1
EXHIBIT 13
SUPPLEMENTARY FINANCIAL DATA
IN THOUSANDS
YEARS ENDED DECEMBER 31
1995 1994 1993
--------- --------- ---------
PROPERTY AND CASUALTY INSURANCE
UNDERWRITING
Net Premiums Written............................. $4,305,992 $3,951,209 $3,521,295
Increase in Unearned Premiums.................... (158,830) (174,926) (141,457)
---------- ---------- ----------
Premiums Earned.................................. 4,147,162 3,776,283 3,379,838
---------- ---------- ----------
Claims and Claim Expenses........................ 2,669,981 2,519,359 2,204,098
Operating Costs and Expenses..................... 1,393,373 1,288,692 1,181,316
Increase in Deferred Policy Acquisition Costs.... (29,223) (39,751) (34,726)
Dividends to Policyholders....................... 18,877 16,294 14,242
---------- ---------- ----------
Underwriting Income (Loss) Before Increase in
Unpaid Claims for Asbestos-Related Settlement
and Return Premium for Medical Malpractice
Commutation.................................... 94,154 (8,311) 14,908
Increase in Unpaid Claims for Asbestos-Related
Settlement..................................... -- -- (675,000)
Return Premium for Medical Malpractice
Commutation.................................... -- -- 125,000
---------- ---------- ----------
Underwriting Income (Loss) Before Income Tax..... 94,154 (8,311) (535,092)
Federal and Foreign Income Tax (Credit).......... 38,500 (500) (197,600)
---------- ---------- ----------
UNDERWRITING INCOME (LOSS)....................... 55,654 (7,811) (337,492)
---------- ---------- ----------
INVESTMENTS
Investment Income Before Expenses and Income Tax. 613,242 570,531 541,749
Investment Expenses.............................. 10,255 10,050 8,040
---------- ---------- ----------
Investment Income Before Income Tax.............. 602,987 560,481 533,709
Federal and Foreign Income Tax................... 95,800 85,500 78,300
---------- ---------- ----------
INVESTMENT INCOME................................ 507,187 474,981 455,409
---------- ---------- ----------
PROPERTY AND CASUALTY INCOME........................ $ 562,841 $ 467,170 $ 117,917
========== ========== ==========
LIFE AND HEALTH INSURANCE
Premiums and Policy Charges......................... $ 622,937 $ 836,293 $ 801,236
Investment Income................................... 232,950 208,745 205,891
---------- ---------- ----------
Total Revenues...................................... 855,887 1,045,038 1,007,127
---------- ---------- ----------
Benefits............................................ 549,219 752,205 669,422
Operating Costs and Expenses........................ 265,403 274,079 248,976
---------- ---------- ----------
Life and Health Income Before Income Tax............ 41,265 18,754 88,729
Federal Income Tax.................................. 13,225 4,251 26,212
---------- ---------- ----------
LIFE AND HEALTH INCOME.............................. $ 28,040 $ 14,503 $ 62,517
========== ========== ==========
REAL ESTATE
Revenues............................................ $ 287,795 $ 204,849 $ 160,650
Cost of Sales and Expenses.......................... 280,099(a) 210,799 158,599
---------- ---------- ----------
Real Estate Income (Loss) Before Income Tax......... 7,696 (5,950) 2,051
Federal Income Tax (Credit)......................... 1,686 (3,913) 4,244
---------- ---------- ----------
REAL ESTATE INCOME (LOSS)........................... $ 6,010 $ (2,037) $ (2,193)
========== ========== ==========
CORPORATE, NET OF TAX................................. $ 14,809 $ 7,661 $ 14,357
========== ========== ==========
REALIZED INVESTMENT GAINS, NET OF TAX................. $ 84,928 $ 41,172 $ 151,619
========== ========== ==========
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES............... $ 696,628 $ 528,469 $ 344,217
========== ========== ==========
(a) Includes an increase of $10,000,000 to the allowance for uncollectible
receivables resulting from the initial application of Statement of Financial
Accounting Standards No. 114, Accounting by Creditors for Impairment of a
Loan.
The above federal and foreign income tax provisions represent allocations of the
consolidated provision.
15
2
PROPERTY AND CASUALTY UNDERWRITING RESULTS
NET PREMIUMS WRITTEN (In Millions of Dollars)
1995 1994 1993 1992 1991
Personal Insurance
Automobile........................ $ 199.7 $ 187.7 $ 191.7 $ 190.9 $ 189.5
Homeowners........................ 449.8 429.7 428.4 416.9 432.2
Other............................. 202.1 196.3 194.4 188.6 193.0
-------- -------- -------- -------- --------
851.6 813.7 814.5 796.4 814.7
-------- -------- -------- -------- --------
Standard Commercial Insurance
Multiple Peril.................... 678.5 604.0 528.8 483.2 482.6
Casualty.......................... 565.9 544.3 626.0(a) 481.7 456.1
Workers' Compensation............. 212.1 190.2 172.0 168.6 177.1
-------- -------- -------- -------- --------
1,456.5 1,338.5 1,326.8(a) 1,133.5 1,115.8
-------- -------- -------- -------- --------
Specialty Commercial Insurance
Fidelity and Surety............... 757.4 706.7 618.7 585.1 538.0
Other............................. 869.6 769.1 650.8 566.6 496.7
-------- -------- -------- -------- --------
1,627.0 1,475.8 1,269.5 1,151.7 1,034.7
-------- -------- -------- -------- --------
Reinsurance Assumed................. 370.9 323.1 235.5 160.9 147.1
-------- -------- -------- -------- --------
Total........................ $4,306.0 $3,951.1 $3,646.3(a) $3,242.5 $3,112.3
======== ======== ======== ======== ========
<FN>
(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........................ 87.5% 96.5% 97.6% 100.2% 106.2%
Homeowners........................ 93.7 110.7 100.2 113.3 106.0
Other............................. 73.6 81.3 84.2 89.9 93.5
-------- -------- -------- -------- --------
87.5 100.3 95.8 104.6 103.1
-------- -------- -------- -------- --------
Standard Commercial Insurance
Multiple Peril.................... 104.3 109.6 110.6 112.8 109.0
Casualty.......................... 118.7 106.2 190.6(b) 94.2 86.2
Workers' Compensation............. 95.0 104.5 117.9 118.7 130.6
-------- -------- -------- -------- --------
108.8 107.6 149.7(b) 105.7 102.6
-------- -------- -------- -------- --------
Specialty Commercial Insurance
Fidelity and Surety............... 82.9 79.2 78.1 81.3 82.4
Other............................. 97.0 103.4 103.4 100.2 98.9
-------- -------- -------- -------- --------
90.4 91.7 91.0 90.5 90.3
-------- -------- -------- -------- --------
Reinsurance Assumed................. 99.1 100.2 111.8 126.9 119.3
-------- -------- -------- -------- --------
Total........................ 96.8% 99.5% 114.8%(b) 101.1% 99.5%
======== ======== ======== ======== ========
<FN>
(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.
16
3
TEN YEAR FINANCIAL SUMMARY
(in thousands except for per share amounts)
FOR THE YEAR 1995 1994 1993 1992 1991
REVENUES
Property and Casualty Insurance
Premiums Earned................... $4,147,162 $3,776,283 $3,504,838(a) $3,163,288 $ 3,037,168
Investment Income................. 613,242 570,531 541,749 501,140 476,984
Life and Health Insurance
Premiums and Policy Charges....... 622,937 836,293 801,236 689,173 634,016
Investment Income................. 232,950 208,745 205,891 192,748 177,654
Real Estate........................ 287,795 204,849 160,650 149,945 140,957
Corporate Investment Income........ 54,445 49,405 52,706 57,176 45,400
Realized Investment Gains (Losses)... 130,660 63,429 232,638 187,349 65,718
TOTAL REVENUES.................. 6,089,191 5,709,535 5,499,708 4,940,819 4,578,897
COMPONENTS OF NET INCOME*
Property and Casualty Insurance
Underwriting Income (Loss) (b).... 55,654 (7,811) (337,492)(c) (15,352) 18,594
Investment Income................. 507,187 474,981 455,409 422,755 397,595
Life and Health Insurance.......... 28,040 14,503 62,517 56,221 51,119
Real Estate Income (Loss).......... 6,010(e) (2,037) (2,193) 10,050 25,007
Corporate.......................... 14,809 7,661 14,357 19,794 16,325
Realized Investment Gains (Losses)... 84,928 41,172 151,619 123,631 43,344
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING
PRINCIPLES..................... 696,628 528,469 344,217 617,099 551,984
Per Share (b)................... 7.85(e) 5.95 3.91(c) 6.96 6.32
NET INCOME...................... 696,628 528,469 324,217(f) 617,099 551,984
Per Share....................... 7.85 5.95 3.69(f) 6.96 6.32
DIVIDENDS DECLARED ON COMMON STOCK... 170,665 161,055 150,784 139,612 127,757
Per Share....................... 1.96 1.84 1.72 1.60 1,48
CHANGE IN UNREALIZED APPRECIATION OR
DEPRECIATION OF INVESTMENTS, NET... 470,233 (487,951) 46,534 (82,082) 12,163
AT YEAR END
TOTAL ASSETS......................... 22,996,525 20,723,055 19,436,870 17,559,182 16,163,605
INVESTED ASSETS
Property and Casualty Insurance.... 10,013,557 8,938,752 8,403,141 7,767,462 7,086,572
Life and Health Insurance.......... 2,967,259 2,560,184 2,473,253 2,208,803 2,063,518
Corporate.......................... 906,597 879,475 965,715 955,828 840,291
PROPERTY AND CASUALTY UNPAID CLAIMS.. 9,588,141 8,913,220 8,235,442 7,220,919 6,591,305
LIFE AND HEALTH POLICY LIABILITIES... 2,943,138 2,659,583 2,446,620 2,193,486 2,072,727
LONG TERM DEBT....................... 1,156,044 1,285,614 1,273,830 1,072,841 1,053,550
SHAREHOLDERS' EQUITY................. 5,262,729 4,247,029 4,196,129 3,954,402 3,541,605
Per Common Share................ 60.28 48.92 47.84 45.18 40.74
<FN>
* The federal and foreign income tax provided for each component of net income
represents its allocated portion of the consolidated provision.
Amounts for 1995 and 1994 reflect the accounting changes prescribed by
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Restatement of prior year amounts
was not permitted. The change in unrealized appreciation or depreciation of
investments for 1994 excludes the increase in unrealized appreciation, as of
January 1, 1994, of $220,519,000 resulting from the change in accounting
principle.
42
4
FOR THE YEAR 1990 1989 1988 1987 1986
REVENUES
Property and Casualty Insurance
Premiums Earned................... $ 2,836,135 $ 2,693,553 $ 2,705,560 $ 2,615,866 $ 2,250,758
Investment Income................. 463,413 426,267 364,126 266,230 216,558
Life and Health Insurance
Premiums and Policy Charges....... 561,961 496,405 426,992 384,108 323,293
Investment Income................. 171,570 159,828 144,264 124,640 104,934
Real Estate........................ 174,846 221,338 155,170 143,381 181,184
Corporate Investment Income........ 39,555 25,167 17,806 17,531 18,329
Realized Investment Gains (Losses)... 46,317 46,942 (17,987) (22,561) 97,710
TOTAL REVENUES.................. 4,293,797 4,069,500 3,795,931 3,529,195 3,192,766
COMPONENTS OF NET INCOME*
Property and Casualty Insurance
Underwriting Income (Loss) (b).... 20,709(d) (25,040) 15,818 62,394 (29,837)
Investment Income................. 371,351 330,096 290,647 226,546 177,146
Life and Health Insurance.......... 45,081 42,103 31,458 23,889 36,573
Real Estate Income (Loss).......... 40,015 42,021 40,018 36,079 32,756
Corporate.......................... 14,760 705 (5,357) (4,229) (2,203)
Realized Investment Gains (Losses)... 30,193 30,932 (12,959) (14,619) 53,506
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING
PRINCIPLES..................... 522,109 420,817 359,625 330,060 267,941
Per Share (b)................... 6.07(d) 4.91 4.27 3.97 3.53
NET INCOME...................... 522,109 420,817 359,625 330,060 267,941
Per Share....................... 6.07 4.91 4.27 3.97 3.53
DIVIDENDS DECLARED ON COMMON STOCK... 109,136 96,515 87,766 71,443 60,485
Per Share....................... 1.32 1.16 1.08 .89 .80
CHANGE IN UNREALIZED APPRECIATION OR
DEPRECIATION OF INVESTMENTS, NET... (19,425) 70,330 29,815 12,294 12,878
AT YEAR END
TOTAL ASSETS......................... 14,510,750 13,384,850 11,507,145 10,167,250 8,486,643
INVESTED ASSETS
Property and Casualty Insurance.... 6,297,825 5,793,656 5,153,027 4,519,268 3,574,360
Life and Health Insurance.......... 1,928,687 1,752,532 1,582,962 1,401,553 1,127,695
Corporate.......................... 688,380 647,817 366,237 256,397 295,617
PROPERTY AND CASUALTY UNPAID CLAIMS.. 6,016,396 5,605,006 4,585,848 3,888,485 3,069,083
LIFE AND HEALTH POLICY LIABILITIES... 1,959,568 1,806,325 1,645,195 1,430,119 1,067,290
LONG TERM DEBT....................... 820,825 612,874 362,779 325,049 391,801
SHAREHOLDERS' EQUITY................. 2,882,639 2,603,739 2,238,447 1,937,033 1,559,138
Per Common Share................ 35.19 30.84 27.54 23.85 20.06
<FN>
(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 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.
(e) Net income has been reduced by a charge of $6,500,000 or $.07 per share for the after-tax effect of a $10,000,000 increase
to the allowance for uncollectible receivables resulting from the initial application of Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan.
(f) 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.
43
5
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
IN THOUSANDS
YEARS ENDED DECEMBER 31
REVENUES 1995 1994 1993
---------- ---------- ----------
Premiums Earned and Policy Charges (Notes 12 and 13).. $4,770,099 $4,612,576 $4,306,074
Investment Income (Note 3)............................ 900,637 828,681 800,346
Real Estate........................................... 287,795 204,849 160,650
Realized Investment Gains (Note 3).................... 130,660 63,429 232,638
---------- ---------- ----------
TOTAL REVENUES................................... 6,089,191 5,709,535 5,499,708
---------- ---------- ----------
BENEFITS, CLAIMS AND EXPENSES
Insurance Claims and Policyholders' Benefits (Notes
13 and 14).......................................... 3,219,200 3,271,564 3,548,520
Amortization of Deferred Policy Acquisition Costs
(Note 4)............................................ 1,198,400 1,113,495 1,012,105
Other Insurance Operating Costs and Expenses.......... 447,170 423,389 395,605
Real Estate Cost of Sales and Expenses................ 280,099 210,799 158,599
Investment Expenses................................... 14,747 14,047 11,091
Corporate Expenses.................................... 29,504 36,877 29,296
---------- ---------- ----------
TOTAL BENEFITS, CLAIMS AND EXPENSES.............. 5,189,120 5,070,171 5,155,216
---------- ---------- ----------
INCOME BEFORE FEDERAL AND FOREIGN
INCOME TAX..................................... 900,071 639,364 344,492
FEDERAL AND FOREIGN INCOME TAX (NOTE 8).................... 203,443 110,895 275
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES.......................... 696,628 528,469 344,217
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES,
NET OF TAX (NOTE 2)...................................... -- -- (20,000)
---------- ---------- ----------
NET INCOME....................................... $ 696,628 $ 528,469 $ 324,217
========== ========== ==========
PER SHARE DATA (NOTES 1 AND 18)
Income Before Cumulative Effect of Changes in
Accounting Principles............................... $ 7.85 $ 5.95 $ 3.91
Cumulative Effect of Changes in Accounting
Principles.......................................... -- -- (.22)
---------- ---------- ----------
Net Income....................................... $ 7.85 $ 5.95 $ 3.69
========== ========== ==========
<FN>
See accompanying notes.
44
6
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
DECEMBER 31
1995 1994
----------- -----------
ASSETS
Invested Assets (Note 3)
Short Term Investments.......................................... $ 484,439 $ 810,873
Fixed Maturities
Held-to-Maturity
Tax Exempt (market $3,004,775 and $3,177,097).............. 2,826,737 3,149,479
Taxable (market $433,883 and $604,077)..................... 402,488 619,095
Available-for-Sale
Tax Exempt (cost $3,607,925 and $2,524,446)................ 3,860,630 2,530,186
Taxable (cost $5,282,675 and $4,604,182)................... 5,512,955 4,423,946
Equity Securities (cost $493,416 and $609,535).................. 587,825 642,153
Policy and Mortgage Loans....................................... 212,339 202,679
----------- -----------
TOTAL INVESTED ASSETS......................................... 13,887,413 12,378,411
Cash (Note 7)...................................................... 11,950 5,599
Accrued Investment Income.......................................... 245,319 215,703
Premiums Receivable................................................ 872,912 787,177
Reinsurance Recoverable on Property and Casualty Unpaid Claims
(Note 12)....................................................... 1,973,666 1,980,340
Prepaid Reinsurance Premiums....................................... 484,358 455,051
Funds Held for Asbestos-Related Settlement (Note 14)............... 1,038,149 558,141
Deferred Policy Acquisition Costs (Note 4)
Property and Casualty Insurance................................. 558,676 529,453
Life and Health Insurance....................................... 612,709 606,493
Real Estate Assets (Notes 5 and 7)................................. 1,742,580 1,740,287
Deferred Income Tax (Note 8)....................................... 159,674 314,720
Other Assets....................................................... 1,409,119 1,151,680
----------- -----------
TOTAL ASSETS.................................................. $22,996,525 $20,723,055
=========== ===========
LIABILITIES
Property and Casualty Unpaid Claims (Note 14)...................... $ 9,588,141 $ 8,913,220
Life and Health Policy Liabilities................................. 2,943,138 2,659,583
Unearned Premiums.................................................. 2,570,682 2,382,545
Short Term Debt (Note 7)........................................... 187,600 153,340
Long Term Debt (Note 7)............................................ 1,156,044 1,285,614
Dividend Payable to Shareholders................................... 42,741 40,035
Accrued Expenses and Other Liabilities............................. 1,245,450 1,041,689
----------- -----------
TOTAL LIABILITIES............................................. 17,733,796 16,476,026
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 11 AND 14)
SHAREHOLDERS' EQUITY (NOTES 10, 17 AND 18)
Preferred Stock -- Authorized 4,000,000 Shares;
$1 Par Value; Issued -- None.................................... -- --
Common Stock -- Authorized 300,000,000 Shares;
$1 Par Value; Issued 87,819,355 and 87,798,286 Shares........... 87,819 87,798
Paid-In Surplus.................................................... 778,239 786,596
Retained Earnings.................................................. 4,206,517 3,680,554
Foreign Currency Translation Gains (Losses), Net of Income Tax..... (3,433) 9,766
Unrealized Appreciation (Depreciation) of Investments, Net (Note 3) 345,894 (124,339)
Receivable from Employee Stock Ownership Plan...................... (114,998) (122,999)
Treasury Stock, at Cost -- 518,468 and 977,580 Shares.............. (37,309) (70,347)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY.................................... 5,262,729 4,247,029
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $22,996,525 $20,723,055
=========== ===========
See accompanying notes.
45
7
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN THOUSANDS
YEARS ENDED DECEMBER 31
1995 1994 1993
---------- ---------- ----------
PREFERRED STOCK
Balance, Beginning and End of Year.................... $ -- $ -- $ --
---------- ---------- ----------
COMMON STOCK
Balance, Beginning of Year............................ 87,798 87,709 87,520
Shares Issued under Option and Incentive Plans........ 21 89 189
---------- ---------- ----------
Balance, End of Year............................. 87,819 87,798 87,709
---------- ---------- ----------
PAID-IN SURPLUS
Balance, Beginning of Year............................ 786,596 782,186 772,815
Additions (Reductions) Resulting from Shares Issued
under Option and Incentive Plans.................... (8,357) 4,410 9,371
---------- ---------- ----------
Balance, End of Year............................. 778,239 786,596 782,186
---------- ---------- ----------
RETAINED EARNINGS
Balance, Beginning of Year............................ 3,680,554 3,313,140 3,139,707
Net Income............................................ 696,628 528,469 324,217
Dividends Declared (per share $1.96, $1.84 and
$1.72).............................................. (170,665) (161,055) (150,784)
---------- ---------- ----------
Balance, End of Year............................. 4,206,517 3,680,554 3,313,140
---------- ---------- ----------
FOREIGN CURRENCY TRANSLATION GAINS (LOSSES)
Balance, Beginning of Year............................ 9,766 327 (5,164)
Change During Year, Net of Income Tax (Note 16)....... (13,199) 9,439 5,491
---------- ---------- ----------
Balance, End of Year............................. (3,433) 9,766 327
---------- ---------- ----------
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS
Balance, Beginning of Year............................ (124,339) 143,093 96,559
Cumulative Effect, as of January 1, 1994, of Change in
Accounting Principle, Net (Note 2).................. -- 220,519 --
Change During Year, Net (Note 3)...................... 470,233 (487,951) 46,534
---------- ---------- ----------
Balance, End of Year............................. 345,894 (124,339) 143,093
---------- ---------- ----------
RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN
Balance, Beginning of Year............................ (122,999) (130,326) (137,035)
Principal Repayments.................................. 8,001 7,327 6,709
---------- ---------- ----------
Balance, End of Year............................. (114,998) (122,999) (130,326)
---------- ---------- ----------
TREASURY STOCK, AT COST
Balance, Beginning of Year............................ (70,347) -- --
Repurchase of Shares.................................. -- (72,052) --
Shares Issued under Option and Incentive Plans........ 33,038 -- --
Shares Issued -- Other................................ -- 1,705 --
--------- ---------- ----------
Balance, End of Year............................. (37,309) (70,347) --
--------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY....................... $5,262,729 $4,247,029 $4,196,129
========== ========== ==========
See accompanying notes.
46
8
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
YEARS ENDED DECEMBER 31
1995 1994 1993
----------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.......................................... $ 696,628 $ 528,469 $ 324,217
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Property and Casualty Unpaid Claims,
Net............................................ 681,595 482,834 1,182,432
Increase (Decrease) in Life and Health Policy
Liabilities, Net............................... (24,163) (10,769) 55,841
Increase in Unearned Premiums, Net............... 158,830 174,926 141,457
Increase in Premiums Receivable.................. (85,735) (67,055) (49,329)
Increase in Funds Held for Asbestos-Related
Settlement..................................... (480,008) (19,969) (538,172)
Increase in Medical Malpractice Reinsurance
Related Receivable............................. (66,194) -- (125,000)
Increase in Deferred Policy Acquisition Costs.... (107,671) (96,718) (82,977)
Deferred Income Tax Credit....................... (25,023) (18,588) (116,720)
Realized Investment Gains........................ (130,660) (63,429) (232,638)
Cumulative Effect of Changes in Accounting
Principles..................................... -- -- 20,000
Other, Net....................................... 96,693 (13,026) 116,410
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES................................... 714,292 896,675 695,521
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturities............. 4,552,855 2,906,535 4,051,247
Proceeds from Maturities of Fixed Maturities........ 782,566 577,131 671,229
Proceeds from Sales of Equity Securities............ 411,993 623,482 298,790
Purchases of Fixed Maturities....................... (6,524,918) (4,265,835) (5,005,539)
Purchases of Equity Securities...................... (195,950) (397,749) (357,254)
Decrease (Increase) in Short Term Investments,
Net.............................................. 326,434 (279,591) (268,077)
Additions to Real Estate Assets, Net................ (34,305) (43,216) (69,552)
Purchases of Fixed Assets........................... (75,388) (71,778) (47,332)
Other, Net.......................................... (20,766) (9,009) (27,436)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES.......... (777,479) (960,030) (753,924)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits Credited to Policyholder Funds............. 442,934 336,765 295,189
Withdrawals from Policyholder Funds................. (138,071) (122,502) (108,116)
Proceeds from Issuance of Long Term Debt............ 173,900 33,225 255,045
Repayment of Long Term Debt......................... (303,470) (21,441) (55,928)
Increase (Decrease) in Short Term Debt, Net......... 34,260 58,500 (193,668)
Dividends Paid to Shareholders...................... (167,959) (158,735) (148,070)
Repurchase of Shares................................ -- (72,052) --
Other, Net.......................................... 27,944 10,608 11,793
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES................................... 69,538 64,368 56,245
----------- ----------- -----------
Net Increase (Decrease) in Cash....................... 6,351 1,013 (2,158)
Cash at Beginning of Year............................. 5,599 4,586 6,744
----------- ----------- -----------
CASH AT END OF YEAR............................ $ 11,950 $ 5,599 $ 4,586
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Year for
Interest (Net of Amounts Capitalized)............ $ 86,041 $ 78,272 $ 56,156
Federal and Foreign Income Taxes................. 218,446 135,187 126,955
See accompanying notes.
47
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 subsidiaries. Significant
intercompany transactions have been eliminated in consolidation.
The consolidated financial statements reflect estimates and judgments made by
management which affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In 1995, the Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 114, Accounting by Creditors for Impairment of a Loan. SFAS No. 114
may not be retroactively applied to prior years' financial statements;
accordingly, the 1994 and 1993 consolidated financial statements have not been
restated for this accounting change. This accounting change and the accounting
changes adopted in 1994 and 1993 are further described in Note (2).
Certain amounts in the financial statements for prior years have been
reclassified to conform with the 1995 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 positive intent to hold to maturity
are classified as held-to-maturity 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 classified as
available-for-sale and carried at market value as of the balance sheet date.
Equity securities, which include common stocks and non-redeemable preferred
stocks, are carried at market value as of the balance sheet date.
Policy and mortgage 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 investments carried at
market value, 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.
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. Beginning
in 1994, deferred policy acquisition costs related to such contracts are also
adjusted to reflect the effects that unrealized gains or losses on investments
classified as available-for-sale would have had on the present value of
estimated gross profits had such gains or losses actually been realized. This
adjustment is excluded from income and charged or credited directly to the
unrealized appreciation
48
10
or depreciation of investments component of shareholders' equity, net of
applicable deferred income tax. 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.
(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 3 1/2% to 8% in 1995.
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% in 1995. 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 ceded 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) Funds Held for Asbestos-Related Settlement
Funds held for asbestos-related settlement are assets of the Corporation's
property and casualty insurance subsidiaries that accrue income for the benefit
of participants in the class settlement of asbestos-related bodily injury claims
against Fibreboard Corporation (see Note (14)).
(h) 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
realizable value. Impairment would be recognized to the extent ultimate
realizable value for a property was less than its carrying value. Ultimate
realizable value is the undiscounted expected future net cash flows from the
property.
Depreciation of real estate properties is calculated using the straight-line
method over the estimated useful lives of the properties.
Real estate mortgages and notes receivable are carried at unpaid principal
balances less an allowance for uncollectible amounts.
The equity method of accounting is used for joint ventures in which the
Corporation's real estate subsidiaries own an interest of less than 50%.
Rental revenues are recognized on a straight-line basis over the term of the
lease. Profits on land, townhome and commercial building sales are recognized at
closing, subject to compliance with applicable accounting guidelines. Profits on
high-rise condominium unit sales are recognized using the percentage of
completion method, subject to achievement of a minimum level of unit sales.
Profits on construction contracts are recognized using the percentage of
completion method.
49
11
(i) 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.
(j) 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 $74,591,000 and $72,041,000 at December
31, 1995 and 1994, respectively.
(k) Income Taxes
The Corporation and its domestic subsidiaries file a consolidated federal
income tax return.
Deferred income tax assets and liabilities are recognized for the expected
future tax effects attributable to temporary differences between the financial
reporting and tax bases of assets and liabilities, based on enacted tax rates
and other provisions of tax law. The effect of a change in tax laws or rates is
recognized in income in the period in which such change is enacted.
U. S. federal income taxes are accrued on undistributed earnings of foreign
subsidiaries.
(l) Foreign Exchange
Assets and liabilities relating to foreign operations are translated into U.
S. dollars using current exchange rates; revenues and expenses are translated
into U. S. dollars using the average exchange rates for each year.
The functional currency of 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.
(m) Fair Values of Financial Instruments
Fair values of financial instruments are based on quoted market prices where
available. Fair values of financial instruments for which quoted market prices
are not available are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rates and the estimated amounts and timing of future cash
flows. 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 policy and mortgage loans of the insurance subsidiaries
are estimated using discounted cash flow analyses and approximate the carrying
values.
(v) Fair values of real estate mortgages and notes receivable are estimated
individually as the lesser of (1) the value of the discounted future cash
flows of the loan or (2) the estimated value of the collateral, which is based
on the discounted future net cash flows from such collateral. The cash flows
are discounted at rates based on a U.S. Treasury security with a maturity
similar to the loan, adjusted for credit risk.
(vi) The carrying value of short term debt approximates fair value due to
the short maturities of this debt.
(vii) Long term debt consists of term loans, mortgages payable and long term
notes. Fair values of term loans approximate the carrying values because such
loans consist primarily of variable-rate debt that reprices frequently. Fair
values of mortgages payable are estimated using discounted cash flow analyses.
Fair values of long term notes are based on prices quoted by dealers.
The carrying values and fair values of financial instruments were as follows:
December 31
------------------------------------------
1995 1994
------------------- ------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(in thousands)
ASSETS
Invested assets
Short term investments.... $ 484,439 $ 484,439 $ 810,873 $ 810,873
Fixed maturities (Note 3)
Held-to-maturity........ 3,229,225 3,438,658 3,768,574 3,781,174
Available-for-sale...... 9,373,585 9,373,585 6,954,132 6,954,132
Equity securities......... 587,825 587,825 642,153 642,153
Policy and mortgage
loans................... 212,339 212,339 202,679 202,679
Real estate mortgages and
notes receivable (Note
5)........................ 409,564 405,400 395,490 353,800
LIABILITIES
Short term debt (Note 7).... 187,600 187,600 153,340 153,340
Long term debt (Note 7)..... 1,156,044 1,219,634 1,285,614 1,255,892
50
12
(n) 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
89,942,341, 90,449,577 and 90,548,534 in 1995, 1994 and 1993, respectively. The
6% guaranteed exchangeable subordinated notes are considered to be common
equivalent shares. The computation assumes the addition to income of the
after-tax interest expense applicable to such notes. The allocated and
unallocated shares held by the Corporation's Employee Stock Ownership Plan are
considered common shares outstanding.
(o) Cash Flow Information
In the statement of cash flows, short term investments are not considered to
be cash equivalents. The effect of changes in foreign exchange rates on cash
balances was immaterial.
(p) Accounting Pronouncements Not Yet Adopted
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The Statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets. Under SFAS No. 121, an impairment loss is recognized if
the sum of the undiscounted expected future cash flows is less than the carrying
amount of the asset. Measurement of impairment should be based on the fair value
of the asset. SFAS No. 121 is effective for years beginning after December 15,
1995. Restatement of prior years' financial statements is not permitted. The
Corporation will adopt SFAS No. 121 in the first quarter of 1996. The adoption
of SFAS No. 121 is not expected to have a significant impact on net income in
1996.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 encourages but does not require entities to adopt the
fair value based method of accounting for all employee stock compensation plans,
under which compensation cost is measured based on the fair value of the award
at the grant date and recognized over the service period. Entities may continue
to account for these plans using the intrinsic value based method of accounting,
under which compensation cost is measured as the excess, if any, of the quoted
market price of the stock at the grant date over the amount an employee must pay
to acquire the stock. Entities not adopting the fair value based method must
present pro forma disclosures of net income and earnings per share as if this
method had been applied. SFAS No. 123 is effective for years beginning after
December 15, 1995. The Corporation plans to continue to use the intrinsic value
based method to measure compensation cost for these plans.
(2) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1995, the Corporation adopted SFAS No. 114, Accounting by
Creditors for Impairment of a Loan. Under SFAS No. 114, a loan is considered
impaired and a valuation allowance is established when it is probable that a
creditor will be unable to collect all principal and interest amounts due
according to the contractual terms of the loan agreement. SFAS No. 114 requires
creditors to measure impairment of a loan based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, based on the market price of the loan or the fair value of
the collateral if the loan is collateral dependent. Prior to 1995, the
Corporation measured impairment of a loan based on undiscounted expected future
cash flows. SFAS No. 114 may not be retroactively applied to prior years'
financial statements. The initial application of SFAS No. 114 resulted in an
increase of $10,000,000 to the allowance for uncollectible receivables.
Effective January 1, 1994, the Corporation adopted SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities. Similar to the
Corporation's previous 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 (previously referred
to as held for investment), available-for-sale or trading. However, SFAS No. 115
establishes more stringent criteria for classifying fixed maturities as
held-to-maturity. Therefore, the adoption of SFAS No. 115 resulted 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. Prior to 1994, such fixed maturities were
carried at the lower of the aggregate amortized cost or market value. In
conjunction with the Corporation's adoption of SFAS No. 115, deferred policy
acquisition costs related to universal life and other interest-sensitive life
insurance contracts were adjusted to reflect the effects that would have been
recognized had the unrealized gains relating to investments classified as
available-for-sale actually been realized, with a corresponding charge directly
to the separate component of shareholders' equity. SFAS No. 115 may not be
retroactively applied to prior years' financial statements. The cumulative
effect on shareholders' equity, as of January 1, 1994, of the change in
accounting principle was as follows:
(in thousands)
Unrealized appreciation of fixed maturities
considered available-for-sale................... $399,980
Adjustment to deferred policy acquisition costs .. (60,720)
--------
339,260
Deferred income tax............................... 118,741
--------
Increase in shareholders' equity.............. $220,519
========
Adoption of the Statement did not have an impact on net income in 1994 or 1995
nor will it in future years.
51
13
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. 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.
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 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.
(3) INVESTED ASSETS AND RELATED INCOME
(a) The sources of net investment income were as follows:
Years Ended December 31
-----------------------
1995 1994 1993
---- ---- ----
(in thousands)
Fixed maturities.............. $812,910 $740,871 $734,353
Equity securities............. 15,836 27,066 23,709
Short term investments........ 39,581 28,925 22,169
Other......................... 32,310 31,819 20,115
-------- -------- --------
Gross investment income..... 900,637 828,681 800,346
Investment expenses........... 14,747 14,047 11,091
-------- -------- --------
$885,890 $814,634 $789,255
======== ======== ========
(b) Realized investment gains and losses were as follows:
Years Ended December 31
-----------------------
1995 1994 1993
---- ---- ----
(in thousands)
Gross realized investment gains
Fixed maturities.......... $ 81,665 $ 68,613 $193,738
Equity securities......... 108,430 138,432 62,274
-------- -------- --------
190,095 207,045 256,012
-------- -------- --------
Gross realized investment losses
Fixed maturities.......... 50,929 130,547 20,627
Equity securities......... 8,506 13,069 2,747
-------- -------- --------
59,435 143,616 23,374
-------- -------- --------
Realized investment gains..... 130,660 63,429 232,638
Income tax.................... 45,732 22,257 81,019
-------- -------- --------
$ 84,928 $ 41,172 $151,619
======== ======== ========
Proceeds from sales of fixed maturities considered available-for-sale were
$4,552,855,000, $2,894,475,000 and $3,471,404,000 in 1995, 1994 and 1993,
respectively. Gross gains of $81,665,000, $68,553,000 and $152,483,000 and gross
losses of $50,929,000, $130,547,000 and $12,542,000 were realized on such sales
in 1995, 1994 and 1993, respectively.
(c) The components of unrealized appreciation (depreciation) of investments
carried at market value were as follows:
December 31
-----------
1995 1994
---- ----
(in thousands)
Equity securities
Gross unrealized appreciation..... $105,495 $ 58,680
Gross unrealized depreciation..... 11,086 26,062
-------- ---------
94,409 32,618
-------- ---------
Fixed maturities
Gross unrealized appreciation..... 504,812 89,999
Gross unrealized depreciation..... 21,827 264,495
-------- ---------
482,985 (174,496)
-------- ---------
577,394 (141,878)
Deferred policy acquisition cost
adjustment.......................... (45,250) 26,982
-------- ---------
532,144 (114,896)
Deferred income tax liability, net of
valuation allowance of $49,657 in
1994................................ 186,250 9,443
-------- ---------
$345,894 $(124,339)
======== =========
The change in unrealized appreciation or depreciation of investments carried
at market value was as follows:
Years Ended December 31
-----------------------
1995 1994 1993
---- ---- ----
(in thousands)
Change in unrealized
appreciation of equity
securities................... $ 61,791 $(187,524) $73,841
Change in unrealized
appreciation or depreciation
of fixed maturities.......... 657,481 (574,476) --
Change in deferred policy
acquisition cost adjustment.. (72,232) 87,702 --
-------- --------- -------
647,040 (674,298) 73,841
Deferred income tax (credit)... 226,464 (236,004) 27,307
Increase (decrease) in
valuation allowance.......... (49,657) 49,657 --
-------- --------- -------
470,233 (487,951) 46,534
Cumulative effect, as of
January 1, 1994, of change
in accounting principle,
net.......................... -- 220,519 --
-------- --------- -------
$470,233 $(267,432) $46,534
======== ========= =======
52
14
At December 31, 1995 and 1994, fixed maturities classified as
held-to-maturity were carried at amortized cost while fixed maturities
classified as available-for-sale were carried at market value. In prior years,
all fixed maturities were carried at amortized cost. The unrealized appreciation
or depreciation of fixed maturities carried at amortized cost is not reflected
in the financial statements. The change in unrealized appreciation of fixed
maturities carried at amortized cost was an increase of $196,833,000, a decrease
of $723,889,000 and an increase of $213,959,000 for the years ended December 31,
1995, 1994 and 1993, respectively.
(d) The amortized cost and estimated market value of fixed maturities were
as follows:
December 31
---------------------------------------------------------------------------------------------------------
1995 1994
-------------------------------------------------- ---------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Appreciation Depreciation Value Cost Appreciation Depreciation Value
--------- ------------ ------------ --------- --------- ------------ ------------ ---------
(in thousands)
Held-to-maturity
Tax exempt........ $ 2,826,737 $178,997 $ 959 $ 3,004,775 $ 3,149,479 $ 72,939 $ 45,321 $ 3,177,097
----------- -------- -------- ----------- ----------- -------- -------- -----------
Taxable
U.S. Government
and government
agency and
authority
obligations... 17,946 2,350 -- 20,296 17,256 -- 163 17,093
Corporate
bonds......... 191,127 21,621 -- 212,748 235,056 8,809 1,976 241,889
Foreign bonds... 15,119 2,259 -- 17,378 149 17 -- 166
Mortgage-backed
securities.... 178,296 5,211 46 183,461 366,634 2,316 24,021 344,929
----------- -------- -------- ----------- ----------- -------- -------- -----------
402,488 31,441 46 433,883 619,095 11,142 26,160 604,077
----------- -------- -------- ----------- ----------- -------- -------- -----------
Total held-
to-maturity... 3,229,225 210,438 1,005 3,438,658 3,768,574 84,081 71,481 3,781,174
----------- -------- -------- ----------- ----------- -------- -------- -----------
Available-for-sale
Tax exempt........ 3,607,925 253,814 1,109 3,860,630 2,524,446 64,309 58,569 2,530,186
----------- -------- -------- ----------- ----------- -------- -------- -----------
Taxable
U.S. Government
and government
agency and
authority
obligations... 976,411 38,763 27 1,015,147 1,000,325 1,221 59,891 941,655
Corporate
bonds......... 1,106,876 67,734 7,213 1,167,397 1,269,054 14,083 46,099 1,237,038
Foreign bonds... 1,451,162 68,598 10,351 1,509,409 980,900 3,016 38,692 945,224
Mortgage-backed
securities.... 1,720,522 75,694 2,924 1,793,292 1,335,876 6,951 61,186 1,281,641
Redeemable
preferred
stocks........ 27,704 209 203 27,710 18,027 419 58 18,388
----------- -------- -------- ----------- ----------- -------- -------- -----------
5,282,675 250,998 20,718 5,512,955 4,604,182 25,690 205,926 4,423,946
----------- -------- -------- ----------- ----------- -------- -------- -----------
Total
available-for-
sale.......... 8,890,600 504,812 21,827 9,373,585 7,128,628 89,999 264,495 6,954,132
----------- -------- -------- ----------- ----------- -------- -------- -----------
Total fixed
maturities... $12,119,825 $715,250 $ 22,832 $12,812,243 $10,897,202 $174,080 $335,976 $10,735,306
=========== ======== ======== =========== =========== ======== ======== ===========
In December 1995, fixed maturities classified as held-to-maturity with an
aggregate amortized cost of $232,167,000 and unrealized appreciation of
$4,019,000 were reclassified as available-for-sale. Such reclassifications
resulted from the Corporation's reassessment of its classifications of fixed
maturities as permitted under SFAS No. 115 implementation guidance issued by the
FASB in November 1995.
The amortized cost and estimated market value of fixed maturities at
December 31, 1995 by contractual maturity were as follows:
Held-to-Maturity Available-for-Sale
---------------------- ----------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- --------- ---------
(in thousands)
Due in one year or less............................. $ 131,301 $ 133,083 $ 93,793 $ 96,013
Due after one year through five years............... 761,773 810,495 1,283,827 1,349,230
Due after five years through ten years.............. 1,036,461 1,117,958 2,351,732 2,494,389
Due after ten years................................. 1,121,394 1,193,661 3,440,726 3,640,661
---------- ---------- ---------- ----------
3,050,929 3,255,197 7,170,078 7,580,293
Mortgage-backed securities.......................... 178,296 183,461 1,720,522 1,793,292
---------- ---------- ---------- ----------
$3,229,225 $3,438,658 $8,890,600 $9,373,585
========== ========== ========== ==========
Actual maturities could differ from contractual maturities because borrowers may
have the right to call or prepay obligations.
53
15
(4) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs deferred and the related amortization charged to
income were as follows:
Years Ended December 31
---------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
Property and Casualty
Insurance
Balance, beginning
of year ............... $ 529,453 $ 489,702 $ 454,976
----------- ----------- ---------
Costs deferred
during year
Commissions and
brokerage............ 592,687 544,733 463,977
Premium taxes and
assessments.......... 108,002 108,008 103,928
Salaries and
overhead............. 449,477 428,255 415,788
----------- ----------- ---------
1,150,166 1,080,996 983,693
Amortization
during year .......... (1,120,943) (1,041,245) (948,967)
----------- ----------- ---------
Balance, end of year..... $ 558,676 $ 529,453 $ 489,702
=========== =========== =========
Life and Health Insurance
Balance, beginning of
year .................... $ 606,493 $ 522,544 $ 474,293
Cumulative effect, as of
January 1, 1994, of
change in accounting
principle.............. -- (60,720) --
Costs deferred during
year .................. 155,905 129,217 111,389
Amortization during
year.................... (77,457) (72,250) (63,138)
Change in adjustment to
reflect the effects
of unrealized (gains)
losses on investments.. (72,232) 87,702 --
----------- ----------- ---------
Balance, end of year..... $ 612,709 $ 606,493 $ 522,544
=========== =========== =========
(5) REAL ESTATE ASSETS
The components of real estate assets were as follows:
December 31
-----------------
1995 1994
---- ----
(in thousands)
Mortgages and notes receivable (net of
allowance for uncollectible amounts
of $87,617 and $73,863)............. $ 409,564 $ 395,490
Income producing properties (net of
accumulated depreciation of $50,192
and $36,069)........................ 864,449 826,768
Construction in progress.............. 87,870 86,125
Land under development and unimproved
land................................ 380,697 431,904
---------- ----------
$1,742,580 $1,740,287
========== ==========
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 $405,400,000 and $353,800,000 at
December 31, 1995 and 1994, respectively. The fair value amounts represent
point-in-time estimates that are not relevant in predicting future earnings or
cash flows related to such receivables.
Depreciation expense related to income producing properties was $14,123,000,
$12,086,000 and $8,671,000 for 1995, 1994 and 1993, respectively.
(6) PROPERTY AND EQUIPMENT
Property and equipment included in other assets were as follows:
December 31
---------------
1995 1994
---- ----
(in thousands)
Cost.................................. $437,073 $385,610
Less accumulated depreciation......... 193,546 168,128
-------- --------
$243,527 $217,482
======== ========
Depreciation expense related to property and equipment was $48,279,000,
$40,839,000 and $31,280,000 for 1995, 1994 and 1993, respectively.
(7) DEBT AND CREDIT ARRANGEMENTS
(a) Short term debt consisted of the following:
December 31
---------------
1995 1994
---- ----
(in thousands)
Commercial paper...................... $177,600 $143,340
Notes................................. 10,000 10,000
-------- --------
$187,600 $153,340
======== ========
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. The weighted average interest rate
on short term debt approximated 5 3/4% and 6% at December 31, 1995 and 1994,
respectively.
54
16
(b) Long term debt consisted of the following:
December 31
---------------------------------------------
1995 1994
------------------- -------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ------- -------- -------
(in thousands)
Term loans....... $ 331,023 $ 331,023 $ 324,413 $ 324,413
Mortgages........ 205,021 205,607 211,201 196,104
8 3/4% notes..... 120,000 133,104 150,000 151,125
8 5/8% notes..... -- -- 100,000 100,000
6% notes......... 150,000 151,365 150,000 141,000
6 7/8% notes..... 100,000 105,410 100,000 90,750
6% exchangeable
subordinated
notes.......... 250,000 293,125 250,000 252,500
---------- ---------- ---------- ----------
$1,156,044 $1,219,634 $1,285,614 $1,255,892
========== ========== ========== ==========
The term loans and mortgages are obligations of the real estate subsidiaries,
except for a $5,212,000 mortgage loan of the life and health insurance
subsidiaries. The term loans mature in varying amounts through 2000.
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. The
mortgages payable are due in varying amounts monthly through 2013. At December
31, 1995, the range of interest rates for term loans was 6% to 9 1/2% and for
mortgages payable the range was 5% to 12%. The term loans and mortgages payable
are secured by real estate assets with a net book value of $1,009,821,000 at
December 31, 1995.
The Corporation has outstanding $120,000,000 of unsecured 8 3/4% notes due
November 15, 1999. The notes are subject to mandatory sinking fund payments in
amounts sufficient to redeem $30,000,000 of principal in each of the years 1996
through 1998. The notes are to 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 $150,000,000 of 6% notes due February 1, 1998
and $100,000,000 of 6 7/8% notes due February 1, 2003. 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 redemption
prices declining annually from 102.6% of the principal amount if redeemed before
May 15, 1996 to 100.9% of the principal amount if redeemed on or after May 15,
1997.
The Corporation filed a shelf registration statement which the Securities and
Exchange Commission declared effective in June 1995, under which up to
$400,000,000 of various types of securities may be issued by the Corporation or
Chubb Capital. No securities have been issued under this registration.
The amounts of long term debt due annually during the five years subsequent to
December 31, 1995 are as follows:
Term Loans
Years Ending and
December 31 Mortgages Notes Total
- ------------ ---------- ----- -----
(in thousands)
1996.................. $167,737 $ 30,000 $197,737
1997.................. 52,026 30,000 82,026
1998.................. 46,875 430,000 476,875
1999.................. 85,760 30,000 115,760
2000.................. 149,917 -- 149,917
(c) Interest costs of $101,526,000, $98,685,000 and $92,905,000 were incurred
in 1995, 1994 and 1993, respectively, of which $16,352,000, $19,407,000 and
$28,685,000 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 July 15, 1997 at which time any loans then outstanding become
payable. Various interest rate options are available to the Corporation, all of
which are based on market rates. The Corporation pays a facility fee of 1/10%
per annum. There have been no borrowings under this agreement. The Corporation
and its subsidiaries had additional unused lines of credit of approximately
$178,000,000 at December 31, 1995. 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.
55
17
(8) FEDERAL AND FOREIGN INCOME TAX
(a) Income tax expense consisted of the following components:
Years Ended December 31
------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
Current tax
United States............................................................. $207,004 $ 97,848 $ 105,293
Foreign................................................................... 21,462 31,635 11,702
Deferred tax credit, principally United States.............................. (25,023) (18,588) (116,720)
-------- -------- ---------
$203,443 $110,895 $ 275
======== ======== =========
(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
-------------------------------------------------------------------
1995 1994 1993
------------------- ------------------- -------------------
% of % of % of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
------ ------- ------ ------- ------ -------
(in thousands)
Income before federal and foreign income tax.... $ 900,071 $ 639,364 $ 344,492
========= ========= =========
Tax at statutory federal income tax rate........ $ 315,025 35.0% $ 223,777 35.0% $ 120,572 35.0%
Tax exempt interest income...................... (115,165) (12.8) (109,980) (17.2) (110,297) (32.0)
Other, net...................................... 3,583 .4 (2,902) (.5) (10,000) (2.9)
--------- ------ --------- ------ --------- ------
Actual tax.............................. $ 203,443 22.6% $ 110,895 17.3% $ 275 .1%
========= ====== ========= ====== ========= ======
(c) The tax effects of temporary differences that gave rise to deferred
income tax assets and liabilities were as follows:
December 31
---------------------
1995 1994
---- ----
(in thousands)
Deferred income tax assets
Property and casualty unpaid claims................................................ $523,535 $478,166
Unearned premiums.................................................................. 130,226 121,269
Life and health policy liabilities................................................. 147,284 127,867
Unrealized depreciation of investments............................................. -- 49,657
Postretirement benefits............................................................ 54,997 50,015
-------- --------
856,042 826,974
Valuation allowance................................................................ -- (49,657)
-------- --------
Total............................................................................ 856,042 777,317
-------- --------
Deferred income tax liabilities
Deferred policy acquisition costs.................................................. 338,313 338,897
Real estate assets................................................................. 118,225 116,056
Unrealized appreciation of investments............................................. 202,088 --
Other, net......................................................................... 37,742 7,644
-------- --------
Total............................................................................ 696,368 462,597
-------- --------
Net deferred income tax asset........................................................ $159,674 $314,720
======== ========
The valuation allowance at December 31, 1994 was related to future tax
benefits on unrealized depreciation of investments, the realization of which was
uncertain. The valuation allowance had no impact on net income.
56
18
(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
----------------------------
1995 1994 1993
---- ---- ----
(in thousands)
Service cost of current
period.................... $ 20,422 $ 19,702 $ 17,877
Interest cost on projected
benefit
obligation................ 23,822 21,232 19,598
Actual return on plan
assets.................... (68,542) (523) (30,767)
Net amortization and
deferral.................. 42,730 (23,420) 10,706
-------- -------- --------
Net pension cost............ $ 18,432 $ 16,991 $ 17,414
======== ======== ========
The following table sets forth the plans' funded status and amounts recognized
in the balance sheets:
December 31
--------------
1995 1994
---- ----
(in thousands)
Actuarial present value of benefit
obligation
for service rendered to date:
Accumulated benefit obligation based
on current salary levels,
including vested benefits of
$212,752 and $180,407............. $224,821 $190,100
Additional amount related to
projected future salary
increases......................... 131,473 118,283
-------- --------
Projected benefit obligation for
service rendered to date.......... 356,294 308,383
Plan assets at fair value............... 341,112 269,349
-------- --------
Projected benefit obligation in excess
of plan assets........................ 15,182 39,034
Unrecognized net gain from past
experience different from that
assumed............................... 36,196 10,209
Unrecognized prior service costs........ (5,208) (5,625)
Unrecognized net asset at January 1,
1985, being recognized principally
over 19 years......................... 8,297 9,647
-------- --------
Pension liability included in other
liabilities........................... $ 54,467 $ 53,265
======== ========
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation at December 31, 1995 and 1994 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 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 non-contributory.
The components of net postretirement benefit cost were as follows:
Years Ended December 31
----------------------------
1995 1994 1993
---- ---- ----
(in thousands)
Service cost of current period... $ 5,687 $ 5,153 $ 4,384
Interest cost on accumulated
benefit obligation............. 7,949 7,420 6,864
------- ------- -------
Net postretirement benefit
cost........................... $13,636 $12,573 $11,248
======= ======= =======
The components of the accumulated postretirement benefit obligation were as
follows:
December 31
---------------
1995 1994
---- ----
(in thousands)
Retirees.................................. $ 38,735 $ 38,713
Fully eligible active plan participants... 5,103 4,371
Other active plan participants............ 74,572 61,207
-------- --------
Accumulated postretirement benefit
obligation.............................. 118,410 104,291
Unrecognized net gain (loss) from past
experience different from that
assumed................................. (933) 3,909
-------- --------
Postretirement benefit liability
included in other liabilities........... $117,477 $108,200
======== ========
The weighted average discount rate used in determining the actuarial present
value of the accumulated postretirement benefit obligation at December 31, 1995
and 1994 was 7 1/2% and 7 3/4%, respectively. At December 31, 1995, the weighted
average health care cost trend rate used to measure the accumulated
postretirement cost for medical benefits was 11 3/4% for 1996 and was 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, 1995 by $15,674,000 and the aggregate of the
service and interest cost components of net postretirement benefit cost for the
year ended December 31, 1995 by $2,017,000.
57
19
(10) OPTION AND INCENTIVE PLANS
(a) The Long-Term Stock Incentive Plan provides for the granting of stock
options, performance shares, restricted stock, 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, 1995, 1,220,273 shares were available for grant under the Long-Term
Stock Incentive Plan.
Stock options are granted at exercise prices not less than the fair market
value of the Corporation's common stock on the date of grant. The terms and
conditions upon which options become exercisable may vary among grants. Options
expire no later than ten years from the date of grant.
Information concerning stock options granted under the Long-Term Stock
Incentive Plan and the prior plan is as follows:
1995 1994 1993
--------------------------- --------------------------- ----------
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................... 2,724,809 $24.50-92.63 2,083,758 $13.23-92.63 1,558,484 $13.23-74.06
Granted..................... 997,115 82.06-98.75 754,525 81.94 678,461 83.56-92.63
Exercised................... (369,166) 24.50-83.56 (76,034) 13.23-72.06 (136,888) 13.23-72.06
Cancelled................... (70,241) 66.75-88.69 (37,440) 47.75-83.56 (16,299) 24.50-83.56
---------- ---------- ---------- -----------
Outstanding, end of year.... 3,282,517 27.93-98.75 2,724,809 24.50-92.63 2,083,758 13.23-92.63
========== =========== ========== ===========
Exercisable, end of year.... 1,980,793 27.93-98.75 1,665,228 24.50-92.63 1,147,272 13.23-92.63
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
$8,626,000, $5,213,000 and $4,219,000 in 1995, 1994 and 1993, 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, 1995, 224,000 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:
1995 1994 1993
-------------------------- -------------------------- -------------------------
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....... 146,000 $26.84-86.94 124,000 $26.84-86.94 100,000 $26.84-69.19
Granted.............................. 24,000 78.75 24,000 77.50 28,000 86.94
Exercised............................ (11,000) 26.84-69.19 (2,000) 34.22 (4,000) 26.84-44.19
------- ------- -------
Outstanding and exercisable, end of
year............................... 159,000 26.84-86.94 146,000 26.84-86.94 124,000 26.84-86.94
======= ======= =======
58
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
1995, 1994 and 1993, cash contributions to the ESOP of $12,307,000, $12,146,000
and $12,172,000, respectively, were charged against income. Dividends on
unallocated shares used for debt service by the ESOP were $4,468,000, $4,615,000
and $4,711,000 in 1995, 1994 and 1993, respectively.
The number of allocated and unallocated shares held by the ESOP at December
31, 1995 were 1,392,527 and 2,337,662, respectively.
(d) The Corporation has a savings plan, the Capital Accumulation Plan, in
which substantially all employees are eligible to participate. Under this plan,
the employer makes a matching contribution equal to 100% of each eligible
employee's pre-tax elective contributions, up to 4% of the employee's
compensation. Contributions are invested at the election of the employee in the
Corporation's common stock or in various other investment funds. Employer
contributions of $13,443,000, $13,026,000 and $12,564,000 were charged against
income in 1995, 1994 and 1993, 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
based on compensation. Shares are purchased at a price not less than 95% of the
fair market value on the date of grant. At December 31, 1995, there were 369,365
subscribed shares at a price of $70.69.
(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
----------------------------
1995 1994 1993
---- ---- ----
(in thousands)
Office facilities............. $70,748 $69,679 $68,805
Equipment..................... 14,596 16,240 20,794
------- ------- -------
$85,344 $85,919 $89,599
======= ======= =======
At December 31, 1995, future minimum rental payments required under
non-cancellable operating leases were as follows:
Years Ending December 31 (in thousands)
1996..................................... $ 73,825
1997..................................... 67,970
1998..................................... 61,279
1999..................................... 52,364
2000..................................... 37,770
After 2000............................... 108,757
--------
$401,965
========
59
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 5.2% of the Corporation's
common stock.
A portion 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 $520,528,000, $489,727,000 and $457,321,000 in 1995, 1994 and
1993, respectively. Reinsurance recoverable on property and casualty unpaid
claims included approximately $775,000,000 and $845,000,000 at December 31, 1995
and 1994, respectively, from the Sun Group.
A property and casualty insurance subsidiary of the Corporation 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 $340,767,000, $264,343,000 and $170,131,000 in 1995, 1994 and 1993,
respectively.
The property and casualty insurance subsidiaries of the Corporation 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 included a commutation provision under which the property and casualty
insurance subsidiaries had an option to reassume the remaining liability of the
Sun Group as of December 31, 1995 and receive payment of an amount determined by
a formula based on experience under the agreement. The property and casualty
insurance subsidiaries exercised this option, which resulted in an amount due
from the Sun Group of $191,194,000 and a reduction in reinsurance recoverable on
unpaid claims from the Sun Group of $66,194,000. The difference of $125,000,000
represents a return premium to the property and casualty insurance subsidiaries,
which was recognized in 1993 at the time the Corporation announced its intention
to exercise the commutation option. The amount due from the Sun Group was
received in January 1996.
The agreement also included 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 $11,062,000 and $9,000,000 in 1994 and
1993, respectively. These amounts were reflected as reductions of other
insurance operating costs and expenses.
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
-------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
Direct.................... $ 4,754,423 $ 4,415,080 $ 4,155,356
Reinsurance assumed....... 712,080 641,615 478,464
Reinsurance ceded......... (1,319,341) (1,280,412) (1,128,982)
----------- ----------- -----------
Premiums earned........... $ 4,147,162 $ 3,776,283 $ 3,504,838
=========== =========== ===========
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 $936,080,000, $962,332,000 and
$590,502,000 in 1995, 1994 and 1993, respectively.
The effect of reinsurance on the premiums and policy charges of the life and
health insurance subsidiaries was as follows:
Years Ended December 31
-----------------------
1995 1994 1993
---- ---- ----
(in thousands)
Direct.......................... $652,035 $862,085 $831,849
Reinsurance assumed............. 1,766 2,056 2,784
Reinsurance ceded............... (30,864) (27,848) (33,397)
-------- -------- --------
Premiums and policy charges..... $622,937 $836,293 $801,236
======== ======== ========
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 $50,537,000, $53,141,000 and $42,005,000
in 1995, 1994 and 1993, respectively.
(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.
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22
In 1993, Pacific Indemnity Company, a subsidiary of the Corporation, entered
into a global settlement agreement with Continental Casualty Company (a
subsidiary of CNA Financial Corporation), Fibreboard Corporation, and attorneys
representing claimants against Fibreboard for all future asbestos-related bodily
injury claims against Fibreboard. This agreement is subject to final appellate
court approval. Pursuant to the global settlement agreement, a $1,525,000,000
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. Pacific Indemnity's share is included in funds
held for asbestos-related settlement. Upon final court approval of the
settlement, the amount in the escrow account, including interest earned thereon,
will be transferred to the trust fund. All of the parties have agreed to use
their best efforts to seek final court approval of the global settlement
agreement.
Pacific Indemnity and Continental Casualty have reached a separate agreement
for the handling of all asbestos-related bodily injury claims pending on August
26, 1993 against Fibreboard. In February 1995, the agreement was amended to
extend for several years the period over which Pacific Indemnity will pay its
remaining obligation, plus interest, under this agreement. Pacific Indemnity's
obligation under this agreement is not expected to exceed $635,000,000, of which
approximately $450,000,000 remained unpaid at December 31, 1995. Assets to be
used for the payment of this obligation have been designated as funds held for
asbestos-related settlement. 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 final appellate 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 by an appellate court. 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.
Additional loss reserves of $675,000,000 were provided in 1993 at the time the
settlement was negotiated.
In July 1995, the United States District Court of the Eastern District of
Texas approved the global settlement agreement and the trilateral agreement. The
judgments approving these agreements have been appealed to the United States
Court of Appeal for the Fifth Circuit. The appeals are scheduled to be argued in
early March 1996. The period of ultimate judicial review continues to lengthen
and may well extend into 1997.
Management is optimistic that the approval of the settlement will be upheld.
However, if both the global settlement agreement and the trilateral agreement
are disapproved by an appellate court, there can then 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.
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.
The property and casualty insurance subsidiaries have additional potential
asbestos exposure on insureds for which excess liability coverages were written.
Such exposure has increased due to the erosion of much of the underlying limits.
The number of claims against such insureds and the value of such claims have
increased in recent years due in part to the non-viability of other defendants.
Other remaining asbestos exposures are mostly peripheral defendants, including
a mix of manufacturers and distributors of certain products that contain
asbestos as well as premises owners. Generally, these insureds are named
defendants on a regional rather than a nationwide basis. Notices of 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.
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23
The courts have been engaged in developing guidelines regarding coverage for
asbestos claims and have begun to articulate more consistent standards regarding
the extent of the obligation of insurers to provide coverage and the method of
allocation of costs among insurers. However, the universe of potential claims is
still unknown. Therefore, uncertainty remains as to the property and casualty
insurance subsidiaries' ultimate liability for asbestos-related claims.
Hazardous waste sites are another significant potential exposure. Under the
"Superfund" law and similar state statutes, when potentially responsible parties
(PRPs) fail to handle the clean-up, regulators have the work done and then
attempt to establish legal liability against the PRPs. The PRPs disposed of
toxic materials at a waste dump site or transported the materials to the site.
Insurance policies issued to PRPs were not intended to cover the clean-up costs
of pollution and, in many cases, did not intend to cover the pollution itself.
As the cost of environmental clean-up continues to grow, PRPs and others have
increasingly filed claims with their insurance carriers. 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 remediation costs among governmental
authorities and the PRPs varies greatly. Second, different courts have addressed
liability and coverage issues regarding pollution claims and have reached
inconsistent conclusions in their interpretation of several issues. These
significant uncertainties are not likely to be resolved in the near future.
Uncertainties also remain as to the Superfund law itself. Superfund's taxing
authority expired on December 31, 1995. It is currently not possible to predict
the direction that any reforms may take, when they may occur or the effect that
any changes may have on the insurance industry.
Reserves for asbestos and toxic waste claims cannot be estimated with
traditional loss reserving techniques. Case reserves and expense reserves for
costs of related litigation have been established where sufficient information
has been developed to indicate the involvement of a specific insurance policy.
In addition, incurred but not reported reserves have been established to cover
additional exposures on both known and unasserted claims. These reserves are
continually reviewed and updated.
A reconciliation of the beginning and ending liability for property and
casualty unpaid claims, net of reinsurance recoverable, and a reconciliation of
the net liability to the corresponding liability on a gross basis is as follows:
1995 1994 1993
---- ---- ----
(in thousands)
Gross liability, beginning
of year.................... $8,913,220 $8,235,442 $7,220,919
Reinsurance recoverable,
beginning of year.......... 1,980,340 1,785,396 1,953,305
---------- ---------- ----------
Net liability, beginning of
year....................... 6,932,880 6,450,046 5,267,614
---------- ---------- ----------
Net incurred claims and claim
expenses related to:
Current year............. 2,705,800 2,549,100 2,214,300
Prior years.............. (35,819) (29,741) 664,798
---------- ---------- ----------
2,669,981 2,519,359 2,879,098
---------- ---------- ----------
Net payments for claims and
claim expenses related to:
Current year............. 737,686 764,525 656,766
Prior years.............. 1,250,700 1,272,000 1,039,900
---------- ---------- ----------
1,988,386 2,036,525 1,696,666
---------- ---------- ----------
Net liability, end of year... 7,614,475 6,932,880 6,450,046
Reinsurance recoverable,
end of year................ 1,973,666 1,980,340 1,785,396
---------- ---------- ----------
Gross liability, end of year. $9,588,141 $8,913,220 $8,235,442
========== ========== ==========
During 1995, the property and casualty insurance subsidiaries experienced
overall favorable development of $35,819,000 on net unpaid claims established as
of the previous year-end. This compares with favorable development of
$29,741,000 in 1994 and unfavorable development of $664,798,000 in 1993. Such
redundancies and deficiency were reflected in operating results in these
respective years. Excluding the effect of the $675,000,000 increase in unpaid
claims related to the Fibreboard settlement, the property and casualty insurance
subsidiaries experienced favorable development of $10,202,000 in 1993. Each of
the past three years benefited from favorable claim severity trends for certain
liability classes; this was offset each year in varying degrees by increases in
unpaid claims relating to asbestos and toxic waste claims.
Management believes that the aggregate loss reserves of the property and
casualty insurance subsidiaries at December 31, 1995 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 deemed
acceptable for measuring hazardous waste site clean-up, additional increases in
loss reserves may emerge which would adversely affect results in future periods.
The amount cannot reasonably be estimated at the present time.
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(15) 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. The property and casualty insurance
subsidiaries underwrite most forms of property and casualty insurance in the
United States, Canada, Europe, Australia and the Far East. The geographic
distribution of property and casualty business in the United States is broad
with a particularly strong market presence in the Northeast. The life and health
insurance subsidiaries, which market a wide variety of insurance and investment
products throughout the United States, are principally engaged in the sale of
personal and group life and health insurance as well as annuity contracts. The
real estate subsidiary is involved in commercial development activities
primarily in New Jersey with additional operations in several other states as
well as residential development activities in central Florida and northern New
Jersey.
Revenues, income from operations before income tax and identifiable assets
for each industry segment were as follows:
Years Ended December 31
------------------------------------
1995 1994 1993
---- ---- ----
Revenues (in thousands)
Property and Casualty Insurance
Premiums earned............................................................. $ 4,147,162 $ 3,776,283 $ 3,504,838
Investment income........................................................... 613,242 570,531 541,749
Life and Health Insurance
Premiums and policy charges................................................. 622,937 836,293 801,236
Investment income........................................................... 232,950 208,745 205,891
Real Estate..................................................................... 287,795 204,849 160,650
----------- ----------- -----------
5,904,086 5,596,701 5,214,364
Corporate investment income..................................................... 54,445 49,405 52,706
Realized investment gains (losses)
Property and Casualty Insurance............................................. 95,030 55,203 172,925
Life and Health Insurance................................................... 21,808 9,304 22,056
Corporate................................................................... 13,822 (1,078) 37,657
----------- ----------- -----------
Total revenues.......................................................... $ 6,089,191 $ 5,709,535 $ 5,499,708
=========== =========== ===========
Income (loss) from operations before income tax
Property and Casualty Insurance................................................. $ 697,141 $ 552,170 $ (1,383)
Life and Health Insurance....................................................... 41,265 18,754 88,729
Real Estate..................................................................... 7,696 (5,950) 2,051
----------- ----------- -----------
746,102 564,974 89,397
Corporate....................................................................... 23,309 10,961 22,457
Realized investment gains (losses)
Property and Casualty Insurance............................................. 95,030 55,203 172,925
Life and Health Insurance................................................... 21,808 9,304 22,056
Corporate................................................................... 13,822 (1,078) 37,657
----------- ----------- -----------
Income before federal and foreign income tax............................ $ 900,071 $ 639,364 $ 344,492
=========== =========== ===========
December 31
-------------------------------------------
Identifiable assets
Property and Casualty Insurance................................................. $16,157,688 $14,435,933 $13,372,599
Life and Health Insurance....................................................... 4,275,365 3,760,079 3,529,802
Real Estate..................................................................... 1,842,831 1,796,706 1,745,212
----------- ----------- -----------
Total identifiable assets............................................... 22,275,884 19,992,718 18,647,613
Corporate....................................................................... 959,384 945,397 1,047,606
Adjustments and eliminations.................................................... (238,743) (215,060) (258,349)
----------- ----------- -----------
Total assets............................................................ $22,996,525 $20,723,055 $19,436,870
=========== =========== ===========
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25
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
----------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
Premiums earned
Personal........................................................................ $ 832,423 $ 812,033 $ 807,550
Standard Commercial............................................................. 1,408,811 1,279,069 1,294,182
Specialty Commercial............................................................ 1,556,473 1,404,793 1,208,672
Reinsurance Assumed............................................................. 349,455 280,388 194,434
---------- ---------- ----------
Total premiums earned....................................................... $4,147,162 $3,776,283 $3,504,838
========== ========== ==========
Income (loss) from operations before income tax
Personal........................................................................ $ 92,686 $ (7,475) $ 30,536
Standard Commercial............................................................. (135,095) (106,126) (642,747)
Specialty Commercial............................................................ 132,187 106,557 101,584
Reinsurance Assumed............................................................. 4,376 (1,267) (24,465)
---------- ---------- ----------
Underwriting income (loss).................................................. 94,154 (8,311) (535,092)
Net investment income........................................................... 602,987 560,481 533,709
---------- ---------- ----------
Income (loss) from operations before income tax............................. $ 697,141 $ 552,170 $ (1,383)
========== ========== ==========
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.
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.
(16) INTERNATIONAL OPERATIONS
The international business of the property and casualty insurance segment
is conducted through subsidiaries that operate solely outside of the United
States and branch offices of domestic subsidiaries. The assets and liabilities
related to such operations are located primarily in the countries in which the
insurance risks are written. International business is also obtained from treaty
reinsurance assumed, principally from the Sun Group.
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
------------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
Revenues
United States..................................................... $ 3,715,023 $ 3,508,243 $ 3,397,825
International..................................................... 1,045,381 838,571 648,762
----------- ----------- -----------
Total....................................................... $ 4,760,404 $ 4,346,814 $ 4,046,587
=========== =========== ===========
Income (loss) from operations before income tax
United States..................................................... $ 592,684 $ 479,153 $ 8,311
International..................................................... 104,457 73,017 (9,694)
----------- ----------- -----------
Total....................................................... $ 697,141 $ 552,170 $ (1,383)
=========== =========== ===========
December 31
-------------------------------------------
Identifiable assets
United States..................................................... $14,055,334 $12,937,447 $12,189,556
International..................................................... 2,102,354 1,498,486 1,183,043
----------- ----------- -----------
Total....................................................... $16,157,688 $14,435,933 $13,372,599
=========== =========== ===========
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26
Foreign currency translation gains or losses credited or charged directly
to the separate component of shareholders' equity were as follows:
Years Ended December 31
----------------------------
1995 1994 1993
---- ---- ----
(in thousands)
Gains (losses) on translation of foreign currencies........................... $(15,931) $14,517 $ 8,492
Income tax (credit)
Current................................................................... (5,994) 4,633 8,546
Deferred.................................................................. 3,262 445 (5,545)
-------- ------- -------
$(13,199) $ 9,439 $ 5,491
======== ======= =======
(17) 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
----------------------------------
1995 1994 1993
---- ---- ----
(number of shares)
Common stock issued
Balance, beginning of year........................................... 87,798,286 87,709,465 87,519,560
Shares issued under option and incentive plans....................... 21,069 88,821 189,905
---------- ---------- ----------
Balance, end of year............................................. 87,819,355 87,798,286 87,709,465
---------- ---------- ----------
Treasury stock
Balance, beginning of year........................................... 977,580 -- --
Repurchase of shares................................................. -- 1,001,500 --
Shares issued under option and incentive plans....................... (459,112) -- --
Shares issued -- other............................................... -- (23,920) --
---------- ---------- ----------
Balance, end of year............................................. 518,468 977,580 --
---------- ---------- ----------
Common stock outstanding, end of year............................ 87,300,887 86,820,706 87,709,465
========== ========== ==========
(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 of the interests represented by each right.
The rights will become exercisable and will detach from the common stock
ten days after a person or group either acquires 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.
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(d) The Corporation's insurance subsidiaries are required to file annual
statements with insurance regulatory authorities prepared on an accounting basis
prescribed or permitted by such authorities (statutory basis). For such
subsidiaries, generally accepted accounting principles (GAAP) differ in certain
respects from statutory accounting practices.
A comparison of shareholders' equity on a GAAP basis and policyholders'
surplus on a statutory basis is as follows:
December 31
---------------------------------------------------
1995 1994
----------------------- -----------------------
GAAP Statutory GAAP Statutory
--------- --------- --------- ---------
(in thousands)
Property and casualty insurance subsidiaries*. $3,617,144 $2,314,720 $2,862,278 $1,923,465
Life and health insurance subsidiaries........ 844,645 317,624 731,810 301,084
---------- ---------- ---------- ----------
4,461,789 $2,632,344 3,594,088 $2,224,549
========== ==========
Corporate and eliminations.................. 800,940 652,941
---------- ----------
$5,262,729 $4,247,029
========== ==========
A comparison of GAAP and statutory net income (loss) is as follows:
Years Ended December 31
--------------------------------------------------------------------------------
1995 1994 1993
---------------------- ---------------------- ----------------------
GAAP Statutory GAAP Statutory GAAP Statutory
-------- --------- -------- --------- -------- ---------
(in thousands)
Property and casualty insurance subsidiaries*. $640,834 $571,199 $506,825 $468,861 $210,204** $ 96,965
Life and health insurance subsidiaries....... 42,216 26,828 20,551 (4,264) 76,853** 31,890
-------- -------- -------- -------- ------- --------
683,050 $598,027 527,376 $464,597 287,057 $128,855
======== ======== ========
Corporate and eliminations................... 13,578 1,093 57,160**
Cumulative effect of changes in accounting
principles, net of tax..................... -- -- (20,000)
-------- -------- --------
$696,628 $528,469 $324,217
======== ======== ========
* 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 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 1995, these subsidiaries paid
dividends to the Corporation totaling $244,008,000.
The maximum dividend distribution that may be made by insurance
subsidiaries to the Corporation during 1996 without prior approval is
approximately $465,000,000.
(18) SUBSEQUENT EVENT
On March 1, 1996, the Board of Directors approved a two-for-one stock split
payable to shareholders of record on April 19, 1996. The share and per share
amounts in the consolidated financial statements have not been adjusted to
reflect the stock split. Net income per share and the weighted average number of
common and common equivalent shares outstanding on a pro forma basis to reflect
the stock split were as follows:
Years Ended December 31
--------------------------------------------
1995 1994 1993
------------ ------------ ------------
Net income per share............................ $3.93 $2.98 $1.84
Average common and common equivalent
shares outstanding............................ 179,884,682 180,899,154 181,097,068
At the same time, the Board of Directors approved an increase in the number of
authorized shares of common stock of the Corporation from 300,000,000 shares to
600,000,000 shares.
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REPORT OF INDEPENDENT AUDITORS
ERNST & YOUNG LLP
787 Seventh Avenue
New York, New York 10019
The Board of Directors and Shareholders
The Chubb Corporation
We have audited the accompanying consolidated balance sheets of The Chubb
Corporation as of December 31, 1995 and 1994, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. 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, 1995 and 1994 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 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 loan impairment in 1995, for investments
in certain debt and equity securities in 1994 and for income taxes and
postretirement benefits other than pensions in 1993.
/s/ Ernst & Young LLP
February 23, 1996,
except for Note 18, as to which
the date is March 1, 1996
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QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data (in millions except per share
data) for 1995 and 1994 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
---------------- ---------------- ---------------- ----------------
1995 1994 1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ---- ---- ----
Revenues...................... $1,464.1 $1,396.0 $1,525.8 $1,414.6 $1,533.3 $1,428.9 $1,566.0 $1,470.0
Benefits and expenses......... 1,280.1 1,326.3 1,285.2 1,232.1 1,312.0 1,236.6 1,311.8 1,275.1
Federal and foreign
income tax (credit) ........ 37.3 (3.5) 55.6 35.8 49.9 39.6 60.7 39.0
-------- -------- -------- -------- -------- -------- -------- --------
Net income.................... $ 146.7 $ 73.2 $ 185.0 $ 146.7 $ 171.4 $ 152.7 $ 193.5 $ 155.9
======== ======== ======== ======== ======== ======== ======== ========
Net income per share.......... $ 1.66 $ .83 $ 2.09 $ 1.65 $ 1.93 $ 1.71 $ 2.17 $ 1.76
Underwriting ratios
Losses to premiums earned... 63.3% 76.6% 64.5% 63.8% 65.4% 63.8% 65.5% 64.2%
Expenses to premiums
written................... 33.0 33.3 31.9 32.5 31.5 32.1 32.1 32.3
-------- -------- -------- -------- -------- -------- -------- --------
Combined.................... 96.3% 109.9% 96.4% 96.3% 96.9% 95.9% 97.6% 96.5%
======== ======== ======== ======== ======== ======== ======== ========
Net income in the first quarter of 1994 was adversely affected by
catastrophe losses of $147.4 million, resulting primarily from the earthquake in
California and the winter storms in the eastern and midwestern parts of the
United States, which represented 16.3 percentage points of the combined ratio.
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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 1995 and 1994.
1995
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Common stock prices
High...................................................... $81.00 $85.13 $96.88 $100.50
Low....................................................... 76.50 77.50 78.25 90.13
Dividends declared............................................ .49 .49 .49 .49
1994
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Common stock prices
High...................................................... $83.13 $82.63 $78.63 $78.50
Low....................................................... 70.75 72.00 69.50 68.63
Dividends declared............................................ .46 .46 .46 .46
At March 1, 1996, there were approximately 8,375 common shareholders of
record.
69