Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS
GENERAL
The Chubb Corporation (the Corporation) was incorporated as a business corporation under the laws of the State of New Jersey in June 1967. The Corporation is a holding company and is principally engaged, through subsidiaries, in three industries: property and casualty insurance, life and health insurance and real estate development. The Corporation and its subsidiaries employed approximately 11,200 persons on December 31, 1994. Revenues, income from operations before income tax and identifiable assets for each industry segment for the three years ended December 31, 1994 are included in Note (16) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1994 Annual Report to Shareholders.
The property and casualty insurance subsidiaries provide insurance coverages on a direct and assumed basis, principally in the United States, Canada, Europe, Australia and the Far East. The life and health insurance and real estate development subsidiaries have no international operations. Revenues, income from operations before income tax and identifiable assets of the property and casualty insurance subsidiaries by geographic area for the three years ended December 31, 1994 are included in Note (17) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1994 Annual Report to Shareholders.
PROPERTY AND CASUALTY INSURANCE GROUP
The Property and Casualty Insurance Group (the Group) is composed of Federal Insurance Company (Federal), Pacific Indemnity Company (Pacific Indemnity), Vigilant Insurance Company (Vigilant), Great Northern Insurance Company (Great Northern), Chubb Insurance Company of New Jersey (Chubb New Jersey), Chubb Custom Insurance Company (Chubb Custom), Chubb National Insurance Company (Chubb National), Chubb Indemnity Insurance Company (Chubb Indemnity), Texas Pacific Indemnity Company, Northwestern Pacific Indemnity Company, Chubb Insurance Company of Canada, Chubb Insurance Company of Europe, S.A., Chubb Insurance Company of Australia, Limited and Chubb Atlantic Indemnity Ltd.
The Group presently underwrites most forms of property and casualty insurance. All members of the Group write non-participating policies. Several members of the Group also write participating policies, particularly in the workers' compensation class of business, under which dividends are paid to the policyholders.
Premiums Written
An analysis of the Group's premiums written during the past three years is shown in the following table.
--------------- (a) Intercompany items eliminated.
The net premiums written during the last five years for major insurance classes of the Group are incorporated by reference from page 16 of the Corporation's 1994 Annual Report to Shareholders.
One or more members of the Group are licensed and transact business in each of the 50 states of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, Canada and parts of Europe, Australia and the Far East. In 1994, approximately 87% of the Group's direct business was produced in the United States, where the Group's businesses enjoy broad geographic distribution with a particularly strong market presence in the Northeast. The four states
accounting for the largest amounts of direct premiums written were New York with 14%, California with 12%, New Jersey with 6% and Pennsylvania with 5%. No other state accounted for 5% or more of such premiums. Approximately 4% of the Group's direct premiums written were produced in Canada.
Underwriting Results
A frequently used industry measurement of property and casualty insurance underwriting results is the combined loss and expense ratio. This ratio is the sum of the ratio of incurred losses and related loss adjustment expenses to premiums earned (loss ratio) plus the ratio of underwriting expenses to premiums written (expense ratio) after reducing both premium amounts by dividends to policyholders. When the combined ratio is under 100%, underwriting results are generally considered profitable; when the combined ratio is over 100%, underwriting results are generally considered unprofitable. Investment income, deferred policy acquisition costs, other non-underwriting income or expense and income taxes are not reflected in the combined ratio. The profitability of property and casualty insurance companies depends on income from both underwriting operations and investments.
The net premiums and the loss, expense and combined loss and expense ratios of the Group for the last five years are shown in the following table.
The 1993 ratios include the effects of a $675 million increase in unpaid claims related to an agreement for the settlement of asbestos-related litigation and a $125 million return premium to the Group related to the commutation of a medical malpractice reinsurance agreement. Excluding the effects of these items, the loss ratio, the expense ratio and the combined loss and expense ratio were 65.5%, 33.5% and 99.0%, respectively, for the year 1993 and 65.8%, 33.9% and 99.7%, respectively, for the five years ended December 31, 1994.
The combined loss and expense ratios during the last five years for major classes of the Group's business are incorporated by reference from page 16 of the Corporation's 1994 Annual Report to Shareholders.
Another frequently used measurement in the property and casualty insurance industry is the ratio of statutory net premiums written to policyholders' surplus. At December 31, 1994 and 1993, such ratio for the Group was 2.11 and 1.97, respectively.
Producing and Servicing of Business
In the United States and Canada, the Group is represented by approximately 3,300 independent agents and accepts business on a regular basis from an estimated 400 insurance brokers. In most instances, these agents and brokers also represent other companies which compete with the Group. The offices maintained by the Group assist these agents and brokers in producing and servicing the Group's business. In addition to the administrative offices of Chubb & Son Inc. in Warren, New Jersey, the Group operates 6 zonal management offices and 63 branch and service offices in the United States and Canada.
The Group's overseas business is developed by its foreign agents and brokers through local branch offices of the Group and by its United States and
Canadian agents and brokers. Overseas business is also obtained from foreign treaty reinsurance assumed principally, but not exclusively, from the Sun Alliance Group plc (Sun Group). In conducting its overseas business, the Group reduces the risks relating to currency fluctuations by maintaining investments in those foreign currencies in which the Group transacts business, with characteristics similar to the liabilities in those currencies. The net asset or liability exposure to the various foreign currencies is regularly reviewed.
Business for the Group is also produced through participation in a number of underwriting pools and syndicates including, among others, Associated Aviation Underwriters, Industrial Risk Insurers, London Accident Reinsurance Group, American Disability Reinsurance Underwriters Syndicate, American Excess Insurance Association, Cargo Reinsurance Association and American Cargo War Risk Reinsurance Exchange. Such pools and syndicates provide underwriting capacity for risks which an individual insurer cannot prudently underwrite because of the magnitude of the risk assumed or which can be more effectively handled by one organization due to the need for specialized loss control and other services.
Reinsurance
In accordance with the normal practice of the insurance industry, the Group assumes and cedes reinsurance with other insurers or reinsurers. These reinsurance arrangements provide greater diversification of business and minimize the Group's maximum net loss arising from large risks or from hazards of catastrophic potentialities.
A large portion of the Group's reinsurance is effected under contracts known as treaties under which all risks meeting prescribed criteria are automatically covered. A substantial portion of the Group's ceded reinsurance is on a quota share basis with a subsidiary of the Sun Group, which is rated A++ by A.M. Best. Additional information related to the Group's ceded reinsurance with the subsidiary of the Sun Group is included in Note (12) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1994 Annual Report to Shareholders. Most of the Group's remaining treaty reinsurance arrangements consist of excess of loss and catastrophe contracts with other insurers or reinsurers which protect against a specified part or all of certain types of losses over stipulated amounts arising from any one occurrence or event. In certain circumstances, reinsurance is also effected by negotiation on individual risks. The amount of each risk retained by the Group is subject to maximum limits which vary by line of business and type of coverage. Retention limits are continually reviewed and are revised periodically as the Group's capacity to underwrite risks changes. Reinsurance contracts do not relieve the Group of its obligation to the policyholders.
The collectibility of reinsurance is subject to the solvency of the reinsurers. The Group is selective in regard to its reinsurers, placing reinsurance with only those reinsurers with strong balance sheets and superior underwriting ability. The Group monitors the financial strength of its reinsurers on an ongoing basis. As a result, uncollectible amounts have not been significant.
The catastrophe reinsurance market suffered large losses in recent years, particularly in 1992. As a result, the catastrophe reinsurance market's capacity was substantially reduced in 1993 and the cost of available coverage rose significantly. In response, effective May 1, 1993, the Group changed its principal catastrophe reinsurance coverage for individual catastrophic events from approximately 87% of losses between $40 million and $160 million to approximately 40% of losses between $85 million and $210 million. Effective May 1, 1994, the Group increased its coverage to approximately 50% of losses between $85 million and $290 million. The effect of the coverage changes on the Group's future results of operations will depend on the severity of future catastrophic events.
The severity of recent catastrophes, particularly Hurricane Andrew in 1992 and the California earthquake in 1994, has demonstrated to insurers, including the Group, that most assumptions on the damage potential of catastrophes have been too optimistic. The Group maintains records showing concentrations of risks in catastrophe prone areas such as California (earthquakes and brush fires) and the Southeast coast of the United States (hurricanes). The Group continually
assesses its concentration of underwriting exposures in catastrophe prone areas and develops strategies to manage its exposure to catastrophic events.
Unpaid Claims and Claim Adjustment Expenses and Related Amounts Recoverable from Reinsurers
Insurance companies are required to establish a liability in their accounts for the ultimate costs (including claim adjustment expenses) of claims which have been reported but not settled and of claims which have been incurred but not reported. Insurance companies are also required to report as assets the portion of such liability that will be recovered from reinsurers.
The process of establishing the liability for unpaid claims and claim adjustment expenses is an imprecise science subject to variables that are influenced by both internal and external factors. This is true because claim settlements to be made in the future will be impacted by changing rates of inflation (particularly medical cost inflation) and other economic conditions, changing legislative, judicial and social environments and changes in the Group's claim handling procedures. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss to the Group and the settlement of the loss. Approximately 50% of the Group's unpaid claims and claim adjustment expenses are provided for IBNR--claims which have not yet been reported to the Group, some of which were not yet known to the insured, and future development on reported claims. In spite of this imprecision, financial reporting requirements dictate that insurance companies report a single amount as the estimate of unpaid claims and claim adjustment expenses as of each evaluation date. These estimates are continually reviewed and updated. Any resulting adjustments are reflected in current operating results.
The Group's estimates of losses for reported claims are established judgmentally on an individual case basis. Such estimates are based on the Group's particular experience with the type of risk involved and its knowledge of the circumstances surrounding each individual claim. These estimates are reviewed on a regular basis or as additional facts become known. The reliability of the estimation process is monitored through comparison with ultimate settlements.
The Group's estimates of losses for unreported claims are principally derived from analyses of historical patterns of the development of paid and reported losses by accident year for each class of business. This process relies on the basic assumption that past experience, adjusted for the effects of current developments and likely trends, is an appropriate basis for predicting future events. For certain classes of business where anticipated loss experience is less predictable because of the small number of claims and/or erratic claim severity patterns, the Group's estimates are based on both expected and actual reported losses. Salvage and subrogation estimates are developed from patterns of actual recoveries.
The Group's estimates of unpaid claim adjustment expenses are based on analyses of the relationship of projected ultimate claim adjustment expenses to projected ultimate losses for each class of business. Claims staff has discretion to override these expense formulas where judgment indicates such action is appropriate.
The Group's estimates of reinsurance recoverable related to reported and unreported claims and claim adjustment expenses, which represent the portion of such liabilities that will be recovered from reinsurers, are determined in a manner consistent with the liabilities associated with the reinsured policies.
The anticipated effect of inflation is implicitly considered when estimating liabilities for unpaid claims and claim adjustment expenses. Estimates of the ultimate value of all unpaid claims are based in part on paid losses, which reflect actual inflation. Inflation is also reflected in estimates established on reported open claims which, when combined with paid losses, form another basis to derive estimates of reserves for all open claims. There is no precise method for subsequently evaluating the adequacy of the consideration given to inflation, since claim settlements are affected by many factors.
The following table provides a reconciliation of the beginning and ending liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, and a reconciliation of the ending net liability to the corresponding liability on a gross basis for the years ended December 31, 1994, 1993 and 1992.
In 1993, Pacific Indemnity entered into a global settlement agreement with Continental Casualty Company (a subsidiary of CNA Financial Corporation), Fibreboard Corporation, and attorneys representing claimants against Fibreboard for all future asbestos-related bodily injury claims against Fibreboard. This settlement relates to an insurance policy issued to Fibreboard by Pacific Indemnity in 1956. Pacific Indemnity and Continental Casualty reached a separate agreement for the handling of all pending asbestos-related bodily injury claims against Fibreboard. At the time the settlement was negotiated, the Group increased its loss reserves by $675 million. The Fibreboard settlement is further discussed in Item 7 of this report on pages 23 and 24.
In 1994, the estimated liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, as established at the previous year-end was redundant by $29.7 million. This compares with unfavorable development of $664.8 million during 1993 and favorable development of $27.6 million during 1992. Such redundancies and deficiency were reflected in the Group's operating results in these respective years. Excluding the $675 million increase in unpaid claims related to the Fibreboard settlement, the Group experienced favorable development of $10.2 million in 1993. Each of the past three years benefited from favorable claim frequency and severity trends for certain liability classes; this was offset each year in varying degrees by increases in claims and claim adjustment expenses relating to asbestos and toxic waste claims.
Unpaid claims and claim adjustment expenses, net of reinsurance recoverable, increased 7% in 1994, after increases of 22% and 11% in 1993 and 1992, respectively. The significant increase in 1993 was primarily due to the $675 million increase related to the Fibreboard settlement. Excluding this $675 million, unpaid claims and claim adjustment expenses increased by 10% in 1993. Substantial reserve growth has occurred each year in those liability coverages, primarily excess liability and executive protection, that are characterized by delayed loss reporting and extended periods of settlement. These coverages have become a more significant portion of the Group's business in recent years. The Group continues to emphasize early and accurate reserving, inventory management of claims and suits, and control of the dollar value of settlements. The number of outstanding claims at year-end 1994 was approximately 9% higher than the number at year-end 1993, due in part to a shift in the Group's book of business toward one with more frequent claims.
The uncertainties relating to unpaid claims, particularly for asbestos and toxic waste claims on insurance policies written many years ago, are discussed in Item 7 of this report on pages 23 through 26.
The following table provides a reconciliation of the beginning and ending liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, related to asbestos and toxic waste claims for the years ended December 31, 1994, 1993 and 1992. Reinsurance recoveries related to asbestos and toxic waste claims are not significant.
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(a) Prior to the Fibreboard settlement in 1993, such reserves were not classified as specific reserves for asbestos claims since it was management's belief that doing so would increase the demands of plaintiffs' attorneys. The $300 million of IBNR reserves were provided as follows: $40 million in 1992, $160 million in 1991, $50 million in 1990, $25 million in 1989 and $25 million in 1988.
(b) Includes $35.1 million, $33.0 million and $76.5 million in 1994, 1993 and 1992, respectively, related to Fibreboard.
(c) Includes $1,049.4 million, $1,218.5 million and $220.5 million at December 31, 1994, 1993 and 1992, respectively, related to Fibreboard. The 1992 amount, adjusted to include the $300 million of IBNR reserves not classified as specific reserves for asbestos claims, was $520.5 million.
There were approximately 3,400 asbestos claims outstanding at December 31, 1994, 1993 and 1992. In 1994, approximately 1,800 claims were opened and the same number were closed. In 1993, approximately 1,000 claims were opened and the same number were closed. In 1992, approximately 1,500 claims were opened while 2,700 were closed. Generally, an asbestos claim is established for each lawsuit against an insured where potential liability has been determined to exist under a policy issued by a member of the Group. However, when multiple insurers respond to one or more lawsuits involving an insured and a member of the Group is not the principal insurer in directing the litigation, generally, all asbestos litigation involving that insured is counted as one claim. Therefore, a counted claim can have from one to thousands of claimants. As a result, management does not believe the above claim count data is meaningful for analysis purposes. Indemnity payments per claim have varied over time due primarily to wide variations in insureds, policy terms and types of claims. Management cannot predict whether indemnity payments per claim will increase, decrease or remain the same.
There were approximately 600 toxic waste claims outstanding at December 31, 1994, 1993 and 1992. Approximately 300 claims were opened in 1994, 1993 and 1992. There were approximately 300 claims closed in 1994 and 1993 and 200 claims closed in 1992. Generally, a toxic waste claim is established for each lawsuit, or alleged equivalent, against an insured where potential liability has been determined to exist under a policy issued by a member of the Group. Because indemnity payments to date for toxic waste claims have not been significant in the aggregate and have varied from claim to claim, management cannot determine whether past claims experience will prove to be representative of future claims experience.
During 1984, the Group discontinued writing medical malpractice business. The Group entered into a stop loss reinsurance agreement, effective year-end 1985, which provides that the reinsurer will pay up to $285 million of losses and allocated loss adjustment expenses for this discontinued class of business in excess of the initial $225 million to be paid by the Group subsequent to December 31, 1985. The cost of this reinsurance was $173.5 million. Since the
effective date of this agreement, the Group has paid an aggregate of $259.4 million of medical malpractice losses and loss adjustment expenses and has recovered the amount in excess of $225 million from the reinsurer. The amount of paid losses is approximately 55% of what was anticipated at the time the business was reinsured nine years ago.
The reinsurance agreement includes a commutation provision under which the Group has an option to reassume the remaining liability of the reinsurer as of December 31, 1995 and receive payment at that time of an amount determined by a formula based on experience under the agreement. In 1993, as a result of the favorable loss experience, the medical malpractice gross liability for unpaid claims and claim adjustment expenses and the related reinsurance recoverable under this agreement were each reduced by approximately $125 million. At the same time, the Group announced its intention to exercise the commutation option under the agreement which will result in a payment by the reinsurer to the Group of approximately $190 million at year-end 1995 and a concurrent reduction in reinsurance recoverable from the reinsurer of approximately $65 million. The difference of $125 million represents a return premium to the Group and was recognized as such in 1993.
The table on page 9 presents the subsequent development of the estimated year-end liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, for the ten years prior to 1994. The top line of the table shows the estimated liability for unpaid claims and claim adjustment expenses recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and loss adjustment expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Group.
The upper section of the table shows the reestimated amount of the previously recorded net liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims for each individual year. The increase or decrease is reflected in the current year's operating results. The "cumulative deficiency (redundancy)" as shown in the table represents the aggregate change in the reserve estimates from the original balance sheet dates through December 31, 1994. The amounts noted are cumulative in nature; that is, an increase in a loss estimate that related to a prior period occurrence generates a deficiency in each intermediate year. For example, a deficiency recognized in 1993 relating to losses incurred prior to December 31, 1984, such as that related to the Fibreboard settlement, would be included in the cumulative deficiency amount for each year in the period 1984 through 1992. Yet, the deficiency would be reflected in operating results only in 1993. The effect of changes in estimates of the liabilities for claims occurring in prior years on income before income taxes in each of the past three years is shown in the reconciliation table on page 6.
A substantial portion of the cumulative deficiencies in liability estimates from 1984 through 1992 relates to additional provisions for asbestos and toxic waste claims, particularly the Fibreboard settlement. The cumulative deficiencies in the 1984 and 1985 columns were also due to additional provisions for medical malpractice claims as well as the substantially increased severity and complexity of liability claims. The cumulative deficiencies experienced relating to asbestos and toxic waste claims were, to varying degrees, the result of: (1) an increase in the actual number of claims filed; (2) an increase in the number of unasserted claims estimated; (3) an increase in the severity of actual and unasserted claims; and (4) an increase in litigation costs associated with such claims.
Conditions and trends that have affected development of the liability for unpaid claims and claim adjustment expenses in the past will not necessarily recur in the future. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies based on the data in this table.
The lower section of the table on page 9 shows the cumulative amount paid with respect to the reestimated liability as of the end of each succeeding year. For example, in the 1984 column, as of December 31, 1994 the Group had paid $2,210.6 million of the currently estimated $3,569.3 million of claims and claim adjustment expenses that were unpaid at the end of 1984; thus, an estimated $1,358.7 million of losses incurred through 1984 remain unpaid as of December 31, 1994, most of which relates to the Fibreboard settlement.
ANALYSIS OF CLAIM AND CLAIM ADJUSTMENT EXPENSE DEVELOPMENT
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The cumulative deficiencies for the years 1984 through 1992 include the effect of the $675 million increase in claims and claim adjustment expenses related to the Fibreboard settlement.
Members of the Group are required to file annual statements with insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis). The differences between the liability for unpaid claims and claim adjustment expenses, net of reinsurance recoverable, reported in the accompanying consolidated financial statements in accordance with generally accepted accounting principles (GAAP) and that reported in the annual statutory statements of the U.S. subsidiaries are as follows:
Investments
For each member of the Group, current investment policy is implemented by management which reports to its Board of Directors.
The main objective of the investment portfolio of the Group is to provide maximum support to the insurance underwriting operations. To accomplish this, the investment function must be highly integrated with the operating functions and capable of responding to the changing conditions in the marketplace. Investment strategies are developed based on a variety of factors including underwriting results and the Group's resulting tax position, fluctuations in interest rates and regulatory requirements.
The investment portfolio of the Group is primarily comprised of high quality bonds, principally tax-exempt, U.S. Treasury, government agency and corporate issues. In addition, the portfolio includes common stocks held primarily with the objective of capital appreciation.
In 1994, the Group invested new cash in taxable bonds and, to a lesser extent, tax-exempt bonds while reducing its equity security portfolio. In 1993, the Group invested new cash primarily in tax-exempt bonds and reduced its taxable bond portfolio. In each year the Group tried to achieve the appropriate mix in its portfolio to balance both investment and tax strategies. At December 31, 1994, 71% of the Group's fixed maturity portfolio was invested in tax-exempt bonds compared with 75% at the previous year-end.
In 1993 and again in 1994, the Group increased its short term investments so that funds would be readily available to pay amounts related to the Fibreboard settlement. Such levels of liquidity will be somewhat lower in 1995 as the payout period of Fibreboard related amounts has been extended.
The investment results of the Group for each of the past three years are shown in the following table.
--------------- (a) Average of amounts at beginning and end of year with fixed maturity securities at amortized cost and equity securities at market value.
(b) Investment income after deduction of investment expenses, but before applicable income tax, excluding income from rental of real estate and fixed assets.
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CHUBB & SON INC.
Chubb & Son Inc., a wholly-owned subsidiary of the Corporation, was incorporated in 1959 under the laws of New York as a successor to the partnership of Chubb & Son which was organized in 1882 by Thomas Caldecot Chubb to act as underwriter and manager of insurance companies. Chubb & Son Inc. is the manager of Federal, Vigilant, Great Northern, Chubb New Jersey, Chubb Custom, Chubb National and Chubb Indemnity. Chubb & Son Inc. also provides certain services to Pacific Indemnity and other members of the Property and Casualty Insurance Group for which it is reimbursed.
Acting subject to the supervision and control of the Boards of Directors of the members of the Group, Chubb & Son Inc. provides day to day executive management and operating personnel and makes available the economy and flexibility inherent in the common operation of a group of insurance companies.
Chubb & Son Inc. also acts as the manager for the United States branch of an unaffiliated South Korean insurance company, Samsung Fire & Marine Insurance Company, Ltd.
LIFE AND HEALTH INSURANCE GROUP
The Life and Health Insurance Group (Life Group) includes Chubb Life Insurance Company of America (Chubb Life), its wholly-owned subsidiaries, The Colonial Life Insurance Company of America (Colonial) and Chubb Sovereign Life Insurance Company (Sovereign), and ChubbHealth, Inc. (ChubbHealth), a joint venture with Healthsource, Inc.
The Life Group, which markets a wide variety of insurance and investment products, is principally engaged in the sale of personal and group life and health insurance as well as annuity contracts. These products, some of which combine life insurance and investment attributes, include traditional insurance products such as term, whole life, and accident and health insurance, as well as fixed premium interest-sensitive life, universal life and variable universal life insurance and mutual funds. In addition, managed care services are provided through ChubbHealth, a health maintenance organization (HMO) operating in the New York City metropolitan area. The target market of the Life Group is small- to medium-sized business establishments and those people, often the proprietors of such businesses, whose needs for financial planning are more complex and diverse than average.
One or more of the companies in the Life Group are licensed and transact business in each of the 50 states of the United States, the District of Columbia, Puerto Rico, Guam and the Virgin Islands. Personal life and health insurance is marketed primarily through approximately 1,600 personal producing general agents and 20,000 brokers. Group life and traditional health insurance is marketed through approximately 9,000 brokers and managed care products are marketed primarily through approximately 250 brokers in the New York City metropolitan area.
The executive, accounting, actuarial and administrative activities of the Life Group are located at the Chubb Life headquarters in Concord, New Hampshire. The group insurance operations are mainly located in Parsippany, New Jersey. The personal insurance operations are in Concord, Santa Barbara, California and Chattanooga, Tennessee. ChubbHealth's network management and medical review activities are located in New York, New York.
The following tables present highlights of the Life Group.
LIFE INSURANCE IN-FORCE*
--------------- * Before deduction for reinsurance ceded.
PREMIUM AND POLICY CHARGE REVENUES BY CLASS
REVENUES, ASSETS AND CAPITAL AND SURPLUS
The main objective of the investment portfolio of the Life Group is to earn a rate of return in excess of that required to satisfy the obligations to policyholders and to cover expenses. The portfolio of the Life Group is primarily comprised of mortgage-backed securities and corporate bonds. The Life Group invests predominantly in investment grade current coupon fixed-income securities with stable cash flows and maturities which are consistent with life insurance liability characteristics. The investment strategy emphasizes maintaining portfolio quality while achieving competitive investment yields. The investment results of the Life Group for each of the past three years are shown in the following table.
--------------- (a) Average of amounts at beginning and end of year with fixed maturity securities at amortized cost and equity securities at market value.
(b) Investment income after deduction of investment expenses, but before applicable income tax, excluding income from real estate.
Reinsurance
The companies in the Life Group, in accordance with common industry practice, reinsure portions of the life insurance risks they underwrite with
other companies. At the present time, the maximum amount of life insurance retained on any one life by the Life Group is $1,250,000, excluding accidental death benefits. Including accidental death benefits, the Life Group accepts a maximum net retention of $1,400,000.
Policy Liabilities
Premium receipts from universal life and other interest-sensitive contracts are established as policyholder account balances. Charges for the cost of insurance and policy administration are assessed against the policyholder account balance. The amount remaining after such charges represents the policy liability before applicable surrender charges.
Benefit reserves on individual life insurance contracts with fixed and guaranteed premiums and benefits are computed so that amounts, with additions from actuarial net premiums to be received and with interest on such reserves compounded annually at certain assumed rates, will be sufficient to meet expected policy obligations. In accordance with generally accepted accounting principles, certain additional factors are considered in the reserve computation as more fully set forth in Note (1)(e) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1994 Annual Report to Shareholders.
Group life reserves represent the unearned premium. Group medical reserves are computed utilizing "lag and adjusted lag" methods. These methods take into account historical claim experience and adjust for current medical inflation and changes in claim backlog.
REAL ESTATE DEVELOPMENT GROUP
The Real Estate Development Group (Real Estate Group) is composed of Bellemead Development Corporation and its subsidiaries. The Real Estate Group is involved with commercial and residential real estate development.
The Real Estate Group develops real estate properties itself rather than through third party developers. It is distinguished from most other real estate developers in that it coordinates all phases of the development process from concept to completion. The services offered to its customers include land acquisition, site planning, architecture, engineering, construction, financing, marketing and property management. Upon completion of development, the properties may be either owned and operated for the Real Estate Group's own account or sold to third parties. The Real Estate Group directly manages virtually all of the properties which it either owns or has sold and retained interests in through secured loans. The Real Estate Group's continuing investment interests in joint ventures generally consist of the ownership and lease of the underlying land and the management and operation of the buildings.
The Real Estate Group's commercial development activities centered around acquiring suburban, multi-site land parcels in locations considered prime for office development and then developing the land in progressive stages. The Real Estate Group's activities include a few metropolitan office building projects. Commercial development activities are primarily in northern and central New Jersey with additional operations in Connecticut, Florida, Illinois, Maryland, Michigan, Pennsylvania and Texas.
The Real Estate Group owns 4,037,000 square feet of office and industrial space, of which 91% is leased. The Real Estate Group has varying interests in an additional 6,373,000 square feet of office and industrial space which is 94% leased.
Residential development activities of the Real Estate Group are primarily in central Florida and northern New Jersey.
The Real Estate Group currently has undeveloped land holdings of approximately 4,450 acres, with primary holdings in New Jersey and Florida and lesser holdings in six additional states.
REGULATION, PREMIUM RATES AND COMPETITION
The Corporation is a holding company primarily engaged in the insurance business and is therefore subject to regulation by certain states as an
insurance holding company. California, Indiana, Minnesota, New Hampshire, New Jersey, New York and all other states have enacted legislation which regulates insurance holding company systems such as the Corporation and its subsidiaries. This legislation generally provides that each insurance company in the system is required to register with the department of insurance of its state of domicile and furnish information concerning the operations of companies within the holding company system which may materially affect the operations, management or financial condition of the insurers within the system. All transactions within a holding company system affecting insurers must be fair and equitable. Notice to the insurance commissioners is required prior to the consummation of transactions affecting the ownership or control of an insurer and of certain material transactions between an insurer and any person in its holding company system and, in addition, certain of such transactions cannot be consummated without the commissioners' prior approval.
Property and Casualty Insurance
The Property and Casualty Insurance Group is subject to regulation and supervision in the states in which it does business. In general, such regulation is for the protection of policyholders rather than shareholders. The extent of such regulation varies but generally has its source in statutes which delegate regulatory, supervisory and administrative powers to a department of insurance. The regulation, supervision and administration relate to, among other things, the standards of solvency which must be met and maintained; the licensing of insurers and their agents; restrictions on insurance policy terminations; unfair trade practices; the nature of and limitations on investments; premium rates; restrictions on the size of risks which may be insured under a single policy; deposits of securities for the benefit of policyholders; approval of policy forms; periodic examinations of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of companies or for other purposes; limitations on dividends to policyholders and shareholders; and the adequacy of provisions for unearned premiums, unpaid claims and claim adjustment expenses, both reported and unreported, and other liabilities.
The extent of insurance regulation on business outside the United States varies significantly among the countries in which the Group operates. Some countries have minimal regulatory requirements, while others regulate insurers extensively. Foreign insurers in many countries are faced with greater restrictions than domestic competitors. Such restrictions include the need to secure new licenses and compulsory cessions of reinsurance. In certain countries the Group has incorporated insurance subsidiaries locally to improve its position.
In December 1993, the National Association of Insurance Commissioners adopted a risk-based capital formula for property and casualty insurance companies. This formula is used by state regulatory authorities to identify insurance companies which may be undercapitalized and which merit further regulatory attention. The formula prescribes a series of risk measurements to determine a minimum capital amount for an insurance company, based on the profile of the individual company. The ratio of a company's actual policyholders' surplus to its minimum capital requirement will determine whether any state regulatory action is required. The risk-based capital requirement is applicable to property and casualty insurance companies for the first time as of year-end 1994. Each member of the Group has more than sufficient capital at December 31, 1994 to meet the risk-based capital requirement.
Regulatory requirements applying to premium rates vary from state to state, but generally provide that rates not be "excessive, inadequate or unfairly discriminatory." Rates for many lines of business, including automobile and homeowners insurance, are subject to prior regulatory approval in many states. However, in certain states, prior regulatory approval of rates is not required for most lines of insurance which the Group underwrites. Ocean marine insurance rates are exempt from regulation.
Subject to regulatory requirements, the Group's management determines the prices charged for its policies based on a variety of factors including claim and claim adjustment expense experience, inflation, tax law and rate changes, and anticipated changes in the legal environment, both judicial and legislative. Methods for arriving at rates vary by type of business, exposure assumed and size of risk. Underwriting profitability is affected by the accuracy of these
assumptions, by the willingness of insurance regulators to approve changes in those rates which they control and by such other matters as underwriting selectivity and expense control.
The property and casualty insurance industry is highly competitive both as to price and service. Members of the Group compete not only with other stock companies but also with mutual companies, other underwriting organizations and alternative risk sharing mechanisms. Some competitors obtain their business at a lower cost through the use of salaried personnel rather than independent agents and brokers. Rates are not uniform for all insurers and vary according to the types of insurers and methods of operation. The Group competes for business not only on the basis of price, but also on the basis of availability of coverage desired by customers and quality of service, including claim adjustment service. The Group's products and services are generally designed to serve specific customer groups or needs and to offer a degree of customization that is of value to the insured.
There are approximately 3,900 property and casualty insurance companies in the United States operating independently or in groups and no single company or group is dominant. According to A.M. Best, the Group is the 14th largest United States property and casualty insurance group based on 1993 net premiums written. The relatively large size and underwriting capacity of the Group provide opportunities not available to smaller companies.
The property and casualty insurance industry has a history of cyclical performance with successive periods of deterioration and improvement over time. The industry and the Group experienced substantial underwriting losses from 1980 through 1984. Beginning in 1984, the industry and the Group were able to increase prices and tighten underwriting terms. Substantial price increases were achieved in most commercial lines from 1984 through 1986. Price competition increased in the property and casualty marketplace during 1987 and has continued through 1994, particularly in the commercial classes. In 1993, property related business experienced some rate firming in the wake of the unprecedented catastrophes of 1992; such prices remained stable in 1994 despite significant catastrophe losses early in the year. Price increases in casualty classes continue to be difficult to achieve. The Group continues to be selective in the writing of new business and to reinforce the sound relationships with customers who appreciate the stability, expertise and added value the Group provides. In the personal lines, the regulatory climate for obtaining rate increases continues to be difficult, particularly in the automobile class.
In all states, insurers authorized to transact certain classes of property and casualty insurance are required to become members of an insolvency fund. In the event of the insolvency of an insurer writing a class of insurance covered by the fund in the state, all members are assessed to pay certain claims against the insolvent insurer. Fund assessments are proportionately based on the members' written premiums for the classes of insurance written by the insolvent insurer. A portion of these assessments is recovered in certain states through premium tax offsets and policyholder surcharges. In 1994, such assessments to the members of the Group amounted to approximately $6 million. The amount of future assessments cannot be reasonably estimated.
State insurance regulation requires insurers to participate in assigned risk plans, reinsurance facilities and joint underwriting associations, which are mechanisms that generally provide risks with various basic insurance coverages when they are not available in voluntary markets. Such mechanisms are most prevalent for automobile and workers' compensation insurance, but a majority of states also mandate participation in Fair Plans or Windstorm Plans, which provide basic property coverages. Some states also require insurers to participate in facilities that provide homeowners, crime and medical malpractice insurance. Participation is based upon the amount of a company's voluntary written premiums in a particular state for the classes of insurance involved. These involuntary market plans generally are underpriced and produce unprofitable underwriting results.
In several states, insurers, including members of the Group, participate in market assistance plans. Typically, a market assistance plan is voluntary, of limited duration and operates under the supervision of the insurance commissioner to provide assistance to applicants unable to obtain commercial and personal liability and property insurance. The assistance may range from identifying sources where coverage may be obtained to pooling of risks among the participating insurers.
Life and Health Insurance
The members of the Life Group are subject to regulation and supervision in each state in which they do business. Such regulation and supervision is generally of the character indicated in the first two paragraphs under the preceding caption, "Property and Casualty Insurance." The risk-based capital formula for life and health insurers was first effective as of year-end 1993. Each member of the Life Group had more than sufficient capital at December 31, 1994 to meet the risk-based capital requirement.
The Life Group operates in a highly competitive industry in which it does not hold a significant market share. The Life Group competes in the personal insurance market not only with other life insurance companies but also with other financial institutions. By offering a full line of products, including interest-sensitive and variable products, both with and without life contingencies, the Life Group meets this competition for its selected customer group. The Life Group also competes in the small group health insurance market by offering indemnity products with comprehensive benefits, and a full line of ancillary products including group dental, life and long term disability. The Life Group has accelerated its involvement in managed health care through the development of ChubbHealth.
Members of the Life Group also participate in insolvency funds. In 1994, insolvency fund assessments to the members of the Life Group amounted to approximately $2 million.
There are approximately 1,800 legal reserve life insurance companies in the United States. According to the National Underwriter, a trade publication, as of January 1, 1994, Chubb Life, Sovereign and Colonial ranked 63rd, 149th and 168th, respectively, among such companies based on total insurance in-force.
Legislative and Judicial Developments
Although the federal government and its regulatory agencies generally do not directly regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways. Current and proposed federal measures which may significantly affect the insurance business include tort reform, toxic waste removal and liability measures, health care reform initiatives, containment of medical care costs, limitations on health insurance premiums, employee benefits regulation, automobile safety regulation, financial services deregulation including the removal of barriers preventing banks from engaging in the insurance business, the taxation of insurance companies and the tax treatment of insurance products.
Enacted and contemplated health care reform on both a national and state level are reshaping the health insurance industry. Although federal legislation on health insurance did not pass Congress in 1994, the Clinton Administration and certain members of Congress may pursue some form of health care reform. Significant changes, if they occur, are not expected to become operational for some time. It is currently not possible to predict the long term impact of health care reforms on the Life Group's business.
Insurance companies are also affected by a variety of state and federal legislative and regulatory measures as well as by decisions of their courts that define and extend the risks and benefits for which insurance is provided. These include redefinitions of risk exposure in areas such as product liability and commercial general liability as well as extension and protection of employee benefits, including pension, workers' compensation and disability benefits.
Legislative and judicial developments pertaining to asbestos and toxic waste exposures are discussed in Item 7 of this report on pages 23 through 26.
In 1988, voters in California approved Ballot Proposition 103, an insurance reform initiative, which is discussed in Item 7 of this report on pages 22 and 23.
In 1990, New Jersey adopted legislation imposing controls over automobile insurance risk selection, pricing, coverage and termination. The New Jersey
statute also applied the state's antitrust laws to automobile insurers, abolished the deficit-ridden Automobile Joint Underwriting Association (JUA), established a Market Transition Facility (MTF) to issue automobile policies until the implementation of an assigned risk mechanism on October 1, 1992 and levied an assessment and surtax on certain insurance coverages to help defray the estimated $3 billion obligation of the JUA. Under the law, insurers must make special rate filings to recoup these added charges from their insurance customers. During its two year existence, the MTF generated a deficit of approximately $1.3 billion which was required to be allocated to automobile insurers, including members of the Group, based on market share. In June 1994, legislation was enacted which limited the liability of automobile insurers for the MTF deficit to $436 million. The Group's share of that amount is approximately $5 million which was satisfied by the combination of a payment made in 1994 and a credit for a payment made in 1993 under a previous agreement entered into with the Insurance Commissioner.
In July 1992, New York adopted legislation implementing changes in the small employer group health insurance market. The major provisions became effective April 1, 1993. New Jersey adopted similar legislation in November 1992, which generally became effective January 1, 1994. Both laws significantly affect the manner in which the Life Group and other small group health indemnity insurers conduct business. In general, the laws create community based rating, mandate prior approval of rates by the insurance department, require open enrollment periods, limit pre-existing condition exclusions and eliminate health underwriting for insured groups with fewer than 50 covered lives. Several lawsuits have been filed by a number of insurers, including a member of the Life Group, to overturn the New York law and regulations. Certain provisions of the law have been successfully challenged and challenges on additional provisions are pending. Approximately 80% of the Life Group's group health business is in the New York and New Jersey traditional indemnity markets. In response to the changes in the traditional indemnity markets, the Life Group has taken a number of actions, including redesigning products and restructuring rates, as well as accelerating its involvement in managed health care.
ITEM 2.



ITEM 2. PROPERTIES
The executive offices of the Corporation and the administrative offices of the Property and Casualty Group are in Warren, New Jersey. The Life Group has its administrative offices in Concord, New Hampshire; Parsippany, New Jersey; Chattanooga, Tennessee and Santa Barbara, California. The Real Estate Group's corporate headquarters is located in Roseland, New Jersey. The insurance subsidiaries maintain zonal and branch offices in major cities throughout the United States, and members of the Property and Casualty Insurance Group also have offices in Canada, Europe, Australia and the Far East. Office facilities are leased with the exception of buildings in Branchburg, New Jersey, Chattanooga and Santa Barbara, and a portion of the Life Group's home office complex in Concord. Management considers its office facilities suitable and adequate for the current level of operations. See Note (11) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1994 Annual Report to Shareholders.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are defendants in various lawsuits arising out of their businesses. It is the opinion of management that the final outcome of these matters will not materially affect the consolidated financial position of the registrant.
Information regarding certain litigation to which property and casualty insurance subsidiaries of the Corporation are a party is included in Item 7 of this report on pages 23 and 24.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the last quarter of the year ended December 31, 1994.
EXECUTIVE OFFICERS OF THE REGISTRANT
---------------
(a) Ages listed above are as of April 25, 1995.
(b) Date indicates year first elected or designated as an executive officer.
All of the foregoing officers serve at the pleasure of the Board of Directors of the Corporation or listed subsidiary and have been employees of the Corporation or a subsidiary of the Corporation for more than five years except for Randell G. Craig, John J. Degnan, Brian W. Nocco and Theresa M. Stone. Mr. Craig joined Chubb Life in 1990 and was previously a vice president with Crown Life Insurance Company. Prior to joining Chubb & Son Inc. in 1990, Mr. Degnan was a senior partner in the New Jersey law firm of Shanley & Fisher. Mr. Nocco, who joined the Corporation in 1994, was previously Treasurer of Continental Bank Corp. Ms. Stone, who joined the Corporation in 1990, was previously a principal with Morgan Stanley & Co. Incorporated.
PART II.
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Incorporated by reference from the Corporation's 1994 Annual Report to Shareholders, page 72.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended December 31, 1994 are incorporated by reference from the Corporation's 1994 Annual Report to Shareholders, pages 44 and 45.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion presents our past results and our expectations for the near term future. The supplementary financial information and consolidated financial statements and related notes, all of which are integral parts of the following analysis of our results and our financial position, are incorporated by reference from the Corporation's 1994 Annual Report to Shareholders, pages 15, 16 and 46 through 67.
Net income amounted to $528 million in 1994 compared with $324 million in 1993 and $617 million in 1992. Net income in 1993 reflected a net charge of $357 million after taxes related to an agreement for the settlement of asbestos-related litigation as well as the Corporation's intention to exercise its option to commute an unrelated existing medical malpractice reinsurance agreement. Net income in 1993 also reflected a one-time charge of $20 million for the cumulative effect of adopting new accounting requirements for postretirement benefits other than pensions and for income taxes.
Net income included realized investment gains after taxes of $41 million, $152 million and $124 million in 1994, 1993 and 1992, respectively. Decisions to sell securities are governed principally by considerations of investment opportunities and tax consequences. Thus, realized investment gains and losses may vary significantly from year to year. As a result, net income may not be indicative of our operating performance for the period.
PROPERTY AND CASUALTY INSURANCE
Property and casualty income was significantly higher in 1994 compared with 1993; such 1993 income was significantly lower than that in 1992. Results in 1993 were adversely affected by a $675 million increase in loss reserves related to an agreement for the settlement of asbestos-related litigation (the "$675 million charge"), which is further described under Loss Reserves. This was partially offset by a $125 million return premium to the property and casualty insurance subsidiaries related to the Corporation's intention to exercise its option to commute an existing medical malpractice reinsurance agreement (the "$125 million return premium").
Property and casualty income after taxes was $467 million in 1994 compared with $118 million in 1993 and $407 million in 1992. Excluding the effects of the $675 million charge and the $125 million return premium, property and casualty income after taxes was $475 million in 1993. Earnings in 1994 were adversely affected by higher catastrophe losses, resulting from the earthquake in California and the winter storms in the eastern and midwestern parts of the United States in the first quarter. Earnings in 1994 benefited from an increase in investment income compared with the prior year. Results for 1993 benefited from lower catastrophe losses and an increase in investment income compared with 1992. Earnings in 1992 were adversely affected by substantial catastrophe losses, including those from Hurricane Andrew. Catastrophe losses were $169 million in 1994 compared with $89 million in 1993 and $175 million in 1992. The 1992 amount was net of recoveries under catastrophe reinsurance contracts of $106 million relating to Hurricane Andrew. There were no recoveries in 1994 and 1993 under such reinsurance contracts.
Net premiums written amounted to $4.0 billion in 1994. This represented an increase of 12% compared with 1993, after excluding the $125 million return
premium from the 1993 amount. Net premiums written in 1993, excluding the $125 million return premium, were 9% higher than 1992. Personal coverages accounted for $814 million or 21% of 1994 premiums written, standard commercial coverages for $1,338 million or 34%, specialty commercial coverages for $1,476 million or 37% and reinsurance assumed for $323 million or 8%. The marketplace continued to be competitive, particularly in the commercial classes. Price increases in the casualty classes have been difficult to achieve for several years. Property related prices remained stable in 1994 despite the significant catastrophe losses early in the year. Such prices had experienced some firming in 1993 in the wake of the unprecedented catastrophes of 1992. Premium growth in 1994 and 1993 was due primarily to the selective writing of new business, improved renewal retention of customers who appreciate the stability, expertise and added value we provide, and exposure growth on existing business. A significant portion of premium growth in both years was achieved outside the United States, from both our expanding foreign branch network and our increased participation in the business of the Sun Alliance Group plc.
The combined loss and expense ratio, the common measure of underwriting profitability, was 99.5% in 1994 compared with 114.8% in 1993 and 101.1% in 1992. Underwriting results were extremely unprofitable in 1993 due to the adverse effect of the $675 million charge. Excluding the effects of the $675 million charge and the $125 million return premium, the combined loss and expense ratio was 99.0% in 1993.
The loss ratio was 67.0% in 1994 compared with 82.5% in 1993 and 66.7% in 1992. Excluding the effects of the $675 million charge and the $125 million return premium, the loss ratio was 65.5% in 1993. The loss ratios continue to reflect the favorable experience resulting from the consistent application of our underwriting standards. Losses from catastrophes represented 4.5, 2.5 and 5.6 percentage points of the loss ratio in 1994, 1993 and 1992, respectively.
Our expense ratio was 32.5% in 1994 compared with 32.3% in 1993 and 34.4% in 1992. Excluding the effect of the $125 million return premium, the expense ratio was 33.5% in 1993. The expense ratio benefited in 1994 and 1993 from written premiums growing at a greater rate than overhead expenses. The expense ratio in 1993 also benefited from lower commissions. Expenses were reduced by contingent profit sharing accruals of $11 million in 1994 and $9 million in both 1993 and 1992 relating to the medical malpractice reinsurance agreement. There will be no further profit sharing allowance under this agreement.
The catastrophe reinsurance market suffered large losses in recent years, particularly in 1992. As a result, the catastrophe reinsurance market's capacity was substantially reduced in 1993 and the cost of available coverage rose significantly. We responded by increasing the initial retention level for individual catastrophe losses from $40 million to $85 million. We experienced two significant catastrophe losses in 1994; however, there were no recoveries from our catastrophe reinsurance coverage due to the higher retention level. The effect of the higher retention on our future results of operations will depend on the severity of future catastrophic events.
Personal Insurance
Premiums from personal insurance were virtually unchanged in 1994 compared with a 2% increase in 1993. Our disciplined approach to pricing continues to make it difficult to write new homeowners and other non-automobile business. Personal automobile premiums have remained level over the past three years, which was consistent with our plan to control our exposure in this class.
Our personal insurance business produced breakeven underwriting results in 1994 compared with an underwriting profit in 1993 and an underwriting loss in 1992. The combined loss and expense ratio was 100.3% in 1994 compared with 95.8% in 1993 and 104.6% in 1992. Underwriting results in each of these years were adversely affected by significant catastrophe losses in the homeowners class, particularly the winter storms and, to a lesser extent, the California earthquake in 1994 and Hurricane Andrew in 1992.
Excluding the impact of catastrophes, homeowners results benefited in each of the last three years from disciplined pricing and stable loss frequency and severity. Catastrophe losses represented 19.6 percentage points of the loss ratio for this class in 1994 compared with 13.4 percentage points in 1993 and 25.0 percentage points in 1992. Other personal coverages, which include insurance for personal valuables and excess liability, were increasingly profitable in 1993 and 1994. Personal excess liability results improved in both years due to favorable loss experience. Our automobile business was profitable in 1994 and 1993 compared with breakeven results in 1992. Results improved modestly in 1993 and 1994 due primarily to stable loss frequency and severity. Automobile results were adversely affected each year by significant losses from the mandated business that we are required by law to accept for those individuals who cannot obtain coverage in the voluntary market.
Standard Commercial Insurance
Premiums from standard commercial insurance, which includes coverages for multiple peril, casualty and workers' compensation, increased 11% in 1994 compared with 1993, after excluding the $125 million return premium discussed below from the 1993 premium amounts. Premiums in 1993, excluding the $125 million return premium, were 6% higher than 1992. The competitive market has continued to place significant pressure on prices. Premium growth in both years was due primarily to a combination of the selective writing of new accounts, improved renewal retention and exposure growth on existing business. Premium growth in 1994 for multiple peril was particularly strong outside the United States.
Medical malpractice business, which we stopped writing in 1984, was reinsured effective year-end 1985. The reinsurance agreement includes a commutation provision under which the property and casualty insurance subsidiaries have an option to reassume the remaining liability of the reinsurer as of December 31, 1995 and receive payment at that time of an amount determined by a formula based on experience under the agreement. In 1993, as a result of favorable loss experience, medical malpractice gross unpaid claims and the related reinsurance recoverable under this agreement were each reduced. At the same time, the Corporation announced its intention to exercise the commutation option under the agreement, which will result in a payment by the reinsurer to the property and casualty insurance subsidiaries of approximately $190 million at year-end 1995 and a concurrent reduction in reinsurance recoverable from the reinsurer of approximately $65 million. The difference of $125 million represents a return premium to the property and casualty insurance subsidiaries and was recognized as such in 1993.
Our standard commercial results were unprofitable in each of the past three years. Such results were extremely unprofitable in 1993 due to the adverse effect of the $675 million charge. The combined loss and expense ratio was 107.6% in 1994 compared with 149.7% in 1993 and 105.7% in 1992. Excluding the effects of the $675 million charge and the $125 million return premium, the combined loss and expense ratio was 107.6% in 1993.
Casualty results in 1993 included the effects of the $675 million charge and the $125 million return premium. Excluding the effects of these items, casualty results deteriorated in 1993 and 1994 primarily due to a decrease in the profitability of the excess liability component resulting from more competitive prices. Excess liability has remained profitable due to favorable loss experience in this class. In each of the past three years, casualty results have been adversely affected to varying degrees by increases in loss reserves on general liability business written in earlier years, particularly for asbestos-related and toxic waste claims. Results in the automobile component were profitable in each of the last three years.
Multiple peril results were similarly unprofitable in each of the last three years. The intensely competitive market for this business has resulted in inadequate prices for these coverages. Results in the property component of this business were adversely affected by significant catastrophe losses in 1994, primarily from the earthquake in California, and in 1992, primarily from Hurricane Andrew and the civil disorder in Los Angeles. Catastrophe losses represented 8.4 percentage points of the loss ratio for this class for 1994 compared with 3.6 percentage points in 1993 and 10.1 percentage points in 1992.
The liability component of this business was particularly unprofitable in 1993 due to an increased frequency and severity of losses.
Workers' compensation results improved substantially in 1994, but remained unprofitable. Results in our voluntary business have benefited from rate increases and the impact of medical cost containment and disability management activities. Results in this class were aggravated in 1992 and 1993 by our share of the losses incurred by the involuntary pools and mandatory business in which we must participate by law.
Specialty Commercial Insurance
Premiums from specialty commercial insurance increased 16% in 1994 compared with 10% in 1993. Premium increases for our executive protection and financial fidelity coverages were due primarily to new business opportunities and exposure increases as significant competition has made price increases difficult to achieve for most of these coverages. Our strategy of working closely with our customers and our ability to differentiate our products have enabled us to renew a large percentage of our business. We have been able to obtain price increases in several of our smaller specialty classes.
The specialty commercial business produced substantial underwriting profits in each of the past three years with combined loss and expense ratios of 91.7% in 1994, 91.0% in 1993 and 90.5% in 1992. Our executive protection, financial fidelity and surety results were highly profitable in each year due to favorable loss experience. The non-fidelity portion of our financial institutions business deteriorated in 1994 due in part to several large losses.
Marine results were unprofitable in 1994 compared with profitable results in 1993 and 1992. The deterioration was mostly due to significant catastrophe losses, resulting primarily from the earthquake in California. Results in our smaller specialty classes improved in 1994, particularly outside the United States. Results in these classes had deteriorated in 1993 due primarily to an increased frequency of large losses.
Reinsurance Assumed
Premiums from reinsurance assumed, which is primarily treaty reinsurance assumed from Sun Alliance, increased 37% in 1994 compared with 46% in 1993. The growth in both years was primarily due to an increase in our participation in the business of Sun Alliance and a firming of rates in Sun Alliance's markets, primarily in the United Kingdom.
Underwriting results for this segment were near breakeven in 1994 compared with unprofitable results in 1993 and 1992. Results improved substantially in each of the last two years. The combined loss and expense ratio was 100.2% in 1994 compared with 111.8% in 1993 and 126.9% in 1992. The improvement in 1994 was due to risk selection and rating measures taken as well as to favorable weather conditions in the United Kingdom. Results in 1992 were adversely affected by our share of the substantial mortgage indemnity insurance losses experienced by Sun Alliance in the United Kingdom.
Regulatory Initiatives
In 1988, voters in California approved Ballot Proposition 103, an insurance reform initiative which affects most property and casualty insurers writing business in the state. Provisions of Proposition 103 would have required insurers to roll back property and casualty insurance rates for certain lines of business to 20 percent below November 1987 levels and would have required an additional 20 percent reduction in automobile rates by November 1989. Approximately 14% of the direct business of the Corporation's property and casualty subsidiaries during the rollback period was written in California. In 1989, the California Supreme Court, ruling on the constitutional challenge to Proposition 103, ruled that an insurer is entitled to a fair rate of return. Since the approval of Proposition 103, the California Insurance Department has established regulations to implement its provisions. These regulations were challenged in the California courts by numerous insurers.
In August 1994, the California Supreme Court issued a decision upholding rollback regulations issued by the California Insurance Commissioner which had previously been ruled invalid by a lower court. These regulations limit the allowable rate of return which an insurer could earn on California business for the rollback period to a rate determined by the Insurance Commissioner and limit the amount of surplus on which an insurer could earn profit during that period. It is not clear what implications, if any, this decision will have on future property and casualty insurance rates in California. A petition for review of the California Supreme Court's decision has been denied by the United States Supreme Court.
In November 1994, the property and casualty subsidiaries were ordered by the Insurance Commissioner to refund premiums for the rollback period in the amount of $86 million, plus interest of $53 million. The property and casualty subsidiaries have notified the Insurance Department of their objection to the rollback amount. Based on our analysis of the operating results of our property and casualty subsidiaries in the State of California during the rollback period, as well as the regulations governing Proposition 103 rollbacks, we have not reflected the rollback amount in our financial statements. It is management's belief that it is probable that the final resolution of this matter will not result in premium refunds of a material amount by the Corporation's property and casualty subsidiaries.
Loss Reserves
Loss reserves are our property and casualty subsidiaries' largest liability. At the end of 1994, gross loss reserves totaled $8.9 billion compared with $8.2 billion and $7.2 billion at year-end 1993 and 1992, respectively. Reinsurance recoverable on such loss reserves was $2.0 billion at the end of 1994 compared with $1.8 billion and $2.0 billion at year-end 1993 and 1992, respectively. Loss reserves, net of reinsurance recoverable, increased 7% in 1994, after increases of 22% and 11% in 1993 and 1992, respectively. The significant increase in 1993 was primarily due to the $675 million increase related to the settlement of asbestos-related litigation. Excluding this $675 million, loss reserves increased by 10% in 1993. Loss and expense payments related to this settlement aggregated $204 million in 1994. Substantial reserve growth has occurred each year in those liability coverages, primarily excess liability and executive protection, that are characterized by delayed loss reporting and extended periods of settlement.
The process of establishing loss reserves is an imprecise science and reflects significant judgmental factors. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss and the settlement of the loss. In fact, approximately 50% of our loss reserves at December 31, 1994 were for claims that had not yet been reported to us, some of which were not yet known to the insured, and for future development on reported claims.
Judicial decisions and legislative actions continue to broaden liability and policy definitions and to increase the severity of claim payments. As a result of this and other societal and economic developments, the uncertainties inherent in estimating ultimate claim costs on the basis of past experience have increased significantly, further complicating the already difficult loss reserving process.
The uncertainties relating to asbestos and toxic waste claims on insurance policies written many years ago are exacerbated by judicial and legislative interpretations of coverage that in some cases have tended to erode the clear and express intent of such policies and in others have expanded theories of liability. The industry is engaged in extensive litigation over these coverage and liability issues and is thus confronted with a continuing uncertainty in its effort to quantify these exposures.
Our most costly asbestos exposure relates to an insurance policy issued to Fibreboard Corporation by Pacific Indemnity Company in 1956. In 1993, Pacific Indemnity Company, a subsidiary of the Corporation, entered into a global settlement agreement with Continental Casualty Company (a subsidiary of CNA Financial Corporation), Fibreboard Corporation, and attorneys representing
claimants against Fibreboard for all future asbestos-related bodily injury claims against Fibreboard. This agreement is subject to court approval. Pursuant to the global settlement agreement, a $1.525 billion trust fund will be established to pay future claims, which are claims that were not filed in court before August 27, 1993. Pacific Indemnity will contribute approximately $538 million to the trust fund and Continental Casualty will contribute the remaining amount. In December 1993, upon execution of the global settlement agreement, Pacific Indemnity and Continental Casualty paid their respective shares into an escrow account. Upon final court approval of the settlement, the amount in the escrow account, including interest earned thereon, will be transferred to the trust fund.
All of the parties have agreed to use their best efforts to seek court approval of the global settlement agreement. Although this agreement has been challenged, management is optimistic that the courts will approve the settlement. The period of judicial review is now expected to extend at least into 1996.
Pacific Indemnity and Continental Casualty have reached a separate agreement for the handling of all pending asbestos-related bodily injury claims against Fibreboard. Pacific Indemnity's obligation under this agreement is not expected to exceed $635 million, of which Pacific Indemnity had paid $132 million through December 31, 1994. A February 1995 amendment to the agreement has extended for several years the period over which Pacific Indemnity will pay its remaining obligation, plus interest, under the agreement. The agreement further provides that the total responsibility of both insurers with respect to pending and future asbestos-related bodily injury claims against Fibreboard will be shared between Pacific Indemnity and Continental Casualty on an approximate 35% and 65% basis, respectively.
Pacific Indemnity, Continental Casualty and Fibreboard have entered into a trilateral agreement, subject to court approval, to settle all present and future asbestos-related bodily injury claims resulting from insurance policies that were, or may have been, issued to Fibreboard by the two insurers. The trilateral agreement will be triggered if the global settlement agreement is disapproved. Pacific Indemnity's obligation under the trilateral agreement is therefore similar to, and not duplicative of, that under those agreements described above.
The trilateral agreement reaffirms portions of an agreement reached in March 1992 between Pacific Indemnity and Fibreboard. Among other matters, that 1992 agreement eliminates any Pacific Indemnity liability to Fibreboard for asbestos-related property damage claims.
Pacific Indemnity, Continental Casualty and Fibreboard have requested a California Court of Appeal to delay its decisions regarding asbestos-related insurance coverage issues, which are currently before it and involve the three parties exclusively, while the approval of the global settlement is pending in court. Continental Casualty and Pacific Indemnity have dismissed disputes against each other which involved Fibreboard and were in litigation.
Prior to the settlement, the Corporation's property and casualty subsidiaries had existing loss reserves of $545 million to cover a portion of their obligation under these agreements. This amount included $300 million of general liability incurred but not reported (IBNR) reserves which were not previously classified as specific reserves for asbestos claims since it was management's belief that doing so would increase the demands of plaintiffs' attorneys. Additional loss reserves of $675 million were provided in the third quarter of 1993 at the time the settlement was negotiated.
Management believes that, as a result of the global settlement agreement and the trilateral agreement, the uncertainty of our exposure with respect to asbestos-related bodily injury claims against Fibreboard has been greatly reduced. However, if both the global settlement agreement and the trilateral agreement are disapproved, there can be no assurance that the loss reserves established for future claims would be sufficient to pay all amounts which ultimately could become payable in respect of future asbestos-related bodily injury claims against Fibreboard.
Other than Fibreboard, our remaining asbestos exposures are mostly peripheral defendants, principally distributors, premises owners and
manufacturers that used asbestos in certain products. Generally, these insureds are named defendants on a regional rather than a nationwide basis. We continue to receive notices of new asbestos claims and new exposures on existing claims as more peripheral parties are drawn into litigation to replace the now defunct mines and bankrupt manufacturers. The recent claims are complex in that they include significant and yet unresolved liability issues. Further, we still do not know the universe of potential claims.
Hazardous waste sites are another significant potential exposure. Under the existing "Superfund" law and similar state statutes, when potentially responsible parties (PRPs) fail to handle the clean-up, regulators have the work done and then attempt to establish legal liability against the PRPs. The PRPs, with proper government authorization in many instances, disposed of toxic materials at a waste dump site or transported the materials to the site. Most sites have multiple PRPs. As the cost of environmental clean-up continues to grow, PRPs and others continue to file claims with their insurance carriers. Insurance policies issued to PRPs were not intended to cover the clean-up costs of pollution and, in many cases, did not intend to cover the pollution itself. Pollution was not a recognized hazard at the time many of these policies were written. In some cases, however, more recent policies specifically excluded such exposures. Ensuing litigation extends to issues of liability, coverage and other policy provisions.
There is great uncertainty involved in estimating our liabilities related to these claims. First, the underlying liabilities of the claimants are extremely difficult to estimate. At any given clean-up site, the allocation of financial responsibility among the governmental authorities and PRPs varies greatly. Second, various courts have addressed liability and coverage issues regarding pollution claims and have reached inconsistent conclusions in their interpretation of several issues. These significant uncertainties are not likely to be resolved in the near future.
Uncertainties also remain as to the Superfund law itself, which has generated far more litigation than it has provided clean-up. The taxes supporting Superfund will end in 1995. The new Congress is expected to address Superfund reform during 1995. It is currently not possible to predict the direction that any reforms may take or the effect that any changes may have on the insurance industry. It is important to note that the Superfund law does not address non-Superfund site cases. For that reason, it does not cover all existing toxic waste litigation, for example, sites that are subject to state law only.
Litigation costs continue to escalate, particularly for toxic waste claims. A substantial portion of the funds expended to date has been for legal fees incurred in the prolonged litigation of coverage issues. Many primary policies provide an indemnity policy limit but an unlimited contract for defense costs. This language in the policy sometimes leads to the payment of defense costs in sizable multiples of the policy limits.
Reserves for asbestos and toxic waste claims cannot be estimated with traditional loss reserving techniques. We have established case reserves and reserves for costs of related litigation where sufficient information has been developed to indicate the involvement of a specific insurance policy. In addition, IBNR reserves have been established to cover additional exposures on both known and unasserted claims. These reserves are continually reviewed and updated. Loss reserve increases relating to asbestos and toxic waste claims were $115 million in 1994, $1,076 million in 1993 and $120 million in 1992. Excluding the $675 million increase in loss reserves related to the Fibreboard settlement and the reclassification of $300 million of general liability IBNR reserves as specific reserves for this settlement, the increase in loss reserves relating to asbestos and toxic waste claims was $101 million in 1993. Further increases in such reserves in 1995 and future years are possible as legal and factual issues concerning these claims are clarified, although the amounts cannot be reasonably estimated.
During 1994, we experienced overall favorable development of $30 million on loss reserves established as of the previous year-end. This compares with unfavorable development of $665 million in 1993 and favorable development of $28 million in 1992. Such redundancies and deficiency were reflected in operating results in these respective years. Excluding the effect of the $675 million increase in loss reserves related to the Fibreboard settlement, we experienced
favorable development of $10 million in 1993. Each of the past three years benefited from favorable claim frequency and severity trends for certain liability classes; this was offset each year in varying degrees by increases in loss reserves relating to asbestos and toxic waste claims.
Management believes that the aggregate loss reserves of the property and casualty subsidiaries at December 31, 1994 were adequate to cover claims for losses which had occurred, including both those known to us and those yet to be reported. In establishing such reserves, management considers facts currently known and the present state of the law and coverage litigation. However, given the expansion of coverage and liability by the courts and the legislatures in the past and the possibilities of similar interpretations in the future, particularly as they relate to asbestos and toxic waste claims, as well as the uncertainty in determining what scientific standards will be deemed acceptable for measuring hazardous waste site clean-up, additional increases in loss reserves may emerge which may adversely affect results in future periods. This emergence cannot reasonably be estimated.
Investments and Liquidity
Investment income after taxes increased 4% in 1994 compared with 8% in 1993. Growth was primarily due to increases in invested assets, which reflected strong cash flow from operations over the period. Such growth in 1994 was tempered by the $538 million paid in December 1993 into an escrow account related to the Fibreboard settlement. The effective tax rate on our investment income was 15.3% in 1994 compared with 14.7% in 1993 and 14.3% in 1992. In 1994, the effective tax rate increased due to holding a larger proportion of our investment portfolio in taxable securities. The increase in the effective tax rate in 1993 was due to the increase in the federal corporate tax rate from 34% to 35%, offset in part by holding a larger proportion of our investment portfolio in tax-exempt securities.
Generally, premiums are received by our property and casualty subsidiaries months or even years before we pay the losses under the policies purchased by such premiums. These funds are used first to make current claim and expense payments. The balance is invested to augment the investment income generated by the existing portfolio. Historically, cash receipts from operations, consisting of insurance premiums and investment income, have provided more than sufficient funds to pay losses, operating expenses and dividends to the Corporation.
Cash available for investment was approximately $725 million in 1994 compared with $480 million in 1993 and $655 million in 1992. The lower amount in 1993 was due to the $538 million paid in December 1993 into an escrow account.
The main objective of the investment portfolio of the property and casualty companies is to provide maximum support to the insurance underwriting operations. Investment strategies are developed based on many factors including underwriting results and our resulting tax position, fluctuations in interest rates and regulatory requirements.
In 1994, we invested new cash in taxable bonds and, to a lesser extent, tax-exempt bonds while reducing our equity security portfolio. In 1993, we invested new cash primarily in tax-exempt bonds and we reduced our taxable bond portfolio. In each year we tried to achieve the appropriate mix in our portfolio to balance both investment and tax strategies. In 1993 and again in 1994, we increased our short-term investments.
The property and casualty subsidiaries have consistently invested in high quality marketable securities. Taxable bonds in our domestic portfolio comprise U.S. Treasury, government agency and corporate issues. Approximately 85% of these bonds are either backed by the U.S. government or rated AA or better by Moody's or Standard & Poor's. Of the tax-exempt bonds, practically all are rated A or better, with approximately half rated AAA. Both taxable and tax-exempt bonds have an average maturity of between 8 and 9 years. Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations. Common stocks are high quality and readily marketable. Foreign investments have quality and maturity characteristics similar to our domestic portfolio. We reduce the risks relating to currency fluctuations by
maintaining investments in those foreign currencies in which we transact business, with characteristics similar to the liabilities in those currencies.
The property and casualty subsidiaries maintain sufficient investments in highly liquid, short-term securities at all times to provide for immediate cash needs. At year-end 1994 and 1993, such investments were at higher than normal levels so that funds would be readily available to pay amounts related to the Fibreboard settlement. Such levels of liquidity will be somewhat lower in 1995 as the payout period of Fibreboard related amounts has been extended. The Corporation maintains bank credit facilities that are available to respond to unexpected cash demands.
LIFE AND HEALTH INSURANCE
Life and health insurance earnings after taxes were $14 million in 1994 compared with $62 million in 1993 and $56 million in 1992. Premiums and policy charges were $836 million in 1994 compared with $801 million in 1993 and $689 million in 1992.
Personal Insurance
Earnings from personal insurance were $33 million in 1994 compared with $37 million in 1993 and $34 million in 1992. The earnings fluctuations were primarily due to changes in the spread between interest earned on our invested assets and interest credited to policyholders on interest-sensitive products. As the result of various adjustments, the tax rate on personal insurance earnings was 30%, 26% and 18% in 1994, 1993 and 1992, respectively.
Premiums and policy charges amounted to $272 million in 1994 compared with $240 million in 1993 and $214 million in 1992. New sales of personal insurance as measured by annualized premiums were $97 million in 1994 compared with $88 million in 1993 and $71 million in 1992. Marketing initiatives conducted with our property and casualty distribution system together with the increasing popularity of variable universal life products continue to contribute to our growth.
Group Insurance
Group insurance operations resulted in a loss of $19 million in 1994 compared with earnings of $25 million in 1993 and $22 million in 1992. Group health rate levels, which had kept pace with medical costs during 1993 and 1992, proved inadequate during 1994 in New York, which is our major market. Group life and dental insurance, which are primarily marketed as ancillary products to group health insurance, contributed modest earnings in each of the last three years.
Premiums were $564 million in 1994 compared with $561 million in 1993 and $475 million in 1992. New group sales as measured by annualized premiums were $52 million in 1994 compared with $323 million in 1993 and $118 million in 1992.
Approximately 80% of our group health business is in the New York and New Jersey traditional indemnity markets. Both states have adopted legislation which eliminates health insurance underwriting, creates community based rating and limits pre-existing condition exclusions for insured groups with fewer than 50 covered lives. As a result, several insurers reduced their market share in the small group health segment in New York in 1993. We offered a competitive product and thus substantially increased our sales in that market during 1993. The growth in premium revenue in 1993 and the first six months of 1994 reflected the effect of the significant increase in sales of new policies during the last three quarters of 1993. Due to increased levels of competition in the small group market in 1994 as well as our significant rate increases, many of the new policies written in 1993, which became eligible for renewal beginning in April 1994, were not renewed. The decline in premium revenue in the last six months of 1994 was primarily due to this increase in non-renewals.
Given these changes in our marketplace and the continuation of the shift away from traditional indemnity products to managed care alternatives, we anticipate that we will experience a reduction of premiums in 1995.
Group health insurance results deteriorated in 1994 due to significantly higher claims than were anticipated when new rates were developed in 1993 and to higher non-renewals. The higher claims resulted from the increased cost of medical services and the increased utilization of those services. The increased utilization was largely due to the attractiveness of traditional indemnity plans to individuals and groups who are more likely to require and use medical services. In response to these factors, we increased rates substantially during 1994.
We continue to believe that traditional indemnity plans will be a less viable product option in the long term for both the consumer and the companies selling such plans. We have accelerated our efforts to lessen our dependence on traditional indemnity medical premium. We are offering managed care products through ChubbHealth, Inc., a health maintenance organization (HMO), which commenced business in the New York City metropolitan area during the second quarter of 1994.
Initial results of ChubbHealth have been encouraging. Our approach has been to provide small business owners with managed care plans which have comprehensive and flexible coverages and an excellent doctor and hospital network.
We also continue to increase our emphasis on managed care outside New York by offering preferred provider organizations which are networks of health care providers that offer cost savings compared with traditional indemnity plans.
Enacted and contemplated health care reform on both a national and state level are reshaping the health insurance industry. Although federal legislation on health insurance did not pass Congress in 1994, the Clinton Administration and certain members of Congress may pursue some form of health care reform. Significant changes, if they occur, are not expected to become operational for some time. It is currently not possible to predict the long term impact of health care reforms on our business.
Investments and Liquidity
Gross investment income increased 1% in 1994 compared with 7% in 1993. Premium receipts in excess of payments for benefits and expenses, together with investment income, continue to provide cash for new investments. New cash available amounted to $140 million in 1994 compared with $225 million in 1993 and $120 million in 1992. The decrease in new cash in 1994 was due to the reduced cash flows from group insurance operations. The increase in 1993 was due to the significant increase in group health premiums and to new single premium sales.
In 1994, new cash was invested primarily in mortgage-backed securities. In 1993, new cash was invested in mortgage-backed securities and corporate bonds. We invest predominantly in investment grade current coupon fixed-income securities with stable cash flows and maturities which are consistent with life insurance liability characteristics. Approximately 95% are investment grade and more than half are rated AAA. We maintain sufficient funds in short-term securities to meet unusual needs for cash.
Mortgage-backed securities comprised 47% and 41% of the fixed maturity portfolio of the life and health subsidiaries at December 31, 1994 and 1993, respectively. Our mortgage-backed securities portfolio consists of government agency pass-through securities, government agency collateralized mortgage obligations (CMO's) and AAA rated non-agency CMO's backed by either government agency collateral or single family home mortgages. The majority of the CMO's in the portfolio are actively traded in liquid markets and market value information is readily available from broker/dealers. The notion of impairment typically associated with corporate bonds (default in paying principal) is less applicable to CMO's. Other risks, most notably prepayment and extension risks, are monitored regularly. Changes in prepayment patterns can either lengthen or shorten the expected timing of the principal repayments and thus the average life and the effective yield of the security. We primarily invest in those classes of CMO instruments that are subject to less prepayment and extension risk and are therefore less volatile than other CMO instruments.
REAL ESTATE
Real estate operations resulted in a loss after taxes of $2 million in both 1994 and 1993 and income of $10 million in 1992. Results continue to be adversely affected by progressively higher portions of interest being charged directly to expense rather than being capitalized and by provisions for possible uncollectible receivables related to mortgages. In addition, 1994 results were adversely affected by higher interest rates. Results in 1993 were adversely affected by a $3 million tax charge related to the federal corporate tax rate increase. Revenues were $205 million in 1994 compared with $161 million in 1993 and $150 million in 1992. Revenue growth in 1994 was primarily due to higher levels of rental income on owned properties.
Our commercial real estate activities centered around acquiring suburban, multi-site land parcels in locations considered prime for office development and then developing the land in progressive stages. We expanded our activities to include a few metropolitan office building projects. We develop real estate properties ourselves rather than through third party developers. We are distinguished from most other real estate developers in that we coordinate all phases of the development process from concept to completion. Upon completion of development, the properties may be either owned and operated for our own account or sold to third parties. We directly manage virtually all of the properties which we either own or have sold and retained interests in through secured loans.
Our continuing investment interests in joint ventures generally consist of the ownership and lease of the underlying land and the management and operation of the buildings. Our agreements with joint ventures to manage all aspects of the ventured properties, including debt structures, tenant leasing, and building improvements and maintenance, have put us in a strong position to protect our ongoing financial interests in the current difficult real estate environment.
The real estate industry continues to suffer from a significantly reduced demand for real estate investment. For the past several years, the supply of available office space has exceeded the demand. Corporate restructurings and downsizings have exacerbated the problem as businesses consolidated their facilities, increasing the supply of available space. While selected real estate markets have experienced increases in leasing activity and some stability in rental rates, the oversupply of available office space for lease in most markets and the resultant depressed rental rates continue to cause downward pressure on the earnings of the real estate development industry.
In light of the current real estate market conditions, we have curtailed our construction of new office buildings in recent years. We have focused on completing and leasing newly constructed facilities and maintaining established properties at high occupancy levels. We completed one new building in 1994 but curtailed construction on two previously planned buildings. Development activities consist almost exclusively of preconstruction type efforts such as site planning, zoning and similar activities. As a consequence, we expect revenues for the next several years to come from ongoing income from owned properties and from management and financing activities related to previously sold properties or properties held in joint ventures. This does not preclude us from entertaining proposals to purchase our properties when such offers provide a reasonable return.
Our vacancy rates are better than the average in substantially all markets in which we operate. We have been successful in both retaining existing tenants and securing new ones and have not had significant credit problems with tenants. During 1994, a total of 2,420,000 square feet was leased compared with 1,710,000 square feet in 1993 and 1,790,000 square feet in 1992. At December 31, 1994, we owned or had interests in 10,840,000 square feet of office and industrial space. Our vacancy rate was 7% at year-end 1994 compared with 10% at year-end 1993 and 14% at year-end 1992. The decreases in the vacancy rate during these years were due to our ability to market a significant amount of the new space which became available in 1991 when several multi-year projects were completed in a difficult leasing market.
In certain markets, renewing leases in established buildings has been difficult as newly constructed space is available nearby at similar rates. While
we have experienced significant leasing activitiy over the past three years, we have had to enter into multiple year leases at depressed market rental rates. This, together with the lack of construction and transaction based activity, will place continued pressure on our real estate earnings for the next several years. We expect that in 1995 a larger portion of interest costs will be charged directly to expense as a result of development activities being curtailed at some of our office parks.
Ultimate net realizable value for real estate assets is determined based on our ability to fully recover costs through a future revenue stream supported principally by rental revenues. In many instances, there currently is not an active market for commercial real estate. Therefore, the prices which might be realized if we were forced to liquidate such properties on an immediate sale basis would probably be less than the carrying values. In light of current market conditions and our intent and ability to hold properties for the long term, our primary focus is to ensure that we can recover our costs through ownership and operation rather than sale.
We analyze both individual buildings and development sites on a continuing basis. Estimates are made of both additional costs to be incurred to complete development where necessary and the revenues and operating costs of the property in the future. The time value of money is not considered in assessing revenues versus costs. Revenue assumptions take into account local market conditions with respect to the lease-up periods, occupancy rates, and current and future construction activity. There are uncertainties as to the actual realization of the assumptions relative to future revenues and future costs. However, management does not believe there is any permanent impairment in real estate carrying values.
The loans receivable, which were issued in connection with our joint venture activities, include primarily purchase money mortgages. Such loans, which represent only 2% of consolidated assets, are generally collateralized by buildings and land. We continuously evaluate the ultimate collectibility of such loans, of which no significant amounts are due in the near term, and establish appropriate reserves. Our agreements to manage all aspects of the ventured properties have played a significant role in enabling us to control potential collectibility issues related to these receivables. The reserve for possible uncollectible receivables was increased by charges against income of $29 million in 1994 and $22 million in both 1993 and 1992, principally related to loans on selected properties with operating income at levels which may not fully meet debt service requirements. During 1994, such reserve was reduced by writedowns aggregating $10 million related to specific loans that are uncollectible. Management believes the reserve of $74 million at December 31, 1994 adequately reflects the current condition of the portfolio based on current accounting guidance. If conditions in the real estate market do not improve, however, additional reserves may be required.
The Corporation will adopt Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, in the first quarter of 1995. SFAS No. 114 establishes new criteria for measuring impairment of a loan. The implementation of SFAS No. 114 will result in an increase to the reserve for possible uncollectible receivables. However, the impact on the Corporation's net income in 1995 will not be significant. This pronouncement is discussed further in Note (1)(o) of the Notes to Consolidated Financial Statements on page 53.
The fair value of these loans receivable is estimated through the use of valuation techniques which consider current yield factors applied to the net cash flows of the properties serving as the underlying collateral for the loans. The fair value of the loans represents a point-in-time estimate that is not relevant in predicting future earnings or cash flows related to such loans. The difference between the aggregate fair value of $354 million and the carrying value of $395 million at December 31, 1994 is not expected to be realized as we intend to hold the loan portfolio to maturity.
Our Florida residential development activities continued during 1994. Construction of a 171 unit oceanfront high rise condominium project commenced during 1994 with 114 units already under contract. Phased construction of a 214 unit mid-rise condominium project continued during 1994. At year-end, 58 units were sold and 35 units were under contract.
We have also begun development of residential projects in northern New Jersey. Our first project is a 178 unit townhome project. At year-end, 45 units were sold and 45 were under contract.
Real estate activities are funded with short-term credit instruments, primarily commercial paper, and debt issued by Chubb Capital Corporation as well as term loans and mortgages. The weighted average interest cost on short-term credit instruments approximated 4.6% in 1994 compared with 3.3% in 1993 and 4.6% in 1992. In 1994, the range of interest rates for term loans was 4.1% to 10.1% and for mortgages the range was 5.0% to 11.9%.
We expect to refinance, under similar terms, most of the term loans and mortgages which become due in 1995. Cash from operations combined with the ability to utilize the Corporation's commercial paper facility will provide sufficient funds for 1995.
CORPORATE
In February 1994, the Board of Directors authorized the repurchase of up to 5,000,000 shares of common stock. During 1994, the Corporation repurchased approximately 1,000,000 shares in open-market transactions at a cost of $72 million.
The Corporation has outstanding $150 million of unsecured 8 3/4% notes due in 1999. In each of the years 1995 through 1998, the Corporation will pay as a mandatory sinking fund an amount sufficient to redeem $30 million of principal.
Chubb Capital has outstanding in the Eurodollar market $250 million of 6% subordinated notes due in 1998. The notes are guaranteed by the Corporation and exchangeable into its common stock. Of the proceeds, $150 million has been used to support our real estate operations.
In February 1993, Chubb Capital sold $150 million of 6% notes due in 1998 and $100 million of 6 7/8% notes due in 2003. The notes are unsecured and are guaranteed by the Corporation. A substantial portion of the proceeds has been used to repay certain short-term debt and term loans incurred to support the real estate operations.
Chubb Capital also had outstanding $100 million of unsecured 8 5/8% notes, the proceeds of which were loaned to our real estate subsidiaries. The notes became due and were redeemed in January 1995. The $100 million loan to the real estate subsidiaries from Chubb Capital was renewed.
In July 1994, the Corporation entered into a revolving credit agreement with a group of banks that provides for unsecured borrowings of up to $300 million. The agreement replaced a similar agreement which was to terminate on November 30, 1994. The new agreement terminates on July 15, 1997 at which time any loans then outstanding become payable. There have been no borrowings under these agreements.
In November 1994, the Corporation acquired Personal Lines Insurance Brokerage, Inc. (PLI), a multi-state agency that specializes in personal lines insurance products. PLI then acquired the personal lines business of Alexander & Alexander Inc. PLI will operate as an independent agency and will continue to place business with a number of insurance companies including the property and casualty subsidiaries of the Corporation. The total of the cash and common stock issued for these acquisitions was $32 million.
In November 1992, the Corporation and Sun Alliance partially reduced their investment in the shares of each other. The proceeds from our sale of Sun Alliance shares were approximately $230 million. During 1994, the Corporation further reduced its investment in Sun Alliance, with proceeds from the sales amounting to approximately $53 million. The sales have not affected the ongoing business relationship between the Corporation's property and casualty subsidiaries and Sun Alliance.
Investment income earned on corporate invested assets and interest and other expenses not allocable to the operating subsidiaries are reflected in the corporate segment. Corporate income after taxes was $8 million in 1994, $14 million in 1993 and $20 million in 1992.
INVESTMENT GAINS AND LOSSES
Investment gains were realized by the Corporation and its insurance subsidiaries in 1994, 1993 and 1992. Such gains before taxes consisted of the following:
A restructuring of the equity security portfolio begun in 1992 resulted in significant realized investment gains in 1992 and 1993. In 1994, a redistribution of invested assets from equity securities to fixed maturities resulted in significant realized investment gains. In addition, approximately $30 million and $75 million of investment gains were realized in 1994 and 1992, respectively, from the Corporation's partial sales of its investment in Sun Alliance.
A primary reason for the sale of fixed maturities in each of the last three years has been to improve our after-tax portfolio yield without sacrificing quality, where market opportunities have existed to do so. The higher gains realized in 1993 were due to the sale of fixed maturities in the first half of the year as part of the realignment of our portfolio and in the latter part of the year to realize gains to partially offset the reduction of statutory surplus of the property and casualty subsidiaries resulting from the decrease in income related to the Fibreboard settlement.
Equity securities are reported in our financial statements at market value.
Fixed maturities which the Corporation and its insurance subsidiaries have the ability and intent to hold to maturity are classified as held-to-maturity. The remaining fixed maturities, which may be sold prior to maturity to support our investment strategies, such as in response to changes in interest rates and the yield curve or to maximize after-tax returns, are classified as available-for-sale.
Effective January 1, 1994, the Corporation adopted SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 115 established more stringent criteria for classifying fixed maturity securities as held-to-maturity. Thus, upon adopting SFAS No. 115, the Corporation reclassified $4.2 billion of fixed maturities as available-for-sale which were previously classified as held-to-maturity. At December 31, 1994, 35% of our fixed maturity portfolio was classified as held-to-maturity compared with 79% at year-ends 1993 and 1992.
SFAS No. 115 also requires that fixed maturities classified as available-for-sale be carried at market value. Prior to 1994, these securities were carried at the lower of the aggregate amortized cost or market value. At December 31, 1994, fixed maturities classified as held-to-maturity were carried at amortized cost while fixed maturities classified as available-for-sale were carried at market value. At December 31, 1993 and 1992, all fixed maturities were carried at amortized cost.
The unrealized appreciation or depreciation of equity securities and fixed maturities carried at market value is reflected in a separate component of shareholders' equity, net of applicable deferred income tax.
The unrealized market appreciation of those fixed maturities carried at amortized cost was $13 million, $736 million and $523 million at December 31, 1994, 1993 and 1992, respectively. Such unrealized appreciation was not reflected in the consolidated financial statements. The decrease in unrealized market appreciation of fixed maturities in 1994 was due to rising interest rates.
FEDERAL INCOME TAXES
The Omnibus Budget Reconciliation Act of 1993, enacted in August 1993, increased the federal corporate tax rate from 34% to 35%, retroactive to January 1, 1993. In addition to applying the higher tax rate to pre-tax income for 1993,
the federal income tax provision for 1993 reflects the effect of the rate increase on deferred income tax assets and liabilities. This effect was a tax benefit of approximately $5 million. The effect on the various business segments was as follows:
In 1992, property and casualty underwriting income after taxes included a benefit of $12 million resulting from a reversal of income tax reserves based on a settlement of prior years' taxes. Life and health insurance income after taxes included similar benefits of $5 million and $3 million in 1993 and 1992, respectively.
The Tax Reform Act of 1986 requires the property and casualty subsidiaries to discount loss reserves for tax purposes as of January 1, 1987 and provides that the initial discount on such loss reserves be excluded from taxable income. The benefit of this exclusion amounted to $6 million in 1992. There was no similar benefit in 1993 or 1994 since, for accounting purposes, the remaining "fresh start" benefit was recognized effective January 1, 1993 as part of the cumulative effect of the change in accounting principle upon the Corporation's adoption of the new accounting requirements for income taxes.
CHANGES IN ACCOUNTING PRINCIPLES
In 1994, the Corporation adopted SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. In 1993, the Corporation adopted SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, and SFAS No. 109, Accounting for Income Taxes. These pronouncements and their effect on the consolidated financial statements are discussed in Note (2) of the Notes to Consolidated Financial Statements on page 53.
ITEM 8.


ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of the Corporation at December 31, 1994 and 1993 and for each of the three years in the period ended December 31, 1994 and the Report of Independent Auditors thereon and the Corporation's unaudited quarterly financial data for the two-year period ended December 31, 1994 are incorporated by reference from the Corporation's 1994 Annual Report to Shareholders, pages 46 through 69.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Corporation's Directors is incorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 25, 1995, pages 2 through 5. Information regarding the executive officers is included in Part I of this report.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 25, 1995, pages 14 through 28 other than the Performance Graph and the Organization and Compensation Committee Report appearing on pages 18 through 24.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 25, 1995, pages 6 through 9.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders on April 25, 1995, pages 28 through 30.
PART IV.
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS AND 2. SCHEDULES
The financial statements and schedules listed in the accompanying index to financial statements and financial statement schedules are filed as part of this report.
3. EXHIBITS
The exhibits listed in the accompanying index to exhibits are filed as part of this report.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the last quarter of the period covered by this report.
For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 33-12208 (filed June 12, 1987), 33-29185 (filed June 7, 1989), and 33-30020 (filed July 18, 1989): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS ANNUAL REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
THE CHUBB CORPORATION (REGISTRANT) March 3, 1995
By /s/ DEAN R. O'HARE ------------------------------ (DEAN R. O'HARE, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
THE CHUBB CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORT OF INDEPENDENT AUDITORS
(ITEM 14(a))
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto.
The consolidated financial statements and supplementary information listed in the above index, which are included in the Annual Report to Shareholders of The Chubb Corporation for the year ended December 31, 1994, are hereby incorporated by reference.
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K) of The Chubb Corporation of our report dated February 24, 1995, included in the 1994 Annual Report to Shareholders of The Chubb Corporation.
Our audits also included the financial statement schedules of The Chubb Corporation listed in Item 14(a). These schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements (Form S-8: No. 33-12208, No. 33-29185, No. 33-30020, No. 33-49230 and No. 33-49232) of our report dated February 24, 1995, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) of The Chubb Corporation.
/s/ ERNST & YOUNG LLP New York, New York March 27, 1995
THE CHUBB CORPORATION
SCHEDULE I
CONSOLIDATED SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES (IN THOUSANDS)
DECEMBER 31, 1994
THE CHUBB CORPORATION
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS -- PARENT COMPANY ONLY (IN THOUSANDS)
DECEMBER 31, 1994 AND 1993
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 1994 Annual Report to Shareholders.
THE CHUBB CORPORATION
SCHEDULE II (CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME -- PARENT COMPANY ONLY (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
The Corporation and its domestic subsidiaries file a consolidated federal income tax return. The Corporation's federal income tax represents its share of the consolidated federal income tax under the Corporation's tax allocation agreements with its subsidiaries.
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 1994 Annual Report to Shareholders.
THE CHUBB CORPORATION
SCHEDULE II (CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS -- PARENT COMPANY ONLY (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
In 1992, $401,634,000 of fixed maturities and equity securities was contributed at cost to a consolidated investment company subsidiary of the Corporation. This noncash transaction has been excluded from the statement of cash flows.
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Corporation's 1994 Annual Report to Shareholders.
THE CHUBB CORPORATION
SCHEDULE III
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
---------------
* Property and casualty assets are available for payment of claims and expenses for all classes of business; therefore, such assets and the related investment income have not been identified with specific groupings of classes of business.
THE CHUBB CORPORATION
SCHEDULE IV
CONSOLIDATED REINSURANCE (IN THOUSANDS)
THE CHUBB CORPORATION
SCHEDULE VI
CONSOLIDATED SUPPLEMENTARY PROPERTY AND CASUALTY INSURANCE INFORMATION (IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
THE CHUBB CORPORATION
EXHIBITS
(ITEM 14(a))