The executive offices of the Corporation and the administrative offices of the Property and Casualty Insurance Group are in Warren, New Jersey. The Property and Casualty Insurance Group maintains zone administrative and branch offices in major cities throughout the United States and also has offices in Canada, Europe, Australia, the Far East and Latin America. Office facilities are leased with the exception of buildings in Branchburg, New Jersey and Simsbury, Connecticut. Management considers its office facilities suitable and adequate for the current level of operations. See Note (14) of the notes to consolidated financial statements incorporated by reference from the Corporation's 2000 Annual Report to Shareholders.
The following discussion presents our past results and our expectations for the near term future. The supplementary financial information and the 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 2000 Annual Report to Shareholders, pages 19, 20 and 42 through 63.
Certain statements in this document, as well as certain statements incorporated by reference herein, may be considered to be "forward looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995, such as statements that include the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project", or similar expressions. Such statements are subject to certain risks and uncertainties. The factors which could cause actual results to differ materially from those suggested by any such statements include, but are not limited to, those discussed or identified from time to time in the Corporation's public filings with the Securities and Exchange Commission and specifically to: risks or uncertainties associated with the Corporation's expectations with respect to its market risk evaluations or with respect to announced real estate plans or rate increases and investment income or cash flow projections and, more generally, to: general economic conditions including changes in interest rates and the performance of the financial markets, changes in domestic and foreign laws, regulations and taxes, changes in competition and pricing environments, regional or general changes in asset valuations, the occurrence of significant natural disasters, the inability to reinsure certain risks economically, the adequacy of loss reserves, as well as general market conditions, competition, pricing and restructurings. Any forward-looking statements set forth in this document speak only as of the initial Securities and Exchange Commission filing date hereof.
Net income, which includes realized investment gains and losses, was $715 million in 2000 compared with $621 million in 1999 and $707 million in 1998.
In July 1999, The Chubb Corporation (Corporation) completed its acquisition of Executive Risk Inc., a specialty insurance company offering directors and officers, errors and omissions and professional liability coverages.
Reported net premiums written amounted to $6.3 billion in 2000, an increase of 11% compared with 1999. Reported net premiums written increased 4% in 1999 compared with 1998. Premium growth in 2000 and 1999 was affected by the inclusion of Executive Risk written premiums since the date of acquisition. Excluding the effect of the acquisition of Executive Risk, premium growth was 8% in 2000 and 1% in 1999.
Substantial premium growth was achieved in 2000 and 1999 outside the United States, particularly in Europe, our largest foreign market. Non-U.S. premiums grew 16% and 12% in 2000 and 1999, respectively, in original currency. However, due to the strength of the U.S. dollar, particularly in 2000, reported non-U.S. premiums increased by only 9% in 2000 and 10% in 1999.
The loss ratio was 67.5% in 2000 compared with 70.3% in 1999 and 66.3% in 1998. Losses from catastrophes represented 1.2 percentage points of the loss ratio in 2000 compared with 4.0 percentage
points in 1999 and 3.3 percentage points in 1998. Catastrophe losses affecting results in 2000 and 1999 resulted primarily from weather-related events in the United States, including in particular Hurricane Floyd in the third quarter of 1999. The 1998 catastrophe losses resulted primarily from the winter ice storms in Canada in the first quarter, the wind and hail storms in the United States in the second quarter and Hurricane Georges in Puerto Rico in the third quarter.
During 1998, we implemented an activity value analysis process that identified and eliminated low-value activities and improved operational efficiency while redirecting resources to activities having the greatest potential to contribute to the Corporation's results. The cost control initiative resulted in job reductions through a combination of early retirements, terminations and attrition. Other savings resulted from improved vendor management and lower consulting expenses and other operating costs. In the first quarter of 1998, we recorded a restructuring charge of $40 million related to the implementation of the initiative. The majority of the charge consisted of accruals for providing enhanced pension benefits and postretirement medical benefits to employees who accepted an early retirement incentive offer. The liabilities related to these enhanced benefits have been included in the pension and postretirement medical benefits liabilities and are being reduced as benefit payments are made over time. All of the other restructuring costs have been paid. The initiative was completed with no significant differences from the original estimates of the restructuring costs.
Our personal insurance business continued to produce exceptionally strong results in 2000, measured by both growth and profitability.
Net premiums from personal insurance increased 13% in 2000 compared with a 12% increase in 1999. We continued to grow our personal lines business with the in-force policy count for all coverages increasing significantly. For most coverages, such growth exceeded 10% each year. Growth has been achieved while maintaining our disciplined approach to pricing and risk selection.
Personal lines premiums outside the United States grew significantly in 2000 and 1999, although from a small base. Much of this growth was in Europe where rates are inadequate. Remedial actions are under way to improve the profitability of this business.
Our personal insurance business produced substantial underwriting profits in each of the past three years. The combined loss and expense ratio was 92.9% in 2000 compared with 89.9% in 1999 and 85.6% in 1998.
Our personal automobile business produced substantial profits in each of the last three years. However, results in 2000 were less profitable due to an increase in the frequency of losses in the liability component of this business. Results in each year benefited from stable loss severity.
Our standard commercial insurance business produced substantial underwriting losses in each of the past three years, but showed improvement in 2000. The improvement was due primarily to fewer large losses as well as the progress made on our initiative to increase prices while not renewing unprofitable accounts. The combined loss and expense ratio was 114.0% in 2000 compared with 123.6% in 1999 and 118.0% in 1998.
Rates are still inadequate. Underpriced business will continue to put pressure on standard commercial underwriting results in 2001. We will continue to push for higher rates in 2001.
Multiple peril results were unprofitable in each of the past three years due, in large part, to inadequate prices. However, such results showed significant improvement in 2000. The improvement occurred in both the property and liability components of this business due to a lower frequency of large losses in both the United States and overseas. Results in the property component also benefited from an absence of catastrophe losses. Results had deteriorated in 1999 compared with the prior year due to an increase in the severity of liability losses as well as several large property losses overseas. There were virtually no catastrophe losses for this class in 2000. Catastrophe losses represented 9.6 percentage points of the loss ratio in 1999 and 8.6 percentage points in 1998.
Results for our casualty business were unprofitable in each of the past three years. Results in 2000 were similar to those in 1999, as improvement in the primary liability component was offset by further deterioration in the automobile component. In 1999, casualty results had deteriorated, primarily in these two components. Casualty results in each of the past three years were adversely affected by incurred losses relating to asbestos and toxic waste claims. The excess liability component of our casualty coverages was modestly unprofitable in 2000 and 1999 compared with the near breakeven results in 1998 due to increases in the severity of the large losses that are prevalent in this class as well as declining prices over the past several years. Excess liability results in each of the past three years benefited from favorable development of prior year loss reserves. Results for the primary liability component were unprofitable in each of the past three years, but more so in 1999 due to a higher frequency of large losses. Primary and excess liability results outside the United States deteriorated in 2000. Results in the automobile component were increasingly unprofitable over the past three years due in large part to inadequate prices, a consequence of the prolonged soft market, and an increased frequency of losses. Results in 2000 were also adversely affected by uninsured motorist claims in Ohio, the result of a state supreme court decision that the uninsured and underinsured motorists coverages of commercial automobile insurance policies also cover employees and their family members even when they are driving their personal cars for non-business purposes.
Workers' compensation results were near breakeven in 2000 compared with results that were similarly unprofitable in 1999 and 1998. The improvement in 2000 was due to higher rates as well as a lower frequency of losses, resulting in part from our disciplined risk selection during the past two years.
Reported net premiums from specialty commercial insurance increased by 21% in 2000 compared with a 9% increase in 1999. Excluding the effect of the acquisition of Executive Risk, premium growth was about 14% in 2000 and 4% in 1999.
Property and marine results remained highly unprofitable over the past three years. The positive effect of the pricing initiative and the culling of unprofitable accounts was offset in 1999 by higher catastrophe losses and in 2000 by significantly higher losses overseas. Results in all three years were adversely affected by a high frequency of large property losses. Catastrophe losses for this class represented 1.7 percentage points of the loss ratio in 2000 compared with 10.2 percentage points in 1999 and 5.7 percentage points in 1998.
Our financial institutions business was also profitable in each of the last three years due to favorable loss experience in the fidelity component of this business. The standard commercial business written on financial institutions produced breakeven results in 2000 compared with unprofitable results in 1999 and profitable results in 1998.
Our most significant individual asbestos exposures involve traditional defendants who manufactured, distributed or installed asbestos products for whom we wrote excess liability coverages. While these insureds are relatively few in number, such exposure has increased in recent years due to the increased volume of claims, the erosion of much of the underlying limits and the bankruptcies of target defendants.
The expanded focus of asbestos litigation beyond asbestos manufacturers and distributors to installers and premises owners has created in some instances conflicts among insureds, primary
insurers and excess insurers, primarily involving questions regarding allocation of indemnity and expense costs and exhaustion of policy limits. These issues are generating costly coverage litigation with the potential for inconsistent results.
Significant uncertainty remains as to our ultimate liability relating to asbestos related claims due to such factors as the long latency period between asbestos exposure and disease manifestation and the resulting potential for involvement of multiple policy periods for individual claims as well as the increase in the volume of claims by plaintiffs claiming exposure but with no symptoms of asbestos-related disease.
Uncertainties also remain as to the Superfund law itself. Superfund's taxing authority expired on December 31, 1995. It has not been re-enacted. Notwithstanding continued pressure by the insurance industry and other interested parties to achieve a legislative solution that would reform the liability provisions of the law, federal legislation appears to be at a standstill. It is currently not possible to predict the direction that any reforms may take, when they may occur or the effect that any changes may have on the insurance industry.
Litigation costs remain substantial, particularly for hazardous waste claims. Primary policies provide a limit on indemnity payments but many do not limit defense costs. This unlimited defense provided in the policies sometimes leads to the payment of defense costs substantially exceeding the indemnity exposure. A substantial portion of the funds we have expended to date has been for legal fees incurred in the prolonged litigation of coverage issues.
Reserves for asbestos and toxic waste claims cannot be estimated with traditional loss reserving techniques that rely on historical accident year loss development factors. We have established case reserves and expense 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. Incurred losses relating to asbestos and toxic waste claims were $31 million in 2000, $47 million in 1999 and $68 million in 1998. Further increases in loss reserves in 2001 and future years are possible as legal and factual issues concerning these claims continue to be clarified. The amount cannot be reasonably estimated.
The Corporation's property and casualty subsidiaries have an exposure to insured losses caused by hurricanes, earthquakes, winter storms, windstorms and other catastrophic events. The frequency and severity of catastrophes are unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. We continually assess our concentration of underwriting exposures in catastrophe prone areas globally and develop strategies to manage this exposure through individual risk selection, subject to regulatory constraints, and through the purchase of catastrophe reinsurance. In recent years, we have invested in modeling technologies and concentration management tools that allow us to better monitor and control catastrophe exposures. We also continue to explore and analyze credible scientific evidence, including the impact of global climate change, that may affect our potential exposure under insurance policies.
New cash available for investment by the property and casualty subsidiaries was approximately $560 million in 2000 compared with $940 million in 1999 and $860 million in 1998. New cash available in 2000 was lower than in 1999 and 1998 due primarily to higher paid losses in 2000 caused in large part by significantly higher payments on directors and officers liability and excess liability claims compared
Corporate and other includes investment income earned on corporate invested assets, interest expense and other expenses not allocable to the operating subsidiaries, and the results of our real estate and other non-insurance subsidiaries. Corporate and other produced a loss before taxes of $4 million in both 2000 and 1999 compared with income of $23 million in 1998. The losses in 2000 and 1999 were primarily due to increasingly higher interest expense each year, due to the inclusion of interest expense on the debt assumed in connection with the Executive Risk acquisition in July 1999. In 2000, corporate and other included income of $10 million from a noncompete payment related to the sale of the Corporation's 50% interest in Associated Aviation Underwriters, Inc. (AAU).
Real estate operations resulted in a loss before taxes of $4 million in each of the past three years, which amounts are included in the corporate and other results for those years. In each year, we sold selected commercial properties as well as residential properties. Real estate revenues were $75 million in 2000, $97 million in 1999 and $82 million in 1998.
Loans receivable, which amounted to $90 million at December 31, 2000, are primarily purchase money mortgages. Such loans, which were issued in connection with our joint venture activities and other property sales, are generally collateralized by buildings and, in some cases, land. We continually evaluate the ultimate collectibility of such loans and establish appropriate reserves.
Fixed maturity securities that 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. Fixed maturities classified as held-to-maturity are carried at amortized cost while fixed maturities classified as available-for-sale are carried at market value. At December 31, 2000, 10% of the fixed maturity portfolio was classified as held-to-maturity compared with 12% at December 31, 1999 and 15% at December 31, 1998.
Changes in unrealized market appreciation or depreciation of fixed maturities were due to fluctuations in interest rates.
Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. Our primary exposure to market risks relates to our investment portfolio, which exposes the Corporation and its property and casualty subsidiaries to risks related to interest rates and, to a lesser extent, credit quality, prepayment, foreign currency exchange rates and equity prices. Analytical tools and monitoring systems are in place to assess each of these elements of market risk.
Interest rate risk is the price sensitivity of a fixed income security to changes in interest rates. We view the potential changes in price of our fixed income investments within the overall context of asset and liability management. Our actuaries estimate the payout pattern of our liabilities, primarily our property and casualty loss reserves, to determine their duration, which is the present value of the weighted average payments expressed in years. We set duration targets for our fixed income investment portfolios after consideration of the duration of these liabilities and other factors, which we believe mitigates the overall effect of interest rate risk for the Corporation and its property and casualty subsidiaries.
Mortgage-backed securities comprised 37% and 33% of our taxable bond portfolio at year-end 2000 and 1999, respectively. About 50% of our mortgage-backed securities holdings at December 31, 2000 related to residential mortgages consisting of government agency pass-through securities, government agency collateralized mortgage obligations (CMOs) and AAA rated non-agency CMOs backed by government agency collateral or single family home mortgages. The majority of the CMOs are actively traded in liquid markets and market value information is readily available from broker/dealers. An additional 25% of our mortgage-backed securities were call protected AAA rated commercial securities. The remaining mortgage-backed holdings were all in investment grade commercial mortgage-backed securities.
Foreign currency risk is the sensitivity to foreign exchange rate fluctuations of the market value and investment income related to foreign currency denominated financial instruments. The functional currency of our foreign operations is generally the currency of the local operating environment since their business is primarily transacted in such local currency. We reduce the risks relating to currency fluctuations by maintaining investments in those foreign currencies in which our property and casualty subsidiaries have loss reserves and other liabilities. Such investments have characteristics similar to our liabilities in those currencies. At December 31, 2000, the property and casualty subsidiaries held foreign investments of $1.4 billion supporting their international operations. Such foreign investments have quality and maturity characteristics similar to our domestic portfolio. The principal currencies creating foreign exchange rate risk for the property and casualty subsidiaries are the Canadian dollar, the Euro and the British pound sterling. The table on page 27 provides information about those fixed maturity investments that are denominated in these currencies. The table presents cash flows of principal amounts in U.S. dollar equivalents by expected maturity dates at December 31, 2000 and 1999. Actual cash flows could differ from the expected amounts.
Equity price risk is the potential loss arising from adverse changes in the value of equity securities. In general, equities have more year-to-year price variability than intermediate term high grade bonds. However, returns over longer time frames have been consistently higher. Our equity securities are high quality, diversified across industries and readily marketable. A hypothetical decrease of 10% in the market prices of the equity securities held at December 31, 2000 and 1999 would have resulted in a decrease of $83 million and $77 million, respectively, in the fair value of the equity securities portfolio.
The long term debt obligations of Executive Risk remained in place subsequent to the acquisition. Chubb Executive Risk Inc., a wholly owned subsidiary of the Corporation, has outstanding $75 million of unsecured 7 1/8% notes due in 2007. Executive Risk Capital Trust, wholly owned by Chubb Executive Risk, has outstanding $125 million of 8.675% capital securities. The sole assets of the Trust are debentures issued by Chubb Executive Risk. The capital securities are subject to mandatory redemption in 2027 upon repayment of the debentures. The capital securities are also subject to mandatory redemption under certain circumstances beginning in 2007. The Corporation has guaranteed the unsecured notes and the capital securities.
The Corporation has two credit agreements with a group of banks that provide for unsecured borrowings of up to $500 million in the aggregate. The $200 million short term revolving credit facility, which was to have terminated on July 5, 2000, was extended to July 4, 2001, and may be renewed or replaced. The $300 million medium term revolving credit facility terminates on July 11, 2002. On the respective termination dates, any loans then outstanding become payable. There have been no borrowings under these agreements. These facilities are available for general corporate purposes and to support Chubb Capital's commercial paper borrowing arrangement.
Consolidated financial statements of the Corporation at December 31, 2000 and 1999 and for each of the three years in the period ended December 31, 2000 and the Report of Independent Auditors thereon and the Corporation's unaudited quarterly financial data for the two-year period ended December 31, 2000 are incorporated by reference from the Corporation's 2000 Annual Report to Shareholders, pages 42 through 65.