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, 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 July 31, 1998 was
165,613,051.
2
THE CHUBB CORPORATION
INDEX
Page Number
-----------
Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997.......................... 1
Consolidated Statements of Income for the
Three Months and Six Months Ended June 30, 1998 and 1997..... 2
Consolidated Statements of Comprehensive Income
for the Three Months and Six Months Ended
June 30, 1998 and 1997....................................... 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 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 4 - Submission of Matters to a Vote of Security Holders.... 17
Item 6 - Exhibits and Reports on Form 8-K....................... 18
3
Page 1
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, Dec. 31,
1998 1997
--------- ---------
(in millions)
Assets
Invested Assets
Short Term Investments .......................... $ 335.2 $ 725.1
Fixed Maturities
Held-to-Maturity - Tax Exempt (market $2,237.1
and $2,347.2) ................................ 2,102.3 2,200.6
Available-for-Sale
Tax Exempt (cost $6,163.0 and $5,408.4) ...... 6,515.3 5,766.9
Taxable (cost $4,191.2 and $4,366.0) ......... 4,294.3 4,485.9
Equity Securities (cost $767.4 and $733.9) ...... 949.5 871.1
--------- ---------
TOTAL INVESTED ASSETS .................... 14,196.6 14,049.6
Cash .............................................. 14.0 11.5
Accrued Investment Income ......................... 211.9 203.8
Premiums Receivable ............................... 1,260.2 1,144.4
Reinsurance Recoverable on Unpaid Claims .......... 1,192.3 1,207.9
Prepaid Reinsurance Premiums ...................... 125.2 115.2
Funds Held for Asbestos-Related Settlement ........ 601.2 599.5
Deferred Policy Acquisition Costs ................. 710.0 676.9
Real Estate Assets ................................ 768.5 790.0
Deferred Income Tax ............................... 361.7 317.0
Other Assets ...................................... 681.4 499.8
--------- ---------
TOTAL ASSETS ............................. $20,123.0 $19,615.6
========= =========
Liabilities
Unpaid Claims ..................................... $10,054.0 $ 9,772.5
Unearned Premiums ................................. 2,837.9 2,696.6
Short Term Debt ................................... 7.5 --
Long Term Debt .................................... 248.1 398.6
Dividend Payable to Shareholders .................. 51.9 49.0
Accrued Expenses and Other Liabilities ............ 1,190.2 1,041.8
--------- ---------
TOTAL LIABILITIES ........................ 14,389.6 13,958.5
--------- ---------
Shareholders' Equity
Common Stock - $1 Par Value; 175,997,066 and
176,037,850 Shares ............................... 176.0 176.0
Paid-In Surplus ................................... 557.6 593.0
Retained Earnings ................................. 5,373.6 5,101.7
Accumulated Other Comprehensive Income
Unrealized Appreciation of Investments, Net of Tax 414.4 400.1
Foreign Currency Translation Losses, Net of Tax .. (32.2) (25.7)
Receivable from Employee Stock Ownership Plan ..... (91.6) (96.7)
Treasury Stock, at Cost - 9,387,024 and
7,320,410 Shares ................................. (664.4) (491.3)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ............... 5,733.4 5,657.1
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $20,123.0 $19,615.6
========= =========
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
1998 1997 1998 1997
--------- --------- --------- ---------
(in millions)
Revenues
Premiums Earned ...................... $ 1,324.4 $ 1,249.0 $ 2,638.5 $ 2,570.0
Investment Income .................... 204.3 192.8 408.4 379.6
Real Estate .......................... 23.1 47.5 47.6 91.8
Realized Investment Gains ............ 45.8 20.3 90.4 45.1
--------- --------- --------- ---------
Total Revenues ................ 1,597.6 1,509.6 3,184.9 3,086.5
--------- --------- --------- ---------
Claims and Expenses
Insurance Claims ..................... 880.7 785.7 1,700.2 1,625.6
Amortization of Deferred Policy
Acquisition Costs ................... 365.9 337.5 727.8 699.2
Other Insurance Operating Costs
and Expenses ........................ 96.4 83.2 184.1 161.7
Real Estate Cost of Sales and Expenses 24.0 58.3 49.4 100.6
Investment Expenses .................. 2.6 2.6 7.9 5.9
Corporate Expenses ................... 5.6 2.9 13.8 8.6
Restructuring Charge ................. -- -- 40.0 --
--------- --------- --------- ---------
Total Claims and Expenses ..... 1,375.2 1,270.2 2,723.2 2,601.6
--------- --------- --------- ---------
Income Before Federal and Foreign
Income Tax ............................ 222.4 239.4 461.7 484.9
Federal and Foreign Income Tax ......... 38.2 50.7 85.7 104.1
--------- --------- --------- ---------
Net Income ............................. $ 184.2 $ 188.7 $ 376.0 $ 380.8
========= ========= ========= =========
Average Common Shares Outstanding ...... 167.5 172.0 167.9 172.6
Average Common and Potentially Dilutive
Shares Outstanding .................... 170.9 176.4 171.4 178.5
NET INCOME PER SHARE
Basic .................................. $ 1.10 $ 1.10 $ 2.24 $ 2.21
Diluted ................................ 1.08 1.08 2.20 2.16
Dividends Declared Per Share ........... .31 .29 .62 .58
See Notes to Consolidated Financial Statements.
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Page 3
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PERIODS ENDED JUNE 30
Second Quarter Six Months
1998 1997 1998 1997
------ ------ ------ ------
(in millions)
Net Income ............................. $184.2 $188.7 $376.0 $380.8
Other Comprehensive Income (Loss)
Change in Unrealized Appreciation
of Investments, Net of Tax .......... (8.8) 111.0 14.3 41.7
Change in Foreign Currency Translation
Losses, Net of Tax .................. (4.7) (7.5) (6.5) (4.9)
------ ------ ------ ------
Other Comprehensive Income (Loss) . (13.5) 103.5 7.8 36.8
------ ------ ------ ------
Comprehensive Income ................... $170.7 $292.2 $383.8 $417.6
====== ====== ====== ======
See Notes to Consolidated Financial Statements.
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Page 4
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30
1998 1997
-------- --------
(in millions)
Cash Flows from Operating Activities
Net Income ....................................... $ 376.0 $ 380.8
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Claims, Net ................. 297.1 539.1
Increase in Unearned Premiums, Net ............. 131.3 218.5
Increase in Premiums Receivable ................ (115.8) (176.7)
Increase in Deferred Policy Acquisition Costs .. (33.1) (60.8)
Change in Deferred Federal Income Tax .......... (48.2) (36.6)
Depreciation ................................... 29.8 32.7
Realized Investment Gains ...................... (90.4) (45.1)
Other, Net ..................................... (18.4) (24.8)
-------- --------
Net Cash Provided by Operating Activities ........ 528.3 827.1
-------- --------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities .......... 1,325.3 1,991.1
Proceeds from Maturities of Fixed Maturities ..... 314.1 312.0
Proceeds from Sales of Equity Securities ......... 195.4 176.1
Proceeds from Sale of Discontinued Operations, Net -- 861.2
Purchases of Fixed Maturities .................... (2,089.8) (2,576.3)
Purchases of Equity Securities ................... (171.6) (249.6)
Increase (Decrease) in Short Term Investments, Net 389.9 (824.6)
Increase (Decrease) in Net Payable from
Security Transactions Not Settled ............... (1.8) 49.0
Other, Net ....................................... (29.8) (49.9)
-------- --------
Net Cash Used in Investing Activities ............ (68.3) (311.0)
-------- --------
Cash Flows from Financing Activities
Proceeds from Issuance of Long Term Debt ......... 0.3 8.1
Repayment of Long Term Debt ...................... (150.8) (12.2)
Increase in Short Term Debt, Net ................. 7.5 33.5
Dividends Paid to Shareholders ................... (101.2) (96.6)
Repurchase of Shares ............................. (248.3) (479.8)
Other, Net ....................................... 35.0 34.0
-------- --------
Net Cash Used in Financing Activities ............ (457.5) (513.0)
-------- --------
Net Increase in Cash ............................... 2.5 3.1
Cash at Beginning of Year .......................... 11.5 4.7
-------- --------
Cash at End of Period ............................ $ 14.0 $ 7.8
======== ========
See Notes to Consolidated Financial Statements.
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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:
Periods Ended June 30
----------------------------------------------
Second Quarter Six Months
-------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
(in millions)
Change in unrealized appreciation of
equity securities ................. $(19.6) $ 50.7 $ 44.9 $ 36.9
Change in unrealized appreciation of
fixed maturities .................. 6.0 119.8 (23.0) 27.0
------ ------ ------ ------
(13.6) 170.5 21.9 63.9
Deferred income tax (credit) ....... (4.8) 59.5 7.6 22.2
------ ------ ------ ------
Change in unrealized appreciation of
investments, net .................. $ (8.8) $111.0 $ 14.3 $ 41.7
====== ====== ====== ======
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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. In June 1998, the Supreme Court announced
it would review the decision of the lower court. A decision by the
Supreme Court is not expected until 1999.
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.
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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:
Periods Ended June 30
-------------------------------------------------
Second Quarter Six Months
--------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
(in millions,
except per share amounts)
Basic earnings per share:
Net income .............................. $ 184.2 $ 188.7 $ 376.0 $ 380.8
======= ======= ======= =======
Weighted average number of common
shares outstanding ..................... 167.5 172.0 167.9 172.6
======= ======= ======= =======
Basic earnings per share ................ $ 1.10 $ 1.10 $ 2.24 $ 2.21
======= ======= ======= =======
Diluted earnings per share:
Net income .............................. $ 184.2 $ 188.7 $ 376.0 $ 380.8
After-tax interest expense on 6%
exchangeable subordinated notes ........ -- 1.1 -- 3.3
------- ------- ------- -------
Net income for computing diluted
earnings per share ..................... $ 184.2 $ 189.8 $ 376.0 $ 384.1
======= ======= ======= =======
Weighted average number of common
shares outstanding ..................... 167.5 172.0 167.9 172.6
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 .......... -- 2.0 -- 3.7
Additional shares from assumed exercise
of stock-based compensation awards ..... 3.4 2.4 3.5 2.2
------- ------- ------- -------
Weighted average number of common shares
and potential common shares assumed
outstanding for computing diluted
earnings per share ..................... 170.9 176.4 171.4 178.5
======= ======= ======= =======
Diluted earnings per share .............. $ 1.08 $ 1.08 $ 2.20 $ 2.16
======= ======= ======= =======
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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, 1998 AND 1997
AND FOR THE QUARTERS ENDED JUNE 30, 1998 AND 1997
SUMMARY OF FINANCIAL RESULTS
The following is a summary of the Corporation's operating results for
the second quarter and six months ended June 30, 1998 and 1997:
Periods Ended June 30
--------------------------------------------------------
Second Quarter Six Months
------------------------ ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in millions)
PROPERTY AND CASUALTY INSURANCE
Underwriting
Net Premiums Written .......... $1,438.3 $1,366.7 $2,769.8 $2,788.5
Increase in Unearned Premiums . (113.9) (117.7) (131.3) (218.5)
-------- -------- -------- --------
Premiums Earned ............ 1,324.4 1,249.0 2,638.5 2,570.0
-------- -------- -------- --------
Claims and Claim Expenses ..... 880.7 785.7 1,700.2 1,625.6
Operating Costs and Expenses .. 481.4 441.8 927.4 906.6
Increase in Deferred Policy
Acquisition Costs ............ (28.2) (28.8) (33.1) (60.8)
Dividends to Policyholders .... 9.1 7.7 17.6 15.1
-------- -------- -------- --------
Underwriting Income (Loss)
Before Income Tax ............ (18.6) 42.6 26.4 83.5
Federal and Foreign Income
Tax (Credit) ................. (7.8) 15.4 8.4 29.9
-------- -------- -------- --------
Underwriting Income (Loss) .... (10.8) 27.2 18.0 53.6
-------- -------- -------- --------
Investments
Investment Income Before
Expenses and Income Tax ...... 189.1 178.8 376.7 353.1
Investment Expenses ........... 2.2 2.2 6.4 4.9
-------- -------- -------- --------
Investment Income Before
Income Tax ................... 186.9 176.6 370.3 348.2
Federal and Foreign Income Tax 29.0 30.0 57.9 58.1
-------- -------- -------- --------
Investment Income ............. 157.9 146.6 312.4 290.1
-------- -------- -------- --------
Property and Casualty Income ... 147.1 173.8 330.4 343.7
CORPORATE AND OTHER, Net of Tax . 7.3 1.8 12.8 7.8
-------- -------- -------- --------
CONSOLIDATED OPERATING INCOME
BEFORE RESTRUCTURING CHARGE .... 154.4 175.6 343.2 351.5
Restructuring Charge, Net of Tax -- -- (26.0) --
-------- -------- -------- --------
CONSOLIDATED OPERATING INCOME ... 154.4 175.6 317.2 351.5
REALIZED INVESTMENT GAINS,
Net of Tax ..................... 29.8 13.1 58.8 29.3
-------- -------- -------- --------
CONSOLIDATED NET INCOME ......... $ 184.2 $ 188.7 $ 376.0 $ 380.8
======== ======== ======== ========
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PROPERTY AND CASUALTY INSURANCE
Earnings from our property and casualty business were modestly lower in
the first six months of 1998 compared with the same period of 1997. The decrease
in 1998 was due in large part to higher catastrophe losses, particularly in the
second quarter. Investment income increased 7.7% in the first six months of 1998
compared with 1997. Property and casualty income after taxes amounted to $330.4
million in the first six months of 1998 and $147.1 million in the second quarter
compared with $343.7 million and $173.8 million, respectively, in 1997.
Reported net premiums written were $2.8 billion in the first six months
of 1998, a decrease of less than 1% compared with the same period in 1997. The
decrease in reported premiums written in the first six months 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:
Six Months Ended
June 30
------------------------
1998 1997
-------- --------
(in millions)
Reported net premiums written ......... $2,769.8 $2,788.5
Portfolio transfer of unearned premiums 174.6
Premiums assumed from Sun Alliance .... (3.8)
-------- --------
Adjusted net premiums written ...... $2,769.8 $2,617.7
======== ========
Net premiums written, as adjusted, increased 5.8% in the first six
months of 1998 compared with the same period in 1997. Net premiums written were
$1.4 billion in the second quarter of 1998, an increase of 5.2% over the
comparable period of 1997. Second quarter premium growth was unaffected by the
termination of the reinsurance agreements with Sun Alliance. 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. Strong premium
growth in the first six months of 1998 was achieved outside the United States
from our international branch network.
Underwriting results were profitable in the first six months of 1998 and
1997. Underwriting results were near breakeven in the second quarter of 1998
compared with profitable results for the same period in 1997. Our combined loss
and expense ratio was 98.2% in the first six months of 1998 and 100.3% in the
second quarter compared with 95.8% and 95.3%, respectively, in 1997.
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The loss ratio was 64.9% for the first six months of 1998 and 67.0% for
the second quarter compared with 63.6% and 63.3%, 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
1998 loss ratios were adversely affected by higher catastrophe losses, resulting
primarily from the winter ice storms in Canada in the first quarter and the wind
and hail storms in the United States in the second quarter. Catastrophe losses
during the first six months of 1998 amounted to $92.0 million which represented
3.5 percentage points of the loss ratio compared with $28.5 million or 1.1
percentage points in 1997. Catastrophe losses for the second quarter of 1998
amounted to $62.3 million or 4.7 percentage points of the loss ratio compared
with $18.1 million or 1.5 percentage points in 1997.
Our expense ratio was 33.3% for both the first six months of 1998 and
the second quarter compared with 32.2% and 32.0%, respectively, in 1997. The
increase in 1998 was due primarily to an increase in commission expense caused
in part by higher contingent payments.
Underwriting results during 1998 and 1997 by class of business were as
follows:
Six Months Ended June 30
----------------------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
----------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in millions)
Personal Insurance
Automobile ................. $ 152.2 $ 153.0 87.5% 85.9%
Homeowners ................. 351.9 352.6 94.0 92.9
Other ...................... 160.2 163.7 64.1 65.3
-------- -------- -------- --------
Total Personal ......... 664.3 669.3 85.4 84.7
-------- -------- -------- --------
Commercial Insurance
Multiple Peril ............. 389.8 413.1 120.0 111.2
Casualty ................... 460.7 472.0 117.5 114.4
Workers' Compensation ...... 169.5 157.1 110.1 104.5
Property and Marine ........ 285.3 302.9 109.6 107.0
Executive Protection ....... 467.7 436.2 74.6 72.7
Financial Institutions ..... 199.8 204.5 81.8 82.6
Other ...................... 132.7 137.2 95.2 82.7
-------- -------- -------- --------
Total Commercial ....... 2,105.5 2,123.0 102.3 98.4
-------- -------- -------- --------
Total Before Reinsurance
Assumed ............... 2,769.8 2,792.3 98.2 95.2
Reinsurance Assumed .......... -- (3.8) -- N/M
-------- -------- -------- --------
Total .................. $2,769.8 $2,788.5 98.2% 95.8%
======== ======== ======== ========
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Quarter Ended June 30
---------------------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
----------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in millions)
Personal Insurance
Automobile ........... $ 81.6 $ 74.7 86.0% 83.4%
Homeowners ........... 197.1 178.4 102.1 93.2
Other ................ 86.3 78.7 64.8 65.5
-------- -------- -------- --------
Total Personal ... 365.0 331.8 89.7 84.4
-------- -------- -------- --------
Commercial Insurance
Multiple Peril ....... 200.2 193.6 121.7 113.7
Casualty ............. 228.9 230.7 120.8 114.1
Workers' Compensation 71.7 65.1 119.8 107.4
Property and Marine .. 157.3 154.6 103.2 108.2
Executive Protection . 244.3 223.6 77.4 71.8
Financial Institutions 101.8 94.6 80.6 84.9
Other ................ 69.1 72.7 94.5 77.0
-------- -------- -------- --------
Total Commercial . 1,073.3 1,034.9 103.7 98.7
-------- -------- -------- --------
Total ............ $1,438.3 $1,366.7 100.3% 95.3%
======== ======== ======== ========
PERSONAL INSURANCE
Reported premiums from personal insurance coverages, which represent
approximately 24% of the premiums written by our property and casualty
subsidiaries, decreased by less than 1% in the first six months of 1998 compared
with the same period 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 six months of 1998. Net premiums written increased 10.0% in the second
quarter of 1998 compared with the similar period in 1997. 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 1998 and 1997. The combined loss and expense ratios were 85.4% for
the first six months of 1998 and 89.7% for the second quarter compared with
84.7% and 84.4%, respectively, in 1997.
Homeowners results were similarly profitable in the first six months of
1998 and 1997 as a reduction in non-catastrophe related losses substantially
offset an increase in catastrophe losses. Homeowners results were modestly
unprofitable in the second quarter of 1998 due to the substantial catastrophe
losses during the quarter. Catastrophe losses represented 12.1 percentage points
of the loss ratio for this class in the first six months of 1998 and 16.2
percentage points in the second quarter compared with 3.1 percentage points and
5.2 percentage points, respectively, in 1997.
14
Page 12
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 76% of our total writings, decreased by approximately 1% in the
first six months 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 4.5% in the
first six months of 1998. Net premiums written increased 3.7% in the second
quarter of 1998 compared with the same period in 1997. 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.
We also continued to emphasize new products in our specialty lines. 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 unprofitable underwriting
results in the first six months of 1998 and in the second quarter compared with
profitable results for the same periods a year ago. The combined loss and
expense ratios were 102.3% for the first six months of 1998 and 103.7% for the
second quarter compared with 98.4% and 98.7%, respectively, 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 primarily to higher catastrophes losses.
Catastrophe losses represented 7.0 percentage points of the loss ratio for this
class in the first six months of 1998 and 8.5 percentage points in the second
quarter compared with only 1.5 percentage points and 1.8 percentage points,
respectively, in 1997. In the liability component, an increase in the frequency
of large losses in 1998 was offset by fewer increases in loss reserves for
asbestos-related and toxic waste claims compared with 1997.
Results for our casualty business were somewhat more unprofitable in
1998 than in 1997 due primarily to deterioration in the automobile component in
the second quarter as the result of an unusually high frequency of large losses.
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 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.
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Workers' compensation results were more unprofitable in 1998 than in
1997. Results in both periods reflect the cumulative effect of price reductions
that have occurred over the past several years. Results deteriorated in the
second quarter of 1998 due to three unusually large losses which represented
approximately 14 percentage points of the loss ratio for this class for the
quarter.
Property and marine results were similarly unprofitable in the first six
months of 1998 and 1997. Results in both periods were adversely affected by an
increase in the frequency of large losses, including several large overseas
losses. Catastrophe losses represented 5.1 percentage points of the loss ratio
for this class in the first six months of 1998 and 6.8 percentage points in the
second quarter compared with 4.8 percentage points and 4.4 percentage points,
respectively, in 1997.
Results for our executive protection business 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 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 $10,054.0 million and $9,772.5 million at June
30, 1998 and December 31, 1997, respectively. Reinsurance recoverables on such
loss reserves were $1,192.3 million and $1,207.9 million at June 30, 1998 and
December 31, 1997, respectively.
Loss reserves, net of reinsurance recoverable, increased by $297.1
million during the first six months 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 $34.8
million in the first six months of 1998 and $63.6 million for the same period in
1997.
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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.
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. In June 1998, the Supreme
Court announced it would review the decision of the lower court. A decision by
the Supreme Court is not expected until 1999.
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 both the first six months of 1998 and in the second quarter compared with the
same periods in 1997. The growth was due to an increase in invested assets since
the second 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 15.6% in the first six
months of 1998 from 16.7% in 1997 due to holding a larger proportion of our
investment portfolio in tax-exempt securities.
New cash available for investment in the first six months of 1998 was
invested 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 $12.8 million in the first six months of 1998 compared with $7.8
million in the first six months of 1997.
In June 1997, a definitive agreement was reached to sell a substantial
portion of our commercial real estate properties. 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. We are continuing to
explore the sale of certain of the remaining properties held by our real estate
subsidiary.
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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.
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 $90.4 million were realized in the first six
months of 1998 compared with net gains of $45.1 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 June 30, 1998, the Corporation
repurchased 12,963,000 shares under the 1997 share repurchase program, including
3,171,100 shares repurchased in open-market transactions in the first six months
of 1998 at a cost of $248.3 million. On July 24, 1998, the Board of Directors
authorized management to increase the share repurchase program by 12,500,000
shares in addition to the 4,537,000 shares remaining at June 30, 1998 under the
1997 authorization.
The Corporation plans to issue $400 million of long term debt in the
third quarter. Proceeds will be used for general corporate purposes, which may
include the repurchase of shares of its common stock.
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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", "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 or its
announced real estate plans; 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 28, 1998. 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 140,836,220 1,714,149
Sheila P. Burke 140,828,733 1,721,636
James I. Cash, Jr. 140,786,953 1,763,416
Percy Chubb, III 139,677,004 2,873,365
Joel J. Cohen 139,678,143 2,872,226
James M. Cornelius 140,819,866 1,730,503
David H. Hoag 140,212,825 2,337,544
Thomas C. MacAvoy 140,824,131 1,726,238
Dean R. O'Hare 140,762,380 1,787,989
Warren B. Rudman 140,792,753 1,757,616
David G. Scholey 97,750,643 44,799,726
Raymond G. H. Seitz 139,657,787 2,892,582
Lawrence M. Small 140,829,328 1,721,041
Richard D. Wood 140,797,805 1,752,564
James M. Zimmerman 140,754,690 1,795,679
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 1998.
Votes For Votes Against
--------- -------------
141,953,755 237,976
There were 358,638 abstaining votes and no broker non-votes cast.
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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 June 30, 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: _______________________________
Henry B. Schram
Senior Vice-President and
Chief Accounting Officer
Date: August 11, 1998