1
SUPPLEMENTARY FINANCIAL DATA
IN THOUSANDS
YEARS ENDED DECEMBER 31
1993 1992 1991
---------- ---------- ----------
PROPERTY AND CASUALTY INSURANCE
UNDERWRITING
Net Premiums Written............................. $3,521,295 $3,242,506 $3,112,264
Increase in Unearned Premiums.................... (141,457) (79,218) (75,096)
---------- ---------- ----------
Premiums Earned.................................. 3,379,838 3,163,288 3,037,168
---------- ---------- ----------
Claims and Claim Expenses........................ 2,204,098 2,098,129 1,941,353
Operating Costs and Expenses..................... 1,181,316 1,115,007 1,087,365
Increase in Deferred Policy Acquisition Costs.... (34,726) (14,951) (27,597)
Dividends to Policyholders....................... 14,242 15,755 20,153
---------- ---------- ----------
Underwriting Income (Loss) Before Increase in
Unpaid Claims for Asbestos-Related Settlement
and Return Premium for Medical Malpractice
Commutation.................................... 14,908 (50,652) 15,894
Increase in Unpaid Claims for Asbestos-Related
Settlement..................................... (675,000) -- --
Return Premium for Medical Malpractice
Commutation.................................... 125,000 -- --
---------- ---------- ----------
Underwriting Income (Loss) Before Income Tax..... (535,092) (50,652) 15,894
Federal and Foreign Income Tax Credit............ (197,600) (35,300)(a) (2,700)
---------- ---------- ----------
UNDERWRITING INCOME (LOSS)....................... (337,492) (15,352) 18,594
---------- ---------- ----------
INVESTMENTS
Investment Income Before Expenses and Income Tax 541,749 501,140 476,984
Investment Expenses.............................. 8,040 7,685 7,489
---------- ---------- ----------
Investment Income Before Income Tax.............. 533,709 493,455 469,495
Federal and Foreign Income Tax................... 78,300 70,700 71,900
---------- ---------- ----------
INVESTMENT INCOME................................ 455,409 422,755 397,595
---------- ---------- ----------
PROPERTY AND CASUALTY INCOME........................ $ 117,917 $ 407,403 $ 416,189
========== ========== ==========
LIFE AND HEALTH INSURANCE
Premiums and Policy Charges......................... $ 801,236 $ 689,173 $ 634,016
Investment Income................................... 205,891 192,748 177,654
---------- ---------- ----------
Total Revenues...................................... 1,007,127 881,921 811,670
---------- ---------- ----------
Benefits............................................ 669,422 591,009 527,551
Operating Costs and Expenses........................ 248,976 216,411 210,863
---------- ---------- ----------
Life and Health Income Before Income Tax............ 88,729 74,501 73,256
Federal Income Tax.................................. 26,212 18,280 22,137
---------- ---------- ----------
LIFE AND HEALTH INCOME.............................. $ 62,517 $ 56,221 $ 51,119
========== ========== ==========
REAL ESTATE
Revenues............................................ $ 160,650 $ 149,945 $ 140,957
Cost of Sales and Expenses.......................... 158,599 134,851 106,169
---------- ---------- ----------
Real Estate Income Before Income Tax................ 2,051 15,094 34,788
Federal Income Tax.................................. 4,244 5,044 9,781
---------- ---------- ----------
REAL ESTATE INCOME (LOSS)........................... $ (2,193) $ 10,050 $ 25,007
========== ========== ==========
CORPORATE, NET OF TAX................................. $ 14,357 $ 19,794 $ 16,325
========== ========== ==========
REALIZED INVESTMENT GAINS, NET OF TAX................. $ 151,619 $ 123,631 $ 43,344
========== ========== ==========
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES............... $ 344,217 $ 617,099 $ 551,984
========== ========== ==========
(a) Reflects a benefit of $12,000,000 resulting from a reversal of income tax
reserves based on a settlement of prior years' taxes.
The above federal and foreign income tax provisions represent allocations of the
consolidated provision.
11
2
PROPERTY AND CASUALTY UNDERWRITING RESULTS
NET PREMIUMS WRITTEN (In Millions of Dollars)
1993 1992 1991 1990 1989
Personal Insurance
Automobile........................ $ 191.7 $ 190.9 $ 189.5 $ 192.0 $ 188.6
Homeowners........................ 428.4 416.9 432.2 408.7 373.6
Other............................. 194.4 188.6 193.0 187.8 177.8
-------- -------- -------- -------- --------
814.5 796.4 814.7 788.5 740.0
-------- -------- -------- -------- --------
Standard Commercial Insurance
Multiple Peril.................... 528.8 483.2 482.6 466.7 437.7
Casualty.......................... 626.0(a) 481.7 456.1 427.7 404.8
Workers' Compensation............. 172.0 168.6 177.1 151.4 137.9
-------- -------- -------- -------- --------
1,326.8(a) 1,133.5 1,115.8 1,045.8 980.4
-------- -------- -------- -------- --------
Specialty Commercial Insurance
Fidelity and Surety............... 618.7 585.1 538.0 514.2 483.5
Other............................. 650.8 566.6 496.7 443.9 408.5
-------- -------- -------- -------- --------
1,269.5 1,151.7 1,034.7 958.1 892.0
-------- -------- -------- -------- --------
Reinsurance Assumed................. 235.5 160.9 147.1 127.3 122.5
-------- -------- -------- -------- --------
Total........................ $3,646.3(a) $3,242.5 $3,112.3 $2,919.7 $2,734.9
======== ======== ======== ======== ========
(a) Includes a $125 million return premium to the Corporation's property and
casualty insurance subsidiaries related to the commutation of a medical
malpractice reinsurance agreement. Excluding this return premium, net
premiums written were $501.0 million for Casualty, $1,201.8 million for
Standard Commercial and $3,521.3 million in Total.
COMBINED LOSS AND EXPENSE RATIOS
Personal Insurance
Automobile........................ 97.6% 100.2% 106.2% 106.1% 102.8%
Homeowners........................ 100.2 113.3 106.0 104.1 108.2
Other............................. 84.2 89.9 93.5 95.6 100.5
-------- -------- -------- -------- --------
95.8 104.6 103.1 102.5 104.9
-------- -------- -------- -------- --------
Standard Commercial Insurance
Multiple Peril.................... 110.6 112.8 109.0 107.9 107.3
Casualty.......................... 190.6(b) 94.2 86.2 99.1 106.9
Workers' Compensation............. 117.9 118.7 130.6 138.5 149.2
-------- -------- -------- -------- --------
149.7(b) 105.7 102.6 108.2 112.2
-------- -------- -------- -------- --------
Specialty Commercial Insurance
Fidelity and Surety............... 78.1 81.3 82.4 78.9 76.9
Other............................. 103.4 100.2 98.9 97.3 100.5
-------- -------- -------- -------- --------
91.0 90.5 90.3 87.3 87.7
-------- -------- -------- -------- --------
Reinsurance Assumed................. 111.8 126.9 119.3 109.2 97.2
-------- -------- -------- -------- --------
Total........................ 114.8%(b) 101.1% 99.5% 99.7% 101.5%
======== ======== ======== ======== ========
(b) Includes the effects of a $675 million increase in unpaid claims related to
an agreement for the settlement of asbestos-related litigation and the $125
million return premium related to the commutation of a medical malpractice
reinsurance agreement. Excluding the effects of these items, the combined
loss and expense ratio was 100.7% for Casualty, 107.6% for Standard
Commercial and 99.0% in Total.
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.
12
3
TEN YEAR FINANCIAL SUMMARY
(in thousands except for per share amounts)
FOR THE YEAR 1993 1992 1991 1990 1989
REVENUES
Property and Casualty Insurance
Premiums Earned.................... $ 3,504,838(a) $ 3,163,288 $ 3,037,168 $ 2,836,135 $ 2,693,553
Investment Income.................. 541,749 501,140 476,984 463,413 426,267
Life and Health Insurance
Premiums and Policy Charges........ 801,236 689,173 634,016 561,961 496,405
Investment Income.................. 205,891 192,748 177,654 171,570 159,828
Real Estate......................... 160,650 149,945 140,957 174,846 221,338
Corporate Investment Income......... 52,706 57,176 46,400 39,555 25,167
Realized Investment Gains (Losses).. 232,638 187,349 65,718 46,317 46,942
TOTAL REVENUES................... 5,499,708 4,940,819 4,578,897 4,293,797 4,069,500
COMPONENTS OF NET INCOME*
Property and Casualty Insurance
Underwriting Income (Loss) (b)..... (337,492)(c) (15,352) 18,594 20,709(e) (25,040)
Investment Income.................. 455,409 422,755 397,595 371,351 330,096
Life and Health Insurance........... 62,517 56,221 51,119 45,081 42,103
Real Estate Income (Loss)........... (2,193) 10,050 25,007 40,015 42,021
Corporate........................... 14,357 19,794 16,325 14,760 705
Realized Investment Gains (Losses).. 151,619 123,631 43,344 30,193 30,932
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING
PRINCIPLES...................... 344,217 617,099 551,984 522,109 420,817
Per Share (b).................... 3.91(c) 6.96 6.32 6.07(e) 4.91
NET INCOME....................... 324,217(d) 617,099 551,984 522,109 420,817
Per Share........................ 3.69(d) 6.96 6.32 6.07 4.91
DIVIDENDS DECLARED ON COMMON STOCK.... 150,784 139,612 127,757 109,136 96,515
Per Share........................ 1.72 1.60 1.48 1.32 1.16
CHANGE IN UNREALIZED APPRECIATION OF
EQUITY SECURITIES, NET OF
DEFERRED INCOME TAX................. 46,534 (82,082) 12,163 (19,425) 70,330
AT YEAR END
TOTAL ASSETS.......................... 19,436,870 17,559,182 16,163,605 14,510,750 13,384,850
INVESTED ASSETS
Property and Casualty Insurance..... 8,403,141 7,767,462 7,086,572 6,297,825 5,793,656
Life and Health Insurance........... 2,473,253 2,208,803 2,063,518 1,928,687 1,752,532
Corporate........................... 965,715 955,828 840,291 688,380 647,817
PROPERTY AND CASUALTY UNPAID CLAIMS... 8,235,442 7,220,919 6,591,305 6,016,396 5,605,006
LIFE AND HEALTH POLICY LIABILITIES.... 2,446,620 2,193,486 2,072,727 1,959,568 1,806,325
LONG TERM DEBT........................ 1,273,830 1,072,841 1,053,550 820,825 612,874
SHAREHOLDERS' EQUITY.................. 4,196,129 3,954,402 3,541,605 2,882,639 2,603,739
Per Common Share................. 47.84 45.18 40.74 35.19 30.84
* The federal and foreign income tax provided for each component of net income
represents its allocated portion of the consolidated provision.
Prior year amounts have been restated to reflect the accounting changes
prescribed by Statement of Financial Accounting Standards No. 113, Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts.
38
4
FOR THE YEAR 1988 1987 1986 1985 1984
REVENUES
Property and Casualty Insurance
Premiums Earned.................... $ 2,705,560 $ 2,615,866 $2,250,758 $1,507,127 $1,331,112
Investment Income.................. 364,126 266,230 216,558 190,609 160,644
Life and Health Insurance
Premiums and Policy Charges........ 426,992 384,108 323,293 302,711 263,690
Investment Income.................. 144,264 124,640 104,934 96,786 74,277
Real Estate......................... 155,170 143,381 181,184 194,758 133,787
Corporate Investment Income......... 17,806 17,531 18,329 6,929 3,984
Realized Investment Gains (Losses).. (17,987) (22,561) 97,710 109,666 25,405
TOTAL REVENUES................... 3,795,931 3,529,195 3,192,766 2,408,586 1,992,899
COMPONENTS OF NET INCOME*
Property and Casualty Insurance
Underwriting Income (Loss) (b)..... 15,818 62,394 (29,837) (188,045) (115,262)
Investment Income.................. 290,647 226,546 177,146 137,047 115,291
Life and Health Insurance........... 31,458 23,889 36,573 34,340 46,531(f)
Real Estate Income (Loss)........... 40,018 36,079 32,756 29,502 24,490
Corporate........................... (5,357) (4,229) (2,203) (1,905) (2,456)
Realized Investment Gains (Losses).. (12,959) (14,619) 53,506 59,601 14,405
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING
PRINCIPLES...................... 359,625 330,060 267,941 70,540 82,999
Per Share (b).................... 4.27 3.97 3.53 .96 1.42(f)
NET INCOME....................... 359,625 330,060 267,941 70,540 82,999
Per Share........................ 4.27 3.97 3.53 .96 1.42
DIVIDENDS DECLARED ON COMMON STOCK.... 87,766 71,443 60,485 47,710 42,992
Per Share........................ 1.08 .89 .80 .76 .73
CHANGE IN UNREALIZED APPRECIATION OF
EQUITY SECURITIES, NET OF
DEFERRED INCOME TAX................. 29,815 12,294 12,878 50,650 (27,082)
AT YEAR END
TOTAL ASSETS.......................... 11,507,145 10,167,250 8,486,643 6,801,928 4,987,202
INVESTED ASSETS
Property and Casualty Insurance..... 5,153,027 4,519,268 3,574,360 2,832,286 1,979,917
Life and Health Insurance........... 1,582,962 1,401,553 1,127,695 1,012,820 927,613
Corporate........................... 366,237 256,397 295,617 76,272 50,677
PROPERTY AND CASUALTY UNPAID CLAIMS... 4,585,848 3,888,485 3,069,083 2,345,527 1,698,584
LIFE AND HEALTH POLICY LIABILITIES.... 1,645,195 1,430,119 1,067,290 939,937 867,690
LONG TERM DEBT........................ 362,779 325,049 391,801 388,121 201,120
SHAREHOLDERS' EQUITY.................. 2,238,447 1,937,033 1,559,138 1,088,400 878,417
Per Common Share................. 27.54 23.85 20.06 14.88 13.94
(a) Premiums earned have been increased by a $125,000,000 return premium to
the Corporation's property and casualty insurance subsidiaries related
to the commutation of a medical malpractice reinsurance agreement.
(b) Net income has been increased by tax benefits of $6,400,000 or $.07 per
share in 1992, $7,200,000 or $.08 per share in 1991, $10,800,000 or $.12
per share in 1990, $19,200,000 or $.22 per share in 1989, $20,400,000 or
$.24 per share in 1988 and $28,800,000 or $.34 per share in 1987
relating to the exclusion from taxable income of a portion of the "fresh
start" discount on property and casualty unpaid claims as a result of
the Tax Reform Act of 1986.
(c) Net income has been reduced by a net charge of $357,500,000 or $3.95 per
share for the after-tax effects of a $675,000,000 increase in unpaid
claims related to an agreement for the settlement of asbestos-related
litigation and the $125,000,000 return premium related to the
commutation of a medical malpractice reinsurance agreement.
(d) Net income has been reduced by a one-time charge of $20,000,000 or $.22
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.
(e) Net income has been increased by the one-time benefit of a
$14,000,000 or $.16 per share elimination of deferred income taxes
relating to estimated property and casualty salvage and subrogation
recoverable as a result of the Revenue Reconciliation Act of 1990.
(f) Net income has been increased by the one-time benefit of a $20,000,000
or $.34 per share elimination of deferred income taxes relating to life
insurance policy reserves as a result of the Tax Reform Act of 1984.
39
5
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
IN THOUSANDS
YEARS ENDED DECEMBER 31
1993 1992 1991
---------- ---------- ----------
REVENUES
Premiums Earned and Policy Charges (Notes 12
and 13).......................................... $4,306,074 $3,852,461 $3,671,184
Investment Income (Note 3)......................... 800,346 751,064 701,038
Real Estate........................................ 160,650 149,945 140,957
Realized Investment Gains (Note 3)................. 232,638 187,349 65,718
---------- ---------- ----------
TOTAL REVENUES................................ 5,499,708 4,940,819 4,578,897
---------- ---------- ----------
BENEFITS, CLAIMS AND EXPENSES
Insurance Claims and Policyholders' Benefits
(Notes 13 and 14)................................ 3,548,520 2,689,138 2,468,904
Amortization of Deferred Policy Acquisition Costs
(Note 4)......................................... 1,012,105 968,611 936,190
Other Insurance Operating Costs and Expenses....... 395,605 361,312 352,452
Real Estate Cost of Sales and Expenses............. 158,599 134,851 106,169
Investment Expenses................................ 11,091 10,679 10,416
Corporate Expenses................................. 29,296 27,787 21,090
---------- ---------- ----------
TOTAL BENEFITS, CLAIMS AND EXPENSES........... 5,155,216 4,192,378 3,895,221
---------- ---------- ----------
INCOME BEFORE FEDERAL AND FOREIGN
INCOME TAX.................................. 344,492 748,441 683,676
FEDERAL AND FOREIGN INCOME TAX (NOTE 8)................. 275 131,342 131,692
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES....................... 344,217 617,099 551,984
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES,
NET OF TAX (NOTE 2)................................... (20,000) -- --
---------- ---------- ----------
NET INCOME.................................... $ 324,217 $ 617,099 $ 551,984
========== ========== ==========
PER SHARE DATA (NOTE 1)
Income Before Cumulative Effect of Changes in
Accounting Principles............................ $ 3.91 $ 6.96 $ 6.32
Cumulative Effect of Changes in Accounting
Principles....................................... (.22) -- --
---------- ---------- ----------
Net Income.................................... $ 3.69 $ 6.96 $ 6.32
========== ========== ==========
See accompanying notes.
40
6
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
DECEMBER 31
1993 1992
----------- -----------
ASSETS
Invested Assets (Note 3)
Short Term Investments.......................................... $ 531,282 $ 263,205
Fixed Maturities
Held for Investment
Tax Exempt (market $6,048,421 and $5,401,783).............. 5,528,880 5,080,706
Taxable (market $2,726,032 and $2,810,898)................. 2,528,907 2,658,857
Available-for-Sale -- Taxable (market $2,148,500 and
$2,047,602).................................................. 2,128,677 1,998,190
Equity Securities (cost $709,905 and $591,914).................. 930,047 738,215
Mortgage Loans.................................................. 15,121 27,618
Policy Loans.................................................... 179,195 165,302
----------- -----------
TOTAL INVESTED ASSETS......................................... 11,842,109 10,932,093
Cash (Note 7)...................................................... 4,586 6,744
Accrued Investment Income.......................................... 204,961 200,497
Premiums Receivable................................................ 720,122 670,793
Reinsurance Recoverable on Property and Casualty Unpaid Claims
(Note 12)....................................................... 1,785,396 1,953,305
Prepaid Reinsurance Premiums....................................... 427,295 369,328
Funds in Escrow -- Asbestos-Related Settlement (Note 14)........... 538,172 --
Deferred Policy Acquisition Costs (Note 4)
Property and Casualty Insurance................................. 489,702 454,976
Life and Health Insurance....................................... 522,544 474,293
Real Estate Assets (Notes 5 and 7)................................. 1,708,981 1,642,774
Deferred Income Tax (Note 8)....................................... 228,971 64,613
Other Assets (Note 6).............................................. 964,031 789,766
----------- -----------
TOTAL ASSETS.................................................. $19,436,870 $17,559,182
=========== ===========
LIABILITIES
Property and Casualty Unpaid Claims (Note 14)...................... $ 8,235,442 $ 7,220,919
Life and Health Policy Liabilities................................. 2,446,620 2,193,486
Unearned Premiums.................................................. 2,179,863 1,980,439
Short Term Debt (Note 7)........................................... 94,840 288,508
Long Term Debt (Note 7)............................................ 1,273,830 1,072,841
Dividend Payable to Shareholders................................... 37,715 35,001
Accrued Expenses and Other Liabilities (Note 9).................... 972,431 813,586
----------- -----------
TOTAL LIABILITIES............................................. 15,240,741 13,604,780
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 11, 14 AND 15)
SHAREHOLDERS' EQUITY (NOTE 18)
Preferred Stock -- Authorized 4,000,000 Shares;
$1 Par Value; Issued -- None.................................... -- --
Common Stock -- Authorized 300,000,000 Shares;
$1 Par Value; Issued 87,709,465 and 87,519,560 Shares........... 87,709 87,520
Paid-In Surplus.................................................... 782,186 772,815
Retained Earnings.................................................. 3,313,140 3,139,707
Foreign Currency Translation Gains (Losses), Net of Income Tax..... 327 (5,164)
Unrealized Appreciation of Equity Securities,
Net of Deferred Income Tax (Note 3)............................. 143,093 96,559
Receivable from Employee Stock Ownership Plan (Note 10)............ (130,326) (137,035)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY.................................... 4,196,129 3,954,402
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $19,436,870 $17,559,182
=========== ===========
See accompanying notes.
41
7
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN THOUSANDS
YEARS ENDED DECEMBER 31
1993 1992 1991
---------- ---------- ----------
PREFERRED STOCK
Balance, Beginning and End of Year.................... $ -- $ -- $ --
---------- ---------- ----------
COMMON STOCK
Balance, Beginning of Year............................ 87,520 86,938 81,912
Shares Issued upon Conversion of Long Term Debt....... -- -- 4,687
Shares Issued under Stock Option and Purchase Plans... 126 515 276
Shares Awarded under Incentive Plans.................. 63 67 63
---------- ---------- ----------
Balance, End of Year............................. 87,709 87,520 86,938
---------- ---------- ----------
PAID-IN SURPLUS
Balance, Beginning of Year............................ 772,815 749,742 542,331
Conversion of Long Term Debt.......................... -- -- 196,040
Additions Resulting from Shares Issued under Stock
Option and Purchase Plans........................... 4,944 19,068 7,804
Additions Resulting from Shares Awarded under
Incentive Plans..................................... 4,427 4,005 3,567
---------- ---------- ----------
Balance, End of Year............................. 782,186 772,815 749,742
---------- ---------- ----------
RETAINED EARNINGS
Balance, Beginning of Year............................ 3,139,707 2,662,220 2,237,993
Net Income............................................ 324,217 617,099 551,984
Dividends Declared (per share $1.72, $1.60 and $1.48). (150,784) (139,612) (127,757)
---------- ---------- ----------
Balance, End of Year............................. 3,313,140 3,139,707 2,662,220
---------- ---------- ----------
FOREIGN CURRENCY TRANSLATION GAINS (LOSSES)
Balance, Beginning of Year............................ (5,164) 7,243 2,730
Change, Net of Income Tax (Note 17)................... 5,491 (12,407) 4,513
---------- ---------- ----------
Balance, End of Year............................. 327 (5,164) 7,243
---------- ---------- ----------
UNREALIZED APPRECIATION OF EQUITY SECURITIES
Balance, Beginning of Year............................ 96,559 178,641 166,478
Change, Net of Deferred Income Tax.................... 46,534 (82,082) 12,163
---------- ---------- ----------
Balance, End of Year............................. 143,093 96,559 178,641
---------- ---------- ----------
RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN
Balance, Beginning of Year............................ (137,035) (143,179) (148,805)
Principal Repayments.................................. 6,709 6,144 5,626
---------- ---------- ----------
Balance, End of Year............................. (130,326) (137,035) (143,179)
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY....................... $4,196,129 $3,954,402 $3,541,605
========== ========== ==========
See accompanying notes.
42
8
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
YEARS ENDED DECEMBER 31
1993 1992 1991
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.......................................... $ 324,217 $ 617,099 $ 551,984
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Property and Casualty
Unpaid Claims, Net............................. 1,182,432 523,750 442,727
Increase (Decrease) in Life and Health Policy
Liabilities, Net............................... 55,841 (14,372) (5,907)
Increase in Unearned Premiums, Net............... 141,457 79,218 75,096
Increase in Premiums Receivable.................. (49,329) (1,241) (4,541)
Funds in Escrow -- Asbestos-Related Settlement... (538,172) -- --
Medical Malpractice Reinsurance Premium
Receivable..................................... (125,000) -- --
Increase in Deferred Policy Acquisition Costs.... (82,977) (43,739) (54,397)
Deferred Income Tax Credit....................... (116,720) (55,303) (48,159)
Realized Investment Gains........................ (232,638) (187,349) (65,718)
Cumulative Effect of Changes in Accounting
Principles..................................... 20,000 -- --
Other, Net....................................... 116,410 (60,207) (16,591)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES................................... 695,521 857,856 874,494
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturities............. 4,051,247 2,509,625 3,478,051
Proceeds from Maturities of Fixed Maturities........ 671,229 560,752 405,181
Proceeds from Sales of Equity Securities............ 298,790 810,438 340,375
Purchases of Fixed Maturities....................... (5,005,539) (4,378,183) (5,003,046)
Purchases of Equity Securities...................... (357,254) (396,045) (604,710)
Decrease (Increase) in Short Term Investments, Net.. (268,077) 4,327 398,505
Increase (Decrease) in Net Payable from Security
Transactions Not Settled......................... (19,092) 41,858 29,696
Additions to Real Estate Properties, Net............ (69,552) (83,703) (160,037)
Purchases of Fixed Assets........................... (47,332) (33,075) (46,336)
Other, Net.......................................... (8,344) 7,706 (3,455)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES.......... (753,924) (956,300) (1,165,776)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits Credited to Policyholder Funds............. 295,189 232,032 213,368
Withdrawals from Policyholder Funds................. (108,116) (106,592) (99,113)
Proceeds from Issuance of Long Term Debt............ 255,045 58,217 315,908
Repayment of Long Term Debt......................... (55,928) (38,926) (3,118)
Increase (Decrease) in Short Term Debt, Net......... (193,668) 61,808 (28,109)
Dividends Paid to Shareholders...................... (148,070) (136,772) (122,625)
Other, Net.......................................... 11,793 25,664 13,058
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES...... 56,245 95,431 289,369
----------- ----------- -----------
Net Decrease in Cash.................................. (2,158) (3,013) (1,913)
Cash at Beginning of Year............................. 6,744 9,757 11,670
----------- ----------- -----------
CASH AT END OF YEAR............................ $ 4,586 $ 6,744 $ 9,757
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Year for
Interest (Net of Amounts Capitalized)............ $ 56,156 $ 53,898 $ 42,692
Federal and Foreign Income Taxes................. 126,955 202,431 180,659
See accompanying notes.
43
9
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 property and casualty
insurance, life and health insurance and real estate development subsidiaries.
Significant intercompany transactions have been eliminated in consolidation.
In 1993, the Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 106, Employers Accounting for Postretirement Benefits Other Than
Pensions, SFAS No. 109, Accounting for Income Taxes, and SFAS No. 113,
Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts. The accounting changes for SFAS No. 106 and SFAS No. 109 have not
been retroactively applied; accordingly, the 1992 and 1991 consolidated
financial statements have not been restated for these changes in accounting
policies. The accounting changes for SFAS No. 113 have been retroactively
applied; however, there was no effect on prior years' net income. These
accounting changes are further described in Note (2).
Certain other amounts in the financial statements for prior years have been
reclassified to conform with the 1993 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. Those fixed maturities which the Corporation and its
insurance subsidiaries have the ability and intent to hold to maturity are
considered held for investment and carried at amortized cost. Fixed maturities
which may be sold prior to maturity to support the investment strategies of the
Corporation and its insurance subsidiaries are considered available for sale and
carried at the lower of the aggregate amortized cost or market value as of the
balance sheet dates.
Equity securities, which include common stocks and non-redeemable preferred
stocks, are carried at market values as of the balance sheet dates.
Mortgage loans and policy loans of the insurance subsidiaries are carried at
unpaid principal balances.
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 income. Unrealized appreciation or depreciation of equity securities, net of
applicable deferred income tax, is excluded from income and credited or charged
directly to a separate component of shareholders' equity.
(c) Premium Revenues and Related Expenses
Property and casualty insurance 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, consisting of commissions, premium
taxes and other costs that vary with and are primarily related to the
production of business, are deferred by major product groups and amortized
over the period in which the related premiums are earned.
Premium receipts from universal life and other interest-sensitive life
insurance contracts are not reported as revenues, but established as
policyholder account balances. Revenues for these contracts consist of policy
charges assessed against the policyholder account balances for the cost of
insurance, policy administration and surrenders. Benefits include claims
incurred in excess of the related policyholder account balances and interest
credited to the policyholder account balances.
Premiums for traditional life insurance contracts under which the premiums and
benefits are fixed and guaranteed are recognized as revenues when due. Benefits
and expenses are provided against such revenues so as to recognize profits over
the estimated lives of the contracts. This is accomplished by means of the
provision for future policy benefits and the deferral and subsequent
amortization of acquisition costs.
Health insurance premiums are earned on a monthly pro rata basis over the
terms of the policies.
Certain costs of acquiring life insurance contracts, principally commissions,
underwriting costs and certain variable agency costs, are deferred. Deferred
policy acquisition costs for universal life and other interest-sensitive life
insurance contracts are amortized over the lives of the contracts in relation to
the present value of estimated gross profits expected to be realized. Deferred
policy acquisition costs for traditional life insurance contracts are amortized
over the premium payment period of the related contracts using assumptions
consistent with those used in computing policy liabilities.
Deferred policy acquisition costs for all insurance operations are reviewed to
determine that they do not exceed recoverable amounts, after considering
anticipated investment income.
44
10
(d) Property and Casualty Unpaid Claims
Liabilities for unpaid claims include the accumulation of individual case
estimates for claims reported and 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) Life and Health Policy Liabilities
Liabilities for universal life and other interest-sensitive life insurance
contracts represent the policyholder account balances before surrender charges.
Interest crediting rates ranged from 4% to 7 5/8%.
Liabilities for traditional life insurance contracts consist of future policy
benefits which are computed by the net level premium method based upon estimated
future investment yield, expected mortality and estimated withdrawals.
Assumptions generally vary by plan, age at issue and year of issue. Interest
rate assumptions ranged from 3% to 9%. Mortality is calculated principally on an
experience multiple applied to select and ultimate tables in common usage in the
industry. Estimated withdrawals are determined principally based on industry
tables.
Liabilities for health insurance include estimates for claims reported and for
claims incurred but not reported.
(f) 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. These arrangements provide greater
diversification of business and minimize the maximum net loss potential arising
from large 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. Reinsurance contracts do not relieve the Corporation's
insurance subsidiaries of their obligation to the policyholders.
Prepaid reinsurance premiums represent the portion of property and casualty
insurance premiums ceded to reinsurers applicable to the unexpired terms of the
reinsurance contracts in force.
Commissions received related to reinsurance premiums are considered in
determining net acquisition costs eligible for deferral.
Reinsurance recoverable on unpaid claims and policy liabilities represent
estimates of the portion of such liabilities that will be recovered from
reinsurers, determined in a manner consistent with the liabilities associated
with the reinsured policies.
(g) Real Estate
Real estate properties are carried at cost and include real estate taxes,
interest and other carrying costs incurred prior to completion of the assets for
their intended use. 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.
The carrying value of real estate properties does not exceed their ultimate
net realizable value. Impairment would be recognized to the extent ultimate net
realizable value were less than the carrying value. Ultimate net realizable
value is determined based on the ability to fully recover costs through a future
revenue stream supported principally by rental revenues, after consideration of
related costs. The time value of money is not considered in assessing revenues
versus costs.
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.
The equity method of accounting is used for joint ventures in which the real
estate subsidiaries own an interest of less than 50%.
Profits on land and building sales are recognized at closing, subject to
receipt of down payments and other requirements in accordance with applicable
accounting guidelines. Profits on construction contracts are recognized using
the percentage of completion method. Profits on condominium unit sales are
recognized using the percentage of completion method, subject to achievement of
a minimum level of unit sales.
45
11
(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) Goodwill
Goodwill, which represents the excess of the purchase price over the fair
value of net assets of subsidiaries acquired, is amortized using the
straight-line method over periods not exceeding 40 years. Total unamortized
goodwill included in other assets was $69,755,000 and $71,941,000 at December
31, 1993 and 1992, respectively.
(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. Prior to 1993, deferred income taxes were
provided to recognize timing differences, which resulted from reporting certain
revenues and expenses in different periods for financial reporting purposes than
for income tax purposes.
Deferred income taxes provided for unrealized appreciation of equity
securities and foreign currency translation gains and losses are recorded as a
charge or credit directly to the applicable component of shareholders' equity.
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 most foreign operations is the currency of the
local operating environment since their business is primarily transacted in such
local currencies. Translation gains and losses, net of applicable income tax,
are excluded from income and accumulated in a separate component of
shareholders' equity.
(l) 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 estimates of future cash flows.
Accordingly, 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.
(iii) Fair values of equity securities are based on quoted market prices.
(iv) Fair values of mortgage loans and policy loans of the insurance
subsidiaries are estimated using discounted cash flow analyses and approximate
carrying values.
(v) Fair values of real estate mortgages and notes receivable are estimated
individually as the lesser of (1) the capitalization value of the
non-discounted cash flow of the property serving as the collateral for the
loan or (2) the value of the discounted cash flow required by the loan. The
capitalization value is determined for each loan by applying the yield,
adjusted for credit risk, of a U.S. Treasury security with a maturity similar
to the loan to the estimated net cash flow from the property's underlying
leases. A similar yield is used for the discounted cash flow analysis.
(vi) The carrying value of short term debt approximates fair value due to
the short maturities of this debt.
(vii) Fair values of term loans and mortgages payable approximate carrying
values because such loans and mortgages consist primarily of variable-rate
debt that reprices frequently and recently issued debt with interest rates
which approximate the current incremental borrowing rates of the issuing
subsidiaries. Fair values of long term notes are based on prices quoted by
dealers.
46
12
(m) Earnings Per Share
Earnings per share amounts are based on the weighted average number of common
and common equivalent shares outstanding during each year, which were
90,548,534, 90,093,741 and 88,637,522 in 1993, 1992 and 1991, respectively. The
5 1/2% convertible subordinated notes, which were converted or redeemed during
1991, and the 6% guaranteed exchangeable subordinated notes are both considered
to be common equivalent shares during the period they were outstanding. The
computation assumes the addition to income of the after-tax interest expense
applicable to such notes.
(n) Cash Flow Information
In the statements 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 1991, $199,915,000 of the 5 1/2% convertible subordinated notes was
converted into 4,687,123 shares of common stock of the Corporation and a real
estate development subsidiary assumed a $113,500,000 mortgage in connection with
a property acquisition. These noncash transactions have been excluded from the
statements of cash flows.
(o) Accounting Pronouncements Not Yet Adopted
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No.
114, Accounting by Creditors for Impairment of a Loan. SFAS No. 114 requires
creditors to evaluate the collectibility of both contractual interest and
contractual principal payments when assessing impairment. Currently, the
Corporation assesses impairment based solely on the recoverability of the
principal balance. SFAS No. 114 also requires creditors to measure impairment of
a loan based on the present value of the loan's expected cash flows discounted
at the loan's effective interest rate or, if more practical, based on the loan's
market price or the fair value of the underlying collateral. SFAS No. 114 is
effective for fiscal years beginning after December 15, 1994. Restatement of
prior year financial statements is not permitted. Management has not yet
determined in what year it intends to adopt SFAS No. 114. The impact of the
Statement on the Corporation's financial position and future operating results
has not yet been quantified.
In May 1993, the FASB also issued SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Similar to the Corporation's current
accounting policy for investments in fixed maturities and equity securities,
SFAS No. 115 provides that the accounting for such securities depends on their
classification as either held-to-maturity (currently referred to as held for
investment), available-for-sale or trading. However, SFAS No. 115 establishes
more stringent criteria to classify fixed maturities as held-to-maturity.
Therefore, SFAS No. 115, when adopted, will result in an increase in the portion
of the Corporation's fixed maturities classified as available-for-sale and a
similar decrease in those classified as held-to-maturity. SFAS No. 115 also
requires that fixed maturities classified as available-for-sale be carried at
market value, with unrealized appreciation or depreciation excluded from income
and credited or charged directly to a separate component of shareholders'
equity. Currently, such fixed maturities are carried at the lower of the
aggregate amortized cost or market value. Upon the Corporation's adoption of
SFAS No. 115, deferred policy acquisition costs related to interest-sensitive
life insurance contracts will be adjusted to reflect the effects that would have
been recognized had the unrealized gains and losses relating to investments
classified as available-for-sale actually been realized, with a corresponding
charge or credit directly to the separate component of shareholders' equity.
SFAS No. 115 is effective for fiscal years beginning after December 15, 1993 and
may not be retroactively applied to prior years' financial statements. The
Corporation will adopt the Statement in the first quarter of 1994. SFAS No. 115,
when adopted, will increase shareholders' equity by an amount which has not yet
been quantified. Adoption of the Statement will not have an impact on net income
in the year of adoption or in future years.
(2) CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1993, the Corporation adopted SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions. SFAS No. 106
requires the Corporation to accrue the expected cost of providing postretirement
benefits, principally health care and life insurance, to employees and their
beneficiaries and covered dependents during the years that the employees render
the necessary service. Prior to 1993, the Corporation used the pay-as-you-go, or
cash, method to recognize the cost of these benefits. The transition obligation
of $89,400,000, which represents the unfunded and unrecognized accumulated
postretirement benefit obligation as of January 1, 1993, was recognized in the
first quarter of 1993 as the cumulative effect of a change in accounting
principle. The cumulative effect, net of related income tax benefits of
$30,400,000, was a decrease in net income of $59,000,000 or $.65 per share.
47
13
Effective January 1, 1993, the Corporation also adopted SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 prescribes an asset and liability
method of accounting for income taxes, the objective of which is to recognize an
asset or liability for the expected future tax effects attributable to temporary
differences between the financial reporting and tax bases of assets and
liabilities. Under the asset and liability method, deferred tax assets and
liabilities are adjusted to reflect changes in tax rates and other provisions of
tax law in the period in which such changes are enacted. (Prior to 1993, the
Corporation used the deferred method, the objective of which was to match income
tax expense with pre-tax accounting income. Under the deferred method, deferred
tax assets and liabilities were not adjusted for changes in the provisions of
the tax law.) Under SFAS No. 109, deferred tax assets are to be recognized
unless it is more likely than not that some portion or all of the deferred tax
assets will not be realized. SFAS No. 109 was implemented by including the
cumulative effect of the change in accounting principle in net income in the
first quarter of 1993. Such cumulative effect was an increase in net income of
$39,000,000 or $.43 per share, due principally to the recognition of the tax
benefit relating to the remaining "fresh start" discount on property and
casualty unpaid claims as a result of the Tax Reform Act of 1986.
In 1993, the Corporation adopted SFAS No. 113, Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts. SFAS No. 113
establishes the conditions required for a contract with a reinsurer to be
accounted for as reinsurance and prescribes accounting and reporting standards
for those contracts. SFAS No. 113 requires that reinsurance recoverables and
prepaid reinsurance premiums be reported separately as assets on the balance
sheet rather than the previous practice of reducing the related insurance
liabilities by such amounts. The change has been retroactively applied.
Accordingly, the 1992 balance sheet amounts have been restated. The adoption of
SFAS No. 113 had no effect on prior years' net income.
Excluding the cumulative effect adjustments, the adoption of these statements
did not have a significant effect on net income in 1993. Their impact on net
income in future years is also not expected to be significant.
(3) INVESTED ASSETS AND RELATED INCOME
(a) The sources of net investment income were as follows:
Years Ended December 31
--------------------------------
1993 1992 1991
-------- -------- --------
(in thousands)
Fixed maturities.............. $734,353 $682,466 $614,667
Equity securities............. 23,709 43,141 47,091
Short term investments........ 22,169 12,121 30,390
Other......................... 20,115 13,336 8,890
-------- -------- --------
Gross investment income..... 800,346 751,064 701,038
Investment expenses........... 11,091 10,679 10,416
-------- -------- --------
$789,255 $740,385 $690,622
======== ======== ========
(b) Realized investment gains and losses were as follows:
Years Ended December 31
--------------------------------
1993 1992 1991
-------- -------- --------
(in thousands)
Gross realized investment gains
Fixed maturities............ $193,738 $ 74,253 $ 70,465
Equity securities........... 62,274 157,356 41,393
-------- -------- --------
256,012 231,609 111,858
-------- -------- --------
Gross realized investment losses
Fixed maturities............ 20,627 20,538 7,738
Equity securities........... 2,747 23,722 38,402
-------- -------- --------
23,374 44,260 46,140
-------- -------- --------
Realized investment gains....... 232,638 187,349 65,718
Income tax...................... 81,019 63,718 22,374
-------- -------- --------
$151,619 $123,631 $ 43,344
======== ======== ========
Proceeds from sales of fixed maturities considered available for sale were
$3,471,404,000 and $2,114,707,000 in 1993 and 1992, respectively. Gross gains of
$152,483,000 and $57,191,000 and gross losses of $12,542,000 and $15,508,000
were realized on such sales in 1993 and 1992, respectively.
(c) The components of unrealized appreciation of equity securities were as
follows:
December 31
-----------------------
1993 1992
-------- --------
(in thousands)
Gross unrealized appreciation... $228,765 $151,262
Gross unrealized depreciation... 8,623 4,961
-------- --------
220,142 146,301
Deferred income tax............. 77,049 49,742
-------- --------
$143,093 $ 96,559
======== ========
The change in unrealized appreciation of equity securities was as follows:
Years Ended December 31
------------------------------
1993 1992 1991
------- --------- -------
(in thousands)
Change in unrealized appreciation
of equity securities........... $73,841 $(124,361) $18,298
Deferred income tax (credit)..... 27,307 (42,279) 6,135
------- --------- -------
$46,534 $ (82,082) $12,163
======= ========== =======
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(d) The amortized cost and estimated market value of fixed maturities were
as follows:
December 31
------------------------------------------------------------------------------------------------
1993 1992
---------------------------------------------- ------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
(in thousands)
Held for investment
Tax exempt............. $ 5,528,880 $519,989 $ 448 $ 6,048,421 $5,080,706 $322,575 $ 1,498 $ 5,401,783
----------- -------- ------- ----------- ---------- -------- ------- -----------
Taxable
Corporate bonds...... 1,323,642 125,355 3,119 1,445,878 1,431,808 92,161 7,498 1,516,471
Foreign bonds........ 325,059 34,114 161 359,012 505,560 19,110 805 523,865
Mortgage-backed
securities......... 876,847 41,942 1,813 916,976 716,626 49,619 1,300 764,945
Redeemable preferred
stocks............. 3,359 807 -- 4,166 4,863 810 56 5,617
----------- -------- ------- ----------- ---------- -------- ------- -----------
2,528,907 202,218 5,093 2,726,032 2,658,857 161,700 9,659 2,810,898
----------- -------- ------- ----------- ---------- -------- ------- -----------
Total held for
investment....... 8,057,787 722,207 5,541 8,774,453 7,739,563 484,275 11,157 8,212,681
----------- -------- ------- ----------- ---------- -------- ------- -----------
Available for sale
Taxable
U.S. Government and
government agency
and authority
obligations........ 951,739 13,530 19,198 946,071 1,076,497 45,110 436 1,121,171
Corporate bonds...... 47,934 149 648 47,435 221,049 394 2,006 219,437
Foreign bonds........ 451,864 21,310 12 473,162 184,952 1,685 1,520 185,117
Mortgage-backed
securities......... 677,140 13,814 9,122 681,832 515,692 11,988 5,803 521,877
----------- -------- ------- ----------- ---------- -------- ------- -----------
Total available for
sale............. 2,128,677 48,803 28,980 2,148,500 1,998,190 59,177 9,765 2,047,602
----------- -------- ------- ----------- ---------- -------- ------- -----------
Total fixed
maturities....... $10,186,464 $771,010 $34,521 $10,922,953 $9,737,753 $543,452 $20,922 $10,260,283
=========== ======== ======= =========== ========== ======== ======= ===========
The increase in unrealized appreciation of fixed maturities was
$213,959,000, $32,059,000 and $411,120,000 for the years ended December 31,
1993, 1992 and 1991, respectively.
The amortized cost and estimated market value of fixed maturities at
December 31, 1993 by contractual maturity were as follows:
Estimated
Amortized Market
Cost Value
----------- -----------
(in thousands)
Due in one year or less.................................... $ 259,188 $ 264,183
Due after one year through five years...................... 1,586,837 1,694,341
Due after five years through ten years..................... 2,657,578 2,894,833
Due after ten years........................................ 4,128,874 4,470,788
----------- -----------
8,632,477 9,324,145
Mortgage-backed securities................................. 1,553,987 1,598,808
----------- -----------
$10,186,464 $10,922,953
=========== ===========
Actual maturities could differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
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(4) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs deferred and the related amortization charged to
income were as follows:
Years Ended December 31
-----------------------------------
1993 1992 1991
--------- --------- ---------
(in thousands)
Property and Casualty Insurance
Balance, beginning of year...... $ 454,976 $ 440,025 $ 412,428
--------- --------- ---------
Costs deferred during year
Commissions and brokerage..... 463,977 432,608 437,426
Premium taxes and assessments. 103,928 103,776 94,152
Salaries and overhead......... 415,788 390,394 372,684
--------- --------- ---------
983,693 926,778 904,262
Amortization during year........ (948,967) (911,827) (876,665)
--------- --------- ---------
Balance, end of year............ $ 489,702 $ 454,976 $ 440,025
========= ========= =========
Life and Health Insurance
Balance, beginning of year...... $ 474,293 $ 445,505 $ 418,705
Costs deferred during year...... 111,389 85,572 86,325
Amortization during year........ (63,138) (56,784) (59,525)
--------- --------- ---------
Balance, end of year............ $ 522,544 $ 474,293 $ 445,505
========= ========= =========
(5) REAL ESTATE ASSETS
The components of real estate assets were as follows:
December 31
-----------------------
1993 1992
---------- ----------
(in thousands)
Mortgages and notes receivable (net of
allowance for uncollectible amounts of
$54,948 and $33,234)................................ $ 424,679 $ 430,350
Income producing properties (net of
accumulated depreciation of $23,983 and $15,626).... 795,205 461,238
Construction in progress.............................. 67,087 229,657
Land under development and unimproved land............ 422,010 521,529
---------- ----------
$1,708,981 $1,642,774
========== ==========
Substantially all mortgages and notes receivable are secured by buildings and
land. The ultimate collectibility of the receivables, of which no significant
amounts are due in the near term, is evaluated continuously and an appropriate
allowance for uncollectible amounts established. Mortgages and notes receivable
had an aggregate fair value of approximately $394,000,000 and $406,000,000 at
December 31, 1993 and 1992, 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. The difference between the fair value
and carrying value at December 31, 1993 is not expected to be realized as the
real estate subsidiaries intend to hold the mortgages and notes to maturity.
(6) PROPERTY AND EQUIPMENT
Property and equipment included in other assets were as follows:
December 31
-------------------
1993 1992
-------- --------
(in thousands)
Cost.................................. $329,876 $302,952
Less accumulated depreciation......... 140,718 122,454
-------- --------
$189,158 $180,498
======== ========
Depreciation expense was $39,951,000, $36,660,000 and $31,700,000 for 1993,
1992 and 1991, respectively.
(7) DEBT AND CREDIT ARRANGEMENTS
(a) Short term debt consisted of the following:
December 31
------------------
1993 1992
------- --------
(in thousands)
Commercial paper....................... $89,540 $223,108
Notes.................................. 5,300 65,400
------- --------
$94,840 $288,508
======= ========
Short term debt is used primarily to support the real estate operations. The
commercial paper is issued by Chubb Capital Corporation (Chubb Capital), a
subsidiary of the Corporation, and is guaranteed by the Corporation. The notes
are current obligations under revolving credit arrangements. Borrowings under
these short term instruments are unsecured and are on terms and at interest
rates generally extended to prime borrowers.
(b) Long term debt consisted of the following:
December 31
-------------------------------------------------
1993 1992
----------------------- -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
(in thousands)
Term loans...... $ 306,236 $ 306,236 $ 352,475 $ 352,475
Mortgages....... 217,594 217,594 220,366 220,366
8 3/4% notes.... 150,000 171,188 150,000 163,388
8 5/8% notes.... 100,000 103,500 100,000 106,665
6% notes........ 150,000 153,188 -- --
6 7/8% notes.... 100,000 103,875 -- --
6% exchangeable
subordinated
notes......... 250,000 266,250 250,000 303,125
---------- ---------- ---------- ----------
$1,273,830 $1,321,831 $1,072,841 $1,146,019
========== ========== ========== ==========
The term loans and mortgages are obligations of the real estate subsidiaries,
except for a $6,637,000 mortgage loan of the life and health insurance
subsidiaries. The term loans mature in varying amounts through 1997.
Substantially all term loans are at an interest rate equivalent to
the lower of the prime rate or a rate associated with the lender's cost of
funds. At December 31, 1993, the interest rates related to these borrowings
ranged from 4 1/4% to 10%. The real estate subsidiaries' mortgages payable are
due in varying amounts monthly through 2013 with interest rates ranging from 5%
to 12%. The term loans and mortgages payable are secured by real estate assets
with a net book value of $860,097,000 at December 31, 1993.
50
16
The life and health insurance subsidiaries' mortgage, which is secured by a
portion of their home office complex, bears interest at 11 3/8% and is payable
monthly through December 2000.
The Corporation has outstanding $150,000,000 of unsecured 8 3/4% notes due
November 15, 1999. In each of the years 1995 through 1998, the Corporation will
pay as a mandatory sinking fund an amount sufficient to redeem $30,000,000 of
principal. The notes will be redeemed on a pro rata basis on November 15 of each
of these years at a redemption price of 100% of their principal amount.
Chubb Capital has outstanding $100,000,000 of unsecured 8 5/8% notes due
January 15, 1995 which are guaranteed by the Corporation.
In February 1993, Chubb Capital sold $150,000,000 of 6% notes due February 1,
1998 and $100,000,000 of 6 7/8% notes due February 1, 2003, the aggregate net
proceeds from which were $248,128,000. These notes are unsecured and are
guaranteed by the Corporation.
Chubb Capital has outstanding in the Eurodollar market $250,000,000 of 6%
exchangeable subordinated notes due May 15, 1998, which are guaranteed by the
Corporation. The notes are exchangeable at the option of the holder into 11.628
shares of common stock of the Corporation for each $1,000 of principal amount,
equivalent to a conversion price of $86.00 per share. The notes are redeemable,
in whole or in part, at the option of Chubb Capital, at any time on or after May
15, 1994, at redemption prices declining annually from 103.4% of the principal
amount if redeemed before May 15, 1995 to 100.9% of the principal amount if
redeemed on or after May 15, 1997.
The amounts of long term debt due annually during the five years subsequent to
December 31, 1993 are as follows:
Term Loans
Years Ending and
December 31 Mortgages Notes Total
------------------ ---------- -------- --------
(in thousands)
1994.................. $107,136 $ -- $107,136
1995.................. 139,447 130,000 269,447
1996.................. 219,854 30,000 249,854
1997.................. 42,579 30,000 72,579
1998.................. 2,881 430,000 432,881
(c) Interest costs of $92,905,000, $94,824,000 and $90,911,000 were incurred
in 1993, 1992 and 1991, respectively, of which $28,685,000, $40,284,000 and
$46,369,000 were capitalized.
(d) The Corporation has a revolving credit agreement with a group of banks
that provides for unsecured borrowings of up to $300,000,000. The agreement
terminates on November 30, 1994 at which time any loans then outstanding become
payable. Borrowings will, at the Corporation's option, bear interest at various
rates, all of which are based on market rates. The Corporation pays a facility
fee of 1/4% per annum. As of December 31, 1993, there were no borrowings under
this agreement. The Corporation and its subsidiaries had additional unused
lines of credit of approximately $186,000,000 at December 31, 1993. These lines
of credit generally have terms ranging from thirty days to one year and are
paid for with a combination of fees and compensating bank balances. Unused
credit facilities are available to support the commercial paper borrowing
arrangement.
(8) FEDERAL AND FOREIGN INCOME TAX
(a) Income tax expense consisted of the following components:
Years Ended December 31
-----------------------------------
1993 1992 1991
--------- -------- --------
(in thousands)
Current tax
United States............................................ $ 105,293 $159,193 $148,913
Foreign.................................................. 11,702 27,452 30,938
Deferred tax credit, principally United States............. (116,720) (55,303) (48,159)
--------- -------- --------
$ 275 $131,342 $131,692
========= ======== ========
The Tax Reform Act of 1986 requires property and casualty insurance
companies to discount unpaid claims for tax purposes as of January 1, 1987 and
provides that the initial discount on such unpaid claims be excluded from
taxable income. Until 1993, the tax benefit of this exclusion was included in
income as the "fresh start" was recognized on the tax return. The federal income
tax provisions in 1992 and 1991 reflect tax benefits of $6,400,000 and
$7,200,000, respectively, relating to the exclusion from taxable income of a
portion of the "fresh start" discount. There was no tax benefit in 1993 since,
for accounting purposes, the remaining "fresh start" benefit was recognized,
effective January 1, 1993, as part of the cumulative effect of the change in
accounting principle upon the adoption by the Corporation of SFAS No. 109 (see
Note (2)).
51
17
(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
-----------------------------------------------------------------------
1993 1992 1991
--------------------- -------------------- --------------------
% of % of % of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
--------- -------- -------- -------- -------- --------
(in thousands)
Income before federal and foreign income tax............ $ 344,492 $748,441 $683,676
========= ======== ========
Tax at statutory federal income tax rate................ $ 120,572 35.0% $254,470 34.0% $232,450 34.0%
Tax exempt interest income.............................. (110,297) (32.0) (96,420) (12.9) (86,719) (12.7)
Deferred income tax benefit due to increase in tax rate. (4,661) (1.4) -- -- -- --
Settlement of prior years' taxes........................ (4,602) (1.3) (15,170) (2.0) -- --
"Fresh start" discount on property and casualty unpaid
claims................................................ -- -- (6,400) (.9) (7,200) (1.0)
Other, net.............................................. (737) (.2) (5,138) (.7) (6,839) (1.0)
--------- ------- -------- ------- -------- -------
Actual tax...................................... $ 275 .1% $131,342 17.5% $131,692 19.3%
========= ======= ======== ======= ======== =======
(c) The tax effects of temporary differences that gave rise to deferred tax
assets and liabilities at December 31, 1993 were as follows:
(in thousands)
Deferred tax assets
Property and casualty unpaid claims...................................................... $461,879
Unearned premiums........................................................................ 111,164
Life and health policy liabilities....................................................... 115,347
Postretirement benefits.................................................................. 49,524
--------
Total.................................................................................. 737,914
--------
Deferred tax liabilities
Deferred policy acquisition costs........................................................ 296,642
Real estate assets....................................................................... 118,386
Unrealized appreciation of equity securities............................................. 77,049
Other, net............................................................................... 16,866
--------
Total.................................................................................. 508,943
--------
Net deferred tax asset..................................................................... $228,971
========
Management believes that it is more likely than not that the net deferred
tax asset at December 31, 1993 will be fully realized.
Prior to the adoption of SFAS No. 109, deferred income tax expense
represented the tax effect of timing differences in the recognition of revenues
and expenses for financial reporting and income tax purposes. The sources of
these differences and the tax effect of each were as follows:
Years Ended
December 31
-----------------------
1992 1991
-------- --------
(in thousands)
Discount on property and casualty unpaid claims.................................... $(39,044) $(45,647)
Unearned premium reserve phase-in.................................................. (12,955) (12,955)
Real estate assets................................................................. 13,059 10,591
Other, net......................................................................... (16,363) (148)
-------- --------
$(55,303) $(48,159)
======== ========
52
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(9) PENSIONS AND OTHER POSTRETIREMENT 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
--------------------------------
1993 1992 1991
-------- -------- --------
(in thousands)
Service cost of current period............................... $ 17,877 $ 15,188 $ 13,039
Interest cost on projected benefit obligation................ 19,598 16,962 14,362
Actual return on plan assets................................. (30,767) (19,361) (42,536)
Net amortization and deferral................................ 10,706 1,996 28,925
-------- -------- --------
Net pension cost............................................. $ 17,414 $ 14,785 $ 13,790
======== ======== ========
The following table sets forth the plans' funded status and amounts recognized
in the balance sheets:
December 31
-------------------
1993 1992
-------- --------
(in thousands)
Actuarial present value of benefit obligations
for service rendered to date:
Accumulated benefit obligation based on current salary
levels, including vested benefits of $168,702 and $142,861.. $178,439 $151,172
Additional amount related to projected future
salary increases............................................ 117,084 96,969
-------- --------
Projected benefit obligation for service rendered to date..... 295,523 248,141
Plan assets at fair value......................................... 265,453 227,674
-------- --------
Projected benefit obligation in excess of plan assets............. 30,070 20,467
Unrecognized net gain from past experience different
from that assumed............................................... 13,438 21,613
Unrecognized prior service costs.................................. (5,196) (5,884)
Unrecognized net asset at January 1, 1985, being recognized
principally over 19 years....................................... 11,034 12,424
-------- --------
Pension liability included in other liabilities................... $ 49,346 $ 48,620
======== ========
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligations at December 31, 1993 and 1992 was
7 1/2% and 7 3/4%, respectively, and the rate of increase in future compensation
levels was 6% for both years. The expected long term rate of return on assets
was 9% for both years.
Plan assets are principally invested in publicly traded stocks and bonds.
(b) The Corporation and its subsidiaries provide certain other postretirement
benefits, principally health care and life insurance, to retired employees and
their beneficiaries and covered dependents. Substantially all U.S. employees may
become eligible for these benefits upon retirement if they meet minimum age and
years of service requirements.
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 noncontributory.
The components of net postretirement benefit cost for the year ended December
31, 1993 were as follows:
(in thousands)
Service cost of current period.............................. $ 4,384
Interest cost on accumulated benefit obligation............. 6,864
--------
Net postretirement benefit cost............................. $ 11,248
========
Prior to the adoption of SFAS No. 106, the cost of other postretirement
benefits was recognized when the annual insurance premiums, which were
immaterial, were paid.
The components of the accumulated postretirement benefit obligation at
December 31, 1993 were as follows:
(in thousands)
Retirees.................................................... $ 39,316
Fully eligible active plan participants..................... 6,072
Other active plan participants.............................. 59,198
--------
Accumulated postretirement benefit obligation............... 104,586
Unrecognized net loss from past experience
different from that assumed............................... (5,729)
--------
Postretirement benefit liability included in other
liabilities............................................... $ 98,857
========
The weighted average discount rate used in determining the actuarial present
value of the accumulated postretirement benefit obligation at December 31, 1993
was 7 1/2%. The health care cost trend rate used to measure the accumulated
postretirement cost for medical benefits was 15% for 1993. The rate is assumed
to decrease gradually to 7 1/2% 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 in
the trend rate for each year would increase the accumulated postretirement
benefit obligation at December 31, 1993 by $11,565,000 and the aggregate of the
service and interest cost components of net postretirement benefit cost for the
year ended December 31, 1993 by $1,395,000.
53
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(10) OPTION AND INCENTIVE PLANS
(a) The Long-Term Stock Incentive Plan provides for the granting of stock
options, stock appreciation rights, performance shares, restricted stock,
restricted stock units, convertible debentures and other stock based awards to
key employees. The Long-Term Stock Incentive Plan succeeds a prior stock option
plan which continues to govern awards made pursuant to it. The maximum number of
shares of the Corporation's common stock in respect to which stock based awards
may be granted under the plan is 4,400,000 shares. At December 31, 1993,
3,064,635 shares were available for grant under the Long-Term Stock Incentive
Plan.
Stock options are rights to purchase shares of the Corporation's common
stock. Stock appreciation rights are rights to receive an amount equal to the
excess of the fair market value of a share over the grant price of such right in
cash, in shares of the Corporation's common stock or in a combination of both.
Stock appreciation rights may be granted in tandem with or unrelated to options.
Stock options and stock appreciation rights 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 and stock appreciation rights
become exercisable may vary among grants. However, stock appreciation rights are
not exercisable earlier than six months after grant. Options and stock
appreciation rights expire no later than ten years from the date of grant.
Information concerning stock options granted under the Long-Term Stock
Incentive Plan and the prior plan is as follows:
1993 1992 1991
------------------------- ----------------------------- -----------------------------
Option Option Option
Number Price Number Price Number Price
of Shares Per Share of Shares Per Share of Shares Per Share
--------- ------------ --------- ------------ --------- ------------
Outstanding, beginning
of year............... 1,558,484 $13.23-74.06 1,228,979 $13.23-72.06 1,144,363 $13.23-47.75
Granted............... 678,461 83.56-92.63 554,900 66.75-74.06 344,350 64.63-72.06
Exercised............. (136,888) 13.23-72.06 (210,220) 13.23-72.06 (245,484) 13.23-47.75
Cancelled............. (16,299) 24.50-83.56 (15,175) 47.75-72.06 (14,250) 35.00-72.06
--------- --------- ---------
Outstanding, end of
year................ 2,083,758 13.23-92.63 1,558,484 13.23-74.06 1,228,979 13.23-72.06
========= ========= =========
Exercisable, end of
year................ 1,147,272 13.23-92.63 847,809 13.23-72.06 737,979 13.23-47.75
No stock appreciation rights unrelated to stock options have been granted.
Of the stock options outstanding at December 31, 1993, 1992 and 1991, 136,962,
157,769 and 238,382, respectively, had stock appreciation rights granted in
tandem with the options. Stock appreciation rights have not been granted since
1990.
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. Convertible debenture awards are convertible into shares of
common stock of the Corporation. The debentures and any shares of common stock
issued upon conversion are subject to forfeiture and to restrictions which limit
the sale or transfer during the restriction period. The cost of the debenture
awards is expensed during the period the related service is performed. The
aggregate amount charged against income with respect to these awards was
$4,219,000, $5,100,000 and $8,214,000 in 1993, 1992 and 1991, respectively.
(b) The Stock Option Plan for Non-Employee Directors provides for the
granting of options to eligible directors to purchase shares of the
Corporation's common stock. Options are granted at exercise prices equal to the
fair market value of the Corporation's common stock on the date of grant.
Options become exercisable immediately and expire no later than five years from
the date of termination as an eligible director. The maximum number of shares in
respect to which options may be granted under the plan is 300,000 shares. At
December 31, 1993, 272,000 shares were available for grant under the Stock
Option Plan for Non-Employee Directors.
Information concerning stock options granted under the Stock Option Plan
for Non-Employee Directors is as follows:
1993 1992 1991
--------------------------- --------------------------- ---------------------------
Option Option Option
Number Price Number Price Number Price
of Shares Per Share of Shares Per Share of Shares Per Share
--------- ------------ --------- ------------ --------- ------------
Outstanding, beginning of year.. 100,000 $26.84-69.19 96,000 $26.84-69.19 68,000 $26.84-44.19
Granted......................... 28,000 86.94 28,000 65.19 30,000 69.19
Exercised....................... (4,000) 26.84-44.19 (24,000) 26.84-69.19 (2,000) 69.19
------- ------- ------
Outstanding and exercisable, end
of year....................... 124,000 26.84-86.94 100,000 26.84-69.19 96,000 26.84-69.19
======= ======= ======
54
20
(c) 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 $150,000,000 loan from the Corporation
to purchase 3,896,102 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 unallocated 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
1993, 1992 and 1991, contributions to the ESOP were $12,172,000, $11,995,000 and
$11,841,000, respectively, and dividends on unallocated shares used for debt
service by the ESOP were $4,711,000, $4,709,000 and $4,623,000, respectively.
(d) The Corporation has a savings plan, the Capital Accumulation Plan.
Effective in 1992, participation in the plan was extended to employees of the
life and health insurance and real estate development subsidiaries. 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 $12,564,000, $12,182,000 and $9,154,000 were charged against
income in 1993, 1992 and 1991, respectively.
(e) The Corporation has a Stock Purchase Plan under which substantially all
employees are eligible to purchase shares of the Corporation's common stock.
Shares are purchased at a price not less than 95% of the fair market value on
the date of grant. At December 31, 1993, there were 237,412 subscribed shares at
a price of $86.06.
(11) LEASES
The Corporation and its subsidiaries occupy office facilities under lease
agreements which expire at various dates through 2009; 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 two to ten
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
-------------------------------
1993 1992 1991
------- ------- -------
(in thousands)
Office facilities............. $68,805 $65,678 $60,030
Equipment..................... 20,794 24,404 24,207
------- ------- -------
$89,599 $90,082 $84,237
======= ======= =======
At December 31, 1993, future minimum rental payments required under
non-cancellable operating leases were as follows:
Years Ending December 31 (in thousands)
1994..................................... $ 79,095
1995..................................... 72,576
1996..................................... 62,984
1997..................................... 52,038
1998..................................... 43,698
After 1998............................... 101,367
--------
$411,758
========
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21
(12) RELATED PARTY TRANSACTIONS
Sun Alliance Group plc (Sun Group), an insurance holding company organized
under the laws of England, is the beneficial owner of 5.1% of the Corporation's
common stock, acquired solely for the purpose of investment.
Approximately 14% of the U.S. insurance business written by the Corporation's
property and casualty insurance subsidiaries is reinsured on a quota share basis
with a subsidiary of the Sun Group. The Sun Group's premiums earned arising from
such reinsurance were $457,321,000, $438,939,000 and $423,055,000 in 1993, 1992
and 1991, respectively. Reinsurance recoverable on property and casualty unpaid
claims included approximately $840,000,000 and $1,000,000,000 at December 31,
1993 and 1992, respectively, from the Sun Group.
A property and casualty insurance subsidiary assumes a portion of the Sun
Group's property and casualty insurance business on a quota share basis. The
assumed reinsurance premiums earned arising from this business were
$170,131,000, $125,731,000 and $120,913,000 in 1993, 1992 and 1991,
respectively.
The property and casualty insurance subsidiaries entered into a stop loss
reinsurance agreement with a subsidiary of the Sun Group, effective year end
1985, relating to medical malpractice unpaid claims. The agreement provides that
the Sun Group will pay up to $285,000,000 of losses and loss adjustment expenses
for this discontinued class of business in excess of the initial $225,000,000 to
be paid by the property and casualty insurance subsidiaries subsequent to
December 31, 1985. Since the effective date of this agreement, the property and
casualty insurance subsidiaries have paid an aggregate of $249,877,000 of
medical malpractice losses and loss adjustment expenses and, under the
agreement, have recovered the amount in excess of $225,000,000 from the Sun
Group.
The agreement includes a provision for contingent profit sharing payments to
the property and casualty insurance subsidiaries based on calculations at
specified dates during the period of the reinsurance agreement. Profit sharing
accruals related to the agreement were $9,000,000, $9,479,000 and $9,000,000 in
1993, 1992 and 1991, respectively. These amounts were reflected as reductions of
other insurance operating costs and expenses.
The agreement also provides that the property and casualty insurance
subsidiaries may elect to commute the remaining liability as of December 31,
1995. In 1993, the Corporation announced its intention to exercise this
election. The commutation will result in a return premium to the property and
casualty insurance subsidiaries of approximately $125,000,000, which was
recognized in 1993.
The reinsurance amounts described in Note (13) include the effects of these
transactions with the Sun Group.
(13) REINSURANCE
The effect of reinsurance on the premiums earned of the property and casualty
insurance subsidiaries was as follows:
Years Ended December 31
-------------------------------------
1993 1992 1991
----------- ----------- -----------
(in thousands)
Direct................... $ 4,155,356 $ 3,824,520 $ 3,579,774
Reinsurance assumed...... 478,464 429,147 476,852
Reinsurance ceded........ (1,128,982) (1,090,379) (1,019,458)
----------- ----------- -----------
Premiums earned.......... $ 3,504,838 $ 3,163,288 $ 3,037,168
=========== =========== ===========
Reinsurance recoveries by the property and casualty insurance subsidiaries
which have been deducted from insurance claims and policyholders' benefits in
the consolidated statements of income were $568,847,000 in 1993.
The effect of reinsurance on the premiums and policy charges of the life and
health insurance subsidiaries was as follows:
Years Ended December 31
------------------------------
1993 1992 1991
-------- -------- --------
(in thousands)
Direct.......................... $831,849 $721,785 $663,810
Reinsurance assumed............. 2,784 2,751 3,094
Reinsurance ceded............... (33,397) (35,363) (32,888)
-------- -------- --------
Premiums and policy charges..... $801,236 $689,173 $634,016
======== ======== ========
The maximum amount of individual life insurance retained on any one life,
including accidental death benefits, amounted to $1,400,000.
Reinsurance recoveries by the life and health insurance subsidiaries which
have been deducted from insurance claims and policyholders' benefits in the
consolidated statements of income were $42,005,000 in 1993.
56
22
(14) PROPERTY AND CASUALTY UNPAID CLAIMS
The process of establishing loss reserves is an imprecise science and reflects
significant judgmental factors. In many liability cases, significant periods of
time, ranging up to several years or more, may elapse between the occurrence of
an insured loss, the reporting of the loss and the settlement of the loss.
Judicial decisions and legislative actions continue to broaden liability and
policy definitions and to increase the severity of claim payments. As a result
of this and other societal and economic developments, the uncertainties inherent
in estimating ultimate claim costs on the basis of past experience have
increased significantly, further complicating the already difficult loss
reserving process.
The uncertainties relating to asbestos and toxic waste claims on insurance
policies written many years ago are exacerbated by judicial and legislative
interpretations of coverage that in some cases have tended to erode the clear
and express intent of such policies and in 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 is subject to court approval.
Pursuant to the global settlement agreement, a $1,525,000,000 trust fund will be
established to pay future claims, which are claims that were not filed in court
before August 27, 1993. Pacific Indemnity will contribute $538,172,000 to the
trust fund and Continental Casualty will contribute the remaining amount. In
December 1993, upon execution of the global settlement agreement, Pacific
Indemnity and Continental Casualty paid their respective shares into an escrow
account. Upon final court approval of the settlement, which could take up to two
years or more, the amount in the escrow account, including interest earned
thereon, will be transferred to the trust fund.
All of the parties have agreed to use their best efforts to seek court
approval of the global settlement agreement. Although it is likely that this
agreement will be challenged, management is optimistic that the courts will
approve the settlement.
Pacific Indemnity and Continental Casualty have reached a separate agreement
for the handling of all pending asbestos-related bodily injury claims against
Fibreboard. Pacific Indemnity's obligation under this agreement is not expected
to exceed $635,000,000. The agreement further provides that the total
responsibility of both insurers with respect to pending and future asbestos-
related bodily injury claims against Fibreboard will be shared between Pacific
Indemnity and Continental Casualty on an approximate 35% and 65% basis,
respectively.
Pacific Indemnity, Continental Casualty and Fibreboard have entered into a
trilateral agreement, subject to court approval, to settle all present and
future asbestos-related bodily injury claims resulting from insurance policies
that were, or may have been, issued to Fibreboard by the two insurers. The
trilateral agreement will be triggered if the global settlement agreement is
disapproved. Pacific Indemnity's obligation under the trilateral agreement is
therefore similar to, and not duplicative of, that under those agreements
described above.
The trilateral agreement reaffirms portions of an agreement reached in March
1992 between Pacific Indemnity and Fibreboard. Among other matters, that 1992
agreement eliminates any Pacific Indemnity liability to Fibreboard for
asbestos-related property damage claims.
Pacific Indemnity, Continental Casualty and Fibreboard have requested a
California Court of Appeal to delay its decisions regarding asbestos-related
insurance coverage issues, which are currently before it and involve the three
parties exclusively, while the approval of the global settlement is pending in
court. Continental Casualty and Pacific Indemnity have dismissed disputes
against each other which involved Fibreboard and were in litigation.
Additional loss reserves of $675,000,000 were provided in 1993 at the time the
settlement was negotiated.
Management believes that, as a result of the global settlement agreement and
the trilateral agreement, the uncertainty of Pacific Indemnity's exposure with
respect to asbestos-related bodily injury claims against Fibreboard has been
greatly reduced. However, if both the global settlement agreement and the
trilateral agreement are disapproved, there can be no assurance that the loss
reserves established for future claims would be sufficient to pay all amounts
which ultimately could become payable in respect of future asbestos-related
bodily injury claims against Fibreboard.
57
23
Other than Fibreboard, remaining asbestos exposures are mostly limited to
peripheral regional defendants, principally distributors. New asbestos claims
and new exposures on existing claims continue to be received as more peripheral
parties are drawn into litigation to replace the now defunct mines and bankrupt
manufacturers. The recent claims are complex in that they include significant
and yet unresolved liability issues. Further, the universe of potential claims
is still not known.
Hazardous waste sites are another significant potential exposure. As the cost
of environmental clean-up continues to grow, potentially responsible parties
(PRPs) and others continue to file claims with their insurance carriers.
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.
Ensuing litigation 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
underlying liabilities of the claimants are extremely difficult to estimate. At
any given clean-up site, the allocation of financial responsibility among the
governmental authorities and PRPs varies greatly. Second, various courts have
addressed liability and coverage issues regarding pollution claims and have
reached inconsistent conclusions in their interpretation of several issues.
These significant uncertainties are not likely to be resolved in the near
future.
Reserves for asbestos and toxic waste claims cannot be estimated with
traditional loss reserving techniques. Case reserves and 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.
Management believes that the aggregate loss reserves of the property and
casualty insurance subsidiaries at December 31, 1993 were adequate to cover
claims for losses which 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 acceptable
for measuring hazardous waste site clean-up, additional increases in loss
reserves may emerge which may adversely affect results in future periods. This
emergence cannot reasonably be estimated.
(15) CONTINGENCIES
In 1988, voters in California approved Ballot Proposition 103, an insurance
reform initiative which affects most property and casualty insurers writing
business in the state. Approximately 14% of the direct business of the
Corporation's property and casualty insurance subsidiaries is written in
California. Provisions of Proposition 103 would have required insurers to roll
back property and casualty insurance rates for certain lines of business to 20
percent below November 1987 levels and would have required an additional 20
percent reduction in automobile rates by November 1989. In 1989, the California
Supreme Court, ruling on the constitutional challenge to Proposition 103, ruled
that an insurer is entitled to a fair rate of return.
The regulations implementing the rate determination and premium rollback
provisions of Proposition 103 continue to evolve. A California Superior Court
decision declared invalid and void the rollback and rate review regulations
proposed by the elected Insurance Commissioner. The Court decision prohibits the
Commissioner from enforcing the regulations as well. The Commissioner has
appealed the Superior Court decision to the California Supreme Court and the
outcome of that appeal is uncertain. In a separate action, a California Court of
Appeal has ruled that Proposition 103 regulations need not be submitted for
approval to the California Office of Administrative Law. A petition for review
has been filed with the California Supreme Court. There are at present no
regulations in force or proposed which establish a final rollback formula.
None of the Corporation's property and casualty insurance subsidiaries have
been among the companies thus far ordered to refund premiums for the rollback
period. Based on an analysis of the operating results of the Corporation's
property and casualty insurance subsidiaries in the State of California during
the rollback period, it is management's belief that it is probable that any
final court decision will not result in premium refunds of a material amount by
the Corporation's property and casualty insurance subsidiaries.
58
24
(16) BUSINESS SEGMENTS
The Corporation is a holding company and is principally engaged, through
subsidiaries, in three industries: property and casualty insurance, life and
health insurance and real estate development. Revenues, income from operations
before income tax and identifiable assets for each industry segment were as
follows:
Years Ended December 31
-----------------------------------------
1993 1992 1991
----------- ----------- -----------
(in thousands)
REVENUES
Property and Casualty Insurance
Premiums earned............................................................. $ 3,504,838 $ 3,163,288 $ 3,037,168
Investment income........................................................... 541,749 501,140 476,984
Life and Health Insurance
Premiums and policy charges................................................. 801,236 689,173 634,016
Investment income........................................................... 205,891 192,748 177,654
Real Estate..................................................................... 160,650 149,945 140,957
----------- ----------- -----------
5,214,364 4,696,294 4,466,779
Corporate investment income..................................................... 52,706 57,176 46,400
Realized investment gains....................................................... 232,638 187,349 65,718
----------- ----------- -----------
Total revenues.......................................................... $ 5,499,708 $ 4,940,819 $ 4,578,897
=========== =========== ===========
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAX
Property and Casualty Insurance................................................. $ (1,383) $ 442,803 $ 485,389
Life and Health Insurance....................................................... 88,729 74,501 73,256
Real Estate..................................................................... 2,051 15,094 34,788
----------- ----------- -----------
89,397 532,398 593,433
Corporate....................................................................... 22,457 28,694 24,525
Realized investment gains....................................................... 232,638 187,349 65,718
----------- ----------- -----------
Income before federal and foreign income tax............................ $ 344,492 $ 748,441 $ 683,676
=========== =========== ===========
December 31
-----------------------------------------
IDENTIFIABLE ASSETS
Property and Casualty Insurance................................................. $13,372,599 $11,999,538 $10,991,559
Life and Health Insurance....................................................... 3,529,802 3,150,630 2,951,704
Real Estate..................................................................... 1,745,212 1,679,138 1,587,511
----------- ----------- -----------
Total identifiable assets............................................... 18,647,613 16,829,306 15,530,774
Corporate....................................................................... 1,047,606 1,009,257 899,474
Adjustments and eliminations.................................................... (258,349) (279,381) (266,643)
----------- ----------- -----------
Total assets............................................................ $19,436,870 $17,559,182 $16,163,605
=========== =========== ===========
The following additional information is with respect to the more
significant groupings of classes of business for the property and casualty
operations:
Years Ended December 31
----------------------------------------
1993 1992 1991
---------- ---------- ----------
(in thousands)
PREMIUMS EARNED
Personal........................................................................ $ 807,550 $ 789,923 $ 804,410
Standard Commercial............................................................. 1,294,182 1,113,654 1,088,635
Specialty Commercial............................................................ 1,208,672 1,108,913 1,000,078
Reinsurance Assumed............................................................. 194,434 150,798 144,045
---------- ---------- ----------
Total premiums earned....................................................... $3,504,838 $3,163,288 $3,037,168
========== ========== ==========
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAX
Personal........................................................................ $ 30,536 $ (36,158) $ (27,391)
Standard Commercial............................................................. (642,747) (70,876) (29,598)
Specialty Commercial............................................................ 101,584 96,894 99,365
Reinsurance Assumed............................................................. (24,465) (40,512) (26,482)
---------- ---------- ----------
Underwriting income (loss).................................................. (535,092) (50,652) 15,894
Net investment income........................................................... 533,709 493,455 469,495
---------- ---------- ----------
Income (loss) from operations before income tax............................. $ (1,383) $ 442,803 $ 485,389
========== ========== ==========
Standard Commercial premiums earned for 1993 include a $125,000,000 return
premium to the property and casualty insurance subsidiaries related to the
commutation of a medical malpractice reinsurance agreement. Standard Commercial
underwriting loss in 1993 reflects a $675,000,000 increase in unpaid claims
related to an agreement for the settlement of asbestos-related litigation and
the $125,000,000 return premium, resulting in a net charge of $550,000,000.
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25
The underwriting income or loss by class of business reflects allocations
of certain significant underwriting expenses using allocation methods deemed
reasonable. Other acceptable allocation methods could produce different results
by groupings of classes of business. Property and casualty assets are available
for payment of claims and expenses for all classes of business; therefore, such
assets and the related investment income have not been identified with specific
groupings of classes of business.
(17) INTERNATIONAL OPERATIONS
Several of the property and casualty insurance subsidiaries provide
international insurance coverages on a direct and assumed basis, principally in
Canada, Europe, Australia and the Far East. The life and health insurance and
real estate subsidiaries have no international operations.
Shown below is a summary of revenues, income from operations before income
tax and identifiable assets of the property and casualty insurance subsidiaries
by geographic area.
Years Ended December 31
--------------------------------------
1993 1992 1991
---------- ---------- ----------
(in thousands)
Revenues
United States........................................................ $3,397,825 $3,089,635 $2,981,312
International........................................................ 648,762 574,793 532,840
---------- ---------- ----------
Total.......................................................... $4,046,587 $3,664,428 $3,514,152
========== ========== ==========
Income (loss) from operations before income tax
United States........................................................ $ 8,311 $ 472,359 $ 455,706
International........................................................ (9,694) (29,556) 29,683
---------- ---------- ----------
Total.......................................................... $ (1,383) $ 442,803 $ 485,389
========== ========== ==========
December 31
---------------------------------------
1993 1992 1991
----------- ----------- -----------
(in thousands)
Identifiable assets
United States....................................................... $12,189,556 $10,993,111 $10,130,473
International....................................................... 1,183,043 1,006,427 861,086
----------- ----------- -----------
Total......................................................... $13,372,599 $11,999,538 $10,991,559
=========== =========== ===========
Foreign currency translation gains or losses credited or charged directly
to the separate component of shareholders' equity were as follows:
Years Ended December 31
-------------------------------
1993 1992 1991
------- -------- ------
(in thousands)
Gains (losses) on translation of foreign currencies............................ $ 8,492 $(18,801) $6,611
Income tax (credit)
Current.................................................................... 8,546 (1,534) 2,165
Deferred................................................................... (5,545) (4,860) (67)
------- -------- ------
$ 5,491 $(12,407) $4,513
======= ======== ======
(18) 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
--------------------------------------
1993 1992 1991
---------- ---------- ----------
(number of shares)
Common stock issued
Balance, beginning of year........................................... 87,519,560 86,937,565 81,911,530
Shares issued upon conversion of long term debt...................... -- -- 4,687,123
Shares issued under stock option and purchase plans.................. 126,355 515,301 276,054
Shares awarded under incentive plans................................. 63,550 66,694 62,858
---------- ---------- ----------
Common stock outstanding, end of year............................ 87,709,465 87,519,560 86,937,565
========== ========== ==========
(c) The Corporation has a Shareholder Rights Plan under which each
shareholder has one-half of a right for each share of common stock of the
Corporation held. Each right entitles the holder to purchase from the
Corporation one one-hundredth of a share of Series A Participating Cumulative
Preferred Stock at an exercise price of $225. The rights attach 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.
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The rights will become exercisable and will detach from the common stock
ten days after a person or group either acquires 25% 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 25% or more
of the outstanding shares of the Corporation's common stock.
In the event that any person or group acquires 25% 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 25%
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.
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 25%
or more of the Corporation's outstanding common stock by a person or group. The
rights will expire at the close of business on June 12, 1999, unless previously
redeemed by the Corporation.
(d) The Corporation's insurance subsidiaries are required to file annual
statements with state 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
----------------------------------------------------
1993 1992
------------------------ ------------------------
GAAP Statutory GAAP Statutory
---------- ---------- ---------- ----------
(in thousands)
Property and casualty insurance subsidiaries* $2,683,264 $1,794,101 $2,600,163 $1,787,176
Life and health insurance subsidiaries...... 758,419 305,609 736,801 321,035
---------- ---------- ---------- ----------
3,441,683 $2,099,710 3,336,964 $2,108,211
========== ==========
Corporate and eliminations.................. 754,446 617,438
---------- ----------
$4,196,129 $3,954,402
========== ==========
A comparison of GAAP and statutory net income is as follows:
Years Ended December 31
-------------------------------------------------------------------------------
1993 1992 1991
--------------------- --------------------- ---------------------
GAAP Statutory GAAP Statutory GAAP Statutory
-------- --------- -------- --------- -------- ---------
(in thousands)
Property and casualty insurance
subsidiaries*.............................. $210,204** $ 96,965 $483,896 $396,952 $475,201 $394,373
Life and health insurance subsidiaries....... 76,853** 31,890 64,991 32,501 54,174 39,565
-------- -------- -------- -------- -------- --------
287,057 $128,855 548,887 $429,453 529,375 $433,938
======== ======== ========
Corporate and eliminations................... 57,160** 68,212 22,609
Cumulative effect of changes in accounting
principles, net of tax.................... (20,000) -- --
-------- -------- --------
$324,217 $617,099 $551,984
======== ======== ========
* A property and casualty subsidiary owns the real estate subsidiaries.
** Before cumulative effect of changes in accounting principles.
(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
insurance subsidiaries. Various state insurance laws restrict the Corporation's
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 investment 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 1993, these subsidiaries paid
dividends to the Corporation totaling $148,008,000.
For 1994, the Corporation's principal property and casualty insurance
subsidiary, an Indiana corporation, requested and received approval to pay an
amount which constitutes an "extraordinary" dividend. The maximum dividend
distribution that may be made by insurance subsidiaries to the Corporation
during 1994, including the "extraordinary" dividend, is approximately
$271,000,000.
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REPORT OF INDEPENDENT AUDITORS
ERNST & YOUNG
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, 1993 and 1992, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1993. 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 generally accepted auditing
standards. 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, 1993 and 1992 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1993 in conformity with generally accepted accounting principles.
As described in Note (2) to the financial statements, The Chubb Corporation
changed its methods of accounting for postretirement benefits other than
pensions, income taxes and reinsurance of short-duration and long-duration
contracts in 1993.
/s/ Ernst & Young
February 25, 1994
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QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data (in millions except per share
data) for 1993 and 1992 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
-------------------- -------------------- -------------------- --------------------
1993 1992 1993 1992 1993 1992 1993 1992
-------- -------- -------- -------- -------- -------- -------- --------
Revenues...................... $1,237.5 $1,175.6 $1,283.6 $1,179.0 $1,570.3 $1,243.7 $1,408.1 $1,342.5
Benefits and expenses......... 1,057.6 997.9 1,072.3 1,025.5 1,815.6 1,062.9 1,209.6 1,106.0
Federal and foreign income tax
(credit).................... 34.1 34.6 42.8 23.1 (114.7) 34.7 38.0 39.0
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before
cumulative effect of changes
in accounting principles.... 145.8 143.1 168.5 130.4 (130.6) 146.1 160.5 197.5
Cumulative effect of changes
in accounting principles,
net of tax.................. (20.0) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)............. $ 125.8 $ 143.1 $ 168.5 $ 130.4 $ (130.6) $ 146.1 $ 160.5 $ 197.5
======== ======== ======== ======== ======== ======== ======== ========
Per share data
Income (loss) before
cumulative effect of
changes in accounting
principles................ $ 1.64 $ 1.62 $ 1.89 $ 1.48 $ (1.42) $ 1.65 $ 1.80 $ 2.21
Cumulative effect of changes
in accounting principles.. (.22) -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)........... $ 1.42 $ 1.62 $ 1.89 $ 1.48 $ (1.42) $ 1.65 $ 1.80 $ 2.21
======== ======== ======== ======== ======== ======== ======== ========
Underwriting ratios
Losses to premiums earned... 65.1% 62.7% 64.6% 65.6% 125.9% 67.6% 66.9% 70.5%
Expenses to premiums
written................... 34.7 35.4 33.4 34.1 29.0 34.2 33.0 34.2
-------- -------- -------- -------- -------- -------- -------- --------
Combined.................... 99.8% 98.1% 98.0% 99.7% 154.9% 101.8% 99.9% 104.7%
======== ======== ======== ======== ======== ======== ======== ========
Revenues for the third quarter of 1993 include a $125 million return
premium to the Corporation's property and casualty insurance subsidiaries
related to the commutation of a medical malpractice reinsurance agreement.
Benefits and expenses for the same period include a $675 million increase in
unpaid claims related to an agreement for the settlement of asbestos-related
litigation. Net income for the quarter was reduced by a net charge of $357.5
million or $3.95 per share for the after-tax effect of these items. Excluding
the effects of these items, the losses to premiums earned ratio for the quarter
was 65.2%, the expenses to premiums written ratio was 33.0% and the combined
ratio was 98.2%.
The income tax provision for the fourth quarter of 1992 reflects a benefit
of $12.0 million resulting from a reversal of income tax reserves based on a
settlement of prior years' taxes. The effect was to increase net income by $.13
per share for the quarter.
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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 1993 and 1992.
1993
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Common stock prices
High...................................................... $95.75 $95.63 $92.75 $83.75
Low....................................................... 84.38 80.75 84.13 76.63
Dividends declared............................................ .43 .43 .43 .43
1992
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Common stock prices
High...................................................... $75.63 $72.63 $85.50 $91.00
Low....................................................... 63.63 63.38 72.75 82.25
Dividends declared............................................ .40 .40 .40 .40
At March 1, 1994, there were approximately 9,025 common shareholders of
record.
67