-----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, PZ40S/kTPq+mCuvakuMYt/hOvnOD2tQXV8cCUqyXHFVX+eLcQNbfDyI+H9lVTF2y M5kr6YJh64lyBoKU8vEF9A== 0000950123-00-002732.txt : 20000328 0000950123-00-002732.hdr.sgml : 20000328 ACCESSION NUMBER: 0000950123-00-002732 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 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: 579268 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 27, 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1999 [ ] 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 B 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 $9,247,973,082 as of March 17, 2000. 174,691,167 Number of shares of common stock outstanding as of March 17, 2000 DOCUMENTS INCORPORATED BY REFERENCE Portions of The Chubb Corporation 1999 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 25, 2000 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 11,900 persons worldwide on December 31, 1999. In July 1999, the Corporation completed its acquisition of Executive Risk Inc. The results of operations of Executive Risk are included in the Corporation's consolidated results of operations from the date of acquisition. Executive Risk offers directors and officers, errors and omissions and professional liability coverages through its insurance subsidiaries, Executive Risk Indemnity Inc., Executive Risk Specialty Insurance Company and Quadrant Indemnity Company. Additional information related to the Corporation's acquisition of Executive Risk is included in Note (3) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1999 Annual Report to Shareholders. Revenues, income before income tax and assets for each operating segment for the three years ended December 31, 1999 are included in Note (16) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1999 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, 1999 are included in Note (16) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1999 Annual Report to Shareholders. PROPERTY AND CASUALTY INSURANCE The principal members of the Property and Casualty Insurance Group (the Group) are 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, Executive Risk Indemnity Inc., Executive Risk Specialty Insurance Company and Quadrant Indemnity Company in the United States, as well as 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. Effective January 1, 2000, Federal became the manager of Executive Risk Indemnity Inc., Executive Risk Specialty Insurance Company and Quadrant Indemnity Company. 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. 2 3 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) 1997............................. $5,524.4 $162.9 $239.3 $5,448.0 1998............................. 5,842.0 141.9 480.4 5,503.5 1999............................. 6,042.6 275.2 616.7 5,701.1
- --------------- (a) Intercompany items eliminated. Reinsurance premiums assumed and ceded in 1997 were affected by changes in reinsurance agreements with the Royal & Sun Alliance Insurance Group plc (Sun Alliance). These changes are described in Note (8) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1999 Annual Report to Shareholders. 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 1999 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 1999, approximately 82% 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% and New Jersey, 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 ------- -------- 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 1999............................. 5,701.1 5,652.0 70.3 32.5 102.8 --------- --------- ------- ------- --------- Total for five years ended December 31, 1999............. $25,732.4 $24,829.7 66.6% 32.5% 99.1% ========= ========= ======= ======= =========
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 1999 Annual Report to Shareholders. 3 4 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, 1999 and 1998, such ratio for the Group was 1.76 and 1.95, respectively. Producing and Servicing of Business In the United States and Canada, the Group is represented by approximately 4,500 independent agents and accepts business on a regular basis from an estimated 1,100 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 7 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 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. Reinsurance contracts do not relieve the Group of its primary obligation to the policyholders. The existing reinsurance program of the Executive Risk insurance subsidiaries at the time of the acquisition was designed to limit the loss retained from a loss occurrence to an amount lower than that typically retained by the Group. Executive Risk has utilized reinsurance to a greater extent because its size has limited the amount of risk it could retain. Most of Executive Risk's reinsurance program has been left in place and will be reviewed during 2000. 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 unpredict- 4 5 able. 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 globally and develops strategies to manage this exposure through individual risk selection, subject to regulatory constraints, and through the purchase of catastrophe reinsurance. The Group uses modeling techniques and concentration management tools that allow it to better monitor and control catastrophe exposures. 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 78% of losses between $100 million and $450 million in the United States and approximately 90% of losses between $25 million and $175 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. 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 65% of the Group's net unpaid claims and claim adjustment expenses at December 31, 1999 were for incurred but not reported (IBNR) losses--claims which had not yet been reported to the Group, some of which were not yet known to the insured, and future development on reported claims. In spite of this imprecision, financial reporting requirements dictate that insurance companies report a single amount as the estimate of unpaid claims and claim adjustment expenses as of each evaluation date. These estimates are continually reviewed and updated. Any resulting adjustments are reflected in current operating results. The Group's estimates of losses for reported claims are established judgmentally on an individual case basis. Such estimates are based on the Group's particular experience with the type of risk involved and its knowledge of the circumstances surrounding each individual claim. These estimates are reviewed on a regular basis or as additional facts become known. The reliability of the estimation process is monitored through comparison with ultimate settlements. The Group's estimates of losses for unreported claims are principally derived from analyses of historical patterns of the development of paid and reported losses by accident year for each class of business. This process relies on the basic assumption that past experience, adjusted for the effects of current developments and likely trends, is an appropriate basis for predicting future outcomes. For certain classes of business where anticipated loss experience is less predictable because of the small number of claims and/or erratic claim severity patterns, the Group's estimates are based on both expected and actual reported losses. Salvage and subrogation estimates are developed from patterns of actual recoveries. The Group's estimates of unpaid claim adjustment expenses are based on analyses of the relationship of projected ultimate claim adjustment expenses to projected ultimate losses for each class of business. Claim staff has discretion to override these expense formulas where judgment indicates such action is appropriate. The Group's estimates of reinsurance recoverable related to reported and unreported claims and claim adjustment expenses represent the portion of such liabilities that will be recovered from reinsurers. Amounts recoverable from reinsurers are recognized as assets at the same time and in a manner consistent with the liabilities associated with the reinsured policies. 5 6 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. 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, 1999, 1998 and 1997:
YEARS ENDED DECEMBER 31 ---------------------------------- 1999 1998 1997 ---- ---- ---- (IN MILLIONS) Net liability, beginning of year................... $ 9,049.9 $ 8,564.6 $7,755.9 --------- --------- -------- Net increase related to acquisition of Executive Risk (net of reinsurance recoverable of $339.5).......................................... 605.8 -- -- --------- --------- -------- Net incurred claims and claim adjustment expenses Provision for claims occurring in the current year.......................................... 4,147.6 3,712.1 3,372.3 Decrease in estimates for claims occurring in prior years................................... (205.6) (218.4) (65.3) --------- --------- -------- 3,942.0 3,493.7 3,307.0 --------- --------- -------- Net payments for claims and claim adjustment expenses related to Current year..................................... 1,278.9 1,210.7 1,080.0 Prior years...................................... 2,570.0 1,797.7 1,418.3 --------- --------- -------- 3,848.9 3,008.4 2,498.3 --------- --------- -------- Net liability, end of year......................... 9,748.8 9,049.9 8,564.6 Reinsurance recoverable, end of year............... 1,685.9 1,306.6 1,207.9 --------- --------- -------- Gross liability, end of year....................... $11,434.7 $10,356.5 $9,772.5 ========= ========= ========
As reestimated at December 31, 1999, the liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, as established at the previous year-end was redundant by $205.6 million. This compares with favorable development of $218.4 million and $65.3 million during 1998 and 1997, 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 experience for certain liability classes; this was offset in part by losses incurred relating to asbestos and toxic waste claims of $46.8 million, $67.8 million and $125.2 million in 1999, 1998 and 1997, respectively. The higher favorable development in 1999 and 1998 compared with 1997 was due to more favorable loss experience for executive protection and excess liability coverages as well as the substantially lower incurred losses related to asbestos and toxic waste claims. As a result of the termination of the reinsurance agreements with Sun Alliance, there were portfolio transfers of gross loss reserves and reinsurance recoverable as of January 1, 1997. The effect of these portfolio transfers was to increase net loss reserves by $286.2 million in 1997 and decrease paid losses by the same amount. The loss portfolio transfers had no effect on incurred claims and claim adjustment expenses. Unpaid claims and claim adjustment expenses, net of reinsurance recoverable, increased by $698.9 million in 1999, $485.3 million in 1998 and $808.7 million in 1997. The increase in 1999 includes $605.8 million of net reserves assumed in July upon the acquisition of Executive Risk. The 1999 increase would have been $548.7 million greater except that loss reserves were reduced by payments in that amount 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. 6 7 The Fibreboard settlement is further discussed in Item 7 of this report on pages 21 and 22. The increase in net loss reserves in 1997 includes the effect of the portfolio transfers with Sun Alliance. Excluding the Fibreboard reserves, the effect of the Executive Risk reserves assumed and the effect of the portfolio transfers, loss reserves, net of reinsurance recoverable, increased by $641.8 million or 8% in 1999, $485.3 million or 6% in 1998, and $516.5 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. 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 1999 was flat compared with the number at year-end 1998, which was in turn 4% higher than that at year-end 1997. 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, 1999, 1998 and 1997. Reinsurance recoveries related to such claims are not significant.
YEARS ENDED DECEMBER 31 ------------------------------------------------------------------------------------------------- 1999 1998 1997 ------------------------------ ------------------------------ ------------------------------- FIBREBOARD ALL FIBREBOARD ALL FIBREBOARD ALL RELATED OTHER TOTAL RELATED OTHER TOTAL RELATED OTHER TOTAL ---------- ----- ----- ---------- ----- ----- ---------- ----- ----- (IN MILLIONS) Net liability, beginning of year..................... $548.7 $527.0 $1,075.7 $548.7 $543.7 $1,092.4 $542.7 $415.9 $ 958.6 Net incurred claims and claim adjustment expenses................. -- 46.8 46.8 -- 67.8 67.8 6.0 119.2 125.2 Net payments for claims.... 548.7 49.3 598.0 -- 84.5 84.5 -- (8.6)(a) (8.6) ------ ------ -------- ------ ------ -------- ------ ------ -------- Net liability, end of year..................... $ -- $524.5 $ 524.5 $548.7 $527.0 $1,075.7 $548.7 $543.7 $1,092.4 ====== ====== ======== ====== ====== ======== ====== ====== ========
- --------------- (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 1,600 asbestos claims outstanding at December 31, 1999 compared with 2,000 asbestos claims outstanding at December 31, 1998 and 3,700 asbestos claims outstanding at December 31, 1997. In 1999, approximately 200 claims were opened and 600 claims were closed. In 1998, approximately 500 claims were opened and 2,200 claims were closed, including claims "closed" to adjust the data base to the methodology implemented in 1998. In 1997, approximately 1,300 claims were opened and 1,500 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 600 toxic waste claims outstanding at December 31, 1999 compared with 650 toxic waste claims outstanding at December 31, 1998 and 800 toxic waste claims outstanding at December 31, 1997. Approximately 300 claims were opened in 1999, 250 claims were opened in 1998 and 300 claims were opened in 1997. There were approximately 350 claims closed in 1999, 400 claims closed in 1998 and 300 claims closed in 1997. Generally, a toxic waste claim is established for each lawsuit, or alleged equivalent, against an insured where potential liability has been determined to exist 7 8 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 1999. The amounts in the table for the years ended December 31, 1989 through 1998 do not include Executive Risk's unpaid claims and claim adjustment expenses. The top line of the table shows the estimated liability for unpaid claims and claim adjustment expenses recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and loss adjustment expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Group. The upper section of the table shows the reestimated amount of the previously recorded net liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims for each individual year. The increase or decrease is reflected in the current year's operating results. The "cumulative deficiency (redundancy)" as shown in the table represents the aggregate change in the reserve estimates from the original balance sheet dates through December 31, 1999. 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, 1989, 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 1989 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 1989 through 1998, there was favorable development for certain liability classes as the result of favorable loss experience. 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 1989 through 1992 in particular reflect the effects of the $675 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 1989 column, as of December 31, 1999 the Group had paid $3,922.1 million of the currently estimated $4,798.9 million of claims and claim adjustment expenses that were unpaid at the end of 1989; thus, an estimated $876.8 million of losses incurred through 1989 remain unpaid as of December 31, 1999, approximately 60% 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, 1999. 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 1989 1990 1991 1992 1993 1994 1995 1996 ---------- ---- ---- ---- ---- ---- ---- ---- ---- (IN MILLIONS) Net Liability for Unpaid Claims and Claim Adjustment Expenses........... $3,880.1 $4,301.1 $4,743.9 $5,267.6 $6,450.0 $6,932.9 $7,614.5 $7,755.9 Net Liability Reestimated as of: One year later..................... 3,846.2 4,272.3 4,716.3 5,932.4 6,420.3 6,897.1 7,571.7 7,690.6 Two years later.................... 3,854.2 4,244.7 5,368.5 5,904.1 6,363.1 6,874.5 7,520.9 7,419.6 Three years later.................. 3,839.8 4,933.0 5,336.5 5,843.5 6,380.4 6,829.8 7,256.8 6,986.2 Four years later................... 4,567.4 4,941.7 5,302.6 5,894.6 6,338.1 6,605.4 6,901.5 Five years later................... 4,602.5 4,969.5 5,389.5 5,863.3 6,150.1 6,352.2 Six years later.................... 4,686.3 5,079.3 5,375.3 5,738.4 5,904.9 Seven years later.................. 4,800.4 5,094.2 5,303.9 5,582.1 Eight years later.................. 4,817.2 5,058.8 5,203.3 Nine years later................... 4,810.6 5,002.6 Ten years later.................... 4,798.9 Cumulative Net Deficiency (Redundancy)........................ 918.8 701.5 459.4 314.5 (545.1) (580.7) (713.0) (769.7) Cumulative Net Deficiency Related to Asbestos and Toxic Waste Claims..... 2,015.9 1,870.9 1,623.1 1,463.2 687.5 572.3 390.5 239.8 Cumulative Amount of Net Liability Paid as of: One year later..................... 880.4 919.1 931.2 1,039.9 1,272.0 1,250.7 1,889.4 1,418.3 Two years later.................... 1,383.9 1,407.2 1,479.9 1,858.5 1,985.7 2,550.7 2,678.2 2,488.2 Three years later.................. 1,715.9 1,808.7 2,083.0 2,332.3 3,015.8 3,073.7 3,438.8 3,757.0 Four years later................... 1,958.6 2,292.0 2,386.9 3,181.4 3,264.5 3,589.8 4,457.6 Five years later................... 2,346.9 2,490.2 3,125.8 3,323.0 3,624.2 4,444.4 Six years later.................... 2,500.9 3,174.7 3,200.4 3,603.5 4,367.9 Seven years later.................. 3,120.6 3,200.4 3,412.7 4,307.7 Eight years later.................. 3,126.5 3,380.5 4.095.5 Nine years later................... 3,278.2 4,040.1 Ten years later.................... 3,922.1 Gross Liability, End of Year......... $7,220.9 $8,235.4 $8,913.2 $9,588.2 $9,523.7 Reinsurance Recoverable, End of Year............................... 1,953.3 1,785.4 1,980.3 1,973.7 1,767.8 -------- -------- -------- -------- -------- Net Liability, End of Year........... $5,267.6 $6,450.0 $6,932.9 $7,614.5 $7,755.9 ======== ======== ======== ======== ======== Reestimated Gross Liability.......... $7,577.4 $7,883.4 $8,500.6 $8,980.7 $8,781.7 Reestimated Reinsurance Recoverable.. 1,995.3 1,978.5 2,148.4 2,079.2 1,795.5 -------- -------- -------- -------- -------- Reestimated Net Liability............ $5,582.1 $5,904.9 $6,352.2 $6,901.5 $6,986.2 ======== ======== ======== ======== ======== Cumulative Gross Deficiency (Redundancy)....................... $ 356.5 $ (352.0) $ (412.6) $ (607.5) $ (742.0) ======== ======== ======== ======== ======== DECEMBER 31 -------------------------------- YEAR ENDED 1997 1998 1999 ---------- ---- ---- ---- (IN MILLIONS) Net Liability for Unpaid Claims and Claim Adjustment Expenses........... $8,564.6 $9,049.9 $ 9,748.8 Net Liability Reestimated as of: One year later..................... 8,346.2 8,854.8 Two years later.................... 7,899.8 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)........................ (664.8) (195.1) Cumulative Net Deficiency Related to Asbestos and Toxic Waste Claims..... 114.6 46.8 Cumulative Amount of Net Liability Paid as of: One year later..................... 1,797.7 2,520.1 Two years later.................... 3,444.2 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......... $9,772.5 $10,356.5 $11,434.7 Reinsurance Recoverable, End of Year............................... 1,207.9 1,306.6 1,685.9 -------- --------- --------- Net Liability, End of Year........... $8,564.6 $ 9,049.9 $ 9,748.8 ======== ========= ========= Reestimated Gross Liability.......... $9,104.8 $10,159.3 Reestimated Reinsurance Recoverable.. 1,205.0 1,304.5 -------- --------- Reestimated Net Liability............ $7,899.8 $ 8,854.8 ======== ========= Cumulative Gross Deficiency (Redundancy)....................... $ (667.7) $ (197.2) ======== =========
- --------------- The amounts for the years 1989 through 1998 do not include Executive Risk's unpaid claims and claim adjustment expenses. During the period from the date Executive Risk was acquired through December 31, 1999, the decrease in its estimates for claims occurring in prior years was $10.5 million. The cumulative deficiencies for the years 1989 through 1992 include the effect of the $675 million increase in claims and claim adjustment expenses related to the Fibreboard settlement. 9 10 Members of the Group are required to file annual statements with insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis). The differences between the liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, reported in the accompanying consolidated financial statements in accordance with generally accepted accounting principles (GAAP) and that reported in the annual statutory statements of the U.S. subsidiaries are as follows:
DECEMBER 31 -------------------- 1999 1998 ---- ---- (IN MILLIONS) Net liability reported on a statutory basis--U.S. subsidiaries.............................................. $9,032.6 $8,470.4 Additions (reductions): Unpaid claims and claim adjustment expenses of foreign subsidiaries........................................... 720.5 659.7 Other reserve differences................................. (4.3) (80.2) -------- -------- Net liability reported on a GAAP basis...................... $9,748.8 $9,049.9 ======== ========
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 1999, the Group invested new cash primarily in tax-exempt bonds and corporate bonds. 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 each year, the Group tried to achieve the appropriate mix in its portfolio to balance both investment and tax strategies. At December 31, 1999, 70% of the Group's fixed maturity portfolio was invested in tax-exempt bonds compared with 71% at December 31, 1998 and 68% at December 31, 1997. 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) 1997............................. $11,725.9 $711.2 6.07% 5.05% 1998............................. 12,795.7 748.9 5.85 4.96 1999............................. 14,208.0 821.0 5.78 4.87
- --------------- (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 November 1997, the Real Estate Group sold a substantial portion of its commercial properties for $736.9 million,which included $628.3 million in cash and the assumption of $108.6 million in debt. In addition to the sale to the joint venture in November 1997, The Real Estate Group sold selected commercial properties as well as residential properties in each of the past three years. The Real Estate Group owns approximately $355 million of land, which is expected to be developed in the future, and approximately $190 million of commercial properties and land parcels under lease. The Real Estate Group is continuing to explore the sale of certain of its remaining properties. Additional information related to the Corporation's real estate operations is included in Item 7 of this report on pages 24 and 25. 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 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 11 12 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, 1999, 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 14th largest United States property and casualty insurance group based on 1998 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 1999, particularly in the commercial classes. The Group continues to be selective in the writing of new business and to reinforce the sound relationships with customers who appreciate the stability, expertise and added value the Group provides. In all states, insurers authorized to transact certain classes of property and casualty insurance are required to become members of an insolvency fund. In the event of the insolvency of a licensed insurer writing a class of insurance covered by the fund in the state, 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 1999, assessments to the members of the Group amounted to approximately $8.3 million. The amount of future assessments cannot be reasonably estimated. State insurance regulation requires insurers to participate in assigned risk plans, reinsurance facilities and joint underwriting associations, which are mechanisms that generally provide applicants with various basic insurance coverages when they are not available in voluntary markets. Such 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 12 13 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, patients' rights, privacy, e-commerce, international trade, automobile safety, 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 Insurance 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 buildings in Branchburg, New Jersey and Simsbury, Connecticut. 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 1999 Annual Report to Shareholders. ITEM 3. LEGAL PROCEEDINGS The Corporation and its subsidiaries are defendants in various lawsuits arising out of their businesses. It is the opinion of management that the final outcome of these matters will not materially affect the consolidated financial position of the registrant. Information regarding certain litigation to which property and casualty insurance subsidiaries of the Corporation are a party is included in Item 7 of this report on pages 20 through 23. 13 14 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, 1999. EXECUTIVE OFFICERS OF THE REGISTRANT
YEAR OF AGE(A) ELECTION(B) ------ ----------- Dean R. O'Hare, Chairman of the Corporation................. 57 1972 Joanne L. Bober, Senior Vice President and General Counsel of the Corporation........................................ 47 1999 John J. Degnan, President of the Corporation................ 55 1994 Gail E. Devlin, Senior Vice President of the Corporation.... 61 1981 George R. Fay, Executive Vice President of Chubb & Son, a division of Federal....................................... 51 1999 David S. Fowler, Senior Vice President of the Corporation... 54 1989 Sylvester Green, Executive Vice President of Chubb & Son, a division of Federal....................................... 59 1998 Henry G. Gulick, Vice President and Secretary of the Corporation............................................... 56 1975 Ralph E. Jones, III, Executive Vice President of Chubb & Son, a division of Federal................................ 44 1999 David B. Kelso, Executive Vice President of the Corporation............................................... 47 1996 Charles M. Luchs, Executive Vice President of Chubb & Son, a division of Federal....................................... 60 1996 Andrew A. McElwee, Jr., Senior Vice President of the Corporation............................................... 45 1997 Glenn A. Montgomery, Senior Vice President of the Corporation............................................... 47 1997 Thomas F. Motamed, Executive Vice President of the Corporation............................................... 51 1997 Michael J. O'Neill, Jr., Senior Vice President and Counsel of the Corporation........................................ 51 1999 Michael O'Reilly, Executive Vice President of the Corporation............................................... 56 1976 Henry B. Schram, Senior Vice President of the Corporation... 53 1985 Stephen J. Sills, Executive Vice President of the Corporation............................................... 51 1999
- --------------- (a) Ages listed above are as of April 25, 2000. (b) Date indicates year first elected or designated as an executive officer. All of the foregoing officers serve at the pleasure of the Board of Directors of the Corporation or listed subsidiary and have been employees of the Corporation or a subsidiary of the Corporation for more than five years except for Ms. Bober and Messrs. Jones, Kelso and Sills. Prior to joining the Corporation in 1999, Ms. Bober was Senior Vice President, General Counsel and Secretary of General Signal Corporation since 1997. Previously, she was a partner in the law firm of Jones, Day, Reavis & Pogue. Before rejoining Chubb in 1999, Mr. Jones was a Director of Hiscox Plc and Managing Director of Hiscox Insurance Company Ltd. since July 1997. Mr. Jones was previously President and Director of Chubb Insurance Company of Europe, as well as a Senior Vice President and Managing Director of Chubb & Son Inc. 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. Mr. Sills, who joined the Corporation in 1999, was most recently President and Chief Executive Officer of Executive Risk, Inc. since 1997. Previously, he served as Executive Vice President and Chief Underwriting Officer for Executive Risk, Inc. 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 1999 Annual Report to Shareholders, page 64. ITEM 6. SELECTED FINANCIAL DATA Selected financial data for the five years ended December 31, 1999 are incorporated by reference from the Corporation's 1999 Annual Report to Shareholders, pages 36 through 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 1999 Annual Report to Shareholders, pages 15, 16 and 40 through 61. 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 or business retention or profitability estimates, as well as with respect to loss reserve adequacy, its investment income or cash flow projections, or its announced real estate plans, 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 or privacy liabilities, the inability to reinsure certain risks economically, the adequacy of loss reserves or currency conversion transactions, as well as general market conditions, competition, pricing and restructurings. Operating income, which excludes realized investment gains and losses, was $565 million in 1999 compared with $615 million in 1998 and $701 million in 1997. Operating income in 1998 reflects a first quarter restructuring charge of $26 million after taxes related to the implementation of a cost control initiative. Net income, which includes realized investment gains and losses, was $621 million in 1999 compared with $707 million in 1998 and $770 million in 1997. ACQUISITION OF EXECUTIVE RISK INC. In July 1999, The Chubb Corporation (Corporation) completed its acquisition of Executive Risk Inc. Executive Risk is a specialty insurance company offering primarily executive protection coverages, particularly directors and officers, errors and omissions and professional liability. 15 16 Executive Risk shareholders received 1.235 shares of the Corporation's common stock for each outstanding common share of Executive Risk. In addition, outstanding Executive Risk stock options were converted to stock options of the Corporation. Approximately 14.3 million shares of common stock of the Corporation were issued to Executive Risk shareholders and an additional 1.8 million shares of common stock of the Corporation were reserved for issuance upon exercise of the converted Executive Risk stock options. The acquisition has been accounted for using the purchase method of accounting. Therefore, the results of operations of Executive Risk are included in the Corporation's consolidated results of operations from the date of acquisition. The assets and liabilities of Executive Risk were recorded at their estimated fair values at the date of acquisition. The value of the stock options assumed by the Corporation was included in the purchase price. The total purchase price was approximately $832 million. The excess of the purchase price over the estimated fair value of the net assets acquired, amounting to approximately $517 million, has been recorded as goodwill and is being amortized over 26 years. PROPERTY AND CASUALTY INSURANCE Property and casualty income before taxes was $626 million in 1999 compared with $685 million in 1998 and $828 million in 1997. The decrease in earnings in 1999 was due to deterioration in underwriting results caused in large part by the continued weakness in the standard commercial classes, which include multiple peril, casualty and workers' compensation, and to a lesser extent, higher catastrophe losses. The decrease in earnings in 1998 was due to a decline in underwriting results caused in large part by substantially higher catastrophe losses compared with 1997 and to a first quarter restructuring charge of $40 million before taxes. Investment income increased in both 1999 and 1998 compared with the respective prior years. Catastrophe losses were $225 million in 1999, $173 million in 1998 and $57 million in 1997. The 1998 amount was net of reinsurance recoveries of approximately $130 million related to Hurricane Georges. We did not have any recoveries from our catastrophe reinsurance program during 1999 or 1997 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 $5.7 billion in 1999, an increase of 4% compared with 1998. Excluding premiums written by Executive Risk, premium growth was 1% in 1999. Personal coverages accounted for $1.5 billion or 27% of 1999 premiums written, standard commercial coverages for $1.9 billion or 32% and specialty commercial coverages for $2.3 billion or 41%. Reported net premiums written increased 1% in 1998 compared with 1997. The reported growth in premiums written in 1998 was affected by the termination in 1997 of 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. As a result of the 1996 merger of Sun Alliance with Royal Insurance Holdings plc, the agreements pertaining to the exchange of reinsurance were terminated effective January 1, 1997. Consequently, during 1997, the property and casualty subsidiaries retained a 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 1997 due to the effect of the portfolio transfers of unearned premiums as of January 1 of that year resulting from the changes in retention. 16 17 After adjusting 1997 reported net premiums for the effects of the termination of the reinsurance agreements with Sun Alliance, net premiums written increased 4% in 1998 compared with 1997. Premium growth in personal lines was strong in both 1999 and 1998. In commercial lines, intense competition in the worldwide marketplace has made profitable premium growth difficult, particularly in the standard commercial classes. Our priorities for 1999 were to renew good business at adequate prices and not renew underperforming accounts where we could not attain price adequacy. We made steady progress in this regard during 1999, increasing rates and non-renewing underperforming business throughout the year. Further, many of our competitors also increased rates during the latter part of 1999. As a result, the pricing outlook in the standard commercial classes is considerably brighter than it was at the outset of 1999. Substantial premium growth was achieved in 1999 and 1998 outside the United States, particularly in Europe, our largest foreign market. Excluding the business that was assumed from Sun Alliance, non-U.S. premiums grew 12% and 9% in 1999 and 1998, respectively, in original currency. Underwriting results were unprofitable in 1999 compared with near-breakeven results in 1998 and profitable results in 1997. The combined loss and expense ratio, the common measure of underwriting profitability, was 102.8% in 1999 compared with 99.8% in 1998 and 96.9% in 1997. The loss ratio was 70.3% in 1999 compared with 66.3% in 1998 and 64.5% in 1997. Losses from catastrophes represented 4.0 percentage points of the loss ratio in 1999 compared with 3.3 percentage points in 1998 and 1.1 percentage points in 1997. Catastrophe losses affecting results in 1999 resulted primarily from weather-related events in the United States: winter storms in the first quarter, windstorms and tornadoes in the second quarter and Hurricane Floyd in the third quarter. The 1998 catastrophe losses resulted primarily from 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. Our expense ratio was 32.5% in 1999 compared with 33.5% in 1998 and 32.4% in 1997. The lower ratio in 1999 was due to salary and overhead expenses decreasing due to a cost control initiative discussed below and a change in accounting that resulted in the capitalization of certain costs incurred to develop computer software for internal use. The increase in the expense 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 commenced an activity value analysis process to identify and eliminate low-value activities and improve operational efficiency while redirecting resources to activities having the greatest potential to contribute to the Corporation's results. Implementation began in the first quarter of 1998 and was substantially completed by the end of that year. The cost control initiative 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 resulted from improved vendor management and lower consulting expenses and other operating costs. In the first quarter of 1998, we recorded a restructuring charge of $40 million related to the implementation of the cost control initiative. Of the $40 million restructuring charge, $30 million was comprised of accruals for providing enhanced pension benefits and postretirement medical benefits to employees who accepted an early retirement incentive offer and $5 million was severance costs for employees who were terminated. The remainder of the charge was for other expenses such as the cost of outplacement services. The initiative was completed with no significant differences from the original estimates of the restructuring costs. The liabilities related to the enhanced pension and postretirement medical benefits were included in the pension and postretirement medical benefits liabilities, which will be reduced as benefit payments are made over time. Of the other restructuring costs, $1.5 million remained unpaid at December 31, 1999. 17 18 PERSONAL INSURANCE Our personal insurance business continued to produce exceptionally strong results in 1999, measured by both growth and profitability. Reported net premiums from personal insurance increased 12% in 1999 compared with a 5% increase in 1998. After adjusting 1997 reported net premiums for the effects of the termination of the reinsurance agreement with Sun Alliance, premium growth in 1998 was 10% compared with 1997. Our in-force policy count increased in 1999 by about 10% for automobile, homeowners and other personal coverages. Such growth was achieved while maintaining our disciplined approach to pricing and risk selection. Premiums outside the United States grew significantly in 1999 and 1998, although from a small base. Our personal insurance business produced substantial underwriting profits in each of the past three years. The combined loss and expense ratio was 89.9% in 1999 compared with 85.6% in 1998 and 83.1% in 1997. 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 an unusually low frequency of non-catastrophe related losses in 1998 substantially offset an increase in catastrophe losses. Homeowners results in 1999 were less profitable than in 1998 due to an increase in both catastrophe losses and non-catastrophe losses. The frequency of non-catastrophe related losses returned to a more normal level in 1999. Results in 1999 were also adversely affected by two large losses aggregating $15 million net of reinsurance. Homeowners results were unprofitable outside the United States in each of the past three years as we are still building the critical mass necessary to absorb the costs of operating the franchise. Catastrophe losses represented 11.8 percentage points of the loss ratio for this class in 1999 compared with 8.5 percentage points in 1998 and 2.9 percentage points in 1997. Our personal 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, as favorable loss experience has continued. STANDARD COMMERCIAL INSURANCE Reported net premiums from standard commercial insurance decreased 8% in 1999 compared with a 1% decrease in 1998. After adjusting 1997 reported net premiums for the effects of the termination of the reinsurance agreement with Sun Alliance, premiums increased 2% in 1998 compared with 1997. The decrease in premiums in 1999 was the result of the strategy we put in place in late 1998 to renew good business at adequate prices and not renew underperforming business where we cannot attain price adequacy. As a result, retention levels were lower in 1999 than in 1998. On the business that was renewed, rates have increased steadily throughout 1999 and we expect this trend to continue. We achieved premium growth in 1999 and 1998 in standard commercial lines outside the United States. Our standard commercial insurance business produced substantial underwriting losses in each of the past three years, with results becoming increasingly unprofitable each year. The combined loss and expense ratio was 123.6% in 1999 compared with 118.0% in 1998 and 114.5% in 1997. It will take at least two annual renewal cycles to adequately reprice the entire standard commercial book, and during that time we will continue to have losses from underpriced business. Thus, it will be the latter part of 2000 before our pricing initiative is expected to have a noticeable effect on our standard commercial results. Multiple peril results were unprofitable in each of the past three years due, in large part, to inadequate prices. Such results were progressively more unprofitable each year. In the liability component of this class, results deteriorated in 1998 and again in 1999 due to increases in the severity of losses. Results in 1997 were adversely affected by substantial incurred losses relating to asbestos and toxic waste claims. Results for the property component deteriorated in 1998 due to higher catastrophe 18 19 losses compared with 1997. Property results deteriorated further in 1999 due primarily to several large losses overseas. Catastrophe losses in 1999 were similar to those in 1998. Catastrophe losses represented 9.6 percentage points of the loss ratio for this class in 1999 compared with 8.6 percentage points in 1998 and 1.5 percentage points in 1997. Results for our casualty business were unprofitable in each of the past three years. Results deteriorated in 1999, primarily in the automobile and primary liability components. In each year, but more so in 1998 and 1997, casualty results were adversely affected by incurred losses relating to asbestos and toxic waste claims. The excess liability component of our casualty coverages was modestly unprofitable in 1999 compared with the near breakeven results in 1998 and the profitable results in 1997 due to increases in the frequency of large losses as well as declining prices. Excess liability results in each of the past three years benefited from favorable development of prior year loss reserves. Results for the primary liability component were unprofitable in each of the past three years, but more so in 1999 and 1997 due to a higher frequency of large losses in those years. Results in the automobile component were increasingly unprofitable in each of the past three years due to an increase in the frequency of losses. Our commercial automobile book of business has been inadequately priced, a consequence of the prolonged soft market. Workers' compensation results were unprofitable in each of the past three years, reflecting the cumulative effect of price reductions over the past several years. Results were also adversely affected in 1999 and 1998 by an increased frequency of large losses. SPECIALTY COMMERCIAL INSURANCE Reported net premiums from specialty commercial insurance increased by 9% in 1999 compared with a 1% increase in 1998. Excluding premiums written by Executive Risk, premium growth was 4% in 1999. After adjusting 1997 reported net premiums for the effects of the termination of the reinsurance agreement with Sun Alliance, premium growth in 1998 was 3% compared with 1997. Our strategy of working closely with our customers and our ability to differentiate our products continue to enable us to renew a large percentage of our executive protection and financial institutions business. However, a competitive market continues to put prices under pressure for this business. Excluding premiums written by Executive Risk, executive protection premiums increased 2% in 1999 while financial institutions premiums decreased 5%. Property and marine premiums decreased due to the effect on retention levels of pricing initiatives and non-renewing certain unprofitable accounts. Other specialty commercial business includes $73 million of premiums in 1999 generated by Chubb Re, our reinsurance business that began operations during the year. Our specialty commercial business produced substantial underwriting profits in each of the last three years. The combined loss and expense ratio was 93.6% in 1999 compared with 91.5% in 1998 and 87.5% in 1997. Property and marine results were unprofitable in each of the past three years. The positive effect of the pricing initiatives and the culling of unprofitable accounts in 1999 was somewhat offset by higher catastrophe losses. Catastrophe losses for this class represented 10.2 percentage points of the loss ratio in 1999 compared with 5.7 percentage points in 1998 and 4.9 percentage points in 1997. Results in all three years were adversely affected by a high frequency of large property losses, including several overseas losses in 1998 and 1997. Executive protection results were highly profitable in each of the past three years due to favorable loss experience on business worldwide, particularly in the directors and officers and fiduciary components. However, such results were less profitable in 1999 due to the less adequate prices in recent years. Our financial institutions business was also profitable in each of the last three years due to favorable loss experience in the fidelity component of this business. The standard commercial business 19 20 written on financial institutions was unprofitable in 1999 and 1997 compared with profitable results in 1998. Our other commercial classes produced profitable results in 1999 and 1997 compared with near-breakeven results in 1998. The deterioration in 1998 was attributable to our aviation business, which produced highly unprofitable results. Our surety business produced highly profitable results in each of the past three years. 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, our share of the Sun Alliance business for the last six months of 1996 was included in our results in the first quarter of 1997. Such results were near breakeven. LOSS RESERVES Loss reserves are our property and casualty subsidiaries' largest liability. At the end of 1999, gross loss reserves totaled $11.4 billion compared with $10.4 billion and $9.8 billion at year-end 1998 and 1997, respectively. Reinsurance recoverable on such loss reserves was $1.7 billion at year-end 1999 compared with $1.3 billion and $1.2 billion at the end of 1998 and 1997, respectively. At year end 1999, gross loss reserves of $1.0 billion and reinsurance recoverable of $390 million were related to Executive Risk. Executive Risk has historically utilized reinsurance to a greater extent because its size has limited the amount of risk it could retain. Loss reserves, net of reinsurance recoverable, increased by $699 million or 8% in 1999 compared with $485 million or 6% in 1998. The increase in 1999 includes $606 million of net reserves assumed in July upon the acquisition of Executive Risk. The 1999 increase would have been $549 million greater except that loss reserves were reduced by payments in that amount during the year related to the settlement of asbestos-related claims against Fibreboard Corporation, which is discussed below. Excluding the Executive Risk reserves assumed and the Fibreboard payments, loss reserves increased 7% in 1999. 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 1999, we experienced overall favorable development of $206 million on loss reserves established as of the previous year-end. This compares with favorable development of $218 million in 1998 and $65 million in 1997. Such redundancies were reflected in operating results in these respective years. Each of the past three years benefited from favorable claim experience for certain liability classes; this was offset in part by losses incurred relating to asbestos and toxic waste claims of $47 million, $68 million and $125 million in 1999, 1998 and 1997, respectively. The higher favorable development in 1999 and 1998 compared with 1997 was due to more favorable loss experience for executive protection and excess liability coverages as well as the substantially lower incurred losses related to asbestos and toxic waste 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 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 65% of our net loss reserves at December 31, 1999 were for incurred but not reported (IBNR) losses -- claims that had not yet been reported to us, some of which were not yet known to the insured, and 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 20 21 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 related to an insurance policy issued to Fibreboard Corporation by Pacific Indemnity Company in 1956. As a result of events during 1999 that are described below, management believes that Pacific Indemnity's exposure with respect to asbestos-related claims against Fibreboard has ended. 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 was subject to final appellate court approval. Pursuant to the global settlement agreement, a $1.525 billion trust fund would be established to pay "future" claims, defined as claims that were not filed in court before August 27, 1993. Pacific Indemnity would contribute approximately $538 million to the trust fund and Continental Casualty would 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, would be transferred to the trust fund. Pacific Indemnity and Continental Casualty reached a separate agreement in 1993 for the handling of all "pending" asbestos-related bodily injury claims, defined as claims pending on August 26, 1993 against Fibreboard. Pacific Indemnity's obligation under this agreement with respect to such pending claims was approximately $635 million, all of which was paid by the end of 1996. The agreement further provided that the total responsibility of both insurers with respect to pending and future asbestos-related bodily injury claims against Fibreboard would 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 pending 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 would be triggered if the global settlement agreement was 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 reaffirmed portions of an agreement reached in March 1992 between Pacific Indemnity and Fibreboard. Among other matters, that 1992 agreement eliminated 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 1999, the Supreme Court refused to affirm approval of the global settlement agreement. The case was returned to the United States District Court of the Eastern District of Texas for further proceedings. In September 1999, the District Court entered judgment disapproving the global settlement agreement. That judgment was not appealed and became final in November 1999. The trilateral agreement was never appealed to the United States Supreme Court and is final. Upon final disapproval of the global settlement agreement, the trilateral agreement became effective. 21 22 In December 1999, the funds that had been held in the escrow account were paid to a trust established to pay future asbestos-related bodily injury claims against Fibreboard. We continue to have potentially significant asbestos exposure, primarily on those traditional defendants who manufactured, distributed or installed asbestos products for whom we wrote excess liability coverages. Such exposure has increased in recent years due to the erosion of much of the underlying limits and the non-viability of other defendants. Our other potential 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. As the resources of traditional asbestos defendants have been depleted, more peripheral parties have been drawn into litigation. Thus, we continue to receive notices of new asbestos claims and new exposures on existing claims despite the fact that practically all manufacturing and usage of asbestos ended nearly two decades ago. Uncertainty remains as to our ultimate liability relating to asbestos claims due to such factors as the long latency period between asbestos exposure and disease manifestation and the resulting potential for involvement of multiple policy periods for individual claims. Significant issues remain unresolved, adding to the complexity and uncertainty of asbestos litigation. These issues primarily involve questions regarding allocation of indemnity and expense costs and exhaustion of policy limits. We are involved in disputes with other insurers and with insureds over these issues, which increase the difficulty of settlement negotiations. 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 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 that 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 22 23 costs. This unlimited defense provided in the policies sometimes leads to the payment of defense costs substantially exceeding 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 somewhat 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 $47 million in 1999 and $68 million in 1998, substantially less than the $125 million in 1997. Further increases in such loss reserves in 2000 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, 1999 were adequate to cover claims for losses that 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 globally 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 used modeling technologies and concentration management tools that allow us to better monitor and control catastrophe exposures. We also continue to explore and analyze credible scientific evidence, including the impact of global climate change, that may affect our potential exposure under insurance policies. INVESTMENTS AND LIQUIDITY Growth in investment income in 1999 and 1998 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 15.7% in 1999 compared with 15.3% in 1998 and 16.7% in 1997. The effective tax rate fluctuates each year as a result of changes in the percentage of our portfolio invested in tax-exempt bonds. Investment income after taxes increased 9% in 1999 compared with 1998 and 7% in 1998 compared with 1997. Excluding the investment income of Executive Risk, such growth was 5% in 1999. 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 together with the investment income generated by the existing portfolio to build the portfolio and thereby increase future investment income. Historically, cash receipts from operations, consisting of insurance premiums and 23 24 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 $940 million in 1999 compared with $860 million in 1998 and $1,260 million in 1997. New cash available in 1999 was not affected by the Fibreboard-related payments during the year since such payments were made from the escrow account that was funded in 1993. New cash in 1997 included approximately $330 million received as the net result of the portfolio transfers of unearned premiums and loss reserves as of January 1, 1997 related to the termination of the reinsurance agreements with Sun Alliance. In 1999, new cash was invested in tax-exempt bonds and corporate bonds. Also, during 1999, we reduced our equity securities portfolio by approximately $350 million with $145 million of the proceeds used to fund the purchase of a 28% interest in Hiscox plc, a leading U.K. personal and commercial specialty insurer. 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 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 AND OTHER Corporate and other includes investment income earned on corporate invested assets, interest and other expenses not allocable to the operating subsidiaries, and the results of our real estate subsidiary. Corporate and other produced a loss before taxes of $4 million in 1999 compared with income of $23 million in 1998 and $41 million in 1997. The decrease in corporate and other income in 1998 and again in 1999 was due primarily to increasingly higher interest expense in each year. 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 November 1997, our real estate subsidiary sold a substantial portion of its commercial properties for $737 million, which included $628 million in cash and the assumption of $109 million in debt. The proceeds from the sale were used to repay outstanding short term debt and certain term loans and mortgages. In the fourth quarter of 1996, we had recorded an impairment loss of $255 million, or $160 million after taxes, to reduce the carrying value of these assets to their estimated fair value. Real estate operations resulted in a loss before taxes of $4 million in both 1999 and 1998 and $9 million in 1997, which amounts are included in the corporate and other results for those respective years. 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. In addition to the November 1997 sale, we sold selected commercial properties as well as residential properties in each of the past three years. Real estate revenues were $97 million in 1999, $82 million in 1998 and $616 million in 1997. Revenues in 1999 and 1998 reflect the reduced operating activity as a result of the sale of a substantial portion of our real estate assets in 1997. We own approximately $355 million of land which we expect will be developed in the future. In addition, we own approximately $190 million of commercial properties and land parcels under lease. We are continuing to explore the sale of certain of our remaining properties. 24 25 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 $81 million at December 31, 1999, 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 assumptions used 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. INVESTMENT GAINS AND LOSSES Net investment gains realized by the Corporation and its property and casualty subsidiaries were as follows:
1999 1998 1997 ---- ---- ---- (in millions) Equity securities........................................... $63 $100 $ 75 Fixed maturities............................................ 24 42 30 --- ---- ---- Realized investment gains before tax........................ $87 $142 $105 === ==== ==== Realized investment gains after tax......................... $56 $ 92 $ 68 === ==== ====
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 maturity securities 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, 1999, 12% of the fixed maturity portfolio was classified as held-to-maturity compared with 15% at December 31, 1998 and 18% at December 31, 1997. 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 $59 million, $138 million and $147 million at December 31, 1999, 1998 and 1997, respectively. Such unrealized appreciation was not reflected in the consolidated financial statements. Changes in unrealized market appreciation or depreciation of fixed maturities were due to fluctuations in interest rates. 25 26 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 of the Corporation and its property and casualty subsidiaries relate primarily 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 the potential changes in price of our fixed income investments 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 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, 1999 and 1998. 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. 26 27 FIXED MATURITIES EXPECTED CASH FLOWS OF PRINCIPAL AMOUNTS
AT DECEMBER 31, 1999 ------------------------------------------------------------------------- TOTAL --------------------- ESTIMATED THERE- AMORTIZED MARKET 2000 2001 2002 2003 2004 AFTER COST VALUE ---- ---- ---- ---- ---- ------ --------- --------- (in millions) Tax-exempt.............................. $475 $ 585 $ 680 $ 549 $ 931 $6,411 $ 9,631 $ 9,669 Average interest rate................. 6.7% 6.7% 6.1% 5.9% 5.8% 5.4% -- -- Taxable -- other than mortgage-backed securities............................ 97 251 372 429 452 1,779 3,380 3,310 Average interest rate................. 6.6% 6.6% 6.6% 6.4% 6.5% 6.5% -- -- Mortgage-backed securities.............. 164 180 231 181 137 782 1,675 1,599 Average interest rate................. 6.7% 6.8% 6.9% 6.8% 6.8% 7.0% -- -- ---- ------ ------ ------ ------ ------ ------- ------- Total................................... $736 $1,016 $1,283 $1,159 $1,520 $8,972 $14,686 $14,578 ==== ====== ====== ====== ====== ====== ======= ======= 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 ==== ====== ====== ====== ====== ====== ======= =======
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 27 28 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 33% and 40% of our taxable bond portfolio at year-end 1999 and 1998, respectively. About 35% of our mortgage-backed securities holdings at December 31, 1999 related to residential mortgages consisting of government agency pass-through securities, government agency collateralized mortgage obligations (CMOs) and AAA rated non-agency CMOs backed by government agency collateral or single family home mortgages. The majority of the CMOs are actively traded in liquid markets and market value information is readily available from broker/dealers. An additional 40% of our mortgage-backed securities were call protected AAA rated commercial securities. The remaining mortgage-backed holdings were all in 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 loss reserves and other liabilities. Such investments have characteristics similar to our liabilities in those currencies. At December 31, 1999, the property and casualty subsidiaries held foreign investments of $1.5 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 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, 1999 and 1998. Actual cash flows could differ from the expected amounts. FOREIGN CURRENCY DENOMINATED FIXED MATURITIES EXPECTED CASH FLOWS OF PRINCIPAL AMOUNTS
AT DECEMBER 31, 1999 ----------------------------------------------------------------- TOTAL --------------------- ESTIMATED THERE- AMORTIZED MARKET 2000 2001 2002 2003 2004 AFTER COST VALUE ---- ---- ---- ---- ---- ------ --------- --------- (in millions) Canadian dollar........................... $19 $43 $50 $64 $58 $132 $366 $372 British pound sterling.................... 10 -- 28 40 38 112 228 225
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
Equity price risk is the potential loss arising from adverse 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, diversified across industries and readily marketable. A hypothetical decrease of 10% in the 28 29 market prices of the equity securities held at December 31, 1999 and 1998 would have resulted in a decrease of $77 million and $109 million, respectively, in the fair value of the equity securities portfolio. 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. Interest rate risk also exists on our debt obligations. At December 31, 1999, the expected cash flows of principal amounts of such debt obligations were a $15 million 7.3% term loan in 2001, $100 million of 6 7/8% notes in 2003 and $642 million after 2004 with a weighted average interest rate of 7.0%. YEAR 2000 READINESS DISCLOSURE The Year 2000 issue referred to the potential that certain information technology (IT) systems and applications as well as non-IT systems, such as equipment with embedded chips and microprocessors, would be unable to properly process data containing dates beginning with the year 2000. The issue existed because many computer systems used two digits rather than four to define the applicable year. Such systems, if not remediated, might have recognized the date "00" as the year 1900 rather than the year 2000, resulting in a system failure or miscalculation 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. A significant focus of the project was the retirement, renovation or rewriting of those mainframe systems that were not Year 2000 ready. From 1995 through 1999, we completed remediation and testing procedures on all of our mainframe IT systems as well as our personal computers, servers and other non-mainframe computers and related software. Our Year 2000 compliance project also included developing a plan to evaluate the readiness of third parties with whom we interact, preparing contingency plans to address the noncompliance of any such third parties and physically testing electronic data interchanges with third parties for Year 2000 compliance. As a result of these remediation efforts, our internal systems proved to be Year 2000 ready and we did not have any significant Year 2000 related difficulties interacting with any third party with whom we conduct business. We have not experienced any disruption of our business and therefore we have not needed to implement any contingency plans. The Year 2000 team included employees of the Corporation and software consultants. A portion of the remediation effort was accomplished by redirecting existing systems resources to the Year 2000 effort. However, we do not believe that this had a significant adverse effect on other systems initiatives. The cost to address the Year 2000 IT systems issue, including compensation of employees and the cost of consultants, approximated $36 million. Approximately $6 million, $14 million and $9 million was incurred in 1999, 1998 and 1997, respectively. 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. Future expenditures related to the Year 2000 issue are expected to be negligible. We have closely monitored the potential impact of the Year 2000 issue on insurance coverages written by our property and casualty subsidiaries. To date, we have received a relatively small number of claims related to the Year 2000 issue. The policies under which such claims have been made include provisions that we believe either preclude or limit the amount of coverage. For these reasons, management does not believe at this time that there is a likelihood of a significant adverse financial impact from Year 2000 related losses. Nevertheless, it is possible that Year 2000 related losses may emerge that would adversely affect operating results in future periods. 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 29 30 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. In July 1998, the Board of Directors authorized the repurchase of up to an additional 12,500,000 shares. Through December 31, 1999, the Corporation had repurchased 20,591,600 shares under the 1997 and 1998 authorizations. As of December 31, 1999, 9,408,400 shares remained under the current share repurchase authorizations. In the aggregate, the Corporation repurchased 2,596,700 shares in open-market transactions in 1999 at a cost of $145 million, 8,203,000 shares in 1998 at a cost of $609 million and 12,940,500 shares in 1997 at a cost of $828 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 Corporation, a wholly owned subsidiary. No securities have been issued under this registration statement. The Corporation has outstanding $300 million of unsecured 6.15% notes due in 2005 and $100 million of unsecured 6.60% debentures due in 2018. Chubb Capital has outstanding $100 million of unsecured 6 7/8 % notes due in 2003. The Chubb Capital notes are guaranteed by the Corporation. The long term debt obligations of Executive Risk remained in place subsequent to the acquisition. Chubb Executive Risk Inc., a wholly owned subsidiary of the Corporation, has outstanding $75 million of unsecured 7 1/8 % notes due in 2007. Executive Risk Capital Trust, wholly owned by Chubb Executive Risk, has outstanding $125 million of 8.675% capital securities. The sole assets of the Trust are debentures issued by Chubb Executive Risk. The capital securities are subject to mandatory redemption in 2027 upon repayment of the debentures. The capital securities are also subject to mandatory redemption under certain circumstances beginning in 2007. The Corporation has 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 was to have terminated on July 7, 1999, was extended to July 5, 2000, 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. CHANGE IN ACCOUNTING PRINCIPLES In 1999, the Corporation adopted Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which was issued by the American Institute of Certified Public Accountants. 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. Prior to 1999, we expensed all development costs of internal use computer software. The SOP has been applied prospectively. The adoption of SOP 98-1 increased the Corporation's net income in 1999 by $17 million. 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 25 through 29 of this report. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated financial statements of the Corporation at December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999 and the Report of Independent Auditors thereon and the Corporation's unaudited quarterly financial data for the two-year period ended December 31, 1999 are incorporated by reference from the Corporation's 1999 Annual Report to Shareholders, pages 40 through 62 and 64. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 30 31 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 25, 2000, 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 25, 2000, pages 8 through 20 other than the Performance Graphs and the Organization and Compensation Committee Report appearing on pages 13 through 18. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 25, 2000, pages 5 and 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 25, 2000, page 21. 31 32 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS AND 2. SCHEDULES The financial statements and schedules listed in the accompanying index to financial statements and financial statement schedules are filed as part of this report. 3. EXHIBITS The exhibits listed in the accompanying index to exhibits are filed as part of this report. (b) REPORTS ON FORM 8-K There were no reports on Form 8-K filed for the three months ended December 31, 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), 333-67347 (filed November 16, 1998) and Post-Effective Amendment No. 2 to Form S-4 on Form S-8 No. 333-73073 (filed July 19, 1999): 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. 32 33 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 3, 2000 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 3, 2000 - --------------------------------------------------- Executive Officer and (DEAN R. O'HARE) Director /s/ ZOE BAIRD Director March 3, 2000 - --------------------------------------------------- (ZOE BAIRD) /s/ JOHN C. BECK Director March 3, 2000 - --------------------------------------------------- (JOHN C. BECK) /s/ SHEILA P. BURKE Director March 3, 2000 - --------------------------------------------------- (SHEILA P. BURKE) /s/ JAMES I. CASH, JR. Director March 3, 2000 - --------------------------------------------------- (JAMES I. CASH, JR.) /s/ PERCY CHUBB, III Director March 3, 2000 - --------------------------------------------------- (PERCY CHUBB, III) /s/ JOEL J. COHEN Director March 3, 2000 - --------------------------------------------------- (JOEL J. COHEN) /s/ JAMES M. CORNELIUS Director March 3, 2000 - --------------------------------------------------- (JAMES M. CORNELIUS) /s/ DAVID H. HOAG Director March 3, 2000 - --------------------------------------------------- (DAVID H. HOAG)
33 34
SIGNATURE TITLE DATE /s/ THOMAS C. MACAVOY Director March 3, 2000 - --------------------------------------------------- (THOMAS C. MACAVOY) /s/ WARREN B. RUDMAN Director March 3, 2000 - --------------------------------------------------- (WARREN B. RUDMAN) /s/ DAVID G. SCHOLEY Director March 3, 2000 - --------------------------------------------------- (DAVID G. SCHOLEY) Director March 3, 2000 - --------------------------------------------------- (RAYMOND G.H. SEITZ) /s/ LAWRENCE M. SMALL Director March 3, 2000 - --------------------------------------------------- (LAWRENCE M. SMALL) /s/ JAMES M. ZIMMERMAN Director March 3, 2000 - --------------------------------------------------- (JAMES M. ZIMMERMAN) /s/ DAVID B. KELSO Executive Vice President and March 3, 2000 - --------------------------------------------------- Chief Financial Officer (DAVID B. KELSO) /s/ HENRY B. SCHRAM Senior Vice President and March 3, 2000 - --------------------------------------------------- Chief Accounting Officer (HENRY B. SCHRAM)
34 35 THE CHUBB CORPORATION INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF INDEPENDENT AUDITORS (ITEM 14(A))
ANNUAL REPORT TO SHAREHOLDERS FORM 10-K PAGE PAGE ---------------- --------- Report of Independent Auditors 62 -- Consolidated Balance Sheets at December 31, 1999 and 1998 41 -- Consolidated Statements of Income for the Years Ended Decem- ber 31, 1999, 1998 and 1997 40 -- Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 42 -- Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 43 -- Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1999, 1998, and 1997 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, 1999 -- 37 II -- Condensed Financial Information of Registrant at December 31, 1999 and 1998 and for the Years Ended December 31, 1999, 1998 and 1997 -- 38 III -- Consolidated Supplementary Insurance Information at and for the Years Ended December 31, 1999, 1998 and 1997 -- 41 IV -- Consolidated Reinsurance for the Years Ended De- cember 31, 1999, 1998 and 1997 -- 42 VI -- Consolidated Supplementary Property and Casualty Insurance Information for the Years Ended December 31, 1999, 1998 and 1997 -- 42
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, 1999, are hereby incorporated by reference. 35 36 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of The Chubb Corporation of our report dated February 23, 2000 included in the 1999 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, No. 333-67347 and Post-Effective Amendment No. 2 to Form S-4 on Form S-8 No. 333-73073) of our report dated February 23, 2000, 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 24, 2000 36 37 THE CHUBB CORPORATION SCHEDULE I CONSOLIDATED SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES (IN MILLIONS) DECEMBER 31, 1999
AMOUNT AT WHICH COST OR SHOWN IN AMORTIZED MARKET THE TYPE OF INVESTMENT COST VALUE BALANCE SHEET Short term investments................................ $ 731.1 $ 731.1 $ 731.1 --------- --------- --------- Fixed maturities Bonds United States Government and government agencies and authorities................................ 1,067.0 1,043.7 1,042.5 States, municipalities and political subdivisions................................... 9,588.7 9,624.8 9,566.9 Foreign.......................................... 1,199.2 1,203.0 1,203.0 Public utilities................................. 341.5 324.4 324.4 All other corporate bonds........................ 2,419.2 2,312.4 2,312.4 --------- --------- --------- Total bonds............................ 14,615.6 14,508.3 14,449.2 Redeemable preferred stocks......................... 70.3 69.9 69.9 --------- --------- --------- Total fixed maturities................. 14,685.9 14,578.2 14,519.1 --------- --------- --------- Equity securities Common stocks Public utilities................................. 1.9 2.5 2.5 Banks, trusts and insurance companies............ 9.4 13.9 13.9 Industrial, miscellaneous and other.............. 688.4 738.3 738.3 --------- --------- --------- Total common stocks.................... 699.7 754.7 754.7 Non-redeemable preferred stocks..................... 15.3 14.5 14.5 --------- --------- --------- Total equity securities................ 715.0 769.2 769.2 --------- --------- --------- Total invested assets.................. $16,132.0 $16,078.5 $16,019.4 ========= ========= =========
37 38 THE CHUBB CORPORATION SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS -- PARENT COMPANY ONLY (IN MILLIONS) DECEMBER 31
1999 1998 ---- ---- Assets Invested Assets Short Term Investments................................. $ 106.7 $ 98.2 Taxable Fixed Maturities -- Available-for-Sale (cost $323.8 and $377.3).................................... 308.9 357.9 Equity Securities (cost $131.6 and $114.2)............. 184.9 129.5 -------- -------- TOTAL INVESTED ASSETS............................. 600.5 585.6 Cash...................................................... .5 -- Investment in Consolidated Subsidiaries................... 5,751.3 5,191.9 Receivable from Consolidated Subsidiary................... 201.7 208.1 Other Assets.............................................. 219.7 189.3 -------- -------- TOTAL ASSETS...................................... $6,773.7 $6,174.9 ======== ======== Liabilities Long Term Debt............................................ $ 400.0 $ 430.0 Dividend Payable to Shareholders.......................... 56.2 50.3 Accrued Expenses and Other Liabilities.................... 45.7 50.5 -------- -------- TOTAL LIABILITIES................................. 501.9 530.8 -------- -------- 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 177,272,322 and 175,989,202 Shares................................................. 177.3 176.0 Paid-In Surplus........................................... 418.4 546.7 Retained Earnings......................................... 6,008.6 5,604.0 Accumulated Other Comprehensive Income Unrealized Appreciation (Depreciation) of Investments, Net of Tax............................................ (112.6) 414.7 Foreign Currency Translation Losses, Net of Tax........ (44.8) (36.0) Receivable from Employee Stock Ownership Plan............. (74.9) (86.3) Treasury Stock, at Cost -- 1,782,489 and 13,722,376 Shares................................................. (100.2) (975.0) -------- -------- TOTAL SHAREHOLDERS' EQUITY........................ 6,271.8 5,644.1 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $6,773.7 $6,174.9 ======== ========
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 1999 Annual Report to Shareholders. 38 39 THE CHUBB CORPORATION SCHEDULE II (CONTINUED) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME -- PARENT COMPANY ONLY (IN MILLIONS) YEARS ENDED DECEMBER 31
1999 1998 1997 ---- ---- ---- Investment Income........................................... $ 41.9 $ 46.2 $ 71.8 Realized Investment Gains................................... 18.1 23.0 13.2 Investment Expenses......................................... (2.1) (2.1) (1.8) Corporate Expenses.......................................... (41.2) (27.7) (34.9) ------ ------ ------ 16.7 39.4 48.3 Federal and Foreign Income Tax.............................. 6.9 3.9 44.0 ------ ------ ------ 9.8 35.5 4.3 Equity in Net Income of Consolidated Subsidiaries........... 611.3 671.5 765.2 ------ ------ ------ NET INCOME............................................. $621.1 $707.0 $769.5 ====== ====== ======
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 1999 Annual Report to Shareholders. 39 40 THE CHUBB CORPORATION SCHEDULE II (CONTINUED) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY (IN MILLIONS) YEARS ENDED DECEMBER 31
1999 1998 1997 ---- ---- ---- Cash Flows from Operating Activities Net Income................................................ $ 621.1 $ 707.0 $ 769.5 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Equity in Net Income of Consolidated Subsidiaries...... (611.3) (671.5) (765.2) Realized Investment Gains.............................. (18.1) (23.0) (13.2) Other, Net............................................. 16.3 (17.5) 16.9 ------- ------- ------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.............................. 8.0 (5.0) 8.0 ------- ------- ------- Cash Flows from Investing Activities Proceeds from Sales of Fixed Maturities................... 105.5 70.6 600.1 Proceeds from Maturities of Fixed Maturities.............. 30.4 94.5 49.1 Proceeds from Sales of Equity Securities.................. 68.7 97.9 89.7 Proceeds from Sale of Discontinued Operations, Net........ -- -- 861.2 Purchases of Fixed Maturities............................. (83.8) (213.5) (606.3) Purchases of Equity Securities............................ (67.7) (122.7) (84.0) Decrease (Increase) in Short Term Investments, Net........ (8.5) 322.6 (411.1) Dividends Received from Consolidated Subsidiaries......... 300.0 280.0 280.0 Other, Net................................................ (9.8) (25.1) 19.6 ------- ------- ------- NET CASH PROVIDED BY INVESTING ACTIVITIES............ 334.8 504.3 798.3 ------- ------- ------- 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............................ (210.6) (203.4) (196.5) Repurchase of Shares...................................... (145.0) (608.5) (827.9) Decrease (Increase) in Receivable from Consolidated Subsidiary............................................. 6.4 (131.2) (61.0) Other, Net................................................ 36.9 73.2 60.4 ------- ------- ------- NET CASH USED IN FINANCING ACTIVITIES................ (342.3) (499.9) (805.7) ------- ------- ------- Net Increase (Decrease) in Cash............................. .5 (.6) .6 Cash at Beginning of Year................................... -- .6 -- ------- ------- ------- CASH AT END OF YEAR.................................. $ .5 $ -- $ .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 1999, the Corporation acquired all of the outstanding common shares of Executive Risk Inc. in exchange for common stock of the Corporation. 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. 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 1999 Annual Report to Shareholders. 40 41 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 ------- ----------- --------- -------- -------- ---------- --------- 1999 Property and Casualty Insurance Personal....................... $201.7 $ 778.8 $ 784.1 $1,447.5 $ 836.8 Standard Commercial............ 226.1 5,386.7 920.4 1,944.9 1,704.8 Specialty Commercial........... 351.9 5,269.2 1,618.6 2,259.6 1,400.4 Investments.................... $821.0* ------ --------- -------- -------- ------ -------- $779.7 $11,434.7 $3,323.1 $5,652.0 $821.0 $3,942.0 ====== ========= ======== ======== ====== ======== 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 ====== ========= ======== ======== ====== ======== YEAR ENDED DECEMBER 31 ------------------------------------ AMORTIZATION OTHER OF DEFERRED INSURANCE POLICY OPERATING ACQUISITION COSTS AND PREMIUMS SEGMENT COSTS EXPENSES** WRITTEN ------- ------------ ---------- -------- 1999 Property and Casualty Insurance Personal....................... $ 401.3 $ 73.1 $1,524.5 Standard Commercial............ 538.5 152.7 1,842.2 Specialty Commercial........... 589.9 133.3 2,334.4 Investments.................... -------- ------ -------- $1,529.7 $359.1 $5,701.1 ======== ====== ======== 1998 Property and Casualty Insurance Personal....................... $ 370.1 $ 72.7 $1,364.7 Standard Commercial............ 554.0 145.6 2,005.8 Specialty Commercial........... 540.2 134.1 2,133.0 Investments.................... -------- ------ -------- $1,464.3 $352.4 $5,503.5 ======== ====== ======== 1997 Property and Casualty Insurance Personal....................... $ 340.3 $ 62.4 $1,306.4 Standard Commercial............ 515.6 128.3 2,026.1 Specialty Commercial........... 505.5 116.0 2,119.3 Reinsurance Assumed............ 41.2 (3.8) Investments.................... -------- ------ -------- $1,402.6 $306.7 $5,448.0 ======== ====== ========
- --------------- * 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. ** Other insurance operating costs and expenses does not include amortization of goodwill and other charges. 41 42 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 ------ --------- ---------- ------ ------------- 1999.................................... $6,037.1 $631.6 $246.5 $5,652.0 4.4 ======== ====== ====== ======== 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 ======== ====== ====== ========
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 -------- -------- ---------------- 1999............................................ $4,147.6 $(205.6) $3,848.9 ======== ======= ======== 1998............................................ $3,712.1 $(218.4) $3,008.4 ======== ======= ======== 1997............................................ $3,372.3 $ (65.3) $2,498.3 ======== ======= ========
42 43 THE CHUBB CORPORATION EXHIBITS (ITEM 14(A))
DESCRIPTION (2) -- Plan of acquisition, reorganization, arrangement, liquidation or succession 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. Incorporated by reference to Exhibit (3) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1998. Certificate of Correction of Certificate of Amendment to the Restated Certificate of Incorporation. Incorporated by reference to Exhibit (3) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1998. 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. Rights Agreement dated as of March 12, 1999 between The Chubb Corporation and First Chicago Trust Company of New York as Rights Agent. Incorporated by reference to Exhibit 99.1 of the registrant's Report to the Securities and Exchange Commission on Form 8-K dated March 12, 1999. (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 Septem- ber 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.
43 44
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, 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, 1998. The Chubb Corporation Stock Option Plan for Non-Employee Directors (1996), as amended, 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, 1998. The Chubb Corporation Long-Term Stock Incentive Plan (1992), as amended, 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, 1998. The Chubb Corporation Stock Option Plan for Non-Employee Directors (1992), as amended, 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, 1998. The Chubb Corporation Deferred Compensation Plan for Directors, as amended, 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, 1998. The Chubb Corporation Executive Deferred Compensation Plan incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1998. The Chubb Corporation Estate Enhancement Program incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-Q for the three months ended March 31, 1999. The Chubb Corporation Estate Enhancement Program for Non-Employee Directors incorporated by reference to Exhibit (10) of the registrant's Report to the Securities and Exchange Commission on Form 10-Q for the three months ended March 31, 1999. Executive Severance Agreement, as amended, 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 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, 1998.
44 45
DESCRIPTION (11) -- Computation of earnings per share incorporated by reference from Note (17) of the notes to consolidated financial statements of the 1999 Annual Report to Shareholders. (13) -- Pages 15, 16, 36 through 62 and 64 of the 1999 Annual Report to Shareholders. (21) -- Subsidiaries of the registrant filed herewith. (23) -- Consent of Independent Auditors (see page 36 of this report). (27) -- Financial Data Schedule filed herewith.
45 EX-13 2 PORTIONS OF 1999 ANNUAL REPORT TO SHAREHOLDERS 1 Supplementary Financial Data
IN MILLIONS YEARS ENDED DECEMBER 31 1999 1998 1997 -------- -------- -------- PROPERTY AND CASUALTY INSURANCE UNDERWRITING Net Premiums Written................................... $5,701.1 $5,503.5 $5,448.0 Increase in Unearned Premiums.......................... (49.1) (199.7) (290.6) -------- -------- -------- Premiums Earned........................................ 5,652.0 5,303.8 5,157.4 -------- -------- -------- Claims and Claim Expenses.............................. 3,942.0 3,493.7 3,307.0 Operating Costs and Expenses........................... 1,841.5 1,832.6 1,753.3 Decrease (Increase) in Deferred Policy Acquisition Costs................................................ 4.2 (51.8) (75.7) Dividends to Policyholders............................. 43.1 35.9 31.7 -------- -------- -------- UNDERWRITING INCOME (LOSS)............................. (178.8) (6.6) 141.1 -------- -------- -------- INVESTMENTS Investment Income Before Expenses...................... 832.6 760.0 721.4 Investment Expenses.................................... 11.6 11.1 10.2 -------- -------- -------- INVESTMENT INCOME...................................... 821.0 748.9 711.2 -------- -------- -------- Amortization of Goodwill and Other Charges................ (16.0) (17.4) (24.1) Restructuring Charge (a).................................. -- (40.0) -- -------- -------- -------- PROPERTY AND CASUALTY INCOME.............................. 626.2 684.9 828.2 CORPORATE AND OTHER......................................... (3.5) 22.9 40.7 -------- -------- -------- CONSOLIDATED OPERATING INCOME BEFORE INCOME TAX............. 622.7 707.8 868.9 Federal and Foreign Income Tax.............................. 57.4 93.0 167.8 -------- -------- -------- CONSOLIDATED OPERATING INCOME............................... 565.3 614.8 701.1 REALIZED INVESTMENT GAINS AFTER INCOME TAX.................. 55.8 92.2 68.4 -------- -------- -------- CONSOLIDATED NET INCOME..................................... $ 621.1 $ 707.0 $ 769.5 ======== ======== ======== PROPERTY AND CASUALTY INVESTMENT INCOME AFTER INCOME TAX.... $ 691.9 $ 634.1 $ 592.3 ======== ======== ========
(a) In the first quarter of 1998, a restructuring charge of $40.0 million ($26.0 million after taxes) related to a cost reduction program was recorded. 15 2 Property and Casualty Underwriting Results NET PREMIUMS WRITTEN (In Millions of Dollars)
1999 1998 1997 1996 1995 Personal Insurance Automobile................................... $ 346.1 $ 309.4 $ 298.6 $ 243.1 $ 200.3 Homeowners................................... 826.7 735.1 697.4 546.1 455.6 Other........................................ 351.7 320.2 310.4 250.0 210.9 -------- -------- -------- -------- -------- Total Personal.......................... 1,524.5 1,364.7 1,306.4 1,039.2 866.8 -------- -------- -------- -------- -------- Commercial Insurance Multiple Peril............................... 714.5 784.5 813.6 671.0 575.7 Casualty..................................... 828.2 900.5 915.8 818.0 717.3 Workers' Compensation........................ 299.5 320.8 296.7 243.7 223.4 -------- -------- -------- -------- -------- Total Standard Commercial............... 1,842.2 2,005.8 2,026.1 1,732.7 1,516.4 -------- -------- -------- -------- -------- Property and Marine.......................... 498.4 524.0 583.0 495.0 426.3 Executive Protection......................... 1,078.0 949.8 891.4 775.7 647.0 Financial Institutions....................... 385.8 391.6 384.3 340.4 285.5 Other........................................ 372.2 267.6 260.6 188.3 195.5 -------- -------- -------- -------- -------- Total Specialty Commercial.............. 2,334.4 2,133.0 2,119.3 1,799.4 1,554.3 -------- -------- -------- -------- -------- Total Commercial........................ 4,176.6 4,138.8 4,145.4 3,532.1 3,070.7 -------- -------- -------- -------- -------- Total Personal and Commercial........... 5,701.1 5,503.5 5,451.8 4,571.3 3,937.5 Reinsurance Assumed from Royal & Sun Alliance..................................... -- -- (3.8) 202.5 368.5 -------- -------- -------- -------- -------- Total................................... $5,701.1 $5,503.5 $5,448.0 $4,773.8 $4,306.0 ======== ======== ======== ======== ========
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................................... 91.8% 89.2% 86.6% 86.5% 87.4% Homeowners................................... 97.9 90.8 88.9 104.3 93.8 Other........................................ 69.4 70.2 66.9 69.3 72.6 -------- -------- -------- -------- -------- Total Personal.......................... 89.9 85.6 83.1 91.7 87.1 -------- -------- -------- -------- -------- Commercial Insurance Multiple Peril............................... 132.7 124.2 118.7 118.1 110.0 Casualty..................................... 119.3 114.6 113.5 113.3 113.8 Workers' Compensation........................ 112.6 111.5 105.0 101.8 95.1 -------- -------- -------- -------- -------- Total Standard Commercial............... 123.6 118.0 114.5 113.6 109.7 -------- -------- -------- -------- -------- Property and Marine.......................... 111.3 116.5 105.5 97.8 92.9 Executive Protection......................... 84.3 75.8 74.5 76.5 82.1 Financial Institutions....................... 95.5 86.7 91.5 83.7 88.8 Other........................................ 92.9 100.9 85.0 99.0 103.9 -------- -------- -------- -------- -------- Total Specialty Commercial.............. 93.6 91.5 87.5 86.1 89.1 -------- -------- -------- -------- -------- Total Commercial........................ 107.3 104.5 100.7 99.7 99.3 -------- -------- -------- -------- -------- Total Personal and Commercial........... 102.8 99.8 96.6 97.9 96.5 Reinsurance Assumed from Royal & Sun Alliance..................................... -- -- N/M N/M 99.2 -------- -------- -------- -------- -------- Total................................... 102.8% 99.8% 96.9% 98.3% 96.8% ======== ======== ======== ======== ========
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 1999 1998 1997 INCOME Property and Casualty Insurance Underwriting Income (Loss)............................... $(178.8) $ (6.6) $ 141.1 Investment Income........................................ 821.0 748.9 711.2 Amortization of Goodwill and Other Charges............... (16.0) (57.4)(b) (24.1) Property and Casualty Insurance Income.................... 626.2 684.9 828.2 Corporate and Other....................................... (3.5) 22.9 40.7 OPERATING INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX...................................... 622.7 707.8 868.9 Federal and Foreign Income Tax (Credit)................... 57.4 93.0 167.8 OPERATING INCOME FROM CONTINUING OPERATIONS............... 565.3 614.8 701.1 Realized Investment Gains from Continuing Operations...... 55.8 92.2 68.4 INCOME FROM CONTINUING OPERATIONS......................... 621.1 707.0 769.5 Income from Discontinued Operations (1)................... -- -- -- NET INCOME................................................ 621.1 707.0 769.5 Property and Casualty Investment Income After Income Tax.................................................... 691.9 634.1 592.3 Dividends Declared on Common Stock.......................... 216.5 204.7 198.3 Net Change in Unrealized Appreciation or Depreciation of Investments, Net of Tax(2)................................ (527.3) 14.6 161.4 PER SHARE Operating Income from Continuing Operations............... 3.33 3.65(b) 4.00 Income from Continuing Operations......................... 3.66 4.19 4.39 Income from Discontinued Operations(1).................... -- -- -- Net Income................................................ 3.66 4.19 4.39 Dividends Declared on Common Stock........................ 1.28 1.24 1.16 Average Common and Potentially Dilutive Shares.............. 169.8 168.6 176.2
(1) In May 1997, the Corporation sold its life and health insurance operations, which have been classified as discontinued operations. (2) 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. 36 4
1996 1995 1994 1993 1992 1991 1990 $ 54.3 $ 111.7 $ .4 $(528.9)(a) $ (46.3) $ 17.1 $ 4.1 646.1 603.0 560.5 533.7 493.5 469.5 456.3 (24.0) (17.5) (8.7) (6.2) (4.3) (1.2) (5.5) 676.4 697.2 552.2 (1.4) 442.9 485.4 454.9 (209.3)(c) 31.0 5.0 24.5 43.8 59.3 80.2 467.1 728.2 557.2 23.1 486.7 544.7 535.1 32.9 144.5 84.4 (107.0) 49.4 87.2 88.3 434.2 583.7 472.8 130.1 437.3 457.5 446.8 52.0 70.7 35.1 137.3 114.8 40.3 25.8 486.2 654.4 507.9 267.4 552.1 497.8 472.6 26.5 42.2 20.6 76.8 65.0 54.2 49.5 512.7 696.6 528.5 324.2(d) 617.1 552.0 522.1 544.2 507.2 475.0 455.4 422.8 397.6 371.4 188.7 170.6 161.1 150.8 139.6 127.8 109.1 (107.2) 470.2 (487.9) 46.5 (82.1) 12.2 (19.4) 2.44(c) 3.27 2.66 .77(a) 2.47 2.61 2.59 2.73 3.67 2.85 1.52 3.10 2.84 2.74 .15 .23 .11 .42 .36 .30 .28 2.88 3.90 2.96 1.83(d) 3.46 3.14 3.02 1.08 .98 .92 .86 .80 .74 .66 181.6 180.9 181.6 182.2 181.4 178.5 175.5
(a) Underwriting income has been reduced by $550.0 million ($357.5 million after-tax or $1.96 per share) for the net effect of a $675.0 million increase in unpaid claims related to an agreement for the settlement of asbestos-related litigation and a $125.0 million return premium related to the commutation of a medical malpractice reinsurance agreement. (b) Property and casualty insurance other charges includes a restructuring charge of $40.0 million ($26.0 million after-tax or $.15 per share). (c) Real estate income has been reduced by a charge of $255.0 million ($160.0 million after-tax or $.89 per share) for the write-down of the carrying value of certain real estate assets to their estimated fair value. (d) 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. 37 5 Ten Year Financial Summary (in millions except for per share amounts)
FOR THE YEAR 1999 1998 1997 REVENUES Property and Casualty Insurance Premiums Earned......................................... $ 5,652.0 $ 5,303.8 $ 5,157.4 Investment Income....................................... 832.6 760.0 721.4 Real Estate.............................................. 96.8 82.2 616.1 Corporate Investment Income.............................. 60.8 61.9 63.9 Realized Investment Gains................................ 87.4 141.9 105.2 TOTAL REVENUES........................................ 6,729.6 6,349.8 6,664.0 AT YEAR END Total Assets............................................... 23,537.0 20,746.0 19,615.6 Invested Assets Property and Casualty Insurance.......................... 14,869.9 13,715.0 12,777.3 Corporate................................................ 1,149.5 1,040.3 1,272.3 Unpaid Claims.............................................. 11,434.7 10,356.5 9,772.5 Long Term Debt............................................. 759.2 607.5 398.6 Total Shareholders' Equity................................. 6,271.8 5,644.1 5,657.1 Per Common Share......................................... 35.74 34.78 33.53 Per Common Share, Excluding the Effects of SFAS No. 115................................................... 36.58 32.59 31.69 Actual Common Shares Outstanding........................... 175.5 162.3 168.7
Amounts prior to 1994 do not reflect the accounting changes prescribed by Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, as restatement of prior year amounts was not permitted. 38 6
1996 1995 1994 1993 1992 1991 1990 $ 4,569.3 $ 4,147.2 $ 3,776.3 $ 3,504.8(a) $ 3,163.3 $ 3,037.2 $ 2,836.1 656.2 613.3 570.5 541.7 501.1 477.0 463.4 319.8 287.8 204.9 160.6 150.0 140.9 174.9 55.4 54.4 49.4 52.7 57.2 46.3 39.6 79.8 108.8 54.1 210.6 174.1 61.1 39.6 5,680.5 5,211.5 4,655.2 4,470.4 4,045.7 3,762.5 3,553.6 19,938.9 19,636.3 17,761.0 16,729.5 15,197.6 13,885.9 12,347.8 11,190.7 10,013.6 8,938.8 8,403.1 7,767.5 7,086.6 6,297.8 890.4 906.6 879.5 965.7 955.8 840.3 688.4 9,523.7 9,588.2 8,913.2 8,235.4 7,220.9 6,591.3 6,016.4 1,070.5 1,150.8 1,279.6 1,267.2 1,065.6 1,045.8 812.6 5,462.9 5,262.7 4,247.0 4,196.1 3,954.4 3,541.6 2,882.6 31.24 30.14 24.46 23.92 22.59 20.37 17.60 30.27 28.51 25.30 23.92 22.59 20.37 17.60 174.9 174.6 173.6 175.4 175.0 173.9 163.8
(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. 39 7 The Chubb Corporation CONSOLIDATED STATEMENTS OF INCOME
IN MILLIONS YEARS ENDED DECEMBER 31 1999 1998 1997 REVENUES -------- -------- -------- Premiums Earned (Note 8)............................... $5,652.0 $5,303.8 $5,157.4 Investment Income (Note 4)............................. 893.4 821.9 785.3 Real Estate............................................ 96.8 82.2 616.1 Realized Investment Gains (Note 4)..................... 87.4 141.9 105.2 -------- -------- -------- TOTAL REVENUES.................................... 6,729.6 6,349.8 6,664.0 -------- -------- -------- CLAIMS AND EXPENSES Insurance Claims (Notes 8 and 15)...................... 3,942.0 3,493.7 3,307.0 Amortization of Deferred Policy Acquisition Costs (Note 5).................................................... 1,529.7 1,464.3 1,402.6 Other Insurance Operating Costs and Expenses........... 375.1 369.8 330.8 Real Estate Cost of Sales and Expenses................. 100.3 85.7 624.7 Investment Expenses.................................... 13.7 13.2 12.0 Corporate Expenses..................................... 58.7 33.4 12.8 Restructuring Charge (Note 9).......................... -- 40.0 -- -------- -------- -------- TOTAL CLAIMS AND EXPENSES......................... 6,019.5 5,500.1 5,689.9 -------- -------- -------- INCOME BEFORE FEDERAL AND FOREIGN INCOME TAX...... 710.1 849.7 974.1 FEDERAL AND FOREIGN INCOME TAX (NOTE 11).................... 89.0 142.7 204.6 -------- -------- -------- NET INCOME........................................ $ 621.1 $ 707.0 $ 769.5 ======== ======== ======== NET INCOME PER SHARE (NOTE 17) Basic............................................. $ 3.70 $ 4.27 $ 4.48 Diluted........................................... 3.66 4.19 4.39
See accompanying notes. 40 8 The Chubb Corporation CONSOLIDATED BALANCE SHEETS
IN MILLIONS DECEMBER 31 1999 1998 ASSETS ---- --------- Invested Assets (Note 4) Short Term Investments................................. $ 731.1 $ 344.2 Fixed Maturities Held-to-Maturity -- Tax Exempt (market $1,801.0 and $2,140.2)........................................... 1,741.9 2,002.2 Available-for-Sale Tax Exempt (cost $7,889.3 and $6,509.3)........... 7,867.5 6,935.1 Taxable (cost $5,054.7 and $4,259.0).............. 4,909.7 4,381.6 Equity Securities (cost $715.0 and $1,002.6)........... 769.2 1,092.2 --------- --------- TOTAL INVESTED ASSETS................................ 16,019.4 14,755.3 Cash...................................................... 22.7 8.3 Securities Lending Collateral............................. 469.5 -- Accrued Investment Income................................. 242.9 221.0 Premiums Receivable....................................... 1,234.7 1,199.3 Reinsurance Recoverable on Unpaid Claims.................. 1,685.9 1,306.6 Prepaid Reinsurance Premiums.............................. 240.1 134.6 Funds Held for Asbestos-Related Settlement................ -- 607.4 Deferred Policy Acquisition Costs (Note 5)................ 779.7 728.7 Real Estate Assets (Notes 6 and 10)....................... 699.4 746.0 Deferred Income Tax (Note 11)............................. 584.2 320.8 Goodwill.................................................. 507.2 -- Other Assets.............................................. 1,051.3 718.0 --------- --------- TOTAL ASSETS......................................... $23,537.0 $20,746.0 ========= ========= LIABILITIES Unpaid Claims (Note 15)................................... $11,434.7 $10,356.5 Unearned Premiums......................................... 3,323.1 2,915.7 Securities Lending Payable................................ 469.5 -- Long Term Debt (Note 10).................................. 759.2 607.5 Dividend Payable to Shareholders.......................... 56.2 50.3 Accrued Expenses and Other Liabilities.................... 1,222.5 1,171.9 --------- --------- TOTAL LIABILITIES.................................... 17,265.2 15,101.9 --------- --------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 14 AND 15) SHAREHOLDERS' EQUITY (NOTES 12 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 177,272,322 and 175,989,202 Shares................................................. 177.3 176.0 Paid-In Surplus........................................... 418.4 546.7 Retained Earnings......................................... 6,008.6 5,604.0 Accumulated Other Comprehensive Income Unrealized Appreciation (Depreciation) of Investments, Net of Tax (Note 4)................................... (112.6) 414.7 Foreign Currency Translation Losses, Net of Tax........ (44.8) (36.0) Receivable from Employee Stock Ownership Plan............. (74.9) (86.3) Treasury Stock, at Cost -- 1,782,489 and 13,722,376 Shares................................................. (100.2) (975.0) --------- --------- TOTAL SHAREHOLDERS' EQUITY........................... 6,271.8 5,644.1 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $23,537.0 $20,746.0 ========= =========
See accompanying notes. 41 9 The Chubb Corporation CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN MILLIONS YEARS ENDED DECEMBER 31 1999 1998 1997 -------- -------- -------- PREFERRED STOCK Balance, Beginning and End of Year..................... $ -- $ -- $ -- -------- -------- -------- COMMON STOCK Balance, Beginning of Year............................. 176.0 176.0 176.1 Share Activity Related to Acquisition of Executive Risk................................................. .6 -- -- Share Activity under Option and Incentive Plans........ .7 -- (.1) -------- -------- -------- Balance, End of Year.............................. 177.3 176.0 176.0 -------- -------- -------- PAID-IN SURPLUS Balance, Beginning of Year............................. 546.7 593.0 695.7 Share Activity Related to Acquisition of Executive Risk................................................. (126.3) -- -- Exchange of Long Term Debt............................. -- -- (68.4) Share Activity under Option and Incentive Plans........ (2.0) (46.3) (34.3) -------- -------- -------- Balance, End of Year.............................. 418.4 546.7 593.0 -------- -------- -------- RETAINED EARNINGS Balance, Beginning of Year............................. 5,604.0 5,101.7 4,530.5 Net Income............................................. 621.1 707.0 769.5 Dividends Declared (per share $1.28, $1.24 and $1.16)............................................... (216.5) (204.7) (198.3) -------- -------- -------- Balance, End of Year.............................. 6,008.6 5,604.0 5,101.7 -------- -------- -------- UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS Balance, Beginning of Year............................. 414.7 400.1 238.7 Change During Year, Net (Note 4)....................... (527.3) 14.6 161.4 -------- -------- -------- Balance, End of Year.............................. (112.6) 414.7 400.1 -------- -------- -------- FOREIGN CURRENCY TRANSLATION LOSSES Balance, Beginning of Year............................. (36.0) (25.7) (15.6) Change During Year, Net of Tax......................... (8.8) (10.3) (10.1) -------- -------- -------- Balance, End of Year.............................. (44.8) (36.0) (25.7) -------- -------- -------- RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN Balance, Beginning of Year............................. (86.3) (96.7) (106.3) Principal Repayments................................... 11.4 10.4 9.6 -------- -------- -------- Balance, End of Year.............................. (74.9) (86.3) (96.7) -------- -------- -------- TREASURY STOCK, AT COST Balance, Beginning of Year............................. (975.0) (491.3) (56.2) Repurchase of Shares................................... (145.0) (608.5) (827.9) Share Activity Related to Acquisition of Executive Risk................................................. 957.2 -- -- Shares Issued upon Exchange of Long Term Debt.......... -- -- 304.4 Share Activity under Option and Incentive Plans........ 62.6 124.8 88.4 -------- -------- -------- Balance, End of Year.............................. (100.2) (975.0) (491.3) -------- -------- -------- TOTAL SHAREHOLDERS' EQUITY........................ $6,271.8 $5,644.1 $5,657.1 ======== ======== ========
See accompanying notes. 42 10 The Chubb Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS
IN MILLIONS YEARS ENDED DECEMBER 31 1999 1998 1997 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income................................................ $ 621.1 $ 707.0 $ 769.5 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Increase in Unpaid Claims, Net......................... 93.1 485.3 808.7 Increase in Unearned Premiums, Net..................... 49.1 199.7 290.6 Decrease (Increase) in Premiums Receivable............. 14.9 (54.9) (159.5) Decrease (Increase) in Funds Held for Asbestos-Related Settlement........................................... 607.4 (7.9) .4 Decrease (Increase) in Deferred Policy Acquisition Costs................................................ 4.2 (51.8) (75.7) Deferred Income Tax (Credit)........................... 5.3 (5.5) (33.3) Depreciation........................................... 68.4 58.2 56.4 Realized Investment Gains.............................. (87.4) (141.9) (105.2) Other, Net............................................. (37.2) 25.8 13.2 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES......................................... 1,338.9 1,214.0 1,565.1 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sales of Fixed Maturities -- Available-for- Sale..................................................... 1,427.5 1,668.8 3,682.6 Proceeds from Maturities of Fixed Maturities.............. 860.3 784.2 658.5 Proceeds from Sales of Equity Securities.................. 1,030.6 366.7 401.3 Proceeds from Sale of Discontinued Operations, Net........ -- -- 861.2 Purchases of Fixed Maturities............................. (3,252.2) (3,218.4) (5,394.8) Purchases of Equity Securities............................ (590.7) (535.7) (519.3) Purchase of Interest in Hiscox plc........................ (145.3) -- -- Decrease (Increase) in Short Term Investments, Net........ (190.9) 380.9 (449.2) Proceeds from Sale of Real Estate Properties.............. 7.0 33.6 759.6 Additions to Real Estate Assets........................... (11.7) (13.2) (40.1) Purchases of Fixed Assets, Net............................ (98.4) (78.8) (71.0) Other, Net................................................ 6.3 (75.5) 41.1 --------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES................ (957.5) (687.4) (70.1) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Issuance of Long Term Debt.................. -- 400.5 10.2 Repayment of Long Term Debt............................... (48.3) (191.6) (344.9) Decrease in Short Term Debt, Net.......................... -- -- (189.5) Dividends Paid to Shareholders............................ (210.6) (203.4) (196.5) Repurchase of Shares...................................... (145.0) (608.5) (827.9) Other, Net................................................ 36.9 73.2 60.4 --------- --------- --------- NET CASH USED IN FINANCING ACTIVITIES................ (367.0) (529.8) (1,488.2) --------- --------- --------- Net Increase (Decrease) in Cash............................. 14.4 (3.2) 6.8 Cash at Beginning of Year................................... 8.3 11.5 4.7 --------- --------- --------- CASH AT END OF YEAR.................................. $ 22.7 $ 8.3 $ 11.5 ========= ========= ========= CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Net Income.................................................. $ 621.1 $ 707.0 $ 769.5 Other Comprehensive Income (Loss) Change in Unrealized Appreciation or Depreciation of Investments, Net of Tax................................ (527.3) 14.6 161.4 Foreign Currency Translation Losses, Net of Tax............................................. (8.8) (10.3) (10.1) --------- --------- --------- (536.1) 4.3 151.3 --------- --------- --------- COMPREHENSIVE INCOME................................. $ 85.0 $ 711.3 $ 920.8 ========= ========= =========
See accompanying notes. 43 11 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 include amounts based on informed estimates and judgments of 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. In May 1997, the Corporation completed the sale of its 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 subsequent to December 31, 1996. Certain amounts in the consolidated financial statements for prior years have been reclassified to conform with the 1999 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 a separate component of comprehensive income. 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 risk 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 12 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) 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. (g) Goodwill Goodwill, which represents the excess of the purchase price over the fair value of net assets of subsidiaries acquired, is being amortized using the straight-line method over 26 years. The carrying value of goodwill is periodically reviewed for impairment. If it became probable that the projected future undiscounted cash flows were not sufficient to recover the carrying value of the goodwill, an impairment loss would be recognized resulting in a write-down of the carrying value of the goodwill. (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 a separate component of comprehensive income. 45 13 (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 1999, the Corporation acquired all of the outstanding common shares of Executive Risk Inc. in exchange for common stock of the Corporation (see Note (3)). The details of the acquisition were as follows: fair value of assets acquired, including goodwill, $2,459 million; fair value of liabilities assumed, $1,627 million; and fair value of common stock issued and options assumed, $832 million. In 1997, $228.6 million of exchangeable subordinated notes were exchanged for 5,316,565 shares of common stock of the Corporation. Also, 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 October 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk. This SOP provides guidance on how to account for insurance and reinsurance contracts that do not transfer insurance risk. SOP 98-7 is effective for the Corporation for the year beginning January 1, 2000. Restatement of previously issued financial statements is not permitted. The adoption of SOP 98-7 is not expected to have a significant effect on the Corporation's financial position or results of operations. 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 in the balance sheet as assets or liabilities and be measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and whether it qualifies for hedge accounting. SFAS No. 133, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133, is effective for the Corporation for the year beginning January 1, 2001. 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. (2) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT Effective January 1, 1999, the Corporation adopted SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which was issued by the AICPA. The 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. Prior to 1999, the Corporation expensed all costs of developing internal use computer software as incurred. The SOP has been applied prospectively. Adoption of SOP 98-1 decreased claims and operating expenses by $25.4 million in 1999, resulting in an increase to net income of $16.5 million or $.10 per diluted share for the year. The effect on net income will decrease in future years as the new method of accounting is phased in. (3) ACQUISITIONS (a) In July 1999, the Corporation completed its acquisition of Executive Risk Inc. Executive Risk is a specialty insurance company offering directors and officers, errors and omissions and professional liability coverages. Executive Risk shareholders received 1.235 shares of the Corporation's common stock for each outstanding common share of Executive Risk. In addition, outstanding Executive Risk stock options were converted to stock options of the Corporation. Approximately 14.3 million shares of common stock of the Corporation were issued to Executive Risk shareholders and an additional 1.8 million shares of common stock of the Corporation were reserved for issuance upon exercise of the converted Executive Risk stock options. The acquisition has been accounted for using the purchase method of accounting. Therefore, the results of operations of Executive Risk are included in the Corporation's consolidated results of operations from the date of acquisition. The assets and liabilities of Executive Risk were recorded at their estimated fair values at the date of acquisition. The value of the stock options assumed by the Corporation was included in the purchase price. The total purchase price was approximately $832 million. The excess of the purchase price over the estimated fair value of the net assets acquired, amounting to approximately $517 million, has been recorded as goodwill and is being amortized over 26 years. Pro forma results of operations showing the effects on the Corporation's operations prior to the date of acquisition have not been presented due to immateriality. (b) In March 1999, the Corporation completed its purchase of a 28% interest in Hiscox plc, a leading U.K. personal and commercial specialty insurer, for approximately $145 million. 46 14 (4) INVESTED ASSETS AND RELATED INCOME (a) The amortized cost and estimated market value of fixed maturities were as follows:
December 31 ------------------------------------------------------------------------------ 1999 1998 --------------------------------------------------- ------------------------ Gross Gross Estimated Gross Amortized Unrealized Unrealized Market Amortized Unrealized Cost Appreciation Depreciation Value Cost Appreciation --------- ------------ ------------ --------- --------- ------------ (in millions) Held-to-maturity -- Tax exempt....... $ 1,741.9 $ 60.3 $ 1.2 $ 1,801.0 $ 2,002.2 $138.0 --------- ------ ------ --------- --------- ------ Available-for-sale Tax exempt......................... 7,889.3 137.5 159.3 7,867.5 6,509.3 427.9 --------- ------ ------ --------- --------- ------ Taxable U.S. Government and government agency and authority obligations.................... 575.4 .5 14.4 561.5 344.2 8.8 Corporate bonds.................. 1,535.0 2.1 61.2 1,475.9 1,031.9 44.5 Foreign bonds.................... 1,199.2 19.4 15.6 1,203.0 1,118.3 85.4 Mortgage-backed securities....... 1,674.8 13.2 88.6 1,599.4 1,694.3 22.1 Redeemable preferred stocks...... 70.3 .1 .5 69.9 70.3 2.9 --------- ------ ------ --------- --------- ------ 5,054.7 35.3 180.3 4,909.7 4,259.0 163.7 --------- ------ ------ --------- --------- ------ Total available-for-sale....... 12,944.0 172.8 339.6 12,777.2 10,768.3 591.6 --------- ------ ------ --------- --------- ------ Total fixed maturities......... $14,685.9 $233.1 $340.8 $14,578.2 $12,770.5 $729.6 ========= ====== ====== ========= ========= ====== December 31 ------------------------ 1998 ------------------------ Gross Estimated Unrealized Market Depreciation Value ------------ --------- (in millions) Held-to-maturity -- Tax exempt....... $-- $ 2,140.2 ----- --------- Available-for-sale Tax exempt......................... 2.1 6,935.1 ----- --------- Taxable U.S. Government and government agency and authority obligations.................... -- 353.0 Corporate bonds.................. .6 1,075.8 Foreign bonds.................... 1.6 1,202.1 Mortgage-backed securities....... 38.9 1,677.5 Redeemable preferred stocks...... -- 73.2 ----- --------- 41.1 4,381.6 ----- --------- Total available-for-sale....... 43.2 11,316.7 ----- --------- Total fixed maturities......... $43.2 $13,456.9 ===== =========
The amortized cost and estimated market value of fixed maturities at December 31, 1999 by contractual maturity were as follows:
Estimated Amortized Market Cost Value --------- --------- (in millions) Held-to-maturity Due in one year or less.................................. $ 185.4 $ 187.2 Due after one year through five years.................... 535.3 552.9 Due after five years through ten years................... 709.0 735.2 Due after ten years...................................... 312.2 325.7 --------- --------- $ 1,741.9 $ 1,801.0 ========= ========= Available-for-sale Due in one year or less.................................. $ 115.5 $ 116.6 Due after one year through five years.................... 2,002.8 2,014.8 Due after five years through ten years................... 4,221.5 4,257.1 Due after ten years...................................... 4,929.4 4,789.3 --------- --------- 11,269.2 11,177.8 Mortgage-backed securities............................... 1,674.8 1,599.4 --------- --------- $12,944.0 $12,777.2 ========= =========
Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations. (b) The components of unrealized appreciation (depreciation) of investments carried at market value were as follows:
December 31 ---------------------- 1999 1998 ---- ---- (in millions) Equity securities Gross unrealized appreciation............................ $ 89.7 $164.6 Gross unrealized depreciation............................ 35.5 75.0 ------- ------ 54.2 89.6 ------- ------ Fixed maturities Gross unrealized appreciation............................ 172.8 591.6 Gross unrealized depreciation............................ 339.6 43.2 ------- ------ (166.8) 548.4 ------- ------ (112.6) 638.0 Deferred income tax liability (asset)...................... (39.4) 223.3 Valuation allowance........................................ 39.4 -- ------- ------ $(112.6) $414.7 ======= ======
47 15 The change in unrealized appreciation or depreciation of investments carried at market value was as follows:
Years Ended December 31 ------------------------------- 1999 1998 1997 ---- ---- ---- (in millions) Change in unrealized appreciation of equity securities.............. $ (35.4) $(47.6) $ 31.4 Change in unrealized appreciation or depreciation of fixed maturities........................ (715.2) 70.0 216.9 ------- ------ ------ (750.6) 22.4 248.3 Deferred income tax (credit)....... (262.7) 7.8 86.9 Increase in valuation allowance.... 39.4 -- -- ------- ------ ------ $(527.3) $ 14.6 $161.4 ======= ====== ======
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 carried at amortized cost was a decrease of $78.9 million, a decrease of $8.6 million and an increase of $16.8 million for the years ended December 31, 1999, 1998 and 1997, respectively. (c) The sources of net investment income were as follows:
Years Ended December 31 ------------------------------------ 1999 1998 1997 ---- ---- ---- (in millions) Fixed maturities.................... $816.9 $761.1 $726.1 Equity securities................... 31.2 24.7 10.8 Short term investments.............. 43.8 35.8 47.6 Other............................... 1.5 .3 .8 ------ ------ ------ Gross investment income............ 893.4 821.9 785.3 Investment expenses................. 13.7 13.2 12.0 ------ ------ ------ $879.7 $808.7 $773.3 ====== ====== ======
(d) Realized investment gains and losses were as follows:
Years Ended December 31 ------------------------------------ 1999 1998 1997 ---- ---- ---- (in millions) Gross realized investment gains Fixed maturities................... $ 38.2 $ 49.2 $ 56.3 Equity securities.................. 172.9 118.5 93.8 ------ ------ ------ 211.1 167.7 150.1 ------ ------ ------ Gross realized investment losses Fixed maturities................... 14.3 7.0 26.5 Equity securities.................. 109.4 18.8 18.4 ------ ------ ------ 123.7 25.8 44.9 ------ ------ ------ Realized investment gains........... 87.4 141.9 105.2 Income tax.......................... 31.6 49.7 36.8 ------ ------ ------ $ 55.8 $ 92.2 $ 68.4 ====== ====== ======
(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 in accordance with the Corporation's guidelines to generate additional income for the Corporation. (5) DEFERRED POLICY ACQUISITION COSTS Policy acquisition costs deferred and the related amortization charged against income were as follows:
Years Ended December 31 --------------------------------- 1999 1998 1997 ---- ---- ---- (in millions) Balance, beginning of year..... $ 728.7 $ 676.9 $ 601.2 --------- --------- --------- Increase related to acquisition of Executive Risk............ 55.2 -- -- --------- --------- --------- Costs deferred during year Commissions and brokerage.... 784.4 768.0 775.0 Premium taxes and assessments................ 132.8 128.5 124.9 Salaries and operating costs...................... 608.3 619.6 578.4 --------- --------- --------- 1,525.5 1,516.1 1,478.3 Amortization during year....... (1,529.7) (1,464.3) (1,402.6) --------- --------- --------- Balance, end of year........... $ 779.7 $ 728.7 $ 676.9 ========= ========= =========
(6) 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 November 1997, the real estate subsidiary sold a substantial portion of its commercial properties for $736.9 million, which included $628.3 million in cash and the assumption of $108.6 million in debt. 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 ------------------- 1999 1998 ---- ---- (in millions) Mortgages and notes receivable (net of allowance for uncollectible amounts of $13.9 and $16.8).... $ 81.2 $105.2 Income producing properties....................... 196.8 166.5 Construction in progress.......................... 66.2 109.2 Land under development and unimproved land........ 355.2 365.1 ------ ------ $699.4 $746.0 ====== ======
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 $85.5 million and $106.9 million at December 31, 1999 and 1998, 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 $3.5 million, $2.9 million and $2.7 million for 1999, 1998 and 1997, respectively. 48 16 (7) PROPERTY AND EQUIPMENT Property and equipment included in other assets were as follows:
December 31 ------------------- 1999 1998 ---- ---- (in millions) Cost.......................................... $517.6 $428.3 Accumulated depreciation...................... 224.1 196.3 ------ ------ $293.5 $232.0 ====== ======
Depreciation expense related to property and equipment was $64.9 million, $55.3 million and $53.7 million for 1999, 1998 and 1997, respectively. (8) 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 ------------------------------ 1999 1998 1997 ---- ---- ---- (in millions) Direct premiums written....... $6,042.6 $5,842.0 $5,524.4 Reinsurance assumed Royal & Sun Alliance........ -- -- (3.8) Other....................... 275.2 141.9 166.7 Reinsurance ceded Royal & Sun Alliance........ -- -- 174.6 Other....................... (616.7) (480.4) (413.9) -------- -------- -------- Net premiums written........ $5,701.1 $5,503.5 $5,448.0 ======== ======== ======== Direct premiums earned........ $6,037.1 $5,624.7 $5,315.8 Reinsurance assumed Royal & Sun Alliance........ -- -- 94.9 Other....................... 246.5 140.6 197.5 Reinsurance ceded............. (631.6) (461.5) (450.8) -------- -------- -------- Net premiums earned......... $5,652.0 $5,303.8 $5,157.4 ======== ======== ========
The Royal & Sun Alliance Insurance Group plc is the beneficial owner of 5.1% 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, 1997, the reinsurance agreements with Royal & Sun Alliance were terminated. The termination of the agreements 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 a reduction of assumed premiums written of $93.6 million in 1997. 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 $501.2 million, $447.4 million and $346.8 million in 1999, 1998 and 1997, respectively. There were no recoveries from Royal & Sun Alliance in any of these years. (9) RESTRUCTURING CHARGE During 1998, the Corporation implemented an activity value analysis process to identify and eliminate low-value activities and to improve operational efficiency while redirecting resources to activities having the greatest potential to contribute to the Corporation's results. The cost control initiative 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 resulted from improved vendor management and lower consulting expenses and other operating costs. In the first quarter of 1998, a restructuring charge of $40.0 million was recorded related to the implementation of the cost control initiative. Of the $40.0 million restructuring charge, approximately $30 million was comprised of accruals for providing enhanced pension benefits and postretirement medical benefits to employees who accepted an early retirement incentive offer and approximately $5 million was severance costs for employees who were terminated. The remainder of the charge was for other expenses such as the cost of outplacement services. The initiative was completed with no significant differences from the original estimates of the restructuring costs. The liabilities related to the enhanced pension and postretirement medical benefits were included in the pension and postretirement medical benefits liabilities, which will be reduced as benefit payments are made over time. Of the other restructuring costs, $1.5 million remained unpaid at December 31, 1999. 49 17 (10) DEBT AND CREDIT ARRANGEMENTS (a) Long term debt consisted of the following:
December 31 ------------------------------------- 1999 1998 ----------------- ----------------- Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- ----- (in millions) Term loan................. $ 15.0 $ 15.0 $ 28.5 $ 28.5 Mortgages................. 44.2 44.8 49.0 48.9 8 3/4% notes.............. -- -- 30.0 30.8 6.15% notes............... 300.0 284.8 300.0 312.8 6.60% debentures.......... 100.0 89.2 100.0 108.1 6 7/8% notes.............. 100.0 99.4 100.0 106.1 7 1/8% notes.............. 75.0 71.0 -- -- 8.675% capital securities.............. 125.0 125.0 -- -- ------ ------ ------ ------ $759.2 $729.2 $607.5 $635.2 ====== ====== ====== ======
The term loan and mortgages are obligations of the real estate subsidiaries. The term loan matures in 2001. The mortgages payable are due in varying amounts monthly through 2010. At December 31, 1999, the interest rate on the term loan was 7.3% and the interest rate for the mortgages payable approximated 8 1/2%. The term loan and mortgages payable are secured by real estate assets with a net book value of $185.0 million at December 31, 1999. The Corporation has outstanding $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. Chubb Capital Corporation, a wholly owned subsidiary of the Corporation, has outstanding $100.0 million of unsecured 6 7/8% notes due February 1, 2003. These notes are fully and unconditionally guaranteed by the Corporation. Chubb Executive Risk Inc., a wholly owned subsidiary of the Corporation, has outstanding $75.0 million of unsecured 7 1/8% notes due December 15, 2007. Executive Risk Capital Trust, wholly owned by Chubb Executive Risk, has outstanding $125.0 million of 8.675% capital securities. The Trust in turn used the proceeds from the issuance of the capital securities to acquire $125.0 million of Chubb Executive Risk 8.675% junior subordinated deferrable interest debentures due February 1, 2027. The sole assets of the Trust are the debentures. The debentures and the related income effects are eliminated in the consolidated financial statements. The capital securities are subject to mandatory redemption on February 1, 2027, upon repayment of the debentures. The capital securities are also subject to mandatory redemption in certain other specified circumstances beginning in 2007 at a redemption price that includes a make whole premium through 2017 and at par thereafter. Chubb Executive Risk has the right, at any time, to defer payments of interest on the debentures and hence distributions on the capital securities for a period not exceeding 10 consecutive semi-annual periods up to the maturity dates of the respective securities. During any such period, interest will continue to accrue and Chubb Executive Risk may not declare or pay any dividends to the Corporation. Chubb Executive Risk's obligations under the debentures and related agreements, taken together, constitute a full and unconditional guarantee by it of payments due on the capital securities. 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, 1999 are as follows:
Years Ending Term Loan December 31 and Mortgages Notes Total ------------ ------------- ----- ----- (in millions) 2000.................. $ .3 $ -- $ .3 2001.................. 15.3 -- 15.3 2002.................. .4 -- .4 2003.................. .4 100.0 100.4 2004.................. .4 -- .4
(b) Interest costs of $48.5 million, $28.9 million and $72.4 million were incurred in 1999, 1998 and 1997, respectively, of which $8.7 million was capitalized in 1997. Interest paid, net of amounts capitalized, was $48.0 million, $23.4 million and $60.4 million in 1999, 1998 and 1997, 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 was to have terminated on July 7, 1999, was extended to July 5, 2000, 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. 50 18 (11) FEDERAL AND FOREIGN INCOME TAX (a) Income tax expense consisted of the following components:
Years Ended December 31 ------------------------- 1999 1998 1997 ---- ---- ---- (in millions) Current tax United States............................................. $41.0 $124.7 $194.4 Foreign................................................... 42.7 23.5 43.5 Deferred tax (credit), principally United States............ 5.3 (5.5) (33.3) ----- ------ ------ $89.0 $142.7 $204.6 ===== ====== ======
Federal and foreign income taxes paid were $83.5 million, $177.9 million and $253.5 million in 1999, 1998 and 1997, 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 --------------------------------------------------------- 1999 1998 1997 ----------------- ----------------- ----------------- % of % of % of Pre-Tax Pre-Tax Pre-Tax Amount Income Amount Income Amount Income ------ ------- ------ ------- ------ ------- (in millions) Income before federal and foreign income tax.............. $710.1 $849.7 $974.1 ======= ======= ======= Tax at statutory federal income tax rate.................. $248.5 35.0% $297.3 35.0% $340.9 35.0% Tax exempt interest income................................ (150.6) (21.2) (137.5) (16.2) (126.4) (13.0) Other, net................................................ (8.9) (1.3) (17.1) (2.0) (9.9) (1.0) ------- ----- ------- ----- ------- ----- Actual tax.......................................... $ 89.0 12.5% $142.7 16.8% $204.6 21.0% ======= ===== ======= ===== ======= =====
(c) The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities were as follows:
December 31 -------------------- 1999 1998 ---- ---- (in millions) Deferred income tax assets Unpaid claims............................................. $521.2 $541.7 Unearned premiums......................................... 191.6 172.7 Postretirement benefits................................... 76.1 73.1 Alternative minimum tax credit carryforward............... 43.1 -- Unrealized depreciation of investments.................... 39.4 -- Other, net................................................ 73.9 60.9 ------ ------ 945.3 848.4 Valuation allowance....................................... (39.4) -- ------ ------ Total................................................... 905.9 848.4 ------ ------ Deferred income tax liabilities Deferred policy acquisition costs......................... 238.0 225.0 Real estate assets........................................ 83.7 79.3 Unrealized appreciation of investments.................... -- 223.3 ------ ------ Total................................................... 321.7 527.6 ------ ------ Net deferred income tax asset......................... $584.2 $320.8 ====== ======
The valuation allowance at December 31, 1999 relates to future tax benefits on unrealized depreciation of investments, the realization of which is uncertain. The valuation allowance had no impact on net income. 51 19 (12) 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, 1999, 5,216,197 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 is as follows:
1999 1998 1997 ----------------------------- ----------------------------- ----------------------------- 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....... 9,765,090 $54.78 9,124,803 $47.67 8,058,829 $41.48 Exchanged for Executive Risk options............................ 1,809,885 36.77 -- -- -- -- Granted.............................. 4,761,683 60.31 2,168,804 78.75 2,753,007 61.05 Exercised............................ (1,359,855) 39.50 (1,320,504) 41.78 (1,486,812) 38.39 Forfeited............................ (411,219) 64.20 (208,013) 75.25 (200,221) 51.69 ---------- ---------- ---------- Outstanding, end of year............. 14,565,584 55.58 9,765,090 54.78 9,124,803 47.67 ========== ========== ========== Exercisable, end of year............. 9,187,352 51.09 6,879,061 47.26 5,932,905 42.54
December 31, 1999 ---------------------------------------------------------------------------------- Options Outstanding Options Exercisable ------------------------------------------------- ------------------------------ Weighted Average Range of Number Weighted Average Remaining Number Weighted Average Option Exercise Prices Outstanding Exercise Price Contractual Life Exercisable Exercise Price ---------------------- ----------- ---------------- ---------------- ----------- ---------------- $ 3.95 - $52.40.................... 5,513,261 $41.09 4.2 5,468,336 $41.04 52.41 - 87.34.................... 9,052,323 64.41 7.9 3,719,016 65.87 ---------- --------- 14,565,584 55.58 6.5 9,187,352 51.09 ========== =========
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 with respect to performance share and restricted stock awards was $5.2 million in 1999 and $14.4 million in 1998 and 1997. 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 based 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.
1999 1998 1997 ---------------------- ---------------------- ---------------------- As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma -------- -------- -------- -------- -------- -------- (in millions except for per share amounts) Net income........................ $621.1 $585.6 $707.0 $679.6 $769.5 $746.3 Diluted earnings per share........ 3.66 3.45 4.19 4.03 4.39 4.26
52 20 The weighted average fair value of options granted under the Long-Term Stock Incentive Plans during 1999, 1998 and 1997 was $13.77, $17.36 and $13.83, 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 1999, 1998 and 1997 were 5.4%, 5.5% and 6.5%, respectively. The expected volatility of the market price of the Corporation's common stock for 1999, 1998 and 1997 grants was 19.0%, 16.4% and 16.3%, respectively. The expected average term of the granted options was 5 1/2 years for 1999 and 5 years for 1998 and 1997. The dividend yield was 2.1% for 1999, 1.6% for 1998 and 1.9% for 1997. (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 1999, 1998 and 1997, cash contributions to the ESOP of $11.2 million, $11.0 million and $12.2 million, respectively, were charged against income. Dividends on shares of common stock in the ESOP used for debt service were $7.7 million, $7.8 million and $6.2 million in 1999, 1998 and 1997, respectively. The number of allocated and unallocated shares held by the ESOP at December 31, 1999 were 3,319,357 and 2,597,404, 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, 1999, there were 1,411,010 shares subscribed, giving employees the right to purchase such shares at a price of $53.89 in March 2001. No compensation cost has been recognized for such rights. Had the fair value based method been used, the cost would have been immaterial. (13) EMPLOYEE BENEFITS (a) The Corporation and its subsidiaries have several non-contributory defined benefit pension plans covering substantially all employees. The benefits are generally based on an employee's years of service and average compensation during the last five years of employment. Pension costs are determined using the projected unit credit method. The Corporation's policy is to make annual contributions that meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The components of net pension cost were as follows:
Years Ended December 31 ------------------------------ 1999 1998 1997 ---- ---- ---- (in millions) Service cost of current period...................... $ 22.2 $ 18.8 $ 19.9 Interest cost on projected benefit obligation.......... 37.6 34.5 30.3 Expected return on plan assets...................... (44.5) (40.3) (35.1) Other gains................... (2.5) (2.5) (2.0) ------ ------ ------ Net pension cost.......... $ 12.8 $ 10.5 $ 13.1 ====== ====== ======
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 (9)). The following table sets forth the plans' funded status and amounts recognized in the balance sheets:
December 31 ------------------- 1999 1998 ---- ---- (in millions) Actuarial present value of projected benefit obligation for service rendered to date.................................. $543.4 $518.7 Plan assets at fair value.................. 599.0 552.9 ------ ------ Plan assets in excess of projected benefit obligation............................... (55.6) (34.2) Unrecognized net gain from past experience different from that assumed.............. 153.8 127.3 Unrecognized prior service costs........... (6.3) (7.5) Unrecognized net asset at January 1, 1985, being recognized principally over 19 years.................................... 3.4 4.9 ------ ------ Pension liability included in other liabilities............................ $ 95.3 $ 90.5 ====== ======
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation at December 31, 1999 and 1998 was 7 1/2% and 7 1/4%, respectively, and the rate of increase in future compensation levels was 4 1/2% for 1999 and 1998. 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. 53 21 (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 were as follows:
Years Ended December 31 ---------------------------------- 1999 1998 1997 ---- ---- ---- (in millions) Service cost of current period... $ 4.5 $ 4.2 $ 4.9 Interest cost on accumulated benefit obligation............. 8.6 8.2 8.8 Net amortization and deferral.... (1.0) (1.3) (.7) ----- ----- ----- Net postretirement benefit cost......................... $12.1 $11.1 $13.0 ===== ===== =====
The components of the accumulated postretirement benefit obligation were as follows:
December 31 ------------------- 1999 1998 ---- ---- (in millions) Accumulated postretirement benefit obligation................................ $123.4 $123.1 Unrecognized net gain from past experience different from that assumed............... 32.2 27.1 ------ ------ Postretirement benefit liability included in other liabilities.................... $155.6 $150.2 ====== ======
The weighted average discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation at December 31, 1999 and 1998 was 7 1/2% and 7 1/4%, respectively. At December 31, 1999, the weighted average health care cost trend rate used to measure the accumulated postretirement cost for medical benefits was 9% for 2000 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, 1999 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, 1999 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 $15.1 million, $14.5 million and $15.0 million were charged against income in 1999, 1998 and 1997, respectively. (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 -------------------------------- 1999 1998 1997 ---- ---- ---- (in millions) Office facilities........................ $71.0 $73.8 $71.1 Equipment................................ 13.4 13.3 12.6 ----- ----- ----- $84.4 $87.1 $83.7 ===== ===== =====
At December 31, 1999, future minimum rental payments required under non-cancellable operating leases were as follows:
Years Ending December 31 ------------ (in millions) 2000.................................... $ 84.2 2001.................................... 79.9 2002.................................... 71.3 2003.................................... 63.7 2004.................................... 54.2 After 2004.............................. 324.8 ------ $678.1 ======
54 22 (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 was subject to final appellate court approval. Pursuant to the global settlement agreement, a $1,525.0 million trust fund would be established to pay "future" claims, defined as claims that were not filed in court before August 27, 1993. Pacific Indemnity would contribute $538.2 million to the trust fund and Continental Casualty would 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 was included in funds held for asbestos-related settlement in the consolidated balance sheet. Upon final court approval of the settlement, the amount in the escrow account, including interest earned thereon, would be transferred to the trust fund. Pacific Indemnity and Continental Casualty reached a separate agreement in 1993 for the handling of all "pending" asbestos-related bodily injury claims, defined as claims pending on August 26, 1993 against Fibreboard. Pacific Indemnity's obligation under this agreement with respect to such pending claims was approximately $635.0 million, all of which was paid by the end of 1996. The agreement further provided that the total responsibility of both insurers with respect to pending and future asbestos-related bodily injury claims against Fibreboard would 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 pending 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 would be triggered if the global settlement agreement was 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 reaffirmed portions of an agreement reached in March 1992 between Pacific Indemnity and Fibreboard. Among other matters, that 1992 agreement eliminated 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 1999, the Supreme Court refused to affirm approval of the global settlement agreement. The case was returned to the United States District Court of the Eastern District of Texas for further proceedings. In September 1999, the District Court entered judgment disapproving the global settlement agreement. That judgment was not appealed and became final in November 1999. The trilateral agreement was never appealed to the United States Supreme Court and is final. Upon final disapproval of the global settlement agreement, the trilateral agreement became effective. In December 1999, the funds that had been held in the escrow account were paid to a trust established to pay future asbestos-related bodily injury claims against Fibreboard. Management believes that Pacific Indemnity's exposure with respect to asbestos-related claims against Fibreboard has ended. The property and casualty subsidiaries continue to have potentially significant asbestos exposure, primarily on those traditional defendants who manufactured, distributed or installed asbestos products for whom excess liability coverages were written. Such exposure has increased in recent years due to the erosion of much of the underlying limits and the non-viability of other defendants. 55 23 The other potential 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. As the resources of traditional asbestos defendants have been depleted, more peripheral parties have been drawn into litigation. Thus, notices of new asbestos claims and new exposures on existing claims continue to be received despite the fact that practically all manufacturing and usage of asbestos ended nearly two decades ago. Uncertainty remains as to the ultimate liability relating to asbestos claims due to such factors as the long latency period between asbestos exposure and disease manifestation and the resulting potential for involvement of multiple policy periods for individual claims. Significant issues remain unresolved, adding to the complexity and uncertainty of asbestos litigation. These issues primarily involve questions regarding allocation of indemnity and expense costs and exhaustion of policy limits. The property and casualty subsidiaries are involved in disputes with other insurers and with insureds over these issues, which increase the difficulty of settlement negotiations. 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 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 definitively 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:
1999 1998 1997 ---- ---- ---- (in millions) Gross liability, beginning of year......................... $10,356.5 $ 9,772.5 $9,523.7 Reinsurance recoverable, beginning of year............ 1,306.6 1,207.9 1,767.8 --------- --------- -------- Net liability, beginning of year......................... 9,049.9 8,564.6 7,755.9 --------- --------- -------- Net increase related to acquisition of Executive Risk (net of reinsurance recoverable of $339.5)....... 605.8 -- -- --------- --------- -------- Net incurred claims and claim expenses related to Current year............... 4,147.6 3,712.1 3,372.3 Prior years................ (205.6) (218.4) (65.3) --------- --------- -------- 3,942.0 3,493.7 3,307.0 --------- --------- -------- Net payments for claims and claim expenses related to Current year............... 1,278.9 1,210.7 1,080.0 Prior years................ 2,570.0 1,797.7 1,418.3 --------- --------- -------- 3,848.9 3,008.4 2,498.3 --------- --------- -------- Net liability, end of year..... 9,748.8 9,049.9 8,564.6 Reinsurance recoverable, end of year.................. 1,685.9 1,306.6 1,207.9 --------- --------- -------- Gross liability, end of year... $11,434.7 $10,356.5 $9,772.5 ========= ========= ========
During 1999, the property and casualty insurance subsidiaries experienced overall favorable development of $205.6 million on net unpaid claims established as of the previous year-end. This compares with favorable development of $218.4 million and $65.3 million in 1998 and 1997, 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, 1999 were adequate to cover claims for losses that 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 24 (16) SEGMENTS INFORMATION 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 from Royal & Sun Alliance. 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. Specialty commercial classes include property and marine, executive protection, financial institutions and other commercial classes. Other specialty commercial business in 1999 includes reinsurance assumed written through Chubb Re, which began operations during the year. Reinsurance assumed from Royal & Sun Alliance was treaty reinsurance that has been terminated (see Note 8). Corporate and other includes corporate investment income, corporate expenses and the results of the real estate subsidiary. 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, amortization of goodwill and certain charges. Investment income performance is based on investment income net of investment expenses, excluding realized investment gains. Revenues, income before income tax and assets of each operating segment were as follows:
Years Ended December 31 ------------------------------ 1999 1998 1997 ---- ---- ---- Revenues (in millions) Property and casualty insurance Premiums earned Personal.......................................... $1,447.5 $1,304.3 $1,188.1 Standard commercial............................... 1,944.9 1,980.6 1,906.1 Specialty commercial.............................. 2,259.6 2,018.9 1,968.3 Reinsurance assumed from Royal & Sun Alliance..... -- -- 94.9 -------- -------- -------- 5,652.0 5,303.8 5,157.4 Investment income..................................... 832.6 760.0 721.4 -------- -------- -------- Total property and casualty insurance............. 6,484.6 6,063.8 5,878.8 Corporate and other Real estate........................................... 96.8 82.2 616.1 Corporate investment income........................... 60.8 61.9 63.9 Realized investment gains................................. 87.4 141.9 105.2 -------- -------- -------- Total revenues.................................... $6,729.6 $6,349.8 $6,664.0 ======== ======== ======== Income (loss) before income tax Property and casualty insurance Underwriting Personal.......................................... $ 121.1 $ 168.1 $ 161.5 Standard commercial............................... (416.8) (360.0) (312.3) Specialty commercial.............................. 121.1 133.5 198.0 Reinsurance assumed from Royal & Sun Alliance..... -- -- 18.2 -------- -------- -------- (174.6) (58.4) 65.4 Increase (decrease) in deferred policy acquisition costs........................................... (4.2) 51.8 75.7 -------- -------- -------- Underwriting income (loss)............................ (178.8) (6.6) 141.1 Investment income..................................... 821.0 748.9 711.2 Amortization of goodwill and other charges............ (16.0) (17.4) (24.1) Restructuring charge.................................. -- (40.0) -- -------- -------- -------- Total property and casualty insurance............. 626.2 684.9 828.2 Corporate and other income (loss)......................... (3.5) 22.9 40.7 Realized investment gains................................. 87.4 141.9 105.2 -------- -------- -------- Total income before income tax.................... $ 710.1 $ 849.7 $ 974.1 ======== ======== ========
December 31 --------------------------------- 1999 1998 1997 ---- ---- ---- (in millions) Assets Property and casualty insurance........................... $21,628.1 $18,954.2 $17,592.4 Corporate and other....................................... 1,976.9 1,878.2 2,239.9 Adjustments and eliminations.............................. (68.0) (86.4) (216.7) --------- --------- --------- Total assets...................................... $23,537.0 $20,746.0 $19,615.6 ========= ========= =========
Distinct investment portfolios are not maintained for each underwriting segment. 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 are not allocated to underwriting segments. 57 25 The international business of the property and casualty insurance segment is conducted primarily through subsidiaries that operate solely outside of the United States. Their assets and liabilities are located principally in the countries where the insurance risks are written. International business is also written by branch offices of certain domestic subsidiaries. Revenues of the property and casualty insurance subsidiaries by geographic area were as follows:
Years Ended December 31 -------------------------------- 1999 1998 1997 ---- ---- ---- (in millions) Revenues United States............................................. $5,452.1 $5,116.6 $4,886.8 International............................................. 1,032.5 947.2 992.0 -------- -------- -------- Total................................................... $6,484.6 $6,063.8 $5,878.8 ======== ======== ========
(17) EARNINGS PER SHARE Basic earnings per common share is based on net income 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 earnings per share:
Years Ended December 31 -------------------------------- 1999 1998 1997 ---- ---- ---- (in millions except for per share amounts) Basic earnings per share: Net income................................................ $621.1 $707.0 $769.5 ====== ====== ====== Weighted average number of common shares outstanding...... 167.7 165.6 171.6 ====== ====== ====== Basic earnings per share.................................. $ 3.70 $ 4.27 $ 4.48 ====== ====== ====== Diluted earnings per share: Net income................................................ $621.1 $707.0 $769.5 After-tax interest expense on 6% exchangeable subordinated notes................................................... -- -- 3.3 ------ ------ ------ Net income for computing diluted earnings per share....... $621.1 $707.0 $772.8 ====== ====== ====== Weighted average number of common shares outstanding...... 167.7 165.6 171.6 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 Additional shares from assumed exercise of stock-based compensation awards..................................... 2.1 3.0 2.8 ------ ------ ------ Weighted average number of common shares and potential common shares assumed outstanding for computing diluted earnings per share...................................... 169.8 168.6 176.2 ====== ====== ====== Diluted earnings per share................................ $ 3.66 $ 4.19 $ 4.39 ====== ====== ======
In 1999 and 1998, options to purchase 5.2 million shares and 1.6 million shares of common stock, respectively, with weighted average exercise prices of $67.71 per share and $78.77 per share, respectively, were excluded from the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the Corporation's common stock. For additional disclosure regarding the stock-based compensation awards, see Note (12). 58 26 (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, long term notes and capital securities. 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 the long term notes and capital securities are based on prices quoted by dealers. The carrying values and fair values of financial instruments were as follows:
December 31 ------------------------------------------- 1999 1998 --------------------- ------------------- Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- ----- (in millions) Assets Invested assets Short term investments.................................. $ 731.1 $ 731.1 $ 344.2 $ 344.2 Fixed maturities (Note 4) Held-to-maturity...................................... 1,741.9 1,801.0 2,002.2 2,140.2 Available-for-sale.................................... 12,777.2 12,777.2 11,316.7 11,316.7 Equity securities....................................... 769.2 769.2 1,092.2 1,092.2 Real estate mortgages and notes receivable (Note 6)....... 81.2 85.5 105.2 106.9 Liabilities Long term debt (Note 10).................................. 759.2 729.2 607.5 635.2
59 27 (19) COMPREHENSIVE INCOME Comprehensive income is defined as all changes in shareholders' equity, except those arising from transactions with shareholders. Comprehensive income includes net income and other comprehensive income, which for the Corporation consists of changes in unrealized appreciation or depreciation of investments carried at market value and changes in foreign currency translation gains or losses. The components of other comprehensive income or loss were as follows:
Years Ended December 31 ---------------------------------------------------------------------------------------- 1999 1998 1997 ---------------------------- -------------------------- -------------------------- Income Income Income Before Tax Before Tax Before Tax Tax (Credit) Net Tax (Credit) Net Tax (Credit) Net ------ -------- --- ------ -------- --- ------ -------- --- (in millions) Unrealized holding gains (losses) arising during the year............ $(663.2) $(191.7)* $(471.5) $164.3 $57.5 $106.8 $353.5 $123.7 $229.8 Less: reclassification adjustment for realized gains included in net income............................. 87.4 31.6 55.8 141.9 49.7 92.2 105.2 36.8 68.4 ------- ------- ------- ------ ----- ------ ------ ------ ------ Net unrealized gains (losses) recognized in other comprehensive income............................. (750.6) (223.3) (527.3) 22.4 7.8 14.6 248.3 86.9 161.4 Foreign currency translation losses............................. (14.2) (5.4) (8.8) (14.2) (3.9) (10.3) (15.3) (5.2) (10.1) ------- ------- ------- ------ ----- ------ ------ ------ ------ Total other comprehensive income (loss).................... $(764.8) $(228.7) $(536.1) $ 8.2 $ 3.9 $ 4.3 $233.0 $ 81.7 $151.3 ======= ======= ======= ====== ===== ====== ====== ====== ======
* Reflects a valuation allowance of $39.4 million. (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) The activity of the Corporation's common stock was as follows:
Years Ended December 31 ----------------------------------------- 1999 1998 1997 ---- ---- ---- (number of shares) Common stock issued Balance, beginning of year................................ 175,989,202 176,037,850 176,084,173 Share activity related to acquisition of Executive Risk... 641,474 -- -- Shares issued upon exchange of long term debt............. -- -- 2,440 Share activity under option and incentive plans........... 641,646 (48,648) (48,763) ----------- ----------- ----------- Balance, end of year.................................. 177,272,322 175,989,202 176,037,850 ----------- ----------- ----------- Treasury stock Balance, beginning of year................................ 13,722,376 7,320,410 1,223,182 Share activity related to acquisition of Executive Risk... (13,651,028) -- -- Repurchase of shares...................................... 2,596,700 8,203,000 12,940,500 Shares issued upon exchange of long term debt............. -- -- (5,314,125) Share activity under option and incentive plans........... (885,559) (1,801,034) (1,529,147) ----------- ----------- ----------- Balance, end of year.................................. 1,782,489 13,722,376 7,320,410 ----------- ----------- ----------- Common stock outstanding, end of year................. 175,489,833 162,266,826 168,717,440 =========== =========== ===========
(c) The Corporation had a shareholders rights plan under which each shareholder had one quarter of a right for each share of common stock of the Corporation held. The rights were scheduled to expire on June 12, 1999. On March 12, 1999, the Board of Directors approved the redemption of these rights for $.01 per right as of March 31, 1999. On March 12, 1999, the Board of Directors adopted a new shareholder rights plan, under which the rights attached 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 are attached 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. 60 28 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 ------------------------------------------------ 1999 1998 --------------------- --------------------- GAAP Statutory GAAP Statutory ---- --------- ---- --------- (in millions) Property and casualty insurance subsidiaries................ $5,255.3 $3,341.5 $4,570.0 $2,836.9 ======== ======== Corporate and other......................................... 1,016.5 1,074.1 -------- -------- $6,271.8 $5,644.1 ======== ========
A comparison of GAAP and statutory net income is as follows:
Years Ended December 31 --------------------------------------------------------------------------- 1999 1998 1997 --------------------- --------------------- --------------------- GAAP Statutory GAAP Statutory GAAP Statutory -------- --------- -------- --------- -------- --------- (in millions) Property and casualty insurance subsidiaries...... $610.6 $609.3 $672.4 $663.1 $752.3 $652.4 ====== ====== ====== Corporate and eliminations........................ 10.5 34.6 17.2 ------ ------ ------ $621.1 $707.0 $769.5 ====== ====== ======
(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 1999, these subsidiaries paid cash dividends to the Corporation totaling $300.0 million. The maximum dividend distribution that may be made by the property and casualty insurance subsidiaries to the Corporation during 2000 without prior approval is approximately $590 million. 61 29 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, 1999 and 1998, 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, 1999. 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 auditing standards generally accepted in the United States. 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, 1999 and 1998 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LP February 23, 2000 62 30 Quarterly Financial Data Summarized unaudited quarterly financial data for 1999 and 1998 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 -------------------- -------------------- -------------------- -------------------- 1999 1998 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- ---- ---- (in millions except for per share amounts) Revenues........................... $1,629.6 $1,587.3 $1,686.6 $1,597.6 $1,709.3 $1,593.2 $1,704.1 $1,571.7 Claims and expenses................ 1,403.0 1,348.0 1,450.7 1,375.2 1,653.3 1,386.0 1,512.5 1,390.9 Federal and foreign income tax (credit)......................... 39.7 47.5 42.6 38.2 (21.3) 33.8 28.0 23.2 -------- -------- -------- -------- -------- -------- -------- -------- Net income..................... $ 186.9 $ 191.8(a) $ 193.3 $ 184.2 $ 77.3 $ 173.4 $ 163.6 $ 157.6 ======== ======== ======== ======== ======== ======== ======== ======== Basic earnings per share........... $ 1.16 $ 1.14(a) $ 1.19 $ 1.10 $ .45 $ 1.05 $ .93 $ .98 ======== ======== ======== ======== ======== ======== ======== ======== Diluted earnings per share......... $ 1.14 $ 1.12(a) $ 1.18 $ 1.08 $ .44 $ 1.04 $ .93 $ .95 ======== ======== ======== ======== ======== ======== ======== ======== Underwriting ratios Losses to premiums earned........ 66.3% 62.8% 67.6% 67.0% 78.1% 67.4% 68.8% 68.1% Expenses to premiums written..... 32.9 33.3 32.7 33.3 32.3 33.8 32.3 33.6 -------- -------- -------- -------- -------- -------- -------- -------- Combined....................... 99.2% 96.1% 100.3% 100.3% 110.4% 101.2% 101.1% 101.7% ======== ======== ======== ======== ======== ======== ======== ========
(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. 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 1999 and 1998.
1999 ---------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Common stock prices High.................................................... $66.44 $75.94 $69.63 $60.75 Low..................................................... 55.44 58.06 49.63 45.50 Dividends declared.......................................... .32 .32 .32 .32
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
At March 6, 2000, there were approximately 7,225 common shareholders of record. 64 EX-21 3 SUBSIDIARIES OF THE REGISTRANT 1 THE CHUBB CORPORATION EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Significant subsidiaries at December 31, 1999 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 COMPANY INCORPORATION OWNED ------- ------------- ------------- Federal Insurance Company................................... Indiana 100% Vigilant Insurance Company............................. New York 100 Chubb Insurance Company of Australia Limited...... Australia 100 Pacific Indemnity Company.............................. 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 Executive Risk Inc. .................................. Delaware 100 Executive Re Inc. ..................................... Delaware 100 Executive Risk Indemnity Inc. .................... Delaware 100 Executive Risk Specialty Insurance Company... Connecticut 100 Quadrant Indemnity Company................... Connecticut 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. 46 EX-27 4 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-31-1999 JAN-01-1999 DEC-31-1999 12,777 1,742 1,801 769 0 0 16,019 23 109 780 23,537 11,435 3,323 0 0 759 0 0 177 6,095 23,537 5,652 893 87 97 3,942 1,530 375 710 89 621 0 0 0 621 3.70 3.66 9,050 4,148 (206) 1,279 2,570 9,749 (206) 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 ($1,686) AS PRESCRIBED BY SFAS 113. SUCH AMOUNTS ARE INCLUDED IN TOTAL ASSETS. UNEARNED-PREMIUMS EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUMS ($240) AS PRESCRIBED BY SFAS NO. 113. THIS PREPAID AMOUNT IS INCLUDED IN TOTAL ASSETS. NOTES-PAYABLE INCLUDES LONG-TERM DEBT OF $759. OTHER-SE INCLUDES PAID IN SURPLUS; RETAINED EARNINGS; FOREIGN CURRENCY TRANSLATION LOSSES, NET OF INCOME TAX; UNREALIZED DEPRECIATION OF INVESTMENTS, NET; RECEIVABLE FROM ESOP AND TREASURY STOCK. OTHER-INCOME REPRESENTS REVENUES FROM REAL ESTATE OPERATIONS. RESERVE-CLOSE INCLUDES $606 EXECUTIVE RISK RESERVES AT ACQUISITION.
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