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 March 31, 1998
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 April 30, 1998 was
168,079,063.
2
THE CHUBB CORPORATION
INDEX
Page Number
Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997......................... 1
Consolidated Statements of Income for the
Three Months Ended March 31, 1998 and 1997................... 2
Consolidated Statements of Comprehensive Income
for the Three Months Ended March 31, 1998 and 1997........... 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997................... 4
Notes to Consolidated Financial Statements.................... 5
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations.............. 8
Part II. Other Information:
Item 6 - Exhibits and Reports on Form 8-K....................... 15
3
Page 1
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
Mar. 31, Dec. 31,
1998 1997
--------- ---------
(in millions)
Assets
Invested Assets
Short Term Investments .......................... $ 892.5 $ 725.1
Fixed Maturities
Held-to-Maturity - Tax Exempt (market $2,292.4
and $2,347.2) ................................ 2,153.0 2,200.6
Available-for-Sale
Tax Exempt (cost $5,779.0 and $5,408.4) ...... 6,130.7 5,766.9
Taxable (cost $4,043.5 and $4,366.0) ......... 4,141.2 4,485.9
Equity Securities (cost $735.5 and $733.9) ...... 937.2 871.1
--------- ---------
TOTAL INVESTED ASSETS .................... 14,254.6 14,049.6
Cash .............................................. 12.8 11.5
Accrued Investment Income ......................... 183.5 203.8
Premiums Receivable ............................... 1,125.9 1,144.4
Reinsurance Recoverable on Unpaid Claims .......... 1,200.2 1,207.9
Prepaid Reinsurance Premiums ...................... 121.3 115.2
Funds Held for Asbestos-Related Settlement ........ 599.6 599.5
Deferred Policy Acquisition Costs .................. 681.8 676.9
Real Estate Assets ................................ 777.6 790.0
Deferred Income Tax ............................... 337.1 317.0
Other Assets ...................................... 704.1 499.8
--------- ---------
TOTAL ASSETS ............................. $19,998.5 $19,615.6
========= =========
Liabilities
Unpaid Claims ..................................... $ 9,900.3 $ 9,772.5
Unearned Premiums ................................. 2,720.1 2,696.6
Long Term Debt .................................... 248.4 398.6
Dividend Payable to Shareholders .................. 52.2 49.0
Accrued Expenses and Other Liabilities ............ 1,324.6 1,041.8
--------- ---------
TOTAL LIABILITIES ........................ 14,245.6 13,958.5
--------- ---------
Shareholders' Equity
Common Stock - $1 Par Value; 176,025,724 and
176,037,850 Shares ............................... 176.0 176.0
Paid-In Surplus ................................... 571.5 593.0
Retained Earnings ................................. 5,241.3 5,101.7
Accumulated Other Comprehensive Income
Unrealized Appreciation of Investments, Net of Tax 423.2 400.1
Foreign Currency Translation Losses, Net of Tax .. (27.5) (25.7)
Receivable from Employee Stock Ownership Plan ..... (96.7) (96.7)
Treasury Stock, at Cost - 7,773,724 and
7,320,410 Shares ................................. (534.9) (491.3)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ............... 5,752.9 5,657.1
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $19,998.5 $19,615.6
========= =========
See Notes to Consolidated Financial Statements.
4
Page 2
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31
1998 1997
--------- ---------
(in millions)
Revenues
Premiums Earned .................................... $ 1,314.1 $ 1,321.0
Investment Income .................................. 204.1 186.8
Real Estate ........................................ 24.5 44.3
Realized Investment Gains .......................... 44.6 24.8
--------- ---------
Total Revenues .............................. 1,587.3 1,576.9
--------- ---------
Claims and Expenses
Insurance Claims ................................... 819.5 839.9
Amortization of Deferred Policy Acquisition Costs .. 361.9 361.7
Other Insurance Operating Costs and Expenses ....... 87.7 78.5
Real Estate Cost of Sales and Expenses ............. 25.4 42.3
Investment Expenses ................................ 5.3 3.3
Corporate Expenses ................................. 8.2 5.7
Restructuring Charge ............................... 40.0 --
--------- ---------
Total Claims and Expenses ................... 1,348.0 1,331.4
--------- ---------
Income Before Federal and Foreign Income Tax ......... 239.3 245.5
Federal and Foreign Income Tax ....................... 47.5 53.4
--------- ---------
Net Income ........................................... $ 191.8 $ 192.1
========= =========
Average Common Shares Outstanding .................... 168.3 173.2
Average Common and Potentially Dilutive
Shares Outstanding .................................. 171.9 180.6
EARNINGS PER SHARE
Basic ................................................ $ 1.14 $ 1.11
Diluted .............................................. 1.12 1.08
Dividends Declared Per Share ......................... .31 .29
See Notes to Consolidated Financial Statements.
5
Page 3
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31
1998 1997
------ ------
(in millions)
Net Income ....................................... $191.8 $192.1
Other Comprehensive Income
Change in Unrealized Appreciation
of Investments, Net of Tax .................... 23.1 (69.3)
Change in Foreign Currency Translation
Losses, Net of Tax ............................ (1.8) 2.6
------ ------
Other Comprehensive Income .................. 21.3 (66.7)
------ ------
Comprehensive Income ............................. $213.1 $125.4
====== ======
See Notes to Consolidated Financial Statements.
6
Page 4
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31
1998 1997
-------- --------
(in millions)
Cash Flows from Operating Activities
Net Income ......................................... $ 191.8 $ 192.1
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Claims, Net ................... 135.5 436.7
Increase in Unearned Premiums, Net ............... 17.4 100.8
Increase in Deferred Policy Acquisition Costs .... (4.9) (32.0)
Depreciation ..................................... 16.0 16.8
Realized Investment Gains ........................ (44.6) (24.8)
Other, Net ....................................... (15.9) (3.4)
-------- --------
Net Cash Provided by Operating Activities .......... 295.3 686.2
-------- --------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities ............ 1,134.6 1,455.5
Proceeds from Maturities of Fixed Maturities ....... 161.6 236.7
Proceeds from Sales of Equity Securities ........... 102.6 122.3
Purchases of Fixed Maturities ...................... (1,270.3) (1,514.3)
Purchases of Equity Securities ..................... (88.4) (132.6)
Increase in Short Term Investments, Net ............ (167.4) (560.6)
Increase in Net Payable from Security Transactions
Not Settled ....................................... 126.1 103.5
Other, Net ......................................... (21.8) (29.6)
-------- --------
Net Cash Used in Investing Activities .............. (23.0) (319.1)
-------- --------
Cash Flows from Financing Activities
Repayment of Long Term Debt ........................ (150.2) (10.0)
Increase in Short Term Debt, Net ................... -- 20.5
Dividends Paid to Shareholders ..................... (49.0) (47.2)
Repurchase of Shares ............................... (89.1) (340.7)
Other, Net ......................................... 17.3 13.9
-------- --------
Net Cash Used in Financing Activities .............. (271.0) (363.5)
-------- --------
Net Increase in Cash ................................. 1.3 3.6
Cash at Beginning of Year ............................ 11.5 4.7
-------- --------
Cash at End of Period .............................. $ 12.8 $ 8.3
======== ========
See Notes to Consolidated Financial Statements.
7
Page 5
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 1997 Annual Report to Shareholders.
2) Adoption of New Accounting Pronouncement
In the first quarter of 1998, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for the reporting and
presentation of comprehensive income and its components. Comprehensive
income is defined as all changes in shareholders' equity, except those
arising from transactions with shareholders. For the Corporation,
comprehensive income includes net income, changes in unrealized
appreciation or depreciation of investments carried at market value and
changes in foreign currency translation gains or losses. SFAS No. 130 only
requires the presentation of additional information in the financial
statements; therefore, the adoption of SFAS No. 130 has no effect on the
Corporation's financial position or results of 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:
Three Months Ended
March 31
1998 1997
------- -------
(in millions)
Change in unrealized appreciation of
equity securities................................. $ 64.5 $ (13.8)
Change in unrealized appreciation of
fixed maturities.................................. (29.0) (92.8)
------- -------
35.5 (106.6)
Deferred income tax (credit)....................... 12.4 (37.3)
------- -------
Change in unrealized appreciation of
investments, net.................................. $ 23.1 $ (69.3)
======= =======
8
Page 6
4) Property and Casualty Unpaid Claims
A discussion of the 1993 Fibreboard asbestos-related settlement is
presented in Note 13 of the notes to consolidated financial statements in
the 1997 Annual Report to Shareholders. The following developments during
1998 relate to the settlement.
In January 1998, the United States Court of Appeals for the Fifth
Circuit again affirmed the approval by a lower court of 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. In April 1998, the objectors to the global settlement
agreement petitioned the United States Supreme Court to review the
decision. The Supreme Court will have to decide whether to take the appeal.
The trilateral agreement among Pacific Indemnity, Continental Casualty
and Fibreboard was never appealed to the United States Supreme Court and is
final. The trilateral agreement will be triggered if the global settlement
agreement is ultimately disapproved. As a result, 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.
5) Restructuring Charge
During the fourth quarter of 1997, the Corporation began an activity
value analysis process to identify and then eliminate low-value activities
and to improve operational efficiency in order to reduce expenses and
redirect resources to those current activities and new initiatives that
have the greatest potential to contribute to the future results of the
Corporation. Implementation began in the first quarter of 1998 and will be
substantially completed by the end of the year. The cost control initiative
will result in approximately 500 job reductions in the home office and the
branch network through a combination of early retirements, terminations and
attrition. Other savings involve vendor management, consulting expenses and
other operating costs.
In the first quarter of 1998, the Corporation recorded a restructuring
charge of $40 million related to the implementation of the cost control
initiative. The restructuring charge relates primarily to costs associated
with providing enhanced pension benefits to employees who accepted an early
retirement incentive offer, severance costs and other costs.
9
Page 7
6) Earnings Per Share
Earnings per share amounts for 1997 have been restated to reflect the
changes prescribed by SFAS No. 128, Earnings per Share. SFAS No. 128
requires presentation of basic earnings per share and diluted earnings per
share.
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended
March 31
--------------------
1998 1997
------- -------
(in millions,
except per share amounts)
Basic earnings per share:
Net income ......................................... $ 191.8 $ 192.1
======= =======
Weighted average number of common
shares outstanding ................................ 168.3 173.2
======= =======
Basic earnings per share ........................... $ 1.14 $ 1.11
======= =======
Diluted earnings per share:
Net income ......................................... $ 191.8 $ 192.1
After-tax interest expense on 6%
exchangeable subordinated notes ................... -- 2.2
------- -------
Net income for computing diluted
earnings per share ................................ $ 191.8 $ 194.3
======= =======
Weighted average number of common
shares outstanding ................................ 168.3 173.2
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 ................................... -- 5.3
Additional shares from assumed exercise of
stock-based compensation awards ................... 3.6 2.1
------- -------
Weighted average number of common shares and
potential common shares assumed outstanding
for computing diluted earnings per share .......... 171.9 180.6
======= =======
Diluted earnings per share ......................... $ 1.12 $ 1.08
======= =======
10
Page 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 1998 AND 1997
SUMMARY OF FINANCIAL RESULTS
The following is a summary of the Corporation's operating results for the
first quarter of 1998 and 1997:
Quarter Ended
March 31
---------------------
1998 1997
-------- --------
(in millions)
PROPERTY AND CASUALTY INSURANCE
Underwriting
Net Premiums Written ............................... $1,331.5 $1,421.8
Increase in Unearned Premiums ...................... (17.4) (100.8)
-------- --------
Premiums Earned ................................. 1,314.1 1,321.0
-------- --------
Claims and Claim Expenses .......................... 819.5 839.9
Operating Costs and Expenses ....................... 446.0 464.8
Increase in Deferred Policy Acquisition Costs ...... (4.9) (32.0)
Dividends to Policyholders ......................... 8.5 7.4
-------- --------
Underwriting Income Before Income Tax .............. 45.0 40.9
Federal and Foreign Income Tax ..................... 16.2 14.5
-------- --------
Underwriting Income ................................ 28.8 26.4
-------- --------
Investments
Investment Income Before Expenses and Income Tax ... 187.6 174.3
Investment Expenses ................................ 4.2 2.7
-------- --------
Investment Income Before Income Tax ................ 183.4 171.6
Federal and Foreign Income Tax ..................... 28.9 28.1
-------- --------
Investment Income .................................. 154.5 143.5
-------- --------
Property and Casualty Income ........................ 183.3 169.9
-------- --------
CORPORATE AND OTHER, Net of Tax ...................... 5.5 6.0
-------- --------
CONSOLIDATED OPERATING INCOME BEFORE
RESTRUCTURING CHARGE ................................ 188.8 175.9
Restructuring Charge, Net of Tax ..................... (26.0) --
-------- --------
CONSOLIDATED OPERATING INCOME ........................ 162.8 175.9
REALIZED INVESTMENT GAINS, Net of Tax ................ 29.0 16.2
-------- --------
CONSOLIDATED NET INCOME .............................. $ 191.8 $ 192.1
======== ========
11
Page 9
PROPERTY AND CASUALTY INSURANCE
Earnings from our property and casualty business were higher in the first
quarter of 1998 compared with the same period of 1997 due primarily to a 7.7%
increase in investment income. Underwriting income was similarly profitable in
both periods. Property and casualty income after taxes amounted to $183.3
million in the first quarter of 1998 compared with $169.9 million in 1997.
Reported net premiums written were $1,331.5 million in the first quarter of
1998, a decrease of 6.4% compared with the first quarter of 1997. The decrease
in reported premiums written in the first quarter of 1998 was due to the
termination, effective January 1, 1997, of the agreements pertaining to the
exchange of reinsurance on a quota share basis with the Royal & Sun Alliance
Insurance Group plc. Net premiums written in the first quarter of 1997 included
the effect of the portfolio transfers of unearned premiums as of January 1, 1997
resulting from the termination of the agreements.
A comparison of reported net premiums written with net premiums written
adjusted to reflect the termination of the reinsurance agreements with Sun
Alliance follows:
Quarter Ended
March 31
------------------------
1998 1997
-------- --------
(in millions)
Reported net premiums written $1,331.5 $1,421.8
Portfolio transfer of unearned premiums 174.6
Premiums assumed from Sun Alliance (3.8)
-------- --------
Adjusted net premiums written $1,331.5 $1,251.0
======== ========
Net premiums written, as adjusted, increased 6.4% in the first quarter of
1998 compared with the same quarter in 1997. The worldwide marketplace continued
to be competitive, particularly in the commercial classes. Competitors continued
to place significant pressure on pricing and coverage terms as they attempted to
maintain or increase market share. Substantial premium growth in the first
quarter of 1998 was achieved outside the United States from our international
branch network.
Underwriting results were profitable in the first quarter of 1998 and 1997.
Our combined loss and expense ratio was 96.1% in the first quarter of 1998
compared with 96.3% in 1997.
The loss ratio improved to 62.8% in the first quarter of 1998 from 63.9% in
1997 despite the adverse effect of higher catastrophe losses resulting primarily
from the winter ice storms in Canada. The loss ratios continue to reflect the
favorable experience resulting from the consistent application of our
disciplined underwriting standards. Catastrophe losses during the first quarter
of 1998 were 2.3 percentage points of the loss ratio compared with only 0.8 of a
percentage point in 1997.
Our expense ratio was 33.3% in the first quarter of 1998 compared with
32.4% in 1997. The increase in 1998 was due primarily to an increase in
commission expense caused in part by higher contingent payments.
12
Page 10
Underwriting results during 1998 and 1997 by class of business were as
follows:
Quarter Ended March 31
----------------------
Net Premiums Combined Loss and
Written Expense Ratios
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in millions)
Personal Insurance
Automobile ...................... $ 70.6 $ 78.3 89.0% 88.4%
Homeowners ...................... 154.8 174.2 85.8 92.7
Other ........................... 73.9 85.0 63.3 65.2
-------- -------- -------- --------
Total Personal .............. 299.3 337.5 81.1 85.0
-------- -------- -------- --------
Commercial Insurance
Multiple Peril .................. 189.6 219.5 118.4 108.8
Casualty ........................ 231.8 241.3 114.2 114.7
Workers' Compensation ........... 97.8 92.0 101.0 102.3
Property and Marine ............. 128.0 148.3 116.6 105.7
Executive Protection ............ 223.4 212.6 71.8 73.6
Financial Institutions .......... 98.0 109.9 83.0 80.4
Other ........................... 63.6 64.5 95.8 89.6
-------- -------- -------- --------
Total Commercial ............ 1,032.2 1,088.1 100.9 98.1
-------- -------- -------- --------
Total Before Reinsurance
Assumed .................... 1,331.5 1,425.6 96.1 95.0
Reinsurance Assumed ............... -- (3.8) -- N/M
-------- -------- -------- --------
Total ....................... $1,331.5 $1,421.8 96.1% 96.3%
======== ======== ======== ========
PERSONAL INSURANCE
Reported premiums from personal insurance coverages, which represent
approximately 22% of the premiums written by our property and casualty
subsidiaries, decreased by 11.3% in the first quarter of 1998 compared with the
same quarter in 1997. In the first quarter of 1997, net premiums written for the
personal classes included $65.8 million due to the effect of the portfolio
transfer of unearned premiums as of January 1, 1997 resulting from the
termination of the reinsurance agreement with Sun Alliance.
Excluding the effects of the termination of the reinsurance agreement with
Sun Alliance, premium growth for the personal classes was 10.1% in the first
quarter of 1998. We continued to grow our homeowners and other non-automobile
business in non-catastrophe prone areas. Personal automobile premiums also
increased as a result of an increase in the number of in-force policies for high
value automobiles.
Our personal insurance business produced highly profitable underwriting
results in the first quarter of 1998 and 1997. The combined loss and expense
ratio was 81.1% in the first quarter of 1998 compared with 85.0% in 1997.
13
Page 11
Homeowners results were more profitable in 1998 compared with 1997 as a
reduction in non-catastrophe related losses more than offset an increase in
catastrophe-related losses resulting primarily from the Canadian ice storms.
Catastrophe losses represented 7.8 percentage points of the loss ratio for this
class in the first quarter of 1998 compared with only 0.9 of a percentage point
in 1997. Other personal coverages, which include insurance for personal
valuables and excess liability, produced highly profitable results in 1998 and
1997 due to continued favorable loss experience. Our automobile business
produced profitable results in both years due primarily to stable loss frequency
and severity.
COMMERCIAL INSURANCE
Reported premiums from commercial insurance, which represent approximately
78% of our total writings, decreased by 5.1% in the first quarter of 1998
compared with the same period a year ago. In the first quarter of 1997, net
premiums written for the commercial classes included $108.8 million due to the
effect of the portfolio transfer of unearned premiums as of January 1, 1997
resulting from the termination of the reinsurance agreement with Sun Alliance.
Excluding the effects of the termination of the reinsurance agreement with
Sun Alliance, premium growth for the commercial classes was 5.4% in the first
quarter of 1998. 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. Premium growth was stronger outside
the United States. Growth in the United States continues to be hindered by
intense competition which has resulted in declining prices and fewer new
business opportunities for several classes of business.
Our commercial insurance business produced near breakeven underwriting
results in the first quarter of 1998 compared with modestly profitable results
for the same period a year ago. The combined loss and expense ratio was 100.9%
in the first quarter of 1998 compared with 98.1% in 1997.
Multiple peril results were unprofitable in 1998 and 1997 due, in large
part, to competitive pressure on prices. Results in 1998 deteriorated in the
property component of this business due to the Canadian catastrophe losses and
in the liability component due to an increase in the frequency of large losses.
Catastrophe losses represented 5.5 percentage points of the loss ratio for this
class in the first quarter of 1998 compared with only 1.2 percentage points in
1997.
Results for our casualty business were unprofitable by a similar margin in
1998 and 1997. Casualty results were adversely affected in both years, but more
so in 1997, by increases in loss reserves for asbestos-related and toxic waste
claims. The excess liability component of our casualty coverages produced
modestly unprofitable underwriting results in 1998 due to declining prices
compared with profitable results in 1997. Results for the primary liability
component were extremely unprofitable in both years due to an increased
frequency of large losses, particularly in 1998. Results in the automobile
component were somewhat unprofitable in 1998 and 1997.
14
Page 12
Workers' compensation results were marginally unprofitable in 1998 and
1997. Results in both periods reflect the cumulative effect of price reductions
that have occurred over the past several years. Results continued to benefit,
however, from the reform of benefit provisions of workers' compensation laws in
many states and the impact of medical cost containment and disability management
activities.
Property and marine results were unprofitable in 1998 and 1997. Results
deteriorated in 1998 due to an increase in the frequency of large losses.
Results in 1998 and 1997 were adversely affected by several large overseas
losses. Catastrophe losses represented 3.4 percentage points of the loss ratio
for this class in the first quarter of 1998 compared with 5.2 percentage points
in 1997.
Executive protection results were highly profitable in 1998 and 1997 due to
favorable loss experience. Our financial institutions business also produced
highly profitable results in both years. Results in our other commercial classes
were profitable in 1998 and 1997 due to our surety business which produced
highly profitable results in both years.
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. This was
offset by a $93.6 million reduction in net premiums written in the first quarter
of 1997 due to the effect of the portfolio transfer of unearned premiums back to
Sun Alliance as of January 1, 1997.
Underwriting results for this segment in the first quarter of 1997, which
represent our share of the Sun Alliance business for the last six months of
1996, were near breakeven.
LOSS RESERVES
Gross loss reserves were $9,900.3 million and $9,772.5 million at March 31,
1998 and December 31, 1997, respectively. Reinsurance recoverables on such loss
reserves were $1,200.2 million and $1,207.9 million at March 31, 1998 and
December 31, 1997, respectively.
Loss reserves, net of reinsurance recoverable, increased by $135.5 million
during the first quarter of 1998. 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 $17.9
million in the first quarter of 1998 and $32.5 million in 1997.
A discussion of the 1993 Fibreboard asbestos-related settlement is
incorporated by reference from Item 7 of the Corporation's 10-K for the year
ended December 31, 1997. The following developments during 1998 relate to the
settlement.
15
Page 13
In January 1998, the United States Court of Appeals for the Fifth Circuit
again affirmed the approval by a lower court of 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. In April
1998, the objectors to the global settlement agreement petitioned the United
States Supreme Court to review the decision. The Supreme Court will have to
decide whether to take the appeal.
The trilateral agreement among Pacific Indemnity, Continental Casualty and
Fibreboard was never appealed to the United States Supreme Court and is final.
The trilateral agreement will be triggered if the global settlement agreement is
ultimately disapproved. As a result, 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 7.7% in
the first quarter of 1998 compared with the same period in 1997. The growth was
due to an increase in invested assets since the first quarter of 1997,
reflecting strong cash flow from operations over the period, partially offset by
lower average yields on new investments. The effective tax rate on investment
income decreased to 15.8% in the first quarter of 1998 from 16.4% in the first
quarter of 1997 due to holding a larger proportion of our investment portfolio
in tax-exempt securities.
New cash available for investment in the first quarter of 1998 was invested
primarily in tax-exempt bonds. The property and casualty subsidiaries maintain
sufficient investments in highly liquid, short term securities to provide for
immediate cash needs.
CORPORATE AND OTHER
Corporate and other includes the results of our real estate subsidiary,
investment income earned on corporate invested assets and interest and other
expenses not allocable to the operating subsidiaries. Corporate and other income
after taxes was $5.5 million in the first quarter of 1998 compared with $6.0
million in the first quarter of 1997.
We are continuing to explore the sale of certain of the remaining
properties held by our real estate subsidiary.
COST REDUCTION PROGRAM AND RESTRUCTURING CHARGE
During the fourth quarter of 1997, the Corporation began an activity value
analysis process to identify and then eliminate low-value activities and to
improve operational efficiency in order to reduce expenses and redirect
resources to those current activities and new initiatives that have the greatest
potential to contribute to the future results of the Corporation. Implementation
began in the first quarter of 1998 and will be substantially completed by the
end of the year. The cost control initiative is expected to result in annual
pre-tax savings of approximately $150 million, beginning in 1999. This
initiative will result in approximately 500 job reductions in the home office
and the branch network through a combination of early retirements, terminations
and attrition. Other savings involve vendor management, consulting expenses and
other operating costs.
16
Page 14
In the first quarter of 1998, the Corporation recorded a restructuring
charge of $40 million, or $26 million after taxes, related to the implementation
of the cost control initiative. The restructuring charge relates primarily to
costs associated with providing enhanced pension benefits to employees who
accepted an early retirement incentive offer, severance costs and other costs.
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 $44.6 million were realized in the first quarter of 1998
compared with net gains of $24.8 million for the same period in 1997.
CAPITAL RESOURCES
On March 7, 1997, the Board of Directors replaced a prior share repurchase
program with a new program, which authorized the repurchase of up to 17,500,000
shares of common stock. Through March 31, 1998, the Corporation repurchased
10,919,200 shares under the new share repurchase program, including 1,127,300
shares repurchased in open-market transactions in the first quarter of 1998 at a
cost of $89.1 million.
At January 1, 1998, Chubb Capital Corporation, a subsidiary of the
Corporation, had outstanding $150 million of 6% notes due February 1, 1998. The
notes were repaid when due.
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", "are expected to", "will continue", "is anticipated",
"estimate", "project", 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 with respect to its activity value analysis program; 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. Reports on Form 8-K - There were no reports on Form 8-K filed for the three
months ended March 31, 1998.
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: May 15, 1998