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, 1999
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, 1999
was 161,677,080.
2
THE CHUBB CORPORATION
INDEX
Page Number
-----------
Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998......................... 1
Consolidated Statements of Income for the
Three Months Ended March 31, 1999 and 1998................... 2
Consolidated Statements of Comprehensive Income
for the Three Months Ended March 31, 1999 and 1998........... 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998................... 4
Notes to Consolidated Financial Statements.................... 5
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations.............. 9
Part II. Other Information:
Item 6 - Exhibits and Reports on Form 8-K....................... 17
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Page 1
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
Mar. 31, Dec. 31,
1999 1998
--------- ---------
(in millions)
Assets
Invested Assets
Short Term Investments............................... $ 541.7 $ 344.2
Fixed Maturities
Held-to-Maturity - Tax Exempt (market $2,068.9
and $2,140.2)..................................... 1,940.8 2,002.2
Available-for-Sale
Tax Exempt (cost $6,830.3 and $6,509.3)........... 7,216.8 6,935.1
Taxable (cost $4,153.1 and $4,259.0).............. 4,245.8 4,381.6
Equity Securities (cost $795.6 and $1,002.6)......... 830.5 1,092.2
--------- ---------
TOTAL INVESTED ASSETS......................... 14,775.6 14,755.3
Cash................................................... 9.9 8.3
Accrued Investment Income.............................. 203.5 221.0
Premiums Receivable.................................... 1,210.8 1,199.3
Reinsurance Recoverable on Unpaid Claims............... 1,266.3 1,306.6
Prepaid Reinsurance Premiums........................... 126.4 134.6
Funds Held for Asbestos-Related Settlement............. 605.9 607.4
Deferred Policy Acquisition Costs...................... 733.8 728.7
Real Estate Assets..................................... 743.3 746.0
Deferred Income Tax.................................... 339.8 320.8
Other Assets........................................... 956.2 718.0
--------- ---------
TOTAL ASSETS.................................. $20,971.5 $20,746.0
========= =========
Liabilities
Unpaid Claims.......................................... $10,514.9 $10,356.5
Unearned Premiums...................................... 2,933.6 2,915.7
Long Term Debt......................................... 607.4 607.5
Dividend Payable to Shareholders....................... 52.1 50.3
Accrued Expenses and Other Liabilities................. 1,213.5 1,171.9
--------- ---------
TOTAL LIABILITIES............................. 15,321.5 15,101.9
--------- ---------
Shareholders' Equity
Common Stock - $1 Par Value; 175,984,913 and
175,989,202 Shares.................................... 176.0 176.0
Paid-In Surplus........................................ 531.5 546.7
Retained Earnings...................................... 5,738.8 5,604.0
Accumulated Other Comprehensive Income
Unrealized Appreciation of Investments, Net of Tax.... 334.2 414.7
Foreign Currency Translation Losses, Net of Tax....... (31.1) (36.0)
Receivable from Employee Stock Ownership Plan.......... (86.3) (86.3)
Treasury Stock, at Cost - 14,448,615 and
13,722,376 Shares..................................... (1,013.1) (975.0)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.................... 5,650.0 5,644.1
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.... $20,971.5 $20,746.0
========= =========
See Notes to Consolidated Financial Statements.
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THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31
1999 1998
-------- --------
(in millions)
Revenues
Premiums Earned..................................... $1,379.8 $1,314.1
Investment Income................................... 208.9 204.1
Real Estate......................................... 9.4 24.5
Realized Investment Gains........................... 31.5 44.6
-------- --------
Total Revenues............................... 1,629.6 1,587.3
-------- --------
Claims and Expenses
Insurance Claims.................................... 908.0 819.5
Amortization of Deferred Policy Acquisition Costs... 373.7 361.9
Other Insurance Operating Costs and Expenses........ 92.2 87.7
Real Estate Cost of Sales and Expenses.............. 10.3 25.4
Investment Expenses................................. 5.2 5.3
Corporate Expenses.................................. 13.6 8.2
Restructuring Charge................................ - 40.0
-------- --------
Total Claims and Expenses.................... 1,403.0 1,348.0
-------- --------
Income Before Federal and Foreign Income Tax.......... 226.6 239.3
Federal and Foreign Income Tax........................ 39.7 47.5
-------- --------
Net Income............................................ $ 186.9 $ 191.8
======== ========
Average Common Shares Outstanding..................... 161.4 168.3
Average Common and Potentially Dilutive
Shares Outstanding................................... 163.2 171.9
Net Income Per Share
Basic................................................ $1.16 $1.14
Diluted.............................................. 1.14 1.12
Dividends Declared Per Share.......................... .32 .31
See Notes to Consolidated Financial Statements.
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THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31
1999 1998
------ ------
(in millions)
Net Income............................................ $186.9 $191.8
------ ------
Other Comprehensive Income (Loss)
Change in Unrealized Appreciation
of Investments, Net of Tax......................... (80.5) 23.1
Foreign Currency Translation
Gains (Losses), Net of Tax......................... 4.9 (1.8)
------ ------
(75.6) 21.3
------ ------
Comprehensive Income.................................. $111.3 $213.1
====== ======
See Notes to Consolidated Financial Statements.
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THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31
1999 1998
------- ---------
(in millions)
Cash Flows from Operating Activities
Net Income.............................................. $ 186.9 $ 191.8
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Claims, Net........................ 198.7 135.5
Increase in Unearned Premiums, Net.................... 26.1 17.4
Depreciation.......................................... 15.4 16.0
Realized Investment Gains............................. (31.5) (44.6)
Other, Net............................................ (29.6) (20.8)
------- ---------
Net Cash Provided by Operating Activities............... 366.0 295.3
------- --------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities................. 393.2 1,134.6
Proceeds from Maturities of Fixed Maturities............ 205.6 161.6
Proceeds from Sales of Equity Securities................ 435.8 102.6
Purchases of Fixed Maturities........................... (752.0) (1,270.3)
Purchases of Equity Securities.......................... (204.0) (88.4)
Purchase of Interest in Hiscox plc...................... (145.3) -
Increase in Short Term Investments, Net................. (197.5) (167.4)
Increase in Net Payable from Security Transactions
Not Settled............................................ 46.0 126.1
Other, Net.............................................. (23.9) (21.8)
------- ---------
Net Cash Used in Investing Activities................... (242.1) (23.0)
------- ---------
Cash Flows from Financing Activities
Repayment of Long Term Debt............................. (.4) (150.2)
Dividends Paid to Shareholders.......................... (50.3) (49.0)
Repurchase of Shares.................................... (75.2) (89.1)
Other, Net.............................................. 3.6 17.3
------- ---------
Net Cash Used in Financing Activities................... (122.3) (271.0)
-------- ---------
Net Increase in Cash...................................... 1.6 1.3
Cash at Beginning of Year................................. 8.3 11.5
------- ---------
Cash at End of Period................................... $ 9.9 $ 12.8
======= =========
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 1998 Annual
Report to Shareholders.
2) Adoption of New Accounting Pronouncement
Effective January 1, 1999, the Corporation adopted Statement of
Position (SOP) 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, which was issued by the American
Institute of Certified Public Accountants. The SOP requires that certain
costs incurred to develop or obtain computer software for internal use
should be capitalized and amortized over the software's expected useful
life. Prior to 1999, the Corporation expensed all development costs of
internal use computer software. The SOP has been applied prospectively.
Adoption of SOP 98-1 resulted in an increase to net income of $2.8
million or $.02 per diluted share for the three months ended March 31,
1999.
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
--------------------
1999 1998
------- ------
(in millions)
Change in unrealized appreciation of
equity securities................................... $ (54.7) $ 64.5
Change in unrealized appreciation of
fixed maturities.................................... (69.2) (29.0)
------- ------
(123.9) 35.5
Deferred income tax (credit)......................... (43.4) 12.4
------- ------
Change in unrealized appreciation of
investments, net.................................... $ (80.5) $ 23.1
======= ======
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4) Restructuring Charge
In the first quarter of 1998, the Corporation recorded a
restructuring charge of $40 million related to the implementation of a
cost control initiative. Of the $40 million restructuring charge, $30
million was comprised of accruals for providing enhanced pension
benefits and postretirement medical benefits to employees who accepted
an early retirement incentive offer and $5 million was severance costs
for employees who were terminated. The remainder of the charge was for
other expenses such as the cost of outplacement services. The initiative
was substantially completed in 1998 with no significant differences from
original estimates. The liabilities related to the enhanced pension and
postretirement medical benefits were included in the pension and
postretirement medical benefits liabilities, which will be reduced as
benefit payments are made over time. Of the other restructuring costs,
approximately $3 million remained unpaid at March 31, 1999.
5) Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share:
Three Months Ended
March 31
-----------------------
1999 1998
------ ------
(in millions,
except per share amounts)
Basic earnings per share:
Net income..................................... $186.9 $191.8
====== ======
Weighted average number of common
shares outstanding............................ 161.4 168.3
====== ======
Basic earnings per share....................... $ 1.16 $ 1.14
====== ======
Diluted earnings per share:
Net income..................................... $186.9 $191.8
====== ======
Weighted average number of common
shares outstanding............................ 161.4 168.3
Additional shares from assumed exercise
of stock-based compensation awards............ 1.8 3.6
------ ------
Weighted average number of common shares
and potential common shares assumed
outstanding for computing diluted
earnings per share............................ 163.2 171.9
====== ======
Diluted earnings per share..................... $ 1.14 $ 1.12
====== ======
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6) Segment Information
Effective December 31, 1998, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131
establishes new standards for reporting information about operating
segments in annual financial statements and requires the reporting of
selected segment information in interim reports to shareholders.
The property and casualty operations include three reportable
underwriting segments and the investment function. The underwriting
segments are personal, standard commercial and specialty commercial. The
personal and commercial segments are managed separately because they
target different customers. The commercial business is further
distinguished by those classes of business that are generally available
in broad markets and are of a more commodity nature (standard) and those
classes available in more limited markets that require specialized
underwriting and claim settlement (specialty). Standard commercial
classes include multiple peril, casualty and workers' compensation and
specialty commercial classes include property and marine, executive
protection, financial institutions and other commercial classes.
Revenues and income before income tax of the operating segments
were as follows:
Three Months Ended
March 31
-------------------------
1999 1998
-------- --------
(in millions)
Revenues
Property and casualty insurance
Premiums earned
Personal................................. $ 345.1 $ 313.4
Standard commercial...................... 500.4 494.9
Specialty commercial..................... 534.3 505.8
-------- --------
1,379.8 1,314.1
Investment income.......................... 195.9 187.6
-------- --------
Total property and casualty insurance.... 1,575.7 1,501.7
Corporate and other.......................... 22.4 41.0
Realized investment gains.................... 31.5 44.6
-------- --------
Total revenues........................... $1,629.6 $1,587.3
======== ========
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Three Months Ended
March 31
-------------------------
1999 1998
-------- --------
(in millions)
Income (loss) before income tax
Property and casualty insurance
Underwriting
Personal................................. $ 41.8 $ 64.1
Standard commercial...................... (87.8) (73.8)
Specialty commercial..................... 48.8 55.0
-------- --------
2.8 45.3
Increase in deferred policy acquisition
costs................................... 5.1 4.9
Other charges............................ (2.0) (5.2)
-------- --------
Underwriting income........................ 5.9 45.0
Investment income.......................... 191.7 183.4
Restructuring charge....................... - (40.0)
-------- --------
Total property and casualty insurance.... 197.6 188.4
Corporate and other.......................... (2.5) 6.3
Realized investment gains.................... 31.5 44.6
-------- --------
Total income before income tax........... $ 226.6 $ 239.3
======== ========
7) Pending Acquisition
On February 8, 1999, the Corporation announced that it entered
into a definitive merger agreement under which it would acquire
Executive Risk Inc. Executive Risk is a specialty insurance company
offering directors and officers, errors and omissions and professional
liability coverages.
The acquisition will be accounted for using the purchase method
of accounting. The agreement provides that Executive Risk shareholders
will receive 1.235 shares of the Corporation's common stock for each
outstanding common share of Executive Risk. The agreement contemplates
that approximately 13,730,000 shares of common stock of the Corporation
will be issued to Executive Risk shareholders and approximately
2,3000,000 shares of common stock of the Corporation will be reserved
for issuance upon exercise of Executive Risk stock options. The total
value of the transaction is expected to be approximately $850 million.
Completion of the acquisition is subject to approval by Executive Risk
shareholders and various regulatory authorities. Closing is expected by
the end of the second quarter of 1999.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1999 AND 1998
SUMMARY OF FINANCIAL RESULTS
The following is a summary of the Corporation's operating results for
the first quarter of 1999 and 1998:
Quarter Ended
March 31
----------------------
1999 1998
-------- --------
(in millions)
PROPERTY AND CASUALTY INSURANCE
Underwriting
Net Premiums Written................................. $1,405.9 $1,331.5
Increase in Unearned Premiums........................ (26.1) (17.4)
-------- --------
Premiums Earned................................... 1,379.8 1,314.1
-------- --------
Claims and Claim Expenses............................ 908.0 819.5
Operating Costs and Expenses......................... 460.7 446.0
Increase in Deferred Policy Acquisition Costs........ (5.1) (4.9)
Dividends to Policyholders........................... 10.3 8.5
-------- --------
Underwriting Income Before Income Tax................ 5.9 45.0
Federal and Foreign Income Tax....................... 2.1 16.2
-------- --------
Underwriting Income.................................. 3.8 28.8
-------- --------
Investments
Investment Income Before Expenses and Income Tax..... 195.9 187.6
Investment Expenses.................................. 4.2 4.2
-------- --------
Investment Income Before Income Tax.................. 191.7 183.4
Federal and Foreign Income Tax....................... 28.7 28.9
-------- --------
Investment Income.................................... 163.0 154.5
-------- --------
Property and Casualty Income.......................... 166.8 183.3
CORPORATE AND OTHER, Net of Tax........................ (.4) 5.5
-------- --------
CONSOLIDATED OPERATING INCOME
BEFORE RESTRUCTURING CHARGE........................... 166.4 188.8
Restructuring Charge, Net of Tax....................... - (26.0)
-------- --------
CONSOLIDATED OPERATING INCOME.......................... 166.4 162.8
REALIZED INVESTMENT GAINS, Net of Tax.................. 20.5 29.0
-------- --------
CONSOLIDATED NET INCOME................................ $ 186.9 $ 191.8
======== ========
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PROPERTY AND CASUALTY INSURANCE
Property and casualty earnings were lower in the first quarter of 1999
compared with the same period of 1998 due to a decrease in underwriting income,
partially offset by an increase in investment income. Property and casualty
income after taxes amounted to $166.8 million in the first quarter of 1999
compared with $183.3 million in 1998.
Net premiums written were $1,405.9 million in the first quarter of 1999,
an increase of 5.6% compared with the first quarter of 1998. Premium growth in
personal lines remained strong. In commercial lines, intense competition in the
worldwide marketplace has made profitable premium growth difficult, particularly
in the standard commercial classes, which include multiple peril, casualty and
workers' compensation. Competitors continued to place significant pressure on
pricing and coverage terms as they sought to maintain or increase market share.
However, our strategy to improve the pricing in the standard commercial classes
has shown some early success thus far in 1999. Substantial premium growth in the
first quarter of 1999 was achieved outside the United States, particularly in
Europe, our largest foreign market.
Underwriting results were profitable in the first quarter of 1999 and
1998. Our combined loss and expense ratio was 99.2% in the first quarter of 1999
compared with 96.1% in 1998.
The loss ratio deteriorated to 66.3% in the first quarter of 1999 from
62.8% in 1998 due in part to higher catastrophe losses. The loss ratio, while
somewhat higher in 1999, continues to reflect the favorable experience resulting
from the consistent application of our disciplined underwriting standards.
Catastrophe losses during the first quarter of 1999 were 2.9 percentage points
of the loss ratio compared with 2.3 percentage points of the loss ratio in 1998.
Catastrophe losses in 1999 resulted primarily from a series of winter storms in
the United States in January. In 1998, catastrophe losses resulted primarily
from the winter ice storms in Canada.
Our expense ratio was 32.9% in the first quarter of 1999 compared with
33.3% in 1998. The lower ratio in 1999 was due to salary and overhead expenses
remaining flat compared with the first quarter of 1998. Such expenses were flat
due primarily to a cost control initiative implemented during 1998 and, to a
lesser extent, a change in accounting that resulted in the capitalization of
certain costs incurred to develop computer software for internal use. The cost
control initiative resulted in approximately 500 job reductions in the home
office and the branch network through a combination of early retirements,
terminations and attrition. Other savings include vendor management, consulting
expenses and other operating costs.
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Underwriting results during 1999 and 1998 by class of business were as
follows:
Quarter Ended March 31
----------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
------------------- -----------------
1999 1998 1999 1998
-------- -------- ----- -----
(in millions)
Personal Insurance
Automobile........................ $ 77.2 $ 70.6 83.1% 89.0%
Homeowners........................ 177.9 154.8 101.4 85.8
Other............................. 79.6 73.9 66.2 63.3
-------- -------- ----- -----
Total Personal................ 334.7 299.3 88.9 81.1
-------- -------- ----- -----
Standard Commercial Insurance
Multiple Peril.................... 189.1 189.6 120.4 118.4
Casualty.......................... 214.0 231.8 116.8 114.2
Workers' Compensation............. 96.0 97.8 116.3 101.0
-------- ------ ----- -----
Total Standard................ 499.1 519.2 117.9 113.4
-------- ------ ----- -----
Specialty Commercial Insurance
Property and Marine............... 127.7 128.0 98.7 116.6
Executive Protection.............. 243.4 223.4 81.9 71.8
Financial Institutions............ 109.3 98.0 83.3 83.0
Other............................. 91.7 63.6 98.5 95.8
-------- -------- ----- -----
Total Specialty Commercial.... 572.1 513.0 88.6 88.6
-------- -------- ----- ------
Total Commercial.............. 1,071.2 1,032.2 102.6 100.9
-------- -------- ------ -----
Total......................... $1,405.9 $1,331.5 99.2% 96.1%
======== ======== ===== =====
PERSONAL INSURANCE
Premiums from personal insurance coverages, which represent 24% of total
premiums written, increased by 11.8% in the first quarter of 1999 compared with
the same quarter in 1998. We continued to grow our homeowners and other
non-automobile business, primarily 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. Premiums outside the United States
grew by over 50% although from a small base.
Our personal insurance business produced highly profitable underwriting
results in the first quarter of 1999 and 1998. The combined loss and expense
ratio was 88.9% in the first quarter of 1999 compared with 81.1% in 1998.
Our homeowners business produced breakeven results in 1999 compared with
highly profitable results in 1998. The deterioration in 1999 was due to an
increase in both catastrophe and non-catastrophe related losses, the latter due
in part to one $7 million loss. Catastrophe losses represented 11.4 percentage
points of the loss ratio for this class in the first quarter of 1999 compared
with 7.8 percentage points in 1998. Our automobile business produced profitable
results in 1999 and 1998 due primarily to stable loss frequency and severity.
Other personal coverages, which include insurance for personal valuables and
excess liability, produced highly profitable results in both years due to
continued favorable loss experience.
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STANDARD COMMERCIAL INSURANCE
Premiums from standard commercial insurance, which represent 35% of our
total writings, decreased by 3.9% in the first quarter of 1999 compared with the
same period a year ago. The decrease was the result of the strategy we put in
place in late 1998 to renew good business at adequate prices and not renew
underperforming accounts where we cannot attain price adequacy. On that business
that was renewed, rates increased modestly in the first quarter of 1999 and we
expect this trend to continue. Retention levels were lower compared with the
first quarter of 1998. Approximately half of the non-renewals were the result of
business we chose not to renew and half were the result of customers not
accepting the price increases we instituted.
Our standard commercial insurance business produced highly unprofitable
results in the first quarter of 1999 and 1998. The combined loss and expense
ratio was 117.9% in the first quarter of 1999 compared with 113.4% in 1998.
Multiple peril results were unprofitable by a similar margin in 1999 and
1998 due, in large part, to inadequate prices. Results in 1999 deteriorated in
the property component of this business due primarily to several large overseas
losses. Results in the liability component improved in 1999 due to a lower
frequency of large losses. Catastrophe losses represented 6.8 percentage points
of the loss ratio for this class in the first quarter of 1999 compared with 5.5
percentage points in 1998.
Results for our casualty business were unprofitable by a similar margin
in 1999 and 1998. Casualty results were adversely affected in both years by
incurred losses relating to asbestos-related and toxic waste claims. The excess
liability component of our casualty coverages produced modestly unprofitable
underwriting results in both 1999 and 1998. Results for the primary liability
component were extremely unprofitable in both years due to a high frequency of
large losses. Results in the automobile component were more unprofitable in 1999
than in 1998. Our commercial automobile book of business is inadequately priced.
Results in 1999 deteriorated due to an increase in the frequency of losses.
Workers' compensation results deteriorated in 1999 from the marginally
unprofitable results in 1998. The deterioration in 1999 was due to an increase
in the frequency of losses. Results in both periods reflect the cumulative
effect of price reductions over the past several years.
SPECIALTY COMMERCIAL INSURANCE
Premiums from specialty commercial insurance, which represent 41% of our
total writings, increased by 11.5% in the first quarter of 1999 compared with
the same period a year ago. Substantial premium growth was achieved in 1999 in
our executive protection business and in the professional liability component of
our financial institutions business due primarily to the selective writing of
new accounts and an emphasis on new products. In addition, other commercial
business includes $17 million of premiums in 1999 from our new Chubb Re
operation. Property and marine premiums were flat in 1999 compared with the
first quarter of 1998 due to the effect on retention levels of pricing
initiatives and non-renewing certain unprofitable accounts.
Our specialty commercial insurance business produced highly profitable
underwriting results in the first quarter of 1999 and 1998. The combined loss
and expense ratio was 88.6% in both years.
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Property and marine results were modestly profitable in 1999 compared
with unprofitable results in 1998. The substantial improvement in 1999 was due
to a decrease in the frequency of large losses and the positive effect of the
pricing initiatives and the culling of unprofitable accounts. Results in 1999
and 1998 were adversely affected by several large overseas losses. Catastrophe
losses represented 3.6 percentage points of the loss ratio for this class in the
first quarter of 1999 compared with 3.4 percentage points in 1998.
Executive protection results were highly profitable in 1999 and 1998 due
to favorable loss experience on U.S. and foreign business, particularly in the
directors and officers and fiduciary liability components. Our financial
institutions business produced highly profitable results in both years due to
the favorable loss experience in the fidelity component. Results in our other
commercial classes were modestly profitable in 1999 and 1998. Our surety
business produced highly profitable results in both years which more than offset
the unprofitable results in our aviation business.
LOSS RESERVES
Gross loss reserves were $10,514.9 million and $10,356.5 million at
March 31, 1999 and December 31, 1998, respectively. Reinsurance recoverables on
such loss reserves were $1,266.3 million and $1,306.6 million at March 31, 1999
and December 31, 1998, respectively.
Loss reserves, net of reinsurance recoverable, increased by $198.7
million during the first quarter of 1999. 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 $12.8
million in the first quarter of 1999 and $17.9 million in 1998.
INVESTMENTS
Investment income after deducting expenses and taxes increased by 5.5%
in the first quarter of 1999 compared with the same period in 1998. The growth
was due to an increase in invested assets since the first quarter of 1998,
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 15.0% in the first quarter of 1999 from 15.8% in the
comparable period in 1998 due to holding a larger proportion of our investment
portfolio in tax-exempt securities.
New cash available for investment in the first quarter of 1999 was
invested in tax-exempt bonds. During the quarter, we reduced our equity
securities portfolio by approximately $200 million with $145 million of the
proceeds used to fund the purchase of a 27% interest in Hiscox plc, a leading
U.K. personal and commercial specialty insurer.
The property and casualty subsidiaries maintain sufficient investments
in highly liquid, short term securities to provide for immediate cash needs.
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CORPORATE AND OTHER
Corporate and other includes investment income earned on corporate
invested assets, interest and other expenses not allocable to the operating
subsidiaries, and the results of our real estate subsidiary. Corporate and other
produced a loss after taxes of $.4 million in the first quarter of 1999 compared
with income of $5.5 million in the first quarter of 1998 due primarily to higher
interest expense in 1999.
RESTRUCTURING CHARGE
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 a cost control initiative. Of the $40 million restructuring charge, $30
million was comprised of accruals for providing enhanced pension benefits and
postretirement medical benefits to employees who accepted an early retirement
incentive offer and $5 million was severance costs for employees who were
terminated. The remainder of the charges was for other expenses such as the cost
of outplacement services. The initiative was substantially completed in 1998
with no significant differences from original estimates. The liabilities related
to the enhanced pension and postretirement medical benefits were included in the
pension and postretirement medical benefits liabilities, which will be reduced
as benefit payments are made over time. Of the other restructuring costs,
approximately $3 million remained unpaid at March 31, 1999.
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 $31.5 million were realized in the first
quarter of 1999 compared with net gains of $44.6 million for the same period in
1998.
CAPITAL RESOURCES
In March 1997, the Board of Directors authorized the repurchase of up to
17,500,000 shares of common stock. In July 1998, the Board of Directors
authorized the repurchase of up to an additional 12,500,000 shares. Through
March 31, 1999, the Corporation repurchased 19,246,300 shares under the 1997 and
1998 authorizations, including 1,251,400 shares repurchased in open-market
transactions in the first quarter of 1999 at a cost of $75.2 million. As of
March 31, 1999, 10,753,700 shares remained under the current share repurchase
authorizations.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue relates to the inability of certain information
technology (IT) systems and applications as well as non-IT systems, such as
equipment with imbedded chips and microprocessors, to properly process data
containing dates beginning with the year 2000. The issue exists because many
systems used two digits rather than four to define the applicable year. Such
systems may recognize the date "00" as the year 1900 rather than the year 2000.
This could result in a system failure or miscalculations causing disruptions of
normal business activities or other unforeseen problems.
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As of March 31, 1999, we completed remediation and testing procedures on
95% of our mainframe IT systems, including all mission critical systems except
one. We expect to complete the remediation and testing of all remaining systems
by June 1999, except for three minor applications that we expect will be
completed in the third quarter of 1999.
We have also completed an inventory and assessment of all our personal
computers, servers and other non-mainframe computers. We expect that all such
computers and related software will be Year 2000 ready in the third quarter of
1999. We have also assessed our non-IT systems and believe that the failure of
any of these systems would have minimal impact on our operations.
The Corporation and its subsidiaries have interaction with many third
parties, including producers, reinsurers, financial institutions, vendors,
suppliers and others. We have initiated contact with these parties regarding
their plans for Year 2000 readiness. We are in the process of evaluating the
responses and following up with those parties from whom we have received no
response. The information obtained is being used to develop business contingency
plans to address any mission critical operations that may be adversely impacted
by the noncompliance of a third party with whom we interact. We have electronic
data interchanges with some third parties. We are physically testing such
interchanges for Year 2000 compliance. We expect that such testing will be
completed by June 1999.
We have identified those third parties that are critical to our
operations and are assessing risks with respect to the potential failure of such
parties to be Year 2000 ready. However, we do not have control over these third
parties and are unable to determine whether all such third parties will address
the Year 2000 issue successfully, including third parties located outside the
United States where it is believed that Year 2000 remediation efforts in general
may be less advanced. Management cannot determine the effect on the
Corporation's future operating results of the failure of third parties to be
Year 2000 ready.
Our Year 2000 plans have been developed with the intention of minimizing
the need for actual implementation of contingency activities. A substantial
portion of 1999 is being used to monitor systems already remediated for Year
2000 for any unidentified problems and to perform additional remediation and
testing as necessary. Nonetheless, in order to address any unexpected
difficulties that may arise, we will keep our core Year 2000 readiness team
intact until June 2000. Additionally, we are in the process of developing
contingency plans to continue business in the unlikely event that one or more of
our critical systems fail.
We believe that we are taking the necessary measures to address Year
2000 issues that may arise and that our internal systems will be compliant.
Notwithstanding such efforts, significant Year 2000 problems could arise. In
particular, the prolonged failure of power and telecommunications systems could
have a material adverse effect on our operations. Similarly, Year 2000 related
difficulties experienced by our producers or financial institutions have the
potential to materially disrupt our business. Given the uncertain nature of Year
2000 problems that may arise, management cannot determine at this time whether
the consequences of Year 2000 related problems will have a material impact on
the Corporation's financial position or results of operations.
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We expect that the cost to address the Year 2000 IT systems issue,
including compensation of employees and the cost of consultants, will
approximate $36 million. Approximately $32 million was incurred as of March 31,
1999, of which $2 million was incurred in the first quarter of 1999. These
amounts do not include the cost of computer equipment purchased to replace
equipment that would have been upgraded in the normal course of business, but
not necessarily prior to January 2000.
An additional concern to the Corporation is the potential future impact
of the Year 2000 issue on insurance coverages written by our property and
casualty subsidiaries. The Year 2000 issue is a risk for some of our insureds
and needs to be considered during the underwriting process similar to any other
risk to which our customers may be exposed. It is possible that Year 2000
related losses may emerge that would adversely affect operating results in
future periods. At this time, in the absence of any significant claims
experience, management cannot determine the nature and extent of any losses, the
availability of coverage for such losses or the likelihood of significant
claims.
PENDING ACQUISITION
On February 8, 1999, the Corporation announced that it entered into a
definitive merger agreement under which it would acquire Executive Risk Inc.
Executive Risk is a specialty insurance company offering directors and officers,
errors and omissions and professional liability coverages.
The acquisition will be accounted for using the purchase method of
accounting. The agreement provides that Executive Risk shareholders will receive
1.235 shares of the Corporation's common stock for each outstanding common share
of Executive Risk. The agreement contemplates that approximately 13,730,000
shares of common stock of the Corporation will be issued to Executive Risk
shareholders and approximately 2,3000,000 shares of common stock of the
Corporation will be reserved for issuance upon exercise of Executive Risk stock
options. The total value of the transaction is expected to be approximately $850
million. Completion of the acquisition is subject to approval by Executive Risk
shareholders and various regulatory authorities. Closing is expected by the end
of the second quarter of 1999.
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
result in", "is expected to", "are continuing to", "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, its business retention estimates
or the completion of the Executive Risk merger; 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 development of major year 2000 liabilities, 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 6 - Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 4 - Instruments defining the rights of security holders, including
debentures
- Rights Agreement dated as of March 12, 1999 between The Chubb
Corporation and First Chicago Trust Company of New York, as Rights
Agent, incorporated by reference to Exhibit (99.1) of the Registrant's
Report to the Securities and Exchange Commission on Form 8-K dated
March 12, 1999.
Exhibit 10 - Material Contracts
- The Chubb Corporation Estate Enhancement Program filed herewith.
- The Chubb Corporation Estate Enhancement Program for Non-Employee
Directors filed herewith.
Exhibit 27 - Financial Data Schedule
- Financial Data Schedule filed herewith.
B. Reports on Form 8-K
The Registrant filed a current report on Form 8-K on January 19, 1999 with
respect to the announcement on January 18, 1999 of its preliminary
financial results for the quarter and year ended December 31, 1998.
The Registrant filed a current report on Form 8-K on February 10, 1999
with respect to the announcement on February 8, 1999 that the Registrant
entered into a definitive merger agreement under which the Registrant will
acquire Executive Risk Inc.
The Registrant filed a current report on Form 8-K on March 15, 1999 with
respect to the announcement on March 12, 1999 that the Registrant had
adopted a new shareholder rights plan, replacing the Registrant's existing
plan, which was due to expire on June 12, 1999.
The Registrant filed a current report on Form 8-K on March 30, 1999 for
the purpose of filing the Rights Agreement dated as of March 12, 1999
between The Chubb Corporation and First Chicago Trust Company of New York,
as Rights Agent.
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 14, 1999