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As filed with the Securities and Exchange Commission on March 27, 2001
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO________
Commission File No. 1-8661
THE CHUBB CORPORATION
(Exact name of registrant as specified in its charter)
NEW JERSEY 13-2595722
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
15 MOUNTAIN VIEW ROAD, P.O. BOX 1615
WARREN, NEW JERSEY 07061-1615
(Address of principal executive offices) (Zip Code)
(908) 903-2000
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, par value $1 per share New York Stock Exchange
Series B Participating Cumulative
Preferred Stock Purchase Rights New York Stock Exchange
(Title of each class) (Name of each exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X. No. .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant was $12,481,356,946 as of March 5, 2001.
175,231,678
Number of shares of common stock outstanding as of March 5, 2001
DOCUMENTS INCORPORATED BY REFERENCE
Portions of The Chubb Corporation 2000 Annual Report to Shareholders are
incorporated by reference in Parts I, II and IV of this Form 10-K. Portions of
the definitive Proxy Statement for the Annual Meeting of Shareholders on April
24, 2001 are incorporated by reference in Part III of this Form 10-K.
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PART I.
ITEM 1. BUSINESS
GENERAL
The Chubb Corporation (the Corporation) was incorporated as a business
corporation under the laws of the State of New Jersey in June 1967. The
Corporation is a holding company with subsidiaries principally engaged in the
property and casualty insurance business. The Corporation and its subsidiaries
employed approximately 12,400 persons worldwide on December 31, 2000.
In July 1999, the Corporation completed its acquisition of Executive Risk
Inc., a specialty insurance company offering directors and officers, errors and
omissions and professional liability coverages. The results of operations of
Executive Risk are included in the Corporation's consolidated results of
operations from the date of acquisition. Additional information related to the
Corporation's acquisition of Executive Risk is included in Note (3) of the notes
to consolidated financial statements incorporated by reference from the
Corporation's 2000 Annual Report to Shareholders.
Revenues, income before income tax and assets for each operating segment
for the three years ended December 31, 2000 are included in Note (16) of the
notes to consolidated financial statements incorporated by reference from the
Corporation's 2000 Annual Report to Shareholders.
The property and casualty insurance subsidiaries provide insurance
coverages principally in the United States, Canada, Europe, Australia, and parts
of Latin America and the Far East. Revenues of the property and casualty
insurance subsidiaries by geographic area for the three years ended December 31,
2000 are included in Note (16) of the notes to consolidated financial statements
incorporated by reference from the Corporation's 2000 Annual Report to
Shareholders.
PROPERTY AND CASUALTY INSURANCE
The principal members of the Property and Casualty Insurance Group (the
Group) are Federal Insurance Company (Federal), Pacific Indemnity Company
(Pacific Indemnity), Vigilant Insurance Company (Vigilant), Great Northern
Insurance Company (Great Northern), Chubb Custom Insurance Company (Chubb
Custom), Chubb National Insurance Company (Chubb National), Chubb Indemnity
Insurance Company (Chubb Indemnity), Chubb Insurance Company of New Jersey
(Chubb New Jersey), Texas Pacific Indemnity Company, Northwestern Pacific
Indemnity Company, Executive Risk Indemnity Inc. (Executive Risk Indemnity),
Executive Risk Specialty Insurance Company (Executive Risk Specialty) and
Quadrant Indemnity Company (Quadrant) in the United States, as well as Chubb
Insurance Company of Canada, Chubb Insurance Company of Europe, S.A., Chubb
Insurance Company of Australia Limited, Chubb do Brasil Companhia de Seguros and
Chubb Atlantic Indemnity Ltd.
Federal is the manager of Vigilant, Pacific Indemnity, Great Northern,
Chubb National, Chubb Indemnity, Chubb New Jersey, Executive Risk Indemnity,
Executive Risk Specialty and Quadrant. Federal also provides certain services to
other members of the Group. Acting subject to the supervision and control of the
Boards of Directors of the members of the Group, the Chubb & Son division of
Federal provides day to day executive management and operating personnel and
makes available the economy and flexibility inherent in the common operation of
a group of insurance companies.
The Group presently underwrites most lines of property and casualty
insurance. All members of the Group write non-participating policies. Several
members of the Group also write participating policies, particularly in the
workers' compensation class of business, under which dividends are paid to the
policyholders.
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Premiums Written
An analysis of the Group's premiums written during the past three years is
shown in the following table:
DIRECT REINSURANCE REINSURANCE NET
PREMIUMS PREMIUMS PREMIUMS PREMIUMS
WRITTEN ASSUMED(A) CEDED(A) WRITTEN
YEAR -------- ----------- ----------- --------
(IN MILLIONS)
1998.......................... $5,842.0 $141.9 $480.4 $5,503.5
1999.......................... 6,042.6 275.2 616.7 5,701.1
2000.......................... 6,741.6 384.4 792.8 6,333.2
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(a) Intercompany items eliminated.
The net premiums written during the last five years for major classes of
the Group's business are incorporated by reference from page 20 of the
Corporation's 2000 Annual Report to Shareholders.
One or more members of the Group are licensed and transact business in each
of the 50 states of the United States, the District of Columbia, Puerto Rico,
the Virgin Islands, Canada, Europe, Australia, and parts of Latin America and
the Far East. In 2000, approximately 82% of the Group's direct business was
produced in the United States, where the Group's businesses enjoy broad
geographic distribution with a particularly strong market presence in the
Northeast. The four states accounting for the largest amounts of direct premiums
written were New York with 13%, California with 10% and New Jersey and Texas
each with 5%. No other state accounted for 5% or more of such premiums.
Approximately 9% of the Group's direct premiums written was produced in Europe
and 3% was produced in Canada.
Underwriting Results
A frequently used industry measurement of property and casualty insurance
underwriting results is the combined loss and expense ratio. This ratio is the
sum of the ratio of incurred losses and related loss adjustment expenses to
premiums earned (loss ratio) plus the ratio of underwriting expenses to premiums
written (expense ratio) after reducing both premium amounts by dividends to
policyholders. When the combined ratio is under 100%, underwriting results are
generally considered profitable; when the combined ratio is over 100%,
underwriting results are generally considered unprofitable. Investment income,
other non-underwriting income or expense and income taxes are not reflected in
the combined ratio. The profitability of property and casualty insurance
companies depends on income from both underwriting operations and investments.
The net premiums and the loss, expense and combined loss and expense ratios
of the Group for the last five years are shown in the following table:
NET PREMIUMS COMBINED
(IN MILLIONS) LOSS AND
---------------------- EXPENSE EXPENSE
LOSS RATIOS RATIOS
YEAR WRITTEN EARNED RATIOS ------- --------
1996............................. $ 4,773.8 $ 4,569.3 66.2% 32.1% 98.3%
1997............................. 5,448.0 5,157.4 64.5 32.4 96.9
1998............................. 5,503.5 5,303.8 66.3 33.5 99.8
1999............................. 5,701.1 5,652.0 70.3 32.5 102.8
2000............................. 6,333.2 6,145.9 67.5 32.9 100.4
--------- --------- ------- ------- ---------
Total for five years ended
December 31, 2000............. $27,759.6 $26,828.4 67.1% 32.7% 99.8%
========= ========= ======= ======= =========
The combined loss and expense ratios during the last five years for major
classes of the Group's business are incorporated by reference from page 20 of
the Corporation's 2000 Annual Report to Shareholders.
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Another frequently used measurement in the property and casualty insurance
industry is the ratio of statutory net premiums written to policyholders'
surplus. At December 31, 2000 and 1999, such ratio for the Group was 1.82 and
1.76, respectively.
Producing and Servicing of Business
In the United States and Canada, the Group is represented by approximately
5,000 independent agents and accepts business on a regular basis from an
estimated 1,000 insurance brokers. In most instances, these agents and brokers
also represent other companies which compete with the Group. The offices
maintained by the Group assist these agents and brokers in producing and
servicing the Group's business. In addition to the administrative offices in
Warren, New Jersey, the Group has seven zone offices and branch and service
offices throughout the United States and Canada.
The Group's overseas business is developed by its foreign agents and
brokers through local branch offices of the Group and by its United States and
Canadian agents and brokers. In conducting its overseas business, the Group
reduces the risks relating to currency fluctuations by maintaining investments
in those foreign currencies in which the Group transacts business, with
characteristics similar to the liabilities in those currencies. The net asset or
liability exposure to the various foreign currencies is regularly reviewed.
Business for the Group is also produced through participation in certain
underwriting pools and syndicates. Such pools and syndicates provide
underwriting capacity for risks which an individual insurer cannot prudently
underwrite because of the magnitude of the risk assumed or which can be more
effectively handled by one organization due to the need for specialized loss
control and other services.
Reinsurance
In accordance with the normal practice of the insurance industry, the Group
assumes and cedes reinsurance with other insurers or reinsurers. Reinsurance is
ceded to provide greater diversification of business and minimize the Group's
maximum net loss arising from large risks or from hazards of potential
catastrophic events.
A large portion of the Group's reinsurance is effected under contracts
known as treaties under which all risks meeting prescribed criteria are
automatically covered. Most of the Group's treaty reinsurance arrangements
consist of excess of loss and catastrophe contracts with other insurers or
reinsurers which protect against a specified part or all of certain types of
losses over stipulated amounts arising from any one occurrence or event. In
certain circumstances, reinsurance is also effected by negotiation on individual
risks. The amount of each risk retained by the Group is subject to maximum
limits which vary by line of business and type of coverage. Retention limits are
continually reviewed and are revised periodically as the Group's capacity to
underwrite risks changes. Reinsurance contracts do not relieve the Group of its
primary obligation to the policyholders.
The existing reinsurance program of the Executive Risk insurance
subsidiaries at the time of the acquisition was designed to limit the loss
retained from a loss occurrence to an amount lower than that typically retained
by the Group. Prior to the acquisition, Executive Risk utilized reinsurance to a
greater extent because its size limited the amount of risk it could retain.
During 2000, Executive Risk's reinsurance program was modified to selectively
increase retention levels.
The collectibility of reinsurance is subject to the solvency of the
reinsurers. The Group is selective in regard to its reinsurers, placing
reinsurance with only those reinsurers with strong balance sheets and superior
underwriting ability. The Group monitors the financial strength of its
reinsurers on an ongoing basis. As a result, uncollectible amounts have not been
significant.
The Group has an exposure to insured losses caused by hurricanes,
earthquakes, winter storms, windstorms and other catastrophic events. The
frequency and severity of catastrophes are unpredictable. The extent of losses
from a catastrophe is a function of both the total amount of insured exposure
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in an area affected by the event and the severity of the event. The Group
continually assesses its concentration of underwriting exposures in catastrophe
prone areas globally and develops strategies to manage this exposure through
individual risk selection, subject to regulatory constraints, and through the
purchase of catastrophe reinsurance. The Group uses modeling techniques and
concentration management tools that allow it to better monitor and control
catastrophe exposures. The Group maintains records showing concentrations of
risk in catastrophe prone areas such as California (earthquake and brush fires)
and the Southeast coast of the United States (hurricanes). The Group's current
catastrophe reinsurance program provides coverage for individual catastrophic
events of approximately 80% of losses between $100 million and $450 million in
the United States and approximately 90% of losses between $25 million and $175
million outside the United States.
Unpaid Claims and Claim Adjustment Expenses and Related Amounts Recoverable
from Reinsurers
Insurance companies are required to establish a liability in their accounts
for the ultimate costs (including claim adjustment expenses) of claims that have
been reported but not settled and of claims that have been incurred but not
reported. Insurance companies are also required to report as assets the portion
of such liability that will be recovered from reinsurers.
The process of establishing the liability for unpaid claims and claim
adjustment expenses is a complex and imprecise science that reflects significant
judgmental factors. This is true because claim settlements to be made in the
future will be impacted by changing rates of inflation and other economic
conditions, changing legislative, judicial and social environments and changes
in the Group's claim handling procedures. In many liability cases, significant
periods of time, ranging up to several years or more, may elapse between the
occurrence of an insured loss, the reporting of the loss to the Group and the
settlement of the loss. More than 60% of the Group's net unpaid claims and claim
adjustment expenses at December 31, 2000 were for incurred but not reported
(IBNR) losses--claims that had not yet been reported to the Group, some of which
were not yet known to the insured, and future development on reported claims. In
spite of this imprecision, financial reporting requirements dictate that
insurance companies report a single amount as the estimate of unpaid claims and
claim adjustment expenses as of each evaluation date. These estimates are
continually reviewed and updated. Any resulting adjustments are reflected in
current operating results.
The Group's estimates of losses for reported claims are established
judgmentally on an individual case basis. Such estimates are based on the
Group's particular experience with the type of risk involved and its knowledge
of the circumstances surrounding each individual claim. These estimates are
reviewed on a regular basis or as additional facts become known. The reliability
of the estimation process is monitored through comparison with ultimate
settlements.
The Group's estimates of losses for unreported claims are principally
derived from analyses of historical patterns of the development of paid and
reported losses by accident year for each class of business. This process relies
on the basic assumption that past experience, adjusted for the effects of
current developments and likely trends, is an appropriate basis for predicting
future outcomes. For certain classes of business where anticipated loss
experience is less predictable because of the small number of claims and/or
erratic claim severity patterns, the Group's estimates are based on both
expected and actual reported losses. Salvage and subrogation estimates are
developed from patterns of actual recoveries.
The Group's estimates of unpaid claim adjustment expenses are based on
analyses of the relationship of projected ultimate claim adjustment expenses to
projected ultimate losses for each class of business. Claim staff has discretion
to override these expense formulas where judgment indicates such action is
appropriate.
The Group's estimates of reinsurance recoverable related to reported and
unreported claims and claim adjustment expenses represent the portion of such
liabilities that will be recovered from reinsurers. Amounts recoverable from
reinsurers are recognized as assets at the same time and in a manner consistent
with the liabilities associated with the reinsured policies.
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The anticipated effect of inflation is implicitly considered when
estimating liabilities for unpaid claims and claim adjustment expenses.
Estimates of the ultimate value of all unpaid claims are based in part on the
development of paid losses, which reflect actual inflation. Inflation is also
reflected in the case estimates established on reported open claims which, when
combined with paid losses, form another basis to derive estimates of reserves
for all unpaid claims. There is no precise method for subsequently evaluating
the adequacy of the consideration given to inflation, since claim settlements
are affected by many factors.
The following table provides a reconciliation of the beginning and ending
liability for unpaid claims and claim adjustment expenses, net of reinsurance
recoverable, and a reconciliation of the ending net liability to the
corresponding liability on a gross basis for the years ended December 31, 2000,
1999 and 1998:
YEARS ENDED DECEMBER 31
-----------------------------------
2000 1999 1998
---- ---- ----
(IN MILLIONS)
Net liability, beginning of year.................. $ 9,748.8 $ 9,049.9 $ 8,564.6
--------- --------- ---------
Increase related to acquisition of Executive Risk
(net of reinsurance recoverable of $339.5)...... -- 605.8 --
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Net incurred claims and claim adjustment expenses
Provision for claims occurring in the current
year......................................... 4,357.7 4,147.6 3,712.1
Decrease in estimates for claims occurring in
prior years.................................. (230.0) (205.6) (218.4)
--------- --------- ---------
4,127.7 3,942.0 3,493.7
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Net payments for claims and claim adjustment
expenses related to
Current year.................................... 1,342.5 1,278.9 1,210.7
Prior years..................................... 2,482.7 2,570.0 1,797.7
--------- --------- ---------
3,825.2 3,848.9 3,008.4
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Net liability, end of year........................ 10,051.3 9,748.8 9,049.9
Reinsurance recoverable, end of year.............. 1,853.3 1,685.9 1,306.6
--------- --------- ---------
Gross liability, end of year...................... $11,904.6 $11,434.7 $10,356.5
========= ========= =========
As reestimated at December 31, 2000, the liability for unpaid claims and
claim adjustment expenses, net of reinsurance recoverable, as established at the
previous year-end was redundant by $230.0 million. This compares with favorable
development of $205.6 million and $218.4 million during 1999 and 1998,
respectively. Such redundancies were reflected in the Group's operating results
in these respective years. Each of the past three years benefited from favorable
claim experience for certain liability classes; this was offset in part by
losses incurred relating to asbestos and toxic waste claims of $31.0 million,
$46.8 million and $67.8 million in 2000, 1999 and 1998, respectively.
Unpaid claims and claim adjustment expenses, net of reinsurance
recoverable, increased by $302.5 million or 3% in 2000, $698.9 million or 8% in
1999 and $485.3 million or 6% in 1998. The increase in 1999 includes $605.8
million of net reserves assumed upon the acquisition of Executive Risk. The 1999
increase would have been $548.7 million greater except that loss reserves were
reduced by payments in that amount during the year related to the settlement of
asbestos-related claims against Fibreboard Corporation. Excluding the effect of
the Executive Risk reserves assumed and the Fibreboard payments, unpaid claims
and claim adjustment expenses, net of reinsurance recoverable, increased by
$641.8 million or 7% in 1999. Reserve growth has occurred each year in those
liability classes that are characterized by delayed loss reporting and extended
periods of settlement. These coverages represent a significant portion of the
Group's business. The Group continues to emphasize early and accurate reserving,
inventory management of claims and suits, and control of the dollar value of
settlements. The number of outstanding claims at year-end 2000 was approximately
9% lower than the number at year-end 1999, which was in turn flat compared with
year-end 1998.
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The uncertainties relating to unpaid claims, particularly for asbestos and
toxic waste claims on insurance policies written many years ago, are discussed
in Item 7 of this report on pages 19 through 22.
The following table provides a reconciliation of the beginning and ending
liability for unpaid claims and claim adjustment expenses, net of reinsurance
recoverable, related to asbestos and toxic waste claims for the years ended
December 31, 2000, 1999 and 1998. Reinsurance recoveries related to such claims
are not significant.
YEARS ENDED DECEMBER 31
-----------------------------
2000 1999 1998
---- ---- --------
(IN MILLIONS)
Net liability, beginning of year............................ $524.5 $1,075.7(a) $1,092.4(a)
Net incurred claims and claim adjustment expenses........... 31.0 46.8 67.8
Net payments for claims..................................... 105.3 598.0(a) 84.5
------ -------- --------
Net liability, end of year.................................. $450.2 $ 524.5 $1,075.7(a)
====== ======== ========
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(a) Includes $548.7 million related to Fibreboard.
The method by which asbestos claims are established by the Group's claim
staff was changed in 1998. Previously, claims were generally established for
each lawsuit. Since the change was implemented in 1998, one master claim is
generally established for all similar claims and lawsuits involving an insured.
Prior year claim counts were not adjusted to conform to the new methodology. A
counted claim can have from one to thousands of claimants. Management does not
believe the following claim count data is meaningful for analysis purposes.
There were approximately 1,100 asbestos claims outstanding at December 31,
2000 compared with 1,600 asbestos claims outstanding at December 31, 1999 and
2,000 asbestos claims outstanding at December 31, 1998. In 2000, approximately
200 claims were opened and 700 claims were closed. In 1999, approximately 200
claims were opened and 600 claims were closed. In 1998, approximately 500 claims
were opened and 2,200 claims were closed, including claims "closed" to adjust
the data base to the methodology implemented in 1998. Indemnity payments per
claim have varied over time due primarily to variations in insureds, policy
terms and types of claims. Management cannot predict whether indemnity payments
per claim will increase, decrease or remain the same.
There were approximately 650 toxic waste claims outstanding at December 31,
2000 compared with 600 toxic waste claims outstanding at December 31, 1999 and
650 toxic waste claims outstanding at December 31, 1998. Approximately 500
claims were opened in 2000, 300 claims were opened in 1999 and 250 claims were
opened in 1998. There were approximately 450 claims closed in 2000, 350 claims
closed in 1999 and 400 claims closed in 1998. Generally, a toxic waste claim is
established for each lawsuit, or alleged equivalent, against an insured where
potential liability has been determined to exist under a policy issued by a
member of the Group. Because indemnity payments to date for toxic waste claims
have not been significant in the aggregate and have varied from claim to claim,
management cannot determine whether past claims experience will prove to be
representative of future claims experience.
The table on page 9 presents the subsequent development of the estimated
year-end liability for unpaid claims and claim adjustment expenses, net of
reinsurance recoverable, for the ten years prior to 2000. The amounts in the
table for the years ended December 31, 1990 through 1998 do not include
Executive Risk's unpaid claims and claim adjustment expenses. The top line of
the table shows the estimated liability for unpaid claims and claim adjustment
expenses recorded at the balance sheet date for each of the indicated years.
This liability represents the estimated amount of losses and loss adjustment
expenses for claims arising in all prior years that are unpaid at the balance
sheet date, including losses that had been incurred but not yet reported to the
Group.
The upper section of the table shows the reestimated amount of the
previously recorded net liability based on experience as of the end of each
succeeding year. The estimate is increased or
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decreased as more information becomes known about the frequency and severity of
claims for each individual year. The increase or decrease is reflected in the
current year's operating results. The "cumulative deficiency (redundancy)" as
shown in the table represents the aggregate change in the reserve estimates from
the original balance sheet dates through December 31, 2000. The amounts noted
are cumulative in nature; that is, an increase in a loss estimate that related
to a prior period occurrence generates a deficiency in each intermediate year.
For example, a deficiency recognized in 2000 relating to losses incurred prior
to December 31, 1990 would be included in the cumulative deficiency amount for
each year in the period 1990 through 1999. Yet, the deficiency would be
reflected in operating results only in 2000. The effect of changes in estimates
of the liabilities for claims occurring in prior years on income before income
taxes in each of the past three years is shown in the reconciliation table on
page 6.
In each of the years 1990 through 1999, there was favorable development for
certain liability classes as the result of favorable loss experience. In each of
these years, this favorable development was offset, in varying degrees, by
unfavorable development related to asbestos and toxic waste claims. The years
1990 through 1992 in particular reflect the effects of the $675 million increase
in loss reserves related to the Fibreboard settlement. The cumulative net
deficiencies experienced relating to asbestos and toxic waste claims were also,
to varying degrees, the result of: (1) an increase in the actual number of
claims filed; (2) an increase in the number of unasserted claims estimated; (3)
an increase in the severity of actual and unasserted claims; and (4) an increase
in litigation costs associated with such claims.
Conditions and trends that have affected development of the liability for
unpaid claims and claim adjustment expenses in the past will not necessarily
recur in the future. Accordingly, it is not appropriate to extrapolate future
redundancies or deficiencies based on the data in this table.
The middle section of the table on page 9 shows the cumulative amount paid
with respect to the reestimated liability as of the end of each succeeding year.
For example, in the 1990 column, as of December 31, 2000 the Group had paid
$4,188.0 million of the currently estimated $5,036.9 million of claims and claim
adjustment expenses that were unpaid at the end of 1990; thus, an estimated
$848.9 million of losses incurred through 1990 remain unpaid as of December 31,
2000, approximately half of which relates to asbestos and toxic waste claims.
The lower section of the table on page 9 shows the gross liability,
reinsurance recoverable and net liability recorded at each year-end beginning
with 1992 and the reestimation of these amounts as of December 31, 2000. Amounts
for years prior to the implementation of Statement of Financial Accounting
Standards No. 113, Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts, have not been presented.
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ANALYSIS OF CLAIM AND CLAIM ADJUSTMENT EXPENSE DEVELOPMENT
DECEMBER 31
---------------------------------------------------------------------------------------
YEAR ENDED 1990 1991 1992 1993 1994 1995 1996 1997
---------- ---- ---- ---- ---- ---- ---- ---- ----
(IN MILLIONS)
Net Liability for Unpaid Claims and
Claim Adjustment Expenses........... $4,301.1 $4,743.9 $5,267.6 $6,450.0 $6,932.9 $7,614.5 $ 7,755.9 $ 8,564.6
Net Liability Reestimated as of:
One year later...................... 4,272.3 4,716.3 5,932.4 6,420.3 6,897.1 7,571.7 7,690.6 8,346.2
Two years later..................... 4,244.7 5,368.5 5,904.1 6,363.1 6,874.5 7,520.9 7,419.6 7,899.8
Three years later................... 4,933.0 5,336.5 5,843.5 6,380.4 6,829.8 7,256.8 6,986.2 7,564.8
Four years later.................... 4,941.7 5,302.6 5,894.6 6,338.1 6,605.4 6,901.5 6,719.4
Five years later.................... 4,969.5 5,389.5 5,863.3 6,150.1 6,352.2 6,692.1
Six years later..................... 5,079.3 5,375.3 5,738.4 5,904.9 6,191.4
Seven years later................... 5,094.2 5,303.9 5,582.1 5,751.4
Eight years later................... 5,058.8 5,203.3 5,500.4
Nine years later.................... 5,002.6 5,169.0
Ten years later..................... 5,036.9
Cumulative Net Deficiency
(Redundancy)........................ 735.8 425.1 232.8 (698.6) (741.5) (922.4) (1,036.5) (999.8)
Cumulative Net Deficiency Related to
Asbestos and Toxic Waste Claims..... 1,901.9 1,654.1 1,494.2 718.5 603.3 421.5 270.8 145.6
Cumulative Amount of
Net Liability Paid as of:
One year later...................... 919.1 931.2 1,039.9 1,272.0 1,250.7 1,889.4 1,418.3 1,797.7
Two years later..................... 1,407.2 1,479.9 1,858.5 1,985.7 2,550.7 2,678.2 2,488.2 3,444.2
Three years later................... 1,808.7 2,083.0 2,332.3 3,015.8 3,073.7 3,438.8 3,757.0 4,160.6
Four years later.................... 2,292.0 2,386.9 3,181.4 3,264.5 3,589.8 4,457.6 4,194.8
Five years later.................... 2,490.2 3,125.8 3,323.0 3,624.2 4,444.4 4,755.4
Six years later..................... 3,174.7 3,200.4 3,603.5 4,367.9 4,683.3
Seven years later................... 3,200.4 3,412.7 4,307.7 4,545.5
Eight years later................... 3,380.5 4.095.5 4,468.3
Nine years later.................... 4,040.1 4,248.7
Ten years later..................... 4,188.0
Gross Liability, End of Year......... $7,220.9 $8,235.4 $8,913.2 $9,588.2 $ 9,523.7 $ 9,772.5
Reinsurance Recoverable, End of
Year................................ 1,953.3 1,785.4 1,980.3 1,973.7 1,767.8 1,207.9
-------- -------- -------- -------- --------- ---------
Net Liability, End of Year........... $5,267.6 $6,450.0 $6,932.9 $7,614.5 $ 7,755.9 $ 8,564.6
======== ======== ======== ======== ========= =========
Reestimated Gross Liability.......... $7,504.0 $7,720.3 $8,316.4 $8,720.0 $ 8,467.1 $ 8,745.3
Reestimated Reinsurance
Recoverable......................... 2,003.6 1,968.9 2,125.0 2,027.9 1,747.7 1,180.5
-------- -------- -------- -------- --------- ---------
Reestimated Net Liability............ $5,500.4 $5,751.4 $6,191.4 $6,692.1 $ 6,719.4 $ 7,564.8
======== ======== ======== ======== ========= =========
Cumulative Gross Deficiency
(Redundancy)........................ $ 283.1 $ (515.1) $ (596.8) $ (868.2) $(1,056.6) $(1,027.2)
======== ======== ======== ======== ========= =========
DECEMBER 31
---------------------------------
YEAR ENDED 1998 1999 2000
---------- ---- ---- ----
(IN MILLIONS)
Net Liability for Unpaid Claims and
Claim Adjustment Expenses........... $ 9,049.9 $ 9,748.8 $10,051.3
Net Liability Reestimated as of:
One year later...................... 8,854.8 9,518.8
Two years later..................... 8,516.5
Three years later...................
Four years later....................
Five years later....................
Six years later.....................
Seven years later...................
Eight years later...................
Nine years later....................
Ten years later.....................
Cumulative Net Deficiency
(Redundancy)........................ (533.4) (230.0)
Cumulative Net Deficiency Related to
Asbestos and Toxic Waste Claims..... 77.8 31.0
Cumulative Amount of
Net Liability Paid as of:
One year later...................... 2,520.1 2,482.7
Two years later..................... 3,707.8
Three years later...................
Four years later....................
Five years later....................
Six years later.....................
Seven years later...................
Eight years later...................
Nine years later....................
Ten years later.....................
Gross Liability, End of Year......... $10,356.5 $11,434.7 $11,904.6
Reinsurance Recoverable, End of
Year................................ 1,306.6 1,685.9 1,853.3
--------- --------- ---------
Net Liability, End of Year........... $ 9,049.9 $ 9,748.8 $10,051.3
========= ========= =========
Reestimated Gross Liability.......... $ 9,825.7 $11,354.1
Reestimated Reinsurance
Recoverable......................... 1,309.2 1,835.3
--------- ---------
Reestimated Net Liability............ $ 8,516.5 $ 9,518.8
========= =========
Cumulative Gross Deficiency
(Redundancy)........................ $ (530.8) $ (80.6)
========= =========
- ---------------
The amounts for the years 1990 through 1998 do not include Executive Risk's
unpaid claims and claim adjustment expenses.
The cumulative deficiencies for the years 1990 through 1992 include the effect
of the $675 million increase in claims and claim adjustment expenses related to
the Fibreboard settlement.
9
10
Members of the Group are required to file annual statements with insurance
regulatory authorities prepared on an accounting basis prescribed or permitted
by such authorities (statutory basis). The differences between the liability for
unpaid claims and claim adjustment expenses, net of reinsurance recoverable,
reported in the accompanying consolidated financial statements in accordance
with generally accepted accounting principles (GAAP) and that reported in the
annual statutory statements of the U.S. subsidiaries are as follows:
DECEMBER 31
---------------------
2000 1999
---- ----
(IN MILLIONS)
Net liability reported on a statutory basis--U.S.
subsidiaries.............................................. $ 9,181.5 $9,032.6
Additions (reductions):
Unpaid claims and claim adjustment expenses of foreign
subsidiaries........................................... 871.4 720.5
Other reserve differences................................. (1.6) (4.3)
--------- --------
Net liability reported on a GAAP basis...................... $10,051.3 $9,748.8
========= ========
Investments
Investment decisions are centrally managed by investment professionals
based on guidelines established by management and approved by the board of
directors for each member of the Group.
The main objectives in managing the investment portfolio of the Group are
to maximize after-tax investment income and total investment returns while
minimizing credit risks in order to provide maximum support to the insurance
underwriting operations. To accomplish this, the investment function must be
highly integrated with the operating functions and capable of responding to the
changing conditions in the marketplace. Investment strategies are developed
based on many factors including underwriting results and the Group's resulting
tax position, regulatory requirements, fluctuations in interest rates and
consideration of other market risks.
The investment portfolio of the Group is primarily comprised of high
quality bonds, principally tax-exempt, U.S. Treasury, government agency,
mortgage-backed securities and corporate issues. In addition, the portfolio
includes equity securities held primarily with the objective of capital
appreciation.
In 2000, the Group invested new cash primarily in mortgage-backed
securities. In 1999, the Group invested new cash primarily in tax-exempt bonds
and corporate bonds. In 1998, the Group invested new cash primarily in
tax-exempt bonds and, to a lesser extent, equity securities. In each year, the
Group tried to achieve the appropriate mix in its portfolio to balance both
investment and tax strategies. At December 31, 2000, 67% of the Group's fixed
maturity portfolio was invested in tax-exempt bonds compared with 70% at
December 31, 1999 and 71% at December 31, 1998.
The investment results of the Group for each of the past three years are
shown in the following table.
AVERAGE PERCENT EARNED
INVESTED INVESTMENT ----------------------
ASSETS(A) INCOME(B) BEFORE TAX AFTER TAX
YEAR --------- ---------- ---------- ---------
(IN MILLIONS)
1998............................. $12,795.7 $748.9 5.85% 4.96%
1999............................. 14,208.0 821.0 5.78 4.87
2000............................. 15,223.9 879.2 5.78 4.83
- ---------------
(a) Average of amounts for the years presented with fixed maturity
securities at amortized cost and equity securities at market value.
(b) Investment income after deduction of investment expenses, but before
applicable income tax.
10
11
REAL ESTATE GROUP
The Real Estate Group is composed of Bellemead Development Corporation and
its subsidiaries. The Real Estate Group is involved in commercial development
activities primarily in New Jersey and residential development activities
primarily in central Florida.
The Real Estate Group owns approximately $325 million of land, which is
expected to be developed in the future, and approximately $190 million of
commercial properties and land parcels under lease. The Real Estate Group is
continuing to explore the sale of certain of its remaining properties.
Additional information related to the Corporation's real estate operations is
included in Item 7 of this report on page 23.
REGULATION, PREMIUM RATES AND COMPETITION
The Corporation is a holding company with subsidiaries primarily engaged in
the property and casualty insurance business and is therefore subject to
regulation by certain states as an insurance holding company. All states have
enacted legislation which regulates insurance holding company systems such as
the Corporation and its subsidiaries. This legislation generally provides that
each insurance company in the system is required to register with the department
of insurance of its state of domicile and furnish information concerning the
operations of companies within the holding company system which may materially
affect the operations, management or financial condition of the insurers within
the system. All transactions within a holding company system affecting insurers
must be fair and equitable. Notice to the insurance commissioners is required
prior to the consummation of transactions affecting the ownership or control of
an insurer and of certain material transactions between an insurer and any
person in its holding company system and, in addition, certain of such
transactions cannot be consummated without the commissioners' prior approval.
The Group is subject to regulation and supervision in the states in which
it does business. In general, such regulation is for the protection of
policyholders rather than shareholders. The extent of such regulation varies but
generally has its source in statutes which delegate regulatory, supervisory and
administrative powers to a department of insurance. The regulation, supervision
and administration relate to, among other things, the standards of solvency
which must be met and maintained; the licensing of insurers and their agents;
restrictions on insurance policy terminations; unfair trade practices; the
nature of and limitations on investments; premium rates; restrictions on the
size of risks which may be insured under a single policy; deposits of securities
for the benefit of policyholders; approval of policy forms; periodic
examinations of the affairs of insurance companies; annual and other reports
required to be filed on the financial condition of companies or for other
purposes; limitations on dividends to policyholders and shareholders; and the
adequacy of provisions for unearned premiums, unpaid claims and claim adjustment
expenses, both reported and unreported, and other liabilities.
The extent of insurance regulation on business outside the United States
varies significantly among the countries in which the Group operates. Some
countries have minimal regulatory requirements, while others regulate insurers
extensively. Foreign insurers in many countries are faced with greater
restrictions than domestic competitors. In certain countries, the Group has
incorporated insurance subsidiaries locally to improve its position.
The National Association of Insurance Commissioners has a risk-based
capital requirement for property and casualty insurance companies. The
risk-based capital formula is used by state regulatory authorities to identify
insurance companies which may be undercapitalized and which merit further
regulatory attention. The formula prescribes a series of risk measurements to
determine a minimum capital amount for an insurance company, based on the
profile of the individual company. The ratio of a company's actual
policyholders' surplus to its minimum capital requirement will determine whether
any state regulatory action is required. At December 31, 2000, each member of
the Group had more than sufficient capital to meet the risk-based capital
requirement.
11
12
Regulatory requirements applying to premium rates vary from state to state,
but generally provide that rates not be "excessive, inadequate or unfairly
discriminatory." Rates for many lines of business, including automobile and
homeowners insurance, are subject to prior regulatory approval in many states.
However, in certain states, prior regulatory approval of rates is not required
for most lines of insurance which the Group underwrites. Ocean marine insurance
rates are exempt from regulation.
Subject to regulatory requirements, the Group's management determines the
prices charged for its policies based on a variety of factors including claim
and claim adjustment expense experience, inflation, tax law and rate changes,
and anticipated changes in the legal environment, both judicial and legislative.
Methods for arriving at prices vary by type of business, exposure assumed and
size of risk. Underwriting profitability is affected by the accuracy of these
assumptions, by the willingness of insurance regulators to approve changes in
those rates which they control and by such other matters as underwriting
selectivity and expense control.
The property and casualty insurance industry is highly competitive both as
to price and service. Members of the Group compete not only with other stock
companies but also with mutual companies, other underwriting organizations and
alternative risk sharing mechanisms. Some competitors obtain their business at a
lower cost through the use of salaried personnel rather than independent agents
and brokers. Rates are not uniform for all insurers and vary according to the
types of insurers and methods of operation. The Group competes for business not
only on the basis of price, but also on the basis of availability of coverage
desired by customers and quality of service, including claim adjustment service.
The Group's products and services are generally designed to serve specific
customer groups or needs and to offer a degree of customization that is of value
to the insured.
There are approximately 3,000 property and casualty insurance companies in
the United States operating independently or in groups and no single company or
group is dominant. According to A.M. Best, the Group is the 13th largest United
States property and casualty insurance group based on 1999 net premiums written.
The relatively large size and underwriting capacity of the Group provide
opportunities not available to smaller companies.
The property and casualty marketplace, particularly the standard commercial
lines, which include multiple peril, casualty and workers' compensation,
experienced severe price competition from the late 1980s through most of the
1990s. As a result, price levels throughout the industry for many of these
coverages fell to inadequate levels. In late 1998, the Group put in place a
strategy to increase the pricing in the standard commercial lines and to not
renew underperforming accounts where it could not attain price adequacy. The
Group's prices for standard commercial coverages have increased steadily and
such increases accelerated in 2000. Many of the Group's competitors have also
insisted on higher prices since the latter part of 1999. Pricing in the
specialty commercial lines and personal lines remains competitive. The Group
continues to work closely with its customers and to reinforce with them the
stability, expertise and added value the Group provides.
In all states, insurers authorized to transact certain classes of property
and casualty insurance are required to become members of an insolvency fund. In
the event of the insolvency of a licensed insurer writing a class of insurance
covered by the fund in the state, members are assessed to pay certain claims
against the insolvent insurer. Generally, fund assessments are proportionately
based on the members' written premiums for the classes of insurance written by
the insolvent insurer. In certain states, a portion of these assessments is
recovered through premium tax offsets and policyholder surcharges. In 2000,
assessments to the members of the Group amounted to approximately $8 million.
The amount of future assessments cannot be reasonably estimated.
State insurance regulation requires insurers to participate in assigned
risk plans, reinsurance facilities and joint underwriting associations, which
are mechanisms that generally provide applicants with various basic insurance
coverages when they are not available in voluntary markets. Such mechanisms are
most prevalent for automobile and workers' compensation insurance, but a
majority of states also mandate participation in Fair Plans or Windstorm Plans,
which provide basic property coverages. Some states also require insurers to
participate in facilities that provide homeowners and
12
13
crime insurance. Participation is based upon the amount of a company's voluntary
written premiums in a particular state for the classes of insurance involved.
These involuntary market plans generally are underpriced and produce
unprofitable underwriting results.
In several states, insurers, including members of the Group, participate in
market assistance plans. Typically, a market assistance plan is voluntary, of
limited duration and operates under the supervision of the insurance
commissioner to provide assistance to applicants unable to obtain commercial and
personal liability and property insurance. The assistance may range from
identifying sources where coverage may be obtained to pooling of risks among the
participating insurers.
Although the federal government and its regulatory agencies generally do
not directly regulate the business of insurance, federal initiatives often have
an impact on the business in a variety of ways. Current and proposed federal
measures which may significantly affect the insurance business include natural
disaster reinsurance, hazardous waste removal and liability measures, tort
reform, containment of medical costs, automobile safety, ergonomics, patients'
rights, privacy, e-commerce, international trade, financial services
deregulation and the taxation of insurance companies.
Insurance companies are also affected by a variety of state and federal
legislative and regulatory measures as well as by decisions of their courts that
define and extend the risks and benefits for which insurance is provided. These
include redefinitions of risk exposure in areas such as product liability and
commercial general liability as well as extension and protection of employee
benefits, including workers' compensation and disability benefits.
Legislative and judicial developments pertaining to asbestos and toxic
waste exposures are discussed in Item 7 of this report on pages 19 through 22.
ITEM 2. PROPERTIES
The executive offices of the Corporation and the administrative offices of
the Property and Casualty Insurance Group are in Warren, New Jersey. The
Property and Casualty Insurance Group maintains zone administrative and branch
offices in major cities throughout the United States and also has offices in
Canada, Europe, Australia, the Far East and Latin America. Office facilities are
leased with the exception of buildings in Branchburg, New Jersey and Simsbury,
Connecticut. Management considers its office facilities suitable and adequate
for the current level of operations. See Note (14) of the notes to consolidated
financial statements incorporated by reference from the Corporation's 2000
Annual Report to Shareholders.
ITEM 3. LEGAL PROCEEDINGS
As previously reported, a purported class action complaint was filed in the
United States District Court for the District of New Jersey on August 31, 2000
by the California Public Employees' Retirement System. The complaint alleges
that the Corporation and three of its current officers, Dean R. O'Hare, David B.
Kelso and Henry B. Schram, and Executive Risk Inc. and three of its former
officers, Stephen J. Sills, Robert H. Kullas and Robert V. Deutsch, are liable
for certain misrepresentations and omissions regarding, among other matters,
disclosures made between April 27, 1999 and October 15, 1999 relating to the
improved pricing in the Corporation's standard commercial insurance business and
relating to the offer of the Corporation's securities to, and solicitation of
votes from, the former shareholders of Executive Risk Inc. in connection with
the Corporation's acquisition of Executive Risk Inc. The Corporation is
defending the action vigorously.
The Corporation and its subsidiaries are also defendants in various
lawsuits arising out of their businesses. It is the opinion of management that
the final outcome of these matters will not materially affect the consolidated
financial position of the registrant.
Information regarding certain litigation to which property and casualty
insurance subsidiaries of the Corporation are a party is included in Item 7 of
this report on pages 19 through 22.
13
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the last
quarter of the year ended December 31, 2000.
EXECUTIVE OFFICERS OF THE REGISTRANT
YEAR OF
AGE(A) ELECTION(B)
------ -----------
Dean R. O'Hare, Chairman of the Corporation................. 58 1972
Joanne L. Bober, Senior Vice President and General Counsel
of the Corporation........................................ 48 1999
John J. Degnan, President of the Corporation................ 56 1994
Gail E. Devlin, Senior Vice President of the Corporation.... 62 1981
George R. Fay, Executive Vice President of Chubb & Son, a
division of Federal....................................... 52 1999
David S. Fowler, Senior Vice President of the Corporation... 55 1989
Henry G. Gulick, Vice President and Secretary of the
Corporation............................................... 57 1975
Weston M. Hicks, Senior Vice President of the Corporation... 44 2001
Ralph E. Jones, III, Executive Vice President of Chubb &
Son, a division of Federal................................ 45 1999
David B. Kelso, Executive Vice President of the
Corporation............................................... 48 1996
Charles M. Luchs, Executive Vice President of Chubb & Son, a
division of Federal....................................... 61 1996
Andrew A. McElwee, Jr., Senior Vice President of the
Corporation............................................... 46 1997
Glenn A. Montgomery, Senior Vice President of the
Corporation............................................... 48 1997
Thomas F. Motamed, Executive Vice President of the
Corporation............................................... 52 1997
Michael J. O'Neill, Jr., Senior Vice President and Counsel
of the Corporation........................................ 52 1999
Michael O'Reilly, Executive Vice President of the
Corporation............................................... 57 1976
Henry B. Schram, Senior Vice President of the Corporation... 54 1985
Stephen J. Sills, Executive Vice President of the
Corporation............................................... 52 1999
- ---------------
(a) Ages listed above are as of April 24, 2001.
(b) Date indicates year first elected or designated as an executive
officer.
All of the foregoing officers serve at the pleasure of the Board of
Directors of the Corporation or listed subsidiary and have been employees of the
Corporation or a subsidiary of the Corporation for more than five years except
for Ms. Bober and Messrs. Hicks, Jones, Kelso and Sills.
Prior to joining the Corporation in 1999, Ms. Bober was Senior Vice
President, General Counsel and Secretary of General Signal Corporation since
1997. Previously, she was a partner in the law firm of Jones, Day, Reavis &
Pogue.
Before joining Chubb in 2001, Mr. Hicks was a Managing Director of J.P.
Morgan where he was responsible for its equity research coverage of the property
and casualty insurance industry. Previously, Mr. Hicks was a Senior Research
Analyst with Sanford Bernstein & Co., Inc.
Before rejoining Chubb in 1999, Mr. Jones was a Director of Hiscox Plc and
Managing Director of Hiscox Insurance Company Ltd. since July 1997. Mr. Jones
was previously President and Director of Chubb Insurance Company of Europe, as
well as a Senior Vice President and Managing Director of Chubb & Son Inc.
Prior to joining Chubb in 1996, Mr. Kelso was Executive Vice President of
First Commerce Corporation in New Orleans, where he had also served as Chief
Financial Officer. Mr. Kelso was previously a partner and head of the North
American Banking Practice for The MAC Group (now known as Gemini Consulting), an
international general management consulting firm.
Mr. Sills, who joined the Corporation in 1999, was most recently President
and Chief Executive Officer of Executive Risk, Inc. since 1997. Previously, he
served as Executive Vice President and Chief Underwriting Officer for Executive
Risk, Inc.
14
15
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Incorporated by reference from the Corporation's 2000 Annual Report to
Shareholders, page 65.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended December 31, 2000 are
incorporated by reference from the Corporation's 2000 Annual Report to
Shareholders, pages 38 through 41.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion presents our past results and our expectations for
the near term future. The supplementary financial information and the
consolidated financial statements and related notes, all of which are integral
parts of the following analysis of our results and our financial position, are
incorporated by reference from the Corporation's 2000 Annual Report to
Shareholders, pages 19, 20 and 42 through 63.
Certain statements in this document, as well as certain statements
incorporated by reference herein, may be considered to be "forward looking
statements" as that term is defined in the Private Securities Litigation Reform
Act of 1995, such as statements that include the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", or similar expressions. Such statements are subject to certain risks
and uncertainties. The factors which could cause actual results to differ
materially from those suggested by any such statements include, but are not
limited to, those discussed or identified from time to time in the Corporation's
public filings with the Securities and Exchange Commission and specifically to:
risks or uncertainties associated with the Corporation's expectations with
respect to its market risk evaluations or with respect to announced real estate
plans or rate increases and investment income or cash flow projections and, more
generally, to: general economic conditions including changes in interest rates
and the performance of the financial markets, changes in domestic and foreign
laws, regulations and taxes, changes in competition and pricing environments,
regional or general changes in asset valuations, the occurrence of significant
natural disasters, the inability to reinsure certain risks economically, the
adequacy of loss reserves, as well as general market conditions, competition,
pricing and restructurings. Any forward-looking statements set forth in this
document speak only as of the initial Securities and Exchange Commission filing
date hereof.
Operating income, which excludes realized investment gains and losses, was
$681 million in 2000 compared with $565 million in 1999 and $615 million in
1998. Operating income in 1998 reflects a first quarter restructuring charge of
$26 million after taxes related to the implementation of a cost control
initiative.
Net income, which includes realized investment gains and losses, was $715
million in 2000 compared with $621 million in 1999 and $707 million in 1998.
ACQUISITION OF EXECUTIVE RISK INC.
In July 1999, The Chubb Corporation (Corporation) completed its acquisition
of Executive Risk Inc., a specialty insurance company offering directors and
officers, errors and omissions and professional liability coverages.
Executive Risk shareholders received 1.235 shares of the Corporation's
common stock for each outstanding common share of Executive Risk. In addition,
outstanding Executive Risk stock options were assumed and adjusted as options to
purchase common stock of the Corporation. Approximately 14.3 million shares of
common stock of the Corporation were issued to Executive Risk shareholders
15
16
and an additional 1.8 million shares of common stock of the Corporation were
reserved for issuance upon exercise of the assumed Executive Risk stock options.
The acquisition has been accounted for using the purchase method of
accounting. Therefore, the results of operations of Executive Risk are included
in the Corporation's consolidated results of operations from the date of
acquisition. The assets and liabilities of Executive Risk were recorded at their
estimated fair values at the date of acquisition. The value of the stock options
assumed by the Corporation was included in the purchase price. The total
purchase price was approximately $832 million. The excess of the purchase price
over the estimated fair value of the net assets acquired, amounting to
approximately $517 million, has been recorded as goodwill and is being amortized
over 26 years.
PROPERTY AND CASUALTY INSURANCE
Property and casualty income before taxes was $803 million in 2000 compared
with $626 million in 1999 and $685 million in 1998. The higher earnings in 2000
were due primarily to an improvement in underwriting results, caused in large
part by substantially lower catastrophe losses compared with the prior year. The
decrease in earnings in 1999 was due to deterioration in underwriting results
caused in large part by the effect of inadequate prices resulting from the
prolonged soft market on our standard commercial results, which include multiple
peril, casualty and workers' compensation, and, to a lesser extent, higher
catastrophe losses compared with 1998. Investment income increased in both 2000
and 1999 compared with the respective prior years.
Catastrophe losses were $72 million in 2000, $225 million in 1999 and $173
million in 1998. The 1998 amount was net of reinsurance recoveries of
approximately $130 million related to Hurricane Georges. We did not have any
recoveries from our catastrophe reinsurance program during 2000 or 1999 since
there were no individual catastrophes for which our losses exceeded the initial
retention. Our initial retention level for each catastrophic event is
approximately $100 million in the United States and generally $25 million
outside the United States.
Reported net premiums written amounted to $6.3 billion in 2000, an increase
of 11% compared with 1999. Reported net premiums written increased 4% in 1999
compared with 1998. Premium growth in 2000 and 1999 was affected by the
inclusion of Executive Risk written premiums since the date of acquisition.
Excluding the effect of the acquisition of Executive Risk, premium growth was 8%
in 2000 and 1% in 1999.
Personal coverages accounted for $1.7 billion or 27% of 2000 net premiums
written, standard commercial coverages for $1.8 billion or 28% and specialty
commercial coverages for $2.8 billion or 45%.
Premium growth in personal lines was strong in both 2000 and 1999. In
commercial lines, competition in the worldwide marketplace has made profitable
premium growth difficult. However, our strategy, begun in late 1998, to increase
the pricing in the standard commercial classes and to not renew underperforming
accounts where we could not attain price adequacy has shown increasing success
throughout 1999 and 2000. Further, many of our competitors have also insisted on
higher prices since the latter part of 1999. As a result, the pricing outlook in
the standard commercial classes continues to be favorable.
Substantial premium growth was achieved in 2000 and 1999 outside the United
States, particularly in Europe, our largest foreign market. Non-U.S. premiums
grew 16% and 12% in 2000 and 1999, respectively, in original currency. However,
due to the strength of the U.S. dollar, particularly in 2000, reported non-U.S.
premiums increased by only 9% in 2000 and 10% in 1999.
Underwriting results were near breakeven in 2000 compared with unprofitable
results in 1999 and near breakeven results in 1998. The combined loss and
expense ratio, the common measure of underwriting profitability, was 100.4% in
2000 compared with 102.8% in 1999 and 99.8% in 1998.
The loss ratio was 67.5% in 2000 compared with 70.3% in 1999 and 66.3% in
1998. Losses from catastrophes represented 1.2 percentage points of the loss
ratio in 2000 compared with 4.0 percentage
16
17
points in 1999 and 3.3 percentage points in 1998. Catastrophe losses affecting
results in 2000 and 1999 resulted primarily from weather-related events in the
United States, including in particular Hurricane Floyd in the third quarter of
1999. The 1998 catastrophe losses resulted primarily from the winter ice storms
in Canada in the first quarter, the wind and hail storms in the United States in
the second quarter and Hurricane Georges in Puerto Rico in the third quarter.
Our expense ratio was 32.9% in 2000 compared with 32.5% in 1999 and 33.5%
in 1998. The increase in the expense ratio in 2000 was due to overhead expenses
growing at a somewhat higher rate than written premiums. The lower expense ratio
in 1999 compared with the prior year was due to salary and overhead expenses
decreasing due to a cost control initiative discussed below and a change in
accounting that has resulted in the capitalization of certain costs incurred to
develop computer software for internal use that were previously expensed.
During 1998, we implemented an activity value analysis process that
identified and eliminated low-value activities and improved operational
efficiency while redirecting resources to activities having the greatest
potential to contribute to the Corporation's results. The cost control
initiative resulted in job reductions through a combination of early
retirements, terminations and attrition. Other savings resulted from improved
vendor management and lower consulting expenses and other operating costs. In
the first quarter of 1998, we recorded a restructuring charge of $40 million
related to the implementation of the initiative. The majority of the charge
consisted of accruals for providing enhanced pension benefits and postretirement
medical benefits to employees who accepted an early retirement incentive offer.
The liabilities related to these enhanced benefits have been included in the
pension and postretirement medical benefits liabilities and are being reduced as
benefit payments are made over time. All of the other restructuring costs have
been paid. The initiative was completed with no significant differences from the
original estimates of the restructuring costs.
PERSONAL INSURANCE
Our personal insurance business continued to produce exceptionally strong
results in 2000, measured by both growth and profitability.
Net premiums from personal insurance increased 13% in 2000 compared with a
12% increase in 1999. We continued to grow our personal lines business with the
in-force policy count for all coverages increasing significantly. For most
coverages, such growth exceeded 10% each year. Growth has been achieved while
maintaining our disciplined approach to pricing and risk selection.
Personal lines premiums outside the United States grew significantly in
2000 and 1999, although from a small base. Much of this growth was in Europe
where rates are inadequate. Remedial actions are under way to improve the
profitability of this business.
Our personal insurance business produced substantial underwriting profits
in each of the past three years. The combined loss and expense ratio was 92.9%
in 2000 compared with 89.9% in 1999 and 85.6% in 1998.
Homeowners results were near breakeven in 2000 compared with profitable
results in 1999 as a decrease in catastrophe losses was more than offset by an
unusually high number of large non-catastrophe losses in 2000, particularly in
the first half of the year. Homeowners results in 1999 were less profitable than
in 1998 due to an increase in both catastrophe losses and non-catastrophe
losses. Results in 1999 were also adversely affected by two large losses
aggregating $15 million, net of reinsurance. Catastrophe losses represented 7.3
percentage points of the loss ratio for this class in 2000 compared with 11.8
percentage points in 1999 and 8.5 percentage points in 1998. Homeowners results
were unprofitable in Europe in each of the past three years as rates are
inadequate and we are still building the critical mass necessary to absorb the
costs of operating that franchise.
Our personal automobile business produced substantial profits in each of
the last three years. However, results in 2000 were less profitable due to an
increase in the frequency of losses in the liability component of this business.
Results in each year benefited from stable loss severity.
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Other personal coverages, which include insurance for personal valuables
and excess liability, were highly profitable in each of the past three years, as
favorable loss experience has continued.
STANDARD COMMERCIAL INSURANCE
Net premiums from standard commercial insurance decreased 3% in 2000
compared with an 8% decrease in 1999. The decrease in premiums in both years was
the result of the strategy we put in place in late 1998 to renew good business
at adequate prices and not renew underperforming business where we cannot attain
price adequacy. As a result, retention levels declined during 1999 and 2000. On
the business that has renewed, however, rates have increased steadily and such
increases accelerated in 2000. The market remains firm and shows no signs of
weakening.
Our standard commercial insurance business produced substantial
underwriting losses in each of the past three years, but showed improvement in
2000. The improvement was due primarily to fewer large losses as well as the
progress made on our initiative to increase prices while not renewing
unprofitable accounts. The combined loss and expense ratio was 114.0% in 2000
compared with 123.6% in 1999 and 118.0% in 1998.
Rates are still inadequate. Underpriced business will continue to put
pressure on standard commercial underwriting results in 2001. We will continue
to push for higher rates in 2001.
Multiple peril results were unprofitable in each of the past three years
due, in large part, to inadequate prices. However, such results showed
significant improvement in 2000. The improvement occurred in both the property
and liability components of this business due to a lower frequency of large
losses in both the United States and overseas. Results in the property component
also benefited from an absence of catastrophe losses. Results had deteriorated
in 1999 compared with the prior year due to an increase in the severity of
liability losses as well as several large property losses overseas. There were
virtually no catastrophe losses for this class in 2000. Catastrophe losses
represented 9.6 percentage points of the loss ratio in 1999 and 8.6 percentage
points in 1998.
Results for our casualty business were unprofitable in each of the past
three years. Results in 2000 were similar to those in 1999, as improvement in
the primary liability component was offset by further deterioration in the
automobile component. In 1999, casualty results had deteriorated, primarily in
these two components. Casualty results in each of the past three years were
adversely affected by incurred losses relating to asbestos and toxic waste
claims. The excess liability component of our casualty coverages was modestly
unprofitable in 2000 and 1999 compared with the near breakeven results in 1998
due to increases in the severity of the large losses that are prevalent in this
class as well as declining prices over the past several years. Excess liability
results in each of the past three years benefited from favorable development of
prior year loss reserves. Results for the primary liability component were
unprofitable in each of the past three years, but more so in 1999 due to a
higher frequency of large losses. Primary and excess liability results outside
the United States deteriorated in 2000. Results in the automobile component were
increasingly unprofitable over the past three years due in large part to
inadequate prices, a consequence of the prolonged soft market, and an increased
frequency of losses. Results in 2000 were also adversely affected by uninsured
motorist claims in Ohio, the result of a state supreme court decision that the
uninsured and underinsured motorists coverages of commercial automobile
insurance policies also cover employees and their family members even when they
are driving their personal cars for non-business purposes.
Workers' compensation results were near breakeven in 2000 compared with
results that were similarly unprofitable in 1999 and 1998. The improvement in
2000 was due to higher rates as well as a lower frequency of losses, resulting
in part from our disciplined risk selection during the past two years.
SPECIALTY COMMERCIAL INSURANCE
Reported net premiums from specialty commercial insurance increased by 21%
in 2000 compared with a 9% increase in 1999. Excluding the effect of the
acquisition of Executive Risk, premium growth was about 14% in 2000 and 4% in
1999.
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Our strategy of working closely with our customers and our ability to bring
new products to market and differentiate such products continue to enable us to
renew a large percentage of our executive protection and financial institutions
business. Excluding the effect of the Executive Risk acquisition, executive
protection and financial institutions premiums increased in 2000 by 10% and 24%,
respectively, substantial improvements over the 1999 growth. However, a
competitive market continues to put prices under pressure, particularly for our
executive protection business. Growth in our financial institutions business was
particularly strong in 2000 due to new business as well as rate increases on the
standard commercial component of this business.
Growth in property and marine premiums in 1999 and 2000 was restricted by
the effect on retention levels of pricing initiatives and non-renewing certain
unprofitable accounts. Growth in our other specialty commercial business was
primarily from Chubb Re, our reinsurance business that began operations in 1999.
Our specialty commercial underwriting results were highly profitable in
each of the last three years. The combined loss and expense ratio was 95.9% in
2000 compared with 93.6% in 1999 and 91.5% in 1998.
Property and marine results remained highly unprofitable over the past
three years. The positive effect of the pricing initiative and the culling of
unprofitable accounts was offset in 1999 by higher catastrophe losses and in
2000 by significantly higher losses overseas. Results in all three years were
adversely affected by a high frequency of large property losses. Catastrophe
losses for this class represented 1.7 percentage points of the loss ratio in
2000 compared with 10.2 percentage points in 1999 and 5.7 percentage points in
1998.
Executive protection results were profitable in each of the past three
years on business worldwide due to favorable development of prior year loss
reserves, particularly in the directors and officers and fiduciary liability
components. However, we have been seeing a narrowing of profit margins over the
three most recent accident years from the levels we experienced before that. As
a result, we have begun a rate initiative and we are analyzing our book of
business. We are focusing in particular on our employment practices liability
business, which has been unprofitable.
Our financial institutions business was also profitable in each of the last
three years due to favorable loss experience in the fidelity component of this
business. The standard commercial business written on financial institutions
produced breakeven results in 2000 compared with unprofitable results in 1999
and profitable results in 1998.
Our other commercial classes produced unprofitable results in 2000 compared
with profitable results in 1999 and near-breakeven results in 1998. Our surety
business produced highly profitable results in each of the past three years.
However, such results were less profitable in 2000 due primarily to one $15
million loss, net of reinsurance. Aviation results were highly unprofitable in
each of the past three years.
LOSS RESERVES
Loss reserves are our property and casualty subsidiaries' largest
liability. At the end of 2000, gross loss reserves totaled $11.9 billion
compared with $11.4 billion and $10.4 billion at year-end 1999 and 1998,
respectively. Reinsurance recoverable on such loss reserves was $1.9 billion at
year-end 2000 compared with $1.7 billion and $1.3 billion at the end of 1999 and
1998, respectively. The 2000 and 1999 gross loss reserves and reinsurance
recoverable include amounts related to Executive Risk. Executive Risk has
historically utilized reinsurance to a greater extent because its size limited
the amount of risk it could retain.
Loss reserves, net of reinsurance recoverable, increased by $302 million or
3% in 2000 compared with $699 million or 8% in 1999. The increase in 1999
included $606 million of net reserves assumed upon the acquisition of Executive
Risk. The 1999 increase would have been $549 million greater except that loss
reserves were reduced by payments in that amount during the year related to the
settlement of asbestos-related claims against Fibreboard Corporation. Excluding
the Executive Risk reserves
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assumed and the Fibreboard payments, loss reserves increased 7% in 1999. Reserve
growth each year has occurred primarily in those liability classes that are
characterized by delayed loss reporting and extended periods of settlement.
During 2000, we experienced overall favorable development of $230 million
on loss reserves established as of the previous year-end. This compares with
favorable development of $206 million in 1999 and $218 million in 1998. Such
redundancies were reflected in operating results in these respective years. Each
of the past three years benefited from favorable claim experience for certain
liability classes, offset in part by losses incurred relating to asbestos and
toxic waste claims.
The process of establishing loss reserves is a complex and imprecise
science that reflects significant judgmental factors. This is true because claim
settlements to be made in the future will be impacted by changing rates of
inflation and other economic conditions, changing legislative, judicial and
social environments and changes in our claim handling procedures. In many
liability cases, significant periods of time, ranging up to several years or
more, may elapse between the occurrence of an insured loss, the reporting of the
loss and the settlement of the loss. In fact, more than 60% of our net loss
reserves at December 31, 2000 were for incurred but not reported (IBNR)
losses -- claims that had not yet been reported to us, some of which were not
yet known to the insured, and future development on reported claims.
Judicial decisions and legislative actions continue to broaden liability
and policy definitions and to increase the severity of claim payments. As a
result of this and other societal and economic developments, the uncertainties
inherent in estimating ultimate claim costs on the basis of past experience
continue to further complicate the already complex loss reserving process.
The uncertainties relating to asbestos and toxic waste claims on insurance
policies written many years ago are exacerbated by inconsistent court decisions
and judicial and legislative interpretations of coverage that in some cases have
tended to erode the clear and express intent of such policies and in others have
expanded theories of liability. The industry as a whole is engaged in extensive
litigation over these coverage and liability issues and is thus confronted with
a continuing uncertainty in its efforts to quantify these exposures.
Asbestos remains the most significant and difficult mass tort for the
insurance industry in terms of claims volume and dollar exposure. In the past
year, the continued flow of claims pushed about a half-dozen manufacturers and
users of asbestos products into bankruptcy. To date, approximately 25 major
companies have filed for bankruptcy as a result of asbestos liability. In part
as a result of these bankruptcies, the volume and value of claims against viable
asbestos defendants continue to increase.
Our most significant individual asbestos exposures involve traditional
defendants who manufactured, distributed or installed asbestos products for whom
we wrote excess liability coverages. While these insureds are relatively few in
number, such exposure has increased in recent years due to the increased volume
of claims, the erosion of much of the underlying limits and the bankruptcies of
target defendants.
Our other asbestos exposures are mostly peripheral defendants, including a
mix of manufacturers, distributors and installers of certain products that
contain asbestos as well as premises owners. Generally, these insureds are named
defendants on a regional rather than a nationwide basis. As the financial
resources of traditional asbestos defendants have been depleted, plaintiffs are
targeting these peripheral parties with greater frequency and, in many cases,
for larger awards. In addition, the plaintiffs bar continues to solicit new
claimants through extensive advertising and through asbestos medical screenings.
Class actions are then initiated even though many of the claimants have not
manifested evidence of serious injury. Thus, new asbestos claims and new
exposures on existing claims have continued unabated despite the fact that
practically all manufacturing and usage of asbestos ended nearly two decades
ago. Based on published projections, we expect that we will continue receiving
asbestos claims at the current rate for at least the next several years.
The expanded focus of asbestos litigation beyond asbestos manufacturers and
distributors to installers and premises owners has created in some instances
conflicts among insureds, primary
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insurers and excess insurers, primarily involving questions regarding allocation
of indemnity and expense costs and exhaustion of policy limits. These issues are
generating costly coverage litigation with the potential for inconsistent
results.
A legislative solution to the asbestos claim litigation is being pursued by
some insurers, including Chubb, and major corporate defendants. Any such
solution would require the support of members of the plaintiffs bar. The new
administration coupled with the rash of recent bankruptcies may create the best
opportunity for such a legislative solution.
Significant uncertainty remains as to our ultimate liability relating to
asbestos related claims due to such factors as the long latency period between
asbestos exposure and disease manifestation and the resulting potential for
involvement of multiple policy periods for individual claims as well as the
increase in the volume of claims by plaintiffs claiming exposure but with no
symptoms of asbestos-related disease.
Hazardous waste sites are another significant potential exposure. Under the
federal "Superfund" law and similar state statutes, when potentially responsible
parties (PRPs) fail to handle the clean-up at a site, regulators have the work
done and then attempt to establish legal liability against the PRPs. Most PRPs
named to date are parties who have been generators, transporters, past or
present land owners or past or present site operators. The PRPs, with proper
government authorization in many instances, disposed of toxic materials at a
waste dump site or transported the materials to the site. Most sites have
multiple PRPs. Insurance policies issued to PRPs were not intended to cover the
clean-up costs of pollution and, in many cases, did not intend to cover the
pollution itself. Pollution was not a recognized hazard at the time many of
these policies were written. In more recent years, however, policies
specifically exclude such exposures.
As the costs of environmental clean-up have become substantial, PRPs and
others have increasingly filed claims with their insurance carriers. Litigation
against insurers extends to issues of liability, coverage and other policy
provisions.
There is great uncertainty involved in estimating our liabilities related
to these claims. First, the liabilities of the claimants are extremely difficult
to estimate. At any given site, the allocation of remediation costs among
governmental authorities and the PRPs varies greatly depending on a variety of
factors. Second, different courts have addressed liability and coverage issues
regarding pollution claims and have reached inconsistent conclusions in their
interpretation of several issues. These significant uncertainties are not likely
to be resolved definitively in the near future.
Uncertainties also remain as to the Superfund law itself. Superfund's
taxing authority expired on December 31, 1995. It has not been re-enacted.
Notwithstanding continued pressure by the insurance industry and other
interested parties to achieve a legislative solution that would reform the
liability provisions of the law, federal legislation appears to be at a
standstill. It is currently not possible to predict the direction that any
reforms may take, when they may occur or the effect that any changes may have on
the insurance industry.
Without federal movement on Superfund reform, the enforcement of Superfund
liability is shifting to the states. States are being forced to reconsider
state-level cleanup statutes and regulations. As individual states move forward,
the potential for conflicting state regulation becomes greater. Significant
uncertainty remains as to the cost of remediating the state sites. Because of
the large number of state sites, such sites could prove even more costly in the
aggregate than Superfund sites.
Toxic waste losses appear to be developing as expected due to relatively
stable claim trends. In many cases, claims are being settled for less than
initially anticipated due to various factors, including more efficient site
remediation efforts. However, litigation remains a serious problem.
Litigation costs remain substantial, particularly for hazardous waste
claims. Primary policies provide a limit on indemnity payments but many do not
limit defense costs. This unlimited defense provided in the policies sometimes
leads to the payment of defense costs substantially exceeding the indemnity
exposure. A substantial portion of the funds we have expended to date has been
for legal fees incurred in the prolonged litigation of coverage issues.
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Reserves for asbestos and toxic waste claims cannot be estimated with
traditional loss reserving techniques that rely on historical accident year loss
development factors. We have established case reserves and expense reserves for
costs of related litigation where sufficient information has been developed to
indicate the involvement of a specific insurance policy. In addition, IBNR
reserves have been established to cover additional exposures on both known and
unasserted claims. These reserves are continually reviewed and updated. Incurred
losses relating to asbestos and toxic waste claims were $31 million in 2000, $47
million in 1999 and $68 million in 1998. Further increases in loss reserves in
2001 and future years are possible as legal and factual issues concerning these
claims continue to be clarified. The amount cannot be reasonably estimated.
Management believes that the aggregate loss reserves of the property and
casualty subsidiaries at December 31, 2000 were adequate to cover claims for
losses that had occurred, including both those known to us and those yet to be
reported. In establishing such reserves, management considers facts currently
known and the present state of the law and coverage litigation. However, given
the expansion of coverage and liability by the courts and the legislatures in
the past and the possibilities of similar interpretations in the future,
particularly as they relate to asbestos and toxic waste claims, as well as some
continuing uncertainty in determining what scientific standards will be deemed
acceptable for measuring hazardous waste site clean-up, additional increases in
loss reserves may emerge which would adversely affect results in future periods.
The amount cannot reasonably be estimated at the present time.
CATASTROPHE EXPOSURE
The Corporation's property and casualty subsidiaries have an exposure to
insured losses caused by hurricanes, earthquakes, winter storms, windstorms and
other catastrophic events. The frequency and severity of catastrophes are
unpredictable. The extent of losses from a catastrophe is a function of both the
total amount of insured exposure in an area affected by the event and the
severity of the event. We continually assess our concentration of underwriting
exposures in catastrophe prone areas globally and develop strategies to manage
this exposure through individual risk selection, subject to regulatory
constraints, and through the purchase of catastrophe reinsurance. In recent
years, we have invested in modeling technologies and concentration management
tools that allow us to better monitor and control catastrophe exposures. We also
continue to explore and analyze credible scientific evidence, including the
impact of global climate change, that may affect our potential exposure under
insurance policies.
INVESTMENTS AND LIQUIDITY
Investment income after taxes increased 6% in 2000 compared with 1999 and
9% in 1999 compared with 1998. The growth was due in part to an increase in
invested assets, which reflected strong cash flow from operations over the
period. Growth in both years was also due in part to the inclusion of Executive
Risk investment income since the date of acquisition. Excluding the effect of
the acquisition of Executive Risk, growth was about 3% in 2000 and 5% in 1999.
The effective tax rate on our investment income was 16.4% in 2000 compared with
15.7% in 1999 and 15.3% in 1998. The effective tax rate fluctuates each year as
a result of changes in the percentage of our portfolio invested in tax-exempt
bonds.
Generally, premiums are received by our property and casualty subsidiaries
months or even years before losses are paid under the policies purchased by such
premiums. These funds are used first to make current claim and expense payments.
The balance is invested to augment the investment income generated by the
existing portfolio. Historically, cash receipts from operations, consisting of
insurance premiums and investment income, have provided more than sufficient
funds to pay losses, operating expenses and dividends to the Corporation.
New cash available for investment by the property and casualty subsidiaries
was approximately $560 million in 2000 compared with $940 million in 1999 and
$860 million in 1998. New cash available in 2000 was lower than in 1999 and 1998
due primarily to higher paid losses in 2000 caused in large part by
significantly higher payments on directors and officers liability and excess
liability claims compared
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with previous years. New cash available in 1999 was not affected by the
Fibreboard-related payments during the year since such payments were made from
an escrow account that was funded in 1993.
In 2000, we invested new cash primarily in mortgage-backed securities. In
1999, new cash was invested in tax-exempt bonds and corporate bonds. Also,
during 1999, we reduced our equity securities portfolio by approximately $350
million with $145 million of the proceeds used to fund the purchase of a 28%
interest in Hiscox plc, a U.K. personal and commercial specialty insurer. In
1998, new cash was invested primarily in tax-exempt bonds and, to a lesser
extent, equity securities. In each year, we tried to achieve the appropriate mix
in our portfolio to balance both investment and tax strategies.
The property and casualty subsidiaries maintain sufficient investments in
highly liquid, short-term securities at all times to provide for immediate cash
needs, and the Corporation maintains bank credit facilities that are available
to respond to unexpected cash demands.
CORPORATE AND OTHER
Corporate and other includes investment income earned on corporate invested
assets, interest expense and other expenses not allocable to the operating
subsidiaries, and the results of our real estate and other non-insurance
subsidiaries. Corporate and other produced a loss before taxes of $4 million in
both 2000 and 1999 compared with income of $23 million in 1998. The losses in
2000 and 1999 were primarily due to increasingly higher interest expense each
year, due to the inclusion of interest expense on the debt assumed in connection
with the Executive Risk acquisition in July 1999. In 2000, corporate and other
included income of $10 million from a noncompete payment related to the sale of
the Corporation's 50% interest in Associated Aviation Underwriters, Inc. (AAU).
REAL ESTATE
Real estate operations resulted in a loss before taxes of $4 million in
each of the past three years, which amounts are included in the corporate and
other results for those years. In each year, we sold selected commercial
properties as well as residential properties. Real estate revenues were $75
million in 2000, $97 million in 1999 and $82 million in 1998.
We own approximately $325 million of land which we expect will be developed
in the future. In addition, we own approximately $190 million of commercial
properties and land parcels under lease. We are continuing to explore the sale
of certain of our remaining properties.
Loans receivable, which amounted to $90 million at December 31, 2000, are
primarily purchase money mortgages. Such loans, which were issued in connection
with our joint venture activities and other property sales, are generally
collateralized by buildings and, in some cases, land. We continually evaluate
the ultimate collectibility of such loans and establish appropriate reserves.
The recoverability of the carrying value of our real estate assets is
assessed based on our ability to fully recover costs through a future revenue
stream. The assumptions used reflect a continued improvement in demand for
office space, an increase in rental rates and the ability and intent to obtain
financing in order to hold and develop such remaining properties and protect our
interests over the long term. Management believes that it has made adequate
provisions for impairment of real estate assets. However, if the assets are not
sold or developed as presently contemplated, it is possible that additional
impairment losses may be recognized.
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INVESTMENT GAINS AND LOSSES
Net investment gains realized by the Corporation and its property and
casualty subsidiaries were as follows:
2000 1999 1998
---- ---- ----
(IN MILLIONS)
Equity securities........................................... $(1) $63 $100
Fixed maturities............................................ 8 24 42
Sale of AAU................................................. 45 -- --
--- --- ----
Realized investment gains before tax........................ $52 $87 $142
=== === ====
Realized investment gains after tax......................... $34 $56 $ 92
=== === ====
Decisions to sell securities are governed principally by considerations of
investment opportunities and tax consequences. Thus, realized investment gains
and losses may vary significantly from year to year.
Sales of equity securities in 1999 and 1998 resulted in net realized
investment gains due primarily to the significant appreciation in the United
States equity markets. A primary reason for the sale of fixed maturities in each
of the last three years has been to improve our after-tax portfolio return
without sacrificing quality where market opportunities have existed to do so.
Fixed maturity securities that the Corporation and its insurance
subsidiaries have the ability and intent to hold to maturity are classified as
held-to-maturity. The remaining fixed maturities, which may be sold prior to
maturity to support our investment strategies, such as in response to changes in
interest rates and the yield curve or to maximize after-tax returns, are
classified as available-for-sale. Fixed maturities classified as
held-to-maturity are carried at amortized cost while fixed maturities classified
as available-for-sale are carried at market value. At December 31, 2000, 10% of
the fixed maturity portfolio was classified as held-to-maturity compared with
12% at December 31, 1999 and 15% at December 31, 1998.
The unrealized appreciation or depreciation of investments carried at
market value, which includes equity securities and fixed maturities classified
as available-for-sale, is reflected in a separate component of other
comprehensive income, net of applicable deferred income tax.
The unrealized market appreciation before tax of those fixed maturities
carried at amortized cost was $69 million, $59 million and $138 million at
December 31, 2000, 1999 and 1998, respectively. Such unrealized appreciation was
not reflected in the consolidated financial statements.
Changes in unrealized market appreciation or depreciation of fixed
maturities were due to fluctuations in interest rates.
MARKET RISK
The main objectives in managing the investment portfolios of the
Corporation and its property and casualty subsidiaries are to maximize after-tax
investment income and total investment returns while minimizing credit risks in
order to provide maximum support to the insurance underwriting operations.
Investment strategies are developed based on many factors including underwriting
results and our resulting tax position, regulatory requirements, fluctuations in
interest rates and consideration of other market risks. Investment decisions are
centrally managed by investment professionals based on guidelines established by
management and approved by the boards of directors.
Market risk represents the potential for loss due to adverse changes in the
fair value of financial instruments. Our primary exposure to market risks
relates to our investment portfolio, which exposes the Corporation and its
property and casualty subsidiaries to risks related to interest rates and, to a
lesser extent, credit quality, prepayment, foreign currency exchange rates and
equity prices. Analytical tools and monitoring systems are in place to assess
each of these elements of market risk.
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Interest rate risk is the price sensitivity of a fixed income security to
changes in interest rates. We view the potential changes in price of our fixed
income investments within the overall context of asset and liability management.
Our actuaries estimate the payout pattern of our liabilities, primarily our
property and casualty loss reserves, to determine their duration, which is the
present value of the weighted average payments expressed in years. We set
duration targets for our fixed income investment portfolios after consideration
of the duration of these liabilities and other factors, which we believe
mitigates the overall effect of interest rate risk for the Corporation and its
property and casualty subsidiaries.
The table below provides information about our fixed maturity investments,
which are sensitive to changes in interest rates. The table presents cash flows
of principal amounts and related weighted average interest rates by expected
maturity dates at December 31, 2000 and 1999. The cash flows are based on the
earlier of the call date or the maturity date or, for mortgage-backed
securities, expected payment patterns. Actual cash flows could differ from the
expected amounts.
FIXED MATURITIES
EXPECTED CASH FLOWS OF PRINCIPAL AMOUNTS
AT DECEMBER 31, 2000
---------------------------------------------------------------------------
TOTAL
---------------------
ESTIMATED
THERE- AMORTIZED MARKET
2001 2002 2003 2004 2005 AFTER COST VALUE
---- ---- ---- ---- ---- ------ --------- ---------
(IN MILLIONS)
Tax-exempt............................. $ 662 $ 620 $ 586 $ 921 $1,308 $5,453 $ 9,550 $ 9,945
Average interest rate................ 6.8% 6.1% 5.9% 5.8% 5.6% 5.3% -- --
Taxable -- other than mortgage-backed
securities........................... 281 336 390 377 550 1,619 3,553 3,584
Average interest rate................ 6.2% 6.4% 6.5% 6.7% 6.6% 6.2% -- --
Mortgage-backed securities............. 286 367 281 192 126 862 2,114 2,104
Average interest rate................ 7.2% 7.3% 7.2% 7.2% 7.3% 7.4% -- --
------ ------ ------ ------ ------ ------ ------- -------
Total.................................. $1,229 $1,323 $1,257 $1,490 $1,984 $7,934 $15,217 $15,633
====== ====== ====== ====== ====== ====== ======= =======
AT DECEMBER 31, 1999
---------------------------------------------------------------------------
TOTAL
---------------------
ESTIMATED
THERE- AMORTIZED MARKET
2000 2001 2002 2003 2004 AFTER COST VALUE
---- ---- ---- ---- ---- ------ --------- ---------
(IN MILLIONS)
Tax-exempt............................. $ 475 $ 585 $ 680 $ 549 $ 931 $6,411 $ 9,631 $ 9,669
Average interest rate................ 6.7% 6.7% 6.1% 5.9% 5.8% 5.4% -- --
Taxable -- other than mortgage-backed
securities........................... 97 251 372 429 452 1,779 3,380 3,310
Average interest rate................ 6.6% 6.6% 6.6% 6.4% 6.5% 6.5% -- --
Mortgage-backed securities............. 164 180 231 181 137 782 1,675 1,599
Average interest rate................ 6.7% 6.8% 6.9% 6.8% 6.8% 7.0% -- --
------ ------ ------ ------ ------ ------ ------- -------
Total.................................. $ 736 $1,016 $1,283 $1,159 $1,520 $8,972 $14,686 $14,578
====== ====== ====== ====== ====== ====== ======= =======
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The Corporation and its property and casualty subsidiaries have
consistently invested in high quality marketable securities. As a result, we
believe that we have minimal credit quality risk. Taxable bonds in our domestic
portfolio comprise U.S. Treasury, government agency, mortgage-backed and
corporate securities. Approximately 60% of taxable bonds are issued by the U.S.
Treasury or U.S. government agencies or rated AA or better by Moody's or
Standard and Poor's. Of the tax-exempt bonds, approximately 95% are rated AA or
better with more than 60% rated AAA. Only 1% of our bond portfolio is below
investment grade. Taxable bonds have an average maturity of six years while tax-
exempt bonds mature on average in eight years.
Prepayment risk refers to the changes in prepayment patterns related to
decreases and increases in interest rates that can either shorten or lengthen
the expected timing of the principal repayments and thus the average life and
the effective yield of a security. Such risk exists primarily within our
portfolio of mortgage-backed securities. We monitor such risk regularly and
invest primarily in those classes of mortgage-backed securities that are less
subject to prepayment risk.
Mortgage-backed securities comprised 37% and 33% of our taxable bond
portfolio at year-end 2000 and 1999, respectively. About 50% of our
mortgage-backed securities holdings at December 31, 2000 related to residential
mortgages consisting of government agency pass-through securities, government
agency collateralized mortgage obligations (CMOs) and AAA rated non-agency CMOs
backed by government agency collateral or single family home mortgages. The
majority of the CMOs are actively traded in liquid markets and market value
information is readily available from broker/dealers. An additional 25% of our
mortgage-backed securities were call protected AAA rated commercial securities.
The remaining mortgage-backed holdings were all in investment grade commercial
mortgage-backed securities.
Foreign currency risk is the sensitivity to foreign exchange rate
fluctuations of the market value and investment income related to foreign
currency denominated financial instruments. The functional currency of our
foreign operations is generally the currency of the local operating environment
since their business is primarily transacted in such local currency. We reduce
the risks relating to currency fluctuations by maintaining investments in those
foreign currencies in which our property and casualty subsidiaries have loss
reserves and other liabilities. Such investments have characteristics similar to
our liabilities in those currencies. At December 31, 2000, the property and
casualty subsidiaries held foreign investments of $1.4 billion supporting their
international operations. Such foreign investments have quality and maturity
characteristics similar to our domestic portfolio. The principal currencies
creating foreign exchange rate risk for the property and casualty subsidiaries
are the Canadian dollar, the Euro and the British pound sterling. The table on
page 27 provides information about those fixed maturity investments that are
denominated in these currencies. The table presents cash flows of principal
amounts in U.S. dollar equivalents by expected maturity dates at December 31,
2000 and 1999. Actual cash flows could differ from the expected amounts.
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27
FOREIGN CURRENCY DENOMINATED FIXED MATURITIES
EXPECTED CASH FLOWS OF PRINCIPAL AMOUNTS
AT DECEMBER 31, 2000
-----------------------------------------------------------------
TOTAL
---------------------
ESTIMATED
THERE- AMORTIZED MARKET
2001 2002 2003 2004 2005 AFTER COST VALUE
---- ---- ---- ---- ---- ------ --------- ---------
(IN MILLIONS)
Canadian dollar........................... $23 $21 $29 $26 $31 $232 $362 $377
Euro...................................... 9 24 25 28 14 213 313 317
British pound sterling.................... -- 13 26 30 34 134 237 240
AT DECEMBER 31, 1999
-----------------------------------------------------------------
TOTAL
---------------------
ESTIMATED
THERE- AMORTIZED MARKET
2000 2001 2002 2003 2004 AFTER COST VALUE
---- ---- ---- ---- ---- ------ --------- ---------
(IN MILLIONS)
Canadian dollar........................... $19 $43 $50 $64 $58 $132 $366 $372
Euro...................................... -- 36 32 44 33 159 304 301
British pound sterling.................... 10 -- 28 40 38 112 228 225
Equity price risk is the potential loss arising from adverse changes in the
value of equity securities. In general, equities have more year-to-year price
variability than intermediate term high grade bonds. However, returns over
longer time frames have been consistently higher. Our equity securities are high
quality, diversified across industries and readily marketable. A hypothetical
decrease of 10% in the market prices of the equity securities held at December
31, 2000 and 1999 would have resulted in a decrease of $83 million and $77
million, respectively, in the fair value of the equity securities portfolio.
All of the above risks are monitored on an ongoing basis. A combination of
in-house systems and proprietary models and externally licensed software are
used to analyze individual securities as well as each portfolio. These tools
provide the portfolio managers with information to assist them in the evaluation
of the market risks of the portfolio.
Interest rate risk also exists on our debt obligations. At December 31,
2000, the expected cash flow of principal amounts of such debt obligations were:
a $10 million 7 1/2% term loan in 2001, $100 million of 6 7/8% notes in 2003,
$300 million of 6.15% notes in 2005 and $342 million after 2005 with a weighted
average interest rate of 7.7%.
CAPITAL RESOURCES
In March 1997, the Board of Directors authorized the repurchase of up to
17,500,000 shares of common stock. In July 1998, the Board of Directors
authorized the repurchase of up to an additional 12,500,000 shares. Through
December 31, 2000, the Corporation had repurchased 24,375,000 shares under the
1997 and 1998 authorizations. As of December 31, 2000, 5,625,000 shares remained
under the current share repurchase authorizations. The Corporation repurchased
3,783,400 shares in open-market transactions in 2000 at a cost of $242 million,
2,596,700 shares in 1999 at a cost of $145 million and 8,203,000 shares in 1998
at a cost of $609 million.
The Corporation filed a shelf registration statement which the Securities
and Exchange Commission declared effective in September 1998, under which up to
$600 million of various types of securities may be issued by the Corporation or
Chubb Capital Corporation, a wholly owned subsidiary. No securities have been
issued under this registration statement.
The Corporation has outstanding $300 million of unsecured 6.15% notes due
in 2005 and $100 million of unsecured 6.60% debentures due in 2018. Chubb
Capital has outstanding $100 million of unsecured 6 7/8% notes due in 2003. The
Chubb Capital notes are guaranteed by the Corporation.
27
28
The long term debt obligations of Executive Risk remained in place
subsequent to the acquisition. Chubb Executive Risk Inc., a wholly owned
subsidiary of the Corporation, has outstanding $75 million of unsecured 7 1/8%
notes due in 2007. Executive Risk Capital Trust, wholly owned by Chubb Executive
Risk, has outstanding $125 million of 8.675% capital securities. The sole assets
of the Trust are debentures issued by Chubb Executive Risk. The capital
securities are subject to mandatory redemption in 2027 upon repayment of the
debentures. The capital securities are also subject to mandatory redemption
under certain circumstances beginning in 2007. The Corporation has guaranteed
the unsecured notes and the capital securities.
The Corporation has two credit agreements with a group of banks that
provide for unsecured borrowings of up to $500 million in the aggregate. The
$200 million short term revolving credit facility, which was to have terminated
on July 5, 2000, was extended to July 4, 2001, and may be renewed or replaced.
The $300 million medium term revolving credit facility terminates on July 11,
2002. On the respective termination dates, any loans then outstanding become
payable. There have been no borrowings under these agreements. These facilities
are available for general corporate purposes and to support Chubb Capital's
commercial paper borrowing arrangement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are included in
Item 7, pages 24 through 27 of this report.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of the Corporation at December 31, 2000
and 1999 and for each of the three years in the period ended December 31, 2000
and the Report of Independent Auditors thereon and the Corporation's unaudited
quarterly financial data for the two-year period ended December 31, 2000 are
incorporated by reference from the Corporation's 2000 Annual Report to
Shareholders, pages 42 through 65.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
29
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Corporation's Directors is incorporated by
reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Shareholders on April 24, 2001, pages 2 through 5. Information
regarding the executive officers is included in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Corporation's definitive Proxy Statement
for the Annual Meeting of Shareholders on April 24, 2001, pages 12 through 24
other than the Performance Graphs and the Organization and Compensation
Committee Report appearing on pages 17 through 22.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Corporation's definitive Proxy Statement
for the Annual Meeting of Shareholders on April 24, 2001, pages 6 through 8.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Corporation's definitive Proxy Statement
for the Annual Meeting of Shareholders on April 24, 2001, page 25.
29
30
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS AND 2. SCHEDULES
The financial statements and schedules listed in the accompanying
index to financial statements and financial statement schedules are filed
as part of this report.
3. EXHIBITS
The exhibits listed in the accompanying index to exhibits are filed as
part of this report.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed for the three months ended
December 31, 2000.
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which undertaking shall be
incorporated by reference into registrant's Registration Statements on Form S-8
Nos. 33-29185 (filed June 7, 1989), 33-30020 (filed July 18, 1989), 33-49230
(filed July 2, 1992), 33-49232 (filed July 2, 1992), 333-09273 (filed July 31,
1996), 333-09275 (filed July 31, 1996), 333-58157 (filed June 30, 1998),
333-67347 (filed November 16, 1998), 333-36530 (filed May 8, 2000) and
Post-Effective Amendment No. 2 to Form S-4 on Form S-8 No. 333-73073 (filed July
19, 1999):
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
30
31
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
THE CHUBB CORPORATION
(REGISTRANT)
March 2, 2001
By DEAN R. O'HARE
----------------------------------
(DEAN R. O'HARE, CHAIRMAN AND
CHIEF EXECUTIVE OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
DEAN R. O'HARE Chairman, Chief March 2, 2001
- --------------------------------------------------- Executive Officer and
(DEAN R. O'HARE) Director
Director March 2, 2001
- ---------------------------------------------------
(ZOE BAIRD)
JOHN C. BECK Director March 2, 2001
- ---------------------------------------------------
(JOHN C. BECK)
SHEILA P. BURKE Director March 2, 2001
- ---------------------------------------------------
(SHEILA P. BURKE)
Director March 2, 2001
- ---------------------------------------------------
(JAMES I. CASH, JR.)
PERCY CHUBB, III Director March 2, 2001
- ---------------------------------------------------
(PERCY CHUBB, III)
JOEL J. COHEN Director March 2, 2001
- ---------------------------------------------------
(JOEL J. COHEN)
JAMES M. CORNELIUS Director March 2, 2001
- ---------------------------------------------------
(JAMES M. CORNELIUS)
DAVID H. HOAG Director March 2, 2001
- ---------------------------------------------------
(DAVID H. HOAG)
31
32
SIGNATURE TITLE DATE
WARREN B. RUDMAN Director March 2, 2001
- ---------------------------------------------------
(WARREN B. RUDMAN)
DAVID G. SCHOLEY Director March 2, 2001
- ---------------------------------------------------
(DAVID G. SCHOLEY)
RAYMOND G.H. SEITZ Director March 2, 2001
- ---------------------------------------------------
(RAYMOND G.H. SEITZ)
LAWRENCE M. SMALL Director March 2, 2001
- ---------------------------------------------------
(LAWRENCE M. SMALL)
KAREN HASTIE WILLIAMS Director March 2, 2001
- ---------------------------------------------------
(KAREN HASTIE WILLIAMS)
Director March 2, 2001
- ---------------------------------------------------
(JAMES M. ZIMMERMAN)
DAVID B. KELSO Executive Vice President and March 2, 2001
- --------------------------------------------------- Chief Financial Officer
(DAVID B. KELSO)
HENRY B. SCHRAM Senior Vice President and March 2, 2001
- --------------------------------------------------- Chief Accounting Officer
(HENRY B. SCHRAM)
32
33
THE CHUBB CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
COVERED BY REPORT OF INDEPENDENT AUDITORS
(ITEM 14(A))
ANNUAL REPORT TO
SHAREHOLDERS FORM 10-K
PAGE PAGE
---------------- ---------
Report of Independent Auditors 64 --
Consolidated Balance Sheets at December 31, 2000 and 1999 43 --
Consolidated Statements of Income for the Years Ended Decem-
ber 31, 2000, 1999 and 1998 42 --
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 2000, 1999 and 1998 44 --
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998 45 --
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 2000, 1999 and 1998 45 --
Notes to Consolidated Financial Statements 46 --
Supplementary Information (unaudited)
Quarterly Financial Data 65 --
Schedules:
I -- Consolidated Summary of Investments -- Other
than Investments in Related Parties at
December 31, 2000 -- 35
II -- Condensed Financial Information of Registrant at
December 31, 2000 and 1999 and for the Years
Ended December 31, 2000, 1999 and 1998 -- 36
III -- Consolidated Supplementary Insurance Information
at and for the Years Ended December 31, 2000,
1999 and 1998 -- 39
IV -- Consolidated Reinsurance for the Years Ended De-
cember 31, 2000, 1999 and 1998 -- 40
VI -- Consolidated Supplementary Property and Casualty
Insurance Information for the Years Ended
December 31, 2000, 1999 and 1998 -- 40
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements and notes thereto.
The consolidated financial statements and supplementary information listed
in the above index, which are included in the Annual Report to Shareholders of
The Chubb Corporation for the year ended December 31, 2000, are hereby
incorporated by reference.
33
34
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of The Chubb Corporation of our report dated February 26, 2001 included in
the 2000 Annual Report to Shareholders of The Chubb Corporation.
Our audits also included the financial statement schedules of The Chubb
Corporation listed in Item 14(a). These schedules are the responsibility of the
Corporation's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-3: No. 333-63175, No. 333-67445 and Form S-8: No. 33-29185,
No. 33-30020, No. 33-49230, No. 33-49232, No. 333-09273, No. 333-09275, No.
333-58157, No. 333-67347, No. 333-36530 and Post-Effective Amendment No. 2 to
Form S-4 on Form S-8 No. 333-73073) of our report dated February 26, 2001, with
respect to the consolidated financial statements incorporated herein by
reference, and our report included in the preceding paragraph with respect to
the financial statement schedules included in this Annual Report (Form 10-K) of
The Chubb Corporation.
ERNST & YOUNG LLP
New York, New York
March 26, 2001
34
35
THE CHUBB CORPORATION
SCHEDULE I
CONSOLIDATED SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
(IN MILLIONS)
DECEMBER 31, 2000
AMOUNT
AT WHICH
COST OR SHOWN IN
AMORTIZED MARKET THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
Short term investments................................ $ 605.6 $ 605.6 $ 605.6
--------- --------- ---------
Fixed maturities
Bonds
United States Government and government agencies
and authorities................................ 1,412.0 1,435.0 1,433.6
States, municipalities and political
subdivisions................................... 9,507.2 9,901.1 9,833.9
Foreign.......................................... 1,267.1 1,294.3 1,294.3
Public utilities................................. 293.3 287.4 287.4
All other corporate bonds........................ 2,629.0 2,608.2 2,608.2
--------- --------- ---------
Total bonds............................ 15,108.6 15,526.0 15,457.4
Redeemable preferred stocks......................... 107.9 107.0 107.0
--------- --------- ---------
Total fixed maturities................. 15,216.5 15,633.0 15,564.4
--------- --------- ---------
Equity securities
Common stocks
Banks, trusts and insurance companies............ 9.1 18.2 18.2
Industrial, miscellaneous and other.............. 795.2 776.0 776.0
--------- --------- ---------
Total common stocks.................... 804.3 794.2 794.2
Non-redeemable preferred stocks..................... 35.5 36.4 36.4
--------- --------- ---------
Total equity securities................ 839.8 830.6 830.6
--------- --------- ---------
Total invested assets.................. $16,661.9 $17,069.2 $17,000.6
========= ========= =========
35
36
THE CHUBB CORPORATION
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS -- PARENT COMPANY ONLY
(IN MILLIONS)
DECEMBER 31
2000 1999
---- ----
Assets
Invested Assets
Short Term Investments................................. $ 172.3 $ 106.7
Taxable Fixed Maturities -- Available-for-Sale (cost
$329.2 and $323.8).................................... 324.8 308.9
Equity Securities (cost $104.3 and $131.6)............. 118.3 184.9
-------- --------
TOTAL INVESTED ASSETS............................. 615.4 600.5
Cash...................................................... .1 .5
Investment in Consolidated Subsidiaries................... 6,436.3 5,751.3
Receivable from Consolidated Subsidiary................... 208.5 201.7
Other Assets.............................................. 274.3 219.7
-------- --------
TOTAL ASSETS...................................... $7,534.6 $6,773.7
======== ========
Liabilities
Long Term Debt............................................ $ 400.0 $ 400.0
Dividend Payable to Shareholders.......................... 57.8 56.2
Accrued Expenses and Other Liabilities.................... 95.1 45.7
-------- --------
TOTAL LIABILITIES................................. 552.9 501.9
-------- --------
Shareholders' Equity
Preferred Stock -- Authorized 4,000,000 Shares;
$1 Par Value; Issued -- None........................... -- --
Common Stock -- Authorized 600,000,000 Shares;
$1 Par Value; Issued 178,833,278 and 177,272,322
Shares................................................. 178.8 177.3
Paid-In Surplus........................................... 466.0 418.4
Retained Earnings......................................... 6,492.6 6,008.6
Accumulated Other Comprehensive Income
Unrealized Appreciation (Depreciation) of Investments,
Net of Tax............................................ 220.1 (112.6)
Foreign Currency Translation Losses, Net of Tax........ (68.5) (44.8)
Receivable from Employee Stock Ownership Plan............. (62.5) (74.9)
Treasury Stock, at Cost -- 3,914,105 and 1,782,489
Shares................................................. (244.8) (100.2)
-------- --------
TOTAL SHAREHOLDERS' EQUITY........................ 6,981.7 6,271.8
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $7,534.6 $6,773.7
======== ========
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in the Corporation's 2000
Annual Report to Shareholders.
36
37
THE CHUBB CORPORATION
SCHEDULE II
(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME -- PARENT COMPANY ONLY
(IN MILLIONS)
YEARS ENDED DECEMBER 31
2000 1999 1998
---- ---- ----
Investment Income........................................... $ 41.7 $ 41.9 $ 46.2
Realized Investment Gains................................... 29.4 18.1 23.0
Investment Expenses......................................... (2.1) (2.1) (2.1)
Corporate Expenses.......................................... (52.6) (41.2) (27.7)
------ ------ ------
16.4 16.7 39.4
Federal and Foreign Income Tax.............................. 3.0 6.9 3.9
------ ------ ------
13.4 9.8 35.5
Equity in Net Income of Consolidated Subsidiaries........... 701.2 611.3 671.5
------ ------ ------
NET INCOME............................................. $714.6 $621.1 $707.0
====== ====== ======
The Corporation and its domestic subsidiaries file a consolidated federal
income tax return. The Corporation's federal income tax represents its
allocation of federal income tax under the Corporation's tax allocation
agreements with its subsidiaries.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in the Corporation's 2000
Annual Report to Shareholders.
37
38
THE CHUBB CORPORATION
SCHEDULE II
(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY
(IN MILLIONS)
YEARS ENDED DECEMBER 31
2000 1999 1998
---- ---- ----
Cash Flows from Operating Activities
Net Income................................................ $ 714.6 $ 621.1 $ 707.0
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Equity in Net Income of Consolidated Subsidiaries...... (701.2) (611.3) (671.5)
Realized Investment Gains.............................. (29.4) (18.1) (23.0)
Other, Net............................................. 11.9 16.3 (17.5)
------- ------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES.............................. (4.1) 8.0 (5.0)
------- ------- -------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities................... 68.7 105.5 70.6
Proceeds from Maturities of Fixed Maturities.............. 3.5 30.4 94.5
Proceeds from Sales of Equity Securities.................. 101.4 68.7 97.9
Purchases of Fixed Maturities............................. (69.2) (83.8) (213.5)
Purchases of Equity Securities............................ (53.4) (67.7) (122.7)
Decrease (Increase) in Short Term Investments, Net........ (65.6) (8.5) 322.6
Dividends Received from Consolidated Subsidiaries......... 320.0 300.0 280.0
Other, Net................................................ 40.8 (9.8) (25.1)
------- ------- -------
NET CASH PROVIDED BY INVESTING ACTIVITIES............ 346.2 334.8 504.3
------- ------- -------
Cash Flows from Financing Activities
Proceeds from Issuance of Long Term Debt.................. -- -- 400.0
Repayment of Long Term Debt............................... -- (30.0) (30.0)
Proceeds from Issuance of Common Stock Under
Incentive and Purchase Plans........................... 119.3 22.7 62.8
Repurchase of Shares...................................... (242.3) (145.0) (608.5)
Dividends Paid to Shareholders............................ (229.0) (210.6) (203.4)
Decrease (Increase) in Receivable from Consolidated
Subsidiary............................................. (6.8) 6.4 (131.2)
Other, Net................................................ 16.3 14.2 10.4
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES................ (342.5) (342.3) (499.9)
------- ------- -------
Net Increase (Decrease) in Cash............................. (.4) .5 (.6)
Cash at Beginning of Year................................... .5 -- .6
------- ------- -------
CASH AT END OF YEAR.................................. $ .1 $ .5 $ --
======= ======= =======
- ---------------
In 1999, the Corporation acquired all of the outstanding common shares of
Executive Risk Inc. in exchange for common stock of the Corporation. This
noncash transaction has been excluded from the statements of cash flows.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in the Corporation's 2000
Annual Report to Shareholders.
38
39
THE CHUBB CORPORATION
SCHEDULE III
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(IN MILLIONS)
DECEMBER 31 YEAR ENDED DECEMBER 31
---------------------------------- ---------------------------------
DEFERRED
POLICY NET
ACQUISITION UNPAID UNEARNED PREMIUMS INVESTMENT INSURANCE
SEGMENT COSTS CLAIMS PREMIUMS EARNED INCOME CLAIMS
------- ----------- --------- -------- -------- ---------- ---------
2000
Property and Casualty Insurance
Personal....................... $234.8 $ 803.5 $ 890.2 $1,620.6 $ 963.7
Standard Commercial............ 227.1 5,302.6 884.7 1,809.9 1,416.9
Specialty Commercial........... 380.1 5,798.5 1,741.4 2,715.4 1,747.1
Investments.................... $879.2*
------ --------- -------- -------- ------ --------
$842.0 $11,904.6 $3,516.3 $6,145.9 $879.2 $4,127.7
====== ========= ======== ======== ====== ========
1999
Property and Casualty Insurance
Personal....................... $201.7 $ 778.8 $ 784.1 $1,447.5 $ 836.8
Standard Commercial............ 226.1 5,386.7 920.4 1,944.9 1,704.8
Specialty Commercial........... 351.9 5,269.2 1,618.6 2,259.6 1,400.4
Investments.................... $821.0*
------ --------- -------- -------- ------ --------
$779.7 $11,434.7 $3,323.1 $5,652.0 $821.0 $3,942.0
====== ========= ======== ======== ====== ========
1998
Property and Casualty Insurance
Personal....................... $186.1 $ 688.9 $ 704.4 $1,304.3 $ 681.8
Standard Commercial............ 258.5 5,686.4 1,011.6 1,980.6 1,631.7
Specialty Commercial........... 284.1 3,981.2 1,199.7 2,018.9 1,180.2
Investments.................... $748.9*
------ --------- -------- -------- ------ --------
$728.7 $10,356.5 $2,915.7 $5,303.8 $748.9 $3,493.7
====== ========= ======== ======== ====== ========
YEAR ENDED DECEMBER 31
------------------------------------
AMORTIZATION OTHER
OF DEFERRED INSURANCE
POLICY OPERATING
ACQUISITION COSTS AND PREMIUMS
SEGMENT COSTS EXPENSES** WRITTEN
------- ------------ ---------- --------
2000
Property and Casualty Insurance
Personal....................... $ 446.7 $ 96.4 $1,722.8
Standard Commercial............ 502.8 132.8 1,786.6
Specialty Commercial........... 695.9 167.2 2,823.8
Investments....................
-------- ------ --------
$1,645.4 $396.4 $6,333.2
======== ====== ========
1999
Property and Casualty Insurance
Personal....................... $ 401.3 $ 73.1 $1,524.5
Standard Commercial............ 538.5 152.7 1,842.2
Specialty Commercial........... 589.9 133.3 2,334.4
Investments....................
-------- ------ --------
$1,529.7 $359.1 $5,701.1
======== ====== ========
1998
Property and Casualty Insurance
Personal....................... $ 370.1 $ 72.7 $1,364.7
Standard Commercial............ 554.0 145.6 2,005.8
Specialty Commercial........... 540.2 134.1 2,133.0
Investments....................
-------- ------ --------
$1,464.3 $352.4 $5,503.5
======== ====== ========
- ---------------
* Property and casualty assets are available for payment of claims and expenses
for all classes of business; therefore, such assets and the related
investment income have not been allocated to the underwriting segments.
** Other insurance operating costs and expenses does not include amortization of
goodwill and other charges.
39
40
THE CHUBB CORPORATION
SCHEDULE IV
CONSOLIDATED REINSURANCE
(IN MILLIONS)
YEARS ENDED DECEMBER 31
PROPERTY AND CASUALTY INSURANCE PREMIUMS EARNED
----------------------------------------------- PERCENTAGE OF
CEDED ASSUMED AMOUNT
DIRECT TO OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------ --------- ---------- ------ -------------
2000.................................... $6,550.2 $786.9 $382.6 $6,145.9 6.2
======== ====== ====== ========
1999.................................... $6,037.1 $631.6 $246.5 $5,652.0 4.4
======== ====== ====== ========
1998.................................... $5,624.7 $461.5 $140.6 $5,303.8 2.7
======== ====== ====== ========
THE CHUBB CORPORATION
SCHEDULE VI
CONSOLIDATED SUPPLEMENTARY PROPERTY AND CASUALTY INSURANCE INFORMATION
(IN MILLIONS)
YEARS ENDED DECEMBER 31
CLAIMS AND CLAIM
ADJUSTMENT
EXPENSES INCURRED
RELATED TO
---------------------- PAID CLAIMS AND
CURRENT PRIOR CLAIM ADJUSTMENT
YEAR YEARS EXPENSES
-------- -------- ----------------
2000............................................ $4,357.7 $(230.0) $3,825.2
======== ======= ========
1999............................................ $4,147.6 $(205.6) $3,848.9
======== ======= ========
1998............................................ $3,712.1 $(218.4) $3,008.4
======== ======= ========
40
41
THE CHUBB CORPORATION
EXHIBITS
(ITEM 14(A))
DESCRIPTION
(2) -- Plan of acquisition, reorganization, arrangement,
liquidation or succession
Agreement and Plan of Merger dated as of February 6, 1999
among Executive Risk Inc., the registrant and Excalibur
Acquisition, Inc. incorporated by reference to Exhibit
(99.2) of the registrant's Report to the Securities and
Exchange Commission on Form 8-K dated February 6, 1999.
(3) -- Articles of Incorporation and By-Laws
Restated Certificate of Incorporation. Incorporated by
reference to Exhibit (3) of the registrant's Report to the
Securities and Exchange Commission on Form 10-Q for the
six months ended June 30, 1996.
Certificate of Amendment to the Restated Certificate of
Incorporation. Incorporated by reference to Exhibit (3) of
the registrant's Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31,
1998.
Certificate of Correction of Certificate of Amendment to the
Restated Certificate of Incorporation. Incorporated by
reference to Exhibit (3) of the registrant's Report to the
Securities and Exchange Commission on Form 10-K for the
year ended December 31, 1998.
Restated By-Laws filed herewith.
(4) -- The registrant is not filing any instruments evidencing any
indebtedness since the total amount of securities
authorized under any single instrument does not exceed 10%
of the total assets of the registrant and its subsidiaries
on a consolidated basis. Copies of such instruments will
be furnished to the Securities and Exchange Commission
upon request.
Rights Agreement dated as of March 12, 1999 between The
Chubb Corporation and First Chicago Trust Company of New
York as Rights Agent. Incorporated by reference to Exhibit
99.1 of the registrant's Report to the Securities and
Exchange Commission on Form 8-K dated March 12, 1999.
(10) -- Material contracts
The Chubb Corporation Producer Stock Incentive Program
incorporated by reference to Exhibit (4.3) of the
registrant's Report to the Securities and Exchange
Commission on Amendment No. 2 to Form S-3 No. 333-67445
dated January 25, 1999.
Executive Compensation Plans and Arrangements.
The Chubb Corporation Long-Term Stock Incentive Plan
(2000) incorporated by reference to Exhibit A of the
registrant's definitive proxy statement for the Annual
Meeting of Shareholders held on April 25, 2000.
The Chubb Corporation Annual Incentive Compensation Plan
(1996) incorporated by reference to Exhibit A of the
registrant's definitive proxy statement for the Annual
Meeting of Shareholders held on April 23, 1996.
The Chubb Corporation Long-Term Stock Incentive Plan
(1996), as amended, incorporated by reference to
Exhibit (10) of the registrant's Report to the
Securities and Exchange Commission on Form 10-K for the
year ended December 31, 1998.
The Chubb Corporation Stock Option Plan for Non-Employee
Directors (1996), as amended, incorporated by reference
to Exhibit (10) of the registrant's Report to the
Securities and Exchange Commission on Form 10-K for the
year ended December 31, 1998.
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DESCRIPTION
The Chubb Corporation Long-Term Stock Incentive Plan
(1992), as amended, incorporated by reference to
Exhibit (10) of the registrant's Report to the
Securities and Exchange Commission on Form 10-K for the
year ended December 31, 1998.
The Chubb Corporation Stock Option Plan for Non-Employee
Directors (1992), as amended, incorporated by reference
to Exhibit (10) of the registrant's Report to the
Securities and Exchange Commission on Form 10-K for the
year ended December 31, 1998.
The Chubb Corporation Deferred Compensation Plan for
Directors, as amended, incorporated by reference to
Exhibit (10) of the registrant's Report to the
Securities and Exchange Commission on Form 10-K for the
year ended December 31, 1998.
The Chubb Corporation Executive Deferred Compensation Plan
incorporated by reference to Exhibit (10) of the
registrant's Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31,
1998.
The Chubb Corporation Estate Enhancement Program
incorporated by reference to Exhibit (10) of the
registrant's Report to the Securities and Exchange
Commission on Form 10-Q for the three months ended
March 31, 1999.
The Chubb Corporation Estate Enhancement Program for
Non-Employee Directors incorporated by reference to
Exhibit (10) of the registrant's Report to the
Securities and Exchange Commission on Form 10-Q for the
three months ended March 31, 1999.
Executive Severance Agreement, as amended, incorporated by
reference to Exhibit (10) of the registrant's Report to
the Securities and Exchange Commission on Form 10-K for
the year ended December 31, 1994.
Executive Severance Agreement incorporated by reference to
Exhibit (10) of the registrant's Report to the
Securities and Exchange Commission on Form 10-K for the
year ended December 31, 1995.
Executive Severance Agreements incorporated by reference
to Exhibit (10) of the registrant's Report to the
Securities and Exchange Commission on Form 10-K for the
year ended December 31, 1997.
Executive Severance Agreement incorporated by reference to
Exhibit (10) of the registrant's Report to the
Securities and Exchange Commission on Form 10-K for the
year ended December 31, 1998.
(11) -- Computation of earnings per share incorporated by reference
from Note (17) of the notes to consolidated financial
statements of the 2000 Annual Report to Shareholders.
(13) -- Pages 19, 20, 38 through 65 of the 2000 Annual Report to
Shareholders.
(21) -- Subsidiaries of the registrant filed herewith.
(23) -- Consent of Independent Auditors (see page 34 of this
report).
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