1
Supplementary Financial Data
IN THOUSANDS
YEARS ENDED DECEMBER 31
1996 1995 1994
---------- ---------- ----------
PROPERTY AND CASUALTY INSURANCE
UNDERWRITING
Net Premiums Written............................. $4,773,753 $4,305,992 $3,951,209
Increase in Unearned Premiums.................... (204,497) (158,830) (174,926)
---------- ---------- ----------
Premiums Earned.................................. 4,569,256 4,147,162 3,776,283
---------- ---------- ----------
Claims and Claim Expenses........................ 3,010,755 2,669,981 2,519,359
Operating Costs and Expenses..................... 1,547,402 1,393,373 1,288,692
Increase in Deferred Policy Acquisition Costs.... (42,522) (29,223) (39,751)
Dividends to Policyholders....................... 23,279 18,877 16,294
---------- ---------- ----------
Underwriting Income (Loss) Before Income Tax..... 30,342 94,154 (8,311)
Federal and Foreign Income Tax (Credit).......... 13,200 38,500 (500)
---------- ---------- ----------
UNDERWRITING INCOME (LOSS)....................... 17,142 55,654 (7,811)
---------- ---------- ----------
INVESTMENTS
Investment Income Before Expenses and Income
Tax............................................ 656,135 613,242 570,531
Investment Expenses.............................. 10,079 10,255 10,050
---------- ---------- ----------
Investment Income Before Income Tax.............. 646,056 602,987 560,481
Federal and Foreign Income Tax................... 101,900 95,800 85,500
---------- ---------- ----------
INVESTMENT INCOME................................ 544,156 507,187 474,981
---------- ---------- ----------
PROPERTY AND CASUALTY INCOME........................ 561,298 562,841 467,170
---------- ---------- ----------
REAL ESTATE
Revenues............................................ 319,787 287,795 204,849
Cost of Sales and Expenses.......................... 555,642(a) 280,099(b) 210,799
---------- ---------- ----------
Real Estate Income (Loss) Before Income Tax......... (235,855) 7,696 (5,950)
Federal Income Tax (Credit)......................... (89,069) 1,686 (3,913)
---------- ---------- ----------
REAL ESTATE INCOME (LOSS)........................... (146,786) 6,010 (2,037)
---------- ---------- ----------
CORPORATE, NET OF TAX................................. 19,652 14,809 7,661
---------- ---------- ----------
CONSOLIDATED OPERATING INCOME FROM CONTINUING
OPERATIONS..................................... 434,164 583,660 472,794
REALIZED INVESTMENT GAINS FROM CONTINUING OPERATIONS,
NET OF TAX.......................................... 52,029 70,752 35,124
---------- ---------- ----------
CONSOLIDATED INCOME FROM CONTINUING OPERATIONS... 486,193 654,412 507,918
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX (c)... 26,491 42,216 20,551
---------- ---------- ----------
CONSOLIDATED NET INCOME.......................... $ 512,684 $ 696,628 $ 528,469
========== ========== ==========
(a) Includes a $255,000,000 write-down of the carrying value of certain real
estate assets to their estimated fair value.
(b) 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.
(c) In February 1997, the Corporation entered into a definitive agreement to
sell its life and health insurance operations. As a result, these operations
have been classified as discontinued operations.
The above federal and foreign income tax provisions represent allocations of the
consolidated provision.
21
2
Property and Casualty Underwriting Results
NET PREMIUMS WRITTEN (In Millions of Dollars)
1996 1995 1994 1993 1992
Personal Insurance
Automobile......................... $ 243.1 $ 200.3 $ 188.0 $ 192.1 $ 191.3
Homeowners......................... 546.1 455.6 436.5 434.1 420.6
Other.............................. 250.0 210.9 204.3 201.6 195.4
-------- -------- -------- -------- --------
Total Personal................ 1,039.2 866.8 828.8 827.8 807.3
-------- -------- -------- -------- --------
Commercial Insurance
Multiple Peril..................... 671.0 575.7 522.6 480.8 432.9
Casualty........................... 818.0 717.3 667.8 728.9(a) 569.9
Workers' Compensation.............. 243.7 223.4 201.6 181.1 175.5
Property and Marine................ 495.0 426.3 360.0 277.5 236.0
Executive Protection............... 775.7 647.0 596.4 515.2 496.8
Other.............................. 528.7 481.0 458.8 415.1 379.0
-------- -------- -------- -------- --------
Total Commercial.............. 3,532.1 3,070.7 2,807.2 2,598.6(a) 2,290.1
-------- -------- -------- -------- --------
Reinsurance Assumed.................. 202.5 368.5 315.2 219.9 145.1
-------- -------- -------- -------- --------
Total......................... $4,773.8 $4,306.0 $3,951.2 $3,646.3(a) $3,242.5
======== ======== ======== ======== ========
(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 $603.9 million for Casualty, $2,473.6 million for
Commercial and $3,521.3 million in Total.
Effective January 1, 1996, the reinsurance agreements with the Royal & Sun
Alliance Insurance Group plc were changed. This resulted in the Corporation's
property and casualty insurance subsidiaries retaining a greater portion of the
business written directly and assuming less reinsurance from Royal & Sun
Alliance.
COMBINED LOSS AND EXPENSE RATIOS
Personal Insurance
Automobile......................... 86.5% 87.4% 96.3% 97.5% 100.2%
Homeowners......................... 104.3 93.8 110.2 100.1 113.1
Other.............................. 69.3 72.6 80.7 84.2 89.2
-------- -------- -------- -------- --------
Total Personal................ 91.7 87.1 99.8 95.6 104.3
-------- -------- -------- -------- --------
Commercial Insurance
Multiple Peril..................... 118.1 110.0 112.4 117.2 116.0
Casualty........................... 113.3 113.8 101.9 175.8(b) 91.3
Workers' Compensation.............. 101.8 95.1 103.9 117.3 117.7
Property and Marine................ 97.8 92.9 102.5 98.7 99.1
Executive Protection............... 76.5 82.1 81.4 78.4 83.1
Other.............................. 89.3 95.1 100.2 99.1 98.9
-------- -------- -------- -------- --------
Total Commercial.............. 99.7 99.3 99.4 121.4(b) 98.2
-------- -------- -------- -------- --------
Reinsurance Assumed.................. N/M 99.2 100.1 112.4 129.9
-------- -------- -------- -------- --------
Total......................... 98.3% 96.8% 99.5% 114.8%(b) 101.1%
======== ======== ======== ======== ========
(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 97.4% for Casualty, 99.2% for 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.
The underwriting results for prior years include certain reclassifications to
conform with the 1996 presentation, which more closely reflects the way the
property and casualty business is now managed. The total net premiums written
and combined loss and expense ratio are not affected.
22
3
Ten Year Financial Summary
(in thousands except for per share amounts)
FOR THE YEAR 1996 1995 1994 1993 1992
REVENUES
Property and Casualty Insurance
Premiums Earned................... $4,569,256 $4,147,162 $3,776,283 $3,504,838(a) $3,163,288
Investment Income................. 656,135 613,242 570,531 541,749 501,140
Real Estate........................ 319,787 287,795 204,849 160,650 149,945
Corporate Investment Income........ 55,425 54,445 49,405 52,706 57,176
Realized Investment Gains (Losses). 79,929 108,852 54,125 210,582 174,061
TOTAL REVENUES................... 5,680,532 5,211,496 4,655,193 4,470,525 4,045,610
COMPONENTS OF NET INCOME*
Property and Casualty Insurance
Underwriting Income (Loss) (b).... 17,142 55,654 (7,811) (337,492)(c) (15,352)
Investment Income................. 544,156 507,187 474,981 455,409 422,755
Real Estate Income (Loss).......... (146,786)(e) 6,010(f) (2,037) (2,193) 10,050
Corporate Income (Loss)............ 19,652 14,809 7,661 14,357 19,794
OPERATING INCOME FROM CONTINUING
OPERATIONS..................... 434,164 583,660 472,794 130,081 437,247
Realized Investment Gains (Losses)
from Continuing Operations....... 52,029 70,752 35,124 137,283 114,861
INCOME FROM CONTINUING OPERATIONS 486,193 654,412 507,918 267,364 552,108
Income from Discontinued Operations 26,491 42,216 20,551 76,853 64,991
NET INCOME....................... 512,684 696,628 528,469 324,217(g) 617,099
DIVIDENDS DECLARED ON COMMON STOCK... 188,689 170,665 161,055 150,784 139,612
CHANGE IN UNREALIZED APPRECIATION OR
DEPRECIATION OF INVESTMENTS, NET... (107,225) 470,233 (487,951) 46,534 (82,082)
PER SHARE DATA**
Operating Income from Continuing
Operations....................... $2.46 $3.30 $2.67 $ .77 $2.48
Income from Continuing Operations.. 2.75 3.70 2.87 1.53 3.12
Income from Discontinued Operations .15 .23 .11 .42 .36
Net Income(b)...................... 2.90(e) 3.93(f) 2.98 1.84(c)(g) 3.48
Dividends Declared................. 1.08 .98 .92 .86 .80
AT YEAR END
TOTAL ASSETS......................... $19,938,866 $19,636,277 $17,760,969 $16,729,505 $15,197,641
INVESTED ASSETS
Property and Casualty Insurance.... 11,190,619 10,013,557 8,938,752 8,403,141 7,767,462
Corporate.......................... 890,441 906,597 879,475 965,715 955,828
UNPAID CLAIMS........................ 9,523,709 9,588,141 8,913,220 8,235,442 7,220,919
LONG TERM DEBT....................... 1,070,532 1,150,832 1,279,649 1,267,193 1,065,604
TOTAL SHAREHOLDERS' EQUITY........... 5,462,874 5,262,729 4,247,029 4,196,129 3,954,402
Per Common Share**............... 31.24 30.14 24.46 23.92 22.59
* The federal and foreign income tax provided for each component of income
represents its allocated portion of the consolidated provision.
** Per share amounts have been retroactively adjusted to reflect the two-for-one
stock split effective April 19, 1996.
In February 1997, the Corporation entered into a definitive agreement to sell
its life and health insurance operations. As a result, these operations have
been classified as discontinued operations.
Amounts prior to 1994 do not reflect the accounting changes prescribed by
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, as restatement of prior year
amounts was not permitted. The change in unrealized appreciation or
depreciation of investments for 1994 excludes the increase in unrealized
appreciation, as of January 1, 1994, of $220,519,000 resulting from the
change in accounting principle.
40
4
FOR THE YEAR 1991 1990 1989 1988 1987
REVENUES
Property and Casualty Insurance
Premiums Earned........................ $3,037,168 $2,836,135 $2,693,553 $2,705,560 $2,615,866
Investment Income...................... 476,984 463,413 426,267 364,126 266,230
Real Estate............................. 140,957 174,846 221,338 155,170 143,381
Corporate Investment Income............. 46,400 39,555 25,167 17,806 17,531
Realized Investment Gains (Losses)...... 61,089 39,619 40,147 (19,647) (16,088)
TOTAL REVENUES........................ 3,762,598 3,553,568 3,406,472 3,223,015 3,026,920
COMPONENTS OF NET INCOME*
Property and Casualty Insurance
Underwriting Income (Loss) (b)......... 18,594 20,709(d) (25,040) 15,818 62,394
Investment Income...................... 397,595 371,351 330,096 290,647 226,546
Real Estate Income (Loss)............... 25,007 40,015 42,021 40,018 36,079
Corporate Income (Loss)................. 16,325 14,760 705 (5,357) (4,229)
OPERATING INCOME FROM CONTINUING
OPERATIONS.......................... 457,521 446,835 347,782 341,126 320,790
Realized Investment Gains (Losses) from
Continuing Operations................. 40,289 25,819 26,447 (14,048) (9,388)
INCOME FROM CONTINUING OPERATIONS..... 497,810 472,654 374,229 327,078 311,402
Income from Discontinued Operations..... 54,174 49,455 46,588 32,547 18,658
NET INCOME............................ 551,984 522,109 420,817 359,625 330,060
DIVIDENDS DECLARED ON COMMON STOCK........ 127,757 109,136 96,515 87,766 71,443
CHANGE IN UNREALIZED APPRECIATION OR
DEPRECIATION OF INVESTMENTS, NET........ 12,163 (19,425) 70,330 29,815 12,294
PER SHARE DATA**
Operating Income from Continuing
Operations............................ $2.62 $2.60 $2.04 $2.03 $1.93
Income from Continuing Operations....... 2.85 2.75 2.19 1.95 1.88
Income from Discontinued Operations..... .31 .28 .27 .19 .11
Net Income(b)........................... 3.16 3.03(d) 2.46 2.14 1.99
Dividends Declared...................... .74 .66 .58 .54 .44 1/2
AT YEAR END
TOTAL ASSETS.............................. $13,885,882 $12,347,786 $11,390,374 $9,699,414 $8,615,658
INVESTED ASSETS
Property and Casualty Insurance......... 7,086,572 6,297,825 5,793,656 5,153,027 4,519,268
Corporate............................... 840,291 688,380 647,817 366,237 256,397
UNPAID CLAIMS............................. 6,591,305 6,016,396 5,605,006 4,585,848 3,888,485
LONG TERM DEBT............................ 1,045,776 812,573 604,156 353,684 315,620
TOTAL SHAREHOLDERS' EQUITY................ 3,541,605 2,882,639 2,603,739 2,238,447 1,937,033
Per Common Share**.................... 20.37 17.60 15.42 13.77 11.93
(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 $.04 per
share in 1992, $7,200,000 or $.04 per share in 1991, $10,800,000 or $.06 per
share in 1990, $19,200,000 or $.11 per share in 1989, $20,400,000 or $.12
per share in 1988 and $28,800,000 or $.17 per share in 1987 related 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 $1.97 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
$.08 per share elimination of deferred income taxes related 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 net charge of $160,000,000 or $.89 per
share for the after-tax effect of a $255,000,000 write-down of the carrying
value of certain real estate assets to their estimated fair value.
(f) Net income has been reduced by a charge of $6,500,000 or $.04 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.
(g) Net income has been reduced by a one-time charge of $20,000,000 or $.11 per
share for the cumulative effect of changes in accounting principles
resulting from the Corporation's adoption of Statements of Financial
Accounting Standards No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions, and No. 109, Accounting for Income Taxes.
Income before the cumulative effect of changes in accounting principles was
$344,217,000 or $1.95 per share.
41
5
The Chubb Corporation
CONSOLIDATED STATEMENTS OF INCOME
IN THOUSANDS
YEARS ENDED DECEMBER 31
REVENUES 1996 1995 1994
---------- ---------- ----------
Premiums Earned (Note 13)............................... $4,569,256 $4,147,162 $3,776,283
Investment Income (Note 4).............................. 711,560 667,687 619,936
Real Estate............................................. 319,787 287,795 204,849
Realized Investment Gains (Note 4)...................... 79,929 108,852 54,125
---------- ---------- ----------
TOTAL REVENUES..................................... 5,680,532 5,211,496 4,655,193
---------- ---------- ----------
CLAIMS AND EXPENSES
Insurance Claims (Notes 13 and 14)...................... 3,010,755 2,669,981 2,519,359
Amortization of Deferred Policy Acquisition
Costs (Note 6).......................................... 1,237,968 1,120,943 1,041,245
Other Insurance Operating Costs and Expenses............ 290,191 262,084 223,990
Real Estate Cost of Sales and Expenses (Note 5)......... 555,642 280,099 210,799
Investment Expenses..................................... 12,436 11,887 11,617
Corporate Expenses...................................... 26,616 29,504 36,877
---------- ---------- ----------
TOTAL CLAIMS AND EXPENSES.......................... 5,133,608 4,374,498 4,043,887
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE FEDERAL
AND FOREIGN INCOME TAX........................... 546,924 836,998 611,306
FEDERAL AND FOREIGN INCOME TAX (NOTE 9)...................... 60,731 182,586 103,388
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS.................. 486,193 654,412 507,918
DISCONTINUED OPERATIONS, NET OF TAX (NOTE 3)
Income from Operations.................................. 48,491 42,216 20,551
Loss on Disposal........................................ (22,000) -- --
---------- ---------- ----------
INCOME FROM DISCONTINUED OPERATIONS................ 26,491 42,216 20,551
---------- ---------- ----------
NET INCOME......................................... $ 512,684 $ 696,628 $ 528,469
========= ========= =========
PER SHARE DATA (NOTES 1 AND 10)
Income from Continuing Operations....................... $ 2.75 $ 3.70 $ 2.87
Income from Discontinued Operations..................... .15 .23 .11
---------- ---------- ----------
Net Income......................................... $ 2.90 $ 3.93 $ 2.98
========= ========= =========
See accompanying notes.
42
6
The Chubb Corporation
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
DECEMBER 31
ASSETS 1996 1995
----------- -----------
ASSETS
Invested Assets (Note 4)
Short Term Investments.......................................... $ 275,909 $ 429,217
Fixed Maturities
Held-to-Maturity -- Tax Exempt (market $2,573,356 and
$3,003,686)................................................ 2,443,595 2,825,686
Available-for-Sale
Tax Exempt (cost $4,415,101 and $3,607,925)................ 4,622,556 3,860,630
Taxable (cost $4,038,748 and $3,128,739)................... 4,092,697 3,257,004
Equity Securities (cost $540,522 and $459,087).................. 646,303 547,617
----------- -----------
TOTAL INVESTED ASSETS......................................... 12,081,060 10,920,154
Cash............................................................... 4,657 11,950
Accrued Investment Income.......................................... 195,346 199,228
Premiums Receivable................................................ 984,906 860,390
Reinsurance Recoverable on Unpaid Claims (Note 13)................. 1,767,885 1,973,666
Prepaid Reinsurance Premiums....................................... 326,682 484,358
Funds Held for Asbestos-Related Settlement (Note 14)............... 599,859 1,038,149
Deferred Policy Acquisition Costs (Note 6)......................... 601,198 558,676
Real Estate Assets (Notes 5 and 8)................................. 1,603,975 1,742,580
Deferred Income Tax (Note 9)....................................... 365,591 230,146
Other Assets....................................................... 564,299 772,335
Net Assets of Discontinued Operations (Note 3)..................... 843,408 844,645
----------- -----------
TOTAL ASSETS.................................................. $19,938,866 $19,636,277
========== ==========
LIABILITIES
Unpaid Claims (Note 14)............................................ $ 9,523,709 $ 9,588,141
Unearned Premiums.................................................. 2,617,503 2,570,682
Short Term Debt (Note 8)........................................... 189,450 151,600
Long Term Debt (Note 8)............................................ 1,070,532 1,150,832
Dividend Payable to Shareholders................................... 47,210 42,741
Accrued Expenses and Other Liabilities............................. 1,027,588 869,552
----------- -----------
TOTAL LIABILITIES............................................. 14,475,992 14,373,548
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 12 AND 14)
SHAREHOLDERS' EQUITY (NOTES 10 AND 17)
Preferred Stock -- Authorized 4,000,000 Shares;
$1 Par Value; Issued -- None.................................... -- --
Common Stock -- Authorized 600,000,000 Shares;
$1 Par Value; Issued 176,084,173 and 87,819,355 Shares.......... 176,084 87,819
Paid-In Surplus.................................................... 695,762 778,239
Retained Earnings.................................................. 4,530,512 4,206,517
Foreign Currency Translation Losses, Net of Income Tax............. (15,678) (3,433)
Unrealized Appreciation of Investments, Net (Note 4)............... 238,669 345,894
Receivable from Employee Stock Ownership Plan...................... (106,261) (114,998)
Treasury Stock, at Cost -- 1,223,182 and 518,468 Shares............ (56,214) (37,309)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY.................................... 5,462,874 5,262,729
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $19,938,866 $19,636,277
========== ==========
See accompanying notes.
43
7
The Chubb Corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN THOUSANDS
YEARS ENDED DECEMBER 31
1996 1995 1994
---------- ---------- ----------
PREFERRED STOCK
Balance, Beginning and End of Year.................... $ -- $ -- $ --
---------- ---------- ----------
COMMON STOCK
Balance, Beginning of Year............................ 87,819 87,798 87,709
Two-for-One Stock Split............................... 87,819 -- --
Shares Issued upon Exchange of Long Term Debt......... 481 -- --
Share Activity under Option and Incentive Plans....... (35) 21 89
---------- ---------- ----------
Balance, End of Year............................. 176,084 87,819 87,798
---------- ---------- ----------
PAID-IN SURPLUS
Balance, Beginning of Year............................ 778,239 786,596 782,186
Two-for-One Stock Split............................... (87,819) -- --
Exchange of Long Term Debt............................ 20,844 -- --
Additions (Reductions) Resulting from Share Activity
under Option and Incentive Plans.................... (15,502) (8,357) 4,410
---------- ---------- ----------
Balance, End of Year............................. 695,762 778,239 786,596
---------- ---------- ----------
RETAINED EARNINGS
Balance, Beginning of Year............................ 4,206,517 3,680,554 3,313,140
Net Income............................................ 512,684 696,628 528,469
Dividends Declared (per share $1.08, $.98 and $.92)... (188,689) (170,665) (161,055)
---------- ---------- ----------
Balance, End of Year............................. 4,530,512 4,206,517 3,680,554
---------- ---------- ----------
FOREIGN CURRENCY TRANSLATION GAINS (LOSSES)
Balance, Beginning of Year............................ (3,433) 9,766 327
Change During Year, Net of Income Tax (Note 16)....... (12,245) (13,199) 9,439
---------- ---------- ----------
Balance, End of Year............................. (15,678) (3,433) 9,766
---------- ---------- ----------
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS
Balance, Beginning of Year............................ 345,894 (124,339) 143,093
Cumulative Effect, as of January 1, 1994, of Change in
Accounting Principle, Net (Note 2).................. -- -- 220,519
Change During Year, Net (Note 4)...................... (107,225) 470,233 (487,951)
---------- ---------- ----------
Balance, End of Year............................. 238,669 345,894 (124,339)
---------- ---------- ----------
RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN
Balance, Beginning of Year............................ (114,998) (122,999) (130,326)
Principal Repayments.................................. 8,737 8,001 7,327
---------- ---------- ----------
Balance, End of Year............................. (106,261) (114,998) (122,999)
---------- ---------- ----------
TREASURY STOCK, AT COST
Balance, Beginning of Year............................ (37,309) (70,347) --
Repurchase of Shares.................................. (82,528) -- (72,052)
Share Activity under Option and Incentive Plans....... 63,623 33,038 --
Shares Issued -- Other................................ -- -- 1,705
---------- ---------- ----------
Balance, End of Year............................. (56,214) (37,309) (70,347)
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY....................... $5,462,874 $5,262,729 $4,247,029
========== ========== ==========
See accompanying notes.
44
8
The Chubb Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
YEARS ENDED DECEMBER 31
1996 1995 1994
----------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.......................................... $ 512,684 $ 696,628 $ 528,469
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Claims, Net................... 141,349 681,595 482,834
Increase in Unearned Premiums, Net............... 204,497 158,830 174,926
Increase in Premiums Receivable.................. (124,516) (96,258) (72,196)
Decrease (Increase) in Funds Held for
Asbestos-Related Settlement.................... 438,290 (480,008) (19,969)
Decrease (Increase) in Medical Malpractice
Reinsurance Related Receivable................. 191,194 (66,194) --
Increase in Deferred Policy Acquisition Costs.... (42,522) (29,223) (39,751)
Deferred Income Tax Credit....................... (117,573) (16,830) (16,287)
Write-down of Real Estate Assets................. 255,000 -- --
Depreciation..................................... 58,991 53,535 44,157
Realized Investment Gains........................ (79,929) (108,852) (54,125)
Other, Net....................................... 193,376 46,808 (29,576)
Discontinued Operations, Net..................... (79,451) (125,739) (101,807)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES................................... 1,551,390 714,292 896,675
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturities --
Available-for-Sale................................. 3,430,532 3,953,901 2,723,317
Proceeds from Maturities of Fixed Maturities........ 762,885 651,385 401,469
Proceeds from Sales of Equity Securities............ 382,917 302,311 567,170
Purchases of Fixed Maturities....................... (5,520,511) (5,466,024) (3,814,935)
Purchases of Equity Securities...................... (395,198) (145,056) (358,734)
Decrease (Increase) in Short Term Investments, Net.. 153,308 269,263 (221,941)
Additions to Real Estate Assets, Net................ (81,963) (34,305) (43,216)
Purchases of Fixed Assets........................... (58,686) (68,435) (62,830)
Other, Net.......................................... (53,147) (23,940) (17,303)
Discontinued Operations, Net........................ (249,152) (216,579) (133,027)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES.......... (1,629,015) (777,479) (960,030)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Long Term Debt............ 85,989 173,900 33,225
Repayment of Long Term Debt......................... (145,629) (302,717) (20,769)
Increase in Short Term Debt, Net.................... 37,850 34,260 53,800
Dividends Paid to Shareholders...................... (184,220) (167,959) (158,735)
Repurchase of Shares................................ (82,528) -- (72,052)
Other, Net.......................................... 52,749 27,944 10,608
Discontinued Operations, Net........................ 306,121 304,110 218,291
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES................................... 70,332 69,538 64,368
----------- ----------- -----------
Net Increase (Decrease) in Cash....................... (7,293) 6,351 1,013
Cash at Beginning of Year............................. 11,950 5,599 4,586
----------- ----------- -----------
CASH AT END OF YEAR............................ $ 4,657 $ 11,950 $ 5,599
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Year from Continuing Operations for
Interest (Net of Amounts Capitalized)............ $ 77,728 $ 83,461 $ 75,840
Federal and Foreign Income Taxes................. 163,265 191,989 121,610
See accompanying notes.
45
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 subsidiaries.
Significant intercompany transactions have been eliminated in consolidation.
The consolidated financial statements reflect estimates and judgments made by
management that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Corporation is a holding company with subsidiaries principally engaged in
two industries: property and casualty insurance and real estate.
On February 23, 1997, the Corporation entered into a definitive agreement to
sell its life and health insurance subsidiaries. Accordingly, the life and
health insurance subsidiaries have been classified as discontinued operations in
the consolidated financial statements (see Note (3)).
Certain other amounts in the consolidated financial statements for prior years
have been reclassified to conform with the 1996 presentation. Also, share and
per share amounts have been retroactively adjusted to reflect the two-for-one
stock split paid to shareholders of record as of April 19, 1996.
(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.
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.
Deferred policy acquisition costs are reviewed to determine that they do not
exceed recoverable amounts, after considering anticipated investment income.
(d) Unpaid Claims
Liabilities for unpaid claims include the accumulation of individual case
estimates for claims reported 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) 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. Ceded 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.
46
10
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. Amounts recoverable from reinsurers are recognized as assets at the
same time and in a manner consistent with the liabilities associated with the
reinsured policies.
(f) 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)).
(g) Real Estate
Real estate properties are carried at cost, net of write-downs for impairment.
Real estate taxes, interest and other carrying costs incurred prior to
completion of the assets for their intended use are capitalized. Also, costs
incurred during the initial leasing of income producing properties are
capitalized until the project is substantially complete, subject to a maximum
time period subsequent to completion of major construction activity.
Effective January 1, 1996, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets. Under SFAS No.
121, real estate properties are reviewed for impairment whenever events or
circumstances indicate that the carrying value of such properties may not be
recoverable. In performing the review for recoverability of carrying value,
estimates are made of the future undiscounted cash flows from each of the
properties during the period the property will be held and upon its eventual
disposition. If the expected future undiscounted cash flows are less than the
carrying value of such properties, an impairment loss is recognized, resulting
in a write-down of the carrying value of the property to an amount based on its
fair value.
Depreciation of real estate properties is calculated using the straight-line
method over the estimated useful lives of the properties.
Real estate mortgages and notes receivable are carried at unpaid principal
balances less an allowance for uncollectible amounts. A loan is considered
impaired when it is probable that all principal and interest amounts will not be
collected according to the contractual terms of the loan agreement. An allowance
for uncollectible amounts is established to the extent that the unpaid principal
balance is greater than the discounted future cash flows of the loan, subject to
the estimated fair value of the underlying collateral. These cash flows are
discounted at the loan's effective interest rate.
Rental revenues are recognized on a straight-line basis over the term of the
lease. Profits on land, townhome unit and commercial building sales are
recognized at closing, subject to compliance with applicable accounting
guidelines. Profits on high-rise condominium unit sales are recognized using the
percentage of completion method, subject to achievement of a minimum level of
unit sales. Profits on construction contracts are recognized using the
percentage of completion method.
(h) Property and Equipment
Property and equipment used in operations are carried at cost less accumulated
depreciation. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets.
(i) Stock-based Compensation
The intrinsic value method of accounting is used for stock-based compensation
plans. Under the intrinsic value method, compensation cost is measured as the
excess, if any, of the quoted market price of the stock at the grant date over
the amount an employee must pay to acquire the stock.
(j) Income Taxes
The Corporation and its domestic subsidiaries file a consolidated federal
income tax return.
Deferred income tax assets and liabilities are recognized for the expected
future tax effects attributable to temporary differences between the financial
reporting and tax bases of assets and liabilities, based on enacted tax rates
and other provisions of tax law. The effect of a change in tax laws or rates is
recognized in income in the period in which such change is enacted.
U. S. federal income taxes are accrued on undistributed earnings of foreign
subsidiaries.
(k) Foreign Exchange
Assets and liabilities relating to foreign operations are translated into U.
S. dollars using current exchange rates; revenues and expenses are translated
into U. S. dollars using the average exchange rates for each year.
The functional currency of 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.
47
11
(l) 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
180,195,310, 179,884,682 and 180,899,154 in 1996, 1995 and 1994, 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.
(m) Cash Flow Information
In the statement of cash flows, short term investments are not considered to
be cash equivalents. The effect of changes in foreign exchange rates on cash
balances was immaterial.
In 1996, $20,660,000 of the 6% exchangeable subordinated notes were exchanged
for 480,464 shares of common stock of the Corporation. This noncash transaction
has been excluded from the consolidated statements of cash flows.
(n) 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 real estate mortgages and notes receivable are estimated
individually as the value of the discounted future cash flows of the loan,
subject to the estimated fair value of the underlying collateral. The cash
flows are discounted at rates based on a U.S. Treasury security with a
maturity similar to the loan, adjusted for credit risk.
(v) The carrying value of short term debt approximates fair value due to the
short maturities of this debt.
(vi) 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 of continuing
operations were as follows:
December 31
----------------------------------------------
1996 1995
---------------------- ----------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
(in thousands)
Assets
Invested assets
Short term investments.... $ 275,909 $ 275,909 $ 429,217 $ 429,217
Fixed maturities (Note 4)
Held-to-maturity........ 2,443,595 2,573,356 2,825,686 3,003,686
Available-for-sale...... 8,715,253 8,715,253 7,117,634 7,117,634
Equity securities......... 646,303 646,303 547,617 547,617
Real estate mortgages and
notes receivable
(Note 5).................. 502,374 487,200 409,564 405,400
Liabilities
Short term debt (Note 8).... 189,450 189,450 151,600 151,600
Long term debt (Note 8)..... 1,070,532 1,128,500 1,150,832 1,214,422
(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.
48
12
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, available-for-sale
or trading. However, SFAS No. 115 establishes more stringent criteria for
classifying fixed maturities 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 SFAS No. 115 has not had an impact on net income nor will it in
future years.
(3) DISCONTINUED OPERATIONS
The Corporation entered into a definitive agreement, dated February 23, 1997,
to sell Chubb Life Insurance Company of America and its subsidiaries to
Jefferson-Pilot Corporation for $875,000,000 in cash, subject to various closing
adjustments and other customary conditions. The sale is subject to regulatory
approvals and is expected to be completed by the end of the second quarter of
1997.
The estimated loss on the sale of the life and health insurance subsidiaries
is $22,000,000 consisting of a loss before tax of $5,000,000 and a tax of
$17,000,000 on the sale. The tax on the sale is due to the tax carrying value of
these subsidiaries being lower than their carrying value for financial statement
purposes. The purchase price will not be adjusted to reflect results of
operations subsequent to December 31, 1996. Therefore, it is expected that the
discontinued life and health insurance operations will not affect the
Corporation's net income in the future.
The results of the discontinued operations were as follows:
Years Ended December 31
------------------------------
1996 1995 1994
-------- -------- ----------
(in thousands)
Revenues
Premiums earned and policy
charges...................... $562,058 $622,937 $ 836,293
Investment income.............. 242,226 232,950 208,745
Realized investment gains...... 12,587 21,808 9,304
-------- -------- ----------
Total revenues............. 816,871 877,695 1,054,342
-------- -------- ----------
Benefits, claims and expenses
Insurance claims and
policyholder benefits........ 492,467 549,219 752,205
Amortization of deferred policy
acquisition costs............ 97,127 77,457 72,250
Other insurance costs and
expenses..................... 152,042 185,086 199,399
Investment expenses............ 2,301 2,860 2,430
-------- -------- ----------
Total benefits, claims and
expenses................. 743,937 814,622 1,026,284
-------- -------- ----------
Income before federal
income tax............... 72,934 63,073 28,058
Federal income tax (credit)
Current........................ 30,415 29,050 9,808
Deferred....................... (5,972) (8,193) (2,301)
-------- -------- ----------
24,443 20,857 7,507
-------- -------- ----------
Income from operations..... $ 48,491 $ 42,216 $ 20,551
======== ======== ==========
The assets and liabilities of the discontinued operations were as follows:
December 31
-----------------------
1996 1995
---------- ----------
(in thousands)
Assets
Invested assets
Short term investments............. $ 48,333 $ 55,222
Fixed maturities
Held-to-maturity................. 381,230 403,539
Available-for-sale............... 2,498,281 2,255,951
Equity securities.................. 30,681 40,208
Policy and mortgage loans.......... 226,802 212,339
---------- ----------
3,185,327 2,967,259
Accrued investment income............ 52,473 46,091
Deferred policy acquisition costs.... 679,113 612,709
Other assets......................... 814,906 649,306
---------- ----------
Total assets..................... 4,731,819 4,275,365
---------- ----------
Liabilities
Life and health policy liabilities... 3,230,656 2,943,138
Short term debt...................... 50,500 36,000
Deferred income tax.................. 44,095 70,472
Accrued expenses and other
liabilities........................ 563,160 381,110
---------- ----------
Total liabilities................ 3,888,411 3,430,720
---------- ----------
Net assets of discontinued
operations..................... $ 843,408 $ 844,645
========== ==========
In addition to the applicable accounting policies for continuing operations
disclosed in Note (1), the following accounting policies relate to discontinued
operations:
(a) Premium Revenues and Related Expenses
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 charged against income include claims
incurred in excess of the related policyholder account balances and interest
credited to the policyholder account balances.
49
13
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.
Certain costs of acquiring life insurance contracts, principally commissions,
underwriting costs and certain variable agency costs, are deferred. Deferred
policy acquisition costs for universal life and other interest-sensitive life
insurance contracts are amortized over the lives of the contracts in relation to
the present value of estimated gross profits expected to be realized. Deferred
policy acquisition costs related to such contracts are 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 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.
(b) Policy Liabilities
Liabilities for universal life and other interest-sensitive life insurance
contracts represent the policyholder account balances before surrender charges.
Interest crediting rates ranged from 4% to 6 7/8% in 1996.
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 1996. 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.
(c) 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 of the discontinued operations was $63,196,000
and $65,382,000 at December 31, 1996 and 1995, respectively.
(4) INVESTED ASSETS AND RELATED INCOME
(a) The sources of net investment income from continuing operations were as
follows:
Years Ended December 31
--------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
Fixed maturities................ $669,715 $604,312 $555,278
Equity securities............... 9,977 12,292 22,070
Short term investments.......... 23,889 35,045 25,992
Other........................... 7,979 16,038 16,596
-------- -------- --------
Gross investment income........ 711,560 667,687 619,936
Investment expenses............. 12,436 11,887 11,617
-------- -------- --------
Net investment income from
continuing operations...... $699,124 $655,800 $608,319
======== ======== ========
(b) Realized investment gains and losses from continuing operations were as
follows:
Years Ended December 31
--------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
Gross realized investment gains
Fixed maturities............... $ 56,492 $ 66,763 $ 62,636
Equity securities.............. 75,566 95,379 130,129
-------- -------- --------
132,058 162,142 192,765
-------- -------- --------
Gross realized investment losses
Fixed maturities............... 45,717 46,520 126,965
Equity securities.............. 6,412 6,770 11,675
-------- -------- --------
52,129 53,290 138,640
-------- -------- --------
Realized investment gains....... 79,929 108,852 54,125
Income tax...................... 27,900 38,100 19,001
-------- -------- --------
Realized investment gains from
continuing operations........ $ 52,029 $ 70,752 $ 35,124
======== ======== ========
(c) The components of unrealized appreciation of investments carried at market
value were as follows:
December 31
---------------------
1996 1995
-------- --------
(in thousands)
Continuing operations
Equity securities
Gross unrealized appreciation........ $114,940 $ 99,481
Gross unrealized depreciation........ 9,159 10,951
-------- --------
105,781 88,530
-------- --------
Fixed maturities
Gross unrealized appreciation........ 297,045 393,521
Gross unrealized depreciation........ 35,641 12,551
-------- --------
261,404 380,970
-------- --------
367,185 469,500
Deferred income tax liability.......... 128,516 164,326
-------- --------
238,669 305,174
Discontinued operations, net............. -- 40,720
-------- --------
$238,669 $345,894
======== ========
50
14
The change in unrealized appreciation or depreciation of investments carried
at market value was as follows:
Years Ended December 31
------------------------------------------
1996 1995 1994
--------- -------- ---------
(in thousands)
Continuing operations
Change in unrealized appreciation of equity securities............................. $ 17,251 $ 60,878 $(178,267)
Change in unrealized appreciation or depreciation of fixed maturities.............. (119,566) 499,053 (418,668)
--------- -------- ---------
(102,315) 559,931 (596,935)
Deferred income tax (credit)....................................................... (35,810) 195,976 (208,927)
Increase (decrease) in valuation allowance......................................... -- (31,651) 31,651
--------- -------- ---------
Change in unrealized appreciation or depreciation.................................. (66,505) 395,606 (419,659)
Discontinued operations, net......................................................... (40,720) 74,627 (68,292)
--------- -------- ---------
(107,225) 470,233 (487,951)
Cumulative effect, as of January 1, 1994, of change in accounting principle, net..... -- -- 220,519
--------- -------- ---------
$(107,225) $470,233 $(267,432)
========= ======== =========
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 of continuing operations carried at
amortized cost was a decrease of $48,239,000, an increase of $150,427,000 and a
decrease of $557,123,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
(d) The amortized cost and estimated market value of fixed maturities were as
follows:
December 31
------------------------------------------------------------------------------------------------------------
1996 1995
---------------------------------------------------- ----------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Appreciation Depreciation Value Cost Appreciation Depreciation Value
----------- ------------ ------------ ----------- ---------- ------------ ------------ ------------
(in thousands)
Continuing operations
Held-to-maturity --
Tax exempt....... $ 2,443,595 $131,147 $ 1,386 $ 2,573,356 $2,825,686 $178,959 $ 959 $3,003,686
----------- -------- ------- ----------- ---------- -------- ------- -----------
Available-for-sale
Tax exempt....... 4,415,101 210,136 2,681 4,622,556 3,607,925 253,814 1,109 3,860,630
----------- -------- ------- ----------- ---------- -------- ------- -----------
Taxable
U.S. Government
and
government
agency and
authority
obligations 1,092,269 5,756 8,345 1,089,680 784,394 32,051 25 816,420
Corporate
bonds........ 317,735 7,460 1,845 323,350 301,108 17,982 419 318,671
Foreign
bonds........ 1,169,238 58,500 11,288 1,216,450 1,316,938 61,750 10,280 1,368,408
Mortgage-backed
securities... 1,444,506 15,043 11,482 1,448,067 701,299 27,924 535 728,688
Redeemable
preferred
stocks....... 15,000 150 -- 15,150 25,000 -- 183 24,817
----------- -------- ------- ----------- ---------- -------- ------- -----------
4,038,748 86,909 32,960 4,092,697 3,128,739 139,707 11,442 3,257,004
----------- -------- ------- ----------- ---------- -------- ------- -----------
Total avail-
able for sale 8,453,849 297,045 35,641 8,715,253 6,736,664 393,521 12,551 7,117,634
----------- -------- ------- ----------- ---------- -------- ------- -----------
Total fixed
maturities... $10,897,444 $428,192 $37,027 $11,288,609 $9,562,350 $572,480 $13,510 $10,121,320
=========== ======== ======= =========== ========== ======== ======= ===========
Discontinued
operations
Held-to-maturity... $ 381,230 $ 20,022 $ 2,343 $ 398,909 $ 403,539 $ 31,479 $ 46 $ 434,972
Available-for-sale... 2,443,448 71,332 16,499 2,498,281 2,153,936 111,291 9,276 2,255,951
----------- -------- ------- ----------- ---------- -------- ------- -----------
Total fixed
maturities... $ 2,824,678 $ 91,354 $18,842 $ 2,897,190 $2,557,475 $142,770 $ 9,322 $ 2,690,923
=========== ======== ======= =========== ========== ======== ======= ===========
The amortized cost and estimated market value of fixed maturities at December
31, 1996 by contractual maturity were as follows:
Continuing Operations Discontinued Operations
------------------------------------------------- -------------------------
Held-to-Maturity Available-for-Sale Held-to-Maturity
----------------------- ----------------------- ---------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---------- ---------- ---------- ---------- --------- ---------
(in thousands) (in thousands)
Due in one year or less............. $ 105,859 $ 107,145 $ 80,671 $ 81,629 $ 10,026 $ 10,207
Due after one year through five
years............................. 684,380 720,503 1,306,804 1,330,143 63,785 68,892
Due after five years through ten
years............................. 924,995 979,145 2,307,112 2,402,009 75,743 81,875
Due after ten years................. 728,361 766,563 3,314,756 3,453,405 58,656 65,043
---------- ---------- ---------- ---------- -------- --------
2,443,595 2,573,356 7,009,343 7,267,186 208,210 226,017
Mortgage-backed securities.......... -- -- 1,444,506 1,448,067 173,020 172,892
---------- ---------- ---------- ---------- -------- --------
$2,443,595 $2,573,356 $8,453,849 $8,715,253 $381,230 $398,909
========== ========== ========== ========== ======== ========
Discontinued Operations
----------------------------------------
Available-for-Sale Available-for-Sale
------------------ ------------------
Estimated
Amortized Market
Cost Value
---------- ----------
Due in one year or less............. $ 10,240 $ 10,266
Due after one year through five
years............................. 257,205 266,921
Due after five years through ten
years............................. 445,479 456,299
Due after ten years................. 819,276 830,643
---------- ----------
1,532,200 1,564,129
Mortgage-backed securities.......... 911,248 934,152
---------- ----------
$2,443,448 $2,498,281
========== ==========
Actual maturities could differ from contractual maturities because borrowers may
have the right to call or prepay obligations.
51
15
(5) REAL ESTATE
In October 1996, the Corporation announced that it was exploring the possible
sale of all or a portion of its real estate assets. During February 1997,
indications of interest in purchasing a substantial portion of the commercial
properties were received from several parties. In March 1997, the Corporation
announced that it had entered into an agreement with a prospective purchaser to
perform due diligence in anticipation of executing a contract for the sale of
these properties. In addition, the Corporation is continuing to explore the sale
of its residential and retail properties.
Because the plan to pursue the sale of these assets in the near term
represented a change in circumstances relating to the manner in which these
assets are expected to be used, the recoverability of their carrying value was
reassessed. As a result, an impairment loss of $255,000,000 was recognized in
1996 to reduce the carrying value of these assets to their estimated fair value.
This charge is included in real estate cost of sales and expenses in the
consolidated statements of income.
The components of real estate assets were as follows:
December 31
-----------------------
1996 1995
---------- ----------
(in thousands)
Mortgages and notes receivable (net of
allowance for uncollectible amounts
of $85,669 and $87,617).............. $ 502,374 $ 409,564
Income producing properties............ 584,496 864,449
Construction in progress............... 135,030 87,870
Land under development and unimproved
land................................. 382,075 380,697
---------- ----------
$1,603,975 $1,742,580
========== ==========
Substantially all mortgages and notes receivable are secured by buildings and
land. The ultimate collectibility of the receivables is evaluated continuously
and an appropriate allowance for uncollectible amounts established. Mortgages
and notes receivable had an aggregate fair value of approximately $487,200,000
and $405,400,000 at December 31, 1996 and 1995, 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 $10,978,000,
$14,123,000 and $12,086,000 for 1996, 1995 and 1994, respectively.
(6) DEFERRED POLICY ACQUISITION COSTS
Property and casualty insurance policy acquisition costs deferred and the
related amortization charged against income were as follows:
Years Ended December 31
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
(in thousands)
Balance, beginning of
year.................. $ 558,676 $ 529,453 $ 489,702
----------- ----------- -----------
Costs deferred during
year
Commissions and
brokerage........... 653,534 592,687 544,733
Premium taxes and
assessments......... 114,666 108,002 108,008
Salaries and
overhead............ 512,290 449,477 428,255
----------- ----------- -----------
1,280,490 1,150,166 1,080,996
Amortization during
year.................. (1,237,968) (1,120,943) (1,041,245)
----------- ----------- -----------
Balance, end of year.... $ 601,198 $ 558,676 $ 529,453
=========== =========== ===========
(7) PROPERTY AND EQUIPMENT
Property and equipment of continuing operations included in other assets were
as follows:
December 31
-------------------
1996 1995
-------- --------
(in thousands)
Cost...................................... $363,079 $329,728
Less accumulated depreciation............. 155,502 131,218
-------- --------
$207,577 $198,510
======== ========
Depreciation expense related to property and equipment from continuing
operations was $48,013,000, $39,412,000 and $32,071,000 for 1996, 1995 and 1994,
respectively.
(8) DEBT AND CREDIT ARRANGEMENTS
(a) Short term debt consists of commercial paper used 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. Borrowings 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 1/2% and 5 3/4% at December 31, 1996 and 1995,
respectively.
52
16
(b) Long term debt consisted of the following:
December 31
-------------------------------------------------
1996 1995
----------------------- -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
(in thousands)
Term loans....... $ 311,351 $ 313,648 $ 331,023 $ 331,023
Mortgages........ 189,841 191,630 199,809 200,395
8 3/4% notes..... 90,000 93,879 120,000 133,104
6% notes......... 150,000 149,685 150,000 151,365
6 7/8% notes..... 100,000 101,010 100,000 105,410
6% exchangeable
subordinated
notes.......... 229,340 278,648 250,000 293,125
---------- ---------- ---------- ----------
$1,070,532 $1,128,500 $1,150,832 $1,214,422
========== ========== ========== ==========
The term loans and mortgages are obligations of the real estate subsidiaries.
The term loans mature in varying amounts through 2001. 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 2010. At December 31, 1996, the range of
interest rates for term loans was 7% 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 $880,410,000 at December 31, 1996.
The Corporation has outstanding $90,000,000 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 1997 and 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 $229,340,000 of 6%
exchangeable subordinated notes due May 15, 1998, which are guaranteed by the
Corporation. The notes are redeemable, in whole or in part, at the option of
Chubb Capital at redemption prices declining from 101.7% of the principal amount
if redeemed before May 15, 1997 to 100.9% of the principal amount if redeemed
thereafter. The notes are exchangeable at the option of the holder into 23.256
shares of common stock of the Corporation for each $1,000 of principal amount,
equivalent to a conversion price of $43.00 per share. In 1996, the holders of
$20,660,000 of notes elected this option, resulting in the issuance of 480,464
shares of common stock.
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, 1996 are as follows:
Years Ending Term Loans
December 31 and Mortgages Notes Total
- ------------------------- ------------- -------- --------
(in thousands)
1997................... $ 78,790 $ 30,000 $108,790
1998................... 49,187 409,340 458,527
1999................... 61,999 30,000 91,999
2000................... 114,839 -- 114,839
2001................... 178,890 -- 178,890
(c) Interest costs for continuing operations of $89,482,000, $98,644,000 and
$96,488,000 were incurred in 1996, 1995 and 1994, respectively, of which
$12,764,000, $16,352,000 and $19,407,000 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
$140,000,000 at December 31, 1996. 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.
53
17
(9) FEDERAL AND FOREIGN INCOME TAX
(a) Income tax expense for continuing operations consisted of the following
components:
Years Ended December 31
-----------------------------------
1996 1995 1994
--------- -------- --------
(in thousands)
Current tax
United States................................................................... $ 152,061 $177,954 $ 88,040
Foreign......................................................................... 26,243 21,462 31,635
Deferred tax credit, principally United States.................................... (117,573) (16,830) (16,287)
--------- -------- --------
$ 60,731 $182,586 $103,388
========= ======== ========
(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
--------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
% of % of % of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
--------- ------- --------- ------- --------- -------
(dollars in thousands)
Income from continuing operations before federal and
foreign income tax.................................. $ 546,924 $ 836,998 $ 611,306
========= ========= =========
Tax at statutory federal income tax rate.............. $ 191,423 35.0% $ 292,949 35.0% $ 213,957 35.0%
Tax exempt interest income............................ (118,961) (21.8) (114,113) (13.6) (108,859) (17.8)
Other, net............................................ (11,731) (2.1) 3,750 .4 (1,710) (.3)
--------- ----- --------- ----- --------- -----
Actual tax for continuing operations............ $ 60,731 11.1% $ 182,586 21.8% $ 103,388 16.9%
========= ===== ========= ===== ========= =====
(c) The tax effects of temporary differences that gave rise to deferred
income tax assets and liabilities were as follows:
December 31
-------------------------
1996 1995
-------- --------
(in thousands)
Deferred income tax assets
Unpaid claims............................................................................ $521,952 $523,535
Unearned premiums........................................................................ 142,153 130,226
Postretirement benefits.................................................................. 52,921 46,851
Other, net............................................................................... 25,150 9,567
-------- --------
Total.................................................................................. 742,176 710,179
-------- --------
Deferred income tax liabilities
Deferred policy acquisition costs........................................................ 185,805 173,936
Real estate assets....................................................................... 45,264 141,771
Unrealized appreciation of investments................................................... 128,516 164,326
Tax on the sale of discontinued operations............................................... 17,000 --
-------- --------
Total.................................................................................. 376,585 480,033
-------- --------
Net deferred income tax asset for continuing operations.............................. $365,591 $230,146
======== ========
54
18
(10) STOCK-BASED COMPENSATION PLANS
(a) In 1996, the Corporation adopted the Long-Term Stock Incentive Plan
(1996), which succeeded the Long-Term Stock Incentive Plan (1992). The Long-Term
Stock Incentive Plan (1996) provides for the granting of stock options,
performance shares, restricted stock and other stock-based awards to key
employees. The maximum number of shares of the Corporation's common stock in
respect to which stock-based awards may be granted under the 1996 plan is
10,230,000 shares plus up to an additional 3,770,000 shares to the extent shares
are reacquired by the Corporation subsequent to December 31, 1996. At December
31, 1996, 10,178,354 shares were available for grant under the 1996 Plan.
Stock options are granted at exercise prices not less than the fair market
value of the Corporation's common stock on the date of grant. The terms and
conditions upon which options become exercisable may vary among grants. Options
expire no later than ten years from the date of grant.
Information concerning stock options granted under the Long-Term Stock
Incentive Plans and a prior stock option plan is as follows:
1996 1995
------------------------------- -------------------------------------
Number Weighted Average Number Weighted Average
of Shares Exercise Price of Shares Exercise Price
---------- ---------------- ---------------- ----------------
Outstanding, beginning of year....... 6,565,034 $37.59 5,449,618 $35.11
Granted.............................. 2,504,048 48.82 1,994,230 41.12
Exercised............................ (782,403) 31.77 (738,332) 28.13
Forfeited............................ (227,850) 43.26 (140,482) 40.93
---------- ----------
Outstanding, end of year............. 8,058,829 41.48 6,565,034 37.59
========== ==========
Exercisable, end of year............. 4,852,845 38.10 3,961,586 35.35
1994
-------------------------------------
Number Weighted Average
of Shares Exercise Price
---------------- ----------------
Outstanding, beginning of year....... 4,167,516 $32.58
Granted.............................. 1,509,050 40.97
Exercised............................ (152,068) 20.62
Forfeited............................ (74,880) 39.91
----------
Outstanding, end of year............. 5,449,618 35.11
==========
Exercisable, end of year............. 3,330,456 31.23
December 31, 1996
------------------------------------------------------------------------------------------
Options Outstanding
----------------------------------------------------- Options Exercisable
Weighted Average --------------------------------
Range of Number Weighted Average Remaining Number Weighted Average
Option Exercise Price Outstanding Exercise Price Contractual Life Exercisable Exercise Price
- ------------------------------------- ----------- ---------------- ---------------- ----------- ----------------
$14.31 - $36.03.................... 1,511,685 $30.51 4.4 years 1,511,685 $30.51
40.97 - 55.19.................... 6,547,144 44.02 8.1 years 3,341,160 41.53
----------- -----------
8,058,829 41.48 7.4 years 4,852,845 38.10
========== ==========
Performance share awards are based on the achievement of various goals over
performance cycle periods. The cost of such awards is expensed over the
performance cycle. Such awards are payable in cash, in shares of the
Corporation's common stock or in a combination of both. Restricted stock awards
consist of shares of common stock of the Corporation granted at no cost. Shares
of restricted stock become outstanding when granted, receive dividends and have
voting rights. The shares are subject to forfeiture and to restrictions which
limit the sale or transfer during the restriction period. An amount equal to the
fair market value of the shares at the date of grant is expensed over the
restriction period.
The Corporation uses the intrinsic value based method of accounting for
stock-based compensation, under which compensation cost is measured as the
excess, if any, of the quoted market price of the stock at the grant date over
the amount an employee must pay to acquire the stock. Since the exercise price
of stock options granted under the Long-Term Stock Incentive Plans is not less
than the market price of the underlying stock on the date of grant, no
compensation cost has been recognized for such grants. The aggregate amount
charged against income with respect to performance share and restricted stock
awards was $10,156,000, $8,626,000 and $5,213,000 in 1996, 1995 and 1994,
respectively.
The following pro forma net income and earnings per share information has
been determined as if the Corporation had accounted for stock-based compensation
awarded under the Long-Term Stock Incentive Plans using the fair value based
method. Under the fair value method, the estimated fair value of awards would be
charged against income on a straight-line basis over the vesting period. The pro
forma effect on net income for 1995 and 1996 is not representative of the pro
forma effect on net income in future years because, as required by SFAS No. 123,
Accounting for Stock Based Compensation, no consideration has been given to
awards granted prior to 1995.
1996 1995
----------------------- -----------------------
As Pro As Pro
Reported Forma Reported Forma
-------- -------- -------- --------
(in thousands except for earnings per share)
Net Income........................................ $512,684 $496,640 $696,628 $692,360
Earnings Per Share................................ 2.90 2.81 3.93 3.90
55
19
The weighted average fair value of options granted under the Long-Term
Stock Incentive Plans during 1996 and 1995 were $11.04 and $10.18, respectively.
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes Model with the following weighted average assumptions. The
risk-free interest rates for 1996 and 1995 were 5.9% and 6.3%, respectively. The
expected volatility of the market price of the Corporation's common stock for
1996 and 1995 grants was 18.3% and 19.3%, respectively. The expected average
term of the granted options was 5 1/2 years and the dividend yield was 2.1% for
both years.
(b) The Corporation has a leveraged Employee Stock Ownership Plan (ESOP) in
which substantially all employees are eligible to participate. At its inception
in 1989, the ESOP used the proceeds of a $150,000,000 loan from the Corporation
to purchase 7,792,204 newly issued shares of the Corporation's common stock. The
loan is due in September 2004 and bears interest at 9%. The Corporation has
recorded the receivable from the ESOP as a separate reduction of shareholders'
equity on the consolidated balance sheets. This balance is reduced as repayments
are made on the loan principal.
The Corporation and its participating subsidiaries make semi-annual
contributions to the ESOP in amounts determined at the discretion of the
Corporation's Board of Directors. The contributions, together with the dividends
on the 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 1996, 1995 and 1994, cash contributions to the ESOP of $12,707,000,
$12,307,000 and $12,146,000, respectively, were charged against income.
Dividends on unallocated shares used for debt service by the ESOP were
$4,571,000, $4,468,000 and $4,615,000 in 1996, 1995 and 1994, respectively.
The number of allocated and unallocated shares held by the ESOP at December
31, 1996 were 3,093,619 and 4,155,844, respectively.
(c) The Corporation has a Stock Purchase Plan under which substantially all
employees are eligible to purchase shares of the Corporation's common stock
based on compensation. Shares are purchased at a price not less than 95% of the
fair market value on the date of grant. At December 31, 1996, there were 566,309
subscribed shares at a price of $52.81. The right to purchase such shares
expires in December 1998. No compensation cost has been recognized for such
rights. Had the fair value method been used, the cost under this method would
have been immaterial.
(11) EMPLOYEE BENEFITS
(a) The Corporation and its subsidiaries have several non-contributory
defined benefit pension plans covering substantially all employees. The benefits
are generally based on an employee's years of service and average compensation
during the last five years of employment. Pension costs are determined using the
projected unit credit method. The Corporation's policy is to make annual
contributions that meet the minimum funding requirements of the Employee
Retirement Income Security Act of 1974. Contributions are intended to provide
not only for benefits attributed to service to date but also for those expected
to be earned in the future.
The components of net pension cost were as follows:
Years Ended December 31
--------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
Service cost of current
period.................... $ 20,633 $ 20,422 $ 19,702
Interest cost on projected
benefit obligation........ 26,022 23,822 21,232
Actual return on plan
assets.................... (49,075) (68,542) (523)
Net amortization and
deferral.................. 17,468 42,730 (23,420)
-------- -------- --------
Net pension cost........ $ 15,048 $ 18,432 $ 16,991
======== ======== ========
56
20
The following table sets forth the plans' funded status and amounts recognized
in the balance sheets:
December 31
------------------
1996 1995
-------- --------
(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
$241,392 and $212,752............. $253,893 $224,821
Additional amount related to
projected future salary
increases......................... 107,004 131,473
-------- --------
Projected benefit obligation for
service rendered to date.......... 360,897 356,294
Plan assets at fair value............... 406,876 341,112
-------- --------
Projected benefit obligation in excess
of (less than) plan assets............ (45,979) 15,182
Unrecognized net gain from past
experience different from that
assumed............................... 98,567 36,196
Unrecognized prior service costs........ (4,648) (5,208)
Unrecognized net asset at January 1,
1985, being recognized principally over
19 years............................... 6,874 8,297
-------- --------
Pension liability included in other
liabilities......................... $ 54,814 $ 54,467
======== ========
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation at December 31, 1996 and 1995 was
7 3/4% and 7 1/2%, respectively, and the rate of increase in future compensation
levels was 5% for 1996 and 6% for 1995. The expected long term rate of return on
assets was 9% for both years.
The decrease in net pension cost in 1996 was due primarily to the reduction,
effective January 1, 1996, in the assumed rate of increase in future
compensation levels. Such reduction also resulted in a decrease in the portion
of the projected benefit obligation related to future salary increases.
Plan assets are principally invested in publicly traded stocks and bonds.
(b) The Corporation and its subsidiaries have a savings plan, the Capital
Accumulation Plan, in which substantially all employees are eligible to
participate. Under this plan, the employer makes a matching contribution equal
to 100% of each eligible employee's pre-tax elective contributions, up to 4% of
the employee's compensation. Contributions are invested at the election of the
employee in the Corporation's common stock or in various other investment funds.
Employer contributions of $14,519,000, $13,443,000 and $13,026,000 were charged
against income in 1996, 1995 and 1994, respectively.
(c) 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
-------------------------------
1996 1995 1994
------- ------- -------
(in thousands)
Service cost of current
period...................... $ 6,016 $ 5,687 $ 5,153
Interest cost on accumulated
benefit obligation.......... 8,601 7,949 7,420
------- ------- -------
Net postretirement benefit
cost...................... $14,617 $13,636 $12,573
======= ======= =======
The components of the accumulated postretirement benefit obligation were as
follows:
December 31
-------------------
1996 1995
-------- --------
(in thousands)
Retirees................................ $ 42,770 $ 38,735
Fully eligible active plan
participants.......................... 8,389 5,103
Other active plan participants.......... 63,448 74,572
-------- --------
Accumulated postretirement benefit
obligation............................ 114,607 118,410
Unrecognized net gain (loss) from past
experience different from that
assumed............................... 13,203 (933)
-------- --------
Postretirement benefit liability
included in other liabilities....... $127,810 $117,477
======== ========
The weighted average discount rate used in determining the actuarial present
value of the accumulated postretirement benefit obligation at December 31, 1996
and 1995 was 7 3/4% and 7 1/2%, respectively. At December 31, 1996, the weighted
average health care cost trend rate used to measure the accumulated
postretirement cost for medical benefits was 11 1/4% for 1997 and was assumed to
decrease gradually to 6% for the year 2008 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, 1996 by $19,040,000 and the aggregate of the
service and interest cost components of net postretirement benefit cost for the
year ended December 31, 1996 by $2,834,000.
57
21
(12) LEASES
The Corporation and its subsidiaries occupy office facilities under lease
agreements which expire at various dates through 2019; such leases are generally
renewed or replaced by other leases. In addition, the Corporation's subsidiaries
lease data processing, office and transportation equipment.
Most leases contain renewal options for increments ranging from two to ten
years; certain lease agreements provide for rent increases based on price-level
factors. All leases are operating leases.
Rent expense for continuing operations was as follows:
Years Ended December 31
---------------------------
1996 1995 1994
------- ------- -------
(in thousands)
Office facilities.................... $67,587 $66,996 $66,188
Equipment............................ 11,823 12,788 14,632
------- ------- -------
$79,410 $79,784 $80,820
======= ======= =======
At December 31, 1996, future minimum rental payments required under
non-cancellable operating leases of continuing operations were as follows:
Years Ending
December 31 (in thousands)
- ------------
1997..................................... $ 68,957
1998..................................... 67,417
1999..................................... 65,283
2000..................................... 62,614
2001..................................... 55,752
After 2001............................... 328,366
--------
$648,389
========
(13) REINSURANCE
Premiums earned and claims incurred are reported net of reinsurance in the
consolidated statements of income.
The effect of reinsurance on the premiums earned of the property and casualty
insurance subsidiaries was as follows:
Years Ended December 31
---------------------------------------
1996 1995 1994
----------- ----------- -----------
(in thousands)
Direct.................... $ 5,023,489 $ 4,754,423 $ 4,415,080
Reinsurance assumed....... 533,002 712,080 641,615
Reinsurance ceded......... (987,235) (1,319,341) (1,280,412)
----------- ----------- -----------
Premiums earned......... $ 4,569,256 $ 4,147,162 $ 3,776,283
=========== =========== ===========
The Royal & Sun Alliance Insurance Group plc is the beneficial owner of 5.2%
of the Corporation's common stock. A property and casualty insurance subsidiary
of the Corporation has assumed on a quota share basis a portion of the property
and casualty insurance business written by certain subsidiaries of Royal & Sun
Alliance. The assumed reinsurance premiums earned of the property and casualty
insurance subsidiaries include $282,905,000, $340,767,000 and $264,343,000 in
1996, 1995 and 1994, respectively, from such business.
A portion of the U.S. insurance business written by the Corporation's property
and casualty insurance subsidiaries has been reinsured on a quota share basis
with a subsidiary of Royal & Sun Alliance. The ceded reinsurance premiums earned
of the property and casualty insurance subsidiaries include $348,024,000,
$520,528,000 and $489,727,000 in 1996, 1995 and 1994, respectively, from such
reinsurance.
Reinsurance recoveries by the property and casualty insurance subsidiaries
which have been deducted from insurance claims were $651,889,000, $936,080,000
and $962,332,000 in 1996, 1995 and 1994, respectively. Such amounts included
recoveries of $251,361,000, $333,759,000 and $337,077,000 in 1996, 1995 and
1994, respectively, from the subsidiary of Royal & Sun Alliance.
Reinsurance recoverable on property and casualty unpaid claims included
approximately $471,000,000 and $681,000,000 at December 31, 1996 and 1995,
respectively, from the subsidiary of Royal & Sun Alliance.
Effective January 1, 1997, the reinsurance agreements with Royal & Sun
Alliance have been terminated.
The property and casualty insurance subsidiaries of the Corporation entered
into a stop loss reinsurance agreement with a subsidiary of Royal & Sun
Alliance, effective year end 1985, relating to medical malpractice unpaid
claims. On December 31, 1995, the property and casualty insurance subsidiaries
exercised a commutation provision under this agreement, which resulted in an
amount due from the Royal & Sun Alliance subsidiary of $191,194,000. The amount
due was received in January 1996.
58
22
(14) 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 complex loss reserving
process.
The uncertainties relating to asbestos and toxic waste claims on insurance
policies written many years ago are exacerbated by judicial and legislative
interpretations of coverage that in some cases have tended to erode the clear
and express intent of such policies and in others have expanded theories of
liability. The industry is engaged in extensive litigation over these coverage
and liability issues and is thus confronted with a continuing uncertainty in its
effort to quantify these exposures.
In 1993, Pacific Indemnity Company, a subsidiary of the Corporation, entered
into a global settlement agreement with Continental Casualty Company (a
subsidiary of CNA Financial Corporation), Fibreboard Corporation, and attorneys
representing claimants against Fibreboard for all future asbestos-related bodily
injury claims against Fibreboard. This agreement is subject to 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 reached a separate agreement for
the handling of all asbestos-related bodily injury claims pending on August 26,
1993 against Fibreboard. Pacific Indemnity's obligation under this agreement
with respect to such pending claims is approximately $635,000,000, the final
$450,000,000 of which was paid during 1996. Assets designated as funds held for
asbestos-related settlement were used to pay this obligation. The agreement
further provides that the total responsibility of both insurers with respect to
pending and future asbestos-related bodily injury claims against Fibreboard will
be shared between Pacific Indemnity and Continental Casualty on an approximate
35% and 65% basis, respectively.
Pacific Indemnity, Continental Casualty and Fibreboard entered into a
trilateral agreement to settle all present and future asbestos-related bodily
injury claims resulting from insurance policies that were, or may have been,
issued to Fibreboard by the two insurers. The trilateral agreement will be
triggered if the global settlement agreement is disapproved by the United States
Supreme 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.
In 1995, the United States District Court of the Eastern District of Texas
approved the global settlement agreement and the trilateral agreement. The
judgments approving these agreements were appealed to the United States Court of
Appeals for the Fifth Circuit. In July 1996, the Fifth Circuit Court affirmed
the 1995 judgments of the District Court. The affirmation of these agreements
had no effect on the amount of loss reserves provided for the settlement. A
petition for re-hearing the global settlement agreement before the entire Fifth
Circuit Court was denied. An appeal to the United States Supreme Court by the
objectors to the global settlement has been filed and the Supreme Court will
decide whether to hear this matter. The trilateral agreement, however, was not
appealed to the United States Supreme Court and is now final. As a result,
management believes that the uncertainty of Pacific Indemnity's exposure with
respect to asbestos-related bodily injury claims against Fibreboard has been
eliminated.
Since 1993, a California Court of Appeal has agreed, in response to a request
by Pacific Indemnity, Continental Casualty and Fibreboard, to delay its
decisions regarding asbestos-related insurance coverage issues 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.
59
23
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.
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
federal "Superfund" law and similar state statutes, when potentially responsible
parties (PRPs) fail to handle the clean-up, regulators have the work done and
then attempt to establish legal liability against the PRPs. The PRPs disposed of
toxic materials at a waste dump site or transported the materials to the site.
Insurance policies issued to PRPs were not intended to cover the clean-up costs
of pollution and, in many cases, did not intend to cover the pollution itself.
As the cost of environmental clean-up continues to grow, PRPs and others have
increasingly filed claims with their insurance carriers. Litigation against
insurers extends to issues of liability, coverage and other policy provisions.
There is great uncertainty involved in estimating the property and casualty
insurance subsidiaries' liabilities related to these claims. First, the
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 unpaid claims, net
of reinsurance recoverable, and a reconciliation of the net liability to the
corresponding liability on a gross basis is as follows:
1996 1995 1994
---------- ---------- ----------
(in thousands)
Gross liability, beginning
of year.................. $9,588,141 $8,913,220 $8,235,442
Reinsurance recoverable,
beginning of year........ 1,973,666 1,980,340 1,785,396
---------- ---------- ----------
Net liability, beginning of
year..................... 7,614,475 6,932,880 6,450,046
---------- ---------- ----------
Net incurred claims and
claim expenses related to
Current year........... 3,053,600 2,705,800 2,549,100
Prior years............ (42,845) (35,819) (29,741)
---------- ---------- ----------
3,010,755 2,669,981 2,519,359
---------- ---------- ----------
Net payments for claims and
claim expenses related to
Current year........... 980,006 737,686 764,525
Prior years............ 1,889,400 1,250,700 1,272,000
---------- ---------- ----------
2,869,406 1,988,386 2,036,525
---------- ---------- ----------
Net liability, end of
year..................... 7,755,824 7,614,475 6,932,880
Reinsurance recoverable,
end of year.............. 1,767,885 1,973,666 1,980,340
---------- ---------- ----------
Gross liability, end of
year..................... $9,523,709 $9,588,141 $8,913,220
========== ========== ==========
During 1996, the property and casualty insurance subsidiaries experienced
overall favorable development of $42,845,000 on net unpaid claims established as
of the previous year-end. This compares with favorable development of
$35,819,000 and $29,741,000 in 1995 and 1994, respectively. Such redundancies
were reflected in operating results in these respective years. Each of the past
three years benefited from favorable claim severity trends for certain liability
classes; this was offset each year in varying degrees by 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, 1996 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.
60
24
(15) BUSINESS SEGMENTS
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 real estate subsidiary has been 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 continuing operations before income tax and
identifiable assets of each industry segment were as follows:
Years Ended December 31
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
Revenues (in thousands)
Property and Casualty Insurance
Premiums earned............................................................... $ 4,569,256 $ 4,147,162 $ 3,776,283
Investment income............................................................. 656,135 613,242 570,531
Real Estate....................................................................... 319,787 287,795 204,849
----------- ----------- -----------
5,545,178 5,048,199 4,551,663
Corporate investment income....................................................... 55,425 54,445 49,405
Realized investment gains (losses)
Property and Casualty Insurance............................................... 65,275 95,030 55,203
Corporate..................................................................... 14,654 13,822 (1,078)
----------- ----------- -----------
Total revenues.............................................................. $ 5,680,532 $ 5,211,496 $ 4,655,193
=========== =========== ===========
Income (loss) from continuing operations before income tax
Property and Casualty Insurance................................................... $ 676,398 $ 697,141 $ 552,170
Real Estate....................................................................... (235,855) 7,696 (5,950)
----------- ----------- -----------
440,543 704,837 546,220
Corporate......................................................................... 26,452 23,309 10,961
Realized investment gains (losses)
Property and Casualty Insurance............................................... 65,275 95,030 55,203
Corporate..................................................................... 14,654 13,822 (1,078)
----------- ----------- -----------
Income from continuing operations before federal and foreign income tax..... $ 546,924 $ 836,998 $ 611,306
=========== =========== ===========
December 31
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
(in thousands)
Identifiable assets
Property and Casualty Insurance................................................... $16,577,935 $16,157,688 $14,435,933
Real Estate....................................................................... 1,641,231 1,842,831 1,796,706
----------- ----------- -----------
Total identifiable assets................................................... 18,219,166 18,000,519 16,232,639
Corporate......................................................................... 959,953 959,384 945,397
Adjustments and eliminations...................................................... (83,661) (168,271) (148,877)
Net assets of discontinued operations............................................. 843,408 844,645 731,810
----------- ----------- -----------
Total assets................................................................ $19,938,866 $19,636,277 $17,760,969
=========== =========== ===========
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
------------------------------------------
1996 1995 1994
---------- ---------- ----------
(in thousands)
Premiums earned
Personal........................................................................ $ 969,710 $ 847,474 $ 826,068
Commercial...................................................................... 3,315,526 2,952,751 2,677,914
Reinsurance Assumed............................................................. 284,020 346,937 272,301
---------- ---------- ----------
Total premiums earned..................................................... $4,569,256 $4,147,162 $3,776,283
========== ========== ==========
Income (loss) from operations before income tax
Personal........................................................................ $ 67,244 $ 97,301 $ (3,247)
Commercial...................................................................... (18,162) (6,957) (3,546)
Reinsurance Assumed............................................................. (18,740) 3,810 (1,518)
---------- ---------- ----------
Underwriting income (loss)................................................ 30,342 94,154 (8,311)
Net investment income........................................................... 646,056 602,987 560,481
---------- ---------- ----------
Income from operations before income tax.................................. $ 676,398 $ 697,141 $ 552,170
========== ========== ==========
61
25
The premiums earned and underwriting income or loss by groupings of classes
of business for prior years include certain reclassifications to conform with
the 1996 presentation, which more closely reflects the way the property and
casualty business is now managed.
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 has also been obtained from
treaty reinsurance assumed, principally from Royal & Sun Alliance.
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
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
(in thousands)
Revenues
United States................................................................... $ 4,145,638 $ 3,715,023 $ 3,508,243
International................................................................... 1,079,753 1,045,381 838,571
----------- ----------- -----------
Total......................................................................... $ 5,225,391 $ 4,760,404 $ 4,346,814
=========== =========== ===========
Income from operations before income tax
United States................................................................... $ 571,575 $ 592,684 $ 479,153
International................................................................... 104,823 104,457 73,017
----------- ----------- -----------
Total......................................................................... $ 676,398 $ 697,141 $ 552,170
=========== =========== ===========
December 31
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
(in thousands)
Identifiable assets
United States................................................................... $14,573,417 $14,055,334 $12,937,447
International................................................................... 2,004,518 2,102,354 1,498,486
----------- ----------- -----------
Total......................................................................... $16,577,935 $16,157,688 $14,435,933
=========== =========== ===========
Foreign currency translation gains or losses credited or charged directly
to the separate component of shareholders' equity were as follows:
Years Ended December 31
-------------------------------
1996 1995 1994
-------- -------- -------
(in thousands)
Gains (losses) on translation of foreign currencies............................................ $(15,129) $(15,931) $14,517
Income tax (credit)
Current.................................................................................... (3,822) (5,994) 4,633
Deferred................................................................................... 938 3,262 445
-------- -------- -------
$(12,245) $(13,199) $ 9,439
======== ======== =======
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(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) On March 1, 1996, 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. At the same time, the Board of Directors approved
a two-for-one stock split payable to shareholders of record as of April 19,
1996.
The activity of the Corporation's common stock was as follows:
Years Ended December 31
-----------------------------------------
1996 1995 1994
----------- ---------- ----------
(number of shares)
Common stock issued
Balance, beginning of year........................................................ 87,819,355 87,798,286 87,709,465
Two-for-one stock split........................................................... 87,819,355 -- --
Shares issued upon exchange of long term debt..................................... 480,464 -- --
Share activity under option and incentive plans................................... (35,001) 21,069 88,821
----------- ---------- ----------
Balance, end of year.......................................................... 176,084,173 87,819,355 87,798,286
----------- ---------- ----------
Treasury stock
Balance, beginning of year........................................................ 518,468 977,580 --
Two-for-one stock split........................................................... 518,468 -- --
Repurchase of shares.............................................................. 1,700,000 -- 1,001,500
Share activity under option and incentive plans................................... (1,513,754) (459,112) --
Shares issued -- other............................................................ -- -- (23,920)
----------- ---------- ----------
Balance, end of year.......................................................... 1,223,182 518,468 977,580
----------- ---------- ----------
Common stock outstanding, end of year......................................... 174,860,991 87,300,887 86,820,706
=========== ========== ==========
(c) The Corporation has a Shareholder Rights Plan under which each
shareholder has one-quarter 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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27
(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
---------------------------------------------------------
1996 1995
------------------------- -------------------------
GAAP Statutory GAAP Statutory
---------- ---------- ---------- ----------
(in thousands)
Property and casualty insurance subsidiaries*....................... $3,788,655 $2,514,203 $3,617,144 $2,314,720
Discontinued life and health insurance operations................... 843,408 328,327 844,645 317,624
---------- ---------- ---------- ----------
4,632,063 $2,842,530 4,461,789 $2,632,344
========== ==========
Corporate and eliminations.......................................... 830,811 800,940
---------- ----------
$5,462,874 $5,262,729
========== ==========
A comparison of GAAP and statutory net income (loss) is as follows:
Years Ended December 31
----------------------------------------------------------------------------------
1996 1995 1994
---------------------- ----------------------- -----------------------
GAAP Statutory GAAP Statutory GAAP Statutory
-------- --------- --------- --------- --------- ---------
(in thousands)
Property and casualty insurance
subsidiaries*............................ $453,300 $560,193 $ 640,834 $571,199 $ 506,825 $468,861
Discontinued life and health insurance
operations............................... 26,491** 33,988 42,216 26,828 20,551 (4,264)
-------- -------- --------- -------- --------- --------
479,791 $594,181 683,050 $598,027 527,376 $464,597
======== ======== ========
Corporate and eliminations................. 32,893 13,578 1,093
-------- --------- ---------
$512,684 $ 696,628 $ 528,469
======== ========= =========
* A property and casualty subsidiary owns the real estate subsidiaries.
** Includes the $22,000,000 after tax loss on disposal.
(e) The Corporation's ability to continue to pay dividends to shareholders
and interest on debt obligations is affected by the availability of liquid
assets held by the Corporation and by the dividend paying ability of its
property and casualty insurance subsidiaries. Various state insurance laws
restrict the Corporation's property and casualty insurance subsidiaries as to
the amount of dividends they may pay to the Corporation without the prior
approval of regulatory authorities. The restrictions are generally based on net
income and on certain levels of policyholders' surplus as determined in
accordance with statutory accounting practices. Dividends in excess of such
thresholds are considered "extraordinary" and require prior regulatory approval.
During 1996, these subsidiaries paid dividends to the Corporation totaling
$250,000,000.
The maximum dividend distribution that may be made by the property and
casualty insurance subsidiaries to the Corporation during 1997 without prior
approval is approximately $438,000,000.
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28
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, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. 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, 1996 and 1995 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
As described in Notes (1)(g) and (2) to the financial statements, The Chubb
Corporation changed its methods of accounting for impairment of long-lived
assets in 1996 and for investments in certain debt and equity securities in
1994.
March 5, 1997 /s/ ERNST & YOUNG LLP
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29
Quarterly Financial Data
Summarized unaudited quarterly financial data for 1996 and 1995 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
------------------- ------------------- ------------------- -------------------
1996 1995 1996 1995 1996 1995 1996 1995
-------- -------- -------- -------- -------- -------- -------- --------
(in millions except per share data)
Revenues............................ $1,481.6 $1,226.0 $1,382.0 $1,299.4 $1,357.0 $1,325.7 $1,459.9 $1,360.4
Claims and expenses................. 1,311.2 1,051.9 1,174.3 1,080.2 1,168.3 1,124.6 1,479.8 1,117.8
Federal and foreign income tax
(credit).......................... 30.0 34.0 42.9 48.5 34.4 43.1 (46.6) 57.0
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations...................... 140.4 140.1 164.8 170.7 154.3 158.0 26.7 185.6
Income (loss) from discontinued
operations, net of tax.......... 11.0 6.6 9.5 14.3 10.9 13.4 (4.9) 7.9
-------- -------- -------- -------- -------- -------- -------- --------
Net income.................... $ 151.4 $ 146.7 $ 174.3 $ 185.0 $ 165.2 $ 171.4 $ 21.8 $ 193.5
======== ======== ======== ======== ======== ======== ======== ========
Per share data
Income from continuing
operations...................... $ .79 $ .79 $ .93 $ .96 $ .87 $ .90 $ .16 $ 1.05
Income (loss) from discontinued
operations...................... .06 .04 .05 .08 .06 .07 (.02) .04
-------- -------- -------- -------- -------- -------- -------- --------
Net income.................... $ .85 $ .83 $ .98 $ 1.04 $ .93 $ .97 $ .14 $ 1.09
======== ======== ======== ======== ======== ======== ======== ========
Underwriting ratios
Losses to premiums earned......... 68.8% 63.3% 64.3% 64.5% 65.4% 65.4% 66.4% 65.5%
Expenses to premiums written...... 32.5 33.0 32.0 31.9 31.8 31.5 32.0 32.1
-------- -------- -------- -------- -------- -------- -------- --------
Combined...................... 101.3% 96.3% 96.3% 96.4% 97.2% 96.9% 98.4% 97.6%
======== ======== ======== ======== ======== ======== ======== ========
In February 1997, the Corporation entered into a definitive agreement to
sell its life and health insurance operations. As a result, these operations
have been classified as discontinued operations. Loss from discontinued
operations for the fourth quarter of 1996 reflects a charge of $22.0 million or
$.12 per share for the after-tax loss on the sale.
Claims and expenses for the fourth quarter of 1996 include a $255.0 million
write-down of the carrying value of certain real estate assets to their
estimated fair value. Income from continuing operations for the quarter has been
reduced by a charge of $160.0 million or $.89 per share for the after-tax effect
of the write-down.
Per share amounts have been retroactively adjusted to reflect the
two-for-one stock split effective April 19, 1996.
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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 1996 and 1995.
1996
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Common stock prices
High.................................................................... $52.13 $49.88 $50.00 $55.50
Low..................................................................... 46.94 44.13 41.38 45.50
Dividends declared.......................................................... .27 .27 .27 .27
1995
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Common stock prices
High.................................................................... $40.50 $42.56 $48.44 $50.25
Low..................................................................... 38.25 38.75 39.13 45.06
Dividends declared.......................................................... .24 1/2 .24 1/2 .24 1/2 .24 1/2
The per share amounts have been retroactively adjusted to reflect the
two-for-one stock split effective April 19, 1996.
At March 1, 1997, there were approximately 8,425 common shareholders of
record.
67