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, 1995
------------------
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
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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, 1995
was 87,211,339.
2
THE CHUBB CORPORATION
INDEX
Page Number
-----------
Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Balance Sheets as of
September 30, 1995 and December 31, 1994..................... 1
Consolidated Statements of Income for the
Three Months and Nine Months Ended
September 30, 1995 and 1994.................................. 2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1995 and 1994................ 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
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Page 1
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
Sept. 30, Dec. 31,
1995 1994
--------- --------
(in millions)
Assets
Invested Assets
Short Term Investments............................... $ 635.2 $ 810.9
Fixed Maturities
Held-to-Maturity
Tax Exempt (market $3,140.1 and $3,177.1)......... 2,988.6 3,149.5
Taxable (market $620.1 and $604.1)................ 594.0 619.1
Available-for-Sale
Tax Exempt (cost $3,295.4 and $2,524.4)........... 3,480.6 2,530.2
Taxable (cost $4,874.3 and $4,604.2).............. 4,992.7 4,423.9
Equity Securities (cost $502.7 and $609.5)........... 603.9 642.1
Policy and Mortgage Loans............................ 209.1 202.7
--------- ---------
TOTAL INVESTED ASSETS......................... 13,504.1 12,378.4
Cash................................................... 4.8 5.6
Accrued Investment Income.............................. 228.4 215.7
Premiums Receivable.................................... 847.6 787.2
Reinsurance Recoverable on Property and Casualty
Unpaid Claims......................................... 2,064.3 1,980.3
Prepaid Reinsurance Premiums........................... 475.1 455.1
Funds Held for Asbestos-Related Settlement............. 1,041.7 558.1
Deferred Policy Acquisition Costs
Property and Casualty Insurance...................... 562.8 529.5
Life and Health Insurance............................ 610.6 606.5
Real Estate Assets..................................... 1,735.1 1,740.3
Deferred Income Tax.................................... 205.6 314.7
Other Assets........................................... 1,348.1 1,151.7
--------- ---------
TOTAL ASSETS.................................. $22,628.2 $20,723.1
========= =========
Liabilities
Property and Casualty Unpaid Claims.................... $ 9,523.4 $ 8,913.2
Life and Health Policy Liabilities..................... 2,878.7 2,659.6
Unearned Premiums...................................... 2,581.7 2,382.6
Short Term Debt........................................ 204.0 153.3
Long Term Debt......................................... 1,165.0 1,285.6
Dividend Payable to Shareholders....................... 42.9 39.9
Accrued Expenses and Other Liabilities................. 1,230.9 1,041.9
--------- ---------
TOTAL LIABILITIES............................. 17,626.6 16,476.1
--------- ---------
Shareholders' Equity
Common Stock - $1 Par Value; 87,820,030 and
87,798,286 Shares..................................... 87.8 87.8
Paid-In Surplus........................................ 779.5 786.6
Retained Earnings...................................... 4,055.7 3,680.5
Foreign Currency Translation Gains, Net of Income Tax.. 1.1 9.8
Unrealized Appreciation (Depreciation) of
Investments, Net...................................... 243.9 (124.3)
Receivable from Employee Stock Ownership Plan.......... (119.1) (123.0)
Treasury Stock, at Cost - 657,440 and 977,580 Shares... (47.3) (70.4)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.................... 5,001.6 4,247.0
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.... $22,628.2 $20,723.1
========= =========
See Notes to Consolidated Financial Statements.
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THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
PERIODS ENDED SEPTEMBER 30
Third Quarter Nine Months
---------------- ----------------
1995 1994 1995 1994
---- ---- ---- ----
(in millions)
Revenues
Premiums Earned and Policy Charges.... $1,206.1 $1,149.2 $3,557.2 $3,431.9
Investment Income..................... 229.9 210.3 667.0 614.2
Real Estate........................... 77.0 54.8 225.0 148.2
Realized Investment Gains............. 20.3 14.6 74.0 45.2
-------- -------- -------- --------
Total Revenues.................. 1,533.3 1,428.9 4,523.2 4,239.5
-------- -------- -------- --------
Benefits, Claims and Expenses
Insurance Claims and Policyholders'
Benefits............................ 816.3 785.4 2,391.6 2,469.8
Amortization of Deferred Policy
Acquisition Costs................... 304.2 273.9 891.9 820.1
Other Insurance Operating Costs and
Expenses............................ 109.5 109.5 340.5 317.8
Real Estate Cost of Sales and Expenses 73.1 55.3 220.3 150.0
Investment Expenses................... 2.9 2.7 11.2 9.6
Corporate Expenses.................... 6.0 9.8 21.8 27.7
------- -------- -------- --------
Total Benefits, Claims and
Expenses...................... 1,312.0 1,236.6 3,877.3 3,795.0
-------- -------- -------- --------
Income Before Federal and Foreign
Income Tax............................ 221.3 192.3 645.9 444.5
Federal and Foreign Income Tax........... 49.9 39.6 142.8 71.9
-------- -------- -------- --------
Net Income............................... $ 171.4 $ 152.7 $ 503.1 $ 372.6
======== ======== ======== ========
Average Common and Common Equivalent
Shares Outstanding (In Thousands)..... 89,983 90,543 89,876 90,608
PER SHARE DATA
- --------------
Net Income............................... $ 1.93 $ 1.71 $ 5.68 $ 4.19
Dividends Declared....................... .49 .46 1.47 1.38
See Notes to Consolidated Financial Statements.
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THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30
1995 1994
---- ----
(in millions)
Cash Flows from Operating Activities
Net Income............................................. $ 503.1 $ 372.6
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Property and Casualty Unpaid Claims, Net. 526.2 405.4
Decrease in Life and Health Policy Liabilities, Net.. (19.3) (22.2)
Increase in Unearned Premiums, Net................... 179.1 177.0
Increase in Premiums Receivable...................... (60.4) (32.9)
Increase in Funds Held for Asbestos-Related
Settlement.......................................... (483.6) (13.6)
Increase in Deferred Policy Acquisition Costs........ (93.9) (84.8)
Realized Investment Gains............................ (74.0) (45.2)
Other, Net........................................... 58.0 (62.8)
--------- ---------
Net Cash Provided by Operating Activities.............. 535.2 693.5
--------- ---------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities................ 2,932.2 2,169.1
Proceeds from Maturities of Fixed Maturities........... 584.1 463.7
Proceeds from Sales of Equity Securities............... 330.0 239.9
Purchases of Fixed Maturities.......................... (4,362.1) (2,930.4)
Purchases of Equity Securities......................... (156.2) (360.7)
Decrease (Increase) in Short Term Investments, Net..... 175.7 (282.7)
Increase in Net Payable from Security Transactions
Not Settled........................................... 37.5 27.2
Additions to Real Estate Assets, Net................... (40.2) (32.5)
Other, Net............................................. (92.8) (46.8)
--------- ---------
Net Cash Used in Investing Activities.................. (591.8) (753.2)
--------- ---------
Cash Flows from Financing Activities
Deposits Credited to Policyholder Funds................ 338.3 243.1
Withdrawals from Policyholder Funds.................... (102.9) (91.9)
Proceeds from Issuance of Long Term Debt............... 151.5 33.2
Repayment of Long Term Debt............................ (272.1) (20.1)
Increase in Short Term Debt, Net....................... 50.7 46.4
Dividends Paid to Shareholders......................... (124.9) (118.5)
Repurchase of Shares................................... - (37.0)
Other, Net............................................. 15.2 4.9
--------- ---------
Net Cash Provided by Financing Activities.............. 55.8 60.1
--------- ---------
Net Increase (Decrease) in Cash.......................... (0.8) 0.4
Cash at Beginning of Year................................ 5.6 4.6
--------- ---------
Cash at End of Period.................................. $ 4.8 $ 5.0
--------- ---------
See Notes to Consolidated Financial Statements.
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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 1994 Annual Report to Shareholders.
2) Adoption of New Accounting Pronouncement
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment
of a Loan. Under SFAS No. 114, a loan is considered impaired and a
valuation allowance is established when it is probable that a creditor will
be unable to collect all principal and interest amounts due according to the
contractual terms of the loan agreement. SFAS No. 114 requires creditors to
measure impairment of a loan based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a
practical expedient, based on the market price of the loan or the fair value
of the collateral if the loan is collateral dependent. Prior to 1995, the
Corporation measured impairment of a loan based on undiscounted expected
future cash flows. SFAS No. 114 may not be retroactively applied to prior
years' financial statements. The initial application of SFAS No. 114
resulted in an increase of $10 million to the allowance for uncollectible
amounts.
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.
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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
------------- ---------------
1995 1994 1995 1994
---- ---- ---- ----
(in millions)
Change in unrealized appreciation of
equity securities...................... $24.7 $ 21.9 $ 68.6 $(100.4)
Change in unrealized appreciation or
depreciation of fixed maturities....... 50.8 (72.7) 478.1 (503.4)
Change in deferred policy acquisition
cost adjustment........................ 3.5 12.4 (56.5) 78.1
----- ------ ------ -------
79.0 (38.4) 490.2 (525.7)
Deferred income tax (credit), net of
change in valuation allowance.......... 27.8 (13.4) 122.0 (184.0)
----- ------ ------ -------
51.2 (25.0) 368.2 (341.7)
Cumulative effect, as of January 1,
1994, of change in accounting
principle, net......................... - - - 220.5
----- ------ ------ -------
Change in unrealized appreciation or
depreciation of investments, net....... $51.2 $(25.0) $368.2 $(121.2)
===== ====== ====== =======
At December 31, 1994, there was a valuation allowance of $49.6
million related to future tax benefits on unrealized depreciation of
investments carried at market value. At March 31, 1995, there was
unrealized appreciation of investments carried at market value. Therefore,
the valuation allowance was eliminated in the first quarter of 1995. Such
elimination was reflected in the deferred income tax provision for the
first quarter of 1995 and had no impact on net income.
4) Property and Casualty Unpaid Claims
A discussion of the 1993 Fibreboard asbestos-related settlement is
presented in Note 14 of the notes to consolidated financial statements in
the 1994 Annual Report to Shareholders. The following developments during
1995 relate to the settlement.
In February 1995, the agreement between Pacific Indemnity Company, a
subsidiary of the Corporation, and Continental Casualty Company
(a subsidiary of CNA Financial Corporation) for the handling of all
asbestos-related bodily injury claims pending on August 26, 1993 against
Fibreboard Corporation was amended to extend for several years the period
over which Pacific Indemnity will pay its remaining obligation, plus
interest, under the agreement. Prior to such amendment, Pacific
Indemnity's payment obligations under this agreement were to have been
completed by March 1, 1995. The increase in funds held for asbestos-
related settlement during 1995 was primarily the result of such amendment.
Funds held for asbestos-related settlement are assets of the Corporation's
property and casualty insurance subsidiaries that accrue income for the
benefit of participants in the class settlement of asbestos-related bodily
injury claims against Fibreboard.
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In July 1995, the United States District Court of the Eastern
District of Texas approved the global settlement agreement among Pacific
Indemnity, Continental Casualty, Fibreboard and attorneys representing
claimants against Fibreboard for all future asbestos-related bodily injury
claims against Fibreboard, which are claims that were not filed in court
before August 27, 1993. The Court also approved the trilateral agreement
among Pacific Indemnity, Continental Casualty and Fibreboard to settle all
pending and future asbestos-related bodily injury claims resulting from
insurance policies that were, or may have been, issued to Fibreboard by the
two insurers. The trilateral agreement will be triggered if the global
settlement agreement is disapproved by a higher court. The judgments
approving these agreements have been appealed, which will extend the period
of judicial review at least into 1996. Management is optimistic that the
approval of the settlement will be upheld. However, if both the global
settlement agreement and the trilateral agreement are disapproved by a
higher court, there can be no assurance that the loss reserves established
for future claims would be sufficient to pay all amounts which ultimately
could become payable in respect of future asbestos-related bodily injury
claims against Fibreboard.
5) Contingencies
In 1988, voters in California approved Ballot Proposition 103, an
insurance reform initiative affecting most property and casualty insurers
writing business in the state. Provisions of Proposition 103 would have
required insurers to roll back property and casualty rates for certain
lines of business to 20 percent below November 1987 levels and would have
required an additional 20 percent reduction in automobile rates by November
1989. In 1989, the California Supreme Court, ruling on the constitutional
challenge to Proposition 103, held that an insurer is entitled to a fair
rate of return. In the years following the approval of Proposition 103,
the California Insurance Department established regulations to implement
its provisions. In 1994, the California Supreme Court upheld these
regulations after numerous legal challenges.
In May 1995, the property and casualty insurance subsidiaries of the
Corporation reached an agreement with the California Insurance Department
to refund premiums, with interest, of approximately $6.6 million related to
business written during the rollback period. The agreement settles all
rollback refund obligations of the property and casualty insurance
subsidiaries related to Proposition 103. A consumer group has challenged
the rollback settlement and an administrative proceeding is pending.
Management believes that the settlement agreement will ultimately be
upheld by the courts.
6) Per Share Data
Earnings per share amounts are based on the weighted average number
of common and common equivalent shares outstanding. The 6% guaranteed
exchangeable subordinated notes are considered to be common equivalent
shares. The computation assumes the addition to income of the after-tax
interest expense applicable to such notes.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND
1994 AND FOR THE QUARTERS ENDED SEPTEMBER 30, 1995 AND 1994
PROPERTY AND CASUALTY INSURANCE
Earnings from our property and casualty business were significantly higher
in the first nine months of 1995 compared with the same period of 1994. The
increase was due to a significant improvement in underwriting results in 1995.
Underwriting results in 1994 were adversely affected by substantially higher
catastrophe losses in the first quarter. Investment income increased modestly
in 1995 compared with 1994. Property and casualty income after taxes amounted
to $418.5 million in the first nine months of 1995 and $139.9 million in the
third quarter compared with $327.5 million and $139.9 million, respectively, in
1994.
Net premiums written were $3.3 billion in the first nine months of 1995 and
$1.1 billion in the third quarter, representing increases of 9.7% and 9.9%,
respectively, over the comparable periods of 1994. The marketplace continued
to be competitive, particularly in the commercial classes. Price increases
continued to be difficult to achieve. Premium growth was due primarily to the
selective writing of new business and exposure growth on existing business. A
significant portion of premium growth was achieved outside the United States,
primarily from our expanding foreign branch network.
Underwriting results were profitable in the first nine months of 1995
compared with near breakeven results for the same period in 1994. Underwriting
results were profitable in the third quarter of both years. Our combined loss
and expense ratio was 96.5% in the first nine months of 1995 and 96.9% in the
third quarter compared with 100.6% and 95.9%, respectively, in 1994.
The loss ratio was 64.4% for the first nine months of 1995 and 65.4% for
the third quarter compared with 68.0% and 63.8%, respectively, in the prior
year. The loss ratio in the first nine months of 1994 was adversely affected
by high catastrophe losses in the first quarter, resulting primarily from the
earthquake in California and the winter storms in the eastern and midwestern
parts of the United States. Catastrophe losses in the first nine months of
1995 amounted to $55.1 million which represented 1.8 percentage points of the
loss ratio compared with $163.9 million or 5.9 percentage points in 1994.
Catastrophe losses in the third quarter of both years were insignificant.
Our expense ratio was 32.1% for the first nine months of 1995 and 31.5% for
the third quarter compared with 32.6% and 32.1%, respectively, in 1994. The
decrease in 1995 was due primarily to growth in written premiums at a somewhat
greater rate than the increase in overhead expenses. Expenses were reduced in
the first nine months of 1994 by a contingent profit sharing accrual of $6.0
million ($2.0 million per quarter) relating to a medical malpractice stop loss
reinsurance agreement.
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Underwriting results during 1995 and 1994 by class of business were as
follows:
Nine Months Ended September 30
------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
-------------- -----------------
1995 1994 1995 1994
---- ---- ---- ----
(in millions)
Personal Insurance
Automobile........................ $ 151.5 $ 142.6 87.3% 95.6%
Homeowners........................ 338.2 326.8 91.4 118.2
Other............................. 153.0 149.7 74.8 83.3
-------- -------- ----- -----
642.7 619.1 86.5 104.6
-------- -------- ----- -----
Standard Commercial Insurance
Multiple Peril.................... 513.2 453.6 103.9 112.2
Casualty.......................... 434.4 413.3 119.2 105.0
Workers' Compensation............. 155.5 139.4 94.6 106.5
-------- -------- ----- -----
1,103.1 1,006.3 108.9 108.5
-------- -------- ----- -----
Specialty Commercial Insurance
Fidelity and Surety............... 567.9 524.9 82.5 77.3
Other............................. 664.5 575.4 96.3 104.0
-------- -------- ----- -----
1,232.4 1,100.3 89.8 91.0
-------- -------- ----- -----
Reinsurance Assumed................. 277.2 241.3 100.4 101.3
-------- -------- ----- -----
Total........................... $3,255.4 $2,967.0 96.5% 100.6%
======== ======== ===== =====
Quarter Ended September 30
-----------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
-------------- -----------------
1995 1994 1995 1994
---- ---- ---- ----
(in millions)
Personal Insurance
Automobile........................ $ 52.5 $ 48.0 81.4% 95.7%
Homeowners........................ 122.9 113.0 87.0 94.7
Other............................. 53.3 50.3 73.0 76.3
-------- -------- ----- -----
228.7 211.3 82.4 90.5
-------- -------- ----- -----
Standard Commercial Insurance
Multiple Peril.................... 171.9 153.3 112.0 105.2
Casualty.......................... 138.2 129.0 120.4 105.4
Workers' Compensation............. 54.0 44.7 91.3 103.7
-------- -------- ----- -----
364.1 327.0 112.5 105.2
-------- -------- ----- -----
Specialty Commercial Insurance
Fidelity and Surety............... 194.8 180.1 79.4 72.0
Other............................. 230.2 185.0 99.0 108.8
-------- -------- ----- -----
425.0 365.1 89.9 90.8
-------- -------- ----- -----
Reinsurance Assumed................. 118.4 130.4 99.7 97.3
-------- -------- ----- -----
Total........................... $1,136.2 $1,033.8 96.9% 95.9%
======== ======== ===== =====
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PERSONAL INSURANCE
Premiums from personal insurance coverages, which represent
approximately 20% of the premiums written by our property and casualty
insurance subsidiaries, increased 3.8% in the first nine months of 1995 and
8.2% in the third quarter compared with the similar periods in 1994. Gradual
progress to increase premium growth is being made as evidenced by the higher
third quarter growth. However, our disciplined approach to pricing continues
to make it difficult to write new homeowners and other non-automobile business.
Personal automobile premiums increased modestly in 1995, which is consistent
with our plan to control our exposure in this class.
Our personal insurance business produced highly profitable underwriting
results in the first nine months of 1995 compared with unprofitable results in
the same period of 1994. Underwriting results in 1994 were adversely affected
by significant catastrophe losses in the first quarter. Underwriting results
were profitable for the third quarter of both 1995 and 1994. The combined loss
and expense ratios were 86.5% for the first nine months of 1995 and 82.4% for
the third quarter compared with 104.6% and 90.5%, respectively, in 1994.
Homeowners results were profitable in 1995, benefiting from disciplined
pricing, fewer large losses and a reduction in non-catastrophe loss frequency.
Weather-related catastrophe losses adversely affected homeowners results in the
first nine months of both years, but particularly in 1994. Catastrophe losses
for this class represented 10.0 percentage points of the loss ratio for the
first nine months of 1995 compared with 23.8 percentage points in the
comparable 1994 period. Other personal coverages, which include insurance for
personal valuables and excess liability, produced more profitable results in
1995 than in 1994. Both years benefited from favorable loss experience.
Results in 1994 were adversely affected by losses of personal valuables
resulting from the earthquake in California in the first quarter. Catastrophe
losses represented less than 1 percentage point of the loss ratio for other
personal coverages in the first nine months of 1995 compared with 6.2
percentage points in 1994. Our automobile business produced profitable results
in 1995 and 1994. Results improved in 1995 due primarily to lower loss
frequency and stable severity.
STANDARD COMMERCIAL INSURANCE
Premiums from standard commercial insurance, which include multiple
peril, casualty and workers' compensation, and which represent approximately
34% of our total writings, increased 9.6% in the first nine months of 1995 and
11.3% in the third quarter compared with the same periods a year ago. The
competitive market has continued to place significant pressure on prices.
Premium growth was due primarily to the selective writing of new accounts and
exposure growth on existing business. Our multiple peril business outside the
United States experienced strong premium growth in 1995.
Our standard commercial business experienced similarly unprofitable
underwriting results in the first nine months of 1995 and 1994. The combined
loss and expense ratios were 108.9% for the first nine months of 1995 and
112.5% for the third quarter compared with 108.5% and 105.2%, respectively, in
1994. Results in the multiple peril class improved substantially in the first
nine months of 1995 compared with 1994; results in 1994 were adversely affected
by significant catastrophe losses in the first quarter, due primarily to the
earthquake in California. Catastrophe losses for the multiple peril class in
the first nine months of 1995 represented only 1.0 percentage point of the loss
ratio compared with 12.4 percentage points in 1994. Multiple peril results
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deteriorated in the third quarter of 1995 compared with the same period in 1994
due in part to a higher frequency of large losses. Casualty results
deteriorated in 1995 compared with 1994. Casualty results in both years, but
more so in 1995, were adversely affected by increases in loss reserves for
asbestos-related and toxic waste claims. The profitability of the excess
liability component of our casualty coverages decreased modestly in 1995 due to
more competitive prices. Results in the automobile component were profitable
in the first nine months of 1995 and 1994. Workers' compensation results were
profitable in 1995 compared with unprofitable results in 1994. Results in our
voluntary business have benefited from rate increases and the impact of medical
cost containment and disability management activities. Results from our share
of the involuntary pools and mandatory business in which we must participate by
law also benefited from these positive factors.
SPECIALTY COMMERCIAL INSURANCE
Premiums from specialty commercial business, which represent
approximately 38% of our total writings, increased by 12.0% in the first nine
months of 1995 and 16.4% in the third quarter compared with the similar periods
in 1994. Premium increases for our executive protection and financial fidelity
coverages were due primarily to new business opportunities as significant
competition has made price increases difficult to achieve for most of these
coverages. Our strategy of working closely with our customers and our ability
to differentiate our products have enabled us to renew a large percentage of
our business. Growth in our smaller specialty classes was particularly strong
outside the United States.
Our specialty commercial business produced substantial underwriting
profits in both 1995 and 1994. The combined loss and expense ratios were 89.8%
for the first nine months of 1995 and 89.9% for the third quarter compared with
91.0% and 90.8%, respectively, in 1994. Our executive protection and financial
fidelity results were highly profitable in both years due to favorable loss
experience. Results in the non-fidelity portion of our financial institutions
business improved in 1995, particularly in the third quarter, due primarily to
fewer large losses. Surety results were unprofitable in 1995 due to several
large losses compared with profitable results in 1994. Marine results were
profitable in 1995 compared with unprofitable results in 1994; results in 1994
were adversely affected by significant catastrophe losses in the first quarter,
resulting primarily from the earthquake in California.
REINSURANCE ASSUMED
Premiums from reinsurance assumed, which is primarily treaty reinsurance
from the Sun Alliance Group plc, represent approximately 8% of our total
premium writings. Premiums increased 14.9% in the first nine months of 1995
compared with the same period in 1994. The increase was due primarily to an
increase in our participation in the business of Sun Alliance. Premiums
decreased 9.2% in the third quarter compared with the same period in 1994.
Premiums written in the third quarter of 1994 included approximately $40
million relating to our assumption of unearned premiums in connection with the
increase in our participation compared with only $10 million in the third
quarter of 1995. Underwriting results for this segment were near breakeven in
1995 and 1994.
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REGULATORY INITIATIVES
In 1988, voters in California approved Ballot Proposition 103, an
insurance reform initiative affecting most property and casualty insurers
writing business in the state. Provisions of Proposition 103 would have
required insurers to roll back property and casualty rates for certain lines of
business to 20 percent below November 1987 levels and would have required an
additional 20 percent reduction in automobile rates by November 1989. In 1989,
the California Supreme Court, ruling on the constitutional challenge to
Proposition 103, held that an insurer is entitled to a fair rate of return. In
the years following the approval of Proposition 103, the California Insurance
Department established regulations to implement its provisions. In 1994, the
California Supreme Court upheld these regulations after numerous legal
challenges.
In May 1995, the property and casualty subsidiaries reached an agreement
with the California Insurance Department to refund premiums, with interest, of
approximately $6.6 million related to business written during the rollback
period. The agreement settles all rollback refund obligations of the property
and casualty subsidiaries related to Proposition 103. A consumer group has
challenged the rollback settlement and an administrative proceeding is pending.
Management believes that the settlement agreement will ultimately be upheld by
the courts.
LOSS RESERVES
Loss reserves, net of reinsurance recoverable, increased by $526.2
million during the first nine months of 1995. Substantial reserve growth has
continued to occur in those liability coverages, primarily excess liability and
executive protection, that are characterized by delayed loss reporting and
extended periods of settlement.
Losses incurred related to asbestos and toxic waste claims were $137.0
million in the first nine months of 1995 and $85.3 million for the same period
in 1994.
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, 1994. The following developments during 1995 relate to
the settlement.
In February 1995, the agreement between Pacific Indemnity Company, a
subsidiary of the Corporation, and Continental Casualty Company (a subsidiary
of CNA Financial Corporation) for the handling of all asbestos-related bodily
injury claims pending on August 26, 1993 against Fibreboard Corporation was
amended to extend for several years the period over which Pacific Indemnity
will pay its remaining obligation, plus interest, under the agreement. Prior
to such amendment, Pacific Indemnity's payment obligations under this agreement
were to have been completed by March 1, 1995. Pacific Indemnity's obligation
under this agreement is not expected to exceed $635 million, of which
approximately $462 million remained unpaid at September 30, 1995.
In July 1995, the United States District Court of the Eastern District
of Texas approved the global settlement agreement among Pacific Indemnity,
Continental Casualty, Fibreboard and attorneys representing claimants against
Fibreboard for all future asbestos-related bodily injury claims against
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Fibreboard, which are claims that were not filed in court before August 27,
1993. The Court also approved the trilateral agreement among Pacific
Indemnity, Continental Casualty and Fibreboard to settle all pending and future
asbestos-related bodily injury claims resulting from insurance policies that
were, or may have been, issued to Fibreboard by the two insurers. The
trilateral agreement will be triggered if the global settlement agreement is
disapproved by a higher court. The judgments approving these agreements have
been appealed, which will extend the period of judicial review at least into
1996. Management is optimistic that the approval of the settlement will be
upheld. However, if both the global settlement agreement and the trilateral
agreement are disapproved by a higher court, there can be no assurance that the
loss reserves established for future claims would be sufficient to pay all
amounts which ultimately could become payable in respect of future
asbestos-related bodily injury claims against Fibreboard.
INVESTMENTS
Investment income after deducting expenses and taxes increased by 6.5%
in the first nine months of 1995 and 7.3% in the third quarter compared with
the same periods in 1994. The growth was primarily due to an increase in
invested assets since the third quarter of 1994, reflecting strong cash flow
from operations. The effective tax rate on investment income increased to
15.8% in the first nine months of 1995 from 14.9% in 1994 due to holding a
larger proportion of our investment portfolio in taxable securities.
In the first nine months of 1995, new cash was invested primarily in
tax-exempt bonds. The level of purchases of taxable bonds exceeded the level
of sales and maturities of such bonds by approximately $450 million in the
first nine months of 1995. However, as the result of the February 1995
amendment to the agreement between Pacific Indemnity and Continental Casualty,
approximately $480 million of taxable bonds purchased during the first quarter
of 1995 were designated as funds held for asbestos-related settlement rather
than invested assets since these assets accrue income for the benefit of
participants in the class settlement of asbestos-related bodily injury claims
against Fibreboard.
We maintain investments in highly liquid short term securities at all
times to provide for immediate cash needs. In 1995, such securities have been
reduced to a more normal level as the expected payout period for Fibreboard
related amounts has been extended.
LIFE AND HEALTH INSURANCE
The life and health subsidiaries had earnings after taxes of $21.8
million for the first nine months of 1995 compared with $12.2 million in 1994.
Total life and health insurance premiums and policy charges amounted to $480.9
million in the first nine months of 1995 compared with $641.9 million in 1994.
Premiums and policy charges for personal insurance amounted to $230.0
million in the first nine months of 1995, a 15% increase over the comparable
period in 1994. Earnings in personal lines were $29.4 million in the first
nine months of 1995 compared with $26.2 million in 1994. The higher earnings
in 1995 were due to favorable mortality experience. Earnings in 1994 reflected
the favorable settlement of litigation in the second quarter related to certain
previously purchased software systems.
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Premium revenue for group insurance was $250.9 million for the first
nine months of 1995 compared with $442.5 million in 1994, a decrease of 43%.
Due to legislation which became effective in April 1993 in New York, which is
our major market, several insurers reduced their market share in the small
group health segment in 1993. We offered a competitive product and thus
substantially increased our sales in that market during 1993. The high premium
revenue in the first six months of 1994 reflected the effect of that
significant increase in sales of new policies. Due to increased levels of
competition in the small group market as well as our significant rate increases
in 1994 and in 1995, many of the new policies written in 1993 were not renewed.
The decline in premium revenue in 1995 was expected due to this increase in
non-renewals. We anticipate that this trend will continue during the remainder
of 1995. We continue to move forward with our efforts to replace our
traditional indemnity business by offering managed care products through
ChubbHealth, Inc., a health maintenance organization.
Group insurance operations resulted in a loss of $7.6 million for the
first nine months of 1995 compared with a loss of $14.0 million in 1994.
Results in both periods were adversely affected by a high level of claims
resulting from the increased cost of medical services and the increased
utilization of those services. In 1995, the benefit from the rate increases
was partially offset by the adverse effect of premium revenue decreasing at a
greater rate than the decrease in expenses.
Gross investment income increased by 10.3% in the first nine months of
1995 over the same period in 1994. The growth was due to an increase in
invested assets since the third quarter of 1994 resulting primarily from
deposits to policyholder funds. New cash was invested primarily in
mortgage-backed securities. To provide for liquidity, funds believed to be
sufficient to meet any unusual needs for cash have been maintained in short
term securities.
REAL ESTATE
Real estate earnings after taxes amounted to $3.5 million for the first
nine months of 1995 compared with a loss of $1.4 million in 1994. Real estate
earnings in 1995 reflect a first quarter charge of $6.5 million after taxes
resulting from the initial application of Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan, which
established new criteria for measuring impairment of a loan. This change in
accounting principle is discussed further in Note 2 of the Notes to
Consolidated Financial Statements.
Results in 1995 benefited from an increase in earnings from rental
operations, residential sales and a third quarter land sale. Results were
adversely affected in 1995 and 1994 by progressively higher portions of
interest being charged directly to expense rather than being capitalized.
Revenues were $225.0 million in the first nine months of 1995 compared
with $148.2 million in 1994. Revenue growth in 1995 was primarily due to
higher levels of rental revenues on owned properties, increased revenues from
residential development and the land sale.
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CORPORATE
Chubb Capital Corporation had outstanding $100 million of unsecured
8 5/8% notes, the proceeds of which were loaned to our real estate subsidiaries.
The notes became due and were redeemed in January 1995. The $100 million loan
to the real estate subsidiaries from Chubb Capital was renewed.
The Corporation filed a shelf registration statement which the
Securities and Exchange Commission declared effective in June 1995, under which
up to $400 million of various types of securities may be issued by the
Corporation or Chubb Capital. No securities have been issued under this
registration.
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.
Investment gains before taxes of $74.0 million were realized in the first nine
months of 1995 compared with gains of $45.2 million for the same period in
1994. The 1995 amount includes $18.5 million of investment gains from the
Corporation's reduction of its investment in Sun Alliance.
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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, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, The
Chubb Corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CHUBB CORPORATION
(Registrant)
By: /s/ Henry B. Schram
-----------------------------
Henry B. Schram
Senior Vice-President and
Chief Accounting Officer
Date: November 13, 1995
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EXHIBIT INDEX
Exhibit 11.1 - Computation of earnings per share
Exhibit 27 - Financial Data Schedule