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, 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 July 16, 1999 was
161,929,069.
2
THE CHUBB CORPORATION
INDEX
Page Number
-----------
Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998.......................... 1
Consolidated Statements of Income for the
Three Months and Six Months Ended
June 30, 1999 and 1998....................................... 2
Consolidated Statements of Comprehensive Income
for the Three Months and Six Months Ended
June 30, 1999 and 1998....................................... 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998...................... 4
Notes to Consolidated Financial Statements.................... 5
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations.............. 10
Part II. Other Information:
Item 4 - Submission of Matters to a Vote of Security Holders.... 20
Item 6 - Exhibits and Reports on Form 8-K....................... 21
3
Page 1
THE CHUBB CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, Dec. 31,
1999 1998
--------- ---------
(in millions)
Assets
Invested Assets
Short Term Investments............................... $ 586.1 $ 344.2
Fixed Maturities
Held-to-Maturity - Tax Exempt (market $1,991.6
and $2,140.2)..................................... 1,900.8 2,002.2
Available-for-Sale
Tax Exempt (cost $7,008.0 and $6,509.3)........... 7,176.0 6,935.1
Taxable (cost $4,364.5 and $4,259.0).............. 4,373.8 4,381.6
Equity Securities (cost $629.9 and $1,002.6)......... 649.7 1,092.2
--------- ---------
TOTAL INVESTED ASSETS......................... 14,686.4 14,755.3
Cash................................................... 25.4 8.3
Accrued Investment Income.............................. 225.9 221.0
Premiums Receivable.................................... 1,253.6 1,199.3
Reinsurance Recoverable on Unpaid Claims............... 1,239.2 1,306.6
Prepaid Reinsurance Premiums........................... 126.3 134.6
Funds Held for Asbestos-Related Settlement............. 607.2 607.4
Deferred Policy Acquisition Costs...................... 746.3 728.7
Real Estate Assets..................................... 720.1 746.0
Deferred Income Tax.................................... 476.1 320.8
Other Assets........................................... 958.9 718.0
--------- ---------
TOTAL ASSETS.................................. $21,065.4 $20,746.0
========= =========
Liabilities
Unpaid Claims.......................................... $10,584.7 $10,356.5
Unearned Premiums...................................... 2,989.8 2,915.7
Long Term Debt......................................... 602.0 607.5
Dividend Payable to Shareholders....................... 51.8 50.3
Accrued Expenses and Other Liabilities................. 1,244.1 1,171.9
--------- ---------
TOTAL LIABILITIES............................. 15,472.4 15,101.9
--------- ---------
Shareholders' Equity
Common Stock - $1 Par Value; 175,977,128 and
175,989,202 Shares.................................... 176.0 176.0
Paid-In Surplus........................................ 520.7 546.7
Retained Earnings...................................... 5,880.3 5,604.0
Accumulated Other Comprehensive Income
Unrealized Appreciation of Investments, Net of Tax.... 128.1 414.7
Foreign Currency Translation Losses, Net of Tax....... (44.4) (36.0)
Receivable from Employee Stock Ownership Plan.......... (80.7) (86.3)
Treasury Stock, at Cost - 14,075,468 and
13,722,376 Shares..................................... (987.0) (975.0)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.................... 5,593.0 5,644.1
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.... $21,065.4 $20,746.0
========= =========
See Notes to Consolidated Financial Statements.
4
Page 2
THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
PERIODS ENDED JUNE 30
Second Quarter Six Months
1999 1998 1999 1998
-------- -------- -------- --------
(in millions)
Revenues
Premiums Earned....................... $1,377.5 $1,324.4 $2,757.3 $2,638.5
Investment Income..................... 215.9 204.3 424.8 408.4
Real Estate........................... 47.3 23.1 56.7 47.6
Realized Investment Gains............. 45.9 45.8 77.4 90.4
-------- -------- -------- --------
Total Revenues................. 1,686.6 1,597.6 3,316.2 3,184.9
-------- -------- -------- --------
Claims and Expenses
Insurance Claims...................... 924.3 880.7 1,832.3 1,700.2
Amortization of Deferred Policy
Acquisition Costs.................... 373.7 365.9 747.4 727.8
Other Insurance Operating Costs
and Expenses......................... 90.1 96.4 182.3 184.1
Real Estate Cost of Sales and Expenses 48.1 24.0 58.4 49.4
Investment Expenses................... 3.0 2.6 8.2 7.9
Corporate Expenses.................... 11.5 5.6 25.1 13.8
Restructuring Charge.................. - - - 40.0
-------- -------- -------- --------
Total Claims and Expenses...... 1,450.7 1,375.2 2,853.7 2,723.2
-------- -------- -------- --------
Income Before Federal and Foreign
Income Tax............................. 235.9 222.4 462.5 461.7
Federal and Foreign Income Tax.......... 42.6 38.2 82.3 85.7
-------- -------- -------- --------
Net Income.............................. $ 193.3 $ 184.2 $ 380.2 $ 376.0
======== ======== ======== ========
Average Common Shares Outstanding....... 161.3 167.5 161.4 167.9
Average Common and Potentially Dilutive
Shares Outstanding..................... 163.9 170.9 163.6 171.4
Net Income Per share
Basic.................................. $1.19 $1.10 $2.35 $2.24
Diluted................................ 1.18 1.08 2.32 2.20
Dividends Declared Per Share............ .32 .31 .64 .62
See Notes to Consolidated Financial Statements.
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THE CHUBB CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PERIODS ENDED JUNE 30
Second Quarter Six Months
---------------- ----------------
1999 1998 1999 1998
------- ------ ------- ------
(in millions)
Net Income................................ $ 193.3 $184.2 $ 380.2 $376.0
------- ------ ------- ------
Other Comprehensive Income (Loss)
Change in Unrealized Appreciation
of Investments, Net of Tax............. (206.1) (8.8) (286.6) 14.3
Foreign Currency Translation Losses,
Net of Tax............................. (13.3) (4.7) (8.4) (6.5)
------- ------ ------- ------
(219.4) (13.5) (295.0) 7.8
------- ------ ------- ------
Comprehensive Income (Loss)............... $ (26.1) $170.7 $ 85.2 $383.8
======= ====== ======= ======
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
1999 1998
-------- --------
(in millions)
Cash Flows from Operating Activities
Net Income ....................................... $ 380.2 $ 376.0
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Increase in Unpaid Claims, Net ................. 295.6 297.1
Increase in Unearned Premiums, Net ............. 82.4 131.3
Increase in Premiums Receivable ................ (54.3) (115.8)
Increase in Deferred Policy Acquisition Cost ... (17.6) (33.1)
Change in Deferred Federal Income Tax .......... .9 (48.2)
Depreciation ................................... 31.2 29.8
Realized Investment Gains ...................... (77.4) (90.4)
Other, Net ..................................... 26.8 (18.4)
-------- --------
Net Cash Provided by Operating Activities ........ 667.8 528.3
-------- --------
Cash Flows from Investing Activities
Proceeds from Sales of Fixed Maturities .......... 828.9 1,325.3
Proceeds from Maturities of Fixed Maturities ..... 354.2 314.1
Proceeds from Sales of Equity Securities ......... 740.8 195.4
Purchases of Fixed Maturities .................... (1,673.9) (2,089.8)
Purchases of Equity Securities ................... (311.5) (171.6)
Purchase of Interest in Hiscox plc ............... (145.3) --
Decrease (Increase) in Short Term Investments, Net (241.9) 389.9
Other, Net ....................................... (42.2) (31.6)
-------- --------
Net Cash Used in Investing Activities ............ (490.9) (68.3)
-------- --------
Cash Flows from Financing Activities
Repayment of Long Term Debt ...................... (5.5) (150.5)
Increase in Short Term Debt, Net ................. -- 7.5
Dividends Paid to Shareholders ................... (102.4) (101.2)
Repurchase of Shares ............................. (75.2) (248.3)
Other, Net ....................................... 23.3 35.0
-------- --------
Net Cash Used in Financing Activities ............ (159.8) (457.5)
-------- --------
Net Increase in Cash ............................... 17.1 2.5
Cash at Beginning of Year .......................... 8.3 11.5
-------- --------
Cash at End of Period ............................ $ 25.4 $ 14.0
======== ========
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 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 $7.1
million or $.04 per diluted share for the six months ended June 30,
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:
Periods Ended June 30
---------------------------------------------------
Second Quarter Six Months
--------------------- ---------------------
1999 1998 1999 1998
------ ------ ------ ------
(in millions)
Change in unrealized appreciation of
equity securities ................. $ (15.1) $(19.6) $ (69.8) $ 44.9
Change in unrealized appreciation of
fixed maturities .................. (301.9) 6.0 (371.1) (23.0)
------ ------ ------ ------
(317.0) (13.6) (440.9) 21.9
Deferred income tax (credit) ....... (110.9) (4.8) (154.3) 7.6
------ ------ ------ ------
Change in unrealized appreciation of
investments, net .................. $(206.1) $ (8.8) $(286.6) $ 14.3
====== ====== ====== ======
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4) Property and Casualty Unpaid Claims
A discussion of the 1993 Fibreboard asbestos-related settlement
is presented in Note 15 of the notes to consolidated financial
statements in the 1998 Annual Report to Shareholders. The following
development during 1999 relates to the settlement.
In June 1999, the United States Supreme Court refused to approve
the global settlement among Pacific Indemnity (a subsidiary of the
Corporation), Continental Casualty Company (a subsidiary of CNA
Financial Corporation), Fibreboard Corporation and attorneys
representing claimants against Fibreboard, thereby setting in motion the
process of disapproval, which is expected to be completed before the end
of the year.
The trilateral agreement among Pacific Indemnity, Continental
Casualty and Fibreboard was established to become effective in the event
that the global settlement agreement was ultimately disapproved. The
trilateral agreement received final judicial approval in a 1996 decision
by the U.S. Court of Appeals for the Fifth Circuit. As a result,
management continues to believe that exposure with respect to
asbestos-related bodily injury claims against Fibreboard has been
eliminated.
5) Restructuring Charge
In the first quarter of 1998, a restructuring charge of $40
million was recorded 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 June 30, 1999.
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6) 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
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
(in millions,
except per share amounts)
Basic earnings per share:
Net income ............................. $ 193.3 $ 184.2 $ 380.2 $ 376.0
======= ======= ======= =======
Weighted average number of common
shares outstanding .................... 161.3 167.5 161.4 167.9
======= ======= ======= =======
Basic earnings per share ............... $ 1.19 $ 1.10 $ 2.35 $ 2.24
======= ======= ======= =======
Diluted earnings per share:
Net income ............................. $ 193.3 $ 184.2 $ 380.2 $ 376.0
======= ======= ======= =======
Weighted average number of common
shares outstanding .................... 161.3 167.5 161.4 167.9
Additional shares from assumed exercise
of stock-based compensation awards .... 2.6 3.4 2.2 3.5
------- ------- ------- -------
Weighted average number of common shares
and potential common shares assumed
outstanding for computing diluted
earnings per share .................... 163.9 170.9 163.6 171.4
======= ======= ======= =======
Diluted earnings per share ............. $ 1.18 $ 1.08 $ 2.32 $ 2.20
======= ======= ======= =======
7) 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.
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Page 8
Revenues and income before income tax of the operating segments
were as follows:
Periods Ended June 30
-----------------------------------------------------
Second Quarter Six Months
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in millions)
Revenues
Property and casualty insurance
Premiums earned
Personal ..................... $ 355.3 $ 321.7 $ 700.4 $ 635.1
Standard commercial .......... 492.9 494.0 993.3 988.9
Specialty commercial ......... 529.3 508.7 1,063.6 1,014.5
-------- -------- -------- --------
1,377.5 1,324.4 2,757.3 2,638.5
Investment income .............. 199.4 189.1 395.3 376.7
-------- -------- -------- --------
Total property and casualty
insurance ................... 1,576.9 1,513.5 3,152.6 3,015.2
Corporate and other .............. 63.8 38.3 86.2 79.3
Realized investment gains ........ 45.9 45.8 77.4 90.4
-------- -------- -------- --------
Total revenues ............... $1,686.6 $1,597.6 $3,316.2 $3,184.9
======== ======== ======== ========
Income (loss) before income tax
Property and casualty insurance
Underwriting
Personal ..................... $ 38.7 $ 18.9 $ 80.5 $ 83.0
Standard commercial .......... (87.6) (105.3) (175.4) (179.1)
Specialty commercial ......... 26.1 44.6 74.9 99.6
-------- -------- -------- --------
(22.8) (41.8) (20.0) 3.5
Increase in deferred policy
acquisition costs ........... 12.5 28.2 17.6 33.1
Other charges ................ (.3) (5.0) (2.3) (10.2)
-------- -------- -------- --------
Underwriting income (loss) .... (10.6) (18.6) (4.7) 26.4
Investment income ............. 196.7 186.9 388.4 370.3
Restructuring charge .......... -- -- -- (40.0)
-------- -------- -------- --------
Total property and casualty
insurance ................... 186.1 168.3 383.7 356.7
Corporate and other .............. 3.9 8.3 1.4 14.6
Realized investment gains ........ 45.9 45.8 77.4 90.4
-------- -------- -------- --------
Total income before income tax $ 235.9 $ 222.4 $ 462.5 $ 461.7
======== ======== ======== ========
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8) Business Acquisition
On July 19, 1999, the Corporation completed its acquisition of
Executive Risk Inc. Executive Risk is a specialty insurance company
offering directors and officers, errors and omissions and professional
liability coverages.
Executive Risk shareholders received 1.235 shares of the
Corporation's common stock for each outstanding common share of
Executive Risk. In addition, outstanding Executive Risk stock options
were converted to stock options of the Corporation. Approximately
14,300,000 shares of common stock of the Corporation were issued to
Executive Risk shareholders and an additional 1,800,000 shares of common
stock of the Corporation have been reserved for issuance upon exercise
of the converted Executive Risk stock options.
The acquisition will be accounted for using the purchase method
of accounting. Therefore, the results of operations of Executive Risk
will be included in the Corporation's consolidated results of operations
from the date of acquisition. The assets and liabilities of Executive
Risk will be recorded at their estimated fair values at the date of
acquisition. The value of the stock options assumed by the Corporation
will be included in the purchase price. The excess of the purchase price
over the estimated fair value of the net assets acquired, which is
expected to approximate $500 million, will be recorded as goodwill and
will be amortized over 26 years.
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Page 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
AND FOR THE QUARTERS ENDED JUNE 30, 1999 AND 1998
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, 1999 and 1998:
Periods Ended June 30
-----------------------------------------------------
Second Quarter Six Months
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in millions)
PROPERTY AND CASUALTY INSURANCE
Underwriting
Net Premiums Written .......... $1,433.8 $1,438.3 $2,839.7 $2,769.8
Increase in Unearned Premiums . (56.3) (113.9) (82.4) (131.3)
-------- -------- -------- --------
Premiums Earned ............ 1,377.5 1,324.4 2,757.3 2,638.5
-------- -------- -------- --------
Claims and Claim Expenses ..... 924.3 880.7 1,832.3 1,700.2
Operating Costs and Expenses .. 466.0 481.4 926.7 927.4
Increase in Deferred Policy
Acquisition Costs ............ (12.5) (28.2) (17.6) (33.1)
Dividends to Policyholders .... 10.3 9.1 20.6 17.6
-------- -------- -------- --------
Underwriting Income (Loss)
Before Income Tax ............ (10.6) (18.6) (4.7) 26.4
Federal and Foreign Income
Tax (Credit) ................. (4.3) (7.8) (2.2) 8.4
-------- -------- -------- --------
Underwriting Income (Loss) .... (6.3) (10.8) (2.5) 18.0
-------- -------- -------- --------
Investments
Investment Income Before
Expenses and Income Tax ...... 199.4 189.1 395.3 376.7
Investment Expenses ........... 2.7 2.2 6.9 6.4
-------- -------- --------
Investment Income Before
Income Tax ................... 196.7 186.9 388.4 370.3
Federal and Foreign Income Tax 30.3 29.0 59.0 57.9
-------- -------- -------- --------
Investment Income ............. 166.4 157.9 329.4 312.4
-------- -------- -------- --------
Restructuring Charge, Net of Tax -- -- -- (26.0)
-------- -------- -------- --------
Property and Casualty Income ... 160.1 147.1 326.9 304.4
CORPORATE AND OTHER, Net of Tax . 3.4 7.3 3.0 12.8
-------- -------- -------- --------
CONSOLIDATED OPERATING INCOME ... 163.5 154.4 329.9 317.2
REALIZED INVESTMENT GAINS,
Net of Tax ..................... 29.8 29.8 50.3 58.8
-------- -------- -------- --------
CONSOLIDATED NET INCOME ......... $ 193.3 $ 184.2 $ 380.2 $ 376.0
======== ======== ======== ========
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PROPERTY AND CASUALTY INSURANCE
Earnings from our property and casualty business were higher in the
first six months of 1999 compared with the same period of 1998. Property and
casualty income after taxes amounted to $326.9 million in the first six months
of 1999 and $160.1 million in the second quarter compared with $304.4 million
and $147.1 million, respectively, in 1998. Property and casualty earnings in
1998 reflect a first quarter charge of $26 million after taxes related to the
implementation of a cost control initiative. Excluding the effect of the
restructuring charge, earnings were similar in the first six months of 1999 and
1998 as a decrease in underwriting income in 1999 was substantially offset by an
increase in investment income.
Net premiums written were $2.8 billion in the first six months of 1999,
an increase of 2.5% compared with the same period in 1998. Net premiums written
were $1.4 billion in the second quarter of 1999, virtually unchanged from the
comparable period 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 modest
success in the first half of 1999. Substantial premium growth in the first six
months of 1999 was achieved outside the United States, particularly in Europe,
our largest foreign market.
Underwriting results were near breakeven in the first six months of 1999
compared with profitable results in 1998. Underwriting results were near
breakeven in the second quarter of both 1999 and 1998. Our combined loss and
expense ratio was 99.7% in the first six months of 1999 and 100.3% in the second
quarter compared with 98.2% and 100.3%, respectively, in 1998.
The loss ratio was 66.9% for the first six months of 1999 and 67.6% for
the second quarter compared with 64.9% and 67.0%, respectively, in the prior
year. The loss ratio, while somewhat higher in 1999, continues to reflect the
favorable experience resulting from the consistent application of our
disciplined underwriting standards. The loss ratios in both years were adversely
affected by significant catastrophe losses. Catastrophe losses during the first
six months of 1999 amounted to $86.9 million which represented 3.2 percentage
points of the loss ratio compared with $92.0 million or 3.5 percentage points in
1998. Catastrophe losses for the second quarter of 1999 amounted to $46.8
million or 3.4 percentage points of the loss ratio compared with $62.3 million
or 4.7 percentage points in 1998. The 1999 catastrophe losses resulted primarily
from the winter storms in the United States in the first quarter and the wind
storms and tornadoes in the United States in the second quarter. The 1998
catastrophe losses resulted 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.
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Page 12
Our expense ratio was 32.8% for the first six months of 1999 and 32.7%
for the second quarter compared with 33.3% for both periods in 1998. The lower
ratio in 1999 was due to salary and overhead expenses remaining flat compared
with the first six months 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 resulted from vendor management and lower consulting
expenses and other operating costs.
In the first quarter of 1998, we recorded a restructuring charge of $40
million, or $26 million after taxes, related to the implementation of the 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 June 30, 1999.
Underwriting results during 1999 and 1998 by class of business were as
follows:
Six Months Ended June 30
------------------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
---------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in millions)
Personal Insurance
Automobile ................... $ 166.5 $ 152.2 85.9% 87.5%
Homeowners ................... 396.7 351.9 94.6 94.0
Other ........................ 177.2 160.2 69.2 64.1
-------- -------- -------- --------
Total Personal ........... 740.4 664.3 86.7 85.4
-------- -------- -------- --------
Commercial Insurance
Multiple Peril ............... 366.0 389.8 126.7 120.0
Casualty ..................... 431.7 460.7 114.9 117.5
Workers' Compensation ........ 156.8 169.5 113.4 110.1
-------- -------- -------- --------
Total Standard Commercial 954.5 1,020.0 119.3 117.2
-------- -------- -------- --------
Property and Marine .......... 261.5 285.3 102.6 109.6
Executive Protection ......... 490.8 467.7 83.9 74.6
Financial Institutions ....... 212.8 199.8 89.2 81.8
Other ........................ 179.7 132.7 91.8 95.2
-------- -------- -------- --------
Total Specialty Commercial 1,144.8 1,085.5 90.5 87.8
-------- -------- -------- --------
Total Commercial ......... 2,099.3 2,105.5 104.2 102.3
-------- -------- -------- --------
Total .................... $2,839.7 $2,769.8 99.7% 98.2%
======== ======== ======== ========
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Quarter Ended June 30
------------------------------------------------
Net Premiums Combined Loss and
Written Expense Ratios
---------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in millions)
Personal Insurance
Automobile ................... $ 89.3 $ 81.6 88.6% 86.0%
Homeowners ................... 218.8 197.1 88.4 102.1
Other ........................ 97.6 86.3 72.1 64.8
-------- -------- -------- --------
Total Personal ........... 405.7 365.0 84.7 89.7
-------- -------- -------- --------
Commercial Insurance
Multiple Peril ............... 176.9 200.2 133.2 121.7
Casualty ..................... 217.7 228.9 113.0 120.8
Workers' Compensation ........ 60.8 71.7 111.7 119.8
-------- -------- -------- --------
Total Standard Commercial 455.4 500.8 120.8 121.1
-------- -------- -------- --------
Property and Marine .......... 133.8 157.3 106.9 103.2
Executive Protection ......... 247.4 244.3 85.9 77.4
Financial Institutions ....... 103.5 101.8 95.1 80.6
Other ........................ 88.0 69.1 85.4 94.5
-------- -------- -------- --------
Total Specialty Commercial 572.7 572.5 92.4 87.1
-------- -------- -------- --------
Total Commercial ......... 1,028.1 1,073.3 105.9 103.7
-------- -------- -------- --------
Total .................... $1,433.8 $1,438.3 100.3% 100.3%
======== ======== ======== ========
PERSONAL INSURANCE
Premiums from personal insurance coverages, which represent 26% of the
premiums written by our property and casualty subsidiaries, increased by 11.5%
in the first six months of 1999 and 11.2% in the second quarter compared with
the similar periods in 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. Premiums outside the United States grew by
approximately 40% in the first six months of 1999, although from a small base.
Our personal insurance business produced highly profitable underwriting
results in 1999 and 1998. The combined loss and expense ratios were 86.7% for
the first six months of 1999 and 84.7% for the second quarter compared with
85.4% and 89.7%, respectively, in 1998.
Homeowners results were similarly profitable in the first six months of
1999 and 1998 as a reduction in catastrophe losses in 1999 substantially offset
an increase in non-catastrophe related losses, the latter due in part to one $7
million loss in the first quarter. Homeowners results were modestly unprofitable
in the second quarter of 1998 due to substantial catastrophe losses. Catastrophe
losses represented 8.6 percentage points of the loss ratio for this class in the
first six months of 1999 and 5.8 percentage points in the second quarter
compared with 12.1 percentage points and 16.2 percentage points, respectively,
in 1998.
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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.
STANDARD COMMERCIAL INSURANCE
Premiums from standard commercial insurance, which represent 34% of our
total writings, decreased by 6.4% in the first six months of 1999 and 9.1% in
the second quarter compared with the similar periods in 1998. The decreases were
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 the business that was renewed, rates have increased modestly
yet steadily in the first six months of 1999 and we expect this trend to
continue. Retention levels were lower in the first six months of 1999 compared
with the same period in 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. It will take at least two
renewal cycles to adequately reprice the entire standard commercial book and
during that time we will continue to have losses from non-renewed policies.
Thus, it will be mid-2000 before these actions have a significant positive
effect on our results.
Our standard commercial insurance business produced highly unprofitable
underwriting results in 1999 and 1998. The combined loss and expense ratio was
119.3% for the first six months of 1999 and 120.8% for the second quarter
compared with 117.2% and 121.1%, respectively, in 1998.
Multiple peril results were highly unprofitable in 1999 and 1998 due, in
large part, to inadequate prices. Results in the property component of this
business deteriorated in the second quarter of 1999 due to a higher frequency of
large losses. Results in 1999 were also adversely affected by several large
overseas property losses. Results in the liability component improved in 1999
due to a lower frequency of large losses, but remained severely unprofitable.
Catastrophe losses represented 5.8 percentage points of the loss ratio for this
class in the first six months of 1999 and 4.9 percentage points in the second
quarter compared with 7.0 percentage points and 8.5 percentage points,
respectively, in 1998.
Results for our casualty business were unprofitable in 1999 and 1998.
Casualty results were adversely affected in both years, but more so in 1998, 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 highly unprofitable in the first six months of both years.
Results in the automobile component were also highly unprofitable in 1999 and
1998. Our commercial automobile book of business is inadequately priced, a
consequence of the prolonged soft market.
Workers' compensation results were unprofitable in 1999 and 1998.
Results in both periods reflect the cumulative effect of price reductions over
the past several years. Results in the second quarter of 1998 were adversely
affected by three unusually large losses.
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SPECIALTY COMMERCIAL INSURANCE
Premiums from specialty commercial insurance, which represent 40% of our
total writings, increased by 5.5% in the first six months of 1999 compared with
the same period a year ago. Net premiums written were flat in the second quarter
of 1999 compared with the same period in 1998. Premium growth in 1999 in our
executive protection business and in the professional liability component of our
financial institutions business was due primarily to the selective writing of
new accounts and an emphasis on new products. A competitive market continues to
put prices under pressure for this business. Our strategy of working closely
with our customers and our ability to differentiate our products continue to
enable us to renew a large percentage of our business. Property and marine
premiums decreased in 1999 due to the effect on retention levels of pricing
initiatives and non-renewing certain unprofitable accounts. Other commercial
business includes $31 million of premiums in the first six months of 1999 from
our new Chubb Re operation.
Our specialty commercial business produced highly profitable
underwriting results in both 1999 and 1998. The combined loss and expense ratio
was 90.5% for the first six months of 1999 and 92.4% for the second quarter
compared with 87.8% and 87.1%, respectively, in 1998.
Property and marine results were less unprofitable in the first six
months of 1999 compared with the same period in 1998. The 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
the second quarter of 1999 were adversely affected by substantially higher
catastrophe losses. Results in 1998 were adversely affected by a high frequency
of large losses, including several large overseas losses. Catastrophe losses
represented 11.6 percentage points of the loss ratio for this class in the first
six months of 1999 and 20.1 percentage points in the second quarter compared
with 5.1 percentage points and 6.8 percentage points, respectively, 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 liability and fiduciary liability components. Our
financial institutions business also produced highly profitable results in the
first six months of 1999 and 1998 due to the favorable loss experience in the
fidelity component. However, executive protection and financial institutions
results were somewhat less profitable in 1999 due to the less adequate prices in
recent years. Results in our other commercial classes were 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 $10,584.7 million and $10,356.5 million at
June 30, 1999 and December 31, 1998, respectively. Reinsurance recoverables on
such loss reserves were $1,239.2 million and $1,306.6 million at June 30, 1999
and December 31, 1998, respectively.
Loss reserves, net of reinsurance recoverable, increased by $295.6
million during the first six months 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.
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Losses incurred related to asbestos and toxic waste claims were
$24.3 million in the first six months of 1999 and $34.8 million for the same
period in 1998.
A discussion of the 1993 Fibreboard asbestos-related settlement is
incorporated by reference from Item 7 of the Corporation's Form 10-K for the
year ended December 31, 1998. The following development during 1999 relates to
the settlement.
In June 1999, the United States Supreme Court refused to approve the
global settlement among Pacific Indemnity (a subsidiary of the Corporation),
Continental Casualty Company (a subsidiary of CNA Financial Corporation),
Fibreboard Corporation and attorneys representing claimants against Fibreboard,
thereby setting in motion the process of disapproval, which is expected to be
completed before the end of the year.
The trilateral agreement among Pacific Indemnity, Continental Casualty
and Fibreboard was established to become effective in the event that the global
settlement agreement was ultimately disapproved. The trilateral agreement
received final judicial approval in a 1996 decision by the U.S. Court of Appeals
for the Fifth Circuit. As a result, management continues to believe that
exposure with respect to asbestos-related bodily injury claims against
Fibreboard has been eliminated.
INVESTMENTS
Investment income after deducting expenses and taxes increased by 5.4%
in both the first six months of 1999 and in the second quarter compared with the
same periods in 1998. The growth was due to an increase in invested assets since
the second 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 15.2% in the first six
months of 1999 from 15.6% in 1998 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 1999 was
invested in tax-exempt bonds and, to a lesser extent, taxable bonds. During the
first six months of 1999, we reduced our equity securities portfolio by
approximately $285 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.
CORPORATE AND OTHER
Corporate and other includes investment income earned on corporate
invested assets, interest expense and other expenses not allocable to the
operating subsidiaries, and the results of our real estate subsidiary. Corporate
and other income after taxes decreased to $3.0 million in the first six months
of 1999 from $12.8 million in the first six months of 1998 due primarily to
higher interest expense in 1999.
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Page 17
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 $77.4 million were realized in the first six
months of 1999 compared with net gains of $90.4 million for the same period in
1998.
ACQUISITION OF EXECUTIVE RISK INC.
On July 19, 1999, the Corporation completed its acquisition of Executive
Risk Inc. Executive Risk is a specialty insurance company offering directors and
officers, errors and omissions and professional liability coverages.
Executive Risk shareholders received 1.235 shares of the Corporation's
common stock for each outstanding common share of Executive Risk. In addition,
outstanding Executive Risk stock options were converted to stock options of the
Corporation. Approximately 14,300,000 shares of common stock of the Corporation
were issued to Executive Risk shareholders and an additional 1,800,000 shares of
common stock of the Corporation have been reserved for issuance upon exercise of
the converted Executive Risk stock options.
The acquisition will be accounted for using the purchase method of
accounting. Therefore, the results of operations of Executive Risk will be
included in the Corporation's consolidated results of operations from the date
of acquisition. The assets and liabilities of Executive Risk will be recorded at
their estimated fair values at the date of acquisition. The value of the stock
options assumed by the Corporation will be included in the purchase price. The
excess of the purchase price over the estimated fair value of the net assets
acquired, which is expected to approximate $500 million, will be recorded as
goodwill and will be amortized over 26 years.
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 June
30, 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. The
Corporation was prohibited from repurchasing common stock while it was in
registration in connection with the acquisition of Executive Risk. As of June
30, 1999, 10,753,700 shares remained under the current share repurchase
authorizations.
The Corporation's $200 million short term revolving credit facility,
which was to have terminated on July 7, 1999, was extended to July 5, 2000.
There have been no borrowings under this agreement.
20
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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.
As of June 30, 1999, we completed remediation and testing procedures on
98% of our mainframe IT systems, including all mission critical systems. We
expect to complete the remediation and testing of the three remaining minor
applications by October 1999.
We have completed the remediation and testing of the vast majority of
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. As of June 30, 1999, approximately 85% of
such interchanges have been tested and determined to be operational. We expect
that testing will continue into the fourth quarter of 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.
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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.
We have conducted an evaluation of the Year 2000 readiness of Executive
Risk. Executive Risk has proactively addressed the Year 2000 issue and is at a
state of readiness similar to the Corporation. During the third quarter, the
Year 2000 readiness activities of the Corporation and Executive Risk will be
integrated.
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 $34 million was incurred as of June 30,
1999, of which $4 million was incurred in the first six months 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.
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 profitability or business retention estimates or with respect to
premium price increases or the non-renewal of underpriced insurance accounts;
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 4 - Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of The Chubb Corporation was held on
April 27, 1999. 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
- -------- --------- -------------
Zoe Baird 137,081,039 2,156,144
John C. Beck 137,166,613 2,070,570
Sheila P. Burke 137,179,570 2,057,613
James I. Cash, Jr. 137,153,831 2,083,352
Percy Chubb, III 137,173,562 2,063,621
Joel J. Cohen 136,749,927 2,487,256
James M. Cornelius 137,172,392 2,064,791
David H. Hoag 137,171,490 2,065,693
Thomas C. MacAvoy 137,141,817 2,095,366
Dean R. O'Hare 137,107,282 2,129,901
Warren B. Rudman 137,138,536 2,098,647
David G. Scholey 136,768,155 2,469,028
Raymond G. H. Seitz 137,162,107 2,075,076
Lawrence M. Small 137,167,003 2,070,180
James M. Zimmerman 136,016,731 3,220,452
There were no broker non-votes cast.
Votes were cast in the following manner in connection with the proposal
to approve the Shareholder Proposal that all future stock option grants to
senior executives shall be performanced-based.
Votes For Votes Against
--------- -------------
38,752,718 76,043,588
There were 1,951,370 abstaining votes and 22,489,507 broker non-votes
cast.
Votes were cast in the following manner in connection with the proposal
to approve the Shareholder Proposal to amend the Corporation's by-laws with
respect to the Corporation's Rights Plan.
Votes For Votes Against
--------- -------------
72,272,843 31,486,502
There were 12,936,771 abstaining votes and 22,541,067 broker non-votes
cast.
As noted in the proxy statement distributed prior to the Annual Meeting,
in the opinion of New Jersey legal counsel, the by-law proposed is invalid under
New Jersey law. Accordingly, the Corporation will not treat this proposal as
part of the Corporation's by-laws.
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 1999.
Votes For Votes Against
--------- -------------
138,625,014 201,456
There were 410,713 abstaining votes and no broker non-votes cast.
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Item 6 - Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 27 - Financial Data Schedule
- Financial Data Schedule filed herewith.
B. Reports on Form 8-K - There were no reports on Form 8-K filed for the three
months ended June 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
The Chubb Corporation has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
THE CHUBB CORPORATION
(Registrant)
By: /s/ Henry B. Schram
_________________________
Henry B. Schram
Senior Vice-President and
Chief Accounting Officer
Date: August 13, 1999