-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V7x3j3C1bhkQNEYeqC395pX2TCrZ6ng+Mv3/CH/L/ecL8cXZfQVQv5xdAWY3H3pT 5pXvnyQ2HfbHqPaEMLis9Q== 0000950123-96-006516.txt : 19961115 0000950123-96-006516.hdr.sgml : 19961115 ACCESSION NUMBER: 0000950123-96-006516 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHUBB CORP CENTRAL INDEX KEY: 0000020171 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 132595722 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08661 FILM NUMBER: 96661946 BUSINESS ADDRESS: STREET 1: 15 MOUNTAIN VIEW RD P O BOX 1615 CITY: WARREN STATE: NJ ZIP: 07061 BUSINESS PHONE: 9805802000 10-Q 1 FORM 10-Q FOR P/E 9/30/96 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 For the quarterly period ended September 30, 1996 ----------------------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission file number 1-8661 ----------- THE CHUBB CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) NEW JERSEY 13-2595722 - ------------------------------- -------------------- (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 15 MOUNTAIN VIEW ROAD, WARREN, NEW JERSEY 07061-1615 - ----------------------------------------- ---------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908) 903-2000 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ---------------- ---------------- The number of shares of common stock outstanding as of October 31, 1996 was 174,010,087. 2 THE CHUBB CORPORATION INDEX
Page Number ----------- Part I. Financial Information: Item 1 - Financial Statements: Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995..................... 1 Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 1996 and 1995.................................. 2 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995................ 3 Notes to Consolidated Financial Statements.................... 4 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 7 Part II. Other Information: Item 6 - Exhibits and Reports on Form 8-K....................... 15
3 Page 1 THE CHUBB CORPORATION CONSOLIDATED BALANCE SHEETS
Sept. 30, Dec. 31, 1996 1995 --------- -------- (in millions) Assets Invested Assets Short Term Investments............................... $ 665.4 $ 484.5 Fixed Maturities Held-to-Maturity Tax Exempt (market $2,607.9 and $3,004.8)......... 2,489.6 2,826.7 Taxable (market $403.1 and $433.9)................ 391.8 402.5 Available-for-Sale Tax Exempt (cost $4,207.9 and $3,607.9)........... 4,368.2 3,860.6 Taxable (cost $6,051.2 and $5,282.7).............. 6,103.3 5,513.0 Equity Securities (cost $596.5 and $493.4)........... 696.3 587.8 Policy and Mortgage Loans............................ 222.4 212.3 --------- --------- TOTAL INVESTED ASSETS......................... 14,937.0 13,887.4 Cash................................................... 9.9 11.9 Accrued Investment Income.............................. 227.5 245.3 Premiums Receivable.................................... 972.6 872.9 Reinsurance Recoverable on Property and Casualty Unpaid Claims......................................... 1,790.3 1,973.7 Prepaid Reinsurance Premiums........................... 348.3 484.4 Funds Held for Asbestos-Related Settlement............. 670.7 1,038.1 Deferred Policy Acquisition Costs Property and Casualty Insurance...................... 601.7 558.7 Life and Health Insurance............................ 682.3 612.7 Real Estate Assets..................................... 1,765.1 1,742.6 Deferred Income Tax.................................... 260.7 159.7 Other Assets........................................... 1,315.8 1,409.1 --------- --------- TOTAL ASSETS.................................. $23,581.9 $22,996.5 ========= ========= Liabilities Property and Casualty Unpaid Claims.................... $ 9,540.5 $ 9,588.2 Life and Health Policy Liabilities..................... 3,176.9 2,943.1 Unearned Premiums...................................... 2,631.6 2,570.7 Short Term Debt........................................ 250.5 187.6 Long Term Debt......................................... 1,078.0 1,156.0 Dividend Payable to Shareholders....................... 47.0 42.7 Accrued Expenses and Other Liabilities................. 1,446.8 1,245.5 --------- --------- TOTAL LIABILITIES............................. 18,171.3 17,733.8 --------- --------- Shareholders' Equity Common Stock - $1 Par Value; 175,615,237 and 87,819,355 Shares (Note 5)............................ 175.6 87.8 Paid-In Surplus........................................ 685.1 778.2 Retained Earnings...................................... 4,555.9 4,206.5 Foreign Currency Translation Losses, Net of Income Tax. (19.0) (3.4) Unrealized Appreciation of Investments, Net............ 191.2 345.9 Receivable from Employee Stock Ownership Plan.......... (110.7) (115.0) Treasury Stock, at Cost - 1,567,513 and 518,468 Shares (Note 5)............................... (67.5) (37.3) --------- --------- TOTAL SHAREHOLDERS' EQUITY.................... 5,410.6 5,262.7 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.... $23,581.9 $22,996.5 ========= =========
See Notes to Consolidated Financial Statements. 4 Page 2 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF INCOME PERIODS ENDED SEPTEMBER 30
Third Quarter Nine Months -------------- -------------- 1996 1995 1996 1995 ---- ---- ---- ---- (in millions) Revenues Premiums Earned and Policy Charges.... $1,212.0 $1,206.1 $3,702.4 $3,557.2 Investment Income..................... 238.1 229.9 704.9 667.0 Real Estate........................... 52.4 77.0 269.8 225.0 Realized Investment Gains............. 0.5 20.3 37.6 74.0 -------- -------- -------- -------- Total Revenues................. 1,503.0 1,533.3 4,714.7 4,523.2 -------- -------- -------- -------- Benefits, Claims and Expenses Insurance Claims and Policyholders' Benefits............................. 815.9 816.3 2,523.6 2,391.6 Amortization of Deferred Policy Acquisition Costs.................... 327.5 304.2 989.1 891.9 Other Insurance Operating Costs and Expenses............................. 97.5 109.5 302.2 340.5 Real Estate Cost of Sales and Expenses 47.5 73.1 253.5 220.3 Investment Expenses................... 3.1 2.9 11.9 11.2 Corporate Expenses.................... 6.3 6.0 21.0 21.8 -------- -------- -------- -------- Total Benefits, Claims and Expenses...................... 1,297.8 1,312.0 4,101.3 3,877.3 -------- -------- -------- -------- Income Before Federal and Foreign Income Tax............................. 205.2 221.3 613.4 645.9 Federal and Foreign Income Tax.......... 40.0 49.9 122.5 142.8 -------- -------- -------- -------- Net Income.............................. $ 165.2 $ 171.4 $ 490.9 $ 503.1 ======== ======== ======== ======== Average Common and Common Equivalent Shares Outstanding (In Thousands)...... 180,001 179,966 180,291 179,753 PER SHARE DATA - -------------- Net Income.............................. $ .93 $ .97 $ 2.76 $ 2.84 Dividends Declared...................... .27 .24 1/2 .81 .73 1/2
See Notes to Consolidated Financial Statements. 5 Page 3 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30
1996 1995 ---- ---- (in millions) Cash Flows from Operating Activities Net Income............................................. $ 490.9 $ 503.1 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Increase in Property and Casualty Unpaid Claims, Net. 135.7 526.2 Increase in Unearned Premiums, Net................... 197.0 179.1 Increase in Premiums Receivable...................... (99.7) (60.4) Decrease (Increase) in Funds Held for Asbestos- Related Settlement.................................. 367.4 (483.6) Decrease in Medical Malpractice Reinsurance Related Receivable.................................. 191.2 - Increase in Deferred Policy Acquisition Costs........ (85.4) (93.9) Depreciation......................................... 49.4 45.7 Realized Investment Gains............................ (37.6) (74.0) Other, Net........................................... 42.9 (7.0) --------- --------- Net Cash Provided by Operating Activities.............. 1,251.8 535.2 --------- --------- Cash Flows from Investing Activities Proceeds from Sales of Fixed Maturities................ 2,466.4 2,932.2 Proceeds from Maturities of Fixed Maturities........... 708.1 584.1 Proceeds from Sales of Equity Securities............... 183.8 330.0 Purchases of Fixed Maturities.......................... (4,192.2) (4,362.1) Purchases of Equity Securities......................... (253.5) (156.2) Decrease (Increase) in Short Term Investments, Net..... (180.9) 175.7 Increase in Net Payable from Security Transactions Not Settled........................................... 86.9 37.5 Additions to Real Estate Assets, Net................... (40.8) (40.2) Other, Net............................................. (79.5) (92.8) --------- --------- Net Cash Used in Investing Activities.................. (1,301.7) (591.8) --------- --------- Cash Flows from Financing Activities Deposits Credited to Policyholder Funds................ 358.9 338.3 Withdrawals from Policyholder Funds.................... (124.3) (102.9) Proceeds from Issuance of Long Term Debt............... 5.0 151.5 Repayment of Long Term Debt............................ (83.0) (272.1) Increase in Short Term Debt, Net....................... 62.9 50.7 Dividends Paid to Shareholders......................... (137.2) (124.9) Repurchase of Shares................................... (56.4) - Other, Net............................................. 22.0 15.2 --------- --------- Net Cash Provided by Financing Activities.............. 47.9 55.8 --------- --------- Net Decrease in Cash..................................... (2.0) (0.8) Cash at Beginning of Year................................ 11.9 5.6 --------- --------- Cash at End of Period.................................. $ 9.9 $ 4.8 ========= =========
See Notes to Consolidated Financial Statements. 6 Page 4 THE CHUBB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1) General The amounts included in this report are unaudited but include those adjustments, consisting of normal recurring items, which management considers necessary for a fair presentation. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes in the 1995 Annual Report to Shareholders. 2) Discontinued Operations In the second quarter of 1996, the Corporation announced a plan to exit the group health insurance business. A definitive agreement was reached on May 31, 1996 with Healthsource Inc. under which Healthsource will acquire the Corporation's 85% interest in ChubbHealth, Inc., a health maintenance organization, for $25 million. The sale is subject to regulatory approvals and is expected to be completed no later than the second quarter of 1997. Also, the life and health insurance subsidiaries discontinued the marketing of traditional group health indemnity business. Due to various contractual and regulatory requirements, group health indemnity coverages will be renewed in certain jurisdictions until an orderly transition to another carrier or termination of coverage can occur. The group health insurance operations have been accounted for as discontinued operations. However, the Corporation's results of operations for periods prior to the second quarter of 1996 have not been restated since amounts attributable to the group health insurance business were not significant. It is expected that the sale of ChubbHealth will result in an after tax gain of approximately $15 million which will be substantially offset by costs relating to the life and health insurance subsidiaries' exit from the traditional indemnity business. The discontinued group health business had no effect on net income subsequent to March 31, 1996. Results of the discontinued group health insurance operations included in the consolidated statements of income were as follows:
Periods Ended September 30 -------------------------------- Third Quarter Nine Months ------------- -------------- 1996 1995 1996 1995 ---- ---- ---- ---- (in millions) Premiums earned.................. - $64.3 $57.5 $250.9 Net loss......................... - (1.5) (1.0) (7.6)
3) Investments Short term investments, which have an original maturity of one year or less, are carried at amortized cost which approximates market value. Fixed maturities classified as held-to-maturity are carried at amortized cost. Fixed maturities classified as available-for-sale and equity securities are carried at market value as of the balance sheet date. 7 Page 5 The net change in unrealized appreciation or depreciation of investments carried at market value was as follows:
Periods Ended September 30 -------------------------------- Third Quarter Nine Months ------------- -------------- 1996 1995 1996 1995 ---- ---- ---- ---- (in millions) Change in unrealized appreciation of equity securities.................... $(2.4) $24.7 $ 5.4 $ 68.6 Change in unrealized appreciation or depreciation of fixed maturities..... 65.7 50.8 (270.6) 478.1 Change in deferred policy acquisition cost adjustment...................... (7.0) 3.5 27.2 (56.5) ----- ----- ------- ------ 56.3 79.0 (238.0) 490.2 Deferred income tax (credit), net of change in valuation allowance........ 19.7 27.8 (83.3) 122.0 ----- ----- ------- ------ Change in unrealized appreciation or depreciation of investments, net..... $36.6 $51.2 $(154.7) $368.2 ===== ===== ======= ======
A valuation allowance of $49.6 million was provided at December 31, 1994 related to future tax benefits on unrealized depreciation of investments carried at market value. At March 31, 1995, there was unrealized appreciation of such investments. Therefore, the valuation allowance was eliminated in the first quarter of 1995. The valuation allowance had no impact on net income. 4) Property and Casualty Unpaid Claims A discussion of the 1993 Fibreboard asbestos-related settlement is presented in Note 14 of the notes to consolidated financial statements in the 1995 Annual Report to Shareholders. The following developments during 1996 relate to the settlement. In July 1996, the United States Court of Appeals for the Fifth Circuit affirmed the 1995 judgment of the United States District Court of the Eastern District of Texas, which approved the global settlement agreement among Pacific Indemnity Company (a subsidiary of the Corporation), 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, which are claims that were not filed in court before August 27, 1993. The Court also affirmed the approval of the trilateral agreement among Pacific Indemnity, Continental Casualty and Fibreboard to settle all pending 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. The affirmation of these agreements had no effect on the amount of loss reserves provided for the settlement. A petition for re-hearing the global settlement agreement before the entire Fifth Circuit Court is pending. Should the petition for re-hearing be denied, an appeal to the United States Supreme Court by the objectors to 8 Page 6 the settlement is expected. No petition for re-hearing the trilateral agreement by the entire Fifth Circuit Court was filed. Management believes that the period during which an appeal of the trilateral agreement to the United States Supreme Court had to be filed expired on October 24, 1996 and that the agreement is therefore final. On that basis, management believes that the uncertainty of our exposure with respect to asbestos-related bodily injury claims against Fibreboard has been eliminated. 5) Shareholders' Equity On March 1, 1996, the Board of Directors approved a two-for-one stock split payable to shareholders of record as of April 19, 1996. Accordingly, in the consolidated balance sheet at September 30, 1996, the shares of common stock issued and the shares held as treasury stock reflect the effect of the stock split. At the same time, the Board of Directors approved an increase in the number of authorized shares of common stock of the Corporation from 300 million shares to 600 million shares. 6) Per Share Data Earnings per share amounts are based on the weighted average number of common and common equivalent shares outstanding. The 6% guaranteed exchangeable subordinated notes are considered to be common equivalent shares. The computation assumes the addition to income of the after-tax interest expense applicable to such notes. The number of shares and per share amounts have been retroactively adjusted to reflect the two-for-one stock split. 9 Page 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 AND FOR THE QUARTERS ENDED SEPTEMBER 30, 1996 AND 1995 PROPERTY AND CASUALTY INSURANCE Earnings from our property and casualty business in the first nine months of 1996 were similar to those in the comparable 1995 period as a decrease in underwriting income was substantially offset by higher investment income. The decrease in underwriting income in 1996 was due to higher catastrophe losses, resulting primarily from the winter storms in the eastern part of the United States in the first quarter. Property and casualty income after taxes amounted to $415.7 million in the first nine months of 1996 and $145.8 million in the third quarter compared with $418.5 million and $139.9 million, respectively, in 1995. Net premiums written were $3.6 billion in the first nine months of 1996 and $1.2 billion in the third quarter, representing increases of 10.3% and 6.1%, respectively, over the comparable periods of 1995. More than half of the premium growth was due to changes in certain reinsurance agreements which are discussed below. The marketplace remained competitive, particularly in the commercial classes, in all our markets worldwide. Competitors continued to place significant pressure on pricing as they attempted to maintain or increase market share. As a result, price increases have been difficult to achieve. In this environment, we have focused on our specialty lines where we emphasize the added value we provide to our customers. In the first nine months of 1996, substantial premium growth was achieved outside the United States from our expanding international branch network. Such growth slowed in the third quarter due in large part to the discontinuation of our participation in certain pools of accident business in Europe. Effective January 1, 1996, the agreements pertaining to the exchange of reinsurance on a quota share basis with the Sun Alliance Group plc were amended to reduce the portion of each company's business that is reinsured with the other. The Corporation's property and casualty subsidiaries now retain a greater portion of the business they write directly and assume less reinsurance from Sun Alliance. As a result of these changes in retention, net premiums written in the first nine months of 1996 increased by $48.2 million for the personal classes and $103.0 million for the commercial classes and decreased by $64.0 million for reinsurance assumed. There was an additional impact on net premiums written in the first quarter of 1996 due to the effect of the portfolio transfers of unearned premiums as of January 1, 1996 resulting from these changes. The effect of these portfolio transfers was an increase in net premiums written of $30.6 million for the personal classes and $61.0 million for the commercial classes and a decrease of $65.2 million for reinsurance assumed. Also, effective January 1, 1996, our casualty excess of loss reinsurance program was modified, principally for excess liability and executive protection coverages. The changes include an increase in the initial retention for each loss from $5 million to $10 million and an increase in the initial aggregate amount of losses retained for each year before reinsurance becomes available. These changes in our casualty reinsurance program increased net premiums written in the first nine months of 1996 by approximately $90 million. 10 Page 8 Underwriting results were profitable in 1996 and 1995. Our combined loss and expense ratio was 98.3% in the first nine months of 1996 and 97.2% in the third quarter compared with 96.5% and 96.9%, respectively, in 1995. The loss ratio was 66.2% for the first nine months of 1996 and 65.4% for the third quarter compared with 64.4% and 65.4%, respectively, in the prior year. The loss ratios continue to reflect the favorable experience resulting from the consistent application of our disciplined underwriting standards. Catastrophe losses in the first nine months of 1996 amounted to $107.8 million which represented 3.2 percentage points of the loss ratio compared with $55.1 million or 1.8 percentage points in 1995. Catastrophe losses for the third quarter of 1996 amounted to $23.9 million or 2.1 percentage points of the loss ratio compared with $6.0 million or 0.6 of a percentage point in 1995. Our expense ratio was 32.1% for the first nine months of 1996 and 31.8% for the third quarter compared with 32.1% and 31.5%, respectively, in 1995. The discussion of underwriting results reflects certain reclassifications to present results in a manner more consistent with the way the property and casualty business is now managed. Prior period amounts have been restated to conform with the new presentation. Underwriting results during 1996 and 1995 by class of business were as follows:
Nine Months Ended September 30 -------------------------------------- Net Premiums Combined Loss and Written Expense Ratios --------------- ----------------- 1996 1995 1996 1995 ---- ---- ---- ---- (in millions) Personal Insurance Automobile........................ $ 184.9 $ 152.0 86.2% 87.2% Homeowners........................ 413.8 342.3 107.8 91.1 Other............................. 192.1 160.4 67.5 73.3 -------- -------- ----- ----- Total Personal................ 790.8 654.7 93.0 85.8 -------- -------- ----- ----- Commercial Insurance Multiple Peril.................... 496.1 418.0 117.8 111.5 Casualty.......................... 620.3 548.4 111.8 113.0 Workers' Compensation............. 183.8 164.0 100.1 94.8 Property and Marine............... 377.9 332.9 95.3 89.4 Executive Protection.............. 578.2 484.2 78.4 81.2 Other............................. 407.0 378.0 88.2 97.8 -------- -------- ----- ----- Total Commercial.............. 2,663.3 2,325.5 99.2 99.1 -------- -------- ----- ----- Reinsurance Assumed................. 135.3 275.2 N/M 100.4 -------- -------- ----- ----- Total......................... $3,589.4 $3,255.4 98.3% 96.5% ======== ======== ===== =====
The combined loss and expense ratio for Reinsurance Assumed was not meaningful for the first nine months of 1996 due to the effect of the portfolio transfer of unearned premiums on the expense ratio. 11 Page 9
Quarter Ended September 30 -------------------------------------- Net Premiums Combined Loss and Written Expense Ratios --------------- ----------------- 1996 1995 1996 1995 ---- ---- ---- ---- (in millions) Personal Insurance Automobile........................ $ 63.0 $ 52.6 87.4% 81.2% Homeowners........................ 139.1 124.4 98.4 86.6 Other............................. 61.8 54.9 67.4 72.3 -------- -------- ----- ----- Total Personal................ 263.9 231.9 88.3 81.9 -------- -------- ----- ----- Commercial Insurance Multiple Peril.................... 170.4 142.4 117.0 121.3 Casualty.......................... 198.5 173.3 113.1 116.6 Workers' Compensation............. 55.8 57.8 108.4 91.1 Property and Marine............... 122.7 118.3 99.8 92.7 Executive Protection.............. 196.6 164.9 72.2 80.0 Other............................. 131.2 130.0 89.8 92.4 -------- -------- ----- ----- Total Commercial.............. 875.2 786.7 99.4 100.8 -------- -------- ----- ----- Reinsurance Assumed................. 66.7 117.6 102.9 99.7 -------- -------- ----- ----- Total......................... $1,205.8 $1,136.2 97.2% 96.9% ======== ======== ===== =====
PERSONAL INSURANCE Premiums from personal insurance coverages, which represent approximately 22% of the premiums written by our property and casualty insurance subsidiaries, increased 20.8% in the first nine months of 1996 and 13.8% in the third quarter compared with the similar periods in 1995. More than half of such growth in the first nine months of 1996 was due to the changes in the reinsurance agreement with Sun Alliance which resulted in both the portfolio transfer of unearned premiums as of January 1, 1996 and an increase in our retention percentage for these classes. Similarly, half of the growth in the third quarter for these classes was due to the increase in our retention. Excluding the effects of the changes in the reinsurance agreement, homeowners and other non-automobile premiums increased due to further progress made to increase premiums written in non-catastrophe prone areas and personal automobile premiums increased as a result of an increase in the number of in-force policies for high value automobiles. Our personal insurance business produced less profitable underwriting results in 1996 than the highly profitable results in the prior year. The combined loss and expense ratios were 93.0% for the first nine months of 1996 and 88.3% for the third quarter compared with 85.8% and 81.9%, respectively, in 1995. Homeowners results were unprofitable in the first nine months of 1996 compared with profitable results in the same period in 1995. Weather-related catastrophe losses adversely affected homeowners results in the first nine months of both years, but more so in 1996. Catastrophe losses for this class represented 17.9 percentage points of the loss ratio for the first nine months of 1996 and 6.5 percentage points for the third quarter compared with 9.8 and 12 Page 10 3.8 percentage points, respectively, in the comparable 1995 periods. Homeowners results in 1995 also benefited from an unusually low number of large losses. Other personal coverages, which include insurance for personal valuables and excess liability, produced highly profitable results in 1996 and 1995 due to continued favorable loss experience. Our automobile business produced profitable results in 1996 and 1995 due primarily to stable loss frequency and severity. COMMERCIAL INSURANCE Premiums from commercial insurance, which represent approximately 74% of our total writings, increased by 14.5% in the first nine months of 1996 and 11.3% in the third quarter compared with the similar periods in 1995. Approximately half of the growth in premiums in the first nine months of 1996 was due to the changes in the reinsurance agreement with Sun Alliance which resulted in both the portfolio transfer of unearned premiums as of January 1, 1996 and an increase in our retention percentage for these classes. Similarly, 40% of the growth in the third quarter for these classes was due to the increase in our retention. In addition, premium growth in 1996 for the excess liability component of our casualty coverages and for our executive protection coverages benefited from the changes in our casualty excess of loss reinsurance program. Excluding the effects of the changes in our reinsurance agreements, premium growth was due primarily to the selective writing of new accounts and exposure growth on existing business. The competitive market has continued to place significant pressure on prices and has made price increases difficult to achieve for most coverages. Premium growth in the first nine months of 1996 was strong outside the United States for property and marine, executive protection and financial institution coverages. Premium growth in the other commercial coverages was adversely affected in the third quarter by the discontinuation of our participation in certain pools of accident business in Europe. Our commercial insurance business produced marginally profitable underwriting results in 1996 and 1995. The combined loss and expense ratios were 99.2% for the first nine months of 1996 and 99.4% for the third quarter compared with 99.1% and 100.8%, respectively, in 1995. Multiple peril results deteriorated in the first nine months of 1996 compared with 1995 due primarily to an increase in catastrophe losses in the property component of this business and, to a lesser extent, an increase in the frequency of large losses in the liability component. Catastrophe losses in the first nine months of 1996 represented 4.8 percentage points of the loss ratio for this class compared with 1.4 percentage points in 1995. Results for our casualty business were similarly unprofitable in 1996 and 1995. Casualty results were adversely affected in both years by losses incurred related to asbestos-related and toxic waste claims. The excess liability component of our casualty coverages has remained profitable due to favorable loss experience in this class. Results in the automobile component were also profitable in the first nine months of 1996 and 1995. Workers' compensation results were breakeven in the first nine months of 1996 compared with profitable results for the same period in 1995. Results in the third quarter of 1996 were unprofitable compared with profitable results in the same quarter in 1995. Results deteriorated in 1996, particularly in the 13 Page 11 third quarter, due in part to an increase in claim frequency and the impact of price reductions. Results in 1995 benefited from reform of the benefit provisions of workers' compensation laws in many states and the impact of medical cost containment and disability management activities. Results from our share of the involuntary pools and mandatory business in which we must participate by law have also benefited from these positive factors. Property and marine results were somewhat less profitable in 1996 than in 1995 due in part to an increase in catastrophe losses. Results in both years benefited from stable loss frequency. Executive protection results were highly profitable in 1996 and 1995 due to favorable loss experience. Our financial institutions business produced more profitable results in the first nine months of 1996 than in 1995. The financial fidelity portion of this business was highly profitable in both years. The non-fidelity results were adversely affected in 1995 by catastrophe losses in the second quarter. Results in our other commercial classes improved in 1996 compared with 1995, but remained modestly unprofitable. The improvement was in surety results which were highly profitable in 1996 compared with unprofitable results in 1995 due to several large losses. REINSURANCE ASSUMED Reinsurance assumed is treaty reinsurance assumed primarily from Sun Alliance. The substantial decrease in premiums written in the first nine months of 1996 compared with the same period in 1995 was due to the effects of the changes in the reinsurance agreement with Sun Alliance whereby the Corporation's property and casualty subsidiaries assume less reinsurance from Sun Alliance. The decrease in net written premiums included the first quarter effect of the $65 million portfolio transfer of unearned premiums back to Sun Alliance as of January 1, 1996. Underwriting results for this segment were near breakeven in the first nine months of 1996 and 1995. LOSS RESERVES Loss reserves, net of reinsurance recoverable, increased by $135.7 million during the first nine months of 1996. The increase would have been greater except that loss reserves were reduced by $384.2 million in the first nine months of 1996 as the result of payments in that amount related to the 1993 Fibreboard asbestos-related settlement. Substantial reserve growth continued to occur in those liability coverages, primarily excess liability and executive protection, that are characterized by delayed loss reporting and extended periods of settlement. Losses incurred related to asbestos and toxic waste claims were $115.4 million in the first nine months of 1996 and $137.0 million for the same period in 1995. A discussion of the 1993 Fibreboard asbestos-related settlement is incorporated by reference from Item 7 of the Corporation's Form 10-K for the year ended December 31, 1995. The following developments during 1996 relate to the settlement. In July 1996, the United States Court of Appeals for the Fifth 14 Page 12 Circuit affirmed the 1995 judgment of the United States District Court of the Eastern District of Texas, which approved the global settlement agreement among Pacific Indemnity Company (a subsidiary of the Corporation), 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, which are claims that were not filed in court before August 27, 1993. The Court also affirmed the approval of the trilateral agreement among Pacific Indemnity, Continental Casualty and Fibreboard to settle all pending 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. The affirmation of these agreements had no effect on the amount of loss reserves provided for the settlement. A petition for re-hearing the global settlement agreement before the entire Fifth Circuit Court is pending. Should the petition for re-hearing be denied, an appeal to the United States Supreme Court by the objectors to the settlement is expected. No petition for re-hearing the trilateral agreement by the entire Fifth Circuit Court was filed. Management believes that the period during which an appeal of the trilateral agreement to the United States Supreme Court had to be filed expired on October 24, 1996 and that the agreement is therefore final. On that basis, management believes that the uncertainty of our exposure with respect to asbestos-related bodily injury claims against Fibreboard has been eliminated. INVESTMENTS Investment income after deducting expenses and taxes increased by 7.2% in the first nine months of 1996 and 7.0% in the third quarter compared with the same periods in 1995. The growth was due to an increase in invested assets since the third quarter of 1995, reflecting strong cash flow from operations. The effective tax rate on investment income was 15.5% and 15.8% for the first nine months of 1996 and 1995, respectively. In the first nine months of 1996, new cash was invested primarily in taxable and tax-exempt bonds. We maintain investments in highly liquid, short term securities at all times to provide for immediate cash needs. LIFE AND HEALTH INSURANCE Life and health insurance earnings after taxes were $27.4 million for the first nine months of 1996 compared with $21.8 million in 1995. Premiums and policy charges for personal insurance amounted to $252.5 million in the first nine months of 1996, an increase of 9.8% over the comparable period in 1995. Earnings from personal insurance were $28.4 million in the first nine months of 1996 compared with $29.4 million in 1995. The earnings decrease was due to higher mortality costs in 1996, particularly in the second quarter; this was offset in part by operating efficiencies realized from the consolidation of service centers in 1995. In the second quarter of 1996, the Corporation announced a plan to exit the group health insurance business. A definitive agreement was reached on May 31 with Healthsource Inc. under which Healthsource will acquire the Corporation's 85% interest in ChubbHealth, Inc., a health maintenance organization, for 15 Page 13 $25 million. The sale is subject to regulatory approvals and is expected to be completed no later than the second quarter of 1997. Also, the life and health insurance subsidiaries discontinued the marketing of traditional group health indemnity business. Due to various contractual and regulatory requirements, group health indemnity coverages will be renewed in certain jurisdictions until an orderly transition to another carrier or termination of coverage can occur. The group health insurance operations have been accounted for as discontinued operations. However, the Corporation's results of operations for periods prior to the second quarter of 1996 have not been restated since amounts attributable to the group health insurance business were not significant. It is expected that the sale of ChubbHealth will result in an after tax gain of approximately $15 million which will be substantially offset by costs relating to our exit from the traditional indemnity business. The discontinued group health business had no effect on net income subsequent to March 31, 1996. Results of the discontinued group health insurance operations included in the consolidated statements of income were as follows:
Periods Ended September 30 ------------------------------------ Third Quarter Nine Months ------------- -------------- 1996 1995 1996 1995 ---- ---- ---- ---- (in millions) Premiums earned.......... - $64.3 $57.5 $250.9 Net loss................. - (1.5) (1.0) (7.6)
Gross investment income increased by 3.4% in the first nine months of 1996 compared with the same period in 1995. Excluding investment income related to the discontinued group health insurance operations, gross investment income increased by 7.0% in the first nine months of 1996. Such growth was due to an increase in invested assets since the third quarter of 1995. The new cash available for investment was due primarily to increases in deposits credited to policyholder funds. In the first nine months of 1996, new cash was invested primarily in corporate bonds. To provide for liquidity, funds believed to be sufficient to meet any immediate needs for cash have been maintained in short term securities. REAL ESTATE Real estate earnings after taxes were $10.0 million for the first nine months of 1996 compared with $3.5 million in 1995. Real estate earnings in 1996 benefited from the sale of several rental properties in the first quarter. Results in 1995 reflect a first quarter charge of $6.5 million after taxes resulting from the initial application of Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, which established new criteria for measuring impairment of a loan. Revenues were $269.8 million in the first nine months of 1996 compared with $225.0 million in 1995. The increase in 1996 was due to the sale of rental properties. 16 Page 14 INVESTMENT GAINS AND LOSSES Decisions to sell securities are governed principally by considerations of investment opportunities and tax consequences. As a result, realized investment gains and losses may vary significantly from period to period. Net investment gains before taxes of $37.6 million were realized in the first nine months of 1996 compared with net gains of $74.0 million for the same period in 1995. CORPORATE During the first nine months of 1996, the Corporation repurchased 1,200,000 shares of its common stock in open-market transactions at a cost of $56.4 million. SUBSEQUENT EVENTS In October 1996, the Corporation announced that it is evaluating strategic alternatives with respect to its life insurance subsidiaries, including the possible sale or spin-off of the business. At the same time, the Corporation announced that it is considering strategic alternatives with respect to its real estate subsidiary, which could include the sale of some or all properties. In October 1996, the Corporation's property and casualty subsidiaries and Sun Alliance agreed that the agreements pertaining to the exchange of reinsurance on a quota share basis will be terminated, effective as of January 1, 1997. The impact on underwriting results in 1997 is not expected to be significant. FORWARD LOOKING INFORMATION Any statements in this communication which may be considered to be "forward looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995 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, 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. 17 Page 15 PART II. OTHER INFORMATION --------------------------- Item 6 - Exhibits and Reports on Form 8-K - ----------------------------------------- A. Exhibit 11.1 - Computation of earnings per share. B. Reports on Form 8-K - The Registrant filed a current report on Form 8-K dated October 29, 1996 with respect to the announcement on October 29, 1996 that the Registrant (1) has retained Goldman, Sachs & Co. to assist it in the process of evaluating its strategic alternatives with respect to the Registrant's life insurance companies and (2) is considering its strategic alternatives with respect to its real estate subsidiary, Bellemead Development Corporation. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, The Chubb Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE CHUBB CORPORATION (Registrant) By: /s/ Henry B. Schram ------------------------------ Henry B. Schram Senior Vice-President and Chief Accounting Officer Date: November 13, 1996 18 EXHIBIT INDEX EXHIBIT NO DESCRIPTION 11.1 - Computation of earnings per share. 27.1 - Financial Data Schedule. EX-11.1 2 COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11.1 THE CHUBB CORPORATION COMPUTATION OF EARNINGS PER SHARE PERIODS ENDED SEPTEMBER 30
Third Quarter Nine Months ------------- ------------- 1996 1995 1996 1995 ---- ---- ---- ---- (in millions) Net income.................................. $165.2 $171.4 $490.9 $503.1 After-tax interest expense on 6% guaranteed exchangeable subordinated notes............ 2.4 2.4 7.3 7.3 ------ ------ ------ ------ Net income for computing earnings per share. $167.6 $173.8 $498.2 $510.4 ====== ====== ====== ====== Average number of common shares outstanding. 174.2 174.2 174.5 174.0 Additional shares from assumed conversion of 6% guaranteed exchangeable subordinated notes as if each $1,000 of principal amount had been converted at issuance into 23.256 shares of common stock........ 5.8 5.8 5.8 5.8 ------ ------ ------ ------ Average number of common and common equivalent shares assumed outstanding for computing earnings per share.............. 180.0 180.0 180.3 179.8 ====== ====== ====== ====== Net income per share........................ $ .93 $ .97 $ 2.76 $ 2.84
The number of shares and per share amounts have been retroactively adjusted to reflect the two-for-one stock split effective April 19, 1996. EX-27.1 3 FINANCIAL DATA SCHEDULE
7 THE CHUBB CORPORATION Financial Data Schedule(*) (*) This schedule contains summary financial information extracted from the Consolidated Balance Sheets and the Consolidated Statements of Income and is qualified in its entirety by reference to such financial statements. 1,000,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 10,472 2,881 3,011 696 10 0 14,937 10 50 1,284 23,582 12,717 2,632 0 0 1,329 176 0 0 5,235 23,582 3,702 705 38 270 2,524 989 302 613 123 491 0 0 0 491 2.76 0 0 0 0 0 0 0 0 DEBT-HELD-FOR-SALE REPRESENTS FIXED MATURITY INVESTMENTS CLASSIFIED AS AVAILABLE-FOR-SALE AND CARRIED AT MARKET VALUE AS PRESCRIBED BY SFAS NO. 115. DEBT-CARRYING-VALUE REPRESENTS FIXED MATURITY INVESTMENTS CLASSIFIED AS HELD-TO-MATURITY AND CARRIED AT AMORTIZED COST AS PRESCRIBED BY SFAS NO. 115. DEBT-MARKET-VALUE REPRESENTS THE RELATED MARKET VALUE OF FIXED MATURITIES CLASSIFIED AS HELD-TO-MATURITY. RECOVER-REINSURE REPRESENTS REINSURANCE RECOVERABLE ON PAID CLAIMS. POLICY-LOSSES EXCLUDE THE REDUCTIONS FOR REINSURANCE RECOVERABLES ON UNPAID CLAIMS ($1,790) AND POLICY LIABILITIES ($190), AS PRESCRIBED BY SFAS NO. 113. SUCH AMOUNTS ARE INCLUDED IN TOTAL ASSETS. UNEARNED-PREMIUMS EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUMS ($348), AS PRESCRIBED BY SFAS NO. 113. THIS PREPAID AMOUNT IS INCLUDED IN TOTAL ASSETS. NOTES-PAYABLE INCLUDES SHORT-TERM DEBT OF $251 AND LONG-TERM DEBT OF $1,078. OTHER-SE INCLUDES PAID-IN SURPLUS; RETAINED EARNINGS; FOREIGN CURRENCY TRANSLATION LOSSES, NET OF INCOME TAX; UNREALIZED APPRECIATION OF INVESTMENTS, NET; RECEIVABLE FROM ESOP AND TREASURY STOCK. OTHER-INCOME REPRESENTS REVENUES FROM REAL ESTATE OPERATIONS. AMOUNTS FOR SECURITIES ACT INDUSTRY GUIDE 6 AND EXCHANGE ACT INDUSTRY GUIDE 4 DISCLOSURES ARE REQUIRED FOR ANNUAL FILINGS ONLY. ACCORDINGLY, NO AMOUNTS WILL BE REPORTED FOR INTERIM FILINGS.
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