-----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, SY5PG679v0bkiDEJrijv2b1RPiVHxI95vaGqbdmJYovpcyY6jWLnu+/fEOgn0IPN RaBGJvQIovG06Eo+lWF5Fw== 0000950123-97-009408.txt : 19971114 0000950123-97-009408.hdr.sgml : 19971114 ACCESSION NUMBER: 0000950123-97-009408 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHUBB CORP CENTRAL INDEX KEY: 0000020171 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 132595722 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08661 FILM NUMBER: 97713998 BUSINESS ADDRESS: STREET 1: 15 MOUNTAIN VIEW RD P O BOX 1615 CITY: WARREN STATE: NJ ZIP: 07061 BUSINESS PHONE: 9805802000 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 For the quarterly period ended September 30, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 For the transition period from to -------------- ----------------- Commission file number 1-8661 THE CHUBB CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) NEW JERSEY 13-2595722 - ------------------------------- -------------------- (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 15 MOUNTAIN VIEW ROAD, WARREN, NEW JERSEY 07061-1615 - ----------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (908) 903-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ---------------- ----------------- The number of shares of common stock outstanding as of October 31, 1997 was 170,165,040. 2 THE CHUBB CORPORATION INDEX Page Number Part I. Financial Information: Item 1 - Financial Statements: Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996..................... 1 Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 1997 and 1996.................................. 2 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996................ 3 Notes to Consolidated Financial Statements.................... 4 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 7 Part II. Other Information: Item 6 - Exhibits and Reports on Form 8-K....................... 15 3 Page 1 THE CHUBB CORPORATION CONSOLIDATED BALANCE SHEETS
Sept. 30, Dec. 31, 1997 1996 --------- --------- (in millions) Assets Invested Assets Short Term Investments .............................. $ 1,117.1 $ 275.9 Fixed Maturities Held-to-Maturity - Tax Exempt (market $2,406.5 and $2,573.4) .................................... 2,266.0 2,443.6 Available-for-Sale Tax Exempt (cost $5,189.9 and $4,415.1) .......... 5,491.2 4,622.6 Taxable (cost $4,027.3 and $4,038.7) ............. 4,138.1 4,092.7 Equity Securities (cost $607.4 and $540.5) .......... 764.8 646.3 --------- --------- TOTAL INVESTED ASSETS ........................ 13,777.2 12,081.1 Cash .................................................. 12.3 4.7 Accrued Investment Income ............................. 185.5 195.3 Premiums Receivable ................................... 1,123.9 984.9 Reinsurance Recoverable on Unpaid Claims .............. 1,209.9 1,767.8 Prepaid Reinsurance Premiums .......................... 114.7 326.7 Funds Held for Asbestos-Related Settlement ............ 596.0 599.9 Deferred Policy Acquisition Costs ..................... 672.1 601.2 Real Estate Assets .................................... 1,624.1 1,604.0 Deferred Income Tax ................................... 358.2 365.6 Other Assets .......................................... 564.6 564.3 Net Assets of Discontinued Operations ................. -- 843.4 --------- --------- TOTAL ASSETS ................................. $20,238.5 $19,938.9 ========= ========= Liabilities Unpaid Claims ......................................... $ 9,655.2 $ 9,523.7 Unearned Premiums ..................................... 2,675.5 2,617.5 Short Term Debt ....................................... 247.0 189.5 Long Term Debt ........................................ 817.4 1,070.5 Dividend Payable to Shareholders ...................... 49.6 47.2 Accrued Expenses and Other Liabilities ................ 1,134.3 1,027.6 --------- --------- TOTAL LIABILITIES ............................ 14,579.0 14,476.0 --------- --------- Shareholders' Equity Common Stock - $1 Par Value; 176,051,138 and 176,084,173 Shares ................................... 176.1 176.1 Paid-In Surplus ....................................... 601.5 695.7 Retained Earnings ..................................... 4,956.0 4,530.5 Foreign Currency Translation Losses, Net of Income Tax .................................... (21.6) (15.6) Unrealized Appreciation of Investments, Net ........... 370.1 238.7 Receivable from Employee Stock Ownership Plan ......... (101.6) (106.3) Treasury Stock, at Cost - 4,982,177 and 1,223,182 Shares ..................................... (321.0) (56.2) --------- --------- TOTAL SHAREHOLDERS' EQUITY ................... 5,659.5 5,462.9 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ... $20,238.5 $19,938.9 ========= =========
See Notes to Consolidated Financial Statements. 4 Page 2 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF INCOME PERIODS ENDED SEPTEMBER 30
Third Quarter Nine Months 1997 1996 1997 1996 ----------- ----------- ----------- ----------- (in millions) Revenues Premiums Earned ...................... $ 1,293.0 $ 1,126.6 $ 3,863.0 $ 3,392.4 Investment Income .................... 200.4 178.0 580.0 527.1 Real Estate .......................... 46.3 52.4 138.1 269.8 Realized Investment Gains (Losses) ... 29.1 (0.1) 74.2 31.2 ----------- ----------- ----------- ----------- Total Revenues ................ 1,568.8 1,356.9 4,655.3 4,220.5 ----------- ----------- ----------- ----------- Claims and Expenses Insurance Claims ..................... 839.3 732.7 2,464.9 2,233.0 Amortization of Deferred Policy Acquisition Costs ................... 348.2 302.4 1,047.4 919.3 Other Insurance Operating Costs and Expenses ............................ 85.3 76.8 247.0 216.9 Real Estate Cost of Sales and Expenses ............................ 46.1 47.5 146.7 253.5 Investment Expenses .................. 2.7 2.6 8.6 10.1 Corporate Expenses ................... 0.7 6.3 9.3 21.0 ----------- ----------- ----------- ----------- Total Claims and Expenses ..... 1,322.3 1,168.3 3,923.9 3,653.8 ----------- ----------- ----------- ----------- Income from Continuing Operations Before Federal and Foreign Income Tax.. 246.5 188.6 731.4 566.7 Federal and Foreign Income Tax ......... 52.5 34.4 156.6 107.3 ----------- ----------- ----------- ----------- Income from Continuing Operations ...... 194.0 154.2 574.8 459.4 Income from Discontinued Operations, Net of Tax ............................ -- 11.0 -- 31.5 ----------- ----------- ----------- ----------- Net Income ............................. $ 194.0 $ 165.2 $ 574.8 $ 490.9 =========== =========== =========== =========== Average Common and Common Equivalent Shares Outstanding (In Thousands) ..... 172,000 180,001 175,044 180,291 PER SHARE DATA Income from Continuing Operations ...... $ 1.12 $ .87 $ 3.30 $ 2.59 Income from Discontinued Operations .... -- .06 -- .17 ----------- ----------- ----------- ----------- Net Income ............................. $ 1.12 $ .93 $ 3.30 $ 2.76 =========== =========== =========== =========== Dividends Declared ..................... $ .29 $ .27 $ .87 $ .81
See Notes to Consolidated Financial Statements. 5 Page 3 THE CHUBB CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30
1997 1996 -------- -------- (in millions) Cash Flows from Operating Activities Net Income ....................................... $ 574.8 $ 490.9 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Increase in Unpaid Claims, Net ................. 689.4 135.7 Increase in Unearned Premiums, Net ............. 270.0 197.0 Increase in Premiums Receivable ................ (139.0) (104.1) Decrease in Medical Malpractice Reinsurance Related Receivable ............................ -- 191.2 Decrease in Funds Held for Asbestos-Related Settlement .................................... 3.9 367.4 Increase in Deferred Policy Acquisition Costs .. (70.9) (43.0) Change in Deferred Federal Income Tax .......... (65.6) (15.2) Depreciation ................................... 44.6 43.4 Realized Investment Gains ...................... (74.2) (31.2) Income from Discontinued Operations, Net of Tax .................................... -- (31.5) Other, Net ..................................... 68.2 87.0 -------- -------- Net Cash Provided by Operating Activities ........ 1,301.2 1,287.6 -------- -------- Cash Flows from Investing Activities Proceeds from Sales of Fixed Maturities .......... 2,649.3 2,288.6 Proceeds from Maturities of Fixed Maturities ..... 479.2 584.7 Proceeds from Sales of Equity Securities ......... 250.6 150.9 Proceeds from Sale of Discontinued Operations, Net ................................. 861.2 -- Purchases of Fixed Maturities .................... (3,698.8) (3,711.3) Purchases of Equity Securities ................... (263.5) (222.8) Increase in Short Term Investments, Net .......... (841.2) (176.9) Increase in Net Payable from Security Transactions Not Settled ........................ 35.8 86.9 Other, Net ....................................... (58.9) (106.6) -------- -------- Net Cash Used in Investing Activities ............ (586.3) (1,106.5) -------- -------- Cash Flows from Financing Activities Proceeds from Issuance of Long Term Debt ......... 10.0 5.0 Repayment of Long Term Debt ...................... (34.5) (82.4) Increase in Short Term Debt, Net ................. 57.5 62.9 Dividends Paid to Shareholders ................... (146.9) (137.2) Repurchase of Shares ............................. (641.1) (56.4) Other, Net ....................................... 47.7 25.0 -------- -------- Net Cash Used in Financing Activities ............ (707.3) (183.1) -------- -------- Net Increase (Decrease) in Cash .................... 7.6 (2.0) Cash at Beginning of Year .......................... 4.7 11.9 -------- -------- Cash at End of Period ............................ $ 12.3 $ 9.9 ======== ========
See Notes to Consolidated Financial Statements. 6 Page 4 THE CHUBB CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1) General The amounts included in this report are unaudited but include those adjustments, consisting of normal recurring items, which management considers necessary for a fair presentation. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes in the 1996 Annual Report to Shareholders. 2) Discontinued Operations On May 13, 1997, the Corporation completed the sale of Chubb Life Insurance Company of America and its subsidiaries to Jefferson-Pilot Corporation for $875 million in cash, subject to closing related adjustments. The life and health insurance subsidiaries have been classified as discontinued operations. 3) Investments Short term investments, which have an original maturity of one year or less, are carried at amortized cost which approximates market value. Fixed maturities classified as held-to-maturity are carried at amortized cost. Fixed maturities classified as available-for-sale and equity securities are carried at market value as of the balance sheet date. The net change in unrealized appreciation of investments carried at market value was as follows:
Periods Ended September 30 ----------------------------------------------- Third Quarter Nine Months ------------------- -------------------- 1997 1996 1997 1996 ------ ------ ------ ------ (in millions) Continuing Operations Change in unrealized appreciation of equity securities ................ $ 14.7 $ (2.2) $ 51.6 $ 8.3 Change in unrealized appreciation of fixed maturities ................. 123.6 53.6 150.6 (199.1) ------ ------ ------ ------ 138.3 51.4 202.2 (190.8) Deferred income tax (credit) ....... 48.6 17.9 70.8 (66.8) ------ ------ ------ ------ Change in unrealized appreciation .. 89.7 33.5 131.4 (124.0) Discontinued operations, net ............ -- 3.1 -- (30.7) ------ ------ ------ ------ Change in unrealized appreciation of investments, net ....................... $ 89.7 $ 36.6 $131.4 $(154.7) ====== ====== ====== ======
7 Page 5 4) Real Estate In June 1997, a definitive agreement was reached to sell a substantial portion of the Corporation's commercial real estate properties. The sale is subject to various closing adjustments and other customary conditions. The carrying value of certain real estate assets was reduced by $10.2 million in the second quarter of 1997 to reflect the terms of the agreement. This charge is included in real estate cost of sales and expenses in the consolidated statements of income. On November 7, 1997, the sale of almost all of the properties covered by the agreement reached in June was closed for $737 million, which includes $628 million in cash and the assumption of $109 million in debt. The buyer is a joint venture formed by Paine Webber Real Estate Securities Inc., Morgan Stanley Real Estate Fund II, L.P. and Gale & Wentworth, L.L.C. Closing on the few remaining properties under the agreement is expected to occur in 1998. Revenues from the sale will be recognized at the time of the closings. The Corporation is continuing to explore the sale of certain of its residential, retail and remaining commercial properties. 5) Property and Casualty Unpaid Claims A discussion of the 1993 Fibreboard asbestos-related settlement is presented in Note 14 of the notes to consolidated financial statements in the 1996 Annual Report to Shareholders. The following development during 1997 relates to the settlement. In June 1997, the United States Supreme Court set aside the ruling by the United States Court of Appeals for the Fifth Circuit that had approved the global settlement agreement among Pacific Indemnity Company (a subsidiary of the Corporation), Continental Casualty Company (a subsidiary of CNA Financial Corporation), Fibreboard Corporation and attorneys representing claimants against Fibreboard. The Supreme Court ordered the Fifth Circuit Court to reconsider its approval of the global settlement agreement in light of a June 1997 ruling by the Supreme Court rejecting an unrelated settlement that included several former asbestos manufacturers. The trilateral agreement among Pacific Indemnity, Continental Casualty and Fibreboard was not appealed to the Supreme Court and is now final. The trilateral agreement will be triggered if the global settlement agreement is ultimately disapproved. Since the trilateral agreement is unaffected by the Supreme Court's recent action, management continues to believe that the uncertainty of Pacific Indemnity's exposure with respect to asbestos-related bodily injury claims against Fibreboard has been eliminated. 6) Reinsurance Effective January 1, 1997, the agreements pertaining to the exchange of reinsurance on a quota share basis with Royal & Sun Alliance Insurance Group plc were terminated. As a result, there were portfolio transfers of unpaid claims, unearned premiums, reinsurance recoverable on unpaid claims and prepaid reinsurance premiums. The effect of the portfolio transfers, which were recorded in the first quarter of 1997, was to decrease unpaid claims and unearned premiums by $183.8 million and $93.6 million, respectively, and reinsurance recoverable on unpaid claims and prepaid reinsurance premiums by $470.0 million and $174.6 million, respectively. 8 Page 6 7) Exchangeable Subordinated Notes At January 1, 1997, Chubb Capital Corporation had outstanding $229.3 million of 6% exchangeable subordinated notes due May 15, 1998. In 1997, the holders of $228.6 million of the notes elected the option to exchange each $1,000 of principal amount into 23.256 shares of common stock of the Corporation, resulting in the issuance of 5,316,565 shares of common stock. The remaining notes were redeemed at 101.7% of the principal amount plus accrued interest. The exchange of the notes into common stock of the Corporation is considered a noncash transaction which has been excluded from the consolidated statements of cash flows. 8) Per Share Data Earnings per share amounts are based on the weighted average number of common and common equivalent shares outstanding. The 6% exchangeable subordinated notes were considered to be common equivalent shares during the period they were outstanding. The computation assumes the addition to income of the after-tax interest expense applicable to such notes. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share, which establishes new standards for computing and presenting earnings per share. SFAS No. 128 requires presentation of basic and diluted earnings per share on the face of the statements of income. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997 and requires restatement of all prior periods presented. Earlier adoption is not permitted. The adoption of SFAS. No. 128 is not expected to have a significant effect on the Corporation's earnings per share. 9 Page 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND FOR THE QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996 PROPERTY AND CASUALTY INSURANCE Earnings from our property and casualty business were substantially higher in the first nine months of 1997 compared with the same period of 1996. The increase in 1997 was due to a significant improvement in underwriting results together with strong growth in investment income. Underwriting results in 1996 were adversely affected by substantially higher catastrophe losses in the first quarter. Property and casualty income after taxes amounted to $506.1 million in the first nine months of 1997 and $162.4 million in the third quarter compared with $415.7 million and $145.8 million, respectively, in 1996. Net premiums written were $4.1 billion in the first nine months of 1997 and $1.3 billion in the third quarter, representing increases of 15.1% and 11.5%, respectively, over the comparable periods of 1996. A portion of the increase in premiums written in the first nine months of both 1996 and 1997 was due to changes to the agreements pertaining to the exchange of reinsurance on a quota share basis with the Sun Alliance Group plc. Effective January 1, 1996, these agreements were amended to reduce the portion of each company's business reinsured with the other. As a result of the 1996 merger of Sun Alliance with Royal Insurance Holdings plc, these agreements were terminated effective January 1, 1997. The Corporation's property and casualty subsidiaries now retain a greater portion of the business they write directly and no longer assume any reinsurance from Sun Alliance. Excluding the effects of the 1996 changes to the reinsurance agreements with Sun Alliance and the 1997 termination of such agreements, net premiums written increased by 9.1% in the first nine months of 1997 and 9.2% in the third quarter over the comparable periods in 1996. Personal lines premium growth was particularly strong. Premium growth was also due in part to modifications to our casualty excess of loss reinsurance program, principally for excess liability and executive protection coverages. The changes, effective January 1, 1997, included an increase in the initial retention for each loss from $10 million to $25 million. These changes in our casualty reinsurance program increased net premiums written in the first nine months of 1997 by approximately $50 million. The marketplace continued to be competitive, particularly in the commercial classes. Competitors continued to place significant pressure on pricing as they attempted to maintain or increase market share. As a result, price increases continued to be difficult to achieve. Underwriting results were profitable in 1997 and 1996. Our combined loss and expense ratio was 96.4% in the first nine months of 1997 and 97.5% in the third quarter compared with 98.3% and 97.2%, respectively, in 1996. The loss ratio was 64.2% for the first nine months of 1997 and 65.3% for the third quarter compared with 66.2% and 65.4%, respectively, in the prior year. The loss ratios continue to reflect the favorable experience resulting from the consistent application of our disciplined underwriting standards. The loss ratio in the first nine months of 1996 was adversely affected by catastrophe losses in the first quarter, resulting primarily from the winter 10 Page 8 storms in the eastern part of the United States. Catastrophe losses in the first nine months of 1997 amounted to $56.5 million which represented 1.5 percentage points of the loss ratio compared with $107.8 million or 3.2 percentage points in 1996. Catastrophe losses for the third quarter of 1997 amounted to $28.0 million or 2.2 percentage points of the loss ratio compared with $23.9 million or 2.1 percentage points in 1996. Our expense ratio was 32.2% for both the first nine months and the third quarter of 1997 compared with 32.1% for the first nine months of 1996 and 31.8% for the third quarter. Underwriting results during 1997 and 1996 by class of business were as follows:
Nine Months Ended September 30 ------------------------------------------------------- Net Premiums Combined Loss and Written Expense Ratios ------------------------ ------------------------ 1997 1996 1997 1996 -------- -------- -------- -------- (in millions) Personal Insurance Automobile ................. $ 228.5 $ 184.9 86.5% 86.2% Homeowners ................. 533.1 413.8 92.1 107.8 Other ...................... 239.5 192.1 66.5 67.5 -------- -------- -------- -------- Total Personal ......... 1,001.1 790.8 84.7 93.0 -------- -------- -------- -------- Commercial Insurance Multiple Peril ............. 611.6 496.1 115.2 117.8 Casualty ................... 687.3 620.3 112.4 111.8 Workers' Compensation ...... 225.6 183.8 106.4 100.1 Property and Marine ........ 447.5 377.9 105.7 95.3 Executive Protection ....... 663.1 578.2 73.4 78.4 Other ...................... 500.6 407.0 87.0 88.2 -------- -------- -------- -------- Total Commercial ....... 3,135.7 2,663.3 99.4 99.2 -------- -------- -------- -------- Total Before Reinsurance Assumed ............... 4,136.8 3,454.1 96.0 97.7 Reinsurance Assumed .......... (3.8) 135.3 N/M N/M -------- -------- -------- -------- Total .................. $4,133.0 $3,589.4 96.4% 98.3% ======== ======== ======== ========
11 Page 9
Quarter Ended September 30 ------------------------------------------------------ Net Premiums Combined Loss and Written Expense Ratios ----------------------- ------------------------ 1997 1996 1997 1996 -------- -------- -------- -------- (in millions) Personal Insurance Automobile ................. $ 75.5 $ 63.0 87.8% 87.4% Homeowners ................. 180.5 139.1 90.5 98.4 Other ...................... 75.8 61.8 69.0 67.4 -------- -------- -------- -------- Total Personal ......... 331.8 263.9 84.8 88.3 -------- -------- -------- -------- Commercial Insurance Multiple Peril ............. 198.5 170.4 122.8 117.0 Casualty ................... 215.3 198.5 108.6 113.1 Workers' Compensation ...... 68.5 55.8 110.4 108.4 Property and Marine ........ 144.6 122.7 103.4 99.8 Executive Protection ....... 226.9 196.6 74.8 72.2 Other ...................... 158.9 131.2 95.2 89.8 -------- -------- -------- -------- Total Commercial ....... 1,012.7 875.2 101.4 99.4 -------- -------- -------- -------- Total Before Reinsurance Assumed ............... 1,344.5 1,139.1 97.5 97.0 Reinsurance Assumed .......... -- 66.7 -- 102.9 -------- -------- -------- -------- Total .................. $1,344.5 $1,205.8 97.5% 97.2% ======== ======== ======== ========
PERSONAL INSURANCE Premiums from personal insurance coverages, which represent approximately 24% of the premiums written by our property and casualty subsidiaries, increased by $210.3 million or 26.6% in the first nine months of 1997 and $67.9 million or 25.7% in the third quarter compared with the same periods in 1996. Of these increases, $104.8 million in the first nine months of 1997 and $37.1 million in the third quarter were due to the increase in our retention percentage for these classes resulting from the termination of the reinsurance agreement with Sun Alliance. In addition, net premiums written for the personal classes included $65.8 million and $30.6 million in the first quarter of 1997 and 1996, respectively, due to the effect of the portfolio transfer of unearned premiums as of January 1 of each year resulting from the termination of the reinsurance agreement. Excluding the effects of the termination of the reinsurance agreement with Sun Alliance, premium growth for the personal classes was 9.3% in the first nine months of 1997 and 11.7% in the third quarter. We continued to grow our homeowners and other non-automobile business in non-catastrophe prone areas. Personal automobile premiums increased as a result of an increase in the number of in-force policies for high value automobiles. Underwriting results for our personal insurance business were substantially more profitable in the first nine months of 1997 than in the prior year. Underwriting results in 1996 were adversely affected by significant catastrophe losses in the first quarter. Underwriting results were highly profitable in the third quarter of both years. The combined loss and expense ratios were 84.7% for the first nine months of 1997 and 84.8% for the third quarter compared with 93.0% and 88.3%, respectively, in 1996. 12 Page 10 Homeowners results were profitable in 1997, benefiting from stable loss frequency and modest catastrophe losses. Results for the first nine months of 1996 for this class were adversely affected by significant weather-related catastrophe losses in the first quarter. Catastrophe losses represented 3.8 percentage points of the loss ratio for this class in the first nine months of 1997 and 5.1 percentage points in the third quarter compared with 17.9 percentage points and 6.5 percentage points, respectively, in 1996. Other personal coverages, which include insurance for personal valuables and excess liability, produced highly profitable results in 1997 and 1996 due to continued favorable loss experience. Our automobile business produced profitable results in 1997 and 1996 due primarily to stable loss frequency and severity. COMMERCIAL INSURANCE Premiums from commercial insurance, which represent approximately 76% of our total writings, increased by $472.4 million or 17.7% in the first nine months of 1997 and $137.5 million or 15.7% in the third quarter compared with the same periods a year ago. Of these increases, $188.2 million in the first nine months of 1997 and $63.7 million in the third quarter were due to the increase in our retention percentage for these classes resulting from the termination of the reinsurance agreement with Sun Alliance. In addition, net premiums written for the commercial classes included $108.8 million and $61.0 million in the first quarter of 1997 and 1996, respectively, due to the effect of the portfolio transfer of unearned premiums as of January 1 of each year resulting from the termination of the reinsurance agreement. Excluding the effects of the termination of the reinsurance agreement with Sun Alliance, premium growth for the commercial classes was 9.1% in the first nine months of 1997 and 8.4% in the third quarter. Premium growth for the excess liability component of our casualty coverages and for our executive protection coverages benefited from the changes to our casualty excess of loss reinsurance program. Premium growth was also due to the selective writing of new accounts, exposure growth on existing business and the purchase of additional coverages by current customers. Growth continues to be hindered by intense competition which has resulted in declining rate levels for several classes of business. Our commercial insurance business produced marginally profitable underwriting results in the first nine months of 1997 and 1996. Results were modestly unprofitable in the third quarter of 1997 compared with profitable results in the same period in 1996. The combined loss and expense ratios were 99.4% for the first nine months of 1997 and 101.4% for the third quarter compared with 99.2% and 99.4%, respectively, in 1996. Multiple peril results improved somewhat in the first nine months of 1997 compared with 1996 but remained unprofitable. Results in both years were adversely affected by inadequate prices and an increase in the frequency of large losses. The improvement in 1997 was due to lower catastrophe losses. Catastrophes losses in the first nine months of 1997 represented 2.0 percentage points of the loss ratio for this class compared with 4.8 percentage points in 1996. 13 Page 11 Results for our casualty business were similarly unprofitable in the first nine months of 1997 and 1996. Casualty results were adversely affected in both years by increases in loss reserves for asbestos-related and toxic waste claims. The excess liability component of our casualty coverages has remained profitable due to favorable loss experience in this class. Results in the automobile component were unprofitable in 1997 compared with profitable results in 1996 due to an increase in the frequency of large losses for this class. Workers' compensation results were unprofitable in the first nine months of 1997 compared with breakeven results in 1996. Results were unprofitable in the third quarter of both years. Results have deteriorated due primarily to the cumulative effect of price reductions over the past several years. Property and marine results were unprofitable in 1997 compared with profitable results in 1996. Results in 1997 were adversely affected by an increase in the frequency of large losses, including several large overseas losses. Catastrophe losses represented 6.5 percentage points of the loss ratio for this class in the first nine months of 1997 and 9.6 percentage points in the third quarter compared with 4.8 percentage points and 6.9 percentage points, respectively, in 1996. Results for our executive protection business were highly profitable in 1997 and 1996 due to favorable loss experience. Our financial institutions business produced less profitable results in 1997 than in 1996. Results in the financial fidelity portion of this business remained highly profitable. The non-fidelity results deteriorated in 1997, particularly in the third quarter due to several large losses. Results in our other commercial classes were profitable in 1997 compared with modestly unprofitable results in 1996. REINSURANCE ASSUMED Reinsurance assumed is treaty reinsurance that was assumed from Sun Alliance. The reinsurance agreement with Sun Alliance was terminated effective January 1, 1997. However, due to the lag in our reporting of such business, net premiums written in the first quarter of 1997 included $89.8 million related to business we assumed from Sun Alliance for the second half of 1996. Net premiums written for this segment were reduced by $93.6 million and $65.2 million in the first quarter of 1997 and 1996, respectively, due to the effect of the portfolio transfer of unearned premiums back to Sun Alliance as of January 1 of each year. Underwriting results for this segment in 1997, which represent our share of the Sun Alliance business for the last six months of 1996, were near breakeven. Results for this segment were near breakeven in the first nine months of 1996. The combined loss and expense ratio for this business was not meaningful for the first nine months of both years due to the effect on the expense ratio of the portfolio transfer of unearned premiums as of January 1 of each year. LOSS RESERVES Gross loss reserves were $9,655.2 million and $9,523.7 million at September 30, 1997 and December 31, 1996, respectively. Reinsurance recoverables on such loss reserves were $1,209.9 million and $1,767.8 million at September 30, 1997 and December 31, 1996, respectively. As a result of the termination of the reinsurance agreements with Sun Alliance, there were portfolio transfers of gross loss reserves and reinsurance recoverables as of January 1, 1997. The effect of these portfolio transfers was a decrease in gross loss reserves of $183.8 million and a decrease in reinsurance recoverables of $470.0 million. 14 Page 12 Excluding the effects of the portfolio transfers, loss reserves, net of reinsurance recoverable, increased by $403.2 million during the first nine months of 1997. Substantial reserve growth continued to occur in those liability classes, primarily excess liability and executive protection, that are characterized by delayed loss reporting and extended periods of settlement. Losses incurred related to asbestos and toxic waste claims were $95.2 million in the first nine months of 1997 and $115.4 million for the same period in 1996. A discussion of the 1993 Fibreboard asbestos-related settlement is incorporated by reference from Item 7 of the Corporation's Form 10-K for the year ended December 31, 1996. The following development during 1997 relates to the settlement. In June 1997, the United States Supreme Court set aside the ruling by the United States Court of Appeals for the Fifth Circuit that had approved the global settlement agreement among Pacific Indemnity Company (a subsidiary of the Corporation), Continental Casualty Company (a subsidiary of CNA Financial Corporation), Fibreboard Corporation and attorneys representing claimants against Fibreboard. The Supreme Court ordered the Fifth Circuit Court to reconsider its approval of the global settlement agreement in light of a June 1997 ruling by the Supreme Court rejecting an unrelated settlement that included several former asbestos manufacturers. The trilateral agreement among Pacific Indemnity, Continental Casualty and Fibreboard was not appealed to the Supreme Court and is now final. The trilateral agreement will be triggered if the global settlement agreement is ultimately disapproved. Since the trilateral agreement is unaffected by the Supreme Court's recent action, management continues to believe that the uncertainty of Pacific Indemnity's exposure with respect to asbestos-related bodily injury claims against Fibreboard has been eliminated. INVESTMENTS Investment income after deducting expenses and taxes increased by 8.9% in both the first nine months and the third quarter of 1997 compared with the same periods in 1996. The growth was due to an increase in invested assets since the third quarter of 1996, reflecting strong cash flow from operations, which was partially offset by lower yields on new investments. The effective tax rate on investment income increased to 16.8% in the first nine months of 1997 from 15.5% in the comparable period of 1996 due to holding a larger proportion of our investment portfolio in taxable securities. New cash available for investment in the first nine months of 1997 included approximately $330 million received in late March as the net result of the portfolio transfers of unearned premiums and loss reserves as of January 1, 1997 related to the termination of the reinsurance agreements with Sun Alliance. New cash available for investment, together with the proceeds from the sale of approximately $250 million of foreign bonds in the first quarter, was invested in tax-exempt bonds and, to a lesser extent, mortgage-backed securities and corporate bonds. The foreign bonds were sold due to the reduction in foreign liabilities resulting from the termination of the reinsurance agreements with Sun Alliance. We maintain investments in highly liquid, short term securities at all times to provide for immediate cash needs. 15 Page 13 REAL ESTATE Real estate operations resulted in a loss after taxes of $5.1 million in the first nine months of 1997 compared with income of $10.0 million in 1996. The loss in 1997 reflects the $6.6 million after tax charge discussed below. Earnings in 1996 benefited from the sale of several rental properties in the first quarter. Revenues were $138.1 million in the first nine months of 1997 compared with $269.8 million in 1996, which included the revenues from the sale of the rental properties. In June 1997, a definitive agreement was reached to sell a substantial portion of our commercial real estate properties. The sale is subject to various closing adjustments and other customary conditions. To reflect the terms of the agreement, the carrying value of certain assets was reduced by $10.2 million, or $6.6 million after tax, in the second quarter of 1997. On November 7, 1997, the sale of almost all of the properties covered by the agreement reached in June was closed for $737 million, which includes $628 million in cash and the assumption of $109 million in debt. The buyer is a joint venture formed by Paine Webber Real Estate Securities Inc., Morgan Stanley Real Estate Fund II, L.P. and Gale & Wentworth, L.L.C. Closing on the few remaining properties under the agreement is expected to occur in 1998. Revenues from the sale will be recognized at the time of the closings. We are continuing to explore the sale of certain of our residential, retail and remaining commercial properties. CORPORATE Investment income earned on corporate invested assets and interest and other expenses not allocated to the operating subsidiaries are reflected in the corporate segment. Corporate income after taxes was $25.6 million in the first nine months of 1997 compared with $13.4 million in the same period of 1996. The increase was due primarily to a reduction in interest expense. INVESTMENT GAINS AND LOSSES Decisions to sell securities are governed principally by considerations of investment opportunities and tax consequences. As a result, realized investment gains and losses may vary significantly from period to period. Net investment gains before taxes of $74.2 million were realized in the first nine months of 1997 compared with net gains of $31.3 million for the same period in 1996. DISCONTINUED OPERATIONS - LIFE AND HEALTH INSURANCE On May 13, 1997, the Corporation completed the sale of Chubb Life Insurance Company of America to Jefferson-Pilot Corporation for $875 million in cash, subject to closing related adjustments. The life and health insurance subsidiaries have been classified as discontinued operations. The discontinued life and health insurance operations did not affect the Corporation's net income in the first nine months of 1997 and will not affect net income in future periods. Earnings from the discontinued life and health insurance operations were $31.5 million in the first nine months of 1996, including realized investment gains of $4.1 million. 16 Page 14 CAPITAL RESOURCES In February 1994, the Board of Directors authorized the repurchase of up to 10,000,000 shares of common stock. Through March 6, 1997, the Corporation repurchased 6,851,600 shares under the 1994 share repurchase program, including 3,148,600 shares repurchased in the first quarter of 1997. On March 7, 1997, the Board of Directors replaced the 1994 program with a new share repurchase program, which authorized the repurchase of up to 17,500,000 shares of common stock. Through September 30, 1997, the Corporation repurchased 7,200,200 shares under the new repurchase program. In the aggregate, the Corporation repurchased 10,348,800 shares in open-market transactions in the first nine months of 1997 at a cost of $641.1 million. At September 30, 1997, an additional 10,299,800 shares may be repurchased under the new authorization. The net proceeds from the sale of Chubb Life Insurance Company of America are being used to repurchase shares of common stock. At January 1, 1997, Chubb Capital Corporation had outstanding $229.3 million of 6% exchangeable subordinated notes due May 15, 1998. In the first quarter of 1997, the holders of $14.1 million of the notes elected the option to exchange them into shares of common stock of the Corporation, resulting in the issuance of 327,207 shares of common stock. Chubb Capital called for redemption on May 14, 1997 the remaining $215.2 million of the notes. Prior to the redemption date, the holders of $214.5 million of the notes elected the option to exchange them, resulting in the issuance of 4,989,358 shares of common stock in the second quarter. The cash proceeds from the sale of real estate properties to the joint venture are expected to be used to further reduce debt. FORWARD LOOKING INFORMATION Certain statements in this document may be considered to be "forward looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995, such as statements that include the words or phrases "will likely result", "expected to", "will continue", "is anticipated", "estimate", "project", "intends to" or similar expressions. Such statements are subject to certain risks and uncertainties. The factors which could cause actual results to differ materially from those suggested by any such statements include, but are not limited to, those discussed or identified from time to time in the Corporation's public filings with the Securities and Exchange Commission and specifically to: risks or uncertainties associated with the Corporation's expectations of litigation developments or its ongoing announced sale activities relating to portions of its non-property and casualty businesses, or associated with its expectations of proceeds deployment and, more generally, to: general economic conditions including changes in interest rates and the performance of the financial markets, changes in domestic and foreign laws, regulations and taxes, changes in competition and pricing environments, regional or general changes in asset valuations, the occurrence of significant natural disasters, the inability to reinsure certain risks economically, the adequacy of loss reserves, as well as general market conditions, competition, pricing and restructurings. 17 Page 15 PART II. OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K A. Exhibit 11.1 - Computation of earnings per share. B. Reports on Form 8-K - There were no reports on Form 8-K filed for the three months ended September 30, 1997. 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 12, 1997 EX-11.1 2 COMPUTATION OF PER SHARE EARNINGS 1 Exhibit 11.1 THE CHUBB CORPORATION COMPUTATION OF EARNINGS PER SHARE PERIODS ENDED SEPTEMBER 30
Third Quarter Nine Months --------------------- --------------------- 1997 1996 1997 1996 ------- ------- ------- ------- (in millions) Net income ................................. $ 194.0 $ 165.2 $ 574.8 $ 490.9 After-tax interest expense on 6% exchangeable subordinated notes ........... -- 2.4 3.3 7.3 ------- ------- ------- ------- Net income for computing earnings per share ................................. $ 194.0 $ 167.6 $ 578.1 $ 498.2 ======= ======= ======= ======= Weighted average number of common shares outstanding ............................... 172.0 174.2 172.6 174.5 Additional shares from assumed conversion of 6% exchangeable subordinated notes as if each $1,000 of principal amount had been converted at issuance into 23.256 shares of common stock ............ -- 5.8 2.4 5.8 ------- ------- ------- ------- Weighted average number of common and common equivalent shares assumed outstanding for computing earnings per share ............. 172.0 180.0 175.0 180.3 ======= ======= ======= ======= Net income per share ....................... $ 1.12 $ .93 $ 3.30 $ 2.76
EX-27 3 FINANCIAL DATA SCHEDULE
7 THE CHUBB CORPORATION Financial Data Schedule(*) (*) This schedule contains summary financial information extracted from the Consolidated Balance Sheets and the Consolidated Statements of Income and is qualified in its entirety by reference to such financial statements. 1,000,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 9,629 2,266 2,407 765 0 0 13,777 12 56 672 20,239 9,655 2,676 0 0 1,064 176 0 0 5,483 20,239 3,863 580 74 138 2,465 1,047 247 731 157 575 0 0 0 575 3.30 0 0 0 0 0 0 0 0 DEBT-HELD-FOR-SALE REPRESENTS FIXED MATURITY INVESTMENTS CLASSIFIED AS AVAILABLE-FOR-SALE AND CARRIED AT MARKET VALUE AS PRESCRIBED BY SFAS NO. 115. DEBT-CARRYING-VALUE REPRESENTS FIXED MATURITY INVESTMENTS CLASSIFIED AS HELD-TO-MATURITY AND CARRIED AT AMORTIZED COST AS PRESCRIBED BY SFAS NO. 115. DEBT-MARKET-VALUE REPRESENTS THE RELATED MARKET VALUE OF FIXED MATURITIES CLASSIFIED AS HELD-TO-MATURITY. RECOVER-REINSURE REPRESENTS REINSURANCE RECOVERABLE ON PAID CLAIMS. POLICY-LOSSES EXCLUDE THE REDUCTIONS FOR REINSURANCE RECOVERABLES ON UNPAID CLAIMS (1,210) AS PRESCRIBED BY SFAS NO. 113. THIS AMOUNT IS INCLUDED IN TOTAL ASSETS. UNEARNED-PREMIUMS EXCLUDE THE REDUCTION FOR PREPAID REINSURANCE PREMIUMS ($115), AS PRESCRIBED BY SFAS NO. 113. THIS PREPAID AMOUNT IS INCLUDED IN TOTAL ASSETS. NOTES-PAYABLE INCLUDES SHORT-TERM DEBT OF $247 AND LONG-TERM DEBT OF $817. OTHER-SE INCLUDES PAID-IN SURPLUS; RETAINED EARNINGS; FOREIGN CURRENCY TRANSLATION LOSSES, NET OF INCOME TAX; UNREALIZED APPRECIATION OF INVESTMENTS, NET; RECEIVABLE FROM ESOP AND TREASURY STOCK. OTHER-INCOME REPRESENTS REVENUES FROM REAL ESTATE OPERATIONS. AMOUNTS FOR SECURITIES ACT INDUSTRY GUIDE 6 AND EXCHANGE ACT INDUSTRY GUIDE 4 DISCLOSURES ARE REQUIRED FOR ANNUAL FILINGS ONLY. ACCORDINGLY, NO AMOUNTS WILL BE REPORTED FOR INTERIM FILINGS.
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