1
SUPPLEMENTARY FINANCIAL DATA
IN MILLIONS
YEARS ENDED DECEMBER 31
1997 1996 1995
-------- -------- --------
PROPERTY AND CASUALTY INSURANCE
UNDERWRITING
Net Premiums Written................................... $5,448.0 $4,773.8 $4,306.0
Increase in Unearned Premiums.......................... (290.6) (204.5) (158.8)
-------- -------- --------
Premiums Earned........................................ 5,157.4 4,569.3 4,147.2
-------- -------- --------
Claims and Claim Expenses.............................. 3,307.0 3,010.8 2,670.0
Operating Costs and Expenses........................... 1,777.4 1,547.4 1,393.3
Increase in Deferred Policy Acquisition Costs.......... (75.7) (42.5) (29.2)
Dividends to Policyholders............................. 31.7 23.3 18.9
-------- -------- --------
Underwriting Income Before Income Tax.................. 117.0 30.3 94.2
Federal and Foreign Income Tax......................... 39.5 13.2 38.5
-------- -------- --------
UNDERWRITING INCOME.................................... 77.5 17.1 55.7
-------- -------- --------
INVESTMENTS
Investment Income Before Expenses and Income Tax....... 721.4 656.2 613.3
Investment Expenses.................................... 10.2 10.1 10.3
-------- -------- --------
Investment Income Before Income Tax.................... 711.2 646.1 603.0
Federal and Foreign Income Tax......................... 118.9 101.9 95.8
-------- -------- --------
INVESTMENT INCOME...................................... 592.3 544.2 507.2
-------- -------- --------
PROPERTY AND CASUALTY INCOME.............................. 669.8 561.3 562.9
-------- -------- --------
REAL ESTATE
Revenues.................................................. 616.1 319.8 287.8
Cost of Sales and Expenses................................ 624.7 555.7(a) 280.1
-------- -------- --------
Real Estate Income (Loss) Before Income Tax............... (8.6) (235.9) 7.7
Federal Income Tax (Credit)............................... (3.5) (89.1) 1.7
-------- -------- --------
REAL ESTATE INCOME (LOSS)................................. (5.1) (146.8)(a) 6.0
-------- -------- --------
CORPORATE, NET OF TAX....................................... 36.4 19.7 14.8
-------- -------- --------
CONSOLIDATED OPERATING INCOME FROM CONTINUING
OPERATIONS........................................... 701.1 434.2 583.7
REALIZED INVESTMENT GAINS FROM CONTINUING OPERATIONS,
NET OF TAX................................................ 68.4 52.0 70.7
-------- -------- --------
CONSOLIDATED INCOME FROM CONTINUING OPERATIONS......... 769.5 486.2 654.4
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX (B)......... -- 26.5 42.2
-------- -------- --------
CONSOLIDATED NET INCOME................................ $ 769.5 $ 512.7 $ 696.6
======== ======== ========
(a) The 1996 real estate loss reflects a net charge of $160.0 million for the
after-tax effect of a $255.0 million write-down of the carrying value of
certain real estate assets to their estimated fair value.
(b) In May 1997, the Corporation sold its life and health insurance operations,
which have been classified as discontinued operations.
The above federal and foreign income tax provisions represent allocations of the
consolidated provision.
15
2
PROPERTY AND CASUALTY UNDERWRITING RESULTS
NET PREMIUMS WRITTEN (In Millions of Dollars)
1997 1996 1995 1994 1993
Personal Insurance
Automobile...................... $ 298.6 $ 243.1 $ 200.3 $ 188.0 $ 192.1
Homeowners...................... 697.4 546.1 455.6 436.5 434.1
Other........................... 310.4 250.0 210.9 204.3 201.6
-------- -------- -------- -------- --------
Total Personal............. 1,306.4 1,039.2 866.8 828.8 827.8
-------- -------- -------- -------- --------
Commercial Insurance
Multiple Peril.................. 813.6 671.0 575.7 522.6 480.8
Casualty........................ 915.8 818.0 717.3 667.8 728.9(a)
Workers' Compensation........... 296.7 243.7 223.4 201.6 181.1
Property and Marine............. 583.0 495.0 426.3 360.0 277.5
Executive Protection............ 891.4 775.7 647.0 596.4 515.2
Other........................... 644.9 528.7 481.0 458.8 415.1
-------- -------- -------- -------- --------
Total Commercial........... 4,145.4 3,532.1 3,070.7 2,807.2 2,598.6(a)
-------- -------- -------- -------- --------
Total Before Reinsurance
Assumed................. 5,451.8 4,571.3 3,937.5 3,636.0 3,426.4(a)
Reinsurance Assumed............... (3.8) 202.5 368.5 315.2 219.9
-------- -------- -------- -------- --------
Total...................... $5,448.0 $4,773.8 $4,306.0 $3,951.2 $3,646.3(a)
======== ======== ======== ======== ========
(a) Includes a $125.0 million return premium to the Corporation's property and
casualty insurance subsidiaries related to the commutation of a medical
malpractice reinsurance agreement. Excluding this return premium, net
premiums written were $603.9 million for Casualty, $2,473.6 million for
Commercial, $3,301.4 million for Total Before Reinsurance Assumed and
$3,521.3 million in Total.
A portion of the increase in net premiums written in both 1996 and 1997 was due
to changes to the reinsurance agreements with the Royal & Sun Alliance Insurance
Group plc. Effective January 1, 1996, these agreements were amended to reduce
the portion of each company's business reinsured with the other. The agreements
were terminated effective January 1, 1997.
COMBINED LOSS AND EXPENSE RATIOS
Personal Insurance
Automobile...................... 86.6% 86.5% 87.4% 96.3% 97.5%
Homeowners...................... 88.9 104.3 93.8 110.2 100.1
Other........................... 66.9 69.3 72.6 80.7 84.2
-------- -------- -------- -------- --------
Total Personal............. 83.1 91.7 87.1 99.8 95.6
-------- -------- -------- -------- --------
Commercial Insurance
Multiple Peril.................. 118.7 118.1 110.0 112.4 117.2
Casualty........................ 113.5 113.3 113.8 101.9 175.8(b)
Workers' Compensation........... 105.0 101.8 95.1 103.9 117.3
Property and Marine............. 105.5 97.8 92.9 102.5 98.7
Executive Protection............ 74.5 76.5 82.1 81.4 78.4
Other........................... 88.9 89.3 95.1 100.2 99.1
-------- -------- -------- -------- --------
Total Commercial........... 100.7 99.7 99.3 99.4 121.4(b)
-------- -------- -------- -------- --------
Total Before Reinsurance
Assumed................. 96.6 97.9 96.5 99.5 115.0(b)
Reinsurance Assumed............... N/M N/M 99.2 100.1 112.4
-------- -------- -------- -------- --------
Total...................... 96.9% 98.3% 96.8% 99.5% 114.8%(b)
======== ======== ======== ======== ========
(b) Includes the effects of a $675.0 million increase in unpaid claims related
to an agreement for the settlement of asbestos-related litigation and the
$125.0 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, 98.3% for Total Before Reinsurance Assumed and 99.0% in Total.
The combined loss and expense ratio, expressed as a percentage, is the key
measure of underwriting profitability traditionally used in the property and
casualty insurance business. It is the sum of the ratio of losses to premiums
earned plus the ratio of underwriting expenses to premiums written after
reducing both premium amounts by dividends to policyholders.
16
3
TEN YEAR FINANCIAL SUMMARY
(in millions except for per share amounts)
FOR THE YEAR 1997 1996 1995 1994
REVENUES
Property and Casualty Insurance
Premiums Earned................................... $5,157.4 $4,569.3 $4,147.2 $3,776.3
Investment Income................................. 721.4 656.2 613.3 570.5
Real Estate........................................ 616.1 319.8 287.8 204.9
Corporate Investment Income........................ 63.9 55.4 54.4 49.4
Realized Investment Gains (Losses)................. 105.2 79.8 108.8 54.1
TOTAL REVENUES.................................. 6,664.0 5,680.5 5,211.5 4,655.2
COMPONENTS OF NET INCOME*
Property and Casualty Insurance
Underwriting Income (Loss)(b)..................... 77.5 17.1 55.7 (7.8)
Investment Income................................. 592.3 544.2 507.2 475.0
Real Estate Income (Loss).......................... (5.1) (146.8)(e) 6.0 (2.0)
Corporate Income (Loss)............................ 36.4 19.7 14.8 7.6
OPERATING INCOME FROM CONTINUING OPERATIONS..... 701.1 434.2 583.7 472.8
Realized Investment Gains (Losses) from
Continuing Operations........................... 68.4 52.0 70.7 35.1
INCOME FROM CONTINUING OPERATIONS............... 769.5 486.2 654.4 507.9
Income from Discontinued Operations................ -- 26.5 42.2 20.6
NET INCOME...................................... 769.5 512.7 696.6 528.5
DILUTED EARNINGS PER SHARE
Operating Income from Continuing Operations........ $4.00 $2.44 $3.27 $2.66
Income from Continuing Operations.................. 4.39 2.73 3.67 2.85
Income from Discontinued Operations................ -- .15 .23 .11
Net Income(b)...................................... 4.39 2.88(e) 3.90 2.96
DIVIDENDS DECLARED ON COMMON STOCK................... 198.3 188.7 170.6 161.1
Per Share.......................................... 1.16 1.08 .98 .92
CHANGE IN UNREALIZED APPRECIATION OR DEPRECIATION OF
INVESTMENTS, NET................................... 161.4 (107.2) 470.2 (487.9)
AT YEAR END
TOTAL ASSETS......................................... $19,615.6 $19,938.9 $19,636.3 $17,761.0
INVESTED ASSETS
Property and Casualty Insurance.................... 12,777.3 11,190.7 10,013.6 8,938.8
Corporate.......................................... 1,272.3 890.4 906.6 879.5
UNPAID CLAIMS........................................ 9,772.5 9,523.7 9,588.2 8,913.2
LONG TERM DEBT....................................... 398.6 1,070.5 1,150.8 1,279.6
TOTAL SHAREHOLDERS' EQUITY........................... 5,657.1 5,462.9 5,262.7 4,247.0
Per Common Share................................... 33.53 31.24 30.14 24.46
* The federal and foreign income tax provided for each component of income
represents its allocated portion of the consolidated provision.
Prior year earnings per share amounts have been restated to reflect the
changes prescribed by Statement of Financial Accounting Standards No. 128,
Earnings per Share. The diluted per share amounts include any dilutive effects
of convertible securities and of awards under employee stock-based
compensation plans.
In May 1997, the Corporation sold its life and health insurance operations,
which 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 $220.5 million resulting from the
change in accounting principle.
36
4
FOR THE YEAR 1993 1992 1991 1990 1989 1988
REVENUES
Property and Casualty Insurance
Premiums Earned................................... $3,504.8(a) $3,163.3 $3,037.2 $2,836.1 $2,693.5 $2,705.5
Investment Income................................. 541.7 501.1 477.0 463.4 426.2 364.1
Real Estate........................................ 160.6 150.0 140.9 174.9 221.3 155.2
Corporate Investment Income........................ 52.7 57.2 46.3 39.6 25.2 17.8
Realized Investment Gains (Losses)................. 210.6 174.1 61.1 39.6 40.2 (19.6)
TOTAL REVENUES.................................. 4,470.4 4,045.7 3,762.5 3,553.6 3,406.4 3,223.0
COMPONENTS OF NET INCOME*
Property and Casualty Insurance
Underwriting Income (Loss)(b)..................... (337.5)(c) (15.3) 18.6 20.7(d) (25.0) 15.8
Investment Income................................. 455.4 422.8 397.6 371.4 330.1 290.6
Real Estate Income (Loss).......................... (2.2) 10.0 25.0 40.0 42.0 40.0
Corporate Income (Loss)............................ 14.4 19.8 16.3 14.7 .7 (5.3)
OPERATING INCOME FROM CONTINUING OPERATIONS..... 130.1 437.3 457.5 446.8 347.8 341.1
Realized Investment Gains (Losses) from
Continuing Operations........................... 137.3 114.8 40.3 25.8 26.4 (14.0)
INCOME FROM CONTINUING OPERATIONS............... 267.4 552.1 497.8 472.6 374.2 327.1
Income from Discontinued Operations................ 76.8 65.0 54.2 49.5 46.6 32.5
NET INCOME...................................... 324.2(f) 617.1 552.0 522.1 420.8 359.6
DILUTED EARNINGS PER SHARE
Operating Income from Continuing Operations........ $ .77 $2.47 $2.61 $2.59 $2.03 $2.03
Income from Continuing Operations.................. 1.52 3.10 2.84 2.74 2.18 1.94
Income from Discontinued Operations................ .42 .36 .30 .28 .27 .19
Net Income(b)...................................... 1.83(c)(f) 3.46 3.14 3.02(d) 2.45 2.13
DIVIDENDS DECLARED ON COMMON STOCK................... 150.8 139.6 127.8 109.1 96.5 87.8
Per Share.......................................... .86 .80 .74 .66 .58 .54
CHANGE IN UNREALIZED APPRECIATION OR DEPRECIATION OF
INVESTMENTS, NET................................... 46.5 (82.1) 12.2 (19.4) 70.3 29.9
AT YEAR END
TOTAL ASSETS......................................... $16,729.5 $15,197.6 $13,885.9 $12,347.8 $11,390.4 $9,699.4
INVESTED ASSETS
Property and Casualty Insurance.................... 8,403.1 7,767.5 7,086.6 6,297.8 5,793.7 5,153.0
Corporate.......................................... 965.7 955.8 840.3 688.4 647.8 366.2
UNPAID CLAIMS........................................ 8,235.4 7,220.9 6,591.3 6,016.4 5,605.0 4,585.8
LONG TERM DEBT....................................... 1,267.2 1,065.6 1,045.8 812.6 604.2 353.7
TOTAL SHAREHOLDERS' EQUITY........................... 4,196.1 3,954.4 3,541.6 2,882.6 2,603.7 2,238.4
Per Common Share................................... 23.92 22.59 20.37 17.60 15.42 13.77
(a) Premiums earned have been increased by a $125.0 million return premium to
the Corporation's property and casualty insurance subsidiaries related to
the commutation of a medical malpractice reinsurance agreement.
(b) Net income has been increased by tax benefits of $6.4 million or $.04 per
share in 1992, $7.2 million or $.04 per share in 1991, $10.8 million or $.06
per share in 1990, $19.2 million or $.11 per share in 1989 and $20.4 million
or $.12 per share in 1988 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 $357.5 million or $1.96 per
share for the after-tax effects of a $675.0 million increase in unpaid
claims related to an agreement for the settlement of asbestos-related
litigation and the $125.0 million 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 $14.0 million 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 $160.0 million or $.89 per
share for the after-tax effect of a $255.0 million write-down of the
carrying value of certain real estate assets to their estimated fair value.
(f) Net income has been reduced by a one-time charge of $20.0 million or $.11
per share for the cumulative effect of changes in accounting principles
resulting from the Corporation's adoption of Statements of Financial
Accounting Standards No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions, and No. 109, Accounting for Income Taxes.
Income before the cumulative effect of changes in accounting principles was
$344.2 million or $1.94 per share.
37
5
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
IN MILLIONS
YEARS ENDED DECEMBER 31
1997 1996 1995
REVENUES -------- -------- --------
Premiums Earned (Note 11).............................. $5,157.4 $4,569.3 $4,147.2
Investment Income (Note 3)............................. 785.3 711.6 667.7
Real Estate............................................ 616.1 319.8 287.8
Realized Investment Gains (Note 3)..................... 105.2 79.8 108.8
-------- -------- --------
TOTAL REVENUES.................................... 6,664.0 5,680.5 5,211.5
-------- -------- --------
CLAIMS AND EXPENSES
Insurance Claims (Notes 11 and 13)..................... 3,307.0 3,010.8 2,670.0
Amortization of Deferred Policy Acquisition Costs (Note
5).................................................... 1,402.6 1,238.0 1,121.0
Other Insurance Operating Costs and Expenses........... 330.8 290.2 262.0
Real Estate Cost of Sales and Expenses (Note 4)........ 624.7 555.7 280.1
Investment Expenses.................................... 12.0 12.3 11.9
Corporate Expenses..................................... 12.8 26.6 29.5
-------- -------- --------
TOTAL CLAIMS AND EXPENSES......................... 5,689.9 5,133.6 4,374.5
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE FEDERAL
AND FOREIGN INCOME TAX.......................... 974.1 546.9 837.0
FEDERAL AND FOREIGN INCOME TAX (NOTE 8)..................... 204.6 60.7 182.6
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS................. 769.5 486.2 654.4
DISCONTINUED OPERATIONS, NET OF TAX (NOTE 2)
Income from Operations................................. -- 48.5 42.2
Loss on Disposal....................................... -- (22.0) --
-------- -------- --------
INCOME FROM DISCONTINUED OPERATIONS............... -- 26.5 42.2
-------- -------- --------
NET INCOME........................................ $ 769.5 $ 512.7 $ 696.6
======== ======== ========
BASIC EARNINGS PER SHARE (NOTES 1 AND 16)
Income from Continuing Operations...................... $ 4.48 $ 2.79 $ 3.77
Income from Discontinued Operations.................... -- .15 .23
-------- -------- --------
Net Income........................................ $ 4.48 $ 2.94 $ 4.00
======== ======== ========
DILUTED EARNINGS PER SHARE (NOTES 1 AND 16)
Income from Continuing Operations...................... $ 4.39 $ 2.73 $ 3.67
Income from Discontinued Operations.................... -- .15 .23
-------- -------- --------
Net Income........................................ $ 4.39 $ 2.88 $ 3.90
======== ======== ========
See accompanying notes.
38
6
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
IN MILLIONS
DECEMBER 31
1997 1996
ASSETS --------- ---------
Invested Assets (Note 3)
Short Term Investments................................. $ 725.1 $ 275.9
Fixed Maturities
Held-to-Maturity -- Tax Exempt (market $2,347.2 and
$2,573.4)........................................... 2,200.6 2,443.6
Available-for-Sale
Tax Exempt (cost $5,408.4 and $4,415.1)........... 5,766.9 4,622.6
Taxable (cost $4,366.0 and $4,038.7).............. 4,485.9 4,092.7
Equity Securities (cost $733.9 and $540.5)............. 871.1 646.3
--------- ---------
TOTAL INVESTED ASSETS................................ 14,049.6 12,081.1
Cash...................................................... 11.5 4.7
Accrued Investment Income................................. 203.8 195.3
Premiums Receivable....................................... 1,144.4 984.9
Reinsurance Recoverable on Unpaid Claims (Note 11)........ 1,207.9 1,767.8
Prepaid Reinsurance Premiums.............................. 115.2 326.7
Funds Held for Asbestos-Related Settlement (Note 13)...... 599.5 599.9
Deferred Policy Acquisition Costs (Note 5)................ 676.9 601.2
Real Estate Assets (Notes 4 and 7)........................ 790.0 1,604.0
Deferred Income Tax (Note 8).............................. 317.0 365.6
Other Assets.............................................. 499.8 564.3
Net Assets of Discontinued Operations (Note 2)............ -- 843.4
--------- ---------
TOTAL ASSETS......................................... $19,615.6 $19,938.9
========= =========
LIABILITIES
Unpaid Claims (Note 13)................................... $ 9,772.5 $ 9,523.7
Unearned Premiums......................................... 2,696.6 2,617.5
Short Term Debt (Note 7).................................. -- 189.5
Long Term Debt (Note 7)................................... 398.6 1,070.5
Dividend Payable to Shareholders.......................... 49.0 47.2
Accrued Expenses and Other Liabilities.................... 1,041.8 1,027.6
--------- ---------
TOTAL LIABILITIES.................................... 13,958.5 14,476.0
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 12 AND 13)
SHAREHOLDERS' EQUITY (NOTES 9 AND 18)
Preferred Stock -- Authorized 4,000,000 Shares;
$1 Par Value; Issued -- None........................... -- --
Common Stock -- Authorized 600,000,000 Shares;
$1 Par Value; Issued 176,037,850 and 176,084,173
Shares................................................. 176.0 176.1
Paid-In Surplus........................................... 593.0 695.7
Retained Earnings......................................... 5,101.7 4,530.5
Foreign Currency Translation Losses, Net of Income Tax.... (25.7) (15.6)
Unrealized Appreciation of Investments, Net of Income Tax
(Note 3)............................................... 400.1 238.7
Receivable from Employee Stock Ownership Plan............. (96.7) (106.3)
Treasury Stock, at Cost -- 7,320,410 and 1,223,182
Shares................................................. (491.3) (56.2)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY........................... 5,657.1 5,462.9
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $19,615.6 $19,938.9
========= =========
See accompanying notes.
39
7
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN MILLIONS
YEARS ENDED DECEMBER 31
1997 1996 1995
-------- -------- --------
PREFERRED STOCK
Balance, Beginning and End of Year..................... $ -- $ -- $ --
-------- -------- --------
COMMON STOCK
Balance, Beginning of Year............................. 176.1 87.8 87.8
Two-for-One Stock Split................................ -- 87.8 --
Shares Issued upon Exchange of Long Term Debt.......... -- .5 --
Share Activity under Option and Incentive Plans........ (.1) -- --
-------- -------- --------
Balance, End of Year.............................. 176.0 176.1 87.8
-------- -------- --------
PAID-IN SURPLUS
Balance, Beginning of Year............................. 695.7 778.2 786.6
Two-for-One Stock Split................................ -- (87.8) --
Exchange of Long Term Debt............................. (68.4) 20.8 --
Reductions Resulting from Share Activity
under Option and Incentive Plans..................... (34.3) (15.5) (8.4)
-------- -------- --------
Balance, End of Year.............................. 593.0 695.7 778.2
-------- -------- --------
RETAINED EARNINGS
Balance, Beginning of Year............................. 4,530.5 4,206.5 3,680.5
Net Income............................................. 769.5 512.7 696.6
Dividends Declared (per share $1.16, $1.08 and $.98)... (198.3) (188.7) (170.6)
-------- -------- --------
Balance, End of Year.............................. 5,101.7 4,530.5 4,206.5
-------- -------- --------
FOREIGN CURRENCY TRANSLATION GAINS (LOSSES)
Balance, Beginning of Year............................. (15.6) (3.4) 9.8
Change During Year, Net of Income Tax (Note 15)........ (10.1) (12.2) (13.2)
-------- -------- --------
Balance, End of Year.............................. (25.7) (15.6) (3.4)
-------- -------- --------
UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENTS
Balance, Beginning of Year............................. 238.7 345.9 (124.3)
Change During Year, Net (Note 3)....................... 161.4 (107.2) 470.2
-------- -------- --------
Balance, End of Year.............................. 400.1 238.7 345.9
-------- -------- --------
RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN
Balance, Beginning of Year............................. (106.3) (115.0) (123.0)
Principal Repayments................................... 9.6 8.7 8.0
-------- -------- --------
Balance, End of Year.............................. (96.7) (106.3) (115.0)
-------- -------- --------
TREASURY STOCK, AT COST
Balance, Beginning of Year............................. (56.2) (37.3) (70.4)
Repurchase of Shares................................... (827.9) (82.5) --
Shares Issued upon Exchange of Long Term Debt.......... 304.4 -- --
Share Activity under Option and Incentive Plans........ 88.4 63.6 33.1
-------- -------- --------
Balance, End of Year.............................. (491.3) (56.2) (37.3)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY........................ $5,657.1 $5,462.9 $5,262.7
======== ======== ========
See accompanying notes.
40
8
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN MILLIONS
YEARS ENDED DECEMBER 31
1997 1996 1995
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................ $ 769.5 $ 512.7 $ 696.6
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Claims, Net......................... 808.7 141.4 681.6
Increase in Unearned Premiums, Net..................... 290.6 204.5 158.8
Increase in Premiums Receivable........................ (159.5) (124.5) (96.2)
Decrease (Increase) in Funds Held for
Asbestos-Related Settlement.......................... .4 438.2 (480.0)
Decrease (Increase) in Medical Malpractice Reinsurance
Related Receivable................................... -- 191.2 (66.2)
Increase in Deferred Policy Acquisition Costs.......... (75.7) (42.5) (29.2)
Deferred Income Tax Credit............................. (33.3) (117.6) (16.8)
Write-down of Real Estate Assets....................... -- 255.0 --
Depreciation........................................... 62.2 59.0 53.5
Realized Investment Gains.............................. (105.2) (79.8) (108.8)
Income from Discontinued Operations, Net............... -- (26.5) (42.2)
Other, Net............................................. 7.4 188.2 73.7
--------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES......................................... 1,565.1 1,599.3 824.8
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturities -- Available-for-
Sale..................................................... 3,682.6 3,430.5 3,953.9
Proceeds from Maturities of Fixed Maturities.............. 658.5 762.9 651.4
Proceeds from Sales of Equity Securities.................. 401.3 383.0 302.3
Proceeds from Sale of Discontinued Operations, Net........ 861.2 -- --
Purchases of Fixed Maturities............................. (5,394.8) (5,520.5) (5,466.0)
Purchases of Equity Securities............................ (519.3) (395.2) (145.1)
Decrease (Increase) in Short Term Investments, Net........ (449.2) 153.4 269.3
Proceeds from Sale of Real Estate Properties.............. 759.6 17.4 10.4
Additions to Real Estate Assets........................... (40.1) (94.3) (71.7)
Purchases of Fixed Assets, Net............................ (71.0) (58.7) (68.4)
Other, Net................................................ 41.1 (53.2) (24.0)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES................ (70.1) (1,374.7) (587.9)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Long Term Debt.................. 10.2 86.0 173.9
Repayment of Long Term Debt............................... (344.9) (145.6) (302.7)
Increase (Decrease) in Short Term Debt, Net............... (189.5) 37.8 34.3
Dividends Paid to Shareholders............................ (196.5) (184.2) (167.8)
Repurchase of Shares...................................... (827.9) (82.5) --
Other, Net................................................ 60.4 56.7 31.7
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES................ (1,488.2) (231.8) (230.6)
--------- --------- ---------
Net Increase (Decrease) in Cash............................. 6.8 (7.2) 6.3
Cash at Beginning of Year................................... 4.7 11.9 5.6
--------- --------- ---------
CASH AT END OF YEAR.................................. $ 11.5 $ 4.7 $ 11.9
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash Paid During the Year for
Interest (Net of Amounts Capitalized).................. $ 60.4 $ 77.7 $ 83.5
Federal and Foreign Income Taxes....................... 253.5 163.3 192.0
See accompanying notes.
41
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 May 13, 1997, the Corporation completed the sale of its life and health
insurance subsidiaries. The life and health insurance subsidiaries have been
classified as discontinued operations (see Note (2)). All footnote disclosures
reflect continuing operations only, unless otherwise noted.
In the fourth quarter of 1997, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings per Share. SFAS No. 128
establishes new standards for computing and presenting earnings per share. SFAS
No. 128 requires presentation of basic earnings per share and diluted earnings
per share. Prior period earnings per share amounts have been restated. The
adoption of SFAS No. 128 did not have a significant effect on the Corporation's
earnings per share.
Certain other amounts in the consolidated financial statements for prior years
have been reclassified to conform with the 1997 presentation.
(b) Investments
Short term investments, which have an original maturity of one year or less,
are carried at amortized cost.
Fixed maturities, which include bonds and redeemable preferred stocks, are
purchased to support the investment strategies of the Corporation and its
insurance subsidiaries. These strategies are developed based on many factors
including rate of return, maturity, credit risk, tax considerations and
regulatory requirements. Fixed maturities which may be sold prior to maturity to
support the investment strategies of the Corporation and its insurance
subsidiaries are classified as available-for-sale and carried at market value as
of the balance sheet date. Those fixed maturities which the Corporation and its
insurance subsidiaries have the ability and positive intent to hold to maturity
are classified as held-to-maturity and carried at amortized cost.
Premiums and discounts arising from the purchase of mortgage-backed securities
are amortized using the interest method over the estimated remaining term of the
securities, adjusted for anticipated prepayments.
Equity securities, which include common stocks and non-redeemable preferred
stocks, are carried at market value as of the balance sheet date.
Unrealized appreciation or depreciation of investments carried at market value
is excluded from income and credited or charged directly to a separate component
of shareholders' equity, net of applicable deferred income tax.
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.
(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 as well as estimates of unreported claims and
claim settlement expenses, less estimates of anticipated salvage and subrogation
recoveries. Estimates are based upon past claim experience modified for current
trends as well as prevailing economic, legal and social conditions. Such
estimates are continually reviewed and updated. Any resulting adjustments are
reflected in current operating results.
(e) Reinsurance
In the ordinary course of business, the Corporation's insurance subsidiaries
assume and cede reinsurance with other insurance companies and are members of
various pools and associations. 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.
42
10
Prepaid reinsurance premiums represent the portion of insurance premiums ceded
to reinsurers applicable to the unexpired terms of the reinsurance contracts in
force.
Commissions received related to reinsurance premiums ceded are considered in
determining net acquisition costs eligible for deferral.
Reinsurance recoverable on unpaid claims represent estimates of the portion of
such liabilities that will be recovered from reinsurers. Amounts recoverable
from reinsurers are recognized as assets at the same time and in a manner
consistent with the liabilities associated with the reinsured policies.
(f) 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 (13)).
(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 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.
Measurement of such impairment is based on the fair value of the property.
Depreciation of real estate properties is calculated using the straight-line
method over the estimated useful lives of the properties.
Real estate mortgages and notes receivable are carried at unpaid principal
balances less an allowance for uncollectible amounts. A loan is considered
impaired when it is probable that all principal and interest amounts will not be
collected according to the contractual terms of the loan agreement. An allowance
for uncollectible amounts is established to recognize any such impairment.
Measurement of impairment is based on the discounted future cash flows of the
loan, subject to the estimated fair value of the underlying collateral. These
cash flows are discounted at the loan's effective interest rate.
Rental revenues are recognized on a straight-line basis over the term of the
lease. Profits on land, townhome unit and commercial building sales are
recognized at closing, subject to compliance with applicable accounting
guidelines. Profits on high-rise condominium unit sales are recognized using the
percentage of completion method, subject to achievement of a minimum level of
unit sales. 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 measurement date
over the amount an employee must pay to acquire the stock.
(j) Income Taxes
The Corporation and its domestic subsidiaries file a consolidated federal
income tax return.
Deferred income tax assets and liabilities are recognized for the expected
future tax effects attributable to temporary differences between the financial
reporting and tax bases of assets and liabilities, based on enacted tax rates
and other provisions of tax law. The effect of a change in tax laws or rates is
recognized in income in the period in which such change is enacted.
U. S. federal income taxes are accrued on undistributed earnings of foreign
subsidiaries.
(k) Foreign Exchange
Assets and liabilities relating to foreign operations are translated into U.S.
dollars using current exchange rates; revenues and expenses are translated into
U.S. dollars using the average exchange rates for each year.
The functional currency of foreign operations is generally the currency of the
local operating environment since their business is primarily transacted in such
local currencies. Translation gains and losses, net of applicable income tax,
are excluded from income and accumulated in a separate component of
shareholders' equity.
43
11
(l) Cash Flow Information
In the statement of cash flows, short term investments are not considered to
be cash equivalents. The effect of changes in foreign exchange rates on cash
balances was immaterial.
In 1997 and 1996, $228.6 million and $20.7 million of exchangeable
subordinated notes were exchanged for 5,316,565 shares and 480,464 shares,
respectively, of common stock of the Corporation. In 1997, $108.6 million of
long term debt was assumed by a joint venture as a part of the sale of real
estate properties. These noncash transactions have been excluded from the
consolidated statements of cash flows.
(m) Accounting Pronouncements Not Yet Adopted
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS No. 125 provides new accounting and
reporting standards for transfers of financial assets and extinguishments of
liabilities. The Statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. Transactions covered by this Statement would include
securitizations, repurchase agreements and securities lending. SFAS No. 125, as
amended by SFAS No. 127, Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125, is effective January 1, 1998 and is to be applied
prospectively. Adoption of this Statement is not expected to have a significant
impact on the Corporation's financial position or results of operations.
In December 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-3, Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments. The SOP provides guidance for
determining when a liability for guaranty-fund and other insurance-related
assessments should be recognized and how such liability should be measured. The
Corporation will adopt SOP 97-3 as of January 1, 1998. Restatement of financial
statements for periods before the year SOP 97-3 is adopted is not permitted. The
adoption of SOP 97-3 is not expected to have a significant impact on the
Corporation's financial position or results of operations.
(2) DISCONTINUED OPERATIONS
On May 13, 1997, the Corporation completed the sale of Chubb Life Insurance
Company of America and its subsidiaries to Jefferson-Pilot Corporation for
$875.0 million in cash, subject to various closing adjustments, none of which
were material.
In 1996, the Corporation recognized a loss of $22.0 million related to the
sale of the life and health insurance subsidiaries. The purchase price was not
adjusted to reflect results of operations subsequent to December 31, 1996.
Therefore, the discontinued life and health insurance operations did not affect
the Corporation's net income in 1997 and will not affect net income in future
periods.
The results of the discontinued operations were as follows:
Years Ended December 31
-----------------------
1996 1995
---- ----
(in millions)
Total revenues...................... $816.8 $877.7
Total benefits, claims and
expenses.......................... 743.9 814.6
------ ------
Income before federal income
tax............................. 72.9 63.1
Federal income tax.................. 24.4 20.9
------ ------
Income from operations............ $ 48.5 $ 42.2
====== ======
The assets and liabilities of the discontinued operations at December 31, 1996
were as follows:
(in millions)
Assets
Invested assets................................. $3,185.3
Other assets.................................... 1,546.5
--------
Total assets.............................. 4,731.8
--------
Liabilities
Life and health policy liabilities.............. 3,230.7
Other liabilities............................... 657.7
--------
Total liabilities......................... 3,888.4
--------
Net assets of discontinued operations............. $ 843.4
========
(3) INVESTED ASSETS AND RELATED INCOME
(a) The sources of net investment income were as follows:
Years Ended December 31
------------------------------------
1997 1996 1995
---- ---- ----
(in millions)
Fixed maturities................... $726.1 $669.7 $604.3
Equity securities.................. 10.8 10.0 12.3
Short term investments............. 47.6 23.9 35.1
Other.............................. .8 8.0 16.0
------ ------ ------
Gross investment income........... 785.3 711.6 667.7
Investment expenses................ 12.0 12.3 11.9
------ ------ ------
$773.3 $699.3 $655.8
====== ====== ======
(b) Realized investment gains and losses were as follows:
Years Ended December 31
------------------------------------
1997 1996 1995
---- ---- ----
(in millions)
Gross realized investment gains
Fixed maturities.................. $56.3 $ 56.4 $ 66.7
Equity securities................. 93.8 75.5 95.4
----- ------ ------
150.1 131.9 162.1
----- ------ ------
Gross realized investment losses
Fixed maturities.................. 26.5 45.7 46.5
Equity securities................. 18.4 6.4 6.8
----- ------ ------
44.9 52.1 53.3
----- ------ ------
Realized investment gains.......... 105.2 79.8 108.8
Income tax......................... 36.8 27.8 38.1
----- ------ ------
$68.4 $ 52.0 $ 70.7
===== ====== ======
44
12
(c) The components of unrealized appreciation of investments carried at
market value were as follows:
December 31
-----------------------
1997 1996
---- ----
(in millions)
Equity securities
Gross unrealized appreciation........................... $160.6 $115.0
Gross unrealized depreciation........................... 23.4 9.2
------ ------
137.2 105.8
------ ------
Fixed maturities
Gross unrealized appreciation........................... 486.0 297.1
Gross unrealized depreciation........................... 7.6 35.6
------ ------
478.4 261.5
------ ------
615.6 367.3
Deferred income tax liability............................. 215.5 128.6
------ ------
$400.1 $238.7
====== ======
The change in unrealized appreciation or depreciation of investments carried
at market value was as follows:
Years Ended December 31
-------------------------------------
1997 1996 1995
---- ---- ----
(in millions)
Continuing operations
Change in unrealized appreciation of equity securities.... $ 31.4 $ 17.3 $ 60.9
Change in unrealized appreciation or depreciation of fixed
maturities.............................................. 216.9 (119.6) 499.1
------ ------- ------
248.3 (102.3) 560.0
Deferred income tax (credit).............................. 86.9 (35.8) 196.0
Decrease in valuation allowance........................... -- -- (31.6)
------ ------- ------
Change in unrealized appreciation or depreciation......... 161.4 (66.5) 395.6
Discontinued operations, net................................ -- (40.7) 74.6
------ ------- ------
$161.4 $(107.2) $470.2
====== ======= ======
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 an increase of $16.8 million, a decrease of $48.2 million and
an increase of $150.4 million for the years ended December 31, 1997, 1996 and
1995, respectively.
(d) The amortized cost and estimated market value of fixed maturities were
as follows:
December 31
--------------------------------------------------------------------------------
1997 1996
--------------------------------------------------- ------------------------
Gross Gross Estimated Gross
Amortized Unrealized Unrealized Market Amortized Unrealized
Cost Appreciation Depreciation Value Cost Appreciation
--------- ------------ ------------ --------- --------- ------------
(in millions)
Held-to-maturity -- Tax exempt.......... $ 2,200.6 $146.7 $ .1 $ 2,347.2 $2,443.6 $131.2
--------- ------ ---- --------- --------- ------
Available-for-sale
Tax exempt............................ 5,408.4 358.6 .1 5,766.9 4,415.1 210.1
--------- ------ ---- --------- --------- ------
Taxable
U.S. Government and government
agency and authority
obligations....................... 594.3 9.9 .1 604.1 1,092.3 5.8
Corporate bonds..................... 819.9 27.0 2.4 844.5 317.7 7.5
Foreign bonds....................... 1,022.5 46.3 2.4 1,066.4 1,169.2 58.5
Mortgage-backed securities.......... 1,778.2 35.8 2.6 1,811.4 1,444.5 15.1
Redeemable preferred stocks......... 151.1 8.4 -- 159.5 15.0 .1
--------- ------ ---- --------- --------- ------
4,366.0 127.4 7.5 4,485.9 4,038.7 87.0
--------- ------ ---- --------- --------- ------
Total available-for-sale.......... 9,774.4 486.0 7.6 10,252.8 8,453.8 297.1
--------- ------ ---- --------- --------- ------
Total fixed maturities............ $11,975.0 $632.7 $7.7 $12,600.0 $10,897.4 $428.3
========= ====== ==== ========= ========= ======
December 31
------------------------
1996
------------------------
Gross Estimated
Unrealized Market
Depreciation Value
------------ ---------
(in millions)
Held-to-maturity -- Tax exempt.......... $ 1.4 $ 2,573.4
----- ---------
Available-for-sale
Tax exempt............................ 2.6 4,622.6
----- ---------
Taxable
U.S. Government and government
agency and authority
obligations....................... 8.4 1,089.7
Corporate bonds..................... 1.8 323.4
Foreign bonds....................... 11.3 1,216.4
Mortgage-backed securities.......... 11.5 1,448.1
Redeemable preferred stocks......... -- 15.1
----- ---------
33.0 4,092.7
----- ---------
Total available-for-sale.......... 35.6 8,715.3
----- ---------
Total fixed maturities............ $37.0 $11,288.7
===== =========
45
13
The amortized cost and estimated market value of fixed maturities at December
31, 1997 by contractual maturity were as follows:
Estimated
Amortized Market
Cost Value
--------- ---------
(in millions)
Held-to-Maturity
Due in one year or less............... $ 111.3 $ 112.8
Due after one year through five
years............................... 644.8 678.2
Due after five years through ten
years............................... 930.6 999.7
Due after ten years................... 513.9 556.5
-------- --------
$2,200.6 $2,347.2
======== ========
Available-for-Sale
Due in one year or less............... $ 194.9 $ 197.0
Due after one year through five
years............................... 1,100.2 1,132.9
Due after five years through ten
years............................... 2,871.2 3,039.4
Due after ten years................... 3,829.9 4,072.1
-------- ---------
7,996.2 8,441.4
Mortgage-backed securities............ 1,778.2 1,811.4
-------- ---------
$9,774.4 $10,252.8
======== =========
Actual maturities could differ from contractual maturities because borrowers may
have the right to call or prepay obligations.
(e) The Corporation engages in securities lending whereby certain securities
from its portfolio are loaned to other institutions for short periods of time.
Cash collateral from the borrower, equal to the market value of the loaned
securities plus accrued interest, is deposited with a lending agent and retained
and invested by the lending agent to provide additional income for the
Corporation. At December 31, 1997 and 1996, the Corporation had no securities
loaned to other institutions. The maximum amount of loaned securities
outstanding during 1997 was approximately $230.0 million.
(4) 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. In March 1997, the
Corporation entered into an agreement with a prospective purchaser to perform
due diligence in anticipation of executing a contract for the sale of
substantially all of its commercial properties. Because the plan to pursue the
sale of these assets in the near term represented a significant change in
circumstances relating to the manner in which these assets would be used, the
recoverability of their carrying value as of December 31, 1996 was reassessed.
As a result, an impairment loss of $255.0 million was recognized in 1996 to
reduce the carrying value of these assets to their estimated fair value. This
charge was included in real estate cost of sales and expenses in the
consolidated statements of income.
In June 1997, a definitive agreement was reached with the purchaser. In
November, the sale of almost all of the properties covered by the agreement
reached in June was closed for $736.9 million, which included $628.3 million in
cash and the assumption of $108.6 million in debt. The buyer is a joint venture
formed by Paine Webber Real Estate Securities Inc., Morgan Stanley Real Estate
Fund II, L.P. and Gale & Wentworth, L.L.C. Closing on the few remaining
properties under the agreement is expected to occur in 1998. The Corporation is
continuing to explore the sale of certain of its remaining properties.
The components of real estate assets were as follows:
December 31
-------------------
1997 1996
---- ----
(in millions)
Mortgages and notes receivable (net of
allowance for uncollectible amounts of
$24.0 and $85.7)........................... $123.8 $ 502.4
Income producing properties.................. 163.8 584.5
Construction in progress..................... 95.8 135.0
Land under development and unimproved land... 406.6 382.1
------ --------
$790.0 $1,604.0
====== ========
Substantially all mortgages and notes receivable are secured by buildings and
land. The ultimate collectibility of the receivables is evaluated continuously
and an appropriate allowance for uncollectible amounts established. Mortgages
and notes receivable had an estimated aggregate fair value of $121.0 million and
$487.2 million at December 31, 1997 and 1996, 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 $2.7 million,
$11.0 million and $14.1 million for 1997, 1996 and 1995, respectively.
(5) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs deferred and the related amortization charged against
income were as follows:
Years Ended December 31
---------------------------------
1997 1996 1995
---- ---- ----
(in millions)
Balance, beginning of year.... $ 601.2 $ 558.7 $ 529.5
--------- --------- ---------
Costs deferred during year
Commissions and brokerage... 775.0 653.5 592.7
Premium taxes and
assessments............... 124.9 114.7 108.0
Salaries and overhead....... 578.4 512.3 449.5
--------- --------- ---------
1,478.3 1,280.5 1,150.2
Amortization during year...... (1,402.6) (1,238.0) (1,121.0)
--------- --------- ---------
Balance, end of year.......... $ 676.9 $ 601.2 $ 558.7
========= ========= =========
46
14
(6) PROPERTY AND EQUIPMENT
Property and equipment included in other assets were as follows:
December 31
-------------------
1997 1996
---- ----
(in millions)
Cost.......................................... $391.7 $363.1
Accumulated depreciation...................... 178.2 155.5
------ ------
$213.5 $207.6
====== ======
Depreciation expense related to property and equipment was $59.5 million,
$48.0 million and $39.4 million for 1997, 1996 and 1995, respectively.
(7) DEBT AND CREDIT ARRANGEMENTS
(a) Short term debt consisted of commercial paper issued by Chubb Capital
Corporation (Chubb Capital), a subsidiary of the Corporation, to support the
real estate operations. Borrowings were unsecured and were on terms and at
interest rates generally extended to prime borrowers. The weighted average
interest rate on short term debt approximated 5 1/2% at December 31, 1996.
(b) Long term debt consisted of the following:
December 31
---------------------------------------
1997 1996
----------------- -------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(in millions)
Term loans................ $ 40.1 $ 40.3 $ 311.4 $ 313.6
Mortgages................. 48.5 47.3 189.8 191.6
8 3/4% notes.............. 60.0 62.7 90.0 93.9
6% notes.................. 150.0 150.0 150.0 149.7
6 7/8% notes.............. 100.0 102.5 100.0 101.0
6% exchangeable
subordinated notes...... -- -- 229.3 278.7
------ ------ -------- --------
$398.6 $402.8 $1,070.5 $1,128.5
====== ====== ======== ========
The term loans and mortgages are obligations of the real estate subsidiaries.
The term loans mature in varying amounts through 2000. Substantially all term
loans are at an interest rate equivalent to the lower of the prime rate or a
rate associated with the lender's cost of funds. The mortgages payable are due
in varying amounts monthly through 2010. At December 31, 1997, interest rates on
term loans approximated 7 1/2% and for mortgages payable the range of interest
rates was 6% to 12%. The term loans and mortgages payable are secured by real
estate assets with a net book value of $212.2 million at December 31, 1997.
The Corporation has outstanding $60.0 million of unsecured 8 3/4% notes due
November 15, 1999. The notes are subject to mandatory sinking fund payments in
amounts sufficient to redeem $30.0 million of principal on a pro rata basis on
November 15, 1998 at a redemption price of 100% of their principal amount.
At December 31, 1997, Chubb Capital had outstanding $150.0 million of 6% notes
due February 1, 1998 and $100.0 million of 6 7/8% notes due February 1, 2003.
These notes are unsecured and are guaranteed by the Corporation. The 6% notes
were paid when due.
Chubb Capital called for redemption on May 14, 1997 the 6% exchangeable
subordinated notes due May 15, 1998. Prior to the redemption date, the holders
of $228.6 million of the notes elected the option to exchange each $1,000 of
principal amount into 23.256 shares of common stock of the Corporation,
resulting in the issuance of 5,316,565 shares of common stock. The remaining
notes were redeemed at 101.7% of the principal amount plus accrued interest.
The Corporation filed a shelf registration statement which the Securities and
Exchange Commission declared effective in June 1995, under which up to $400.0
million of various types of securities may be issued by the Corporation or Chubb
Capital. No securities have been issued under this registration statement.
The amounts of long term debt due annually during the five years subsequent to
December 31, 1997 are as follows:
Years Ending Term Loans
December 31 and Mortgages Notes Total
------------ ------------- ----- -----
(in millions)
1998.................. $ 1.5 $180.0 $181.5
1999.................. 45.6 30.0 75.6
2000.................. 37.5 -- 37.5
2001.................. .3 -- .3
2002.................. .4 -- .4
(c) Interest costs of $72.4 million, $89.5 million and $98.6 million were
incurred in 1997, 1996 and 1995, respectively, of which $8.7 million, $12.8
million and $16.4 million were capitalized.
(d) In July 1997, the Corporation entered into two credit agreements with a
group of banks that provide for unsecured borrowings of up to $500.0 million in
the aggregate. The $200.0 million short term revolving credit facility
terminates on July 10, 1998 and may be renewed or replaced. The $300.0 million
medium term revolving credit facility terminates on July 11, 2002. On the
respective termination dates for these agreements, any loans then outstanding
become payable. There have been no borrowings under these agreements. Various
interest rate options are available to the Corporation, all of which are based
on market rates. These facilities replaced a $300.0 million revolving credit
facility, which terminated, and the Corporation's lines of credit. Unused credit
facilities are available for general corporate purposes and to support the
commercial paper borrowing arrangement.
47
15
(8) FEDERAL AND FOREIGN INCOME TAX
(a) Income tax expense consisted of the following components:
Years Ended December 31
---------------------------
1997 1996 1995
---- ---- ----
(in millions)
Current tax
United States............................................. $194.4 $ 152.1 $177.9
Foreign................................................... 43.5 26.2 21.5
Deferred tax credit, principally United States.............. (33.3) (117.6) (16.8)
------ ------- ------
$204.6 $ 60.7 $182.6
====== ======= ======
(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
--------------------------------------------------------
1997 1996 1995
---------------- ----------------- -----------------
% of % of % of
Pre-Tax Pre-Tax Pre-Tax
Amount Income Amount Income Amount Income
------ ------- ------ ------- ------ -------
(in millions)
Income from continuing operations before federal and
foreign income tax...................................... $974.1 $546.9 $837.0
====== ======= =======
Tax at statutory federal income tax rate.................. $340.9 35.0% $191.4 35.0% $293.0 35.0%
Tax exempt interest income................................ (126.4) (13.0) (119.0) (21.8) (114.1) (13.6)
Other, net................................................ (9.9) (1.0) (11.7) (2.1) 3.7 .4
------ ----- ------- ----- ------- -----
Actual tax.......................................... $204.6 21.0% $ 60.7 11.1% $182.6 21.8%
====== ===== ======= ===== ======= =====
(c) The tax effects of temporary differences that gave rise to deferred
income tax assets and liabilities were as follows:
December 31
--------------------
1997 1996
---- ----
(in millions)
Deferred income tax assets
Unpaid claims............................................. $572.6 $522.0
Unearned premiums......................................... 160.8 142.2
Postretirement benefits................................... 62.9 52.9
Other, net................................................ 27.9 8.2
------ ------
Total................................................... 824.2 725.3
------ ------
Deferred income tax liabilities
Deferred policy acquisition costs......................... 210.4 185.8
Real estate assets........................................ 81.3 45.3
Unrealized appreciation of investments.................... 215.5 128.6
------ ------
Total................................................... 507.2 359.7
------ ------
Net deferred income tax asset......................... $317.0 $365.6
====== ======
48
16
(9) 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
14,000,000. At December 31, 1997, 11,605,119 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:
1997 1996 1995
----------------------------- ---------------------------- ----------------------------
Number Weighted Average Number Weighted Average Number Weighted Average
of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price
--------- ---------------- --------- ---------------- --------- ----------------
Outstanding, beginning of year....... 8,058,829 $41.48 6,565,034 $37.59 5,449,618 $35.11
Granted.............................. 2,753,007 61.05 2,504,048 48.82 1,994,230 41.12
Exercised............................ (1,486,812) 38.39 (782,403) 31.77 (738,332) 28.13
Forfeited............................ (200,221) 51.69 (227,850) 43.26 (140,482) 40.93
---------- --------- ---------
Outstanding, end of year............. 9,124,803 47.67 8,058,829 41.48 6,565,034 37.59
========== ========= =========
Exercisable, end of year............. 5,932,905 42.54 4,852,845 38.10 3,961,586 35.35
December 31, 1997
----------------------------------------------------------------------------------
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.................... 1,038,649 $30.86 3.4 1,038,649 $30.86
$40.97 - $77.69.................... 8,086,154 49.82 7.5 4,894,256 45.01
--------- ---------
9,124,803 47.67 7.0 5,932,905 42.54
========= =========
Performance share awards are based on the achievement of various goals over
performance cycle periods. The cost of such awards is expensed over the
performance cycle. Such awards are payable in cash, in shares of the
Corporation's common stock or in a combination of both. Restricted stock awards
consist of shares of common stock of the Corporation granted at no cost. Shares
of restricted stock become outstanding when granted, receive dividends and have
voting rights. The shares are subject to forfeiture and to restrictions which
limit the sale or transfer during the restriction period. An amount equal to the
fair market value of the shares at the date of grant is expensed over the
restriction period.
The Corporation uses the intrinsic value based method of accounting for
stock-based compensation, under which compensation cost is measured as the
excess, if any, of the quoted market price of the stock at the measurement date
over the amount an employee must pay to acquire the stock. Since the exercise
price of stock options granted under the Long-Term Stock Incentive Plans is not
less than the market price of the underlying stock on the date of grant, no
compensation cost has been recognized for such grants. The aggregate amount
charged against income (including continuing and discontinued operations) with
respect to performance share and restricted stock awards was $14.4 million,
$10.2 million and $8.6 million in 1997, 1996 and 1995, 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 at the
grant date would be charged against income on a straight-line basis over the
vesting period. The pro forma effect on net income for 1996 and 1995 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.
1997 1996 1995
---------------------- ---------------------- ----------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- -------- -------- -------- -------- --------
(in millions except for per share amounts)
Net income............................. $769.5 $746.3 $512.7 $496.6 $696.6 $692.4
Diluted earnings per share............. 4.39 4.26 2.88 2.79 3.90 3.88
49
17
The weighted average fair value of options granted under the Long-Term Stock
Incentive Plans during 1997, 1996 and 1995 were $13.83, $11.04 and $10.18,
respectively. The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions. The risk-free interest rates for 1997, 1996 and 1995 were
6.5%, 5.9% and 6.3%, respectively. The expected volatility of the market price
of the Corporation's common stock for 1997, 1996 and 1995 grants was 16.3%,
18.3% and 19.3%, respectively. The expected average term of the granted options
was 5 years for 1997 and 5 1/2 years for 1996 and 1995. The dividend yield was
1.9% for 1997 and 2.1% for 1996 and 1995.
(b) The Corporation has a leveraged Employee Stock Ownership Plan (ESOP) in
which substantially all employees are eligible to participate. At its inception
in 1989, the ESOP used the proceeds of a $150.0 million loan from the
Corporation to purchase 7,792,204 newly issued shares of the Corporation's
common stock. The loan is due in September 2004 and bears interest at 9%. The
Corporation has recorded the receivable from the ESOP as a separate reduction of
shareholders' equity on the consolidated balance sheets. This balance is reduced
as repayments are made on the loan principal.
The Corporation and its participating subsidiaries make semi-annual
contributions to the ESOP in amounts determined at the discretion of the
Corporation's Board of Directors. The contributions, together with the dividends
on the shares of common stock in the ESOP, are used by the ESOP to make loan
interest and principal payments to the Corporation. As interest and principal
are paid, a portion of the common stock is allocated to eligible employees.
The Corporation uses the cash payment method of recognizing ESOP expense. In
1997, 1996 and 1995, cash contributions to the ESOP of $12.2 million, $12.7
million and $12.3 million, respectively, were charged against income (including
continuing and discontinued operations). Dividends on shares of common stock in
the ESOP used for debt service were $6.2 million, $4.6 million and $4.5 million
in 1997, 1996 and 1995, respectively.
The number of allocated and unallocated shares held by the ESOP at December
31, 1997 were 3,023,768 and 3,636,364, respectively. All such shares are
considered outstanding for the computation of earnings per share.
(c) The Corporation has a Stock Purchase Plan under which substantially all
employees are eligible to purchase shares of the Corporation's common stock
based on compensation. Shares are purchased at a price equal to the fair market
value on the date of grant. At December 31, 1997, there were 469,326 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 would have been immaterial.
(10) 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 (including continuing and discontinued
operations) were as follows:
Years Ended December 31
------------------------------
1997 1996 1995
---- ---- ----
(in millions)
Service cost of current
period...................... $ 19.9 $ 20.6 $ 20.4
Interest cost on projected
benefit obligation.......... 30.3 26.0 23.8
Actual return on plan
assets...................... (78.7) (49.1) (68.5)
Net amortization and
deferral.................... 41.6 17.5 42.7
------ ------ ------
Net pension cost.......... $ 13.1 $ 15.0 $ 18.4
====== ====== ======
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.
50
18
The following table sets forth the plans' funded status and amounts recognized
in the balance sheets:
December 31
-------------------
1997 1996
---- ----
(in millions)
Actuarial present value of benefit
obligation for service rendered to date:
Accumulated benefit obligation based on
current salary levels, including
vested benefits of $307.0 and $261.4.. $318.8 $273.9
Additional amount related to projected
future salary increases............... 116.2 107.0
------ ------
Projected benefit obligation for
service rendered to date.............. 435.0 380.9
Plan assets at fair value................... 487.8 426.9
------ ------
Plan assets in excess of projected benefit
obligation................................ (52.8) (46.0)
Unrecognized net gain from past experience
different from that assumed............... 120.7 98.5
Unrecognized prior service costs............ (8.8) (4.6)
Unrecognized net asset at January 1, 1985,
being recognized principally over 19
years..................................... 6.4 6.9
------ ------
Pension liability included in other
liabilities............................. $ 65.5 $ 54.8
====== ======
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation at December 31, 1997 and 1996 was
7 1/2% and 7 3/4%, respectively, and the rate of increase in future compensation
levels was 5% for both years. The expected long term rate of return on assets
was 9% for both years. Plan assets are principally invested in publicly traded
stocks and bonds.
(b) The Corporation and its subsidiaries provide certain other postretirement
benefits, principally health care and life insurance, to retired employees and
their beneficiaries and covered dependents. Substantially all employees may
become eligible for these benefits upon retirement if they meet minimum age and
years of service requirements. The expected cost of these benefits is accrued
during the years that the employees render the necessary service.
The Corporation does not fund these benefits in advance. Benefits are paid as
covered expenses are incurred. Health care coverage is contributory. Retiree
contributions vary based upon a retiree's age, type of coverage and years of
service with the Corporation. Life insurance coverage is non-contributory.
The components of net postretirement benefit cost (including continuing and
discontinued operations) were as follows:
Years Ended December 31
----------------------------------
1997 1996 1995
---- ---- ----
(in millions)
Service cost of current period.... $ 4.9 $ 6.0 $ 5.7
Interest cost on accumulated
benefit obligation.............. 8.8 8.6 7.9
Net amortization and deferral..... (.7) -- --
----- ----- -----
Net postretirement benefit
cost.......................... $13.0 $14.6 $13.6
===== ===== =====
The components of the accumulated postretirement benefit obligation were as
follows:
December 31
-------------------
1997 1996
---- ----
(in millions)
Retirees.................................... $ 55.9 $ 42.8
Fully eligible active plan participants..... 5.1 8.4
Other active plan participants.............. 64.8 63.4
------ ------
Accumulated postretirement benefit
obligation................................ 125.8 114.6
Unrecognized net gain from past experience
different from that assumed............... 18.1 13.2
------ ------
Postretirement benefit liability included
in other liabilities.................... $143.9 $127.8
====== ======
The weighted average discount rate used in determining the actuarial present
value of the accumulated postretirement benefit obligation at December 31, 1997
and 1996 was 7 1/2% and 7 3/4%, respectively. At December 31, 1997, the weighted
average health care cost trend rate used to measure the accumulated
postretirement cost for medical benefits was 10 1/2% for 1998 and was assumed to
decrease gradually to 6% for the year 2005 and remain at that level thereafter.
The health care cost trend rate assumption has a significant effect on the
amount of the accumulated postretirement benefit obligation and the net
postretirement benefit cost reported. To illustrate, a one percent increase in
the trend rate for each year would increase the accumulated postretirement
benefit obligation at December 31, 1997 by $19.3 million and the aggregate of
the service and interest cost components of net postretirement benefit cost for
the year ended December 31, 1997 by $2.5 million.
(c) The Corporation and its subsidiaries have a savings plan, the Capital
Accumulation Plan, in which substantially all employees are eligible to
participate. Under this plan, the employer makes a matching contribution equal
to 100% of each eligible employee's pre-tax elective contributions, up to 4% of
the employee's compensation. Contributions are invested at the election of the
employee in the Corporation's common stock or in various other investment funds.
Employer contributions of $15.0 million, $14.5 million and $13.4 million were
charged against income (including continuing and discontinued operations) in
1997, 1996 and 1995, respectively.
51
19
(11) REINSURANCE
Premiums earned and insurance claims are reported net of reinsurance in the
consolidated statements of income.
The effect of reinsurance on the premiums written and earned of the property
and casualty insurance subsidiaries was as follows:
Years Ended December 31
------------------------------
1997 1996 1995
---- ---- ----
(in millions)
Direct premiums written....... $5,524.4 $5,166.5 $4,907.3
Reinsurance assumed
Royal & Sun Alliance........ (3.8) 202.5 368.5
Other....................... 166.7 234.3 378.8
Reinsurance ceded
Royal & Sun Alliance........ 174.6 (269.2) (535.5)
Other....................... (413.9) (560.3) (813.1)
-------- -------- --------
Net premiums written........ $5,448.0 $4,773.8 $4,306.0
======== ======== ========
Direct premiums earned........ $5,315.8 $5,023.5 $4,754.4
Reinsurance assumed
Royal & Sun Alliance........ 94.9 284.0 346.9
Other....................... 197.5 249.0 365.2
Reinsurance ceded
Royal & Sun Alliance........ -- (348.0) (520.5)
Other....................... (450.8) (639.2) (798.8)
-------- -------- --------
Net premiums earned......... $5,157.4 $4,569.3 $4,147.2
======== ======== ========
The Royal & Sun Alliance Insurance Group plc is the beneficial owner of 5.4%
of the Corporation's common stock. A property and casualty insurance subsidiary
of the Corporation assumed on a quota share basis a portion of the property and
casualty insurance business written by certain subsidiaries of Royal & Sun
Alliance.
Similarly, a portion of the U.S. insurance business written by the
Corporation's property and casualty insurance subsidiaries was reinsured on a
quota share basis with a subsidiary of Royal & Sun Alliance.
Effective January 1, 1996, the reinsurance agreements with Royal & Sun
Alliance were amended to reduce the amount of each company's business reinsured
with the other. Effective January 1, 1997, the agreements were terminated. The
changes to the agreements in 1996 and their termination in 1997 resulted in
portfolio transfers of the business previously ceded to Royal & Sun Alliance
back to the Corporation's property and casualty insurance subsidiaries and of
the business previously assumed by the Corporation's property and casualty
insurance subsidiaries back to Royal & Sun Alliance. The effect of the portfolio
transfers was a reduction of ceded premiums written of $174.6 million and $91.6
million in 1997 and 1996, respectively, and a reduction of assumed premiums
written of $93.6 million and $65.2 million in 1997 and 1996, respectively.
The 1997 assumed reinsurance premiums written and earned from Royal & Sun
Alliance include business assumed for the second half of 1996 which was reported
on a lag.
Reinsurance recoveries by the property and casualty insurance subsidiaries
which have been deducted from insurance claims were $346.8 million, $651.9
million and $936.1 million in 1997, 1996 and 1995, respectively. Such amounts
included recoveries of $251.4 million and $333.8 million in 1996 and 1995,
respectively, from the subsidiary of Royal & Sun Alliance.
Reinsurance recoverable on property and casualty unpaid claims included
approximately $471.0 million at December 31, 1996 from the subsidiary of Royal &
Sun Alliance.
(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 three to five
years; certain lease agreements provide for rent increases based on price-level
factors. All leases are operating leases.
Rent expense was as follows:
Years Ended
December 31
------------------------------
1997 1996 1995
---- ---- ----
(in millions)
Office facilities.......................... $71.1 $67.6 $67.0
Equipment.................................. 12.6 11.8 12.8
----- ----- -----
$83.7 $79.4 $79.8
===== ===== =====
At December 31, 1997, future minimum rental payments required under
non-cancellable operating leases were as follows:
Years Ending
December 31
- ------------ (in millions)
1998..................................... $ 67.3
1999..................................... 70.8
2000..................................... 68.9
2001..................................... 60.6
2002..................................... 52.9
After 2002............................... 346.6
------
$667.1
======
52
20
(13) 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 $1,525.0 million
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
$538.2 million to the trust fund and Continental Casualty will contribute the
remaining amount. In December 1993, upon execution of the global settlement
agreement, Pacific Indemnity and Continental Casualty paid their respective
shares into an escrow account. 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 $635.0 million, all of
which has been paid. The agreement further provides that the total
responsibility of both insurers with respect to pending and future
asbestos-related bodily injury claims against Fibreboard will be shared between
Pacific Indemnity and Continental Casualty on an approximate 35% and 65% basis,
respectively.
Pacific Indemnity, Continental Casualty and Fibreboard entered into a
trilateral agreement to settle all present and future asbestos-related bodily
injury claims resulting from insurance policies that were, or may have been,
issued to Fibreboard by the two insurers. The trilateral agreement will be
triggered if the global settlement agreement is ultimately disapproved. Pacific
Indemnity's obligation under the trilateral agreement is therefore similar to,
and not duplicative of, that under those agreements described above.
The trilateral agreement reaffirms portions of an agreement reached in March
1992 between Pacific Indemnity and Fibreboard. Among other matters, that 1992
agreement eliminates any Pacific Indemnity liability to Fibreboard for
asbestos-related property damage claims.
In July 1995, the United States District Court of the Eastern District of
Texas approved the global settlement agreement and the trilateral agreement. The
judgments approving these agreements were appealed to the United States Court of
Appeals for the Fifth Circuit. In July 1996, the Fifth Circuit Court affirmed
the 1995 judgments of the District Court. The objectors to the global agreement
appealed to the United States Supreme Court. In June 1997, the United States
Supreme Court set aside the ruling by the Fifth Circuit Court that had approved
the global agreement and ordered the Fifth Circuit Court to reconsider its
approval in light of a June 1997 ruling by the Supreme Court rejecting an
unrelated settlement that included several former asbestos manufacturers. In
January 1998, the Fifth Circuit Court again affirmed the global settlement
agreement, ruling that it was legally distinct from the other settlement. It is
expected that objectors to the settlement will petition the Supreme Court to
review the decision. The Supreme Court would then have to decide whether to take
the appeal.
The trilateral agreement, however, was never appealed to the United States
Supreme Court and is now final. As a result, management continues to believe
that the uncertainty of Pacific Indemnity's exposure with respect to
asbestos-related bodily injury claims against Fibreboard has been eliminated.
Since 1993, a California Court of Appeal has agreed, in response to a request
by Pacific Indemnity, Continental Casualty and Fibreboard, to delay its
decisions regarding asbestos-related insurance coverage issues that are
currently before it and involve the three parties exclusively, while the
approval of the global settlement is pending in court. Continental Casualty and
Pacific Indemnity have dismissed disputes against each other which involved
Fibreboard and were in litigation.
The property and casualty insurance subsidiaries have additional potential
asbestos exposure, primarily 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.
53
21
The 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.
Legal guidelines regarding coverage for asbestos claims have begun to
articulate more consistent standards regarding the extent of the insurers'
coverage obligation and the method of allocation of costs among insurers.
However, 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 costs of environmental clean-up have become substantial, PRPs and others
have increasingly filed claims with their insurance carriers. Litigation against
insurers extends to issues of liability, coverage and other policy provisions.
There is great uncertainty involved in estimating the property and casualty
insurance subsidiaries' liabilities relating to these claims. First, the
underlying liabilities of the claimants are extremely difficult to estimate. At
any given clean-up site, the allocation of remediation costs among governmental
authorities and the PRPs varies greatly. Second, different courts have addressed
liability and coverage issues regarding pollution claims and have reached
inconsistent conclusions in their interpretation of several issues. These
significant uncertainties are not likely to be resolved in the near future.
Uncertainties also remain as to the Superfund law itself. 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:
1997 1996 1995
---- ---- ----
(in millions)
Gross liability, beginning of
year........................... $9,523.7 $9,588.2 $8,913.2
Reinsurance recoverable,
beginning of year.............. 1,767.8 1,973.7 1,980.3
-------- -------- --------
Net liability, beginning of
year........................... 7,755.9 7,614.5 6,932.9
-------- -------- --------
Net incurred claims and claim
expenses related to
Current year................. 3,372.3 3,053.6 2,705.8
Prior years.................. (65.3) (42.8) (35.8)
-------- -------- --------
3,307.0 3,010.8 2,670.0
-------- -------- --------
Net payments for claims and claim
expenses related to
Current year................. 1,080.0 980.0 737.7
Prior years.................. 1,418.3 1,889.4 1,250.7
-------- -------- --------
2,498.3 2,869.4 1,988.4
-------- -------- --------
Net liability, end of year....... 8,564.6 7,755.9 7,614.5
Reinsurance recoverable,
end of year.................... 1,207.9 1,767.8 1,973.7
-------- -------- --------
Gross liability, end of year..... $9,772.5 $9,523.7 $9,588.2
======== ======== ========
During 1997, the property and casualty insurance subsidiaries experienced
overall favorable development of $65.3 million on net unpaid claims established
as of the previous year-end. This compares with favorable
development of $42.8 million and $35.8 million in 1996 and 1995, 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, 1997 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.
54
22
(14) BUSINESS SEGMENTS
The property and casualty insurance subsidiaries underwrite most forms of
property and casualty insurance in the United States, Canada, Europe and parts
of Australia, Latin America and the Far East. The geographic distribution of
property and casualty business in the United States is broad with a particularly
strong market presence in the Northeast.
The real estate subsidiary is involved in commercial development activities
primarily in New Jersey and residential development activities primarily in
central Florida.
Revenues, income from continuing operations before income tax and
identifiable assets of each industry segment were as follows:
Years Ended December 31
------------------------------
1997 1996 1995
---- ---- ----
Revenues (in millions)
Property and casualty insurance
Premiums earned....................................... $5,157.4 $4,569.3 $4,147.2
Investment income..................................... 721.4 656.2 613.3
Real estate............................................... 616.1 319.8 287.8
-------- -------- --------
6,494.9 5,545.3 5,048.3
Corporate investment income............................... 63.9 55.4 54.4
Realized investment gains
Property and casualty insurance....................... 90.2 65.2 95.1
Corporate............................................. 15.0 14.6 13.7
-------- -------- --------
Total revenues...................................... $6,664.0 $5,680.5 $5,211.5
======== ======== ========
Income (loss) from continuing operations before income tax
Property and casualty insurance........................... $ 828.2 $ 676.4 $ 697.2
Real estate............................................... (8.6) (235.9) 7.7
-------- -------- --------
819.6 440.5 704.9
Corporate................................................. 49.3 26.6 23.3
Realized investment gains
Property and casualty insurance....................... 90.2 65.2 95.1
Corporate............................................. 15.0 14.6 13.7
-------- -------- --------
Income from continuing operations before federal and
foreign income tax.................................. $ 974.1 $ 546.9 $ 837.0
======== ======== ========
December 31
---------------------------------
1997 1996 1995
---- ---- ----
(in millions)
Identifiable assets
Property and casualty insurance........................... $17,592.4 $16,577.9 $16,157.7
Real estate............................................... 815.2 1,641.3 1,842.8
--------- --------- ---------
Total identifiable assets........................... 18,407.6 18,219.2 18,000.5
Corporate................................................. 1,424.7 959.8 959.4
Adjustments and eliminations.............................. (216.7) (83.5) (168.2)
Net assets of discontinued operations..................... -- 843.4 844.6
--------- --------- ---------
Total assets........................................ $19,615.6 $19,938.9 $19,636.3
========= ========= =========
The following additional information is with respect to the more
significant groupings of classes of business for the property and casualty
insurance operations:
Years Ended December 31
------------------------------------
1997 1996 1995
---- ---- ----
(in millions)
Premiums earned
Personal.................................................. $1,188.1 $ 969.7 $ 847.5
Commercial................................................ 3,874.4 3,315.6 2,952.8
Reinsurance assumed....................................... 94.9 284.0 346.9
-------- -------- --------
Total premiums earned............................... $5,157.4 $4,569.3 $4,147.2
======== ======== ========
Income (loss) from operations before income tax
Personal.................................................. $ 184.1 $ 67.2 $ 97.3
Commercial................................................ (55.4) (18.2) (6.9)
Reinsurance assumed....................................... (11.7) (18.7) 3.8
-------- -------- --------
Underwriting income................................. 117.0 30.3 94.2
Net investment income..................................... 711.2 646.1 603.0
-------- -------- --------
Income from operations before income tax............ $ 828.2 $ 676.4 $ 697.2
======== ======== ========
55
23
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.
(15) 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. Prior to 1997, international business was also
obtained from treaty reinsurance assumed 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
-----------------------------------
1997 1996 1995
---- ---- ----
(in millions)
Revenues
United States............................................. $ 4,886.8 $ 4,145.7 $ 3,715.1
International............................................. 992.0 1,079.8 1,045.4
--------- --------- ---------
Total................................................... $ 5,878.8 $ 5,225.5 $ 4,760.5
========= ========= =========
Income from operations before income tax
United States............................................. $ 744.4 $ 571.6 $ 592.7
International............................................. 83.8 104.8 104.5
--------- --------- ---------
Total................................................... $ 828.2 $ 676.4 $ 697.2
========= ========= =========
December 31
-----------------------------------
1997 1996 1995
---- ---- ----
(in millions)
Identifiable assets
United States............................................. $15,826.8 $14,573.4 $14,055.3
International............................................. 1,765.6 2,004.5 2,102.4
--------- --------- ---------
Total................................................... $17,592.4 $16,577.9 $16,157.7
========= ========= =========
Foreign currency translation gains or losses credited or charged directly
to the separate component of shareholders' equity were as follows:
Years Ended December 31
------------------------------------
1997 1996 1995
---- ---- ----
(in millions)
Losses on translation of foreign currencies................. $(15.3) $(15.1) $(15.9)
Income tax (credit)
Current................................................. (5.0) (3.8) (6.0)
Deferred................................................ (.2) .9 3.3
------ ------ ------
$(10.1) $(12.2) $(13.2)
====== ====== ======
56
24
(16) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted income
from continuing operations per share:
Years Ended December 31
--------------------------------
1997 1996 1995
---- ---- ----
(in millions except for per
share amounts)
Basic earnings per share:
Income from continuing operations......................... $769.5 $486.2 $654.4
====== ====== ======
Weighted average number of common shares outstanding...... 171.6 174.2 173.9
====== ====== ======
Income from continuing operations per share............... $ 4.48 $ 2.79 $ 3.77
====== ====== ======
Diluted earnings per share:
Income from continuing operations......................... $769.5 $486.2 $654.4
After-tax interest expense on 6% exchangeable subordinated
notes................................................... 3.3 9.7 9.8
------ ------ ------
Income from continuing operations for computing diluted
earnings per share...................................... $772.8 $495.9 $664.2
====== ====== ======
Weighted average number of common shares outstanding...... 171.6 174.2 173.9
Additional shares from assumed conversion of 6%
exchangeable subordinated notes as if each $1,000 of
principal amount had been converted at issuance into
23.256 shares of common stock........................... 1.8 5.8 5.8
Additional shares from assumed exercise of stock-based
compensation awards..................................... 2.8 1.6 1.2
------ ------ ------
Weighted average number of common shares and potential
common shares assumed outstanding for computing diluted
earnings per share...................................... 176.2 181.6 180.9
====== ====== ======
Income from continuing operations per diluted share....... $ 4.39 $ 2.73 $ 3.67
====== ====== ======
For additional disclosures regarding the exchangeable subordinated notes and
stock-based compensation awards, see Notes (7) and (9).
(17) 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 which
can fluctuate based on such factors as interest rates, inflation, monetary
policy and general economic conditions.
(iii) Fair values of equity securities are based on quoted market prices.
(iv) Fair values of real estate mortgages and notes receivable are estimated
individually as the value of the discounted future cash flows of the loan,
subject to the estimated fair value of the underlying collateral. The cash
flows are discounted at rates based on a U.S. Treasury security with a
maturity similar to the loan, adjusted for credit risk.
(v) 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.
57
25
The carrying values and fair values of financial instruments were as follows:
December 31
-------------------------------------------
1997 1996
--------------------- -------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(in millions)
Assets
Invested assets
Short term investments.................................. $ 725.1 $ 725.1 $ 275.9 $ 275.9
Fixed maturities (Note 3)
Held-to-maturity...................................... 2,200.6 2,347.2 2,443.6 2,573.4
Available-for-sale.................................... 10,252.8 10,252.8 8,715.3 8,715.3
Equity securities....................................... 871.1 871.1 646.3 646.3
Real estate mortgages and notes receivable (Note 4)....... 123.8 121.0 502.4 487.2
Liabilities
Short term debt (Note 7).................................. -- -- 189.5 189.5
Long term debt (Note 7)................................... 398.6 402.8 1,070.5 1,128.5
(18) SHAREHOLDERS' EQUITY
(a) The authorized but unissued preferred shares may be issued in one or
more series and the shares of each series shall have such rights as fixed by the
Board of Directors.
(b) On March 1, 1996, 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
----------------------------------------
1997 1996 1995
---- ---- ----
(number of shares)
Common stock issued
Balance, beginning of year................................ 176,084,173 87,819,355 87,798,286
Two-for-one stock split................................... -- 87,819,355 --
Shares issued upon exchange of long term debt............. 2,440 480,464 --
Share activity under option and incentive plans........... (48,763) (35,001) 21,069
----------- ----------- ----------
Balance, end of year.................................. 176,037,850 176,084,173 87,819,355
----------- ----------- ----------
Treasury stock
Balance, beginning of year................................ 1,223,182 518,468 977,580
Two-for-one stock split................................... -- 518,468 --
Repurchase of shares...................................... 12,940,500 1,700,000 --
Shares issued upon exchange of long term debt............. (5,314,125) -- --
Share activity under option and incentive plans........... (1,529,147) (1,513,754) (459,112)
----------- ----------- ----------
Balance, end of year.................................. 7,320,410 1,223,182 518,468
----------- ----------- ----------
Common stock outstanding, end of year................. 168,717,440 174,860,991 87,300,887
=========== =========== ==========
(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.
58
26
The rights do not have the right to vote or to receive dividends. The
rights may be redeemed in whole, but not in part, at a price of $.01 per right
by the Corporation at any time until the tenth day after the acquisition of 25%
or more of the Corporation's outstanding common stock by a person or group. The
rights will expire at the close of business on June 12, 1999, unless previously
redeemed by the Corporation.
(d) The Corporation's insurance subsidiaries are required to file annual
statements with 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
------------------------------------------------
1997 1996
--------------------- ---------------------
GAAP Statutory GAAP Statutory
---- --------- ---- ---------
(in millions)
Property and casualty insurance subsidiaries*............... $4,162.5 $2,596.0 $3,788.7 $2,514.2
Discontinued life and health insurance operations........... -- -- 843.4 328.3
-------- -------- -------- --------
4,162.5 $2,596.0 4,632.1 $2,842.5
======== ========
Real estate subsidiary*..................................... 264.4 --
Corporate and eliminations.................................. 1,230.2 830.8
-------- --------
$5,657.1 $5,462.9
======== ========
A comparison of GAAP and statutory net income is as follows:
Years Ended December 31
---------------------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
GAAP Statutory GAAP Statutory GAAP Statutory
-------- --------- -------- --------- -------- ---------
(in millions)
Property and casualty insurance subsidiaries*..... $752.3 $652.4 $453.3 $560.2 $640.8 $571.2
Discontinued life and health insurance
operations...................................... -- -- 26.5** 34.0 42.2 26.8
------ ------ ------ ------ ------ ------
752.3 $652.4 479.8 $594.2 683.0 $598.0
====== ====== ======
Corporate and eliminations........................ 17.2 32.9 13.6
------ ------ ------
$769.5 $512.7 $696.6
====== ====== ======
* A property and casualty subsidiary owned the real estate subsidiary until
December 1997, when the real estate subsidiary was distributed to the
Corporation in the form of a dividend.
** Includes the $22.0 million 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 1997, these subsidiaries paid cash dividends to the Corporation totaling
$280.0 million.
The maximum dividend distribution that may be made by the property and
casualty insurance subsidiaries to the Corporation during 1998 without prior
approval is approximately $825.0 million.
59
27
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, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. 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, 1997 and 1996 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
As described in Note (1)(g) to the financial statements, The Chubb
Corporation changed its methods of accounting for impairment of long-lived
assets in 1996.
February 20, 1998 /s/ ERNST & YOUNG LLP
60
28
QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data for 1997 and 1996 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
------------------- ------------------- ------------------- -------------------
1997 1996 1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ---- ---- ----
(in millions except for per share amounts)
Revenues.............................. $1,576.9 $1,481.6 $1,509.6 $1,382.0 $1,568.8 $1,357.0 $2,008.7 $1,459.9
Claims and expenses................... 1,331.4 1,311.2 1,270.2 1,174.3 1,322.3 1,168.3 1,766.0 1,479.8
Federal and foreign income tax
(credit)............................ 53.4 30.0 50.7 42.9 52.5 34.4 48.0 (46.6)
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing operations... 192.1 140.4 188.7 164.8 194.0 154.3 194.7 26.7
Income (loss) from discontinued
operations, net of tax............ -- 11.0 -- 9.5 -- 10.9 -- (4.9)
-------- -------- -------- -------- -------- -------- -------- --------
Net income...................... $ 192.1 $ 151.4 $ 188.7 $ 174.3 $ 194.0 $ 165.2 $ 194.7 $ 21.8
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings per share
Income from continuing operations... $ 1.11 $ .81 $ 1.10 $ .94 $ 1.12 $ .88 $ 1.15 $ .16
Income (loss) from discontinued
operations........................ -- .06 -- .05 -- .06 -- (.02)
-------- -------- -------- -------- -------- -------- -------- --------
Net income...................... $ 1.11 $ .87 $ 1.10 $ .99 $ 1.12 $ .94 $ 1.15 $ .14
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings per share
Income from continuing operations... $ 1.08 $ .79 $ 1.08 $ .92 $ 1.10 $ .86 $ 1.13 $ .16
Income (loss) from discontinued
operations........................ -- .06 -- .05 -- .06 -- (.02)
-------- -------- -------- -------- -------- -------- -------- --------
Net income...................... $ 1.08 $ .85 $ 1.08 $ .97 $ 1.10 $ .92 $ 1.13 $ .14
======== ======== ======== ======== ======== ======== ======== ========
Underwriting ratios
Losses to premiums earned........... 63.9% 68.8% 63.3% 64.3% 65.3% 65.4% 65.5% 66.4%
Expenses to premiums written........ 32.4 32.5 32.0 32.0 32.2 31.8 32.9 32.0
-------- -------- -------- -------- -------- -------- -------- --------
Combined........................ 96.3% 101.3% 95.3% 96.3% 97.5% 97.2% 98.4% 98.4%
======== ======== ======== ======== ======== ======== ======== ========
On May 13, 1997, the Corporation completed the sale of its life and health
insurance operations. 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 $.12 per diluted share ($.12 per basic
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 $.89 per diluted share ($.91 per basic
share) for the after-tax effect of the write-down.
Earnings per share amounts for the first three quarters of 1997 and the
four quarters of 1996 have been restated to reflect the changes prescribed by
Statement of Financial Accounting Standards No. 128, Earnings per Share.
61
29
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 1997 and 1996.
1997
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Common stock prices
High.................................................... $62.25 $67.63 $71.75 $78.13
Low..................................................... 53.00 51.25 65.56 65.88
Dividends declared.......................................... .29 .29 .29 .29
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
At March 9, 1998, there were approximately 8,000 common shareholders of
record.
62