1
Supplementary Financial Data
IN MILLIONS
YEARS ENDED DECEMBER 31
1999 1998 1997
-------- -------- --------
PROPERTY AND CASUALTY INSURANCE
UNDERWRITING
Net Premiums Written................................... $5,701.1 $5,503.5 $5,448.0
Increase in Unearned Premiums.......................... (49.1) (199.7) (290.6)
-------- -------- --------
Premiums Earned........................................ 5,652.0 5,303.8 5,157.4
-------- -------- --------
Claims and Claim Expenses.............................. 3,942.0 3,493.7 3,307.0
Operating Costs and Expenses........................... 1,841.5 1,832.6 1,753.3
Decrease (Increase) in Deferred Policy Acquisition
Costs................................................ 4.2 (51.8) (75.7)
Dividends to Policyholders............................. 43.1 35.9 31.7
-------- -------- --------
UNDERWRITING INCOME (LOSS)............................. (178.8) (6.6) 141.1
-------- -------- --------
INVESTMENTS
Investment Income Before Expenses...................... 832.6 760.0 721.4
Investment Expenses.................................... 11.6 11.1 10.2
-------- -------- --------
INVESTMENT INCOME...................................... 821.0 748.9 711.2
-------- -------- --------
Amortization of Goodwill and Other Charges................ (16.0) (17.4) (24.1)
Restructuring Charge (a).................................. -- (40.0) --
-------- -------- --------
PROPERTY AND CASUALTY INCOME.............................. 626.2 684.9 828.2
CORPORATE AND OTHER......................................... (3.5) 22.9 40.7
-------- -------- --------
CONSOLIDATED OPERATING INCOME BEFORE INCOME TAX............. 622.7 707.8 868.9
Federal and Foreign Income Tax.............................. 57.4 93.0 167.8
-------- -------- --------
CONSOLIDATED OPERATING INCOME............................... 565.3 614.8 701.1
REALIZED INVESTMENT GAINS AFTER INCOME TAX.................. 55.8 92.2 68.4
-------- -------- --------
CONSOLIDATED NET INCOME..................................... $ 621.1 $ 707.0 $ 769.5
======== ======== ========
PROPERTY AND CASUALTY INVESTMENT INCOME AFTER INCOME TAX.... $ 691.9 $ 634.1 $ 592.3
======== ======== ========
(a) In the first quarter of 1998, a restructuring charge of $40.0 million ($26.0
million after taxes) related to a cost reduction program was recorded.
15
2
Property and Casualty Underwriting Results
NET PREMIUMS WRITTEN (In Millions of Dollars)
1999 1998 1997 1996 1995
Personal Insurance
Automobile................................... $ 346.1 $ 309.4 $ 298.6 $ 243.1 $ 200.3
Homeowners................................... 826.7 735.1 697.4 546.1 455.6
Other........................................ 351.7 320.2 310.4 250.0 210.9
-------- -------- -------- -------- --------
Total Personal.......................... 1,524.5 1,364.7 1,306.4 1,039.2 866.8
-------- -------- -------- -------- --------
Commercial Insurance
Multiple Peril............................... 714.5 784.5 813.6 671.0 575.7
Casualty..................................... 828.2 900.5 915.8 818.0 717.3
Workers' Compensation........................ 299.5 320.8 296.7 243.7 223.4
-------- -------- -------- -------- --------
Total Standard Commercial............... 1,842.2 2,005.8 2,026.1 1,732.7 1,516.4
-------- -------- -------- -------- --------
Property and Marine.......................... 498.4 524.0 583.0 495.0 426.3
Executive Protection......................... 1,078.0 949.8 891.4 775.7 647.0
Financial Institutions....................... 385.8 391.6 384.3 340.4 285.5
Other........................................ 372.2 267.6 260.6 188.3 195.5
-------- -------- -------- -------- --------
Total Specialty Commercial.............. 2,334.4 2,133.0 2,119.3 1,799.4 1,554.3
-------- -------- -------- -------- --------
Total Commercial........................ 4,176.6 4,138.8 4,145.4 3,532.1 3,070.7
-------- -------- -------- -------- --------
Total Personal and Commercial........... 5,701.1 5,503.5 5,451.8 4,571.3 3,937.5
Reinsurance Assumed from Royal & Sun
Alliance..................................... -- -- (3.8) 202.5 368.5
-------- -------- -------- -------- --------
Total................................... $5,701.1 $5,503.5 $5,448.0 $4,773.8 $4,306.0
======== ======== ======== ======== ========
A portion of the increase in net premiums written in both 1996 and 1997 was due
to changes to the reinsurance agreements with the Royal & Sun Alliance Insurance
Group plc. Effective January 1, 1996, these agreements were amended to reduce
the portion of each company's business reinsured with the other. The agreements
were terminated effective January 1, 1997.
COMBINED LOSS AND EXPENSE RATIOS
Personal Insurance
Automobile................................... 91.8% 89.2% 86.6% 86.5% 87.4%
Homeowners................................... 97.9 90.8 88.9 104.3 93.8
Other........................................ 69.4 70.2 66.9 69.3 72.6
-------- -------- -------- -------- --------
Total Personal.......................... 89.9 85.6 83.1 91.7 87.1
-------- -------- -------- -------- --------
Commercial Insurance
Multiple Peril............................... 132.7 124.2 118.7 118.1 110.0
Casualty..................................... 119.3 114.6 113.5 113.3 113.8
Workers' Compensation........................ 112.6 111.5 105.0 101.8 95.1
-------- -------- -------- -------- --------
Total Standard Commercial............... 123.6 118.0 114.5 113.6 109.7
-------- -------- -------- -------- --------
Property and Marine.......................... 111.3 116.5 105.5 97.8 92.9
Executive Protection......................... 84.3 75.8 74.5 76.5 82.1
Financial Institutions....................... 95.5 86.7 91.5 83.7 88.8
Other........................................ 92.9 100.9 85.0 99.0 103.9
-------- -------- -------- -------- --------
Total Specialty Commercial.............. 93.6 91.5 87.5 86.1 89.1
-------- -------- -------- -------- --------
Total Commercial........................ 107.3 104.5 100.7 99.7 99.3
-------- -------- -------- -------- --------
Total Personal and Commercial........... 102.8 99.8 96.6 97.9 96.5
Reinsurance Assumed from Royal & Sun
Alliance..................................... -- -- N/M N/M 99.2
-------- -------- -------- -------- --------
Total................................... 102.8% 99.8% 96.9% 98.3% 96.8%
======== ======== ======== ======== ========
The combined loss and expense ratio, expressed as a percentage, is the key
measure of underwriting profitability traditionally used in the property and
casualty insurance business. It is the sum of the ratio of losses to premiums
earned plus the ratio of underwriting expenses to premiums written after
reducing both premium amounts by dividends to policyholders.
16
3
Ten Year Financial Summary
(in millions except for per share amounts)
FOR THE YEAR 1999 1998 1997
INCOME
Property and Casualty Insurance
Underwriting Income (Loss)............................... $(178.8) $ (6.6) $ 141.1
Investment Income........................................ 821.0 748.9 711.2
Amortization of Goodwill and Other Charges............... (16.0) (57.4)(b) (24.1)
Property and Casualty Insurance Income.................... 626.2 684.9 828.2
Corporate and Other....................................... (3.5) 22.9 40.7
OPERATING INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX...................................... 622.7 707.8 868.9
Federal and Foreign Income Tax (Credit)................... 57.4 93.0 167.8
OPERATING INCOME FROM CONTINUING OPERATIONS............... 565.3 614.8 701.1
Realized Investment Gains from Continuing Operations...... 55.8 92.2 68.4
INCOME FROM CONTINUING OPERATIONS......................... 621.1 707.0 769.5
Income from Discontinued Operations (1)................... -- -- --
NET INCOME................................................ 621.1 707.0 769.5
Property and Casualty Investment Income After Income
Tax.................................................... 691.9 634.1 592.3
Dividends Declared on Common Stock.......................... 216.5 204.7 198.3
Net Change in Unrealized Appreciation or Depreciation of
Investments, Net of Tax(2)................................ (527.3) 14.6 161.4
PER SHARE
Operating Income from Continuing Operations............... 3.33 3.65(b) 4.00
Income from Continuing Operations......................... 3.66 4.19 4.39
Income from Discontinued Operations(1).................... -- -- --
Net Income................................................ 3.66 4.19 4.39
Dividends Declared on Common Stock........................ 1.28 1.24 1.16
Average Common and Potentially Dilutive Shares.............. 169.8 168.6 176.2
(1) In May 1997, the Corporation sold its life and health
insurance operations, which have been classified as
discontinued operations.
(2) Amounts prior to 1994 do not reflect the accounting changes
prescribed by Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and
Equity Securities, as restatement of prior year amounts was
not permitted. The change in unrealized appreciation or
depreciation of investments for 1994 excludes the increase
in unrealized appreciation, as of January 1, 1994, of $220.5
million resulting from the change in accounting principle.
36
4
1996 1995 1994 1993 1992 1991 1990
$ 54.3 $ 111.7 $ .4 $(528.9)(a) $ (46.3) $ 17.1 $ 4.1
646.1 603.0 560.5 533.7 493.5 469.5 456.3
(24.0) (17.5) (8.7) (6.2) (4.3) (1.2) (5.5)
676.4 697.2 552.2 (1.4) 442.9 485.4 454.9
(209.3)(c) 31.0 5.0 24.5 43.8 59.3 80.2
467.1 728.2 557.2 23.1 486.7 544.7 535.1
32.9 144.5 84.4 (107.0) 49.4 87.2 88.3
434.2 583.7 472.8 130.1 437.3 457.5 446.8
52.0 70.7 35.1 137.3 114.8 40.3 25.8
486.2 654.4 507.9 267.4 552.1 497.8 472.6
26.5 42.2 20.6 76.8 65.0 54.2 49.5
512.7 696.6 528.5 324.2(d) 617.1 552.0 522.1
544.2 507.2 475.0 455.4 422.8 397.6 371.4
188.7 170.6 161.1 150.8 139.6 127.8 109.1
(107.2) 470.2 (487.9) 46.5 (82.1) 12.2 (19.4)
2.44(c) 3.27 2.66 .77(a) 2.47 2.61 2.59
2.73 3.67 2.85 1.52 3.10 2.84 2.74
.15 .23 .11 .42 .36 .30 .28
2.88 3.90 2.96 1.83(d) 3.46 3.14 3.02
1.08 .98 .92 .86 .80 .74 .66
181.6 180.9 181.6 182.2 181.4 178.5 175.5
(a) Underwriting income has been reduced by $550.0 million ($357.5 million
after-tax or $1.96 per share) for the net effect of a $675.0 million
increase in unpaid claims related to an agreement for the settlement of
asbestos-related litigation and a $125.0 million return premium related to
the commutation of a medical malpractice reinsurance agreement.
(b) Property and casualty insurance other charges includes a restructuring
charge of $40.0 million ($26.0 million after-tax or $.15 per share).
(c) Real estate income has been reduced by a charge of $255.0 million ($160.0
million after-tax or $.89 per share) for the write-down of the carrying
value of certain real estate assets to their estimated fair value.
(d) Net income has been reduced by a one-time charge of $20.0 million or $.11
per share for the cumulative effect of changes in accounting principles
resulting from the Corporation's adoption of Statements of Financial
Accounting Standards No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions, and No. 109, Accounting for Income Taxes.
Income before the cumulative effect of changes in accounting principles was
$344.2 million or $1.94 per share.
37
5
Ten Year Financial Summary
(in millions except for per share amounts)
FOR THE YEAR 1999 1998 1997
REVENUES
Property and Casualty Insurance
Premiums Earned......................................... $ 5,652.0 $ 5,303.8 $ 5,157.4
Investment Income....................................... 832.6 760.0 721.4
Real Estate.............................................. 96.8 82.2 616.1
Corporate Investment Income.............................. 60.8 61.9 63.9
Realized Investment Gains................................ 87.4 141.9 105.2
TOTAL REVENUES........................................ 6,729.6 6,349.8 6,664.0
AT YEAR END
Total Assets............................................... 23,537.0 20,746.0 19,615.6
Invested Assets
Property and Casualty Insurance.......................... 14,869.9 13,715.0 12,777.3
Corporate................................................ 1,149.5 1,040.3 1,272.3
Unpaid Claims.............................................. 11,434.7 10,356.5 9,772.5
Long Term Debt............................................. 759.2 607.5 398.6
Total Shareholders' Equity................................. 6,271.8 5,644.1 5,657.1
Per Common Share......................................... 35.74 34.78 33.53
Per Common Share, Excluding the Effects of SFAS No.
115................................................... 36.58 32.59 31.69
Actual Common Shares Outstanding........................... 175.5 162.3 168.7
Amounts prior to 1994 do not reflect the accounting changes
prescribed by Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities, as restatement of prior year amounts
was not permitted.
38
6
1996 1995 1994 1993 1992 1991 1990
$ 4,569.3 $ 4,147.2 $ 3,776.3 $ 3,504.8(a) $ 3,163.3 $ 3,037.2 $ 2,836.1
656.2 613.3 570.5 541.7 501.1 477.0 463.4
319.8 287.8 204.9 160.6 150.0 140.9 174.9
55.4 54.4 49.4 52.7 57.2 46.3 39.6
79.8 108.8 54.1 210.6 174.1 61.1 39.6
5,680.5 5,211.5 4,655.2 4,470.4 4,045.7 3,762.5 3,553.6
19,938.9 19,636.3 17,761.0 16,729.5 15,197.6 13,885.9 12,347.8
11,190.7 10,013.6 8,938.8 8,403.1 7,767.5 7,086.6 6,297.8
890.4 906.6 879.5 965.7 955.8 840.3 688.4
9,523.7 9,588.2 8,913.2 8,235.4 7,220.9 6,591.3 6,016.4
1,070.5 1,150.8 1,279.6 1,267.2 1,065.6 1,045.8 812.6
5,462.9 5,262.7 4,247.0 4,196.1 3,954.4 3,541.6 2,882.6
31.24 30.14 24.46 23.92 22.59 20.37 17.60
30.27 28.51 25.30 23.92 22.59 20.37 17.60
174.9 174.6 173.6 175.4 175.0 173.9 163.8
(a) Premiums earned have been increased by a $125.0 million return premium to
the Corporation's property and casualty insurance subsidiaries related to
the commutation of a medical malpractice reinsurance agreement.
39
7
The Chubb Corporation
CONSOLIDATED STATEMENTS OF INCOME
IN MILLIONS
YEARS ENDED DECEMBER 31
1999 1998 1997
REVENUES -------- -------- --------
Premiums Earned (Note 8)............................... $5,652.0 $5,303.8 $5,157.4
Investment Income (Note 4)............................. 893.4 821.9 785.3
Real Estate............................................ 96.8 82.2 616.1
Realized Investment Gains (Note 4)..................... 87.4 141.9 105.2
-------- -------- --------
TOTAL REVENUES.................................... 6,729.6 6,349.8 6,664.0
-------- -------- --------
CLAIMS AND EXPENSES
Insurance Claims (Notes 8 and 15)...................... 3,942.0 3,493.7 3,307.0
Amortization of Deferred Policy Acquisition Costs (Note
5).................................................... 1,529.7 1,464.3 1,402.6
Other Insurance Operating Costs and Expenses........... 375.1 369.8 330.8
Real Estate Cost of Sales and Expenses................. 100.3 85.7 624.7
Investment Expenses.................................... 13.7 13.2 12.0
Corporate Expenses..................................... 58.7 33.4 12.8
Restructuring Charge (Note 9).......................... -- 40.0 --
-------- -------- --------
TOTAL CLAIMS AND EXPENSES......................... 6,019.5 5,500.1 5,689.9
-------- -------- --------
INCOME BEFORE FEDERAL AND FOREIGN INCOME TAX...... 710.1 849.7 974.1
FEDERAL AND FOREIGN INCOME TAX (NOTE 11).................... 89.0 142.7 204.6
-------- -------- --------
NET INCOME........................................ $ 621.1 $ 707.0 $ 769.5
======== ======== ========
NET INCOME PER SHARE (NOTE 17)
Basic............................................. $ 3.70 $ 4.27 $ 4.48
Diluted........................................... 3.66 4.19 4.39
See accompanying notes.
40
8
The Chubb Corporation
CONSOLIDATED BALANCE SHEETS
IN MILLIONS
DECEMBER 31
1999 1998
ASSETS ---- ---------
Invested Assets (Note 4)
Short Term Investments................................. $ 731.1 $ 344.2
Fixed Maturities
Held-to-Maturity -- Tax Exempt (market $1,801.0 and
$2,140.2)........................................... 1,741.9 2,002.2
Available-for-Sale
Tax Exempt (cost $7,889.3 and $6,509.3)........... 7,867.5 6,935.1
Taxable (cost $5,054.7 and $4,259.0).............. 4,909.7 4,381.6
Equity Securities (cost $715.0 and $1,002.6)........... 769.2 1,092.2
--------- ---------
TOTAL INVESTED ASSETS................................ 16,019.4 14,755.3
Cash...................................................... 22.7 8.3
Securities Lending Collateral............................. 469.5 --
Accrued Investment Income................................. 242.9 221.0
Premiums Receivable....................................... 1,234.7 1,199.3
Reinsurance Recoverable on Unpaid Claims.................. 1,685.9 1,306.6
Prepaid Reinsurance Premiums.............................. 240.1 134.6
Funds Held for Asbestos-Related Settlement................ -- 607.4
Deferred Policy Acquisition Costs (Note 5)................ 779.7 728.7
Real Estate Assets (Notes 6 and 10)....................... 699.4 746.0
Deferred Income Tax (Note 11)............................. 584.2 320.8
Goodwill.................................................. 507.2 --
Other Assets.............................................. 1,051.3 718.0
--------- ---------
TOTAL ASSETS......................................... $23,537.0 $20,746.0
========= =========
LIABILITIES
Unpaid Claims (Note 15)................................... $11,434.7 $10,356.5
Unearned Premiums......................................... 3,323.1 2,915.7
Securities Lending Payable................................ 469.5 --
Long Term Debt (Note 10).................................. 759.2 607.5
Dividend Payable to Shareholders.......................... 56.2 50.3
Accrued Expenses and Other Liabilities.................... 1,222.5 1,171.9
--------- ---------
TOTAL LIABILITIES.................................... 17,265.2 15,101.9
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 14 AND 15)
SHAREHOLDERS' EQUITY (NOTES 12 AND 20)
Preferred Stock -- Authorized 4,000,000 Shares;
$1 Par Value; Issued -- None........................... -- --
Common Stock -- Authorized 600,000,000 Shares;
$1 Par Value; Issued 177,272,322 and 175,989,202
Shares................................................. 177.3 176.0
Paid-In Surplus........................................... 418.4 546.7
Retained Earnings......................................... 6,008.6 5,604.0
Accumulated Other Comprehensive Income
Unrealized Appreciation (Depreciation) of Investments,
Net of Tax (Note 4)................................... (112.6) 414.7
Foreign Currency Translation Losses, Net of Tax........ (44.8) (36.0)
Receivable from Employee Stock Ownership Plan............. (74.9) (86.3)
Treasury Stock, at Cost -- 1,782,489 and 13,722,376
Shares................................................. (100.2) (975.0)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY........................... 6,271.8 5,644.1
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $23,537.0 $20,746.0
========= =========
See accompanying notes.
41
9
The Chubb Corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN MILLIONS
YEARS ENDED DECEMBER 31
1999 1998 1997
-------- -------- --------
PREFERRED STOCK
Balance, Beginning and End of Year..................... $ -- $ -- $ --
-------- -------- --------
COMMON STOCK
Balance, Beginning of Year............................. 176.0 176.0 176.1
Share Activity Related to Acquisition of Executive
Risk................................................. .6 -- --
Share Activity under Option and Incentive Plans........ .7 -- (.1)
-------- -------- --------
Balance, End of Year.............................. 177.3 176.0 176.0
-------- -------- --------
PAID-IN SURPLUS
Balance, Beginning of Year............................. 546.7 593.0 695.7
Share Activity Related to Acquisition of Executive
Risk................................................. (126.3) -- --
Exchange of Long Term Debt............................. -- -- (68.4)
Share Activity under Option and Incentive Plans........ (2.0) (46.3) (34.3)
-------- -------- --------
Balance, End of Year.............................. 418.4 546.7 593.0
-------- -------- --------
RETAINED EARNINGS
Balance, Beginning of Year............................. 5,604.0 5,101.7 4,530.5
Net Income............................................. 621.1 707.0 769.5
Dividends Declared (per share $1.28, $1.24 and
$1.16)............................................... (216.5) (204.7) (198.3)
-------- -------- --------
Balance, End of Year.............................. 6,008.6 5,604.0 5,101.7
-------- -------- --------
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS
Balance, Beginning of Year............................. 414.7 400.1 238.7
Change During Year, Net (Note 4)....................... (527.3) 14.6 161.4
-------- -------- --------
Balance, End of Year.............................. (112.6) 414.7 400.1
-------- -------- --------
FOREIGN CURRENCY TRANSLATION LOSSES
Balance, Beginning of Year............................. (36.0) (25.7) (15.6)
Change During Year, Net of Tax......................... (8.8) (10.3) (10.1)
-------- -------- --------
Balance, End of Year.............................. (44.8) (36.0) (25.7)
-------- -------- --------
RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN
Balance, Beginning of Year............................. (86.3) (96.7) (106.3)
Principal Repayments................................... 11.4 10.4 9.6
-------- -------- --------
Balance, End of Year.............................. (74.9) (86.3) (96.7)
-------- -------- --------
TREASURY STOCK, AT COST
Balance, Beginning of Year............................. (975.0) (491.3) (56.2)
Repurchase of Shares................................... (145.0) (608.5) (827.9)
Share Activity Related to Acquisition of Executive
Risk................................................. 957.2 -- --
Shares Issued upon Exchange of Long Term Debt.......... -- -- 304.4
Share Activity under Option and Incentive Plans........ 62.6 124.8 88.4
-------- -------- --------
Balance, End of Year.............................. (100.2) (975.0) (491.3)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY........................ $6,271.8 $5,644.1 $5,657.1
======== ======== ========
See accompanying notes.
42
10
The Chubb Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN MILLIONS
YEARS ENDED DECEMBER 31
1999 1998 1997
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................ $ 621.1 $ 707.0 $ 769.5
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Claims, Net......................... 93.1 485.3 808.7
Increase in Unearned Premiums, Net..................... 49.1 199.7 290.6
Decrease (Increase) in Premiums Receivable............. 14.9 (54.9) (159.5)
Decrease (Increase) in Funds Held for Asbestos-Related
Settlement........................................... 607.4 (7.9) .4
Decrease (Increase) in Deferred Policy Acquisition
Costs................................................ 4.2 (51.8) (75.7)
Deferred Income Tax (Credit)........................... 5.3 (5.5) (33.3)
Depreciation........................................... 68.4 58.2 56.4
Realized Investment Gains.............................. (87.4) (141.9) (105.2)
Other, Net............................................. (37.2) 25.8 13.2
--------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES......................................... 1,338.9 1,214.0 1,565.1
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturities -- Available-for-
Sale..................................................... 1,427.5 1,668.8 3,682.6
Proceeds from Maturities of Fixed Maturities.............. 860.3 784.2 658.5
Proceeds from Sales of Equity Securities.................. 1,030.6 366.7 401.3
Proceeds from Sale of Discontinued Operations, Net........ -- -- 861.2
Purchases of Fixed Maturities............................. (3,252.2) (3,218.4) (5,394.8)
Purchases of Equity Securities............................ (590.7) (535.7) (519.3)
Purchase of Interest in Hiscox plc........................ (145.3) -- --
Decrease (Increase) in Short Term Investments, Net........ (190.9) 380.9 (449.2)
Proceeds from Sale of Real Estate Properties.............. 7.0 33.6 759.6
Additions to Real Estate Assets........................... (11.7) (13.2) (40.1)
Purchases of Fixed Assets, Net............................ (98.4) (78.8) (71.0)
Other, Net................................................ 6.3 (75.5) 41.1
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES................ (957.5) (687.4) (70.1)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Long Term Debt.................. -- 400.5 10.2
Repayment of Long Term Debt............................... (48.3) (191.6) (344.9)
Decrease in Short Term Debt, Net.......................... -- -- (189.5)
Dividends Paid to Shareholders............................ (210.6) (203.4) (196.5)
Repurchase of Shares...................................... (145.0) (608.5) (827.9)
Other, Net................................................ 36.9 73.2 60.4
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES................ (367.0) (529.8) (1,488.2)
--------- --------- ---------
Net Increase (Decrease) in Cash............................. 14.4 (3.2) 6.8
Cash at Beginning of Year................................... 8.3 11.5 4.7
--------- --------- ---------
CASH AT END OF YEAR.................................. $ 22.7 $ 8.3 $ 11.5
========= ========= =========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net Income.................................................. $ 621.1 $ 707.0 $ 769.5
Other Comprehensive Income (Loss)
Change in Unrealized Appreciation or Depreciation of
Investments, Net of Tax................................ (527.3) 14.6 161.4
Foreign Currency Translation Losses,
Net of Tax............................................. (8.8) (10.3) (10.1)
--------- --------- ---------
(536.1) 4.3 151.3
--------- --------- ---------
COMPREHENSIVE INCOME................................. $ 85.0 $ 711.3 $ 920.8
========= ========= =========
See accompanying notes.
43
11
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include the
accounts of The Chubb Corporation (Corporation) and its subsidiaries.
Significant intercompany transactions have been eliminated in consolidation.
The consolidated financial statements include amounts based on informed
estimates and judgments of management for those transactions that are not yet
complete or for which the ultimate effects cannot be precisely determined. Such
estimates and judgments affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Corporation is a holding company with subsidiaries principally engaged in
the property and casualty insurance business. The property and casualty
insurance subsidiaries underwrite most forms of property and casualty insurance
in the United States, Canada, Europe and parts of Australia, Latin America and
the Far East. The geographic distribution of property and casualty business in
the United States is broad with a particularly strong market presence in the
Northeast.
In May 1997, the Corporation completed the sale of its life and health
insurance subsidiaries. The purchase price was not adjusted to reflect results
of operations subsequent to December 31, 1996. Therefore, the discontinued life
and health insurance operations did not affect the Corporation's net income
subsequent to December 31, 1996.
Certain amounts in the consolidated financial statements for prior years have
been reclassified to conform with the 1999 presentation.
(b) Investments
Short term investments, which have an original maturity of one year or less,
are carried at amortized cost.
Fixed maturities, which include bonds and redeemable preferred stocks, are
purchased to support the investment strategies of the Corporation and its
insurance subsidiaries. These strategies are developed based on many factors
including rate of return, maturity, credit risk, tax considerations and
regulatory requirements. Fixed maturities which may be sold prior to maturity to
support the investment strategies of the Corporation and its insurance
subsidiaries are classified as available-for-sale and carried at market value as
of the balance sheet date. Those fixed maturities which the Corporation and its
insurance subsidiaries have the ability and positive intent to hold to maturity
are classified as held-to-maturity and carried at amortized cost.
Premiums and discounts arising from the purchase of mortgage-backed securities
are amortized using the interest method over the estimated remaining term of the
securities, adjusted for anticipated prepayments.
Equity securities, which include common stocks and non-redeemable preferred
stocks, are carried at market value as of the balance sheet date.
Unrealized appreciation or depreciation of investments carried at market value
is excluded from net income and credited or charged, net of applicable deferred
income tax, directly to a separate component of comprehensive income.
Realized gains and losses on the sale of investments are determined on the
basis of the cost of the specific investments sold and are credited or charged
to net income.
(c) Premium Revenues and Related Expenses
Premiums are earned on a monthly pro rata basis over the terms of the
policies. Revenues include estimates of audit premiums and premiums on
retrospectively rated policies. Unearned premiums represent the portion of
premiums written applicable to the unexpired terms of policies in force.
Acquisition costs are deferred by major product groups and amortized over the
period in which the related premiums are earned. Such costs include commissions,
premium taxes and other costs that vary with and are primarily related to the
production of business. Deferred policy acquisition costs are reviewed to
determine that they do not exceed recoverable amounts, after considering
anticipated investment income.
(d) Unpaid Claims
Liabilities for unpaid claims include the accumulation of individual case
estimates for claims reported as well as estimates of unreported claims and
claim settlement expenses, less estimates of anticipated salvage and subrogation
recoveries. Estimates are based upon past claim experience modified for current
trends as well as prevailing economic, legal and social conditions. Such
estimates are continually reviewed and updated. Any resulting adjustments are
reflected in current operating results.
(e) Reinsurance
In the ordinary course of business, the Corporation's insurance subsidiaries
assume and cede reinsurance with other insurance companies and are members of
various pools and associations. Reinsurance is ceded to provide greater
diversification of risk and to limit the maximum net loss potential arising from
large or concentrated risks. A large portion of the reinsurance is effected
under contracts known as treaties and in some instances by negotiation on
individual risks. Certain of these arrangements consist of excess of loss and
catastrophe contracts which protect against losses over stipulated amounts
arising from any one occurrence or event. Ceded reinsurance contracts do not
relieve the Corporation's insurance subsidiaries of their primary obligation to
the policyholders.
44
12
Prepaid reinsurance premiums represent the portion of insurance premiums ceded
to reinsurers applicable to the unexpired terms of the reinsurance contracts in
force.
Commissions received related to reinsurance premiums ceded are considered in
determining net acquisition costs eligible for deferral.
Reinsurance recoverable on unpaid claims represent estimates of the portion of
such liabilities that will be recovered from reinsurers. Amounts recoverable
from reinsurers are recognized as assets at the same time and in a manner
consistent with the liabilities associated with the reinsured policies.
(f) Real Estate
Real estate properties are carried at cost, net of write-downs for impairment.
Real estate taxes, interest and other carrying costs incurred prior to
completion of the assets for their intended use are capitalized. Also, costs
incurred during the initial leasing of income producing properties are
capitalized until the project is substantially complete, subject to a maximum
time period subsequent to completion of major construction activity.
Real estate properties are reviewed for impairment whenever events or
circumstances indicate that the carrying value of such properties may not be
recoverable. In performing the review for recoverability of carrying value,
estimates are made of the future undiscounted cash flows from each of the
properties during the period the property will be held and upon its eventual
disposition. If the expected future undiscounted cash flows are less than the
carrying value of any such property, an impairment loss is recognized resulting
in a write-down of the carrying value of the property. Measurement of such
impairment is based on the fair value of the property.
Depreciation of real estate properties is calculated using the straight-line
method over the estimated useful lives of the properties.
Real estate mortgages and notes receivable are carried at unpaid principal
balances less an allowance for uncollectible amounts. A loan is considered
impaired when it is probable that all principal and interest amounts will not be
collected according to the contractual terms of the loan agreement. An allowance
for uncollectible amounts is established to recognize any such impairment.
Measurement of impairment is based on the discounted future cash flows of the
loan, subject to the estimated fair value of the underlying collateral. These
cash flows are discounted at the loan's effective interest rate.
Rental revenues are recognized on a straight-line basis over the term of the
lease. Profits on land, townhome unit and commercial building sales are
recognized at closing, subject to compliance with applicable accounting
guidelines. Profits on high-rise condominium unit sales are recognized using the
percentage of completion method, subject to achievement of a minimum level of
unit sales.
(g) Goodwill
Goodwill, which represents the excess of the purchase price over the fair
value of net assets of subsidiaries acquired, is being amortized using the
straight-line method over 26 years. The carrying value of goodwill is
periodically reviewed for impairment. If it became probable that the projected
future undiscounted cash flows were not sufficient to recover the carrying value
of the goodwill, an impairment loss would be recognized resulting in a
write-down of the carrying value of the goodwill.
(h) Property and Equipment
Property and equipment used in operations are carried at cost less accumulated
depreciation. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets.
(i) Stock-Based Compensation
The intrinsic value method of accounting is used for stock-based compensation
plans. Under the intrinsic value method, compensation cost is measured as the
excess, if any, of the quoted market price of the stock at the measurement date
over the amount an employee must pay to acquire the stock.
(j) Income Taxes
The Corporation and its domestic subsidiaries file a consolidated federal
income tax return.
Deferred income tax assets and liabilities are recognized for the expected
future tax effects attributable to temporary differences between the financial
reporting and tax bases of assets and liabilities, based on enacted tax rates
and other provisions of tax law. The effect of a change in tax laws or rates is
recognized in net income in the period in which such change is enacted.
U. S. federal income taxes are accrued on undistributed earnings of foreign
subsidiaries.
(k) Foreign Exchange
Assets and liabilities relating to foreign operations are translated into U.S.
dollars using current exchange rates; revenues and expenses are translated into
U.S. dollars using the average exchange rates for each year.
The functional currency of foreign operations is generally the currency of the
local operating environment since their business is primarily transacted in such
local currency. Translation gains and losses, net of applicable income tax, are
excluded from net income and are credited or charged directly to a separate
component of comprehensive income.
45
13
(l) Cash Flow Information
In the statement of cash flows, short term investments are not considered to
be cash equivalents. The effect of changes in foreign exchange rates on cash
balances was immaterial.
In 1999, the Corporation acquired all of the outstanding common shares of
Executive Risk Inc. in exchange for common stock of the Corporation (see Note
(3)). The details of the acquisition were as follows: fair value of assets
acquired, including goodwill, $2,459 million; fair value of liabilities assumed,
$1,627 million; and fair value of common stock issued and options assumed, $832
million. In 1997, $228.6 million of exchangeable subordinated notes were
exchanged for 5,316,565 shares of common stock of the Corporation. Also, in
1997, $108.6 million of long term debt was assumed by a joint venture as a part
of the sale of real estate properties. These noncash transactions have been
excluded from the consolidated statements of cash flows.
(m) Accounting Pronouncements Not Yet Adopted
In October 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-7, Deposit Accounting: Accounting
for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk.
This SOP provides guidance on how to account for insurance and reinsurance
contracts that do not transfer insurance risk. SOP 98-7 is effective for the
Corporation for the year beginning January 1, 2000. Restatement of previously
issued financial statements is not permitted. The adoption of SOP 98-7 is not
expected to have a significant effect on the Corporation's financial position or
results of operations.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 requires that all derivatives be recognized in the balance sheet as
assets or liabilities and be measured at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and whether it qualifies for hedge accounting. SFAS No. 133, as amended by SFAS
No. 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133, is
effective for the Corporation for the year beginning January 1, 2001. This
Statement should not be applied retroactively to financial statements of prior
periods. Currently, the Corporation's use of derivative instruments is not
significant. Thus, the adoption of SFAS No. 133 is not expected to have a
significant effect on the Corporation's financial position or results of
operations.
(2) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1999, the Corporation adopted SOP 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use, which was
issued by the AICPA. The SOP requires that certain costs incurred to develop or
obtain computer software for internal use should be capitalized and amortized
over the software's expected useful life. Prior to 1999, the Corporation
expensed all costs of developing internal use computer software as incurred. The
SOP has been applied prospectively. Adoption of SOP 98-1 decreased claims and
operating expenses by $25.4 million in 1999, resulting in an increase to net
income of $16.5 million or $.10 per diluted share for the year. The effect on
net income will decrease in future years as the new method of accounting is
phased in.
(3) ACQUISITIONS
(a) In July 1999, the Corporation completed its acquisition of Executive Risk
Inc. Executive Risk is a specialty insurance company offering directors and
officers, errors and omissions and professional liability coverages.
Executive Risk shareholders received 1.235 shares of the Corporation's common
stock for each outstanding common share of Executive Risk. In addition,
outstanding Executive Risk stock options were converted to stock options of the
Corporation. Approximately 14.3 million shares of common stock of the
Corporation were issued to Executive Risk shareholders and an additional 1.8
million shares of common stock of the Corporation were reserved for issuance
upon exercise of the converted Executive Risk stock options.
The acquisition has been accounted for using the purchase method of
accounting. Therefore, the results of operations of Executive Risk are included
in the Corporation's consolidated results of operations from the date of
acquisition. The assets and liabilities of Executive Risk were recorded at their
estimated fair values at the date of acquisition. The value of the stock options
assumed by the Corporation was included in the purchase price. The total
purchase price was approximately $832 million. The excess of the purchase price
over the estimated fair value of the net assets acquired, amounting to
approximately $517 million, has been recorded as goodwill and is being amortized
over 26 years.
Pro forma results of operations showing the effects on the Corporation's
operations prior to the date of acquisition have not been presented due to
immateriality.
(b) In March 1999, the Corporation completed its purchase of a 28% interest in
Hiscox plc, a leading U.K. personal and commercial specialty insurer, for
approximately $145 million.
46
14
(4) INVESTED ASSETS AND RELATED INCOME
(a) The amortized cost and estimated market value of fixed maturities were as
follows:
December 31
------------------------------------------------------------------------------
1999 1998
--------------------------------------------------- ------------------------
Gross Gross Estimated Gross
Amortized Unrealized Unrealized Market Amortized Unrealized
Cost Appreciation Depreciation Value Cost Appreciation
--------- ------------ ------------ --------- --------- ------------
(in millions)
Held-to-maturity -- Tax exempt....... $ 1,741.9 $ 60.3 $ 1.2 $ 1,801.0 $ 2,002.2 $138.0
--------- ------ ------ --------- --------- ------
Available-for-sale
Tax exempt......................... 7,889.3 137.5 159.3 7,867.5 6,509.3 427.9
--------- ------ ------ --------- --------- ------
Taxable
U.S. Government and government
agency and authority
obligations.................... 575.4 .5 14.4 561.5 344.2 8.8
Corporate bonds.................. 1,535.0 2.1 61.2 1,475.9 1,031.9 44.5
Foreign bonds.................... 1,199.2 19.4 15.6 1,203.0 1,118.3 85.4
Mortgage-backed securities....... 1,674.8 13.2 88.6 1,599.4 1,694.3 22.1
Redeemable preferred stocks...... 70.3 .1 .5 69.9 70.3 2.9
--------- ------ ------ --------- --------- ------
5,054.7 35.3 180.3 4,909.7 4,259.0 163.7
--------- ------ ------ --------- --------- ------
Total available-for-sale....... 12,944.0 172.8 339.6 12,777.2 10,768.3 591.6
--------- ------ ------ --------- --------- ------
Total fixed maturities......... $14,685.9 $233.1 $340.8 $14,578.2 $12,770.5 $729.6
========= ====== ====== ========= ========= ======
December 31
------------------------
1998
------------------------
Gross Estimated
Unrealized Market
Depreciation Value
------------ ---------
(in millions)
Held-to-maturity -- Tax exempt....... $-- $ 2,140.2
----- ---------
Available-for-sale
Tax exempt......................... 2.1 6,935.1
----- ---------
Taxable
U.S. Government and government
agency and authority
obligations.................... -- 353.0
Corporate bonds.................. .6 1,075.8
Foreign bonds.................... 1.6 1,202.1
Mortgage-backed securities....... 38.9 1,677.5
Redeemable preferred stocks...... -- 73.2
----- ---------
41.1 4,381.6
----- ---------
Total available-for-sale....... 43.2 11,316.7
----- ---------
Total fixed maturities......... $43.2 $13,456.9
===== =========
The amortized cost and estimated market value of fixed maturities at December
31, 1999 by contractual maturity were as follows:
Estimated
Amortized Market
Cost Value
--------- ---------
(in millions)
Held-to-maturity
Due in one year or less.................................. $ 185.4 $ 187.2
Due after one year through five years.................... 535.3 552.9
Due after five years through ten years................... 709.0 735.2
Due after ten years...................................... 312.2 325.7
--------- ---------
$ 1,741.9 $ 1,801.0
========= =========
Available-for-sale
Due in one year or less.................................. $ 115.5 $ 116.6
Due after one year through five years.................... 2,002.8 2,014.8
Due after five years through ten years................... 4,221.5 4,257.1
Due after ten years...................................... 4,929.4 4,789.3
--------- ---------
11,269.2 11,177.8
Mortgage-backed securities............................... 1,674.8 1,599.4
--------- ---------
$12,944.0 $12,777.2
========= =========
Actual maturities could differ from contractual maturities because borrowers may
have the right to call or prepay obligations.
(b) The components of unrealized appreciation (depreciation) of investments
carried at market value were as follows:
December 31
----------------------
1999 1998
---- ----
(in millions)
Equity securities
Gross unrealized appreciation............................ $ 89.7 $164.6
Gross unrealized depreciation............................ 35.5 75.0
------- ------
54.2 89.6
------- ------
Fixed maturities
Gross unrealized appreciation............................ 172.8 591.6
Gross unrealized depreciation............................ 339.6 43.2
------- ------
(166.8) 548.4
------- ------
(112.6) 638.0
Deferred income tax liability (asset)...................... (39.4) 223.3
Valuation allowance........................................ 39.4 --
------- ------
$(112.6) $414.7
======= ======
47
15
The change in unrealized appreciation or depreciation of investments carried
at market value was as follows:
Years Ended December 31
-------------------------------
1999 1998 1997
---- ---- ----
(in millions)
Change in unrealized appreciation
of equity securities.............. $ (35.4) $(47.6) $ 31.4
Change in unrealized appreciation
or
depreciation of fixed
maturities........................ (715.2) 70.0 216.9
------- ------ ------
(750.6) 22.4 248.3
Deferred income tax (credit)....... (262.7) 7.8 86.9
Increase in valuation allowance.... 39.4 -- --
------- ------ ------
$(527.3) $ 14.6 $161.4
======= ====== ======
The unrealized appreciation of fixed maturities carried at amortized cost is
not reflected in the financial statements. The change in unrealized appreciation
of fixed maturities carried at amortized cost was a decrease of $78.9 million, a
decrease of $8.6 million and an increase of $16.8 million for the years ended
December 31, 1999, 1998 and 1997, respectively.
(c) The sources of net investment income were as follows:
Years Ended December 31
------------------------------------
1999 1998 1997
---- ---- ----
(in millions)
Fixed maturities.................... $816.9 $761.1 $726.1
Equity securities................... 31.2 24.7 10.8
Short term investments.............. 43.8 35.8 47.6
Other............................... 1.5 .3 .8
------ ------ ------
Gross investment income............ 893.4 821.9 785.3
Investment expenses................. 13.7 13.2 12.0
------ ------ ------
$879.7 $808.7 $773.3
====== ====== ======
(d) Realized investment gains and losses were as follows:
Years Ended December 31
------------------------------------
1999 1998 1997
---- ---- ----
(in millions)
Gross realized investment gains
Fixed maturities................... $ 38.2 $ 49.2 $ 56.3
Equity securities.................. 172.9 118.5 93.8
------ ------ ------
211.1 167.7 150.1
------ ------ ------
Gross realized investment losses
Fixed maturities................... 14.3 7.0 26.5
Equity securities.................. 109.4 18.8 18.4
------ ------ ------
123.7 25.8 44.9
------ ------ ------
Realized investment gains........... 87.4 141.9 105.2
Income tax.......................... 31.6 49.7 36.8
------ ------ ------
$ 55.8 $ 92.2 $ 68.4
====== ====== ======
(e) The Corporation engages in securities lending whereby certain securities
from its portfolio are loaned to other institutions for short periods of time.
Cash collateral from the borrower, equal to the market value of the loaned
securities plus accrued interest, is deposited with a lending agent and retained
and invested by the lending agent in accordance with the Corporation's
guidelines to generate additional income for the Corporation.
(5) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs deferred and the related amortization charged against
income were as follows:
Years Ended December 31
---------------------------------
1999 1998 1997
---- ---- ----
(in millions)
Balance, beginning of year..... $ 728.7 $ 676.9 $ 601.2
--------- --------- ---------
Increase related to acquisition
of Executive Risk............ 55.2 -- --
--------- --------- ---------
Costs deferred during year
Commissions and brokerage.... 784.4 768.0 775.0
Premium taxes and
assessments................ 132.8 128.5 124.9
Salaries and operating
costs...................... 608.3 619.6 578.4
--------- --------- ---------
1,525.5 1,516.1 1,478.3
Amortization during year....... (1,529.7) (1,464.3) (1,402.6)
--------- --------- ---------
Balance, end of year........... $ 779.7 $ 728.7 $ 676.9
========= ========= =========
(6) REAL ESTATE
In October 1996, the Corporation announced that its real estate subsidiary was
exploring the possible sale of all or a significant portion of its assets. In
November 1997, the real estate subsidiary sold a substantial portion of its
commercial properties for $736.9 million, which included $628.3 million in cash
and the assumption of $108.6 million in debt. The real estate subsidiary is
continuing to explore the sale of certain of its remaining properties.
The components of real estate assets were as follows:
December 31
-------------------
1999 1998
---- ----
(in millions)
Mortgages and notes receivable (net of allowance
for uncollectible amounts of $13.9 and $16.8).... $ 81.2 $105.2
Income producing properties....................... 196.8 166.5
Construction in progress.......................... 66.2 109.2
Land under development and unimproved land........ 355.2 365.1
------ ------
$699.4 $746.0
====== ======
Substantially all mortgages and notes receivable are secured by buildings and
land. The ultimate collectibility of the receivables is evaluated continuously
and an appropriate allowance for uncollectible amounts established. Mortgages
and notes receivable had an estimated aggregate fair value of $85.5 million and
$106.9 million at December 31, 1999 and 1998, respectively. The fair value
amounts represent point-in-time estimates that are not relevant in predicting
future earnings or cash flows related to such receivables.
Depreciation expense related to income producing properties was $3.5 million,
$2.9 million and $2.7 million for 1999, 1998 and 1997, respectively.
48
16
(7) PROPERTY AND EQUIPMENT
Property and equipment included in other assets were as follows:
December 31
-------------------
1999 1998
---- ----
(in millions)
Cost.......................................... $517.6 $428.3
Accumulated depreciation...................... 224.1 196.3
------ ------
$293.5 $232.0
====== ======
Depreciation expense related to property and equipment was $64.9 million,
$55.3 million and $53.7 million for 1999, 1998 and 1997, respectively.
(8) REINSURANCE
Premiums earned and insurance claims are reported net of reinsurance in the
consolidated statements of income.
The effect of reinsurance on the premiums written and earned of the property
and casualty insurance subsidiaries was as follows:
Years Ended December 31
------------------------------
1999 1998 1997
---- ---- ----
(in millions)
Direct premiums written....... $6,042.6 $5,842.0 $5,524.4
Reinsurance assumed
Royal & Sun Alliance........ -- -- (3.8)
Other....................... 275.2 141.9 166.7
Reinsurance ceded
Royal & Sun Alliance........ -- -- 174.6
Other....................... (616.7) (480.4) (413.9)
-------- -------- --------
Net premiums written........ $5,701.1 $5,503.5 $5,448.0
======== ======== ========
Direct premiums earned........ $6,037.1 $5,624.7 $5,315.8
Reinsurance assumed
Royal & Sun Alliance........ -- -- 94.9
Other....................... 246.5 140.6 197.5
Reinsurance ceded............. (631.6) (461.5) (450.8)
-------- -------- --------
Net premiums earned......... $5,652.0 $5,303.8 $5,157.4
======== ======== ========
The Royal & Sun Alliance Insurance Group plc is the beneficial owner of 5.1%
of the Corporation's common stock. Prior to 1997, a property and casualty
insurance subsidiary of the Corporation assumed on a quota share basis a portion
of the property and casualty insurance business written by certain subsidiaries
of Royal & Sun Alliance. Similarly, a portion of the U.S. insurance business
written by the Corporation's property and casualty insurance subsidiaries was
reinsured on a quota share basis with a subsidiary of Royal & Sun Alliance.
Effective January 1, 1997, the reinsurance agreements with Royal & Sun
Alliance were terminated. The termination of the agreements in 1997 resulted in
portfolio transfers of the business previously ceded to Royal & Sun Alliance
back to the Corporation's property and casualty insurance subsidiaries and of
the business previously assumed by the Corporation's property and casualty
insurance subsidiaries back to Royal & Sun Alliance. The effect of the portfolio
transfers was a reduction of ceded premiums written of $174.6 million and a
reduction of assumed premiums written of $93.6 million in 1997.
The 1997 assumed reinsurance premiums written and earned from Royal & Sun
Alliance include business assumed for the second half of 1996 which was reported
on a lag.
Reinsurance recoveries by the property and casualty insurance subsidiaries
which have been deducted from insurance claims were $501.2 million, $447.4
million and $346.8 million in 1999, 1998 and 1997, respectively. There were no
recoveries from Royal & Sun Alliance in any of these years.
(9) RESTRUCTURING CHARGE
During 1998, the Corporation implemented an activity value analysis process to
identify and eliminate low-value activities and to improve operational
efficiency while redirecting resources to activities having the greatest
potential to contribute to the Corporation's results. The cost control
initiative resulted in approximately 500 job reductions in the home office and
the branch network through a combination of early retirements, terminations and
attrition. Other savings resulted from improved vendor management and lower
consulting expenses and other operating costs.
In the first quarter of 1998, a restructuring charge of $40.0 million was
recorded related to the implementation of the cost control initiative. Of the
$40.0 million restructuring charge, approximately $30 million was comprised of
accruals for providing enhanced pension benefits and postretirement medical
benefits to employees who accepted an early retirement incentive offer and
approximately $5 million was severance costs for employees who were terminated.
The remainder of the charge was for other expenses such as the cost of
outplacement services. The initiative was completed with no significant
differences from the original estimates of the restructuring costs. The
liabilities related to the enhanced pension and postretirement medical benefits
were included in the pension and postretirement medical benefits liabilities,
which will be reduced as benefit payments are made over time. Of the other
restructuring costs, $1.5 million remained unpaid at December 31, 1999.
49
17
(10) DEBT AND CREDIT ARRANGEMENTS
(a) Long term debt consisted of the following:
December 31
-------------------------------------
1999 1998
----------------- -----------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(in millions)
Term loan................. $ 15.0 $ 15.0 $ 28.5 $ 28.5
Mortgages................. 44.2 44.8 49.0 48.9
8 3/4% notes.............. -- -- 30.0 30.8
6.15% notes............... 300.0 284.8 300.0 312.8
6.60% debentures.......... 100.0 89.2 100.0 108.1
6 7/8% notes.............. 100.0 99.4 100.0 106.1
7 1/8% notes.............. 75.0 71.0 -- --
8.675% capital
securities.............. 125.0 125.0 -- --
------ ------ ------ ------
$759.2 $729.2 $607.5 $635.2
====== ====== ====== ======
The term loan and mortgages are obligations of the real estate subsidiaries.
The term loan matures in 2001. The mortgages payable are due in varying amounts
monthly through 2010. At December 31, 1999, the interest rate on the term loan
was 7.3% and the interest rate for the mortgages payable approximated 8 1/2%.
The term loan and mortgages payable are secured by real estate assets with a net
book value of $185.0 million at December 31, 1999.
The Corporation has outstanding $300.0 million of unsecured 6.15% notes due
August 15, 2005 and $100.0 million of unsecured 6.60% debentures due August 15,
2018.
Chubb Capital Corporation, a wholly owned subsidiary of the Corporation, has
outstanding $100.0 million of unsecured 6 7/8% notes due February 1, 2003. These
notes are fully and unconditionally guaranteed by the Corporation.
Chubb Executive Risk Inc., a wholly owned subsidiary of the Corporation, has
outstanding $75.0 million of unsecured 7 1/8% notes due December 15, 2007.
Executive Risk Capital Trust, wholly owned by Chubb Executive Risk, has
outstanding $125.0 million of 8.675% capital securities. The Trust in turn used
the proceeds from the issuance of the capital securities to acquire $125.0
million of Chubb Executive Risk 8.675% junior subordinated deferrable interest
debentures due February 1, 2027. The sole assets of the Trust are the
debentures. The debentures and the related income effects are eliminated in the
consolidated financial statements. The capital securities are subject to
mandatory redemption on February 1, 2027, upon repayment of the debentures. The
capital securities are also subject to mandatory redemption in certain other
specified circumstances beginning in 2007 at a redemption price that includes a
make whole premium through 2017 and at par thereafter. Chubb Executive Risk has
the right, at any time, to defer payments of interest on the debentures and
hence distributions on the capital securities for a period not exceeding 10
consecutive semi-annual periods up to the maturity dates of the respective
securities. During any such period, interest will continue to accrue and Chubb
Executive Risk may not declare or pay any dividends to the Corporation. Chubb
Executive Risk's obligations under the debentures and related agreements, taken
together, constitute a full and unconditional guarantee by it of payments due on
the capital securities.
The Corporation filed a shelf registration statement which the Securities and
Exchange Commission declared effective in September 1998, under which up to
$600.0 million of various types of securities may be issued by the Corporation
or Chubb Capital. No securities have been issued under this registration
statement.
The amounts of long term debt due annually during the five years subsequent to
December 31, 1999 are as follows:
Years Ending Term Loan
December 31 and Mortgages Notes Total
------------ ------------- ----- -----
(in millions)
2000.................. $ .3 $ -- $ .3
2001.................. 15.3 -- 15.3
2002.................. .4 -- .4
2003.................. .4 100.0 100.4
2004.................. .4 -- .4
(b) Interest costs of $48.5 million, $28.9 million and $72.4 million were
incurred in 1999, 1998 and 1997, respectively, of which $8.7 million was
capitalized in 1997. Interest paid, net of amounts capitalized, was $48.0
million, $23.4 million and $60.4 million in 1999, 1998 and 1997, respectively.
(c) In July 1997, the Corporation entered into two credit agreements with a
group of banks that provide for unsecured borrowings of up to $500.0 million in
the aggregate. The $200.0 million short term revolving credit facility, which
was to have terminated on July 7, 1999, was extended to July 5, 2000, and may be
renewed or replaced. The $300.0 million medium term revolving credit facility
terminates on July 11, 2002. On the respective termination dates for these
agreements, any loans then outstanding become payable. There have been no
borrowings under these agreements. Various interest rate options are available
to the Corporation, all of which are based on market rates. The Corporation pays
a fee to have these credit facilities available. Unused credit facilities are
available for general corporate purposes and to support Chubb Capital's
commercial paper borrowing arrangement.
50
18
(11) FEDERAL AND FOREIGN INCOME TAX
(a) Income tax expense consisted of the following components:
Years Ended December 31
-------------------------
1999 1998 1997
---- ---- ----
(in millions)
Current tax
United States............................................. $41.0 $124.7 $194.4
Foreign................................................... 42.7 23.5 43.5
Deferred tax (credit), principally United States............ 5.3 (5.5) (33.3)
----- ------ ------
$89.0 $142.7 $204.6
===== ====== ======
Federal and foreign income taxes paid were $83.5 million, $177.9 million
and $253.5 million in 1999, 1998 and 1997, respectively.
(b) The provision for federal and foreign income tax gives effect to
permanent differences between income for financial reporting purposes and
taxable income. Accordingly, the effective income tax rate is less than the
statutory federal corporate tax rate. The reasons for the lower effective tax
rate were as follows:
Years Ended December 31
---------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
% of % of % of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
------ ------- ------ ------- ------ -------
(in millions)
Income before federal and foreign income tax.............. $710.1 $849.7 $974.1
======= ======= =======
Tax at statutory federal income tax rate.................. $248.5 35.0% $297.3 35.0% $340.9 35.0%
Tax exempt interest income................................ (150.6) (21.2) (137.5) (16.2) (126.4) (13.0)
Other, net................................................ (8.9) (1.3) (17.1) (2.0) (9.9) (1.0)
------- ----- ------- ----- ------- -----
Actual tax.......................................... $ 89.0 12.5% $142.7 16.8% $204.6 21.0%
======= ===== ======= ===== ======= =====
(c) The tax effects of temporary differences that gave rise to deferred
income tax assets and liabilities were as follows:
December 31
--------------------
1999 1998
---- ----
(in millions)
Deferred income tax assets
Unpaid claims............................................. $521.2 $541.7
Unearned premiums......................................... 191.6 172.7
Postretirement benefits................................... 76.1 73.1
Alternative minimum tax credit carryforward............... 43.1 --
Unrealized depreciation of investments.................... 39.4 --
Other, net................................................ 73.9 60.9
------ ------
945.3 848.4
Valuation allowance....................................... (39.4) --
------ ------
Total................................................... 905.9 848.4
------ ------
Deferred income tax liabilities
Deferred policy acquisition costs......................... 238.0 225.0
Real estate assets........................................ 83.7 79.3
Unrealized appreciation of investments.................... -- 223.3
------ ------
Total................................................... 321.7 527.6
------ ------
Net deferred income tax asset......................... $584.2 $320.8
====== ======
The valuation allowance at December 31, 1999 relates to future tax benefits
on unrealized depreciation of investments, the realization of which is
uncertain. The valuation allowance had no impact on net income.
51
19
(12) STOCK-BASED COMPENSATION PLANS
(a) The Long-Term Stock Incentive Plan (1996) provides for the granting of
stock options, performance shares, restricted stock and other stock-based awards
to key employees. The maximum number of shares of the Corporation's common stock
in respect to which stock-based awards may be granted under the 1996 Plan is
14,000,000. At December 31, 1999, 5,216,197 shares were available for grant
under the 1996 Plan.
Stock options are granted at exercise prices not less than the fair market
value of the Corporation's common stock on the date of grant. The terms and
conditions upon which options become exercisable may vary among grants. Options
expire no later than ten years from the date of grant.
Information concerning stock options is as follows:
1999 1998 1997
----------------------------- ----------------------------- -----------------------------
Number Weighted Average Number Weighted Average Number Weighted Average
of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price
--------- ---------------- --------- ---------------- --------- ----------------
Outstanding, beginning of year....... 9,765,090 $54.78 9,124,803 $47.67 8,058,829 $41.48
Exchanged for Executive Risk
options............................ 1,809,885 36.77 -- -- -- --
Granted.............................. 4,761,683 60.31 2,168,804 78.75 2,753,007 61.05
Exercised............................ (1,359,855) 39.50 (1,320,504) 41.78 (1,486,812) 38.39
Forfeited............................ (411,219) 64.20 (208,013) 75.25 (200,221) 51.69
---------- ---------- ----------
Outstanding, end of year............. 14,565,584 55.58 9,765,090 54.78 9,124,803 47.67
========== ========== ==========
Exercisable, end of year............. 9,187,352 51.09 6,879,061 47.26 5,932,905 42.54
December 31, 1999
----------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Weighted Average
Range of Number Weighted Average Remaining Number Weighted Average
Option Exercise Prices Outstanding Exercise Price Contractual Life Exercisable Exercise Price
---------------------- ----------- ---------------- ---------------- ----------- ----------------
$ 3.95 - $52.40.................... 5,513,261 $41.09 4.2 5,468,336 $41.04
52.41 - 87.34.................... 9,052,323 64.41 7.9 3,719,016 65.87
---------- ---------
14,565,584 55.58 6.5 9,187,352 51.09
========== =========
Performance share awards are based on the achievement of various goals over
performance cycle periods. The cost of such awards is expensed over the
performance cycle. Such awards are payable in cash, in shares of the
Corporation's common stock or in a combination of both. Restricted stock awards
consist of shares of common stock of the Corporation granted at no cost. Shares
of restricted stock become outstanding when granted, receive dividends and have
voting rights. The shares are subject to forfeiture and to restrictions which
limit the sale or transfer during the restriction period. An amount equal to the
fair market value of the shares at the date of grant is expensed over the
restriction period.
The Corporation uses the intrinsic value based method of accounting for
stock-based compensation, under which compensation cost is measured as the
excess, if any, of the quoted market price of the stock at the measurement date
over the amount an employee must pay to acquire the stock. Since the exercise
price of stock options granted under the Long-Term Stock Incentive Plans is not
less than the market price of the underlying stock on the date of grant, no
compensation cost has been recognized for such grants. The aggregate amount
charged against income with respect to performance share and restricted stock
awards was $5.2 million in 1999 and $14.4 million in 1998 and 1997.
The following pro forma net income and earnings per share information has
been determined as if the Corporation had accounted for stock-based compensation
awarded under the Long-Term Stock Incentive Plans using the fair value based
method. Under the fair value based method, the estimated fair value of awards at
the grant date would be charged against income on a straight-line basis over the
vesting period.
1999 1998 1997
---------------------- ---------------------- ----------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- -------- -------- -------- -------- --------
(in millions except for per share amounts)
Net income........................ $621.1 $585.6 $707.0 $679.6 $769.5 $746.3
Diluted earnings per share........ 3.66 3.45 4.19 4.03 4.39 4.26
52
20
The weighted average fair value of options granted under the Long-Term Stock
Incentive Plans during 1999, 1998 and 1997 was $13.77, $17.36 and $13.83,
respectively. The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions. The risk-free interest rates for 1999, 1998 and 1997 were
5.4%, 5.5% and 6.5%, respectively. The expected volatility of the market price
of the Corporation's common stock for 1999, 1998 and 1997 grants was 19.0%,
16.4% and 16.3%, respectively. The expected average term of the granted options
was 5 1/2 years for 1999 and 5 years for 1998 and 1997. The dividend yield was
2.1% for 1999, 1.6% for 1998 and 1.9% for 1997.
(b) The Corporation has a leveraged Employee Stock Ownership Plan (ESOP) in
which substantially all employees are eligible to participate. At its inception
in 1989, the ESOP used the proceeds of a $150.0 million loan from the
Corporation to purchase 7,792,204 newly issued shares of the Corporation's
common stock. The loan is due in September 2004 and bears interest at 9%. The
Corporation has recorded the receivable from the ESOP as a separate reduction of
shareholders' equity on the consolidated balance sheets. This balance is reduced
as repayments are made on the loan principal.
The Corporation and its participating subsidiaries make semi-annual
contributions to the ESOP in amounts determined at the discretion of the
Corporation's Board of Directors. The contributions, together with the dividends
on the shares of common stock in the ESOP, are used by the ESOP to make loan
interest and principal payments to the Corporation. As interest and principal
are paid, a portion of the common stock is allocated to eligible employees.
The Corporation uses the cash payment method of recognizing ESOP expense. In
1999, 1998 and 1997, cash contributions to the ESOP of $11.2 million, $11.0
million and $12.2 million, respectively, were charged against income. Dividends
on shares of common stock in the ESOP used for debt service were $7.7 million,
$7.8 million and $6.2 million in 1999, 1998 and 1997, respectively.
The number of allocated and unallocated shares held by the ESOP at December
31, 1999 were 3,319,357 and 2,597,404, respectively. All such shares are
considered outstanding for the computation of earnings per share.
(c) The Corporation has a Stock Purchase Plan under which substantially all
employees are eligible to purchase shares of the Corporation's common stock
based on compensation. At December 31, 1999, there were 1,411,010 shares
subscribed, giving employees the right to purchase such shares at a price of
$53.89 in March 2001. No compensation cost has been recognized for such rights.
Had the fair value based method been used, the cost would have been immaterial.
(13) EMPLOYEE BENEFITS
(a) The Corporation and its subsidiaries have several non-contributory defined
benefit pension plans covering substantially all employees. The benefits are
generally based on an employee's years of service and average compensation
during the last five years of employment. Pension costs are determined using the
projected unit credit method. The Corporation's policy is to make annual
contributions that meet the minimum funding requirements of the Employee
Retirement Income Security Act of 1974. Contributions are intended to provide
not only for benefits attributed to service to date but also for those expected
to be earned in the future.
The components of net pension cost were as follows:
Years Ended December 31
------------------------------
1999 1998 1997
---- ---- ----
(in millions)
Service cost of current
period...................... $ 22.2 $ 18.8 $ 19.9
Interest cost on projected
benefit obligation.......... 37.6 34.5 30.3
Expected return on plan
assets...................... (44.5) (40.3) (35.1)
Other gains................... (2.5) (2.5) (2.0)
------ ------ ------
Net pension cost.......... $ 12.8 $ 10.5 $ 13.1
====== ====== ======
In 1998, an expense of $29.0 million related to enhanced pension benefits
provided to employees who accepted an early retirement incentive offer was
included as part of a restructuring charge (see Note (9)).
The following table sets forth the plans' funded status and amounts recognized
in the balance sheets:
December 31
-------------------
1999 1998
---- ----
(in millions)
Actuarial present value of projected
benefit obligation for service rendered
to date.................................. $543.4 $518.7
Plan assets at fair value.................. 599.0 552.9
------ ------
Plan assets in excess of projected benefit
obligation............................... (55.6) (34.2)
Unrecognized net gain from past experience
different from that assumed.............. 153.8 127.3
Unrecognized prior service costs........... (6.3) (7.5)
Unrecognized net asset at January 1, 1985,
being recognized principally over 19
years.................................... 3.4 4.9
------ ------
Pension liability included in other
liabilities............................ $ 95.3 $ 90.5
====== ======
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation at December 31, 1999 and 1998 was
7 1/2% and 7 1/4%, respectively, and the rate of increase in future compensation
levels was 4 1/2% for 1999 and 1998. The expected long term rate of return on
assets was 9% for both years. Plan assets are principally invested in publicly
traded stocks and bonds.
53
21
(b) The Corporation and its subsidiaries provide certain other postretirement
benefits, principally health care and life insurance, to retired employees and
their beneficiaries and covered dependents. Substantially all employees may
become eligible for these benefits upon retirement if they meet minimum age and
years of service requirements. The expected cost of these benefits is accrued
during the years that the employees render the necessary service.
The Corporation does not fund these benefits in advance. Benefits are paid as
covered expenses are incurred. Health care coverage is contributory. Retiree
contributions vary based upon a retiree's age, type of coverage and years of
service with the Corporation. Life insurance coverage is non-contributory.
The components of net postretirement benefit cost were as follows:
Years Ended December 31
----------------------------------
1999 1998 1997
---- ---- ----
(in millions)
Service cost of current period... $ 4.5 $ 4.2 $ 4.9
Interest cost on accumulated
benefit obligation............. 8.6 8.2 8.8
Net amortization and deferral.... (1.0) (1.3) (.7)
----- ----- -----
Net postretirement benefit
cost......................... $12.1 $11.1 $13.0
===== ===== =====
The components of the accumulated postretirement benefit obligation were as
follows:
December 31
-------------------
1999 1998
---- ----
(in millions)
Accumulated postretirement benefit
obligation................................ $123.4 $123.1
Unrecognized net gain from past experience
different from that assumed............... 32.2 27.1
------ ------
Postretirement benefit liability included
in other liabilities.................... $155.6 $150.2
====== ======
The weighted average discount rate used in determining the actuarial present
value of the accumulated postretirement benefit obligation at December 31, 1999
and 1998 was 7 1/2% and 7 1/4%, respectively. At December 31, 1999, the weighted
average health care cost trend rate used to measure the accumulated
postretirement cost for medical benefits was 9% for 2000 and was assumed to
decrease gradually to 6% for the year 2005 and remain at that level thereafter.
The health care cost trend rate assumption has a significant effect on the
amount of the accumulated postretirement benefit obligation and the net
postretirement benefit cost reported. To illustrate, a one percent increase or
decrease in the trend rate for each year would increase or decrease the
accumulated postretirement benefit obligation at December 31, 1999 by
approximately $18 million and the aggregate of the service and interest cost
components of net postretirement benefit cost for the year ended December 31,
1999 by approximately $2 million.
(c) The Corporation and its subsidiaries have a savings plan, the Capital
Accumulation Plan, in which substantially all employees are eligible to
participate. Under this plan, the employer makes a matching contribution equal
to 100% of each eligible employee's pre-tax elective contributions, up to 4% of
the employee's compensation. Contributions are invested at the election of the
employee in the Corporation's common stock or in various other investment funds.
Employer contributions of $15.1 million, $14.5 million and $15.0 million were
charged against income in 1999, 1998 and 1997, respectively.
(14) LEASES
The Corporation and its subsidiaries occupy office facilities under lease
agreements which expire at various dates through 2019; such leases are generally
renewed or replaced by other leases. In addition, the Corporation's subsidiaries
lease data processing, office and transportation equipment.
Most leases contain renewal options for increments ranging from three to five
years; certain lease agreements provide for rent increases based on price-level
factors. All leases are operating leases.
Rent expense was as follows:
Years Ended
December 31
--------------------------------
1999 1998 1997
---- ---- ----
(in millions)
Office facilities........................ $71.0 $73.8 $71.1
Equipment................................ 13.4 13.3 12.6
----- ----- -----
$84.4 $87.1 $83.7
===== ===== =====
At December 31, 1999, future minimum rental payments required under
non-cancellable operating leases were as follows:
Years Ending
December 31
------------ (in millions)
2000.................................... $ 84.2
2001.................................... 79.9
2002.................................... 71.3
2003.................................... 63.7
2004.................................... 54.2
After 2004.............................. 324.8
------
$678.1
======
54
22
(15) UNPAID CLAIMS
The process of establishing loss reserves is a complex and imprecise science
that reflects significant judgmental factors. This is true because claim
settlements to be made in the future will be impacted by changing rates of
inflation and other economic conditions, changing legislative, judicial and
social environments and changes in the property and casualty insurance
subsidiaries' claim handling procedures. In many liability cases, significant
periods of time, ranging up to several years or more, may elapse between the
occurrence of an insured loss, the reporting of the loss and the settlement of
the loss.
Judicial decisions and legislative actions continue to broaden liability and
policy definitions and to increase the severity of claim payments. As a result
of this and other societal and economic developments, the uncertainties inherent
in estimating ultimate claim costs on the basis of past experience continue to
further complicate the already complex loss reserving process.
The uncertainties relating to asbestos and toxic waste claims on insurance
policies written many years ago are exacerbated by inconsistent court decisions
and judicial and legislative interpretations of coverage that in some cases have
tended to erode the clear and express intent of such policies and in others have
expanded theories of liability. The industry is engaged in extensive litigation
over these coverage and liability issues and is thus confronted with a
continuing uncertainty in its effort to quantify these exposures.
In 1993, Pacific Indemnity Company, a subsidiary of the Corporation, entered
into a global settlement agreement with Continental Casualty Company (a
subsidiary of CNA Financial Corporation), Fibreboard Corporation, and attorneys
representing claimants against Fibreboard for all future asbestos-related bodily
injury claims against Fibreboard. This agreement was subject to final appellate
court approval. Pursuant to the global settlement agreement, a $1,525.0 million
trust fund would be established to pay "future" claims, defined as claims that
were not filed in court before August 27, 1993. Pacific Indemnity would
contribute $538.2 million to the trust fund and Continental Casualty would
contribute the remaining amount. In December 1993, upon execution of the global
settlement agreement, Pacific Indemnity and Continental Casualty paid their
respective shares into an escrow account. Pacific Indemnity's share was included
in funds held for asbestos-related settlement in the consolidated balance sheet.
Upon final court approval of the settlement, the amount in the escrow account,
including interest earned thereon, would be transferred to the trust fund.
Pacific Indemnity and Continental Casualty reached a separate agreement in
1993 for the handling of all "pending" asbestos-related bodily injury claims,
defined as claims pending on August 26, 1993 against Fibreboard. Pacific
Indemnity's obligation under this agreement with respect to such pending claims
was approximately $635.0 million, all of which was paid by the end of 1996. The
agreement further provided that the total responsibility of both insurers with
respect to pending and future asbestos-related bodily injury claims against
Fibreboard would be shared between Pacific Indemnity and Continental Casualty on
an approximate 35% and 65% basis, respectively.
At the same time, Pacific Indemnity, Continental Casualty and Fibreboard
entered into a trilateral agreement to settle all pending and future
asbestos-related bodily injury claims resulting from insurance policies that
were, or may have been, issued to Fibreboard by the two insurers. The trilateral
agreement would be triggered if the global settlement agreement was ultimately
disapproved. Pacific Indemnity's obligation under the trilateral agreement is
therefore similar to, and not duplicative of, that under those agreements
described above.
The trilateral agreement reaffirmed portions of an agreement reached in March
1992 between Pacific Indemnity and Fibreboard. Among other matters, that 1992
agreement eliminated any Pacific Indemnity liability to Fibreboard for
asbestos-related property damage claims.
In July 1995, the United States District Court of the Eastern District of
Texas approved the global settlement agreement and the trilateral agreement. The
judgments approving these agreements were appealed to the United States Court of
Appeals for the Fifth Circuit. In July 1996, the Fifth Circuit Court affirmed
the 1995 judgments of the District Court. The objectors to the global settlement
agreement appealed to the United States Supreme Court. In June 1999, the Supreme
Court refused to affirm approval of the global settlement agreement. The case
was returned to the United States District Court of the Eastern District of
Texas for further proceedings. In September 1999, the District Court entered
judgment disapproving the global settlement agreement. That judgment was not
appealed and became final in November 1999.
The trilateral agreement was never appealed to the United States Supreme Court
and is final. Upon final disapproval of the global settlement agreement, the
trilateral agreement became effective. In December 1999, the funds that had been
held in the escrow account were paid to a trust established to pay future
asbestos-related bodily injury claims against Fibreboard. Management believes
that Pacific Indemnity's exposure with respect to asbestos-related claims
against Fibreboard has ended.
The property and casualty subsidiaries continue to have potentially
significant asbestos exposure, primarily on those traditional defendants who
manufactured, distributed or installed asbestos products for whom excess
liability coverages were written. Such exposure has increased in recent years
due to the erosion of much of the underlying limits and the non-viability of
other defendants.
55
23
The other potential asbestos exposures are mostly peripheral defendants,
including a mix of manufacturers and distributors of certain products that
contain asbestos as well as premises owners. Generally, these insureds are named
defendants on a regional rather than a nationwide basis. As the resources of
traditional asbestos defendants have been depleted, more peripheral parties have
been drawn into litigation. Thus, notices of new asbestos claims and new
exposures on existing claims continue to be received despite the fact that
practically all manufacturing and usage of asbestos ended nearly two decades
ago.
Uncertainty remains as to the ultimate liability relating to asbestos claims
due to such factors as the long latency period between asbestos exposure and
disease manifestation and the resulting potential for involvement of multiple
policy periods for individual claims. Significant issues remain unresolved,
adding to the complexity and uncertainty of asbestos litigation. These issues
primarily involve questions regarding allocation of indemnity and expense costs
and exhaustion of policy limits. The property and casualty subsidiaries are
involved in disputes with other insurers and with insureds over these issues,
which increase the difficulty of settlement negotiations.
Hazardous waste sites are another significant potential exposure. Under the
federal "Superfund" law and similar state statutes, when potentially responsible
parties (PRPs) fail to handle the clean-up, regulators have the work done and
then attempt to establish legal liability against the PRPs. The PRPs disposed of
toxic materials at a waste dump site or transported the materials to the site.
Insurance policies issued to PRPs were not intended to cover the clean-up costs
of pollution and, in many cases, did not intend to cover the pollution itself.
As the costs of environmental clean-up have become substantial, PRPs and others
have increasingly filed claims with their insurance carriers. Litigation against
insurers extends to issues of liability, coverage and other policy provisions.
There is great uncertainty involved in estimating the property and casualty
insurance subsidiaries' liabilities related to these claims. First, the
liabilities of the claimants are extremely difficult to estimate. At any given
site, the allocation of remediation costs among governmental authorities and the
PRPs varies greatly. Second, different courts have addressed liability and
coverage issues regarding pollution claims and have reached inconsistent
conclusions in their interpretation of several issues. These significant
uncertainties are not likely to be resolved definitively in the near future.
Uncertainties also remain as to the Superfund law itself. Superfund's taxing
authority expired on December 31, 1995. It is currently not possible to predict
the direction that any reforms may take, when they may occur or the effect that
any changes may have on the insurance industry.
Reserves for asbestos and toxic waste claims cannot be estimated with
traditional loss reserving techniques that rely on historical accident year loss
development factors. Case reserves and expense reserves for costs of related
litigation have been established where sufficient information has been developed
to indicate the involvement of a specific insurance policy. In addition,
incurred but not reported reserves have been established to cover additional
exposures on both known and unasserted claims. These reserves are continually
reviewed and updated.
A reconciliation of the beginning and ending liability for unpaid claims, net
of reinsurance recoverable, and a reconciliation of the net liability to the
corresponding liability on a gross basis is as follows:
1999 1998 1997
---- ---- ----
(in millions)
Gross liability, beginning of
year......................... $10,356.5 $ 9,772.5 $9,523.7
Reinsurance recoverable,
beginning of year............ 1,306.6 1,207.9 1,767.8
--------- --------- --------
Net liability, beginning of
year......................... 9,049.9 8,564.6 7,755.9
--------- --------- --------
Net increase related to
acquisition of Executive Risk
(net of reinsurance
recoverable of $339.5)....... 605.8 -- --
--------- --------- --------
Net incurred claims and claim
expenses related to
Current year............... 4,147.6 3,712.1 3,372.3
Prior years................ (205.6) (218.4) (65.3)
--------- --------- --------
3,942.0 3,493.7 3,307.0
--------- --------- --------
Net payments for claims and
claim expenses related to
Current year............... 1,278.9 1,210.7 1,080.0
Prior years................ 2,570.0 1,797.7 1,418.3
--------- --------- --------
3,848.9 3,008.4 2,498.3
--------- --------- --------
Net liability, end of year..... 9,748.8 9,049.9 8,564.6
Reinsurance recoverable,
end of year.................. 1,685.9 1,306.6 1,207.9
--------- --------- --------
Gross liability, end of year... $11,434.7 $10,356.5 $9,772.5
========= ========= ========
During 1999, the property and casualty insurance subsidiaries experienced
overall favorable development of $205.6 million on net unpaid claims established
as of the previous year-end. This compares with favorable development of $218.4
million and $65.3 million in 1998 and 1997, respectively. Such redundancies were
reflected in operating results in these respective years. Each of the past three
years benefited from favorable claim severity trends for certain liability
classes; this was offset each year in varying degrees by incurred losses
relating to asbestos and toxic waste claims.
Management believes that the aggregate loss reserves of the property and
casualty insurance subsidiaries at December 31, 1999 were adequate to cover
claims for losses that had occurred, including both those known and those yet to
be reported. In establishing such reserves, management considers facts currently
known and the present state of the law and coverage litigation. However, given
the expansion of coverage and liability by the courts and the legislatures in
the past and the possibilities of similar interpretations in the future,
particularly as they relate to asbestos and toxic waste claims, as well as the
uncertainty in determining what scientific standards will be deemed acceptable
for measuring hazardous waste site clean-up, additional increases in loss
reserves may emerge which would adversely affect results in future periods. The
amount cannot reasonably be estimated at the present time.
56
24
(16) SEGMENTS INFORMATION
The property and casualty operations include four reportable underwriting
segments and the investment function. The underwriting segments are personal,
standard commercial, specialty commercial and reinsurance assumed from Royal &
Sun Alliance. The personal and commercial segments are managed separately
because they target different customers. The commercial business is further
distinguished by those classes of business that are generally available in broad
markets and are of a more commodity nature (standard) and those classes
available in more limited markets that require specialized underwriting and
claim settlement (specialty). Standard commercial classes include multiple
peril, casualty and workers' compensation. Specialty commercial classes include
property and marine, executive protection, financial institutions and other
commercial classes. Other specialty commercial business in 1999 includes
reinsurance assumed written through Chubb Re, which began operations during the
year. Reinsurance assumed from Royal & Sun Alliance was treaty reinsurance that
has been terminated (see Note 8).
Corporate and other includes corporate investment income, corporate
expenses and the results of the real estate subsidiary.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies in Note (1). Performance of the
property and casualty underwriting segments is based on underwriting results
before deferred policy acquisition costs, amortization of goodwill and certain
charges. Investment income performance is based on investment income net of
investment expenses, excluding realized investment gains.
Revenues, income before income tax and assets of each operating segment
were as follows:
Years Ended December 31
------------------------------
1999 1998 1997
---- ---- ----
Revenues (in millions)
Property and casualty insurance
Premiums earned
Personal.......................................... $1,447.5 $1,304.3 $1,188.1
Standard commercial............................... 1,944.9 1,980.6 1,906.1
Specialty commercial.............................. 2,259.6 2,018.9 1,968.3
Reinsurance assumed from Royal & Sun Alliance..... -- -- 94.9
-------- -------- --------
5,652.0 5,303.8 5,157.4
Investment income..................................... 832.6 760.0 721.4
-------- -------- --------
Total property and casualty insurance............. 6,484.6 6,063.8 5,878.8
Corporate and other
Real estate........................................... 96.8 82.2 616.1
Corporate investment income........................... 60.8 61.9 63.9
Realized investment gains................................. 87.4 141.9 105.2
-------- -------- --------
Total revenues.................................... $6,729.6 $6,349.8 $6,664.0
======== ======== ========
Income (loss) before income tax
Property and casualty insurance
Underwriting
Personal.......................................... $ 121.1 $ 168.1 $ 161.5
Standard commercial............................... (416.8) (360.0) (312.3)
Specialty commercial.............................. 121.1 133.5 198.0
Reinsurance assumed from Royal & Sun Alliance..... -- -- 18.2
-------- -------- --------
(174.6) (58.4) 65.4
Increase (decrease) in deferred policy acquisition
costs........................................... (4.2) 51.8 75.7
-------- -------- --------
Underwriting income (loss)............................ (178.8) (6.6) 141.1
Investment income..................................... 821.0 748.9 711.2
Amortization of goodwill and other charges............ (16.0) (17.4) (24.1)
Restructuring charge.................................. -- (40.0) --
-------- -------- --------
Total property and casualty insurance............. 626.2 684.9 828.2
Corporate and other income (loss)......................... (3.5) 22.9 40.7
Realized investment gains................................. 87.4 141.9 105.2
-------- -------- --------
Total income before income tax.................... $ 710.1 $ 849.7 $ 974.1
======== ======== ========
December 31
---------------------------------
1999 1998 1997
---- ---- ----
(in millions)
Assets
Property and casualty insurance........................... $21,628.1 $18,954.2 $17,592.4
Corporate and other....................................... 1,976.9 1,878.2 2,239.9
Adjustments and eliminations.............................. (68.0) (86.4) (216.7)
--------- --------- ---------
Total assets...................................... $23,537.0 $20,746.0 $19,615.6
========= ========= =========
Distinct investment portfolios are not maintained for each underwriting
segment. Property and casualty assets are available for payment of claims and
expenses for all classes of business. Therefore, such assets and the related
investment income are not allocated to underwriting segments.
57
25
The international business of the property and casualty insurance segment
is conducted primarily through subsidiaries that operate solely outside of the
United States. Their assets and liabilities are located principally in the
countries where the insurance risks are written. International business is also
written by branch offices of certain domestic subsidiaries.
Revenues of the property and casualty insurance subsidiaries by geographic
area were as follows:
Years Ended December 31
--------------------------------
1999 1998 1997
---- ---- ----
(in millions)
Revenues
United States............................................. $5,452.1 $5,116.6 $4,886.8
International............................................. 1,032.5 947.2 992.0
-------- -------- --------
Total................................................... $6,484.6 $6,063.8 $5,878.8
======== ======== ========
(17) EARNINGS PER SHARE
Basic earnings per common share is based on net income divided by the
weighted average number of common shares outstanding during each year. Diluted
earnings per share assumes the conversion of all outstanding convertible debt
and the maximum dilutive effect of awards under stock-based compensation plans.
The following table sets forth the computation of basic and diluted
earnings per share:
Years Ended December 31
--------------------------------
1999 1998 1997
---- ---- ----
(in millions except for per
share amounts)
Basic earnings per share:
Net income................................................ $621.1 $707.0 $769.5
====== ====== ======
Weighted average number of common shares outstanding...... 167.7 165.6 171.6
====== ====== ======
Basic earnings per share.................................. $ 3.70 $ 4.27 $ 4.48
====== ====== ======
Diluted earnings per share:
Net income................................................ $621.1 $707.0 $769.5
After-tax interest expense on 6% exchangeable subordinated
notes................................................... -- -- 3.3
------ ------ ------
Net income for computing diluted earnings per share....... $621.1 $707.0 $772.8
====== ====== ======
Weighted average number of common shares outstanding...... 167.7 165.6 171.6
Additional shares from assumed conversion of 6%
exchangeable subordinated notes as if each $1,000 of
principal amount had been converted at issuance into
23.256 shares of common stock........................... -- -- 1.8
Additional shares from assumed exercise of stock-based
compensation awards..................................... 2.1 3.0 2.8
------ ------ ------
Weighted average number of common shares and potential
common shares assumed outstanding for computing diluted
earnings per share...................................... 169.8 168.6 176.2
====== ====== ======
Diluted earnings per share................................ $ 3.66 $ 4.19 $ 4.39
====== ====== ======
In 1999 and 1998, options to purchase 5.2 million shares and 1.6 million
shares of common stock, respectively, with weighted average exercise prices of
$67.71 per share and $78.77 per share, respectively, were excluded from the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the Corporation's common stock.
For additional disclosure regarding the stock-based compensation awards,
see Note (12).
58
26
(18) FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of financial instruments are based on quoted market prices where
available. Fair values of financial instruments for which quoted market prices
are not available are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rates and the estimated amounts and timing of future cash
flows. In such instances, the derived fair value estimates cannot be
substantiated by comparison to independent markets and are not necessarily
indicative of the amounts that could be realized in immediate settlement of the
instrument. Certain financial instruments, particularly insurance contracts, are
excluded from fair value disclosure requirements.
The methods and assumptions used to estimate the fair value of financial
instruments are as follows:
(i) The carrying value of short term investments approximates fair value due
to the short maturities of these investments.
(ii) Fair values of fixed maturities with active markets are based on quoted
market prices. For fixed maturities that trade in less active markets, fair
values are obtained from independent pricing services. Fair values of fixed
maturities are principally a function of current interest rates. Care should
be used in evaluating the significance of these estimated market values which
can fluctuate based on such factors as interest rates, inflation, monetary
policy and general economic conditions.
(iii) Fair values of equity securities are based on quoted market prices.
(iv) Fair values of real estate mortgages and notes receivable are estimated
individually as the value of the discounted future cash flows of the loan,
subject to the estimated fair value of the underlying collateral. The cash
flows are discounted at rates based on a U.S. Treasury security with a
maturity similar to the loan, adjusted for credit risk.
(v) Long term debt consists of a term loan, mortgages payable, long term
notes and capital securities. The fair value of the term loan approximates the
carrying value because such loan consists of variable-rate debt that reprices
frequently. Fair values of mortgages payable are estimated using discounted
cash flow analyses. Fair values of the long term notes and capital securities
are based on prices quoted by dealers.
The carrying values and fair values of financial instruments were as follows:
December 31
-------------------------------------------
1999 1998
--------------------- -------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(in millions)
Assets
Invested assets
Short term investments.................................. $ 731.1 $ 731.1 $ 344.2 $ 344.2
Fixed maturities (Note 4)
Held-to-maturity...................................... 1,741.9 1,801.0 2,002.2 2,140.2
Available-for-sale.................................... 12,777.2 12,777.2 11,316.7 11,316.7
Equity securities....................................... 769.2 769.2 1,092.2 1,092.2
Real estate mortgages and notes receivable (Note 6)....... 81.2 85.5 105.2 106.9
Liabilities
Long term debt (Note 10).................................. 759.2 729.2 607.5 635.2
59
27
(19) COMPREHENSIVE INCOME
Comprehensive income is defined as all changes in shareholders' equity,
except those arising from transactions with shareholders. Comprehensive income
includes net income and other comprehensive income, which for the Corporation
consists of changes in unrealized appreciation or depreciation of investments
carried at market value and changes in foreign currency translation gains or
losses.
The components of other comprehensive income or loss were as follows:
Years Ended December 31
----------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- -------------------------- --------------------------
Income Income Income
Before Tax Before Tax Before Tax
Tax (Credit) Net Tax (Credit) Net Tax (Credit) Net
------ -------- --- ------ -------- --- ------ -------- ---
(in millions)
Unrealized holding gains (losses)
arising during the year............ $(663.2) $(191.7)* $(471.5) $164.3 $57.5 $106.8 $353.5 $123.7 $229.8
Less: reclassification adjustment for
realized gains included in net
income............................. 87.4 31.6 55.8 141.9 49.7 92.2 105.2 36.8 68.4
------- ------- ------- ------ ----- ------ ------ ------ ------
Net unrealized gains (losses)
recognized in other comprehensive
income............................. (750.6) (223.3) (527.3) 22.4 7.8 14.6 248.3 86.9 161.4
Foreign currency translation
losses............................. (14.2) (5.4) (8.8) (14.2) (3.9) (10.3) (15.3) (5.2) (10.1)
------- ------- ------- ------ ----- ------ ------ ------ ------
Total other comprehensive
income (loss).................... $(764.8) $(228.7) $(536.1) $ 8.2 $ 3.9 $ 4.3 $233.0 $ 81.7 $151.3
======= ======= ======= ====== ===== ====== ====== ====== ======
* Reflects a valuation allowance of $39.4 million.
(20) SHAREHOLDERS' EQUITY
(a) The authorized but unissued preferred shares may be issued in one or
more series and the shares of each series shall have such rights as fixed by the
Board of Directors.
(b) The activity of the Corporation's common stock was as follows:
Years Ended December 31
-----------------------------------------
1999 1998 1997
---- ---- ----
(number of shares)
Common stock issued
Balance, beginning of year................................ 175,989,202 176,037,850 176,084,173
Share activity related to acquisition of Executive Risk... 641,474 -- --
Shares issued upon exchange of long term debt............. -- -- 2,440
Share activity under option and incentive plans........... 641,646 (48,648) (48,763)
----------- ----------- -----------
Balance, end of year.................................. 177,272,322 175,989,202 176,037,850
----------- ----------- -----------
Treasury stock
Balance, beginning of year................................ 13,722,376 7,320,410 1,223,182
Share activity related to acquisition of Executive Risk... (13,651,028) -- --
Repurchase of shares...................................... 2,596,700 8,203,000 12,940,500
Shares issued upon exchange of long term debt............. -- -- (5,314,125)
Share activity under option and incentive plans........... (885,559) (1,801,034) (1,529,147)
----------- ----------- -----------
Balance, end of year.................................. 1,782,489 13,722,376 7,320,410
----------- ----------- -----------
Common stock outstanding, end of year................. 175,489,833 162,266,826 168,717,440
=========== =========== ===========
(c) The Corporation had a shareholders rights plan under which each
shareholder had one quarter of a right for each share of common stock of the
Corporation held. The rights were scheduled to expire on June 12, 1999. On March
12, 1999, the Board of Directors approved the redemption of these rights for
$.01 per right as of March 31, 1999.
On March 12, 1999, the Board of Directors adopted a new shareholder rights
plan, under which the rights attached on March 31, 1999. Under the new plan,
each shareholder has one right for each share of common stock of the Corporation
held. Each right entitles the holder to purchase from the Corporation one
one-thousandth of a share of Series B Participating Cumulative Preferred Stock
at an exercise price of $240. The rights are attached to all outstanding shares
of common stock and trade with the common stock until the rights become
exercisable. The rights are subject to adjustment to prevent dilution of the
interests represented by each right.
The rights will become exercisable and will detach from the common stock
ten days after a person or group either acquires 20% or more of the outstanding
shares of the Corporation's common stock or announces a tender or exchange offer
which, if consummated, would result in that person or group owning 20% or more
of the outstanding shares of the Corporation's common stock.
60
28
In the event that any person or group acquires 20% or more of the
outstanding shares of the Corporation's common stock, each right will entitle
the holder, other than such person or group, to purchase that number of shares
of the Corporation's common stock having a market value of two times the
exercise price of the right. In the event that, following the acquisition of 20%
or more of the Corporation's outstanding common stock by a person or group, the
Corporation is acquired in a merger or other business combination transaction or
50% or more of the Corporation's assets or earning power is sold, each right
will entitle the holder to purchase common stock of the acquiring company having
a value equal to two times the exercise price of the right.
At any time after any person or group acquires 20% or more of the
Corporation's common stock, but before such person or group acquires 50% or more
of such stock, the Corporation may exchange all or part of the rights, other
than the rights owned by such person or group, for shares of the Corporation's
common stock at an exchange ratio of one share of common stock per right.
The rights do not have the right to vote or to receive dividends. The
rights may be redeemed in whole, but not in part, at a price of $.01 per right
by the Corporation at any time until the tenth day after the acquisition of 20%
or more of the Corporation's outstanding common stock by a person or group. The
rights will expire at the close of business on March 12, 2009, unless previously
exchanged or redeemed by the Corporation.
(d) The Corporation's insurance subsidiaries are required to file annual
statements with insurance regulatory authorities prepared on an accounting basis
prescribed or permitted by such authorities (statutory basis). For such
subsidiaries, generally accepted accounting principles (GAAP) differ in certain
respects from statutory accounting practices.
A comparison of shareholders' equity on a GAAP basis and policyholders'
surplus on a statutory basis is as follows:
December 31
------------------------------------------------
1999 1998
--------------------- ---------------------
GAAP Statutory GAAP Statutory
---- --------- ---- ---------
(in millions)
Property and casualty insurance subsidiaries................ $5,255.3 $3,341.5 $4,570.0 $2,836.9
======== ========
Corporate and other......................................... 1,016.5 1,074.1
-------- --------
$6,271.8 $5,644.1
======== ========
A comparison of GAAP and statutory net income is as follows:
Years Ended December 31
---------------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
GAAP Statutory GAAP Statutory GAAP Statutory
-------- --------- -------- --------- -------- ---------
(in millions)
Property and casualty insurance subsidiaries...... $610.6 $609.3 $672.4 $663.1 $752.3 $652.4
====== ====== ======
Corporate and eliminations........................ 10.5 34.6 17.2
------ ------ ------
$621.1 $707.0 $769.5
====== ====== ======
(e) The Corporation's ability to continue to pay dividends to shareholders
and interest on debt obligations is affected by the availability of liquid
assets held by the Corporation and by the dividend paying ability of its
property and casualty insurance subsidiaries. Various state insurance laws
restrict the Corporation's property and casualty insurance subsidiaries as to
the amount of dividends they may pay to the Corporation without the prior
approval of regulatory authorities. The restrictions are generally based on net
income and on certain levels of policyholders' surplus as determined in
accordance with statutory accounting practices. Dividends in excess of such
thresholds are considered "extraordinary" and require prior regulatory approval.
During 1999, these subsidiaries paid cash dividends to the Corporation totaling
$300.0 million.
The maximum dividend distribution that may be made by the property and
casualty insurance subsidiaries to the Corporation during 2000 without prior
approval is approximately $590 million.
61
29
Report of Independent Auditors
ERNST & YOUNG LLP
787 Seventh Avenue
New York, New York 10019
The Board of Directors and Shareholders
The Chubb Corporation
We have audited the accompanying consolidated balance sheets of The Chubb
Corporation as of December 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity, cash flows and comprehensive income
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Chubb
Corporation at December 31, 1999 and 1998 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
/s/ ERNST & YOUNG LP
February 23, 2000
62
30
Quarterly Financial Data
Summarized unaudited quarterly financial data for 1999 and 1998 are shown
below. In management's opinion, the interim financial data contain all
adjustments, consisting of normal recurring items, necessary to present fairly
the results of operations for the interim periods.
Three Months Ended
--------------------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------------- -------------------- -------------------- --------------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
(in millions except for per share amounts)
Revenues........................... $1,629.6 $1,587.3 $1,686.6 $1,597.6 $1,709.3 $1,593.2 $1,704.1 $1,571.7
Claims and expenses................ 1,403.0 1,348.0 1,450.7 1,375.2 1,653.3 1,386.0 1,512.5 1,390.9
Federal and foreign income tax
(credit)......................... 39.7 47.5 42.6 38.2 (21.3) 33.8 28.0 23.2
-------- -------- -------- -------- -------- -------- -------- --------
Net income..................... $ 186.9 $ 191.8(a) $ 193.3 $ 184.2 $ 77.3 $ 173.4 $ 163.6 $ 157.6
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings per share........... $ 1.16 $ 1.14(a) $ 1.19 $ 1.10 $ .45 $ 1.05 $ .93 $ .98
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings per share......... $ 1.14 $ 1.12(a) $ 1.18 $ 1.08 $ .44 $ 1.04 $ .93 $ .95
======== ======== ======== ======== ======== ======== ======== ========
Underwriting ratios
Losses to premiums earned........ 66.3% 62.8% 67.6% 67.0% 78.1% 67.4% 68.8% 68.1%
Expenses to premiums written..... 32.9 33.3 32.7 33.3 32.3 33.8 32.3 33.6
-------- -------- -------- -------- -------- -------- -------- --------
Combined....................... 99.2% 96.1% 100.3% 100.3% 110.4% 101.2% 101.1% 101.7%
======== ======== ======== ======== ======== ======== ======== ========
(a) Net income has been reduced by a net charge of $26.0 million or $.15 per
share for the after-tax effect of a $40.0 million restructuring charge.
Common Stock Data
The common stock of the Corporation is listed and principally traded on the
New York Stock Exchange (NYSE). The following are the high and low closing sale
prices as reported on the NYSE Composite Tape and the quarterly dividends
declared for each quarter of 1999 and 1998.
1999
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Common stock prices
High.................................................... $66.44 $75.94 $69.63 $60.75
Low..................................................... 55.44 58.06 49.63 45.50
Dividends declared.......................................... .32 .32 .32 .32
1998
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Common stock prices
High.................................................... $81.44 $82.63 $88.25 $73.38
Low..................................................... 71.00 73.31 62.50 57.00
Dividends declared.......................................... .31 .31 .31 .31
At March 6, 2000, there were approximately 7,225 common shareholders of
record.
64