1
Supplementary Financial Data
IN MILLIONS
YEARS ENDED DECEMBER 31
1998 1997 1996
-------- -------- --------
PROPERTY AND CASUALTY INSURANCE
UNDERWRITING
Net Premiums Written................................... $5,503.5 $5,448.0 $4,773.8
Increase in Unearned Premiums.......................... (199.7) (290.6) (204.5)
-------- -------- --------
Premiums Earned........................................ 5,303.8 5,157.4 4,569.3
-------- -------- --------
Claims and Claim Expenses.............................. 3,493.7 3,307.0 3,010.8
Operating Costs and Expenses........................... 1,850.0 1,777.4 1,547.4
Increase in Deferred Policy Acquisition Costs.......... (51.8) (75.7) (42.5)
Dividends to Policyholders............................. 35.9 31.7 23.3
-------- -------- --------
Underwriting Income (Loss) Before Income Tax........... (24.0) 117.0 30.3
Federal and Foreign Income Tax (Credit)................ (9.9) 39.5 13.2
-------- -------- --------
UNDERWRITING INCOME (LOSS)............................. (14.1) 77.5 17.1
-------- -------- --------
INVESTMENTS
Investment Income Before Expenses and Income Tax....... 760.0 721.4 656.2
Investment Expenses.................................... 11.1 10.2 10.1
-------- -------- --------
Investment Income Before Income Tax.................... 748.9 711.2 646.1
Federal and Foreign Income Tax......................... 114.8 118.9 101.9
-------- -------- --------
INVESTMENT INCOME...................................... 634.1 592.3 544.2
-------- -------- --------
PROPERTY AND CASUALTY INCOME.............................. 620.0 669.8 561.3
-------- -------- --------
REAL ESTATE
Revenues.................................................. 82.2 616.1 319.8
Cost of Sales and Expenses................................ 85.7 624.7 555.7(a)
-------- -------- --------
Real Estate Loss Before Income Tax........................ (3.5) (8.6) (235.9)
Federal Income Tax Credit................................. (1.5) (3.5) (89.1)
-------- -------- --------
REAL ESTATE LOSS.......................................... (2.0) (5.1) (146.8)(a)
-------- -------- --------
CORPORATE, NET OF TAX....................................... 22.8 36.4 19.7
-------- -------- --------
CONSOLIDATED OPERATING INCOME FROM CONTINUING
OPERATIONS BEFORE RESTRUCTURING CHARGE............... 640.8 701.1 434.2
RESTRUCTURING CHARGE, NET OF TAX (B)........................ (26.0) -- --
-------- -------- --------
CONSOLIDATED OPERATING INCOME FROM CONTINUING
OPERATIONS AFTER RESTRUCTURING CHARGE................ 614.8 701.1 434.2
REALIZED INVESTMENT GAINS FROM CONTINUING OPERATIONS,
NET OF TAX................................................ 92.2 68.4 52.0
-------- -------- --------
CONSOLIDATED INCOME FROM CONTINUING OPERATIONS......... 707.0 769.5 486.2
INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX (C)......... -- -- 26.5
-------- -------- --------
CONSOLIDATED NET INCOME................................ $ 707.0 $ 769.5 $ 512.7
======== ======== ========
(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 the first quarter of 1998, the Corporation recorded a net charge of $26.0
million for the after-tax effect of a $40.0 million restructuring charge.
(c) 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)
1998 1997 1996 1995 1994
Personal Insurance
Automobile........................... $ 309.4 $ 298.6 $ 243.1 $ 200.3 $ 188.0
Homeowners........................... 735.1 697.4 546.1 455.6 436.5
Other................................ 320.2 310.4 250.0 210.9 204.3
-------- -------- -------- -------- --------
Total Personal.................. 1,364.7 1,306.4 1,039.2 866.8 828.8
-------- -------- -------- -------- --------
Commercial Insurance
Multiple Peril....................... 784.5 813.6 671.0 575.7 522.6
Casualty............................. 900.5 915.8 818.0 717.3 667.8
Workers' Compensation................ 320.8 296.7 243.7 223.4 201.6
Property and Marine.................. 524.0 583.0 495.0 426.3 360.0
Executive Protection................. 949.8 891.4 775.7 647.0 596.4
Financial Institutions............... 391.6 384.3 340.4 285.5 260.0
Other................................ 267.6 260.6 188.3 195.5 198.8
-------- -------- -------- -------- --------
Total Commercial................ 4,138.8 4,145.4 3,532.1 3,070.7 2,807.2
-------- -------- -------- -------- --------
Total Before Reinsurance
Assumed...................... 5,503.5 5,451.8 4,571.3 3,937.5 3,636.0
Reinsurance Assumed.................... -- (3.8) 202.5 368.5 315.2
-------- -------- -------- -------- --------
Total........................... $5,503.5 $5,448.0 $4,773.8 $4,306.0 $3,951.2
======== ======== ======== ======== ========
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........................... 89.2% 86.6% 86.5% 87.4% 96.3%
Homeowners........................... 90.8 88.9 104.3 93.8 110.2
Other................................ 70.2 66.9 69.3 72.6 80.7
-------- -------- -------- -------- --------
Total Personal.................. 85.6 83.1 91.7 87.1 99.8
-------- -------- -------- -------- --------
Commercial Insurance
Multiple Peril....................... 124.2 118.7 118.1 110.0 112.4
Casualty............................. 114.6 113.5 113.3 113.8 101.9
Workers' Compensation................ 111.5 105.0 101.8 95.1 103.9
Property and Marine.................. 116.5 105.5 97.8 92.9 102.5
Executive Protection................. 75.8 74.5 76.5 82.1 81.4
Financial Institutions............... 86.7 91.5 83.7 88.8 96.2
Other................................ 100.9 85.0 99.0 103.9 105.4
-------- -------- -------- -------- --------
Total Commercial................ 104.5 100.7 99.7 99.3 99.4
-------- -------- -------- -------- --------
Total Before Reinsurance
Assumed...................... 99.8 96.6 97.9 96.5 99.5
Reinsurance Assumed.................... -- N/M N/M 99.2 100.1
-------- -------- -------- -------- --------
Total........................... 99.8% 96.9% 98.3% 96.8% 99.5%
======== ======== ======== ======== ========
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 1998 1997 1996
REVENUES
Property and Casualty Insurance
Premiums Earned............................................ $5,303.8 $5,157.4 $4,569.3
Investment Income.......................................... 760.0 721.4 656.2
Real Estate................................................. 82.2 616.1 319.8
Corporate Investment Income................................. 61.9 63.9 55.4
Realized Investment Gains................................... 141.9 105.2 79.8
TOTAL REVENUES........................................... 6,349.8 6,664.0 5,680.5
COMPONENTS OF NET INCOME*
Property and Casualty Insurance
Underwriting Income (Loss)(b).............................. (14.1) 77.5 17.1
Investment Income.......................................... 634.1 592.3 544.2
Property and Casualty Insurance Income...................... 594.0(e) 669.8 561.3
Real Estate Income (Loss)................................... (2.0) (5.1) (146.8)(f)
Corporate Income............................................ 22.8 36.4 19.7
OPERATING INCOME FROM CONTINUING OPERATIONS.............. 614.8 701.1 434.2
Realized Investment Gains from Continuing Operations........ 92.2 68.4 52.0
INCOME FROM CONTINUING OPERATIONS........................ 707.0 769.5 486.2
Income from Discontinued Operations......................... -- -- 26.5
NET INCOME............................................... 707.0 769.5 512.7
DILUTED EARNINGS PER SHARE
Operating Income from Continuing Operations(b).............. 3.65(e) 4.00 2.44(f)
Income from Continuing Operations........................... 4.19 4.39 2.73
Income from Discontinued Operations......................... -- -- .15
Net Income.................................................. 4.19 4.39 2.88
DIVIDENDS DECLARED ON COMMON STOCK............................ 204.7 198.3 188.7
Per Share................................................... 1.24 1.16 1.08
CHANGE IN UNREALIZED APPRECIATION OR DEPRECIATION OF
INVESTMENTS, NET............................................ 14.6 161.4 (107.2)
AT YEAR END
TOTAL ASSETS.................................................. $20,746.0 $19,615.6 $19,938.9
INVESTED ASSETS
Property and Casualty Insurance............................. 13,715.0 12,777.3 11,190.7
Corporate................................................... 1,040.3 1,272.3 890.4
UNPAID CLAIMS................................................. 10,356.5 9,772.5 9,523.7
LONG TERM DEBT................................................ 607.5 398.6 1,070.5
TOTAL SHAREHOLDERS' EQUITY.................................... 5,644.1 5,657.1 5,462.9
Per Common Share............................................ 34.78 33.53 31.24
* The federal and foreign income tax provided for each component of income
represents its allocated portion of the consolidated provision.
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.
38
4
1995 1994 1993 1992 1991 1990 1989
$4,147.2 $3,776.3 $3,504.8(a) $3,163.3 $3,037.2 $2,836.1 $2,693.5
613.3 570.5 541.7 501.1 477.0 463.4 426.2
287.8 204.9 160.6 150.0 140.9 174.9 221.3
54.4 49.4 52.7 57.2 46.3 39.6 25.2
108.8 54.1 210.6 174.1 61.1 39.6 40.2
5,211.5 4,655.2 4,470.4 4,045.7 3,762.5 3,553.6 3,406.4
55.7 (7.8) (337.5)(c) (15.3) 18.6 20.7(d) (25.0)
507.2 475.0 455.4 422.8 397.6 371.4 330.1
562.9 467.2 117.9 407.5 416.2 392.1 305.1
6.0 (2.0) (2.2) 10.0 25.0 40.0 42.0
14.8 7.6 14.4 19.8 16.3 14.7 .7
583.7 472.8 130.1 437.3 457.5 446.8 347.8
70.7 35.1 137.3 114.8 40.3 25.8 26.4
654.4 507.9 267.4 552.1 497.8 472.6 374.2
42.2 20.6 76.8 65.0 54.2 49.5 46.6
696.6 528.5 324.2(g) 617.1 552.0 522.1 420.8
3.27 2.66 .77(c) 2.47 2.61 2.59(d) 2.03
3.67 2.85 1.52 3.10 2.84 2.74 2.18
.23 .11 .42 .36 .30 .28 .27
3.90 2.96 1.83(g) 3.46 3.14 3.02 2.45
170.6 161.1 150.8 139.6 127.8 109.1 96.5
.98 .92 .86 .80 .74 .66 .58
470.2 (487.9) 46.5 (82.1) 12.2 (19.4) 70.3
$19,636.3 $17,761.0 $16,729.5 $15,197.6 $13,885.9 $12,347.8 $11,390.4
10,013.6 8,938.8 8,403.1 7,767.5 7,086.6 6,297.8 5,793.7
906.6 879.5 965.7 955.8 840.3 688.4 647.8
9,588.2 8,913.2 8,235.4 7,220.9 6,591.3 6,016.4 5,605.0
1,150.8 1,279.6 1,267.2 1,065.6 1,045.8 812.6 604.2
5,262.7 4,247.0 4,196.1 3,954.4 3,541.6 2,882.6 2,603.7
30.14 24.46 23.92 22.59 20.37 17.60 15.42
(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) Underwriting 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, and $19.2 million or $.11 per share in
1989 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) Underwriting 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) Underwriting 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) Property and casualty insurance income has been reduced by a net charge of
$26.0 million or $.15 per share for the after-tax effect of a $40.0 million
restructuring charge.
(f) Real estate 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.
(g) 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.
39
5
The Chubb Corporation
CONSOLIDATED STATEMENTS OF INCOME
IN MILLIONS
YEARS ENDED DECEMBER 31
1998 1997 1996
REVENUES -------- -------- --------
Premiums Earned (Note 13).............................. $5,303.8 $5,157.4 $4,569.3
Investment Income (Note 4)............................. 821.9 785.3 711.6
Real Estate............................................ 82.2 616.1 319.8
Realized Investment Gains (Note 4)..................... 141.9 105.2 79.8
-------- -------- --------
TOTAL REVENUES.................................... 6,349.8 6,664.0 5,680.5
-------- -------- --------
CLAIMS AND EXPENSES
Insurance Claims (Notes 13 and 15)..................... 3,493.7 3,307.0 3,010.8
Amortization of Deferred Policy Acquisition Costs (Note
6).................................................... 1,464.3 1,402.6 1,238.0
Other Insurance Operating Costs and Expenses........... 369.8 330.8 290.2
Real Estate Cost of Sales and Expenses (Note 5)........ 85.7 624.7 555.7
Investment Expenses.................................... 13.2 12.0 12.3
Corporate Expenses..................................... 33.4 12.8 26.6
Restructuring Charge (Note 12)......................... 40.0 -- --
-------- -------- --------
TOTAL CLAIMS AND EXPENSES......................... 5,500.1 5,689.9 5,133.6
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE FEDERAL
AND FOREIGN INCOME TAX.......................... 849.7 974.1 546.9
FEDERAL AND FOREIGN INCOME TAX (NOTE 9)..................... 142.7 204.6 60.7
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS................. 707.0 769.5 486.2
DISCONTINUED OPERATIONS, NET OF TAX (NOTE 3)
Income from Operations................................. -- -- 48.5
Loss on Disposal....................................... -- -- (22.0)
-------- -------- --------
INCOME FROM DISCONTINUED OPERATIONS............... -- -- 26.5
-------- -------- --------
NET INCOME........................................ $ 707.0 $ 769.5 $ 512.7
======== ======== ========
BASIC EARNINGS PER SHARE (NOTE 17)
Income from Continuing Operations...................... $ 4.27 $ 4.48 $ 2.79
Income from Discontinued Operations.................... -- -- .15
-------- -------- --------
Net Income........................................ $ 4.27 $ 4.48 $ 2.94
======== ======== ========
DILUTED EARNINGS PER SHARE (NOTE 17)
Income from Continuing Operations...................... $ 4.19 $ 4.39 $ 2.73
Income from Discontinued Operations.................... -- -- .15
-------- -------- --------
Net Income........................................ $ 4.19 $ 4.39 $ 2.88
======== ======== ========
See accompanying notes.
40
6
The Chubb Corporation
CONSOLIDATED BALANCE SHEETS
IN MILLIONS
DECEMBER 31
1998 1997
ASSETS --------- ---------
Invested Assets (Note 4)
Short Term Investments................................. $ 344.2 $ 725.1
Fixed Maturities
Held-to-Maturity -- Tax Exempt (market $2,140.2 and
$2,347.2)........................................... 2,002.2 2,200.6
Available-for-Sale
Tax Exempt (cost $6,509.3 and $5,408.4)........... 6,935.1 5,766.9
Taxable (cost $4,259.0 and $4,366.0).............. 4,381.6 4,485.9
Equity Securities (cost $1,002.6 and $733.9)........... 1,092.2 871.1
--------- ---------
TOTAL INVESTED ASSETS................................ 14,755.3 14,049.6
Cash...................................................... 8.3 11.5
Accrued Investment Income................................. 221.0 203.8
Premiums Receivable....................................... 1,199.3 1,144.4
Reinsurance Recoverable on Unpaid Claims.................. 1,306.6 1,207.9
Prepaid Reinsurance Premiums.............................. 134.6 115.2
Funds Held for Asbestos-Related Settlement (Note 15)...... 607.4 599.5
Deferred Policy Acquisition Costs (Note 6)................ 728.7 676.9
Real Estate Assets (Notes 5 and 8)........................ 746.0 790.0
Deferred Income Tax (Note 9).............................. 320.8 317.0
Other Assets.............................................. 718.0 499.8
--------- ---------
TOTAL ASSETS......................................... $20,746.0 $19,615.6
========= =========
LIABILITIES
Unpaid Claims (Note 15)................................... $10,356.5 $ 9,772.5
Unearned Premiums......................................... 2,915.7 2,696.6
Long Term Debt (Note 8)................................... 607.5 398.6
Dividend Payable to Shareholders.......................... 50.3 49.0
Accrued Expenses and Other Liabilities.................... 1,171.9 1,041.8
--------- ---------
TOTAL LIABILITIES.................................... 15,101.9 13,958.5
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES (NOTES 14, 15 AND 21)
SHAREHOLDERS' EQUITY (NOTES 10 AND 20)
Preferred Stock -- Authorized 4,000,000 Shares;
$1 Par Value; Issued -- None........................... -- --
Common Stock -- Authorized 600,000,000 Shares;
$1 Par Value; Issued 175,989,202 and 176,037,850
Shares................................................. 176.0 176.0
Paid-In Surplus........................................... 546.7 593.0
Retained Earnings......................................... 5,604.0 5,101.7
Accumulated Other Comprehensive Income
Unrealized Appreciation of Investments, Net of Tax
(Note 4).............................................. 414.7 400.1
Foreign Currency Translation Losses, Net of Tax........ (36.0) (25.7)
Receivable from Employee Stock Ownership Plan............. (86.3) (96.7)
Treasury Stock, at Cost -- 13,722,376 and 7,320,410
Shares................................................. (975.0) (491.3)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY........................... 5,644.1 5,657.1
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... $20,746.0 $19,615.6
========= =========
See accompanying notes.
41
7
The Chubb Corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
IN MILLIONS
YEARS ENDED DECEMBER 31
1998 1997 1996
-------- -------- --------
PREFERRED STOCK
Balance, Beginning and End of Year..................... $ -- $ -- $ --
-------- -------- --------
COMMON STOCK
Balance, Beginning of Year............................. 176.0 176.1 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.............................. 176.0 176.0 176.1
-------- -------- --------
PAID-IN SURPLUS
Balance, Beginning of Year............................. 593.0 695.7 778.2
Two-for-One Stock Split................................ -- -- (87.8)
Exchange of Long Term Debt............................. -- (68.4) 20.8
Share Activity under Option and Incentive Plans........ (46.3) (34.3) (15.5)
-------- -------- --------
Balance, End of Year.............................. 546.7 593.0 695.7
-------- -------- --------
RETAINED EARNINGS
Balance, Beginning of Year............................. 5,101.7 4,530.5 4,206.5
Net Income............................................. 707.0 769.5 512.7
Dividends Declared (per share $1.24, $1.16 and
$1.08)............................................... (204.7) (198.3) (188.7)
-------- -------- --------
Balance, End of Year.............................. 5,604.0 5,101.7 4,530.5
-------- -------- --------
UNREALIZED APPRECIATION OF INVESTMENTS
Balance, Beginning of Year............................. 400.1 238.7 345.9
Change During Year, Net (Note 4)....................... 14.6 161.4 (107.2)
-------- -------- --------
Balance, End of Year.............................. 414.7 400.1 238.7
-------- -------- --------
FOREIGN CURRENCY TRANSLATION LOSSES
Balance, Beginning of Year............................. (25.7) (15.6) (3.4)
Change During Year, Net of Tax......................... (10.3) (10.1) (12.2)
-------- -------- --------
Balance, End of Year.............................. (36.0) (25.7) (15.6)
-------- -------- --------
RECEIVABLE FROM EMPLOYEE STOCK OWNERSHIP PLAN
Balance, Beginning of Year............................. (96.7) (106.3) (115.0)
Principal Repayments................................... 10.4 9.6 8.7
-------- -------- --------
Balance, End of Year.............................. (86.3) (96.7) (106.3)
-------- -------- --------
TREASURY STOCK, AT COST
Balance, Beginning of Year............................. (491.3) (56.2) (37.3)
Repurchase of Shares................................... (608.5) (827.9) (82.5)
Shares Issued upon Exchange of Long Term Debt.......... -- 304.4 --
Share Activity under Option and Incentive Plans........ 124.8 88.4 63.6
-------- -------- --------
Balance, End of Year.............................. (975.0) (491.3) (56.2)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY........................ $5,644.1 $5,657.1 $5,462.9
======== ======== ========
See accompanying notes.
42
8
The Chubb Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN MILLIONS
YEARS ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................ $ 707.0 $ 769.5 $ 512.7
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Claims, Net......................... 485.3 808.7 141.4
Increase in Unearned Premiums, Net..................... 199.7 290.6 204.5
Increase in Premiums Receivable........................ (54.9) (159.5) (124.5)
Change in Funds Held for Asbestos-Related Settlement... (7.9) .4 438.2
Decrease in Medical Reinsurance Related Receivable..... -- -- 191.2
Increase in Deferred Policy Acquisition Costs.......... (51.8) (75.7) (42.5)
Deferred Income Tax Credit............................. (5.5) (33.3) (117.6)
Write-down of Real Estate Assets....................... -- -- 255.0
Depreciation........................................... 58.2 56.4 59.0
Realized Investment Gains.............................. (141.9) (105.2) (79.8)
Income from Discontinued Operations, Net............... -- -- (26.5)
Other, Net............................................. 25.8 13.2 188.2
--------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES......................................... 1,214.0 1,565.1 1,599.3
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Fixed Maturities -- Available-for-
Sale..................................................... 1,668.8 3,682.6 3,430.5
Proceeds from Maturities of Fixed Maturities.............. 784.2 658.5 762.9
Proceeds from Sales of Equity Securities.................. 366.7 401.3 383.0
Proceeds from Sale of Discontinued Operations, Net........ -- 861.2 --
Purchases of Fixed Maturities............................. (3,218.4) (5,394.8) (5,520.5)
Purchases of Equity Securities............................ (535.7) (519.3) (395.2)
Decrease (Increase) in Short Term Investments, Net........ 380.9 (449.2) 153.4
Proceeds from Sale of Real Estate Properties.............. 33.6 759.6 17.4
Additions to Real Estate Assets........................... (13.2) (40.1) (94.3)
Purchases of Fixed Assets, Net............................ (78.8) (71.0) (58.7)
Other, Net................................................ (75.5) 41.1 (53.2)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES................ (687.4) (70.1) (1,374.7)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Long Term Debt.................. 400.5 10.2 86.0
Repayment of Long Term Debt............................... (191.6) (344.9) (145.6)
Increase (Decrease) in Short Term Debt, Net............... -- (189.5) 37.8
Dividends Paid to Shareholders............................ (203.4) (196.5) (184.2)
Repurchase of Shares...................................... (608.5) (827.9) (82.5)
Other, Net................................................ 73.2 60.4 56.7
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES................ (529.8) (1,488.2) (231.8)
--------- --------- ---------
Net Increase (Decrease) in Cash............................. (3.2) 6.8 (7.2)
Cash at Beginning of Year................................... 11.5 4.7 11.9
--------- --------- ---------
CASH AT END OF YEAR.................................. $ 8.3 $ 11.5 $ 4.7
========= ========= =========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net Income.................................................. $ 707.0 $ 769.5 $ 512.7
Other Comprehensive Income (Loss)
Change in Unrealized Appreciation of Investments,
Net of Tax............................................. 14.6 161.4 (107.2)
Change in Foreign Currency Translation Losses,
Net of Tax............................................. (10.3) (10.1) (12.2)
--------- --------- ---------
4.3 151.3 (119.4)
--------- --------- ---------
COMPREHENSIVE INCOME................................. $ 711.3 $ 920.8 $ 393.3
========= ========= =========
See accompanying notes.
43
9
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include the
accounts of The Chubb Corporation (Corporation) and its subsidiaries.
Significant intercompany transactions have been eliminated in consolidation.
The consolidated financial statements reflect estimates and judgments made by
management for those transactions that are not yet complete or for which the
ultimate effects cannot be precisely determined. Such estimates and judgments
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Corporation is a holding company with subsidiaries principally engaged in
the property and casualty insurance business. The property and casualty
insurance subsidiaries underwrite most forms of property and casualty insurance
in the United States, Canada, Europe and parts of Australia, Latin America and
the Far East. The geographic distribution of property and casualty business in
the United States is broad with a particularly strong market presence in the
Northeast.
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 (3)). All footnote disclosures
reflect continuing operations only, unless otherwise noted.
Certain amounts in the consolidated financial statements for prior years have
been reclassified to conform with the 1998 presentation.
(b) Investments
Short term investments, which have an original maturity of one year or less,
are carried at amortized cost.
Fixed maturities, which include bonds and redeemable preferred stocks, are
purchased to support the investment strategies of the Corporation and its
insurance subsidiaries. These strategies are developed based on many factors
including rate of return, maturity, credit risk, tax considerations and
regulatory requirements. Fixed maturities which may be sold prior to maturity to
support the investment strategies of the Corporation and its insurance
subsidiaries are classified as available-for-sale and carried at market value as
of the balance sheet date. Those fixed maturities which the Corporation and its
insurance subsidiaries have the ability and positive intent to hold to maturity
are classified as held-to-maturity and carried at amortized cost.
Premiums and discounts arising from the purchase of mortgage-backed securities
are amortized using the interest method over the estimated remaining term of the
securities, adjusted for anticipated prepayments.
Equity securities, which include common stocks and non-redeemable preferred
stocks, are carried at market value as of the balance sheet date.
Unrealized appreciation or depreciation of investments carried at market value
is excluded from net income and credited or charged, net of applicable deferred
income tax, directly to other comprehensive income, which is a component of
shareholders' equity.
Realized gains and losses on the sale of investments are determined on the
basis of the cost of the specific investments sold and are credited or charged
to net income.
(c) Premium Revenues and Related Expenses
Premiums are earned on a monthly pro rata basis over the terms of the
policies. Revenues include estimates of audit premiums and premiums on
retrospectively rated policies. Unearned premiums represent the portion of
premiums written applicable to the unexpired terms of policies in force.
Acquisition costs are deferred by major product groups and amortized over the
period in which the related premiums are earned. Such costs include commissions,
premium taxes and other costs that vary with and are primarily related to the
production of business. Deferred policy acquisition costs are reviewed to
determine that they do not exceed recoverable amounts, after considering
anticipated investment income.
(d) Unpaid Claims
Liabilities for unpaid claims include the accumulation of individual case
estimates for claims reported as well as estimates of unreported claims and
claim settlement expenses, less estimates of anticipated salvage and subrogation
recoveries. Estimates are based upon past claim experience modified for current
trends as well as prevailing economic, legal and social conditions. Such
estimates are continually reviewed and updated. Any resulting adjustments are
reflected in current operating results.
(e) Reinsurance
In the ordinary course of business, the Corporation's insurance subsidiaries
assume and cede reinsurance with other insurance companies and are members of
various pools and associations. Reinsurance is ceded to provide greater
diversification of business and to limit the maximum net loss potential arising
from large or concentrated risks. A large portion of the reinsurance is effected
under contracts known as treaties and in some instances by negotiation on
individual risks. Certain of these arrangements consist of excess of loss and
catastrophe contracts which protect against losses over stipulated amounts
arising from any one occurrence or event. Ceded reinsurance contracts do not
relieve the Corporation's insurance subsidiaries of their primary obligation to
the policyholders.
44
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 (15)).
(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.
Real estate properties are reviewed for impairment whenever events or
circumstances indicate that the carrying value of such properties may not be
recoverable. In performing the review for recoverability of carrying value,
estimates are made of the future undiscounted cash flows from each of the
properties during the period the property will be held and upon its eventual
disposition. If the expected future undiscounted cash flows are less than the
carrying value of any such property, an impairment loss is recognized resulting
in a write-down of the carrying value of the property. Measurement of such
impairment is based on the fair value of the property.
Depreciation of real estate properties is calculated using the straight-line
method over the estimated useful lives of the properties.
Real estate mortgages and notes receivable are carried at unpaid principal
balances less an allowance for uncollectible amounts. A loan is considered
impaired when it is probable that all principal and interest amounts will not be
collected according to the contractual terms of the loan agreement. An allowance
for uncollectible amounts is established to recognize any such impairment.
Measurement of impairment is based on the discounted future cash flows of the
loan, subject to the estimated fair value of the underlying collateral. These
cash flows are discounted at the loan's effective interest rate.
Rental revenues are recognized on a straight-line basis over the term of the
lease. Profits on land, townhome unit and commercial building sales are
recognized at closing, subject to compliance with applicable accounting
guidelines. Profits on high-rise condominium unit sales are recognized using the
percentage of completion method, subject to achievement of a minimum level of
unit sales. 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 net income in the period in which such change is enacted.
U. S. federal income taxes are accrued on undistributed earnings of foreign
subsidiaries.
(k) Foreign Exchange
Assets and liabilities relating to foreign operations are translated into U.S.
dollars using current exchange rates; revenues and expenses are translated into
U.S. dollars using the average exchange rates for each year.
The functional currency of foreign operations is generally the currency of the
local operating environment since their business is primarily transacted in such
local currency. Translation gains and losses, net of applicable income tax, are
excluded from net income and are credited or charged directly to other
comprehensive income, which is a component of shareholders' equity.
45
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 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 requires that all derivatives be recognized as assets or liabilities and
be measured at fair value. The accounting for changes in the fair value of the
derivative depends on the intended use of the derivative. SFAS No. 133 is
effective for the Corporation on January 1, 2000. This Statement should not be
applied retroactively to financial statements of prior periods. Currently, the
Corporation's use of derivative instruments is not significant. Thus, the
adoption of SFAS No. 133 is not expected to have a significant effect on the
Corporation's financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This SOP requires that certain
costs incurred to develop or obtain computer software for internal use should be
capitalized and amortized over the software's expected useful life. Currently,
the Corporation expenses all development costs of internal use computer
software. SOP 98-1 is effective for the Corporation on January 1, 1999 and is to
be applied prospectively. The adoption of SOP 98-1 will increase the
Corporation's net income in 1999 by an amount that has not yet been quantified.
The effect on net income will decrease in future years as the new method of
accounting is phased in.
(2) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Corporation adopted SFAS No. 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, as amended by SFAS No. 127, Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125. 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 include
securitizations, repurchase agreements and securities lending. The Corporation
currently engages in securities lending. The Statement has been applied
prospectively. Adoption of SFAS No. 125 did not have a significant impact on the
Corporation's financial position or results of operations.
Effective January 1, 1998, the Corporation adopted SOP 97-3, Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments, which was
issued by the AICPA. 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 SOP requires that a liability be
recognized for insurance-related assessments when an assessment has been imposed
or it is probable that an assessment will be imposed, the event obligating an
entity to pay the imposed or probable assessment has occurred and the amount of
the assessment can be reasonably estimated. Restatement of prior years'
financial statements is not permitted. Since the Corporation's previous
accounting policy for insurance-related assessments was consistent with the
requirements of SOP 97-3, the adoption of SOP 97-3 did not have any impact on
the Corporation's financial position or results of operations.
(3) 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 1998 and will not affect net income in
future periods.
The results of the discontinued operations for the year ended December 31,
1996 were as follows:
(in millions)
Total revenues................................. $816.8
Total benefits, claims and expenses............ 743.9
------
Income before federal income tax............. 72.9
Federal income tax............................. 24.4
------
Income from operations....................... $ 48.5
======
46
12
(4) INVESTED ASSETS AND RELATED INCOME
(a) The amortized cost and estimated market value of fixed maturities were as
follows:
December 31
------------------------------------------------------------------------------
1998 1997
--------------------------------------------------- ------------------------
Gross Gross Estimated Gross
Amortized Unrealized Unrealized Market Amortized Unrealized
Cost Appreciation Depreciation Value Cost Appreciation
--------- ------------ ------------ --------- --------- ------------
(in millions)
Held-to-maturity -- Tax exempt....... $ 2,002.2 $138.0 $-- $ 2,140.2 $ 2,200.6 $146.7
--------- ------ ----- --------- --------- ------
Available-for-sale
Tax exempt......................... 6,509.3 427.9 2.1 6,935.1 5,408.4 358.6
--------- ------ ----- --------- --------- ------
Taxable
U.S. Government and government
agency and authority
obligations.................... 344.2 8.8 -- 353.0 594.3 9.9
Corporate bonds.................. 1,031.9 44.5 .6 1,075.8 819.9 27.0
Foreign bonds.................... 1,118.3 85.4 1.6 1,202.1 1,022.5 46.3
Mortgage-backed securities....... 1,694.3 22.1 38.9 1,677.5 1,778.2 35.8
Redeemable preferred stocks...... 70.3 2.9 -- 73.2 151.1 8.4
--------- ------ ----- --------- --------- ------
4,259.0 163.7 41.1 4,381.6 4,366.0 127.4
--------- ------ ----- --------- --------- ------
Total available-for-sale....... 10,768.3 591.6 43.2 11,316.7 9,774.4 486.0
--------- ------ ----- --------- --------- ------
Total fixed maturities......... $12,770.5 $729.6 $43.2 $13,456.9 $11,975.0 $632.7
========= ====== ===== ========= ========= ======
December 31
------------------------
1997
------------------------
Gross Estimated
Unrealized Market
Depreciation Value
------------ ---------
(in millions)
Held-to-maturity -- Tax exempt....... $ .1 $ 2,347.2
---- ---------
Available-for-sale
Tax exempt......................... .1 5,766.9
---- ---------
Taxable
U.S. Government and government
agency and authority
obligations.................... .1 604.1
Corporate bonds.................. 2.4 844.5
Foreign bonds.................... 2.4 1,066.4
Mortgage-backed securities....... 2.6 1,811.4
Redeemable preferred stocks...... -- 159.5
---- ---------
7.5 4,485.9
---- ---------
Total available-for-sale....... 7.6 10,252.8
---- ---------
Total fixed maturities......... $7.7 $12,600.0
==== =========
The amortized cost and estimated market value of fixed maturities at December
31, 1998 by contractual maturity were as follows:
Estimated
Amortized Market
Cost Value
--------- ---------
(in millions)
Held-to-maturity
Due in one year or less.................................. $ 122.5 $ 124.4
Due after one year through five years.................... 612.4 644.4
Due after five years through ten years................... 851.6 918.5
Due after ten years...................................... 415.7 452.9
-------- --------
$2,002.2 $2,140.2
======== ========
Available-for-sale
Due in one year or less.................................. $ 248.7 $ 250.9
Due after one year through five years.................... 1,216.0 1,272.5
Due after five years through ten years................... 3,223.3 3,461.6
Due after ten years...................................... 4,386.0 4,654.2
--------- ---------
9,074.0 9,639.2
Mortgage-backed securities............................... 1,694.3 1,677.5
--------- ---------
$10,768.3 $11,316.7
========= =========
Actual maturities could differ from contractual maturities because borrowers may
have the right to call or prepay obligations.
(b) The components of unrealized appreciation of investments carried at market
value were as follows:
December 31
-------------------
1998 1997
---- ----
(in millions)
Equity securities
Gross unrealized appreciation........................... $164.6 $160.6
Gross unrealized depreciation........................... 75.0 23.4
------ ------
89.6 137.2
------ ------
Fixed maturities
Gross unrealized appreciation........................... 591.6 486.0
Gross unrealized depreciation........................... 43.2 7.6
------ ------
548.4 478.4
------ ------
638.0 615.6
Deferred income tax liability............................. 223.3 215.5
------ ------
$414.7 $400.1
====== ======
47
13
The change in unrealized appreciation of investments carried at market value
was as follows:
Years Ended December 31
-------------------------------
1998 1997 1996
---- ---- ----
(in millions)
Continuing operations
Change in unrealized appreciation
of equity securities............. $(47.6) $ 31.4 $ 17.3
Change in unrealized appreciation
of fixed maturities.............. 70.0 216.9 (119.6)
------ ------ -------
22.4 248.3 (102.3)
Deferred income tax (credit)....... 7.8 86.9 (35.8)
------ ------ -------
Change in unrealized
appreciation..................... 14.6 161.4 (66.5)
Discontinued operations, net........ -- -- (40.7)
------ ------ -------
$ 14.6 $161.4 $(107.2)
====== ====== =======
The unrealized appreciation of fixed maturities carried at amortized cost is
not reflected in the financial statements. The change in unrealized appreciation
of fixed maturities of continuing operations carried at amortized cost was a
decrease of $8.6 million, an increase of $16.8 million and a decrease of $48.2
million for the years ended December 31, 1998, 1997 and 1996, respectively.
(c) The sources of net investment income were as follows:
Years Ended December 31
------------------------------------
1998 1997 1996
---- ---- ----
(in millions)
Fixed maturities..................... $761.1 $726.1 $669.7
Equity securities.................... 24.7 10.8 10.0
Short term investments............... 35.8 47.6 23.9
Other................................ .3 .8 8.0
------ ------ ------
Gross investment income............. 821.9 785.3 711.6
Investment expenses.................. 13.2 12.0 12.3
------ ------ ------
$808.7 $773.3 $699.3
====== ====== ======
(d) Realized investment gains and losses were as follows:
Years Ended December 31
------------------------------------
1998 1997 1996
---- ---- ----
(in millions)
Gross realized investment gains
Fixed maturities.................... $ 49.2 $ 56.3 $ 56.4
Equity securities................... 118.5 93.8 75.5
------ ------ ------
167.7 150.1 131.9
------ ------ ------
Gross realized investment losses
Fixed maturities.................... 7.0 26.5 45.7
Equity securities................... 18.8 18.4 6.4
------ ------ ------
25.8 44.9 52.1
------ ------ ------
Realized investment gains............ 141.9 105.2 79.8
Income tax........................... 49.7 36.8 27.8
------ ------ ------
$ 92.2 $ 68.4 $ 52.0
====== ====== ======
(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 generate additional income for the
Corporation. At December 31, 1998 and 1997, the Corporation had no securities
loaned to other institutions. Securities lending activity in 1998 was
insignificant. The maximum amount of loaned securities outstanding during 1997
was approximately $230 million.
(5) REAL ESTATE
In October 1996, the Corporation announced that its real estate subsidiary was
exploring the possible sale of all or a significant portion of its assets. In
March 1997, the real estate subsidiary 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 1997, 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. Closing on the one remaining
property under the agreement is expected to occur in 1999. The real estate
subsidiary is continuing to explore the sale of certain of its remaining
properties.
The components of real estate assets were as follows:
December 31
-------------------
1998 1997
---- ----
(in millions)
Mortgages and notes receivable (net of allowance
for uncollectible amounts of $16.8 and $24.0)..... $105.2 $123.8
Income producing properties........................ 166.5 163.8
Construction in progress........................... 109.2 95.8
Land under development and unimproved land......... 365.1 406.6
------ ------
$746.0 $790.0
====== ======
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 $106.9 million and
$121.0 million at December 31, 1998 and 1997, 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 $2.9 million,
$2.7 million and $11.0 million for 1998, 1997 and 1996, respectively.
48
14
(6) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs deferred and the related amortization charged against
income were as follows:
Years Ended December 31
---------------------------------
1998 1997 1996
---- ---- ----
(in millions)
Balance, beginning of year.... $ 676.9 $ 601.2 $ 558.7
--------- --------- ---------
Costs deferred during year
Commissions and brokerage... 768.0 775.0 653.5
Premium taxes and
assessments............... 128.5 124.9 114.7
Salaries and overhead....... 619.6 578.4 512.3
--------- --------- ---------
1,516.1 1,478.3 1,280.5
Amortization during year...... (1,464.3) (1,402.6) (1,238.0)
--------- --------- ---------
Balance, end of year.......... $ 728.7 $ 676.9 $ 601.2
========= ========= =========
(7) PROPERTY AND EQUIPMENT
Property and equipment included in other assets were as follows:
December 31
-------------------
1998 1997
---- ----
(in millions)
Cost.......................................... $428.3 $391.7
Accumulated depreciation...................... 196.3 178.2
------ ------
$232.0 $213.5
====== ======
Depreciation expense related to property and equipment was $55.3 million,
$53.7 million and $48.0 million for 1998, 1997 and 1996, respectively.
(8) DEBT AND CREDIT ARRANGEMENTS
(a) Long term debt consisted of the following:
December 31
-------------------------------------
1998 1997
----------------- -----------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(in millions)
Term loan.................. $ 28.5 $ 28.5 $ 40.1 $ 40.3
Mortgages.................. 49.0 48.9 48.5 47.3
8 3/4% notes............... 30.0 30.8 60.0 62.7
6.15% notes................ 300.0 312.8 -- --
6.60% debentures........... 100.0 108.1 -- --
6 7/8% notes............... 100.0 106.1 100.0 102.5
6% notes................... -- -- 150.0 150.0
------ ------ ------ ------
$607.5 $635.2 $398.6 $402.8
====== ====== ====== ======
The term loan and mortgages are obligations of the real estate subsidiaries.
The term loan matures in 2000. The term loan is 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, 1998, the interest rate on the term loan approximated 7 1/2% and
for the mortgages payable the range of interest rates was 6% to 12%. The term
loan and mortgages payable are secured by real estate assets with a net book
value of $192.3 million at December 31, 1998.
In August 1998, the Corporation sold $300.0 million of unsecured 6.15% notes
due August 15, 2005 and $100.0 million of unsecured 6.60% debentures due August
15, 2018, the aggregate net proceeds from which were $397.0 million.
The Corporation also has outstanding $30.0 million of unsecured 8 3/4% notes
due November 15, 1999.
Chubb Capital Corporation has outstanding $100.0 million of 6 7/8% notes due
February 1, 2003. These notes are unsecured and are guaranteed by the
Corporation.
The Corporation filed a shelf registration statement which the Securities and
Exchange Commission declared effective in September 1998, under which up to
$600.0 million of various types of securities may be issued by the Corporation
or Chubb Capital. No securities have been issued under this registration
statement.
The amounts of long term debt due annually during the five years subsequent to
December 31, 1998 are as follows:
Years Ending Term Loan
December 31 and Mortgages Notes Total
------------ ------------- ----- -----
(in millions)
1999.................. $44.1 $ 30.0 $ 74.1
2000.................. 28.8 -- 28.8
2001.................. .3 -- .3
2002.................. .4 -- .4
2003.................. .4 100.0 100.4
(b) Interest costs of $28.9 million, $72.4 million and $89.5 million were
incurred in 1998, 1997 and 1996, respectively, of which $8.7 million and $12.8
million were capitalized in 1997 and 1996, respectively. Interest paid, net of
amounts capitalized, was $23.4 million, $60.4 million and $77.7 million in 1998,
1997 and 1996, respectively.
(c) In July 1997, the Corporation entered into two credit agreements with a
group of banks that provide for unsecured borrowings of up to $500.0 million in
the aggregate. The $200.0 million short term revolving credit facility, which
terminated on July 10, 1998, was extended to July 7, 1999, and may be renewed or
replaced. The $300.0 million medium term revolving credit facility terminates on
July 11, 2002. On the respective termination dates for these agreements, any
loans then outstanding become payable. There have been no borrowings under these
agreements. Various interest rate options are available to the Corporation, all
of which are based on market rates. The Corporation pays a fee to have these
credit facilities available. Unused credit facilities are available for general
corporate purposes and to support Chubb Capital's commercial paper borrowing
arrangement.
49
15
(9) FEDERAL AND FOREIGN INCOME TAX
(a) Income tax expense consisted of the following components:
Years Ended December 31
---------------------------
1998 1997 1996
---- ---- ----
(in millions)
Current tax
United States............................................. $124.7 $194.4 $ 152.1
Foreign................................................... 23.5 43.5 26.2
Deferred tax credit, principally United States.............. (5.5) (33.3) (117.6)
------ ------ -------
$142.7 $204.6 $ 60.7
====== ====== =======
Federal and foreign income taxes paid were $177.9 million, $253.5 million
and $163.3 million in 1998, 1997 and 1996, respectively.
(b) The provision for federal and foreign income tax gives effect to
permanent differences between income for financial reporting purposes and
taxable income. Accordingly, the effective income tax rate is less than the
statutory federal corporate tax rate. The reasons for the lower effective tax
rate were as follows:
Years Ended December 31
---------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
% 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...................................... $849.7 $974.1 $546.9
======= ======= =======
Tax at statutory federal income tax rate.................. $297.3 35.0% $340.9 35.0% $191.4 35.0%
Tax exempt interest income................................ (137.5) (16.2) (126.4) (13.0) (119.0) (21.8)
Other, net................................................ (17.1) (2.0) (9.9) (1.0) (11.7) (2.1)
------- ----- ------- ----- ------- -----
Actual tax.......................................... $142.7 16.8% $204.6 21.0% $ 60.7 11.1%
======= ===== ======= ===== ======= =====
(c) The tax effects of temporary differences that gave rise to deferred
income tax assets and liabilities were as follows:
December 31
--------------------
1998 1997
---- ----
(in millions)
Deferred income tax assets
Unpaid claims............................................. $541.7 $572.6
Unearned premiums......................................... 172.7 160.8
Postretirement benefits................................... 73.1 62.9
Other, net................................................ 60.9 27.9
------ ------
Total................................................... 848.4 824.2
------ ------
Deferred income tax liabilities
Deferred policy acquisition costs......................... 225.0 210.4
Real estate assets........................................ 79.3 81.3
Unrealized appreciation of investments.................... 223.3 215.5
------ ------
Total................................................... 527.6 507.2
------ ------
Net deferred income tax asset......................... $320.8 $317.0
====== ======
50
16
(10) STOCK-BASED COMPENSATION PLANS
(a) The Long-Term Stock Incentive Plan (1996) provides for the granting of
stock options, performance shares, restricted stock and other stock-based awards
to key employees. The maximum number of shares of the Corporation's common stock
in respect to which stock-based awards may be granted under the 1996 plan is
14,000,000. At December 31, 1998, 10,023,108 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:
1998 1997 1996
----------------------------- ----------------------------- ----------------------------
Number Weighted Average Number Weighted Average Number Weighted Average
of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price
--------- ---------------- --------- ---------------- --------- ----------------
Outstanding, beginning of year....... 9,124,803 $47.67 8,058,829 $41.48 6,565,034 $37.59
Granted.............................. 2,168,804 78.75 2,753,007 61.05 2,504,048 48.82
Exercised............................ (1,320,504) 41.78 (1,486,812) 38.39 (782,403) 31.77
Forfeited............................ (208,013) 75.25 (200,221) 51.69 (227,850) 43.26
---------- ---------- ---------
Outstanding, end of year............. 9,765,090 54.78 9,124,803 47.67 8,058,829 41.48
========== ========== =========
Exercisable, end of year............. 6,879,061 47.26 5,932,905 42.54 4,852,845 38.10
December 31, 1998
----------------------------------------------------------------------------------
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
--------------------- ----------- ---------------- ---------------- ----------- ----------------
$17.50 - $41.81.................... 3,373,550 $39.14 4.8 3,373,550 $39.14
$42.13 - $87.34.................... 6,391,540 63.06 7.8 3,505,511 55.07
--------- ---------
9,765,090 54.78 6.8 6,879,061 47.26
========= =========
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 in
1998 and 1997 and $10.2 million in 1996.
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.
1998 1997 1996
---------------------- ---------------------- ----------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- -------- -------- -------- -------- --------
(in millions except for per share amounts)
Net income.......................... $707.0 $679.6 $769.5 $746.3 $512.7 $496.6
Diluted earnings per share.......... 4.19 4.03 4.39 4.26 2.88 2.79
51
17
The weighted average fair value of options granted under the Long-Term Stock
Incentive Plans during 1998, 1997 and 1996 was $19.08, $13.83 and $11.04,
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 1998, 1997 and 1996 were
5.5%, 6.5% and 5.9%, respectively. The expected volatility of the market price
of the Corporation's common stock for 1998, 1997 and 1996 grants was 16.4%,
16.3% and 18.3%, respectively. The expected average term of the granted options
was 5 years for 1998 and 1997 and 5 1/2 years for 1996. The dividend yield was
1.6% for 1998, 1.9% for 1997 and 2.1% for 1996.
(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
1998, 1997 and 1996, cash contributions to the ESOP of $11.0 million, $12.2
million and $12.7 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 $7.8 million, $6.2 million and $4.6 million
in 1998, 1997 and 1996, respectively.
The number of allocated and unallocated shares held by the ESOP at December
31, 1998 were 2,947,830 and 3,116,884, respectively. All such shares are
considered outstanding for the computation of earnings per share.
(c) The Corporation has a Stock Purchase Plan under which substantially all
employees are eligible to purchase shares of the Corporation's common stock
based on compensation. At December 31, 1998, there were no subscribed shares.
(11) EMPLOYEE BENEFITS
(a) The Corporation and its subsidiaries have several non-contributory defined
benefit pension plans covering substantially all employees. The benefits are
generally based on an employee's years of service and average compensation
during the last five years of employment. Pension costs are determined using the
projected unit credit method. The Corporation's policy is to make annual
contributions that meet the minimum funding requirements of the Employee
Retirement Income Security Act of 1974. Contributions are intended to provide
not only for benefits attributed to service to date but also for those expected
to be earned in the future.
The components of net pension cost (including continuing and discontinued
operations) were as follows:
Years Ended December 31
------------------------------
1998 1997 1996
---- ---- ----
(in millions)
Service cost of current
period...................... $ 18.8 $ 19.9 $ 20.6
Interest cost on projected
benefit obligation.......... 34.5 30.3 26.0
Expected return on plan
assets...................... (40.3) (35.1) (25.6)
Other gains................... (2.5) (2.0) (6.0)
------ ------ ------
Net pension cost.......... $ 10.5 $ 13.1 $ 15.0
====== ====== ======
In 1998, an expense of $29.0 million related to enhanced pension benefits
provided to employees who accepted an early retirement incentive offer was
included as part of a restructuring charge (see Note (12)).
The following table sets forth the plans' funded status and amounts recognized
in the balance sheets:
December 31
-------------------
1998 1997
---- ----
(in millions)
Actuarial present value of projected
benefit obligation for service rendered
to date.................................. $518.7 $435.0
Plan assets at fair value.................. 552.9 487.8
------ ------
Plan assets in excess of projected benefit
obligation............................... (34.2) (52.8)
Unrecognized net gain from past experience
different from that assumed.............. 127.3 120.7
Unrecognized prior service costs........... (7.5) (8.8)
Unrecognized net asset at January 1, 1985,
being recognized principally over 19
years.................................... 4.9 6.4
------ ------
Pension liability included in other
liabilities............................ $ 90.5 $ 65.5
====== ======
52
18
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation at December 31, 1998 and 1997 was
7 1/4% and 7 1/2%, respectively, and the rate of increase in future compensation
levels was 4 1/2% for 1998 and 5% for 1997. 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
----------------------------------
1998 1997 1996
---- ---- ----
(in millions)
Service cost of current period.... $ 4.2 $ 4.9 $ 6.0
Interest cost on accumulated
benefit obligation.............. 8.2 8.8 8.6
Net amortization and deferral..... (1.3) (.7) --
----- ----- -----
Net postretirement benefit
cost.......................... $11.1 $13.0 $14.6
===== ===== =====
The components of the accumulated postretirement benefit obligation were as
follows:
December 31
-------------------
1998 1997
---- ----
(in millions)
Accumulated postretirement benefit
obligation................................ $123.1 $125.8
Unrecognized net gain from past experience
different from that assumed............... 27.1 18.1
------ ------
Postretirement benefit liability included
in other liabilities.................... $150.2 $143.9
====== ======
The weighted average discount rate used in determining the actuarial present
value of the accumulated postretirement benefit obligation at December 31, 1998
and 1997 was 7 1/4% and 7 1/2%, respectively. At December 31, 1998, the weighted
average health care cost trend rate used to measure the accumulated
postretirement cost for medical benefits was 10% for 1999 and was assumed to
decrease gradually to 6% for the year 2005 and remain at that level thereafter.
The health care cost trend rate assumption has a significant effect on the
amount of the accumulated postretirement benefit obligation and the net
postretirement benefit cost reported. To illustrate, a one percent increase or
decrease in the trend rate for each year would increase or decrease the
accumulated postretirement benefit obligation at December 31, 1998 by
approximately $18 million and the aggregate of the service and interest cost
components of net postretirement benefit cost for the year ended December 31,
1998 by approximately $2 million.
(c) The Corporation and its subsidiaries have a savings plan, the Capital
Accumulation Plan, in which substantially all employees are eligible to
participate. Under this plan, the employer makes a matching contribution equal
to 100% of each eligible employee's pre-tax elective contributions, up to 4% of
the employee's compensation. Contributions are invested at the election of the
employee in the Corporation's common stock or in various other investment funds.
Employer contributions of $14.5 million, $15.0 million and $14.5 million were
charged against income (including continuing and discontinued operations) in
1998, 1997 and 1996, respectively.
(12) RESTRUCTURING CHARGE
During the fourth quarter of 1997, the Corporation began an activity value
analysis process to identify and eliminate low-value activities and to improve
operational efficiency in order to reduce expenses and redirect resources to
those current activities and new initiatives that have the greatest potential to
contribute to the future results of the Corporation. Implementation began in the
first quarter of 1998 and is substantially completed. This cost control
initiative has resulted in approximately 500 job reductions in the home office
and the branch network through a combination of early retirements, terminations
and attrition. Other savings involve vendor management, consulting expenses and
other operating costs.
In the first quarter of 1998, the Corporation recorded a restructuring charge
of $40.0 million related to the implementation of the cost control initiative.
The restructuring charge relates primarily to costs associated with providing
enhanced pension benefits to employees who accepted an early retirement
incentive offer, severance costs and other costs. The initiative was
substantially completed in 1998 with no significant differences from original
estimates.
53
19
(13) 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
------------------------------
1998 1997 1996
---- ---- ----
(in millions)
Direct premiums written....... $5,842.0 $5,524.4 $5,166.5
Reinsurance assumed
Royal & Sun Alliance........ -- (3.8) 202.5
Other....................... 141.9 166.7 234.3
Reinsurance ceded
Royal & Sun Alliance........ -- 174.6 (269.2)
Other....................... (480.4) (413.9) (560.3)
-------- -------- --------
Net premiums written........ $5,503.5 $5,448.0 $4,773.8
======== ======== ========
Direct premiums earned........ $5,624.7 $5,315.8 $5,023.5
Reinsurance assumed
Royal & Sun Alliance........ -- 94.9 284.0
Other....................... 140.6 197.5 249.0
Reinsurance ceded
Royal & Sun Alliance........ -- -- (348.0)
Other....................... (461.5) (450.8) (639.2)
-------- -------- --------
Net premiums earned......... $5,303.8 $5,157.4 $4,569.3
======== ======== ========
The Royal & Sun Alliance Insurance Group plc is the beneficial owner of 5.6%
of the Corporation's common stock. Prior to 1997, a property and casualty
insurance subsidiary of the Corporation assumed on a quota share basis a portion
of the property and casualty insurance business written by certain subsidiaries
of Royal & Sun Alliance. Similarly, a portion of the U.S. insurance business
written by the Corporation's property and casualty insurance subsidiaries was
reinsured on a quota share basis with a subsidiary of Royal & Sun Alliance.
Effective January 1, 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 $447.4 million, $346.8
million and $651.9 million in 1998, 1997 and 1996, respectively. The 1996 amount
included recoveries of $251.4 million from the subsidiary of Royal & Sun
Alliance.
(14) LEASES
The Corporation and its subsidiaries occupy office facilities under lease
agreements which expire at various dates through 2019; such leases are generally
renewed or replaced by other leases. In addition, the Corporation's subsidiaries
lease data processing, office and transportation equipment.
Most leases contain renewal options for increments ranging from three to five
years; certain lease agreements provide for rent increases based on price-level
factors. All leases are operating leases.
Rent expense was as follows:
Years Ended
December 31
--------------------------------
1998 1997 1996
---- ---- ----
(in millions)
Office facilities......................... $73.8 $71.1 $67.6
Equipment................................. 13.3 12.6 11.8
----- ----- -----
$87.1 $83.7 $79.4
===== ===== =====
At December 31, 1998, future minimum rental payments required under
non-cancellable operating leases were as follows:
Years Ending
December 31
- ------------ (in millions)
1999..................................... $ 78.9
2000..................................... 75.9
2001..................................... 69.5
2002..................................... 62.9
2003..................................... 55.9
After 2003............................... 351.5
------
$694.6
======
54
20
(15) UNPAID CLAIMS
The process of establishing loss reserves is a complex and imprecise science
that reflects significant judgmental factors. This is true because claim
settlements to be made in the future will be impacted by changing rates of
inflation and other economic conditions, changing legislative, judicial and
social environments and changes in the property and casualty insurance
subsidiaries' claim handling procedures. In many liability cases, significant
periods of time, ranging up to several years or more, may elapse between the
occurrence of an insured loss, the reporting of the loss and the settlement of
the loss.
Judicial decisions and legislative actions continue to broaden liability and
policy definitions and to increase the severity of claim payments. As a result
of this and other societal and economic developments, the uncertainties inherent
in estimating ultimate claim costs on the basis of past experience continue to
further complicate the already complex loss reserving process.
The uncertainties relating to asbestos and toxic waste claims on insurance
policies written many years ago are exacerbated by inconsistent court decisions
and judicial and legislative interpretations of coverage that in some cases have
tended to erode the clear and express intent of such policies and in others have
expanded theories of liability. The industry is engaged in extensive litigation
over these coverage and liability issues and is thus confronted with a
continuing uncertainty in its effort to quantify these exposures.
In 1993, Pacific Indemnity Company, a subsidiary of the Corporation, entered
into a global settlement agreement with Continental Casualty Company (a
subsidiary of CNA Financial Corporation), Fibreboard Corporation, and attorneys
representing claimants against Fibreboard for all future asbestos-related bodily
injury claims against Fibreboard. This agreement 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 in
1993 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.
At the same time, 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 settlement
agreement appealed to the United States Supreme Court. In June 1997, the Supreme
Court set aside the ruling by the Fifth Circuit Court that had approved the
global settlement agreement and ordered the Fifth Circuit Court to reconsider
its approval. In January 1998, the Fifth Circuit Court again affirmed the global
settlement agreement. In April 1998, the objectors to the settlement petitioned
the Supreme Court to review the decision. In December 1998, argument was held
before the Supreme Court on the objectors' challenge. A decision is expected
during 1999.
The trilateral agreement was never appealed to the United States Supreme Court
and is 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.
55
21
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.
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.
Hazardous waste sites are another significant potential exposure. Under the
federal "Superfund" law and similar state statutes, when potentially responsible
parties (PRPs) fail to handle the clean-up, regulators have the work done and
then attempt to establish legal liability against the PRPs. The PRPs disposed of
toxic materials at a waste dump site or transported the materials to the site.
Insurance policies issued to PRPs were not intended to cover the clean-up costs
of pollution and, in many cases, did not intend to cover the pollution itself.
As the costs of environmental clean-up have become substantial, PRPs and others
have increasingly filed claims with their insurance carriers. Litigation against
insurers extends to issues of liability, coverage and other policy provisions.
There is great uncertainty involved in estimating the property and casualty
insurance subsidiaries' liabilities related to these claims. First, the
liabilities of the claimants are extremely difficult to estimate. At any given
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 that rely on historical accident year loss
development factors. Case reserves and expense reserves for costs of related
litigation have been established where sufficient information has been developed
to indicate the involvement of a specific insurance policy. In addition,
incurred but not reported reserves have been established to cover additional
exposures on both known and unasserted claims. These reserves are continually
reviewed and updated.
A reconciliation of the beginning and ending liability for unpaid claims, net
of reinsurance recoverable, and a reconciliation of the net liability to the
corresponding liability on a gross basis is as follows:
1998 1997 1996
---- ---- ----
(in millions)
Gross liability, beginning of
year.......................... $ 9,772.5 $9,523.7 $9,588.2
Reinsurance recoverable,
beginning of year............. 1,207.9 1,767.8 1,973.7
--------- -------- --------
Net liability, beginning of
year.......................... 8,564.6 7,755.9 7,614.5
--------- -------- --------
Net incurred claims and claim
expenses related to
Current year................ 3,712.1 3,372.3 3,053.6
Prior years................. (218.4) (65.3) (42.8)
--------- -------- --------
3,493.7 3,307.0 3,010.8
--------- -------- --------
Net payments for claims and
claim expenses related to
Current year................ 1,210.7 1,080.0 980.0
Prior years................. 1,797.7 1,418.3 1,889.4
--------- -------- --------
3,008.4 2,498.3 2,869.4
--------- -------- --------
Net liability, end of year...... 9,049.9 8,564.6 7,755.9
Reinsurance recoverable,
end of year................... 1,306.6 1,207.9 1,767.8
--------- -------- --------
Gross liability, end of year.... $10,356.5 $9,772.5 $9,523.7
========= ======== ========
During 1998, the property and casualty insurance subsidiaries experienced
overall favorable development of $218.4 million on net unpaid claims established
as of the previous year-end. This compares with favorable
development of $65.3 million and $42.8 million in 1997 and 1996, respectively.
Such redundancies were reflected in operating results in these respective years.
Each of the past three years benefited from favorable claim severity trends for
certain liability classes; this was offset each year in varying degrees by
incurred losses relating to asbestos and toxic waste claims.
Management believes that the aggregate loss reserves of the property and
casualty insurance subsidiaries at December 31, 1998 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.
56
22
(16) SEGMENTS INFORMATION
Effective December 31, 1998, the Corporation adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 establishes new standards for reporting information about operating segments
in annual financial statements and requires the reporting of selected segment
information in interim reports to shareholders. The adoption of SFAS No. 131 did
not result in a significant change from the Corporation's previous segment
disclosures and had no effect on the Corporation's financial position or results
of operations.
The property and casualty operations include four reportable underwriting
segments and the investment function. The underwriting segments are personal,
standard commercial, specialty commercial and reinsurance assumed. The personal
and commercial segments are managed separately because they target different
customers. The commercial business is further distinguished by those classes of
business that are generally available in broad markets and are of a more
commodity nature (standard) and those classes available in more limited markets
that require specialized underwriting and claim settlement (specialty). Standard
commercial classes include multiple peril, casualty and workers' compensation
and specialty commercial classes include property and marine, executive
protection, financial institutions and other commercial classes. Reinsurance
assumed is treaty reinsurance that was assumed from Royal & Sun Alliance prior
to 1997. The real estate segment includes commercial development activities
primarily in New Jersey and residential development activities primarily in
central Florida.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies in Note (1). Performance of the
property and casualty underwriting segments is based on underwriting results
before deferred policy acquisition costs and certain charges. Investment income
performance is based on investment income net of investment expenses. Real
estate performance is based on pretax income.
Revenues, income from continuing operations before income tax and assets of
each operating segment were as follows:
Years Ended December 31
------------------------------
1998 1997 1996
---- ---- ----
Revenues (in millions)
Property and casualty insurance
Premiums earned
Personal.......................................... $1,304.3 $1,188.1 $ 969.7
Standard commercial............................... 1,980.6 1,906.1 1,642.4
Specialty commercial.............................. 2,018.9 1,968.3 1,673.2
Reinsurance assumed............................... -- 94.9 284.0
-------- -------- --------
5,303.8 5,157.4 4,569.3
Investment income..................................... 760.0 721.4 656.2
-------- -------- --------
Total property and casualty insurance............. 6,063.8 5,878.8 5,225.5
Real estate............................................... 82.2 616.1 319.8
-------- -------- --------
6,146.0 6,494.9 5,545.3
Corporate investment income............................... 61.9 63.9 55.4
Realized investment gains................................. 141.9 105.2 79.8
-------- -------- --------
Total revenues.................................... $6,349.8 $6,664.0 $5,680.5
======== ======== ========
Income (loss) from continuing operations before income tax
Property and casualty insurance
Underwriting
Personal.......................................... $ 168.1 $ 161.5 $ 57.9
Standard commercial............................... (360.0) (312.3) (250.4)
Specialty commercial.............................. 133.5 198.0 191.9
Reinsurance assumed............................... -- 18.2 12.4
-------- -------- --------
(58.4) 65.4 11.8
Increase in deferred policy acquisition costs......... 51.8 75.7 42.5
Other charges......................................... (17.4) (24.1) (24.0)
-------- -------- --------
Underwriting income (loss)............................ (24.0) 117.0 30.3
Investment income..................................... 748.9 711.2 646.1
Restructuring charge.................................. (40.0) -- --
-------- -------- --------
Total property and casualty insurance............. 684.9 828.2 676.4
Real estate loss.......................................... (3.5) (8.6) (235.9)
-------- -------- --------
681.4 819.6 440.5
Corporate income.......................................... 26.4 49.3 26.6
Realized investment gains................................. 141.9 105.2 79.8
-------- -------- --------
Total income from continuing operations before
income tax...................................... $ 849.7 $ 974.1 $ 546.9
======== ======== ========
57
23
December 31
---------------------------------
1998 1997 1996
---- ---- ----
Assets (in millions)
Property and casualty insurance........................... $18,954.2 $17,592.4 $16,577.9
Real estate............................................... 770.0 815.2 1,641.3
--------- --------- ---------
19,724.2 18,407.6 18,219.2
Corporate................................................. 1,108.2 1,424.7 959.8
Adjustments and eliminations.............................. (86.4) (216.7) (83.5)
Net assets of discontinued operations..................... -- -- 843.4
--------- --------- ---------
Total assets...................................... $20,746.0 $19,615.6 $19,938.9
========= ========= =========
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 allocated to underwriting segments.
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. Prior to 1997, international
business was also obtained from treaty reinsurance assumed from Royal & Sun
Alliance.
Revenues of the property and casualty insurance subsidiaries by geographic
area were as follows:
Years Ended December 31
-----------------------------------
1998 1997 1996
---- ---- ----
(in millions)
Revenues
United States............................................. $ 5,116.6 $ 4,886.8 $ 4,145.7
International............................................. 947.2 992.0 1,079.8
--------- --------- ---------
Total................................................... $ 6,063.8 $ 5,878.8 $ 5,225.5
========= ========= =========
(17) EARNINGS PER SHARE
Basic earnings per common share is based on income from continuing
operations divided by the weighted average number of common shares outstanding
during each year. Diluted earnings per share assumes the conversion of all
outstanding convertible debt and the maximum dilutive effect of awards under
stock-based compensation plans.
The following table sets forth the computation of basic and diluted income
from continuing operations per share:
Years Ended December 31
--------------------------------
1998 1997 1996
---- ---- ----
(in millions except for per
share amounts)
Basic earnings per share:
Income from continuing operations......................... $707.0 $769.5 $486.2
====== ====== ======
Weighted average number of common shares outstanding...... 165.6 171.6 174.2
====== ====== ======
Income from continuing operations per share............... $ 4.27 $ 4.48 $ 2.79
====== ====== ======
Diluted earnings per share:
Income from continuing operations......................... $707.0 $769.5 $486.2
After-tax interest expense on 6% exchangeable subordinated
notes................................................... -- 3.3 9.7
------ ------ ------
Income from continuing operations for computing diluted
earnings per share...................................... $707.0 $772.8 $495.9
====== ====== ======
Weighted average number of common shares outstanding...... 165.6 171.6 174.2
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
Additional shares from assumed exercise of stock-based
compensation awards..................................... 3.0 2.8 1.6
------ ------ ------
Weighted average number of common shares and potential
common shares assumed outstanding for computing diluted
earnings per share...................................... 168.6 176.2 181.6
====== ====== ======
Income from continuing operations per diluted share....... $ 4.19 $ 4.39 $ 2.73
====== ====== ======
For additional disclosure regarding the stock-based compensation awards,
see Note (10).
58
24
(18) FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of financial instruments are based on quoted market prices where
available. Fair values of financial instruments for which quoted market prices
are not available are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rates and the estimated amounts and timing of future cash
flows. In such instances, the derived fair value estimates cannot be
substantiated by comparison to independent markets and are not necessarily
indicative of the amounts that could be realized in immediate settlement of the
instrument. Certain financial instruments, particularly insurance contracts, are
excluded from fair value disclosure requirements.
The methods and assumptions used to estimate the fair value of financial
instruments are as follows:
(i) The carrying value of short term investments approximates fair value due
to the short maturities of these investments.
(ii) Fair values of fixed maturities with active markets are based on quoted
market prices. For fixed maturities that trade in less active markets, fair
values are obtained from independent pricing services. Fair values of fixed
maturities are principally a function of current interest rates. Care should
be used in evaluating the significance of these estimated market values which
can fluctuate based on such factors as interest rates, inflation, monetary
policy and general economic conditions.
(iii) Fair values of equity securities are based on quoted market prices.
(iv) Fair values of real estate mortgages and notes receivable are estimated
individually as the value of the discounted future cash flows of the loan,
subject to the estimated fair value of the underlying collateral. The cash
flows are discounted at rates based on a U.S. Treasury security with a
maturity similar to the loan, adjusted for credit risk.
(v) Long term debt consists of a term loan, mortgages payable and long term
notes. The fair value of the term loan approximates the carrying value because
such loan consists of variable-rate debt that reprices frequently. Fair values
of mortgages payable are estimated using discounted cash flow analyses. Fair
values of long term notes are based on prices quoted by dealers.
The carrying values and fair values of financial instruments were as follows:
December 31
-------------------------------------------
1998 1997
--------------------- -------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(in millions)
Assets
Invested assets
Short term investments.................................. $ 344.2 $ 344.2 $ 725.1 $ 725.1
Fixed maturities (Note 4)
Held-to-maturity...................................... 2,002.2 2,140.2 2,200.6 2,347.2
Available-for-sale.................................... 11,316.7 11,316.7 10,252.8 10,252.8
Equity securities....................................... 1,092.2 1,092.2 871.1 871.1
Real estate mortgages and notes receivable (Note 5)....... 105.2 106.9 123.8 121.0
Liabilities
Long term debt (Note 8)................................... 607.5 635.2 398.6 402.8
59
25
(19) COMPREHENSIVE INCOME
In the first quarter of 1998, the Corporation adopted SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes standards for the
reporting and presentation of comprehensive income and its components.
Comprehensive income is defined as all changes in shareholders' equity, except
those arising from transactions with shareholders. For the Corporation,
comprehensive income includes net income, changes in unrealized appreciation or
depreciation of investments carried at market value and changes in foreign
currency translation gains or losses. SFAS No. 130 only requires the
presentation of additional information in the financial statements; therefore,
the adoption of SFAS No. 130 had no effect on the Corporation's financial
position or results of operations.
The components of other comprehensive income or loss were as follows:
Years Ended December 31
-------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- -----------------------------
Income Income Income
Before Tax Before Tax Before Tax
Tax (Credit) Net Tax (Credit) Net Tax (Credit) Net
------ -------- --- ------ -------- --- ------ -------- ---
(in millions)
Continuing operations
Unrealized holding gains (losses)
arising during the year......... $164.3 $57.5 $106.8 $353.5 $123.7 $229.8 $ (22.5) $ (8.0) $ (14.5)
Less: reclassification adjustment
for realized gains included in
net income...................... 141.9 49.7 92.2 105.2 36.8 68.4 79.8 27.8 52.0
------ ----- ------ ------ ------ ------ ------- ------ -------
Net unrealized gains (losses)
recognized in other
comprehensive income............ 22.4 7.8 14.6 248.3 86.9 161.4 (102.3) (35.8) (66.5)
Foreign currency translation
losses.......................... (14.2) (3.9) (10.3) (15.3) (5.2) (10.1) (15.1) (2.9) (12.2)
------ ----- ------ ------ ------ ------ ------- ------ -------
Total other comprehensive income
(loss) from continuing
operations.................... $ 8.2 $ 3.9 4.3 $233.0 $ 81.7 151.3 $(117.4) $(38.7) (78.7)
====== ===== ====== ====== ======= ======
Discontinued operations, net...... -- -- (40.7)
------ ------ -------
Total other comprehensive income
(loss)........................ $ 4.3 $151.3 $(119.4)
====== ====== =======
(20) SHAREHOLDERS' EQUITY
(a) The authorized but unissued preferred shares may be issued in one or
more series and the shares of each series shall have such rights as fixed by the
Board of Directors.
(b) 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
-----------------------------------------
1998 1997 1996
---- ---- ----
(number of shares)
Common stock issued
Balance, beginning of year................................ 176,037,850 176,084,173 87,819,355
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........... (48,648) (48,763) (35,001)
----------- ----------- -----------
Balance, end of year.................................. 175,989,202 176,037,850 176,084,173
----------- ----------- -----------
Treasury stock
Balance, beginning of year................................ 7,320,410 1,223,182 518,468
Two-for-one stock split................................... -- -- 518,468
Repurchase of shares...................................... 8,203,000 12,940,500 1,700,000
Shares issued upon exchange of long term debt............. -- (5,314,125) --
Share activity under option and incentive plans........... (1,801,034) (1,529,147) (1,513,754)
----------- ----------- -----------
Balance, end of year.................................. 13,722,376 7,320,410 1,223,182
----------- ----------- -----------
Common stock outstanding, end of year................. 162,266,826 168,717,440 174,860,991
=========== =========== ===========
60
26
(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 buy, upon occurrence of
certain events, one one-hundredth of a share of preferred stock at an exercise
price of $225. The rights generally become exercisable if a person or group
acquires 25% or more of the Corporation's common stock, or commences a tender or
exchange offer that, upon consummation, would result in a person or group owning
25% or more of the Corporation's common stock. On March 12, 1999, the Board of
Directors approved the redemption of the rights, which were scheduled to expire
on June 12, 1999, for $.01 per right as of March 31, 1999.
On March 12, 1999, the Board of Directors also adopted a new shareholder
rights plan, under which the rights attach on March 31, 1999. Under the new
plan, each shareholder has one right for each share of common stock of the
Corporation held. Each right entitles the holder to purchase from the
Corporation one one-thousandth of a share of Series B Participating Cumulative
Preferred Stock at an exercise price of $240. The rights 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 20% or more of the outstanding
shares of the Corporation's common stock or announces a tender or exchange offer
which, if consummated, would result in that person or group owning 20% or more
of the outstanding shares of the Corporation's common stock.
In the event that any person or group acquires 20% or more of the
outstanding shares of the Corporation's common stock, each right will entitle
the holder, other than such person or group, to purchase that number of shares
of the Corporation's common stock having a market value of two times the
exercise price of the right. In the event that, following the acquisition of 20%
or more of the Corporation's outstanding common stock by a person or group, the
Corporation is acquired in a merger or other business combination transaction or
50% or more of the Corporation's assets or earning power is sold, each right
will entitle the holder to purchase common stock of the acquiring company having
a value equal to two times the exercise price of the right.
At any time after any person or group acquires 20% or more of the
Corporation's common stock, but before such person or group acquires 50% or more
of such stock, the Corporation may exchange all or part of the rights, other
than the rights owned by such person or group, for shares of the Corporation's
common stock at an exchange ratio of one share of common stock per right.
The rights do not have the right to vote or to receive dividends. The
rights may be redeemed in whole, but not in part, at a price of $.01 per right
by the Corporation at any time until the tenth day after the acquisition of 20%
or more of the Corporation's outstanding common stock by a person or group. The
rights will expire at the close of business on March 12, 2009, unless previously
exchanged or redeemed by the Corporation.
(d) The Corporation's insurance subsidiaries are required to file annual
statements with insurance regulatory authorities prepared on an accounting basis
prescribed or permitted by such authorities (statutory basis). For such
subsidiaries, generally accepted accounting principles (GAAP) differ in certain
respects from statutory accounting practices.
A comparison of shareholders' equity on a GAAP basis and policyholders'
surplus on a statutory basis is as follows:
December 31
------------------------------------------------
1998 1997
--------------------- ---------------------
GAAP Statutory GAAP Statutory
---- --------- ---- ---------
(in millions)
Property and casualty insurance subsidiaries................ $4,570.0 $2,836.9 $4,162.5 $2,596.0
======== ========
Real estate subsidiary...................................... 544.7 264.4
Corporate and eliminations.................................. 529.4 1,230.2
-------- --------
$5,644.1 $5,657.1
======== ========
61
27
A comparison of GAAP and statutory net income is as follows:
Years Ended December 31
---------------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ---------------------
GAAP Statutory GAAP Statutory GAAP Statutory
-------- --------- -------- --------- -------- ---------
(in millions)
Property and casualty insurance subsidiaries*..... $672.4 $663.1 $752.3 $652.4 $453.3 $560.2
Discontinued life and health insurance
operations...................................... -- -- -- -- 26.5** 34.0
------ ------ ------ ------ ------ ------
672.4 $663.1 752.3 $652.4 479.8 $594.2
====== ====== ======
Corporate and eliminations........................ 34.6 17.2 32.9
------ ------ ------
$707.0 $769.5 $512.7
====== ====== ======
* 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 1998, 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 1999 without prior
approval is approximately $590 million.
(21) PENDING TRANSACTIONS
(a) On February 8, 1999, the Corporation announced that it entered into a
definitive merger agreement under which it would acquire Executive Risk Inc.
Executive Risk is a specialty insurance company offering directors and officers,
errors and omissions and professional liability coverages. Executive Risk's
gross and net written premiums for 1998 were approximately $500 million and $280
million, respectively.
The acquisition will be accounted for using the purchase method of
accounting. The agreement provides that Executive Risk shareholders will receive
1.235 shares of the Corporation's common stock for each outstanding common share
of Executive Risk. The agreement contemplates that approximately 13,730,000
shares of common stock of the Corporation will be issued to Executive Risk
shareholders and approximately 2,300,000 shares of common stock of the
Corporation will be reserved for issuance upon exercise of Executive Risk stock
options. The total value of the transaction is expected to be approximately $850
million. Completion of the acquisition is subject to approval by Executive Risk
shareholders and various regulatory authorities. Closing is expected in the
second quarter of 1999.
(b) The Corporation has agreed to purchase a 27% interest in Hiscox plc, a
leading U.K. personal and commercial specialty insurer, for approximately $140
million. Closing of this transaction is subject to regulatory approvals which
are pending.
62
28
Report of Independent Auditors
ERNST & YOUNG LLP
787 Seventh Avenue
New York, New York 10019
The Board of Directors and Shareholders
The Chubb Corporation
We have audited the accompanying consolidated balance sheets of The Chubb
Corporation as of December 31, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity, cash flows and comprehensive income
for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
February 24, 1999,
except for Note 20(c), as to which the date is
March 12, 1999
63
29
Quarterly Financial Data
Summarized unaudited quarterly financial data for 1998 and 1997 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
-------------------- -------------------- -------------------- --------------------
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
(in millions except for per share amounts)
Revenues........................... $1,587.3 $1,576.9 $1,597.6 $1,509.6 $1,593.2 $1,568.8 $1,571.7 $2,008.7
Claims and expenses................ 1,348.0 1,331.4 1,375.2 1,270.2 1,386.0 1,322.3 1,390.9 1,766.0
Federal and foreign income tax..... 47.5 53.4 38.2 50.7 33.8 52.5 23.2 48.0
-------- -------- -------- -------- -------- -------- -------- --------
Net income..................... $ 191.8(a) $ 192.1 $ 184.2 $ 188.7 $ 173.4 $ 194.0 $ 157.6 $ 194.7
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings per share........... $ 1.14(a) $ 1.11 $ 1.10 $ 1.10 $ 1.05 $ 1.12 $ .98 $ 1.15
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings per share......... $ 1.12(a) $ 1.08 $ 1.08 $ 1.08 $ 1.04 $ 1.10 $ .95 $ 1.13
======== ======== ======== ======== ======== ======== ======== ========
Underwriting ratios
Losses to premiums earned........ 62.8% 63.9% 67.0% 63.3% 67.4% 65.3% 68.1% 65.5%
Expenses to premiums written..... 33.3 32.4 33.3 32.0 33.8 32.2 33.6 32.9
-------- -------- -------- -------- -------- -------- -------- --------
Combined....................... 96.1% 96.3% 100.3% 95.3% 101.2% 97.5% 101.7% 98.4%
======== ======== ======== ======== ======== ======== ======== ========
(a) Net income has been reduced by a net charge of $26.0 million or $.15 per
share for the after-tax effect of a $40.0 million restructuring charge.
64
30
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 1998 and 1997.
1998
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Common stock prices
High.................................................... $81.44 $82.63 $88.25 $73.38
Low..................................................... 71.00 73.31 62.50 57.00
Dividends declared.......................................... .31 .31 .31 .31
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
At March 8, 1999, there were approximately 7,650 common shareholders of
record.
65