $726.1 $669.7 Equity securities.................... 24.7 10.8 10.0 Short term investments............... 35.8 47.6 23.9 Other................................ .3 .8 8.0 ------ ------ ------ Gross investment income............. 821.9 785.3 711.6 Investment expenses.................. 13.2 12.0 12.3 ------ ------ ------ $808.7 $773.3 $699.3 ====== ====== ======
(d) Realized investment gains and losses were as follows:
Years Ended December 31 ------------------------------------ 1998 1997 1996 ---- ---- ---- (in millions) Gross realized investment gains Fixed maturities.................... $ 49.2 $ 56.3 $ 56.4 Equity securities................... 118.5 93.8 75.5 ------ ------ ------ 167.7 150.1 131.9 ------ ------ ------ Gross realized investment losses Fixed maturities.................... 7.0 26.5 45.7 Equity securities................... 18.8 18.4 6.4 ------ ------ ------ 25.8 44.9 52.1 ------ ------ ------ Realized investment gains............ 141.9 105.2 79.8 Income tax........................... 49.7 36.8 27.8 ------ ------ ------ $ 92.2 $ 68.4 $ 52.0 ====== ====== ======
(e) The Corporation engages in securities lending whereby certain securities from its portfolio are loaned to other institutions for short periods of time. Cash collateral from the borrower, equal to the market value of the loaned securities plus accrued interest, is deposited with a lending agent and retained and invested by the lending agent to generate additional income for the Corporation. At December 31, 1998 and 1997, the Corporation had no securities loaned to other institutions. Securities lending activity in 1998 was insignificant. The maximum amount of loaned securities outstanding during 1997 was approximately $230 million. (5) REAL ESTATE In October 1996, the Corporation announced that its real estate subsidiary was exploring the possible sale of all or a significant portion of its assets. In March 1997, the real estate subsidiary entered into an agreement with a prospective purchaser to perform due diligence in anticipation of executing a contract for the sale of substantially all of its commercial properties. Because the plan to pursue the sale of these assets in the near term represented a significant change in circumstances relating to the manner in which these assets would be used, the recoverability of their carrying value as of December 31, 1996 was reassessed. As a result, an impairment loss of $255.0 million was recognized in 1996 to reduce the carrying value of these assets to their estimated fair value. This charge was included in real estate cost of sales and expenses in the consolidated statements of income. In June 1997, a definitive agreement was reached with the purchaser. In November 1997, the sale of almost all of the properties covered by the agreement reached in June was closed for $736.9 million, which included $628.3 million in cash and the assumption of $108.6 million in debt. Closing on the one remaining property under the agreement is expected to occur in 1999. The real estate subsidiary is continuing to explore the sale of certain of its remaining properties. The components of real estate assets were as follows:
December 31 ------------------- 1998 1997 ---- ---- (in millions) Mortgages and notes receivable (net of allowance for uncollectible amounts of $16.8 and $24.0)..... $105.2 $123.8 Income producing properties........................ 166.5 163.8 Construction in progress........................... 109.2 95.8 Land under development and unimproved land......... 365.1 406.6 ------ ------ $746.0 $790.0 ====== ======
Substantially all mortgages and notes receivable are secured by buildings and land. The ultimate collectibility of the receivables is evaluated continuously and an appropriate allowance for uncollectible amounts established. Mortgages and notes receivable had an estimated aggregate fair value of $106.9 million and $121.0 million at December 31, 1998 and 1997, 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 $2.9 million, $2.7 million and $11.0 million for 1998, 1997 and 1996, respectively. 48 14 (6) DEFERRED POLICY ACQUISITION COSTS Policy acquisition costs deferred and the related amortization charged against income were as follows:
Years Ended December 31 --------------------------------- 1998 1997 1996 ---- ---- ---- (in millions) Balance, beginning of year.... $ 676.9 $ 601.2 $ 558.7 --------- --------- --------- Costs deferred during year Commissions and brokerage... 768.0 775.0 653.5 Premium taxes and assessments............... 128.5 124.9 114.7 Salaries and overhead....... 619.6 578.4 512.3 --------- --------- --------- 1,516.1 1,478.3 1,280.5 Amortization during year...... (1,464.3) (1,402.6) (1,238.0) --------- --------- --------- Balance, end of year.......... $ 728.7 $ 676.9 $ 601.2 ========= ========= =========
(7) PROPERTY AND EQUIPMENT Property and equipment included in other assets were as follows:
December 31 ------------------- 1998 1997 ---- ---- (in millions) Cost.......................................... $428.3 $391.7 Accumulated depreciation...................... 196.3 178.2 ------ ------ $232.0 $213.5 ====== ======
Depreciation expense related to property and equipment was $55.3 million, $53.7 million and $48.0 million for 1998, 1997 and 1996, respectively. (8) DEBT AND CREDIT ARRANGEMENTS (a) Long term debt consisted of the following:
December 31 ------------------------------------- 1998 1997 ----------------- ----------------- Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- ----- (in millions) Term loan.................. $ 28.5 $ 28.5 $ 40.1 $ 40.3 Mortgages.................. 49.0 48.9 48.5 47.3 8 3/4% notes............... 30.0 30.8 60.0 62.7 6.15% notes................ 300.0 312.8 -- -- 6.60% debentures........... 100.0 108.1 -- -- 6 7/8% notes............... 100.0 106.1 100.0 102.5 6% notes................... -- -- 150.0 150.0 ------ ------ ------ ------ $607.5 $635.2 $398.6 $402.8 ====== ====== ====== ======
The term loan and mortgages are obligations of the real estate subsidiaries. The term loan matures in 2000. The term loan is 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, 1998, the interest rate on the term loan approximated 7 1/2% and for the mortgages payable the range of interest rates was 6% to 12%. The term loan and mortgages payable are secured by real estate assets with a net book value of $192.3 million at December 31, 1998. In August 1998, the Corporation sold $300.0 million of unsecured 6.15% notes due August 15, 2005 and $100.0 million of unsecured 6.60% debentures due August 15, 2018, the aggregate net proceeds from which were $397.0 million. The Corporation also has outstanding $30.0 million of unsecured 8 3/4% notes due November 15, 1999. Chubb Capital Corporation has outstanding $100.0 million of 6 7/8% notes due February 1, 2003. These notes are unsecured and are guaranteed by the Corporation. The Corporation filed a shelf registration statement which the Securities and Exchange Commission declared effective in September 1998, under which up to $600.0 million of various types of securities may be issued by the Corporation or Chubb Capital. No securities have been issued under this registration statement. The amounts of long term debt due annually during the five years subsequent to December 31, 1998 are as follows:
Years Ending Term Loan December 31 and Mortgages Notes Total ------------ ------------- ----- ----- (in millions) 1999.................. $44.1 $ 30.0 $ 74.1 2000.................. 28.8 -- 28.8 2001.................. .3 -- .3 2002.................. .4 -- .4 2003.................. .4 100.0 100.4
(b) Interest costs of $28.9 million, $72.4 million and $89.5 million were incurred in 1998, 1997 and 1996, respectively, of which $8.7 million and $12.8 million were capitalized in 1997 and 1996, respectively. Interest paid, net of amounts capitalized, was $23.4 million, $60.4 million and $77.7 million in 1998, 1997 and 1996, respectively. (c) In July 1997, the Corporation entered into two credit agreements with a group of banks that provide for unsecured borrowings of up to $500.0 million in the aggregate. The $200.0 million short term revolving credit facility, which terminated on July 10, 1998, was extended to July 7, 1999, and may be renewed or replaced. The $300.0 million medium term revolving credit facility terminates on July 11, 2002. On the respective termination dates for these agreements, any loans then outstanding become payable. There have been no borrowings under these agreements. Various interest rate options are available to the Corporation, all of which are based on market rates. The Corporation pays a fee to have these credit facilities available. Unused credit facilities are available for general corporate purposes and to support Chubb Capital's commercial paper borrowing arrangement. 49 15 (9) FEDERAL AND FOREIGN INCOME TAX (a) Income tax expense consisted of the following components:
Years Ended December 31 --------------------------- 1998 1997 1996 ---- ---- ---- (in millions) Current tax United States............................................. $124.7 $194.4 $ 152.1 Foreign................................................... 23.5 43.5 26.2 Deferred tax credit, principally United States.............. (5.5) (33.3) (117.6) ------ ------ ------- $142.7 $204.6 $ 60.7 ====== ====== =======
Federal and foreign income taxes paid were $177.9 million, $253.5 million and $163.3 million in 1998, 1997 and 1996, respectively. (b) The provision for federal and foreign income tax gives effect to permanent differences between income for financial reporting purposes and taxable income. Accordingly, the effective income tax rate is less than the statutory federal corporate tax rate. The reasons for the lower effective tax rate were as follows:
Years Ended December 31 --------------------------------------------------------- 1998 1997 1996 ----------------- ----------------- ----------------- % of % of % of Pre-Tax Pre-Tax Pre-Tax Amount Income Amount Income Amount Income ------ ------- ------ ------- ------ ------- (in millions) Income from continuing operations before federal and foreign income tax...................................... $849.7 $974.1 $546.9 ======= ======= ======= Tax at statutory federal income tax rate.................. $297.3 35.0% $340.9 35.0% $191.4 35.0% Tax exempt interest income................................ (137.5) (16.2) (126.4) (13.0) (119.0) (21.8) Other, net................................................ (17.1) (2.0) (9.9) (1.0) (11.7) (2.1) ------- ----- ------- ----- ------- ----- Actual tax.......................................... $142.7 16.8% $204.6 21.0% $ 60.7 11.1% ======= ===== ======= ===== ======= =====
(c) The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities were as follows:
December 31 -------------------- 1998 1997 ---- ---- (in millions) Deferred income tax assets Unpaid claims............................................. $541.7 $572.6 Unearned premiums......................................... 172.7 160.8 Postretirement benefits................................... 73.1 62.9 Other, net................................................ 60.9 27.9 ------ ------ Total................................................... 848.4 824.2 ------ ------ Deferred income tax liabilities Deferred policy acquisition costs......................... 225.0 210.4 Real estate assets........................................ 79.3 81.3 Unrealized appreciation of investments.................... 223.3 215.5 ------ ------ Total................................................... 527.6 507.2 ------ ------ Net deferred income tax asset......................... $320.8 $317.0 ====== ======
50 16 (10) STOCK-BASED COMPENSATION PLANS (a) The Long-Term Stock Incentive Plan (1996) provides for the granting of stock options, performance shares, restricted stock and other stock-based awards to key employees. The maximum number of shares of the Corporation's common stock in respect to which stock-based awards may be granted under the 1996 plan is 14,000,000. At December 31, 1998, 10,023,108 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:
1998 1997 1996 ----------------------------- ----------------------------- ---------------------------- Number Weighted Average Number Weighted Average Number Weighted Average of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price --------- ---------------- --------- ---------------- --------- ---------------- Outstanding, beginning of year....... 9,124,803 $47.67 8,058,829 $41.48 6,565,034 $37.59 Granted.............................. 2,168,804 78.75 2,753,007 61.05 2,504,048 48.82 Exercised............................ (1,320,504) 41.78 (1,486,812) 38.39 (782,403) 31.77 Forfeited............................ (208,013) 75.25 (200,221) 51.69 (227,850) 43.26 ---------- ---------- --------- Outstanding, end of year............. 9,765,090 54.78 9,124,803 47.67 8,058,829 41.48 ========== ========== ========= Exercisable, end of year............. 6,879,061 47.26 5,932,905 42.54 4,852,845 38.10
December 31, 1998 ---------------------------------------------------------------------------------- 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 --------------------- ----------- ---------------- ---------------- ----------- ---------------- $17.50 - $41.81.................... 3,373,550 $39.14 4.8 3,373,550 $39.14 $42.13 - $87.34.................... 6,391,540 63.06 7.8 3,505,511 55.07 --------- --------- 9,765,090 54.78 6.8 6,879,061 47.26 ========= =========
Performance share awards are based on the achievement of various goals over performance cycle periods. The cost of such awards is expensed over the performance cycle. Such awards are payable in cash, in shares of the Corporation's common stock or in a combination of both. Restricted stock awards consist of shares of common stock of the Corporation granted at no cost. Shares of restricted stock become outstanding when granted, receive dividends and have voting rights. The shares are subject to forfeiture and to restrictions which limit the sale or transfer during the restriction period. An amount equal to the fair market value of the shares at the date of grant is expensed over the restriction period. The Corporation uses the intrinsic value based method of accounting for stock-based compensation, under which compensation cost is measured as the excess, if any, of the quoted market price of the stock at the measurement date over the amount an employee must pay to acquire the stock. Since the exercise price of stock options granted under the Long-Term Stock Incentive Plans is not less than the market price of the underlying stock on the date of grant, no compensation cost has been recognized for such grants. The aggregate amount charged against income (including continuing and discontinued operations) with respect to performance share and restricted stock awards was $14.4 million in 1998 and 1997 and $10.2 million in 1996. 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 at the grant date would be charged against income on a straight-line basis over the vesting period.
1998 1997 1996 ---------------------- ---------------------- ---------------------- As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma -------- -------- -------- -------- -------- -------- (in millions except for per share amounts) Net income.......................... $707.0 $679.6 $769.5 $746.3 $512.7 $496.6 Diluted earnings per share.......... 4.19 4.03 4.39 4.26 2.88 2.79
51 17 The weighted average fair value of options granted under the Long-Term Stock Incentive Plans during 1998, 1997 and 1996 was $19.08, $13.83 and $11.04, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions. The risk-free interest rates for 1998, 1997 and 1996 were 5.5%, 6.5% and 5.9%, respectively. The expected volatility of the market price of the Corporation's common stock for 1998, 1997 and 1996 grants was 16.4%, 16.3% and 18.3%, respectively. The expected average term of the granted options was 5 years for 1998 and 1997 and 5 1/2 years for 1996. The dividend yield was 1.6% for 1998, 1.9% for 1997 and 2.1% for 1996. (b) The Corporation has a leveraged Employee Stock Ownership Plan (ESOP) in which substantially all employees are eligible to participate. At its inception in 1989, the ESOP used the proceeds of a $150.0 million loan from the Corporation to purchase 7,792,204 newly issued shares of the Corporation's common stock. The loan is due in September 2004 and bears interest at 9%. The Corporation has recorded the receivable from the ESOP as a separate reduction of shareholders' equity on the consolidated balance sheets. This balance is reduced as repayments are made on the loan principal. The Corporation and its participating subsidiaries make semi-annual contributions to the ESOP in amounts determined at the discretion of the Corporation's Board of Directors. The contributions, together with the dividends on the shares of common stock in the ESOP, are used by the ESOP to make loan interest and principal payments to the Corporation. As interest and principal are paid, a portion of the common stock is allocated to eligible employees. The Corporation uses the cash payment method of recognizing ESOP expense. In 1998, 1997 and 1996, cash contributions to the ESOP of $11.0 million, $12.2 million and $12.7 million, respectively, were charged against income (including continuing and discontinued operations). Dividends on shares of common stock in the ESOP used for debt service were $7.8 million, $6.2 million and $4.6 million in 1998, 1997 and 1996, respectively. The number of allocated and unallocated shares held by the ESOP at December 31, 1998 were 2,947,830 and 3,116,884, respectively. All such shares are considered outstanding for the computation of earnings per share. (c) The Corporation has a Stock Purchase Plan under which substantially all employees are eligible to purchase shares of the Corporation's common stock based on compensation. At December 31, 1998, there were no subscribed shares. (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 (including continuing and discontinued operations) were as follows:
Years Ended December 31 ------------------------------ 1998 1997 1996 ---- ---- ---- (in millions) Service cost of current period...................... $ 18.8 $ 19.9 $ 20.6 Interest cost on projected benefit obligation.......... 34.5 30.3 26.0 Expected return on plan assets...................... (40.3) (35.1) (25.6) Other gains................... (2.5) (2.0) (6.0) ------ ------ ------ Net pension cost.......... $ 10.5 $ 13.1 $ 15.0 ====== ====== ======
In 1998, an expense of $29.0 million related to enhanced pension benefits provided to employees who accepted an early retirement incentive offer was included as part of a restructuring charge (see Note (12)). The following table sets forth the plans' funded status and amounts recognized in the balance sheets:
December 31 ------------------- 1998 1997 ---- ---- (in millions) Actuarial present value of projected benefit obligation for service rendered to date.................................. $518.7 $435.0 Plan assets at fair value.................. 552.9 487.8 ------ ------ Plan assets in excess of projected benefit obligation............................... (34.2) (52.8) Unrecognized net gain from past experience different from that assumed.............. 127.3 120.7 Unrecognized prior service costs........... (7.5) (8.8) Unrecognized net asset at January 1, 1985, being recognized principally over 19 years.................................... 4.9 6.4 ------ ------ Pension liability included in other liabilities............................ $ 90.5 $ 65.5 ====== ======
52 18 The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation at December 31, 1998 and 1997 was 7 1/4% and 7 1/2%, respectively, and the rate of increase in future compensation levels was 4 1/2% for 1998 and 5% for 1997. The expected long term rate of return on assets was 9% for both years. Plan assets are principally invested in publicly traded stocks and bonds. (b) The Corporation and its subsidiaries provide certain other postretirement benefits, principally health care and life insurance, to retired employees and their beneficiaries and covered dependents. Substantially all employees may become eligible for these benefits upon retirement if they meet minimum age and years of service requirements. The expected cost of these benefits is accrued during the years that the employees render the necessary service. The Corporation does not fund these benefits in advance. Benefits are paid as covered expenses are incurred. Health care coverage is contributory. Retiree contributions vary based upon a retiree's age, type of coverage and years of service with the Corporation. Life insurance coverage is non-contributory. The components of net postretirement benefit cost (including continuing and discontinued operations) were as follows:
Years Ended December 31 ---------------------------------- 1998 1997 1996 ---- ---- ---- (in millions) Service cost of current period.... $ 4.2 $ 4.9 $ 6.0 Interest cost on accumulated benefit obligation.............. 8.2 8.8 8.6 Net amortization and deferral..... (1.3) (.7) -- ----- ----- ----- Net postretirement benefit cost.......................... $11.1 $13.0 $14.6 ===== ===== =====
The components of the accumulated postretirement benefit obligation were as follows:
December 31 ------------------- 1998 1997 ---- ---- (in millions) Accumulated postretirement benefit obligation................................ $123.1 $125.8 Unrecognized net gain from past experience different from that assumed............... 27.1 18.1 ------ ------ Postretirement benefit liability included in other liabilities.................... $150.2 $143.9 ====== ======
The weighted average discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation at December 31, 1998 and 1997 was 7 1/4% and 7 1/2%, respectively. At December 31, 1998, the weighted average health care cost trend rate used to measure the accumulated postretirement cost for medical benefits was 10% for 1999 and was assumed to decrease gradually to 6% for the year 2005 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amount of the accumulated postretirement benefit obligation and the net postretirement benefit cost reported. To illustrate, a one percent increase or decrease in the trend rate for each year would increase or decrease the accumulated postretirement benefit obligation at December 31, 1998 by approximately $18 million and the aggregate of the service and interest cost components of net postretirement benefit cost for the year ended December 31, 1998 by approximately $2 million. (c) The Corporation and its subsidiaries have a savings plan, the Capital Accumulation Plan, in which substantially all employees are eligible to participate. Under this plan, the employer makes a matching contribution equal to 100% of each eligible employee's pre-tax elective contributions, up to 4% of the employee's compensation. Contributions are invested at the election of the employee in the Corporation's common stock or in various other investment funds. Employer contributions of $14.5 million, $15.0 million and $14.5 million were charged against income (including continuing and discontinued operations) in 1998, 1997 and 1996, respectively. (12) RESTRUCTURING CHARGE During the fourth quarter of 1997, the Corporation began an activity value analysis process to identify and eliminate low-value activities and to improve operational efficiency in order to reduce expenses and redirect resources to those current activities and new initiatives that have the greatest potential to contribute to the future results of the Corporation. Implementation began in the first quarter of 1998 and is substantially completed. This cost control initiative has resulted in approximately 500 job reductions in the home office and the branch network through a combination of early retirements, terminations and attrition. Other savings involve vendor management, consulting expenses and other operating costs. In the first quarter of 1998, the Corporation recorded a restructuring charge of $40.0 million related to the implementation of the cost control initiative. The restructuring charge relates primarily to costs associated with providing enhanced pension benefits to employees who accepted an early retirement incentive offer, severance costs and other costs. The initiative was substantially completed in 1998 with no significant differences from original estimates. 53 19 (13) REINSURANCE Premiums earned and insurance claims are reported net of reinsurance in the consolidated statements of income. The effect of reinsurance on the premiums written and earned of the property and casualty insurance subsidiaries was as follows:
Years Ended December 31 ------------------------------ 1998 1997 1996 ---- ---- ---- (in millions) Direct premiums written....... $5,842.0 $5,524.4 $5,166.5 Reinsurance assumed Royal & Sun Alliance........ -- (3.8) 202.5 Other....................... 141.9 166.7 234.3 Reinsurance ceded Royal & Sun Alliance........ -- 174.6 (269.2) Other....................... (480.4) (413.9) (560.3) -------- -------- -------- Net premiums written........ $5,503.5 $5,448.0 $4,773.8 ======== ======== ======== Direct premiums earned........ $5,624.7 $5,315.8 $5,023.5 Reinsurance assumed Royal & Sun Alliance........ -- 94.9 284.0 Other....................... 140.6 197.5 249.0 Reinsurance ceded Royal & Sun Alliance........ -- -- (348.0) Other....................... (461.5) (450.8) (639.2) -------- -------- -------- Net premiums earned......... $5,303.8 $5,157.4 $4,569.3 ======== ======== ========
The Royal & Sun Alliance Insurance Group plc is the beneficial owner of 5.6% of the Corporation's common stock. Prior to 1997, a property and casualty insurance subsidiary of the Corporation assumed on a quota share basis a portion of the property and casualty insurance business written by certain subsidiaries of Royal & Sun Alliance. Similarly, a portion of the U.S. insurance business written by the Corporation's property and casualty insurance subsidiaries was reinsured on a quota share basis with a subsidiary of Royal & Sun Alliance. Effective January 1, 1996, the reinsurance agreements with Royal & Sun Alliance were amended to reduce the amount of each company's business reinsured with the other. Effective January 1, 1997, the agreements were terminated. The changes to the agreements in 1996 and their termination in 1997 resulted in portfolio transfers of the business previously ceded to Royal & Sun Alliance back to the Corporation's property and casualty insurance subsidiaries and of the business previously assumed by the Corporation's property and casualty insurance subsidiaries back to Royal & Sun Alliance. The effect of the portfolio transfers was a reduction of ceded premiums written of $174.6 million and $91.6 million in 1997 and 1996, respectively, and a reduction of assumed premiums written of $93.6 million and $65.2 million in 1997 and 1996, respectively. The 1997 assumed reinsurance premiums written and earned from Royal & Sun Alliance include business assumed for the second half of 1996 which was reported on a lag. Reinsurance recoveries by the property and casualty insurance subsidiaries which have been deducted from insurance claims were $447.4 million, $346.8 million and $651.9 million in 1998, 1997 and 1996, respectively. The 1996 amount included recoveries of $251.4 million from the subsidiary of Royal & Sun Alliance. (14) LEASES The Corporation and its subsidiaries occupy office facilities under lease agreements which expire at various dates through 2019; such leases are generally renewed or replaced by other leases. In addition, the Corporation's subsidiaries lease data processing, office and transportation equipment. Most leases contain renewal options for increments ranging from three to five years; certain lease agreements provide for rent increases based on price-level factors. All leases are operating leases. Rent expense was as follows:
Years Ended December 31 -------------------------------- 1998 1997 1996 ---- ---- ---- (in millions) Office facilities......................... $73.8 $71.1 $67.6 Equipment................................. 13.3 12.6 11.8 ----- ----- ----- $87.1 $83.7 $79.4 ===== ===== =====
At December 31, 1998, future minimum rental payments required under non-cancellable operating leases were as follows:
Years Ending December 31 - ------------ (in millions) 1999..................................... $ 78.9 2000..................................... 75.9 2001..................................... 69.5 2002..................................... 62.9 2003..................................... 55.9 After 2003............................... 351.5 ------ $694.6 ======
54 20 (15) UNPAID CLAIMS The process of establishing loss reserves is a complex and imprecise science that reflects significant judgmental factors. This is true because claim settlements to be made in the future will be impacted by changing rates of inflation and other economic conditions, changing legislative, judicial and social environments and changes in the property and casualty insurance subsidiaries' claim handling procedures. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss and the settlement of the loss. Judicial decisions and legislative actions continue to broaden liability and policy definitions and to increase the severity of claim payments. As a result of this and other societal and economic developments, the uncertainties inherent in estimating ultimate claim costs on the basis of past experience continue to further complicate the already complex loss reserving process. The uncertainties relating to asbestos and toxic waste claims on insurance policies written many years ago are exacerbated by inconsistent court decisions and judicial and legislative interpretations of coverage that in some cases have tended to erode the clear and express intent of such policies and in others have expanded theories of liability. The industry is engaged in extensive litigation over these coverage and liability issues and is thus confronted with a continuing uncertainty in its effort to quantify these exposures. In 1993, Pacific Indemnity Company, a subsidiary of the Corporation, entered into a global settlement agreement with Continental Casualty Company (a subsidiary of CNA Financial Corporation), Fibreboard Corporation, and attorneys representing claimants against Fibreboard for all future asbestos-related bodily injury claims against Fibreboard. This agreement is subject to final appellate court approval. Pursuant to the global settlement agreement, a $1,525.0 million 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 $538.2 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. 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 in 1993 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 $635.0 million, all of which has been paid. 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. At the same time, Pacific Indemnity, Continental Casualty and Fibreboard entered into a trilateral agreement to settle all present and future asbestos-related bodily injury claims resulting from insurance policies that were, or may have been, issued to Fibreboard by the two insurers. The trilateral agreement will be triggered if the global settlement agreement is ultimately disapproved. Pacific Indemnity's obligation under the trilateral agreement is therefore similar to, and not duplicative of, that under those agreements described above. The trilateral agreement reaffirms portions of an agreement reached in March 1992 between Pacific Indemnity and Fibreboard. Among other matters, that 1992 agreement eliminates any Pacific Indemnity liability to Fibreboard for asbestos-related property damage claims. In July 1995, the United States District Court of the Eastern District of Texas approved the global settlement agreement and the trilateral agreement. The judgments approving these agreements were appealed to the United States Court of Appeals for the Fifth Circuit. In July 1996, the Fifth Circuit Court affirmed the 1995 judgments of the District Court. The objectors to the global settlement agreement appealed to the United States Supreme Court. In June 1997, the Supreme Court set aside the ruling by the Fifth Circuit Court that had approved the global settlement agreement and ordered the Fifth Circuit Court to reconsider its approval. In January 1998, the Fifth Circuit Court again affirmed the global settlement agreement. In April 1998, the objectors to the settlement petitioned the Supreme Court to review the decision. In December 1998, argument was held before the Supreme Court on the objectors' challenge. A decision is expected during 1999. The trilateral agreement was never appealed to the United States Supreme Court and is final. As a result, management continues to believe that the uncertainty of 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 that are currently before it and involve the three parties exclusively, while the approval of the global settlement is pending in court. Continental Casualty and Pacific Indemnity have dismissed disputes against each other which involved Fibreboard and were in litigation. 55 21 The property and casualty insurance subsidiaries have additional potential asbestos exposure, primarily on insureds for which excess liability coverages were written. Such exposure has increased due to the erosion of much of the underlying limits. The number of claims against such insureds and the value of such claims have increased in recent years due in part to the non-viability of other defendants. The remaining asbestos exposures are mostly peripheral defendants, including a mix of manufacturers and distributors of certain products that contain asbestos as well as premises owners. Generally, these insureds are named defendants on a regional rather than a nationwide basis. Notices of new asbestos claims and new exposures on existing claims continue to be received as more peripheral parties are drawn into litigation to replace the now defunct mines and bankrupt manufacturers. Hazardous waste sites are another significant potential exposure. Under the federal "Superfund" law and similar state statutes, when potentially responsible parties (PRPs) fail to handle the clean-up, regulators have the work done and then attempt to establish legal liability against the PRPs. The PRPs disposed of toxic materials at a waste dump site or transported the materials to the site. Insurance policies issued to PRPs were not intended to cover the clean-up costs of pollution and, in many cases, did not intend to cover the pollution itself. As the costs of environmental clean-up have become substantial, PRPs and others have increasingly filed claims with their insurance carriers. Litigation against insurers extends to issues of liability, coverage and other policy provisions. There is great uncertainty involved in estimating the property and casualty insurance subsidiaries' liabilities related to these claims. First, the liabilities of the claimants are extremely difficult to estimate. At any given clean-up site, the allocation of remediation costs among governmental authorities and the PRPs varies greatly. Second, different courts have addressed liability and coverage issues regarding pollution claims and have reached inconsistent conclusions in their interpretation of several issues. These significant uncertainties are not likely to be resolved in the near future. Uncertainties also remain as to the Superfund law itself. Superfund's taxing authority expired on December 31, 1995. It is currently not possible to predict the direction that any reforms may take, when they may occur or the effect that any changes may have on the insurance industry. Reserves for asbestos and toxic waste claims cannot be estimated with traditional loss reserving techniques that rely on historical accident year loss development factors. Case reserves and expense reserves for costs of related litigation have been established where sufficient information has been developed to indicate the involvement of a specific insurance policy. In addition, incurred but not reported reserves have been established to cover additional exposures on both known and unasserted claims. These reserves are continually reviewed and updated. 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:
1998 1997 1996 ---- ---- ---- (in millions) Gross liability, beginning of year.......................... $ 9,772.5 $9,523.7 $9,588.2 Reinsurance recoverable, beginning of year............. 1,207.9 1,767.8 1,973.7 --------- -------- -------- Net liability, beginning of year.......................... 8,564.6 7,755.9 7,614.5 --------- -------- -------- Net incurred claims and claim expenses related to Current year................ 3,712.1 3,372.3 3,053.6 Prior years................. (218.4) (65.3) (42.8) --------- -------- -------- 3,493.7 3,307.0 3,010.8 --------- -------- -------- Net payments for claims and claim expenses related to Current year................ 1,210.7 1,080.0 980.0 Prior years................. 1,797.7 1,418.3 1,889.4 --------- -------- -------- 3,008.4 2,498.3 2,869.4 --------- -------- -------- Net liability, end of year...... 9,049.9 8,564.6 7,755.9 Reinsurance recoverable, end of year................... 1,306.6 1,207.9 1,767.8 --------- -------- -------- Gross liability, end of year.... $10,356.5 $9,772.5 $9,523.7 ========= ======== ========
During 1998, the property and casualty insurance subsidiaries experienced overall favorable development of $218.4 million on net unpaid claims established as of the previous year-end. This compares with favorable development of $65.3 million and $42.8 million in 1997 and 1996, respectively. Such redundancies were reflected in operating results in these respective years. Each of the past three years benefited from favorable claim severity trends for certain liability classes; this was offset each year in varying degrees by incurred losses relating to asbestos and toxic waste claims. Management believes that the aggregate loss reserves of the property and casualty insurance subsidiaries at December 31, 1998 were adequate to cover claims for losses which had occurred, including both those known and those yet to be reported. In establishing such reserves, management considers facts currently known and the present state of the law and coverage litigation. However, given the expansion of coverage and liability by the courts and the legislatures in the past and the possibilities of similar interpretations in the future, particularly as they relate to asbestos and toxic waste claims, as well as the uncertainty in determining what scientific standards will be deemed acceptable for measuring hazardous waste site clean-up, additional increases in loss reserves may emerge which would adversely affect results in future periods. The amount cannot reasonably be estimated at the present time. 56 22 (16) SEGMENTS INFORMATION Effective December 31, 1998, the Corporation adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes new standards for reporting information about operating segments in annual financial statements and requires the reporting of selected segment information in interim reports to shareholders. The adoption of SFAS No. 131 did not result in a significant change from the Corporation's previous segment disclosures and had no effect on the Corporation's financial position or results of operations. The property and casualty operations include four reportable underwriting segments and the investment function. The underwriting segments are personal, standard commercial, specialty commercial and reinsurance assumed. The personal and commercial segments are managed separately because they target different customers. The commercial business is further distinguished by those classes of business that are generally available in broad markets and are of a more commodity nature (standard) and those classes available in more limited markets that require specialized underwriting and claim settlement (specialty). Standard commercial classes include multiple peril, casualty and workers' compensation and specialty commercial classes include property and marine, executive protection, financial institutions and other commercial classes. Reinsurance assumed is treaty reinsurance that was assumed from Royal & Sun Alliance prior to 1997. The real estate segment includes commercial development activities primarily in New Jersey and residential development activities primarily in central Florida. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note (1). Performance of the property and casualty underwriting segments is based on underwriting results before deferred policy acquisition costs and certain charges. Investment income performance is based on investment income net of investment expenses. Real estate performance is based on pretax income. Revenues, income from continuing operations before income tax and assets of each operating segment were as follows:
Years Ended December 31 ------------------------------ 1998 1997 1996 ---- ---- ---- Revenues (in millions) Property and casualty insurance Premiums earned Personal.......................................... $1,304.3 $1,188.1 $ 969.7 Standard commercial............................... 1,980.6 1,906.1 1,642.4 Specialty commercial.............................. 2,018.9 1,968.3 1,673.2 Reinsurance assumed............................... -- 94.9 284.0 -------- -------- -------- 5,303.8 5,157.4 4,569.3 Investment income..................................... 760.0 721.4 656.2 -------- -------- -------- Total property and casualty insurance............. 6,063.8 5,878.8 5,225.5 Real estate............................................... 82.2 616.1 319.8 -------- -------- -------- 6,146.0 6,494.9 5,545.3 Corporate investment income............................... 61.9 63.9 55.4 Realized investment gains................................. 141.9 105.2 79.8 -------- -------- -------- Total revenues.................................... $6,349.8 $6,664.0 $5,680.5 ======== ======== ======== Income (loss) from continuing operations before income tax Property and casualty insurance Underwriting Personal.......................................... $ 168.1 $ 161.5 $ 57.9 Standard commercial............................... (360.0) (312.3) (250.4) Specialty commercial.............................. 133.5 198.0 191.9 Reinsurance assumed............................... -- 18.2 12.4 -------- -------- -------- (58.4) 65.4 11.8 Increase in deferred policy acquisition costs......... 51.8 75.7 42.5 Other charges......................................... (17.4) (24.1) (24.0) -------- -------- -------- Underwriting income (loss)............................ (24.0) 117.0 30.3 Investment income..................................... 748.9 711.2 646.1 Restructuring charge.................................. (40.0) -- -- -------- -------- -------- Total property and casualty insurance............. 684.9 828.2 676.4 Real estate loss.......................................... (3.5) (8.6) (235.9) -------- -------- -------- 681.4 819.6 440.5 Corporate income.......................................... 26.4 49.3 26.6 Realized investment gains................................. 141.9 105.2 79.8 -------- -------- -------- Total income from continuing operations before income tax...................................... $ 849.7 $ 974.1 $ 546.9 ======== ======== ========
57 23
December 31 --------------------------------- 1998 1997 1996 ---- ---- ---- Assets (in millions) Property and casualty insurance........................... $18,954.2 $17,592.4 $16,577.9 Real estate............................................... 770.0 815.2 1,641.3 --------- --------- --------- 19,724.2 18,407.6 18,219.2 Corporate................................................. 1,108.2 1,424.7 959.8 Adjustments and eliminations.............................. (86.4) (216.7) (83.5) Net assets of discontinued operations..................... -- -- 843.4 --------- --------- --------- Total assets...................................... $20,746.0 $19,615.6 $19,938.9 ========= ========= =========
Property and casualty assets are available for payment of claims and expenses for all classes of business; therefore, such assets and the related investment income have not been allocated to underwriting segments. 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. Prior to 1997, international business was also obtained from treaty reinsurance assumed from Royal & Sun Alliance. Revenues of the property and casualty insurance subsidiaries by geographic area were as follows:
Years Ended December 31 ----------------------------------- 1998 1997 1996 ---- ---- ---- (in millions) Revenues United States............................................. $ 5,116.6 $ 4,886.8 $ 4,145.7 International............................................. 947.2 992.0 1,079.8 --------- --------- --------- Total................................................... $ 6,063.8 $ 5,878.8 $ 5,225.5 ========= ========= =========
(17) EARNINGS PER SHARE Basic earnings per common share is based on income from continuing operations divided by the weighted average number of common shares outstanding during each year. Diluted earnings per share assumes the conversion of all outstanding convertible debt and the maximum dilutive effect of awards under stock-based compensation plans. The following table sets forth the computation of basic and diluted income from continuing operations per share:
Years Ended December 31 -------------------------------- 1998 1997 1996 ---- ---- ---- (in millions except for per share amounts) Basic earnings per share: Income from continuing operations......................... $707.0 $769.5 $486.2 ====== ====== ====== Weighted average number of common shares outstanding...... 165.6 171.6 174.2 ====== ====== ====== Income from continuing operations per share............... $ 4.27 $ 4.48 $ 2.79 ====== ====== ====== Diluted earnings per share: Income from continuing operations......................... $707.0 $769.5 $486.2 After-tax interest expense on 6% exchangeable subordinated notes................................................... -- 3.3 9.7 ------ ------ ------ Income from continuing operations for computing diluted earnings per share...................................... $707.0 $772.8 $495.9 ====== ====== ====== Weighted average number of common shares outstanding...... 165.6 171.6 174.2 Additional shares from assumed conversion of 6% exchangeable subordinated notes as if each $1,000 of principal amount had been converted at issuance into 23.256 shares of common stock........................... -- 1.8 5.8 Additional shares from assumed exercise of stock-based compensation awards..................................... 3.0 2.8 1.6 ------ ------ ------ Weighted average number of common shares and potential common shares assumed outstanding for computing diluted earnings per share...................................... 168.6 176.2 181.6 ====== ====== ====== Income from continuing operations per diluted share....... $ 4.19 $ 4.39 $ 2.73 ====== ====== ======
For additional disclosure regarding the stock-based compensation awards, see Note (10). 58 24 (18) FAIR VALUES OF FINANCIAL INSTRUMENTS Fair values of financial instruments are based on quoted market prices where available. Fair values of financial instruments for which quoted market prices are not available are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rates and the estimated amounts and timing of future cash flows. In such instances, the derived fair value estimates cannot be substantiated by comparison to independent markets and are not necessarily indicative of the amounts that could be realized in immediate settlement of the instrument. Certain financial instruments, particularly insurance contracts, are excluded from fair value disclosure requirements. The methods and assumptions used to estimate the fair value of financial instruments are as follows: (i) The carrying value of short term investments approximates fair value due to the short maturities of these investments. (ii) Fair values of fixed maturities with active markets are based on quoted market prices. For fixed maturities that trade in less active markets, fair values are obtained from independent pricing services. Fair values of fixed maturities are principally a function of current interest rates. Care should be used in evaluating the significance of these estimated market values which can fluctuate based on such factors as interest rates, inflation, monetary policy and general economic conditions. (iii) Fair values of equity securities are based on quoted market prices. (iv) Fair values of real estate mortgages and notes receivable are estimated individually as the value of the discounted future cash flows of the loan, subject to the estimated fair value of the underlying collateral. The cash flows are discounted at rates based on a U.S. Treasury security with a maturity similar to the loan, adjusted for credit risk. (v) Long term debt consists of a term loan, mortgages payable and long term notes. The fair value of the term loan approximates the carrying value because such loan consists of variable-rate debt that reprices frequently. Fair values of mortgages payable are estimated using discounted cash flow analyses. Fair values of long term notes are based on prices quoted by dealers. The carrying values and fair values of financial instruments were as follows:
December 31 ------------------------------------------- 1998 1997 --------------------- ------------------- Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- ----- (in millions) Assets Invested assets Short term investments.................................. $ 344.2 $ 344.2 $ 725.1 $ 725.1 Fixed maturities (Note 4) Held-to-maturity...................................... 2,002.2 2,140.2 2,200.6 2,347.2 Available-for-sale.................................... 11,316.7 11,316.7 10,252.8 10,252.8 Equity securities....................................... 1,092.2 1,092.2 871.1 871.1 Real estate mortgages and notes receivable (Note 5)....... 105.2 106.9 123.8 121.0 Liabilities Long term debt (Note 8)................................... 607.5 635.2 398.6 402.8
59 25 (19) COMPREHENSIVE INCOME In the first quarter of 1998, the Corporation adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for the reporting and presentation of comprehensive income and its components. Comprehensive income is defined as all changes in shareholders' equity, except those arising from transactions with shareholders. For the Corporation, comprehensive income includes net income, changes in unrealized appreciation or depreciation of investments carried at market value and changes in foreign currency translation gains or losses. SFAS No. 130 only requires the presentation of additional information in the financial statements; therefore, the adoption of SFAS No. 130 had no effect on the Corporation's financial position or results of operations. The components of other comprehensive income or loss were as follows:
Years Ended December 31 ------------------------------------------------------------------------------------------- 1998 1997 1996 --------------------------- --------------------------- ----------------------------- Income Income Income Before Tax Before Tax Before Tax Tax (Credit) Net Tax (Credit) Net Tax (Credit) Net ------ -------- --- ------ -------- --- ------ -------- --- (in millions) Continuing operations Unrealized holding gains (losses) arising during the year......... $164.3 $57.5 $106.8 $353.5 $123.7 $229.8 $ (22.5) $ (8.0) $ (14.5) Less: reclassification adjustment for realized gains included in net income...................... 141.9 49.7 92.2 105.2 36.8 68.4 79.8 27.8 52.0 ------ ----- ------ ------ ------ ------ ------- ------ ------- Net unrealized gains (losses) recognized in other comprehensive income............ 22.4 7.8 14.6 248.3 86.9 161.4 (102.3) (35.8) (66.5) Foreign currency translation losses.......................... (14.2) (3.9) (10.3) (15.3) (5.2) (10.1) (15.1) (2.9) (12.2) ------ ----- ------ ------ ------ ------ ------- ------ ------- Total other comprehensive income (loss) from continuing operations.................... $ 8.2 $ 3.9 4.3 $233.0 $ 81.7 151.3 $(117.4) $(38.7) (78.7) ====== ===== ====== ====== ======= ====== Discontinued operations, net...... -- -- (40.7) ------ ------ ------- Total other comprehensive income (loss)........................ $ 4.3 $151.3 $(119.4) ====== ====== =======
(20) SHAREHOLDERS' EQUITY (a) The authorized but unissued preferred shares may be issued in one or more series and the shares of each series shall have such rights as fixed by the Board of Directors. (b) On March 1, 1996, 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 ----------------------------------------- 1998 1997 1996 ---- ---- ---- (number of shares) Common stock issued Balance, beginning of year................................ 176,037,850 176,084,173 87,819,355 Two-for-one stock split................................... -- -- 87,819,355 Shares issued upon exchange of long term debt............. -- 2,440 480,464 Share activity under option and incentive plans........... (48,648) (48,763) (35,001) ----------- ----------- ----------- Balance, end of year.................................. 175,989,202 176,037,850 176,084,173 ----------- ----------- ----------- Treasury stock Balance, beginning of year................................ 7,320,410 1,223,182 518,468 Two-for-one stock split................................... -- -- 518,468 Repurchase of shares...................................... 8,203,000 12,940,500 1,700,000 Shares issued upon exchange of long term debt............. -- (5,314,125) -- Share activity under option and incentive plans........... (1,801,034) (1,529,147) (1,513,754) ----------- ----------- ----------- Balance, end of year.................................. 13,722,376 7,320,410 1,223,182 ----------- ----------- ----------- Common stock outstanding, end of year................. 162,266,826 168,717,440 174,860,991 =========== =========== ===========
60 26 (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 buy, upon occurrence of certain events, one one-hundredth of a share of preferred stock at an exercise price of $225. The rights generally become exercisable if a person or group acquires 25% or more of the Corporation's common stock, or commences a tender or exchange offer that, upon consummation, would result in a person or group owning 25% or more of the Corporation's common stock. On March 12, 1999, the Board of Directors approved the redemption of the rights, which were scheduled to expire on June 12, 1999, for $.01 per right as of March 31, 1999. On March 12, 1999, the Board of Directors also adopted a new shareholder rights plan, under which the rights attach on March 31, 1999. Under the new plan, each shareholder has one right for each share of common stock of the Corporation held. Each right entitles the holder to purchase from the Corporation one one-thousandth of a share of Series B Participating Cumulative Preferred Stock at an exercise price of $240. The rights 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 20% or more of the outstanding shares of the Corporation's common stock or announces a tender or exchange offer which, if consummated, would result in that person or group owning 20% or more of the outstanding shares of the Corporation's common stock. In the event that any person or group acquires 20% or more of the outstanding shares of the Corporation's common stock, each right will entitle the holder, other than such person or group, to purchase that number of shares of the Corporation's common stock having a market value of two times the exercise price of the right. In the event that, following the acquisition of 20% or more of the Corporation's outstanding common stock by a person or group, the Corporation is acquired in a merger or other business combination transaction or 50% or more of the Corporation's assets or earning power is sold, each right will entitle the holder to purchase common stock of the acquiring company having a value equal to two times the exercise price of the right. At any time after any person or group acquires 20% or more of the Corporation's common stock, but before such person or group acquires 50% or more of such stock, the Corporation may exchange all or part of the rights, other than the rights owned by such person or group, for shares of the Corporation's common stock at an exchange ratio of one share of common stock per right. The rights do not have the right to vote or to receive dividends. The rights may be redeemed in whole, but not in part, at a price of $.01 per right by the Corporation at any time until the tenth day after the acquisition of 20% or more of the Corporation's outstanding common stock by a person or group. The rights will expire at the close of business on March 12, 2009, unless previously exchanged or redeemed by the Corporation. (d) The Corporation's insurance subsidiaries are required to file annual statements with insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis). For such subsidiaries, generally accepted accounting principles (GAAP) differ in certain respects from statutory accounting practices. A comparison of shareholders' equity on a GAAP basis and policyholders' surplus on a statutory basis is as follows:
December 31 ------------------------------------------------ 1998 1997 --------------------- --------------------- GAAP Statutory GAAP Statutory ---- --------- ---- --------- (in millions) Property and casualty insurance subsidiaries................ $4,570.0 $2,836.9 $4,162.5 $2,596.0 ======== ======== Real estate subsidiary...................................... 544.7 264.4 Corporate and eliminations.................................. 529.4 1,230.2 -------- -------- $5,644.1 $5,657.1 ======== ========
61 27 A comparison of GAAP and statutory net income is as follows:
Years Ended December 31 --------------------------------------------------------------------------- 1998 1997 1996 --------------------- --------------------- --------------------- GAAP Statutory GAAP Statutory GAAP Statutory -------- --------- -------- --------- -------- --------- (in millions) Property and casualty insurance subsidiaries*..... $672.4 $663.1 $752.3 $652.4 $453.3 $560.2 Discontinued life and health insurance operations...................................... -- -- -- -- 26.5** 34.0 ------ ------ ------ ------ ------ ------ 672.4 $663.1 752.3 $652.4 479.8 $594.2 ====== ====== ====== Corporate and eliminations........................ 34.6 17.2 32.9 ------ ------ ------ $707.0 $769.5 $512.7 ====== ====== ======
* A property and casualty subsidiary owned the real estate subsidiary until December 1997, when the real estate subsidiary was distributed to the Corporation in the form of a dividend. ** Includes the $22.0 million 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 1998, these subsidiaries paid cash dividends to the Corporation totaling $280.0 million. The maximum dividend distribution that may be made by the property and casualty insurance subsidiaries to the Corporation during 1999 without prior approval is approximately $590 million. (21) PENDING TRANSACTIONS (a) On February 8, 1999, the Corporation announced that it entered into a definitive merger agreement under which it would acquire Executive Risk Inc. Executive Risk is a specialty insurance company offering directors and officers, errors and omissions and professional liability coverages. Executive Risk's gross and net written premiums for 1998 were approximately $500 million and $280 million, respectively. The acquisition will be accounted for using the purchase method of accounting. The agreement provides that Executive Risk shareholders will receive 1.235 shares of the Corporation's common stock for each outstanding common share of Executive Risk. The agreement contemplates that approximately 13,730,000 shares of common stock of the Corporation will be issued to Executive Risk shareholders and approximately 2,300,000 shares of common stock of the Corporation will be reserved for issuance upon exercise of Executive Risk stock options. The total value of the transaction is expected to be approximately $850 million. Completion of the acquisition is subject to approval by Executive Risk shareholders and various regulatory authorities. Closing is expected in the second quarter of 1999. (b) The Corporation has agreed to purchase a 27% interest in Hiscox plc, a leading U.K. personal and commercial specialty insurer, for approximately $140 million. Closing of this transaction is subject to regulatory approvals which are pending. 62 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, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, cash flows and comprehensive income for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP February 24, 1999, except for Note 20(c), as to which the date is March 12, 1999 63 29 Quarterly Financial Data Summarized unaudited quarterly financial data for 1998 and 1997 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 -------------------- -------------------- -------------------- -------------------- 1998 1997 1998 1997 1998 1997 1998 1997 ---- ---- ---- ---- ---- ---- ---- ---- (in millions except for per share amounts) Revenues........................... $1,587.3 $1,576.9 $1,597.6 $1,509.6 $1,593.2 $1,568.8 $1,571.7 $2,008.7 Claims and expenses................ 1,348.0 1,331.4 1,375.2 1,270.2 1,386.0 1,322.3 1,390.9 1,766.0 Federal and foreign income tax..... 47.5 53.4 38.2 50.7 33.8 52.5 23.2 48.0 -------- -------- -------- -------- -------- -------- -------- -------- Net income..................... $ 191.8(a) $ 192.1 $ 184.2 $ 188.7 $ 173.4 $ 194.0 $ 157.6 $ 194.7 ======== ======== ======== ======== ======== ======== ======== ======== Basic earnings per share........... $ 1.14(a) $ 1.11 $ 1.10 $ 1.10 $ 1.05 $ 1.12 $ .98 $ 1.15 ======== ======== ======== ======== ======== ======== ======== ======== Diluted earnings per share......... $ 1.12(a) $ 1.08 $ 1.08 $ 1.08 $ 1.04 $ 1.10 $ .95 $ 1.13 ======== ======== ======== ======== ======== ======== ======== ======== Underwriting ratios Losses to premiums earned........ 62.8% 63.9% 67.0% 63.3% 67.4% 65.3% 68.1% 65.5% Expenses to premiums written..... 33.3 32.4 33.3 32.0 33.8 32.2 33.6 32.9 -------- -------- -------- -------- -------- -------- -------- -------- Combined....................... 96.1% 96.3% 100.3% 95.3% 101.2% 97.5% 101.7% 98.4% ======== ======== ======== ======== ======== ======== ======== ========
(a) Net income has been reduced by a net charge of $26.0 million or $.15 per share for the after-tax effect of a $40.0 million restructuring charge. 64 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 1998 and 1997.
1998 ---------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Common stock prices High.................................................... $81.44 $82.63 $88.25 $73.38 Low..................................................... 71.00 73.31 62.50 57.00 Dividends declared.......................................... .31 .31 .31 .31
1997 ---------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Common stock prices High.................................................... $62.25 $67.63 $71.75 $78.13 Low..................................................... 53.00 51.25 65.56 65.88 Dividends declared.......................................... .29 .29 .29 .29
At March 8, 1999, there were approximately 7,650 common shareholders of record. 65 EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 THE CHUBB CORPORATION EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Significant subsidiaries at December 31, 1998 of The Chubb Corporation, a New Jersey Corporation, and their subsidiaries (indented), together with the percentages of ownership, are set forth below.
PERCENTAGE PLACE OF OF SECURITIES INCORPORATION OWNED COMPANY ------------- ------------- Federal Insurance Company................................... Indiana 100% Vigilant Insurance Company............................. New York 100 Chubb Insurance Company of Australia Limited...... Australia 100 Pacific Indemnity Company.............................. Wisconsin 100 Northwestern Pacific Indemnity Company............ Oregon 100 Texas Pacific Indemnity Company................... Texas 100 Great Northern Insurance Company....................... Minnesota 100 Chubb Insurance Company of New Jersey.................. New Jersey 100 Chubb Custom Insurance Company......................... Delaware 100 Chubb National Insurance Company....................... Indiana 100 Chubb Indemnity Insurance Company...................... New York 100 CC Canada Holdings Ltd................................. Canada 100 Chubb Insurance Company of Canada................. Canada 100 Chubb Insurance Company of Europe, S.A................. Belgium 100 Chubb Atlantic Indemnity Ltd. .............................. Bermuda 100 DHC Corporation........................................ Delaware 100 Chubb do Brasil Companhia de Seguros.............. Brazil 99 Bellemead Development Corporation........................... Delaware 100 Chubb Capital Corporation................................... New Jersey 100
- --------------- Certain other subsidiaries of the Corporation and its consolidated subsidiaries have been omitted since, in the aggregate, they would not constitute a significant subsidiary. 47 EX-27 6 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-31-1998 JAN-01-1998 DEC-31-1998 11,317 2,002 2,140 1,092 0 0 14,755 8 114 729 20,746 10,357 2,916 0 0 608 176 0 0 5,468 20,746 5,304 822 142 82 3,494 1,464 370 850 143 707 0 0 0 707 4.27 4.19 8,565 3,712 (218) 1,211 1,798 9,050 (218) 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 ($1,307), AS PRESCRIBED BY SFAS NO. 113. SUCH AMOUNTS ARE INCLUDED IN TOTAL ASSETS. UNEARNED-PREMIUMS EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUMS ($135) AS PRESCRIBED BY SFAS NO. 113. THIS PREPAID AMOUNT IS INCLUDED IN TOTAL ASSETS. NOTES-PAYABLE INCLUDES LONG-TERM DEBT OF $608. 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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