-----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, Jjan01MZSes+6joBd2gpN3NB0rluBByV/J5gawbkvvOhPayHaoJ/mLyANuig8eVZ l+dCmPGzqVl3CBu85BJJ/w== 0000950123-04-013181.txt : 20041108 0000950123-04-013181.hdr.sgml : 20041108 20041108163339 ACCESSION NUMBER: 0000950123-04-013181 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041108 DATE AS OF CHANGE: 20041108 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: 041126128 BUSINESS ADDRESS: STREET 1: 15 MOUNTAIN VIEW RD P O BOX 1615 CITY: WARREN STATE: NJ ZIP: 07061 BUSINESS PHONE: 9089032000 10-Q 1 y68364e10vq.txt FORM 10-Q 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, 2004 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 [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ] The number of shares of common stock outstanding as of September 30, 2004 was 191,559,422. THE CHUBB CORPORATION INDEX
Page Number ----------- Part I. Financial Information: Item 1 - Financial Statements: Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2004 and 2003..................................... 1 Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003........................ 2 Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September 30, 2004 and 2003..................................... 3 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003................... 4 Notes to Consolidated Financial Statements....................... 5 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations................. 9 Item 4 - Controls and Procedures................................... 30 Part II. Other Information: Item 1 - Legal Proceedings......................................... 31 Item 5 - Other Information......................................... 31 Item 6 - Exhibits and Reports on Form 8-K.......................... 32 Signatures........................................................... 33
Page 1 Part I. Financial Information Item 1 - Financial Statements THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF INCOME PERIODS ENDED SEPTEMBER 30
Third Quarter Nine Months --------------- ---------------- 2004 2003 2004 2003 ---- ---- ---- ---- (in millions) Revenues Premiums Earned....................... $2,955.0 $2,608.2 $8,610.6 $7,466.6 Investment Income..................... 316.7 287.9 921.2 816.6 Other Revenues........................ 24.8 (9.4) 51.3 32.7 Realized Investment Gains............. 48.9 60.5 146.5 85.7 -------- -------- -------- -------- Total Revenues................. 3,345.4 2,947.2 9,729.6 8,401.6 -------- -------- -------- -------- Losses and Expenses Insurance Losses and Loss Expenses.... 1,881.8 1,711.3 5,428.3 4,850.0 Amortization of Deferred Policy Acquisition Costs.................... 720.6 653.3 2,110.8 1,863.7 Other Insurance Operating Expenses.... 160.4 173.9 508.4 533.5 Investment Expenses................... 5.3 5.0 18.7 21.4 Other Operating Expenses.............. 28.7 30.4 81.7 67.3 Corporate Expenses.................... 68.5 35.6 146.3 116.9 -------- -------- -------- -------- Total Losses and Expenses...... 2,865.3 2,609.5 8,294.2 7,452.8 -------- -------- -------- -------- Income Before Federal and Foreign Income Tax............................. 480.1 337.7 1,435.4 948.8 Federal and Foreign Income Tax.......... 116.1 77.9 354.6 212.3 -------- -------- -------- -------- Net Income.............................. $ 364.0 $ 259.8 $1,080.8 $ 736.5 ======== ======== ======== ======== Net Income Per Share Basic.................................. $1.91 $1.39 $5.71 $4.17 Diluted................................ 1.88 1.37 5.61 4.13 Dividends Declared Per Share............ .39 .36 1.17 1.08
See Notes to Consolidated Financial Statements. Page 2 THE CHUBB CORPORATION CONSOLIDATED BALANCE SHEETS
Sept. 30, Dec. 31, 2004 2003 --------- --------- (in millions) Assets Invested Assets Short Term Investments............................... $ 1,697.0 $ 2,695.9 Fixed Maturities Held-to-Maturity - Tax Exempt (market $387.2 and $502.2)....................................... 363.2 467.0 Available-for-Sale Tax Exempt (cost $12,826.5 and $10,509.7)......... 13,408.7 11,154.0 Taxable (cost $12,571.6 and $10,531.8)............ 12,805.5 10,790.7 Equity Securities (cost $1,675.4 and $1,381.4)....... 1,784.7 1,514.4 --------- --------- TOTAL INVESTED ASSETS......................... 30,059.1 26,622.0 Cash................................................... 41.7 52.2 Securities Lending Collateral.......................... 1,801.3 704.8 Accrued Investment Income.............................. 337.6 286.8 Premiums Receivable.................................... 2,260.8 2,188.0 Reinsurance Recoverable on Unpaid Losses and Loss Expenses..................................... 3,533.2 3,426.6 Prepaid Reinsurance Premiums........................... 368.3 391.0 Deferred Policy Acquisition Costs...................... 1,410.7 1,343.4 Real Estate Assets..................................... 490.4 518.8 Investment in Partially Owned Company.................. 328.3 312.3 Deferred Income Tax.................................... 603.6 641.4 Goodwill............................................... 467.4 467.4 Other Assets........................................... 1,425.5 1,405.9 --------- --------- TOTAL ASSETS.................................. $43,127.9 $38,360.6 ========= ========= Liabilities Unpaid Losses and Loss Expenses........................ $19,699.2 $17,947.8 Unearned Premiums...................................... 6,290.1 5,939.4 Securities Lending Payable............................. 1,801.3 704.8 Long Term Debt......................................... 2,811.8 2,813.9 Dividend Payable to Shareholders....................... 74.7 67.7 Accrued Expenses and Other Liabilities................. 2,869.3 2,365.0 --------- --------- TOTAL LIABILITIES............................. 33,546.4 29,838.6 --------- --------- Shareholders' Equity Common Stock - $1 Par Value; 195,803,824 and 195,803,824 Shares.................................... 195.8 195.8 Paid-In Surplus........................................ 1,317.3 1,318.8 Retained Earnings...................................... 7,726.5 6,868.9 Accumulated Other Comprehensive Income Unrealized Appreciation of Investments, Net of Tax.... 601.5 673.6 Foreign Currency Translation Gains, Net of Tax........ 26.9 12.0 Receivable from Employee Stock Ownership Plan.......... - (17.9) Treasury Stock, at Cost - 4,244,402 and 7,840,448 Shares...................................... (286.5) (529.2) --------- --------- TOTAL SHAREHOLDERS' EQUITY.................... 9,581.5 8,522.0 --------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.... $43,127.9 $38,360.6 ========= ==========
See Notes to Consolidated Financial Statements. Page 3 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME PERIODS ENDED SEPTEMBER 30
Third Quarter Nine Months -------------- ------------- 2004 2003 2004 2003 ---- ---- ---- ---- (in millions) Net Income................................. $364.0 $ 259.8 $1,080.8 $736.5 ------ ------- -------- ------ Other Comprehensive Income (Loss) Change in Unrealized Appreciation of Investments, Net of Tax.............. 319.5 (150.4) (72.1) 90.5 Foreign Currency Translation Gains (Losses), Net of Tax.................... 8.0 (8.8) 14.9 37.6 ------ ------- -------- ------ 327.5 (159.2) (57.2) 128.1 ------ ------- -------- ------ Comprehensive Income....................... $691.5 $ 100.6 $1,023.6 $864.6 ====== ======= ======== ======
See Notes to Consolidated Financial Statements. Page 4 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30
2004 2003 ---- ---- (in millions) Cash Flows from Operating Activities Net Income............................................ $ 1,080.8 $ 736.5 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Increase in Unpaid Losses and Loss Expenses, Net.... 1,644.8 1,141.1 Increase in Unearned Premiums, Net.................. 362.1 670.9 Increase in Premiums Receivable..................... (72.8) (56.4) Increase in Deferred Policy Acquisition Costs....... (65.0) (133.7) Change in Deferred Income Tax....................... 60.7 69.9 Depreciation........................................ 79.6 77.8 Realized Investment Gains........................... (146.5) (85.7) Other, Net.......................................... 251.6 68.9 ---------- --------- Net Cash Provided by Operating Activities............. 3,195.3 2,489.3 ---------- --------- Cash Flows from Investing Activities Proceeds from Sales of Fixed Maturities............... 5,203.6 4,415.4 Proceeds from Maturities of Fixed Maturities.......... 1,600.9 1,730.5 Proceeds from Sales of Equity Securities.............. 586.9 367.6 Purchases of Fixed Maturities......................... (11,071.7) (9,196.1) Purchases of Equity Securities........................ (715.1) (732.2) Decrease (Increase) in Short Term Investments, Net.... 998.9 (932.7) Increase in Net Payable from Security Transactions Not Settled............................. 212.8 81.6 Purchases of Property and Equipment, Net.............. (44.7) (55.7) Other, Net............................................ (1.1) .6 ---------- --------- Net Cash Used in Investing Activities................. (3,229.5) (4,321.0) ---------- --------- Cash Flows from Financing Activities Proceeds from Issuance of Long Term Debt.............. - 960.0 Repayment of Long Term Debt........................... (.3) (100.3) Increase in Funds Held Under Deposit Contracts........ 28.0 261.7 Proceeds from Common Stock Offering................... - 886.8 Proceeds from Issuance of Common Stock Under Incentive and Purchase Plans......................... 194.3 25.2 Dividends Paid to Shareholders........................ (216.2) (183.6) Other, Net............................................ 17.9 (14.9) ---------- --------- Net Cash Provided by Financing Activities............. 23.7 1,834.9 ---------- --------- Net Increase (Decrease) in Cash......................... (10.5) 3.2 Cash at Beginning of Year............................... 52.2 41.9 ---------- --------- Cash at End of Period................................. $ 41.7 $ 45.1 ========== =========
See Notes to Consolidated Financial Statements. Page 5 THE CHUBB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1) General The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts of The Chubb Corporation and its subsidiaries (collectively, the Corporation). Significant intercompany transactions have been eliminated in consolidation. 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 Notes to Consolidated Financial Statements included in the Corporation's 2003 Annual Report on Form 10-K. 2) 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. 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 ------------- ------------- 2004 2003 2004 2003 ---- ---- ---- ---- (in millions) Change in unrealized appreciation or depreciation of equity securities... $(18.5) $ 8.1 $ (23.7) $ 81.2 Change in unrealized appreciation of fixed maturities.................... 510.1 (239.5) (87.1) 58.0 ------ ------- ------- ------ 491.6 (231.4) (110.8) 139.2 Deferred income tax (credit)......... 172.1 (81.0) (38.7) 48.7 ------ ------- ------- ------ Change in unrealized appreciation of investments, net................. $319.5 $(150.4) $ (72.1) $ 90.5 ====== ======= ======= ======
Page 6 3) Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
Periods Ended September 30 ----------------------------------- Third Quarter Nine Months ------------- ------------- 2004 2003 2004 2003 ---- ---- ---- ---- (in millions, except per share amounts) Basic earnings per share: Net income.......................... $364.0 $259.8 $1,080.8 $736.5 ====== ====== ======== ====== Weighted average number of common shares outstanding................... 190.5 186.6 189.3 176.5 ====== ====== ======== ====== Basic earnings per share.............. $ 1.91 $ 1.39 $ 5.71 $ 4.17 ====== ====== ======== ====== Diluted earnings per share: Net income.......................... $364.0 $259.8 $1,080.8 $736.5 ====== ====== ======== ====== Weighted average number of common shares outstanding................... 190.5 186.6 189.3 176.5 Additional shares from assumed exercise of stock-based compensation awards.................. 2.8 2.8 3.2 1.9 ------ ------ -------- ------ Weighted average number of common shares and potential common shares assumed outstanding for computing diluted earnings per share........... 193.3 189.4 192.5 178.4 ====== ====== ======== ====== Diluted earnings per share............ $ 1.88 $ 1.37 $ 5.61 $ 4.13 ====== ====== ======== ======
4) Segments Information The principal business of the Corporation is property and casualty insurance. The profitability of the property and casualty insurance business depends on the results of both underwriting operations and investments, which are viewed as two distinctive operations. The under-writing operations are managed separately from the investment function. The property and casualty underwriting operations consist of three separate business units: personal insurance, commercial insurance and specialty insurance. The personal segment targets the personal insurance market. The personal classes include automobile, homeowners and other personal coverages. The commercial segment includes those classes of business that are generally available in broad markets and are of a more commodity nature. Commercial classes include multiple peril, casualty, workers' compensation and property and marine. The specialty segment includes those classes of business that are available in more limited markets since they require specialized underwriting and claim settlement. Specialty classes include executive protection, financial institutions and other specialty coverages. Chubb Financial Solutions' non-insurance business was primarily structured credit derivatives, principally as a counterparty in portfolio credit default swap contracts. The Corporation has implemented a plan to exit the credit derivatives business. Corporate and other includes investment income earned on corporate invested assets, corporate expenses and the Corporation's real estate and other non-insurance subsidiaries. Page 7 Revenues and income before income tax of the operating segments were as follows:
Periods Ended September 30 ---------------------------------------- Third Quarter Nine Months ------------- ----------- 2004 2003 2004 2003 ---- ---- ---- ---- (in millions) Revenues Property and casualty insurance Premiums earned Personal insurance............... $ 680.0 $ 620.1 $2,008.0 $1,804.0 Commercial insurance............. 1,121.9 985.4 3,260.8 2,786.2 Specialty insurance.............. 1,153.1 1,002.7 3,341.8 2,876.4 -------- -------- -------- -------- 2,955.0 2,608.2 8,610.6 7,466.6 Investment income.................. 304.2 274.1 885.0 794.2 -------- -------- -------- -------- Total property and casualty insurance....................... 3,259.2 2,882.3 9,495.6 8,260.8 Chubb Financial Solutions non-insurance business.............. 2.0 (35.2) (1.2) (17.3) Corporate and other.................. 35.3 39.6 88.7 72.4 Realized investment gains............ 48.9 60.5 146.5 85.7 -------- -------- -------- -------- Total revenues................... $3,345.4 $2,947.2 $9,729.6 $8,401.6 ======== ======== ======== ======== Income (loss) before income tax Property and casualty insurance Underwriting Personal insurance............... $ (30.4) $ (21.2) $ 23.4 $ (28.6) Commercial insurance............. 199.6 81.6 550.8 201.5 Specialty insurance.............. 8.6 (46.2) (72.4) (64.6) -------- -------- -------- -------- 177.8 14.2 501.8 108.3 Increase in deferred policy acquisition costs............... 15.6 56.4 65.0 133.7 -------- -------- -------- -------- Underwriting income.............. 193.4 70.6 566.8 242.0 Investment income.................. 299.1 269.6 867.8 776.7 Other charges...................... (1.2) (.9) (3.7) (22.6) -------- -------- -------- -------- Total property and casualty insurance....................... 491.3 339.3 1,430.9 996.1 Chubb Financial Solutions non-insurance business.............. .2 (38.8) (17.0) (30.6) Corporate and other loss............. (60.3) (23.3) (125.0) (102.4) Realized investment gains............ 48.9 60.5 146.5 85.7 -------- -------- -------- -------- Total income before income tax... $ 480.1 $ 337.7 $1,435.4 $ 948.8 ======== ======== ======== ========
Page 8 5) Accounting Pronouncements Not Yet Adopted In March 2004, the Emerging Issues Task Force (EITF) reached consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF Issue No. 03-1 provides application guidance to be used to determine when an investment is impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. In September, the Financial Accounting Standards Board (FASB) issued a proposed FASB Staff Position (FSP) that would provide implementation guidance with respect to EITF Issue No. 03-1. Also, in September, the FASB issued FSP 03-1-1, which delays the effective date for the measurement and recognition guidance contained in EITF Issue No. 03-1 until the FASB issues a final FSP that provides implementation guidance. Pending the issuance of final implementation guidance by the FASB, management is unable to determine the effect, if any, that the implementation of EITF Issue No. 03-1 would have on the Corporation's results of operations. However, since almost all of the Corporation's invested assets are already carried at fair value, the implementation of EITF Issue No. 03-1 would not have a significant effect on the Corporation's shareholders' equity. Page 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations for the Nine Months Ended September 30, 2004 and 2003 and for the Quarters Ended September 30, 2004 and 2003 Certain statements in this document are "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995 (PSLRA). These forward-looking statements are made pursuant to the safe harbor provisions of the PSLRA and include estimates and assumptions related to economic, competitive, regulatory, judicial, legislative and other developments. These include statements relating to trends in, or representing management's beliefs about, our future strategies, operations and financial results, as well as other statements that include words such as "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "should," "will," or other similar expressions. Forward-looking statements are made based upon management's current expectations and beliefs concerning trends and future developments and their potential effects on us. These statements are not guarantees of future performance. Actual results may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties, which include, among others, those discussed or identified from time to time in our public filings with the Securities and Exchange Commission and those associated with: - - the availability of primary and reinsurance coverage, including the implications relating to terrorism legislation and regulation; - - global political conditions and the occurrence of any terrorist attacks, including any nuclear, biological, chemical or radiological events; - - the effects of outbreak or escalation of war or hostilities; - - premium price increases and profitability or growth estimates overall or by lines of business or geographic area, and related expectations with respect to the timing and terms of any required regulatory approvals; - - adverse changes in loss cost trends; - - our ability to retain existing business; - - material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements; - - our expectations with respect to cash flow projections and investment income and with respect to other income; - - the adequacy of loss reserves including: - our expectations relating to reinsurance recoverables; - the effects of proposed asbestos liability legislation, including the impact of claims patterns arising from the possibility of legislation and those that may arise if legislation is not passed; - our estimates relating to ultimate asbestos liabilities; - the impact from the bankruptcy protection sought by various asbestos producers and other related businesses; - the willingness of parties, including us, to settle disputes; - developments in judicial decisions or regulatory or legislative actions relating to coverage and liability for asbestos, toxic waste and mold claims; - development of new theories of liability; Page 10 - - the impact of economic factors on companies on whose behalf we have issued surety bonds, and, in particular, on those companies that have filed for bankruptcy or otherwise experienced deterioration in creditworthiness; - - the effects of disclosures by, and investigations of, public companies relating to possible accounting irregularities, practices in the financial services industry and other corporate governance issues, including: - the effects on the capital markets and the markets for directors and officers and errors and omissions insurance; - claims and litigation arising out of actual or alleged accounting or other corporate malfeasance by other companies; - claims and litigation arising out of practices in the financial services industry; - legislative or regulatory proposals or changes, including the changes in law and regulation implemented under the Sarbanes-Oxley Act of 2002; - - the effects of investigations into market practices in the U.S. property and casualty insurance industry; - - the occurrence of significant weather-related or other natural or human-made disasters, particularly in locations where we have concentrations of risk; - - any downgrade in our claims-paying, financial strength or other credit ratings; - - the ability of our subsidiaries to pay us dividends; - - general economic conditions including: - changes in interest rates, market credit spreads and the performance of the financial markets, generally and as they relate to credit risks assumed by our Chubb Financial Solutions unit in particular; - the effects of inflation; - changes in domestic and foreign laws, regulations and taxes; - changes in competition and pricing environments; - regional or general changes in asset valuations; - the inability to reinsure certain risks economically; - changes in the litigation environment; - general market conditions; and - - the ability to implement management's strategic plans and initiatives. The Corporation assumes no obligation to update any forward-looking information set forth in this document, which speak as of the date hereof. Page 11 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS The consolidated financial statements include amounts based on informed estimates and judgments of management for those transactions that are not yet complete. Such estimates and judgments affect the reported amounts in the financial statements. Those estimates and judgments that were most critical to the preparation of the financial statements involved the adequacy of loss reserves and the recoverability of related reinsurance recoverables, the fair value of future obligations under financial products contracts and the recoverability of the carrying value of real estate properties. These estimates and judgments, which are discussed within the following analysis of our results of operations, require the use of assumptions about matters that are highly uncertain and therefore are subject to change as facts and circumstances develop. If different estimates and judgments had been applied, materially different amounts might have been reported in the financial statements. EXECUTIVE SUMMARY The following highlights do not address all of the matters covered in the other sections of Management's Discussion and Analysis of Financial Condition and Results of Operations or contain all of the information that may be important to the Corporation's shareholders or the investing public. This summary should be read in conjunction with the other sections of Management's Discussion and Analysis of Financial Condition and Results of Operations. - - Net income was $1,080.8 million in the first nine months of 2004 and $364.0 million in the third quarter compared with $736.5 million and $259.8 million, respectively, in the comparable periods of 2003. - - Premium growth was 10% in the first nine months of 2004 and 6% in the third quarter. - - Our combined loss and expense ratio was 92.9% in the first nine months of 2004 and 93.3% in the third quarter compared with 95.8% and 96.6% in the corresponding periods of 2003. - - We reached an agreement in July 2004 that resulted in Aquila providing us with collateral sufficient to cover our entire $500 million exposure under surety bonds issued for Aquila. - - Property and casualty investment income after taxes increased by 12% in the first nine months of 2004 and 13% in the third quarter. Page 12 A summary of the Corporation's results for the third quarter and nine months ended September 30, 2004 and 2003 is as follows:
Periods Ended September 30 ------------------------------------------- Third Quarter Nine Months ---------------- -------------- 2004 2003 2004 2003 ---- ---- ---- ---- (in millions) PROPERTY AND CASUALTY INSURANCE Underwriting Net Premiums Written........... $3,025.7 $2,845.5 $8,972.7 $8,137.5 Increase in Unearned Premiums.. (70.7) (237.3) (362.1) (670.9) -------- -------- -------- -------- Premiums Earned............. 2,955.0 2,608.2 8,610.6 7,466.6 -------- -------- -------- -------- Losses and Loss Expenses....... 1,881.8 1,711.3 5,428.3 4,850.0 Operating Costs and Expenses... 888.1 876.7 2,658.7 2,490.3 Increase in Deferred Policy Acquisition Costs............. (15.6) (56.4) (65.0) (133.7) Dividends to Policyholders..... 7.3 6.0 21.8 18.0 -------- -------- -------- -------- Underwriting Income............ 193.4 70.6 566.8 242.0 -------- -------- -------- -------- Investments Investment Income Before Expenses...................... 304.2 274.1 885.0 794.2 Investment Expenses............ 5.1 4.5 17.2 17.5 -------- -------- -------- -------- Investment Income.............. 299.1 269.6 867.8 776.7 -------- -------- -------- -------- Other Charges................... (1.2) (.9) (3.7) (22.6) -------- -------- -------- -------- Property and Casualty Income.... 491.3 339.3 1,430.9 996.1 CHUBB FINANCIAL SOLUTIONS NON-INSURANCE BUSINESS.......... .2 (38.8) (17.0) (30.6) CORPORATE AND OTHER.............. (60.3) (23.3) (125.0) (102.4) REALIZED INVESTMENT GAINS........ 48.9 60.5 146.5 85.7 -------- -------- -------- -------- CONSOLIDATED INCOME BEFORE INCOME TAX...................... 480.1 337.7 1,435.4 948.8 Federal and Foreign Income Tax... 116.1 77.9 354.6 212.3 -------- -------- -------- -------- CONSOLIDATED NET INCOME.......... $ 364.0 $ 259.8 $1,080.8 $ 736.5 ======== ======== ======== ======== PROPERTY AND CASUALTY INVESTMENT INCOME AFTER INCOME TAX......... $ 241.6 $ 213.9 $ 695.8 $ 619.1 ======== ======== ======== ========
Net income included realized investment gains after taxes of $99.4 million in the first nine months of 2004 and $31.7 million in the third quarter compared with realized investment gains after taxes of $55.7 million and $39.3 million in the comparable periods of 2003. Decisions to sell securities are governed principally by considerations of investment opportunities and tax consequences. As a result, realized gains and losses on the sale of investments may vary significantly from period to period. Page 13 PROPERTY AND CASUALTY INSURANCE RESULTS Earnings from our property and casualty business were significantly higher in the first nine months and third quarter of 2004 compared with the same periods of 2003. Underwriting income was substantially higher in 2004 due primarily to the exceptionally strong results in our commercial business. Investment income also increased significantly in 2004 compared with 2003. Property and casualty income before taxes amounted to $1,430.9 million in the first nine months of 2004 and $491.3 million in the third quarter compared with $996.1 million and $339.3 million, respectively, in 2003. The profitability of the property and casualty insurance business depends on the results of both underwriting operations and investments, which we view as two distinctive operations. The underwriting functions are managed separately from the investment function. Accordingly, in assessing our performance, we evaluate underwriting results separately from investment results. UNDERWRITING RESULTS We evaluate the underwriting results of our property and casualty insurance business in the aggregate and also for each of our three separate business units: personal insurance, commercial insurance and specialty insurance. The combined loss and expense ratio, expressed as a percentage, is the key measure of underwriting profitability traditionally used in the property and casualty business. We evaluate the performance of our underwriting operations and of each of our business units using the combined loss and expense ratio calculated in accordance with statutory accounting principles. It is the sum of the ratio of losses 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. Statutory accounting principles differ in certain respects from generally accepted accounting principles (GAAP). Under statutory accounting principles applicable to property and casualty insurance companies, policy acquisition and other underwriting expenses are recognized immediately, not at the time premiums are earned. We use underwriting results determined in accordance with GAAP, among other measures, to assess the overall performance of the underwriting operations. To convert statutory underwriting results to a GAAP basis, policy acquisition expenses are deferred and amortized over the period in which the related premiums are earned. Underwriting income determined in accordance with GAAP is defined as premiums earned less losses incurred and GAAP underwriting expenses incurred. Net Premiums Written Net premiums written were $9.0 billion in the first nine months of 2004 and $3.0 billion in the third quarter, representing increases of 10% and 6%, respectively, compared with the same periods in 2003. Premium growth in our reinsurance assumed business generated by Chubb Re was particularly strong in the first half of 2004. However, as we anticipated, premiums produced by Chubb Re declined in the third quarter compared with the same period in 2003. Page 14 About 80% of our net premiums written are in the United States. U.S. premiums grew 10% in the first nine months of 2004 and 6% in the third quarter. Excluding premiums produced by Chubb Re, such growth was 8% in the first nine months of 2004 and 7% in the third quarter. On a reported basis, non U.S. premiums grew 14% in the first nine months of 2004 and 11% in the third quarter. In local currencies, such growth was 4% for both periods. We experienced premium growth in the first nine months of 2004 in all segments of our business. The growth was the result of our retaining a high percentage of our existing customers, attracting new customers and securing modest rate increases. As was true for most of 2003, the size of rate increases has decelerated as the marketplace has become more competitive. We expect that this trend will continue throughout 2004 and into 2005. Reinsurance Our premiums written are net of amounts ceded to reinsurers who assume a portion of the risk under the insurance policies that are subject to the reinsurance. The cost of reinsurance in the marketplace has leveled off. However, reinsurance capacity for certain coverages, such as terrorism, is still limited and expensive. Our reinsurance costs in 2004 are similar to those in 2003. We discontinued a casualty per risk treaty that responded primarily to excess liability exposures over $25 million, as underwriting actions we have taken in recent years have resulted in a reduction in the number of such exposures, which we believe made this treaty no longer economical. Our executive protection per risk treaty was renewed with coverage similar to the prior year. On our casualty clash treaty, which operates like a catastrophe treaty, our retention remained at $50 million. Our property reinsurance program was renewed in April 2004. On the property per risk treaty, our retention remained at $15 million. Our property catastrophe treaty for events in the United States was modified to increase our initial retention from $150 million to $250 million and to increase the reinsurance coverage at the top. The program now provides coverage of approximately 88% of losses between $250 million and $1.25 billion, with additional coverage of 95% of losses between $1.25 billion and $1.5 billion in the northeastern part of the country. Our property reinsurance treaties continue to include terrorism exclusions. We are making a concerted effort to monitor and control terrorism risk aggregations. However, given the uncertainty of any potential terrorist attack and the limited terrorism coverage in our reinsurance program, our future operating results could be more volatile. Profitability Underwriting results were substantially more profitable in the first nine months and third quarter of 2004 than in the comparable periods in 2003. Our combined loss and expense ratio was 92.9% in the first nine months of 2004 and 93.3% in the third quarter compared with 95.8% and 96.6%, respectively, in 2003. Page 15 Underwriting results in the first nine months of 2004 were adversely affected by an increase in net loss reserves of about $160 million in the second quarter for errors and omissions losses related to investment banks. Such results benefited from an $80 million reduction in net loss reserves in the second quarter related to the September 11, 2001 attack. These reserve adjustments are further discussed under "Loss Reserves." The loss ratio was 63.2% for the first nine months of 2004 and 63.9% for the third quarter compared with 65.1% and 65.7%, respectively, in the prior year. Catastrophe losses during the first nine months of 2004 amounted to $338.5 million, which represented 3.9 percentage points of the loss ratio, compared with $261.5 million or 3.5 percentage points in 2003. The 2004 catastrophe loss amount excludes the $80 million reduction in loss reserves in the second quarter related to the September 11, 2001 attack, which reduced the loss ratio by 0.9 of a percentage point in the first nine months. Catastrophe losses for the third quarter of 2004 amounted to $196.1 million or 6.7 percentage points of the loss ratio compared with $96.0 million or 3.7 percentage points in 2003. The catastrophe losses in the third quarter of 2004 were due primarily to the storms that hit Florida and several other states. Our expense ratio was 29.7% for the first nine months of 2004 and 29.4% for the third quarter compared with 30.7% and 30.9%, respectively, in 2003. The decrease in the expense ratio was due primarily to premiums written growing at a higher rate than overhead expenses. During 2004, we have made continued progress in reducing our expense structure. Producer Compensation We have agreements in place with insurance brokers under which we agree to pay commissions that are contingent on the volume and/or the profitability of business placed with us. We also have in place contingent commission arrangements with agents who are appointed by us to sell our insurance. The New York Attorney General has raised issues with respect to potential conflicts of interest arising from the payment of contingent commissions to brokers. In response, several brokers have announced that they are eliminating the practice of receiving contingent compensation from insurers. In addition, several state insurance regulators have announced that they are looking at compensation arrangements for brokers and agents and considering regulatory reform in this area. We are reviewing our compensation arrangements with agents and brokers and will modify them, as necessary, so that they are consistent with evolving standards in this area. At September 30, 2004, we accrued for potential contingent commission payments based on the terms of existing agreements with brokers and agents. Although announced decisions by brokers and proposals by regulators may change the manner in which insurance intermediaries are compensated, based on what is currently known, management does not expect that any such reforms, including any changes in compensation arrangements related to 2004 or future years, would have a material adverse effect on the Corporation's future operating results, financial condition or liquidity. Page 16 REVIEW OF UNDERWRITING RESULTS BY BUSINESS UNIT Underwriting results during 2004 and 2003 by business unit were as follows:
Net Premiums Combined Loss and Written Expense Ratios ------- -------------- 2004 2003 2004 2003 ---- ---- ---- ---- (in millions) Nine Months Ended September 30 PERSONAL INSURANCE Automobile........................ $ 474.1 $ 443.6 94.2% 98.9% Homeowners........................ 1,217.6 1,114.2 103.4 106.6 Other............................. 425.7 391.4 82.4 77.8 -------- -------- ----- ----- Total Personal................ 2,117.4 1,949.2 97.1 98.9 -------- -------- ----- ----- COMMERCIAL INSURANCE Multiple Peril.................... 879.4 809.4 76.7 90.3 Casualty.......................... 1,170.0 1,010.0 87.2 88.7 Workers' Compensation............. 573.2 475.9 91.8 92.2 Property and Marine............... 816.8 766.1 72.5 89.3 -------- -------- ----- ----- Total Commercial.............. 3,439.4 3,061.4 81.4 89.6 -------- -------- ----- ----- SPECIALTY INSURANCE Executive Protection.............. 1,610.3 1,526.0 101.2 104.0 Financial Institutions............ 639.7 603.4 125.0 111.5 Other............................. 1,165.9 997.5 89.3 84.4 -------- -------- ----- ----- Total Specialty............... 3,415.9 3,126.9 101.5 99.8 -------- -------- ----- ----- TOTAL......................... $8,972.7 $8,137.5 92.9% 95.8% ======== ======== ===== ===== Quarter Ended September 30 PERSONAL INSURANCE Automobile........................ $ 163.7 $ 154.3 92.5% 96.4% Homeowners........................ 443.2 402.9 109.1 108.7 Other............................. 147.3 132.1 88.0 78.7 -------- -------- ----- ----- Total Personal................ 754.2 689.3 101.2 99.9 -------- -------- ----- ----- COMMERCIAL INSURANCE Multiple Peril.................... 287.8 276.6 77.1 92.7 Casualty.......................... 386.6 331.4 89.1 90.8 Workers' Compensation............. 184.3 158.4 90.1 94.1 Property and Marine............... 258.5 253.6 73.3 86.4 -------- -------- ----- ----- Total Commercial.............. 1,117.2 1,020.0 82.3 90.6 -------- -------- ----- ----- SPECIALTY INSURANCE Executive Protection.............. 558.6 525.0 100.3 104.2 Financial Institutions............ 181.6 182.8 103.9 111.4 Other............................. 414.1 428.4 95.9 87.8 -------- -------- ----- ----- Total Specialty............... 1,154.3 1,136.2 99.2 100.6 -------- -------- ----- ----- Total......................... $3,025.7 $2,845.5 93.3% 96.6% ======== ======== ===== =====
Page 17 Personal Insurance Premiums from personal insurance coverages, which represent 24% of net premiums written, increased by 9% in both the first nine months and third quarter of 2004 compared with the comparable periods in 2003. Premium growth occurred in all classes; however, growth has slowed somewhat from 2003 levels due to a slowing in the pace of rate increases combined with some additional marketplace competition. The premium growth in our homeowners business was due to increased insurance-to-value and modestly higher rates; the in force policy count for this class had minimal growth. Our personal insurance business produced more profitable underwriting results in the first nine months of 2004 than in the same period in 2003. Results in the third quarter of 2004 were modestly unprofitable compared with breakeven results in 2003. The combined loss and expense ratio was 97.1% for the first nine months of 2004 and 101.2% for the third quarter compared with 98.9% and 99.9%, respectively, in 2003. Results in both years were adversely affected by catastrophe losses; the impact of catastrophes was particularly significant in the third quarter of 2004. Excluding catastrophe losses, our personal insurance business showed significant improvement in 2004 as evidenced by the combined ratio of 85.1% in the first nine months of 2004 and 82.2% in the third quarter compared with 89.6% and 89.2%, respectively, in 2003. Our homeowners business produced unprofitable underwriting results in 2004 and 2003. Results in both years were adversely affected by significant catastrophe losses, particularly in the third quarter of 2004. Catastrophe losses represented 20.4 percentage points of the loss ratio for this class in the first nine months of 2004 and 32.1 percentage points in the third quarter compared with 16.1 and 18.6 percentage points, respectively, in 2003. Excluding catastrophe losses, our homeowners business showed significant improvement in 2004. The improvement was largely the result of better pricing and a reduction of water damage losses primarily through the implementation of contract wording changes related to mold damage. Our remediation plan relating to our homeowners business in the United States, which began in the latter part of 2001, is on track. We have implemented rate increases in many states. In addition, we have made regulatory filings in most states to introduce contract changes that would enable us to treat mold as a separate peril available at an appropriate price. These changes, which have been implemented in 46 states, are beginning to reduce the frequency and severity of our water damage losses, particularly in Texas, the state in which such losses have been most significant. Our automobile business produced profitable results in both 2004 and 2003, but more so in 2004. The improved results in 2004 were due to lower claim frequency and stable severity. Other personal coverages, which include insurance for valuable articles, excess liability and yacht, produced highly profitable results in 2004 and 2003 due to continued favorable loss experience. Results in the third quarter of 2004 were adversely affected by several large yacht losses. Page 18 Commercial Insurance Premiums from commercial insurance, which represent 38% of our net writings, increased by 12% in the first nine months of 2004 and 10% in the third quarter compared with the same periods a year ago. The premium growth in this business was due to an increase in our in force policy count and to price increases. Growth occurred in all segments of this business but was particularly strong in the workers' compensation and casualty classes. Rates continued to increase in 2004 although, as expected, the level of rate increases declined in each succeeding quarter as we experienced more competition in the marketplace. Retention levels in the first nine months of 2004 were somewhat higher than those in the comparable period of 2003. New business remained strong but was down from 2003 levels due to a decrease in submission activity. We continue to get favorable terms and conditions on business written. Our commercial insurance business produced highly profitable underwriting results in 2004 and 2003. These profitable results reflect the cumulative effect of price increases, better terms and conditions and more stringent risk selection in recent years. The 2004 results were exceptionally profitable due to unusually low property losses. The combined loss and expense ratio for commercial business was 81.4% for the first nine months of 2004 and 82.3% for the third quarter compared with 89.6% and 90.6%, respectively, in 2003. Multiple peril produced highly profitable results in 2004 and 2003, but more so in 2004. Both the liability and property components of this business were more profitable in 2004. The property component was exceptionally profitable in 2004 due to unusually low losses. Catastrophe losses represented 3.9 percentage points of the loss ratio for this class in the first nine months of 2004 and 7.2 percentage points for the third quarter compared with 4.7 percentage points and 5.2 percentage points, respectively, in 2003. Our casualty business produced highly profitable results in 2004 and 2003. Such results were due to the price increases over the last several years and favorable loss experience. The automobile and primary liability components of this business were highly profitable in both years. The excess liability component was modestly profitable in the first nine months of 2004 and 2003. Excess liability results in 2004 benefited from a $30 million reduction in net loss reserves in the second quarter related to the September 11, 2001 attack. Workers' compensation results were profitable in 2004 and 2003 due in large part to our disciplined risk selection during the past several years. Property and marine results were highly profitable in both years, particularly in 2004, due to more stringent risk selection and few severe losses. Results in the second quarter of 2003 included one $25 million loss that resulted from an adverse arbitration decision rendered against an insurance pool in which we were formerly a participant. Catastrophe losses represented 4.3 percentage points of the loss ratio for this class in the first nine months of 2004 and 6.8 percentage points in the third quarter compared with 6.9 percentage points and 5.9 percentage points, respectively, in 2003. Page 19 Specialty Insurance Premiums from specialty insurance, which represent 38% of our net writings, increased by 9% in the first nine months of 2004 and 2% in the third quarter compared with the similar periods in 2003. Premium growth in the first nine months was enhanced by the 25% growth in premiums generated by Chubb Re. However, as expected, premiums produced by Chubb Re in the third quarter of 2004 were 6% lower than in the same period in 2003. We expect that in the fourth quarter of 2004 Chubb Re's premium growth, if any, will be minimal. The aggregate growth in our executive protection and financial institutions businesses was 6% in the first nine months of 2004 and 5% in the third quarter. Growth was constrained by competitive pressure on rates and our commitment to maintain underwriting discipline. Rates were down in the for-profit directors and officers liability component. We obtained modest rate increases in most other classes. New business in the first nine months was similar to 2003 levels. Retention levels, however, were significantly higher than in 2003 and we continued to get favorable terms and conditions on both renewals and new business. Our specialty insurance business produced modestly unprofitable underwriting results in the first nine months of 2004 compared with near breakeven results in the same period of 2003. Results in the third quarter of 2004 showed modest improvement compared with the same period in 2003. The combined loss and expense ratio was 101.5% for the first nine months of 2004 and 99.2% for the third quarter compared with 99.8% and 100.6%, respectively, in 2003. Executive protection results were unprofitable in 2004 and 2003, but showed improvement in 2004 due to the impact of higher premiums. Results in both years were adversely affected by unfavorable development on loss reserves related to accident years 2002 and prior. Financial institutions results were highly unprofitable in the first nine months of 2004 and 2003, but far more so in 2004. The deterioration in 2004 was in the professional liability component of this business. Results for the professional liability component were highly unprofitable in both years due to substantial unfavorable development in the errors and omissions liability class on loss reserves related to accident years 2002 and prior. Such results were particularly unprofitable in 2004 due to the increase in loss reserves of about $160 million in the second quarter related to investment banks. Fidelity results were highly profitable in both years due to favorable loss experience. The standard commercial business written on financial institutions produced profitable results in the first nine months of 2004 and 2003, reflecting the rate increases and more stringent risk selection in recent years. Such results were highly profitable in 2004 due to a $50 million reduction in net loss reserves in the second quarter related to the September 11, 2001 attack. Page 20 Our other specialty results were highly profitable in the first nine months of 2004 and 2003. Reinsurance assumed business generated by Chubb Re, the largest component, was similarly profitable in 2004 and 2003; results in the third quarter of 2004 included catastrophe losses of $25 million. Our accident business was more profitable in 2004 than in 2003. Our surety business produced highly profitable results in the first nine months of both years, but more so in 2003. Surety results in the third quarter of 2004 were breakeven compared with highly profitable results in 2003. The deterioration in the third quarter of 2004 was due to two large losses, one of which was the Aquila settlement described below. Surety results in 2003 benefited from a $17 million recovery in the second quarter from the sale of a bankruptcy claim against various Enron entities. Our surety business tends to be characterized by infrequent but potentially high severity losses. Since the end of 2001, we have been reducing our exposure on an absolute basis and by specific bond type. The majority of our obligations are intended to be performance-based guarantees. When losses occur, they are mitigated by the customer's balance sheet, contract proceeds and bankruptcy recovery. Notwithstanding our efforts to manage and reduce our surety exposure, we continue to have substantial commercial surety exposure for outstanding bonds. In that regard, we have exposures related to commercial surety bonds issued on behalf of companies that have experienced deterioration in creditworthiness. We therefore may experience an increase in filed claims and may incur high severity losses. Such losses would be recorded if and when claims are filed and determined to be valid, and could have a material adverse effect on the Corporation's results of operations and liquidity. We had in force $500 million of gas forward purchase surety bonds with one principal, Aquila. These surety bonds secured Aquila's obligation to supply gas under long-term forward purchase agreements. In July 2004, a settlement was reached and approved by the court that resulted in Aquila providing us with collateral sufficent to cover our entire exposure under the surety bonds. Our cost under this agreement was $15 million. Page 21 LOSS RESERVES Loss reserves at September 30, 2004 and December 31, 2003 included significant amounts related to asbestos and toxic waste claims and the September 11, 2001 attack. The components of loss reserves were as follows:
September 30, December 31, 2004 2003 ------- ------- (in millions) Gross loss reserves Total, per balance sheet $19,699 $17,948 Less: Related to asbestos and toxic waste claims 1,117 1,295 Related to September 11 attack 747 999 ------- ------- Total, as adjusted $17,835 $15,654 ======= ======= Reinsurance recoverable Total, per balance sheet $ 3,533 $ 3,427 Less: Related to asbestos and toxic waste claims 55 57 Related to September 11 attack 617 748 ------- ------- Total, as adjusted $ 2,861 $ 2,622 ======= ======= Net loss reserves Total $16,166 $14,521 Total, as adjusted 14,974 13,032
The loss reserves related to asbestos and toxic waste claims and the September 11 attack are significant components of our total loss reserves, but they distort the growth trend in our loss reserves. Adjusted to exclude such loss reserves, our loss reserves, net of reinsurance recoverable, increased by $1,942 million during the first nine months of 2004. Net loss reserves, as adjusted, by segment were as follows:
September 30, December 31, 2004 2003 ------- ------- (in millions) Personal insurance $ 1,448 $ 1,219 Commercial insurance 5,732 5,248 Specialty insurance 7,794 6,565 ------- ------- Net loss reserves, as adjusted $14,974 $13,032 ======= =======
Page 22 Loss reserves for each of our business segments increased significantly in the first nine months of 2004. The increase was most significant in specialty insurance, due in large part to directors and officers liability and errors and omissions liability claim activity, including the errors and omissions reserve increase related to investment banks discussed below, as well as the growth in our reinsurance assumed business. Unpaid claims related to catastrophes contributed approximately $100 million to the increase in personal insurance loss reserves. In the second quarter, we updated our analysis of our exposure to investment banking errors and omissions claims related to report years 2002 and prior. These claims pertain principally to allegations against investment banks of laddering or of aiding and abetting in certain of the high-profile corporate abuse cases. During the quarter, the last of the significant regulatory settlements was announced, clearing the way for intensified and accelerated attention to the class action litigation that drives our exposure. In addition, recent developments in litigation relating to various corporate abuse scandals have led a number of investment banks to focus on, and in some cases pursue vigorously, settlement strategies. These developments and other information about potential settlement ranges and allocations of responsibility among investment banks for which we were one of the insurers were considered as part of the analysis of our exposure that led to our decision to increase net loss reserves by about $160 million. Separately, we reduced our net loss reserves related to the September 11, 2001 attack by $80 million in the second quarter as a result of several recent events. In March, the deadline for filing a liability claim with respect to the September 11 attack expired. That enabled us to define more precisely the number of claimants under liability policies. Then, in June, the final award determinations for claimants of the World Trade Center Victims Compensation Fund were made. As for our property exposure, in April, the jury in the Silverstein case found that we had bound coverage under a policy form that defined the September 11 attack as one occurrence. The effect of that verdict was to eliminate the need for us to make any additional payment. While an appeal has been filed, we believe that it has no merit. We continually review and update our loss reserves. Based on all information currently available, we believe that the aggregate loss reserves of the property and casualty subsidiaries at September 30, 2004 were adequate to cover claims for losses that had occurred, including both those known to us and those yet to be reported. In establishing such reserves, we consider facts currently known and the present state of the law and coverage litigation. However, given the judicial decisions and legislative actions that have broadened the scope of coverage and expanded theories of liability in the past and the possibilities of similar interpretations in the future, particularly as they relate to asbestos claims and, to a lesser extent, toxic waste claims, additional liabilities may emerge in future periods for amounts in excess of carried reserves. Such increases in estimates could have a material adverse effect on the Corporation's future operating results. However, management does not expect that any such increases would have a material effect on the Corporation's consolidated financial condition or liquidity. Page 23 INVESTMENT RESULTS Property and casualty investment income before taxes increased by 12% in the first nine months of 2004 and 11% in the third quarter compared with the same periods in 2003. The growth in investment income was the result of an increase in invested assets due to substantial cash flow from operations as well as a capital contribution of $800 million to the property and casualty subsidiaries by the Corporation toward the end of the second quarter of 2003. Growth in investment income in 2004 was dampened, however, by lower available reinvestment rates on fixed maturities that matured over the past year. The effective tax rate on investment income was 19.8% in the first nine months of 2004 compared with 20.3% in the same period in 2003. The effective tax rate on investment income is lower than the statutory tax rate due to our holding a portion of our investment portfolio in tax-exempt securities. On an after-tax basis, property and casualty investment income increased by 12% in the first nine months of 2004 and 13% in the third quarter. Management uses property and casualty investment income after-tax, a non-GAAP financial measure, to evaluate its investment performance because it reflects the impact of any change in the proportion of the investment portfolio invested in tax-exempt securities and is therefore more meaningful for analysis purposes than investment income before income tax. OTHER CHARGES Other charges include miscellaneous income and expenses of the property and casualty subsidiaries. Other charges in the first nine months of 2003 included expenses of $15 million, mostly in the second quarter, related to the restructuring of our operations in Continental Europe. The restructuring costs consisted primarily of severance costs. CHUBB FINANCIAL SOLUTIONS Chubb Financial Solutions (CFS) was organized in 2000 to develop and provide customized products to address specific financial needs of corporate clients. CFS operated through both the capital and insurance markets. In April 2003, the Corporation announced its intention to exit CFS's non-insurance business and to run-off the existing financial products portfolio. CFS's non-insurance business was primarily structured credit derivatives, principally as a counterparty in portfolio credit default swap contracts. The Corporation guaranteed all of these obligations. Portfolio credit default swaps are derivatives and are carried in the financial statements at estimated fair value, which represents management's best estimate of the cost to exit the positions. Most of the credit default swaps tend to be unique transactions and there is no market for trading such exposures. To estimate the fair value of the obligation in each credit default swap, we use internal valuation models that are similar to external valuation models. Page 24 The fair value of our credit default swaps is subject to fluctuations arising from, among other factors, changes in credit spreads, the financial ratings of referenced asset-backed securities, actual credit events reducing subordination, credit correlation within a portfolio, anticipated recovery rates related to potential defaults and changes in interest rates. Changes in fair value are included in income in the period of the change. Thus, CFS's results are subject to volatility, which has had a significant effect on the Corporation's results of operations from period to period. The non-insurance business of CFS produced a loss before taxes of $17.0 million in the first nine months of 2004 compared with a loss of $30.6 million in the first nine months of 2003. The loss in 2004 was primarily related to the termination during the period of CFS's obligations under certain credit default swaps. In 2003, the loss was due to an increase in the fair value of our obligations as a result of deterioration in the credit quality of certain referenced securities underlying two of our asset-backed portfolio credit default swaps. Revenues from the non-insurance business of CFS, primarily consisting of the change in fair value of derivative contracts, were negative $1.2 million in the first nine months of 2004 compared with negative $17.3 million in the same period of 2003. Revenues were negative in 2004 due to the termination of several portfolio credit default swaps during the period. Revenues were negative in 2003 due to the adverse impact of changes in the fair value of our obligations related to credit default swaps. CFS's aggregate exposure, or retained risk, from each of its in-force portfolio credit default swaps is referred to as notional amount. Notional amounts are used to express the extent of involvement in swap transactions. These amounts are used to calculate the exchange of contractual cash flows and are not necessarily representative of the potential for gain or loss. The notional amounts are not recorded on the balance sheet. The notional amount of CFS's credit default swaps was reduced to $11.3 billion at September 30, 2004 from $24.7 billion at December 31, 2003 and $39.2 billion at September 30, 2003. This reduction in notional amount of credit default swaps has been accomplished either by terminating the swap with the original counterparty at a negotiated settlement amount or by entering into a credit default swap with a third party that effectively offsets the existing credit default swap. As of September 30, 2004, approximately $1.5 billion of the reduction in notional amount of credit default swaps had been accomplished by entering into offsetting credit default swaps. Our realistic loss exposure is a very small portion of the $11.3 billion notional amount due to several factors. Our position is senior to subordinated interests of $5.4 billion in the aggregate. Of the $5.4 billion of subordination, only $37 million has eroded due to defaults through September 30, 2004, none of which has pierced the subordination limits of any of our contracts. In addition, using internal rating models, CFS estimates that the credit ratings of the individual portfolio credit default swaps at September 30, 2004 were either AAA or AA. In addition to portfolio credit default swaps, CFS entered into a derivative contract linked to an equity market index and a few other insignificant non-insurance transactions. Page 25 The notional amount and fair value of our future obligations under derivative contracts by type of risk were as follows:
Notional Amount Fair Value --------------------------- --------------------------- September 30, December 31, September 30, December 31, 2004 2003 2004 2003 ------------- ------------ ------------- ------------ (in billions) (in millions) Credit default swaps Corporate securities $ 1.3 $11.2 $ 5 $21 Asset-backed securities 7.4 10.5 9 23 Loan portfolios 2.6 3.0 1 2 ----- ----- --- --- 11.3 24.7 15 46 Other .3 .4 8 9 ----- ----- --- --- $11.6 $25.1 $23 $55 ===== ===== === ===
In the fourth quarter of 2003, CFS terminated two asset-backed portfolio credit default swaps that had experienced deterioration in credit quality and simultaneously entered into a new contract that guarantees principal and interest obligations. The Corporation guaranteed CFS's obligations under the contract. CFS's potential payment obligation extends to the date when the last of the underlying obligations expires. At September 30, 2004, the notional amount of referenced securities was $2.0 billion. Under the agreement, CFS's maximum potential payment obligation is limited to $500 million regardless of the amount of losses that might be incurred on the $2.0 billion of referenced securities. Moreover, if losses are incurred, CFS's payment obligations are limited to an extended payment schedule under which no payment would be due until 2010 at the earliest. CFS established a liability of $186 million related to the principal and interest contract, which represented the estimated fair value of the guarantee at its inception. The principal and interest guarantee is not a derivative contract. Therefore, the liability related to this contract is not marked-to-market each period. Due to the nature of the guarantee, we will reduce this liability only upon either the expiration or settlement of the guarantee. If actual losses are incurred, a liability for the losses will be established, and a portion of the guarantee liability will be released. The amount released will depend on our evaluation of expected ultimate loss experience. CORPORATE AND OTHER Corporate and other includes investment income earned on corporate invested assets, interest expense and other expenses not allocated 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 $125.0 million in the first nine months of 2004 compared with a loss of $102.4 million in the first nine months of 2003. The higher loss in 2004 was due primarily to lower income from our investment in Allied World Assurance Company, Ltd., higher interest expense and a larger loss from our real estate operations offset in part by higher investment income. The third quarter results of Allied World included storm losses, our share of which was approximately $30 million. Interest expense was higher in 2004 due primarily to the issuance of $500 million of debt in the first quarter of 2003 and $460 million of debt in the second quarter of 2003. Investment income was higher in 2004 due to an increase in corporate invested assets resulting from the issuance of debt and equity securities during 2003. Page 26 In both 2004 and 2003, corporate results included a loss at The Chubb Institute, Inc., our post secondary educational subsidiary. As part of our focus on our core insurance business, we sold Chubb Institute in September 2004. The sale transaction is further discussed under "Realized Investment Gains and Losses." REAL ESTATE Real estate operations resulted in a loss before taxes of $12.1 million in the first nine months of 2004 compared with a loss of $3.2 million in the same period in 2003, which amounts are included in the corporate and other results. The higher loss in 2004 was due primarily to the recognition of an impairment loss on a commercial property. We own approximately $270 million of land that we expect will be developed in the future. In addition, our real estate assets include approximately $170 million of commercial properties and land parcels under lease, of which $22 million relates to a variable interest entity in which we are the primary beneficiary. We are continuing to explore the sale of certain of our remaining properties. The recoverability of the carrying value of our real estate assets is assessed based on our ability to fully recover costs through a future revenue stream. The assumptions used reflect future improvement in demand for office space, an increase in rental rates and the ability and intent to obtain financing in order to hold and develop such remaining properties and protect our interests over the long term. We believe that we have made adequate provisions for impairment of real estate assets. However, if the assets are not sold or developed or if leased properties do not perform as presently contemplated, it is possible that additional impairment losses may be recognized that would have a material adverse effect on the Corporation's results of operations. REALIZED INVESTMENT GAINS AND LOSSES Net investment gains realized were as follows:
Periods Ended September 30 --------------------------------------- Third Quarter Nine Months ------------------ ----------------- 2004 2003 2004 2003 ---- ---- ---- ---- (in millions) Net realized gains (losses) Equity securities $ 35.9 $39.8 $165.8 $59.2 Fixed maturities 17.7 21.9 12.4 74.6 Chubb Institute (4.5) - (31.5) - ------ ----- ------ ----- 49.1 61.7 146.7 133.8 ------ ----- ------ ----- Other than temporary impairment Equity securities - 1.2 - 14.5 Fixed maturities .2 - .2 33.6 ------ ----- ------ ----- .2 1.2 .2 48.1 ------ ----- ------ ----- Realized investment gains before tax $ 48.9 $60.5 $146.5 $85.7 ====== ===== ====== ===== Realized investment gains after tax $ 31.7 $39.3 $ 99.4 $55.7 ====== ===== ====== =====
Page 27 A substantial portion of the realized gains in 2004 from equity securities related to our share of gains recognized by investment partnerships in which we have an interest. In May 2004, we entered into an agreement to sell Chubb Institute. We recognized a loss of $27 million in the second quarter based on the terms of the agreement. The sale closed in September 2004. Under the final terms of the sale, we recognized an additional loss of $4.5 million in the third quarter. We regularly review those invested assets whose fair value is less than cost to determine if an other than temporary decline in value has occurred. In evaluating whether a decline in value of any investment is other than temporary, we consider various quantitative and qualitative factors including the length of time and the extent to which the fair value has been less than the cost, the financial condition and near term prospects of the issuer, whether the debtor is current on contractually obligated interest and principal payments, and our intent and ability to hold the investment for a period of time sufficient to allow us to recover our cost. If a decline in the fair value of an individual security is deemed to be other than temporary, the difference between cost and estimated fair value is charged to income as a realized investment loss. The fair value of the investment becomes its new cost basis. CAPITAL RESOURCES AND LIQUIDITY Capital resources and liquidity represent the overall financial strength of the Corporation and its ability to generate cash flows from its operating subsidiaries, borrow funds at competitive rates and raise new capital to meet operating and growth needs. CAPITAL RESOURCES Capital resources provide protection for policyholders, furnish the financial strength to support the business of underwriting insurance risks and facilitate continued business growth. At September 30, 2004, the Corporation had shareholders' equity of $9.6 billion and total debt of $2.8 billion. Management continuously monitors the amount of capital resources that the Corporation maintains both for itself and its operating subsidiaries. In connection with our long-term capital strategy, the Corporation from time to time contributes capital to its property and casualty subsidiaries. In addition, in order to satisfy its capital needs as a result of any rating agency capital adequacy or other future rating issues, or in the event the Corporation were to need additional capital to make strategic investments in light of market opportunities, the Corporation may take a variety of actions, which could include the issuance of additional debt and/or equity securities. In June 2003, a shelf registration statement that the Corporation filed in March 2003 was declared effective by the Securities and Exchange Commission. Under the registration statement, up to $2.5 billion of various types of securities may be issued. At September 30, 2004, the Corporation had approximately $650 million remaining under the shelf registration statement. In July 1998, the Board of Directors authorized the repurchase of up to 12,500,000 shares of the Corporation's common stock. The authorization has no expiration. The Corporation made no share repurchases during the first nine months of 2004. As of September 30, 2004, 3,287,100 shares remained under the share repurchase authorization. We do not anticipate that we will repurchase any shares of our common stock in 2004. Page 28 RATINGS The Corporation and its insurance subsidiaries are rated by major rating agencies. These ratings reflect the rating agency's opinion of our financial strength, operating performance, strategic position and ability to meet our obligations to policyholders. Ratings are an important factor in establishing our competitive position in our operating businesses. There can be no assurance that our ratings will continue for any given period of time or that they will not be changed. Reductions in our ratings could adversely affect the competitive position of our operating businesses. It is possible that positive or negative ratings actions may occur in the future. If our ratings were downgraded, the Corporation may incur higher borrowing costs and may have more limited means to access capital. LIQUIDITY Liquidity is a measure of our ability to generate sufficient cash flows to meet the short and long term cash requirements of our business operations. Our property and casualty operations provide liquidity in that premiums are generally received months or even years before losses are paid under the policies purchased by such premiums. 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. After satisfying our cash requirements, excess cash flows are used to build the investment portfolio and thereby increase future investment income. New cash from operations available for investment by the property and casualty subsidiaries was approximately $3.0 billion in the first nine months of 2004 compared with $2.2 billion in the same period in 2003. The increase in new cash in 2004 was due to premium receipts increasing at a greater rate than paid losses and operating expenses. Our property and casualty subsidiaries maintain investments in highly liquid, short-term and other marketable securities to provide for immediate cash needs. The Corporation's liquidity requirements in the past have been met by dividends from its property and casualty subsidiaries and the issuance of commercial paper and debt and equity securities. Subject to our operating results, financial condition, capital structure and any regulatory constraints, it is expected that our liquidity requirements in the future will be met by these sources of funds or, if necessary, borrowings from our credit facilities. 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 $250 million short term revolving credit facility, which was to have terminated on June 24, 2004, was extended to June 22, 2005. The $250 million medium term revolving credit facility terminates on June 28, 2007. There have been no borrowings under these agreements. Page 29 INVESTED ASSETS The main objectives in managing our investment portfolios are to maximize after-tax investment income and total investment returns while minimizing credit risks in order 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, regulatory requirements, fluctuations in interest rates and consideration of other market risks. Investment decisions are centrally managed by investment professionals based on guidelines established by management and approved by the boards of directors. Our investment portfolio is primarily comprised of high quality bonds, principally tax-exempt, U.S. Treasury and government agency, mortgage-backed securities and corporate issues as well as foreign bonds that support our international operations. In addition, the portfolio includes equity securities held primarily with the objective of capital appreciation. In the first nine months of 2004, we invested new cash in tax-exempt bonds and taxable bonds. The taxable bonds were primarily mortgage-backed securities and U.S. Treasury securities. Our objective is to achieve the appropriate mix of taxable and tax-exempt securities in our portfolio to balance both investment and tax strategies. The unrealized appreciation before tax of investments carried at market value, which includes fixed maturities classified as available-for-sale and equity securities, was $925 million and $1,036 million at September 30, 2004 and December 31, 2003, respectively. Such unrealized appreciation is reflected in a separate component of other comprehensive income, net of applicable deferred income tax. The unrealized market appreciation before tax of those fixed maturities carried at amortized cost was $24 million at September 30, 2004 and $35 million at December 31, 2003. Such unrealized appreciation was not reflected in the consolidated financial statements. Changes in unrealized appreciation of fixed maturities were due primarily to fluctuations in interest rates. Page 30 Item 4 - Controls and Procedures As of September 30, 2004, an evaluation of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures was performed under the supervision and with the participation of the Corporation's management, including the chief executive officer and chief financial officer. Based on that evaluation, the chief executive officer and chief financial officer concluded that the Corporation's disclosure controls and procedures were effective as of the evaluation date. During the three month period ended September 30, 2004, there were no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting. Page 31 PART II. OTHER INFORMATION Item 1 - Legal Proceedings As part of ongoing investigations of market practices in the insurance industry, the Corporation has received subpoenas and other information requests from the Attorneys General of several states, including Connecticut, New York, North Carolina and Ohio. It is our belief that these inquiries are being made to a number of industry participants doing business in the relevant jurisdictions and that the Corporation has not been singled out in being asked to provide information in any investigation. We anticipate that officials from other jurisdictions will initiate investigations into similar matters and, because the Corporation's insurance subsidiaries operate throughout the United States and in many jurisdictions outside of the United States, the Corporation believes that it is likely that it will receive additional subpoenas and requests for information in connection with such inquiries. The Corporation will cooperate fully in such investigations. Item 5 - Other Information The Corporation's independent registered public accounting firm, Ernst & Young LLP ("Ernst & young"), recently reported to the Corporation's Audit Committee and management that affiliates of Ernst & Young had performed certain tax remittance and disbursement services in China on behalf of a subsidiary of the Corporation and that such services raised questions regarding Ernst & Young's independence with respect to its performance of audit services. As part of its report, Ernst & Young informed the Corporation's Audit Committee and management that Ernst & Young has reported the existence of these services, which were discontinued in 2002, to the Securities and Exchange Commission and the Public Company Accounting Oversight Board. Ernst & Young has concluded that, given several factors including the nature of the services, the de minimis fees associated therewith (which for 2001 and 2002 were approximately $11,000 in the aggregate) and the fact that none of its personnel involved in providing these services performed any audit or audit-related services for the Corporation, Ernst & Young's independence with respect to its audit services has not been impaired. After discussion, the Audit Committee concurred in this conclusion that Ernst & Young's independence was not impaired by the provision of these services. Page 32 Item 6 - Exhibits and Reports on Form 8-K A. Exhibits Exhibit (31) Rule 13a-14(a)/15d-14(a) Certifications (1) Certification by John D. Finnegan (2) Certification by Michael O'Reilly Exhibit (32) Section 1350 Certifications (1) Certification by John D. Finnegan (2) Certification by Michael O'Reilly B. Reports on Form 8-K The Registrant filed a current report on Form 8-K on July 20, 2004 furnishing under Item 9 information with respect to a settlement agreement between two subsidiaries of the Registrant and Aquila, Inc. The Registrant filed a current report on Form 8-K on July 22, 2004 furnishing under Item 9 information with respect to court approval of the settlement agreement between two subsidiaries of the Registrant and Aquila, Inc. The Registrant filed a current report on Form 8-K on July 27, 2004 furnishing under Item 12 information with respect to the issuance of a press release announcing its results for the quarter ended June 30, 2004 and the availability of its Supplementary Investor Information Report for the quarter ended June 30, 2004. The Registrant filed a current report on Form 8-K on August 11, 2004 furnishing under Item 9 information with respect to the death of a member of the Corporation's board of directors. The Registrant filed a current report on Form 8-K on August 25, 2004 furnishing under Item 7.01 information with respect to the impact of Hurricane Charley. The Registrant filed a current report on Form 8-K on September 7, 2004 furnishing under Item 7.01 information with respect to the consummation of the previously announced sale of The Chubb Institute, Inc. The Registrant filed a current report on Form 8-K on September 20, 2004 furnishing under Item 7.01 information with respect to the impact of Hurricane Frances. The Registrant filed a current report on Form 8-K on October 15, 2004 furnishing under Item 7.01 information with respect to the impact of hurricanes in the third quarter. The Registrant filed a current report on Form 8-K on October 25, 2004 furnishing under Item 7.01 information with respect to receipt of interrogatories and a subpoena seeking information as part of an investigation by the Connecticut Attorney General's office into possible violations of the antitrust laws. Page 33 The Registrant filed a current report on Form 8-K on October 26, 2004 furnishing under Item 2.02 information with respect to the issuance of a press release announcing its results for the quarter ended September 30, 2004 and the availability of its Supplementary Investor Information Report for the quarter ended September 30, 2004. The Registrant filed a current report on Form 8-K on November 2, 2004 furnishing under Item 7.01 information with respect to receipt of an investigative demand seeking information as part of an investigation by the Ohio Attorney General's office into possible violations of the antitrust laws. 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 8, 2004 EX-31.1 2 y68364exv31w1.txt CERTIFICATION Exhibit 31.1 CERTIFICATION I, John D. Finnegan, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Chubb Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 8, 2004 /s/ John D. Finnegan - ----------------------------------------------- John D. Finnegan Chairman, President and Chief Executive Officer EX-31.2 3 y68364exv31w2.txt CERTIFICATION Exhibit 31.2 CERTIFICATION I, Michael O'Reilly, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Chubb Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 8, 2004 /s/ Michael O'Reilly - ----------------------------------------- Michael O'Reilly Vice Chairman and Chief Financial Officer EX-32.1 4 y68364exv32w1.txt CERTIFICATION Exhibit 32.1 CERTIFICATION OF PERIODIC REPORT I, John D. Finnegan, Chairman, President and Chief Executive Officer of The Chubb Corporation (the "Corporation"), certify, pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly Report on Form 10-Q of the Corporation for the quarterly period ended September 30, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. Dated: November 8, 2004 /s/ John D. Finnegan - ----------------------------------------------- John D. Finnegan Chairman, President and Chief Executive Officer EX-32.2 5 y68364exv32w2.txt CERTIFICATION Exhibit 32.2 CERTIFICATION OF PERIODIC REPORT I, Michael O'Reilly, Vice Chairman and Chief Financial Officer of The Chubb Corporation (the "Corporation"), certify, pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly Report on Form 10-Q of the Corporation for the quarterly period ended September 30, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. Dated: November 8, 2004 /s/ Michael O'Reilly - ----------------------------------------- Michael O'Reilly Vice Chairman and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----