Annual Report 2001 - Chubb Group of Insurance Companies

(j) Stock-Based Compensation
The intrinsic value method of accounting is used for
stock-based compensation plans. Under the intrinsic
value method, compensation cost is measured as the
excess, if any, of the quoted market price of the stock at
the measurement date over the amount an employee
must pay to acquire the stock.
(k) Income Taxes
The Corporation and its domestic subsidiaries Ñle a
consolidated federal income tax return.
Deferred income tax assets and liabilities are recognized
for the expected future tax eÅects attributable to
temporary diÅerences between the Ñnancial reporting
and tax bases of assets and liabilities, based on enacted tax
rates and other provisions of tax law. The eÅect of a
change in tax laws or rates is recognized in net income in
the period in which such change is enacted.
U.S. federal income taxes are accrued on undistributed
earnings of foreign subsidiaries.
(l) Foreign Exchange
Assets and liabilities relating to foreign operations are
translated into U.S. dollars using current exchange rates;
revenues and expenses are translated into U.S. dollars
using the average exchange rates for each year.
The functional currency of foreign operations is gener-
ally the currency of the local operating environment
since their business is primarily transacted in such local
currency. Translation gains and losses, net of applicable
income tax, are excluded from net income and are
credited or charged directly to a separate component of
comprehensive income.
(m) Cash Flow Information
In the statement of cash Öows, short term investments
are not considered to be cash equivalents. The eÅect of
changes in foreign exchange rates on cash balances was
immaterial.
In 1999, the Corporation acquired all of the outstanding
common shares of Executive Risk Inc. in exchange
for common stock of the Corporation (see
Note (3)(a)). The details of the acquisition were as
follows: fair value of assets acquired, including goodwill,
$2,459 million; fair value of liabilities assumed, $1,627
million; and fair value of common stock issued and
options assumed, $832 million. This noncash transaction
has been excluded from the consolidated statements of
cash Öows.
(n) Accounting Pronouncements Not Yet Adopted
In June 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Stan-
dards (SFAS) No. 142, Goodwill and Other Intangible
Assets. The Statement addresses how intangible assets
should be accounted for upon their acquisition and how
goodwill and other intangible assets should be accounted
for after they have been initially recognized in the Ñnan-
cial statements. Under SFAS No. 142, goodwill will no
longer be amortized but rather will be tested at least
annually for impairment. The provisions of
SFAS No. 142 are eÅective for the Corporation for the
year beginning January 1, 2002. The Statement shall be
applied to goodwill recognized in the Corporation's Ñ-
nancial statements at that date. SFAS No. 142 may not
be applied retroactively to Ñnancial statements of prior
periods. The elimination of goodwill amortization is
expected to result in an increase in net income in 2002 of
approximately $20 million. The Corporation is in the
process of assessing the eÅect, if any, that the implemen-
tation of the other provisions of SFAS No. 142 will have
on its Ñnancial position or results of operations.
(2) Adoption of New Accounting Pronouncements
EÅective January 1, 2001, the Corporation adopted
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, and SFAS No. 138, Accounting
for Certain Derivative Instruments and Certain Hedging
Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedg-
ing activities and SFAS No. 138 provides additional
guidance related to accounting and reporting for certain
derivative instruments and hedging activities.
SFAS No. 133 requires that all derivatives be recognized
in the balance sheet as assets or liabilities and be mea-
sured at fair value. Changes in the fair value of a
derivative are reported in net income or other compre-
hensive income, depending on the intended use of the
derivative and whether it qualiÑes for hedge accounting.
The Statements may not be applied retroactively to
Ñnancial statements of prior periods. The Corporation's
use of derivatives has not been signiÑcant. Thus, the
adoption of SFAS No. 133 and SFAS No. 138 did not
have a signiÑcant eÅect on the Corporation's Ñnancial
position or results of operations.
EÅective April 1, 2001, the Corporation adopted the
Emerging Issues Task Force (EITF) consensus on Issue
No. 99-20, Recognition of Interest Income and Impair-
ment on Purchased and Retained BeneÑcial Interests in
Securitized Financial Assets. EITF Issue No. 99-20
requires that investors in certain asset-backed securities
recognize changes in a security's estimated yield prospec-
tively. EITF Issue No. 99-20 also requires that if the
carrying value of any such asset-backed security exceeds
its current fair value, a determination should be made as
to whether the excess represents an other than temporary
decline in value and any such decline should be
recognized as a loss in the income statement. The adoption
of EITF Issue No. 99-20 did not have a signiÑcant
eÅect on the Corporation's Ñnancial position or results of
operations.
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