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 June 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 July 31, 1997 was
172,467,338.
2
THE CHUBB CORPORATION
INDEX
Page Number
-----------
Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996.......................... 1
Consolidated Statements of Income for the
Three Months and Six Months Ended June 30, 1997 and 1996..... 2
Consolidated Statements of Cash Flows for the
Six Months Ended June 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.............. 8
Part II. Other Information:
Item 4 - Submission of Matters to a Vote of Security Holders.... 16
Item 6 - Exhibits and Reports on Form 8-K....................... 17
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Page 1
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, Dec. 31,
1997 1996
--------- ---------
(in millions)
Assets
Invested Assets
Short Term Investments............................... $ 1,100.5 $ 275.9
Fixed Maturities
Held-to-Maturity - Tax Exempt (market $2,465.1
and $2,573.4)..................................... 2,342.2 2,443.6
Available-for-Sale
Tax Exempt (cost $4,953.2 and $4,415.1)........... 5,173.2 4,622.6
Taxable (cost $3,880.3 and $4,038.7).............. 3,948.8 4,092.7
Equity Securities (cost $650.4 and $540.5)........... 793.1 646.3
--------- ---------
TOTAL INVESTED ASSETS......................... 13,357.8 12,081.1
Cash................................................... 7.8 4.7
Accrued Investment Income.............................. 196.6 195.3
Premiums Receivable.................................... 1,161.6 984.9
Reinsurance Recoverable on Unpaid Claims............... 1,280.3 1,767.8
Prepaid Reinsurance Premiums........................... 114.3 326.7
Funds Held for Asbestos-Related Settlement............. 593.2 599.9
Deferred Policy Acquisition Costs...................... 662.0 601.2
Real Estate Assets..................................... 1,629.4 1,604.0
Deferred Income Tax.................................... 377.4 365.6
Other Assets........................................... 585.9 564.3
Net Assets of Discontinued Operations.................. - 843.4
--------- ---------
TOTAL ASSETS.................................. $19,966.3 $19,938.9
========= =========
Liabilities
Unpaid Claims.......................................... $ 9,575.3 $ 9,523.7
Unearned Premiums...................................... 2,623.6 2,617.5
Short Term Debt........................................ 223.0 189.5
Long Term Debt......................................... 837.8 1,070.5
Dividend Payable to Shareholders....................... 50.3 47.2
Accrued Expenses and Other Liabilities................. 1,084.4 1,027.6
--------- ---------
TOTAL LIABILITIES............................. 14,394.4 14,476.0
--------- ---------
Shareholders' Equity
Common Stock - $1 Par Value; 176,060,309 and
176,084,173 Shares.................................... 176.1 176.1
Paid-In Surplus........................................ 609.2 695.7
Retained Earnings...................................... 4,811.6 4,530.5
Foreign Currency Translation Losses, Net of Income Tax. (20.5) (15.6)
Unrealized Appreciation of Investments, Net............ 280.4 238.7
Receivable from Employee Stock Ownership Plan.......... (101.6) (106.3)
Treasury Stock, at Cost - 2,984,733 and
1,223,182 Shares...................................... (183.3) (56.2)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.................... 5,571.9 5,462.9
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.... $19,966.3 $19,938.9
========= =========
See Notes to Consolidated Financial Statements.
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Page 2
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
PERIODS ENDED JUNE 30
Second Quarter Six Months
1997 1996 1997 1996
-------- -------- -------- --------
(in millions)
Revenues
Premiums Earned....................... $1,249.0 $1,144.3 $2,570.0 $2,265.8
Investment Income..................... 192.8 174.5 379.6 349.1
Real Estate........................... 47.5 51.0 91.8 217.4
Realized Investment Gains............. 20.3 12.2 45.1 31.3
-------- -------- -------- --------
Total Revenues................. 1,509.6 1,382.0 3,086.5 2,863.6
-------- -------- -------- --------
Claims and Expenses
Insurance Claims...................... 785.7 732.4 1,625.6 1,500.3
Amortization of Deferred Policy
Acquisition Costs.................... 337.5 312.0 699.2 616.9
Other Insurance Operating Costs and
Expenses............................. 83.2 73.5 161.7 140.1
Real Estate Cost of Sales and Expenses 58.3 46.1 100.6 206.0
Investment Expenses................... 2.6 2.9 5.9 7.5
Corporate Expenses.................... 2.9 7.4 8.6 14.7
-------- -------- -------- --------
Total Claims and Expenses...... 1,270.2 1,174.3 2,601.6 2,485.5
-------- -------- -------- --------
Income from Continuing Operations
Before Federal and Foreign Income Tax.. 239.4 207.7 484.9 378.1
Federal and Foreign Income Tax.......... 50.7 42.9 104.1 72.9
-------- -------- -------- --------
Income from Continuing Operations....... 188.7 164.8 380.8 305.2
Income from Discontinued Operations,
Net of Tax............................. - 9.5 - 20.5
-------- -------- -------- --------
Net Income.............................. $ 188.7 $ 174.3 $ 380.8 $ 325.7
======== ======== ======== ========
Average Common and Common Equivalent
Shares Outstanding (In Thousands)...... 174,311 180,416 176,566 180,436
PER SHARE DATA
Income from Continuing Operations....... $1.09 $.93 $2.18 $1.72
Income from Discontinued Operations..... - .05 - .11
----- ---- ----- -----
Net Income.............................. $1.09 $.98 $2.18 $1.83
===== ==== ===== =====
Dividends Declared...................... $ .29 $.27 $ .58 $ .54
See Notes to Consolidated Financial Statements.
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Page 3
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30
1997 1996
--------- ---------
(in millions)
Cash Flows from Operating Activities
Net Income............................................. $ 380.8 $ 325.7
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Claims, Net....................... 539.1 142.2
Increase in Unearned Premiums, Net................... 218.5 117.8
Increase in Premiums Receivable...................... (176.7) (164.4)
Decrease in Medical Malpractice Reinsurance
Related Receivable.................................. - 191.2
Decrease in Funds Held for Asbestos-Related
Settlement.......................................... 6.7 209.8
Increase in Deferred Policy Acquisition Costs........ (60.8) (27.5)
Change in Deferred Federal Income Tax................ (36.6) (5.2)
Depreciation......................................... 32.7 28.7
Realized Investment Gains............................ (45.1) (31.3)
Income from Discontinued Operations, Net of Tax...... - (20.5)
Other, Net........................................... (31.5) (12.4)
--------- ---------
Net Cash Provided by Operating Activities.............. 827.1 754.1
--------- ---------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities................ 1,991.1 1,866.3
Proceeds from Maturities of Fixed Maturities........... 312.0 617.5
Proceeds from Sales of Equity Securities............... 176.1 136.5
Proceeds from Sale of Discontinued Operations, Net..... 861.2 -
Purchases of Fixed Maturities.......................... (2,576.3) (3,018.6)
Purchases of Equity Securities......................... (249.6) (134.5)
Increase in Short Term Investments, Net................ (824.6) (31.8)
Increase (Decrease)in Net Payable from Security
Transactions Not Settled.............................. 49.0 (4.1)
Other, Net............................................. (49.9) (65.4)
--------- ---------
Net Cash Used in Investing Activities.................. (311.0) (634.1)
--------- ---------
Cash Flows from Financing Activities
Proceeds from Issuance of Long Term Debt............... 8.1 2.0
Repayment of Long Term Debt............................ (12.2) (77.7)
Increase in Short Term Debt, Net....................... 33.5 55.9
Dividends Paid to Shareholders......................... (96.6) (89.9)
Repurchase of Shares................................... (479.8) (34.0)
Other, Net............................................. 34.0 18.2
--------- ---------
Net Cash Used in Financing Activities.................. (513.0) (125.5)
--------- ---------
Net Increase (Decrease) in Cash.......................... 3.1 (5.5)
Cash at Beginning of Year................................ 4.7 11.9
--------- ---------
Cash at End of Period.................................. $ 7.8 $ 6.4
========= =========
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 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.
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Page 5
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 June 30
--------------------------------------------------
Second Quarter Six Months
--------------------- ---------------------
1997 1996 1997 1996
------ ------ ------ ------
(in millions)
Continuing Operations
Change in unrealized appreciation of
equity securities ................ $ 50.7 $ 7.7 $ 36.9 $ 10.5
Change in unrealized appreciation of
fixed maturities.................. 119.8 (79.5) 27.0 (252.7)
------ ------ ------ ------
170.5 (71.8) 63.9 (242.2)
Deferred income tax (credit)........ 59.5 (25.0) 22.2 (84.7)
------ ------ ------ ------
Change in unrealized appreciation... 111.0 (46.8) 41.7 (157.5)
Discontinued operations, net............. -- (13.4) -- (33.8)
------ ------ ------ ------
Change in unrealized appreciation of
investments, net....................... $111.0 $(60.2) $ 41.7 $(191.3)
====== ====== ====== ======
4) Real Estate
In June 1997, a definitive agreement was reached to sell a
substantial portion of the Corporation's commercial real estate
properties to PW/MS Acquisition I, LLC, a joint venture company formed
by Paine Webber Real Estate Securities Inc. and Morgan Stanley Real
Estate Fund II, L.P. The purchase price of $758 million includes $649
million in cash and the assumption of $109 million in debt. 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.
The closings for the properties sold to PW/MS Acquisition I are
expected to occur by the end of 1997. 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.
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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 further consider the global
settlement agreement in light of a June 1997 ruling by the Supreme Court
that had rejected 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.
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.
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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.
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Page 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
1996 AND FOR THE QUARTERS ENDED JUNE 30, 1997 AND 1996
PROPERTY AND CASUALTY INSURANCE
Earnings from our property and casualty business were substantially
higher in the first six months of 1997 compared with the same period of 1996.
The increase was due primarily to a significant improvement in underwriting
results in 1997. Underwriting results in 1996 were adversely affected by
substantially higher catastrophe losses in the first quarter. Investment income
increased in 1997 compared with 1996. Property and casualty income after taxes
amounted to $343.7 million in the first six months of 1997 and $173.8 million in
the second quarter compared with $269.9 million and $149.6 million,
respectively, in 1996.
Net premiums written were $2.8 billion in the first six months of 1997
and $1.4 billion in the second quarter representing increases of 17.0% and 8.8%,
respectively, over the comparable periods of 1996. A portion of the increase
in premiums written in the first six 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 six months of 1997 and 6.6% in the
second quarter over the comparable periods in 1996. 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 95.8% in the first six months of 1997 and 95.3% in the
second quarter compared with 98.8% and 96.3%, respectively, in 1996.
The loss ratio was 63.6% for the first six months of 1997 and 63.3% for
the second quarter compared with 66.6% and 64.3%, 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 six months of 1996 was adversely affected by catastrophe
losses in the first quarter, resulting primarily from the winter storms in the
eastern part of the United States. Catastrophe losses in the first six months of
1997 amounted to $28.5 million which represented 1.1 percentage points of the
loss ratio compared with $83.9 million or 3.7 percentage points in 1996.
Catastrophe losses for the second quarter of 1997 amounted to $18.1 million or
1.5 percentage points of the loss ratio compared with $10.9 million or 1.0
percentage point in 1996.
Our expense ratio was 32.2% for the first six months of both 1997 and
1996 and 32.0% for the second quarter of both years.
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Page 9
Underwriting results during 1997 and 1996 by class of business were as
follows:
Six Months Ended June 30
----------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
------------------- ----------------
1997 1996 1997 1996
-------- -------- ------ ------
(in millions)
Personal Insurance
Automobile........................ $ 153.0 $ 121.9 85.9% 85.5%
Homeowners........................ 352.6 274.7 92.9 112.6
Other............................. 163.7 130.3 65.3 67.5
-------- -------- ----- -----
Total Personal................ 669.3 526.9 84.7 95.3
-------- -------- ----- -----
Commercial Insurance
Multiple Peril.................... 413.1 325.7 111.2 118.2
Casualty.......................... 472.0 421.8 114.4 111.2
Workers' Compensation............. 157.1 128.0 104.5 96.3
Property and Marine............... 302.9 255.2 107.0 93.0
Executive Protection.............. 436.2 381.6 72.7 81.6
Other............................. 341.7 275.8 82.8 87.4
-------- -------- ----- -----
Total Commercial.............. 2,123.0 1,788.1 98.4 99.0
-------- -------- ----- -----
Total Before Reinsurance
Assumed...................... 2,792.3 2,315.0 95.2 98.2
Reinsurance Assumed................. (3.8) 68.6 N/M N/M
-------- -------- ----- ----
Total......................... $2,788.5 $2,383.6 95.8% 98.8%
======== ======== ===== =====
Quarter Ended June 30
----------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
------------------- ----------------
1997 1996 1997 1996
-------- -------- ------ ------
(in millions)
Personal Insurance
Automobile........................ $ 74.7 $ 62.3 83.4% 81.8%
Homeowners........................ 178.4 144.6 93.2 98.2
Other............................. 78.7 65.4 65.5 69.6
-------- -------- ----- -----
Total Personal................ 331.8 272.3 84.4 87.5
-------- -------- ----- -----
Commercial Insurance
Multiple Peril.................... 193.6 167.2 113.7 117.4
Casualty.......................... 230.7 213.1 114.1 108.7
Workers' Compensation............. 65.1 55.1 107.4 97.0
Property and Marine............... 154.6 143.8 108.2 87.9
Executive Protection.............. 223.6 200.6 71.8 82.8
Other............................. 167.3 136.8 81.9 88.3
-------- -------- ----- -----
Total Commercial.............. 1,034.9 916.6 98.7 98.1
-------- -------- ----- -----
Total Before Reinsurance
Assumed...................... 1,366.7 1,188.9 95.3 95.6
Reinsurance Assumed................. - 66.9 - 107.6
-------- -------- ----- -----
Total......................... $1,366.7 $1,255.8 95.3% 96.3%
======== ======== ===== =====
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PERSONAL INSURANCE
Premiums from personal insurance coverages, which represent
approximately 24% of the premiums written by our property and casualty
subsidiaries, increased by $142.4 million or 27.0% in the first six months of
1997 and $59.5 million or 21.9% in the second quarter compared with the same
periods in 1996. Of these increases, $67.7 million in the first six months of
1997 and $37.0 million in the second 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 8.0% in the first
six months of 1997 and 8.3% in the second 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.
Our personal insurance business produced substantially more profitable
underwriting results in the first six 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
second quarter of both years. The combined loss and expense ratios were 84.7%
for the first six months of 1997 and 84.4% for the second quarter compared with
95.3% and 87.5%, respectively, in 1996.
Homeowners results were profitable in 1997, benefiting from stable loss
activity and fewer catastrophe losses. Results for this class in 1996 were
adversely affected by significant weather-related catastrophe losses in the
first quarter. Catastrophe losses represented 3.1 percentage points of the loss
ratio for this class in the first six months of 1997 and 5.2 percentage points
in the second quarter compared with 23.7 percentage points and 5.2 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 $334.9 million or 18.7% in the first six months
of 1997 and $118.3 million or 12.9% in the second quarter compared with the same
periods a year ago. Of these increases, $124.5 million in the first six months
of 1997 and $62.1 million in the second 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.
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Page 11
Excluding the effects of the termination of the reinsurance agreement
with Sun Alliance, premium growth for the commercial classes was 9.4% in the
first six months of 1997 and 6.1% in the second quarter. Such premium growth was
due primarily to the selective writing of new accounts, exposure growth on
existing business and the purchase of additional coverages by current customers.
The competitive market has continued to place significant pressure on prices and
has made price increases difficult to achieve for most coverages.
Our commercial insurance business produced modestly profitable
underwriting results in 1997 and 1996. The combined loss and expense ratios were
98.4% for the first six months of 1997 and 98.7% for the second quarter compared
with 99.0% and 98.1%, respectively, in 1996.
Multiple peril results improved in 1997 compared with 1996 but remained
unprofitable. The improvement was in the property component of this business due
to an absence of catastrophe losses and favorable loss experience. Catastrophe
losses in the first six months of 1997 represented only 1.5 percentage points
of the loss ratio for this class compared with 5.1 percentage points in 1996.
Results for our casualty business were somewhat more unprofitable in
1997 than in 1996 due primarily to deterioration in the automobile component.
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 1997 compared with
profitable results in 1996. Results in our voluntary business deteriorated due
primarily to the impact of price reductions. Results from our share of the
involuntary pools and mandatory business in which we must participate by law
also deteriorated in 1997.
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 in the first six months of 1997 represented 4.8
percentage points of the loss ratio for this class compared with 3.7 percentage
points in 1996.
Results for our executive protection business were highly profitable in
1997 and 1996 due to favorable loss experience. Our financial institutions
business also produced highly profitable results in 1997 and 1996. Lower profits
in the non-fidelity portion of this business in 1997 were substantially offset
by improvement in the financial fidelity results. Results in our other
commercial classes were profitable in 1997 compared with modestly unprofitable
results in 1996.
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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 somewhat unprofitable in the first six
months of 1996. The combined loss and expense ratio for this business was not
meaningful for the first six 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 $9,575.3 million and $9,523.7 million at June
30, 1997 and December 31, 1996, respectively. Reinsurance recoverables on such
loss reserves were $1,280.3 million and $1,767.8 million at June 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.
Excluding the effects of the portfolio transfers, loss reserves, net of
reinsurance recoverable, increased by $252.9 million during the first six 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 $63.6
million in the first six months of 1997 and $76.9 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 further consider the global settlement agreement in light of a June 1997
ruling by the Supreme Court that had rejected an unrelated settlement that
included several former asbestos manufacturers.
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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 the first six months of 1997 and by 9.6% in the second quarter compared with
the same periods in 1996. The growth was due to an increase in invested assets
since the second 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 16.7% in the first six 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 six 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.
REAL ESTATE
In June 1997, a definitive agreement was reached to sell a substantial
portion of our commercial real estate properties to PW/MS Acquisition I, LLC, a
joint venture company formed by Paine Webber Real Estate Securities Inc. and
Morgan Stanley Real Estate Fund II, L.P. The purchase price of $758 million
includes $649 million in cash and the assumption of $109 million in debt. 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.
Real estate operations resulted in a loss after taxes of $5.2 million in
the first six months of 1997 compared with income of $7.0 million in 1996. The
loss in 1997 reflects the $6.6 million after tax charge. Earnings in 1996
benefited from the sale of several rental properties. Revenues were $91.8
million in the first six months of 1997 compared with $217.4 million in 1996,
which included the revenues from the sale of the rental properties.
The closings for the properties sold to PW/MA Acquisition I are
expected to occur by the end of 1997. 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.
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CORPORATE
Investment income earned on corporate invested assets and interest and
other expenses not allocable to the operating subsidiaries are reflected in the
corporate segment. Corporate income after taxes was $13.0 million in the first
six months of 1997 compared with $7.9 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 $45.1 million were realized in the first six
months of 1997 compared with net gains of $31.4 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 six months of 1997 and will not affect net income in future
periods. Earnings from the discontinued life and health insurance operations
were $20.5 million in the first six months of 1996, including realized
investment gains of $3.7 million.
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 June 30, 1997, the Corporation repurchased 4,825,200 shares under
the new repurchase program. In the aggregate, the Corporation repurchased
7,973,800 shares in open-market transactions in the first six months of 1997 at
a cost of $479.8 million. At June 30, 1997, an additional 12,674,800 shares may
be repurchased under the new authorization. The Corporation intends to use
a substantial portion of the proceeds from the sale of Chubb Life Insurance
Company of America, which were held in short term securities at June 30, 1997,
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 PW/MS
Acquisition I are expected to be applied to further debt reduction.
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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. In particular, this document
includes forward looking statements relating, but not limited to, the
Corporation's expectations of litigation developments and its recent and
ongoing sale activities relating to portions of its non-property and casualty
business and associated with its expectations of proceeds deployment. 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 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.
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PART II. OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of The Chubb Corporation was held on
April 22, 1997. Matters submitted to Shareholders at the meeting were as
follows:
Votes were cast in the following manner in connection with the election
of each Director to serve until the next Annual Meeting of Shareholders.
Votes Against
Director Votes For or Withheld
- -------- --------- -----------
John C. Beck 148,541,928 71,004
Sheila P. Burke 148,547,628 65,304
James I. Cash, Jr 148,558,744 54,188
Percy Chubb, III 147,186,437 1,426,495
Joel J. Cohen 147,147,062 1,465,870
David H. Hoag 145,452,643 3,160,289
Robert V. Lindsay 148,451,884 161,048
Thomas C. MacAvoy 148,538,527 74,405
Gertrude G. Michelson 148,459,751 153,181
Dean R. O'Hare 148,295,837 317,095
Warren B. Rudman 147,154,346 1,458,586
David G. Scholey 147,183,563 1,429,369
Raymond G. H. Seitz 147,167,036 1,445,896
Lawrence M. Small 148,352,845 260,087
Richard D. Wood 148,515,462 97,470
For each Director, there were 1,180,594 abstaining votes. There were no
broker non-votes cast.
Votes were cast in the following manner in connection with the proposal
to approve the selection of Ernst & Young LLP as the independent auditors of the
Registrant for the year 1997.
Votes For Votes Against
--------- -------------
149,231,919 281,130
There were 280,477 abstaining votes and no broker non-votes cast.
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Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 3 - Restated by-laws of the Corporation filed herewith.
Exhibit 10 - Material Contracts
- Executive severance agreement between Mr. Edward Dunlop and The Chubb
Corporation dated June 19, 1997.
Exhibit 11.1 - Computation of earnings per share.
b. Reports on Form 8-K
The Registrant filed a current report on Form 8-K dated May 13, 1997
with respect to the announcement on May 13, 1997 that the Registrant
completed the previously announced sale of all of the capital stock of
Chubb Life Insurance Company of America, a wholly owned subsidiary of
the Registrant, to Jefferson-Pilot Corporation for $875 million
in cash.
The Registrant filed a current report on Form 8-K dated June 12, 1997
with respect to the announcement on June 12, 1997 that Bellemead
Development Corporation, a wholly owned subsidiary of the Registrant,
reached a definitive agreement to sell a substantial portion of its
commercial real estate properties for $758 million to PW/MS Acquisition
I, LLC, a joint venture company formed by Paine Webber Real Estate
Securities Inc. and Morgan Stanley Real Estate Fund II, L.P.
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: August 14, 1997
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EXHIBIT INDEX
A. Exhibit 3 - Restated by-laws of the Corporation filed herewith
B. Exhibit 10 - Material Contracts
- Executive severance agreement between Mr. Edward Dunlop and The Chubb
Corporation dated June 19, 1997.
C. Exhibit 11.1 - Computation of earnings per share.