The Chubb CorporationThe Chubb Corporation

Annual Report 1998Annual Report 1998

The Chubb Organization

In the spring of 1882, Thomas Caldecot Chubb

and his son Percy opened a marine underwriting

business in the seaport district of New York

City. Having collected $1,000 from each of 100

prominent merchants to start their venture, they

began to insure ships and cargoes. The Chubbs

were adept at turning risk into success, often by helping policyholders

prevent disasters before they occurred. By the turn of the century,

Chubb had established strong relationships with the insurance agents

and brokers who placed their clients' business with Chubb underwrit-

ers, and the original subscribers enjoyed a substantial return on their

investment in the young company.

Chubb & Son has never valued size in itself but regards size as a

measure of what has been achieved. Upon the company's 75th

anniversary in 1957, Hendon Chubb � who had joined his older

brother Percy in the Ñrm in 1895 Ì� noted, ""I think there is perhaps a

tendency in American business to overemphasize mere size, whereas

to me it should be a by-product of a job well done.''

""Never compromise with integrity,'' also a Hendon Chubb princi-

ple, captures the spirit of our companies. Each member of the Chubb

organization seeks to stand apart in bringing quality, fairness and

integrity to each transaction, for the beneÑt of all involved.

The Chubb Corporation was formed in 1967 and was listed on the

New York Stock Exchange in 1984. Today, Chubb stands among the

largest insurers in the United States and the world. Chubb's 9500

property and casualty employees serve customers from more than

120 oÇces throughout North America, Europe, South America and

the PaciÑc Rim.

No matter how wide the inÖuence of the Ñrm, we at Chubb still

measure success by a job well done. The principles of Ñnancial

stability and excellent service combined with the high caliber of our

employees are the mainstays of our organization.

The Chubb Corporation

ZOE BAIRD THOMAS C. MACAVOYDirectorsPresident Professor Emeritus

The Markle Foundation University of VirginiaFormer Vice Chairman

JOHN C. BECK Corning, Inc.Member

Beck, Mack & Oliver LLC DEAN R. O'HARE

Chairman and Chief Executive OÇcer

SHEILA P. BURKE of the Corporation

Executive Dean

John F. Kennedy School of Government, WARREN B. RUDMAN

Harvard University Partner

Paul, Weiss, Rifkind, Wharton & GarrisonJAMES I. CASH, JR.Professor SIR DAVID G. SCHOLEY, CBEHarvard Graduate School of Senior Advisor

Business Administration Warburg Dillon Read

PERCY CHUBB, III RAYMOND G.H. SEITZ

Former Vice Chairman of the Corporation Vice Chairman

Lehman Bros. International (Europe)JOEL J. COHEN

Managing Director LAWRENCE M. SMALL

Donaldson, Lufkin & Jenrette Securities Corp. President and Chief Operating OÇcer

Fannie MaeJAMES M. CORNELIUS

Chairman JAMES M. ZIMMERMAN

Guidant Corporation Chairman and Chief Executive OÇcer

Federated Department Stores, Inc.DAVID H. HOAG

Former Chairman and Chief Executive OÇcer

The LTV Corporation

All of the above directors are also directors of Federal Insurance Company. Certain are also directorsof other subsidiaries of the Corporation.

Chairman and Chief Executive OÇcer Senior Vice President and General CounselOÇcersDEAN R. O'HARE ROBERT RUSIS

President Vice Presidents

JOHN J. DEGNAN BRANT W. FREE, JR.PAUL R. GEYER

Executive Vice Presidents ROBERT A. MARZOCCHI

DAVID B. KELSO RICHARD V. WERNER

THOMAS F. MOTAMED ROBERT M. WITKOFF

DONN H. NORTON

MICHAEL O'REILLY Vice President and Counsel

MICHAEL J. O'NEILL, JR.Senior Vice Presidents

DANIEL J. CONWAY Vice President and Associate Counsel

GAIL E. DEVLIN JOHN E. WISINGER

DAVID S. FOWLER

Vice President and SecretaryFREDERICK W. GAERTNER

HENRY G. GULICKNED I. GERSTMAN

ANDREW A. MCELWEE, JR.Vice President and TreasurerGLENN A. MONTGOMERY

PHILIP J. SEMPIERMARJORIE D. RAINES

HENRY B. SCHRAM

To Our Shareholders:

Chubb made progress on many fronts in the last year. Specialty commercial and personal lines, which

together make up almost two-thirds of our book, grew rapidly and proÑtably. We continued our

proÑtable global expansion and made substantial, permanent cuts in our cost base company-wide. In

February 1999, we entered into a deÑnitive agreement to acquire Executive Risk Inc., a leading

underwriter of specialty commercial coverages Ì an acquisition that will further strengthen Chubb's

proÑtable executive protection and Ñnancial institutions businesses.

Our progress, however, was partially obscured by disappointing Ñnancial results. We fell short

of making an underwriting proÑt and earnings declined from 1997's level. While catastrophe losses

took a heavier toll in 1998, the real culprit was the abysmal market in standard commercial lines. We

are taking aggressive steps to correct pricing problems in this business, and we expect to see their

impact on our Ñnancial results later this year.

Operating income in 1998 was $641 million commercial business. Fixing the pricing problems we

or $3.80 per share, before a $26 million or $.15 per face in standard commercial lines is our number one

share restructuring charge taken in the first quarter. priority in 1999.

This compares with $701 million or $4.00 per share in I'm pleased to report that at its meeting today,

1997. We produced a combined ratio of 99.8% and the Board of Directors voted to raise the regular

an underwriting loss of $14 million compared with quarterly dividend to $0.32 per share from $0.31 per

96.9% and an underwriting profit of $77 million in share, an increase of 3.2%.

1997. Our 1998 results include $173 million of Building Value

catastrophe losses, compared with only $57 million in In the last two years, we have transformed Chubb from

1997. The basic story of 1998, however, is that a diversiÑed Ñnancial services company to an enterprise

excellent results in personal and specialty commercial focused solely on the property and casualty insurance

lines were more than offset by losses in our standard business, where we have long produced superior results

2

both in absolute terms and relative to the rest of the 1998, which is not far above our target of 95%. The two

industry. At the same time, we have signiÑcantly strategies we have pursued at Chubb for more than a

reduced our outstanding debt and returned almost decade Ì specialization and globalization Ì continue to

$2 billion to shareholders in the form of share demonstrate success. If the actions we are taking to

repurchases and cash dividends. In 1998, we repur- address the proÑtability issues in our standard commer-

chased more than eight million shares of Chubb stock cial book produce the results we intend, I am conÑdent

and we will remain opportunistic that our specialty focus and inter-

buyers in 1999, albeit at a slower national expansion will enable us

pace than in the recent past. to meet the three goals set out

While shareholders have above in future years.

beneÑted from our balance sheet Addressing StandardCommercial Pricingmoves, sustained proÑtable growthThe most signiÑcant challenge weremains the most eÅective meansface is in standard commercialTo Comeof building value for our ownerslines, which represent about 35%over the long term. Three primaryof our total book, where the mar-goals guide us in this regard:ket has been virtually in a free fall.‚ Making an underwriting proÑt,Pricing has sunk to levels where‚ Producing a combined loss andwe have no choice but to walkexpense ratio in the 95% rangeaway from business that is certainbefore catastrophe losses, and

Dean R. O'Hareto lose money. Premiums in our

Chairman and Chief Executive OÇcer‚ Delivering year-over-year pre-standard commercial book, includ-mium growth at twice the rate of the industry.

ing commercial multiple peril, casualty and workersEven in a year such as the one just ended, whencompensation, were essentially Öat for the year, and thewe did not meet all of the goals we have set forcombined ratio was well above 100%.ourselves, our performance relative to the rest of the

This performance is clearly not acceptable, andindustry indicates that our strategies are sound and thatwe are taking aggressive steps to address it. Simply put,we are doing the right things. We do take somewe are seeking price increases ranging from 5% to 20%comfort in the fact that excluding catastrophes, Chubbon much of our standard commercial book, with theas a whole produced a combined ratio of 96.5% in

3

extent of the increase sought in each instance deter- for the latter was constrained by continued consolidation

mined by the nature of the risk and the loss experience. in Ñnancial services and turmoil in the Ñnancial markets

In cases where we are not receiving suÇcient premium during the second half of the year, but growth overseas

for the risks we are taking on, we are prepared to walk continued apace. Together these two lines of business

away from the business rather than renew an unproÑta- produced an underwriting proÑt margin of more than

ble account. Irrespective of the 20%, an impressive accomplish-

consequences, we are going to ment in any market, but all the

push very hard to make price more so given today's conditions.

increases stick. One specialty line that did

Fixing the pricingThis posture may well have not produce an underwriting profit

a dampening eÅect on premium last year was our property andproblems we face in

growth in 1999, but we will gladly marine business where we experi-

trade that for the positive impact it enced several large property losses.standard commercialshould also have on our proÑtabil- Premiums declined reflecting our

lines is our numberity. Given that standard commer- decision not to renew a number of

cial lines represent a much smaller large, problem accounts. We areone priority in 1999.

portion of our book than other well on the way to repricing this

insurers, we are better positioned book, and I expect to see it return

than most to absorb the business to profitability in the near future.

losses we will experience in the Taken together, specialty

process of achieving proÑtable results. commercial lines, including our smaller specialties such

as surety, produced a 91.5% combined ratio in 1998.Specialty Concentration

The acquisition of Executive Risk will represent aSpecialty lines have been growing faster than the overall

significant strengthening of our executive protection andinsurance market for the last two decades, and 1998

financial institutions businesses. Combining Executivewas no exception. Premiums in executive protection,

Risk's book with our own will give us a gross premiumour largest commercial specialty, rose 7.5%, and Ñnan-

base in these lines of $1.7 billion, a comprehensivecial institutions premiums grew 5%. Domestic growth

4

product oÅering and leading positions in numerous catastrophe losses. Excluding catastrophes, the com-

market segments. In short, the combination will create bined ratio for this business was just over 80%.

the preeminent insurer in the executive protection The performance of personal and specialty

marketplace. We expect the two companies' comple- commercial lines means that almost 65% of Chubb's

mentary product lines, underwriting capabilities and total book is generating an underwriting proÑt margin of

distribution channels to lead to accelerated growth while better than 10%.

maintaining historically high proÑt margins. Consistent Global Growth

with our strategy, proÑtable specialty lines will represent A little more than a decade ago, we foresaw the

a larger share of Chubb's commercial business mix. industry's domestic premium growth slowing to the low

In personal lines, we have long specialized by single-digits, and indeed, U.S. premiums have been

concentrating on the aÉuent individual with substantial growing at about 3% a year for the last several years.

assets to protect. We have designed our product At the same time, we noted that more and more of our

oÅerings, sold under the Masterpiece name, speciÑcally customers were expanding into international markets,

for this market segment. These products oÅer many of including many of the thousands of mid-sized compa-

the broadest coverages and highest limits in the nies that make up our commercial customer base.

industry, and we back them with exceptional claims These two observations led us to accelerate our

management and a high level of service. While many own program of overseas expansion. Chubb now has a

other insurers are backing oÅ from oÅering full network of more than 120 oÇces in 33 countries that

replacement value for homeowners, we are one of the account for over 90% of the world's property and

few companies that customers can still turn to if they casualty premiums. We continue to add to this network,

want to know that they are fully insured regardless of particularly by establishing smaller, cost-eÅective oÇces

what it costs to replace their home. in secondary business centers and by setting up new

All of our personal insurance products Ì home- operations in emerging insurance markets, such as

owners, auto, valuable articles and excess liability Ì Venezuela, where we opened for business last year.

have shown excellent growth for the last several years. Our international premiums have grown signiÑ-

In 1998, personal lines produced growth of 10% and a cantly faster than our domestic business, especially in

combined ratio of 85.6%, including 4.7 points of Europe, our largest overseas market. In 1998, interna-

5

tional premiums grew about 9% on a local currency During 1998, we attacked our cost structure

basis, with 18% growth in Europe oÅset by the through a rigorous activity value analysis program that

economic diÇculties in Asia and Latin America. We examined all our business activities from the point of

have built a global underwriting, claims and customer view of whether they add value to the enterprise. As

service infrastructure that in today's competitive envi- with any large organization, we found that many

ronment is diÇcult to replicate and therefore represents activities had outlived their usefulness or otherwise

a signiÑcant competitive advantage. become redundant, and we elimi-

While commercial lines, nated them. Cost savings in 1999. . . sustainedand particularly specialty commer- are expected to be $150 million.

proÑtable growthcial lines, have been driving our Equally important, we have ele-

international expansion, we are vated expense control as a continu-remains the most

also pursuing personal insurance ing priority and established a more

business in attractive markets. cost-conscious and value-orientedeÅective means of

These include Germany, France, mindset throughout the

Spain and especially the United organization.building value forKingdom. We are enjoying strong We have brought a similar

our owners over theorganic growth in the U.K., and rigor to the issue of growth and

during 1998, we expanded our put in place a much more meth-

long term.market presence with the acquisi- odical and analytical process by

tion of an excellent book of high- which ideas for new products and

value homeowners' coverages from other new business initiatives are

the Wellington syndicate at Lloyd's. Although the base developed, evaluated and funded. While it is much too

is currently small, we are very optimistic about the early to assess its impact in financial terms, this

outlook for Masterpiece overseas. methodology already has surfaced a number of attrac-

Report on 1998 Priorities tive ideas for new premium growth, and I expect

In last year's annual report, I identiÑed three priorities several of these to have a positive impact as early

for the year: getting better control of our costs, Ñnding as 1999.

ways to accelerate organic growth and pursuing strategic When we began our search for acquisitions, we

acquisitions. We have made good progress on all fronts. established strict strategic and Ñnancial criteria, includ-

6

ing that any candidate would have to strengthen our In December, Richard D. Wood retired from

specialty focus or expand our global reach. By the Chubb board after nine years as a director of the

expanding our position in the executive protection and corporation. We have beneÑted from his wise counsel

Ñnancial institutions markets, Executive Risk clearly and experience, and we will miss him.

falls within our strategic parameters. With modest Lastly, in February 1999, an old friend and long-

earnings dilution expected in 1999 and some positive time Chubb executive, Donn Norton, retired after

impact thereafter, the transaction clears our Ñnancial 29 years with the company. During much of this time,

hurdles as well. It should not be overlooked that Donn headed our real estate business and served as an

Executive Risk, under the leadership of Stephen Sills, executive vice president of the corporation. Donn made

also brings to Chubb a wealth of management and many signiÑcant contributions to Chubb, and we wish

underwriting talent as well as an aggressive, him well.

entrepreneurial approach that is more the exception As always, I am grateful to our employees

than the rule in our industry. worldwide for their hard work and productive eÅorts

During 1998, we also established a new reinsur- during 1998. It is a fact of business today that each

ance business, Chubb Re, and recruited as its CEO year we ask our staÅ to do more with less, and Chubb's

John Berger, one of the top people in his Ñeld. In this employees have always responded eÅectively to this

move, we are adding to Chubb's ranks a senior challenge. I am also grateful to our more than 5,000

executive and a management team who are widely agents and brokers worldwide for their continued

recognized for their innovative and entrepreneurial business and support. Lastly, I thank our customers

approach to the reinsurance business. around the world for the conÑdence they put in us to

In December 1998, we announced our intention handle their protection needs.

to purchase 27% of Hiscox plc, a leading BritishSincerely,

personal and commercial specialty insurer. We have

high regard for the management of the company and its

underwriting expertise.

In June, Zoe Baird was elected a director of the

corporation. She is president of The Markle FoundationDean R. O'Hare

and a former senior vice president and general counselChairman and Chief Executive OÇcer

of Aetna Inc. We are very pleased to have herMarch 12, 1999

participation on the board.

7

""Whether it's my personal or corporate insurance, Chubb never fails to impress me with

prompt and professional settlement of claims.'' ❖ ""Not possible to improve. I was stunned by

the speed of my claim settlement. Thank you'' ❖ ""Been with Chubb just over one year and

most impressed with overall service'' ❖ ""Astonished at the timeliness of the pay-

ment.'' ❖ ""Tough to beat your service'' ❖ ""Excellent. I would not switch to any other

company because the service I get from Chubb is wonderful.'' ❖ ""Outstanding. Couldn't ask

for anything more.'' ❖ ""This is my Ñrst ever claim and all I can say is I have been absolutely

astonished at the helpfulness of the staÅ. I don't see how you can improve on excellence.

Congratulations and thank you'' ❖ ""I ran into our claim representative in the grocery store

after the second storm. He not only asked if we'd had any more damage, but he also

remembered me by name. A true sign of quality. Please thank him for his kindness during a

very emotional time for us.'' ❖ ""I would just wish to say that you took the trauma out of a

sticky situation.'' ❖ ""Superior is a very aggressive word, however we are deeply pleased with

the service we received and the excellent customer service skills displayed by your representa-

tives'' ❖ ""Thank you for your assistance. We will always remain grateful customers of your

insurance company.'' ❖ ""An example to the rest of the industry.'' ❖ Prompt and courteous.

Truly the Chubb diÅerence.'' ❖ ""Thank you for making a diÇcult situation easier.'' ❖ ""44

years in insurance in Georgia gave me great experience in claims handling, but your

representative was the best I have ever encountered. The easiest and most eÇciently handled

claim in my many years of experience.'' ❖ ""I hope to continue with your company

forever.'' ❖ ""You can be proud of your service.'' ❖ ""Would recommend your company as

outstanding.'' ❖ ""Words can't express how satisÑed I am.'' ❖ ""We have considered insuring

with someone else "for less,' but have found your excellent responsiveness and service to be

worth the extra.''

8

Delivering What the Policy Promises

There is an irony inherent in every insurance policy: the customer who buys it hopes never to have to

use it. However, insurance thrives in part because the world is an unsafe place, as the 350,000 new

claims Ñled with Chubb in 1998 unfortunately evidence. As a result, we have ample opportunity to

fulÑll our end of the insurance bargain, a responsibility that Chubb has viewed as paramount since our

earliest days more than a century ago when we insured ships bound for New York bearing cotton,

grain, silk and coÅee from ports around the world.

We have built our name and reputation on the belief that when losses do occur, the service we

provide in resolving the claim is an integral part of what the customer purchased with our policy. Over

the years, claim management has become an increasingly complex business, requiring foresight into

emerging risks, new investment in infrastructure and expertise, and a continuing commitment to

responding faster to accidents, disasters, crimes and litigation wherever they take place around the

world. This year we describe some of the reasons why, when the inevitable does occur, our customers

can depend on us to deliver the promise our policies make.

We move fast.

Time is money, whether you're a homeowner or a 2,000 homeowner and business losses resulting from six

business manager, so rapid response is the raison d'etre successive violent storms in August and September.

for the staÅ of the new Eastern Claim Service Center Chesapeake is also the home of Chubb's catas-

in Chesapeake, Virginia. Opened in May, the center trophe unit. Armed with state-of-the-art mapping and

takes calls around the clock, 365 days a year, and communications technology, this unit can assemble on

expedites claim handling for agents, brokers and cus- immediate notice a team of claim professionals any-

tomers located east of the Mississippi. A similar center where in the world to respond to a catastrophic event.

to serve the Western U.S. is in the planning stages. In In 1998, the ""CAT'' unit provided fast, on-the-scene

its Ñrst eight months of operation, the Eastern claim service to residential and commercial customers follow-

center received more than 60,000 calls, handled more ing 37 diÅerent disasters in North America alone,

than 37,000 claims, hired more than 100 new employ- including ice storms, tornadoes, Öoods and hurricanes.

ees and, in a span of just three weeks, dealt with nearly

9

We respond anywhere in the world. Seattle, much of its cargo was lost or damaged. Chubb

The globalization of business has added layers of insured many of the containers on board, whose

complexity to commercial insurance. Interpreting local contents ranged from clothing to bicycles to computer

policies in multiple languages is a frustrating process for software, on behalf of 40 diÅerent commercial custom-

agents, brokers and customers alike. To simplify the ers. To resolve claims such as these, we depend on

untangling of cross-border cover- marine claim specialists Ì many

ages, Chubb launched the Multi- with 20 or more years' experi-

national Claim Unit, based in ence Ì who are experts in the

Boston, which is equipped to han- complex and often arcane language

dle calls in 140 languages through of the world's oldest form of insur-

a toll-free number accessible 24 ance and who can be aggressive

hours a day. about recovering costs from otherTo Come

Consider the example of a parties. Understanding the diÅer-

U.S.-based diaper manufacturer ence between a general and a

that suÅered a $10 million loss as particular ""average'' Ì the com-

a result of a Ñre at its factory in mon term for a marine loss Ì and

Argentina. Although the damage how to adjust it makes all the

to the plant and its inventory diÅerence in the speed andEastern Claim Service Center

Chesapeake, Virginiaexceeded that covered by the com- amount of the settlement, particu-

pany's Argentine carrier, the Multinational Claim Unit larly with a claim involving multiple customers, contain-

(MCU) worked with Chubb's oÇces in the United ers and insurers. As one of our veteran marine

States and Buenos Aires to ensure that coverage under underwriters put it, ""The greater the depth of expertise,

the parent company's Chubb master controlled policy the faster the service to the customer and the broker.''

extended to the subsidiary. With almost 20% of our We're comfortable handling complex cases.

business based in countries outside the United States, In the fast-paced race to be a leading player in the

Chubb's MCU is a strategic advantage that exempliÑes global telecommunications industry, one large European

what a truly global network can do. company has grown rapidly and proÑtably. So, when

Our adjusters are specialists. the company announced poorer-than-expected operating

At another longitude entirely, a typhoon raged in the results, the news surprised investors and rivals alike.

PaciÑc, tossing the APL China container ship in The company attributed the shortfall to economic

treacherous seas. Although the ship made it to port in conditions in Asia and Russia, but this did little to stop

10

its stock price from plummeting. The company soon decades of experience handling D&O claims.

faced multiple lawsuits, including suits from sharehold- We help businesses manage crises.

ers of an American telecommunications Ñrm acquired A restaurant faced its worst nightmare: several patrons

just months earlier, which alleged inadequate and fell ill and attributed their sickness to food poisoning.

misleading disclosure and sought damages from both The restaurant had to move quickly to take care of

the corporation and its directors those who had fallen ill as well as

and oÇcers personally. protect its reputation. As the res-

Fortunately, because this taurant's insurer, we worked with

company has been a Chubb cus- the appropriate oÇcials to deter-

tomer for 19 years and recognizes mine the cause of the outbreak,

the value of a comprehensive lia- coordinated an action plan to sort

bility program with worldwide cov- valid from potentially fraudulentTo Come

erage for its directors and oÇcers, claims, and made sure that those

we were on the case from the who fell genuinely ill had their

outset. Chubb's network of 124 claims settled as quickly and fairly

branches has claim specialists sta- as possible. At the same time, we

tioned around the world, including mounted a vigorous defense on our

directors and oÇcers (D&O) lia- customer's behalf against those

bility specialists in Europe. who might try to use such inci-

Because of our claim specialist, local proximity and dents for fraudulent personal gain. Whatever the crisis,

close customer relationship, we were able to conÑrm the we see it as our primary role to protect our customers'

customer's choice of defense counsel and begin to set reputations by taking the same level of care with claims

strategy immediately with the company's risk manager made against the customers as with claims made by

and general counsel. them.

Chubb's international network gives customers We provide counsel before there's a claim.

access to strong claim representation around the world. As more and more companies look to cut costs through

In this instance, our D&O claim specialists in the self-insurance or other risk retention programs, we have

States have been able to assist with U.S. litigation designated a team of claim business consultants to work

related to the case, and senior claim managers in with these customers to help them both prevent losses

Chubb's headquarters also have provided strategic and handle claims in an eÇcient and cost-eÅective

direction and a global perspective based upon our manner. For example, one Chubb claim consultant

11

serves as the worldwide claim coordinator for an stately Victorian building and a national historic

international food and beverage company. In another landmark. Built in 1880 as a lawn tennis resort for

instance, a bank accustomed to handling its claims Newport's summer residents, it remains an elegant and

through a third-party administrator (TPA) merged with active tennis club, museum and home of tournaments.

another Ñnancial institution, doubling the number of its Last summer, a Ñre from a neighboring building leapt

locations in the process. To honor to the Hall of Fame, destroying a

the existing relationship with the signiÑcant portion of the club.

TPA while ensuring consistent Within days, our adjuster made an

claim service for all locations, advance payment of $1 million

Chubb oÅered to set nationwide toward a loss that would ultimately

service standards and help adjust exceed $4 million.

claims, while retaining the TPA as The ability to move quicklyTo Come

the bank's claim manager. is vital in many claim situations Ì

For a sporting goods manu- in this instance, a major tourna-

facturer with 300 stores, we helped ment was scheduled to be played

organize its managed care/workers at the Hall of Fame in a few

compensation program by design- weeks' time Ì but even more

ing a kit customized for each important is a genuine understand-

location that explained to employ- ing of the uniqueness of what has

ees what to do in case of an accident or injury, been lost. Based on our years of experience insuring

identiÑed local doctors and listed Chubb's local claim museums and historic homes, we know how important

contacts. it is to preserve the character of a building when it is

In each of these cases, it was the claim business repaired or rebuilt following a Ñre. While our claim

consultant's ability to understand each customer's con- adjuster put the rebuilding and restoration process into

cerns and to orchestrate both local and global claim motion immediately, he was also careful to ensure that

support that won Chubb the account. Worldwide, claim the specialists and artisans chosen by the Hall of Fame

business consultants were responsible for helping win or would be able to restore this Victorian masterpiece to

retain $120 million in business in 1998. its original splendor.

We respect a building's history. We bring homes back to life.

The belle of Bellevue Avenue in Newport, Rhode Another architectural treasure suÅered a sadder fate.

Island is the International Tennis Hall of Fame, a Built in 1883, this elegant oceanfront house was one of

1212

a handful of summer homes designed by the architect architect developed blueprints that would enable build-

Stanford White. Distinctive for its craftsmanship as well ers to replicate the original house, from its stained glass

as its grandeur, the house was a landmark listed in the windows to well-loved creaks in the staircase. A hand-

National Register of Historic Places. Midwinter two picked team of architects, contractors, restoration spe-

years ago, an accidental Ñre engulfed the home, cialists, masons, welders, millworkers and landscapers

reducing it to rubble in just a couple of hours. Though are using the very materials that made the original

no one was hurt, all that remained house unique: the wood is old

was the chimney, remnants of the rather than new Southern yellow""While an insurance

cupola and handfuls of ceramic heart pine; the bricks hand-hewnpolicy is a legal contract

tiles that had lined the rather than extruded; and the tiles

that expresses ourmantelpiece. have been Ñred in England to

Despite the extent of the match the originals rescued fromminimum responsibility,devastation, perhaps not all was the ashes. To reproduce 115 yearsthere are manylost. The family had a Masterpiece of history, painters will even applyoccasions when equityhomeowners policy that included a multiple coats of paint inside and

demands that weprovision called ""extended replace- out. While no insurance policy can

recognize a moralment cost valuation.'' This added replace all of the keepsakes and

obligation beyond thedimension of protection Ì which mementos that are lost in a tragic

most insurers limit if they oÅer it accident, we believe our policystrictly legal terms Ìat all Ì gives the homeowner the comes as close as is possible toand this is always aresources to rebuild a house bringing the original house backconsideration in ourexactly as it was, using the same to life.

settlements.''materials used to build the original We stand by our promise.

structure. The philosophy that guides ChubbHendon Chubb (1874-1960)

We understand how trau- in each claim settlement was

matic it is to lose one's home, and established with the company's

we know that the last thing our customers want to founding: treat each customer the way we would like to

worry about is the rebuilding process. While customers be treated if we experienced the same loss Ì with

often ask us to recommend an architect or a builder in integrity, empathy, promptness, expertise and fairness.

a situation such as this, they are just as often as likely More than a century later, Chubb's 1,325 claim staÅ

to want to choose their own Ì which a Chubb policy are still guided by these same principles. Imbedded in

enables them to do. In this instance, the family chose our culture and in our contracts is a commitment to

an architectural Ñrm that specializes in restoration and deliver what our policies promise and, in so doing, to

a local builder experienced in repairing period homes. try consistently to exceed the expectations of our

Working from White's records, photographs of personal and commercial customers as well as their

the home and the resident's memories, the restoration agents and brokers worldwide.

13

Forward Looking Information

Certain statements in this document may be considered region or by line of business, as well as with respect to

to be ""forward looking statements'' as that term is its activity value analysis program, its share repurchase

deÑned in the Private Securities Litigation Reform Act program, investment income or cash Öow projections, its

of 1995, such as statements that include the words or announced real estate plans, or the timing or earnings

phrases ""will likely result'', ""are expected to'', ""will impact of the announced Executive Risk transaction,

continue'', ""is anticipated'', ""estimate'', ""project'', or and more generally, to: general economic conditions

similar expressions. Such statements are subject to including changes in interest rates and the performance

certain risks and uncertainties. The factors which could of the Ñnancial markets, changes in domestic and

cause actual results to diÅer materially from those foreign laws, regulations and taxes, changes in

suggested by any such statements include, but are not competition and pricing environments, regional or

limited to, those discussed or identiÑed from time to general changes in asset valuations, the occurrence of

time in the Corporation's public Ñlings with the signiÑcant natural disasters, the development of major

Securities and Exchange Commission and speciÑcally to Year 2000 liabilities, the inability to reinsure certain

risks or uncertainties associated with the Corporation's risks economically, the adequacy of loss reserves, Euro

expectations with respect to premium price increases, or currency conversion transactions, as well as general

the non-renewal of underpriced insurance accounts, market conditions, competition, pricing and

business proÑtability or growth estimates overall and by restructurings.

14

Supplementary Financial Data

In Millions

Years Ended December 31

1998 1997 1996

Property and Casualty Insurance

Underwriting

Net Premiums WrittenÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,503.5 $5,448.0 $4,773.8

Increase in Unearned Premiums ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (199.7) (290.6) (204.5)

Premiums Earned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,303.8 5,157.4 4,569.3

Claims and Claim Expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,493.7 3,307.0 3,010.8

Operating Costs and ExpensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,850.0 1,777.4 1,547.4

Increase in Deferred Policy Acquisition CostsÏÏÏÏÏÏÏÏÏÏ (51.8) (75.7) (42.5)

Dividends to Policyholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35.9 31.7 23.3

Underwriting Income (Loss) Before Income TaxÏÏÏÏÏÏÏ (24.0) 117.0 30.3

Federal and Foreign Income Tax (Credit) ÏÏÏÏÏÏÏÏÏÏÏÏ (9.9) 39.5 13.2

Underwriting Income (Loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (14.1) 77.5 17.1

Investments

Investment Income Before Expenses and Income TaxÏÏÏ 760.0 721.4 656.2

Investment ExpensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11.1 10.2 10.1

Investment Income Before Income TaxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 748.9 711.2 646.1

Federal and Foreign Income Tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 114.8 118.9 101.9

Investment Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 634.1 592.3 544.2

Property and Casualty Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 620.0 669.8 561.3

Real Estate

Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 82.2 616.1 319.8

Cost of Sales and Expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 85.7 624.7 555.7 (a)

Real Estate Loss Before Income Tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3.5) (8.6) (235.9)

Federal Income Tax Credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1.5) (3.5) (89.1)

Real Estate LossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2.0) (5.1) (146.8)(a)

Corporate, Net of Tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22.8 36.4 19.7

CONSOLIDATED OPERATING INCOME FROMCONTINUING OPERATIONS BEFORERESTRUCTURING CHARGE ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 640.8 701.1 434.2

Restructuring Charge, Net of Tax (b)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (26.0) Ì Ì

CONSOLIDATED OPERATING INCOME FROMCONTINUING OPERATIONS AFTERRESTRUCTURING CHARGE ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 614.8 701.1 434.2

Realized Investment Gains from Continuing Operations,Net of TaxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 92.2 68.4 52.0

CONSOLIDATED INCOME FROMCONTINUING OPERATIONSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 707.0 769.5 486.2

Income From Discontinued Operations, Net of Tax (c)ÏÏÏÏÏ Ì Ì 26.5

CONSOLIDATED NET INCOME ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 707.0 $ 769.5 $ 512.7

(a) The 1996 real estate loss reÖects a net charge of $160.0 million for the after-tax eÅect of a $255.0 million write-down of the carrying value of certain

real estate assets to their estimated fair value.

(b) In the Ñrst quarter of 1998, the Corporation recorded a net charge of $26.0 million for the after-tax eÅect of a $40.0 million restructuring charge.

(c) In May 1997, the Corporation sold its life and health insurance operations, which have been classiÑed as discontinued operations.

The above federal and foreign income tax provisions represent allocations of the consolidated provision.

15

Property and Casualty Underwriting Results

Net Premiums Written (In Millions of Dollars)

1998 1997 1996 1995 1994

Personal InsuranceAutomobile ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 309.4 $ 298.6 $ 243.1 $ 200.3 $ 188.0HomeownersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 735.1 697.4 546.1 455.6 436.5Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 320.2 310.4 250.0 210.9 204.3

Total PersonalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,364.7 1,306.4 1,039.2 866.8 828.8

Commercial InsuranceMultiple Peril ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 784.5 813.6 671.0 575.7 522.6Casualty ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 900.5 915.8 818.0 717.3 667.8Workers' Compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 320.8 296.7 243.7 223.4 201.6Property and Marine ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 524.0 583.0 495.0 426.3 360.0Executive Protection ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 949.8 891.4 775.7 647.0 596.4Financial Institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 391.6 384.3 340.4 285.5 260.0Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 267.6 260.6 188.3 195.5 198.8

Total Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,138.8 4,145.4 3,532.1 3,070.7 2,807.2

Total Before Reinsurance Assumed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,503.5 5,451.8 4,571.3 3,937.5 3,636.0

Reinsurance Assumed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (3.8) 202.5 368.5 315.2

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $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. EÅective January 1, 1996, these agreements were amended to reduce the portion of each company's

business reinsured with the other. The agreements were terminated eÅective January 1, 1997.

Combined Loss and Expense Ratios

Personal InsuranceAutomobile ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 89.2% 86.6% 86.5% 87.4% 96.3%HomeownersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 90.8 88.9 104.3 93.8 110.2Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70.2 66.9 69.3 72.6 80.7

Total PersonalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 85.6 83.1 91.7 87.1 99.8

Commercial InsuranceMultiple Peril ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 124.2 118.7 118.1 110.0 112.4Casualty ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 114.6 113.5 113.3 113.8 101.9Workers' Compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 111.5 105.0 101.8 95.1 103.9Property and Marine ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 116.5 105.5 97.8 92.9 102.5Executive Protection ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75.8 74.5 76.5 82.1 81.4Financial Institutions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 86.7 91.5 83.7 88.8 96.2Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100.9 85.0 99.0 103.9 105.4

Total Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 104.5 100.7 99.7 99.3 99.4

Total Before Reinsurance Assumed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 99.8 96.6 97.9 96.5 99.5

Reinsurance Assumed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì N/M N/M 99.2 100.1

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 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 proÑtability 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

Management's Discussion andAnalysis of Financial Conditionand Results of Operations

The following discussion presents our past results and our underwriting results caused in large part by substantially

expectations for the near term future. Separately, we higher catastrophe losses. Investment income increased in

present our consolidated Ñnancial statements and related 1998 compared with the prior year. The increase in

notes on pages 40 to 62 and other supplementary earnings in 1997 was due to highly proÑtable underwrit-

Ñnancial information on pages 15, 16, 38 and 39, all of ing results as well as strong growth in investment income

which are integral parts of the following analysis of our compared with 1996. Earnings in 1996 were adversely

results of operations and our Ñnancial position. aÅected by higher catastrophe losses.

Operating income from continuing operations, which Catastrophe losses were $173 million in 1998, $57 million

excludes realized investment gains and losses, was in 1997 and $142 million in 1996. The 1998 amount was

$615 million in 1998 compared with $701 million in net of reinsurance recoveries of approximately $150 mil-

1997 and $434 million in 1996. Operating income in lion relating to Hurricane Georges. We did not have any

1998 reflects a first quarter restructuring charge of recoveries from our catastrophe reinsurance program

$26 million after taxes related to the implementation of during 1997 or 1996 since there were no individual

a cost control initiative. Operating income in 1996 catastrophes for which our losses exceeded the initial

reflects a fourth quarter charge of $160 million after retention. Our initial retention level for each catastrophic

taxes related to the write-down of the carrying value of event is approximately $100 million in the United States

certain real estate assets. and generally $25 million outside the United States.

Income from continuing operations, which includes Reported net premiums written amounted to $5.5 billionrealized investment gains and losses related to such in 1998, an increase of 1% compared with 1997.operations, was $707 million in 1998 compared with Reported net premiums written increased 14% in 1997$770 million in 1997 and $486 million in 1996. compared with 1996. Personal coverages accounted for

$1.4 billion or 25% of 1998 premiums written andIn May 1997, the Corporation completed the sale of its

commercial coverages for $4.1 billion or 75%. Thelife and health insurance operations. The life and health

reported growth in premiums written in 1998 and 1997insurance operations have been classiÑed as discontinued

was aÅected by changes in certain reinsurance agree-operations.

ments, which are discussed below.

Net income, which includes the results of the discontin-For many years, a portion of the U.S. insurance businessued operations, amounted to $707 million in 1998written by the Corporation's property and casualtycompared with $770 million in 1997 and $513 millionsubsidiaries was reinsured on a quota share basis with ain 1996.subsidiary of the Sun Alliance Group plc. Similarly, a

subsidiary of the Corporation assumed a portion of SunProperty and Casualty Insurance

Alliance's property and casualty business on a quota

Property and casualty earnings were lower in 1998 share basis. EÅective January 1, 1996, the agreements

compared with 1997. Such earnings in 1997 were pertaining to the exchange of reinsurance were amended

substantially higher than in 1996. Property and casualty to reduce the portion of each company's business

income after taxes was $620 million in 1998 compared reinsured with the other. Consequently, during 1996, the

with $670 million in 1997 and $561 million in 1996. The Corporation's property and casualty subsidiaries retained

decrease in earnings in 1998 was due to a decline in a greater portion of the business they wrote directly and

17

1998 1997 1996

(in millions)

Reported net premiums written $5,504 $5,448 $4,774

Premiums assumed from Sun Alliance (4) 203

Net premiums written, excluding premiumsassumed from Sun Alliance 5,504 5,452 4,571

Portfolio transfers of unearned premiums 175 92

Adjusted net premiums written(1998 compared with 1997) $5,504 5,277

Increase in retention Ì 1997 392

Adjusted net premiums written(1997 compared with 1996) $4,885 $4,479

Net premiums written, as adjusted, increased 4% in 1998

compared with 1997. Similarly, net premiums written, as

adjusted, increased 9% in 1997 compared with 1996.

After a review of the costs and beneÑts of our casualty

excess of loss reinsurance program, eÅective January 1,

1996, we modiÑed the program, principally for the excess

liability and executive protection classes. The changes

included an increase in the initial retention for each loss

from $5 million to $10 million and an increase in the

initial aggregate amount of losses retained for each year

before reinsurance responds. These changes in our

casualty reinsurance program increased net premiums

written in 1996 by approximately $130 million comparedassumed less reinsurance from Sun Alliance. As a resultwith the prior year. During 1996, we continued toof the 1996 merger of Sun Alliance with Royalevaluate the relative costs and beneÑts of the program.Insurance Holdings plc, these agreements were termi-As a result, eÅective January 1, 1997, we again modiÑednated eÅective January 1, 1997. Therefore, in 1997, thethe program, increasing the initial retention for each loss

property and casualty subsidiaries retained an evenfrom $10 million to $25 million. This change in our

greater portion of the business they wrote directly andcasualty reinsurance program increased net premiums

assumed no reinsurance from Sun Alliance. There waswritten in 1997 by approximately $65 million compared

an additional impact on net premiums written in the Ñrstwith 1996. These changes have had a positive impact on

quarter of 1996 and 1997 due to the eÅect of thethe cash Öows and resulting investment income of the

portfolio transfers of unearned premiums as of January 1property and casualty subsidiaries.

of each year resulting from the changes in retention.

Premium growth in personal lines was strong in bothA comparison of reported net premiums written with net

1997 and 1998. In commercial lines, intense competitionpremiums written adjusted to reÖect the changes to the

in the worldwide marketplace has made proÑtablereinsurance agreements with Sun Alliance follows: premium growth diÇcult, particularly in the standard

classes, which include multiple peril, casualty and work-

ers' compensation. In 1998, competitors continued to

18

place signiÑcant pressure on pricing as they attempted to

maintain or increase market share. In an environment

where price increases have been diÇcult to achieve, we

have focused on our specialty lines where we emphasize

the added value we provide to our customers. Strong

growth was achieved in both years in premiums outside

the United States, particularly in Europe, our largest

foreign market.

In view of the continuing unproÑtability of the standard

commercial classes, we have accelerated actions to

achieve price increases. Our priorities for 1999 are to

renew good business at adequate prices and not renew payments and also to written premiums growing at aunderperforming accounts where we cannot attain price somewhat lesser rate than overhead expenses.adequacy. This aggressive pricing strategy could cause us

to lose some business. Therefore, we expect overallDuring the fourth quarter of 1997, we began an activity

premium growth to be Öat in 1999.value analysis process to identify and eliminate low-value

activities and to improve operational eÇciency in order toUnderwriting results were near-breakeven in 1998 com- reduce expenses and redirect resources to those currentpared with proÑtable results in 1997 and 1996. The activities and new initiatives having the greatest potentialcombined loss and expense ratio, the common measure

to contribute to the future results of the Corporation.of underwriting proÑtability, was 99.8% in 1998 compared

Implementation began in the Ñrst quarter of 1998 and iswith 96.9% in 1997 and 98.3% in 1996.

substantially completed. This cost control initiative has

resulted in approximately 500 job reductions in the homeThe loss ratio was 66.3% in 1998 compared with 64.5%

oÇce and the branch network through a combination ofin 1997 and 66.2% in 1996. The loss ratio continues to

early retirements, terminations and attrition. Other sav-reÖect the favorable experience resulting from the

ings involve vendor management, consulting expenses andconsistent application of our disciplined underwriting

other operating costs. The initiative is expected to resultstandards. Losses from catastrophes represented 3.3 per-

in annual cost savings of approximately $150 million,centage points of the loss ratio in 1998 compared with

beginning in 1999.1.1 percentage points in 1997 and 3.1 percentage points

in 1996. The signiÑcant catastrophes aÅecting results inIn the Ñrst quarter of 1998, we recorded a restructuring1998 included the winter ice storms in Canada in thecharge of $40 million, or $26 million after taxes, relatedÑrst quarter, the wind and hail storms in the Unitedto the implementation of the cost control initiative. TheStates in the second quarter and Hurricane Georges inrestructuring charge relates primarily to costs associatedPuerto Rico in the third quarter. Catastrophe losses inwith providing enhanced pension beneÑts to employees1996 resulted primarily from the winter storms in thewho accepted an early retirement incentive oÅer, sever-eastern part of the United States in the Ñrst quarter.

ance costs and other costs.

Our expense ratio was 33.5% in 1998 compared with

PERSONAL INSURANCE32.4% in 1997 and 32.1% in 1996. The increase in the

Reported premiums from personal insurance increasedratio in 1998 was due primarily to an increase in

commission expense caused in part by higher contingent 5% in 1998 compared with a 26% increase in 1997. The

19

areas while maintaining our disciplined approach to

pricing and risk selection. Personal automobile premiums

grew as a result of an increase in the number of in-force

policies for high-value automobiles.

Our personal insurance business produced substantial

underwriting proÑts in each of the past three years. The

combined loss and expense ratio was 85.6% in 1998

compared with 83.1% in 1997 and 91.7% in 1996.

The proÑtability of our homeowners business each year is

aÅected substantially by the amount of catastrophe losses

we incur. Homeowners results were proÑtable by a

similar margin in 1998 and 1997 as a reduction in the

frequency of non-catastrophe related losses in 1998

substantially oÅset an increase in catastrophe losses.

Results for this class were unproÑtable in 1996 as

catastrophe losses, particularly those caused by the winter

storms, adversely aÅected results. Catastrophe losses

represented 8.5 percentage points of the loss ratio for this

class in 1998 compared with 2.9 percentage points in

1997 and 16.7 percentage points in 1996.

Our automobile business produced substantial proÑts in

each of the last three years. Results in each year

beneÑted from stable loss frequency and severity.eÅect on net premiums written of the changes to the

reinsurance agreement with Sun Alliance was as follows:

Other personal coverages, which include insurance for1998 1997 1996 personal valuables and excess liability, were highly

(in millions) proÑtable in each of the past three years. Personal excessReported net premiums written $1,365 $1,306 $1,039 liability proÑtability increased in 1997 due to favorablePortfolio transfers of unearned premiums 66 31 loss experience but decreased somewhat in 1998 due toAdjusted net premiums written

an increase in the frequency of large losses.(1998 compared with 1997) $1,365 1,240

Increase in retention Ì 1997 139COMMERCIAL INSURANCE

Adjusted net premiums writtenReported premiums from commercial insurance were(1997 compared with 1996) $1,101 $1,008

virtually unchanged in 1998 compared with 1997.

Reported premiums in 1997 were 17% higher than inNet premiums written, as adjusted, increased 10% in

1996. The eÅect on net premiums written of the changes1998 compared with 1997 and 9% in 1997 compared

to the reinsurance agreement with Sun Alliance is shownwith 1996. We continued to grow our homeowners and

other non-automobile business in non-catastrophe prone on the following page.

20

1998 1997 1996

(in millions)

Reported net premiums written $4,139 $4,146 $3,532

Portfolio transfers of unearned premiums 109 61

Adjusted net premiums written

(1998 compared with 1997) $4,139 4,037

Increase in retention Ì 1997 253

Adjusted net premiums written

(1997 compared with 1996) $3,784 $3,471

Net premiums written, as adjusted, increased 3% in 1998

compared with 1997 and 9% in 1997 compared with

1996. Our strategy of working closely with our customers

and our ability to diÅerentiate our products have enabled

us to renew a large percentage of our business. Growth

was achieved in 1998 in our executive protection business

due to an emphasis on new products. Financial services

consolidation together with competition has constrained

growth in our Ñnancial institutions business. Premium

growth in the standard commercial classes continues to

be hindered by the intense competition that has driven

prices to increasingly unproÑtable levels. Premium growth

in 1997 for the excess liability component of our casualty

coverages and for our executive protection coverages

beneÑted from the changes to our casualty excess of losssubstantial incurred losses in 1997 relating to suchreinsurance program. Premium growth in 1998 and 1997claims. Results for the multiple peril class were similarwas stronger outside the United States.in 1997 and 1996 as an improvement in 1997 in the

property component, due in part to an absence ofOur commercial insurance business produced unproÑtable catastrophe losses, was oÅset by higher losses in theresults in 1998 compared with near breakeven underwrit- liability component resulting from an increase in theing results in 1997 and 1996. The combined loss and frequency of large losses and higher incurred lossesexpense ratio was 104.5% in 1998 compared with 100.7% relating to asbestos and toxic waste claims. Catastrophein 1997 and 99.7% in 1996. losses represented 8.6 percentage points of the loss ratio

for this class in 1998 compared with 1.5 percentage

points in 1997 and 4.8 percentage points in 1996.Multiple peril results were unproÑtable in each of the

past three years due, in large part, to inadequate prices.

Results for this class in 1998 deteriorated in the property Results for our casualty business were similarly unproÑta-component due to higher catastrophe losses. In the ble in each of the past three years. In each year, casualtyliability component, there was an increase in the results were adversely aÅected by incurred losses relatingfrequency of large losses in 1998. However, this was to asbestos and toxic waste claims, but more so in 1996.oÅset by negligible multiple peril incurred losses in 1998 The excess liability component of our casualty coverages

relating to asbestos and toxic waste claims on insurance was slightly unproÑtable in 1998 compared with proÑta-

policies written many years ago compared with the ble results in 1997 and 1996 due to declining prices

21

Property and marine results were unproÑtable in 1998

and 1997, but more so in 1998, compared with proÑtable

results in 1996. Results in 1998 and 1997 were adversely

aÅected by an increase in the frequency of large losses,

including several large overseas losses. Results in all three

years were adversely aÅected by catastrophe losses.

Catastrophe losses for this class represented 5.7 percent-

age points of the loss ratio in 1998 compared with 4.9

percentage points in 1997 and 4.5 percentage points in

1996.

Executive protection results were highly proÑtable in

each of the past three years due to favorable loss

experience, particularly in the directors and oÇcers and

Ñduciary components. Our Ñnancial institutions business

was also proÑtable during the same period due to the

favorable loss experience in the Ñdelity component of this

business. Such proÑtability was somewhat lower in 1997

due to several large losses in the non-Ñdelity portion of

this business.

Our other commercial classes produced near breakeven

results in 1998 compared with proÑtable results in 1997

and near breakeven results in 1996. The deterioration in

1998 was attributable to our aviation business, whichand an increase in the frequency of losses. Excess liabilityproduced highly unproÑtable results. The improvement inresults in 1998 beneÑted from favorable development on1997 was primarily attributable to our surety andcertain case reserves set up several years ago. Results foraccident business.the primary liability component were unproÑtable in each

of the past three years, but more so in 1997 and 1996REINSURANCE ASSUMEDdue to a higher frequency of losses in those years.

Reinsurance assumed is treaty reinsurance that wasResults in the automobile component were more unprof-

itable in 1998 than in 1997 compared with breakeven assumed from Sun Alliance. The reinsurance agreement

results in 1996. The deterioration in 1997 and again in with Sun Alliance was terminated eÅective January 1,

1998 was due to an increase in the frequency of large 1997. However, due to the lag in our reporting of suchlosses. business, net premiums written in the Ñrst quarter of

1997 included $90 million related to business we

Workers' compensation results were unproÑtable in each assumed from Sun Alliance in the second half of 1996.

of the past three years. Results deteriorated in 1997 and Net premiums written for this segment were reduced by

again in 1998 due in large part to the cumulative eÅect $94 million and $65 million in the Ñrst quarter of 1997

of price reductions over the past several years. Results and 1996, respectively, due to the eÅect of the portfolio

were also adversely aÅected in 1998 by several large transfers of unearned premiums back to Sun Alliance as

losses. of January 1 of each year.

22

Underwriting results for this segment in 1997, which substantially lower incurred losses related to asbestos and

represent our share of the Sun Alliance business for the toxic waste claims, the continued favorable loss experi-

last six months of 1996, were near breakeven. Underwrit- ence for executive protection coverages and favorable

ing results were also near breakeven in 1996. development on certain excess liability case reserves set

up several years ago.

LOSS RESERVES

Loss reserves are our property and casualty subsidiaries'The process of establishing loss reserves is a complex and

largest liability. At the end of 1998, gross loss reservesimprecise science that reÖects signiÑcant judgmental

totaled $10.4 billion compared with $9.8 billion andfactors. This is true because claim settlements to be

$9.5 billion at year-end 1997 and 1996, respectively.made in the future will be impacted by changing rates of

Reinsurance recoverable on such loss reserves was $1.3inÖation and other economic conditions, changing legisla-

billion at year-end 1998 compared with $1.2 billion andtive, judicial and social environments and changes in our

$1.8 billion at the end of 1997 and 1996, respectively.claim handling procedures. In many liability cases,

signiÑcant periods of time, ranging up to several years or

As a result of the changes to the reinsurance agreements more, may elapse between the occurrence of an insured

with Sun Alliance, there were portfolio transfers of gross loss, the reporting of the loss and the settlement of the

loss reserves and reinsurance recoverable as of January 1, loss. In fact, approximately 60% of our net loss reserves

1997 and 1996. The eÅect of these portfolio transfers was at December 31, 1998 were for IBNR Ì claims that had

a decrease in gross loss reserves of $184 million and $209 not yet been reported to us, some of which were not yet

million and a decrease in reinsurance recoverable of known to the insured, and for future development on

$470 million and $244 million in 1997 and 1996, reported claims.

respectively.

Judicial decisions and legislative actions continue toLoss reserves, net of reinsurance recoverable, increased broaden liability and policy deÑnitions and to increase theby $485 million or 6% in 1998 compared with $809 mil- severity of claim payments. As a result of this and otherlion or 10% in 1997. Excluding the eÅect of the 1997 societal and economic developments, the uncertaintiesportfolio transfer, net loss reserves increased by $523 mil- inherent in estimating ultimate claim costs on the basislion or 7% in 1997. Substantial reserve growth has of past experience continue to further complicate theoccurred each year in those liability classes, primarily already complex loss reserving process.excess liability and executive protection, that are charac-

terized by delayed loss reporting and extended periods ofThe uncertainties relating to asbestos and toxic wastesettlement.claims on insurance policies written many years ago are

exacerbated by inconsistent court decisions and judicialDuring 1998, we experienced overall favorable develop-

and legislative interpretations of coverage that in somement of $218 million on loss reserves established as of

cases have tended to erode the clear and express intentthe previous year-end. This compares with favorable

of such policies and in others have expanded theories ofdevelopment of $65 million in 1997 and $43 million in

liability. The industry is engaged in extensive litigation1996. Such redundancies were reÖected in operating

over these coverage and liability issues and is thusresults in these respective years. Each of the past three

confronted with a continuing uncertainty in its eÅorts toyears beneÑted from favorable claim severity trends for

quantify these exposures.certain liability classes; this was oÅset each year in

varying degrees by losses incurred relating to asbestos

and toxic waste claims. The higher favorable develop- Our most costly asbestos exposure relates to an insurance

ment in 1998 compared with the prior years was due to policy issued to Fibreboard Corporation by PaciÑc

23

Indemnity Company in 1956. In 1993, PaciÑc Indemnity settlement agreement is ultimately disapproved. PaciÑc

Company, a subsidiary of the Corporation, entered into a Indemnity's obligation under the trilateral agreement is

global settlement agreement with Continental Casualty therefore similar to, and not duplicative of, that under

Company (a subsidiary of CNA Financial Corporation), those agreements described above.

Fibreboard Corporation, and attorneys representing claim-

ants against Fibreboard for all future asbestos-related The trilateral agreement reaÇrms portions of an agree-bodily injury claims against Fibreboard. This agreement ment reached in March 1992 between PaciÑc Indemnityis subject to Ñnal appellate court approval. Pursuant to and Fibreboard. Among other matters, that 1992 agree-the global settlement agreement, a $1.525 billion trust ment eliminates any PaciÑc Indemnity liability tofund will be established to pay future claims, which are Fibreboard for asbestos-related property damage claims.claims that were not Ñled in court before August 27,

1993. PaciÑc Indemnity will contribute approximately In July 1995, the United States District Court of the$538 million to the trust fund and Continental Casualty Eastern District of Texas approved the global settlementwill contribute the remaining amount. In Decem- agreement and the trilateral agreement. The judgmentsber 1993, upon execution of the global settlement approving these agreements were appealed to the Unitedagreement, PaciÑc Indemnity and Continental Casualty States Court of Appeals for the Fifth Circuit. Inpaid their respective shares into an escrow account. Upon July 1996, the Fifth Circuit Court aÇrmed the 1995Ñnal court approval of the settlement, the amount in the judgments of the District Court. The objectors to theescrow account, including interest earned thereon, will be global settlement agreement appealed to the Unitedtransferred to the trust fund. All of the parties have States Supreme Court. In June 1997, the Supreme Courtagreed to use their best eÅorts to seek Ñnal court set aside the ruling by the Fifth Circuit Court that hadapproval of the global settlement agreement. approved the global settlement agreement and ordered

the Fifth Circuit Court to reconsider its approval. InPaciÑc Indemnity and Continental Casualty reached a January 1998, the Fifth Circuit Court again aÇrmed theseparate agreement in 1993 for the handling of all global settlement agreement. In April 1998, the objectorsasbestos-related bodily injury claims pending on to the settlement petitioned the Supreme Court to reviewAugust 26, 1993 against Fibreboard. PaciÑc Indemnity's the decision. In December 1998, argument was heldobligation under this agreement with respect to such before the Supreme Court on the objectors' challenge. Apending claims is approximately $635 million, all of decision is expected during 1999.which has been paid. The agreement further provides

that the total responsibility of both insurers with respectThe trilateral agreement was never appealed to the

to pending and future asbestos-related bodily injuryUnited States Supreme Court and is Ñnal. As a result,

claims against Fibreboard will be shared between PaciÑcmanagement continues to believe that the uncertainty of

Indemnity and Continental Casualty on an approximatePaciÑc Indemnity's exposure with respect to asbestos-

35% and 65% basis, respectively.related bodily injury claims against Fibreboard has been

eliminated.At the same time, PaciÑc Indemnity, Continental Casu-

alty and Fibreboard entered into a trilateral agreement toSince 1993, a California Court of Appeal has agreed, in

settle all present and future asbestos-related bodily injuryresponse to a request by PaciÑc Indemnity, Continental

claims resulting from insurance policies that were, orCasualty and Fibreboard, to delay its decisions regarding

may have been, issued to Fibreboard by the two insurers.asbestos-related insurance coverage issues that are cur-

The trilateral agreement will be triggered if the globalrently before it and involve the three parties exclusively,

while the approval of the global settlement is pending in

24

court. Continental Casualty and PaciÑc Indemnity have There is great uncertainty involved in estimating our

dismissed disputes against each other which involved liabilities related to these claims. First, the liabilities of

Fibreboard and were in litigation. the claimants are extremely diÇcult to estimate. At any

given site, the allocation of remediation costs among

governmental authorities and the PRPs varies greatly.We have additional potential asbestos exposure, primarilySecond, diÅerent courts have addressed liability andon insureds for which we wrote excess liability coverages.coverage issues regarding pollution claims and haveSuch exposure has increased due to the erosion of muchreached inconsistent conclusions in their interpretation ofof the underlying limits. The number of claims againstseveral issues. These signiÑcant uncertainties are notsuch insureds and the value of such claims havelikely to be resolved deÑnitively in the near future.increased in recent years due in part to the non-viability

of other defendants.

Uncertainties also remain as to the Superfund law itself.

Superfund's taxing authority expired on December 31,Our remaining asbestos exposures are mostly peripheral1995. Notwithstanding continued pressure by the insur-defendants, including a mix of manufacturers and distrib-ance industry and other interested parties to achieve autors of certain products that contain asbestos as well aslegislative solution which would reform the liabilitypremises owners. Generally, these insureds are namedprovisions of the law, Congress has not yet addressed thedefendants on a regional rather than a nationwide basis.issue. It is currently not possible to predict the directionWe continue to receive notices of new asbestos claimsthat any reforms may take, when they may occur or theand new exposures on existing claims as more peripheraleÅect that any changes may have on the insuranceparties are drawn into litigation to replace the nowindustry.defunct mines and bankrupt manufacturers.

The Superfund law does not address non-Superfund sites.Hazardous waste sites are another signiÑcant potentialFor that reason, it does not cover all existing hazardousexposure. Under the federal ""Superfund'' law and similarwaste exposures, such as those involving sites that arestate statutes, when potentially responsible partiessubject to state law only. There remains signiÑcant(PRPs) fail to handle the clean-up, regulators have theuncertainty as to the cost of remediating the state sites.work done and then attempt to establish legal liabilityBecause of the large number of state sites, such sitesagainst the PRPs. The PRPs, with proper governmentcould prove even more costly in the aggregate thanauthorization in many instances, disposed of toxic materi-Superfund sites.als at a waste dump site or transported the materials to

the site. Most sites have multiple PRPs. InsuranceLitigation costs remain substantial, particularly for haz-policies issued to PRPs were not intended to cover theardous waste claims. A substantial portion of the fundsclean-up costs of pollution and, in many cases, did notwe have expended to date has been for legal feesintend to cover the pollution itself. Pollution was not aincurred in the prolonged litigation of coverage issues.recognized hazard at the time many of these policiesPrimary policies provide a limit on indemnity paymentswere written. In more recent years, however, policiesbut many do not limit defense costs. This unlimitedspeciÑcally exclude such exposures.defense provided in the policy sometimes leads to the

payment of defense costs in multiples of the indemnityAs the costs of environmental clean-up have becomeexposure.substantial, PRPs and others have increasingly Ñled

claims with their insurance carriers. Litigation against

insurers extends to issues of liability, coverage and other

policy provisions.

25

Reserves for asbestos and toxic waste claims cannot be CATASTROPHE EXPOSURE

estimated with traditional loss reserving techniques that The Corporation's property and casualty subsidiaries have

rely on historical accident year loss development factors. an exposure to insured losses caused by hurricanes,

We have established case reserves and expense reserves earthquakes, winter storms, windstorms and other cata-

for costs of related litigation where suÇcient information strophic events. The frequency and severity of catastro-

has been developed to indicate the involvement of a phes are unpredictable. The extent of losses from a

speciÑc insurance policy. In addition, IBNR reserves catastrophe is a function of both the total amount of

have been established to cover additional exposures on insured exposure in an area aÅected by the event and the

both known and unasserted claims. These reserves are severity of the event. We continually assess our concen-

continually reviewed and updated. We have evaluated tration of underwriting exposures in catastrophe prone

ultimate incurred losses using newly emerging techniques areas and develop strategies to manage this exposure

for estimating environmental liabilities and have through individual risk selection, subject to regulatory

expanded our claim data base. As a result, we are more constraints, and through the purchase of catastrophe

conÑdent about the range of likely ultimate incurred reinsurance. In recent years, we have invested in

losses relating to asbestos and toxic waste claims. modeling technologies that allow us to better monitor

Therefore, the incurred losses relating to asbestos and catastrophe exposures. We also continue to explore and

toxic waste claims were only $68 million in 1998, analyze credible scientiÑc evidence, including the impact

substantially less than the $125 million in 1997 and the of global climate change, that may aÅect our potential

$151 million in 1996. Further increases in such loss exposure under insurance policies.

reserves in 1999 and future years are possible as legal

and factual issues concerning these claims continue to beINVESTMENTS AND LIQUIDITY

clariÑed. The amount cannot be reasonably estimated. Investment income after taxes increased 7% in 1998

compared with 9% in 1997. Growth was primarily due toManagement believes that the aggregate loss reserves of increases in invested assets, which reÖected strong cashthe property and casualty subsidiaries at December 31, Öow from operations over the period, partially oÅset by1998 were adequate to cover claims for losses which had lower average yields on new investments.occurred, including both those known to us and those yet

to be reported. In establishing such reserves, manage- The eÅective tax rate on our investment income wasment considers facts currently known and the present 15.3% in 1998 compared with 16.7% in 1997 and 15.8%state of the law and coverage litigation. However, given in 1996. The eÅective tax rate increased in 1997 andthe expansion of coverage and liability by the courts and then decreased in 1998 due to changes in the percentagethe legislatures in the past and the possibilities of similar of our investment income subject to tax.interpretations in the future, particularly as they relate to

asbestos and toxic waste claims, as well as the uncer-Generally, premiums are received by our property and

tainty in determining what scientiÑc standards will becasualty subsidiaries months or even years before losses

deemed acceptable for measuring hazardous waste siteare paid under the policies purchased by such premiums.

clean-up, additional increases in loss reserves may emergeThese funds are used Ñrst to make current claim and

which would adversely aÅect results in future periods.expense payments. The balance is invested to augment

The amount cannot reasonably be estimated at thethe investment income generated by the existing portfo-

present time.lio. Historically, cash receipts from operations, consisting

of insurance premiums and investment income, have

provided more than suÇcient funds to pay losses,

operating expenses and dividends to the Corporation.

26

New cash available for investment by the property and

casualty subsidiaries was approximately $860 million in

1998 compared with $1,260 million in 1997 and

$1,150 million in 1996. New cash in 1997 and 1996

included approximately $330 million and $40 million,

respectively, received as the net result of the portfolio

transfers of unearned premiums and loss reserves as of

January 1 of each year related to the changes to the

reinsurance agreements with Sun Alliance. New cash in

1996 also included $191 million received in January as a

result of the commutation of a stop loss reinsurance

agreement related to medical malpractice unpaid claims

arising from business written prior to 1985.

In 1998, new cash was invested primarily in tax-exempt

bonds and, to a lesser extent, equity securities. In 1997,

new cash was invested in tax-exempt bonds and, to a

lesser extent, corporate bonds and mortgage-backed

securities. In addition, in the Ñrst quarter of 1997,

$250 million of foreign denominated bonds were sold due

to the reduction in foreign liabilities resulting from the

termination of the reinsurance agreements with Sundue primarily to a reduction in interest expense. The

Alliance, with the proceeds invested in U.S. dollarlower corporate income in 1998 was due primarily to an

denominated securities. In 1996, we invested new cashincrease in interest expense.

primarily in mortgage-backed securities and tax-exempt

bonds. In each year, we tried to achieve the appropriate

mix in our portfolio to balance both investment and tax Real Estate

strategies. In October 1996, we announced that we were exploring

the possible sale of all or a signiÑcant portion of our real

The property and casualty subsidiaries maintain suÇcient estate assets. In March 1997, our real estate subsidiary

investments in highly liquid, short-term securities at all entered into an agreement with a prospective purchaser

times to provide for immediate cash needs and the to perform due diligence in anticipation of executing a

Corporation maintains bank credit facilities that are contract for the sale of substantially all of its commercial

available to respond to unexpected cash demands. properties. Because the plan to pursue the sale of these

assets in the near term represented a signiÑcant change

Corporate in circumstances relating to the manner in which these

Investment income earned on corporate invested assets assets would be used, we reassessed the recoverability of

and interest and other expenses not allocable to the their carrying value as of December 31, 1996. As a

operating subsidiaries are reÖected in the corporate result, we recorded an impairment loss of $255 million,

segment. Corporate income after taxes was $23 million in or $160 million after taxes, in the fourth quarter of 1996

1998 compared with $36 million in 1997 and $20 million to reduce the carrying value of these assets to their

in 1996. The increase in corporate income in 1997 was estimated fair value.

27

In June 1997, a deÑnitive agreement was reached with Statement of Financial Accounting Standards

the purchaser. In November 1997, the sale of almost all (SFAS) No. 121, Accounting for the Impairment of

of the properties covered by the agreement reached in Long-Lived Assets and for Long-Lived Assets to Be

June was closed for $737 million, which included Disposed Of, requires that we analyze our individual

$628 million in cash and the assumption of $109 million buildings, leased land and development sites on a

in debt. The buyer is a joint venture formed by Paine continuing basis to determine if an impairment loss has

Webber Real Estate Securities Inc., Morgan Stanley occurred. Estimates are made of the revenues and

Real Estate Fund II, L.P. and Gale & Wentworth, operating costs, plus any additional costs to be incurred

L.L.C. Closing on the one remaining property under the to complete development, of the property in the future

agreement is expected to occur in 1999. through an assumed holding period based on our

intended use of the property. The time value of money is

not considered in assessing whether an impairment hasIn addition to the sale to the joint venture in Novem-

occurred. If it is determined that impairment hasber 1997, we sold several other commercial properties as

occurred, measurement of such impairment is based onwell as residential properties in 1997 and 1998. We are

the fair value of the assets. The $255 million writedowncontinuing to explore the sale of certain of our remaining

of real estate assets in 1996 was made in accordanceproperties.

with the provisions of SFAS No. 121.

We have retained approximately $365 million of land

Loans receivable, which were issued in connection withwhich we expect will be developed in the future. In

our joint venture activities and other property sales, areaddition, we have retained approximately $165 million of

primarily purchase money mortgages. Such loans, whichcommercial properties and land parcels under lease.

amounted to $105 million at December 31, 1998, are

generally collateralized by buildings and, in some cases,Real estate operations resulted in a loss after taxes of

land. We continually evaluate the ultimate collectibility$2 million in 1998 compared with losses of $5 million in

of such loans and establish appropriate reserves.1997 and $147 million in 1996. The loss in 1996 reÖects

the $160 million after tax impairment charge. Excluding

the impact of the impairment charge, results in 1996 The carrying value of the real estate assets we plan to

beneÑted from the sale of several rental properties. dispose of in the near term is based on the estimated fair

value of these assets. The recoverability of the carrying

value of the remaining real estate assets is assessed basedRevenues were $82 million in 1998, $616 million in 1997

on our ability to fully recover costs through a futureand $320 million in 1996. Revenues in 1998 reÖect the

revenue stream. The process by which SFAS No. 121 isreduced operating activity as a result of the sale of a

applied and necessary write-downs are calculated assumessubstantial portion of our real estate assets in 1997.

these properties will be developed and disposed of over aRevenues in 1997 included $380 million from the

period of time. The assumptions reÖect a continuedNovember sale of real estate properties. Proceeds

improvement in demand for oÇce space, an increase inreceived from that sale that related to mortgages

rental rates and the ability and intent to obtain Ñnancingreceivable are not classiÑed as revenues. Revenues in

in order to hold and develop such remaining properties1996 included higher levels of revenues from residential

and protect our interests over the long term. Manage-development and the sale of rental properties.

ment believes that it has made adequate provisions for

impairment of real estate assets. However, if the assets

are not sold or developed as presently contemplated, it is

28

possible that additional impairment losses may be Fixed maturities which the Corporation and its insurance

recognized. subsidiaries have the ability and intent to hold to

maturity are classiÑed as held-to-maturity. The remaining

Ñxed maturities, which may be sold prior to maturity toReal estate activities were funded in the past with short-

support our investment strategies, such as in response toterm credit instruments, primarily commercial paper, and

changes in interest rates and the yield curve or todebt issued by Chubb Capital Corporation as well as

maximize after-tax returns, are classiÑed as available-for-with term loans and mortgages. Proceeds from the

sale. Fixed maturities classiÑed as held-to-maturity areNovember 1997 sale were used to repay the outstanding

carried at amortized cost while Ñxed maturities classiÑedshort-term debt and certain term loans and mortgages as

as available-for-sale are carried at market value. Atwell as to reduce intercompany borrowings from Chubb

December 31, 1998, 15% of the Ñxed maturity portfolioCapital. In February 1998, the remaining $300 million of

was classiÑed as held-to-maturity compared with 18% atintercompany borrowings from Chubb Capital was con-

December 31, 1997 and 22% at December 31, 1996.verted into preferred stock of the real estate subsidiary.

In 1998, the interest rate on the remaining term loanThe unrealized appreciation or depreciation of invest-approximated 7¥% and for mortgages the range ofments carried at market value, which includes equityinterest rates was 6% to 12%.securities and Ñxed maturities classiÑed as available-for-

sale, is reÖected in a separate component of otherInvestment Gains and Losses

comprehensive income, net of applicable deferred incomeNet investment gains realized by the Corporation and its

tax.property and casualty subsidiaries were as follows:

The unrealized market appreciation before tax of those1998 1997 1996

Ñxed maturities carried at amortized cost was $138 mil-(in millions)

lion, $147 million and $130 million at December 31,Equity securities $100 $ 75 $69

1998, 1997 and 1996, respectively. Such unrealizedFixed maturities 42 30 11

appreciation was not reÖected in the consolidated Ñnan-Realized investment gains before tax $142 $105 $80

cial statements.Realized investment gains after tax $ 92 $ 68 $52

Changes in unrealized market appreciation of Ñxed

maturities were due to Öuctuations in interest rates.Decisions to sell securities are governed principally by

considerations of investment opportunities and tax conse-

quences. Thus, realized investment gains and losses may Discontinued Operations Ì Life and Health

vary signiÑcantly from year to year. Insurance

In May 1997, the Corporation completed the sale of

Chubb Life Insurance Company of America to JeÅer-Sales of equity securities in each of the last three yearsson-Pilot Corporation for $875 million in cash, subject toresulted in net realized investment gains due primarily tovarious closing adjustments, none of which were material.the signiÑcant appreciation in the United States equity

markets. A primary reason for the sale of Ñxed maturities

in each of the last three years has been to improve our In 1996, the Corporation recognized a loss of $22 million

after-tax portfolio return without sacriÑcing quality where relating to the sale of the life and health insurance

market opportunities have existed to do so. operations. The purchase price was not adjusted to reÖect

29

results of operations subsequent to December 31, 1996. and, to a lesser extent, credit quality, prepayment, foreign

The discontinued life and health insurance operations did currency exchange rates and equity prices. Analytical

not aÅect the Corporation's net income in 1997 and 1998 tools and monitoring systems are in place to assess each

and will not aÅect net income in future periods. Earnings of these elements of market risk.

in 1996 from the discontinued life and health insurance

operations were $49 million, including realized invest- Interest rate risk is the price sensitivity of a Ñxed incomement gains of $8 million. security to changes in interest rates. We view these

potential changes in price within the overall context of

Market Risk asset and liability management. Our actuaries estimate

The main objectives in managing the investment portfo- the payout pattern of our liabilities, primarily our

lios of the Corporation and its property and casualty property and casualty loss reserves, to determine their

subsidiaries are to maximize after-tax investment income duration, which is the present value of the weighted

and total investment returns while minimizing credit risks average payments expressed in years. We set duration

in order to provide maximum support to the insurance targets for our Ñxed income investment portfolios after

underwriting operations. Investment strategies are devel- consideration of the duration of these liabilities and other

oped based on many factors including underwriting factors, which we believe mitigates the overall eÅect of

results and our resulting tax position, regulatory require- interest rate risk for the Corporation and its property and

ments, Öuctuations in interest rates and consideration of casualty subsidiaries.

other market risks. Investment decisions are centrally

managed by investment professionals based on guidelines The table on the following page provides informationestablished by management and approved by the boards about all our Ñxed maturity investments, which areof directors. sensitive to changes in interest rates. The table presents

cash Öows of principal amounts and related weighted

Market risk represents the potential for loss due to average interest rates by expected maturity dates at

adverse changes in the fair value of Ñnancial instruments. December 31, 1998 and 1997. The cash Öows are based

The market risks related to Ñnancial instruments of the on the earlier of the call date or the maturity date or, for

Corporation and its property and casualty subsidiaries mortgage-backed securities, expected payment patterns.

primarily relate to the investment portfolio, which Actual cash Öows could diÅer from the expected

exposes the Corporation to risks related to interest rates amounts.

30

Fixed Maturities

Expected Cash Flows of Principal Amounts

At December 31, 1998

Total

Estimated

There- Amortized Market

1999 2000 2001 2002 2003 after Cost Value

(in millions)

Tax-exemptÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $462 $391 $578 $ 637 $ 575 $5,869 $ 8,512 $ 9,075

Average interest rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.8% 6.7% 6.7% 6.1% 5.7% 5.5% Ì Ì

Taxable Ì other than mortgage-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 201 139 175 209 389 1,451 2,564 2,704

Average interest rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.5% 6.3% 6.9% 6.6% 6.6% 6.6% Ì Ì

Mortgage-backed securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 196 189 208 163 117 822 1,695 1,678

Average interest rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.1% 7.1% 7.1% 7.0% 7.0% 7.3% Ì Ì

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $859 $719 $961 $1,009 $1,081 $8,142 $12,771 $13,457

At December 31, 1997

Total

Estimated

There- Amortized Market

1998 1999 2000 2001 2002 after Cost Value

(in millions)

Tax-exemptÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $387 $423 $384 $ 520 $ 563 $5,332 $ 7,609 $ 8,114

Average interest rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6.7% 6.9% 6.7% 6.7% 6.0% 5.7% Ì Ì

Taxable Ì other than mortgage-backed securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 158 308 146 258 140 1,578 2,588 2,675

Average interest rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.7% 6.3% 6.7% 6.8% 7.3% 7.0% Ì Ì

Mortgage-backed securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 231 162 167 180 177 861 1,778 1,811

Average interest rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.1% 7.3% 7.4% 7.3% 7.4% 7.4% Ì Ì

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $776 $893 $697 $ 958 $ 880 $7,771 $11,975 $12,600

The Corporation and its property and casualty subsidiar- securities to commercial mortgage-backed securities and

ies have consistently invested in high quality marketable corporate bonds. Approximately 60% of taxable bonds are

securities. As a result, we believe that we have minimal issued by the U.S. Treasury or U.S. government agencies

credit quality risk. Taxable bonds in our domestic or rated AA or better by Moody's or Standard and

portfolio comprise U.S. Treasury, government agency, Poor's. Of the tax-exempt bonds, approximately 90% are

mortgage-backed and corporate securities. During 1998, rated AA or better with more than half rated AAA.

to increase our investment returns, we shifted a portion Only 1% of our bond portfolio is below investment grade.

of the taxable portfolio from government agency mort- Taxable bonds have an average maturity of 7 years while

gage-backed securities and lower yielding U.S. Treasury tax-exempt bonds mature on average in 9 years.

31

Prepayment risk refers to the changes in prepayment Foreign currency risk is the sensitivity to foreign

patterns related to decreases and increases in interest exchange rate Öuctuations of the market value and

rates that can either shorten or lengthen the expected investment income related to foreign currency denomi-

timing of the principal repayments and thus the average nated Ñnancial instruments. The functional currency of

life and the eÅective yield of a security. Such risk exists our foreign operations is generally the currency of the

primarily within our portfolio of mortgage-backed securi- local operating environment since their business is

ties. We monitor such risk regularly and invest primarily primarily transacted in such local currency. We reduce

in those classes of mortgage-backed securities that are the risks relating to currency Öuctuations by maintaining

less subject to prepayment risk. investments in those foreign currencies in which we have

unpaid claims and other liabilities. Such investments

have characteristics similar to our liabilities in thoseMortgage-backed securities comprised 40% of our taxable

currencies. At December 31, 1998, the property andbond portfolio at both year-end 1998 and 1997. About

casualty subsidiaries held foreign investments of $1.2 bil-40% of our mortgage-backed securities holdings at

lion supporting their international operations. Such for-December 31, 1998 related to residential mortgages

eign investments have quality and maturity characteristicsconsisting of government agency pass-through securities,

similar to our domestic portfolio. The principal currenciesgovernment agency collateralized mortgage obligations

creating foreign exchange rate risk for the property and(CMOs) and AAA rated non-agency CMOs backed by

casualty subsidiaries are the Canadian dollar and thegovernment agency collateral or single family home

British pound sterling. The table on the following pagemortgages. The majority of the CMOs are actively

provides information about those Ñxed maturity invest-traded in liquid markets and market value information is

ments included in the table on page 31 that arereadily available from broker/dealers. An additional 40%

denominated in these two currencies. The table presentsof our mortgage-backed securities were call protected

cash Öows of principal amounts in U.S. dollar equivalentsAAA rated commercial securities. The remaining mort-

by expected maturity dates at December 31, 1998 andgage-backed holdings were all investment grade commer-

1997. Actual cash Öows could diÅer from the expectedcial mortgage-backed securities.

amounts.

32

Foreign Currency Denominated Fixed Maturities

Expected Cash Flows of Principal Amounts

At December 31, 1998

Total

Estimated

There- Amortized Market

1999 2000 2001 2002 2003 after Cost Value

(in millions)

Canadian dollar ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5 $31 $39 $40 $46 $151 $312 $343

British pound sterling ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 24 21 39 32 140 256 284

At December 31, 1997

Total

Estimated

There- Amortized Market

1998 1999 2000 2001 2002 after Cost Value

(in millions)

Canadian dollar ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $Ì $ 6 $16 $47 $43 $195 $307 $337

British pound sterling ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 19 23 5 175 222 229

Equity price risk is the potential loss arising from containing dates beginning with the year 2000. The issue

changes in the value of equity securities. In general, exists because many systems used two digits rather than

equities have more year-to-year price variability than four to deÑne the applicable year. Such systems may

intermediate term high grade bonds. However, returns recognize the date ""00'' as the year 1900 rather than the

over longer time frames have been consistently higher. year 2000. This could result in a system failure or

Our equity securities are high quality and readily miscalculations causing disruptions of normal business

marketable. activities or other unforeseen problems.

All of the above risks are monitored on an ongoing basis. In 1995, we initiated a project to ensure Year 2000

A combination of in-house systems and proprietary readiness of the Corporation's systems and applications.

models and externally licensed software are used to We put in place a team responsible for bringing our

analyze individual securities as well as each portfolio. systems and equipment into Year 2000 compliance.

These tools provide the portfolio managers with informa-

tion to assist them in the evaluation of the market risks The team performed an inventory and assessment of ourof the portfolio. mainframe systems to determine which must be retired,

renovated or rewritten as a result of Year 2000 issues. As

Year 2000 Readiness Disclosure of December 31, 1998, we completed remediation and

The Year 2000 issue relates to the inability of certain testing procedures on 95% of our mainframe IT systems,

information technology (IT) systems and applications as including all mission critical systems except one. We

well as non-IT systems, such as equipment with imbed- expect to complete the remediation and testing of all

ded chips and microprocessors, to properly process data remaining systems by June 1999.

33

We have also completed an inventory and assessment of systems already remediated for Year 2000 for any

all our personal computers, servers and other non- unidentiÑed problems and to perform additional remedia-

mainframe computers. We expect that all such com- tion and testing as necessary. Nonetheless, in order to

puters and related software will be Year 2000 ready by address any unexpected diÇculties that may arise, we

the third quarter of 1999. We have also assessed our will keep our core Year 2000 readiness team intact until

non-IT systems and believe that the failure of any of June 2000. Additionally, we are studying the develop-

these systems would have minimal impact on our ment of contingency plans to continue business in the

operations. unlikely event that one or more of our critical systems

fail.

The Corporation and its subsidiaries have interaction with

many third parties, including producers, reinsurers, Ñnan- We believe that we are taking the necessary measures tocial institutions, vendors, suppliers and others. We have address Year 2000 issues that may arise and that ourinitiated contact with these parties regarding their plans internal systems will be compliant. Notwithstanding suchfor Year 2000 readiness. We are in the process of eÅorts, signiÑcant Year 2000 problems could arise. Inevaluating the responses and following up with those particular, the prolonged failure of power and telecom-parties from whom we have received no response. The munications systems could have a material adverse eÅectinformation obtained will be used to develop business on our operations. Similarly, Year 2000 related diÇcultiescontingency plans to address any mission critical opera- experienced by our producers or Ñnancial institutionstions that may be adversely impacted by the noncompli- have the potential to materially disrupt our business.ance of a third party with whom we interact. We have Given the uncertain nature of Year 2000 problems thatelectronic data interchanges with some third parties. We may arise, management cannot determine at this timeare physically testing such interchanges for Year 2000 whether the consequences of Year 2000 related problemscompliance. We expect that such testing will be com- will have a material impact on the Corporation's Ñnancialpleted by June 1999. position or results of operations.

We have identiÑed those third parties that are critical toThe Year 2000 team has included employees of theour operations and are assessing risks with respect to theCorporation and software consultants. A portion of thepotential failure of such parties to be Year 2000 ready.remediation eÅort has been accomplished by redirectingHowever, we do not have control over these third partiesexisting systems resources to the Year 2000 eÅort.and are unable to determine whether all such thirdHowever, we do not believe that this has had aparties will address the Year 2000 issue successfully,signiÑcant adverse eÅect on other systems initiatives.including third parties located outside the United States

where it is believed that Year 2000 remediation eÅorts in

general may be less advanced. Management cannot We expect that the cost to address the Year 2000 IT

determine the eÅect on the Corporation's future operat- systems issue, including compensation of employees and

ing results of the failure of third parties to be Year 2000 the cost of consultants, will approximate $36 million.

ready. Approximately $30 million was incurred as of Decem-

ber 31, 1998, of which $14 million was incurred in 1998.

Our Year 2000 plans have been developed with the These amounts do not include the cost of computer

intention of minimizing the need for actual implementa- equipment purchased to replace equipment that would

tion of contingency activities. We anticipate that a have been upgraded in the normal course of business, but

substantial portion of 1999 will be used to monitor not necessarily prior to January 2000.

34

An additional concern to the Corporation is the potential replaced the 1994 authorization with a new authorization

future impact of the Year 2000 issue on insurance to repurchase up to 17,500,000 shares of common stock.

coverages written by our property and casualty subsidiar- On July 24, 1998, the Board of Directors authorized the

ies. The Year 2000 issue is a risk for some of our repurchase of up to an additional 12,500,000 shares.

insureds and needs to be considered during the under- Through December 31, 1998, the Corporation had

writing process similar to any other risk to which our repurchased 17,994,900 shares under the 1997 and 1998

customers may be exposed. It is possible that Year 2000 authorizations. As of December 31, 1998, 12,005,100

related losses may emerge that would adversely aÅect shares remained under the current share repurchase

operating results in future periods. At this time, in the authorizations. In the aggregate, the Corporation repur-

absence of any signiÑcant claims experience, manage- chased 8,203,000 shares in open-market transactions in

ment cannot determine the nature and extent of any 1998 at a cost of $609 million, 12,940,500 shares in 1997

losses, the availability of coverage for such losses or the at a cost of $828 million and 1,700,000 shares in 1996 at

likelihood of signiÑcant claims. a cost of $83 million.

The Euro The Corporation Ñled a shelf registration statement whichOn January 1, 1999, eleven of the Ñfteen member the Securities and Exchange Commission declared eÅec-countries of the European Economic and Monetary tive in September 1998, under which up to $600 millionUnion adopted the euro as their common currency, at of various types of securities may be issued by thewhich time the rates of conversion between the euro and Corporation or Chubb Capital. No securities have beenthe participating national currencies were Ñxed. The euro issued under this registration statement.will be introduced gradually over a period of three years.

During this transition period, business in the participatingIn August 1998, the Corporation sold $300 million of

countries will be conducted in the euro or the nationalunsecured 6.15% notes due in 2005 and $100 million of

currency. Once the national currencies are phased out,unsecured 6.60% debentures due in 2018 under a

the euro will be the sole legal currency in these countries.previously Ñled shelf registration. The proceeds were used

for general corporate purposes, which included theWe have identiÑed the systems and operational issues

repurchase of shares of our common stock.related to the impact of the adoption of the euro on our

European property and casualty operations. We wereThe Corporation also has outstanding $30 million ofprepared to transact euro denominated business as ofunsecured 8∂% notes due in 1999. Chubb Capital hasJanuary 1, 1999. We will address additional systemsoutstanding $100 million of 6∑% notes due in 2003. Theissues over the three year transition period. The adoptionChubb Capital notes are unsecured and are guaranteedof the euro is not expected to have a material eÅect onby the Corporation.the Corporation's Ñnancial position or results of

operations.

In July 1997, the Corporation entered into two credit

Capital Resources agreements with a group of banks that provide for

In February 1994, the Board of Directors authorized the unsecured borrowings of up to $500 million in the

repurchase of up to 10,000,000 shares of common stock. aggregate. The $200 million short term revolving credit

Through March 1997, the Corporation had repurchased facility, which terminated on July 10, 1998, was extended

6,851,600 shares under the 1994 share repurchase to July 7, 1999, and may be renewed or replaced. The

authorization. In March 1997, the Board of Directors $300 million medium term revolving credit facility

35

terminates on July 11, 2002. On the respective termina- approximately $850 million. Completion of the acquisi-

tion dates, any loans then outstanding become payable. tion is subject to approval by Executive Risk shareholders

There have been no borrowings under these agreements. and various regulatory authorities. Closing is expected in

These facilities are available for general corporate pur- the second quarter of 1999.

poses and to support Chubb Capital's commercial paper

borrowing arrangement.The Corporation has agreed to purchase a 27% interest

in Hiscox plc, a leading U.K. personal and commercialPending Transactions

specialty insurer, for approximately $140 million. ClosingOn February 8, 1999, the Corporation announced that it

of this transaction is subject to regulatory approvalsentered into a deÑnitive merger agreement under which it

which are pending.would acquire Executive Risk Inc. Executive Risk is a

specialty insurance company oÅering directors and

oÇcers, errors and omissions and professional liability Changes in Accounting Principles

coverages. Executive Risk's gross and net written premi- In March 1998, the American Institute of CertiÑed

ums for 1998 were approximately $500 million and Public Accountants issued Statement of Position

$280 million, respectively. (SOP) 98-1, Accounting for the Costs of Computer

Software Developed or Obtained for Internal Use. This

The acquisition will be accounted for using the purchase SOP requires that certain costs incurred to develop or

method of accounting. The agreement provides that obtain computer software for internal use should be

Executive Risk shareholders will receive 1.235 shares of capitalized and amortized over the software's expected

the Corporation's common stock for each outstanding useful life. Currently, we expense all development costs

common share of Executive Risk. The agreement con- of internal use computer software. SOP 98-1 is eÅective

templates that approximately 13,730,000 shares of com- for the Corporation on January 1, 1999 and is to be

mon stock of the Corporation will be issued to Executive applied prospectively. The adoption of SOP 98-1 will

Risk shareholders and approximately 2,300,000 shares of increase the Corporation's net income in 1999 by an

common stock of the Corporation will be reserved for amount that has not yet been quantiÑed. The eÅect on

issuance upon exercise of Executive Risk stock options. net income will decrease in future years as the new

The total value of the transaction is expected to be method of accounting is phased in.

36

Financial ReportingResponsibility

Management is responsible for the integrity of the The Corporation engages Ernst & Young LLP as

Ñnancial information included in this annual report and independent auditors to audit its Ñnancial statements

for ascertaining that such information presents fairly the and express their opinion thereon. They have full access

Ñnancial position and operating results of the to each member of management in conducting their

Corporation. The accompanying consolidated Ñnancial audits. Such audits are conducted in accordance with

statements have been prepared in conformity with generally accepted auditing standards and include a

generally accepted accounting principles. Such review and evaluation of the system of internal

statements include informed estimates and judgments of accounting controls, tests of the accounting records and

management for those transactions that are not yet other auditing procedures they consider necessary to

complete or for which the ultimate eÅects cannot be express their opinion on the consolidated Ñnancial

precisely determined. Financial information presented statements.

elsewhere in this annual report is consistent with that inThe Corporation's accounting policies and internal

the Ñnancial statements.controls are under the general oversight of the Board of

The accounting systems and internal accounting controls Directors acting through its Audit Committee. This

of the Corporation are designed to provide reasonable Committee is composed entirely of Directors who are

assurance that assets are safeguarded against losses not oÇcers or employees of the Corporation. The

from unauthorized use or disposition, that transactions Committee meets regularly with management, the

are executed in accordance with management's internal auditors and the independent auditors to review

authorization and that the Ñnancial records are reliable the accounting principles and practices employed by the

for preparing Ñnancial statements and maintaining Corporation and to discuss auditing, internal control

accountability for assets. QualiÑed personnel and Ñnancial reporting matters. Both the internal and

throughout the organization maintain and monitor these independent auditors have, at all times, unrestricted

internal accounting controls on an ongoing basis. In access to the Audit Committee, without members of

addition, the Corporation's Internal Audit Department management present, to discuss the results of their

systematically reviews these controls, evaluates their audits, their evaluations of the adequacy of the

adequacy and eÅectiveness and reports thereon. Corporation's internal accounting controls and the

quality of the Corporation's Ñnancial reporting, and any

other matter that they believe should be brought to the

attention of the Committee.

37

Ten Year Financial Summary(in millions except for per share amounts)

FOR THE YEAR 1998 1997 1996Revenues

Property and Casualty InsurancePremiums Earned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,303.8 $5,157.4 $4,569.3Investment Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 760.0 721.4 656.2

Real Estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 82.2 616.1 319.8Corporate Investment Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61.9 63.9 55.4Realized Investment Gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 141.9 105.2 79.8

Total Revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,349.8 6,664.0 5,680.5

Components of Net Income*Property and Casualty InsuranceUnderwriting Income (Loss)(b)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (14.1) 77.5 17.1Investment Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 634.1 592.3 544.2

Property and Casualty Insurance IncomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 594.0(e) 669.8 561.3Real Estate Income (Loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2.0) (5.1) (146.8)(f)Corporate Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22.8 36.4 19.7

Operating Income from Continuing Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 614.8 701.1 434.2Realized Investment Gains from Continuing OperationsÏÏÏÏÏÏÏÏÏÏÏÏ 92.2 68.4 52.0

Income from Continuing Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 707.0 769.5 486.2Income from Discontinued Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 26.5

Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 707.0 769.5 512.7

Diluted Earnings Per ShareOperating Income from Continuing Operations(b) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.65(e) 4.00 2.44(f)Income from Continuing OperationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.19 4.39 2.73Income from Discontinued Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì .15Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.19 4.39 2.88

Dividends Declared on Common Stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 204.7 198.3 188.7Per Share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.24 1.16 1.08

Change in Unrealized Appreciation orDepreciation of Investments, Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14.6 161.4 (107.2)

AT YEAR ENDTotal AssetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $20,746.0 $19,615.6 $19,938.9Invested Assets

Property and Casualty InsuranceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,715.0 12,777.3 11,190.7Corporate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,040.3 1,272.3 890.4

Unpaid Claims ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10,356.5 9,772.5 9,523.7Long Term Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 607.5 398.6 1,070.5Total Shareholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,644.1 5,657.1 5,462.9

Per Common Share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 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 classiÑed as discontinued operations.

Amounts prior to 1994 do not reÖect 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 inunrealized 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

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 $2,693.5613.3 570.5 541.7 501.1 477.0 463.4 426.2287.8 204.9 160.6 150.0 140.9 174.9 221.354.4 49.4 52.7 57.2 46.3 39.6 25.2

108.8 54.1 210.6 174.1 61.1 39.6 40.25,211.5 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)507.2 475.0 455.4 422.8 397.6 371.4 330.1562.9 467.2 117.9 407.5 416.2 392.1 305.1

6.0 (2.0) (2.2) 10.0 25.0 40.0 42.014.8 7.6 14.4 19.8 16.3 14.7 .7

583.7 472.8 130.1 437.3 457.5 446.8 347.870.7 35.1 137.3 114.8 40.3 25.8 26.4

654.4 507.9 267.4 552.1 497.8 472.6 374.242.2 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) 2.033.67 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 5,793.7906.6 879.5 965.7 955.8 840.3 688.4 647.8

9,588.2 8,913.2 8,235.4 7,220.9 6,591.3 6,016.4 5,605.01,150.8 1,279.6 1,267.2 1,065.6 1,045.8 812.6 604.25,262.7 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 insurancesubsidiaries related to the commutation of a medical malpractice reinsurance agreement.

(b) Underwriting income has been increased by tax beneÑts 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 aportion 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 eÅects of a $675.0 millionincrease in unpaid claims related to an agreement for the settlement of asbestos-related litigation and the $125.0 million return premiumrelated to the commutation of a medical malpractice reinsurance agreement.

(d) Underwriting income has been increased by the one-time beneÑt of a $14.0 million or $.08 per share elimination of deferred income taxesrelated 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 eÅect 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 eÅect 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 eÅect of changes in accountingprinciples resulting from the Corporation's adoption of Statements of Financial Accounting Standards No. 106, Employers' Accounting forPostretirement BeneÑts Other Than Pensions, and No. 109, Accounting for Income Taxes. Income before the cumulative eÅect of changesin accounting principles was $344.2 million or $1.94 per share.

39

The Chubb CorporationConsolidated Statements of Income

In MillionsYears Ended December 31

1998 1997 1996Revenues

Premiums Earned (Note 13) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,303.8 $5,157.4 $4,569.3

Investment Income (Note 4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 821.9 785.3 711.6

Real Estate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 82.2 616.1 319.8

Realized Investment Gains (Note 4)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 141.9 105.2 79.8

TOTAL REVENUES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,349.8 6,664.0 5,680.5

Claims and Expenses

Insurance Claims (Notes 13 and 15)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,493.7 3,307.0 3,010.8

Amortization of Deferred Policy Acquisition Costs (Note 6) ÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,464.3 1,402.6 1,238.0

Other Insurance Operating Costs and Expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 369.8 330.8 290.2

Real Estate Cost of Sales and Expenses (Note 5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 85.7 624.7 555.7

Investment ExpensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13.2 12.0 12.3

Corporate ExpensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33.4 12.8 26.6

Restructuring Charge (Note 12)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 40.0 Ì Ì

TOTAL CLAIMS AND EXPENSES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,500.1 5,689.9 5,133.6

INCOME FROM CONTINUING OPERATIONS BEFOREFEDERAL AND FOREIGN INCOME TAX ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 849.7 974.1 546.9

Federal and Foreign Income Tax (Note 9)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 142.7 204.6 60.7

INCOME FROM CONTINUING OPERATIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏ 707.0 769.5 486.2

Discontinued Operations, Net of Tax (Note 3)

Income from OperationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 48.5

Loss on Disposal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (22.0)

INCOME FROM DISCONTINUED OPERATIONS ÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 26.5

NET INCOME ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 707.0 $ 769.5 $ 512.7

Basic Earnings Per Share (Note 17)

Income from Continuing OperationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4.27 $ 4.48 $ 2.79

Income from Discontinued Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì .15

Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4.27 $ 4.48 $ 2.94

Diluted Earnings Per Share (Note 17)

Income from Continuing OperationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4.19 $ 4.39 $ 2.73

Income from Discontinued Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì .15

Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4.19 $ 4.39 $ 2.88

See accompanying notes.

40

The Chubb CorporationConsolidated Balance Sheets

In MillionsDecember 31

1998 1997AssetsInvested Assets (Note 4)

Short Term Investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 344.2 $ 725.1Fixed Maturities

Held-to-Maturity Ì Tax Exempt (market $2,140.2 and $2,347.2) ÏÏÏÏÏ 2,002.2 2,200.6Available-for-Sale

Tax Exempt (cost $6,509.3 and $5,408.4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,935.1 5,766.9Taxable (cost $4,259.0 and $4,366.0) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,381.6 4,485.9

Equity Securities (cost $1,002.6 and $733.9)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,092.2 871.1

TOTAL INVESTED ASSETSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14,755.3 14,049.6

Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8.3 11.5Accrued Investment IncomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 221.0 203.8Premiums Receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,199.3 1,144.4Reinsurance Recoverable on Unpaid Claims ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,306.6 1,207.9Prepaid Reinsurance Premiums ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 134.6 115.2Funds Held for Asbestos-Related Settlement (Note 15) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 607.4 599.5Deferred Policy Acquisition Costs (Note 6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 728.7 676.9Real Estate Assets (Notes 5 and 8) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 746.0 790.0Deferred Income Tax (Note 9)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 320.8 317.0Other Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 718.0 499.8

TOTAL ASSETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $20,746.0 $19,615.6

LiabilitiesUnpaid Claims (Note 15) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,356.5 $ 9,772.5Unearned Premiums ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,915.7 2,696.6Long Term Debt (Note 8)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 607.5 398.6Dividend Payable to Shareholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 50.3 49.0Accrued Expenses and Other Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,171.9 1,041.8

TOTAL LIABILITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 15,101.9 13,958.5

Commitments and Contingent Liabilities (Notes 14, 15 and 21)

Shareholders' Equity (Notes 10 and 20)Preferred Stock Ì Authorized 4,000,000 Shares;

$1 Par Value; Issued Ì None ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì ÌCommon Stock Ì Authorized 600,000,000 Shares;

$1 Par Value; Issued 175,989,202 and 176,037,850 SharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 176.0 176.0Paid-In Surplus ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 546.7 593.0Retained Earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,604.0 5,101.7Accumulated Other Comprehensive Income

Unrealized Appreciation of Investments, Net of Tax (Note 4)ÏÏÏÏÏÏÏÏÏÏ 414.7 400.1Foreign Currency Translation Losses, Net of Tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (36.0) (25.7)

Receivable from Employee Stock Ownership Plan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (86.3) (96.7)Treasury Stock, at Cost Ì 13,722,376 and 7,320,410 Shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (975.0) (491.3)

TOTAL SHAREHOLDERS' EQUITY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,644.1 5,657.1

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ÏÏÏÏÏÏÏ $20,746.0 $19,615.6

See accompanying notes.

41

The Chubb CorporationConsolidated Statements of Shareholders' Equity

In MillionsYears Ended December 31

1998 1997 1996

Preferred Stock

Balance, Beginning and End of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì $ Ì $ Ì

Common Stock

Balance, Beginning of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 176.0 176.1 87.8Two-for-One Stock Split ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 87.8Shares Issued upon Exchange of Long Term Debt ÏÏÏÏÏÏÏÏÏÏ Ì Ì .5Share Activity under Option and Incentive PlansÏÏÏÏÏÏÏÏÏÏÏÏ Ì (.1) Ì

Balance, End of YearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 176.0 176.0 176.1

Paid-In Surplus

Balance, Beginning of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 593.0 695.7 778.2Two-for-One Stock Split ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (87.8)Exchange of Long Term Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (68.4) 20.8Share Activity under Option and Incentive PlansÏÏÏÏÏÏÏÏÏÏÏÏ (46.3) (34.3) (15.5)

Balance, End of YearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 546.7 593.0 695.7

Retained Earnings

Balance, Beginning of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,101.7 4,530.5 4,206.5Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 707.0 769.5 512.7Dividends Declared (per share $1.24, $1.16 and $1.08) ÏÏÏÏÏÏ (204.7) (198.3) (188.7)

Balance, End of YearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,604.0 5,101.7 4,530.5

Unrealized Appreciation of Investments

Balance, Beginning of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 400.1 238.7 345.9Change During Year, Net (Note 4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14.6 161.4 (107.2)

Balance, End of YearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 414.7 400.1 238.7

Foreign Currency Translation Losses

Balance, Beginning of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (25.7) (15.6) (3.4)Change During Year, Net of TaxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (10.3) (10.1) (12.2)

Balance, End of YearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (36.0) (25.7) (15.6)

Receivable from Employee Stock Ownership Plan

Balance, Beginning of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (96.7) (106.3) (115.0)Principal RepaymentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10.4 9.6 8.7

Balance, End of YearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (86.3) (96.7) (106.3)

Treasury Stock, at Cost

Balance, Beginning of Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (491.3) (56.2) (37.3)Repurchase of SharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (608.5) (827.9) (82.5)Shares Issued upon Exchange of Long Term Debt ÏÏÏÏÏÏÏÏÏÏ Ì 304.4 ÌShare Activity under Option and Incentive PlansÏÏÏÏÏÏÏÏÏÏÏÏ 124.8 88.4 63.6

Balance, End of YearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (975.0) (491.3) (56.2)

TOTAL SHAREHOLDERS' EQUITYÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $5,644.1 $5,657.1 $5,462.9

See accompanying notes.

42

The Chubb CorporationConsolidated Statements of Cash Flows

In MillionsYears Ended December 31

1998 1997 1996

Cash Flows from Operating ActivitiesNet Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 707.0 $ 769.5 $ 512.7Adjustments to Reconcile Net Income to Net CashProvided by Operating ActivitiesIncrease in Unpaid Claims, Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 485.3 808.7 141.4Increase in Unearned Premiums, Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 199.7 290.6 204.5Increase in Premiums Receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (54.9) (159.5) (124.5)Change in Funds Held for Asbestos-Related Settlement ÏÏ (7.9) .4 438.2Decrease in Medical Reinsurance Related Receivable ÏÏÏ Ì Ì 191.2Increase in Deferred Policy Acquisition CostsÏÏÏÏÏÏÏÏÏÏ (51.8) (75.7) (42.5)Deferred Income Tax Credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5.5) (33.3) (117.6)Write-down of Real Estate Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 255.0DepreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 58.2 56.4 59.0Realized Investment Gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (141.9) (105.2) (79.8)Income from Discontinued Operations, Net ÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (26.5)Other, Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 25.8 13.2 188.2

NET CASH PROVIDED BY OPERATINGACTIVITIESÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,214.0 1,565.1 1,599.3

Cash Flows from Investing ActivitiesProceeds from Sales of Fixed Maturities ÌAvailable-for-Sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,668.8 3,682.6 3,430.5

Proceeds from Maturities of Fixed MaturitiesÏÏÏÏÏÏÏÏÏÏÏÏ 784.2 658.5 762.9Proceeds from Sales of Equity SecuritiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 366.7 401.3 383.0Proceeds from Sale of Discontinued Operations, NetÏÏÏÏÏÏ Ì 861.2 ÌPurchases of Fixed Maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,218.4) (5,394.8) (5,520.5)Purchases of Equity Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (535.7) (519.3) (395.2)Decrease (Increase) in Short Term Investments, Net ÏÏÏÏÏ 380.9 (449.2) 153.4Proceeds from Sale of Real Estate Properties ÏÏÏÏÏÏÏÏÏÏÏÏ 33.6 759.6 17.4Additions to Real Estate Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (13.2) (40.1) (94.3)Purchases of Fixed Assets, NetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (78.8) (71.0) (58.7)Other, Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (75.5) 41.1 (53.2)

NET CASH USED IN INVESTING ACTIVITIES ÏÏ (687.4) (70.1) (1,374.7)

Cash Flows from Financing ActivitiesProceeds from Issuance of Long Term Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏ 400.5 10.2 86.0Repayment of Long Term Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (191.6) (344.9) (145.6)Increase (Decrease) in Short Term Debt, Net ÏÏÏÏÏÏÏÏÏÏÏ Ì (189.5) 37.8Dividends Paid to ShareholdersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (203.4) (196.5) (184.2)Repurchase of Shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (608.5) (827.9) (82.5)Other, Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 73.2 60.4 56.7

NET CASH USED IN FINANCING ACTIVITIES (529.8) (1,488.2) (231.8)

Net Increase (Decrease) in Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3.2) 6.8 (7.2)Cash at Beginning of YearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11.5 4.7 11.9

CASH AT END OF YEARÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 8.3 $ 11.5 $ 4.7

Consolidated Statements of Comprehensive Income

Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 707.0 $ 769.5 $ 512.7Other Comprehensive Income (Loss)

Change in Unrealized Appreciation of Investments,Net of Tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 14.6 161.4 (107.2)

Change in Foreign Currency Translation Losses,Net of Tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (10.3) (10.1) (12.2)

4.3 151.3 (119.4)

COMPREHENSIVE INCOME ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 711.3 $ 920.8 $ 393.3

See accompanying notes.

43

Notes to Consolidated Financial Statements

(1) Summary of SigniÑcant Accounting Policies Equity securities, which include common stocks andnon-redeemable preferred stocks, are carried at market(a) Basis of Presentationvalue as of the balance sheet date.

The accompanying consolidated Ñnancial statementshave been prepared in accordance with generally accepted Unrealized appreciation or depreciation of investmentsaccounting principles and include the accounts of The carried at market value is excluded from net income andChubb Corporation (Corporation) and its subsidiaries. credited or charged, net of applicable deferred incomeSigniÑcant intercompany transactions have been elimi- tax, directly to other comprehensive income, which is anated in consolidation. component of shareholders' equity.

The consolidated Ñnancial statements reÖect estimatesRealized gains and losses on the sale of investments are

and judgments made by management for those transac-determined on the basis of the cost of the speciÑc invest-

tions that are not yet complete or for which the ultimatements sold and are credited or charged to net income.

eÅects cannot be precisely determined. Such estimatesand judgments aÅect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities (c) Premium Revenues and Related Expensesat the date of the Ñnancial statements and the reported

Premiums are earned on a monthly pro rata basis overamounts of revenues and expenses during the reportingthe terms of the policies. Revenues include estimates ofperiod. Actual results could diÅer from those estimates.audit premiums and premiums on retrospectively rated

The Corporation is a holding company with subsidiariespolicies. Unearned premiums represent the portion of

principally engaged in the property and casualty insurancepremiums written applicable to the unexpired terms of

business. The property and casualty insurance subsidiariespolicies in force.

underwrite most forms of property and casualty insurancein the United States, Canada, Europe and parts of Aus- Acquisition costs are deferred by major product groupstralia, Latin America and the Far East. The geographic and amortized over the period in which the relateddistribution of property and casualty business in the premiums are earned. Such costs include commissions,United States is broad with a particularly strong market premium taxes and other costs that vary with and arepresence in the Northeast. primarily related to the production of business. Deferred

policy acquisition costs are reviewed to determine thatOn May 13, 1997, the Corporation completed the salethey do not exceed recoverable amounts, after consideringof its life and health insurance subsidiaries. The life andanticipated investment income.health insurance subsidiaries have been classiÑed as dis-

continued operations (see Note (3)). All footnote disclo-sures reÖect continuing operations only, unless otherwise (d) Unpaid Claimsnoted.

Liabilities for unpaid claims include the accumulationCertain amounts in the consolidated Ñnancial state-of individual case estimates for claims reported as well asments for prior years have been reclassiÑed to conformestimates of unreported claims and claim settlementwith the 1998 presentation.expenses, less estimates of anticipated salvage and subro-gation recoveries. Estimates are based upon past claim(b) Investmentsexperience modiÑed for current trends as well as prevail-

Short term investments, which have an original matur- ing economic, legal and social conditions. Such estimatesity of one year or less, are carried at amortized cost. are continually reviewed and updated. Any resulting ad-

Fixed maturities, which include bonds and redeemable justments are reÖected in current operating results.preferred stocks, are purchased to support the investmentstrategies of the Corporation and its insurance subsidiar-

(e) Reinsuranceies. These strategies are developed based on many factorsincluding rate of return, maturity, credit risk, tax consid- In the ordinary course of business, the Corporation'serations and regulatory requirements. Fixed maturities insurance subsidiaries assume and cede reinsurance withwhich may be sold prior to maturity to support the other insurance companies and are members of variousinvestment strategies of the Corporation and its insurance pools and associations. Reinsurance is ceded to providesubsidiaries are classiÑed as available-for-sale and carried greater diversiÑcation of business and to limit the maxi-at market value as of the balance sheet date. Those Ñxed mum net loss potential arising from large or concentratedmaturities which the Corporation and its insurance sub- risks. A large portion of the reinsurance is eÅected undersidiaries have the ability and positive intent to hold to contracts known as treaties and in some instances bymaturity are classiÑed as held-to-maturity and carried at negotiation on individual risks. Certain of these arrange-amortized cost. ments consist of excess of loss and catastrophe contracts

Premiums and discounts arising from the purchase of which protect against losses over stipulated amounts aris-mortgage-backed securities are amortized using the inter- ing from any one occurrence or event. Ceded reinsuranceest method over the estimated remaining term of the contracts do not relieve the Corporation's insurance sub-securities, adjusted for anticipated prepayments. sidiaries of their primary obligation to the policyholders.

44

Prepaid reinsurance premiums represent the portion of Rental revenues are recognized on a straight-line basisinsurance premiums ceded to reinsurers applicable to the over the term of the lease. ProÑts on land, townhome unitunexpired terms of the reinsurance contracts in force. and commercial building sales are recognized at closing,

subject to compliance with applicable accounting guide-Commissions received related to reinsurance premiums

lines. ProÑts on high-rise condominium unit sales areceded are considered in determining net acquisition costs

recognized using the percentage of completion method,eligible for deferral.

subject to achievement of a minimum level of unit sales.ProÑts on construction contracts are recognized using theReinsurance recoverable on unpaid claims representpercentage of completion method.estimates of the portion of such liabilities that will be

recovered from reinsurers. Amounts recoverable fromreinsurers are recognized as assets at the same time and in

(h) Property and Equipmenta manner consistent with the liabilities associated with thereinsured policies.

Property and equipment used in operations are carriedat cost less accumulated depreciation. Depreciation is(f) Funds Held for Asbestos-Related Settlementcalculated using the straight-line method over the esti-

Funds held for asbestos-related settlement are assets of mated useful lives of the assets.the Corporation's property and casualty insurance subsidi-aries that accrue income for the beneÑt of participants inthe class settlement of asbestos-related bodily injury (i) Stock-Based Compensationclaims against Fibreboard Corporation (see Note (15)).

The intrinsic value method of accounting is used forstock-based compensation plans. Under the intrinsic(g) Real Estatevalue method, compensation cost is measured as the

Real estate properties are carried at cost, net of write- excess, if any, of the quoted market price of the stock atdowns for impairment. Real estate taxes, interest and the measurement date over the amount an employee mustother carrying costs incurred prior to completion of the pay to acquire the stock.assets for their intended use are capitalized. Also, costsincurred during the initial leasing of income producingproperties are capitalized until the project is substantially (j) Income Taxescomplete, subject to a maximum time period subsequent

The Corporation and its domestic subsidiaries Ñle ato completion of major construction activity.consolidated federal income tax return.

Real estate properties are reviewed for impairmentwhenever events or circumstances indicate that the carry- Deferred income tax assets and liabilities are recog-ing value of such properties may not be recoverable. In nized for the expected future tax eÅects attributable toperforming the review for recoverability of carrying value, temporary diÅerences between the Ñnancial reporting andestimates are made of the future undiscounted cash Öows tax bases of assets and liabilities, based on enacted taxfrom each of the properties during the period the property rates and other provisions of tax law. The eÅect of awill be held and upon its eventual disposition. If the change in tax laws or rates is recognized in net income inexpected future undiscounted cash Öows are less than the the period in which such change is enacted.carrying value of any such property, an impairment loss isrecognized resulting in a write-down of the carrying value

U. S. federal income taxes are accrued on undistributedof the property. Measurement of such impairment is

earnings of foreign subsidiaries.based on the fair value of the property.

Depreciation of real estate properties is calculated(k) Foreign Exchangeusing the straight-line method over the estimated useful

lives of the properties. Assets and liabilities relating to foreign operations aretranslated into U.S. dollars using current exchange rates;Real estate mortgages and notes receivable are carriedrevenues and expenses are translated into U.S. dollarsat unpaid principal balances less an allowance for uncol-using the average exchange rates for each year.lectible amounts. A loan is considered impaired when it is

probable that all principal and interest amounts will notbe collected according to the contractual terms of the loan The functional currency of foreign operations is gener-agreement. An allowance for uncollectible amounts is ally the currency of the local operating environment sinceestablished to recognize any such impairment. Measure- their business is primarily transacted in such local cur-ment of impairment is based on the discounted future rency. Translation gains and losses, net of applicablecash Öows of the loan, subject to the estimated fair value income tax, are excluded from net income and areof the underlying collateral. These cash Öows are dis- credited or charged directly to other comprehensive in-counted at the loan's eÅective interest rate. come, which is a component of shareholders' equity.

45

(l) Cash Flow Information SFAS No. 125 provides new accounting and reportingstandards for transfers of Ñnancial assets and extinguish-

In the statement of cash Öows, short term investments ments of liabilities. The Statement provides consistentare not considered to be cash equivalents. The eÅect of standards for distinguishing transfers of Ñnancial assetschanges in foreign exchange rates on cash balances was that are sales from transfers that are secured borrowings.immaterial. Transactions covered by this Statement include securi-

tizations, repurchase agreements and securities lending.In 1997 and 1996, $228.6 million and $20.7 million of

The Corporation currently engages in securities lending.exchangeable subordinated notes were exchanged for

The Statement has been applied prospectively. Adoption5,316,565 shares and 480,464 shares, respectively, of

of SFAS No. 125 did not have a signiÑcant impact on thecommon stock of the Corporation. In 1997, $108.6 million

Corporation's Ñnancial position or results of operations.of long term debt was assumed by a joint venture as a partof the sale of real estate properties. These noncash trans-

EÅective January 1, 1998, the Corporation adoptedactions have been excluded from the consolidated state-SOP 97-3, Accounting by Insurance and Other Enter-ments of cash Öows.prises for Insurance-Related Assessments, which was is-sued by the AICPA. The SOP provides guidance for

(m) Accounting Pronouncements Not Yet Adopted determining when a liability for guaranty fund and otherinsurance-related assessments should be recognized andIn June 1998, the Financial Accounting Standardshow such liability should be measured. The SOP requiresBoard (FASB) issued Statement of Financial Accountingthat a liability be recognized for insurance-related assess-Standards (SFAS) No. 133, Accounting for Derivativements when an assessment has been imposed or it isInstruments and Hedging Activities. SFAS No. 133 es-probable that an assessment will be imposed, the eventtablishes accounting and reporting standards for deriva-obligating an entity to pay the imposed or probabletive instruments and for hedging activities. SFAS No. 133assessment has occurred and the amount of the assess-requires that all derivatives be recognized as assets orment can be reasonably estimated. Restatement of priorliabilities and be measured at fair value. The accountingyears' Ñnancial statements is not permitted. Since thefor changes in the fair value of the derivative depends onCorporation's previous accounting policy for insurance-the intended use of the derivative. SFAS No. 133 isrelated assessments was consistent with the requirementseÅective for the Corporation on January 1, 2000. Thisof SOP 97-3, the adoption of SOP 97-3 did not have anyStatement should not be applied retroactively to Ñnancialimpact on the Corporation's Ñnancial position or results ofstatements of prior periods. Currently, the Corporation'soperations.use of derivative instruments is not signiÑcant. Thus, the

adoption of SFAS No. 133 is not expected to have asigniÑcant eÅect on the Corporation's Ñnancial position or (3) Discontinued Operationsresults of operations.

On May 13, 1997, the Corporation completed the saleIn March 1998, the American Institute of CertiÑed of Chubb Life Insurance Company of America and its

Public Accountants (AICPA) issued Statement of Posi- subsidiaries to JeÅerson-Pilot Corporation for $875.0 mil-tion (SOP) 98-1, Accounting for the Costs of Computer lion in cash, subject to various closing adjustments, noneSoftware Developed or Obtained for Internal Use. This of which were material.SOP requires that certain costs incurred to develop orobtain computer software for internal use should be capi- In 1996, the Corporation recognized a loss of $22.0talized and amortized over the software's expected useful million related to the sale of the life and health insurancelife. Currently, the Corporation expenses all development subsidiaries. The purchase price was not adjusted tocosts of internal use computer software. SOP 98-1 is reÖect results of operations subsequent to December 31,eÅective for the Corporation on January 1, 1999 and is to 1996. Therefore, the discontinued life and health insur-be applied prospectively. The adoption of SOP 98-1 will ance operations did not aÅect the Corporation's net in-increase the Corporation's net income in 1999 by an come in 1997 and 1998 and will not aÅect net income inamount that has not yet been quantiÑed. The eÅect on net future periods.income will decrease in future years as the new method ofaccounting is phased in. The results of the discontinued operations for the year

ended December 31, 1996 were as follows:(in millions)(2) Adoption of New Accounting Pronouncements

Total revenues ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $816.8EÅective January 1, 1998, the Corporation adoptedTotal beneÑts, claims and expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 743.9

SFAS No. 125, Accounting for Transfers and Servicing ofIncome before federal income tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 72.9Financial Assets and Extinguishments of Liabilities, as

Federal income tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24.4amended by SFAS No. 127, Deferral of the EÅective

Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 48.5Date of Certain Provisions of FASB Statement No. 125.

46

(4) Invested Assets and Related Income

(a) The amortized cost and estimated market value of Ñxed maturities were as follows:

December 31

1998 1997

Gross Gross Estimated Gross Gross EstimatedAmortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market

Cost Appreciation Depreciation Value Cost Appreciation Depreciation Value

(in millions)

Held-to-maturity Ì Tax exempt ÏÏÏÏÏÏÏÏ $ 2,002.2 $138.0 $Ì $ 2,140.2 $ 2,200.6 $146.7 $ .1 $ 2,347.2

Available-for-saleTax exempt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,509.3 427.9 2.1 6,935.1 5,408.4 358.6 .1 5,766.9

TaxableU.S. Government and government

agency and authority obligations ÏÏÏÏÏ 344.2 8.8 Ì 353.0 594.3 9.9 .1 604.1Corporate bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,031.9 44.5 .6 1,075.8 819.9 27.0 2.4 844.5Foreign bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,118.3 85.4 1.6 1,202.1 1,022.5 46.3 2.4 1,066.4Mortgage-backed securities ÏÏÏÏÏÏÏÏÏ 1,694.3 22.1 38.9 1,677.5 1,778.2 35.8 2.6 1,811.4Redeemable preferred stocks ÏÏÏÏÏÏÏÏ 70.3 2.9 Ì 73.2 151.1 8.4 Ì 159.5

4,259.0 163.7 41.1 4,381.6 4,366.0 127.4 7.5 4,485.9

Total available-for-sale ÏÏÏÏÏÏÏÏÏÏÏ 10,768.3 591.6 43.2 11,316.7 9,774.4 486.0 7.6 10,252.8

Total Ñxed maturities ÏÏÏÏÏÏÏÏÏÏÏÏ $12,770.5 $729.6 $43.2 $13,456.9 $11,975.0 $632.7 $7.7 $12,600.0

The amortized cost and estimated market value of Ñxed maturities at December 31, 1998 by contractual maturity wereas follows:

EstimatedAmortized Market

Cost Value

(in millions)Held-to-maturity

Due in one year or lessÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 122.5 $ 124.4Due after one year through Ñve yearsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 612.4 644.4Due after Ñve years through ten years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 851.6 918.5Due after ten years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 415.7 452.9

$2,002.2 $2,140.2

Available-for-saleDue in one year or less ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 248.7 $ 250.9Due after one year through Ñve years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,216.0 1,272.5Due after Ñve years through ten yearsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,223.3 3,461.6Due after ten years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,386.0 4,654.2

9,074.0 9,639.2Mortgage-backed securitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,694.3 1,677.5

$10,768.3 $11,316.7

Actual maturities could diÅer from contractual maturities because borrowers may have the right to call or prepayobligations.

(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 appreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $164.6 $160.6Gross unrealized depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75.0 23.4

89.6 137.2

Fixed maturitiesGross unrealized appreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 591.6 486.0Gross unrealized depreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 43.2 7.6

548.4 478.4

638.0 615.6Deferred income tax liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 223.3 215.5

$414.7 $400.1

47

The change in unrealized appreciation of investments agent to generate additional income for the Corporation.carried at market value was as follows: At December 31, 1998 and 1997, the Corporation had no

securities loaned to other institutions. Securities lendingYears Ended December 31

activity in 1998 was insigniÑcant. The maximum amount1998 1997 1996

of loaned securities outstanding during 1997 was approxi-(in millions)Continuing operations mately $230 million.

Change in unrealized appreciation ofequity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(47.6) $ 31.4 $ 17.3 (5) Real Estate

Change in unrealized appreciation ofÑxed maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 70.0 216.9 (119.6) In October 1996, the Corporation announced that its

real estate subsidiary was exploring the possible sale of all22.4 248.3 (102.3)Deferred income tax (credit) ÏÏÏÏÏÏÏÏ 7.8 86.9 (35.8) or a signiÑcant portion of its assets. In March 1997, theChange in unrealized appreciation ÏÏÏÏ 14.6 161.4 (66.5) real estate subsidiary entered into an agreement with a

prospective purchaser to perform due diligence in antici-Discontinued operations, net ÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (40.7)pation of executing a contract for the sale of substantially$ 14.6 $161.4 $(107.2)all of its commercial properties. Because the plan topursue the sale of these assets in the near term repre-

The unrealized appreciation of Ñxed maturities carriedsented a signiÑcant change in circumstances relating to

at amortized cost is not reÖected in the Ñnancial state-the manner in which these assets would be used, the

ments. The change in unrealized appreciation of Ñxedrecoverability of their carrying value as of December 31,

maturities of continuing operations carried at amortized1996 was reassessed. As a result, an impairment loss of

cost was a decrease of $8.6 million, an increase of$255.0 million was recognized in 1996 to reduce the

$16.8 million and a decrease of $48.2 million for the yearscarrying value of these assets to their estimated fair value.

ended December 31, 1998, 1997 and 1996, respectively.This charge was included in real estate cost of sales andexpenses in the consolidated statements of income.(c) The sources of net investment income were as

follows: In June 1997, a deÑnitive agreement was reached withYears Ended December 31 the purchaser. In November 1997, the sale of almost all of

1998 1997 1996 the properties covered by the agreement reached in June(in millions) was closed for $736.9 million, which included $628.3 mil-

Fixed maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $761.1 $726.1 $669.7 lion in cash and the assumption of $108.6 million in debt.Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 24.7 10.8 10.0 Closing on the one remaining property under the agree-Short term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35.8 47.6 23.9

ment is expected to occur in 1999. The real estateOther ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .3 .8 8.0subsidiary is continuing to explore the sale of certain of its

Gross investment incomeÏÏÏÏÏÏÏÏÏÏÏÏÏ 821.9 785.3 711.6remaining properties.Investment expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13.2 12.0 12.3

$808.7 $773.3 $699.3 The components of real estate assets were as follows:

December 31

(d) Realized investment gains and losses were as follows: 1998 1997

(in millions)Years Ended December 31

1998 1997 1996 Mortgages and notes receivable (net of allowance foruncollectible amounts of $16.8 and $24.0)ÏÏÏÏÏÏÏÏÏÏÏÏ $105.2 $123.8(in millions)

Income producing properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 166.5 163.8Gross realized investment gainsConstruction in progress ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 109.2 95.8Fixed maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 49.2 $ 56.3 $ 56.4Land under development and unimproved landÏÏÏÏÏÏÏÏÏÏÏÏÏ 365.1 406.6Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 118.5 93.8 75.5

$746.0 $790.0167.7 150.1 131.9

Gross realized investment lossesSubstantially all mortgages and notes receivable areFixed maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.0 26.5 45.7

Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 18.8 18.4 6.4 secured by buildings and land. The ultimate collectibility25.8 44.9 52.1 of the receivables is evaluated continuously and an appro-

priate allowance for uncollectible amounts established.Realized investment gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 141.9 105.2 79.8Mortgages and notes receivable had an estimated aggre-Income tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49.7 36.8 27.8

gate fair value of $106.9 million and $121.0 million at$ 92.2 $ 68.4 $ 52.0December 31, 1998 and 1997, respectively. The fair valueamounts represent point-in-time estimates that are not(e) The Corporation engages in securities lendingrelevant in predicting future earnings or cash Öows relatedwhereby certain securities from its portfolio are loaned toto such receivables.other institutions for short periods of time. Cash collateral

from the borrower, equal to the market value of the Depreciation expense related to income producingloaned securities plus accrued interest, is deposited with a properties was $2.9 million, $2.7 million and $11.0 millionlending agent and retained and invested by the lending for 1998, 1997 and 1996, respectively.

48

(6) Deferred Policy Acquisition Costs In August 1998, the Corporation sold $300.0 million ofunsecured 6.15% notes due August 15, 2005 and $100.0Policy acquisition costs deferred and the related amor-million of unsecured 6.60% debentures due August 15,tization charged against income were as follows:2018, the aggregate net proceeds from which wereYears Ended December 31$397.0 million.1998 1997 1996

(in millions)The Corporation also has outstanding $30.0 million of

Balance, beginning of year ÏÏÏÏÏÏÏ $ 676.9 $ 601.2 $ 558.7 unsecured 8∂% notes due November 15, 1999.Costs deferred during year

Commissions and brokerageÏÏÏÏ 768.0 775.0 653.5 Chubb Capital Corporation has outstanding $100.0Premium taxes and assessmentsÏÏ 128.5 124.9 114.7 million of 6∑% notes due February 1, 2003. These notesSalaries and overhead ÏÏÏÏÏÏÏÏÏÏ 619.6 578.4 512.3

are unsecured and are guaranteed by the Corporation.1,516.1 1,478.3 1,280.5

Amortization during year ÏÏÏÏÏÏÏÏ (1,464.3) (1,402.6) (1,238.0)The Corporation Ñled a shelf registration statement

Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏ $ 728.7 $ 676.9 $ 601.2which the Securities and Exchange Commission declaredeÅective in September 1998, under which up to

(7) Property and Equipment $600.0 million of various types of securities may be issuedProperty and equipment included in other assets were by the Corporation or Chubb Capital. No securities have

as follows: been issued under this registration statement.December 31

The amounts of long term debt due annually during the1998 1997Ñve years subsequent to December 31, 1998 are as(in millions)follows:

CostÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $428.3 $391.7Years Ending Term LoanAccumulated depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 196.3 178.2December 31 and Mortgages Notes Total

$232.0 $213.5(in millions)

1999ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $44.1 $ 30.0 $ 74.1Depreciation expense related to property and equip-2000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28.8 Ì 28.8ment was $55.3 million, $53.7 million and $48.0 million2001ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .3 Ì .3for 1998, 1997 and 1996, respectively.2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .4 Ì .4

(8) Debt and Credit Arrangements 2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .4 100.0 100.4

(a) Long term debt consisted of the following:(b) Interest costs of $28.9 million, $72.4 million and

December 31$89.5 million were incurred in 1998, 1997 and 1996,

1998 1997respectively, of which $8.7 million and $12.8 million were

Carrying Fair Carrying Faircapitalized in 1997 and 1996, respectively. Interest paid,Value Value Value Valuenet of amounts capitalized, was $23.4 million, $60.4(in millions)million and $77.7 million in 1998, 1997 and 1996,Term loan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 28.5 $ 28.5 $ 40.1 $ 40.3respectively.Mortgages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 49.0 48.9 48.5 47.3

8∂% notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30.0 30.8 60.0 62.76.15% notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 300.0 312.8 Ì Ì (c) In July 1997, the Corporation entered into two6.60% debentures ÏÏÏÏÏÏÏÏÏÏÏ 100.0 108.1 Ì Ì credit agreements with a group of banks that provide for6∑% notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 100.0 106.1 100.0 102.5

unsecured borrowings of up to $500.0 million in the6% notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 150.0 150.0aggregate. The $200.0 million short term revolving credit$607.5 $635.2 $398.6 $402.8facility, which terminated on July 10, 1998, was extended

The term loan and mortgages are obligations of the real to July 7, 1999, and may be renewed or replaced. Theestate subsidiaries. The term loan matures in 2000. The $300.0 million medium term revolving credit facility ter-term loan is at an interest rate equivalent to the lower of minates on July 11, 2002. On the respective terminationthe prime rate or a rate associated with the lender's cost dates for these agreements, any loans then outstandingof funds. The mortgages payable are due in varying become payable. There have been no borrowings underamounts monthly through 2010. At December 31, 1998, these agreements. Various interest rate options are availa-the interest rate on the term loan approximated 7¥% and ble to the Corporation, all of which are based on marketfor the mortgages payable the range of interest rates was rates. The Corporation pays a fee to have these credit6% to 12%. The term loan and mortgages payable are facilities available. Unused credit facilities are availablesecured by real estate assets with a net book value of for general corporate purposes and to support Chubb$192.3 million at December 31, 1998. Capital's commercial paper borrowing arrangement.

49

(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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $124.7 $194.4 $ 152.1ForeignÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 23.5 43.5 26.2

Deferred tax credit, principally United StatesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (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 and1996, respectively.

(b) The provision for federal and foreign income tax gives eÅect to permanent diÅerences between income forÑnancial reporting purposes and taxable income. Accordingly, the eÅective income tax rate is less than the statutoryfederal corporate tax rate. The reasons for the lower eÅective tax rate were as follows:

Years Ended December 31

1998 1997 1996

% of % of % ofPre-Tax Pre-Tax Pre-Tax

Amount Income Amount Income Amount Income

(in millions)Income from continuing operations before federal and

foreign income taxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 849.7 $ 974.1 $ 546.9

Tax at statutory federal income tax rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 297.3 35.0% $ 340.9 35.0% $ 191.4 35.0%Tax exempt interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (137.5) (16.2) (126.4) (13.0) (119.0) (21.8)Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (17.1) (2.0) (9.9) (1.0) (11.7) (2.1)

Actual tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 142.7 16.8% $ 204.6 21.0% $ 60.7 11.1%

(c) The tax eÅects of temporary diÅerences that gave rise to deferred income tax assets and liabilities were asfollows:

December 31

1998 1997

(in millions)Deferred income tax assets

Unpaid claims ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $541.7 $572.6Unearned premiums ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 172.7 160.8Postretirement beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 73.1 62.9Other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 60.9 27.9

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 848.4 824.2

Deferred income tax liabilitiesDeferred policy acquisition costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 225.0 210.4Real estate assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 79.3 81.3Unrealized appreciation of investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 223.3 215.5

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 527.6 507.2

Net deferred income tax asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $320.8 $317.0

50

(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'scommon stock in respect to which stock-based awards may be granted under the 1996 plan is 14,000,000. AtDecember 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 onthe date of grant. The terms and conditions upon which options become exercisable may vary among grants. Optionsexpire 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 optionplan is as follows:

1998 1997 1996

Number Weighted Average Number Weighted Average Number Weighted Averageof Shares Exercise Price of Shares Exercise Price of Shares Exercise Price

Outstanding, beginning of yearÏÏÏÏÏÏÏÏÏÏ 9,124,803 $47.67 8,058,829 $41.48 6,565,034 $37.59

GrantedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,168,804 78.75 2,753,007 61.05 2,504,048 48.82

Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,320,504) 41.78 (1,486,812) 38.39 (782,403) 31.77

Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (208,013) 75.25 (200,221) 51.69 (227,850) 43.26

Outstanding, end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,765,090 54.78 9,124,803 47.67 8,058,829 41.48

Exercisable, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,879,061 47.26 5,932,905 42.54 4,852,845 38.10

December 31, 1998

Options Outstanding Options Exercisable

Weighted AverageRange of Number Weighted Average Remaining Number Weighted Average

Option Exercise Price Outstanding Exercise Price Contractual Life Exercisable Exercise Price

$17.50 - $41.81ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,373,550 $39.14 4.8 3,373,550 $39.14

$42.13 - $87.34ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 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 ofsuch awards is expensed over the performance cycle. Such awards are payable in cash, in shares of the Corporation'scommon stock or in a combination of both. Restricted stock awards consist of shares of common stock of the Corporationgranted 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. Anamount 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 whichcompensation cost is measured as the excess, if any, of the quoted market price of the stock at the measurement date overthe 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 compensationcost has been recognized for such grants. The aggregate amount charged against income (including continuing anddiscontinued operations) with respect to performance share and restricted stock awards was $14.4 million in 1998 and1997 and $10.2 million in 1996.

The following pro forma net income and earnings per share information has been determined as if the Corporationhad accounted for stock-based compensation awarded under the Long-Term Stock Incentive Plans using the fair valuebased method. Under the fair value method, the estimated fair value of awards at the grant date would be charged againstincome on a straight-line basis over the vesting period.

1998 1997 1996

As Pro As Pro As ProReported Forma Reported Forma Reported Forma

(in millions except for per share amounts)

Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $707.0 $679.6 $769.5 $746.3 $512.7 $496.6

Diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏ 4.19 4.03 4.39 4.26 2.88 2.79

51

The weighted average fair value of options granted (c) The Corporation has a Stock Purchase Plan underunder the Long-Term Stock Incentive Plans during 1998, which substantially all employees are eligible to purchase1997 and 1996 was $19.08, $13.83 and $11.04, respec- shares of the Corporation's common stock based ontively. The fair value of each option grant was estimated compensation. At December 31, 1998, there were noon the date of grant using the Black-Scholes option subscribed shares.pricing model with the following weighted average as-sumptions. The risk-free interest rates for 1998, 1997 and (11) Employee BeneÑts1996 were 5.5%, 6.5% and 5.9%, respectively. The ex- (a) The Corporation and its subsidiaries have severalpected volatility of the market price of the Corporation's non-contributory deÑned beneÑt pension plans coveringcommon stock for 1998, 1997 and 1996 grants was 16.4%, substantially all employees. The beneÑts are generally16.3% and 18.3%, respectively. The expected average based on an employee's years of service and averageterm of the granted options was 5 years for 1998 and 1997 compensation during the last Ñve years of employment.and 51/2 years for 1996. The dividend yield was 1.6% for Pension costs are determined using the projected unit1998, 1.9% for 1997 and 2.1% for 1996. credit method. The Corporation's policy is to make an-

nual contributions that meet the minimum funding re-quirements of the Employee Retirement Income Security(b) The Corporation has a leveraged Employee StockAct of 1974. Contributions are intended to provide notOwnership Plan (ESOP) in which substantially all em-only for beneÑts attributed to service to date but also forployees are eligible to participate. At its inception in 1989,those expected to be earned in the future.the ESOP used the proceeds of a $150.0 million loan

from the Corporation to purchase 7,792,204 newly issued The components of net pension cost (including contin-shares of the Corporation's common stock. The loan is uing and discontinued operations) were as follows:due in September 2004 and bears interest at 9%. The

Years Ended December 31Corporation has recorded the receivable from the ESOP1998 1997 1996as a separate reduction of shareholders' equity on the

(in millions)consolidated balance sheets. This balance is reduced asrepayments are made on the loan principal. Service cost of current periodÏÏÏÏÏÏ $ 18.8 $ 19.9 $ 20.6

Interest cost on projectedbenefit obligationÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34.5 30.3 26.0

The Corporation and its participating subsidiaries make Expected return on plan assets ÏÏÏÏÏ (40.3) (35.1) (25.6)Other gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2.5) (2.0) (6.0)semi-annual contributions to the ESOP in amounts deter-

mined at the discretion of the Corporation's Board of Net pension cost ÏÏÏÏÏÏÏÏÏÏÏ $ 10.5 $ 13.1 $ 15.0

Directors. The contributions, together with the dividendsIn 1998, an expense of $29.0 million related to en-on the shares of common stock in the ESOP, are used by

hanced pension beneÑts provided to employees who ac-the ESOP to make loan interest and principal paymentscepted an early retirement incentive oÅer was included asto the Corporation. As interest and principal are paid, apart of a restructuring charge (see Note (12)).portion of the common stock is allocated to eligible

employees.The following table sets forth the plans' funded status

and amounts recognized in the balance sheets:The Corporation uses the cash payment method of

December 31recognizing ESOP expense. In 1998, 1997 and 1996, cash1998 1997contributions to the ESOP of $11.0 million, $12.2 million(in millions)and $12.7 million, respectively, were charged against

Actuarial present value of projected beneÑtincome (including continuing and discontinued opera- obligation for service rendered to date ÏÏÏÏÏÏÏÏ $518.7 $435.0tions). Dividends on shares of common stock in the Plan assets at fair value ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 552.9 487.8

ESOP used for debt service were $7.8 million, $6.2 mil- Plan assets in excess of projectedbeneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (34.2) (52.8)lion and $4.6 million in 1998, 1997 and 1996, respectively.

Unrecognized net gain from past experiencediÅerent from that assumed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 127.3 120.7

Unrecognized prior service costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7.5) (8.8)The number of allocated and unallocated shares heldUnrecognized net asset at January 1, 1985,by the ESOP at December 31, 1998 were 2,947,830 and

being recognized principally over 19 years ÏÏÏÏÏÏ 4.9 6.43,116,884, respectively. All such shares are considered

Pension liability included in other liabilities ÏÏÏÏÏÏ $ 90.5 $ 65.5outstanding for the computation of earnings per share.

52

The weighted average discount rate used in determin- 1998, the weighted average health care cost trend rateing the actuarial present value of the projected beneÑt used to measure the accumulated postretirement cost forobligation at December 31, 1998 and 1997 was 71/4% and medical beneÑts was 10% for 1999 and was assumed to7¥%, respectively, and the rate of increase in future decrease gradually to 6% for the year 2005 and remain atcompensation levels was 41/2% for 1998 and 5% for 1997. that level thereafter. The health care cost trend rateThe expected long term rate of return on assets was 9% assumption has a signiÑcant eÅect on the amount of thefor both years. Plan assets are principally invested in accumulated postretirement beneÑt obligation and the netpublicly traded stocks and bonds. postretirement beneÑt cost reported. To illustrate, a one

percent increase or decrease in the trend rate for each(b) The Corporation and its subsidiaries provide certain year would increase or decrease the accumulated postre-

other postretirement benefits, principally health care and life tirement beneÑt obligation at December 31, 1998 byinsurance, to retired employees and their beneficiaries and approximately $18 million and the aggregate of the ser-covered dependents. Substantially all employees may be- vice and interest cost components of net postretirementcome eligible for these benefits upon retirement if they meet beneÑt cost for the year ended December 31, 1998 byminimum age and years of service requirements. The ex- approximately $2 million.pected cost of these benefits is accrued during the years thatthe employees render the necessary service. (c) The Corporation and its subsidiaries have a savings

plan, the Capital Accumulation Plan, in which substan-The Corporation does not fund these beneÑts in ad- tially all employees are eligible to participate. Under this

vance. BeneÑts are paid as covered expenses are incurred. plan, the employer makes a matching contribution equalHealth care coverage is contributory. Retiree contribu- to 100% of each eligible employee's pre-tax electivetions vary based upon a retiree's age, type of coverage and contributions, up to 4% of the employee's compensation.years of service with the Corporation. Life insurance Contributions are invested at the election of the employeecoverage is non-contributory. in the Corporation's common stock or in various other in-

vestment funds. Employer contributions of $14.5 million,The components of net postretirement beneÑt cost $15.0 million and $14.5 million were charged against

(including continuing and discontinued operations) were income (including continuing and discontinued opera-as follows: tions) in 1998, 1997 and 1996, respectively.

Years Ended December 31

1998 1997 1996 (12) Restructuring Charge(in millions)

During the fourth quarter of 1997, the CorporationService cost of current period ÏÏÏÏÏÏÏÏ $ 4.2 $ 4.9 $ 6.0

began an activity value analysis process to identify andInterest cost on accumulatedbeneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8.2 8.8 8.6 eliminate low-value activities and to improve operational

Net amortization and deferralÏÏÏÏÏÏÏÏ (1.3) (.7) Ì eÇciency in order to reduce expenses and redirect re-Net postretirement beneÑt costÏÏÏÏÏ $11.1 $13.0 $14.6 sources to those current activities and new initiatives that

have the greatest potential to contribute to the futureresults of the Corporation. Implementation began in theThe components of the accumulated postretirementÑrst quarter of 1998 and is substantially completed. ThisbeneÑt obligation were as follows:cost control initiative has resulted in approximately 500job reductions in the home oÇce and the branch networkDecember 31

1998 1997 through a combination of early retirements, terminations(in millions) and attrition. Other savings involve vendor management,

consulting expenses and other operating costs.Accumulated postretirement benefit obligation ÏÏÏÏÏÏ $123.1 $125.8

Unrecognized net gain from past experiencediÅerent from that assumed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 27.1 18.1 In the Ñrst quarter of 1998, the Corporation recorded aPostretirement beneÑt liability included in restructuring charge of $40.0 million related to the imple-

other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $150.2 $143.9 mentation of the cost control initiative. The restructuringcharge relates primarily to costs associated with providing

The weighted average discount rate used in determin- enhanced pension beneÑts to employees who accepted aning the actuarial present value of the accumulated postre- early retirement incentive oÅer, severance costs and othertirement beneÑt obligation at December 31, 1998 and costs. The initiative was substantially completed in 19981997 was 71/4% and 7¥%, respectively. At December 31, with no signiÑcant diÅerences from original estimates.

53

The 1997 assumed reinsurance premiums written and(13) Reinsuranceearned from Royal & Sun Alliance include businessPremiums earned and insurance claims are reported netassumed for the second half of 1996 which was reportedof reinsurance in the consolidated statements of income.on a lag.

The effect of reinsurance on the premiums written andReinsurance recoveries by the property and casualtyearned of the property and casualty insurance subsidiaries

insurance subsidiaries which have been deducted fromwas as follows:insurance claims were $447.4 million, $346.8 million and$651.9 million in 1998, 1997 and 1996, respectively. TheYears Ended December 311996 amount included recoveries of $251.4 million from1998 1997 1996the subsidiary of Royal & Sun Alliance.(in millions)

Direct premiums writtenÏÏÏÏÏÏÏÏÏ $5,842.0 $5,524.4 $5,166.5(14) LeasesReinsurance assumed

Royal & Sun AllianceÏÏÏÏÏÏÏÏÏ Ì (3.8) 202.5 The Corporation and its subsidiaries occupy oÇce facil-OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 141.9 166.7 234.3 ities under lease agreements which expire at various dates

Reinsurance cededthrough 2019; such leases are generally renewed orRoyal & Sun AllianceÏÏÏÏÏÏÏÏÏ Ì 174.6 (269.2)replaced by other leases. In addition, the Corporation'sOtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (480.4) (413.9) (560.3)subsidiaries lease data processing, oÇce and transporta-Net premiums writtenÏÏÏÏÏÏÏÏÏ $5,503.5 $5,448.0 $4,773.8tion equipment.

Direct premiums earned ÏÏÏÏÏÏÏÏÏ $5,624.7 $5,315.8 $5,023.5Most leases contain renewal options for increments

Reinsurance assumedranging from three to Ñve years; certain lease agreementsRoyal & Sun AllianceÏÏÏÏÏÏÏÏÏ Ì 94.9 284.0provide for rent increases based on price-level factors. AllOtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 140.6 197.5 249.0

Reinsurance ceded leases are operating leases.Royal & Sun AllianceÏÏÏÏÏÏÏÏÏ Ì Ì (348.0)

Rent expense was as follows:OtherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (461.5) (450.8) (639.2)

Net premiums earned ÏÏÏÏÏÏÏÏÏ $5,303.8 $5,157.4 $4,569.3Years EndedDecember 31

The Royal & Sun Alliance Insurance Group plc is the 1998 1997 1996beneÑcial owner of 5.6% of the Corporation's common (in millions)stock. Prior to 1997, a property and casualty insurance

OÇce facilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $73.8 $71.1 $67.6subsidiary of the Corporation assumed on a quota share EquipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13.3 12.6 11.8basis a portion of the property and casualty insurance

$87.1 $83.7 $79.4business written by certain subsidiaries of Royal & SunAlliance. Similarly, a portion of the U.S. insurance busi-

At December 31, 1998, future minimum rental pay-ness written by the Corporation's property and casualty

ments required under non-cancellable operating leasesinsurance subsidiaries was reinsured on a quota share

were as follows:basis with a subsidiary of Royal & Sun Alliance.

Years EndingEÅective January 1, 1996, the reinsurance agreementsDecember 31 (in millions)with Royal & Sun Alliance were amended to reduce the

1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 78.9amount of each company's business reinsured with the2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 75.9other. EÅective January 1, 1997, the agreements were2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69.5terminated. The changes to the agreements in 1996 and2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 62.9

their termination in 1997 resulted in portfolio transfers of2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 55.9

the business previously ceded to Royal & Sun Alliance After 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 351.5back to the Corporation's property and casualty insurance

$694.6subsidiaries and of the business previously assumed by theCorporation's property and casualty insurance subsidiariesback to Royal & Sun Alliance. The eÅect of the portfoliotransfers 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 writ-ten of $93.6 million and $65.2 million in 1997 and 1996,respectively.

54

(15) Unpaid Claims under this agreement with respect to such pending claimsis approximately $635.0 million, all of which has beenThe process of establishing loss reserves is a complexpaid. The agreement further provides that the total re-and imprecise science that reÖects signiÑcant judgmentalsponsibility of both insurers with respect to pending andfactors. This is true because claim settlements to be madefuture asbestos-related bodily injury claims againstin the future will be impacted by changing rates ofFibreboard will be shared between PaciÑc Indemnity andinÖation and other economic conditions, changing legisla-Continental Casualty on an approximate 35% and 65%tive, judicial and social environments and changes in thebasis, respectively.property and casualty insurance subsidiaries' claim han-

dling procedures. In many liability cases, signiÑcant peri- At the same time, PaciÑc Indemnity, Continental Cas-ods of time, ranging up to several years or more, may ualty and Fibreboard entered into a trilateral agreement toelapse between the occurrence of an insured loss, the settle all present and future asbestos-related bodily injuryreporting of the loss and the settlement of the loss. claims resulting from insurance policies that were, or may

have been, issued to Fibreboard by the two insurers. TheJudicial decisions and legislative actions continue totrilateral agreement will be triggered if the global settle-broaden liability and policy deÑnitions and to increase thement agreement is ultimately disapproved. PaciÑc Indem-severity of claim payments. As a result of this and othernity's obligation under the trilateral agreement issocietal and economic developments, the uncertaintiestherefore similar to, and not duplicative of, that underinherent in estimating ultimate claim costs on the basis ofthose agreements described above.past experience continue to further complicate the already

complex loss reserving process. The trilateral agreement reaÇrms portions of an agree-ment reached in March 1992 between PaciÑc IndemnityThe uncertainties relating to asbestos and toxic wasteand Fibreboard. Among other matters, that 1992 agree-claims on insurance policies written many years ago arement eliminates any PaciÑc Indemnity liability toexacerbated by inconsistent court decisions and judicialFibreboard for asbestos-related property damage claims.and legislative interpretations of coverage that in some

cases have tended to erode the clear and express intent of In July 1995, the United States District Court of thesuch policies and in others have expanded theories of Eastern District of Texas approved the global settlementliability. The industry is engaged in extensive litigation agreement and the trilateral agreement. The judgmentsover these coverage and liability issues and is thus con- approving these agreements were appealed to the Unitedfronted with a continuing uncertainty in its eÅort to States Court of Appeals for the Fifth Circuit. In Julyquantify these exposures. 1996, the Fifth Circuit Court aÇrmed the 1995 judg-

ments of the District Court. The objectors to the globalIn 1993, PaciÑc Indemnity Company, a subsidiary ofsettlement agreement appealed to the United States Su-the Corporation, entered into a global settlement agree-preme Court. In June 1997, the Supreme Court set asidement with Continental Casualty Company (a subsidiarythe ruling by the Fifth Circuit Court that had approvedof CNA Financial Corporation), Fibreboard Corporation,the global settlement agreement and ordered the Fifthand attorneys representing claimants against FibreboardCircuit Court to reconsider its approval. In January 1998,for all future asbestos-related bodily injury claims againstthe Fifth Circuit Court again aÇrmed the global settle-Fibreboard. This agreement is subject to Ñnal appellatement agreement. In April 1998, the objectors to thecourt approval. Pursuant to the global settlement agree-settlement petitioned the Supreme Court to review thement, a $1,525.0 million trust fund will be established todecision. In December 1998, argument was held beforepay future claims, which are claims that were not Ñled inthe Supreme Court on the objectors' challenge. A deci-court before August 27, 1993. PaciÑc Indemnity willsion is expected during 1999.contribute $538.2 million to the trust fund and Continen-

tal Casualty will contribute the remaining amount. In The trilateral agreement was never appealed to theDecember 1993, upon execution of the global settlement United States Supreme Court and is Ñnal. As a result,agreement, PaciÑc Indemnity and Continental Casualty management continues to believe that the uncertainty ofpaid their respective shares into an escrow account. PaciÑc Indemnity's exposure with respect to asbestos-PaciÑc Indemnity's share is included in funds held for related bodily injury claims against Fibreboard has beenasbestos-related settlement. Upon Ñnal court approval of eliminated.the settlement, the amount in the escrow account, includ- Since 1993, a California Court of Appeal has agreed, ining interest earned thereon, will be transferred to the trust response to a request by Pacific Indemnity, Continentalfund. All of the parties have agreed to use their best Casualty and Fibreboard, to delay its decisions regardingeÅorts to seek Ñnal court approval of the global settlement asbestos-related insurance coverage issues that are currentlyagreement. before it and involve the three parties exclusively, while the

PaciÑc Indemnity and Continental Casualty reached a approval of the global settlement is pending in court. Conti-separate agreement in 1993 for the handling of all asbes- nental Casualty and Pacific Indemnity have dismissed dis-tos-related bodily injury claims pending on August 26, putes against each other which involved Fibreboard and1993 against Fibreboard. PaciÑc Indemnity's obligation were in litigation.

55

The property and casualty insurance subsidiaries have reported reserves have been established to cover addi-additional potential asbestos exposure, primarily on in- tional exposures on both known and unasserted claims.sureds for which excess liability coverages were written. These reserves are continually reviewed and updated.Such exposure has increased due to the erosion of much

A reconciliation of the beginning and ending liabilityof the underlying limits. The number of claims againstfor unpaid claims, net of reinsurance recoverable, and asuch insureds and the value of such claims have increasedreconciliation of the net liability to the correspondingin recent years due in part to the non-viability of otherliability on a gross basis is as follows:defendants.

1998 1997 1996The remaining asbestos exposures are mostly peripheral(in millions)defendants, including a mix of manufacturers and distrib-

Gross liability, beginning of year ÏÏÏÏÏÏÏ $ 9,772.5 $9,523.7 $9,588.2utors of certain products that contain asbestos as well asReinsurance recoverable,premises owners. Generally, these insureds are named

beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,207.9 1,767.8 1,973.7defendants on a regional rather than a nationwide basis.

Net liability, beginning of year ÏÏÏÏÏÏÏ 8,564.6 7,755.9 7,614.5Notices of new asbestos claims and new exposures onNet incurred claims and claimexisting claims continue to be received as more peripheral

expenses related toparties are drawn into litigation to replace the now de-

Current year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,712.1 3,372.3 3,053.6funct mines and bankrupt manufacturers. Prior years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (218.4) (65.3) (42.8)

3,493.7 3,307.0 3,010.8Hazardous waste sites are another signiÑcant potentialNet payments for claims and claimexposure. Under the federal ""Superfund'' law and similar

expenses related tostate statutes, when potentially responsible parties

Current year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,210.7 1,080.0 980.0(PRPs) fail to handle the clean-up, regulators have the Prior years ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,797.7 1,418.3 1,889.4work done and then attempt to establish legal liability 3,008.4 2,498.3 2,869.4against the PRPs. The PRPs disposed of toxic materials

Net liability, end of yearÏÏÏÏÏÏÏÏÏÏÏ 9,049.9 8,564.6 7,755.9at a waste dump site or transported the materials to the Reinsurance recoverable,site. Insurance policies issued to PRPs were not intended end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,306.6 1,207.9 1,767.8

to cover the clean-up costs of pollution and, in manyGross liability, end of year ÏÏÏÏÏÏÏÏÏ $10,356.5 $9,772.5 $9,523.7cases, did not intend to cover the pollution itself. As the

costs of environmental clean-up have become substantial, During 1998, the property and casualty insurance sub-PRPs and others have increasingly Ñled claims with their sidiaries experienced overall favorable development ofinsurance carriers. Litigation against insurers extends to $218.4 million on net unpaid claims established as of theissues of liability, coverage and other policy provisions. previous year-end. This compares with favorableThere is great uncertainty involved in estimating the development of $65.3 million and $42.8 million in 1997property and casualty insurance subsidiaries' liabilities and 1996, respectively. Such redundancies were reÖectedrelated to these claims. First, the liabilities of the claim- in operating results in these respective years. Each of theants are extremely diÇcult to estimate. At any given past three years beneÑted from favorable claim severityclean-up site, the allocation of remediation costs among trends for certain liability classes; this was oÅset each yeargovernmental authorities and the PRPs varies greatly. in varying degrees by incurred losses relating to asbestosSecond, diÅerent courts have addressed liability and cov- and toxic waste claims.erage issues regarding pollution claims and have reachedinconsistent conclusions in their interpretation of several Management believes that the aggregate loss reservesissues. These signiÑcant uncertainties are not likely to be of the property and casualty insurance subsidiaries atresolved in the near future. December 31, 1998 were adequate to cover claims for

losses which had occurred, including both those knownUncertainties also remain as to the Superfund lawand those yet to be reported. In establishing such reserves,itself. Superfund's taxing authority expired on Decem-management considers facts currently known and theber 31, 1995. It is currently not possible to predict thepresent state of the law and coverage litigation. However,direction that any reforms may take, when they maygiven the expansion of coverage and liability by the courtsoccur or the eÅect that any changes may have on theand the legislatures in the past and the possibilities ofinsurance industry.similar interpretations in the future, particularly as they

Reserves for asbestos and toxic waste claims cannot be relate to asbestos and toxic waste claims, as well as theestimated with traditional loss reserving techniques that uncertainty in determining what scientiÑc standards willrely on historical accident year loss development factors. be deemed acceptable for measuring hazardous waste siteCase reserves and expense reserves for costs of related clean-up, additional increases in loss reserves may emergelitigation have been established where suÇcient informa- which would adversely aÅect results in future periods.tion has been developed to indicate the involvement of a The amount cannot reasonably be estimated at the pre-speciÑc insurance policy. In addition, incurred but not sent time.

56

(16) Segments Information

EÅective December 31, 1998, the Corporation adopted SFAS No. 131, Disclosures about Segments of an Enterpriseand Related Information. SFAS No. 131 establishes new standards for reporting information about operating segments inannual Ñnancial 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 signiÑcant change from the Corporation's previous segment disclosuresand had no eÅect on the Corporation's Ñnancial 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. Thepersonal and commercial segments are managed separately because they target diÅerent customers. The commercialbusiness is further distinguished by those classes of business that are generally available in broad markets and are of amore commodity nature (standard) and those classes available in more limited markets that require specializedunderwriting and claim settlement (specialty). Standard commercial classes include multiple peril, casualty and workers'compensation and specialty commercial classes include property and marine, executive protection, Ñnancial institutionsand other commercial classes. Reinsurance assumed is treaty reinsurance that was assumed from Royal & Sun Allianceprior to 1997. The real estate segment includes commercial development activities primarily in New Jersey and residentialdevelopment activities primarily in central Florida.

The accounting policies of the segments are the same as those described in the summary of signiÑcant accountingpolicies in Note (1). Performance of the property and casualty underwriting segments is based on underwriting resultsbefore deferred policy acquisition costs and certain charges. Investment income performance is based on investmentincome 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 asfollows:

Years Ended December 31

1998 1997 1996

Revenues (in millions)Property and casualty insurance

Premiums earnedPersonal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,304.3 $1,188.1 $ 969.7Standard commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,980.6 1,906.1 1,642.4Specialty commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,018.9 1,968.3 1,673.2Reinsurance assumed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 94.9 284.0

5,303.8 5,157.4 4,569.3Investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 760.0 721.4 656.2

Total property and casualty insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,063.8 5,878.8 5,225.5Real estateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 82.2 616.1 319.8

6,146.0 6,494.9 5,545.3Corporate investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 61.9 63.9 55.4Realized investment gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 141.9 105.2 79.8

Total revenuesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $6,349.8 $6,664.0 $5,680.5

Income (loss) from continuing operations before income taxProperty and casualty insurance

UnderwritingPersonal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 168.1 $ 161.5 $ 57.9Standard commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (360.0) (312.3) (250.4)Specialty commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 133.5 198.0 191.9Reinsurance assumed ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 18.2 12.4

(58.4) 65.4 11.8Increase in deferred policy acquisition costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 51.8 75.7 42.5Other charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (17.4) (24.1) (24.0)

Underwriting income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (24.0) 117.0 30.3Investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 748.9 711.2 646.1Restructuring charge ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (40.0) Ì Ì

Total property and casualty insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 684.9 828.2 676.4Real estate loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3.5) (8.6) (235.9)

681.4 819.6 440.5Corporate income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 26.4 49.3 26.6Realized investment gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 141.9 105.2 79.8

Total income from continuing operations before income taxÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 849.7 $ 974.1 $ 546.9

57

December 31

1998 1997 1996

Assets (in millions)Property and casualty insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $18,954.2 $17,592.4 $16,577.9Real estateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 770.0 815.2 1,641.3

19,724.2 18,407.6 18,219.2CorporateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,108.2 1,424.7 959.8Adjustments and eliminations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (86.4) (216.7) (83.5)Net assets of discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 843.4

Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $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 thatoperate solely outside of the United States and branch oÇces of domestic subsidiaries. Prior to 1997, internationalbusiness 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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,116.6 $ 4,886.8 $ 4,145.7InternationalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 947.2 992.0 1,079.8

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 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 averagenumber of common shares outstanding during each year. Diluted earnings per share assumes the conversion of alloutstanding convertible debt and the maximum dilutive eÅect 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 pershare amounts)

Basic earnings per share:Income from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $707.0 $769.5 $486.2

Weighted average number of common shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 165.6 171.6 174.2

Income from continuing operations per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4.27 $ 4.48 $ 2.79

Diluted earnings per share:Income from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $707.0 $769.5 $486.2After-tax interest expense on 6% exchangeable subordinated notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 3.3 9.7

Income from continuing operations for computing diluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $707.0 $772.8 $495.9

Weighted average number of common shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 165.6 171.6 174.2Additional 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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 1.8 5.8Additional shares from assumed exercise of stock-based compensation awards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.0 2.8 1.6

Weighted average number of common shares and potential common shares assumed outstanding for computingdiluted earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 168.6 176.2 181.6

Income from continuing operations per diluted share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4.19 $ 4.39 $ 2.73

For additional disclosure regarding the stock-based compensation awards, see Note (10).

58

(18) Fair Values of Financial Instruments values of Ñxed maturities are principally a function ofcurrent interest rates. Care should be used in evaluating

Fair values of Ñnancial instruments are based on quotedthe signiÑcance of these estimated market values which

market prices where available. Fair values of Ñnancialcan Öuctuate based on such factors as interest rates,

instruments for which quoted market prices are not avail-inÖation, monetary policy and general economic

able are based on estimates using present value or otherconditions.

valuation techniques. Those techniques are signiÑcantlyaÅected by the assumptions used, including the discount

(iii) Fair values of equity securities are based onrates and the estimated amounts and timing of future cash

quoted market prices.Öows. In such instances, the derived fair value estimatescannot be substantiated by comparison to independent

(iv) Fair values of real estate mortgages and notesmarkets and are not necessarily indicative of the amountsreceivable are estimated individually as the value of thethat could be realized in immediate settlement of thediscounted future cash Öows of the loan, subject to theinstrument. Certain Ñnancial instruments, particularly in-estimated fair value of the underlying collateral. Thesurance contracts, are excluded from fair value disclosurecash Öows are discounted at rates based on a U.S.requirements.Treasury security with a maturity similar to the loan,

The methods and assumptions used to estimate the fair adjusted for credit risk.value of Ñnancial instruments are as follows:

(v) Long term debt consists of a term loan, mort-(i) The carrying value of short term investments

gages payable and long term notes. The fair value of theapproximates fair value due to the short maturities of

term loan approximates the carrying value becausethese investments.

such loan consists of variable-rate debt that reprices(ii) Fair values of Ñxed maturities with active mar- frequently. Fair values of mortgages payable are esti-

kets are based on quoted market prices. For Ñxed mated using discounted cash Öow analyses. Fair valuesmaturities that trade in less active markets, fair values of long term notes are based on prices quoted byare obtained from independent pricing services. Fair dealers.

The carrying values and fair values of Ñnancial instruments were as follows:December 31

1998 1997

Carrying Fair Carrying FairValue Value Value Value

(in millions)

Assets

Invested assets

Short term investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 344.2 $ 344.2 $ 725.1 $ 725.1

Fixed maturities (Note 4)

Held-to-maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,002.2 2,140.2 2,200.6 2,347.2

Available-for-sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,316.7 11,316.7 10,252.8 10,252.8

Equity securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,092.2 1,092.2 871.1 871.1

Real estate mortgages and notes receivable (Note 5)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 105.2 106.9 123.8 121.0

Liabilities

Long term debt (Note 8)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 607.5 635.2 398.6 402.8

59

(19) Comprehensive Income

In the Ñrst 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 deÑned as all changes in shareholders' equity, except those arising from transactions withshareholders. For the Corporation, comprehensive income includes net income, changes in unrealized appreciation ordepreciation of investments carried at market value and changes in foreign currency translation gains or losses. SFASNo. 130 only requires the presentation of additional information in the Ñnancial statements; therefore, the adoption ofSFAS No. 130 had no eÅect on the Corporation's Ñnancial 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 IncomeBefore Tax Before Tax Before TaxTax (Credit) Net Tax (Credit) Net Tax (Credit) Net

(in millions)Continuing operationsUnrealized holding gains (losses) arising

during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $164.3 $57.5 $106.8 $353.5 $123.7 $229.8 $ (22.5) $ (8.0) $ (14.5)Less: reclassiÑcation adjustment for

realized gains included in net income ÏÏÏ 141.9 49.7 92.2 105.2 36.8 68.4 79.8 27.8 52.0

Net unrealized gains (losses) recognized inother comprehensive incomeÏÏÏÏÏÏÏÏÏÏÏ 22.4 7.8 14.6 248.3 86.9 161.4 (102.3) (35.8) (66.5)

Foreign currency translation lossesÏÏÏÏÏÏÏÏ (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 ÏÏÏÏÏÏÏÏÏÏ $ 8.2 $ 3.9 4.3 $233.0 $ 81.7 151.3 $(117.4) $(38.7) (78.7)

Discontinued operations, netÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (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 seriesshall have such rights as Ñxed 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 recordas 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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 176,037,850 176,084,173 87,819,355

Two-for-one stock split ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 87,819,355

Shares issued upon exchange of long term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 2,440 480,464

Share activity under option and incentive plansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (48,648) (48,763) (35,001)

Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 175,989,202 176,037,850 176,084,173

Treasury stock

Balance, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,320,410 1,223,182 518,468

Two-for-one stock split ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì 518,468

Repurchase of sharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,203,000 12,940,500 1,700,000

Shares issued upon exchange of long term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì (5,314,125) Ì

Share activity under option and incentive plansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,801,034) (1,529,147) (1,513,754)

Balance, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,722,376 7,320,410 1,223,182

Common stock outstanding, end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 162,266,826 168,717,440 174,860,991

60

(c) The Corporation has a shareholder rights plan under which each shareholder has one quarter of a right for eachshare 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 aperson or group acquires 25% or more of the Corporation's common stock, or commences a tender or exchange oÅer that,upon consummation, would result in a person or group owning 25% or more of the Corporation's common stock. OnMarch 12, 1999, the Board of Directors approved the redemption of the rights, which were scheduled to expire onJune 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 attachon March 31, 1999. Under the new plan, each shareholder has one right for each share of common stock of theCorporation held. Each right entitles the holder to purchase from the Corporation one one-thousandth of a share ofSeries B Participating Cumulative Preferred Stock at an exercise price of $240. The rights attach to all outstanding sharesof common stock and trade with the common stock until the rights become exercisable. The rights are subject toadjustment 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 eitheracquires 20% or more of the outstanding shares of the Corporation's common stock or announces a tender or exchangeoÅer which, if consummated, would result in that person or group owning 20% or more of the outstanding shares of theCorporation's common stock.

In the event that any person or group acquires 20% or more of the outstanding shares of the Corporation's commonstock, each right will entitle the holder, other than such person or group, to purchase that number of shares of theCorporation'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, theCorporation is acquired in a merger or other business combination transaction or 50% or more of the Corporation's assetsor earning power is sold, each right will entitle the holder to purchase common stock of the acquiring company having avalue 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 suchperson or group acquires 50% or more of such stock, the Corporation may exchange all or part of the rights, other than therights owned by such person or group, for shares of the Corporation's common stock at an exchange ratio of one share ofcommon 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 theCorporation's outstanding common stock by a person or group. The rights will expire at the close of business onMarch 12, 2009, unless previously exchanged or redeemed by the Corporation.

(d) The Corporation's insurance subsidiaries are required to Ñle annual statements with insurance regulatoryauthorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis). For suchsubsidiaries, generally accepted accounting principles (GAAP) diÅer in certain respects from statutory accountingpractices.

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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $4,570.0 $2,836.9 $4,162.5 $2,596.0

Real estate subsidiaryÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 544.7 264.4

Corporate and eliminations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 529.4 1,230.2

$5,644.1 $5,657.1

61

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*ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $672.4 $663.1 $752.3 $652.4 $453.3 $560.2Discontinued life and health insurance operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì 26.5** 34.0

672.4 $663.1 752.3 $652.4 479.8 $594.2

Corporate and eliminations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 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 theCorporation 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 aÅectedby the availability of liquid assets held by the Corporation and by the dividend paying ability of its property and casualtyinsurance subsidiaries. Various state insurance laws restrict the Corporation's property and casualty insurance subsidiariesas to the amount of dividends they may pay to the Corporation without the prior approval of regulatory authorities. Therestrictions are generally based on net income and on certain levels of policyholders' surplus as determined in accordancewith statutory accounting practices. Dividends in excess of such thresholds are considered ""extraordinary'' and requireprior 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 theCorporation 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 deÑnitive merger agreement under whichit would acquire Executive Risk Inc. Executive Risk is a specialty insurance company oÅering directors and oÇcers, errorsand omissions and professional liability coverages. Executive Risk's gross and net written premiums for 1998 wereapproximately $500 million and $280 million, respectively.

The acquisition will be accounted for using the purchase method of accounting. The agreement provides thatExecutive Risk shareholders will receive 1.235 shares of the Corporation's common stock for each outstanding commonshare of Executive Risk. The agreement contemplates that approximately 13,730,000 shares of common stock of theCorporation will be issued to Executive Risk shareholders and approximately 2,300,000 shares of common stock of theCorporation will be reserved for issuance upon exercise of Executive Risk stock options. The total value of the transactionis expected to be approximately $850 million. Completion of the acquisition is subject to approval by Executive Riskshareholders 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 commercialspecialty insurer, for approximately $140 million. Closing of this transaction is subject to regulatory approvals which arepending.

62

Report of Independent Auditors

ERNST & YOUNG LLP787 Seventh AvenueNew 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, 1998and 1997, and the related consolidated statements of income, shareholders' equity, cash Öows and comprehensive incomefor each of the three years in the period ended December 31, 1998. These Ñnancial statements are the responsibility of theCorporation's management. Our responsibility is to express an opinion on these Ñnancial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the Ñnancial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in theÑnancial statements. An audit also includes assessing the accounting principles used and signiÑcant estimates made bymanagement, as well as evaluating the overall Ñnancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In our opinion, the Ñnancial statements referred to above present fairly, in all material respects, the consolidatedÑnancial position of The Chubb Corporation at December 31, 1998 and 1997 and the consolidated results of its operationsand its cash Öows for each of the three years in the period ended December 31, 1998 in conformity with generallyaccepted accounting principles.

February 24, 1999,except for Note 20(c), as to which the date isMarch 12, 1999

63

Quarterly Financial Data

Summarized unaudited quarterly Ñnancial data for 1998 and 1997 are shown below. In management's opinion, theinterim Ñnancial data contain all adjustments, consisting of normal recurring items, necessary to present fairly the resultsof 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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,587.3 $1,576.9 $1,597.6 $1,509.6 $1,593.2 $1,568.8 $1,571.7 $2,008.7Claims and expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,348.0 1,331.4 1,375.2 1,270.2 1,386.0 1,322.3 1,390.9 1,766.0Federal and foreign income tax ÏÏÏÏÏÏÏÏÏÏÏÏÏ 47.5 53.4 38.2 50.7 33.8 52.5 23.2 48.0

Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 191.8(a) $ 192.1 $ 184.2 $ 188.7 $ 173.4 $ 194.0 $ 157.6 $ 194.7

Basic earnings per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.14(a) $ 1.11 $ 1.10 $ 1.10 $ 1.05 $ 1.12 $ .98 $ 1.15

Diluted earnings per shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.12(a) $ 1.08 $ 1.08 $ 1.08 $ 1.04 $ 1.10 $ .95 $ 1.13

Underwriting ratiosLosses to premiums earned ÏÏÏÏÏÏÏÏÏÏÏÏÏ 62.8% 63.9% 67.0% 63.3% 67.4% 65.3% 68.1% 65.5%Expenses to premiums written ÏÏÏÏÏÏÏÏÏÏ 33.3 32.4 33.3 32.0 33.8 32.2 33.6 32.9

Combined ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 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 eÅect of a $40.0 million restructuring charge.

64

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 quarterlydividends declared for each quarter of 1998 and 1997.

1998

First Second Third FourthQuarter Quarter Quarter Quarter

Common stock prices

HighÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $81.44 $82.63 $88.25 $73.38

Low ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71.00 73.31 62.50 57.00

Dividends declaredÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .31 .31 .31 .31

1997

First Second Third FourthQuarter Quarter Quarter Quarter

Common stock prices

HighÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $62.25 $67.63 $71.75 $78.13

Low ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 53.00 51.25 65.56 65.88

Dividends declaredÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .29 .29 .29 .29

At March 8, 1999, there were approximately 7,650 common shareholders of record.

65

Chubb & Son, a division of Federal Insurance CompanyManaging Directors

EMELIA M. ACCARDI FABIAN J. FONDRIEST DORIS M. JOHNSON DEAN R. O'HARE

JOHN L. ANGERAMI DAVID S. FOWLER DAVID B. KELSO MICHAEL O'REILLY

JOEL D. ARONCHICK BRICE R. GAMBER JOHN F. KIRBY, JR. RICHARD H. ORT

DOUGLAS A. BATTING GREGORY GEORGIEFF PAUL J. KRUMP GARY J. OWCAR

ALAN C. BROWN CHRIS J. GILES CHARLES M. LUCHS GARY C. PETROSINO

MALCOLM B. BURTON JOHN H. GILLESPIE MICHAEL J. MARCHIO ROBERT RUSIS

TERRENCE W. CAVANAUGH BAXTER W. GRAHAM GEORGE F. MARTS TIMOTHY J. SZERLONG

ROBERT C. COX SYLVESTER GREEN GERARDO G. MAURIZ WILLIAM J. TABINSKY

JIMMY R. DEADERICK DONNA M. GRIFFIN CHARLES G. MCCAIG JANICE M. TOMLINSON

JOHN J. DEGNAN WALTER P. GUZZO DONALD E. MERGEN GARY TRUST

GAIL E. DEVLIN DAVID G. HARTMAN ELLEN J. MOORE GARY J. TULLY

WILLIAM J. FALSONE JACK HICKS THOMAS F. MOTAMED WILLIAM P. TULLY

GEORGE R. FAY JAYNE E. HILL WILLIAM E. NAMACHER

OÇcers

Chairman TIMOTHY M. SHANNAHAN TIMOTHY R. DIVELEY MICHAEL W. O'MALLEY

DEAN R. O'HARE JOHN M. SWORDS ALAN G. DRISCOLL KATHLEEN A. ORENCZAK

TIMOTHY J. SZERLONG FRANCES E. DUGAN JOAN L. O'SULLIVANPresident

WILLIAM J. TABINSKY MARK D. DUGLE JOHN J. OWENSJOHN J. DEGNAN

BRUCE W. THORNE LESLIE L. EDSALL DANIEL A. PACICCO

Executive Vice Presidents JANICE M. TOMLINSON JEFFREY A. EICHHORN NANCY D. PATE-NELSON

DOUGLAS A. BATTING GARY TRUST KATHLEEN S. ELLIS ROBERT A. PATULO

DAVID S. FOWLER GARY J. TULLY TIMOTHY T. ELLIS JANE M. PETERSON

SYLVESTER GREEN WILLIAM P. TULLY MICHELE N. FINCHER STEVEN M. PICKETT

DAVID B. KELSO RICHARD V. WERNER PHILIP W. FISCUS MARJORIE D. RAINES

CHARLES M. LUCHS THOMAS V. FITZPATRICK ALAN R. RILEYSenior Vice President and

THOMAS F. MOTAMED FREDERICK W. GAERTNER FRANK E. ROBERTSONChief Accounting OÇcer

MICHAEL O'REILLY SUSAN A. GAFFNEY EDWARD F. ROCHFORDHENRY B. SCHRAM

THOMAS J. GANTER WILLIAM C. ROGERS, JR.Senior Vice Presidents

Senior Vice President and JAMES E. GARDNER JAMES ROMANELLIEMELIA M. ACCARDI

Chief Actuary WALLACE W. GARDNER, JR. EVAN J. ROSENBERGGEORGE N. ALLPORT

DAVID G. HARTMAN NED I. GERSTMAN RUTH M. RYANJOHN L. ANGERAMI

GERALD T. GIESLER RICHARD M. SARGENT, JR.JOEL D. ARONCHICK Senior Vice Presidents and

ANN T. GINN STEVEN SCHULMANGEORGE F. BREUER Actuaries

PERRY S. GRANOF ANTHONY W. SHINEJAMES P. BRONNER JAMES E. BILLER

SUZANNE V. HANEY RICHARD I. SIMONALAN C. BROWN ADRIENNE B. KANE

WILLIAM W. HARWOOD MARY N. SKLARSKIR. JEFFERY BROWN MICHAEL F. MCMANUS

GARY L. HEARD MICHAEL A. SLORMALCOLM B. BURTON

Senior Vice President and MICHAEL W. HEEMBROCK JOHN P. SMITHJOHN F. CASELLA

General Counsel MAUREEN Y. HIGDON VICTOR J. SORDILLOTERRENCE W. CAVANAUGH

ROBERT RUSIS KIM D. HOGREFE RICHARD W. SPAULDINGMEGAN G. COLWELL

ROBERT S. HOLLEY, JR. EDWARD G. SPELLROBERT C. COX Senior Vice President and

MICHAEL S. HOWEY WILLIAM M. STAATSROBERT F. DADD Assistant General Counsel

PATRICIA A. HURLEY PAUL M. STACHURAD. SCOTT DALTON WILLIAM J. MURRAY

JAMES S. HYATT MICHAEL E. STAPLETONJAMES A. DARLING

Senior Vice President and RICHARD A. IOSET VICTOR C. STEWMANJIMMY R. DEADERICK

Secretary GERALD A. IPPOLITO PAMELA L. STRADERWILLIAM J. FALSONE

HENRY G. GULICK ROBERT A. IVEY, III DIANE T. STREHLEGEORGE R. FAY

PATRICIA L. JACKSON LYNNE B. STYPLEEDWARD J. FERNANDEZ Senior Vice President and

ALEJANDRO JIMENEZ ROBERT W. TESCHKEFABIAN J. FONDRIEST Treasurer

DAVID L. KEENAN CLIFTON E. THOMASMICHAEL G. FURGUESON PHILIP J. SEMPIER

TIMOTHY J. KELLY PETER J. THOMPSONBRICE R. GAMBER

Vice Presidents JOHN J. KENNEDY LEROY TOPPSGREGORY GEORGIEFF

VALERIE A. AGUIRRE JEFFREY P. KING RICHARD E. TOWLECHRIS J. GILES

JAMES D. ALBERTSON MARGARET A. KLOSE ROGER D. TRACHSELJOHN H. GILLESPIE

JAMES E. ALTMAN MARK P. KORSGAARD WALTER R. TRIPPEBAXTER W. GRAHAM

WILLIAM D. ARRIGHI LINDA A. KORTLANDT PETER J. TUCKERLAWRENCE GRANT

KIRK O. BAILEY KATHLEEN W. KOUFACOS KATHERINE L. TUSADONNA M. GRIFFIN

DOUGLAS W. BAILLIE ERIC T. KRANTZ KARL J. UPHOFFWALTER P. GUZZO

J. MICHAEL BALDWIN JOHN B. KRISTIANSEN RUSSELL A. VAN HOUTENJACK HICKS

DONALD E. BARB JOHN A. KUHN RICHARD VREELANDJAYNE E. HILL

JOHN L. BAYLEY KATHLEEN S. LANGNER CHARLES J. WALKONISDORIS M. JOHNSON

ARTHUR J. BEAVER KEVIN J. LEIDWINGER HARRY C. WALLACEJOHN F. KIRBY, JR.

JON C. BIDWELL DEBORAH A. LEITCH SUSAN C. WALTERMIREPAUL J. KRUMP

STANLEY V. BLOOM LEOPOLD H. LEMMELIN, II RYAN L. WATSONKIRK H. LARSEN

JULIA T. BOLAND PAUL L. LEWIS CAROLE J. WEBERDONALD B. LAWSON

CHARLES A. BORDA ROBERT A. LIPPERT JAMES L. WESTROBERT W. LINGEMAN

THOMAS B. BREINER FREDERICK W. LOBDELL ERROL L. WHISLERMICHAEL J. MARCHIO

DEBORAH L. BRONSON BEVERLY J. LUEHS W. JAMES WHITE, JR.GEORGE F. MARTS

PATRICIA A. BUBB AMELIA C. LYNCH DAVID B. WILLIAMSROBERT A. MARZOCCHI

GERARD M. BUTLER HELEN A. MAKSYMIUK JEREMY N. WINTERGERARDO G. MAURIZ

ROBERT E. CALLARD MICHAEL L. MARINARO ALAN J. WONSOWSKICHARLES G. MCCAIG

MICHAEL J. CASELLA RICHARD D. MAUKJENNIFER B. MCELDOWNEY Vice Presidents and

RICHARD A. CIULLO JAMES C. MCCARTHYDONALD E. MERGEN Actuaries

RAYMOND H. CONDON THOMAS J. MCCORMACKELLEN J. MOORE WALTER B. BARNES

WILLIAM T. CONWAY LISA M. MCGEEHAROLD L. MORRISON, JR. LINDA M. GROH

JOHN P. COONAN JUDY MERANTEWILLIAM E. NAMACHER

THOMAS R. CORNWELL JOSEPH G. MERTEN Vice President andRANA NIKPOUR

ROBERT H. COURTEMANCHE JOHN MOELLER CounselRICHARD H. ORT

WILLIAM S. CROWLEY FRANK MORELLI LOUIS NAGYGARY J. OWCAR

ANDREW T. CUNNINGHAM RICHARD P. MUNSONJOSEPH V. PERNO Vice Presidents and

GARDNER R. CUNNINGHAM, JR. SUSAN S. MURPHYGARY C. PETROSINO Associate Counsels

KENNETH L. DAVIDSON, JR. KEVIN M. NEARYPATRICK A. PISANO PETER K. BARBER

GLENN R. DAY DOUGLAS A. NORDSTROMSTEVEN R. POZZI DONNA M. LOMBARDI

GARY R. DELONG JOSEPH C. O'DONNELLDINO ROBUSTO

PARKER W. RUSH

Chubb Insurance Company of Canada

Directors

DIANE P. BAXTER STUART K. MANN DEAN R. O'HARE CRAWFORD W. SPRATT

BARRY T. GRANT THOMAS F. MOTAMED PETER B. SMITH JANICE M. TOMLINSON

D. UDO NIXDORF

OÇcers

Chairman and President Vice Presidents SCOTT GUNTER Secretary

JANICE M. TOMLINSON JEAN BERTRAND JAMES V. NEWMAN CRAWFORD W. SPRATT

LEEANN BOYD RICHARD F. NOBLESSenior Vice PresidentsJAMES CALLAHAN GEOFFREY D. SHIELDSDIANE P. BAXTERRONEE GERMAND. UDO NIXDORF

Chubb Insurance Company of Europe, S.A.

Directors

JOEL D. ARONCHICK WILLIAM E. NAMACHER KEVIN O'SHIEL SIR DAVID G. SCHOLEY, CBECECILE COUNE DEAN R. O'HARE

OÇcers

President Senior Vice President, Vice Presidents KAREN MORRIS

JOEL D. ARONCHICK General Counsel and JANIC BAUDRIHAYE STEPHEN OAKES

Company Secretary JOHN BOARDMAN MIKE O'DEASenior Vice PresidentsLOUIS NAGY MARION BROWN JALIL REHMANDANIEL ANBER

BERNHARD BUDDE BOGISLAV GRAF VON SCHWERINJ. MICHAEL BALDWIN Senior Vice President and CLIVE CHIPPERFIELD ERIC SIDGWICKROSS BUCHMUELLER Chief Financial OÇcer KENNETH CHUNG JOHN SIMSCECILE COUNE KEVIN O'SHIEL CHRISTIAN DE HERICOURT DAVID STEVENSGREGORY GEORGIEFFCAROLYN HAMILTON ROBERT TROTTCHRIS J. GILES Senior Vice President andERIC HASSEL BERT VAN DER VOSSENCHRISTOPHER HAMILTON ActuaryJERRY HOURIHAN ALBERT VAN KERCKHOVENCARLOS MERINO MICHAEL F. MCMANUSHORST IHLAS PAOLO VERGANIJOHN REDMONDKILLIAN MCDERMOTT WALTER WASHINGTONPAUL VAN PELT

WOLFGANG WEISTHOMAS WARDENJEREMY N. WINTERWITOLD WILDEN

Federal Insurance Company

OÇcers

Chairman and President Senior Vice President LAWRENCE GRANT ERIC M. STEPHANUS

and General CounselDEAN R. O'HARE RICK A. GRAY STEPHEN TASY

ROBERT RUSIS MICHAEL S. HOWEY MARK VON HAARTMANSenior Vice Presidents JAMES E. KERNS DOREEN YIP

Vice PresidentsROGER C.P. BROOKHOUSE MARK T. LINGAFELTERDOUGLAS A. BATTING Vice President andJOHN J. DEGNAN AMELIA C. LYNCHTHOMAS B. BREINER ActuaryDAVID S. FOWLER ROBERT A. MARZOCCHIMALCOLM B. BURTON DAVID G. HARTMANCHRIS J. GILES MELISSA S. MASLESROBERT E. CALLARDIAN LANCASTER GERARDO G. MAURIZ Vice President andMICHAEL J. CASELLADONALD E. MERGEN SecretaryMARK A. MILEUSNICFLORA CHINMICHAEL O'REILLY HENRY G. GULICKGLENN A. MONTGOMERYGAIL E. DEVLINGARY J. OWCAR MARJORIE D. RAINESRICK J. ELDRIDGE Vice President andGARY C. PETROSINO FRANK E. ROBERTSON TreasurerIAN R. FARAGHER

PARKER W. RUSH PHILIP J. SEMPIERBRANT W. FREE, JR.HENRY B. SCHRAM

BRICE R. GAMBER

Subsidiaries AÇliates

Property and Casualty Insurance ASSOCIATED AVIATION UNDERWRITERS, INC.

CHUBB INSURANCE COMPANY (THAILAND), LIMITEDFEDERAL INSURANCE COMPANY

VIGILANT INSURANCE COMPANYDividend Agent, Transfer Agent and Registrar

GREAT NORTHERN INSURANCE COMPANY

FIRST CHICAGO TRUST COMPANY OF NEW YORKPACIFIC INDEMNITY COMPANY

P.O. BOX 2500NORTHWESTERN PACIFIC INDEMNITY COMPANY

JERSEY CITY, NJ 07303-2500TEXAS PACIFIC INDEMNITY COMPANY

TELEPHONE 800-317-4445CHUBB CUSTOM INSURANCE COMPANY

COMPANY CODE 1816CHUBB INDEMNITY INSURANCE COMPANY

CHUBB INSURANCE COMPANY OF NEW JERSEYStock Listing

CHUBB NATIONAL INSURANCE COMPANY

THE COMMON STOCK OF THE CORPORATIONCHUBB ATLANTIC INDEMNITY, LTD.IS TRADED ON THE NEW YORK STOCK EXCHANGECHUBB INSURANCE COMPANY OF AUSTRALIA, LIMITED

UNDER THE SYMBOL CB.CHUBB INSURANCE COMPANY OF CANADA

CHUBB INSURANCE COMPANY OF EUROPE, S.A.The Chubb Corporation

CHUBB ARGENTINA DE SEGUROS, S.A.15 MOUNTAIN VIEW ROAD, P.O. BOX 1615

CHUBB DO BRASIL COMPANHIA DE SEGUROSWARREN, NJ 07061-1615

CHUBB DE COLOMBIA COMPAN A DE SEGUROS S.A.TELEPHONE (908) 903-2000

CHUBB DE CHILE COMPAN A DE SEGUROS GENERALES S.A.http://www.chubb.com

CHUBB DE MEXICO, COMPANIA AFIANZADORA, S.A. DE S.V.

CHUBB DE MEXICO, COMPANIA DE SEGUROS, S.A. DE S.V.

PT ASURANSI CHUBB INDONESIA

CHUBB DE VENEZUELA COMPANIA DE SEGUROS C.A.

Property and Casualty Insurance Underwriting Managers

CHUBB & SON, A DIVISION OF FEDERAL INSURANCE COMPANY

CHUBB CUSTOM MARKET, INC.

CHUBB MULTINATIONAL MANAGERS, INC.

Reinsurance

CHUBB RE, INC.

Consulting Ì Claims Administration Ì Services

CHUBB CUSTOMER CENTER, INC.

CHUBB SERVICES CORPORATION

Insurance Agency

PERSONAL LINES INSURANCE BROKERAGE, INC.

Real Estate

BELLEMEAD DEVELOPMENT CORPORATION

Financing

CHUBB CAPITAL CORPORATION

Registered Investment Adviser

CHUBB ASSET MANAGERS, INC.

Computer Training and StaÇng

CHUBB COMPUTER SERVICES, INC.

THE CHUBB INSTITUTE, INC.

The Chubb CorporationThe Chubb Corporation15 Mountain View Road, P.O. Box 1615

Warren, New Jersey 07061-1615

www.chubb.com

15 Mountain View Road, P.O. Box 1615

Warren, New Jersey 07061-1615

www.chubb.com