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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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO________
Commission File No. 1-8661
THE CHUBB CORPORATION
(Exact name of registrant as specified in its charter)
NEW JERSEY 13-2595722
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
15 MOUNTAIN VIEW ROAD, P.O. BOX 1615
WARREN, NEW JERSEY 07061-1615
(Address of principal executive offices) (Zip Code)
(908) 903-2000
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Common Stock, par value $1 per share New York Stock Exchange
Series A Participating Cumulative
Preferred Stock Purchase Rights New York Stock Exchange
(Title of each class) (Name of each exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X. No. .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant was $13,506,798,832 as of March 9, 1998.
168,518,126
Number of shares of common stock outstanding as of March 9, 1998
DOCUMENTS INCORPORATED BY REFERENCE
Portions of The Chubb Corporation 1997 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
28, 1998 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 two
industries: property and casualty insurance and real estate. On May 13, 1997,
the Corporation completed the sale of its life and health insurance subsidiaries
to Jefferson-Pilot Corporation. Accordingly, the life and health insurance
subsidiaries have been classified as discontinued operations in the consolidated
financial statements. The Corporation and its subsidiaries employed
approximately 11,000 persons worldwide on December 31, 1997.
Revenues, income from continuing operations before income tax and
identifiable assets for each industry segment for the three years ended December
31, 1997 are included in Note (14) of the notes to consolidated financial
statements incorporated by reference from the Corporation's 1997 Annual Report
to Shareholders.
The property and casualty insurance subsidiaries provide insurance
coverages principally in the United States, Canada, Europe and parts of
Australia, Latin America and the Far East. The real estate subsidiaries have no
international operations. Revenues, income from operations before income tax and
identifiable assets of the property and casualty insurance subsidiaries by
geographic area for the three years ended December 31, 1997 are included in Note
(15) of the notes to consolidated financial statements incorporated by reference
from the Corporation's 1997 Annual Report to Shareholders.
PROPERTY AND CASUALTY INSURANCE GROUP
The Property and Casualty Insurance Group (the Group) is composed of
Federal Insurance Company (Federal), Pacific Indemnity Company (Pacific
Indemnity), Vigilant Insurance Company (Vigilant), Great Northern Insurance
Company (Great Northern), Chubb Custom Insurance Company (Chubb Custom), Chubb
National Insurance Company (Chubb National), Chubb Indemnity Insurance Company
(Chubb Indemnity), Chubb Insurance Company of New Jersey (Chubb New Jersey),
Texas Pacific Indemnity Company, Northwestern Pacific Indemnity Company, Chubb
Insurance Company of Canada, Chubb Insurance Company of Europe, S.A., Chubb
Insurance Company of Australia Limited, Chubb do Brasil Companhia de Seguros and
Chubb Atlantic Indemnity Ltd.
The Group presently underwrites most forms of property and casualty
insurance. All members of the Group write non-participating policies. Several
members of the Group also write participating policies, particularly in the
workers' compensation class of business, under which dividends are paid to the
policyholders.
Premiums Written
An analysis of the Group's premiums written during the past three years is
shown in the following table:
DIRECT REINSURANCE REINSURANCE NET
PREMIUMS PREMIUMS PREMIUMS PREMIUMS
YEAR WRITTEN ASSUMED(A) CEDED(A) WRITTEN
- ---- -------- ----------- ----------- --------
(IN MILLIONS)
1995............................. $4,907.3 $747.3 $1,348.6 $4,306.0
1996............................. 5,166.5 436.8 829.5 4,773.8
1997............................. 5,524.4 162.9 239.3 5,448.0
- ---------------
(a) Intercompany items eliminated.
Reinsurance premiums assumed and ceded decreased in 1996 and 1997 due to
changes in reinsurance agreements with the Royal & Sun Alliance Insurance Group
plc (Sun Alliance). These changes are described in Note (11) of the notes to
consolidated financial statements incorporated by reference from the
Corporation's 1997 Annual Report to Shareholders.
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3
The net premiums written during the last five years for major classes of
the Group's business are incorporated by reference from page 16 of the
Corporation's 1997 Annual Report to Shareholders.
One or more members of the Group are licensed and transact business in each
of the 50 states of the United States, the District of Columbia, Puerto Rico,
the Virgin Islands, Canada, Europe and parts of Australia, Latin America and the
Far East. In 1997, approximately 84% 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%, New Jersey with 6% and Pennsylvania 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 4% was
produced in Canada.
Underwriting Results
A frequently used industry measurement of property and casualty insurance
underwriting results is the combined loss and expense ratio. This ratio is the
sum of the ratio of incurred losses and related loss adjustment expenses to
premiums earned (loss ratio) plus the ratio of underwriting expenses to premiums
written (expense ratio) after reducing both premium amounts by dividends to
policyholders. When the combined ratio is under 100%, underwriting results are
generally considered profitable; when the combined ratio is over 100%,
underwriting results are generally considered unprofitable. Investment income,
other non-underwriting income or expense and income taxes are not reflected in
the combined ratio. The profitability of property and casualty insurance
companies depends on income from both underwriting operations and investments.
The net premiums and the loss, expense and combined loss and expense ratios
of the Group for the last five years are shown in the following table:
NET PREMIUMS
(IN MILLIONS) COMBINED
---------------------- LOSS AND
LOSS EXPENSE EXPENSE
YEAR WRITTEN EARNED RATIOS RATIOS RATIOS
- ---- ------- ------ ------ ------- --------
1993............................. $ 3,646.3 $ 3,504.8 82.5% 32.3% 114.8%
1994............................. 3,951.2 3,776.3 67.0 32.5 99.5
1995............................. 4,306.0 4,147.2 64.7 32.1 96.8
1996............................. 4,773.8 4,569.3 66.2 32.1 98.3
1997............................. 5,448.0 5,157.4 64.5 32.4 96.9
--------- --------- ------- ------- ---------
Total for five years ended
December 31, 1997............. $22,125.3 $21,155.0 68.3% 32.3% 100.6%
========= ========= ======= ======= =========
Results for 1993 includes the effects of a $675.0 million increase in
unpaid claims related to an agreement for the settlement of asbestos-related
litigation and a $125.0 million return premium to the Group related to the
commutation of a medical malpractice reinsurance agreement. Excluding the
effects of these items, the loss ratio, the expense ratio and the combined loss
and expense ratio were 65.5%, 33.5% and 99.0%, respectively, for the year 1993
and 65.5%, 32.5% and 98.0%, respectively, for the five years ended December 31,
1997.
The combined loss and expense ratios during the last five years for major
classes of the Group's business are incorporated by reference from page 16 of
the Corporation's 1997 Annual Report to Shareholders.
Another frequently used measurement in the property and casualty insurance
industry is the ratio of statutory net premiums written to policyholders'
surplus. At December 31, 1997 and 1996, such ratio for the Group was 2.13 and
1.93, respectively. The increase in the ratio in 1997 was due to Federal
distributing its investment in a real estate subsidiary to the Corporation in
the form of a dividend.
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Producing and Servicing of Business
In the United States and Canada, the Group is represented by approximately
3,600 independent agents and accepts business on a regular basis from an
estimated 450 insurance brokers. In most instances, these agents and brokers
also represent other companies which compete with the Group. The offices
maintained by the Group assist these agents and brokers in producing and
servicing the Group's business. In addition to the administrative offices in
Warren, New Jersey, the Group operates 5 zone offices and 61 branch and service
offices in 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. Overseas business was also obtained from
reinsurance assumed on a quota share basis from certain subsidiaries of Sun
Alliance. Effective January 1, 1997, this reinsurance agreement was terminated.
In conducting its overseas business, the Group reduces the risks relating to
currency fluctuations by maintaining investments in those foreign currencies in
which the Group transacts business, with characteristics similar to the
liabilities in those currencies. The net asset or liability exposure to the
various foreign currencies is regularly reviewed.
Business for the Group is also produced through participation in a number
of underwriting pools and syndicates including, among others, Associated
Aviation Underwriters, Cargo Reinsurance Association, American Cargo War Risk
Reinsurance Exchange and American Accident Reinsurance Group. Such pools and
syndicates provide underwriting capacity for risks which an individual insurer
cannot prudently underwrite because of the magnitude of the risk assumed or
which can be more effectively handled by one organization due to the need for
specialized loss control and other services.
Reinsurance
In accordance with the normal practice of the insurance industry, the Group
assumes and cedes reinsurance with other insurers or reinsurers. These
reinsurance arrangements 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. For many years, a portion of the insurance business
written by the Group was reinsured on a quota share basis with a subsidiary of
Sun Alliance. Effective January 1, 1997, this reinsurance agreement was
terminated. Additional information related to the Group's ceded reinsurance with
the subsidiary of Sun Alliance is included in Note (11) of the notes to
consolidated financial statements incorporated by reference from the
Corporation's 1997 Annual Report to Shareholders and in Item 7 on pages 17 and
18 of this report. Most of the Group's remaining treaty reinsurance arrangements
consist of excess of loss and catastrophe contracts with other insurers or
reinsurers which protect against a specified part or all of certain types of
losses over stipulated amounts arising from any one occurrence or event. In
certain circumstances, reinsurance is also effected by negotiation on individual
risks. The amount of each risk retained by the Group is subject to maximum
limits which vary by line of business and type of coverage. Retention limits are
continually reviewed and are revised periodically as the Group's capacity to
underwrite risks changes. Additional information related to the Group's
reinsurance programs is included in Item 7 of this report on pages 17 and 18.
Reinsurance contracts do not relieve the Group of its obligation to the
policyholders.
The collectibility of reinsurance is subject to the solvency of the
reinsurers. The Group is selective in regard to its reinsurers, placing
reinsurance with only those reinsurers with strong balance sheets and superior
underwriting ability. The Group monitors the financial strength of its
reinsurers on an ongoing basis. As a result, uncollectible amounts have not been
significant.
The Group has an exposure to insured losses caused by hurricanes,
earthquakes, winter storms, windstorms and other catastrophic events. The
frequency and severity of catastrophes are unpredict-
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5
able. The extent of losses from a catastrophe is a function of both the total
amount of insured exposure in an area affected by the event and the severity of
the event. The Group continually assesses its concentration of underwriting
exposures in catastrophe prone areas and develops strategies to manage this
exposure through individual risk selection, subject to regulatory constraints,
and through the purchase of catastrophe reinsurance. The Group has invested in
modeling techniques that allow it to better monitor catastrophe exposures. In
addition, the Group maintains records showing concentrations of risk in
catastrophe prone areas such as California (earthquake and brush fires) and the
Southeast coast of the United States (hurricanes). In recent years, the Group
has increased its initial retention limit for each catastrophic event. The Group
has also raised its reinsurance coverage limits for each event. The Group's
current principal catastrophe reinsurance program provides coverage for
individual catastrophic events of approximately 73% of losses between $100.0
million and $450.0 million.
Unpaid Claims and Claim Adjustment Expenses and Related Amounts Recoverable
from Reinsurers
Insurance companies are required to establish a liability in their accounts
for the ultimate costs (including claim adjustment expenses) of claims which
have been reported but not settled and of claims which have been incurred but
not reported. Insurance companies are also required to report as assets the
portion of such liability that will be recovered from reinsurers.
The process of establishing the liability for unpaid claims and claim
adjustment expenses is an imprecise science subject to variables that are
influenced by both internal and external factors. This is true because claim
settlements to be made in the future will be impacted by changing rates of
inflation (particularly medical cost inflation) and other economic conditions,
changing legislative, judicial and social environments and changes in the
Group's claim handling procedures. In many liability cases, significant periods
of time, ranging up to several years or more, may elapse between the occurrence
of an insured loss, the reporting of the loss to the Group and the settlement of
the loss. Approximately 60% of the Group's net unpaid claims and claim
adjustment expenses at December 31, 1997 were for IBNR--claims which had not yet
been reported to the Group, some of which were not yet known to the insured, and
future development on reported claims. In spite of this imprecision, financial
reporting requirements dictate that insurance companies report a single amount
as the estimate of unpaid claims and claim adjustment expenses as of each
evaluation date. These estimates are continually reviewed and updated. Any
resulting adjustments are reflected in current operating results.
The Group's estimates of losses for reported claims are established
judgmentally on an individual case basis. Such estimates are based on the
Group's particular experience with the type of risk involved and its knowledge
of the circumstances surrounding each individual claim. These estimates are
reviewed on a regular basis or as additional facts become known. The reliability
of the estimation process is monitored through comparison with ultimate
settlements.
The Group's estimates of losses for unreported claims are principally
derived from analyses of historical patterns of the development of paid and
reported losses by accident year for each class of business. This process relies
on the basic assumption that past experience, adjusted for the effects of
current developments and likely trends, is an appropriate basis for predicting
future outcomes. For certain classes of business where anticipated loss
experience is less predictable because of the small number of claims and/or
erratic claim severity patterns, the Group's estimates are based on both
expected and actual reported losses. Salvage and subrogation estimates are
developed from patterns of actual recoveries.
The Group's estimates of unpaid claim adjustment expenses are based on
analyses of the relationship of projected ultimate claim adjustment expenses to
projected ultimate losses for each class of business. Claim staff has discretion
to override these expense formulas where judgment indicates such action is
appropriate.
The Group's estimates of reinsurance recoverable related to reported and
unreported claims and claim adjustment expenses represent the portion of such
liabilities that will be recovered from reinsurers. Amounts recoverable from
reinsurers are recognized as assets at the same time and in a manner consistent
with the liabilities associated with the reinsured policies.
5
6
The anticipated effect of inflation is implicitly considered when
estimating liabilities for unpaid claims and claim adjustment expenses.
Estimates of the ultimate value of all unpaid claims are based in part on the
development of paid losses, which reflect actual inflation. Inflation is also
reflected in the case estimates established on reported open claims which, when
combined with paid losses, form another basis to derive estimates of reserves
for all unpaid claims. There is no precise method for subsequently evaluating
the adequacy of the consideration given to inflation, since claim settlements
are affected by many factors.
The following table provides a reconciliation of the beginning and ending
liability for unpaid claims and claim adjustment expenses, net of reinsurance
recoverable, and a reconciliation of the ending net liability to the
corresponding liability on a gross basis for the years ended December 31, 1997,
1996 and 1995:
YEARS ENDED DECEMBER 31
------------------------------
1997 1996 1995
---- ---- ----
(IN MILLIONS)
Net liability, beginning of year....................... $7,755.9 $7,614.5 $6,932.9
------- ------- -------
Net incurred claims and claim adjustment expenses
Provision for claims occurring in the current year... 3,372.3 3,053.6 2,705.8
Decrease in estimates for claims occurring in prior
years............................................. (65.3) (42.8) (35.8)
------- ------- -------
3,307.0 3,010.8 2,670.0
------- ------- -------
Net payments for claims and claim expenses related to
Current year......................................... 1,080.0 980.0 737.7
Prior years.......................................... 1,418.3 1,889.4 1,250.7
------- ------- -------
2,498.3 2,869.4 1,988.4
------- ------- -------
Net liability, end of year............................. 8,564.6 7,755.9 7,614.5
Reinsurance recoverable, end of year................... 1,207.9 1,767.8 1,973.7
------- ------- -------
Gross liability, end of year........................... $9,772.5 $9,523.7 $9,588.2
======= ======= =======
As reestimated at December 31, 1997, the liability for unpaid claims and
claim adjustment expenses, net of reinsurance recoverable, as established at the
previous year-end was redundant by $65.3 million. This compares with favorable
development of $42.8 million and $35.8 million during 1996 and 1995,
respectively. Such redundancies were reflected in the Group's operating results
in these respective years. Each of the past three years benefited from favorable
claim severity trends for certain liability classes; this was offset each year
in varying degrees by increases in claims and claim adjustment expenses relating
to asbestos and toxic waste claims.
As a result of the changes to the reinsurance agreements with Sun Alliance,
there were portfolio transfers of gross loss reserves and reinsurance
recoverable as of January 1, 1996 and 1997. The effect of these portfolio
transfers was a decrease in gross loss reserves of $183.8 million and $209.3
million and a decrease in reinsurance recoverable of $470.0 million and $244.3
million in 1997 and 1996, respectively.
Unpaid claims and claim adjustment expenses, net of reinsurance
recoverable, increased by $808.7 million in 1997 compared with $141.4 million
and $681.6 million in 1996 and 1995, respectively. The 1996 increase would have
been greater except that loss reserves were reduced as the result of significant
payments during the year related to the settlement of asbestos-related claims
against Fibreboard Corporation. The Fibreboard reserves and related loss
payments are presented in the table on page 7. The Fibreboard settlement is
further discussed in Item 7 of this report on pages 21 and 22.
Excluding the Fibreboard reserves and the effect of the portfolio
transfers, loss reserves, net of reinsurance recoverable, increased by $516.5
million or 7% in 1997, $562.9 million or 9% in 1996, and $731.8 million or 12%
in 1995. Substantial reserve growth has occurred each year in those liability
classes, primarily excess liability and executive protection, that are
characterized by delayed loss
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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 1997 was approximately 3% higher than the number at year-end 1996,
which was in turn 7% higher than that at year-end 1995. Such increases were due
in part to a shift for certain liability classes toward a book of business with
more frequent and less severe claims, offset somewhat in 1997 by a significantly
lower number of outstanding property claims at year-end 1997 due to the absence
of catastrophes toward the end of the year.
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 21 through 24.
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, 1997, 1996 and 1995. Reinsurance recoveries related to such claims
are not significant.
YEARS ENDED DECEMBER 31
-------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ------------------------------ ------------------------------
FIBREBOARD ALL FIBREBOARD ALL FIBREBOARD ALL
RELATED OTHER TOTAL RELATED OTHER TOTAL RELATED OTHER TOTAL
---------- ----- ----- ---------- ----- ----- ---------- ----- -----
(IN MILLIONS)
Net liability, beginning of
year........................ $542.7 $415.9 $ 958.6 $999.2 $343.8 $1,343.0 $1,049.4 $240.9 $1,290.3
Net incurred claims and claim
adjustment expenses......... 6.0 119.2 125.2 5.0 145.7 150.7 10.0 171.8 181.8
Net payments for claims....... -- (8.6)(a) (8.6) 461.5 73.6 535.1 60.2 68.9 129.1
------ ------ -------- ------ ------ -------- -------- ------ --------
Net liability, end of year.... $548.7 $543.7 $1,092.4 $542.7 $415.9 $ 958.6 $ 999.2 $343.8 $1,343.0
====== ====== ======== ====== ====== ======== ======== ====== ========
(a) As a result of the termination of the reinsurance agreements with Sun
Alliance, there was a portfolio transfer of asbestos and toxic waste loss
reserves as of January 1, 1997. The effect of the portfolio transfer was to
increase loss reserves by $55.6 million and decrease paid losses by the same
amount. The loss portfolio transfer had no effect on incurred claims and
claim adjustment expenses.
There were approximately 3,700 asbestos claims outstanding at December 31,
1997 compared with 3,900 asbestos claims outstanding at December 31, 1996 and
4,700 asbestos claims outstanding at December 31, 1995. In 1997, approximately
1,300 claims were opened and 1,500 claims were closed. In 1996, approximately
1,800 claims were opened and 2,600 claims were closed. In 1995, approximately
2,600 claims were opened and 1,300 claims were closed. Generally, an asbestos
claim is established for each lawsuit against an insured where potential
liability has been determined to exist under a policy issued by a member of the
Group. However, when multiple insurers respond to one or more lawsuits involving
an insured and a member of the Group is not the principal insurer in directing
the litigation, generally, all asbestos litigation involving that insured is
counted as one claim. Therefore, a counted claim can have from one to thousands
of claimants. As a result, management does not believe the above claim count
data is meaningful for analysis purposes. Indemnity payments per claim have
varied over time due primarily to wide 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 800 toxic waste claims outstanding at December 31,
1997 and 1996 and 700 toxic waste claims outstanding at December 31, 1995.
Approximately 300 claims were opened in 1997, 400 claims were opened in 1996 and
300 claims were opened in 1995. There were approximately 300 claims closed in
1997 and 1996 and 200 claims closed in 1995. 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.
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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 1997. The top line of the
table shows the estimated liability for unpaid claims and claim adjustment
expenses recorded at the balance sheet date for each of the indicated years.
This liability represents the estimated amount of losses and loss adjustment
expenses for claims arising in all prior years that are unpaid at the balance
sheet date, including losses that had been incurred but not yet reported to the
Group.
The upper section of the table shows the reestimated amount of the
previously recorded net liability based on experience as of the end of each
succeeding year. The estimate is increased or decreased as more information
becomes known about the frequency and severity of claims for each individual
year. The increase or decrease is reflected in the current year's operating
results. The "cumulative deficiency (redundancy)" as shown in the table
represents the aggregate change in the reserve estimates from the original
balance sheet dates through December 31, 1997. The amounts noted are cumulative
in nature; that is, an increase in a loss estimate that related to a prior
period occurrence generates a deficiency in each intermediate year. For example,
a deficiency recognized in 1993 relating to losses incurred prior to December
31, 1987, such as the $675.0 million increase in loss reserves related to the
Fibreboard settlement, would be included in the cumulative deficiency amount for
each year in the period 1987 through 1992. Yet, the deficiency would be
reflected in operating results only in 1993. The effect of changes in estimates
of the liabilities for claims occurring in prior years on income before income
taxes in each of the past three years is shown in the reconciliation table on
page 6.
In each of the years 1987 through 1996, there was favorable development for
certain liability classes as the result of favorable claim severity trends. In
each of these years, this favorable development was offset, in varying degrees,
by unfavorable development related to additional provisions for asbestos and
toxic waste claims. The years 1987 through 1992 in particular reflect the
effects of the $675.0 million increase in loss reserves related to the
Fibreboard settlement. The cumulative net deficiencies experienced relating to
asbestos and toxic waste claims were also, to varying degrees, the result of:
(1) an increase in the actual number of claims filed; (2) an increase in the
number of unasserted claims estimated; (3) an increase in the severity of actual
and unasserted claims; and (4) an increase in litigation costs associated with
such claims.
Conditions and trends that have affected development of the liability for
unpaid claims and claim adjustment expenses in the past will not necessarily
recur in the future. Accordingly, it is not appropriate to extrapolate future
redundancies or deficiencies based on the data in this table.
The middle section of the table on page 9 shows the cumulative amount paid
with respect to the reestimated liability as of the end of each succeeding year.
For example, in the 1987 column, as of December 31, 1997 the Group had paid
$2,954.1 million of the currently estimated $4,420.0 million of claims and claim
adjustment expenses that were unpaid at the end of 1987; thus, an estimated
$1,465.9 million of losses incurred through 1987 remain unpaid as of December
31, 1997, approximately 75% of which relates to asbestos and toxic waste claims.
The lower section of the table on page 9 shows the gross liability,
reinsurance recoverable and net liability recorded at each year-end beginning
with 1992 and the reestimation of these amounts as of December 31, 1997. 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 1987 1988 1989 1990 1991 1992 1993 1994 1995
---------- ---- ---- ---- ---- ---- ---- ---- ---- ----
(IN MILLIONS)
Net Liability for Unpaid Claims and
Claim Adjustment Expenses............ $2,818.6 $3,374.3 $3,880.1 $4,301.1 $4,743.9 $5,267.6 $6,450.0 $6,932.9 $7,614.5
Net Liability Reestimated as of:
One year later...................... 2,776.9 3,360.5 3,846.2 4,272.3 4,716.3 5,932.4 6,420.3 6,897.1 7,571.7
Two years later..................... 2,835.9 3,336.0 3,854.2 4,244.7 5,368.5 5,904.1 6,363.1 6,874.5 7,520.9
Three years later................... 2,831.0 3,359.8 3,839.8 4,933.0 5,336.5 5,843.5 6,380.4 6,829.8
Four years later.................... 2,891.7 3,385.1 4,567.4 4,941.7 5,302.6 5,894.6 6,338.1
Five years later.................... 2,961.0 4,203.9 4,602.5 4,969.5 5,389.5 5,863.3
Six years later..................... 3,897.2 4,265.2 4,686.3 5,079.3 5,375.3
Seven years later................... 3,993.7 4,387.6 4,800.4 5,094.2
Eight years later................... 4,157.1 4,522.5 4,817.2
Nine years later.................... 4,304.9 4,550.7
Ten years later..................... 4,420.0
Cumulative Net Deficiency
(Redundancy)......................... 1,601.4 1,176.4 937.1 793.1 631.4 595.7 (111.9) (103.1) (93.6)
Cumulative Net Deficiency Related to
Asbestos and Toxic Waste Claims...... 2,121.3 2,030.3 1,901.3 1,756.3 1,508.5 1,348.6 572.9 457.7 275.9
Cumulative Amount of
Net Liability Paid as of:
One year later...................... 694.7 761.6 880.4 919.1 931.2 1,039.9 1,272.0 1,250.7 1,889.4
Two years later..................... 1,108.3 1,226.3 1,383.9 1,407.2 1,479.9 1,858.5 1,985.7 2,550.7 2,678.2
Three years later................... 1,419.1 1,555.1 1,715.9 1,808.7 2,083.0 2,332.3 3,015.8 3,073.7
Four years later.................... 1,651.6 1,778.8 1,958.6 2,292.0 2,386.9 3,181.4 3,264.5
Five years later.................... 1,818.2 1,966.1 2,346.9 2,490.2 3,125.8 3,323.0
Six years later..................... 1,961.9 2,307.9 2,500.9 3,174.7 3,200.4
Seven years later................... 2,281.0 2,422.7 3,120.6 3,200.4
Eight years later................... 2,370.5 3,009.5 3,126.5
Nine years later.................... 2,952.4 3,014.2
Ten years later..................... 2,954.1
Gross Liability, End of Year.......... $7,220.9 $8,235.4 $8,913.2 $9,588.2
Reinsurance Recoverable, End of
Year................................ 1,953.3 1,785.4 1,980.3 1,973.7
------- ------- ------- -------
Net Liability, End of Year............ $5,267.6 $6,450.0 $6,932.9 $7,614.5
======= ======= ======= =======
Reestimated Gross Liability........... $7,869.1 $8,340.7 $9,020.2 $9,647.0
Reestimated Reinsurance Recoverable... 2,005.8 2,002.6 2,190.4 2,126.1
------- ------- ------- -------
Reestimated Net Liability............. $5,863.3 $6,338.1 $6,829.8 $7,520.9
======= ======= ======= =======
Cumulative Gross Deficiency
(Redundancy)........................ $ 648.2 $ 105.3 $ 107.0 $ 58.8
======= ======= ======= =======
DECEMBER 31
-----------------
YEAR ENDED 1996 1997
---------- ---- ----
Net Liability for Unpaid Claims and
Claim Adjustment Expenses............ $7,755.9 $8,564.6
Net Liability Reestimated as of:
One year later...................... 7,690.6
Two years later.....................
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)......................... (65.3)
Cumulative Net Deficiency Related to
Asbestos and Toxic Waste Claims...... 125.2
Cumulative Amount of
Net Liability Paid as of:
One year later...................... 1,418.3
Two years later.....................
Three years later...................
Four years later....................
Five years later....................
Six years later.....................
Seven years later...................
Eight years later...................
Nine years later....................
Ten years later.....................
Gross Liability, End of Year.......... $9,523.7 $9,772.5
Reinsurance Recoverable, End of
Year................................ 1,767.8 1,207.9
------- -------
Net Liability, End of Year............ $7,755.9 $8,564.6
======= =======
Reestimated Gross Liability........... $9,519.3
Reestimated Reinsurance Recoverable... 1,828.7
-------
Reestimated Net Liability............. $7,690.6
=======
Cumulative Gross Deficiency
(Redundancy)........................ $ (4.4)
=======
- ---------------
The cumulative deficiencies for the years 1987 through 1992 include the effect
of the $675.0 million increase in claims and claim adjustment expenses related
to the Fibreboard settlement.
9
10
Members of the Group are required to file annual statements with insurance
regulatory authorities prepared on an accounting basis prescribed or permitted
by such authorities (statutory basis). The differences between the liability for
unpaid claims and claim adjustment expenses, net of reinsurance recoverable,
reported in the accompanying consolidated financial statements in accordance
with generally accepted accounting principles (GAAP) and that reported in the
annual statutory statements of the U.S. subsidiaries are as follows:
DECEMBER 31
--------------------
1997 1996
---- ----
(IN MILLIONS)
Net liability reported on a statutory basis -- U.S.
subsidiaries.............................................. $8,086.3 $7,305.2
Additions (reductions):
Unpaid claims and claim adjustment expenses of foreign
subsidiaries........................................... 553.9 528.8
Other reserve differences................................. (75.6) (78.1)
-------- --------
Net liability reported on a GAAP basis...................... $8,564.6 $7,755.9
======== ========
Investments
Investment decisions are centrally managed by investment professionals
based on guidelines established by management and approved by the board of
directors for each member of the Group.
The main objectives in managing the investment portfolio of the Group are
to maximize after-tax investment income and total investment returns while
minimizing credit risks in order to provide maximum support to the insurance
underwriting operations. To accomplish this, the investment function must be
highly integrated with the operating functions and capable of responding to the
changing conditions in the marketplace. Investment strategies are developed
based on many factors including underwriting results and the Group's resulting
tax position, regulatory requirements, fluctuations in interest rates and
consideration of other market risks.
The investment portfolio of the Group is primarily comprised of high
quality bonds, principally tax-exempt, U.S. Treasury, government agency,
mortgage-backed securities and corporate issues. In addition, the portfolio
includes equity securities held primarily with the objective of capital
appreciation.
In 1997, the Group invested new cash primarily in tax-exempt bonds and, to
a lesser extent, corporate bonds and mortgage-backed securities. In 1996, the
Group invested new cash primarily in mortgage-backed securities and tax-exempt
bonds. In 1995, the Group invested new cash primarily in tax-exempt bonds. In
each year, the Group tried to achieve the appropriate mix in its portfolio to
balance both investment and tax strategies. At December 31, 1997 and 1996, 68%
of the Group's fixed maturity portfolio was invested in tax-exempt bonds
compared with 73% at December 31, 1995.
The investment results of the Group for each of the past three years are
shown in the following table.
AVERAGE PERCENT EARNED
INVESTED INVESTMENT ----------------------
YEAR ASSETS(A) INCOME(B) BEFORE TAX AFTER TAX
- ---- --------- ---------- ---------- ---------
(IN MILLIONS)
1995............................. $ 9,342.3 $603.0 6.5% 5.4%
1996............................. 10,333.8 646.1 6.3 5.3
1997............................. 11,725.9 711.2 6.1 5.1
- ---------------
(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
CHUBB & SON INC.
Chubb & Son Inc., a wholly-owned subsidiary of the Corporation, was
incorporated in 1959 under the laws of New York as a successor to the
partnership of Chubb & Son which was organized in 1882 by Thomas Caldecot Chubb
to act as underwriter and manager of insurance companies. Through December 31,
1997, Chubb & Son Inc. was the manager of Federal, Vigilant, Great Northern,
Chubb Custom, Chubb National, Chubb Indemnity and Chubb New Jersey and also
provided certain services to Pacific Indemnity and other members of the Property
and Casualty Insurance Group for which it was reimbursed. Acting subject to the
supervision and control of the Boards of Directors of the members of the Group,
Chubb & Son Inc. provided day to day executive management and operating
personnel and made available the economy and flexibility inherent in the common
operation of a group of insurance companies.
On December 31, 1997, all management and service agreements between Chubb &
Son Inc. and the insurers listed above were terminated. Effective January 1,
1998, Federal became the manager of Vigilant, Pacific Indemnity, Great Northern,
Chubb National, Chubb Indemnity and Chubb New Jersey. The terms of the new
management agreements are substantially similar to the management agreements
previously in effect with Chubb & Son Inc. The employees of Chubb & Son Inc.
were transferred to the newly-constituted Chubb & Son division of Federal, which
now performs the management and other services previously performed by Chubb &
Son Inc.
REAL ESTATE GROUP
The Real Estate Group is composed of Bellemead Development Corporation and
its subsidiaries. The Real Estate Group is involved in commercial development
activities primarily in New Jersey and residential development activities
primarily in central Florida.
In October 1996, the Corporation announced that it was exploring the
possible sale of all or a portion of its real estate assets. In March 1997, the
Corporation entered into an agreement with a prospective purchaser to perform
due diligence in anticipation of executing a contract for the sale of
substantially all of its commercial properties. In June 1997, a definitive
agreement was reached with the purchaser. In November, the sale of almost all of
the properties covered by the agreement reached in June was closed for $736.9
million. The buyer is a joint venture formed by Paine Webber Real Estate
Securities Inc., Morgan Stanley Real Estate Fund II, L.P. and Gale & Wentworth,
L.L.C. Closing on the few remaining properties under the agreement is expected
to occur in 1998. In addition to the November sale to the joint venture, several
other commercial properties as well as residential properties were sold in 1997.
The Corporation is continuing to explore the sale of certain of its remaining
properties. The Corporation plans to retain approximately $375.0 million of
undeveloped land which is expected to be developed in the future. In addition,
the Corporation plans to retain certain properties and land parcels under lease.
Additional information related to the Corporation's real estate operations is
included in Item 7 of this report on pages 27 and 28.
DISCONTINUED OPERATIONS
On May 13, 1997, the Corporation completed the sale of Chubb Life Insurance
Company of America and its subsidiaries, Chubb Colonial Life Insurance Company
and Chubb Sovereign Life Insurance Company, to Jefferson-Pilot Corporation for
$875.0 million in cash, subject to various closing adjustments, none of which
were material.
In 1996, the Corporation recognized a loss of $22.0 million related to the
sale of the life and health insurance subsidiaries. The purchase price was not
adjusted to reflect results of operations subsequent to December 31, 1996.
Therefore, the discontinued life and health insurance operations did not affect
the Corporation's net income in 1997 and will not affect net income in future
periods. Earnings from the discontinued life and health insurance operations
were $48.5 million and $42.2 million, including realized investment gains of
$8.2 million and $14.2 million, in 1996 and 1995, respectively.
11
12
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 Property and Casualty Insurance 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.
In December 1993, the National Association of Insurance Commissioners
adopted a risk-based capital formula for property and casualty insurance
companies. This 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, 1997, each member of
the Group had more than sufficient capital to meet the risk-based capital
requirement.
Regulatory requirements applying to premium rates vary from state to state,
but generally provide that rates not be "excessive, inadequate or unfairly
discriminatory." Rates for many lines of business, including automobile and
homeowners insurance, are subject to prior regulatory approval in many states.
However, in certain states, prior regulatory approval of rates is not required
for most lines of insurance which the Group underwrites. Ocean marine insurance
rates are exempt from regulation.
Subject to regulatory requirements, the Group's management determines the
prices charged for its policies based on a variety of factors including claim
and claim adjustment expense experience, inflation, tax law and rate changes,
and anticipated changes in the legal environment, both judicial and legislative.
Methods for arriving at prices vary by type of business, exposure assumed and
size of risk. Underwriting profitability is affected by the accuracy of these
assumptions, by the willingness of
12
13
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 more than 3,000 property and casualty insurance companies in the
United States operating independently or in groups and no single company or
group is dominant. According to A.M. Best, the Group is the 12th largest United
States property and casualty insurance group based on 1996 net premiums written.
The relatively large size and underwriting capacity of the Group provide
opportunities not available to smaller companies.
The property and casualty insurance industry in the United States has a
history of cyclical performance with successive periods of deterioration and
improvement over time. Price competition increased in the property and casualty
marketplace during 1987 and has continued through 1997, particularly in the
commercial classes. The Group continues to be selective in the writing of new
business and to reinforce the sound relationships with customers who appreciate
the stability, expertise and added value the Group provides.
In all states, insurers authorized to transact certain classes of property
and casualty insurance are required to become members of an insolvency fund. In
the event of the insolvency of a licensed insurer writing a class of insurance
covered by the fund in the state, all members are assessed to pay certain claims
against the insolvent insurer. Fund assessments are proportionately based on the
members' written premiums for the classes of insurance written by the insolvent
insurer. A portion of these assessments is recovered in certain states through
premium tax offsets and policyholder surcharges. In 1997, such assessments to
the members of the Group amounted to approximately $2.3 million. The amount of
future assessments cannot be reasonably estimated.
State insurance regulation requires insurers to participate in assigned
risk plans, reinsurance facilities and joint underwriting associations, which
are mechanisms that generally provide applicants with various basic insurance
coverages when they are not available in voluntary markets. Such mechanisms are
most prevalent for automobile and workers' compensation insurance, but a
majority of states also mandate participation in Fair Plans or Windstorm Plans,
which provide basic property coverages. Some states also require insurers to
participate in facilities that provide homeowners and crime insurance.
Participation is based upon the amount of a company's voluntary written premiums
in a particular state for the classes of insurance involved. These involuntary
market plans generally are underpriced and produce unprofitable underwriting
results.
In several states, insurers, including members of the Group, participate in
market assistance plans. Typically, a market assistance plan is voluntary, of
limited duration and operates under the supervision of the insurance
commissioner to provide assistance to applicants unable to obtain commercial and
personal liability and property insurance. The assistance may range from
identifying sources where coverage may be obtained to pooling of risks among the
participating insurers.
Although the federal government and its regulatory agencies generally do
not directly regulate the business of insurance, federal initiatives often have
an impact on the business in a variety of ways. Current and proposed federal
measures which may significantly affect the insurance business include
securities litigation reform, tort reform, hazardous waste removal and liability
measures, containment of medical costs, employee benefits regulation, automobile
safety regulation, financial services
13
14
deregulation including the removal of barriers preventing banks from engaging in
the insurance business and the taxation of insurance companies.
Insurance companies are also affected by a variety of state and federal
legislative and regulatory measures as well as by decisions of their courts that
define and extend the risks and benefits for which insurance is provided. These
include redefinitions of risk exposure in areas such as product liability and
commercial general liability as well as extension and protection of employee
benefits, including pension, 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 21 through 24.
ITEM 2. PROPERTIES
The executive offices of the Corporation and the administrative offices of
the Property and Casualty Group are in Warren, New Jersey. The Real Estate
Group's corporate headquarters is located in Roseland, New Jersey. The Property
and Casualty Insurance Group maintains zone administrative and branch offices in
major cities throughout the United States and also has offices in Canada,
Europe, Australia, the Far East and Latin America. Office facilities are leased
with the exception of a building in Branchburg, New Jersey. Management considers
its office facilities suitable and adequate for the current level of operations.
See Note (12) of the notes to consolidated financial statements incorporated by
reference from the Corporation's 1997 Annual Report to Shareholders.
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are defendants in various lawsuits
arising out of their businesses. It is the opinion of management that the final
outcome of these matters will not materially affect the consolidated financial
position of the registrant.
Information regarding certain litigation to which property and casualty
insurance subsidiaries of the Corporation are a party is included in Item 7 of
this report on pages 21 through 24.
14
15
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, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
YEAR OF
AGE(A) ELECTION(B)
------ -----------
Dean R. O'Hare, Chairman of the Corporation................. 55 1972
Douglas A. Batting, Executive Vice President of Chubb & Son
Inc.(c)................................................... 55 1996
John P. Cavoores, Executive Vice President of Chubb & Son
Inc.(c)................................................... 40 1996
Robert P. Crawford, Jr., Executive Vice President of the
Corporation(d)............................................ 56 1994
John J. Degnan, President of the Corporation................ 53 1994
Gail E. Devlin, Senior Vice President of the Corporation.... 59 1981
Edward Dunlop, Senior Vice President of the
Corporation(d)............................................ 57 1995
David S. Fowler, Senior Vice President of the Corporation... 52 1989
Henry G. Gulick, Vice President and Secretary of the
Corporation............................................... 54 1975
David B. Kelso, Executive Vice President of the
Corporation............................................... 45 1996
Charles M. Luchs, Executive Vice President of Chubb & Son
Inc.(c)................................................... 58 1996
Andrew A. McElwee, Jr., Senior Vice President of the
Corporation............................................... 43 1997
Glenn A. Montgomery, Senior Vice President of the
Corporation............................................... 45 1997
Thomas F. Motamed, Executive Vice President of the
Corporation............................................... 49 1997
Donn H. Norton, Executive Vice President of the
Corporation............................................... 56 1985
Michael O'Reilly, Executive Vice President of the
Corporation............................................... 54 1976
Robert Rusis, Senior Vice President and General Counsel of
the Corporation........................................... 64 1990
Henry B. Schram, Senior Vice President of the Corporation... 51 1985
- ---------------
(a) Ages listed above are as of April 28, 1998.
(b) Date indicates year first elected or designated as an executive
officer.
(c) In connection with the establishment of the Chubb & Son division of
Federal Insurance Company, Messrs. Batting, Cavoores and Luchs were
elected Executive Vice Presidents of the Chubb & Son division of
Federal effective January 1, 1998.
(d) Messrs. Crawford and Dunlop retired as executive officers of the
registrant effective December 31, 1997.
All of the foregoing officers serve at the pleasure of the Board of
Directors of the Corporation or listed subsidiary and have been employees of the
Corporation or a subsidiary of the Corporation for more than five years except
for David B. Kelso. Prior to joining Chubb in 1996, Mr. Kelso was Executive Vice
President of First Commerce Corporation in New Orleans, where he had also served
as Chief Financial Officer. Mr. Kelso was previously a partner and head of the
North American Banking Practice for The MAC Group (now known as Gemini
Consulting), an international general management consulting firm.
15
16
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
Incorporated by reference from the Corporation's 1997 Annual Report to
Shareholders, page 62.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended December 31, 1997 are
incorporated by reference from the Corporation's 1997 Annual Report to
Shareholders, pages 36 and 37.
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 1997 Annual Report to
Shareholders, pages 15, 16 and 38 through 59.
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 & Exchange Commission and specifically to:
risks or uncertainties associated with the Corporation's expectations with
respect to its activity value analysis program, year 2000 liabilities, its
market risk evaluations or with respect to announced real estate plans or
premium growth 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.
Operating income from continuing operations, which excludes realized
investment gains and losses, was $701 million in 1997 compared with $434 million
in 1996 and $584 million in 1995. Operating income in 1996 reflects a fourth
quarter charge of $160 million after taxes related to the write-down of the
carrying value of certain real estate assets.
Income from continuing operations, which includes realized investment gains
and losses related to such operations, was $770 million in 1997 compared with
$486 million in 1996 and $655 million in 1995. 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.
In May 1997, the Corporation completed the sale of its life and health
insurance operations to Jefferson-Pilot Corporation for $875 million in cash,
subject to closing adjustments, none of which were material. The life and health
insurance operations have been classified as discontinued operations.
Net income, which includes the results of the discontinued operations,
amounted to $770 million in 1997 compared with $513 million in 1996 and $697
million in 1995.
PROPERTY AND CASUALTY INSURANCE
Property and casualty earnings were substantially higher in 1997 than in
1996 and 1995. Property and casualty income after taxes was $670 million in 1997
compared with $561 million in 1996 and
16
17
$563 million in 1995. The increase in earnings in 1997 was due to highly
profitable underwriting results as well as strong growth in investment income
compared with 1996. Earnings in 1996 were adversely affected by higher
catastrophe losses, resulting primarily from the winter storms in the eastern
part of the United States in the first quarter. Investment income increased in
1996 compared with the prior year. Earnings in 1995 benefited from highly
profitable underwriting results.
Catastrophe losses were $57 million in 1997, $142 million in 1996 and $64
million in 1995. Our initial retention level for each catastrophic event is
approximately $100 million. We did not have any recoveries from our catastrophe
reinsurance coverage during the past three years since there were no individual
catastrophes for which our losses exceeded the initial retention.
Reported net premiums written amounted to $5.4 billion in 1997, an increase
of 14% compared with 1996. Reported net premiums written increased 11% in 1996
compared with 1995. Personal coverages accounted for $1.3 billion or 24% of 1997
premiums written and commercial coverages for $4.1 billion or 76%. A portion of
the increase in premiums written in both 1997 and 1996 was due to changes in
certain reinsurance agreements, which are discussed below.
For many years, a portion of the U.S. insurance business written by the
Corporation's property and casualty subsidiaries was reinsured on a quota share
basis with a subsidiary of the Sun Alliance Group plc. Similarly, a subsidiary
of the Corporation assumed a portion of Sun Alliance's property and casualty
business on a quota share basis. Effective January 1, 1996, the agreements
pertaining to the exchange of reinsurance were amended to reduce the portion of
each company's business reinsured with the other. Consequently, during 1996, the
Corporation's property and casualty subsidiaries retained a greater portion of
the business they wrote directly and assumed less reinsurance from Sun Alliance.
As a result of the 1996 merger of Sun Alliance with Royal Insurance Holdings
plc, these agreements were terminated effective January 1, 1997. Therefore, in
1997, the property and casualty subsidiaries retained an even greater portion of
the business they wrote directly and assumed no reinsurance from Sun Alliance.
There was an additional impact on net premiums written in the first quarter of
1996 and 1997 due to the effect of the portfolio transfers of unearned premiums
as of January 1 of each year resulting from the changes in retention.
A comparison of reported net premiums written with net premiums written
adjusted to reflect the changes to the reinsurance agreements with Sun Alliance
follows:
1997 1996 1995
---- ---- ----
(in millions)
Reported net premiums written............................. $5,448 $4,774 $4,306
Premiums assumed from Sun Alliance........................ (4) 203 368
------ ------ ------
Net premiums written, excluding premiums assumed from
Sun Alliance............................................ 5,452 4,571 3,938
Portfolio transfers of unearned premiums.................. 175 92
Increase in retention -- 1997............................. 392
------ ------
Adjusted net premiums written (1997 compared with 1996)... $4,885 4,479
======
Increase in retention -- 1996............................. 202
------ ------
Adjusted net premiums written (1996 compared with 1995)... $4,277 $3,938
====== ======
Net premiums written, as adjusted, increased 9% in 1997 compared with 1996.
Similarly, net premiums written, as adjusted, increased 9% in 1996 compared with
1995.
After a review of the costs and benefits of our casualty excess of loss
reinsurance program, effective January 1, 1996, we modified the program,
principally for the excess liability and executive protection classes. The
changes included an increase in the initial retention for each loss from $5
million to $10 million and an increase in the initial aggregate amount of losses
retained for each year before reinsurance becomes available. These changes in
our casualty reinsurance program increased net premiums written in 1996 by
approximately $130 million compared with the prior year. During 1996, we
continued to evaluate the relative costs and benefits of the program. As a
result, effective
17
18
January 1, 1997, we again modified the program, increasing the initial retention
for each loss from $10 million to $25 million. This change in our casualty
reinsurance program increased net premiums written in 1997 by approximately $65
million compared with 1996. These changes have had a positive impact on the cash
flows and resulting investment income of the property and casualty subsidiaries.
Premium growth in 1997 and 1996 was also due to the selective writing of
new business, exposure growth on existing business and the purchase of
additional coverages by current customers. The worldwide marketplace continued
to be competitive, particularly in the commercial classes in the United States.
Competitors continued to place significant pressure on pricing as they attempted
to maintain or increase market share. As a result, price increases continued to
be difficult to achieve. In this environment, we have focused on our specialty
lines where we emphasize the added value we provide to our customers.
Substantial premium growth in both years was achieved outside the United States
from our international branch network.
Underwriting results were profitable in each of the past three years. The
combined loss and expense ratio, the common measure of underwriting
profitability, was 96.9% in 1997 compared with 98.3% in 1996 and 96.8% in 1995.
The loss ratio was 64.5% in 1997 compared with 66.2% in 1996 and 64.7% in
1995. The loss ratios continue to reflect the favorable experience resulting
from the consistent application of our disciplined underwriting standards.
Losses from catastrophes represented 1.1 percentage points of the loss ratio in
1997 compared with 3.1 percentage points in 1996 and 1.5 percentage points in
1995.
Our expense ratio was 32.4% in 1997 compared with 32.1% in both 1996 and
1995.
Reported premium growth in the first quarter of 1998 will be distorted when
compared with 1997 due to the Sun Alliance related transactions in the first
quarter of 1997. As a result, reported net premiums written are expected to show
a decline in the first quarter of 1998.
During the fourth quarter of 1997, the Corporation began an activity value
analysis process to identify and then eliminate low-value activities and to
improve operational efficiency so that we can reduce expenses and redirect
resources to those current activities and new initiatives that have the greatest
potential to contribute to the future results of the Corporation. Implementation
will commence in the second quarter of 1998. The cost control initiative will
result in job reductions in both the home office and the branch network. While
we have not yet fully quantified the impact of the initiative, we hope to
achieve annual pre-tax savings in the $100 to $150 million range, beginning in
1999. Such savings are based on the elimination of certain payroll and
payroll-related costs, lease costs and other operating costs.
The Corporation expects to record a restructuring charge in the first
quarter of 1998 related to the implementation of the cost control initiative.
The amount of the charge has not yet been quantified.
PERSONAL INSURANCE
Reported premiums from personal insurance increased 26% in 1997 compared
with a 20% increase in 1996. The effect on net premiums written of the changes
to the reinsurance agreement with Sun Alliance was as follows:
1997 1996 1995
---- ---- ----
(in millions)
Reported net premiums written............................... $1,306 $1,039 $867
Portfolio transfers of unearned premiums.................... 66 31
Increase in retention -- 1997............................... 139
------ ------
Adjusted net premiums written (1997 compared with 1996)..... $1,101 1,008
======
Increase in retention -- 1996............................... 64
------ ----
Adjusted net premiums written (1996 compared with 1995)..... $ 944 $867
====== ====
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Net premiums written, as adjusted, increased 9% in 1997 compared with 1996
and 9% in 1996 compared with 1995. We continued to grow our homeowners and other
non-automobile business in non-catastrophe prone areas while maintaining our
disciplined approach to pricing and risk selection. Personal automobile premiums
increased as a result of an increase in the number of in-force policies for
high-value automobiles.
Our personal insurance business produced substantial underwriting profits
in each of the past three years. The combined loss and expense ratio was 83.1%
in 1997 compared with 91.7% in 1996 and 87.1% in 1995.
The profitability of our homeowners business each year is affected
substantially by the amount of catastrophe losses we incur. Homeowners results
were highly profitable in 1997, benefiting from modest catastrophe losses and
reduced loss frequency. Results for this class were unprofitable in 1996 as
catastrophe losses, particularly those caused by the winter storms, adversely
affected results. Homeowners results were profitable in 1995 due to lower loss
frequency. Catastrophe losses represented only 2.9 percentage points of the loss
ratio for this class in 1997 compared with 16.7 percentage points in 1996 and
10.3 percentage points in 1995.
Our automobile business produced substantial profits in each of the last
three years. Results in each year benefited from stable loss frequency and
severity. Automobile results were adversely affected each year by losses from
the mandated business that we are required by law to accept for those
individuals who cannot obtain coverage in the voluntary market.
Other personal coverages, which include insurance for personal valuables
and excess liability, were highly profitable in each of the past three years.
Personal excess liability profitability increased in 1996 and again in 1997 due
to favorable loss experience.
COMMERCIAL INSURANCE
Reported premiums from commercial insurance increased 17% in 1997 compared
with 15% in 1996. The effect on net premiums written of the changes to the
reinsurance agreement with Sun Alliance was as follows:
1997 1996 1995
---- ---- ----
(in millions)
Reported net premiums written............................. $4,146 $3,532 $3,071
Portfolio transfers of unearned premiums.................. 109 61
Increase in retention -- 1997............................. 253
------ ------
Adjusted net premiums written (1997 compared with 1996)... $3,784 3,471
======
Increase in retention -- 1996............................. 138
------ ------
Adjusted net premiums written (1996 compared with 1995)... $3,333 $3,071
====== ======
Net premiums written, as adjusted, increased 9% in 1997 compared with 1996
and 9% in 1996 compared with 1995. Premium growth in 1997 and 1996 for the
excess liability component of our casualty coverages and for our executive
protection coverages benefited from the changes to our casualty excess of loss
reinsurance program. Premium growth in both years was also due to the selective
writing of new accounts, exposure growth on existing business and the purchase
of additional coverages by current customers. Premium growth was stronger
outside the United States. Growth in the United States continues to be hindered
by intense competition which has resulted in declining prices for several
classes of business. Our strategy of working closely with our customers and our
ability to differentiate our products have enabled us to renew a large
percentage of our business.
Our commercial insurance business produced near breakeven underwriting
results in each of the past three years. The combined loss and expense ratio was
100.7% in 1997 compared with 99.7% in 1996 and 99.3% in 1995.
Multiple peril results were unprofitable in each of the past three years
due, in large part, to inadequate prices. Results for this class were also
adversely affected in each of the past three years, but
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more so in 1997, by increases in loss reserves for asbestos-related and toxic
waste claims. Multiple peril results were similar in 1997 and 1996 as an
improvement in 1997 in the property component, due in part to an absence of
catastrophe losses, was offset by higher losses in the liability component
resulting from an increase in the frequency of large losses. Results for this
class benefited in 1995 from an absence of catastrophe losses. Catastrophe
losses represented 1.5 percentage points of the loss ratio for this class in
1997 compared with 4.8 percentage points in 1996 and 1.0 percentage point in
1995.
Results for our casualty business were similarly unprofitable in each of
the past three years. In each year, casualty results were adversely affected by
increases in loss reserves for asbestos-related and toxic waste claims. The
amount of such reserve strengthening in the casualty classes decreased in 1996
and again in 1997. The excess liability component of our casualty coverages has
remained profitable due to favorable loss experience in this class. Results for
the primary liability component were extremely unprofitable in 1997 and 1996 due
to an increased frequency of losses. Results in the automobile component were
unprofitable in 1997 compared with breakeven results in 1996 and profitable
results in 1995. The deterioration in 1997 was due to an increase in the
frequency of large losses.
Workers' compensation results were unprofitable in 1997 and 1996 compared
with profitable results in 1995. Results deteriorated in 1996 and again in 1997
due in large part to the cumulative effect of price reductions over the past
several years. Results continued to benefit, however, from the reform of benefit
provisions of workers' compensation laws in many states, and the impact of
medical cost containment and disability management activities. Results from our
share of the involuntary pools and mandatory business in which we must
participate by law have also benefited from these positive factors.
Property and marine results were unprofitable in 1997 compared with
profitable results in 1996 and 1995. Results in 1997 were adversely affected by
an increase in the frequency of large losses, including several large overseas
losses. Results in 1997 and 1996 were adversely affected by catastrophe losses
which were insignificant in 1995. Catastrophe losses for this class represented
4.9 percentage points of the loss ratio in 1997 compared with 4.5 percentage
points in 1996 and 0.8 of a percentage point in 1995.
Our executive protection results were highly profitable in each of the past
three years due to favorable loss experience. Our financial institutions
business was also profitable during the same period.
Results in our other commercial classes were profitable in 1997 compared
with the near breakeven results in 1996 and unprofitable results in 1995. This
improvement was primarily attributable to our surety business, which produced
increasingly profitable results in 1996 and 1997 compared with unprofitable
results in 1995 due to several large losses.
REINSURANCE ASSUMED
Reinsurance assumed is treaty reinsurance that was assumed from Sun
Alliance. The reinsurance agreement with Sun Alliance was terminated effective
January 1, 1997. However, due to the lag in our reporting of such business, net
premiums written in the first quarter of 1997 included $90 million related to
business we assumed from Sun Alliance for the second half of 1996. Net premiums
written for this segment were reduced by $94 million and $65 million in the
first quarter of 1997 and 1996, respectively, due to the effect of the portfolio
transfers of unearned premiums back to Sun Alliance as of January 1 of each
year. Net premiums written in 1996 were substantially lower than in 1995 due to
the changes in the reinsurance agreement with Sun Alliance whereby we assumed
less reinsurance from them.
Underwriting results for this segment in 1997, which represent our share of
the Sun Alliance business for the last six months of 1996, were near breakeven.
Underwriting results were also near breakeven in 1996 and 1995.
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LOSS RESERVES
Loss reserves are our property and casualty subsidiaries' largest
liability. At the end of 1997, gross loss reserves totaled $9.8 billion compared
with $9.5 billion and $9.6 billion at year-end 1996 and 1995, respectively.
Reinsurance recoverable on such loss reserves was $1.2 billion at year-end 1997
compared with $1.8 billion and $2.0 billion at the end of 1996 and 1995,
respectively.
As a result of the changes to the reinsurance agreements with Sun Alliance,
there were portfolio transfers of gross loss reserves and reinsurance
recoverable as of January 1, 1996 and 1997. The effect of these portfolio
transfers was a decrease in gross loss reserves of $184 million and $209 million
and a decrease in reinsurance recoverable of $470 million and $244 million in
1997 and 1996, respectively.
Loss reserves, net of reinsurance recoverable, increased by $809 million in
1997 compared with $141 million in 1996. The 1996 increase would have been
greater except that loss reserves were reduced as the result of significant
payments during the year related to the settlement of asbestos-related claims
against Fibreboard Corporation, which is discussed below. Loss reserves included
$549 million, $543 million and $999 million at year-end 1997, 1996 and 1995,
respectively, related to the Fibreboard settlement. Loss and expense payments
related to the settlement aggregated $462 million in 1996 and $60 million in
1995. There were no such payments in 1997.
Excluding the Fibreboard reserves and the effect of the portfolio
transfers, loss reserves, net of reinsurance recoverable, increased by $517
million or 7% in 1997 compared with $562 million or 9% in 1996. Substantial
reserve growth has occurred each year in those liability classes, primarily
excess liability and executive protection, that are characterized by delayed
loss reporting and extended periods of settlement.
During 1997, we experienced overall favorable development of $65 million on
loss reserves established as of the previous year-end. This compares with
favorable development of $43 million in 1996 and $36 million in 1995. Such
favorable development was reflected in operating results in these respective
years. Results in each of the past three years benefited from favorable claim
severity trends for certain liability classes; this was offset each year in
varying degrees by losses incurred relating to asbestos and toxic waste claims.
The process of establishing loss reserves is an imprecise science and
reflects significant judgmental factors. In many liability cases, significant
periods of time, ranging up to several years or more, may elapse between the
occurrence of an insured loss, the reporting of the loss and the settlement of
the loss. In fact, approximately 60% of our net loss reserves at December 31,
1997 were for IBNR -- 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 have
increased significantly, further complicating the already complex loss reserving
process.
The uncertainties relating to asbestos and toxic waste claims on insurance
policies written many years ago are exacerbated by judicial and legislative
interpretations of coverage that in some cases have tended to erode the clear
and express intent of such policies and in other cases have expanded theories of
liability. The industry is engaged in extensive litigation over these coverage
and liability issues and is thus confronted with a continuing uncertainty in its
efforts to quantify these exposures.
Our most costly asbestos exposure relates to an insurance policy issued to
Fibreboard Corporation by Pacific Indemnity Company in 1956. In 1993, Pacific
Indemnity Company, a subsidiary of the Corporation, entered into a global
settlement agreement with Continental Casualty Company (a subsidiary of CNA
Financial Corporation), Fibreboard Corporation, and attorneys representing
claimants against Fibreboard for all future asbestos-related bodily injury
claims against Fibreboard. This agreement is subject to final appellate court
approval. Pursuant to the global settlement agreement, a $1.525 billion trust
fund will be established to pay future claims, which are claims that
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were not filed in court before August 27, 1993. Pacific Indemnity will
contribute approximately $538 million to the trust fund and Continental Casualty
will contribute the remaining amount. In December 1993, upon execution of the
global settlement agreement, Pacific Indemnity and Continental Casualty paid
their respective shares into an escrow account. Upon final court approval of the
settlement, the amount in the escrow account, including interest earned thereon,
will be transferred to the trust fund. All of the parties have agreed to use
their best efforts to seek final court approval of the global settlement
agreement.
Pacific Indemnity and Continental Casualty reached a separate agreement for
the handling of all asbestos-related bodily injury claims pending on August 26,
1993 against Fibreboard. Pacific Indemnity's obligation under this agreement
with respect to such pending claims is approximately $635 million, all of which
has been paid. The agreement further provides that the total responsibility of
both insurers with respect to pending and future asbestos-related bodily injury
claims against Fibreboard will be shared between Pacific Indemnity and
Continental Casualty on an approximate 35% and 65% basis, respectively.
Pacific Indemnity, Continental Casualty and Fibreboard entered into a
trilateral agreement to settle all present and future asbestos-related bodily
injury claims resulting from insurance policies that were, or may have been,
issued to Fibreboard by the two insurers. The trilateral agreement will be
triggered if the global settlement agreement is ultimately disapproved. Pacific
Indemnity's obligation under the trilateral agreement is therefore similar to,
and not duplicative of, that under those agreements described above.
The trilateral agreement reaffirms portions of an agreement reached in
March 1992 between Pacific Indemnity and Fibreboard. Among other matters, that
1992 agreement eliminates any Pacific Indemnity liability to Fibreboard for
asbestos-related property damage claims.
In July 1995, the United States District Court of the Eastern District of
Texas approved the global settlement agreement and the trilateral agreement. The
judgments approving these agreements were appealed to the United States Court of
Appeals for the Fifth Circuit. In July 1996, the Fifth Circuit Court affirmed
the 1995 judgments of the District Court. The objectors to the global agreement
appealed to the United States Supreme Court. In June 1997, the United States
Supreme Court set aside the ruling by the Fifth Circuit Court that had approved
the global agreement and ordered the Fifth Circuit Court to reconsider its
approval in light of a June 1997 ruling by the Supreme Court rejecting an
unrelated settlement that included several former asbestos manufacturers. In
January 1998, the Fifth Circuit Court again affirmed the global settlement
agreement, ruling that it was legally distinct from the other settlement. It is
expected that objectors to the settlement will petition the Supreme Court to
review the decision. The Supreme Court would then have to decide whether to take
the appeal.
The trilateral agreement, however, was never appealed to the United States
Supreme Court and is final. As a result, management continues to believe that
the uncertainty of Pacific Indemnity's exposure with respect to asbestos-related
bodily injury claims against Fibreboard has been eliminated.
Since 1993, a California Court of Appeal has agreed, in response to a
request by Pacific Indemnity, Continental Casualty and Fibreboard, to delay its
decisions regarding asbestos-related insurance coverage issues that are
currently before it and involve the three parties exclusively, while the
approval of the global settlement is pending in court. Continental Casualty and
Pacific Indemnity have dismissed disputes against each other which involved
Fibreboard and were in litigation.
We have additional potential asbestos exposure, primarily on insureds for
which we wrote excess liability coverages. Such exposure has increased due to
the erosion of much of the underlying limits. The number of claims against such
insureds and the value of such claims have increased in recent years due in part
to the non-viability of other defendants.
Our remaining asbestos exposures are mostly peripheral defendants,
including a mix of manufacturers and distributors of certain products that
contain asbestos as well as premises owners. Generally, these insureds are named
defendants on a regional rather than a nationwide basis. We continue to
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receive notices of new asbestos claims and new exposures on existing claims as
more peripheral parties are drawn into litigation to replace the now defunct
mines and bankrupt manufacturers.
Legal guidelines regarding coverage for asbestos claims have begun to
articulate more consistent standards regarding the extent of the insurers'
coverage obligation and the method of allocation of costs among insurers.
However, we still do not know the universe of potential claims. Therefore,
uncertainty remains as to our ultimate liability for asbestos-related claims.
Hazardous waste sites are another significant potential exposure. Under the
federal "Superfund" law and similar state statutes, when potentially responsible
parties (PRPs) fail to handle the clean-up, regulators have the work done and
then attempt to establish legal liability against the PRPs. The PRPs, with
proper government authorization in many instances, disposed of toxic materials
at a waste dump site or transported the materials to the site. Most sites have
multiple PRPs.
Insurance policies issued to PRPs were not intended to cover the clean-up
costs of pollution and, in many cases, did not intend to cover the pollution
itself. Pollution was not a recognized hazard at the time many of these policies
were written. In more recent years, 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 relating
to these claims. First, the underlying liabilities of the claimants are
extremely difficult to estimate. At any given clean-up site, the allocation of
remediation costs among governmental authorities and the PRPs varies greatly.
Second, different courts have addressed liability and coverage issues regarding
pollution claims and have reached inconsistent conclusions in their
interpretation of several issues. These significant uncertainties are not likely
to be resolved in the near future.
Uncertainties also remain as to the Superfund law itself, which has
generated far more litigation than it has provided cleanup of hazardous waste
sites. Superfund's taxing authority expired on December 31, 1995.
Notwithstanding continued pressure by the insurance industry and other
interested parties to achieve a legislative solution which would reform the
liability provisions of the law, Congress has not yet addressed the issue. It is
currently not possible to predict the direction that any reforms may take, when
they may occur or the effect that any changes may have on the insurance
industry.
The Superfund law does not address non-Superfund sites. For that reason, it
does not cover all existing hazardous waste exposures, such as those involving
sites that are subject to state law only. There remains significant uncertainty
as to the cost of remediating the state sites. Because of the large number of
state sites, such sites could prove even more costly in the aggregate than
Superfund sites.
Litigation costs remain substantial, particularly for hazardous waste
claims. A substantial portion of the funds we have expended to date has been for
legal fees incurred in the prolonged litigation of coverage issues. Primary
policies provide a limit on indemnity payments but many do not limit defense
costs. This sometimes leads to the payment of defense costs in multiples of the
policy limits.
Reserves for asbestos and toxic waste claims cannot be estimated with
traditional loss reserving techniques. 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. Losses incurred relating to asbestos and toxic waste claims were $125
million in 1997, $151 million in 1996 and $182 million in 1995. Further
increases in loss reserves in 1998 and future years are possible as legal and
factual issues concerning asbestos and toxic waste claims are clarified,
although the amounts cannot be reasonably estimated.
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Management believes that the aggregate loss reserves of the property and
casualty subsidiaries at December 31, 1997 were adequate to cover claims for
losses which had occurred, including both those known to us and those yet to be
reported. In establishing such reserves, management considers facts currently
known and the present state of the law and coverage litigation. However, given
the expansion of coverage and liability by the courts and the legislatures in
the past and the possibilities of similar interpretations in the future,
particularly as they relate to asbestos and toxic waste claims, as well as the
uncertainty in determining what scientific standards will be deemed acceptable
for measuring hazardous waste site clean-up, additional increases in loss
reserves may emerge that would adversely affect results in future periods. The
amount cannot reasonably be estimated at the present time.
OTHER UNCERTAINTIES
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. The Corporation continually assesses its concentration of
underwriting exposures in catastrophe prone areas and develops strategies to
manage this exposure through individual risk selection, subject to regulatory
constraints, and through the purchase of catastrophe reinsurance. In recent
years, the Corporation has invested in modeling technologies that allow us to
better monitor 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.
The Year 2000 issue relates to computer programs that were written using
two digits rather than four to define the applicable year. Such programs may
recognize the date "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of normal
business activities or other unforeseen problems.
In 1995, we initiated a project to ensure Year 2000 compliance of the
Corporation's computer systems and applications. Management believes that all
key systems that are not already Year 2000 compliant will be modified or
replaced by the end of 1999 and that the costs to modify or replace such systems
will not have a significant impact on the Corporation's operating results or
financial position. We are also coordinating with entities with which we
interact to address potential Year 2000 issues to minimize the potential adverse
consequences, if any, that could result from the failure of such entities to
address this issue.
An additional concern to the Corporation is the potential future impact of
the Year 2000 issue on insurance coverages written by our property and casualty
subsidiaries. The Year 2000 issue is a risk for some of our insureds and needs
to be considered during the underwriting process similar to any other risk to
which our customers may be exposed. We have established a dedicated team to
identify Year 2000 issues across all product lines. It is possible that Year
2000 related losses may emerge that would adversely affect operating results in
future periods. The amount cannot be estimated at the present time.
INVESTMENTS AND LIQUIDITY
Investment income after taxes increased 9% in 1997 compared with 7% in
1996. Growth was primarily due to increases in invested assets, which reflected
strong cash flow from operations over the period, partially offset by lower
average yields on new investments.
The effective tax rate on our investment income was 16.7% in 1997 compared
with 15.8% in 1996 and 15.9% in 1995. The effective tax rate increased in 1997
as the percentage of our investment income subject to tax increased.
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
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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 $1,260 million in 1997 compared with $1,150 million in 1996
and $430 million in 1995. New cash in 1997 and 1996 included approximately $330
million and $40 million, respectively, received as the net result of the
portfolio transfers of unearned premiums and loss reserves as of January 1 of
each year related to the changes to the reinsurance agreements with Sun
Alliance. New cash in 1996 also included $191 million received in January as a
result of the commutation of a stop loss reinsurance agreement related to
medical malpractice unpaid claims arising from business written prior to 1985.
The substantially lower amount in 1995 was due to the designation of $480
million of new cash as funds held for asbestos-related settlement. Income on
these assets accrued for the benefit of participants in the class settlement of
asbestos-related bodily injury claims against Fibreboard.
In 1997, new cash was invested primarily in tax-exempt bonds and, to a
lesser extent, corporate bonds and mortgage-backed securities. In addition, $250
million of foreign bonds were sold in the first quarter, due to the reduction in
foreign liabilities resulting from the termination of the reinsurance agreements
with Sun Alliance, with the proceeds invested in U.S. dollar denominated
securities. In 1996, we invested new cash primarily in mortgage-backed
securities and tax-exempt bonds. In 1995, we invested new cash primarily in
tax-exempt bonds. In each year, we tried to achieve the appropriate mix in our
portfolio to balance both investment and tax strategies.
The property and casualty subsidiaries maintain sufficient investments in
highly liquid, short-term securities at all times to provide for immediate cash
needs and the Corporation maintains bank credit facilities that are available to
respond to unexpected cash demands.
CORPORATE
Investment income earned on corporate invested assets and interest and
other expenses not allocable to the operating subsidiaries are reflected in the
corporate segment. Corporate income after taxes was $36 million in 1997 compared
with $20 million in 1996 and $15 million in 1995. The increase in corporate
income in 1997 was due primarily to a reduction in interest expense.
MARKET RISK
The main objectives in managing the investment portfolios of the
Corporation and its property and casualty subsidiaries are to maximize after-tax
investment income and total investment returns while minimizing credit risks in
order to provide maximum support to the insurance underwriting operations.
Investment strategies are developed based on many factors including underwriting
results and our resulting tax position, regulatory requirements, fluctuations in
interest rates and consideration of other market risks. Investment decisions are
centrally managed by investment professionals based on guidelines established by
management and approved by the boards of directors.
Market risk represents the potential for loss due to adverse changes in the
fair value of financial instruments. The market risks related to financial
instruments of the Corporation and its property and casualty subsidiaries
primarily relate to the investment portfolio, which exposes the Corporation to
risks related to interest rates and, to a lesser extent, credit quality,
prepayment, foreign currency exchange rates and equity prices. Analytical tools
and monitoring systems are in place to assess each of these elements of market
risk.
Interest rate risk is the price sensitivity of a fixed income security to
changes in interest rates. We view these potential changes in price within the
overall context of asset and liability management. Our actuaries estimate the
payout pattern of our liabilities, primarily our property and casualty loss
reserves, to determine their duration, which is the present value of the
weighted average payments expressed in years. We set duration targets for our
fixed income investment portfolios after consideration of the duration of these
liabilities and other factors, which we believe mitigates the overall effect of
interest rate risk for the Corporation.
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The table below provides information about the Corporation's fixed maturity
investments at December 31, 1997 that 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. 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
TOTAL
---------------------
ESTIMATED
AMORTIZED MARKET
1998 1999 2000 2001 2002 THEREAFTER COST VALUE
---- ---- ---- ---- ---- ---------- --------- ---------
(in millions)
Tax-exempt.................... $387 $423 $384 $520 $563 $5,332 $ 7,609 $ 8,114
Average interest rate..... 6.5% 6.7% 6.3% 6.5% 5.9% 5.7% -- --
Taxable -- other than
mortgage-backed
securities.................. 158 308 146 258 140 1,578 2,588 2,675
Average interest rate..... 7.7% 6.3% 6.7% 6.8% 7.3% 7.0% -- --
Mortgage-backed securities.... 231 162 167 180 177 861 1,778 1,811
Average interest rate..... 7.1% 7.3% 7.4% 7.3% 7.4% 7.4% -- --
---- ---- ---- ---- ---- ------ ------- -------
Total......................... $776 $893 $697 $958 $880 $7,771 $11,975 $12,600
==== ==== ==== ==== ==== ====== ======= =======
The Corporation and its property and casualty subsidiaries have
consistently invested in high quality marketable securities. As a result, we
believe that the Corporation has minimal credit quality risk. Taxable bonds in
our domestic portfolio comprise U.S. Treasury, government agency, mortgage-
backed and corporate securities. Approximately 80% of taxable bonds are issued
by the U.S. Treasury or U.S. government agencies or are rated AA or better by
Moody's or Standard and Poor's. Of the tax exempt bonds, approximately 90% are
rated AA or better with more than half rated AAA. Less than 1% of our bond
portfolio is below investment grade. Both taxable and tax exempt bonds have an
average maturity of approximately 9 years.
Our taxable bond portfolio includes mortgage-backed securities, which
comprised 40% and 35% of this portfolio at year-end 1997 and 1996, respectively.
About 60% of our mortgage-backed securities holdings at December 31, 1997
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 35% of our mortgage-backed securities are invested in call protected
AAA rated commercial securities.
Prepayment risk refers to the changes in prepayment patterns 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. We invest primarily in those classes of mortgage-backed
securities that are less subject to prepayment risk.
Foreign currency risk is the sensitivity to foreign exchange rate
fluctuations of the market value and investment income related to foreign
currency denominated financial instruments. The functional currency of our
foreign operations is generally the currency of the local operating environment
since their business is primarily transacted in such local currency. We reduce
the risks relating to currency fluctuations by maintaining investments in those
foreign currencies in which we transact business. Such investments have
characteristics similar to our liabilities in those currencies. At December 31,
1997, the property and casualty subsidiaries held foreign investments of $1.1
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 Corporation are
the Canadian dollar and the British pound sterling. The table on the following
page provides
26
27
information about the Corporation's fixed maturity investments denominated in
these two currencies at December 31, 1997. The table presents cash flows of
principal amounts in U.S. dollars by expected maturity dates. Actual cash flows
could differ from the expected amounts.
FOREIGN CURRENCY DENOMINATED FIXED MATURITIES
EXPECTED CASH FLOWS OF PRINCIPAL AMOUNTS
TOTAL
---------------------
ESTIMATED
AMORTIZED MARKET
1998 1999 2000 2001 2002 THEREAFTER COST VALUE
---- ---- ---- ---- ---- ---------- --------- ---------
(in millions)
Canadian dollar........... $-- $6 $16 $47 $43 $195 $307 $337
British pound sterling.... -- -- 19 23 5 175 222 229
Equity price risk is the potential loss arising from changes in the value
of equity securities. In general, equities have more year-to-year price
variability than intermediate term high grade bonds. However, returns over
longer time frames have been consistently higher. Our equity securities are high
quality and readily marketable.
All of the above risks are monitored on an ongoing basis. A combination of
in-house systems and proprietary models and externally licensed software are
used to analyze individual securities as well as each portfolio. These tools
provide the portfolio managers with information to assist them in the evaluation
of the market risks of the portfolio.
REAL ESTATE
In October 1996, the Corporation announced that it was exploring the
possible sale of all or a significant portion of its real estate assets. In
March 1997, the Corporation entered into an agreement with a prospective
purchaser to perform due diligence in anticipation of executing a contract for
the sale of substantially all of its commercial properties. Because the plan to
pursue the sales of these assets in the near term represented a significant
change in circumstances relating to the manner in which these assets would be
used, we reassessed the recoverability of their carrying value as of December
31, 1996. As a result, we recorded an impairment loss of $255 million, or $160
million after tax, in the fourth quarter of 1996 to reduce the carrying value of
these assets to their estimated fair value.
In June 1997, a definitive agreement was reached with the purchaser. In
November, the sale of almost all of the properties covered by the agreement
reached in June was closed for $737 million, which included $628 million in cash
and the assumption of $109 million in debt. The buyer is a joint venture formed
by Paine Webber Real Estate Securities Inc., Morgan Stanley Real Estate Fund II,
L.P. and Gale & Wentworth, L.L.C. Closing on the few remaining properties under
the agreement is expected to occur in 1998.
In addition to the November sale to the joint venture, we sold several
other commercial properties as well as residential properties in 1997. We are
continuing to explore the sale of certain of our remaining properties.
We plan to retain approximately $375 million of undeveloped land which we
expect will be developed in the future. In addition, we plan to retain certain
properties and land parcels under lease.
Real estate operations resulted in a loss after taxes of $5 million in 1997
compared with a loss of $147 million in 1996 and income of $6 million in 1995.
The loss in 1996 reflects the $160 million after tax impairment charge. Results
in 1996 benefited from the sale of several rental properties and a decrease in
interest expense caused by lower average interest rates. Results in 1995
benefited from a land sale. Results in both 1996 and 1995 also benefited from
increases in earnings from residential sales. In each of the last three years,
results were adversely affected by a high proportion of interest costs charged
directly to expense rather than being capitalized.
27
28
Revenues were $616 million in 1997, $320 million in 1996 and $288 million
in 1995. Revenues in 1997 include $380 million from the November sale of real
estate properties. Proceeds received from that sale which related to mortgages
receivable are not classified as revenues. Revenues in 1996 and 1995 included
higher levels of revenues from residential development. Revenues in 1996 also
included the sale of rental properties while 1995 revenues included the land
sale.
The Corporation adopted Statement of Financial Accounting Standards (SFAS)
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, in the first quarter of 1996. SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets.
SFAS No. 121 requires that we analyze our individual buildings, leased land
and development sites on a continuing basis to determine if an impairment loss
has occurred. Estimates are made of the revenues and operating costs, plus any
additional costs to be incurred to complete development, of the property in the
future through an assumed holding period based on our intended use of the
property. The time value of money is not considered in assessing whether an
impairment has occurred. If it is determined that impairment has occurred,
measurement of such impairment is based on the fair value of the assets. The
$255 million write-down of real estate assets in 1996 was made in accordance
with the provisions of SFAS No. 121.
Loans receivable, which were issued in connection with our joint venture
activities and other property sales, are primarily purchase money mortgages.
Such loans are generally collateralized by buildings and, in some cases, land.
We continually evaluate the ultimate collectibility of such loans and establish
appropriate reserves. Our valuation approach is similar to that utilized under
SFAS No. 121, except that cash flows are discounted at the receivable interest
rates. The reserve for possible uncollectible receivables was increased by
charges against income of $18 million in 1995, including $10 million from the
initial application of SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, which established new criteria for measuring impairment of a loan. Such
charges were not significant in 1996 and 1997. Management believes the reserve
of $24 million at December 31, 1997 adequately reflects the current condition of
the portfolio.
The carrying value of the real estate assets we plan to dispose of in the
near term is based on the estimated fair value of these assets. The
recoverability of the carrying value of the remaining real estate assets is
assessed based on our ability to fully recover costs through a future revenue
stream. The process by which SFAS No. 121 is applied and necessary write-downs
are calculated assumes these properties will be developed and disposed of over a
period of time. The assumptions reflect a continued improvement in demand for
office space, an increase in rental rates and the ability and intent to obtain
financing in order to hold and develop such remaining properties and protect our
interests over the long term. Management believes that it has made adequate
provisions for impairment of real estate assets. However, if the assets are not
sold or developed as presently contemplated, it is possible that additional
impairment losses may be recognized.
Real estate activities have been funded with short-term credit instruments,
primarily commercial paper, and debt issued by Chubb Capital Corporation as well
as with term loans and mortgages. The weighted average interest cost on
short-term credit instruments approximated 5 1/4% in 1997, 5 1/2% in 1996 and 6%
in 1995. In 1997, interest rates on term loans approximated 7 1/2% and for
mortgages the range of interest rates was 5% to 12%.
Proceeds from the November 1997 sale were used to repay the outstanding
short term debt and certain term loans and mortgages as well as to reduce
intercompany borrowings from Chubb Capital. In February 1998, the remaining $300
million of intercompany borrowings from Chubb Capital was converted into
preferred stock of the real estate subsidiary.
As a result of the November 1997 sale, real estate revenues will be
significantly reduced in the future. The reduction in revenues will be
substantially offset by significant reductions in interest expense due to the
decrease in debt outstanding and in payroll costs and other operating expenses.
28
29
INVESTMENT GAINS AND LOSSES
Net investment gains realized by the Corporation and its property and
casualty insurance subsidiaries were as follows:
1997 1996 1995
---- ---- ----
(in millions)
Equity securities........................................... $ 75 $69 $ 89
Fixed maturities............................................ 30 11 20
---- --- ----
Realized investment gains before tax........................ $105 $80 $109
==== === ====
Realized investment gains after tax......................... $ 68 $52 $ 71
==== === ====
Sales of equity securities in each of the last three years resulted in
realized investment gains due primarily to the significant appreciation in the
United States equity markets. A primary reason for the sale of fixed maturities
in each of the last three years has been to improve our after-tax portfolio
return without sacrificing quality where market opportunities have existed to do
so.
Fixed maturities which the Corporation and its insurance subsidiaries have
the ability and intent to hold to maturity are classified as held-to-maturity.
The remaining fixed maturities, which may be sold prior to maturity to support
our investment strategies, such as in response to changes in interest rates and
the yield curve or to maximize after-tax returns, are classified as
available-for-sale. Fixed maturities classified as held-to-maturity are carried
at amortized cost while fixed maturities classified as available-for-sale are
carried at market value. At December 31, 1997, 18% of the fixed maturity
portfolio was classified as held-to-maturity compared with 22% at December 31,
1996 and 30% at December 31, 1995.
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 shareholders'
equity, net of applicable deferred income tax.
The unrealized market appreciation before tax of those fixed maturities
carried at amortized cost was $147 million, $130 million and $178 million at
December 31, 1997, 1996 and 1995, respectively. Such unrealized appreciation was
not reflected in the consolidated financial statements.
Changes in unrealized market appreciation of fixed maturities were due to
fluctuations in interest rates.
DISCONTINUED OPERATIONS -- LIFE AND HEALTH INSURANCE
On May 13, 1997, the Corporation completed the sale of Chubb Life Insurance
Company of America to Jefferson-Pilot Corporation for $875 million in cash,
subject to various closing adjustments, none of which were material.
In 1996, the Corporation recognized a loss of $22 million related to the
sale of the life and health insurance operations. The purchase price was not
adjusted to reflect results of operations subsequent to December 31, 1996.
Therefore, the discontinued life and health insurance operations did not affect
the Corporation's net income in 1997 and will not affect net income in future
periods. Earnings from the discontinued life and health insurance operations
were $49 million and $42 million in 1996 and 1995, respectively, including
realized investment gains of $8 million and $14 million.
CAPITAL RESOURCES
In February 1994, the Board of Directors authorized the repurchase of up to
10,000,000 shares of common stock. Through March 6, 1997, the Corporation
repurchased 6,851,600 shares under the 1994 share repurchase program, including
3,148,600 shares repurchased in the first quarter of 1997. On March 7, 1997, the
Board of Directors replaced the 1994 program with a new share repurchase
program, which authorizes the repurchase of up to 17,500,000 shares of common
stock. Through December 31, 1997, the Corporation repurchased 9,791,900 shares
under the new repurchase program.
29
30
In the aggregate, the Corporation repurchased 12,940,500 shares in open-market
transactions in 1997 at a cost of $828 million. In 1996, 1,700,000 shares were
repurchased at a cost of $83 million.
The Corporation filed a shelf registration statement which the Securities
and Exchange Commission declared effective in June 1995, under which up to $400
million of various types of securities may be issued by the Corporation or Chubb
Capital. No securities have been issued under this registration statement.
The Corporation has outstanding $60 million of unsecured 8 3/4% notes due
in 1999. In 1998, the Corporation will pay as a mandatory sinking fund an amount
sufficient to redeem $30 million of principal.
At December 31, 1997, Chubb Capital had outstanding $150 million of 6%
notes due in 1998 and $100 million of 6 7/8% notes due in 2003. The notes are
unsecured and are guaranteed by the Corporation. A substantial portion of the
proceeds were used to support our real estate operations. The debt due in 1998
was repaid in February using proceeds from the real estate sales.
As of January 1, 1997, Chubb Capital had outstanding $229 million of 6%
exchangeable subordinated notes due May 15, 1998. In 1997, the holders of almost
all of the notes elected the option to exchange them into shares of common stock
of the Corporation, resulting in the issuance of 5,316,565 shares of common
stock. The remaining notes were redeemed.
In July 1997, the Corporation entered into two credit agreements with a
group of banks that provide for unsecured borrowings of up to $500 million in
the aggregate. The $200 million short term revolving credit facility terminates
on July 10, 1998 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 agreements replaced an agreement
similar to the medium term agreement, which terminated, as well as the
Corporation's lines of credit.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are included in
Item 7, pages 25 through 27 of this report.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of the Corporation at December 31, 1997
and 1996 and for each of the three years in the period ended December 31, 1997
and the Report of Independent Auditors thereon and the Corporation's unaudited
quarterly financial data for the two-year period ended December 31, 1997 are
incorporated by reference from the Corporation's 1997 Annual Report to
Shareholders, pages 38 through 61.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
31
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Corporation's Directors is incorporated by
reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Shareholders on April 28, 1998, pages 2 through 4. Information
regarding the executive officers is included in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Corporation's definitive Proxy Statement
for the Annual Meeting of Shareholders on April 28, 1998, pages 8 through 20
other than the Performance Graphs and the Organization and Compensation
Committee Report appearing on pages 13 through 17.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Corporation's definitive Proxy Statement
for the Annual Meeting of Shareholders on April 28, 1998, pages 5 through 7.
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 28, 1998, pages 20 and 21.
31
32
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS AND 2. SCHEDULES
The financial statements and schedules listed in the accompanying
index to financial statements and financial statement schedules are filed
as part of this report.
3. EXHIBITS
The exhibits listed in the accompanying index to exhibits are filed as
part of this report.
(b) REPORTS ON FORM 8-K
The Registrant filed a current report on Form 8-K dated November 10,
1997 with respect to the announcement on November 10, 1997 that the
Registrant's real estate subsidiary, Bellemead Development Corporation,
closed the sale of a substantial portion of its commercial real estate
properties to a joint venture company formed by Paine Webber Real Estate
Securities Inc., Morgan Stanley Real Estate Fund II, L.P. and Gale &
Wentworth, L.L.C. for $737 million.
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. 2-90826 (filed May 1, 1984), 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) and 333-09275 (filed July 31, 1996):
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
32
33
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
THE CHUBB CORPORATION
(REGISTRANT)
March 6, 1998
By /s/ DEAN R. O'HARE
-------------------------------
(DEAN R. O'HARE, CHAIRMAN AND
CHIEF EXECUTIVE OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DEAN R. O'HARE Chairman, Chief March 6, 1998
- --------------------------------------------------- Executive Officer and
(DEAN R. O'HARE) Director
/s/ JOHN C. BECK Director March 6, 1998
- ---------------------------------------------------
(JOHN C. BECK)
/s/ SHEILA P. BURKE Director March 6, 1998
- ---------------------------------------------------
(SHEILA P. BURKE)
/s/ JAMES I. CASH, JR. Director March 6, 1998
- ---------------------------------------------------
(JAMES I. CASH, JR.)
/s/ PERCY CHUBB, III Director March 6, 1998
- ---------------------------------------------------
(PERCY CHUBB, III)
/s/ JOEL J. COHEN Director March 6, 1998
- ---------------------------------------------------
(JOEL J. COHEN)
/s/ JAMES M. CORNELIUS Director March 6, 1998
- ---------------------------------------------------
(JAMES M. CORNELIUS)
/s/ DAVID H. HOAG Director March 6, 1998
- ---------------------------------------------------
(DAVID H. HOAG)
/s/ THOMAS C. MACAVOY Director March 6, 1998
- ---------------------------------------------------
(THOMAS C. MACAVOY)
33
34
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GERTRUDE G. MICHELSON Director March 6, 1998
- ---------------------------------------------------
(GERTRUDE G. MICHELSON)
/s/ WARREN B. RUDMAN Director March 6, 1998
- ---------------------------------------------------
(WARREN B. RUDMAN)
Director March 6, 1998
- ---------------------------------------------------
(DAVID G. SCHOLEY)
/s/ RAYMOND G.H. SEITZ Director March 6, 1998
- ---------------------------------------------------
(RAYMOND G.H. SEITZ)
/s/ LAWRENCE M. SMALL Director March 6, 1998
- ---------------------------------------------------
(LAWRENCE M. SMALL)
/s/ RICHARD D. WOOD Director March 6, 1998
- ---------------------------------------------------
(RICHARD D. WOOD)
/s/ JAMES M. ZIMMERMAN Director March 6, 1998
- ---------------------------------------------------
(JAMES M. ZIMMERMAN)
/s/ DAVID B. KELSO Executive Vice President and March 6, 1998
- --------------------------------------------------- Chief Financial Officer
(DAVID B. KELSO)
/s/ HENRY B. SCHRAM Senior Vice President and March 6, 1998
- --------------------------------------------------- Chief Accounting Officer
(HENRY B. SCHRAM)
34
35
THE CHUBB CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
COVERED BY REPORT OF INDEPENDENT AUDITORS
(ITEM 14(a))
ANNUAL REPORT TO
SHAREHOLDERS FORM 10-K
PAGE PAGE
---------------- ---------
Report of Independent Auditors 60 --
Consolidated Balance Sheets at December 31, 1997 and 1996 39 --
Consolidated Statements of Income for the Years Ended Decem-
ber 31, 1997, 1996 and 1995 38 --
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995 40 --
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 41 --
Notes to Consolidated Financial Statements 42 --
Supplementary Information (unaudited)
Quarterly Financial Data 61 --
Schedules:
I -- Consolidated Summary of Investments -- Other
than Investments in Related Parties at
December 31, 1997 -- 37
II -- Condensed Financial Information of Registrant at
December 31, 1997 and 1996 and for the Years
Ended December 31, 1997, 1996 and 1995 -- 38
III -- Consolidated Supplementary Insurance Information
at and for the Years Ended December 31, 1997,
1996 and 1995 -- 41
IV -- Consolidated Reinsurance for the Years Ended De-
cember 31, 1997, 1996 and 1995 -- 42
VI -- Consolidated Supplementary Property and Casualty
Insurance Information for the Years Ended
December 31, 1997, 1996 and 1995 -- 42
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements and notes thereto.
The consolidated financial statements and supplementary information listed
in the above index, which are included in the Annual Report to Shareholders of
The Chubb Corporation for the year ended December 31, 1997, are hereby
incorporated by reference.
35
36
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of The Chubb Corporation of our report dated February 20, 1998 included in
the 1997 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. 33-59111 and Form S-8: No. 2-90826, No. 33-29185, No.
33-30020, No. 33-49230, No. 33-49232, No. 333-09273 and No. 333-09275) of our
report dated February 20, 1998, 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 25, 1998
36
37
THE CHUBB CORPORATION
SCHEDULE I
CONSOLIDATED SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
(IN MILLIONS)
DECEMBER 31, 1997
AMOUNT
AT WHICH
COST OR SHOWN IN
AMORTIZED MARKET THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
------------------ --------- ------ -------------
Short term investments................................ $ 725.1 $ 725.1 $ 725.1
--------- --------- ---------
Fixed maturities
Bonds
United States Government and government agencies
and authorities................................ 1,636.6 1,672.0 1,669.6
States, municipalities and political
subdivisions................................... 7,561.2 8,063.8 7,919.6
Foreign.......................................... 1,022.5 1,066.4 1,066.4
Public utilities................................. 190.7 195.8 195.8
All other corporate bonds........................ 1,412.9 1,442.5 1,442.5
--------- --------- ---------
Total bonds............................ 11,823.9 12,440.5 12,293.9
Redeemable preferred stocks......................... 151.1 159.5 159.5
--------- --------- ---------
Total fixed maturities................. 11,975.0 12,600.0 12,453.4
--------- --------- ---------
Equity securities
Common stocks
Banks, trusts and insurance companies............ 23.9 39.8 39.8
Industrial, miscellaneous and other.............. 710.0 831.3 831.3
--------- --------- ---------
Total equity securities................ 733.9 871.1 871.1
--------- --------- ---------
Total invested assets.................. $13,434.0 $14,196.2 $14,049.6
========= ========= =========
37
38
THE CHUBB CORPORATION
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS -- PARENT COMPANY ONLY
(IN MILLIONS)
DECEMBER 31
1997 1996
---- ----
Assets
Invested Assets
Short Term Investments................................. $ 420.8 $ 9.7
Taxable Fixed Maturities -- Available-for-Sale (cost
$330.8 and $792.9).................................... 334.9 786.8
Equity Securities (cost $66.4 and $52.1)............... 83.6 86.9
-------- --------
TOTAL INVESTED ASSETS............................. 839.3 883.4
Cash...................................................... .6 --
Investment in Consolidated Subsidiaries
Continuing Operations.................................. 4,779.6 3,714.7
Discontinued Operations................................ -- 843.4
Other Assets.............................................. 231.4 212.6
-------- --------
TOTAL ASSETS...................................... $5,850.9 $5,654.1
======== ========
Liabilities
Long Term Debt............................................ 60.0 90.0
Dividend Payable to Shareholders.......................... 49.0 47.2
Deferred Income Tax....................................... 39.5 15.0
Accrued Expenses and Other Liabilities.................... 45.3 39.0
-------- --------
TOTAL LIABILITIES................................. 193.8 191.2
-------- --------
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 176,037,850 and 176,084,173
Shares................................................. 176.0 176.1
Paid-In Surplus........................................... 593.0 695.7
Retained Earnings......................................... 5,101.7 4,530.5
Foreign Currency Translation Losses, Net of Income Tax.... (25.7) (15.6)
Unrealized Appreciation of Investments, Net of Income
Tax.................................................... 400.1 238.7
Receivable from Employee Stock Ownership Plan............. (96.7) (106.3)
Treasury Stock, at Cost -- 7,320,410 and 1,223,182
Shares................................................. (491.3) (56.2)
-------- --------
TOTAL SHAREHOLDERS' EQUITY........................ 5,657.1 5,462.9
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $5,850.9 $5,654.1
======== ========
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in the Corporation's 1997
Annual Report to Shareholders.
38
39
THE CHUBB CORPORATION
SCHEDULE II
(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME -- PARENT COMPANY ONLY
(IN MILLIONS)
YEARS ENDED DECEMBER 31
1997 1996 1995
---- ---- ----
Investment Income........................................... $ 71.8 $ 41.5 $ 20.0
Realized Investment Gains (Losses).......................... 13.2 12.8 (.5)
Investment Expenses......................................... (1.8) (2.0) (1.1)
Corporate Expenses.......................................... (34.9) (33.4) (33.4)
------ ------ ------
48.3 18.9 (15.0)
Federal and Foreign Income Tax (Credit)..................... 44.0 (.1) 2.7
------ ------ ------
4.3 18.8 (17.7)
Equity in Income from Continuing Operations of Consolidated
Subsidiaries.............................................. 765.2 467.4 672.1
------ ------ ------
INCOME FROM CONTINUING OPERATIONS...................... 769.5 486.2 654.4
Equity in Income from Discontinued Operations............... -- 26.5 42.2
------ ------ ------
NET INCOME............................................. $769.5 $512.7 $696.6
====== ====== ======
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 1997
Annual Report to Shareholders.
39
40
THE CHUBB CORPORATION
SCHEDULE II
(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY
(IN MILLIONS)
YEARS ENDED DECEMBER 31
1997 1996 1995
---- ---- ----
Cash Flows from Operating Activities
Net Income................................................ $ 769.5 $ 512.7 $ 696.6
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Equity in Income of Continuing Operations of
Consolidated Subsidiaries............................ (765.2) (467.4) (672.1)
Equity in Income from Discontinued Operations.......... -- (26.5) (42.2)
Realized Investment (Gains) Losses..................... (13.2) (12.8) .5
Other, Net............................................. 16.9 (12.7) 5.2
------- ------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES.............................. 8.0 (6.7) (12.0)
------- ------- -------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities................... 600.1 237.7 110.2
Proceeds from Maturities of Fixed Maturities.............. 49.1 104.9 13.3
Proceeds from Sales of Equity Securities.................. 89.7 17.3 2.5
Proceeds from Sale of Discontinued Operations, Net........ 861.2 -- --
Purchases of Fixed Maturities............................. (606.3) (398.0) (39.6)
Purchases of Equity Securities............................ (84.0) (16.1) (8.7)
Decrease (Increase) in Short Term Investments, Net........ (411.1) 53.0 (1.2)
Dividends Received from Consolidated Subsidiaries......... 280.0 275.2 244.0
Capital Contributions to Consolidated Subsidiaries........ -- -- (24.0)
Other, Net................................................ 19.6 (23.4) (40.1)
------- ------- -------
NET CASH PROVIDED BY INVESTING ACTIVITIES............ 798.3 250.6 256.4
------- ------- -------
Cash Flows from Financing Activities
Proceeds from Exercise of Stock Option by Subsidiary...... 249.3(a) -- --
Repayment of Long Term Debt............................... (30.0) (30.0) (30.0)
Dividends Paid to Shareholders............................ (196.5) (184.2) (167.8)
Repurchase of Shares...................................... (827.9) (82.5) --
Other, Net................................................ (.6) 52.7 (46.6)
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES................ (805.7) (244.0) (244.4)
------- ------- -------
Net Increase (Decrease) in Cash............................. .6 (.1) --
Cash at Beginning of Year................................... -- .1 .1
------- ------- -------
CASH AT END OF YEAR.................................. $ .6 $ -- $ .1
======= ======= =======
- ---------------
(a) In 1997 and 1996, Chubb Capital Corporation, a subsidiary of the
Corporation, exercised its option to obtain 5,316,565 shares and 480,464
shares, respectively, of the Corporation's common stock. Chubb Capital
exchanged such shares for $228.6 million and $20.7 million, respectively, of
its 6% exchangeable subordinated notes. In 1997, Chubb Capital paid the
Corporation for the cost of those shares.
In 1997, a $264.4 million investment in a real estate development
subsidiary was received as a dividend from a subsidiary of the Corporation. In
addition, $410.7 million of fixed maturity securities were contributed to an
investment company subsidiary of the Corporation. In 1996, $520.3 million of
fixed maturity securities were received as a dividend from the investment
company subsidiary. These noncash transactions have been excluded from the
statements of cash flows.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in the Corporation's 1997
Annual Report to Shareholders.
40
41
THE CHUBB CORPORATION
SCHEDULE III
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(IN MILLIONS)
DECEMBER 31 YEAR ENDED DECEMBER 31
--------------------------------- ---------------------------------
DEFERRED
POLICY NET
ACQUISITION UNPAID UNEARNED PREMIUMS INVESTMENT INSURANCE
SEGMENT COSTS CLAIMS PREMIUMS EARNED INCOME CLAIMS
------- ----------- -------- -------- -------- ---------- ---------
1997
Property and Casualty Insurance
Personal............................................ $174.5 $ 675.5 $ 644.7 $1,188.1 $ 595.5
Commercial.......................................... 502.4 9,097.0 2,051.9 3,874.4 2,646.1
Reinsurance Assumed................................. -- -- -- 94.9 65.4
Investments......................................... $711.2*
------ -------- -------- -------- ------ --------
$676.9 $9,772.5 $2,696.6 $5,157.4 $711.2 $3,307.0
====== ======== ======== ======== ====== ========
1996
Property and Casualty Insurance
Personal............................................ $146.1 $ 688.5 $ 591.9 $ 969.7 $ 570.5
Commercial.......................................... 425.2 8,652.8 1,926.8 3,315.6 2,252.6
Reinsurance Assumed................................. 29.9 182.4 98.8 284.0 187.7
Investments......................................... $646.1*
------ -------- -------- -------- ------ --------
$601.2 $9,523.7 $2,617.5 $4,569.3 $646.1 $3,010.8
====== ======== ======== ======== ====== ========
1995
Property and Casualty Insurance
Personal............................................ $131.5 $ 692.0 $ 548.1 $ 847.5 $ 442.5
Commercial.......................................... 367.2 8,498.5 1,842.3 2,952.8 2,000.8
Reinsurance Assumed................................. 60.0 397.7 180.3 346.9 226.7
Investments......................................... $603.0*
------ -------- -------- -------- ------ --------
$558.7 $9,588.2 $2,570.7 $4,147.2 $603.0 $2,670.0
====== ======== ======== ======== ====== ========
YEAR ENDED DECEMBER 31
-----------------------------------
AMORTIZATION OTHER
OF DEFERRED INSURANCE
POLICY OPERATING
ACQUISITION COSTS AND PREMIUMS
SEGMENT COSTS EXPENSES WRITTEN
------- ------------ --------- --------
1997
Property and Casualty Insurance
Personal............................................ $ 340.3 $ 68.2 $1,306.4
Commercial.......................................... 1,021.1 262.6 4,145.4
Reinsurance Assumed................................. 41.2 (3.8)
Investments.........................................
-------- ------ --------
$1,402.6 $330.8 $5,448.0
======== ====== ========
1996
Property and Casualty Insurance
Personal............................................ $ 273.5 $ 58.5 $1,039.2
Commercial.......................................... 849.5 231.7 3,532.1
Reinsurance Assumed................................. 115.0 202.5
Investments.........................................
-------- ------ --------
$1,238.0 $290.2 $4,773.8
======== ====== ========
1995
Property and Casualty Insurance
Personal............................................ $ 254.0 $ 53.7 $ 866.8
Commercial.......................................... 750.6 208.3 3,070.7
Reinsurance Assumed................................. 116.4 368.5
Investments.........................................
-------- ------ --------
$1,121.0 $262.0 $4,306.0
======== ====== ========
- ---------------
* Property and casualty assets are available for payment of claims and expenses
for all classes of business; therefore, such assets and the related
investment income have not been identified with specific groupings of classes
of business.
41
42
THE CHUBB CORPORATION
SCHEDULE IV
CONSOLIDATED REINSURANCE
(IN MILLIONS)
YEARS ENDED DECEMBER 31
PROPERTY AND CASUALTY INSURANCE PREMIUMS EARNED
----------------------------------------------- PERCENTAGE OF
CEDED ASSUMED AMOUNT
DIRECT TO OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------ --------- ---------- ------ -------------
1997......................................... $5,315.8 $ 450.8 $292.4 $5,157.4 5.7
======== ======== ====== ========
1996......................................... $5,023.5 $ 987.2 $533.0 $4,569.3 11.7
======== ======== ====== ========
1995......................................... $4,754.4 $1,319.3 $712.1 $4,147.2 17.2
======== ======== ====== ========
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
-------- -------- ----------------
1997.................................................. $3,372.3 $(65.3) $2,498.3
======== ====== ========
1996.................................................. $3,053.6 $(42.8) $2,869.4
======== ====== ========
1995.................................................. $2,705.8 $(35.8) $1,988.4
======== ====== ========
42
43
THE CHUBB CORPORATION
EXHIBITS
(ITEM 14(a))
DESCRIPTION
-----------
(2) -- Plan of acquisition, reorganization, arrangement,
liquidation or succession
Stock Purchase Agreement dated as of February 23, 1997
between Jefferson-Pilot Corporation and the registrant
incorporated by reference to Exhibit 2.1 of the
registrant's Report to the Securities and Exchange
Commission on Form 10-Q for the three months ended March
31, 1997. (Confidential treatment granted with respect to
certain portions thereof.)
(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.
Restated By-Laws. 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,
1997.
(4) -- The registrant is not filing any instruments evidencing any
indebtedness since the total amount of securities
authorized under any single instrument does not exceed 10%
of the total assets of the registrant and its subsidiaries
on a consolidated basis. Copies of such instruments will
be furnished to the Securities and Exchange Commission
upon request.
(10) -- Material contracts
Global Settlement Agreement among Fibreboard Corporation,
Continental Casualty Company, CNA Casualty Company of
California, Columbia Casualty Company, Pacific Indemnity
Company, and the Settlement Class and together with
Exhibits A through D incorporated by reference to Exhibit
(10) of the registrant's Report to the Securities and
Exchange Commission on Form 10-K for the year ended
December 31, 1993.
Settlement Agreement with Fibreboard Corporation,
Continental Casualty Company, CNA Casualty Company of
California and Columbia Casualty Company incorporated by
reference to Exhibit (10) of the registrant's Report to
the Securities and Exchange Commission on Form 10-Q for
the nine months ended September 30, 1993.
Continental-Pacific Agreement with Continental Casualty
Company incorporated by reference to Exhibit (10) of the
registrant's Report to the Securities and Exchange
Commission on Form 10-Q for the nine months ended
September 30, 1993.
Amendment to the Continental-Pacific Agreement with
Continental Casualty Company incorporated by reference to
Exhibit (10) of the registrant's Report to the Securities
and Exchange Commission on Form 10-K for the year ended
December 31, 1994.
Executive Compensation Plans and Arrangements.
The Chubb Corporation Annual Incentive Compensation Plan
(1996) incorporated by reference to Exhibit A of the
registrant's definitive proxy statement for the Annual
Meeting of Shareholders held on April 23, 1996.
The Chubb Corporation Long-Term Stock Incentive Plan
(1996), as amended, incorporated by reference to
Exhibit (10) of the registrant's Report to the
Securities and Exchange Commission on Form 10-Q for the
six months ended June 30, 1996.
43
44
DESCRIPTION
-----------
The Chubb Corporation Stock Option Plan for Non-Employee
Directors (1996) incorporated by reference to Exhibit C
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
(1992) 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,
1992.
The Chubb Corporation Stock Option Plan (1984)
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.
The Chubb Corporation Stock Option Plan for Non-Employee
Directors (1992) 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, 1992.
The Chubb Corporation Deferred Compensation Plan for
Directors 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 and their amendments
incorporated by reference to Exhibit (10) of the
registrant's Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31,
1994.
Executive Severance 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, 1995.
Executive Severance Agreement incorporated by reference to
Exhibit (10) of the registrant's Report to the
Securities and Exchange Commission on Form 10-Q for the
six months ended June 30, 1997.
Executive Severance Agreements filed herewith.
Contract for consulting and advisory services with Percy
Chubb III, a director of the registrant, incorporated
by reference to Exhibit (10) of the registrant's Report
to the Securities and Exchange Commission on Form 10-K
for the year ended December 31, 1996.
(11) -- Computation of earnings per share incorporated by reference
from Note (16) of the notes to consolidated financial
statements of the 1997 Annual Report to Shareholders.
(13) -- Pages 15, 16, and 36 through 62 of the 1997 Annual Report to
Shareholders.
(21) -- Subsidiaries of the registrant filed herewith.
(23) -- Consent of Independent Auditors (see page 36 of this
report).
44