SUPPLEMENTARY FINANCIAL DATA

			In Millions
			Years Ended December 31
			2001(a)			2000			1999
Property and Casualty Insurance
	Underwriting
		Net Premiums Written	$	6,961.5		$	6,333.2		$	5,701.1
		Increase in Unearned Premiums		(305.1	)		(187.3	)		(49.1	)
		Premiums Earned		6,656.4			6,145.9			5,652.0
		Claims and Claim Expenses		5,357.4			4,127.7			3,942.0
		Operating Costs and Expenses		2,260.8			2,076.6			1,841.5
		Decrease (Increase) in Deferred Policy Acquisition Costs		(86.8	)		(62.3	)		4.2
		Dividends to Policyholders		28.5			27.5			43.1
		Underwriting Loss		(903.5	)		(23.6	)		(178.8	)
	Investments
		Investment Income Before Expenses		914.7			890.8			832.6
		Investment Expenses		12.1			11.6			11.6
		Investment Income		902.6			879.2			821.0
	Amortization of Goodwill and Other Charges			(52.3	)		(52.2	)		(16.0	)
	Property and Casualty Income			(53.2	)		803.4			626.2
Corporate and Other				(13.6	)		(3.9	)		(3.5	)
CONSOLIDATED OPERATING INCOME (LOSS) BEFORE INCOME TAX				(66.8	)		799.5			622.7
Federal and Foreign Income Tax (Credit)				(177.8	)		118.4			57.4
CONSOLIDATED OPERATING INCOME				111.0			681.1			565.3
Realized Investment Gains After Income Tax				.5			33.5			55.8
CONSOLIDATED NET INCOME			$	111.5		$	714.6		$	621.1
Property and Casualty Investment Income After Income Tax			$	749.1		$	735.2		$	691.9
Diluted Earnings Per Share Data
	Consolidated Operating Income		$	.63		$	3.82		$	3.33
	Consolidated Net Income			.63			4.01			3.66

(a)  Results for 2001 include net costs of $645.0 million ($420.0 million after-tax or $2.39 per share) related to the September 11 attack and net surety bond losses of $220.0 million ($143.0 million after-tax or $0.81 per share) related to the bankruptcy of Enron Corp.

21

PROPERTY AND CASUALTY UNDERWRITING RESULTS

Net Premiums Written (In Millions of Dollars)

			2001(a)		2000		1999		1998		1997
Personal Insurance
	Automobile		$	480.2	$	403.3	$	346.1	$	309.4	$	298.6
	Homeowners			1,065.4		927.6		826.7		735.1		697.4
	Other			435.5		391.9		351.7		320.2		310.4
		Total Personal		1,981.1		1,722.8		1,524.5		1,364.7		1,306.4
Commercial Insurance
	Multiple Peril			767.4		734.8		754.5		817.8		843.7
	Casualty			799.8		781.3		828.2		900.5		915.8
	Workers’ Compensation			355.1		320.9		299.5		320.8		296.7
	Property and Marine			568.5		503.6		498.4		524.0		583.0
		Total Commercial		2,490.8		2,340.6		2,380.6		2,563.1		2,639.2
Specialty Insurance
	Executive Protection			1,348.7		1,274.7		1,038.0		916.5		861.3
	Financial Institutions			534.2		504.9		385.8		391.6		384.3
	Other			606.7		490.2		372.2		267.6		256.8
		Total Specialty		2,489.6		2,269.8		1,796.0		1,575.7		1,502.4
		Total	$	6,961.5	$	6,333.2	$	5,701.1	$	5,503.5	$	5,448.0

Combined Loss and Expense Ratios

Personal Insurance
	Automobile		99.8	%	95.9	%	91.8	%	89.2	%	86.6	%
	Homeowners		112.6		100.8		97.9		90.8		88.9
	Other		75.8		71.4		69.4		70.2		66.9
		Total Personal	101.3		92.9		89.9		85.6		83.1
Commercial Insurance
	Multiple Peril		109.6		114.5		130.4		122.7		117.1
	Casualty		114.9		118.7		119.3		114.6		113.5
	Workers’ Compensation		92.9		99.8		112.6		111.5		105.0
	Property and Marine		115.8		115.0		111.3		116.5		105.5
		Total Commercial	110.5		114.2		120.4		117.2		112.0
Specialty Insurance
	Executive Protection		94.0		86.2		84.2		75.3		74.5
	Financial Institutions		187.7		90.6		95.5		86.7		91.5
	Other		146.2		105.5		92.9		100.9		85.0
		Total Specialty	125.5		91.3		88.5		82.5		80.7
		Total	113.4	%	100.4	%	102.8	%	99.8	%	96.9	%

(a) Underwriting results for 2001 excluding the effects of the September 11 attack are presented on page 26.

The combined loss and expense ratio, expressed as a percentage, is the key measure of underwriting profitability traditionally used in the property and casualty insurance business. It is the sum of the ratio of losses to premiums earned plus the ratio of underwriting expenses to premiums written after reducing both premium amounts by dividends to policyholders.

The underwriting results for prior years include certain reclassifications to conform with the 2001 presentation, which more closely reflects the way the property and casualty business is now managed. The total net premiums written and combined loss and expense ratios are not affected.

22

TEN YEAR FINANCIAL SUMMARY

(in millions except for per share amounts)

FOR THE YEAR			2001			2000			1999
Income
	Property and Casualty Insurance
		Underwriting Income (Loss)	$	(903.5	)(a)	$	(23.6	)	$	(178.8	)
		Investment Income		902.6			879.2			821.0
		Amortization of Goodwill and Other Charges		(52.3	)(a)		(52.2	)		(16.0	)
	Property and Casualty Insurance Income (Loss)			(53.2	)		803.4			626.2
	Corporate and Other			(13.6	)		(3.9	)		(3.5	)
	Operating Income (Loss) from Continuing Operations Before Income Tax			(66.8	)		799.5			622.7
	Federal and Foreign Income Tax (Credit)			(177.8	)		118.4			57.4
	Operating Income from Continuing Operations			111.0			681.1			565.3
	Realized Investment Gains from Continuing Operations			.5			33.5			55.8
	Income from Continuing Operations			111.5			714.6			621.1
	Income from Discontinued Operations (1)			—			—			—
	Net Income			111.5			714.6			621.1
	Property and Casualty Investment Income After Income Tax			749.1			735.2			691.9
Dividends Declared on Common Stock				234.8			230.6			216.5
Net Change in Unrealized Appreciation or Depreciation of Investments, Net of Tax (2)				32.5			332.7			(527.3	)
Per Share
	Operating Income from Continuing Operations			.63	(a)		3.82			3.33
	Income from Continuing Operations			.63			4.01			3.66
	Income from Discontinued Operations (1)			—			—			—
	Net Income			.63			4.01			3.66
	Dividends Declared on Common Stock			1.36			1.32			1.28
Average Common and Potentially Dilutive Shares				175.8			178.3			169.8

(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.

44

1998			1997			1996			1995			1994			1993			1992
$	(6.6	)	$	141.1		$	54.3		$	111.7		$	.4		$	(528.9	)(b)	$	(46.3	)
	748.9			711.2			646.1			603.0			560.5			533.7			493.5
	(57.4	)(c)		(24.1	)		(24.0	)		(17.5	)		(8.7	)		(6.2	)		(4.3	)
	684.9			828.2			676.4			697.2			552.2			(1.4	)		442.9
	22.9			40.7			(209.3	)(d)		31.0			5.0			24.5			43.8
	707.8			868.9			467.1			728.2			557.2			23.1			486.7
	93.0			167.8			32.9			144.5			84.4			(107.0	)		49.4
	614.8			701.1			434.2			583.7			472.8			130.1			437.3
	92.2			68.4			52.0			70.7			35.1			137.3			114.8
	707.0			769.5			486.2			654.4			507.9			267.4			552.1
	—			—			26.5			42.2			20.6			76.8			65.0
	707.0			769.5			512.7			696.6			528.5			324.2	(e)		617.1
	634.1			592.3			544.2			507.2			475.0			455.4			422.8
	204.7			198.3			188.7			170.6			161.1			150.8			139.6
	14.6			161.4			(107.2	)		470.2			(487.9	)		46.5			(82.1	)
	3.65	(c)		4.00			2.44	(d)		3.27			2.66			.77	(b)		2.47
	4.19			4.39			2.73			3.67			2.85			1.52			3.10
	—			—			.15			.23			.11			.42			.36
	4.19			4.39			2.88			3.90			2.96			1.83	(e)		3.46
	1.24			1.16			1.08			.98			.92			.86			.80
	168.6			176.2			181.6			180.9			181.6			182.2			181.4

(a)	Underwriting income has been reduced by net costs of $635.0 million and other charges include costs of $10.0 million (in the aggregate, $420.0 million after-tax or $2.39 per share) related to the September 11 attack. Underwriting income also has been reduced by net surety bond losses of $220.0 million ($143.0 million after-tax or $0.81 per share) related to the bankruptcy of Enron Corp.
(b)	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.
(c)	Property and casualty insurance other charges includes a restructuring charge of $40.0 million ($26.0 million after-tax or $0.15 per share).
(d)	Real estate income has been reduced by a charge of $255.0 million ($160.0 million after-tax or $0.89 per share) for the writedown of the carrying value of certain real estate assets to their estimated fair value.
(e)	Net income has been reduced by a one-time charge of $20.0 million or $0.11 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.

45

TEN YEAR FINANCIAL SUMMARY

(in millions except for per share amounts)

FOR THE YEAR				2001		2000		1999
Revenues
	Property and Casualty Insurance
		Premiums Earned		$	6,656.4	$	6,145.9	$	5,652.0
		Investment Income			914.7		890.8		832.6
	Corporate Investment Income				68.1		66.4		60.8
	Real Estate and Other				114.0		96.9		96.8
	Realized Investment Gains				.8		51.5		87.4
			Total Revenues		7,754.0		7,251.5		6,729.6
AT YEAR END
Total Assets					29,449.0		25,026.7		23,537.0
Invested Assets
	Property and Casualty Insurance				16,853.3		15,804.5		14,869.9
	Corporate				930.6		1,196.1		1,149.5
Unpaid Claims and Claim Expenses					15,514.9		11,904.6		11,434.7
Long Term Debt					1,351.0		753.8		759.2
Total Shareholders’ Equity					6,525.3		6,981.7		6,271.8
	Per Common Share				38.37		39.91		35.74
	Per Common Share, with Available-for-Sale Fixed Maturities at Amortized Cost				36.60		38.60		36.58
Actual Common Shares Outstanding					170.1		174.9		175.5

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.

46

1998		1997		1996		1995		1994		1993			1992
$	5,303.8	$	5,157.4	$	4,569.3	$	4,147.2	$	3,776.3	$	3,504.8	(a)	$	3,163.3
	760.0		721.4		656.2		613.3		570.5		541.7			501.1
	61.9		63.9		55.4		54.4		49.4		52.7			57.2
	82.2		616.1		319.8		287.8		204.9		160.6			150.0
	141.9		105.2		79.8		108.8		54.1		210.6			174.1
	6,349.8		6,664.0		5,680.5		5,211.5		4,655.2		4,470.4			4,045.7
	20,746.0		19,615.6		19,938.9		19,636.3		17,761.0		16,729.5			15,197.6
	13,715.0		12,777.3		11,190.7		10,013.6		8,938.8		8,403.1			7,767.5
	1,040.3		1,272.3		890.4		906.6		879.5		965.7			955.8
	10,356.5		9,772.5		9,523.7		9,588.2		8,913.2		8,235.4			7,220.9
	607.5		398.6		1,070.5		1,150.8		1,279.6		1,267.2			1,065.6
	5,644.1		5,657.1		5,462.9		5,262.7		4,247.0		4,196.1			3,954.4
	34.78		33.53		31.24		30.14		24.46		23.92			22.59
	32.59		31.69		30.27		28.51		25.30		23.92			22.59
	162.3		168.7		174.9		174.6		173.6		175.4			175.0

(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.

47

THE CHUBB CORPORATION

Consolidated Statements of Income

			In Millions
			Years Ended December 31
			2001			2000		1999
Revenues
	Premiums Earned		$	6,656.4		$	6,145.9	$	5,652.0
	Investment Income			982.8			957.2		893.4
	Real Estate and Other Revenues			114.0			96.9		96.8
	Realized Investment Gains			.8			51.5		87.4
		TOTAL REVENUES		7,754.0			7,251.5		6,729.6
Claims and Expenses
	Insurance Claims and Claim Expenses			5,357.4			4,127.7		3,942.0
	Amortization of Deferred Policy Acquisition Costs			1,771.4			1,645.4		1,529.7
	Other Insurance Operating Costs and Expenses			483.4			448.6		375.1
	Real Estate and Other Expenses			110.1			87.9		100.3
	Investment Expenses			14.1			13.7		13.7
	Corporate Expenses			83.6			77.2		58.7
		TOTAL CLAIMS AND EXPENSES		7,820.0			6,400.5		6,019.5
		INCOME (LOSS) BEFORE FEDERAL AND FOREIGN INCOME TAX		(66.0	)		851.0		710.1
Federal and Foreign Income Tax (Credit)				(177.5	)		136.4		89.0
		NET INCOME	$	111.5		$	714.6	$	621.1
Net Income Per Share
		Basic	$	.65		$	4.10	$	3.70
		Diluted		.63			4.01		3.66

See accompanying notes.

48

THE CHUBB CORPORATION

Consolidated Balance Sheets

					In Millions
					December 31
					2001			2000
Assets
	Invested Assets
		Short Term Investments			$	956.8		$	605.6
		Fixed Maturities
			Held-to-Maturity — Tax Exempt (market $1,282.5 and $1,564.7)			1,218.5			1,496.1
			Available-for-Sale
				Tax Exempt (cost $8,053.8 and $8,053.8)		8,372.9			8,380.5
				Taxable (cost $6,408.2 and $5,666.6)		6,525.3			5,687.8
		Equity Securities (cost $757.9 and $839.8)				710.4			830.6
			TOTAL INVESTED ASSETS			17,783.9			17,000.6
	Cash					25.8			22.4
	Securities Lending Collateral					417.5			451.1
	Accrued Investment Income					247.7			246.8
	Premiums Receivable					1,692.8			1,409.8
	Reinsurance Recoverable on Unpaid Claims and Claim Expenses					4,505.2			1,853.3
	Prepaid Reinsurance Premiums					340.8			246.0
	Deferred Policy Acquisition Costs					928.8			842.0
	Real Estate Assets					646.6			677.1
	Investments in Partially Owned Companies					386.2			122.9
	Deferred Income Tax					674.8			501.0
	Goodwill					467.4			487.3
	Other Assets					1,331.5			1,166.4
			TOTAL ASSETS		$	29,449.0		$	25,026.7
Liabilities
	Unpaid Claims and Claim Expenses				$	15,514.9		$	11,904.6
	Unearned Premiums					3,916.2			3,516.3
	Securities Lending Payable					417.5			451.1
	Short Term Debt					199.0			—
	Long Term Debt					1,351.0			753.8
	Dividend Payable to Shareholders					57.8			57.8
	Accrued Expenses and Other Liabilities					1,467.3			1,361.4
			TOTAL LIABILITIES			22,923.7			18,045.0
Commitments and Contingent Liabilities (Notes 9, 15 and 16)
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 180,131,238 and 178,833,278 Shares					180.1			178.8
	Paid-In Surplus					527.0			466.0
	Retained Earnings					6,369.3			6,492.6
	Accumulated Other Comprehensive Income
		Unrealized Appreciation of Investments, Net of Tax				252.6			220.1
		Foreign Currency Translation Losses, Net of Tax				(73.0	)		(68.5	)
	Receivable from Employee Stock Ownership Plan					(48.9	)		(62.5	)
	Treasury Stock, at Cost — 10,059,857 and 3,914,105 Shares					(681.8	)		(244.8	)
			TOTAL SHAREHOLDERS’ EQUITY			6,525.3			6,981.7
			TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	29,449.0		$	25,026.7

See accompanying notes.

49

THE CHUBB CORPORATION

Consolidated Statements of Shareholders’ Equity

			In Millions
			Years Ended December 31
			2001			2000			1999
Preferred Stock
	Balance, Beginning and End of Year		$	—		$	—		$	—
Common Stock
	Balance, Beginning of Year			178.8			177.3			176.0
	Share Activity Related to Acquisition of Executive Risk			—			—			.6
	Share Activity under Option and Incentive Plans			1.3			1.5			.7
		Balance, End of Year		180.1			178.8			177.3
Paid-In Surplus
	Balance, Beginning of Year			466.0			418.4			546.7
	Share Activity Related to Acquisition of Executive Risk			—			—			(126.3	)
	Share Activity under Option and Incentive Plans			61.0			47.6			(2.0	)
		Balance, End of Year		527.0			466.0			418.4
Retained Earnings
	Balance, Beginning of Year			6,492.6			6,008.6			5,604.0
	Net Income			111.5			714.6			621.1
	Dividends Declared (per share $1.36, $1.32 and $1.28)			(234.8	)		(230.6	)		(216.5	)
		Balance, End of Year		6,369.3			6,492.6			6,008.6
Unrealized Appreciation (Depreciation) of Investments
	Balance, Beginning of Year			220.1			(112.6	)		414.7
	Change During Year, Net of Tax			32.5			332.7			(527.3	)
		Balance, End of Year		252.6			220.1			(112.6	)
Foreign Currency Translation Losses
	Balance, Beginning of Year			(68.5	)		(44.8	)		(36.0	)
	Change During Year, Net of Tax			(4.5	)		(23.7	)		(8.8	)
		Balance, End of Year		(73.0	)		(68.5	)		(44.8	)
Receivable from Employee Stock Ownership Plan
	Balance, Beginning of Year			(62.5	)		(74.9	)		(86.3	)
	Principal Repayments			13.6			12.4			11.4
		Balance, End of Year		(48.9	)		(62.5	)		(74.9	)
Treasury Stock, at Cost
	Balance, Beginning of Year			(244.8	)		(100.2	)		(975.0	)
	Repurchase of Shares			(555.6	)		(242.3	)		(145.0	)
	Share Activity Related to Acquisition of Executive Risk			—			—			957.2
	Share Activity under Option and Incentive Plans			118.6			97.7			62.6
		Balance, End of Year		(681.8	)		(244.8	)		(100.2	)
		TOTAL SHAREHOLDERS’ EQUITY	$	6,525.3		$	6,981.7		$	6,271.8

See accompanying notes.

50

THE CHUBB CORPORATION

Consolidated Statements of Cash Flows

				In Millions
				Years Ended December 31
				2001			2000			1999
Cash Flows from Operating Activities
	Net Income			$	111.5		$	714.6		$	621.1
	Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
		Increase in Unpaid Claims and Claim Expenses, Net			958.4			302.5			93.1
		Increase in Unearned Premiums, Net			305.1			187.3			49.1
		Decrease (Increase) in Premiums Receivable			(283.0	)		(175.1	)		14.9
		Decrease in Funds Held for Asbestos-Related Settlement			—			—			607.4
		Decrease (Increase) in Deferred Policy Acquisition Costs			(86.8	)		(62.3	)		4.2
		Deferred Income Tax (Credit)			(189.9	)		(25.3	)		5.3
		Depreciation			95.1			84.4			68.4
		Realized Investment Gains			(.8	)		(51.5	)		(87.4	)
		Other, Net			101.1			(10.3	)		(37.2	)
			NET CASH PROVIDED BY OPERATING ACTIVITIES		1,010.7			964.3			1,338.9
Cash Flows from Investing Activities
	Proceeds from Sales of Fixed Maturities — Available-for-Sale				4,581.5			2,180.8			1,427.5
	Proceeds from Maturities of Fixed Maturities				1,246.2			741.6			860.3
	Proceeds from Sales of Equity Securities				458.1			453.5			1,030.6
	Proceeds from Sale of Interest in Associated Aviation Underwriters, Inc.				—			55.0			—
	Purchases of Fixed Maturities				(6,307.2	)		(3,463.3	)		(3,252.2	)
	Purchases of Equity Securities				(374.6	)		(579.4	)		(590.7	)
	Purchase of Investments in Partially Owned Companies				(276.5	)		—			(145.3	)
	Decrease (Increase) in Short Term Investments, Net				(351.2	)		125.5			(190.9	)
	Purchases of Property and Equipment, Net				(185.2	)		(138.7	)		(98.4	)
	Other, Net				44.0			1.5			1.6
			NET CASH USED IN INVESTING ACTIVITIES		(1,164.9	)		(623.5	)		(957.5	)
Cash Flows from Financing Activities
	Increase in Short Term Debt, Net				199.0			—			—
	Proceeds from Issuance of Long Term Debt				600.0			—			—
	Repayment of Long Term Debt				(2.8	)		(5.4	)		(48.3	)
	Proceeds from Issuance of Common Stock Under Incentive and Purchase Plans				146.8			119.3			22.7
	Repurchase of Shares				(555.6	)		(242.3	)		(145.0	)
	Dividends Paid to Shareholders				(234.8	)		(229.0	)		(210.6	)
	Other, Net				5.0			16.3			14.2
			NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		157.6			(341.1	)		(367.0	)
Net Increase (Decrease) in Cash					3.4			(.3	)		14.4
Cash at Beginning of Year					22.4			22.7			8.3
			CASH AT END OF YEAR	$	25.8		$	22.4		$	22.7
Consolidated Statements of Comprehensive Income
Net Income				$	111.5		$	714.6		$	621.1
Other Comprehensive Income (Loss)
	Change in Unrealized Appreciation or Depreciation of
		Investments, Net of Tax			32.5			332.7			(527.3	)
	Foreign Currency Translation Losses, Net of Tax				(4.5	)		(23.7	)		(8.8	)
					28.0			309.0			(536.1	)
			COMPREHENSIVE INCOME	$	139.5		$	1,023.6		$	85.0

See accompanying notes.

51

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. Chubb Financial Solutions (CFSI) was organized by the Corporation in 2000 to engage in developing and providing risk-financing services through the capital and insurance markets. Since its inception, CFSI’s non-insurance operations have been primarily in the credit derivatives business, principally as a counterparty to credit default swaps. Insurance and reinsurance solutions developed by CFSI are written by the Corporation’s property and casualty insurance subsidiaries.

   Certain amounts in the consolidated financial statements for prior years have been reclassified to conform with the 2001 presentation.

(b) Invested Assets

   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 include common stocks, non-redeemable preferred stocks and alternative investments, primarily investment partnerships. Common and non-redeemable preferred stocks are carried at market value as of the balance sheet date. Investment partnerships are carried at the equity in the estimated market value of the investments held by the partnerships.

   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. When the market value of any investment is lower than its cost and such decline is determined to be other than temporary, the cost of the investment is written down to market value and the amount of the writedown is charged to net income as a realized investment loss.

   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. The Corporation maintains full ownership rights to the securities loaned and, accordingly, such securities are included in invested assets. The securities lending collateral is recognized as an asset with a corresponding liability for the obligation to return the collateral.

(c) Investments in Partially Owned Companies

   Investments in partially owned companies include the Corporation’s minority ownership interest in entities where its ownership interest is greater than 20% but less than 50% and in corporate joint ventures. At December 31, 2001, investments in partially owned companies included the Corporation’s 28% interest in Hiscox plc and 19% interest in Allied World Assurance Holdings, Ltd. The equity method of accounting is used for investments in partially owned companies.

52

(d) Premium Revenues and Related Expenses

   Premiums are earned on a monthly pro rata basis over the terms of the policies and 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.

   Ceded premiums are charged to income over the terms of the reinsurance contracts. Prepaid reinsurance premiums represent the portion of insurance premiums ceded to reinsurers applicable to the unexpired terms of the reinsurance contracts 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. Commissions received related to reinsurance premiums ceded are considered in determining net acquisition costs eligible for deferral. Deferred policy acquisition costs are reviewed to determine that they do not exceed recoverable amounts, after considering anticipated investment income.

(e) 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.

   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 unpaid claims liabilities associated with the reinsured policies.

   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 changes in estimates are reflected in operating results in the period in which the estimates are changed.

(f) Credit Derivatives

   Credit derivatives, principally 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 writedowns 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 writedown of the carrying value of the property. Measurement of such impairment is based on the fair value of the property.

   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 expected 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.

(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 writedown of the carrying value of the goodwill. Effective January 1, 2002, the accounting for goodwill will change (see Note (1)(n)).

(i) Property and Equipment

   Property and equipment used in operations, including certain costs incurred to develop or obtain computer software for internal use, are capitalized and carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets.

53

(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.

(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)(a)). 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 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. The Statement addresses how intangible assets should be accounted for upon their acquisition and how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Under SFAS No. 142, goodwill will no longer be amortized but rather will be tested at least annually for impairment. The provisions of SFAS No. 142 are effective for the Corporation for the year beginning January 1, 2002. The Statement shall be applied to goodwill recognized in the Corporation’s financial statements at that date. SFAS No. 142 may not be applied retroactively to financial statements of prior periods. The elimination of goodwill amortization is expected to result in an increase in net income in 2002 of approximately $20 million. The Corporation is in the process of assessing the effect, if any, that the implementation of the other provisions of SFAS No. 142 will have on its financial position or results of operations.

(2) Adoption of New Accounting Pronouncements

   Effective January 1, 2001, the Corporation adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities and SFAS No. 138 provides additional guidance related to accounting and reporting for certain derivative instruments and 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. The Statements may not be applied retroactively to financial statements of prior periods. The Corporation’s use of derivatives has not been significant. Thus, the adoption of SFAS No. 133 and SFAS No. 138 did not have a significant effect on the Corporation’s financial position or results of operations.

   Effective April 1, 2001, the Corporation adopted the Emerging Issues Task Force (EITF) consensus on Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets. EITF Issue No. 99-20 requires that investors in certain asset-backed securities recognize changes in a security’s estimated yield prospectively. EITF Issue No. 99-20 also requires that if the carrying value of any such asset-backed security exceeds its current fair value, a determination should be made as to whether the excess represents an other than temporary decline in value and any such decline should be recognized as a loss in the income statement. The adoption of EITF Issue No. 99-20 did not have a significant effect on the Corporation’s financial position or results of operations.

54

(3) Acquisitions and Dispositions

   (a) 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.

   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 using an expected useful life of 26 years. Beginning in 2002, the remaining goodwill will no longer be amortized (see Note (1)(n)).

   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 November 2001, the Corporation acquired a 19% interest in Allied World Assurance Holdings, Ltd, a newly formed Bermuda-based company, for approximately $250 million. Allied World Assurance was established to underwrite insurance and reinsurance business worldwide.

   (d) 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.

(4)  Significant Losses

   (a) In the third quarter of 2001, net costs of $645 million were incurred related to the September 11 attack in the United States. The net costs consisted of estimated net claims and claim expenses of $665 million less net reinsurance reinstatement premium revenue of $30 million plus a $10 million charge for the Corporation’s share of the losses publicly estimated by Hiscox.

   Gross claims and claim expenses of the property and casualty insurance subsidiaries from the September 11 attack are estimated at about $3 billion. Most of the claims were from property exposure and business interruption losses. There were also significant workers’ compensation losses. The net claims and claim expenses of $665 million were significantly lower than the gross amount due to various reinsurance agreements. The property exposures were protected by facultative reinsurance, a property per risk treaty that limited the net loss per risk, and a property catastrophe treaty. Workers’ compensation losses were protected by a casualty catastrophe treaty and a casualty clash treaty.

   While it is possible that the estimated ultimate net losses related to the September 11 attack may change in the future, management does not expect that any such change would have a material effect on the Corporation’s financial condition.

   (b) In the fourth quarter of 2001, surety bond losses of $220 million, net of reinsurance, were recognized related to the bankruptcy of Enron Corp. The surety losses represent the maximum exposure of the property and casualty insurance subsidiaries relating to bonds issued to various obligees in connection with Enron commitments. However, certain of these bonds are the subject of litigation. Management believes there are reasonable grounds for challenging the validity of the obligations under the bonds that are the subject of the litigation and intends to pursue the litigation vigorously. If the Corporation is successful in the litigation, any favorable development would be reflected in future operating results.

55

(5) Invested Assets and Related Income

   (a) The amortized cost and estimated market value of fixed maturities were as follows:

				December 31
				2001								2000
						Gross		Gross		Estimated				Gross		Gross		Estimated
				Amortized		Unrealized		Unrealized		Market		Amortized		Unrealized		Unrealized		Market
				Cost		Appreciation		Depreciation		Value		Cost		Appreciation		Depreciation		Value
				(in millions)
Held-to-maturity — Tax exempt				$	1,218.5	$	64.0	$	—	$	1,282.5	$	1,496.1	$	68.6	$	—	$	1,564.7
Available-for-sale
	Tax exempt				8,053.8		334.0		14.9		8,372.9		8,053.8		337.5		10.8		8,380.5
	Taxable
		U.S. Government and government agency and authority obligations			660.0		24.9		—		684.9		613.3		14.9		.3		627.9
		Corporate bonds			2,009.4		57.5		28.7		2,038.2		1,564.7		14.3		23.9		1,555.1
		Foreign bonds			1,581.9		44.3		.6		1,625.6		1,267.1		32.3		5.1		1,294.3
		Mortgage-backed securities			2,111.8		35.6		17.0		2,130.4		2,113.6		19.2		29.3		2,103.5
		Redeemable preferred stocks			45.1		1.1		—		46.2		107.9		—		.9		107.0
					6,408.2		163.4		46.3		6,525.3		5,666.6		80.7		59.5		5,687.8
			Total available-for-sale		14,462.0		497.4		61.2		14,898.2		13,720.4		418.2		70.3		14,068.3
			Total fixed maturities	$	15,680.5	$	561.4	$	61.2	$	16,180.7	$	15,216.5	$	486.8	$	70.3	$	15,633.0

   The amortized cost and estimated market value of fixed maturities at December 31, 2001 by contractual maturity were as follows:

				Estimated
		Amortized		Market
		Cost		Value
		(in millions)
Held-to-maturity
	Due in one year or less	$	65.0	$	66.3
	Due after one year through five years		600.9		629.3
	Due after five years through ten years		364.4		384.6
	Due after ten years		188.2		202.3
		$	1,218.5	$	1,282.5
Available-for-sale
	Due in one year or less	$	320.0	$	326.9
	Due after one year through five years		2,772.5		2,892.1
	Due after five years through ten years		5,056.2		5,245.5
	Due after ten years		4,201.5		4,303.3
			12,350.2		12,767.8
	Mortgage-backed securities		2,111.8		2,130.4
		$	14,462.0	$	14,898.2

Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations.

   (b) The components of unrealized appreciation or depreciation of investments carried at market value were as follows:

		December 31
		2001			2000
		(in millions)
Equity securities
	Gross unrealized appreciation	$	20.7		$	51.9
	Gross unrealized depreciation		68.2			61.1
			(47.5	)		(9.2	)
Fixed maturities
	Gross unrealized appreciation		497.4			418.2
	Gross unrealized depreciation		61.2			70.3
			436.2			347.9
			388.7			338.7
Deferred income tax liability			136.1			118.6
		$	252.6		$	220.1

56

   The change in unrealized appreciation or depreciation of investments carried at market value was as follows:

	Years Ended December 31
	2001			2000			1999
	(in millions)
Change in unrealized appreciation or depreciation of equity securities	$	(38.3	)	$	(63.4	)	$	(35.4	)
Change in unrealized appreciation or depreciation of fixed maturities		88.3			514.7			(715.2	)
		50.0			451.3			(750.6	)
Deferred income tax (credit)		17.5			158.0			(262.7	)
Increase (decrease) in valuation allowance		—			(39.4	)		39.4
	$	32.5		$	332.7		$	(527.3	)

   The unrealized appreciation of fixed maturities carried at amortized cost is not reflected in the financial statements. The change in unrealized appreciation of fixed maturities carried at amortized cost was a decrease of $4.6 million, an increase of $9.5 million and a decrease of $78.9 million for the years ended December 31, 2001, 2000 and 1999, respectively.

   (c) The sources of net investment income were as follows:

		Years Ended December 31
		2001		2000			1999
		(in millions)
Fixed maturities		$	921.8	$	895.4		$	816.9
Equity securities			25.6		23.5			31.2
Short term investments			34.8		38.5			43.8
Other			.6		(.2	)		1.5
	Gross investment income		982.8		957.2			893.4
Investment expenses			14.1		13.7			13.7
		$	968.7	$	943.5		$	879.7

   (d) Realized investment gains and losses were as follows:

		Years Ended December 31
		2001		2000		1999
		(in millions)
Gross realized investment gains
	Fixed maturities	$	56.9	$	48.2	$	38.2
	Equity securities		81.6		94.0		172.9
	Sale of AAU		—		44.9		—
			138.5		187.1		211.1
Gross realized investment losses
	Fixed maturities		57.7		40.5		14.3
	Equity securities		80.0		95.1		109.4
			137.7		135.6		123.7
Realized investment gains			.8		51.5		87.4
Income tax			.3		18.0		31.6
		$	.5	$	33.5	$	55.8

(6) Deferred Policy Acquisition Costs

   Policy acquisition costs deferred and the related amortization charged against income were as follows:

		Years Ended December 31
		2001			2000			1999
		(in millions)
Balance, beginning of year		$	842.0		$	779.7		$	728.7
Increase related to acquisition of Executive Risk			—			—			55.2
Costs deferred during year
	Commissions and brokerage		950.9			869.0			784.4
	Premium taxes and assessments		163.8			138.3			132.8
	Salaries and operating costs		743.5			700.4			608.3
			1,858.2			1,707.7			1,525.5
Amortization during year			(1,771.4	)		(1,645.4	)		(1,529.7	)
Balance, end of year		$	928.8		$	842.0		$	779.7

(7)  Real Estate

   The components of real estate assets were as follows:

	December 31
	2001		2000
	(in millions)
Mortgages and notes receivable (net of allowance for uncollectible amounts of $.7 and $2.1)	$	97.7	$	89.7
Income producing properties		186.9		192.8
Construction in progress		51.8		69.0
Land under development and unimproved land		310.2		325.6
	$	646.6	$	677.1

   Substantially all mortgages and notes receivable are secured by buildings and land. Mortgages and notes receivable had an estimated aggregate fair value of $89.0 million and $81.9 million at December 31, 2001 and 2000, 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 $4.2 million, $4.0 million and $3.5 million for 2001, 2000 and 1999, respectively.

(8) Property and Equipment

   Property and equipment included in other assets were as follows:

	December 31
	2001		2000
	(in millions)
Cost	$	727.0	$	599.8
Accumulated depreciation		279.8		235.9
	$	447.2	$	363.9

   Depreciation expense related to property and equipment was $90.9 million, $80.4 million and $64.9 million for 2001, 2000 and 1999, respectively.

57

(9) Unpaid Claims and Claim Expenses

   The process of establishing loss reserves is complex and imprecise as it 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.

   Most of the property and casualty insurance subsidiaries’ loss reserves relate to long tail liability classes of business. For many liability claims significant periods of time, ranging up to several years or more, may elapse between the occurrence of the loss, the reporting of the loss and the settlement of the claim. The longer the time span between the incidence of a loss and the settlement of the claim, the more the ultimate settlement amount can vary.

   Judicial decisions and legislative actions continue to broaden liability and policy definitions and to increase the severity of claim payments. As a result of this and other societal and economic developments, the uncertainties inherent in estimating ultimate claim costs on the basis of past experience have been exacerbated, further complicating the already complex loss reserving process.

   The uncertainties relating to asbestos and toxic waste claims on insurance policies written many years ago are exacerbated by 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.

   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 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. Litigation is then initiated even though many of the claimants do not show any signs of asbestos-related illness. Thus, new asbestos claims and new exposures on existing claims have continued unabated despite the fact that usage of asbestos has declined since the mid-1970’s. 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.

   Early asbestos claims focused on the major manufacturers, distributors or installers of asbestos products under the products liability section of primary general liability policies, which typically had aggregate limits that capped an insurer’s liability. A growing number of asbestos claims by insureds are being presented as “non-products” claims, such as those by installers of asbestos products and by property owners who allegedly had asbestos on their property, under the premises or operations section of primary general liability policies. Unlike products exposures, these non-products exposures typically had no aggregate limits, creating potentially greater exposure. Further, in an effort to seek additional insurance coverage, some insureds that have substantially eroded their products coverage are presenting new asbestos claims as non-products premises or operations claims or attempting to reclassify old products claims. The extent to which insureds will be successful in obtaining coverage on this basis is uncertain.

   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 related 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 who claim exposure but who have no symptoms of asbestos-related disease and an increase in claims filed under the non-aggregate premises or operations section of general liability policies.

58

   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 became substantial, PRPs and others 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 and has not been re-enacted. At this time, it is 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.

   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. Reserves for asbestos and toxic waste claims are continually reviewed and updated. Further increases in such loss reserves in future years are possible as legal and factual issues concerning these claims continue to be clarified. The amount cannot be reasonably estimated at the present time.

   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:

		2001			2000			1999
		(in millions)
Gross liability, beginning of year		$	11,904.6		$	11,434.7		$	10,356.5
Reinsurance recoverable, beginning of year			1,853.3			1,685.9			1,306.6
Net liability, beginning of year			10,051.3			9,748.8			9,049.9
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		5,552.9			4,357.7			4,147.6
	Prior years		(195.5	)		(230.0	)		(205.6	)
			5,357.4			4,127.7			3,942.0
Net payments for claims and claim expenses related to
	Current year		1,605.3			1,342.5			1,278.9
	Prior years		2,793.7			2,482.7			2,570.0
			4,399.0			3,825.2			3,848.9
Net liability, end of year			11,009.7			10,051.3			9,748.8
Reinsurance recoverable, end of year			4,505.2			1,853.3			1,685.9
Gross liability, end of year		$	15,514.9		$	11,904.6		$	11,434.7

   At December 31, 2001, the gross liability for unpaid claims and claim expenses and reinsurance recoverable included $2,775.2 million and $2,238.8 million, respectively, related to the September 11 attack.

   During 2001, the property and casualty insurance subsidiaries experienced overall favorable development of $195.5 million on net unpaid claims and claim expenses established as of the previous year-end. This compares with favorable development of $230.0 million and $205.6 million in 2000 and 1999, 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, offset in part by losses related to asbestos and toxic waste claims.

   Management believes that the aggregate loss reserves of the property and casualty insurance subsidiaries at December 31, 2001 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, additional increases in loss reserves may emerge in future periods. Any such increases would have an adverse effect on future operating results. However, management does not expect that any such increases would have a material adverse effect on the Corporation’s financial condition.

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(10) Debt and Credit Arrangements

   (a) Short term debt consists of commercial paper issued by Chubb Capital Corporation (Chubb Capital), a wholly owned subsidiary of the Corporation, and is fully and unconditionally guaranteed by the Corporation. Borrowings are unsecured and are on terms and at interest rates generally extended to prime borrowers. The weighted average interest rate on short term debt approximated 1.9% at December 31, 2001.

   (b) Long term debt consisted of the following:

	December 31
	2001				2000
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
	(in millions)
Term loan	$	7.5	$	7.5	$	10.0	$	10.0
Mortgages		43.5		52.5		43.8		49.0
6% notes		400.0		393.5		—		—
6.15% notes		300.0		311.8		300.0		294.3
6.60% debentures		100.0		97.8		100.0		90.3
6.80% debentures		200.0		198.2		—		—
6 7/8% notes		100.0		104.4		100.0		100.8
7 1/8% notes		75.0		79.4		75.0		75.6
8.675% capital securities		125.0		142.0		125.0		125.8
	$	1,351.0	$	1,387.1	$	753.8	$	745.8

   The term loan and mortgages are obligations of the real estate subsidiaries. The term loan matures in 2002. The mortgages payable are due in varying amounts monthly through 2010. At December 31, 2001, the interest rate on the term loan was 3.6% 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 $179.4 million at December 31, 2001.

   In November 2001, the Corporation sold $400.0 million of unsecured 6% notes due November 15, 2011 and $200 million of unsecured 6.80% debentures due November 15, 2031, the aggregate net proceeds from which were $591.8 million.

   The Corporation also 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 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.

   In August 2001, the Corporation entered into a cancelable interest rate swap agreement with a notional amount of $125 million that replaces the fixed rate of the capital securities with the 3-month LIBOR rate plus 204 basis points. The swap agreement provides only for the exchange of interest on the notional amount. The interest rate swap matures in February 2027. The fair value of the swap at December 31, 2001 was not significant.

   The Corporation filed a shelf registration statement with the Securities and Exchange Commission in December 2001. When the registration statement is declared effective, up to $1.0 billion of various types of securities may be issued by the Corporation.

   The amounts of long term debt due annually during the five years subsequent to December 31, 2001 are as follows:

Years Ending	Term Loan
December 31	and Mortgages		Notes		Total
	(in millions)
2002	$	7.9	$	—	$	7.9
2003		.4		100.0		100.4
2004		.4		—		.4
2005		.6		300.0		300.6
2006		.6		—		.6

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   (c) Interest costs of $55.0 million, $52.9 million and $48.5 million were incurred in 2001, 2000 and 1999, respectively. Interest paid was $55.5 million, $52.7 million and $48.0 million in 2001, 2000 and 1999, respectively.

   (d) 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 4, 2001, was extended to July 2, 2002, 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.

(11) 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. Thus, a credit exposure exists with respect to reinsurance ceded to the extent that any reinsurer is unable to meet the obligations assumed under the reinsurance contracts. The Corporation evaluates the financial condition of its reinsurers on an ongoing basis.

   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
		2001			2000			1999
		(in millions)
Direct premiums written		$	7,534.3		$	6,741.6		$	6,042.6
Reinsurance assumed			525.2			384.4			275.2
Reinsurance ceded			(1,098.0	)		(792.8	)		(616.7	)
	Net premiums written	$	6,961.5		$	6,333.2		$	5,701.1
Direct premiums earned		$	7,125.8		$	6,550.2		$	6,037.1
Reinsurance assumed			533.9			382.6			246.5
Reinsurance ceded			(1,003.3	)		(786.9	)		(631.6	)
	Net premiums earned	$	6,656.4		$	6,145.9		$	5,652.0

   Assumed reinsurance premiums earned and written and ceded reinsurance premiums earned and written for 2001 included reinstatement premiums of $95.0 million and $65.0 million, respectively, related to the September 11 attack.

   Reinsurance recoveries by the property and casualty insurance subsidiaries that have been deducted from insurance claims and claim expenses were $3,367.4 million, $791.0 million and $501.2 million in 2001, 2000 and 1999, respectively. The 2001 amount included recoveries of $2,385.2 million related to the September 11 attack.

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(12) Federal and Foreign Income Tax

      (a) Income tax expense (credit) consisted of the following components:

		Years Ended December 31
		2001			2000			1999
		(in millions)
Current tax (credit)
	United States	$	(8.3	)	$	152.1		$	41.0
	Foreign		20.7			9.6			42.7
Deferred tax (credit), principally United States			(189.9	)		(25.3	)		5.3
		$	(177.5	)	$	136.4		$	89.0

      Federal and foreign income taxes paid were $53.4 million, $159.7 million and $83.5 million in 2001, 2000 and 1999, 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 different than the statutory federal corporate tax rate. The reasons for the different effective tax rate were as follows:

		Years Ended December 31
		2001						2000						1999
					% of						% of						% of
					Pre-Tax						Pre-Tax						Pre-Tax
		Amount			Income			Amount			Income			Amount			Income
		(in millions)
Income (loss) before federal and foreign income tax		$	(66.0	)				$	851.0					$	710.1
Tax (credit) at statutory federal income tax rate		$	(23.1	)		(35.0	)%	$	297.9			35.0	%	$	248.5			35.0	%
Tax exempt interest income			(149.3	)		(226.2	)		(153.9	)		(18.1	)		(150.6	)		(21.2	)
Other, net			(5.1	)		(7.7	)		(7.6	)		(.9	)		(8.9	)		(1.3	)
	Actual tax (credit)	$	(177.5	)		(268.9	)%	$	136.4			16.0	%	$	89.0			12.5	%

      (c) The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities were as follows:

				December 31
				2001		2000
				(in millions)
Deferred income tax assets
	Unpaid claims and claim expenses			$	560.3	$	528.6
	Unearned premiums				219.9		201.6
	Postretirement benefits				79.8		77.8
	Alternative minimum tax credit carryforward				141.4		62.9
	Other, net				163.7		81.5
		Total			1,165.1		952.4
Deferred income tax liabilities
	Deferred policy acquisition costs				285.4		258.5
	Real estate assets				68.8		74.3
	Unrealized appreciation of investments				136.1		118.6
		Total			490.3		451.4
			Net deferred income tax asset	$	674.8	$	501.0

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(13) 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, 2001, 9,075,809 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:

	2001					2000					1999
	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		16,683,741		$	55.66		14,565,584			$55.58		9,765,090			$54.78
Exchanged for Executive Risk options		—			—		—			—		1,809,885			36.77
Granted		3,760,311			72.60		5,833,616			50.88		4,761,683			60.31
Exercised		(1,740,701	)		47.80		(3,242,900	)		46.05		(1,359,855	)		39.50
Forfeited		(327,047	)		67.51		(472,559	)		60.13		(411,219	)		64.20
Outstanding, end of year		18,376,304			59.66		16,683,741			55.66		14,565,584			55.58
Exercisable, end of year		12,215,260			57.86		8,787,173			57.80		9,187,352			51.09

	December 31, 2001
	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 — $46.84		1,437,650	$	39.75		2.4		1,437,650	$	39.75
47.06 —  59.97		9,243,089		52.95		6.7		6,782,637		54.31
60.25 —  78.97		7,695,565		71.44		6.7		3,994,973		70.41
		18,376,304		59.66		6.4		12,215,260		57.86

      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. 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 that limit the sale or transfer during 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 is recognized for such grants. The cost of performance share awards is expensed over the performance cycle. An amount equal to the fair market value of restricted share awards at the date of grant is expensed over the restriction period. The aggregate amount charged against income with respect to performance share and restricted stock awards was $13.5 million in 2001, $11.5 million in 2000 and $5.2 million in 1999.

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      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.

	2001				2000				1999
	As		Pro		As		Pro		As		Pro
	Reported		Forma		Reported		Forma		Reported		Forma
	(in millions except for per share amounts)
Net income	$	111.5	$	65.7	$	714.6	$	669.6	$	621.1	$	585.6
Diluted earnings per share		.63		.37		4.01		3.76		3.66		3.45

      The weighted average fair value of options granted under the Long-Term Stock Incentive Plans during 2001, 2000 and 1999 was $18.22, $11.98 and $13.77, 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 2001, 2000 and 1999 were 4.7%, 6.7% and 5.4%, respectively. The expected volatility of the market price of the Corporation’s common stock for 2001, 2000 and 1999 grants was 25.7%, 21.9% and 19.0%, respectively. The expected average term of the granted options was 5 1/2 years for 2001, 2000 and 1999. The dividend yield was 1.9% for 2001, 2.7% for 2000 and 2.1% for 1999.

      (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 2001, 2000 and 1999, cash contributions to the ESOP of $11.3 million, $11.0 million and $11.2 million, respectively, were charged against income. Dividends on shares of common stock in the ESOP used for debt service were $7.7 million for 2001, 2000 and 1999.

      The number of allocated and unallocated shares held by the ESOP at December 31, 2001 were 4,008,152 and 1,558,444, 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. In March 2001, approximately 1,100,000 shares were issued under the plan at a price of $53.89 per share. At December 31, 2001, there were no subscribed shares.

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(14)  Employee Benefits

   (a) The Corporation and its subsidiaries have several non-contributory defined benefit pension plans covering substantially all employees. Prior to 2001, benefits were generally based on an employee’s years of service and average compensation during the last five years of employment. 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 credits 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 did not have a significant effect on the Corporation’s financial position or results of operations.

   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
		2001			2000			1999
		(in millions)
Service cost of current period		$	28.6		$	26.4		$	22.2
Interest cost on projected benefit obligation			43.9			40.2			37.6
Expected return on plan assets			(53.5	)		(49.9	)		(44.5	)
Other gains			(5.0	)		(6.3	)		(2.5	)
	Net pension cost	$	14.0		$	10.4		$	12.8

   The following table sets forth the plans’ funded status and amounts recognized in the balance sheets:

		December 31
		2001			2000
		(in millions)
Actuarial present value of projected benefit obligation for service rendered to date		$	665.2		$	589.2
Plan assets at fair value			538.8			594.1
Projected benefit obligation in excess of (less than) plan assets			126.4			(4.9	)
Unrecognized net gain from past experience different from that assumed			4.0			115.8
Unrecognized prior service costs			(19.7	)		(10.9	)
Unrecognized net asset at January 1, 1985, being recognized principally over 19 years			.6			2.1
	Pension liability included in other liabilities	$	111.3		$	102.1

   The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation at December 31, 2001 and 2000 was 7 1/4% and 7 1/2%, respectively, 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.

   (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
		2001			2000			1999
		(in millions)
Service cost of current period		$	5.0		$	4.8		$	4.5
Interest cost on accumulated benefit obligation			9.2			8.7			8.6
Net amortization and deferral			(1.4	)		(1.5	)		(1.0	)
	Net postretirement benefit cost	$	12.8		$	12.0		$	12.1

   The components of the accumulated postretirement benefit obligation were as follows:

		December 31
		2001		2000
		(in millions)
Accumulated postretirement benefit obligation		$	137.0	$	126.3
Unrecognized net gain from past experience different from that assumed			31.7		35.6
	Postretirement benefit liability included in other liabilities	$	168.7	$	161.9

65

   The weighted average discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation at December 31, 2001 and 2000 was 7 1/4% and 7 1/2%, respectively. At December 31, 2001, the weighted average health care cost trend rate used to measure the accumulated postretirement cost for medical benefits was 10% for 2002 and was assumed to decrease gradually to 5% for the year 2009 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, 2001 by approximately $22 million and the aggregate of the service and interest cost components of net postretirement benefit cost for the year ended December 31, 2001 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 $18.6 million, $17.1 million and $15.1 million were charged against income in 2001, 2000 and 1999, respectively.

(15) 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
	2001		2000		1999
	(in millions)
Office facilities	$	82.3	$	75.2	$	71.0
Equipment		15.5		14.6		13.4
	$	97.8	$	89.8	$	84.4

   At December 31, 2001, future minimum rental payments required under non-cancellable operating leases were as follows:

Years Ending
December 31
	(in millions)
2002	$	91.3
2003		82.1
2004		73.4
2005		65.0
2006		58.6
After 2006		349.8
	$	720.2

(16) Commitments and Contingent Liabilities

   (a) CFSI participates in the credit derivatives business, principally as a counterparty to credit default swaps. The Corporation has issued unconditional guarantees with respect to all obligations of CFSI arising from these transactions.

   Obligations with respect to credit default swaps are carried at estimated fair value. At December 31, 2001, the fair value of future obligations under credit default swaps was $47.9 million. At that date, the aggregate exposure or retained risk, referred to as notional amounts, from open credit default swaps was approximately $14.3 billion. The notional amounts are used to express the extent of involvement in swap transactions. Notional amounts are not a quantification of market risk or credit risk and are not recorded on the balance sheet. The notional amounts are used to calculate the exchange of contractual cash flows and are not necessarily representative of the potential for gain or loss.

   (b) A property and casualty insurance subsidiary issued a reinsurance contract to an insurer that provides financial guarantees on asset-backed transactions. At December 31, 2001, the aggregate principal commitments related to the contract for which the subsidiary was contingently liable amounted to approximately $400 million, all of which expire by 2023.

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(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
		2001		2000		1999
		(in millions except for per
		share amounts)
Basic earnings per share:
	Net income	$	111.5	$	714.6	$	621.1
	Weighted average number of common shares outstanding		172.2		174.3		167.7
	Basic earnings per share	$	.65	$	4.10	$	3.70
Diluted earnings per share:
	Net income	$	111.5	$	714.6	$	621.1
	Weighted average number of common shares outstanding		172.2		174.3		167.7
	Additional shares from assumed exercise of stock-based compensation awards		3.6		4.0		2.1
	Weighted average number of common shares and potential common shares assumed outstanding for computing diluted earnings per share		175.8		178.3		169.8
	Diluted earnings per share	$	.63	$	4.01	$	3.66

      In 2001, 2000 and 1999, options to purchase 4.0 million shares, 3.5 million shares and 5.2 million shares of common stock with weighted average exercise prices of $76.27 per share, $68.81 per share and $67.71 per share, respectively, were excluded from the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the Corporation’s common stock.

      For additional disclosure regarding the stock-based compensation awards, see Note (13).

(18) Segments Information

   The property and casualty operations include three reportable underwriting segments and the investment function. The underwriting segments are personal insurance, commercial insurance and specialty insurance. The personal segment targets the personal insurance market. The personal classes include automobile, homeowners and other personal coverages. The commercial segment includes those classes of business that are generally available in broad markets and are of a more commodity nature. Commercial classes include multiple peril, casualty, workers’ compensation and property and marine. The specialty segment includes those classes of business that are available in more limited markets since they require specialized underwriting and claim settlement. Specialty classes include executive protection, financial institutions and other specialty coverages.

   The property and casualty underwriting segments were changed in 2001 to present results in a manner more consistent with the way the business is now managed. The property and marine business was reclassified from the specialty insurance segment to the commercial insurance segment and some business that was included within executive protection was reclassified to multiple peril. Prior period amounts have been reclassified to conform to the new presentation.

   Corporate and other includes investment income earned on corporate invested assets, corporate expenses and the results of CFSI and 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.

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      Distinct investment portfolios are not maintained for each underwriting segment. Property and casualty invested 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
				2001			2000			1999
Revenues				(in millions)
	Property and casualty insurance
		Premiums earned
			Personal insurance	$	1,847.9		$	1,620.6		$	1,447.5
			Commercial insurance		2,366.3			2,353.7			2,495.2
			Specialty insurance		2,442.2			2,171.6			1,709.3
					6,656.4			6,145.9			5,652.0
		Investment income			914.7			890.8			832.6
			Total property and casualty insurance		7,571.1			7,036.7			6,484.6
	Corporate and other
		Corporate investment income			68.1			66.4			60.8
		Real estate and other			114.0			96.9			96.8
	Realized investment gains				.8			51.5			87.4
			Total revenues	$	7,754.0		$	7,251.5		$	6,729.6
Income (loss) before income tax
	Property and casualty insurance
		Underwriting
			Personal insurance	$	(67.3	)	$	80.7		$	121.1
			Commercial insurance		(290.2	)		(326.7	)		(464.1	)
			Specialty insurance		(632.8	)		160.1			168.4
					(990.3	)		(85.9	)		(174.6	)
			Increase (decrease) in deferred policy acquisition costs		86.8			62.3			(4.2	)
		Underwriting loss			(903.5	)		(23.6	)		(178.8	)
		Investment income			902.6			879.2			821.0
		Amortization of goodwill and other charges			(52.3	)		(52.2	)		(16.0	)
			Total property and casualty insurance		(53.2	)		803.4			626.2
	Corporate and other income (loss)				(13.6	)		(3.9	)		(3.5	)
	Realized investment gains				.8			51.5			87.4
			Total income (loss) before income tax	$	(66.0	)	$	851.0		$	710.1

			December 31
			2001			2000			1999
			(in millions)
Assets
	Property and casualty insurance		$	27,767.0		$	23,066.1		$	21,628.1
	Corporate and other			1,752.9			2,030.4			1,976.9
	Adjustments and eliminations			(70.9	)		(69.8	)		(68.0	)
		Total assets	$	29,449.0		$	25,026.7		$	23,537.0

      Property and casualty results for 2001 included an underwriting loss of $635.0 million from the September 11 attack, comprising $20.0 million in personal insurance, $103.2 million in commercial insurance and $511.8 million in specialty insurance, as well as other charges of $10.0 million. Specialty insurance underwriting results in 2001 also included net surety bond losses of $220.0 million related to the bankruptcy of Enron Corp.

      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
			2001		2000		1999
			(in millions)
Revenues
	United States		$	6,331.9	$	5,914.9	$	5,452.1
	International			1,239.2		1,121.8		1,032.5
		Total	$	7,571.1	$	7,036.7	$	6,484.6

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(19) 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 with active markets are based on quoted market prices. For other equity securities, fair values are estimates of value.

   (iv) Fair values of real estate mortgages and notes receivable are estimated individually as the value of the discounted future cash flows of the loan, subject to the estimated fair value of the underlying collateral. The cash flows are discounted at rates based on a U.S. Treasury security with a maturity similar to the loan, adjusted for credit risk.

   (v) The carrying value of short term debt approximates fair value due to the short maturities of this debt.

   (vi) Long term debt consists of 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.

   (vii) Fair values of credit derivatives, principally credit default swaps, are determined using an internal valuation model that is similar to external valuation models. The fair value of a credit default swap is subject to fluctuations arising from, among other factors, observable changes in credit spreads and interest rates.

   The carrying values and fair values of financial instruments were as follows:

				December 31
				2001				2000
				Carrying		Fair		Carrying		Fair
				Value		Value		Value		Value
				(in millions)
Assets
	Invested assets
		Short term investments		$	956.8	$	956.8	$	605.6	$	605.6
		Fixed maturities (Note 5)
			Held-to-maturity		1,218.5		1,282.5		1,496.1		1,564.7
			Available-for-sale		14,898.2		14,898.2		14,068.3		14,068.3
		Equity securities			710.4		710.4		830.6		830.6
	Real estate mortgages and notes receivable (Note 7)				97.7		89.0		89.7		81.9
Liabilities
	Short term debt (Note 10)				199.0		199.0		—		—
	Long term debt (Note 10)				1,351.0		1,387.1		753.8		745.8
	Credit derivatives (Note 16)				47.9		47.9		6.2		6.2

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(20) 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
		2001									2000									1999
					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		$	50.8		$	17.8		$	33.0		$	502.8		$	136.6	*	$	366.2		$	(663.2	)	$	(191.7	)*	$	(471.5	)
Less: reclassification adjustment for realized gains included in net income			.8			.3			.5			51.5			18.0			33.5			87.4			31.6			55.8
Net unrealized gains (losses) recognized in other comprehensive income			50.0			17.5			32.5			451.3			118.6			332.7			(750.6	)		(223.3	)		(527.3	)
Foreign currency translation losses			(6.7	)		(2.2	)		(4.5	)		(36.6	)		(12.9	)		(23.7	)		(14.2	)		(5.4	)		(8.8	)
	Total other comprehensive income (loss)	$	43.3		$	15.3		$	28.0		$	414.7		$	105.7		$	309.0		$	(764.8	)	$	(228.7	)	$	(536.1	)

* Reflects a decrease of $39.4 million and an increase of $39.4 million in a valuation allowance in 2000 and 1999, respectively.

(21) 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
			2001			2000			1999
			(number of shares)
Common stock issued
	Balance, beginning of year			178,833,278			177,272,322			175,989,202
	Share activity related to acquisition of Executive Risk			—			—			641,474
	Share activity under option and incentive plans			1,297,960			1,560,956			641,646
		Balance, end of year		180,131,238			178,833,278			177,272,322
Treasury stock
	Balance, beginning of year			3,914,105			1,782,489			13,722,376
	Share activity related to acquisition of Executive Risk			—			—			(13,651,028	)
	Repurchase of shares			7,971,600			3,783,400			2,596,700
	Share activity under option and incentive plans			(1,825,848	)		(1,651,784	)		(885,559	)
		Balance, end of year		10,059,857			3,914,105			1,782,489
		Common stock outstanding, end of year		170,071,381			174,919,173			175,489,833

      (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.

70

      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. Effective January 1, 2001, the Corporation’s U.S. domiciled insurance subsidiaries adopted the National Association of Insurance Commissioners’ Codification of Statutory Accounting Principles (Codification). Codification is intended to standardize regulatory reporting to state insurance departments. The adoption of Codification increased the statutory basis policyholders’ surplus of the Corporation’s insurance subsidiaries at December 31, 2001 by approximately $295 million.

      A comparison of shareholders’ equity on a GAAP basis and policyholders’ surplus on a statutory basis is as follows:

	December 31
	2001					2000
	GAAP			Statutory		GAAP		Statutory
	(in millions)
Property and casualty insurance subsidiaries	$	6,566.6		$	3,814.8	$	5,974.6	$	3,483.7
Corporate and other		(41.3	)				1,007.1
	$	6,525.3				$	6,981.7

      A comparison of GAAP and statutory net income (loss) is as follows:

	Years Ended December 31
	2001					2000				1999
	GAAP		Statutory			GAAP		Statutory		GAAP		Statutory
	(in millions)
Property and casualty insurance subsidiaries	$	95.0	$	(239.2	)	$	711.3	$	622.2	$	610.6	$	609.3
Corporate and other		16.5					3.3				10.5
	$	111.5				$	714.6			$	621.1

      (e) The Corporation’s ability to continue to pay dividends to shareholders and interest on debt obligations relies on the availability of liquid assets in the Corporation, which is dependent on 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 2001, these subsidiaries paid cash dividends to the Corporation totaling $240 million.

      The maximum dividend distribution that may be made by the property and casualty insurance subsidiaries to the Corporation during 2002 without prior approval is approximately $350 million.

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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, 2001 and 2000, 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, 2001. 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, 2001 and 2000 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.

February 28, 2002

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QUARTERLY FINANCIAL DATA

      Summarized unaudited quarterly financial data for 2001 and 2000 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
			2001			2000			2001			2000			2001(a)			2000			2001(b)			2000
			(in millions except for per share amounts)
Revenues			$	1,891.5		$	1,767.0		$	1,914.5		$	1,774.0		$	1,956.3		$	1,858.5		$	1,991.7		$	1,852.0
Claims and expenses				1,682.1			1,592.9			1,748.3			1,549.8			2,383.7			1,601.4			2,005.9			1,656.4
Federal and foreign income tax (credit)				34.4			20.4			19.4			39.6			(188.4	)		49.2			(42.9	)		27.2
		Net income (loss)	$	175.0		$	153.7		$	146.8		$	184.6		$	(239.0	)	$	207.9		$	28.7		$	168.4
Basic earnings (loss) per share			$	1.00		$	.88		$	.84		$	1.05		$	(1.40	)	$	1.20		$	.17		$	.97
Diluted earnings (loss) per share			$	.97		$	.87		$	.83		$	1.02		$	(1.40	)	$	1.17		$	.16		$	.95
Underwriting ratios
	Losses to premiums earned			67.0	%		69.2	%		70.0	%		65.9	%		105.7	%		66.9	%		79.9	%		67.9	%
	Expenses to premiums written			32.9			32.7			33.5			32.7			32.1			32.5			32.0			33.8
		Combined		99.9	%		101.9	%		103.5	%		98.6	%		137.8	%		99.4	%		111.9	%		101.7	%

(a)  In the third quarter of 2001, revenues included reinstatement premiums of $30.0 million and claims and expenses included costs of $675.0 million related to the September 11 attack. Net income for the quarter was reduced by $420.0 million or $2.46 per basic and diluted share for the after-tax effect of the net costs. Excluding the impact of the September 11 attack, the losses to premiums earned ratio was 67.2%, the expenses to premiums written ratio was 32.7% and the combined ratio was 99.9%.

(b)  In the fourth quarter of 2001, claims and expenses included net surety bond losses of $220.0 million related to the bankruptcy of Enron Corp., resulting in an after-tax charge to net income of $143.0 million or $0.83 per diluted share ($0.85 per basic share). Excluding the effect of the Enron surety losses, the losses to premiums earned ratio for the quarter was 67.0% and the combined ratio was 99.0%.

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 2001 and 2000.

		2001
		First		Second		Third		Fourth
		Quarter		Quarter		Quarter		Quarter
Common stock prices
	High	$	83.44	$	79.00	$	76.89	$	77.66
	Low		65.27		64.32		58.59		66.02
Dividends declared			.34		.34		.34		.34

		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

      At March 11, 2002, there were approximately 6,300 common shareholders of record.

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