-----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, Sr8iGOM5nJq2p0bEpGTkAO14lZ7NtPj3BuwcL79Hhp2dol23HmoMEFsF7sl5Poly YoBdlw5OgKXqf5nIFo4Rqw== 0000950123-01-002702.txt : 20010328 0000950123-01-002702.hdr.sgml : 20010328 ACCESSION NUMBER: 0000950123-01-002702 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010327 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: 1580173 BUSINESS ADDRESS: STREET 1: 15 MOUNTAIN VIEW RD P O BOX 1615 CITY: WARREN STATE: NJ ZIP: 07061 BUSINESS PHONE: 9089032000 10-K 1 y43479e10-k.txt THE CHUBB CORPORATION 1 As filed with the Securities and Exchange Commission on March 27, 2001 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 2000 [ ] 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 $12,481,356,946 as of March 5, 2001. 175,231,678 Number of shares of common stock outstanding as of March 5, 2001 DOCUMENTS INCORPORATED BY REFERENCE Portions of The Chubb Corporation 2000 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 24, 2001 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 12,400 persons worldwide on December 31, 2000. In July 1999, the Corporation completed its acquisition of Executive Risk Inc., a specialty insurance company offering directors and officers, errors and omissions and professional liability coverages. The results of operations of Executive Risk are included in the Corporation's consolidated results of operations from the date of acquisition. 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 2000 Annual Report to Shareholders. Revenues, income before income tax and assets for each operating segment for the three years ended December 31, 2000 are included in Note (16) of the notes to consolidated financial statements incorporated by reference from the Corporation's 2000 Annual Report to Shareholders. The property and casualty insurance subsidiaries provide insurance coverages principally in the United States, Canada, Europe, Australia, and parts of Latin America and the Far East. Revenues of the property and casualty insurance subsidiaries by geographic area for the three years ended December 31, 2000 are included in Note (16) of the notes to consolidated financial statements incorporated by reference from the Corporation's 2000 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 Indemnity), Executive Risk Specialty Insurance Company (Executive Risk Specialty) and Quadrant Indemnity Company (Quadrant) 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, Chubb New Jersey, Executive Risk Indemnity, Executive Risk Specialty and Quadrant. 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 lines 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) 1998.......................... $5,842.0 $141.9 $480.4 $5,503.5 1999.......................... 6,042.6 275.2 616.7 5,701.1 2000.......................... 6,741.6 384.4 792.8 6,333.2
- --------------- (a) Intercompany items eliminated. The net premiums written during the last five years for major classes of the Group's business are incorporated by reference from page 20 of the Corporation's 2000 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, Australia, and parts of Latin America and the Far East. In 2000, 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 four states accounting for the largest amounts of direct premiums written were New York with 13%, California with 10% and New Jersey and Texas each with 5%. No other state accounted for 5% or more of such premiums. Approximately 9% of the Group's direct premiums written was produced in Europe and 3% 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 ------- -------- 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 2000............................. 6,333.2 6,145.9 67.5 32.9 100.4 --------- --------- ------- ------- --------- Total for five years ended December 31, 2000............. $27,759.6 $26,828.4 67.1% 32.7% 99.8% ========= ========= ======= ======= =========
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 20 of the Corporation's 2000 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, 2000 and 1999, such ratio for the Group was 1.82 and 1.76, respectively. Producing and Servicing of Business In the United States and Canada, the Group is represented by approximately 5,000 independent agents and accepts business on a regular basis from an estimated 1,000 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 has seven 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 certain underwriting pools and syndicates. 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. Prior to the acquisition, Executive Risk utilized reinsurance to a greater extent because its size limited the amount of risk it could retain. During 2000, Executive Risk's reinsurance program was modified to selectively increase retention levels. The collectibility of reinsurance is subject to the solvency of the reinsurers. The Group is selective in regard to its reinsurers, placing reinsurance with only those reinsurers with strong balance sheets and superior underwriting ability. The Group monitors the financial strength of its reinsurers on an ongoing basis. As a result, uncollectible amounts have not been significant. The Group has an exposure to insured losses caused by hurricanes, earthquakes, winter storms, windstorms and other catastrophic events. The frequency and severity of catastrophes are unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure 4 5 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 80% 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 that have been reported but not settled and of claims that 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. More than 60% of the Group's net unpaid claims and claim adjustment expenses at December 31, 2000 were for incurred but not reported (IBNR) losses--claims that 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, 2000, 1999 and 1998:
YEARS ENDED DECEMBER 31 ----------------------------------- 2000 1999 1998 ---- ---- ---- (IN MILLIONS) Net liability, beginning of year.................. $ 9,748.8 $ 9,049.9 $ 8,564.6 --------- --------- --------- 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......................................... 4,357.7 4,147.6 3,712.1 Decrease in estimates for claims occurring in prior years.................................. (230.0) (205.6) (218.4) --------- --------- --------- 4,127.7 3,942.0 3,493.7 --------- --------- --------- Net payments for claims and claim adjustment expenses related to Current year.................................... 1,342.5 1,278.9 1,210.7 Prior years..................................... 2,482.7 2,570.0 1,797.7 --------- --------- --------- 3,825.2 3,848.9 3,008.4 --------- --------- --------- Net liability, end of year........................ 10,051.3 9,748.8 9,049.9 Reinsurance recoverable, end of year.............. 1,853.3 1,685.9 1,306.6 --------- --------- --------- Gross liability, end of year...................... $11,904.6 $11,434.7 $10,356.5 ========= ========= =========
As reestimated at December 31, 2000, the liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, as established at the previous year-end was redundant by $230.0 million. This compares with favorable development of $205.6 million and $218.4 million during 1999 and 1998, 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 $31.0 million, $46.8 million and $67.8 million in 2000, 1999 and 1998, respectively. Unpaid claims and claim adjustment expenses, net of reinsurance recoverable, increased by $302.5 million or 3% in 2000, $698.9 million or 8% in 1999 and $485.3 million or 6% in 1998. The increase in 1999 includes $605.8 million of net reserves assumed 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. Excluding the effect of the Executive Risk reserves assumed and the Fibreboard payments, unpaid claims and claim adjustment expenses, net of reinsurance recoverable, increased by $641.8 million or 7% in 1999. Reserve growth has occurred each year in those liability classes 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 2000 was approximately 9% lower than the number at year-end 1999, which was in turn flat compared with year-end 1998. 6 7 The uncertainties relating to unpaid claims, particularly for asbestos and toxic waste claims on insurance policies written many years ago, are discussed in Item 7 of this report on pages 19 through 22. 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, 2000, 1999 and 1998. Reinsurance recoveries related to such claims are not significant.
YEARS ENDED DECEMBER 31 ----------------------------- 2000 1999 1998 ---- ---- -------- (IN MILLIONS) Net liability, beginning of year............................ $524.5 $1,075.7(a) $1,092.4(a) Net incurred claims and claim adjustment expenses........... 31.0 46.8 67.8 Net payments for claims..................................... 105.3 598.0(a) 84.5 ------ -------- -------- Net liability, end of year.................................. $450.2 $ 524.5 $1,075.7(a) ====== ======== ========
- --------------- (a) Includes $548.7 million related to Fibreboard. 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 1,100 asbestos claims outstanding at December 31, 2000 compared with 1,600 asbestos claims outstanding at December 31, 1999 and 2,000 asbestos claims outstanding at December 31, 1998. In 2000, approximately 200 claims were opened and 700 claims were closed. 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. Indemnity payments per claim have varied over time due primarily to variations in insureds, policy terms and types of claims. Management cannot predict whether indemnity payments per claim will increase, decrease or remain the same. There were approximately 650 toxic waste claims outstanding at December 31, 2000 compared with 600 toxic waste claims outstanding at December 31, 1999 and 650 toxic waste claims outstanding at December 31, 1998. Approximately 500 claims were opened in 2000, 300 claims were opened in 1999 and 250 claims were opened in 1998. There were approximately 450 claims closed in 2000, 350 claims closed in 1999 and 400 claims closed in 1998. Generally, a toxic waste claim is established for each lawsuit, or alleged equivalent, against an insured where potential liability has been determined to exist under a policy issued by a member of the Group. Because indemnity payments to date for toxic waste claims have not been significant in the aggregate and have varied from claim to claim, management cannot determine whether past claims experience will prove to be representative of future claims experience. The table on page 9 presents the subsequent development of the estimated year-end liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, for the ten years prior to 2000. The amounts in the table for the years ended December 31, 1990 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 7 8 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, 2000. 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 2000 relating to losses incurred prior to December 31, 1990 would be included in the cumulative deficiency amount for each year in the period 1990 through 1999. Yet, the deficiency would be reflected in operating results only in 2000. 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 1990 through 1999, 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 1990 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 1990 column, as of December 31, 2000 the Group had paid $4,188.0 million of the currently estimated $5,036.9 million of claims and claim adjustment expenses that were unpaid at the end of 1990; thus, an estimated $848.9 million of losses incurred through 1990 remain unpaid as of December 31, 2000, approximately half 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, 2000. 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 1990 1991 1992 1993 1994 1995 1996 1997 ---------- ---- ---- ---- ---- ---- ---- ---- ---- (IN MILLIONS) Net Liability for Unpaid Claims and Claim Adjustment Expenses........... $4,301.1 $4,743.9 $5,267.6 $6,450.0 $6,932.9 $7,614.5 $ 7,755.9 $ 8,564.6 Net Liability Reestimated as of: One year later...................... 4,272.3 4,716.3 5,932.4 6,420.3 6,897.1 7,571.7 7,690.6 8,346.2 Two years later..................... 4,244.7 5,368.5 5,904.1 6,363.1 6,874.5 7,520.9 7,419.6 7,899.8 Three years later................... 4,933.0 5,336.5 5,843.5 6,380.4 6,829.8 7,256.8 6,986.2 7,564.8 Four years later.................... 4,941.7 5,302.6 5,894.6 6,338.1 6,605.4 6,901.5 6,719.4 Five years later.................... 4,969.5 5,389.5 5,863.3 6,150.1 6,352.2 6,692.1 Six years later..................... 5,079.3 5,375.3 5,738.4 5,904.9 6,191.4 Seven years later................... 5,094.2 5,303.9 5,582.1 5,751.4 Eight years later................... 5,058.8 5,203.3 5,500.4 Nine years later.................... 5,002.6 5,169.0 Ten years later..................... 5,036.9 Cumulative Net Deficiency (Redundancy)........................ 735.8 425.1 232.8 (698.6) (741.5) (922.4) (1,036.5) (999.8) Cumulative Net Deficiency Related to Asbestos and Toxic Waste Claims..... 1,901.9 1,654.1 1,494.2 718.5 603.3 421.5 270.8 145.6 Cumulative Amount of Net Liability Paid as of: One year later...................... 919.1 931.2 1,039.9 1,272.0 1,250.7 1,889.4 1,418.3 1,797.7 Two years later..................... 1,407.2 1,479.9 1,858.5 1,985.7 2,550.7 2,678.2 2,488.2 3,444.2 Three years later................... 1,808.7 2,083.0 2,332.3 3,015.8 3,073.7 3,438.8 3,757.0 4,160.6 Four years later.................... 2,292.0 2,386.9 3,181.4 3,264.5 3,589.8 4,457.6 4,194.8 Five years later.................... 2,490.2 3,125.8 3,323.0 3,624.2 4,444.4 4,755.4 Six years later..................... 3,174.7 3,200.4 3,603.5 4,367.9 4,683.3 Seven years later................... 3,200.4 3,412.7 4,307.7 4,545.5 Eight years later................... 3,380.5 4.095.5 4,468.3 Nine years later.................... 4,040.1 4,248.7 Ten years later..................... 4,188.0 Gross Liability, End of Year......... $7,220.9 $8,235.4 $8,913.2 $9,588.2 $ 9,523.7 $ 9,772.5 Reinsurance Recoverable, End of Year................................ 1,953.3 1,785.4 1,980.3 1,973.7 1,767.8 1,207.9 -------- -------- -------- -------- --------- --------- Net Liability, End of Year........... $5,267.6 $6,450.0 $6,932.9 $7,614.5 $ 7,755.9 $ 8,564.6 ======== ======== ======== ======== ========= ========= Reestimated Gross Liability.......... $7,504.0 $7,720.3 $8,316.4 $8,720.0 $ 8,467.1 $ 8,745.3 Reestimated Reinsurance Recoverable......................... 2,003.6 1,968.9 2,125.0 2,027.9 1,747.7 1,180.5 -------- -------- -------- -------- --------- --------- Reestimated Net Liability............ $5,500.4 $5,751.4 $6,191.4 $6,692.1 $ 6,719.4 $ 7,564.8 ======== ======== ======== ======== ========= ========= Cumulative Gross Deficiency (Redundancy)........................ $ 283.1 $ (515.1) $ (596.8) $ (868.2) $(1,056.6) $(1,027.2) ======== ======== ======== ======== ========= ========= DECEMBER 31 --------------------------------- YEAR ENDED 1998 1999 2000 ---------- ---- ---- ---- (IN MILLIONS) Net Liability for Unpaid Claims and Claim Adjustment Expenses........... $ 9,049.9 $ 9,748.8 $10,051.3 Net Liability Reestimated as of: One year later...................... 8,854.8 9,518.8 Two years later..................... 8,516.5 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)........................ (533.4) (230.0) Cumulative Net Deficiency Related to Asbestos and Toxic Waste Claims..... 77.8 31.0 Cumulative Amount of Net Liability Paid as of: One year later...................... 2,520.1 2,482.7 Two years later..................... 3,707.8 Three years later................... Four years later.................... Five years later.................... Six years later..................... Seven years later................... Eight years later................... Nine years later.................... Ten years later..................... Gross Liability, End of Year......... $10,356.5 $11,434.7 $11,904.6 Reinsurance Recoverable, End of Year................................ 1,306.6 1,685.9 1,853.3 --------- --------- --------- Net Liability, End of Year........... $ 9,049.9 $ 9,748.8 $10,051.3 ========= ========= ========= Reestimated Gross Liability.......... $ 9,825.7 $11,354.1 Reestimated Reinsurance Recoverable......................... 1,309.2 1,835.3 --------- --------- Reestimated Net Liability............ $ 8,516.5 $ 9,518.8 ========= ========= Cumulative Gross Deficiency (Redundancy)........................ $ (530.8) $ (80.6) ========= =========
- --------------- The amounts for the years 1990 through 1998 do not include Executive Risk's unpaid claims and claim adjustment expenses. The cumulative deficiencies for the years 1990 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 --------------------- 2000 1999 ---- ---- (IN MILLIONS) Net liability reported on a statutory basis--U.S. subsidiaries.............................................. $ 9,181.5 $9,032.6 Additions (reductions): Unpaid claims and claim adjustment expenses of foreign subsidiaries........................................... 871.4 720.5 Other reserve differences................................. (1.6) (4.3) --------- -------- Net liability reported on a GAAP basis...................... $10,051.3 $9,748.8 ========= ========
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 2000, the Group invested new cash primarily in mortgage-backed securities. 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 each year, the Group tried to achieve the appropriate mix in its portfolio to balance both investment and tax strategies. At December 31, 2000, 67% of the Group's fixed maturity portfolio was invested in tax-exempt bonds compared with 70% at December 31, 1999 and 71% at December 31, 1998. 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) 1998............................. $12,795.7 $748.9 5.85% 4.96% 1999............................. 14,208.0 821.0 5.78 4.87 2000............................. 15,223.9 879.2 5.78 4.83
- --------------- (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. The Real Estate Group owns approximately $325 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 page 23. 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 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, 2000, each member of the Group had more than sufficient capital to meet the risk-based capital requirement. 11 12 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 13th largest United States property and casualty insurance group based on 1999 net premiums written. The relatively large size and underwriting capacity of the Group provide opportunities not available to smaller companies. The property and casualty marketplace, particularly the standard commercial lines, which include multiple peril, casualty and workers' compensation, experienced severe price competition from the late 1980s through most of the 1990s. As a result, price levels throughout the industry for many of these coverages fell to inadequate levels. In late 1998, the Group put in place a strategy to increase the pricing in the standard commercial lines and to not renew underperforming accounts where it could not attain price adequacy. The Group's prices for standard commercial coverages have increased steadily and such increases accelerated in 2000. Many of the Group's competitors have also insisted on higher prices since the latter part of 1999. Pricing in the specialty commercial lines and personal lines remains competitive. The Group continues to work closely with its customers and to reinforce with them 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 2000, assessments to the members of the Group amounted to approximately $8 million. The amount of future assessments cannot be reasonably estimated. State insurance regulation requires insurers to participate in assigned risk plans, reinsurance facilities and joint underwriting associations, which are mechanisms that generally provide applicants with various basic insurance coverages when they are not available in voluntary markets. Such mechanisms are most prevalent for automobile and workers' compensation insurance, but a majority of states also mandate participation in Fair Plans or Windstorm Plans, which provide basic property coverages. Some states also require insurers to participate in facilities that provide homeowners and 12 13 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 natural disaster reinsurance, hazardous waste removal and liability measures, tort reform, containment of medical costs, automobile safety, ergonomics, patients' rights, privacy, e-commerce, international trade, financial services deregulation 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 19 through 22. 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 2000 Annual Report to Shareholders. ITEM 3. LEGAL PROCEEDINGS As previously reported, a purported class action complaint was filed in the United States District Court for the District of New Jersey on August 31, 2000 by the California Public Employees' Retirement System. The complaint alleges that the Corporation and three of its current officers, Dean R. O'Hare, David B. Kelso and Henry B. Schram, and Executive Risk Inc. and three of its former officers, Stephen J. Sills, Robert H. Kullas and Robert V. Deutsch, are liable for certain misrepresentations and omissions regarding, among other matters, disclosures made between April 27, 1999 and October 15, 1999 relating to the improved pricing in the Corporation's standard commercial insurance business and relating to the offer of the Corporation's securities to, and solicitation of votes from, the former shareholders of Executive Risk Inc. in connection with the Corporation's acquisition of Executive Risk Inc. The Corporation is defending the action vigorously. The Corporation and its subsidiaries are also 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 19 through 22. 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, 2000. EXECUTIVE OFFICERS OF THE REGISTRANT
YEAR OF AGE(A) ELECTION(B) ------ ----------- Dean R. O'Hare, Chairman of the Corporation................. 58 1972 Joanne L. Bober, Senior Vice President and General Counsel of the Corporation........................................ 48 1999 John J. Degnan, President of the Corporation................ 56 1994 Gail E. Devlin, Senior Vice President of the Corporation.... 62 1981 George R. Fay, Executive Vice President of Chubb & Son, a division of Federal....................................... 52 1999 David S. Fowler, Senior Vice President of the Corporation... 55 1989 Henry G. Gulick, Vice President and Secretary of the Corporation............................................... 57 1975 Weston M. Hicks, Senior Vice President of the Corporation... 44 2001 Ralph E. Jones, III, Executive Vice President of Chubb & Son, a division of Federal................................ 45 1999 David B. Kelso, Executive Vice President of the Corporation............................................... 48 1996 Charles M. Luchs, Executive Vice President of Chubb & Son, a division of Federal....................................... 61 1996 Andrew A. McElwee, Jr., Senior Vice President of the Corporation............................................... 46 1997 Glenn A. Montgomery, Senior Vice President of the Corporation............................................... 48 1997 Thomas F. Motamed, Executive Vice President of the Corporation............................................... 52 1997 Michael J. O'Neill, Jr., Senior Vice President and Counsel of the Corporation........................................ 52 1999 Michael O'Reilly, Executive Vice President of the Corporation............................................... 57 1976 Henry B. Schram, Senior Vice President of the Corporation... 54 1985 Stephen J. Sills, Executive Vice President of the Corporation............................................... 52 1999
- --------------- (a) Ages listed above are as of April 24, 2001. (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. Hicks, 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 joining Chubb in 2001, Mr. Hicks was a Managing Director of J.P. Morgan where he was responsible for its equity research coverage of the property and casualty insurance industry. Previously, Mr. Hicks was a Senior Research Analyst with Sanford Bernstein & Co., Inc. 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 2000 Annual Report to Shareholders, page 65. ITEM 6. SELECTED FINANCIAL DATA Selected financial data for the five years ended December 31, 2000 are incorporated by reference from the Corporation's 2000 Annual Report to Shareholders, pages 38 through 41. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion presents our past results and our expectations for the near term future. The supplementary financial information and the consolidated financial statements and related notes, all of which are integral parts of the following analysis of our results and our financial position, are incorporated by reference from the Corporation's 2000 Annual Report to Shareholders, pages 19, 20 and 42 through 63. 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 its market risk evaluations or with respect to announced real estate plans or rate increases and investment income or cash flow projections 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 inability to reinsure certain risks economically, the adequacy of loss reserves, as well as general market conditions, competition, pricing and restructurings. Any forward-looking statements set forth in this document speak only as of the initial Securities and Exchange Commission filing date hereof. Operating income, which excludes realized investment gains and losses, was $681 million in 2000 compared with $565 million in 1999 and $615 million in 1998. 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 $715 million in 2000 compared with $621 million in 1999 and $707 million in 1998. ACQUISITION OF EXECUTIVE RISK INC. In July 1999, The Chubb Corporation (Corporation) completed its acquisition of Executive Risk Inc., 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 assumed and adjusted as options to purchase common stock of the Corporation. Approximately 14.3 million shares of common stock of the Corporation were issued to Executive Risk shareholders 15 16 and an additional 1.8 million shares of common stock of the Corporation were reserved for issuance upon exercise of the assumed 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 $803 million in 2000 compared with $626 million in 1999 and $685 million in 1998. The higher earnings in 2000 were due primarily to an improvement in underwriting results, caused in large part by substantially lower catastrophe losses compared with the prior year. The decrease in earnings in 1999 was due to deterioration in underwriting results caused in large part by the effect of inadequate prices resulting from the prolonged soft market on our standard commercial results, which include multiple peril, casualty and workers' compensation, and, to a lesser extent, higher catastrophe losses compared with 1998. Investment income increased in both 2000 and 1999 compared with the respective prior years. Catastrophe losses were $72 million in 2000, $225 million in 1999 and $173 million in 1998. 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 2000 or 1999 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 $6.3 billion in 2000, an increase of 11% compared with 1999. Reported net premiums written increased 4% in 1999 compared with 1998. Premium growth in 2000 and 1999 was affected by the inclusion of Executive Risk written premiums since the date of acquisition. Excluding the effect of the acquisition of Executive Risk, premium growth was 8% in 2000 and 1% in 1999. Personal coverages accounted for $1.7 billion or 27% of 2000 net premiums written, standard commercial coverages for $1.8 billion or 28% and specialty commercial coverages for $2.8 billion or 45%. Premium growth in personal lines was strong in both 2000 and 1999. In commercial lines, competition in the worldwide marketplace has made profitable premium growth difficult. However, our strategy, begun in late 1998, to increase the pricing in the standard commercial classes and to not renew underperforming accounts where we could not attain price adequacy has shown increasing success throughout 1999 and 2000. Further, many of our competitors have also insisted on higher prices since the latter part of 1999. As a result, the pricing outlook in the standard commercial classes continues to be favorable. Substantial premium growth was achieved in 2000 and 1999 outside the United States, particularly in Europe, our largest foreign market. Non-U.S. premiums grew 16% and 12% in 2000 and 1999, respectively, in original currency. However, due to the strength of the U.S. dollar, particularly in 2000, reported non-U.S. premiums increased by only 9% in 2000 and 10% in 1999. Underwriting results were near breakeven in 2000 compared with unprofitable results in 1999 and near breakeven results in 1998. The combined loss and expense ratio, the common measure of underwriting profitability, was 100.4% in 2000 compared with 102.8% in 1999 and 99.8% in 1998. The loss ratio was 67.5% in 2000 compared with 70.3% in 1999 and 66.3% in 1998. Losses from catastrophes represented 1.2 percentage points of the loss ratio in 2000 compared with 4.0 percentage 16 17 points in 1999 and 3.3 percentage points in 1998. Catastrophe losses affecting results in 2000 and 1999 resulted primarily from weather-related events in the United States, including in particular Hurricane Floyd in the third quarter of 1999. 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 32.9% in 2000 compared with 32.5% in 1999 and 33.5% in 1998. The increase in the expense ratio in 2000 was due to overhead expenses growing at a somewhat higher rate than written premiums. The lower expense ratio in 1999 compared with the prior year was due to salary and overhead expenses decreasing due to a cost control initiative discussed below and a change in accounting that has resulted in the capitalization of certain costs incurred to develop computer software for internal use that were previously expensed. During 1998, we implemented an activity value analysis process that identified and eliminated low-value activities and improved operational efficiency while redirecting resources to activities having the greatest potential to contribute to the Corporation's results. The cost control initiative resulted in job reductions 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 initiative. The majority of the charge consisted of accruals for providing enhanced pension benefits and postretirement medical benefits to employees who accepted an early retirement incentive offer. The liabilities related to these enhanced benefits have been included in the pension and postretirement medical benefits liabilities and are being reduced as benefit payments are made over time. All of the other restructuring costs have been paid. The initiative was completed with no significant differences from the original estimates of the restructuring costs. PERSONAL INSURANCE Our personal insurance business continued to produce exceptionally strong results in 2000, measured by both growth and profitability. Net premiums from personal insurance increased 13% in 2000 compared with a 12% increase in 1999. We continued to grow our personal lines business with the in-force policy count for all coverages increasing significantly. For most coverages, such growth exceeded 10% each year. Growth has been achieved while maintaining our disciplined approach to pricing and risk selection. Personal lines premiums outside the United States grew significantly in 2000 and 1999, although from a small base. Much of this growth was in Europe where rates are inadequate. Remedial actions are under way to improve the profitability of this business. Our personal insurance business produced substantial underwriting profits in each of the past three years. The combined loss and expense ratio was 92.9% in 2000 compared with 89.9% in 1999 and 85.6% in 1998. Homeowners results were near breakeven in 2000 compared with profitable results in 1999 as a decrease in catastrophe losses was more than offset by an unusually high number of large non-catastrophe losses in 2000, particularly in the first half of the year. Homeowners results in 1999 were less profitable than in 1998 due to an increase in both catastrophe losses and non-catastrophe losses. Results in 1999 were also adversely affected by two large losses aggregating $15 million, net of reinsurance. Catastrophe losses represented 7.3 percentage points of the loss ratio for this class in 2000 compared with 11.8 percentage points in 1999 and 8.5 percentage points in 1998. Homeowners results were unprofitable in Europe in each of the past three years as rates are inadequate and we are still building the critical mass necessary to absorb the costs of operating that franchise. Our personal automobile business produced substantial profits in each of the last three years. However, results in 2000 were less profitable due to an increase in the frequency of losses in the liability component of this business. Results in each year benefited from stable loss severity. 17 18 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 Net premiums from standard commercial insurance decreased 3% in 2000 compared with an 8% decrease in 1999. The decrease in premiums in both years 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 declined during 1999 and 2000. On the business that has renewed, however, rates have increased steadily and such increases accelerated in 2000. The market remains firm and shows no signs of weakening. Our standard commercial insurance business produced substantial underwriting losses in each of the past three years, but showed improvement in 2000. The improvement was due primarily to fewer large losses as well as the progress made on our initiative to increase prices while not renewing unprofitable accounts. The combined loss and expense ratio was 114.0% in 2000 compared with 123.6% in 1999 and 118.0% in 1998. Rates are still inadequate. Underpriced business will continue to put pressure on standard commercial underwriting results in 2001. We will continue to push for higher rates in 2001. Multiple peril results were unprofitable in each of the past three years due, in large part, to inadequate prices. However, such results showed significant improvement in 2000. The improvement occurred in both the property and liability components of this business due to a lower frequency of large losses in both the United States and overseas. Results in the property component also benefited from an absence of catastrophe losses. Results had deteriorated in 1999 compared with the prior year due to an increase in the severity of liability losses as well as several large property losses overseas. There were virtually no catastrophe losses for this class in 2000. Catastrophe losses represented 9.6 percentage points of the loss ratio in 1999 and 8.6 percentage points in 1998. Results for our casualty business were unprofitable in each of the past three years. Results in 2000 were similar to those in 1999, as improvement in the primary liability component was offset by further deterioration in the automobile component. In 1999, casualty results had deteriorated, primarily in these two components. Casualty results in each of the past three years 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 2000 and 1999 compared with the near breakeven results in 1998 due to increases in the severity of the large losses that are prevalent in this class as well as declining prices over the past several years. 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 due to a higher frequency of large losses. Primary and excess liability results outside the United States deteriorated in 2000. Results in the automobile component were increasingly unprofitable over the past three years due in large part to inadequate prices, a consequence of the prolonged soft market, and an increased frequency of losses. Results in 2000 were also adversely affected by uninsured motorist claims in Ohio, the result of a state supreme court decision that the uninsured and underinsured motorists coverages of commercial automobile insurance policies also cover employees and their family members even when they are driving their personal cars for non-business purposes. Workers' compensation results were near breakeven in 2000 compared with results that were similarly unprofitable in 1999 and 1998. The improvement in 2000 was due to higher rates as well as a lower frequency of losses, resulting in part from our disciplined risk selection during the past two years. SPECIALTY COMMERCIAL INSURANCE Reported net premiums from specialty commercial insurance increased by 21% in 2000 compared with a 9% increase in 1999. Excluding the effect of the acquisition of Executive Risk, premium growth was about 14% in 2000 and 4% in 1999. 18 19 Our strategy of working closely with our customers and our ability to bring new products to market and differentiate such products continue to enable us to renew a large percentage of our executive protection and financial institutions business. Excluding the effect of the Executive Risk acquisition, executive protection and financial institutions premiums increased in 2000 by 10% and 24%, respectively, substantial improvements over the 1999 growth. However, a competitive market continues to put prices under pressure, particularly for our executive protection business. Growth in our financial institutions business was particularly strong in 2000 due to new business as well as rate increases on the standard commercial component of this business. Growth in property and marine premiums in 1999 and 2000 was restricted by the effect on retention levels of pricing initiatives and non-renewing certain unprofitable accounts. Growth in our other specialty commercial business was primarily from Chubb Re, our reinsurance business that began operations in 1999. Our specialty commercial underwriting results were highly profitable in each of the last three years. The combined loss and expense ratio was 95.9% in 2000 compared with 93.6% in 1999 and 91.5% in 1998. Property and marine results remained highly unprofitable over the past three years. The positive effect of the pricing initiative and the culling of unprofitable accounts was offset in 1999 by higher catastrophe losses and in 2000 by significantly higher losses overseas. Results in all three years were adversely affected by a high frequency of large property losses. Catastrophe losses for this class represented 1.7 percentage points of the loss ratio in 2000 compared with 10.2 percentage points in 1999 and 5.7 percentage points in 1998. Executive protection results were profitable in each of the past three years on business worldwide due to favorable development of prior year loss reserves, particularly in the directors and officers and fiduciary liability components. However, we have been seeing a narrowing of profit margins over the three most recent accident years from the levels we experienced before that. As a result, we have begun a rate initiative and we are analyzing our book of business. We are focusing in particular on our employment practices liability business, which has been unprofitable. 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 written on financial institutions produced breakeven results in 2000 compared with unprofitable results in 1999 and profitable results in 1998. Our other commercial classes produced unprofitable results in 2000 compared with profitable results in 1999 and near-breakeven results in 1998. Our surety business produced highly profitable results in each of the past three years. However, such results were less profitable in 2000 due primarily to one $15 million loss, net of reinsurance. Aviation results were highly unprofitable in each of the past three years. LOSS RESERVES Loss reserves are our property and casualty subsidiaries' largest liability. At the end of 2000, gross loss reserves totaled $11.9 billion compared with $11.4 billion and $10.4 billion at year-end 1999 and 1998, respectively. Reinsurance recoverable on such loss reserves was $1.9 billion at year-end 2000 compared with $1.7 billion and $1.3 billion at the end of 1999 and 1998, respectively. The 2000 and 1999 gross loss reserves and reinsurance recoverable include amounts related to Executive Risk. Executive Risk has historically utilized reinsurance to a greater extent because its size limited the amount of risk it could retain. Loss reserves, net of reinsurance recoverable, increased by $302 million or 3% in 2000 compared with $699 million or 8% in 1999. The increase in 1999 included $606 million of net reserves assumed 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. Excluding the Executive Risk reserves 19 20 assumed and the Fibreboard payments, loss reserves increased 7% in 1999. Reserve growth each year has occurred primarily in those liability classes that are characterized by delayed loss reporting and extended periods of settlement. During 2000, we experienced overall favorable development of $230 million on loss reserves established as of the previous year-end. This compares with favorable development of $206 million in 1999 and $218 million in 1998. 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, offset in part by losses incurred relating 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, more than 60% of our net loss reserves at December 31, 2000 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 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 as a whole 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. Asbestos remains the most significant and difficult mass tort for the insurance industry in terms of claims volume and dollar exposure. In the past year, the continued flow of claims pushed about a half-dozen manufacturers and users of asbestos products into bankruptcy. To date, approximately 25 major companies have filed for bankruptcy as a result of asbestos liability. In part as a result of these bankruptcies, the volume and value of claims against viable asbestos defendants continue to increase. Our most significant individual asbestos exposures involve traditional defendants who manufactured, distributed or installed asbestos products for whom we wrote excess liability coverages. While these insureds are relatively few in number, such exposure has increased in recent years due to the increased volume of claims, the erosion of much of the underlying limits and the bankruptcies of target defendants. Our other asbestos exposures are mostly peripheral defendants, including a mix of manufacturers, distributors and installers 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 financial resources of traditional asbestos defendants have been depleted, plaintiffs are targeting these peripheral parties with greater frequency and, in many cases, for larger awards. In addition, the plaintiffs bar continues to solicit new claimants through extensive advertising and through asbestos medical screenings. Class actions are then initiated even though many of the claimants have not manifested evidence of serious injury. Thus, new asbestos claims and new exposures on existing claims have continued unabated despite the fact that practically all manufacturing and usage of asbestos ended nearly two decades ago. Based on published projections, we expect that we will continue receiving asbestos claims at the current rate for at least the next several years. The expanded focus of asbestos litigation beyond asbestos manufacturers and distributors to installers and premises owners has created in some instances conflicts among insureds, primary 20 21 insurers and excess insurers, primarily involving questions regarding allocation of indemnity and expense costs and exhaustion of policy limits. These issues are generating costly coverage litigation with the potential for inconsistent results. A legislative solution to the asbestos claim litigation is being pursued by some insurers, including Chubb, and major corporate defendants. Any such solution would require the support of members of the plaintiffs bar. The new administration coupled with the rash of recent bankruptcies may create the best opportunity for such a legislative solution. Significant uncertainty remains as to our ultimate liability relating to asbestos related 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 as well as the increase in the volume of claims by plaintiffs claiming exposure but with no symptoms of asbestos-related disease. 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 at a site, regulators have the work done and then attempt to establish legal liability against the PRPs. Most PRPs named to date are parties who have been generators, transporters, past or present land owners or past or present site operators. 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 depending on a variety of factors. 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 has not been re-enacted. 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, federal legislation appears to be at a standstill. 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. Without federal movement on Superfund reform, the enforcement of Superfund liability is shifting to the states. States are being forced to reconsider state-level cleanup statutes and regulations. As individual states move forward, the potential for conflicting state regulation becomes greater. Significant uncertainty remains 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. Toxic waste losses appear to be developing as expected due to relatively stable claim trends. In many cases, claims are being settled for less than initially anticipated due to various factors, including more efficient site remediation efforts. However, litigation remains a serious problem. Litigation costs remain substantial, particularly for hazardous waste claims. Primary policies provide a limit on indemnity payments but many do not limit defense costs. This unlimited defense provided in the policies sometimes leads to the payment of defense costs substantially exceeding the indemnity exposure. A substantial portion of the funds we have expended to date has been for legal fees incurred in the prolonged litigation of coverage issues. 21 22 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. Incurred losses relating to asbestos and toxic waste claims were $31 million in 2000, $47 million in 1999 and $68 million in 1998. Further increases in loss reserves in 2001 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, 2000 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 some continuing 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 invested in 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 Investment income after taxes increased 6% in 2000 compared with 1999 and 9% in 1999 compared with 1998. The growth was due in part to an increase in invested assets, which reflected strong cash flow from operations over the period. Growth in both years was also due in part to the inclusion of Executive Risk investment income since the date of acquisition. Excluding the effect of the acquisition of Executive Risk, growth was about 3% in 2000 and 5% in 1999. The effective tax rate on our investment income was 16.4% in 2000 compared with 15.7% in 1999 and 15.3% in 1998. The effective tax rate fluctuates each year as a result of changes in the percentage of our portfolio invested in tax-exempt bonds. Generally, premiums are received by our property and casualty subsidiaries months or even years before losses are paid under the policies purchased by such premiums. These funds are used first to make current claim and expense payments. The balance is invested to augment the investment income generated by the existing portfolio. Historically, cash receipts from operations, consisting of insurance premiums and investment income, have provided more than sufficient funds to pay losses, operating expenses and dividends to the Corporation. New cash available for investment by the property and casualty subsidiaries was approximately $560 million in 2000 compared with $940 million in 1999 and $860 million in 1998. New cash available in 2000 was lower than in 1999 and 1998 due primarily to higher paid losses in 2000 caused in large part by significantly higher payments on directors and officers liability and excess liability claims compared 22 23 with previous years. New cash available in 1999 was not affected by the Fibreboard-related payments during the year since such payments were made from an escrow account that was funded in 1993. In 2000, we invested new cash primarily in mortgage-backed securities. 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 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 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 expense and other expenses not allocable to the operating subsidiaries, and the results of our real estate and other non-insurance subsidiaries. Corporate and other produced a loss before taxes of $4 million in both 2000 and 1999 compared with income of $23 million in 1998. The losses in 2000 and 1999 were primarily due to increasingly higher interest expense each year, due to the inclusion of interest expense on the debt assumed in connection with the Executive Risk acquisition in July 1999. In 2000, corporate and other included income of $10 million from a noncompete payment related to the sale of the Corporation's 50% interest in Associated Aviation Underwriters, Inc. (AAU). REAL ESTATE Real estate operations resulted in a loss before taxes of $4 million in each of the past three years, which amounts are included in the corporate and other results for those years. In each year, we sold selected commercial properties as well as residential properties. Real estate revenues were $75 million in 2000, $97 million in 1999 and $82 million in 1998. We own approximately $325 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. Loans receivable, which amounted to $90 million at December 31, 2000, are primarily purchase money mortgages. Such loans, which were issued in connection with our joint venture activities and other property sales, are generally collateralized by buildings and, in some cases, land. We continually evaluate the ultimate collectibility of such loans and establish appropriate reserves. The recoverability of the carrying value of our 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. 23 24 INVESTMENT GAINS AND LOSSES Net investment gains realized by the Corporation and its property and casualty subsidiaries were as follows:
2000 1999 1998 ---- ---- ---- (IN MILLIONS) Equity securities........................................... $(1) $63 $100 Fixed maturities............................................ 8 24 42 Sale of AAU................................................. 45 -- -- --- --- ---- Realized investment gains before tax........................ $52 $87 $142 === === ==== Realized investment gains after tax......................... $34 $56 $ 92 === === ====
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 1999 and 1998 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 that 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, 2000, 10% of the fixed maturity portfolio was classified as held-to-maturity compared with 12% at December 31, 1999 and 15% at December 31, 1998. 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 $69 million, $59 million and $138 million at December 31, 2000, 1999 and 1998, 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. 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. Our primary exposure to market risks relates to our investment portfolio, which exposes the Corporation and its property and casualty subsidiaries 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. 24 25 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 below 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, 2000 and 1999. 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. FIXED MATURITIES EXPECTED CASH FLOWS OF PRINCIPAL AMOUNTS
AT DECEMBER 31, 2000 --------------------------------------------------------------------------- TOTAL --------------------- ESTIMATED THERE- AMORTIZED MARKET 2001 2002 2003 2004 2005 AFTER COST VALUE ---- ---- ---- ---- ---- ------ --------- --------- (IN MILLIONS) Tax-exempt............................. $ 662 $ 620 $ 586 $ 921 $1,308 $5,453 $ 9,550 $ 9,945 Average interest rate................ 6.8% 6.1% 5.9% 5.8% 5.6% 5.3% -- -- Taxable -- other than mortgage-backed securities........................... 281 336 390 377 550 1,619 3,553 3,584 Average interest rate................ 6.2% 6.4% 6.5% 6.7% 6.6% 6.2% -- -- Mortgage-backed securities............. 286 367 281 192 126 862 2,114 2,104 Average interest rate................ 7.2% 7.3% 7.2% 7.2% 7.3% 7.4% -- -- ------ ------ ------ ------ ------ ------ ------- ------- Total.................................. $1,229 $1,323 $1,257 $1,490 $1,984 $7,934 $15,217 $15,633 ====== ====== ====== ====== ====== ====== ======= ======= 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 ====== ====== ====== ====== ====== ====== ======= =======
25 26 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. 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 95% are rated AA or better with more than 60% rated AAA. Only 1% of our bond portfolio is below investment grade. Taxable bonds have an average maturity of six years while tax- exempt bonds mature on average in eight years. Prepayment risk refers to the changes in prepayment patterns related to decreases and increases in interest rates that can either shorten or lengthen the expected timing of the principal repayments and thus the average life and the effective yield of a security. Such risk exists primarily within our portfolio of mortgage-backed securities. We monitor such risk regularly and invest primarily in those classes of mortgage-backed securities that are less subject to prepayment risk. Mortgage-backed securities comprised 37% and 33% of our taxable bond portfolio at year-end 2000 and 1999, respectively. About 50% of our mortgage-backed securities holdings at December 31, 2000 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 25% 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 our property and casualty subsidiaries have loss reserves and other liabilities. Such investments have characteristics similar to our liabilities in those currencies. At December 31, 2000, the property and casualty subsidiaries held foreign investments of $1.4 billion supporting their international operations. Such foreign investments have quality and maturity characteristics similar to our domestic portfolio. The principal currencies creating foreign exchange rate risk for the property and casualty subsidiaries are the Canadian dollar, the Euro and the British pound sterling. The table on page 27 provides information about those fixed maturity investments that are denominated in these currencies. The table presents cash flows of principal amounts in U.S. dollar equivalents by expected maturity dates at December 31, 2000 and 1999. Actual cash flows could differ from the expected amounts. 26 27 FOREIGN CURRENCY DENOMINATED FIXED MATURITIES EXPECTED CASH FLOWS OF PRINCIPAL AMOUNTS
AT DECEMBER 31, 2000 ----------------------------------------------------------------- TOTAL --------------------- ESTIMATED THERE- AMORTIZED MARKET 2001 2002 2003 2004 2005 AFTER COST VALUE ---- ---- ---- ---- ---- ------ --------- --------- (IN MILLIONS) Canadian dollar........................... $23 $21 $29 $26 $31 $232 $362 $377 Euro...................................... 9 24 25 28 14 213 313 317 British pound sterling.................... -- 13 26 30 34 134 237 240
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 Euro...................................... -- 36 32 44 33 159 304 301 British pound sterling.................... 10 -- 28 40 38 112 228 225
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 market prices of the equity securities held at December 31, 2000 and 1999 would have resulted in a decrease of $83 million and $77 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, 2000, the expected cash flow of principal amounts of such debt obligations were: a $10 million 7 1/2% term loan in 2001, $100 million of 6 7/8% notes in 2003, $300 million of 6.15% notes in 2005 and $342 million after 2005 with a weighted average interest rate of 7.7%. CAPITAL RESOURCES In March 1997, the Board of Directors authorized the repurchase of 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, 2000, the Corporation had repurchased 24,375,000 shares under the 1997 and 1998 authorizations. As of December 31, 2000, 5,625,000 shares remained under the current share repurchase authorizations. The Corporation repurchased 3,783,400 shares in open-market transactions in 2000 at a cost of $242 million, 2,596,700 shares in 1999 at a cost of $145 million and 8,203,000 shares in 1998 at a cost of $609 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. 27 28 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 guaranteed the unsecured notes and the capital securities. 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 5, 2000, was extended to July 4, 2001, 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and qualitative disclosures about market risk are included in Item 7, pages 24 through 27 of this report. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated financial statements of the Corporation at December 31, 2000 and 1999 and for each of the three years in the period ended December 31, 2000 and the Report of Independent Auditors thereon and the Corporation's unaudited quarterly financial data for the two-year period ended December 31, 2000 are incorporated by reference from the Corporation's 2000 Annual Report to Shareholders, pages 42 through 65. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 28 29 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 24, 2001, pages 2 through 5. Information regarding the executive officers is included in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 24, 2001, pages 12 through 24 other than the Performance Graphs and the Organization and Compensation Committee Report appearing on pages 17 through 22. 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 24, 2001, pages 6 through 8. 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 24, 2001, page 25. 29 30 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, 2000. 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), 333-36530 (filed May 8, 2000) 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. 30 31 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 2, 2001 By 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 DEAN R. O'HARE Chairman, Chief March 2, 2001 - --------------------------------------------------- Executive Officer and (DEAN R. O'HARE) Director Director March 2, 2001 - --------------------------------------------------- (ZOE BAIRD) JOHN C. BECK Director March 2, 2001 - --------------------------------------------------- (JOHN C. BECK) SHEILA P. BURKE Director March 2, 2001 - --------------------------------------------------- (SHEILA P. BURKE) Director March 2, 2001 - --------------------------------------------------- (JAMES I. CASH, JR.) PERCY CHUBB, III Director March 2, 2001 - --------------------------------------------------- (PERCY CHUBB, III) JOEL J. COHEN Director March 2, 2001 - --------------------------------------------------- (JOEL J. COHEN) JAMES M. CORNELIUS Director March 2, 2001 - --------------------------------------------------- (JAMES M. CORNELIUS) DAVID H. HOAG Director March 2, 2001 - --------------------------------------------------- (DAVID H. HOAG)
31 32
SIGNATURE TITLE DATE WARREN B. RUDMAN Director March 2, 2001 - --------------------------------------------------- (WARREN B. RUDMAN) DAVID G. SCHOLEY Director March 2, 2001 - --------------------------------------------------- (DAVID G. SCHOLEY) RAYMOND G.H. SEITZ Director March 2, 2001 - --------------------------------------------------- (RAYMOND G.H. SEITZ) LAWRENCE M. SMALL Director March 2, 2001 - --------------------------------------------------- (LAWRENCE M. SMALL) KAREN HASTIE WILLIAMS Director March 2, 2001 - --------------------------------------------------- (KAREN HASTIE WILLIAMS) Director March 2, 2001 - --------------------------------------------------- (JAMES M. ZIMMERMAN) DAVID B. KELSO Executive Vice President and March 2, 2001 - --------------------------------------------------- Chief Financial Officer (DAVID B. KELSO) HENRY B. SCHRAM Senior Vice President and March 2, 2001 - --------------------------------------------------- Chief Accounting Officer (HENRY B. SCHRAM)
32 33 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 64 -- Consolidated Balance Sheets at December 31, 2000 and 1999 43 -- Consolidated Statements of Income for the Years Ended Decem- ber 31, 2000, 1999 and 1998 42 -- Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2000, 1999 and 1998 44 -- Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 45 -- Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2000, 1999 and 1998 45 -- Notes to Consolidated Financial Statements 46 -- Supplementary Information (unaudited) Quarterly Financial Data 65 -- Schedules: I -- Consolidated Summary of Investments -- Other than Investments in Related Parties at December 31, 2000 -- 35 II -- Condensed Financial Information of Registrant at December 31, 2000 and 1999 and for the Years Ended December 31, 2000, 1999 and 1998 -- 36 III -- Consolidated Supplementary Insurance Information at and for the Years Ended December 31, 2000, 1999 and 1998 -- 39 IV -- Consolidated Reinsurance for the Years Ended De- cember 31, 2000, 1999 and 1998 -- 40 VI -- Consolidated Supplementary Property and Casualty Insurance Information for the Years Ended December 31, 2000, 1999 and 1998 -- 40
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, 2000, are hereby incorporated by reference. 33 34 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 26, 2001 included in the 2000 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, No. 333-36530 and Post-Effective Amendment No. 2 to Form S-4 on Form S-8 No. 333-73073) of our report dated February 26, 2001, 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. ERNST & YOUNG LLP New York, New York March 26, 2001 34 35 THE CHUBB CORPORATION SCHEDULE I CONSOLIDATED SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES (IN MILLIONS) DECEMBER 31, 2000
AMOUNT AT WHICH COST OR SHOWN IN AMORTIZED MARKET THE TYPE OF INVESTMENT COST VALUE BALANCE SHEET Short term investments................................ $ 605.6 $ 605.6 $ 605.6 --------- --------- --------- Fixed maturities Bonds United States Government and government agencies and authorities................................ 1,412.0 1,435.0 1,433.6 States, municipalities and political subdivisions................................... 9,507.2 9,901.1 9,833.9 Foreign.......................................... 1,267.1 1,294.3 1,294.3 Public utilities................................. 293.3 287.4 287.4 All other corporate bonds........................ 2,629.0 2,608.2 2,608.2 --------- --------- --------- Total bonds............................ 15,108.6 15,526.0 15,457.4 Redeemable preferred stocks......................... 107.9 107.0 107.0 --------- --------- --------- Total fixed maturities................. 15,216.5 15,633.0 15,564.4 --------- --------- --------- Equity securities Common stocks Banks, trusts and insurance companies............ 9.1 18.2 18.2 Industrial, miscellaneous and other.............. 795.2 776.0 776.0 --------- --------- --------- Total common stocks.................... 804.3 794.2 794.2 Non-redeemable preferred stocks..................... 35.5 36.4 36.4 --------- --------- --------- Total equity securities................ 839.8 830.6 830.6 --------- --------- --------- Total invested assets.................. $16,661.9 $17,069.2 $17,000.6 ========= ========= =========
35 36 THE CHUBB CORPORATION SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS -- PARENT COMPANY ONLY (IN MILLIONS) DECEMBER 31
2000 1999 ---- ---- Assets Invested Assets Short Term Investments................................. $ 172.3 $ 106.7 Taxable Fixed Maturities -- Available-for-Sale (cost $329.2 and $323.8).................................... 324.8 308.9 Equity Securities (cost $104.3 and $131.6)............. 118.3 184.9 -------- -------- TOTAL INVESTED ASSETS............................. 615.4 600.5 Cash...................................................... .1 .5 Investment in Consolidated Subsidiaries................... 6,436.3 5,751.3 Receivable from Consolidated Subsidiary................... 208.5 201.7 Other Assets.............................................. 274.3 219.7 -------- -------- TOTAL ASSETS...................................... $7,534.6 $6,773.7 ======== ======== Liabilities Long Term Debt............................................ $ 400.0 $ 400.0 Dividend Payable to Shareholders.......................... 57.8 56.2 Accrued Expenses and Other Liabilities.................... 95.1 45.7 -------- -------- TOTAL LIABILITIES................................. 552.9 501.9 -------- -------- 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 178,833,278 and 177,272,322 Shares................................................. 178.8 177.3 Paid-In Surplus........................................... 466.0 418.4 Retained Earnings......................................... 6,492.6 6,008.6 Accumulated Other Comprehensive Income Unrealized Appreciation (Depreciation) of Investments, Net of Tax............................................ 220.1 (112.6) Foreign Currency Translation Losses, Net of Tax........ (68.5) (44.8) Receivable from Employee Stock Ownership Plan............. (62.5) (74.9) Treasury Stock, at Cost -- 3,914,105 and 1,782,489 Shares................................................. (244.8) (100.2) -------- -------- TOTAL SHAREHOLDERS' EQUITY........................ 6,981.7 6,271.8 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $7,534.6 $6,773.7 ======== ========
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 2000 Annual Report to Shareholders. 36 37 THE CHUBB CORPORATION SCHEDULE II (CONTINUED) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME -- PARENT COMPANY ONLY (IN MILLIONS) YEARS ENDED DECEMBER 31
2000 1999 1998 ---- ---- ---- Investment Income........................................... $ 41.7 $ 41.9 $ 46.2 Realized Investment Gains................................... 29.4 18.1 23.0 Investment Expenses......................................... (2.1) (2.1) (2.1) Corporate Expenses.......................................... (52.6) (41.2) (27.7) ------ ------ ------ 16.4 16.7 39.4 Federal and Foreign Income Tax.............................. 3.0 6.9 3.9 ------ ------ ------ 13.4 9.8 35.5 Equity in Net Income of Consolidated Subsidiaries........... 701.2 611.3 671.5 ------ ------ ------ NET INCOME............................................. $714.6 $621.1 $707.0 ====== ====== ======
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 2000 Annual Report to Shareholders. 37 38 THE CHUBB CORPORATION SCHEDULE II (CONTINUED) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY (IN MILLIONS) YEARS ENDED DECEMBER 31
2000 1999 1998 ---- ---- ---- Cash Flows from Operating Activities Net Income................................................ $ 714.6 $ 621.1 $ 707.0 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Equity in Net Income of Consolidated Subsidiaries...... (701.2) (611.3) (671.5) Realized Investment Gains.............................. (29.4) (18.1) (23.0) Other, Net............................................. 11.9 16.3 (17.5) ------- ------- ------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.............................. (4.1) 8.0 (5.0) ------- ------- ------- Cash Flows from Investing Activities Proceeds from Sales of Fixed Maturities................... 68.7 105.5 70.6 Proceeds from Maturities of Fixed Maturities.............. 3.5 30.4 94.5 Proceeds from Sales of Equity Securities.................. 101.4 68.7 97.9 Purchases of Fixed Maturities............................. (69.2) (83.8) (213.5) Purchases of Equity Securities............................ (53.4) (67.7) (122.7) Decrease (Increase) in Short Term Investments, Net........ (65.6) (8.5) 322.6 Dividends Received from Consolidated Subsidiaries......... 320.0 300.0 280.0 Other, Net................................................ 40.8 (9.8) (25.1) ------- ------- ------- NET CASH PROVIDED BY INVESTING ACTIVITIES............ 346.2 334.8 504.3 ------- ------- ------- Cash Flows from Financing Activities Proceeds from Issuance of Long Term Debt.................. -- -- 400.0 Repayment of Long Term Debt............................... -- (30.0) (30.0) Proceeds from Issuance of Common Stock Under Incentive and Purchase Plans........................... 119.3 22.7 62.8 Repurchase of Shares...................................... (242.3) (145.0) (608.5) Dividends Paid to Shareholders............................ (229.0) (210.6) (203.4) Decrease (Increase) in Receivable from Consolidated Subsidiary............................................. (6.8) 6.4 (131.2) Other, Net................................................ 16.3 14.2 10.4 ------- ------- ------- NET CASH USED IN FINANCING ACTIVITIES................ (342.5) (342.3) (499.9) ------- ------- ------- Net Increase (Decrease) in Cash............................. (.4) .5 (.6) Cash at Beginning of Year................................... .5 -- .6 ------- ------- ------- CASH AT END OF YEAR.................................. $ .1 $ .5 $ -- ======= ======= =======
- --------------- In 1999, the Corporation acquired all of the outstanding common shares of Executive Risk Inc. in exchange for common stock of the Corporation. This noncash transaction has been excluded from the statements of cash flows. The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 2000 Annual Report to Shareholders. 38 39 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 ------- ----------- --------- -------- -------- ---------- --------- 2000 Property and Casualty Insurance Personal....................... $234.8 $ 803.5 $ 890.2 $1,620.6 $ 963.7 Standard Commercial............ 227.1 5,302.6 884.7 1,809.9 1,416.9 Specialty Commercial........... 380.1 5,798.5 1,741.4 2,715.4 1,747.1 Investments.................... $879.2* ------ --------- -------- -------- ------ -------- $842.0 $11,904.6 $3,516.3 $6,145.9 $879.2 $4,127.7 ====== ========= ======== ======== ====== ======== 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 ====== ========= ======== ======== ====== ======== YEAR ENDED DECEMBER 31 ------------------------------------ AMORTIZATION OTHER OF DEFERRED INSURANCE POLICY OPERATING ACQUISITION COSTS AND PREMIUMS SEGMENT COSTS EXPENSES** WRITTEN ------- ------------ ---------- -------- 2000 Property and Casualty Insurance Personal....................... $ 446.7 $ 96.4 $1,722.8 Standard Commercial............ 502.8 132.8 1,786.6 Specialty Commercial........... 695.9 167.2 2,823.8 Investments.................... -------- ------ -------- $1,645.4 $396.4 $6,333.2 ======== ====== ======== 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 ======== ====== ========
- --------------- * 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. 39 40 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 ------ --------- ---------- ------ ------------- 2000.................................... $6,550.2 $786.9 $382.6 $6,145.9 6.2 ======== ====== ====== ======== 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 ======== ====== ====== ========
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 -------- -------- ---------------- 2000............................................ $4,357.7 $(230.0) $3,825.2 ======== ======= ======== 1999............................................ $4,147.6 $(205.6) $3,848.9 ======== ======= ======== 1998............................................ $3,712.1 $(218.4) $3,008.4 ======== ======= ========
40 41 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 filed herewith. (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 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 Long-Term Stock Incentive Plan (2000) incorporated by reference to Exhibit A of the registrant's definitive proxy statement for the Annual Meeting of Shareholders held on April 25, 2000. 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.
41 42
DESCRIPTION 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. (11) -- Computation of earnings per share incorporated by reference from Note (17) of the notes to consolidated financial statements of the 2000 Annual Report to Shareholders. (13) -- Pages 19, 20, 38 through 65 of the 2000 Annual Report to Shareholders. (21) -- Subsidiaries of the registrant filed herewith. (23) -- Consent of Independent Auditors (see page 34 of this report).
42 EX-3 2 y43479ex3.txt RESTATED BYLAWS 1 BY-LAWS OF THE CHUBB CORPORATION Incorporated under the Laws of the State of New Jersey ADMINISTRATIVE OFFICES 15 Mountain View Road, P.O. Box 1615 Warren, N.J. 07061-1615 REVISED TO JUNE 2, 2000 BY-LAWS of THE CHUBB CORPORATION ---------- ARTICLE I OFFICES Section 1. The Corporation shall maintain a registered office in the State of New Jersey as required by law. The Corporation may also have offices in such other places as the Board of Directors may from time to time appoint or as the business of the Corporation may require. ARTICLE II SEAL Section 1. The seal of the Corporation shall be circular in form and shall have the name of the Corporation on the circumference and the words and numerals "Corporate Seal 1967 New Jersey" in the center. ARTICLE III MEETINGS OF STOCKHOLDERS Section 1. Meetings of the stockholders of the Corporation shall be held at such places in the State of New Jersey or in the City of New York, State of New York, as may from time to time be designated by the Board of Directors and stated in the Notice of Meeting. Section 2. The Annual Meeting of the Stockholders of the Corporation shall be held on such day in the month of April of each year, or such other month of the year, as shall be designated by the Board of Directors and as stated in the Notice of Meeting, for the election of Directors and for the transaction of such other business as may be brought before the meeting. Any business which may properly be brought before a meeting of the stockholders may be considered and transacted at the Annual Meeting. 2 Section 3. Special meetings of the stockholders may be called on the order of the Chairman, of the Chairman of the Executive Committee, if any, of a majority of the Board of Directors or of the holder or holders of fifty percent or more of the issued and outstanding Common Stock of the Corporation. Section 4. Written notice of all meetings of the stockholders shall be mailed to or delivered to each stockholder at least ten days prior to the meeting. Notice of any special meeting shall state in general terms the purposes for which the meeting is to be held. Section 5. The holders of a majority of the issued and outstanding shares of the Common Stock of the Corporation entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of the stockholders; but, if there be less than a quorum, the holders of a majority of the stock so present or represented may adjourn the meeting from time to time. Section 6. At all meetings of the stockholders, every registered owner of shares entitled to vote may vote in person or proxy and shall have one vote for each such share standing in his name on the books of the Corporation. Elections of directors need not be by ballot. Section 7. The Chairman, or in his absence, the Vice Chairman, or in his absence, the President, or in his absence, the Chairman of the Executive Committee, if any, shall preside at all meetings of the stockholders; and, in the absence of all the foregoing officers, the stockholders present shall elect a Chairman by a plurality vote. The Chairman presiding at any meeting of stockholders shall have the power to appoint two or more persons to act as inspectors or tellers to receive, canvass and report the votes cast by the stockholders at such meeting; but no candidate for the office of director shall be appointed as inspector or teller at any meeting for the election of directors. Section 8. The Secretary of the Corporation shall act as secretary of all meetings of the stockholders; and in his absence, the Chairman shall appoint a person to act as secretary of the meeting. Section 9. (a) In order that the Corporation may determine the stockholders entitled to give a written consent to any corporate action without a meeting, the Board of Directors shall fix, in advance, a date as the record date for stockholders entitled to give such consent, which record date shall be not less than ten nor more than sixty days before the date fixed by the Board of Directors for tabulation of such consents or, if no date has been fixed by the Board of Directors for tabulation of such consents, more than sixty days before the last day on which consents received may be counted. (b) In order that the Board of Directors may fix the record date referred to in Section 9(a) of this Article III, any stockholder who shall desire to solicit written consents of stockholders to any corporate action without a meeting shall deliver a notice thereof in writing to the Secretary of the Corporation at the principal executive offices of the Corporation not less than sixty nor more than ninety days prior to the date on which such stockholder intends to first solicit any such written consent. Such notice shall set forth (i) a brief description of the corporate action for which such stockholder intends to solicit written consents and (ii) whether or not such a stockholder intends to solicit written consents to such action from all stockholders who would have been or would be entitled to vote at a meeting called to take such action. Section 10. (a) (i) The proposal of business by a stockholder to be considered at an Annual Meeting of Stockholders, which proposal is not in the form of a proposal requested by such stockholder to be included pursuant to Rule 14a-8 under the Securities Exchange Act of 1934 (the "Exchange Act") in the Corporation's proxy statement for such Annual Meeting, and/or nominations of persons for election to the Board of Directors of the Corporation at an Annual 3 Meeting of Stockholders may be made by a stockholder who was a stockholder of record at the time of giving of notice provided for in Section 10(a) (ii) of this Article III, who is entitled to vote at such Annual Meeting and who has complied with the notice procedures set forth in said Section 10(a) (ii). (ii) For any such business and/or nominations to be properly brought before an Annual Meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such business must be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not less than ninety nor more than one hundred twenty days prior to the first anniversary of the preceding year's Annual Meeting; provided however, that in the event that the date of the Annual Meeting is more than thirty days before or more than sixty days after such anniversary date, notice by the stockholder to be timely shall be so delivered not less than ninety days nor more than one hundred twenty days prior to such Annual Meeting or ten days following the day on which public announcement of the date of such meeting is first made. In no event shall the public announcement of an adjournment of an Annual Meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (A) as to any such business that the stockholder proposes to bring before the meeting, a brief description of such business, the reasons for conducting such business at the meeting, any material interest of such stockholder in such business and the beneficial owner, if any, on whose behalf the proposal is made; (B) as to each person whom the stockholder proposes to nominate for election as a director, all information relating to such person that would be required to be disclosed in a solicitation of proxies for the election of such person as a director pursuant to Regulation 14A under the Exchange Act (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if so elected); and (C) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf of the proposal or nomination is made (1) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner, and (2) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (iii) Notwithstanding anything in Section 10(a) (ii) of this Article III to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is to be increased and there is no public announcement naming all of the nominees for directors or specifying the size of the increased Board of Directors made by the Corporation at least one hundred days prior to the first anniversary of the preceding year's Annual Meeting, a stockholder's notice required under Section 10(a) (ii) of this Article III shall also be considered timely, but only with respect to nominees for any new positions created by such increase in the number of directors, if it shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not less than ten days following the day on which such public announcement is first made by the Corporation. (b) Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's Notice of Meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in Section 10(a) (ii) and this Section 10(b) of this Article III, who is entitled to vote at the meeting and who has complied with the notice procedures set forth in said Section 10(a) (ii) and this Section 10(b). In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more persons to the Board of Directors, any such stockholder may nominate a person or 4 persons (as the case may be) for election to such position(s) as specified in the Corporation's Notice of Meeting if the stockholder's notice required by this said Section 10(a) (ii) and this Section 10(b) shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not less than ninety days nor more than one hundred twenty days prior to such special meeting or ten days following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. (c) Except as otherwise provided by applicable law, the Chairman of the meeting shall have the authority to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed (as the case may be) in accordance with the procedures set forth in this Section 10 of this Article III, and, if any proposed nomination or business is not in compliance with this By-Law, to declare that such defective proposal or nomination shall be disregarded. (d) For purposes of this Section 10 of Article III, a "public announcement" shall mean disclosure in a press release issued by the Corporation and reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (e) In addition to the requirements of the foregoing provisions of this Section 10 of Article III, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in this By-Law shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule l4a-8 under the Exchange Act. ARTICLE IV BOARD OF DIRECTORS Section 1. The property, business and affairs of the Corporation shall be managed and controlled by its Board of Directors. The number of directors shall be such number, not less than seven nor more than thirty, as shall be fixed from time to time by the Board of Directors. At each Annual Meeting the stockholders shall elect the number of directors as fixed by the Board of Directors (not less than seven nor more than thirty) and such directors shall hold office until the next Annual Meeting, and until their successors are elected and qualify. Any director may be removed from office at any time, with or without cause, by the affirmative vote of the holders of a majority of the stock present in person or represented by proxy at any meeting at which a quorum is present. Directors need not be residents of the State of New Jersey, but each director shall at the time of his election be a stockholder of the Corporation or of a corporation holding twenty-five percent (25 %) or more of the Common Stock of the Corporation. Section 2. Whenever any vacancy shall occur in the Board of Directors, by reason of death, resignation or increase in the number of directors or otherwise, it may be filled by a majority of the remaining directors, though less than a quorum, for the balance of the term. Section 3. The Board of Directors may hold meetings and keep the books of the Corporation (except the stock transfer books) outside of the State of New Jersey. Section 4. Regular meetings of the Board of Directors, shall be held quarterly on the second Thursday of March, June, September and December (or if such Thursday be a legal holiday, then 5 on the next succeeding business day) at the offices of the Corporation in New Jersey or at the offices of the Corporation in the City of New York unless in the judgment of the Board or the Executive Committee a regular meeting should be held on a different date or at a different place. Written notice of regular meetings of the Board shall be given to each director at least one full day in advance of the meeting. Section 5. Special meetings of the Board of Directors may be called by order of the Chairman, of the Chairman of the Executive Committee, if any, or by two directors at the time in office. The Secretary shall give notice of each special meeting by mailing the same at least two days before the meeting or by telephoning or by facsimile the same at least one day before the meeting to each director. Section 6. At meetings of the Board of Directors, the Chairman or President, or in their absence, the Chairman of the Executive Committee, if any, shall preside. The attendance of seven directors in office shall be necessary to constitute a quorum for the transaction of business, but less than a quorum may adjourn any meeting from time to time until a quorum shall be present, whereupon the meeting may be held, as adjourned, without further notice. Section 7. The directors shall receive such compensation for their services as directors as may be prescribed by the Board of Directors and shall be reimbursed by the Corporation for ordinary and reasonable expense incurred in the performance of their duties. ARTICLE V COMMITTEES Section 1. There shall be an Executive Committee consisting of the Chairman, the Chairman of the Executive Committee, if any, and not less than two nor more than seven other directors, to be appointed by the Board of Directors, which committee shall meet at the call of its Chairman or of any member thereof and shall have authority to exercise, so far as may be permitted by law, all the powers of the Board of Directors in the management of the business, property and affairs of the Corporation during the intervals between the meetings of the Board of Directors. A majority of the members of such committee shall constitute a quorum. The Executive Committee or a quorum thereof may act from time to time on the basis of written approval of proposals without formal meeting. Section 2. There shall be a Finance Committee consisting of the Chairman, the Chairman of the Executive Committee, if any, and not less than two nor more than seven other directors to be appointed by the Board of Directors, which committee shall have authority to direct and control the investment of funds and the purchase and sale of securities by the Corporation. A majority of the members of such committee shall constitute a quorum. The Finance Committee or a quorum thereof may act from time to time on the basis of written approval of proposals without formal meeting. Regular meetings of the Committee shall be held quarterly at dates set by vote of the Committee. Special meetings may be called at any time at the request of any member. Section 3. The Board of Directors may appoint other committees, which shall have such powers and perform such duties as from time to time may be prescribed by the Board. Section 4. The Board shall have the power to fill vacancies in, to change the membership of, or to dissolve any committee, and to appoint alternate members of any committee, but in no event may an officer of the Corporation or any of its subsidiaries serve as a member or as an alternate member of any audit committee or of any committee which has powers or duties with respect to compensation of the Corporation's officers. Directors appointed as alternate members of any committee shall act in the absence or disability of members of that committee with all of the powers of such absent or disabled members and shall serve on such committee in the order 6 established by resolution adopted by a majority of the Board of Directors. Action taken by any committee shall be reported at the meeting of the Board next succeeding such action, except that, when such meeting of the Board is held within two days after such action, such report, if not made at the first meeting, shall be made to the Board at its second meeting following such committee action. ARTICLE VI OFFICERS Section 1. Elected Officers. The elected officers of the Corporation shall be a Chairman, a President, one or more Vice Presidents, a Treasurer and a Secretary. The Board of Directors may also elect a Vice Chairman, a Chairman of the Executive Committee and may designate Vice Presidents as Executive or Senior Vice Presidents and may elect from time to time, such other officers as it considers necessary, each of whom shall hold office for such period, have such authority, and perform such duties as the Board may from time to time determine. Any person may hold two, but no more than two, offices. The Chairman, the Vice Chairman, if any, and the Chairman of the Executive Committee, if any, shall be chosen from among the directors. Section 2. Appointed Officers. The Chairman may appoint as officers of the Corporation such Assistant, Associate, Regional or Resident Officers and such other subordinate officers as he may deem proper, and shall specify the authority of and the duties to be performed by such officers, and may remove them at any time with or without cause. Section 3. Term of Office. The principal officers shall be chosen annually by the Board of Directors at the first meeting of the Board following the Stockholders' Annual Meeting, or as soon thereafter as is conveniently possible. Additional Vice Presidents may be elected from time to time. The term of office of all Executive Officers shall be for one year or until their respective successors are duly chosen and qualified, but any Executive Officer may be removed, with or without cause, at any time by the Board. Section 4. Vacancies. Any vacancy in an office from any cause may be filled for the unexpired portion of the term by the Board of Directors. Section 5. Duties and Responsibilities. (a) The Chairman shall be the chief executive officer of the Corporation and shall exercise general supervision of the management of its business and shall be responsible for the development of its policies and their execution. He shall, in general, perform all duties incident to the office of Chairman and such other duties as may be assigned to him by the Board of Directors. (b) The Vice Chairman, if any, shall have such powers and perform such duties as the Chairman may delegate to him and, in the absence of the Chairman, shall exercise the functions and duties of the Chairman. (c) The President shall have such powers and perform such duties as the Chairman may delegate to him and, in the absence of the Chairman and the Vice Chairman, if any, shall exercise the functions and duties of the Chairman. (d) The Chairman of the Executive Committee, if any, shall perform such functions as may be assigned to him by the Board of Directors, the committees of which he is chairman, or the Chairman of the Corporation. (e) Each Vice President shall have such powers and perform such duties as the Board of Directors or the Chairman may from time to time prescribe. The Vice Presidents in the order of 7 priority designated by the Chairman or the Board of Directors shall exercise the functions of the President in his absence. (f) The Treasurer shall have the custody and care of all the funds and securities of the Corporation, and shall deposit all funds to the credit of the Corporation in such institution or institutions as the Board of Directors may designate; he or an Assistant Treasurer or such other officer or officers or appointee or appointees as may be authorized by the Board of Directors shall endorse all instruments or documents requiring endorsement for or on behalf of the Corporation; he shall perform all acts incident to the position of Treasurer, subject to the control of the Board; he shall have such other powers and perform such other duties as the Board of Directors or the President may from time to time prescribe; and he may be required by the Board of Directors to give security for the faithful discharge of his duties. He shall have custody of the stock registers and transfer books of the Corporation. (g) The Secretary shall keep the minutes of all meetings of the Board of Directors and of the Stockholders, and shall attend to the giving of proper notices to Directors and Stockholders; he may sign, with the President or a Senior Vice President, all authorized contracts, instruments or documents in the name of the Corporation; he shall be the custodian of the seal of the Corporation and shall attest such seal when required; he shall perform all the duties incident to the office of Secretary, subject to the control of the Board of Directors; he shall have such other powers and perform such other duties as the Board of Directors or the President may from time to time prescribe or as may be prescribed by these By-Laws. (h) In case of the absence or disability of any officer of the Corporation and of any person hereby authorized to act in his place during such period of absence or disability, the Board of Directors may from time to time delegate the powers and duties of such officer to any other officer, or any director, or any other person whom it may select. ARTICLE VII CAPITAL STOCK Section 1. Certificates for stock of the Corporation shall be in such form as the Board of Directors may from time to time prescribe and shall be signed by the Chairman or the Vice Chairman or the President or a Vice President and by the Treasurer or an Assistant Treasurer. Section 2. Shares of capital stock of the Corporation shall be transferable on the books of the Corporation only by the holder of record thereof in person or by duly authorized attorney, upon surrender and cancellation of certificates for a like number of shares. Section 3. In case any certificate for the capital stock of the Corporation shall be lost, stolen or destroyed, the Corporation as a condition precedent to the issuance of a new certificate in place thereof, may require such proof of the fact and such indemnity to be given to it as shall be deemed necessary or advisable by it. Section 4. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder thereof in fact and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. Section 5. The Board of Directors shall have the power to close the stock transfer books of the Corporation for a period not exceeding fifty (50) days preceding the date of any meeting of stockholders or the date for payment of any dividend or the date for the allotment of rights or the date when any change or conversion or exchange of capital stock shall go into effect; provided, that in lieu of closing the stock transfer books as aforesaid, the Board of Directors may fix in advance a date, not exceeding fifty (50) days preceding the date of any meeting of stockholders, 8 or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, as a record date for the determination of the stockholders entitled to notice of and to vote at any such meetings or entitled to receive payment of any such dividends, or any such allotment or rights, or to exercise the rights in respect to any such change, conversion or exchange of capital stock, and, in such case, only, stockholders of record on the date so fixed shall be entitled to such notice of and to vote at such meetings, or to receive payment of such dividends or any such allotment of rights, or to exercise such rights, in respect to any such change, conversion or exchange of the capital stock as the case may be, and notwithstanding any transfer of any stock on the books of the Corporation after any such record date as fixed as aforesaid. ARTICLE VIII MISCELLANEOUS Section 1. The Board of Directors shall have power to fix, and from time to time change, the fiscal year of the Corporation. Unless otherwise fixed by the Board, the calendar year shall be the fiscal year. Section 2. Any notice required to be given under the provisions of these By-Laws or otherwise may be waived by the stockholder, director or officer to whom such notice is required to be given, either before or after the meeting or action of which notice is waived. Section 3. Any notice required to be given to any stockholder, director or officer under the provisions of these By-Laws or otherwise shall (subject to the provisions of law and of the Certificate of Incorporation of the Corporation) be deemed to be sufficiently given if such notice be written or printed and be deposited in the post office addressed to such stockholder, director or officer at his address as the name appears on the books or records of the Corporation, or such notice may be sent by facsimile or delivered in person to such stockholder, director or officer and the mailing of such notice or positing of such facsimile or delivery of such notice, as the case may be, shall constitute due and sufficient notice. Section 4. The Corporation may lend money to, guarantee any obligation of, or otherwise assist, any officer or other employee of the Corporation or of any subsidiary, including an officer or other employee who is a director of the Corporation, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the Corporation, provided, however, that any such loan, guarantee or assistance to an officer or other employee who is also a director of the Corporation shall be authorized by a majority of the entire Board of Directors. The loan, guarantee, or other assistance may be made with or without interest, and may be unsecured, or secured in such manner as the Board of Directors shall approve, and may be made upon such other terms and conditions as the Board of Directors may determine. ARTICLE IX INVESTMENTS AND MONEYS Investment of the funds of the Corporation and the purchase and sale of securities by the Corporation shall be made only as authorized or approved by the Board of Directors or the Executive Committee or the Finance Committee or by some other committee appointed by the Board of Directors and charged with the duty of supervising or making such investments, purchases and sales. Securities representing the invested funds of the Corporation shall be placed for safekeeping in safe deposit vaults in the name of the Corporation, or pursuant to a custodian account, in such Banks, Trust or Safe Deposit Companies as shall be approved by the Board of Directors or the 9 Executive Committee. Access to the vaults shall be in accordance with procedure approved by resolution of the Board of Directors or the Executive Committee and such resolution shall be effective upon a copy thereof being lodged with the Bank, Trust or Safe Deposit Company in which the securities are lodged. In the event that the Board of Directors shall determine to establish a custodian account with a Bank or Trust Company and shall provide that all or any part of the securities now or hereafter representing the invested funds of the Corporation shall be delivered to such Bank or Trust Company approved by the Board of Directors or the Executive Committee, then and in that event such Bank or Trust Company shall hold such securities so delivered in the custodian account in accordance with the procedure and under the authority of the resolution approved by the Board of Directors or the Executive Committee. Any two of the following: the Chairman, the Vice Chairman, if any, the President, the Chairman of the Executive Committee, if any, or any Vice President acting jointly, or any one of them acting jointly with any Vice President or the Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer, is authorized and empowered to sell, assign, exchange and transfer any and all shares of stock, bonds and other securities owned by or standing in the name of the Corporation, and to make, execute and deliver in the name and as the act of the Corporation under its corporate seal any and all instruments in writing necessary or proper to carry such sales, assignments, exchanges and transfers into effect. Money received by the Corporation may be deposited to its credit in such Trust Companies or Banks as the Board of Directors may designate. The Chairman, or the Vice Chairman, if any, or the President, or the Chairman of the Executive Committee, if any, or any Vice President shall have authority to vote in person or by proxy any of the stock of any other corporation which the Corporation may hold and to execute any and all consents or other documents relating to such stocks. ARTICLE X AMENDMENT The Board of Directors shall have power to make, alter and repeal By-Laws of the Corporation by a vote of a majority of all of the directors at any regular or special meeting of the Board, provided that notice of the proposed action shall have been given in the notice or waiver of notice of such meeting of the Board. The By-Laws may be altered or repealed by the stockholders by the vote of a majority of all of the stockholders at any meeting, provided that notice of the proposed alteration or repeal shall have been given in the notice or waiver of notice of such meeting of stockholders. EX-13 3 y43479ex13.txt PORTIONS OF 2000 ANNUAL REPORT TO SHAREHOLDERS 1 SUPPLEMENTARY FINANCIAL DATA
IN MILLIONS YEARS ENDED DECEMBER 31 2000 1999 1998 -------- -------- -------- PROPERTY AND CASUALTY INSURANCE UNDERWRITING Net Premiums Written................................... $6,333.2 $5,701.1 $5,503.5 Increase in Unearned Premiums.......................... (187.3) (49.1) (199.7) -------- -------- -------- Premiums Earned........................................ 6,145.9 5,652.0 5,303.8 -------- -------- -------- Claims and Claim Expenses.............................. 4,127.7 3,942.0 3,493.7 Operating Costs and Expenses........................... 2,076.6 1,841.5 1,832.6 Decrease (Increase) in Deferred Policy Acquisition Costs................................................ (62.3) 4.2 (51.8) Dividends to Policyholders............................. 27.5 43.1 35.9 -------- -------- -------- UNDERWRITING LOSS...................................... (23.6) (178.8) (6.6) -------- -------- -------- INVESTMENTS Investment Income Before Expenses...................... 890.8 832.6 760.0 Investment Expenses.................................... 11.6 11.6 11.1 -------- -------- -------- INVESTMENT INCOME...................................... 879.2 821.0 748.9 -------- -------- -------- Amortization of Goodwill and Other Charges................ (52.2) (16.0) (17.4) Restructuring Charge (a).................................. -- -- (40.0) -------- -------- -------- PROPERTY AND CASUALTY INCOME.............................. 803.4 626.2 684.9 CORPORATE AND OTHER......................................... (3.9) (3.5) 22.9 -------- -------- -------- CONSOLIDATED OPERATING INCOME BEFORE INCOME TAX............. 799.5 622.7 707.8 Federal and Foreign Income Tax.............................. 118.4 57.4 93.0 -------- -------- -------- CONSOLIDATED OPERATING INCOME............................... 681.1 565.3 614.8 REALIZED INVESTMENT GAINS AFTER INCOME TAX.................. 33.5 55.8 92.2 -------- -------- -------- CONSOLIDATED NET INCOME..................................... $ 714.6 $ 621.1 $ 707.0 ======== ======== ======== PROPERTY AND CASUALTY INVESTMENT INCOME AFTER INCOME TAX.... $ 735.2 $ 691.9 $ 634.1 ======== ======== ========
(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. 19 2 PROPERTY AND CASUALTY UNDERWRITING RESULTS NET PREMIUMS WRITTEN (In Millions of Dollars)
2000 1999 1998 1997 1996 Personal Insurance Automobile................................... $ 403.3 $ 346.1 $ 309.4 $ 298.6 $ 243.1 Homeowners................................... 927.6 826.7 735.1 697.4 546.1 Other........................................ 391.9 351.7 320.2 310.4 250.0 -------- -------- -------- -------- -------- Total Personal.......................... 1,722.8 1,524.5 1,364.7 1,306.4 1,039.2 -------- -------- -------- -------- -------- Commercial Insurance Multiple Peril............................... 684.4 714.5 784.5 813.6 671.0 Casualty..................................... 781.3 828.2 900.5 915.8 818.0 Workers' Compensation........................ 320.9 299.5 320.8 296.7 243.7 -------- -------- -------- -------- -------- Total Standard Commercial............... 1,786.6 1,842.2 2,005.8 2,026.1 1,732.7 -------- -------- -------- -------- -------- Property and Marine.......................... 503.6 498.4 524.0 583.0 495.0 Executive Protection......................... 1,325.1 1,078.0 949.8 891.4 775.7 Financial Institutions....................... 504.9 385.8 391.6 384.3 340.4 Other........................................ 490.2 372.2 267.6 260.6 188.3 -------- -------- -------- -------- -------- Total Specialty Commercial.............. 2,823.8 2,334.4 2,133.0 2,119.3 1,799.4 -------- -------- -------- -------- -------- Total Commercial........................ 4,610.4 4,176.6 4,138.8 4,145.4 3,532.1 -------- -------- -------- -------- -------- Total Personal and Commercial........... 6,333.2 5,701.1 5,503.5 5,451.8 4,571.3 Reinsurance Assumed from Royal & Sun Alliance..................................... -- -- -- (3.8) 202.5 -------- -------- -------- -------- -------- Total................................... $6,333.2 $5,701.1 $5,503.5 $5,448.0 $4,773.8 ======== ======== ======== ======== ========
A portion of the increase in net premiums written in 1997 was due to the termination of quota share reinsurance agreements with the Royal & Sun Alliance Insurance Group plc. The agreements were terminated effective January 1, 1997. COMBINED LOSS AND EXPENSE RATIOS Personal Insurance Automobile................................... 95.9% 91.8% 89.2% 86.6% 86.5% Homeowners................................... 100.8 97.9 90.8 88.9 104.3 Other........................................ 71.4 69.4 70.2 66.9 69.3 -------- -------- -------- -------- -------- Total Personal.......................... 92.9 89.9 85.6 83.1 91.7 -------- -------- -------- -------- -------- Commercial Insurance Multiple Peril............................... 114.8 132.7 124.2 118.7 118.1 Casualty..................................... 118.7 119.3 114.6 113.5 113.3 Workers' Compensation........................ 99.8 112.6 111.5 105.0 101.8 -------- -------- -------- -------- -------- Total Standard Commercial............... 114.0 123.6 118.0 114.5 113.6 -------- -------- -------- -------- -------- Property and Marine.......................... 115.0 111.3 116.5 105.5 97.8 Executive Protection......................... 87.1 84.3 75.8 74.5 76.5 Financial Institutions....................... 90.6 95.5 86.7 91.5 83.7 Other........................................ 105.5 92.9 100.9 85.0 99.0 -------- -------- -------- -------- -------- Total Specialty Commercial.............. 95.9 93.6 91.5 87.5 86.1 -------- -------- -------- -------- -------- Total Commercial........................ 103.1 107.3 104.5 100.7 99.7 -------- -------- -------- -------- -------- Total Personal and Commercial........... 100.4 102.8 99.8 96.6 97.9 Reinsurance Assumed from Royal & Sun Alliance..................................... -- -- -- N/M N/M -------- -------- -------- -------- -------- Total................................... 100.4% 102.8% 99.8% 96.9% 98.3% ======== ======== ======== ======== ========
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. 20 3 TEN YEAR FINANCIAL SUMMARY (in millions except for per share amounts)
FOR THE YEAR 2000 1999 1998 INCOME Property and Casualty Insurance Underwriting Income (Loss)............................... $ (23.6) $(178.8) $ (6.6) Investment Income........................................ 879.2 821.0 748.9 Amortization of Goodwill and Other Charges............... (52.2) (16.0) (57.4)(b) Property and Casualty Insurance Income (Loss)............. 803.4 626.2 684.9 Corporate and Other....................................... (3.9) (3.5) 22.9 OPERATING INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX...................................... 799.5 622.7 707.8 Federal and Foreign Income Tax (Credit)................... 118.4 57.4 93.0 OPERATING INCOME FROM CONTINUING OPERATIONS............... 681.1 565.3 614.8 Realized Investment Gains from Continuing Operations...... 33.5 55.8 92.2 INCOME FROM CONTINUING OPERATIONS......................... 714.6 621.1 707.0 Income from Discontinued Operations (1)................... -- -- -- NET INCOME................................................ 714.6 621.1 707.0 Property and Casualty Investment Income After Income Tax.................................................... 735.2 691.9 634.1 Dividends Declared on Common Stock.......................... 230.6 216.5 204.7 Net Change in Unrealized Appreciation or Depreciation of Investments, Net of Tax (2)............................... 332.7 (527.3) 14.6 PER SHARE Operating Income from Continuing Operations............... 3.82 3.33 3.65(b) Income from Continuing Operations......................... 4.01 3.66 4.19 Income from Discontinued Operations (1)................... -- -- -- Net Income................................................ 4.01 3.66 4.19 Dividends Declared on Common Stock........................ 1.32 1.28 1.24 Average Common and Potentially Dilutive Shares.............. 178.3 169.8 168.6
(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 a $220.5 million increase in unrealized appreciation, as of January 1, 1994, resulting from the change in accounting principle. 38 4
1997 1996 1995 1994 1993 1992 1991 $ 141.1 $ 54.3 $ 111.7 $ .4 $(528.9)(a) $ (46.3) $ 17.1 711.2 646.1 603.0 560.5 533.7 493.5 469.5 (24.1) (24.0) (17.5) (8.7) (6.2) (4.3) (1.2) 828.2 676.4 697.2 552.2 (1.4) 442.9 485.4 40.7 (209.3)(c) 31.0 5.0 24.5 43.8 59.3 868.9 467.1 728.2 557.2 23.1 486.7 544.7 167.8 32.9 144.5 84.4 (107.0) 49.4 87.2 701.1 434.2 583.7 472.8 130.1 437.3 457.5 68.4 52.0 70.7 35.1 137.3 114.8 40.3 769.5 486.2 654.4 507.9 267.4 552.1 497.8 -- 26.5 42.2 20.6 76.8 65.0 54.2 769.5 512.7 696.6 528.5 324.2(d) 617.1 552.0 592.3 544.2 507.2 475.0 455.4 422.8 397.6 198.3 188.7 170.6 161.1 150.8 139.6 127.8 161.4 (107.2) 470.2 (487.9) 46.5 (82.1) 12.2 4.00 2.44(c) 3.27 2.66 .77(a) 2.47 2.61 4.39 2.73 3.67 2.85 1.52 3.10 2.84 -- .15 .23 .11 .42 .36 .30 4.39 2.88 3.90 2.96 1.83(d) 3.46 3.14 1.16 1.08 .98 .92 .86 .80 .74 176.2 181.6 180.9 181.6 182.2 181.4 178.5
(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. 39 5 TEN YEAR FINANCIAL SUMMARY (in millions except for per share amounts)
FOR THE YEAR 2000 1999 1998 REVENUES Property and Casualty Insurance Premiums Earned......................................... $ 6,145.9 $ 5,652.0 $ 5,303.8 Investment Income....................................... 890.8 832.6 760.0 Corporate Investment Income.............................. 66.4 60.8 61.9 Real Estate and Other.................................... 96.9 96.8 82.2 Realized Investment Gains................................ 51.5 87.4 141.9 TOTAL REVENUES........................................ 7,251.5 6,729.6 6,349.8 AT YEAR END Total Assets............................................... 25,026.7 23,537.0 20,746.0 Invested Assets Property and Casualty Insurance.......................... 15,804.5 14,869.9 13,715.0 Corporate................................................ 1,196.1 1,149.5 1,040.3 Unpaid Claims and Claim Expenses........................... 11,904.6 11,434.7 10,356.5 Long Term Debt............................................. 753.8 759.2 607.5 Total Shareholders' Equity................................. 6,981.7 6,271.8 5,644.1 Per Common Share......................................... 39.91 35.74 34.78 Per Common Share, with Available-for-Sale Fixed Maturities at Amortized Cost.......................... 38.60 36.58 32.59 Actual Common Shares Outstanding........................... 174.9 175.5 162.3
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. 40 6
1997 1996 1995 1994 1993 1992 1991 $ 5,157.4 $ 4,569.3 $ 4,147.2 $ 3,776.3 $ 3,504.8(a) $ 3,163.3 $ 3,037.2 721.4 656.2 613.3 570.5 541.7 501.1 477.0 63.9 55.4 54.4 49.4 52.7 57.2 46.3 616.1 319.8 287.8 204.9 160.6 150.0 140.9 105.2 79.8 108.8 54.1 210.6 174.1 61.1 6,664.0 5,680.5 5,211.5 4,655.2 4,470.4 4,045.7 3,762.5 19,615.6 19,938.9 19,636.3 17,761.0 16,729.5 15,197.6 13,885.9 12,777.3 11,190.7 10,013.6 8,938.8 8,403.1 7,767.5 7,086.6 1,272.3 890.4 906.6 879.5 965.7 955.8 840.3 9,772.5 9,523.7 9,588.2 8,913.2 8,235.4 7,220.9 6,591.3 398.6 1,070.5 1,150.8 1,279.6 1,267.2 1,065.6 1,045.8 5,657.1 5,462.9 5,262.7 4,247.0 4,196.1 3,954.4 3,541.6 33.53 31.24 30.14 24.46 23.92 22.59 20.37 31.69 30.27 28.51 25.30 23.92 22.59 20.37 168.7 174.9 174.6 173.6 175.4 175.0 173.9
(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. 41 7 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF INCOME
IN MILLIONS YEARS ENDED DECEMBER 31 2000 1999 1998 REVENUES -------- -------- -------- Premiums Earned (Note 10).............................. $6,145.9 $5,652.0 $5,303.8 Investment Income (Note 4)............................. 957.2 893.4 821.9 Real Estate and Other Revenues......................... 96.9 96.8 82.2 Realized Investment Gains (Note 4)..................... 51.5 87.4 141.9 -------- -------- -------- TOTAL REVENUES.................................... 7,251.5 6,729.6 6,349.8 -------- -------- -------- CLAIMS AND EXPENSES Insurance Claims and Claim Expenses (Notes 9 and 10)... 4,127.7 3,942.0 3,493.7 Amortization of Deferred Policy Acquisition Costs (Note 5).................................................... 1,645.4 1,529.7 1,464.3 Other Insurance Operating Costs and Expenses........... 448.6 375.1 369.8 Real Estate and Other Expenses......................... 87.9 100.3 85.7 Investment Expenses.................................... 13.7 13.7 13.2 Corporate Expenses..................................... 77.2 58.7 33.4 Restructuring Charge (Note 15)......................... -- -- 40.0 -------- -------- -------- TOTAL CLAIMS AND EXPENSES......................... 6,400.5 6,019.5 5,500.1 -------- -------- -------- INCOME BEFORE FEDERAL AND FOREIGN INCOME TAX...... 851.0 710.1 849.7 FEDERAL AND FOREIGN INCOME TAX (NOTE 11).................... 136.4 89.0 142.7 -------- -------- -------- NET INCOME........................................ $ 714.6 $ 621.1 $ 707.0 ======== ======== ======== NET INCOME PER SHARE (NOTE 17) Basic............................................. $ 4.10 $ 3.70 $ 4.27 Diluted........................................... 4.01 3.66 4.19
See accompanying notes. 42 8 THE CHUBB CORPORATION CONSOLIDATED BALANCE SHEETS
IN MILLIONS DECEMBER 31 2000 1999 ASSETS --------- --------- Invested Assets (Note 4) Short Term Investments................................. $ 605.6 $ 731.1 Fixed Maturities Held-to-Maturity -- Tax Exempt (market $1,564.7 and $1,801.0)........................................... 1,496.1 1,741.9 Available-for-Sale Tax Exempt (cost $8,053.8 and $7,889.3)........... 8,380.5 7,867.5 Taxable (cost $5,666.6 and $5,054.7).............. 5,687.8 4,909.7 Equity Securities (cost $839.8 and $715.0)............. 830.6 769.2 --------- --------- TOTAL INVESTED ASSETS................................ 17,000.6 16,019.4 Cash...................................................... 22.4 22.7 Securities Lending Collateral............................. 451.1 469.5 Accrued Investment Income................................. 246.8 242.9 Premiums Receivable....................................... 1,409.8 1,234.7 Reinsurance Recoverable on Unpaid Claims and Claim Expenses .............................................. 1,853.3 1,685.9 Prepaid Reinsurance Premiums.............................. 246.0 240.1 Deferred Policy Acquisition Costs (Note 5)................ 842.0 779.7 Real Estate Assets (Notes 6 and 8)........................ 677.1 699.4 Deferred Income Tax (Note 11)............................. 501.0 584.2 Goodwill.................................................. 487.3 507.2 Other Assets.............................................. 1,289.3 1,051.3 --------- --------- TOTAL ASSETS......................................... $25,026.7 $23,537.0 ========= ========= LIABILITIES Unpaid Claims and Claim Expenses (Note 9)................. $11,904.6 $11,434.7 Unearned Premiums......................................... 3,516.3 3,323.1 Securities Lending Payable................................ 451.1 469.5 Long Term Debt (Note 8)................................... 753.8 759.2 Dividend Payable to Shareholders.......................... 57.8 56.2 Accrued Expenses and Other Liabilities.................... 1,361.4 1,222.5 --------- --------- TOTAL LIABILITIES.................................... 18,045.0 17,265.2 --------- --------- COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 9 AND 14) 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 178,833,278 and 177,272,322 Shares................................................. 178.8 177.3 Paid-In Surplus........................................... 466.0 418.4 Retained Earnings......................................... 6,492.6 6,008.6 Accumulated Other Comprehensive Income Unrealized Appreciation (Depreciation) of Investments, Net of Tax (Note 4)................................... 220.1 (112.6) Foreign Currency Translation Losses, Net of Tax........ (68.5) (44.8) Receivable from Employee Stock Ownership Plan............. (62.5) (74.9) Treasury Stock, at Cost -- 3,914,105 and 1,782,489 Shares................................................. (244.8) (100.2) --------- --------- TOTAL SHAREHOLDERS' EQUITY........................... 6,981.7 6,271.8 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $25,026.7 $23,537.0 ========= =========
See accompanying notes. 43 9 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN MILLIONS YEARS ENDED DECEMBER 31 2000 1999 1998 -------- -------- -------- PREFERRED STOCK Balance, Beginning and End of Year..................... $ -- $ -- $ -- -------- -------- -------- COMMON STOCK Balance, Beginning of Year............................. 177.3 176.0 176.0 Share Activity Related to Acquisition of Executive Risk................................................. -- .6 -- Share Activity under Option and Incentive Plans........ 1.5 .7 -- -------- -------- -------- Balance, End of Year.............................. 178.8 177.3 176.0 -------- -------- -------- PAID-IN SURPLUS Balance, Beginning of Year............................. 418.4 546.7 593.0 Share Activity Related to Acquisition of Executive Risk................................................. -- (126.3) -- Share Activity under Option and Incentive Plans........ 47.6 (2.0) (46.3) -------- -------- -------- Balance, End of Year.............................. 466.0 418.4 546.7 -------- -------- -------- RETAINED EARNINGS Balance, Beginning of Year............................. 6,008.6 5,604.0 5,101.7 Net Income............................................. 714.6 621.1 707.0 Dividends Declared (per share $1.32, $1.28 and $1.24)............................................... (230.6) (216.5) (204.7) -------- -------- -------- Balance, End of Year.............................. 6,492.6 6,008.6 5,604.0 -------- -------- -------- UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS Balance, Beginning of Year............................. (112.6) 414.7 400.1 Change During Year, Net of Tax (Note 4)................ 332.7 (527.3) 14.6 -------- -------- -------- Balance, End of Year.............................. 220.1 (112.6) 414.7 -------- -------- -------- FOREIGN CURRENCY TRANSLATION LOSSES Balance, Beginning of Year............................. (44.8) (36.0) (25.7) Change During Year, Net of Tax......................... (23.7) (8.8) (10.3) -------- -------- -------- Balance, End of Year.............................. (68.5) (44.8) (36.0) -------- -------- -------- RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN Balance, Beginning of Year............................. (74.9) (86.3) (96.7) Principal Repayments................................... 12.4 11.4 10.4 -------- -------- -------- Balance, End of Year.............................. (62.5) (74.9) (86.3) -------- -------- -------- TREASURY STOCK, AT COST Balance, Beginning of Year............................. (100.2) (975.0) (491.3) Repurchase of Shares................................... (242.3) (145.0) (608.5) Share Activity Related to Acquisition of Executive Risk................................................. -- 957.2 -- Share Activity under Option and Incentive Plans........ 97.7 62.6 124.8 -------- -------- -------- Balance, End of Year.............................. (244.8) (100.2) (975.0) -------- -------- -------- TOTAL SHAREHOLDERS' EQUITY........................ $6,981.7 $6,271.8 $5,644.1 ======== ======== ========
See accompanying notes. 44 10 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
IN MILLIONS YEARS ENDED DECEMBER 31 2000 1999 1998 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income................................................ $ 714.6 $ 621.1 $ 707.0 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Increase in Unpaid Claims and Claim Expenses, Net...... 302.5 93.1 485.3 Increase in Unearned Premiums, Net..................... 187.3 49.1 199.7 Decrease (Increase) in Premiums Receivable............. (175.1) 14.9 (54.9) Decrease (Increase) in Funds Held for Asbestos-Related Settlement........................................... -- 607.4 (7.9) Decrease (Increase) in Deferred Policy Acquisition Costs................................................ (62.3) 4.2 (51.8) Deferred Income Tax (Credit)........................... (25.3) 5.3 (5.5) Depreciation........................................... 84.4 68.4 58.2 Realized Investment Gains.............................. (51.5) (87.4) (141.9) Other, Net............................................. (10.3) (37.2) 25.8 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES......................................... 964.3 1,338.9 1,214.0 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sales of Fixed Maturities -- Available-for- Sale..................................................... 2,180.8 1,427.5 1,668.8 Proceeds from Maturities of Fixed Maturities.............. 741.6 860.3 784.2 Proceeds from Sales of Equity Securities.................. 453.5 1,030.6 366.7 Proceeds from Sale of Interest in Associated Aviation Underwriters, Inc........................................ 55.0 -- -- Purchases of Fixed Maturities............................. (3,463.3) (3,252.2) (3,218.4) Purchases of Equity Securities............................ (579.4) (590.7) (535.7) Purchase of Interest in Hiscox plc........................ -- (145.3) -- Decrease (Increase) in Short Term Investments, Net........ 125.5 (190.9) 380.9 Purchases of Property and Equipment, Net.................. (138.7) (98.4) (78.8) Other, Net................................................ 1.5 1.6 (55.1) --------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES................ (623.5) (957.5) (687.4) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Issuance of Long Term Debt.................. -- -- 400.5 Repayment of Long Term Debt............................... (5.4) (48.3) (191.6) Proceeds from Issuance of Common Stock Under Incentive and Purchase Plans........................................... 119.3 22.7 62.8 Repurchase of Shares...................................... (242.3) (145.0) (608.5) Dividends Paid to Shareholders............................ (229.0) (210.6) (203.4) Other, Net................................................ 16.3 14.2 10.4 --------- --------- --------- NET CASH USED IN FINANCING ACTIVITIES................ (341.1) (367.0) (529.8) --------- --------- --------- Net Increase (Decrease) in Cash............................. (.3) 14.4 (3.2) Cash at Beginning of Year................................... 22.7 8.3 11.5 --------- --------- --------- CASH AT END OF YEAR.................................. $ 22.4 $ 22.7 $ 8.3 ========= ========= ========= CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Net Income.................................................. $ 714.6 $ 621.1 $ 707.0 --------- --------- --------- Other Comprehensive Income (Loss) Change in Unrealized Appreciation or Depreciation of Investments, Net of Tax................................ 332.7 (527.3) 14.6 Foreign Currency Translation Losses, Net of Tax........... (23.7) (8.8) (10.3) --------- --------- --------- 309.0 (536.1) 4.3 --------- --------- --------- COMPREHENSIVE INCOME................................. $ 1,023.6 $ 85.0 $ 711.3 ========= ========= =========
See accompanying notes. 45 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 lines of property and casualty insurance in the United States, Canada, Europe, Australia and parts of 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. Certain amounts in the consolidated financial statements for prior years have been reclassified to conform with the 2000 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 that 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 that vary with and are primarily related to the production of business are deferred by major product groups and amortized over the period in which the related premiums are earned. Such costs include commissions, premium taxes and certain other underwriting and policy issuance costs. Deferred policy acquisition costs are reviewed to determine that they do not exceed recoverable amounts, after considering anticipated investment income. (d) Unpaid Claims and Claim Expenses Liabilities for unpaid claims and claim expenses include the accumulation of individual case estimates for claims reported as well as estimates of incurred but not reported claims and estimates of 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 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 and claim expenses 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. 46 12 (f) Financial Services Operations Beginning in 2000, Chubb Financial Solutions, Inc., a wholly owned subsidiary of the Corporation, participates in the credit derivatives business as a principal. The Corporation guarantees certain obligations of Chubb Financial Solutions. Derivative instruments, primarily credit default swaps, are carried at estimated fair value as of the balance sheet date. Changes in fair value are credited or charged to net income. (g) Real Estate Real estate properties are carried at cost, net of write-downs for impairment. Real estate taxes, interest and other carrying costs incurred prior to completion of the assets for their intended use are capitalized. Also, costs incurred during the initial leasing of income producing properties are capitalized until the project is substantially complete, subject to a maximum time period subsequent to completion of major construction activity. Real estate properties are reviewed for impairment whenever events or circumstances indicate that the carrying value of such properties may not be recoverable. In performing the review for recoverability of carrying value, estimates are made of the future undiscounted cash flows from each of the properties during the period the property will be held and upon its eventual disposition. If the expected future undiscounted cash flows are less than the carrying value of any 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. (h) 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 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. (i) Property and Equipment Property and equipment used in operations are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. (j) 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. (k) Income Taxes The Corporation and its domestic subsidiaries file a consolidated federal income tax return. Deferred income tax assets and liabilities are recognized for the expected future tax effects attributable to temporary differences between the financial reporting and tax bases of assets and liabilities, based on enacted tax rates and other provisions of tax law. The effect of a change in tax laws or rates is recognized in net income in the period in which such change is enacted. U.S. federal income taxes are accrued on undistributed earnings of foreign subsidiaries. (l) Foreign Exchange Assets and liabilities relating to foreign operations are translated into U.S. dollars using current exchange rates; revenues and expenses are translated into U.S. dollars using the average exchange rates for each year. The functional currency of 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. 47 13 (m) Cash Flow Information In the statement of cash flows, short term investments are not considered to be cash equivalents. The effect of changes in foreign exchange rates on cash balances was immaterial. In 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. This noncash transaction has been excluded from the consolidated statements of cash flows. (n) Accounting Pronouncements Not Yet Adopted In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that all derivatives be recognized in the balance sheet as assets or liabilities and be measured at fair value. Changes in the fair value of a derivative are reported in net income or other comprehensive income, depending on the intended use of the derivative and whether it qualifies for hedge accounting. In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, which provides additional guidance related to accounting and reporting for certain derivative instruments and hedging activities. 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, and SFAS No. 138 are effective for the Corporation for the year beginning January 1, 2001. These Statements may 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 and SFAS No. 138 is not expected to have a significant effect on the Corporation's financial position or results of operations. (2) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS Effective January 1, 2000, the Corporation adopted Statement of Position (SOP) 98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk, which was issued by the American Institute of Certified Public Accountants (AICPA). This SOP provides guidance on how to account for insurance and reinsurance contracts that do not transfer insurance risk. Restatement of prior years' financial statements is not permitted. The adoption of SOP 98-7 did not have any effect on the Corporation's financial position or results of operations since the Corporation's existing accounting policy was consistent with the requirements of the SOP. 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 estimated 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 claim expenses and operating expenses by an aggregate $37.6 million in 2000 and $25.4 million in 1999, resulting in an increase to net income of $24.4 million or $.14 per diluted share in 2000 and $16.5 million or $.10 per diluted share in 1999. The effect on net income will decrease in future years as the new method of accounting is phased in. (3) ACQUISITIONS AND DISPOSITIONS (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 assumed and adjusted as options to purchase common stock 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 assumed 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 purchased a 28% interest in Hiscox plc, a U.K. personal and commercial specialty insurer, for approximately $145 million. (c) In September 2000, the Corporation sold its 50% interest in Associated Aviation Underwriters, Inc. (AAU). The consideration from the sale was $65 million, consisting of a base purchase price of $55 million and a non-compete payment of $10 million. 48 14 (4) INVESTED ASSETS AND RELATED INCOME (a) The amortized cost and estimated market value of fixed maturities were as follows:
December 31 ------------------------------------------------------------------------------ 2000 1999 --------------------------------------------------- ------------------------ Gross Gross Estimated Gross Amortized Unrealized Unrealized Market Amortized Unrealized Cost Appreciation Depreciation Value Cost Appreciation --------- ------------ ------------ --------- --------- ------------ (in millions) Held-to-maturity -- Tax exempt...... $ 1,496.1 $ 68.6 $-- $ 1,564.7 $ 1,741.9 $ 60.3 --------- ------ ----- --------- --------- ------ Available-for-sale Tax exempt........................ 8,053.8 337.5 10.8 8,380.5 7,889.3 137.5 --------- ------ ----- --------- --------- ------ Taxable U.S. Government and government agency and authority obligations................... 613.3 14.9 .3 627.9 575.4 .5 Corporate bonds................. 1,564.7 14.3 23.9 1,555.1 1,535.0 2.1 Foreign bonds................... 1,267.1 32.3 5.1 1,294.3 1,199.2 19.4 Mortgage-backed securities...... 2,113.6 19.2 29.3 2,103.5 1,674.8 13.2 Redeemable preferred stocks..... 107.9 -- .9 107.0 70.3 .1 --------- ------ ----- --------- --------- ------ 5,666.6 80.7 59.5 5,687.8 5,054.7 35.3 --------- ------ ----- --------- --------- ------ Total available-for-sale...... 13,720.4 418.2 70.3 14,068.3 12,944.0 172.8 --------- ------ ----- --------- --------- ------ Total fixed maturities........ $15,216.5 $486.8 $70.3 $15,633.0 $14,685.9 $233.1 ========= ====== ===== ========= ========= ====== December 31 ------------------------ 1999 ------------------------ Gross Estimated Unrealized Market Depreciation Value ------------ --------- (in millions) Held-to-maturity -- Tax exempt...... $ 1.2 $ 1,801.0 ------ --------- Available-for-sale Tax exempt........................ 159.3 7,867.5 ------ --------- Taxable U.S. Government and government agency and authority obligations................... 14.4 561.5 Corporate bonds................. 61.2 1,475.9 Foreign bonds................... 15.6 1,203.0 Mortgage-backed securities...... 88.6 1,599.4 Redeemable preferred stocks..... .5 69.9 ------ --------- 180.3 4,909.7 ------ --------- Total available-for-sale...... 339.6 12,777.2 ------ --------- Total fixed maturities........ $340.8 $14,578.2 ====== =========
The amortized cost and estimated market value of fixed maturities at December 31, 2000 by contractual maturity were as follows:
Estimated Amortized Market Cost Value --------- --------- (in millions) Held-to-maturity Due in one year or less.................................. $ 101.3 $ 102.3 Due after one year through five years.................... 595.5 617.7 Due after five years through ten years................... 543.5 571.8 Due after ten years...................................... 255.8 272.9 --------- --------- $ 1,496.1 $ 1,564.7 ========= ========= Available-for-sale Due in one year or less.................................. $ 165.3 $ 165.2 Due after one year through five years.................... 2,459.4 2,511.9 Due after five years through ten years................... 4,463.6 4,648.5 Due after ten years...................................... 4,518.5 4,639.2 --------- --------- 11,606.8 11,964.8 Mortgage-backed securities............................... 2,113.6 2,103.5 --------- --------- $13,720.4 $14,068.3 ========= =========
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 ---------------- 2000 1999 ---- ---- (in millions) Equity securities Gross unrealized appreciation............................ $ 51.9 $ 89.7 Gross unrealized depreciation............................ 61.1 35.5 ------ ------- (9.2) 54.2 ------ ------- Fixed maturities Gross unrealized appreciation............................ 418.2 172.8 Gross unrealized depreciation............................ 70.3 339.6 ------ ------- 347.9 (166.8) ------ ------- 338.7 (112.6) Deferred income tax liability (asset)...................... 118.6 (39.4) Valuation allowance........................................ -- 39.4 ------ ------- $220.1 $(112.6) ====== =======
49 15 The change in unrealized appreciation or depreciation of investments carried at market value was as follows:
Years Ended December 31 ------------------------------- 2000 1999 1998 ---- ---- ---- (in millions) Change in unrealized appreciation or depreciation of equity securities........................ $(63.4) $ (35.4) $(47.6) Change in unrealized appreciation or depreciation of fixed maturities........................ 514.7 (715.2) 70.0 ------ ------- ------ 451.3 (750.6) 22.4 Deferred income tax (credit)....... 158.0 (262.7) 7.8 Increase (decrease) in valuation allowance......................... (39.4) 39.4 -- ------ ------- ------ $332.7 $(527.3) $ 14.6 ====== ======= ======
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 an increase of $9.5 million, a decrease of $78.9 million and a decrease of $8.6 million for the years ended December 31, 2000, 1999 and 1998, respectively. (c) The sources of net investment income were as follows:
Years Ended December 31 ------------------------------------ 2000 1999 1998 ---- ---- ---- (in millions) Fixed maturities.................... $895.4 $816.9 $761.1 Equity securities................... 23.5 31.2 24.7 Short term investments.............. 38.5 43.8 35.8 Other............................... (.2) 1.5 .3 ------ ------ ------ Gross investment income............ 957.2 893.4 821.9 Investment expenses................. 13.7 13.7 13.2 ------ ------ ------ $943.5 $879.7 $808.7 ====== ====== ======
(d) Realized investment gains and losses were as follows:
Years Ended December 31 ------------------------------------ 2000 1999 1998 ---- ---- ---- (in millions) Gross realized investment gains Fixed maturities................... $ 48.2 $ 38.2 $ 49.2 Equity securities.................. 94.0 172.9 118.5 Sale of AAU........................ 44.9 -- -- ------ ------ ------ 187.1 211.1 167.7 ------ ------ ------ Gross realized investment losses Fixed maturities................... 40.5 14.3 7.0 Equity securities.................. 95.1 109.4 18.8 ------ ------ ------ 135.6 123.7 25.8 ------ ------ ------ Realized investment gains........... 51.5 87.4 141.9 Income tax.......................... 18.0 31.6 49.7 ------ ------ ------ $ 33.5 $ 55.8 $ 92.2 ====== ====== ======
(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 --------------------------------- 2000 1999 1998 ---- ---- ---- (in millions) Balance, beginning of year..... $ 779.7 $ 728.7 $ 676.9 --------- --------- --------- Increase related to acquisition of Executive Risk............ -- 55.2 -- --------- --------- --------- Costs deferred during year Commissions and brokerage.... 869.0 784.4 768.0 Premium taxes and assessments................ 138.3 132.8 128.5 Salaries and operating costs...................... 700.4 608.3 619.6 --------- --------- --------- 1,707.7 1,525.5 1,516.1 Amortization during year....... (1,645.4) (1,529.7) (1,464.3) --------- --------- --------- Balance, end of year........... $ 842.0 $ 779.7 $ 728.7 ========= ========= =========
(6) REAL ESTATE The components of real estate assets were as follows:
December 31 ------------------- 2000 1999 ---- ---- (in millions) Mortgages and notes receivable (net of allowance for uncollectible amounts of $2.1 and $13.9)..... $ 89.7 $ 81.2 Income producing properties....................... 192.8 196.8 Construction in progress.......................... 69.0 66.2 Land under development and unimproved land........ 325.6 355.2 ------ ------ $677.1 $699.4 ====== ======
Substantially all mortgages and notes receivable are secured by buildings and land. Mortgages and notes receivable had an estimated aggregate fair value of $81.9 million and $75.5 million at December 31, 2000 and 1999, 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 $4.0 million, $3.5 million and $2.9 million for 2000, 1999 and 1998, respectively. (7) PROPERTY AND EQUIPMENT Property and equipment included in other assets were as follows:
December 31 ------------------- 2000 1999 ---- ---- (in millions) Cost.......................................... $599.8 $517.6 Accumulated depreciation...................... 235.9 224.1 ------ ------ $363.9 $293.5 ====== ======
Depreciation expense related to property and equipment was $80.4 million, $64.9 million and $55.3 million for 2000, 1999 and 1998, respectively. 50 16 (8) DEBT AND CREDIT ARRANGEMENTS (a) Long term debt consisted of the following:
December 31 ------------------------------------- 2000 1999 ----------------- ----------------- Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- ----- (in millions) Term loan................. $ 10.0 $ 10.0 $ 15.0 $ 15.0 Mortgages................. 43.8 49.0 44.2 44.8 6.15% notes............... 300.0 294.3 300.0 284.8 6.60% debentures.......... 100.0 90.3 100.0 89.2 6 7/8% notes.............. 100.0 100.8 100.0 99.4 7 1/8% notes.............. 75.0 75.6 75.0 71.0 8.675% capital securities.............. 125.0 125.8 125.0 125.0 ------ ------ ------ ------ $753.8 $745.8 $759.2 $729.2 ====== ====== ====== ======
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, 2000, the interest rate on the term loan was 7 1/2% 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 $183.2 million at December 31, 2000. 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. These notes are fully and unconditionally guaranteed by the Corporation. 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 ten 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. The capital securities are unconditionally and on a subordinated basis guaranteed by the Corporation. The Corporation filed a shelf registration statement which the Securities and Exchange Commission declared effective in September 1998, under which up to $600.0 million of various types of securities may be issued by the Corporation or Chubb Capital. No securities have been issued under this registration statement. The amounts of long term debt due annually during the five years subsequent to December 31, 2000 are as follows:
Years Ending Term Loan December 31 and Mortgages Notes Total ------------ ------------- ----- ----- (in millions) 2001.................. $10.3 $ -- $ 10.3 2002.................. .4 -- .4 2003.................. .4 100.0 100.4 2004.................. .4 -- .4 2005.................. .6 300.0 300.6
(b) Interest costs of $52.9 million, $48.5 million and $28.9 million were incurred in 2000, 1999 and 1998, respectively. Interest paid was $52.7 million, $48.0 million and $23.4 million in 2000, 1999 and 1998, respectively. (c) The Corporation has 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 5, 2000, was extended to July 4, 2001, 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. 51 17 (9) UNPAID CLAIMS AND CLAIM EXPENSES 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 as a whole 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. Asbestos remains the most significant and difficult mass tort for the insurance industry in terms of claims volume and dollar exposure. The property and casualty insurance subsidiaries' most significant individual asbestos exposures involve traditional defendants who manufactured, distributed or installed asbestos products for whom excess liability coverages were written. While these insureds are relatively few in number, such exposure has increased in recent years due to the increased volume of claims, the erosion of much of the underlying limits and the bankruptcies of target defendants. Other potential asbestos exposures are mostly peripheral defendants, including a mix of manufacturers, distributors and installers 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 financial resources of traditional asbestos defendants have been depleted, plaintiffs are targeting these peripheral parties with greater frequency and, in many cases, for larger awards. In addition, the plaintiffs bar continues to solicit new claimants through extensive advertising and through asbestos medical screenings. Class actions are then initiated even though many of the claimants have not manifested evidence of serious injury. Thus, new asbestos claims and new exposures on existing claims have continued unabated despite the fact that practically all manufacturing and usage of asbestos ended nearly two decades ago. Based on published projections, it is expected that the property and casualty insurance subsidiaries will continue receiving asbestos claims at the current rate for at least the next several years. The expanded focus of asbestos litigation beyond asbestos manufacturers and distributors to installers and premises owners has created in some instances conflicts among insureds, primary insurers and excess insurers, primarily involving questions regarding allocation of indemnity and expense costs and exhaustion of policy limits. These issues are generating costly coverage litigation with the potential for inconsistent results. Significant uncertainty remains as to the ultimate liability of the property and casualty insurance subsidiaries relating to asbestos related 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 as well as the increase in the volume of claims by plaintiffs claiming exposure but with no symptoms of asbestos-related disease. 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 at a site, regulators have the work done and then attempt to establish legal liability against the PRPs. Most PRPs named to date are parties who have been generators, transporters, past or present land owners or past or present site operators. 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 depending on a variety of factors. 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 has not been re-enacted. 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. Without federal movement on Superfund reform, the enforcement of Superfund liability is shifting to the 52 18 states. States are being forced to reconsider state-level cleanup statutes and regulations. As individual states move forward, the potential for conflicting state regulation becomes greater. Significant uncertainty remains 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. 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 and claim expenses, net of reinsurance recoverable, and a reconciliation of the net liability to the corresponding liability on a gross basis is as follows:
2000 1999 1998 ---- ---- ---- (in millions) Gross liability, beginning of year........................ $11,434.7 $10,356.5 $ 9,772.5 Reinsurance recoverable, beginning of year........... 1,685.9 1,306.6 1,207.9 --------- --------- --------- Net liability, beginning of year........................ 9,748.8 9,049.9 8,564.6 --------- --------- --------- 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.............. 4,357.7 4,147.6 3,712.1 Prior years............... (230.0) (205.6) (218.4) --------- --------- --------- 4,127.7 3,942.0 3,493.7 --------- --------- --------- Net payments for claims and claim expenses related to Current year.............. 1,342.5 1,278.9 1,210.7 Prior years............... 2,482.7 2,570.0 1,797.7 --------- --------- --------- 3,825.2 3,848.9 3,008.4 --------- --------- --------- Net liability, end of year.... 10,051.3 9,748.8 9,049.9 Reinsurance recoverable, end of year................. 1,853.3 1,685.9 1,306.6 --------- --------- --------- Gross liability, end of year........................ $11,904.6 $11,434.7 $10,356.5 ========= ========= =========
During 2000, the property and casualty insurance subsidiaries experienced overall favorable development of $230.0 million on net unpaid claims and claim expenses established as of the previous year-end. This compares with favorable development of $205.6 million and $218.4 million in 1999 and 1998, respectively. 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 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, 2000 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 some continuing 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. (10) 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 that 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. Premiums earned and insurance claims and claim expenses 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 ------------------------------ 2000 1999 1998 ---- ---- ---- (in millions) Direct premiums written....... $6,741.6 $6,042.6 $5,842.0 Reinsurance assumed........... 384.4 275.2 141.9 Reinsurance ceded............. (792.8) (616.7) (480.4) -------- -------- -------- Net premiums written........ $6,333.2 $5,701.1 $5,503.5 ======== ======== ======== Direct premiums earned........ $6,550.2 $6,037.1 $5,624.7 Reinsurance assumed........... 382.6 246.5 140.6 Reinsurance ceded............. (786.9) (631.6) (461.5) -------- -------- -------- Net premiums earned......... $6,145.9 $5,652.0 $5,303.8 ======== ======== ========
Reinsurance recoveries by the property and casualty insurance subsidiaries that have been deducted from insurance claims and claim expenses were $791.0 million, $501.2 million and $447.4 million in 2000, 1999 and 1998, respectively. 53 19 (11) FEDERAL AND FOREIGN INCOME TAX (a) Income tax expense consisted of the following components:
Years Ended December 31 ----------------------------- 2000 1999 1998 ---- ---- ---- (in millions) Current tax United States............................................. $152.1 $41.0 $124.7 Foreign................................................... 9.6 42.7 23.5 Deferred tax (credit), principally United States............ (25.3) 5.3 (5.5) ------ ----- ------ $136.4 $89.0 $142.7 ====== ===== ======
Federal and foreign income taxes paid were $159.7 million, $83.5 million and $177.9 million in 2000, 1999 and 1998, 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 --------------------------------------------------------- 2000 1999 1998 ----------------- ----------------- ----------------- % of % of % of Pre-Tax Pre-Tax Pre-Tax Amount Income Amount Income Amount Income ------ ------- ------ ------- ------ ------- (in millions) Income before federal and foreign income tax.............. $851.0 $710.1 $849.7 ======= ======= ======= Tax at statutory federal income tax rate.................. $297.9 35.0% $248.5 35.0% $297.3 35.0% Tax exempt interest income................................ (153.9) (18.1) (150.6) (21.2) (137.5) (16.2) Other, net................................................ (7.6) (.9) (8.9) (1.3) (17.1) (2.0) ------- ----- ------- ----- ------- ----- Actual tax.......................................... $136.4 16.0% $ 89.0 12.5% $142.7 16.8% ======= ===== ======= ===== ======= =====
(c) The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities were as follows:
December 31 -------------------- 2000 1999 ---- ---- (in millions) Deferred income tax assets Unpaid claims and claim expenses.......................... $528.6 $521.2 Unearned premiums......................................... 201.6 191.6 Postretirement benefits................................... 77.8 76.1 Alternative minimum tax credit carryforward............... 62.9 43.1 Unrealized depreciation of investments.................... -- 39.4 Other, net................................................ 81.5 73.9 ------ ------ 952.4 945.3 Valuation allowance....................................... -- (39.4) ------ ------ Total................................................... 952.4 905.9 ------ ------ Deferred income tax liabilities Deferred policy acquisition costs......................... 258.5 238.0 Real estate assets........................................ 74.3 83.7 Unrealized appreciation of investments.................... 118.6 -- ------ ------ Total................................................... 451.4 321.7 ------ ------ Net deferred income tax asset......................... $501.0 $584.2 ====== ======
The valuation allowance at December 31, 1999 related to future tax benefits on unrealized depreciation of investments, the realization of which was uncertain. The valuation allowance had no impact on net income. 54 20 (12) STOCK-BASED COMPENSATION PLANS (a) In 2000, the Corporation adopted the Long-Term Stock Incentive Plan (2000), which succeeded the Long-Term Stock Incentive Plan (1996). The Long-Term Stock Incentive Plan (2000), which is similar to the 1996 plan, 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 2000 Plan is 13,000,000. At December 31, 2000, 12,725,137 shares were available for grant under the 2000 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:
2000 1999 1998 ----------------------------- ----------------------------- ----------------------------- 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....... 14,565,584 $55.58 9,765,090 $54.78 9,124,803 $47.67 Exchanged for Executive Risk options............................ -- -- 1,809,885 36.77 -- -- Granted.............................. 5,833,616 50.88 4,761,683 60.31 2,168,804 78.75 Exercised............................ (3,242,900) 46.05 (1,359,855) 39.50 (1,320,504) 41.78 Forfeited............................ (472,559) 60.13 (411,219) 64.20 (208,013) 75.25 ---------- ---------- ---------- Outstanding, end of year............. 16,683,741 55.66 14,565,584 55.58 9,765,090 54.78 ========== ========== ========== Exercisable, end of year............. 8,787,173 57.80 9,187,352 51.09 6,879,061 47.26
December 31, 2000 ---------------------------------------------------------------------------------- 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 -- $46.85................... 2,086,399 $39.50 3.1 2,043,750 $39.35 47.06 -- 52.94................... 6,072,962 48.14 8.2 1,285,516 48.76 53.06 -- 88.88................... 8,524,380 64.98 6.8 5,457,907 66.84 ---------- --------- 16,683,741 55.66 6.8 8,787,173 57.80 ========== =========
Performance share awards are based on the achievement of various goals over performance cycle periods and are payable in cash, in shares of the Corporation's common stock or in a combination of both. The cost of such awards is expensed over the performance cycle. 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 $11.5 million in 2000, $5.2 million in 1999 and $14.4 million in 1998. 55 21 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.
2000 1999 1998 ---------------------- ---------------------- ---------------------- As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma -------- -------- -------- -------- -------- -------- (in millions except for per share amounts) Net income........................ $714.6 $669.6 $621.1 $585.6 $707.0 $679.6 Diluted earnings per share........ 4.01 3.76 3.66 3.45 4.19 4.03
The weighted average fair value of options granted under the Long-Term Stock Incentive Plans during 2000, 1999 and 1998 was $11.98, $13.77 and $17.36, 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 2000, 1999 and 1998 were 6.7%, 5.4% and 5.5%, respectively. The expected volatility of the market price of the Corporation's common stock for 2000, 1999 and 1998 grants was 21.9%, 19.0% and 16.4%, respectively. The expected average term of the granted options was 5 1/2 years for 2000 and 1999 and 5 years for 1998. The dividend yield was 2.7% for 2000, 2.1% for 1999 and 1.6% for 1998. (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 2000, 1999 and 1998, cash contributions to the ESOP of $11.0 million, $11.2 million and $11.0 million, respectively, were charged against income. Dividends on shares of common stock in the ESOP used for debt service were $7.7 million in 2000 and 1999 and $7.8 million in 1998. The number of allocated and unallocated shares held by the ESOP at December 31, 2000 were 3,641,054 and 2,077,924, 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, 2000, there were approximately 1,200,000 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. 56 22 (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 ------------------------------ 2000 1999 1998 ---- ---- ---- (in millions) Service cost of current period...................... $ 26.4 $ 22.2 $ 18.8 Interest cost on projected benefit obligation.......... 40.2 37.6 34.5 Expected return on plan assets...................... (49.9) (44.5) (40.3) Other gains................... (6.3) (2.5) (2.5) ------ ------ ------ Net pension cost.......... $ 10.4 $ 12.8 $ 10.5 ====== ====== ======
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 (15)). The following table sets forth the plans' funded status and amounts recognized in the balance sheets:
December 31 ------------------- 2000 1999 ---- ---- (in millions) Actuarial present value of projected benefit obligation for service rendered to date.................................. $589.2 $543.4 Plan assets at fair value.................. 594.1 599.0 ------ ------ Plan assets in excess of projected benefit obligation............................... (4.9) (55.6) Unrecognized net gain from past experience different from that assumed.............. 115.8 153.8 Unrecognized prior service costs........... (10.9) (6.3) Unrecognized net asset at January 1, 1985, being recognized principally over 19 years.................................... 2.1 3.4 ------ ------ Pension liability included in other liabilities............................ $102.1 $ 95.3 ====== ======
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation at December 31, 2000 and 1999 was 7 1/2% and the rate of increase in future compensation levels was 4 1/2% for both years. The expected long term rate of return on assets was 9% for both years. Plan assets are principally invested in publicly traded stocks and bonds. Effective January 1, 2001, the Corporation changed the formula for providing pension benefits from the final average pay formula to a cash balance formula, which will credit employees semi-annually with an amount equal to a percentage of eligible compensation based on age and years of service as well as an interest credit based on individual account balances. Employees hired prior to 2001 will generally be eligible to receive vested benefits based on the higher of the final average pay or cash balance formulas. This change in the pension benefit formula will not have a significant effect on the Corporation's financial position or results of operations. (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 hired before January 1, 1999 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 ---------------------------------- 2000 1999 1998 ---- ---- ---- (in millions) Service cost of current period... $ 4.8 $ 4.5 $ 4.2 Interest cost on accumulated benefit obligation............. 8.7 8.6 8.2 Net amortization and deferral.... (1.5) (1.0) (1.3) ----- ----- ----- Net postretirement benefit cost......................... $12.0 $12.1 $11.1 ===== ===== =====
The components of the accumulated postretirement benefit obligation were as follows:
December 31 ------------------- 2000 1999 ---- ---- (in millions) Accumulated postretirement benefit obligation................................ $126.3 $123.4 Unrecognized net gain from past experience different from that assumed............... 35.6 32.2 ------ ------ Postretirement benefit liability included in other liabilities.................... $161.9 $155.6 ====== ======
57 23 The weighted average discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation at December 31, 2000 and 1999 was 7 1/2%. At December 31, 2000, the weighted average health care cost trend rate used to measure the accumulated postretirement cost for medical benefits was 8.7% for 2001 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, 2000 by approximately $20 million and the aggregate of the service and interest cost components of net postretirement benefit cost for the year ended December 31, 2000 by approximately $3 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 $17.1 million, $15.1 million and $14.5 million were charged against income in 2000, 1999 and 1998, respectively. (14) LEASES The Corporation and its subsidiaries occupy office facilities under lease agreements that 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 -------------------------------- 2000 1999 1998 ---- ---- ---- (in millions) Office facilities........................ $75.2 $71.0 $73.8 Equipment................................ 14.6 13.4 13.3 ----- ----- ----- $89.8 $84.4 $87.1 ===== ===== =====
At December 31, 2000, future minimum rental payments required under non-cancellable operating leases were as follows:
Years Ending December 31 ------------ (in millions) 2001.................................... $ 87.5 2002.................................... 78.6 2003.................................... 68.5 2004.................................... 60.8 2005.................................... 53.2 After 2005.............................. 281.2 ------ $629.8 ======
(15) RESTRUCTURING CHARGE During 1998, the Corporation implemented an activity value analysis process that identified and eliminated low-value activities and improved operational efficiency while redirecting resources to activities having the greatest potential to contribute to the Corporation's results. The cost control initiative resulted in job reductions through a combination of early retirements, terminations and attrition. 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 have been included in the pension and postretirement medical benefits liabilities and are being reduced as benefit payments are made over time. All of the other restructuring costs have been paid. 58 24 (16) SEGMENTS INFORMATION The property and casualty operations include three reportable underwriting segments and the investment function. The underwriting segments are personal, standard commercial and specialty commercial. 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. Corporate and other includes investment income earned on corporate invested assets, corporate expenses and the results of the Corporation's real estate and other non-insurance subsidiaries. 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. 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. Revenues, income before income tax and assets of each operating segment were as follows:
Years Ended December 31 ------------------------------ 2000 1999 1998 ---- ---- ---- Revenues (in millions) Property and casualty insurance Premiums earned Personal.......................................... $1,620.6 $1,447.5 $1,304.3 Standard commercial............................... 1,809.9 1,944.9 1,980.6 Specialty commercial.............................. 2,715.4 2,259.6 2,018.9 -------- -------- -------- 6,145.9 5,652.0 5,303.8 Investment income..................................... 890.8 832.6 760.0 -------- -------- -------- Total property and casualty insurance............. 7,036.7 6,484.6 6,063.8 Corporate and other Corporate investment income........................... 66.4 60.8 61.9 Real estate and other................................. 96.9 96.8 82.2 Realized investment gains................................. 51.5 87.4 141.9 -------- -------- -------- Total revenues.................................... $7,251.5 $6,729.6 $6,349.8 ======== ======== ======== Income (loss) before income tax Property and casualty insurance Underwriting Personal.......................................... $ 80.7 $ 121.1 $ 168.1 Standard commercial............................... (243.6) (416.8) (360.0) Specialty commercial.............................. 77.0 121.1 133.5 -------- -------- -------- (85.9) (174.6) (58.4) Increase (decrease) in deferred policy acquisition costs........................................... 62.3 (4.2) 51.8 -------- -------- -------- Underwriting loss..................................... (23.6) (178.8) (6.6) Investment income..................................... 879.2 821.0 748.9 Amortization of goodwill and other charges............ (52.2) (16.0) (17.4) Restructuring charge.................................. -- -- (40.0) -------- -------- -------- Total property and casualty insurance............. 803.4 626.2 684.9 Corporate and other income (loss)......................... (3.9) (3.5) 22.9 Realized investment gains................................. 51.5 87.4 141.9 -------- -------- -------- Total income before income tax.................... $ 851.0 $ 710.1 $ 849.7 ======== ======== ========
December 31 --------------------------------- 2000 1999 1998 ---- ---- ---- (in millions) Assets Property and casualty insurance........................... $23,066.1 $21,628.1 $18,954.2 Corporate and other....................................... 2,030.4 1,976.9 1,878.2 Adjustments and eliminations.............................. (69.8) (68.0) (86.4) --------- --------- --------- Total assets...................................... $25,026.7 $23,537.0 $20,746.0 ========= ========= =========
59 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 -------------------------------- 2000 1999 1998 ---- ---- ---- (in millions) Revenues United States............................................. $5,914.9 $5,452.1 $5,116.6 International............................................. 1,121.8 1,032.5 947.2 -------- -------- -------- Total................................................... $7,036.7 $6,484.6 $6,063.8 ======== ======== ========
(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 includes 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 -------------------------------- 2000 1999 1998 ---- ---- ---- (in millions except for per share amounts) Basic earnings per share: Net income................................................ $714.6 $621.1 $707.0 ====== ====== ====== Weighted average number of common shares outstanding...... 174.3 167.7 165.6 ====== ====== ====== Basic earnings per share.................................. $ 4.10 $ 3.70 $ 4.27 ====== ====== ====== Diluted earnings per share: Net income................................................ $714.6 $621.1 $707.0 ====== ====== ====== Weighted average number of common shares outstanding...... 174.3 167.7 165.6 Additional shares from assumed exercise of stock-based compensation awards..................................... 4.0 2.1 3.0 ------ ------ ------ Weighted average number of common shares and potential common shares assumed outstanding for computing diluted earnings per share...................................... 178.3 169.8 168.6 ====== ====== ====== Diluted earnings per share................................ $ 4.01 $ 3.66 $ 4.19 ====== ====== ======
Options to purchase 3.5 million shares, 5.2 million shares and 1.6 million shares of common stock with weighted average exercise prices of $68.81 per share, $67.71 per share and $78.77 per share in 2000, 1999 and 1998, 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). 60 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. (vi) Fair values of credit default swaps are determined using an internal pricing model that is similar to external valuation models. The carrying values and fair values of financial instruments were as follows:
December 31 --------------------------------------------- 2000 1999 --------------------- --------------------- Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- ----- (in millions) Assets Invested assets Short term investments.................................. $ 605.6 $ 605.6 $ 731.1 $ 731.1 Fixed maturities (Note 4) Held-to-maturity...................................... 1,496.1 1,564.7 1,741.9 1,801.0 Available-for-sale.................................... 14,068.3 14,068.3 12,777.2 12,777.2 Equity securities....................................... 830.6 830.6 769.2 769.2 Real estate mortgages and notes receivable (Note 6)....... 89.7 81.9 81.2 75.5 Liabilities Long term debt (Note 8)................................... 753.8 745.8 759.2 729.2 Credit default swaps...................................... 6.2 6.2 -- --
61 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 -------------------------------------------------------------------------------------- 2000 1999 1998 -------------------------- ---------------------------- -------------------------- 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............ $502.8 $136.6* $366.2 $(663.2) $(191.7)* $(471.5) $164.3 $57.5 $106.8 Less: reclassification adjustment for realized gains included in net income............................. 51.5 18.0 33.5 87.4 31.6 55.8 141.9 49.7 92.2 ------ ------ ------ ------- ------- ------- ------ ----- ------ Net unrealized gains (losses) recognized in other comprehensive income 451.3 118.6 332.7 (750.6) (223.3) (527.3) 22.4 7.8 14.6 Foreign currency translation losses............................. (36.6) (12.9) (23.7) (14.2) (5.4) (8.8) (14.2) (3.9) (10.3) ------ ------ ------ ------- ------- ------- ------ ----- ------ Total other comprehensive income (loss).................... $414.7 $105.7 $309.0 $(764.8) $(228.7) $(536.1) $ 8.2 $ 3.9 $ 4.3 ====== ====== ====== ======= ======= ======= ====== ===== ======
* Reflects a decrease of $39.4 million and an increase of $39.4 million in a valuation allowance in 2000 and 1999, respectively. (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 ----------------------------------------- 2000 1999 1998 ---- ---- ---- (number of shares) Common stock issued Balance, beginning of year................................ 177,272,322 175,989,202 176,037,850 Share activity related to acquisition of Executive Risk... -- 641,474 -- Share activity under option and incentive plans........... 1,560,956 641,646 (48,648) ----------- ----------- ----------- Balance, end of year.................................. 178,833,278 177,272,322 175,989,202 ----------- ----------- ----------- Treasury stock Balance, beginning of year................................ 1,782,489 13,722,376 7,320,410 Share activity related to acquisition of Executive Risk... -- (13,651,028) -- Repurchase of shares...................................... 3,783,400 2,596,700 8,203,000 Share activity under option and incentive plans........... (1,651,784) (885,559) (1,801,034) ----------- ----------- ----------- Balance, end of year.................................. 3,914,105 1,782,489 13,722,376 ----------- ----------- ----------- Common stock outstanding, end of year................. 174,919,173 175,489,833 162,266,826 =========== =========== ===========
(c) The Corporation has a shareholders rights plan under which 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. 62 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 ------------------------------------------------ 2000 1999 --------------------- --------------------- GAAP Statutory GAAP Statutory ---- --------- ---- --------- (in millions) Property and casualty insurance subsidiaries................ $5,974.6 $3,483.7 $5,255.3 $3,341.5 ======== ======== Corporate and other......................................... 1,007.1 1,016.5 -------- -------- $6,981.7 $6,271.8 ======== ========
A comparison of GAAP and statutory net income is as follows:
Years Ended December 31 --------------------------------------------------------------------------- 2000 1999 1998 --------------------- --------------------- --------------------- GAAP Statutory GAAP Statutory GAAP Statutory -------- --------- -------- --------- -------- --------- (in millions) Property and casualty insurance subsidiaries...... $711.3 $622.2 $610.6 $609.3 $672.4 $663.1 ====== ====== ====== Corporate and other............................... 3.3 10.5 34.6 ------ ------ ------ $714.6 $621.1 $707.0 ====== ====== ======
In 1998, the National Association of Insurance Commissioners adopted the Codification of Statutory Accounting Principles (Codification). The Codification, which is intended to standardize the statutory basis of accounting, is effective January 1, 2001. The adoption of the Codification is not expected to have a significant effect on the statutory basis policyholders' surplus of the Corporation's insurance subsidiaries. (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 2000, these subsidiaries paid cash dividends to the Corporation totaling $320 million. The maximum dividend distribution that may be made by the property and casualty insurance subsidiaries to the Corporation during 2001 without prior approval is approximately $880 million. 63 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, 2000 and 1999, 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, 2000. 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, 2000 and 1999 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States. [ERNST & YOUNG LOGO] February 26, 2001 64 30 QUARTERLY FINANCIAL DATA Summarized unaudited quarterly financial data for 2000 and 1999 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 -------------------- -------------------- -------------------- -------------------- 2000 1999 2000 1999 2000 1999 2000 1999 ---- ---- ---- ---- ---- ---- ---- ---- (in millions except for per share amounts) Revenues........................... $1,767.0 $1,629.6 $1,774.0 $1,686.6 $1,858.5 $1,709.3 $1,852.0 $1,704.1 Claims and expenses................ 1,592.9 1,403.0 1,549.8 1,450.7 1,601.4 1,653.3 1,656.4 1,512.5 Federal and foreign income tax (credit)......................... 20.4 39.7 39.6 42.6 49.2 (21.3) 27.2 28.0 -------- -------- -------- -------- -------- -------- -------- -------- Net income..................... $ 153.7 $ 186.9 $ 184.6 $ 193.3 $ 207.9 $ 77.3 $ 168.4 $ 163.6 ======== ======== ======== ======== ======== ======== ======== ======== Basic earnings per share........... $ .88 $ 1.16 $ 1.05 $ 1.19 $ 1.20 $ .45 $ .97 $ .93 ======== ======== ======== ======== ======== ======== ======== ======== Diluted earnings per share......... $ .87 $ 1.14 $ 1.02 $ 1.18 $ 1.17 $ .44 $ .95 $ .93 ======== ======== ======== ======== ======== ======== ======== ======== Underwriting ratios Losses to premiums earned........ 69.2% 66.3% 65.9% 67.6% 66.9% 78.1% 67.9% 68.8% Expenses to premiums written..... 32.7 32.9 32.7 32.7 32.5 32.3 33.8 32.3 -------- -------- -------- -------- -------- -------- -------- -------- Combined....................... 101.9% 99.2% 98.6% 100.3% 99.4% 110.4% 101.7% 101.1% ======== ======== ======== ======== ======== ======== ======== ========
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 2000 and 1999.
2000 ---------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Common stock prices High.................................................... $67.56 $72.38 $82.00 $90.00 Low..................................................... 44.75 59.63 62.75 72.25 Dividends declared.......................................... .33 .33 .33 .33
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
At March 5, 2001, there were approximately 6,600 common shareholders of record. 65 EX-21 4 y43479ex21.txt SUBSIDIARIES OF THE REGISTRANT 1 THE CHUBB CORPORATION EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Significant subsidiaries at December 31, 2000 of The Chubb Corporation, a New Jersey Corporation, and their subsidiaries (indented), together with the percentages of ownership, are set forth below.
PERCENTAGE PLACE OF OF SECURITIES INCORPORATION OWNED COMPANY ------------- ------------- Federal Insurance Company................................... Indiana 100% Vigilant Insurance Company............................. New York 100 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 Executive Risk Indemnity Inc. ......................... Delaware 100 Executive Risk Specialty Insurance Company........ Connecticut 100 Quadrant Indemnity Company........................ Connecticut 100 CC Canada Holdings Ltd. ............................... Canada 100 Chubb Insurance Company of Canada................. Canada 100 Chubb Insurance Company of Europe, S.A. ............... Belgium 100 Chubb Insurance Company of Australia Limited........... Australia 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 Chubb Financial Solutions, Inc. ............................ Delaware 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. 43 -----END PRIVACY-ENHANCED MESSAGE-----